<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 October 3, 1998
[ ] 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
October 31, 1998 was 3,684,313 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
MICROFIELD GRAPHICS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet - October 3, 1998
and January 3, 1998 3
Consolidated Statement of Operations -Three and
Nine Months Ended October 3, 1998 and September 27, 1997 4
Consolidated Statement of Cash Flows -Nine Months
Ended October 3, 1998 and September 27, 1997 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 1 Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash
Cash and cash equivalents $ 1,378,869 $ 909,184
Accounts receivable, net of allowances
of $27,293 and $24,680 843,149 1,027,902
Inventories (Note 3) 904,789 712,000
Prepaid expenses and other 151,460 216,427
------------ ------------
Total current assets 3,278,267 2,865,513
Property and equipment, net (Note 4) 416,545 384,251
Other assets 58,783 72,444
------------ ------------
$ 3,753,595 $ 3,322,208
------------ ------------
------------ ------------
Current liabilities:
Current portion of debt $ 858,333 $ 1,083,333
Accounts payable 412,770 606,556
Accrued payroll and payroll taxes 108,743 193,757
Unearned income 47,845 53,745
Accrued liabilities 223,136 164,483
------------ ------------
Total current liabilities 1,650,827 2,101,874
Long-term debt, net of current portion 27,778 90,278
------------ ------------
1,678,605 2,192,152
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized, 3,631,044 and 3,211,813 shares
issued and outstanding 14,269,413 12,185,527
Accumulated deficit (12,194,423) (11,055,471)
------------ ------------
Total shareholders' equity 2,074,990 1,130,056
$ 3,753,595 $ 3,322,208
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 4, September 27, October 4, September 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 1,245,020 1,556,294 $ 5,642,067 3,924,400
Cost of goods sold 719,199 747,770 3,274,290 2,056,529
------------ ------------ ------------ ------------
Gross profit 525,821 808,524 2,367,777 1,867,871
Operating expenses
Research and development 254,862 326,801 710,360 755,779
Marketing and sales 619,413 671,684 2,050,668 2,090,462
General and administrative 236,382 229,106 705,039 694,695
------------ ------------ ------------ ------------
1,110,657 1,227,591 3,466,067 3,540,936
------------ ------------ ------------ ------------
Loss from operations (584,836) (419,067) (1,098,290) (1,673,065)
Other income (expense)
Interest income (expense), net (7,626) (9,531) (39,384) (10,643)
Other income, net 98 -- 228 4,683
------------ ------------ ------------ ------------
Loss before provision for income taxes (592,364) (428,598) (1,137,446) (1,679,025)
Provision for income taxes 800 1,061 1,505 2,317
------------ ------------ ------------ ------------
Net loss $ (593,164) (429,659) $ (1,138,951) (1,681,342)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share
Basic $ (.16) (.13) $ (.32) (.53)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted $ (.16) (.13) $ (.32) (.53)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in per share calculations
Basic 3,627,984 3,196,794 3,512,594 3,195,981
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted 3,627,984 3,196,794 3,512,594 3,195,981
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
---------------------------------
October 3, September 27,
1998 1997
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (1,138,951) $ (1,681,342)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 143,361 190,522
Gain on sale and leaseback of property and equipment -- (1,626)
Changes in assets and liabilities:
Accounts receivable 184,753 (182,124)
Inventories (192,789) 381,844
Prepaid expenses and other 64,967 35,635
Accounts payable (193,786) 84,081
Accrued payroll and payroll taxes (85,014) (144,797)
Unearned income (5,900) 78
Accrued liabilities 58,653 120,096
------------- -------------
Net cash used in operating activities (1,164,706) (1,197,633)
Cash flows from investing activities:
Acquisition of property and equipment (161,994) (46,561)
------------- -------------
Net cash used in investing activities (161,994) (46,561)
Cash flows from financing activities:
Payments on equipment line of credit (62,500) (55,552)
Payments on capital lease obligations -- (51,493)
Proceeds from (payments on) operating line of credit (225,000) 700,000
Proceeds from exercise of common stock options
and warrants 93,677 4,347
Proceeds from issuance of common stock 1,990,208 --
------------- -------------
Net cash provided by financing activities 1,796,385 597,302
Net increase (decrease) in cash and cash equivalents 469,685 (646,892)
Cash and cash equivalents, beginning of period 909,184 1,867,856
------------- -------------
Cash and cash equivalents, end of period $ 1,378,869 $ 1,220,964
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 76,517 $ 48,248
------------- -------------
------------- -------------
$ 705 $ 2,317
------------- -------------
------------- -------------
</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 nine months ended
October 3, 1998 and September 27, 1997 have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. The financial
information as of January 3, 1998 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 January
3, 1998. 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
nine months ended October 3, 1998 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 52-week period ending January 2, 1999. The Company's last fiscal year
was the 53-week period ended January 3, 1998. The Company's third fiscal
quarters in fiscal 1998 and 1997 were the 13-week periods ended October 3, 1998
and September 27, 1997, 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.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which defines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about operating segments, and is effective for the Company's fiscal
year ended December 1998. 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:
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
------------- --------------
<S> <C> <C>
Raw materials $ 587,248 $ 515,122
Finished goods 317,541 196,878
------------- --------------
$ 904,789 $ 712,000
------------- --------------
------------- --------------
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
-------------- --------------
<S> <C> <C>
Machinery and equipment $ 1,204,056 $ 1,042,062
Less accumulated
depreciation and
amortization 787,511 657,811
-------------- --------------
$ 416,545 $ 384,251
-------------- --------------
-------------- --------------
</TABLE>
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 principal purpose of these products is to make
meetings more productive and cost effective by capturing ideas from all meeting
members (whether they are located locally or linked remotely through a computer
and an audio hookup) and making the information available to all of the linked
systems, where everyone involved can see and interact with the information
produced and presented. The Company's product lines incorporate a series of
digital whiteboards, digital whiteboard rear projection systems and interactive
plasma display 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 was incorporated in Oregon in 1986. The Company's executive
offices are located at 7216 SW Durham Road, Portland, OR 97224.
In July 1997 the Company entered into a General Purchase and Development
Agreement with Minnesota Mining and Manufacturing Company (3M), through which 3M
globally markets advanced versions of the Company's SoftBoard family of
products. Under the terms of the two year agreement, the
7
<PAGE>
Company developed specialized versions of the SoftBoard product line exclusively
for 3M. The Company recorded revenue from non-recurring engineering services in
the third and fourth quarters of 1997 and the first quarter of 1998. Product
shipments from the Company to 3M began in the fourth quarter 1997. For the
three months ended October 3, 1998 and September 27, 1997 approximately 4% and
10%, respectively, of the Company's sales were attributable to 3M.
The Company's future 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.
As with any large OEM or distributor relationship, order rates may be subject to
quarterly fluctuations as demand varies and inventories are adjusted.
In March 1998 the Company signed a Common Stock Purchase Agreement with
Steelcase Inc. (Steelcase), pursuant to which Steelcase purchased 350,000 shares
of the Company's common stock and a warrant for a total of $2,012,500 in cash.
The warrant gives Steelcase the right to purchase an additional 260,000 shares
of the Company's common stock at $6.75 per share. The warrant is exerciseable
starting on March 16, 1999 and expires on March 16, 2001.
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 NINE MONTHS ENDED
----------------------- -----------------------
OCT. 3, SEPT. 27, OCT. 3, SEPT. 27,
1998 1997 1998 1997
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Sales 100 % 100 % 100 % 100 %
Cost of goods sold 58 48 58 52
-------- --------- -------- ---------
Gross profit 42 52 42 48
Research and development expenses (20) (21) (13) (19)
Marketing and sales expenses (50) (43) (36) (53)
General and administrative expenses (19) (15) (12) (18)
-------- --------- -------- ---------
Loss from operations (47) (27) (19) (42)
Other income (expense) (1) (1) (1) --
-------- --------- -------- ---------
Loss before provision for income taxes (48) (28) (20) (42)
Provision for income taxes -- -- -- --
-------- --------- -------- ---------
Net loss (48) % (28) % (20) % (42) %
-------- --------- -------- ---------
</TABLE>
THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED WITH THIRD QUARTER
AND NINE MONTHS ENDED SEPTEMBER 27, 1997
SALES. Sales decreased $311,000 (20%) to $1,245,000 in the third quarter
of 1998 from $1,556,000 in the third quarter of 1997. Sales increased $1,718,000
(44%) to $5,642,000 in the first nine months of 1997 from $3,924,000 in the
first nine months of 1997. The decrease for the three month period resulted
primarily from lower revenue from 3M during the current quarter compared to the
same quarter in 1997. The increase for the first nine months of this year
resulted primarily from shipment of the initial commitment of product to 3M
under the agreement the Company signed with it in July of 1997. 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 42% in the third quarter of 1998 from 52% in the third quarter of
1997. The Company's gross margin also decreased to 42% in the first nine months
of 1998 from 48% in the first nine months of 1997. The decline in gross margin
during the third quarter of 1998 was due primarily to the high concentration of
non-recurring engineering revenue charged to 3M during the third quarter of
1997. Much of the work associated with that revenue had been done in previous
quarters, therefore the cost associated with the revenue in that quarter was
low. Gross margins for the nine months decreased between years as a result of
the lower margins provided from sales to 3M in the original equipment
manufacturer (OEM) channel. Sales into this channel traditionally have lower
average selling prices, and therefore lower margins, based on the potentially
higher volumes that are anticipated in an OEM relationship.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. These expenses decreased $72,000 (22%) to $255,000 in the
third quarter of 1998 from $327,000 in the third quarter of 1997. These
expenses decreased $46,000 (6%) to $710,000 in the first nine months of 1998
from $756,000 in the first nine months of 1997. These decreases were due
primarily to lower new product development costs incurred during the current
periods. Research and development expenses decreased as a percentage of sales
to 13% in the first nine months of 1998 from 19% in the first nine months of
1997. The decrease was due primarily to the higher level of Company revenue in
the first nine months of 1998 compared to the same period in 1997.
MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased
$52,000 (8%) to $619,000 in the third quarter of 1998 from $671,000 in the third
quarter of 1997. These expenses decreased $40,000 (2%) to $2,050,000 in the
first nine months of 1998 from $2,090,000 in the first nine months of 1997. The
decrease between quarters was due primarily to lower costs associated with the
current advertising program and decreased participation in trade shows during
the quarter. Marketing and sales expenses decreased as a percentage of sales to
36% in the first nine months of 1998 from 53% in the first nine months of 1997
primarily due to the higher sales volume in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $7,000 (3%) to $226,000 in the third quarter of 1998 from $229,000 in
the third quarter of 1997. These expenses increased $10,000 (1%) to $705,000 in
the first nine months of 1998 from $695,000 in the first nine months of 1997.
General and administrative expenses decreased as a percentage of sales to 12% in
the first nine months of 1998 from 18% in the first nine months of 1997
primarily due to the higher sales volume in 1998.
OTHER INCOME (EXPENSE). Other income (expense) includes interest income,
interest expense, and miscellaneous income. Other expense, net was ($8,000) in
the third quarter of 1998 compared to ($10,000) of other expense, net in the
third quarter of 1997. Other expense, net was $(39,000) in the first nine
months of 1998 compared to $(6,000) of other expense, net in the first nine
months of 1997. Interest expense increased as a result of increased levels of
borrowing under the Company's operating line of credit. Interest income
decreased as a result of lower cash balances in the first nine months of 1998
compared to the first nine months of 1997.
INCOME TAXES. The Company recorded losses from operations in the third
quarters of 1998 and 1997. Accordingly, no provision for income 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 October 3, 1998,
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 October 3, 1998, the Company had a $2,000,000
line of credit with its bank using its accounts receivable and certain of its
inventory as collateral. The operating line bears interest monthly at prime
(8.5 % at October 3, 1998). At October 3, 1998 $775,000 was outstanding under
the line of credit. Accounts receivable decreased to $843,000 from $1,028,000
at the end of 1997, and inventory increased to $905,000 from $712,000 at the
end of 1997.
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 may not be
sufficient to fund its operations for at least the next 12 months, and is
looking at alternative means of financing the business should the above sources
be insufficient.
IMPACT OF THE YEAR 2000 ISSUE
The Company has made an assessment of the Year 2000 issue on its internal
systems and equipment, its hardware and software products, and on the systems of
its vendor base. Based on this assessment, the Company believes that its
internal systems have been updated to address the Year 2000 issue, its hardware
and software products will properly recognize calendar dates beginning in the
Year 2000, and its vendor base is appropriately addressing the Year 2000 issues.
Accordingly, the Company believes it is Year 2000 ready and does not currently
expect to incur any material costs in connection with the Year 2000 issue.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 5, 1998 a former temporary leased employee filed a complaint in
federal district court for the district of Oregon (Schmechel vs. Microfield
Graphics, Inc.), alleging gender discrimination and harassment in addition to a
state wrongful constructive discharge claim. The plaintiff has alleged
emotional distress, economic loss and punitive damages totaling $1.4 million.
No members of the Company's management were named in the suit. The Company
believes the complaints are without merit and intends to defend these actions
vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit filed as part of this report is listed below:
Exhibit No.
-----------
27 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended October 3,
1998.
11
<PAGE>
SIGNATURES
In accordance with 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: November 17, 1998
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)
12
<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: November 17, 1998
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)
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 nine month periods ended October 3, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 1,379
<SECURITIES> 0
<RECEIVABLES> 870
<ALLOWANCES> 27
<INVENTORY> 905
<CURRENT-ASSETS> 3,278
<PP&E> 1,204
<DEPRECIATION> 788
<TOTAL-ASSETS> 3,754
<CURRENT-LIABILITIES> 1,651
<BONDS> 0
0
0
<COMMON> 14,269
<OTHER-SE> (12,194)
<TOTAL-LIABILITY-AND-EQUITY> 3,754
<SALES> 5,642
<TOTAL-REVENUES> 5,642
<CGS> 3,274
<TOTAL-COSTS> 3,274
<OTHER-EXPENSES> 2,355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> (1,137)
<INCOME-TAX> 2
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,139)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
