<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1997
[ ] TRANSITION REPORT PURSUANT TO 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.
(Exact name of small business issuer as specified in its charter)
OREGON 93-0935149
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7216 SW DURHAM RD.
PORTLAND, OREGON 97224
(Address of principal executive offices and zip code)
(503) 620-4000
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section 3
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days:
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of July
31, 1997 was 3,195,575 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
MICROFIELD GRAPHICS, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet - June 28, 1997
and December 28, 1996 3
Consolidated Statement of Operations -Three and
Six Months Ended June 28, 1997 and June 29, 1996 4
Consolidated Statement of Cash Flows -Six Months
Ended June 28, 1997 and June 29, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
2
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
June 28, December 28,
1997 1996
----------- ------------
Current assets:
Cash and cash equivalents $ 1,366,404 $ 1,867,856
Accounts receivable, net of allowances
of $24,680 and $45,648 757,070 777,807
Inventories (Note 3) 602,803 997,693
Prepaid expenses and other 184,294 248,875
----------- ------------
Total current assets 2,910,571 3,892,231
Property and equipment, net (Note 4) 455,839 542,826
Other assets 81,321 86,720
----------- ------------
$ 3,447,731 $ 4,521,777
----------- ------------
----------- ------------
Current liabilities:
Current portion of debt $ 583,328 $ 119,537
Accounts payable 205,374 399,011
Accrued payroll and payroll taxes 94,272 209,697
Unearned income 62,109 60,803
Accrued liabilities 254,678 183,420
----------- ------------
Total current liabilities 1,199,761 972,468
Long-term debt, net of current portion 131,950 181,956
----------- ------------
1,331,711 1,154,424
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized, 3,195,575 and 3,195,575 shares
issued and outstanding 12,152,781 12,152,781
Accumulated deficit (10,036,761) (8,785,428)
----------- ------------
Total shareholders' equity 2,116,020 3,367,353
----------- ------------
$ 3,447,731 $ 4,521,777
----------- ------------
----------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended Six months ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 1,182,739 1,772,547 $ 2,368,106 3,125,896
Cost of goods sold 668,198 835,871 1,308,759 1,538,686
----------- ------------ ------------ ------------
Gross profit 514,541 936,676 1,059,347 1,587,210
Operating expenses
Research and development 210,091 377,348 428,978 745,802
Marketing and sales 660,713 878,501 1,418,778 1,679,829
General and administrative 253,782 273,047 465,589 522,277
----------- ------------ ------------ ------------
1,124,586 1,528,896 2,313,345 2,947,908
----------- ------------ ------------ ------------
Loss from operations (610,045) (592,220) (1,253,998) (1,360,698)
Other income (expense)
Interest income (expense), net (2,847) 35,167 (1,112) 85,472
Other income, net -- 2,981 4,682 7,240
----------- ------------ ------------ ------------
Loss before provision for income taxes (612,892) (554,072) (1,250,428) (1,267,986)
Provision for income taxes 800 -- 1,256 800
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Net loss $ (613,692) (554,072) $ (1,251,684) (1,268,786)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Net loss per share $ (.19) (.17) $ (.39) (.40)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Shares used in per share calculations 3,195,575 3,168,394 3,195,575 3,160,360
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended
--------------------------------
June 28, June 29,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (1,251,684) $ (1,268,786)
Adjustments to reconcile net loss to net cash
used operating activities:
Depreciation and amortization 132,817 129,400
Gain on sale and leaseback of property and equipment (1,626) (4,065)
Changes in assets and liabilties:
Accounts receivable 20,737 (326,931)
Inventories 394,890 57,352
Prepaid expenses and other 64,581 (30,696)
Accounts payable (193,637) (208,956)
Accrued payroll and payroll taxes (115,425) --
Unearned income 1,306 --
Accrued liabilties 72,884 89,414
------------ ------------
Net cash used in operating activities (875,157) (1,563,268)
Cash flows from investing activities:
Investments in marketable securities -- 1,564,002
Acquisition of property and equipment (40,431) (182,881)
Purchases of other assets -- (16,221)
------------ ------------
Net cash provided by(used in) investing activities (40,431) 1,364,900
Cash flows from financing activities:
Payments on equipment line of credit (34,720) --
Payments on capital lease obligations (51,493) (63,846)
Proceeds from operating line of credit 500,000 --
Proceeds from exercise of common stock options
and warrants -- 77,641
Adjustments to common stock 349 --
------------ ------------
Net cash provided by financing activities 414,136 13,795
Net decrease in cash and cash equivalents (501,452) (184,573)
Cash and cash equivalents, beginning of period 1,867,856 3,180,872
------------ ------------
Cash and cash equivalents, end of period $ 1,366,404 $ 2,996,299
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 26,706 23,531
------------ ------------
------------ ------------
Income taxes 1,256 800
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
MICROFIELD GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Microfield
Graphics, Inc. (the "Company") for the quarters and the six months ended June
28, 1997 and June 29, 1996 have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. The financial
information as of December 28, 1996 is derived from the Company's Annual Report
on Form 10-KSB. The accompanying consolidated financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles and should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
December 28, 1996. In the opinion of Company management, the unaudited
consolidated financial statements for the interim periods presented include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the results for such interim periods. Operating results for the
quarters and the six months ended June 28, 1997 are not necessarily indicative
of the results that may be expected for the full year or any portion thereof.
The Company's fiscal year is the 52- or 53-week period ending on the
Saturday closest to the last day of December. The Company's current fiscal year
is the 53-week period ended January 3, 1998. The Company's last fiscal year was
the 52-week period ended December 28, 1996. The Company's second fiscal quarters
in fiscal 1997 and 1996 were the 13-week periods ended June 28, 1997 and June
29, 1996, respectively.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 128, EARNINGS PER SHARE (SFAS 128) which
changes the standards for computing and presenting earnings per share and
supercedes Accounting Principles Board Opinion No. 15 EARNINGS PER SHARE. The
FASB also issued SFAS 129 DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE.
Both of these are effective for financial statements issued for periods ending
after December 15, 1997. The Company does not expect the adoption of these to
have a material impact on the Company's financial condition or results of
operations.
In June 1997, the FASB issued SFAS 130 Reporting Comprehensive Income which
establishes requirements for disclosure of comprehensive income. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of earlier financial statements for comparative purposes is required. The
Company does not expect the adoption to have a material impact on the Company's
financial condition or results of operations.
6
<PAGE>
3. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out method), or market value. Inventory costs include raw
materials, direct labor and allocated overhead and consist of the following:
June 28, December 28,
1997 1996
------------ ---------------
Raw materials $416,371 $554,713
Finished goods 186,432 442,980
------------ ---------------
------------ ---------------
$602,803 $997,693
------------ ---------------
------------ ---------------
4. PROPERTY AND EQUIPMENT
June 28, December 28,
1997 1996
------------- --------------
Machinery and equipment $1,003,638 $738,431
Capitalized leased assets -- 224,775
------------- --------------
1,003,638 963,206
Less accumulated depreciation
and amortization 547,799 420,380
------------- -------------
$ 455,839 $542,826
------------ -------------
------------ -------------
5. SUBSEQUENT EVENTS
On July 14, 1997 the Company entered into a General Purchase and
Development Agreement with Minnesota Mining and Manufacturing Company (3M),
through which 3M will globally market advanced versions of the Company's
SoftBoard family of products. Under the terms of the two year agreement, the
Company will develop specialized versions of the SoftBoard product line for 3M.
Shipments from the Company to 3M are scheduled to begin in the fourth quarter of
1997, with shipments of approximately $1.7 million scheduled for the first
quarter of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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
7
<PAGE>
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's results of operations will depend on continued and increased
market acceptance of its SoftBoard 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 could have a material
adverse effect on the Company's financial condition and results of operations.
In November 1994, the Company entered into an exclusive distributorship
agreement with Sord Computer Corporation, a subsidiary of Toshiba Corporation
("SORD") to market SoftBoards in Japan. In September 1995, the agreement with
SORD was extended through June 30, 1997, and contained a minimum purchase
commitment of approximately $1,000,000 over the twelve-month period beginning
July 1, 1995. The Company is currently in discussions with SORD regarding the
relationship in future periods. In the second quarter of 1997 and 1996,
approximately 2% and 20%, respectively, of the Company's sales were attributable
to SORD. For the six month periods ended June 28, 1997 and June 29, 1996
approximately 3% and 20%, respectively, of the Company's sales were attributable
to SORD.
As with any large OEM or distributor relationship, order rates may be
subject to quarterly fluctuations as demand varies and inventories are adjusted.
The Company's results for the first six months of 1997 were adversely affected
by the decrease in sales to SORD.
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales 100 % 100 % 100 % 100 %
Cost of goods sold 56 47 55 49
---------- ---------- ---------- ----------
Gross profit 44 53 45 51
Research and development expenses (18) (21) (18) (24)
Marketing and sales expenses (56) (50) (60) (54)
General and administrative expenses (22) (15) (20) (17)
---------- ---------- ---------- ----------
Loss from operations (52) (33) (53) (44)
Other income (expense) -- 2 -- 3
---------- ---------- ---------- ----------
Loss before provision for income taxes (52) (31) (53) (41)
Provision for income taxes -- -- -- --
---------- ---------- ---------- ----------
Net loss (52) % (31) % (53) % (41) %
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997 COMPARED WITH SECOND QUARTER
AND SIX MONTHS ENDED JUNE 29, 1996
SALES. Sales decreased $590,000 (33%) to $1,183,000 in the second quarter
of 1997 from $1,773,000 in the second quarter of 1996. Sales decreased $758,000
(24%) to $2,368,000 in the first six months of 1997 from $3,126,000 in the first
six months of 1996. The decreases resulted primarily from lower sales to SORD
during the quarter and the first six months of this year. SEE OVERVIEW.
8
<PAGE>
GROSS PROFIT. Cost of goods sold includes the cost of raw materials needed
to assemble the products, 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
decreased to 44% in the second quarter of 1997 from 53% in the second quarter of
1996. The Company's gross margin also decreased to 45% in the first six months
of 1997 from 51% in the first six months of 1996. The decline in gross margins
was due primarily to lower production levels which resulted in less absorption
of manufacturing overhead during the quarter.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. These expenses decreased $167,000 (44%) to $210,000 in
the second quarter of 1997 from $377,000 in the second quarter of 1996. These
expenses decreased $317,000 (42%) to $429,000 in the first six months of 1997
from $746,000 in the first six months of 1996. Research and development
expenses decreased as a percentage of sales to 18% in the first six months of
1997 from 24% in the first six months of 1996. The decrease was due primarily
to the lower rate of spending on new product development in the second quarter
of 1997 compared to the second quarter of 1996.
MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased
$218,000 (25%) to $661,000 in the second quarter of 1997 from $879,000 in the
second quarter of 1996. These expenses decreased $261,000 (16%) to $1,419,000
in the first six months of 1997 from $1,680,000 in the first six months of 1996.
The decrease was due primarily to a shift in the Company's sales channel
strategy. The decrease was also affected by a redistribution and consolidation
of a number of the marketing functions, refocused trade show expenditures, a
shift in advertising strategy, and lower sales commissions. Marketing and sales
expenses increased as a percentage of sales to 60% in the first six months of
1997 from 54% in the first six months of 1996 primarily due to the lower sales
volume.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $19,000 (7%) to $254,000 in the second quarter of 1997 from $273,000
in the second quarter of 1996. These expenses decreased $56,000 (11%) to
$466,000 in the first six months of 1997 from $522,000 in the first six months
of 1996. The decrease was due primarily to a reduction in Directors and
Officers liability insurance premiums and to lower use of outside services.
General and administrative expenses increased as a percentage of sales to 20% in
the first six months of 1997 from 17% in the first six months of 1996 primarily
due to the lower sales volume.
OTHER INCOME (EXPENSE). Other income (expense) includes interest income,
interest expense, and miscellaneous income. Other expense, net was ($3,000) in
the second quarter of 1997 compared to $38,000 of other income, net in the
second quarter of 1996. Other income, net was $4,000 in the first six months of
1997 compared to $93,000 of other income, net in the first six months of 1996.
Net interest income decreased as a result of lower cash balances in the first
six months of 1997 compared to the first six months of 1996.
INCOME TAXES. The Company recorded losses from operations in the second
quarters of 1997 and 1996. Accordingly, no provision for income taxes, other
than minimum state taxes, was provided for in either of these periods.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures through the private and public sale of equity securities, cash from
operations, and borrowings under operating lines of credit. At June 28, 1997,
the Company had working capital of approximately $1.7 million and its principal
source of liquidity consisted of approximately $1.4 million in cash and cash
equivalents. Additionally, as of June 28, 1997, the Company had a $2,000,000
line of credit with its bank, which bears interest monthly at prime (8.5 % at
June 28, 1997). At June 28, 1997 $500,000 was outstanding under the line of
credit. Inventories decreased approximately $395,000 in the first six months of
1997 as a result of lower purchases of raw materials.
The Company has no commitments for capital expenditures in material
amounts.
The Company believes its existing cash and cash equivalents, cash available
under its operating line of credit, and cash from operations will be sufficient
to fund its operations for at least the next 12 months.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting was held on June 3, 1997 at which the
actions below were taken. At June 3, 1997, 3,195,575 shares of Common
Stock were issued and outstanding.
1. The following three nominees for directors to the Board of
Directors of the Company, all of whom were existing directors and
together constituted all of the directors of the issuer, received the
following number of votes and were properly elected to the Board of
Directors: John B. Conroy ( 2,875,288 shares for and 78,935 shares
withheld), Samuel W. Mallicoat ( 2,855,835 shares for and 90,843 shares
withheld), and William P. Cargile ( 2,767,743 shares for and 71,390
shares withheld).
2. A majority of the votes cast approved the amendment of the
Company's 1995 Stock Incentive Plan to increase the aggregate number of
shares of Common Stock that may be issued thereunder to a total of
550,000 shares ( 1,322,834 Common shares were voted in favor, 125,744
Common shares were voted in opposition, 6,995 Common shares abstaining,
with 1,419,105 broker nonvotes).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit filed as part of this report is listed below:
Exhibit No.
-----------
11 Statement regarding computation of per share
earnings
27 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 28, 1997.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August __, 1997
MICROFIELD GRAPHICS, INC.
By:/s/JOHN B. CONROY
--------------
John B. Conroy
President and Chief Executive Officer
(Principal Executive Officer)
By:/S/RANDALL R. REED
---------------
Randall R. Reed
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
12
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
MICROFIELD GRAPHICS, INC.
CALCULATION OF NET LOSS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- ---------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Total shares used in per
share calculations 3,195,575 3,168,394 3,195,575 3,160,360
---------- ---------- ------------ -----------
---------- ---------- ------------ -----------
Net loss $ (613,692) (554,072) $ (1,251,684) (1,268,786)
---------- ---------- ------------ -----------
---------- ---------- ------------ -----------
Net loss per share $ (.19) (.17) $ (.39) (.40)
---------- ---------- ------------ -----------
---------- ---------- ------------ -----------
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S FORM 10-QSB FOR THE
THREE AND SIX MONTH PERIODS ENDED JUNE 28, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-3-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JUN-28-1997
<CASH> 1,366
<SECURITIES> 0
<RECEIVABLES> 782
<ALLOWANCES> 25
<INVENTORY> 603
<CURRENT-ASSETS> 2,911
<PP&E> 1,004
<DEPRECIATION> 548
<TOTAL-ASSETS> 3,448
<CURRENT-LIABILITIES> 1,200
<BONDS> 0
0
0
<COMMON> 12,153
<OTHER-SE> (10,037)
<TOTAL-LIABILITY-AND-EQUITY> 3,448
<SALES> 2,368
<TOTAL-REVENUES> 2,368
<CGS> 1,309
<TOTAL-COSTS> 1,309
<OTHER-EXPENSES> 2,314
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,251)
<INCOME-TAX> 1
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,252)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
