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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-26226
MICROFIELD GRAPHICS, INC.
(Name of small business issuer in its charter)
OREGON 93-0935149
(State or other jurisdiction (I.R.S. Employer of
incorporation or organization) Identification No.)
7216 SW DURHAM ROAD
PORTLAND, OREGON 97224
(Address of principal executive offices and zip code)
(503) 620-4000
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes [ X ] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year were $ 6,072,618.
The aggregate market value of voting stock held by non-affiliates of the
registrant at February 28, 1997 was $4,764,251, computed by reference to the
average bid and asked prices as reported on the Nasdaq SmallCap Market.
The number of shares outstanding of the Registrants Common Stock as of February
28, 1997 was 3,195,575 shares.
The index to exhibits appears on page 16 of this document.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer has incorporated into Part III of Form 10-KSB, by reference, portions
of its Proxy Statement dated April 17, 1997.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
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MICROFIELD GRAPHICS, INC.
FORM 10-KSB INDEX
PART I
Page
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Item 1. Description of Business 3
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 9
Item 6. Management's Discussion and Analysis of Financial
Condition and of Operation 9
Item 7. Financial Statements 13
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 13
Item 10. Executive Compensation 14
Item 11. Security Ownership of Certain Beneficial Owners and
Management 14
Item 12. Certain Relationships and Related Transactions 14
Item 13. Exhibits and Reports on Form 8-K 16
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Microfield Graphics, Inc. (the "Company") develops, manufactures and markets
computer conferencing and telecommunications products to facilitate group
communications. The Company's product lines incorporate a series of digital
whiteboards and digital whiteboard rear projection systems under the brand name
SoftBoard, along with a variety of application software packages, supplies and
accessories. Information written or drawn on the SoftBoard surface is recorded
and displayed on a personal computer simultaneously and in color using the
Company's proprietary technology. The information is recorded in a computer
file that can be replayed, printed, faxed, e-mailed or saved for future
applications. Optional proprietary software allows the information to be
communicated in real time to remote computers over standard telephone lines,
networks and the internet. The Company shipped its first Series 200 SoftBoard
in December 1993 and its first System 400 rear projection SoftBoard model in
August 1996.
Effective March 31, 1995, the Company sold its wholly-owned subsidiary, Imagraph
Corporation, which developed, manufactured and marketed advanced graphics
controllers and frame grabbers.
The Company was incorporated in Oregon in 1986. The Company's executive offices
are located at 7216 SW Durham Road, Portland, OR 97224.
PRODUCTS
The Company produces three SoftBoard models: a wall-mounted SoftBoard (Model
201), a mobile SoftBoard on casters (Model 203) and a smaller SoftBoard designed
for personal offices or cubicles (Model 205). Each SoftBoard can be purchased
for use with either an IBM-compatible PC or a Macintosh computer. Each SoftBoard
includes the Company's proprietary bundled application software that stores the
information written on SoftBoard in a computer file and provides capabilities
for playback, printing, distribution and use in other applications. The playback
feature uses a VCR-like interface and allows the user to review information
recorded on the SoftBoard, stroke-by-stroke, page-by-page, or to move rapidly
between multiple pages of a session. The writing surface of each SoftBoard is
high-quality, porcelain-on-steel.
During 1996, the Company announced and started selling a next-generation product
line, the System 400, that integrates a rear-projection system with a SoftBoard
that has a translucent surface, together in a self-contained unit. This new
product creates a room-sized interactive computer screen allowing a user to
combine information already in a computer file with new information created
during a collaborative session. This can be accomplished with a computer hooked
up directly in the room, with a computer somewhere else on the network, or over
the internet with one or more remote sites. The System 400 enhances both
single-site and multi-site collaboration due to the interactivity of the rear-
projection system. The System 400 allows groups of people either in one
location or in multiple locations to view the information in a room-sized
setting and to interact with the information in the computer file in all
locations. The Company believes this new product line, while suitable for many
applications, addresses the needs of a different market than its Series 200
SoftBoard products and will not materially reduce sales of its SoftBoard
products.
Also during 1996, the Company started selling the System 300, a new product
aimed at the market that wants the interactivity that the SoftBoard input
technology offers, in a custom rear projection application. The System 300 is a
Model 201 SoftBoard with a translucent writing surface instead of a porcelain
writing surface. Typically, the customer has a dedicated room outfitted with a
very high end, very high resolution projector. The System 300 is either built
into a false wall, behind which the projector is placed, or is designed into a
custom built cabinet that also houses the projector. The System 300 is then
used in the same manner as the System 400.
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Both the System 300 and System 400 products allow a roomful of people to be
involved in a group working session where remote collaboration is needed and a
computer is running Windows and any Windows conferencing applications such as
ProShare, NetMeeting, and Netscape Collaborator.
The comparative features of the Company's SoftBoard models are set forth below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SOFTBOARD WRITING
MODEL SURFACE SIZE MSRP FEATURES
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
201 40.5 x 54 inches $3,295 Wall-mounted SoftBoard; large writing area for presentations and
meetings
- ------------------------------------------------------------------------------------------------------------------------------------
203 35 x 47 inches $3,995 Mobile SoftBoard; includes storage
shelf for computer equipment
- ------------------------------------------------------------------------------------------------------------------------------------
205 24 x 25.5 inches $2,795 Personal SoftBoard for use in an office or cubicle environment;
excellent for meeting preparation or private brainstorming
- ------------------------------------------------------------------------------------------------------------------------------------
403 35 x 47 inches $25,500 Self-enclosed rear-projection system consisting of SoftBoard rear
projection screen, VGA resolution projector, Digital Signal Processing
(DSP) unit, active pen, Infra-Red (IR) electronics for the pen, and
software
- ------------------------------------------------------------------------------------------------------------------------------------
423 35 x 47 inches $27,500 Self-enclosed rear-projection system consisting of SoftBoard rear
projection screen, Super VGA resolution projector, DSP unit, active pen,
IR electronics for the pen, and software
- ------------------------------------------------------------------------------------------------------------------------------------
301 40.5 x 54 inches $9,500 Rear-projection system with choice of mounting options, includes
SoftBoard frame, rear projection screen DSP unit, active pen, IR
electronics for the pen and software; requires a projector, enclosure
and mounting.
- ------------------------------------------------------------------------------------------------------------------------------------
Features of the Company's optional software are set forth below.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SOFTWARE MSRP FEATURES
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
SBRecord System software Provides the basic operating system software for the SoftBoard and its
included with the communication with the attached personal computer
purchase of a
SoftBoard
- ------------------------------------------------------------------------------------------------------------------------------------
SBRemote $145 per site Provides connection with a PC/SoftBoard at a remote site via modem, network or video
telecommunication process
- ------------------------------------------------------------------------------------------------------------------------------------
Softkeys $129 Allows control of PC functions directly from the SoftBoard surface, i.e. print,
replay and record
- ------------------------------------------------------------------------------------------------------------------------------------
SBProjection $350 Converts SoftBoard to a front projection, interactive display using any LCD projector
- ------------------------------------------------------------------------------------------------------------------------------------
SBTemplate $350 Adapts manual status board formats to SoftBoard, recording dynamic information
changes on a "fill in the blank" basis and communicates to remote sites via SBRemote
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The pens and erasers used with SoftBoard are available directly from the Company
and from resellers.
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SoftBoards are used by businesses, schools and governmental agencies for
meetings, training and work group development sessions, to augment traditional
audio and video conferencing sessions with graphics and interactivity, and for
scheduling and status updates.
PRODUCT DEVELOPMENT
The Company views SoftBoard as a platform for additional software and other
benefit enhancement products. During 1996, new general releases of SBRecord,
SBRemote, and SBProjection were developed, including a combination of new and
improved features for the Series 200 hardware products. The Company intends to
continue to enhance and add features to its family of proprietary software
products that will provide an upgrade path for all existing customers.
SBProjection, which functions with Series 200 SoftBoards to create the front
projected Group Desktop, and functions with System 300 and System 400 SoftBoards
to create the rear projected Group Desktop, is being enhanced to operate with
Windows NT. This is in addition to its existing compatibility with all other
Windows operating systems.
Current and future development efforts include hardware and software that will
provide further simplifications to the installation and usage models for
SoftBoard hardware and software products. These enhancements will increase the
local productivity of existing customers, be attractive for a wider range of
casual, walk-in conference room training applications, and take advantage of
rapid external developments in the area of computer-aided remote conferencing.
The Company expended approximately $1.3 million and $1.2 million in research and
development costs, respectively, in fiscal years 1996 and 1995. SEE NOTE 2 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITEM 7.
MARKETING, SALES AND DISTRIBUTION
The Company markets its SoftBoard products to resellers, OEMs and directly to
end users in the United States and to distributors and resellers outside the
United States. The Company's Vice President, Sales oversees the international
distributors and resellers, OEM accounts and major customer end user accounts.
The Company's Vice President, Marketing manages both the end user sales and
reseller sales teams. The Company sells SoftBoards directly to end users
through telemarketing and telesales at its Portland, Oregon offices.
In June 1994 the Company entered into an exclusive OEM agreement with Steelcase,
Inc. ("Steelcase") for sale of SoftBoard products into the office furniture
market through its subsidiary, Metropolitan Furniture Corporation ("Metro").
The Company discontinued monthly shipments to Metro at the end of the third
quarter 1995, because Metro was experiencing delays in the product line into
which SoftBoards were integrated. Sales to Metro of standard SoftBoard products
were resumed in the fourth quarter of 1996. Sales to Metro were approximately
1% and 16% of total sales, respectively for fiscal years 1996 and 1995. SEE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
In November 1994, the Company entered into an exclusive distributorship
arrangement with Sord Computer Corporation, a subsidiary of Toshiba Corporation
("SORD"), to market SoftBoards in Japan. Sales to SORD were approximately 25%
and 18% of total sales for fiscal year 1996 and 1995, respectively. SEE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
As with any large OEM or distributor relationship, order rates may be subject to
quarterly fluctuations as demand builds and inventories are adjusted. The
absence of sales to Steelcase and Metro in 1996 has had an adverse effect on the
Company's business. In addition, the failure of SORD to continue its purchase of
SoftBoard products at rates comparable to its historic levels could have a
material adverse effect on the Company's financial condition and results of
operations.
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MANUFACTURING AND SUPPLY
The principal components of the various SoftBoard models consist of lasers,
scanners, electronic subassemblies, the porcelain-on-steel and translucent glass
writing surfaces, and metal housing and frame parts. The Company buys and tests
parts manufactured to its specifications and delivers certain electronic
components to subcontractors for subassembly. The Company assembles the final
product. Final assembly includes precise alignment of the lasers and scanners
and final testing. The Company generally ships products from its facility within
one day after receipt of an order.
Certain components of the Company's products are purchased from single sources.
The Company believes alternative sources are available and could be located and
qualified for all components. The Company does not, however, have any long-term
supply contracts with any vendors. Although a component may be available from
more than one supplier, the Company could incur delays in switching suppliers,
which could have an adverse effect on the Company's sales and results of
operations.
During 1996, the Company moved to a new facility. This facility increased the
Company's manufacturing space from approximately 10,500 square feet to
approximately 21,000 square feet. This has allowed for better organization of
the raw materials flow in the manufacturing process, as well as providing room
for the additional assembly area for the new System 400 product line. The new
facility also has a higher clear height which will allow for additional future
expansion.
COMPETITION
The Company believes the ability to compete effectively in the market for
computer-assisted conferencing and presentation products generally, and
electronic whiteboards particularly, depends upon price and key product
characteristics, including ease of use, positional accuracy, reliability and
applications software.
Although there are competitors selling electronic whiteboards and conferencing
solutions, the Company believes each is focused on a slightly different part of
the market, or on the fringes of the Company's main markets, emphasizing
different capabilities. The competitors that manufacture electronic whiteboards
with capabilities somewhat similar to those of SoftBoard use pressure-sensitive
surfaces, which the Company believes are generally awkward to use because of the
pressure required to register the writing and which the Company believes are
less durable than SoftBoard's porcelain-on-steel writing surface. Additionally,
the Company believes SoftBoard's functionality and long-term reliability is
significantly greater than current competitors.
The Company also competes with manufacturers of simple electronic copyboards,
conferencing software and front- and rear-projection systems. Electronic copy
boards, which generally range in price from approximately $1,500 to
approximately $4,500, provide only black and white printouts on thermal paper,
are not connected to a computer and offer no ability to store the screen image
for subsequent playback and review or transmission to remote locations. In
addition, the meeting or presentation process is typically interrupted and
delayed while participants wait for the written information to be scanned and
copied.
Certain software products provide conferencing and "shared whiteboard"
capabilities in software. The users run an application on the PC that allows
them to mark up documents on computer screens and share them with other users on
a network. Input is limited to keyboard, mouse or graphics tablet; there is no
capability to draw or write on a whiteboard surface. These software-only
products do not allow for a group of people in the same room to share and
interact with the information. The Company believes these software "shared
whiteboard" products are complementary to SoftBoard, because SoftBoard provides
an input device that can be used with certain of these software products.
The Company is aware of two competitors that offer rear-projection systems. The
first competitor offers a system which has a pressure sensitive surface. With
pressure sensitive technology a limited amount of light can be
6
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projected through the writing surface making it more difficult for the user and
any other participants to view the image on the display, thereby requiring the
lights in the meeting room to be turned off. Their product is also subject to
alignment problems if moved even slightly, and is not supplied with an
integrated LCD projector. The Company believes that the System 400 is superior
to this product because of the greater amount of light that is delivered through
the System 400 writing surface, it can be moved across the room or around the
world with minimal, and often no alignment problems, and it is complete and
ready to connect to a personal computer for immediate use. The other competitor
offers a more fully integrated system, including a computer, but is
substantially more expensive than the Company's rear-projection products.
Most of the Company's competitors are more established, benefit from greater
name recognition and have significantly greater financial, technological,
production and marketing resources than the Company. In addition, many of these
companies have large and established sales forces and have been selling their
products to the same customers targeted by the Company for a substantial period
of time. The market acceptance of certain competing products that are based on
different technologies or approaches could have the effect of reducing the size
of the market for the Company's products, resulting in lower prices and erosion
of the Company's gross profit.
INTELLECTUAL PROPERTY
The Company was issued United States Patent No. 5,248,856 in September 1993 for
the graphic data-acquisition technology incorporated in Softboard. Related
patent applications are pending in Europe and Canada. In July 1995 the Company
was issued U.S. Patent No. 5,434,392 for the marking system with Pen Up/Pen Down
tracking. In December 1996, the Company was issued Patent No. 5,583,323 for the
calibration of the graphic data-aquisition tracking system, and Patent No.
5,585,605 for the optical scanner employing lase and laser safety control. In
addition, the Company has filed and will file other patent applications for
various features incorporated in Softboard. The Company relies on copyright
protection for its proprietary software. SoftBoard-Registered Trademark-,
Microfield Graphics-Registered Trademark- are registered trademarks of the
Company in the United States, and trademark applications have been filed for the
phrases "See What I'm Saying," and "Group Desktop."
The Company attempts to protect its intellectual property rights through a
combination of patents, copyrights, trade secret and other intellectual property
law, nondisclosure agreements and other measures. The Company believes,
however, that its financial performance will depend more upon the innovation,
technological expertise and marketing abilities of its employees than upon such
protection.
In February 1994 the Company received a letter from IBM offering the Company a
license under an IBM patent that IBM alleged related to technology incorporated
in SoftBoard. The Company denied that SoftBoard technology was covered by the
IBM patent. In January 1995 IBM sent the Company a letter demanding that the
Company either accept a license under the IBM patent or stop selling SoftBoard.
In March 1995 the Company responded asking IBM to identify more specifically the
alleged infringement, or to cease and desist its pursuit of this claim. The
Company has received no communication from IBM since the letter of January 1995.
The Company believes, based in part on the advice of Kolisch Hartwell Dickinson
McCormack & Heuser, its special patent counsel, that SoftBoard does not infringe
the IBM patent.
There is no assurance that IBM will choose not to pursue this matter further or
that IBM will not file an infringement lawsuit against the Company. If a
lawsuit is filed, there is no assurance that the Company will prevail. Although
IBM has offered a license of its technology, there is no assurance that the
license terms would be satisfactory to the Company. IBM's persistence in this
matter could result in substantial costs and diversion of management time and
other resources and could have a material adverse effect on the Company's
business, financial condition and results of operations.
In November 1995, a Japanese company, BUG Incorporated ("BUG"), wrote a letter
to SORD, a distributor of the Company's SoftBoard products in Japan. BUG
suggested in the letter that the Company's SoftBoard products may infringe
claims which BUG has pending in a published Japanese patent application (No. 5-
171236). The
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Company obtained and reviewed an English translation of the Japanese patent
application. The Company believes, based on the advice of Kolisch Hartwell
Dickinson McCormack & Heuser and their review of the Japanese patent application
and relevant prior art, that a favorable outcome on this matter is likely
because the pending claims are not patentable in view of prior art of which the
Company is aware. The Company's patent counsel informed BUG on February 23,
1996 of its position respecting noninfringement and there has been no
communication from BUG since that date.
There is no assurance that BUG will choose not to pursue this matter further.
BUG's persistence in this matter could result in substantial costs and diversion
of management time and other resources and could have a material adverse effect
on the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
SoftBoard uses low-powered infrared lasers, similar to those used in compact
disc players and laser printers. The Company has independently tested its
products and believes it complies with the applicable industry and governmental
safety requirements for lasers.
EMPLOYEES
As of January 31, 1997, the Company employed 43 persons. None of the Company's
employees are covered by collective bargaining agreements, and the Company
believes its relations with its employees are good.
ITEM 2. PROPERTIES
The Company moved into a new facility in Portland, Oregon, in June 1996,
consisting of approximately 34,000 square feet 13,000 square feet of office
space and 21,000 square feet of manufacturing space. The Company occupies this
facility pursuant to a non-cancellable lease which expires in 2003.
ITEM 3. LEGAL PROCEEDINGS
As of March 7, 1996 there were no other pending legal proceedings to which the
Company or its subsidiaries is a party. SEE BUSINESS - INTELLECTUAL PROPERTY.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 28, 1996.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq Small Cap Market under the
symbol "MICG." Commencing in May 1997 after the Company's 1997 annual meeting,
the Company's Nasdaq SmallCap Market Symbol will change to "SFBD." The following
table sets forth the high and low sales prices as reported by the Nasdaq
SmallCap Market for the periods indicated. The Company's common stock commenced
trading on June 23, 1995.
FISCAL 1995 LOW HIGH
--- ----
Second Quarter (since June 23, 1995) $ 6 5/8 $ 10 1/2
Third Quarter 8 7/8 15 7/8
Fourth Quarter 5 1/4 10
FISCAL 1996
First Quarter $ 4 7/8 $ 8
Second Quarter 3 1/4 5 7/8
Third Quarter 3 1/4 6 3/4
Fourth Quarter 2 6 1/4
There were approximately 280 shareholders of record and 3300 beneficial
shareholders at March 6, 1997. There were no cash dividends declared or paid in
fiscal years 1996 or 1995. The Company does not anticipate declaring such
dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets computer conferencing and
telecommunications products to facilitate group communications. The Company's
initial products are a series of digital whiteboards and digital whiteboard rear
projection systems marketed under the brand name SoftBoard. Information written
or drawn on the SoftBoard surface is recorded and displayed on a personal
computer simultaneously and in color using the Company's proprietary technology.
The information is recorded in a computer file that can be replayed, printed,
faxed, e-mailed or saved for future applications. Optional proprietary software
allows the information to be communicated in real time to remote computers.
In June 1994 the Company entered into an exclusive OEM agreement with Steelcase
Inc. ("Steelcase") for sale of SoftBoard products into the office furniture
market through its subsidiary, Metropolitan Furniture Corporation ("Metro"). In
July 1995, Metro informed the Company that it was experiencing non-SoftBoard
related material shortages that were causing shipping delays of its product that
incorporates SoftBoard. This shorage caused Metro to become overinventoried
with SoftBoards, and therefore stopped purchasing material amounts of SoftBoard
products. Since that date, Metro has significantly reduced its inventory of
SoftBoard products and has resumed purchasing standard SoftBoard product in
small quantities, but has not purchased a material amount of product since the
third quarter of 1995. In 1996 and 1995, approximately 1% and 16%,
respectively, of the Company's sales were attributable to sales to Steelcase and
Metro. The Company is unable to predict when, if ever, Steelcase or Metro will
resume purchases of significant quantities of SoftBoard products from the
Company.
In November 1994, the Company entered into an exclusive distributorship
arrangement with Sord Computer Corporation ("SORD"), a subsidiary of Toshiba
Corporation, to market SoftBoards in Japan. In 1996 and 1995, approximately 25%
and 18%, respectively, of the Company's sales were attributable to SORD.
Although SORD is experiencing significant sales growth of SoftBoard products,
they are expected to purchase fewer units over the next several months in order
to balance inventories. The Company has no commitment from SORD to purchase
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product beyond the fourth quarter of 1996, and no assurance SORD will purchase
significant quantities of SoftBoard products in the future.
As with any large OEM or distributor relationship, order rates may be subject to
quarterly fluctuations as demand builds and inventories are adjusted. The
absence of sales to Steelcase and Metro in 1996 has had an adverse effect on the
Company's business. In addition, the failure of SORD to continue its purchase of
SoftBoard products at rates comparable to its historic levels could have a
material adverse effect on the Company's financial condition and results of
operations.
Prior to the introduction of SoftBoard, the Company designed, developed,
manufactured and marketed advanced graphics hardware and software. Imagraph
Corporation, acquired by the Company in January 1991, developed, manufactured
and marketed advanced graphics controllers and frame grabbers. On March 31,
1995, the Company sold all of the stock of Imagraph Corporation, a wholly-owned
subsidiary of the Company (the "Discontinued Operations"), for $2.0 million,
including securities of the acquiring company valued at approximately $200,000.
The Company recognized a gain on the sale of Imagraph Corporation of
approximately $473,000 in fiscal 1995. In December 1995, the securities of the
acquiring company were sold, resulting in a gain of approximately $74,000. The
Company's consolidated financial statements reflect the results of operations of
the Discontinued Operations in a single line item, which encompasses revenue
from the Discontinued Operations offset by related expenses associated solely
with those operations. Following the sale of the Discontinued Operations, the
Company's business consists principally of the development, manufacture and
marketing of computer conferencing and telecommunications products.
The Company's SoftBoard products are expected to provide the substantial
majority of its sales in the foreseeable future. The Company's results will
therefore depend on continued and increased market acceptance of these products
and the Company's ability to modify them to meet the needs of its customers. Any
reduction in demand for, or increasing competition with respect to, these
products would have a material adverse effect on the Company's financial
condition and results of operations
Except as otherwise noted, the financial and related information presented below
under "Results of Operations" relates solely to the SoftBoard Business.
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RESULTS OF OPERATIONS
The following table sets forth, as a percentage of sales, certain consolidated
statement of operations data relating to the SoftBoard business for the periods
indicated.
FISCAL FISCAL
1996 1995
---- ----
Net sales 100 % 100 %
Cost of goods sold 50 56
------- ------
Gross profit 50 44
Research and development expenses (22) (22)
Marketing and sales expenses (56) (44)
General and administrative expenses (17) (15)
------- ------
Loss from operations (45) (37)
Other income 2 2
------- ------
Loss from continuing operations
before income taxes (43) (35)
Benefit from income taxes - -
------- ------
Loss from continuing operations (43) (35)
Discontinued operations:
Income from discontinued operations - 1
Gain on disposal of discontinued operations - 9
------- ------
Net loss (43) % (25) %
------- ------
------- ------
SALES. Sales increased $775,000 (15%) to $6,073,000 in 1996 from $5,298,000 in
1995. The increase was due primarily to increased sales to the Company's core
customer base, which is made up of sales directly to end users and sales to
resellers. SEE OVERVIEW, ABOVE. In fiscal 1996, export sales aggregated
$1,535,000 (25% of net sales), compared to $1,486,000 (28% of net sales) in
1995. SEE NOTE 13 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GROSS PROFIT. Cost of goods sold includes the cost of raw materials needed to
assemble the product, assembly and preparation by vendors and direct and
indirect costs associated with the procurement, testing, scheduling and quality
assurance functions performed by the Company. The Company's gross margin
improved to 50% in 1996 from 44% in 1995. The improvement in gross margin was
due primarily to lower sales to the OEM channel and increased sales through the
end user channel, which provided higher overall average sales prices on those
products. The increase was also affected by increased software and accessory
sales, which generally have higher margins, and to decreases in materials costs
gained from the Company's ongoing product cost reduction program.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are expensed
as incurred. Research and development expenses increased $195,000 (17%) to
$1,348,000 in 1996 from $1,153,000 in 1995. The increase was due primarily to an
increased rate of expenditure related to the development of the System 400
SoftBoard rear projection unit introduced in June 1996. Research and
development expenses, as a percentage of sales, were 22% in both 1996 and 1995.
The development of the System 400 was substantially complete as of the end of
June 1996.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased $1,071,000
(45%) to $3,426,000 in 1996 from $2,355,000 in 1995. The increases were due
primarily to additional marketing and sales expenses incurred to increase
product awareness and to increase the penetration of products into the
marketplace. These included
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increases in advertising and participation in additional trade shows.
Additionally, the rate of spending in 1995 was restricted by a shortage of
working capital during the first six months of that period. Marketing and sales
expenses increased as a percentage of sales to 56 % in 1996 from 44% in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $220,000 (28%) to $1,015,000 in 1996 from $795,000 in 1995. The
increase was due primarily to the higher insurance and administrative costs
associated with status as a public company. Additionally, the rate of spending
in 1995 was restricted by a shortage of working capital during the first six
months of that period. General and administrative expenses increased as a
percentage of sales to 17 % in 1996 from 15% in 1995.
OTHER INCOME (EXPENSE). Other income (expense) includes interest income,
interest expense and miscellaneous income. Interest income increased in 1996 as
a result of interest earned on the proceeds of the Company's June 1995 initial
public offering. Interest expense decreased primarily due to the fact that
there were no amounts outstanding under the Company's operating line of credit
during 1996.
INCOME TAXES. As of December 28, 1996 the Company had available net operating
loss carryforwards of approximately $7.7 million for federal income tax
purposes. Such carryforwards may be used to reduce consolidated taxable income,
if any, in future years through their expiration in 2003 to 2011. Utilization of
net operating loss carryforwards may be limited due to the ownership changes
resulting from the Company's initial public offering in 1995 and other stock
transactions. In addition, the Company has research and development credits
aggregating approximately $189,000 for income tax purposes at December 28, 1996.
Such credits may be used to reduce taxes payable, if any, on a consolidated
basis in future years through their expiration in 2000 to 2009. SEE NOTE 7 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures through the private sale of equity securities, cash from
operations, borrowings under bank lines of credit. In June 1995 the Company sold
1,100,000 shares of Common Stock in an initial public offering at $6.00 per
share. In July 1995, an additional 165,000 shares were sold at $6.00 per share
pursuant to an overallotment option exercised by the underwriters of the initial
public offering. In total, the Company received net proceeds from the initial
public offering of approximately $6.3 million. In July 1995, Summit Partners
L.P. and related entities exercised warrants for the purchase of 67,354 shares
of the Company's common stock at $5.05 per share, resulting in net proceeds to
the Company of approximately $340,000. In December 1996, the Company borrowed
$250,000 under an equipment line of credit.
At December 28, 1996 the Company had working capital of approximately $3,000,000
and its principal sources of liquidity consisted of $1,868,000 in cash and cash
equivalents. Additionally, at December 28, 1996, the Company has a $2,000,000
line of credit, which bears interest monthly at prime (8.25% at December 28,
1996). No amounts were outstanding under the line of credit at December 28,
1996. SEE NOTE 6 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Accounts
receivable decreased $188,000 and inventories increased $446,000 in 1996, due to
lower than expected sales in the fourth quarter of 1996. Prepaid expenses and
other decreased $56,000 in 1996 due to decreased deposits made for future trade
shows and lower amounts required to be prepaid under the Company's directors and
officers insurance policy.
The Company has no commitments for capital expenditures in material amounts.
The Company believes its existing cash and cash equivalents, short term
investments in marketable securities and cash generated from operations will be
sufficient to fund its operations for at least the next 12 months.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements, together with the report thereon of Price
Waterhouse LLP are included in this report as follows:
Microfield Graphics, Inc.: Page
----
Report of Independent Accountants F-1
Consolidated Balance Sheets
December 28, 1996 and December 30, 1995 F-2
Consolidated Statements of Operations for the years
ended December 28, 1996 and December 30, 1995 F-3
Consolidated Statements of Shareholders' Equity
December 28, 1996 and December 30, 1995 F-4
Consolidated Statements of Cash Flows for the years ended
December 28, 1996 and December 30, 1995 F-5
Notes to Consolidated Financial Statements F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and positions of the Company's executive officers are as
follows:
NAME AGE CURRENT POSITION(S) WITH COMPANY
-----------------------------------------------------------------------
John B. Conroy 58 Chairman of the Board, President and Chief
Executive Officer
Neil Lindsay 32 Vice President, Marketing
Scott D. McVay 57 Vice President, Sales
Randall R. Reed 40 Chief Financial Officer and Secretary
Michael W. Stansell 54 Vice President, Operations
Peter F. Zinsli 66 Director, International Sales
Donald H. Zurstadt 55 Vice President, Engineering
JOHN B. CONROY joined the Company in May 1986 and was appointed President
and elected a Director that same month. Mr. Conroy was designated Chief
Executive Officer by the Board of Directors in January 1987, and appointed
Chairman of the Board of Directors in June 1996. Mr. Conroy previously held
executive management
13
<PAGE>
positions with a number of computer industry companies, has served as a Director
of several holds a BSEE from New York University
NEIL R. LINDSAY joined the Company in June 1996 as Vice President,
Marketing. Mr. Lindsay was Vice President, Sales and Marketing at Print Paks,
Inc. a supplier of multimedia software products from October 1995 to June 1996,
and served as North American Business Manager, among other positions, at
Hewlett-Packard Corporation, a manufacturer of computing and electronic
products, from February 1988 to October 1995. Mr. Lindsay holds an MBA from
Golden Gate University, and a Bachelor of Applied Sciences from Edith Cowan
University in Western Australia.
SCOTT D. MCVAY joined the Company in December 1993 as Vice President,
Sales. Mr. McVay was Vice President, Marketing, at Mass Memory Technology, a
manufacturer of PC storage products, from December 1992 to November 1993, and
Vice President, Worldwide Sales, at Emulex Corp., a manufacturer of
telecommunications and memory products, from April 1990 to June 1992. Mr. McVay
was Vice President of Sales and Marketing at Iomega from 1983 through 1987, and
held various positions at IBM over 19 years. Mr. McVay holds a BS and an MBA in
marketing from the University of Colorado.
RANDALL R. REED joined the Company in August 1985 as Controller and became
the Company's Chief Financial Officer and Secretary in April 1990. Mr. Reed was
a Tax Supervisor among other positions at Coopers and Lybrand from August 1981
to February 1985. Mr. Reed is a Certified Public Accountant and holds a BS in
business administration from Southern Oregon State College.
MICHAEL W. STANSELL joined the Company in November 1985 as Director of
Manufacturing and was appointed Vice President, Operations, in January 1987.
Mr. Stansell was a division manufacturing manager, among other positions, at
Tektronix Corporation from August 1965 through October 1985.
PETER F. ZINSLI joined the Company in December 1992 as Director of
Marketing, and was appointed Vice President, Marketing from June 1993 to June
1996. In June 1996 Mr. Zinsli was appointed Director of International Sales.
Prior to joining the Company, Mr. Zinsli was a consultant to several high-
technology companies from May 1991 to November 1992. Mr. Zinsli has held
executive management positions with several computer industry companies, and was
a co-founder of two of them.
DONALD H. ZURSTADT joined the Company in September 1989 as Manager of
Engineering and was appointed Vice President, Engineering, in April 1990. Mr.
Zurstadt has held management and engineering positions with several computer
industry companies over the past 30 years including Tektronix, Inc., McDonnell
Douglas Automation Corporation and Digital Equipment Corporation. Mr. Zurstadt
holds a BA in physics from the University of Colorado.
Information with respect to directors of the Company and Section 16(a) required
by this item is included in the Company's definitive proxy statement for its
1997 Annual Meeting of Shareholders under the captions ELECTION OF DIRECTORS and
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING, respectively, and is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders under the caption
EXECUTIVE COMPENSATION AND OTHER MATTERS and is incorporated herein by
reference.
14
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders under the caption
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
15
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herein:
Exhibit No.
-----------
*3.1 Articles of Incorporation, as amended
*3.2 Bylaws, as amended
*4.1 See Article III of Exhibit 3.1 and Articles
I and VI of Exhibit 3.2
*10.1 1986 Stock Option Plan, as amended
*10.2 1995 Stock Incentive Plan, as amended
*10.3 Form of Incentive Stock Option Agreement
(1)*10.4 Master Purchase Agreement dated June 15, 1994
between the Registrant and Steelcase, Inc.
*10.5 Series 1 Preferred Stock Purchase Agreement
dated September 1, 1994 between the Registrant
and certain investors
*10.7 Form of Representative's Warrants
(1)*10.8 Japanese Marketing License Agreement
**11.1 Statement re computation of earnings (loss)
per common share
**23 Consent of Price Waterhouse LLP
**27 Financial Data Schedule
____________
* Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form SB-2 (Registration No. 33-91890).
** Filed herewith.
(1) Portions of this Exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 28, 1996.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 26, 1997
MICROFIELD GRAPHICS, INC.
By: /s/ JOHN B. CONROY
------------------
John B. Conroy
Chairman of the Board, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title
- --------- -----
/s/ JOHN B. CONROY Chairman of the Board, President, and Chief
- ----------------------- Executive Officer (Principal Executive Officer)
John B. Conroy Date: March 26, 1997
/s/ RANDALL R. REED Chief Financial Officer and Secretary
- ----------------------- (Principal Financial and Accounting Officer)
Randall R. Reed Date: March 26, 1997
/s/ SAMUEL W. MALLICOAT Director
- ----------------------- Date: March 26, 1997
Samuel W. Mallicoat
/s/ WILLIAM P. CARGILE Director
- ----------------------- Date: March 26, 1997
William P. Cargile
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Microfield Graphics, Inc. (d.b.a. Softboard)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of redeemable common stock and
nonredeemable shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Microfield Graphics, Inc. (d.b.a.
Softboard) and its subsidiary at December 28, 1996 and December 30, 1995 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Portland, Oregon
January 27, 1997
F-1
<PAGE>
MICROFIELD GRAPHICS, INC.
(d.b.a. SOFTBOARD)
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
DECEMBER 28, DECEMBER 30,
ASSETS 1996 1995
------------ ------------
Current assets:
Cash and cash equivalents $ 1,867,856 $ 3,180,872
Short term investments in marketable
securities - 1,564,002
Accounts receivable, net (Note 3) 777,807 965,590
Inventories (Note 4) 997,693 551,619
Prepaid expenses and other 248,875 304,784
----------- -----------
Total current assets 3,892,231 6,566,867
Property and equipment, net (Note 5) 542,826 318,097
Other assets 86,720 81,300
----------- -----------
$ 4,521,777 $ 6,966,264
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
(Note 6) $ 119,537 $ 136,671
Accounts payable 399,011 543,607
Accrued payroll and payroll taxes 209,697 287,814
Unearned income 60,803 33,492
Other accrued liabilities 183,420 39,431
----------- -----------
Total current liabilities 972,468 1,041,015
Long-term debt, net of current portion
(Note 6) 181,956 51,483
----------- -----------
Total liabilities 1,154,424 1,092,498
----------- -----------
Commitments (Note 8)
Shareholders' equity (Notes 9 and 12):
Convertible preferred stock,
10,000,000 shares authorized, none
outstanding - -
Common stock, 25,000,000 shares
authorized, 3,195,575 and
3,127,954 shares issued and
outstanding, respectively 12,152,781 12,060,048
Accumulated deficit (8,785,428) (6,186,282)
----------- -----------
Total shareholders' equity 3,367,353 5,873,766
----------- -----------
$ 4,521,777 $ 6,966,264
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
MICROFIELD GRAPHICS, INC.
(d.b.a. SOFTBOARD)
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 28, DECEMBER 30,
1996 1995
------------- -------------
Net sales (Note 13) $ 6,072,618 $ 5,297,837
Cost of goods sold 3,037,508 2,971,972
----------- -----------
Gross profit 3,035,110 2,325,865
----------- -----------
Operating expenses:
Research and development 1,348,148 1,152,970
Marketing and sales 3,426,418 2,355,233
General and administrative 1,014,743 794,887
----------- -----------
5,789,309 4,303,090
----------- -----------
Loss from operations (2,754,199) (1,977,225)
Other income:
Interest income, net 130,788 49,232
Loss on disposal of property and
equipment (3,205) -
Other income 28,746 76,716
----------- -----------
Loss from continuing operations
before income taxes (2,597,870) (1,851,277)
Provision for income taxes (Note 7) (1,276) -
----------- -----------
Loss from continuing operations (2,599,146) (1,851,277)
----------- -----------
Discontinued operations (Note 10):
Income from discontinued operations - 74,780
Gain on disposal of discontinued
operations - 472,750
----------- -----------
- 547,530
----------- -----------
Net loss $ (2,599,146) $ (1,303,747)
----------- -----------
----------- -----------
Loss per share:
Loss from continuing operations $ (.82) $ (.76)
Earnings from discontinued operations - .22
----------- -----------
Net loss $ (.82) $ (.54)
----------- -----------
----------- -----------
Shares used in calculation 3,176,660 2,436,782
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
MICROFIELD GRAPHICS, INC.
(d.b.a. SOFTBOARD)
CONSOLIDATED STATEMENT OF REDEEMABLE COMMON STOCK AND NONREDEEMABLE
SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------
RETAINED
REDEEMABLE CONVERTIBLE NONREDEEMABLE EARNINGS
COMMON STOCK PREFERRED STOCK COMMON STOCK (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT)
-------- --------- --------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 170,365 $ 860,000 1,750,650 $ 1,212,455 1,186,250 $ 3,213,292 $ (4,882,535)
Conversion of preferred stock with
reverse split of 6.31:1 - - (1,750,650) (1,212,455) 277,444 1,212,455
Conversion of redeemable common
stock (170,365) (860,000) - - 170,365 860,000 -
Stock options and warrants
exercised - - - 228,895 516,222 -
Issuance of common stock, net of
offering expenses - - - 1,265,000 6,258,079 -
Net loss - - - - - - (1,303,747)
----------- ---------- ---------- ------------- ---------- ----------- ---------
Balance at December 30, 1995 - - - - 3,127,954 12,060,048 (6,186,282)
Stock options exercised - - - - 66,421 87,633 -
Issuance of common stock - - - - 1,200 5,100 -
Net loss - - - - - - (2,599,146)
----------- ---------- ---------- ------------- ---------- ----------- ---------
Balance at December 28, 1996 - $ - - $ - 3,195,575 $ 12,152,781 $ (8,785,428)
----------- ---------- ---------- ------------- ---------- ----------- ---------
----------- ---------- ---------- ------------- ---------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MICROFIELD GRAPHICS, INC.
(d.b.a. SOFTBOARD)
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 28, DECEMBER 30,
1996 1995
-------------- -------------
Cash flows from operating activities:
Net loss $ (2,599,146) $ (1,303,747)
Income from discontinued operations - (74,780)
Gain on disposal of discontinued operations - (472,750)
------------ ------------
Loss from continuing operations (2,599,146) (1,851,277)
Adjustments to reconcile loss from
continuing operations to operating cash flows:
Depreciation and amortization 300,432 167,918
Issuance of common stock for compensation 5,100 -
Loss (gain) on disposal of property and
equipment, net 3,205 (8,129)
Gain on sale of investments - (74,127)
Changes in assets and liabilities:
Accounts receivable 187,783 (395,543)
Inventories (446,074) (193,844)
Prepaid expenses and other 55,909 (244,354)
Accounts payable (144,596) (27,366)
Accrued payroll and payroll taxes (78,117) -
Unearned income 27,311 -
Other accrued liabilities 143,989 (1,100)
------------ ------------
Net cash used in operating activities (2,544,204) (2,627,822)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of Imagraph Corporation - 1,800,000
Proceeds from the maturity of investments 1,564,002 -
Acquisition of property and equipment, net (517,566) (209,482)
Purchases of patents and other (16,220) (17,720)
Advances from discontinued operations - 160,424
Proceeds from sale leaseback of property
and equipment - 250,000
Deferred gain on sale leaseback of property
and equipment - (11,380)
Purchases of investments in marketable
securities - (1,564,002)
Proceeds from sale of investments - 274,127
------------ ------------
Net cash provided by investing activities 1,030,216 681,967
------------ ------------
Cash flows from financing activities:
Net borrowings under (payments on) line of
credit and term loan agreement 250,000 (1,665,000)
Net proceeds from issuance of common stock - 6,258,079
Net payments on capital lease obligation (136,661) (61,846)
Proceeds from exercise of common stock
options and warrants 87,633 516,222
------------ ------------
Net cash provided by financing activities 200,972 5,047,455
------------ ------------
Net (decrease) increase in cash and
cash equivalents (1,313,016) 3,101,600
Cash and cash equivalents, beginning of year 3,180,872 79,272
------------ ------------
Cash and cash equivalents, end of year $ 1,867,856 $ 3,180,872
------------ ------------
------------ ------------
Cash paid for:
Interest $ 39,841 $ 112,917
------------ ------------
------------ ------------
Income taxes $ 1,276 $ 810
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MICROFIELD GRAPHICS, INC.
(d.b.a. SOFTBOARD)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. THE COMPANY AND BASIS OF PRESENTATION
Microfield Graphics, Inc., an Oregon corporation incorporated in October
1986, develops, manufactures and markets computer conferencing and
telecommunications products to facilitate group communications. The
Company's product lines incorporate a series of digital whiteboards and
digital whiteboard rear projection systems under the brand name SoftBoard,
along with a variety of application software packages, supplies and
accessories. Information written or drawn on the SoftBoard surface is
recorded and displayed on a personal computer simultaneously and in color
using the Company's proprietary technology
Prior to the introduction of SoftBoard, Microfield Graphics, Inc. designed,
developed, manufactured and marketed advanced graphics hardware and
software. Imagraph Corporation ("Imagraph"), acquired by the Company in
January 1991, developed, manufactured and marketed advanced graphics
controllers and frame grabbers. Imagraph was sold in March 1995 (see Note
10).
The Company also has a wholly owned foreign sales corporation in Barbados.
Hereafter in these consolidated financial statements, the term "Company"
refers to Microfield Graphics, Inc. and its subsidiary. The Company's
primary market is in the United States; however, there are export sales to
Japan, the United Kingdom and many other countries. (See export sales in
Note 13).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company operates on a 52-53 week fiscal year ending on the Saturday
closest to the last day of December.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Microfield
and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
During the year ended December 30, 1995, the following noncash transactions
occurred:
- The Company received equity securities valued at $200,000 as part
of the proceeds from the sale of Imagraph (see Note 10);
- The Company leased equipment aggregating $250,000 under a sale
leaseback agreement (see Note 11).
During the year ended December 31, 1996, the Company issued stock with a
fair market value of $5,100 to resellers and employees.
F-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments, which are readily
convertible into cash and have original maturities of three months or less,
to be cash equivalents. Short-term investments, which have maturities
greater than three months and less than one year, are composed of medium
term notes.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS No.115) on a prospective basis. SFAS 115
creates certain classification categories for investments based on the
nature of the securities and intent of the Company. Pursuant to adoption,
the Company has categorized its investments as held-to-maturity.
Securities classified as held-to-maturity are stated at amortized cost with
corresponding premiums or discounts amortized to interest income over the
life of the investment.
ACCOUNTS RECEIVABLE
Accounts receivable at December 28, 1996 and December 30, 1995 are recorded
net of allowances for uncollectible accounts of $45,649 and $41,963,
respectively.
INVENTORIES
Inventories are stated at the lower of standard cost or market value.
Standard costs approximate the first-in, first-out method. Inventory costs
include raw materials, direct labor and allocated overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using
accelerated methods over their estimated useful lives of five years.
Repairs and maintenance are charged to expense as incurred; improvements
are capitalized. When the Company sells or disposes of assets, the
accounts are relieved of the related costs and accumulated depreciation and
resulting gains and losses are reflected in operations.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as
incurred.
REVENUE RECOGNITION
Revenue is recognized upon shipment of products. Revenue on warranty
contracts is recognized over the life of the contract.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes,"
using the asset and liability approach. The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Under FAS
109, the effect on deferred taxes of a change in tax rates is recognized in
operations in the period that includes the enactment date.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per common share is based upon the weighted average number of
outstanding shares of common stock, common stock equivalent shares from
convertible preferred stock (using the if-converted method) and common
stock equivalent shares from the exercise of stock options and warrants
(using the treasury stock method). Common equivalent shares from
convertible preferred stock, stock options and warrants are excluded from
the computation if their effect is anti-dilutive. However, pursuant to the
Securities and Exchange Commission's Staff Accounting Bulletin No. 83,
preferred stock (using the if-converted method) and common and common
equivalent shares (using the treasury stock method and the anticipated
initial public offering price) issued during the 12-month period prior to
an initial public offering are included in the calculations as if they were
outstanding through the date of the initial public offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable, line of credit and accrued
liabilities as presented in the consolidated financial statements
approximate fair value because of the short-term maturity of these
instruments. The recorded amount of capital lease obligations and long-
term debt approximates fair value since the imputed interest or stated
interest approximates currently competitive rates.
3. CONCENTRATIONS OF CREDIT RISK
One customer accounted for approximately 25% of net sales for the year
ended December 28, 1996, and two customers accounted for approximately 18%
and 16% net sales for the year ended December 30, 1995. Accounts
receivable from one customer totaled approximately $126,387 and $229,450 at
December 28, 1996 and December 30, 1995, respectively.
F-8
<PAGE>
4. INVENTORIES
Inventories consist of the following:
DECEMBER 28, DECEMBER 30,
1996 1995
------------ -----------
Raw materials $ 554,713 $ 440,592
Work in process - 9,130
Finished goods 442,980 101,897
---------- ----------
$ 997,693 $ 551,619
---------- ----------
---------- ----------
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
Furniture, machinery and equipment $ 738,431 $ 220,865
Capitalized leased assets 224,775 238,618
---------- ----------
963,206 459,483
Less accumulated depreciation and
amortization 420,380 141,386
---------- ----------
$ 542,826 $ 318,097
---------- ----------
---------- ----------
Accumulated amortization of capitalized leased assets aggregated
$218,530 and $104,167 at December 28, 1996 and December 30, 1995,
respectively. Such amounts are included in the above schedule.
6. DEBT
At December 28, 1996, the Company had a $2,000,000 line of credit with a
bank. Borrowings under the line are due on demand, bear interest payable
monthly at prime and are collateralized by inventories and accounts
receivable. As of December 28, 1996 and December 30, 1995, no borrowings
were outstanding under the line of credit. Pursuant to the line of credit
agreement, the Company is required to comply with certain financial
covenants, including ratios and minimum net worth. At December 28, 1996,
the Company was in compliance with all of its debt covenants. The line of
credit agreement expires in September 1997.
F-9
<PAGE>
6. DEBT (CONTINUED)
The Company's long-term debt consists of the following:
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
Term loan payable to bank in monthly
instalments of $7,988 starting on
February 28, 1997, including interest at
the prime rate plus .5% (8.75%), through
January 31, 2000. All assets purchased
with the proceeds of this loan are
pledged as collateral. $ 250,000 $ -
Capital lease obligation payable in monthly
instalments (See Note 11) 51,493 188,154
--------- ---------
301,493 188,154
Less principal amounts due within one year 119,537 136,671
--------- ---------
Long-term debt $ 181,956 $ 51,483
--------- ---------
--------- ---------
Remaining maturities on long-term debt are summarized as follows:
YEAR ENDING
DECEMBER 31,
------------
1997 $ 119,537
1998 83,222
1999 90,803
2000 7,931
-----------
$ 301,493
-----------
-----------
7. INCOME TAXES
The provision for income taxes of $1,276 for 1996 consists of minimum
payments due and paid to the state. No provision for or benefit from
income taxes was recognized in 1995.
The provision for (benefit from) from income taxes for the years ended
December 28, 1996 and December 30, 1995 differs from the amount which would
be expected as a result of applying the statutory taxes rates to the loss
before income taxes due primarily to changes in the valuation allowance to
fully reserve net deferred tax assets.
F-10
<PAGE>
7. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following
components:
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
Current:
Allowance for bad debts $ 17,511 $ 16,097
Employee benefits 33,639 62,457
Inventory basis differences 1,029 10,162
Allowances 31,508 -
Unearned revenues 23,324 -
----------- ---------
107,011 88,716
----------- ---------
Non-current:
Property and equipment basis
differences $ - (920)
Intangible assets 4,874 1,949
Net operating loss carryforwards 3,039,210 1,948,008
Research and development credits 228,441 189,289
----------- ---------
3,272,525 2,138,326
----------- ---------
Total deferred tax asset 3,379,536 2,227,042
Deferred tax asset valuation allowances (3,379,536) (2,227,042)
----------- ---------
Net deferred tax assets (liabilities) $ - $ -
----------- ---------
----------- ---------
At December 28, 1996, the Company had available net operating loss
carryforwards of approximately $7,900,000 for federal income tax purposes.
Such carryforwards may be used to reduce consolidated taxable income, if
any, in future years through their expiration in 2003 to 2011. Utilization
of net operating loss carryforwards may be limited due to the ownership
changes resulting from the Company's initial public offering in 1995 (Note
12). In addition, the Company has research and development credits
aggregating approximately $228,441 for income tax purposes at December 28,
1996. Such credits may be used to reduce taxes payable, if any, in future
years through their expiration in 2001 to 2011.
F-11
<PAGE>
8. LEASE COMMITMENTS
The Company leases office space under operating leases which require future
minimum lease commitments through July 2003 as follows:
YEAR ENDING
DECEMBER 31,
------------
1997 $ 292,272
1998 292,272
1999 292,272
2000 292,272
2001 306,882
Thereafter 506,594
-----------
Total minimum payments required $ 1,982,564
-----------
-----------
Rent expense totaled $301,795 and $242,494 for fiscal years ended 1996 and
1995, respectively.
9. SHAREHOLDERS' EQUITY
COMMON STOCK
As of November 10, 1992, the Company and one of its shareholders entered
into an agreement whereby the shareholder received a put right and warrants
to purchase 67,354 shares of the Company's common stock at $5.05 per share
through November 10, 1997. The shares were classified as redeemable common
stock at December 31, 1994 at their recorded aggregate value of $860,000.
The agreement with the shareholder terminated in 1995 upon the completion
of the Company's initial public offering (Note 12). Accordingly, the
shares have been classified in shareholders' equity as of December 28, 1996
and December 30, 1995 in the accompanying consolidated balance sheet.
Additionally, the shareholder exercised its warrants to purchase 67,354
shares of the Company's common stock at $5.05 per share in 1995.
INCENTIVE STOCK OPTION PLAN
The Company has Stock Option Plans (the Plans). At December 28, 1996 and
December 30, 1995, 757,062 and 465,660 shares of common stock were reserved
for issuance to employees. Under the Plans, the options may be granted to
employees, including officers, to purchase shares of the Company's common
stock at fair market value, as determined by the Company's Board of
Directors, at date of grant. The options are exercisable over a period of
up to nine years from the date of grant or such shorter term as provided
for in the Plans. The options become exercisable over four years.
F-12
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1996. SFAS No. 123 was issued by the Financial
Accounting Standards Board in October 1995 and allows companies to choose
whether to account for stock-based compensation on a fair value method or
to continue to account for stock-based compensation under the current
intrinsic value method as prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". The Company has elected to continue to follow
the provisions of APB Opinion No. 25. Therefore, adoption of SFAS No. 123
in 1996 did not have a significant effect on the Company's financial
position or results of operations.
A summary of the status of the Company's Stock Option Plans as of December
28, 1996 and December 30, 1995 and for the years then ended is presented
below:
1996 1995
------------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PERFORMANCE OPTIONS SHARES PRICE SHARES PRICE
- --------------------------------- ------------- ---------- -------- --------
Outstanding at beginning of year 303,204 $ 4.67 312,987 $ 1.05
Granted 84,000 4.21 184,648 6.95
Exercised (66,421) 1.26 (161,557) 1.05
Forfeited (31,449) 6.11 (32,874) 1.05
--------- ------- -------- -------
289,334 $ 4.54 303,204 $ 4.67
--------- ------- -------- -------
--------- ------- -------- -------
Options exercisable at year-end 91,824 92,829
--------- --------
--------- --------
NUMBER OF OPTIONS WEIGHTED
----------------------- AVERAGE CONTRACTUAL
EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE REMAINING
------------------- ------------------------ --------------------
$ 1.26 56,628 43,242 2.1
3.75 - 6.00 232,706 48,582 4.0
---------- ---------
289,334 91,824
---------- ---------
---------- ---------
The Company has computed for pro forma disclosure purposes the value of all
options granted during 1996 and 1995 using the Black-Scholes pricing model
as prescribed by SFAS 123 and the following assumptions used for grants:
1996 1995
------------ ------------
Risk free interest rate 6.4 % 5.4 %
Expected dividend yield 0 % 0 %
Expected lives 4.5 4.5
Expected volatility 60.0 % 60.0 %
Adjustments are made for options forfeited prior to vesting.
F-13
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
Had compensation cost for the Company's Plans been determined based on the
fair value at the grant dates consistent with the method of SFAS 123, the
total value of options granted would be computed as follows:
Year ended December 31, 1995 $ 690,988
Year ended December 31, 1996 485,796
Such amounts would be amortized over the vesting period of the options.
Accordingly, under SFAS 123, the Company's net loss and loss per share
would have been changed to the pro forma amounts indicated below:
1996 1995
-------------- -------------
Net income (loss) As reported $ (2,599,146) $ (1,303,747)
Pro forma (2,755,473) (1,347,090)
Primary earnings
(loss) per share As reported (.82) (.54)
Pro forma (.87) (.55)
The effects of applying SFAS 123 for providing pro forma disclosures for
1996 and 1995 are not likely to be representative of the effects on
reported net income (loss) and net income (loss) per common equivalent
share for future years, because options vest over several years and
additional awards generally are made each year.
COMMON STOCK WARRANTS
In connection with its initial public offering (Note 12) in 1995, the
Company issued 110,000 warrants to purchase shares of common stock at an
exercise price of $7.20 per share. No warrants have been exercised to
date; such warrants expire in 2000.
10. DISCONTINUED OPERATIONS
Effective March 31, 1995, the Company sold all of the outstanding shares of
common stock of Imagraph to an unrelated third party for $2,000,000,
including $200,000 of Series C preferred stock of the third party. The
Company recognized a gain on the sale of Imagraph of $472,750 for the year
ended December 30, 1995.
The results of Imagraph have been reported separately as discontinued
operations in the consolidated statement of operations for periods through
March 31, 1995. Sales of the discontinued operations were $1,393,811 for
the year ended December 31, 1995.
F-14
<PAGE>
11. SALE LEASEBACK OF PROPERTY AND EQUIPMENT
In March 1995, the Company entered into an agreement whereby it sold its
property and equipment and subsequently leased back such assets from the
purchaser (lessor) under a capital lease agreement (Note 6). The Company
received proceeds aggregating $250,000 from the sale of the assets and
issued warrants for the purchase of 6,792 shares of the Company's common
stock at $4.42 per share. Such warrants expire on the later of April 1,
1997 or the date that all of the Company's obligations to the lessor have
been satisfied. The net gain on the sale, aggregating approximately
$20,000, has been deferred and is being recognized over the term of the
lease.
12. RECAPITALIZATION AND PUBLIC OFFERING OF COMMON STOCK
During 1995, the Company amended its articles of incorporation to effect a
one-for-6.31 reverse split of the Company's common stock. All common and
common equivalent shares in the accompanying consolidated financial
statements have been adjusted retroactively to give effect to the reverse
split.
In July 1995, the Company completed an initial public offering of 1,265,000
shares of common stock at $6.00 per share. The net proceeds of the
offering were $6,258,079.
13. EXPORT SALES
Export sales aggregated $1,535,000 and $1,486,000 in 1996 and 1995,
respectively. Such export sales were made to customers in the following
countries:
YEAR ENDED
DECEMBER 28, DECEMBER 30,
1996 1995
----------- -----------
Japan $ 962,000 $ 958,000
United Kingdom 249,000 141,000
Other 324,000 387,000
---------- ----------
$ 1,535,000 $ 1,486,000
---------- ----------
---------- ----------
F-15
<PAGE>
Exhibit 11.1
MICROFIELD GRAPHICS, INC.
CALCULATION OF NET LOSS PER SHARE
TWELVE MONTHS ENDED
---------------------------
DECEMBER 28, DECEMBER 30,
1996 1995
------------- ------------
Actual weighted average
shares outstanding for
the period 3,176,660 2,414,887
Dilutive common stock
options and warrants
using the treasury stock
method -- 21,895
---------- ----------
Total shares used in per
share calculations 3,176,660 2,436,782
---------- ----------
---------- ----------
Net loss $ (2,599,146) $ (1,303,747)
---------- ----------
---------- ----------
Net loss per share $ (0.82) $ (0.54)
---------- ----------
---------- ----------
Note: Preferred stock and common equivalent shares issued during the
12-month period prior to the Company's initial public offering are included
in the calculations as if they were outstanding through the date of the
initial public offering, even though anti-dilutive, pursuant to Staff
Accounting Bulletin No. 83.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-97544) of Microfield Graphics, Inc. of our
report dated January 27, 1997 appearing on page F-1 of this Form 10-KSB.
PRICE WATERHOUSE LLP
Portland, Oregon
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 1,868
<SECURITIES> 0
<RECEIVABLES> 823
<ALLOWANCES> (46)
<INVENTORY> 998
<CURRENT-ASSETS> 892
<PP&E> 963
<DEPRECIATION> 420
<TOTAL-ASSETS> 4,522
<CURRENT-LIABILITIES> 972
<BONDS> 0
0
0
<COMMON> 12,153
<OTHER-SE> (8,785)
<TOTAL-LIABILITY-AND-EQUITY> 4,521
<SALES> 6,073
<TOTAL-REVENUES> 6,073
<CGS> 3,038
<TOTAL-COSTS> 5,830
<OTHER-EXPENSES> 26
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171
<INCOME-PRETAX> (2,598)
<INCOME-TAX> 1
<INCOME-CONTINUING> (2,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,599)
<EPS-PRIMARY> (.82)
<EPS-DILUTED> (.82)
</TABLE>
