<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 March 29, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 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, OR 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 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of April
30, 1997 was 3,195,575 shares.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
MICROFIELD GRAPHICS, INC.
FORM 10-QSB
INDEX
<TABLE>
PART I FINANCIAL INFORMATION Page
- ------------------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet -March 29, 1997
and December 28, 1996 3
Consolidated Statement of Operations -Quarter Ended
March 29, 1997 and March 30, 1996 4
Consolidated Statement of Cash Flows -Quarter
Ended March 29, 1997 and March 30, 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 6. Exhibits and Reports on Form 8-K 10
</TABLE>
2
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MICROFIELD GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 29, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,466,291 $ 1,867,856
Accounts receivable, net of allowances
of $24,680 and $45,648 751,615 777,807
Inventories (Note 3) 918,249 997,693
Prepaid expenses and other 199,982 248,875
------------ ----------
Total current assets 3,336,137 3,892,231
Property and equipment, net (Note 4) 494,459 542,826
Other assets 84,021 86,720
------------ ----------
$ 3,914,617 $ 4,521,777
------------ ----------
------------ ----------
Current liabilities:
Current portion of debt $ 483,328 $ 119,537
Accounts payable 183,806 399,011
Accrued payroll and payroll taxes 145,573 209,697
Unearned income 64,661 60,803
Accrued liabilities 148,161 183,420
------------ ----------
Total current liabilities 1,025,529 972,468
Long-term debt, net of current portion 159,728 181,956
------------ ----------
1,185,257 1,154,424
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized, 3,195,575 and 3,152,326 shares
issued and outstanding 12,152,781 12,152,781
Accumulated deficit (9,423,421) (8,785,428)
------------ ----------
Total shareholders' equity 2,729,360 3,367,353
------------ ----------
$ 3,914,617 $ 4,521,777
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
---------------------------
March 29, March 30,
1997 1996
---------- ----------
<S> <C> <C>
Sales $1,185,367 $1,353,349
Cost of goods sold 640,560 702,815
---------- ----------
Gross profit 544,807 650,534
Operating expenses
Research and development 218,887 368,454
Marketing and sales 758,066 801,329
General and administrative 211,807 249,230
---------- ----------
1,188,760 1,419,013
---------- ----------
Loss from operations (643,953) (768,479)
Other income (expense)
Interest income, net 1,735 50,306
Other income, net 4,682 4,259
---------- ----------
Loss before provision for income taxes (637,536) (713,914)
Provision for income taxes 457 800
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Net loss $ (637,993) $ (714,714)
---------- ----------
---------- ----------
Net loss per share $ (0.20) $ (0.23)
---------- ----------
---------- ----------
Shares used in per share calculations 3,195,575 3,152,326
---------- ----------
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</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
----------------------------------------
March 29, March 30,
1997 1996
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<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (637,993) $ (714,714)
Adjustments to reconcile loss from continuing operations
to operating cash flows:
Depreciation and amortization 75,112 63,700
Gain on sale and leaseback of property and equipment (1,626) (2,439)
Changes in assets and liabilties:
Accounts receivable 26,192 41,912
Inventories 79,444 (82,054)
Prepaid expenses and other 48,893 (38,190)
Accounts payable (215,205) (18,547)
Accrued payroll and payroll taxes (64,124)
Unearned income 3,858
Accrued liabilties (33,633) (6,798)
------------- -------------
Net cash used in operating activities (719,082) (757,130)
Cash flows from investing activities:
Sales of marketable securities -- 45,546
Acquisition of property and equipment (24,046) (110,910)
Purchases of other assets -- (14,571)
------------- -------------
Net cash used in investing activities (24,046) (79,935)
Cash flows from financing activities:
Payments on equipment line of credit (6,944) --
Payments on capital lease obligations (51,493) (30,873)
Proceeds from operating line of credit 400,000
Proceeds from exercise of common stock options
and warrants 38,239
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Net cash provided by financing activities 341,563 7,366
Net decrease in cash and cash equivalents (401,565) (829,699)
Cash and cash equivalents, beginning of period 1,867,856 3,180,872
------------- -------------
Cash and cash equivalents, end of period $ 1,466,291 $ 2,351,173
------------- -------------
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Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 13,439 $ 12,461
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Income taxes 456 800
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</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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 ended March 29, 1997 and March
30, 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 From 10-KSB. The
accompanying 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 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 quarter ended March 29, 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 last fiscal year was
the 52 weeks ended December 28, 1996. The Company's first fiscal quarters in
fiscal 1997 and 1996 were the 13-week periods ended March 29, 1997, and March
30, 1996, respectively.
2. RECENTLY ISSUED ACCOUNTING STANDARD
In March 1997, The FASB issued Statement of Financial Accounting Standards No.
128, EARNINGS PER SHARE (SFAS 128). SFAS 128 applies to entities with publicly
held common stock and is effective for financial statements issued for periods
ending after December 15, 1997. SFAS replaces APB Opinion 15, EARNINGS PER
SHARE, and simplifies the computation of EPS by replacing the presentation of
primary EPS with a presentation of basic EPS. The impact of the SFAS 128 EPS
calculation for the first quarter 1997 is not material.
3. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out method), or market value, and consist of the following:
March 29, December 28,
1997 1996
---------- ------------
Raw materials $508,787 $554,713
Work in process -- --
Finished goods 409,462 442,980
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$918,249 $997,693
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6
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4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 29, December
1997 28, 1996
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Machinery and equipment $987,252 $738,431
Furniture -- --
Capitalized leased assets -- 224,775
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987,252 963,206
Less accumulated depreciation
and amortization 492,793 420,380
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$494,459 $542,826
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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 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 SoftBoard products are expected to provide the substantial
majority of its sales for 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 could have a material adverse effect on the
Company's financial condition and results of operations.
In September 1995, the Company entered into an exclusive distributorship
agreement with Sord Computer Corporation, a subsidiary of Toshiba Corporation
("SORD") to market SoftBoards in Japan. The agreement with SORD extends the
distributorship through June 30, 1997, and contains a minimum purchase
commitment of approximately $1,000,000 over the twelve-month period beginning
July 1, 1995. Sales to SORD were approximately 4% and 21% of total sales in
the first quarter of 1997 and 1996 respectively.
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 quarter of 1997 were adversely
affected by the decrease in sales to SORD.
7
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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.
<TABLE>
<CAPTION>
FIRST FIRST
QUARTER QUARTER
1997 1996
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<S> <C> <C>
Sales 100 % 100 %
Cost of goods sold 54 52
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Gross profit 46 48
Research and development expenses (18) (27)
Marketing and sales expenses (64) (59)
General and administrative expenses (18) (18)
------- -------
Loss from operations (54) (56)
Other income (expense) -- 4
------- -------
Loss before provision for income taxes (54) (52)
Provision for income taxes -- --
------- -------
Net loss (54)% (52)%
------- -------
------- -------
</TABLE>
FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996
SALES. Sales decreased $168,000 (12%) to $1,185,000 in the first
quarter of 1997 from $1,353,000 in the first quarter of 1996. The decrease
resulted primarily from lower shipments to SORD in the first quarter of 1997
compared to the first quarter of 1996. Sales to all customers other than
SORD increased by 6% quarter over quarter. SEE "OVERVIEW"
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 46% in the first quarter of 1997 from 48%
in the first quarter of 1996. The decrease in gross margin was due primarily
to lower absorption of manufacturing overhead during the quarter.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. These expenses decreased $150,000 (41%) to $219,000 in
the first quarter of 1997 from $369,000 in the first quarter of 1995.
Research and development expenses decreased as a percentage of sales to 18%
in the first quarter of 1997 from 27% in the first quarter of 1996. The
decrease was due primarily to the lower rate of spending on new product
development in the first quarter of 1997 compared to the first quarter of
1996.
MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased
$43,000 (5%) to $758,000 in the first quarter of 1997 from $801,000 in the
first quarter of 1996. The decrease was due primarily to lower advertising
expense, and to lower expenditures for outside sales travel. Marketing and
sales expenses increased as a percentage of sales to 64% in the first quarter
of 1997 from 59% in the first quarter of 1996. The Company plans to continue
its efforts to build market and product awareness through advertising and
attendance at industry trade shows.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $37,000 (15%) to $212,000 in the first quarter of 1997 from $249,000
in the first quarter of 1996. The decrease was due primarily to
8
<PAGE>
lower insurance costs and lower use of outside resources. These expenses
were 18% of sales in both the first quarter of 1997 and the first quarter of
1996.
OTHER INCOME (EXPENSE). Other income (expense) includes interest income,
interest expense, and miscellaneous income. Net interest income decreased
$48,000 (96%) to $2,000 in the first quarter of 1997 from $50,000 in the
first quarter of 1996. Net interest income decreased as a result of lower
cash balances in the first quarter of 1997 compared to the first quarter of
1996.
INCOME TAXES. The Company recorded losses from operations in the first
quarters of 1997 and 1996. Accordingly, no provision for income taxes, other
than minimum state taxes, was provided for in either of these periods.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures through the private and publi sale of equity securities, cash
from operations, and borrowings under operating lines of credit. At March
29, 1997, the Company had working capital of approximately $2.3 million and
its principal source of liquidity consisted of $1.5 million in cash and cash
equivalents. Additionally, as of March 29, 1997, the Company had a $2,000,000
line of credit with its bank, which bears interest monthly at prime (8.5 % at
March 29, 1997). At March 29, 1997 $400,000 was outstanding under the line of
credit. Inventories decreased approximately $79,000 in the first quarter of
1997 as a result of lower purchases of raw materials. Prepaids decreased
$49,000, primarily due to a decrease in deposits on leases and trade shows.
Property and equipment, net of depreciation, decreased by $48,000 primarily
due to low fixed asset purchases during the quarter offset by depreciation
expense.
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.
9
<PAGE>
PART II. OTHER INFORMATION
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 March 29, 1997.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: May , 1997
--
MICROFIELD GRAPHICS, INC.
By:
---------------------------------
John B. Conroy
President and Chief Executive Officer
(Principal Executive Officer)
By:
---------------------------------
Randall R. Reed
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: May , 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
MICROFIELD GRAPHICS, INC.
CALCULATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
MARCH 29, MARCH 30,
1997 1996
------------- ------------
<S> <C> <C>
Total shares used in per share calculations 3,195,575 3,152,326
------------- ------------
------------- ------------
Net loss $ (637,993) $ (714,714)
------------- ------------
------------- ------------
Net loss per share $ (0.20) $ (0.23)
------------- ------------
------------- ------------
</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 month periods ended March 29, 1997, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-28-1996
<PERIOD-END> MAR-29-1997
<CASH> 1,446
<SECURITIES> 0
<RECEIVABLES> 776
<ALLOWANCES> 25
<INVENTORY> 918
<CURRENT-ASSETS> 3,336
<PP&E> 987
<DEPRECIATION> 493
<TOTAL-ASSETS> 3,915
<CURRENT-LIABILITIES> 1,026
<BONDS> 0
0
0
<COMMON> 12,153
<OTHER-SE> (9,423)
<TOTAL-LIABILITY-AND-EQUITY> 3,915
<SALES> 1,185
<TOTAL-REVENUES> 1,185
<CGS> 641
<TOTAL-COSTS> 641
<OTHER-EXPENSES> 1,189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (638)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (638)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
