<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 July 3, 1999
[ ] 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,
1999 was 4,132,185 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 - July 3, 1999
and January 2, 1999 3
Consolidated Statement of Operations -Three and
Six Months Ended July 3, 1999 and July 4, 1998 4
Consolidated Statement of Cash Flows -Six Months
Ended July 3, 1999 and July 4, 1998 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 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
July 3, January 2,
1999 1999
----------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 404,899 $ 739,628
Accounts receivable, net of allowances
of $41,997 and $44,553 497,355 797,543
Inventories (Note 2) 710,305 946,103
Prepaid expenses and other 123,729 156,627
----------------- -----------------
Total current assets 1,736,288 2,639,901
Property and equipment, net (Note 3) 319,712 379,457
Other assets 191,717 226,140
----------------- -----------------
$ 2,247,717 $ 3,245,498
----------------- -----------------
----------------- -----------------
Current liabilities:
Current portion of debt $ 572,611 $ 738,333
Accounts payable 354,226 532,308
Accrued payroll and payroll taxes 63,126 255,698
Unearned income 81,147 56,101
Accrued liabilities 205,826 186,403
----------------- -----------------
Total current liabilities 1,276,936 1,768,843
Long-term debt, net of current portion 51,481 84,165
----------------- -----------------
1,328,417 1,853,008
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
Authorized, 4,132,185 and 3,686,775 shares
Issued and outstanding 15,352,662 14,362,698
Accumulated deficit (14,433,362) (12,970,208)
----------------- -----------------
Total shareholders' equity 919,300 1,392,490
----------------- -----------------
$ 2,247,717 $ 3,245,498
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
-------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 807,433 1,839,122 $ 1,860,748 4,397,046
Cost of goods sold 501,433 1,130,984 1,172,724 2,555,091
-------------- ---------------- ----------------- ---------------
Gross profit 306,000 708,138 688,024 1,841,955
Operating expenses
Research and development 281,049 245,179 525,659 455,497
Marketing and sales 578,298 795,491 1,059,717 1,431,255
General and administrative 241,371 259,007 489,000 468,657
-------------- ---------------- ----------------- ---------------
1,100,718 1,299,677 2,074,376 2,355,409
-------------- ---------------- ----------------- ---------------
Loss from operations (794,718) (591,539) (1,386,352) (513,454)
Other income (expense)
Interest income (expense), net (12,040) (7,618) (27,284) (31,758)
Other income (expense), net (49,742) 131 (49,518) 131
-------------- ---------------- ----------------- ---------------
Loss before provision for income taxes (856,500) (599,026) (1,463,154) (545,081)
Provision for income taxes -- -- -- 706
-------------- ---------------- ----------------- ---------------
Net loss $ (856,500) (599,026) $ (1,463,154) (545,787)
-------------- ---------------- ----------------- ---------------
-------------- ---------------- ----------------- ---------------
Net loss per share
Basic $ (.22) (.17) $ (.37) (.16)
-------------- ---------------- ----------------- ---------------
-------------- ---------------- ----------------- ---------------
Diluted $ (.22) (.17) $ (.37) (.16)
-------------- ---------------- ----------------- ---------------
-------------- ---------------- ----------------- ---------------
Shares used in per share calculations
Basic 3,926,753 3,625,988 3,926,753 3,454,899
-------------- ---------------- ----------------- ---------------
-------------- ---------------- ----------------- ---------------
Diluted 3,926,753 3,625,988 3,926,753 3,454,899
-------------- ---------------- ----------------- ---------------
-------------- ---------------- ----------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
----------------------------------------------
July 3, July 4,
1999 1998
------------------- ------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (1,463,154) $ (545,787)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 99,845 95,574
Changes in assets and liabilities:
Accounts receivable 300,188 (504,727)
Inventories 235,798 (152,431)
Prepaid expenses and other assets 57,547 26,068
Accounts payable (178,082) (133,535)
Accrued payroll and payroll taxes (192,572) (134,450)
Unearned income 25,046 843
Accrued liabilities (6,316) 55,964
------------------ -----------------
Net cash used in operating activities (1,121,700) (1,292,481)
Cash flows from investing activities:
Acquisition of property and equipment (30,326) (115,516)
------------------ -----------------
Net cash used in investing activities (30,326) (115,516)
Cash flows from financing activities:
Payments on equipment line of credit (41,667) (41,666)
Payments on operating line of credit (131,000) (200,000)
Proceeds from exercise of common stock options
and warrants 1,210 86,210
Proceeds from issuance of common stock 988,754 1,990,208
------------------ -----------------
Net cash provided by financing activities 817,297 1,834,752
Net (decrease) increase in cash and cash equivalents (334,729) 426,755
Cash and cash equivalents, beginning of period 739,628 909,184
------------------ -----------------
Cash and cash equivalents, end of period $ 404,899 $ 1,335,939
------------------ -----------------
------------------ -----------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 17,555 $ 54,478
------------------ -----------------
------------------ -----------------
Income taxes $ -- $ 706
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<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 July 3, 1999 and July 4, 1998 have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. The
financial information as of January 2, 1999 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 2, 1999. 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
July 3, 1999 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 ended January 1, 2000. The Company's last fiscal
year was the 53-week period ended January 2, 1999. The Company's second
fiscal quarters in fiscal 1999 and 1998 were the 13-week periods ended July
3, 1999 and July 4, 1998, respectively.
<PAGE>
2. 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>
July 3, January 2,
1999 1999
----------------- -------------------
<S> <C> <C>
Raw materials $ 390,176 $ 607,140
Finished goods 320,129 338,963
----------------- -------------------
$ 710,305 $ 946,103
----------------- -------------------
----------------- -------------------
</TABLE>
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
July 3, January 2,
1999 1999
----------------- -------------------
<S> <C> <C>
Machinery and equipment $1,253,340 $1,223,014
Less accumulated depreciation and
amortization 933,628 843,557
----------------- -------------------
$ 319,712 $ 379,457
----------------- -------------------
----------------- -------------------
</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 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 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
<PAGE>
Company developed specialized versions of the SoftBoard product line
exclusively for 3M. Shipments from the Company to 3M began in the fourth
quarter of 1997 and continued through the second quarter of 1998. For the six
months ended July 3, 1999 and July 4, 1998 approximately 0% and 58%,
respectively, of the Company's sales were attributable to 3M.
In April 1999, the Company was informed by 3M of their decision to
exit the Advanced Meeting Solutions (AMS) Project under which the SoftBoard
family of products was marketed. The Company reached an agreement with 3M
under which the Company will assume responsibility for the global
distribution network of whiteboard products. In this role, the Company will
support digital whiteboard product sales, service and warranty obligations
for all of 3M's installed base and dealer network affected by their
withdrawal from the AMS Project. The reduced level of sales to 3M and their
announced exit from the AMS program has had a material adverse effect on the
Company's business. During the first half of 1999, the Company believes that
3M's liquidation of its inventory of Ideaboard products negatively impacted
sales of its SoftBoard digital whiteboard products. Unit sales in this
product line have been strengthening, reflecting completion of the 3M
liquidation program, the recent expansion of the Company's dealer base as
previously announced, and new product pricing strategies which the Company
recently introduced.
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. In March 1999, Steelcase purchased an additional 444,445 shares for
a total of $1,000,001 in cash. As of July 3, 1999 Steelcase owned 23% of the
outstanding common stock of the Company.
At the end of the second quarter of 1999, the Company introduced a
major restructuring to realign operating expenses with sales levels while
retaining critical functions in key operational areas. Total overhead expense
was reduced by approximately 50% through a combination of staff reductions,
workweek reductions, temporary executive salary reductions, and reductions in
general expense spending levels. As a result, the Company has delayed the
previously reported Joint Development Agreement with Steelcase Inc. entered
into in the first quarter of 1999. In the near term, the Company plans to
focus efforts on expanding product offerings based on its current technology.
It is the Company's intention to resume the joint product development program
with Steelcase when the Company achieves profitablity on a sustainable basis.
There is no assurance that the development program will be resumed or that
the restructuring will return the Company to profitability.
Also at the end of the second quarter of 1999, the Company
introduced a product price reduction in its 200 Series digital whiteboard
product line. Prices were adjusted to achieve closer parity with competing
products in the marketplace.
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.
<PAGE>
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
--------------------------- ------------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------------ ---------- --------- ----------
<S> <C> <C> <C> <C>
Sales 100 % 100 % 100 % 100 %
Cost of goods sold 62 61 63 58
----------- ---------- --------- ----------
Gross profit 38 39 37 42
Research and development expenses (35) (13) (29) (10)
Marketing and sales expenses (72) (43) (57) (33)
General and administrative expenses (30) (14) (26) (11)
----------- ---------- --------- ----------
Loss from operations (99) (32) (75) (12)
Other income (expense) (7) -- (4) --
----------- ---------- --------- ----------
Loss before provision for income taxes (106) (32) (79) (12)
Provision for income taxes -- -- -- --
----------- ---------- --------- ----------
----------- ---------- --------- ----------
Net loss (106) % (32) % (79) % (12) %
----------- ---------- --------- ----------
----------- ---------- --------- ----------
</TABLE>
SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999 COMPARED WITH SECOND QUARTER
AND SIX MONTHS ENDED JULY 3, 1998.
SALES. Sales decreased $1,032,000 (56%) to $807,000 in the second
quarter of 1999 from $1,839,000 in the second quarter of 1998. Sales
decreased $2,536,000 (58%) to $1,861,000 in the first six months of 1999 from
$4,397,000 in the first six months of 1998. The decreases were due primarily
to the decreased level of sales to 3M and reduced demand for products being
sold by the Company due to 3M's liquidation of its Ideaboard inventory. There
were no sales to 3M during the first and second quarters of 1999 while sales
to 3M during the comparable periods in 1998 were $1,585,000 million and
$958,000, respectively. 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 38% in the second quarter of 1999 from
39% in the second quarter of 1998. The Company's gross margin also decreased
to 37% in the first six months of 1999 from 42% in the first six months of
1998. The decline in gross margins is due primarily to lower production
volumes in the first and second quarters of 1999 compared to the comparable
quarters in 1998, resulting in lower absorption of manufacturing overhead
expense. In addition, increased sales through the Company's reseller channel
contributes to lower margins due to discounted reseller prices.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs
are expensed as incurred. These expenses increased $36,000 (15%) to $281,000
in the second quarter of 1999 from $245,000 in the second quarter of 1998.
These expenses increased $70,000 (15%) to $525,000 in the first six months of
1999 from $455,000 in the first six months of 1998. These increases were due
primarily to higher development costs incurred for new technology development
on the next generation SoftBoard Series 200 product line. Research and
development expenses increased as a percentage of sales to 29% in the first
six months of 1999 from 10% in the first six months of 1998. The increase was
due to the
<PAGE>
combination of slightly higher development costs coupled with significantly
lower revenue levels in the first six months of 1999 compared to the same
period in 1998.
MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased
$218,000 (27%) to $578,000 in the second quarter of 1999 from $796,000 in the
second quarter of 1998. These expenses decreased $371,000 (26%) to $1,060,000
in the first six months of 1999 from $1,431,000 in the first six months of
1998. The decreases are primarily due to lower costs associated with the
current advertising program and decreased participation in trade shows.
Marketing and sales expenses increased as a percentage of sales to 57% in the
first six months of 1999 from 33% in the first six months of 1998 due to the
lower sales volume.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $17,000 (6%) to $242,000 in the second quarter of 1999
from $259,000 in the second quarter of 1998 These expenses increased $20,000
(4%) to $489,000 in the first six months of 1999 from $469,000 in the first
six months of 1998. General and administrative expenses increased as a
percentage of sales to 26% in the first six months of 1999 from 11% in the
first six months of 1998 primarily due to the the Company's lower sales
volume.
OTHER INCOME (EXPENSE). Other income (expense) includes interest
income, interest expense, and miscellaneous income or expense. Other expense,
net was $61,000 in the second quarter of 1999 compared to $7,000 of other
expense, net in the second quarter of 1998. Other expense, net was $77,000 in
the first six months of 1999 compared to $32,000 of other expense, net in the
first six months of 1998. The increase in expense over the comparable three
and six month periods is primarily due to a legal settlement and related
legal costs of $26,000, and other minor expenses. SEE PART II, ITEM 1 - LEGAL
PROCEEDINGS.
INCOME TAXES. The Company recorded losses from operations in the
second quarters of 1999 and 1998. Accordingly, no provision for income taxes
was provided for in either of these periods. The Company recorded income in
the first quarter of 1998, but did not provide for other than minimum state
income taxes due to available net operating loss carryforwards of
approximately $10 million for federal tax purposes.
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 July 3,
1999, the Company had working capital of approximately $459,000 and its
principal source of liquidity consisted of approximately $405,000 in cash and
cash equivalents. Accounts receivable decreased to $497,000 from $798,000 at
the end of 1998, and inventory decreased to $710,000 from $946,000 at the end
of 1998.
The Company has a $2,000,000 operating 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 (8.0 % at July 3, 1999). At
July 3, 1999 $524,000 was outstanding under the line of credit. The Company
is presently not in compliance with the minimum tangible net worth financial
covenant of its Loan Agreement with the bank. While the Company has requested
a covenant waiver from the bank, there can be no assurance that one will be
granted. In the event that a waiver is not granted, the Company's business
and financial condition could be materially and adversely affected.
<PAGE>
In June 1999, the Company concluded that its existing resources at
that time (cash and cash equivalents, cash available under its operating line
of credit) coupled with the reduction in sales that occurred during the first
six months of 1999 could possibly have resulted in the Company not having
sufficient funds to operate for at least the next twelve months. In response
to this, the Company significantly reduced corporate expenses through a
restructuring and introduced additional interim cost savings measures (SEE
OVERVIEW). The Company believes its present and expected future resources are
sufficient to fund its operations for the foreseeable future. The Company is
also exploring alternative means of financing the business. There is no
assurance that the Company can obtain such financing, or that such financing
will be on terms acceptable to the Company.
The Company has no commitments for capital expenditures in material
amounts.
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 material costs in connection with the
Year 2000 issue.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, 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 alleged emotional distress, economic loss and
punitive damages. No members of the Company's management were named in the
suit. A Settlement Agreement was executed during the second quarter of 1999
and a settlement payment was made by the Company. The settlement expense and
related legal costs is included in Other Expense and did not have a material
effect on the Company's operating results.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is presently not in compliance with the minimum tangible
net worth financial covenant of its Loan Agreement with its bank. While the
Company has requested a covenant waiver from the bank, there can be no
assurance that one will be granted. In the event that a waiver is not
granted, the Company's business and financial condition could be materially
and adversely affected. SEE LIQUIDITY AND CAPITAL RESOURCES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting was held on May 19, 1999 at which the
actions below were taken. At May 19, 1999, 3,687,740 shares of Common Stock
were issued and outstanding.
1. The following four 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 (3,476,165 shares for and
47,116 shares withheld), William P. Cargile (3,476,565 shares for
and 46,716 shares withheld), Herbert S. Shaw (3,476,565 shares for
and 46,716 shares withheld), and James P. Keane (3,476,565 shares
for and 46,716 shares withheld).
2. The Company's 1995 Stock Incentive Plan was amended to increase
the aggregate number of shares of common stock that may be issued
thereunder to 850,000, an increase of 350,000 shares. The voting
results were as follows: For 1,129,956; Against 169,902; Abstained
5,347; Broker Non-Votes 2,218,076.
ITEM 5. OTHER INFORMATION
On April 21, 1999, the Company received notice from the Nasdaq Stock
Market that the Company no longer meets the requirements for continued listing
on the Nasdaq SmallCap Market. Under Marketplace Rule 4310(c)(2), companies are
required to maintain 1) net tangible assets of $2 million, 2) market
capitalization of $35 million, or 3) net income of $500,000 in the most recently
completed fiscal year, or in two of the last three most recently completed
fiscal years. As of January 2, 1999, the Company's 1998 fiscal year end, the
Company did not meet any of these requirements. In order for the
<PAGE>
Company to continue to be listed on the Nasdaq Stock Market, the Company is
required to submit to Nasdaq a proposal for achieving compliance and
subsequently meet one of the three requirements listed.
The Company submitted its proposal as required and has provided a
subsequent update. Should the Company's proposal be deemed not to warrant
continued listing, Nasdaq will immediately issue a formal notice of
deficiency specifying a delisting date for the Company's securities. Should
the Company's securities be delisted from the Nasdaq Stock Market, the
marketability of the Company's common stock could be seriously impaired.
During the quarter ended July 3, 1999, Randall. R. Reed, the
Company's Chief Financial Officer, resigned. In July 1999, the Company's
Controller, Sandra K. Pleasants, was appointed Chief Financial Officer. In
connection with the Company's restructuring, the Vice President of
Engineering resigned and the Vice President of Operations and the Vice
President of Sales positions were consolidated under a post held by Michael
W. Stansell, Vice President Operations and Sales.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit filed as part of this report is listed below:
Exhibit No.
-----------
10.12 Restated 1995 Stock Incentive Plan dated
May 11, 1998, as amended May 19, 1999.
27 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
July 3, 1999.
<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: August 17, 1999
MICROFIELD GRAPHICS, INC.
By:
--------------------------------
John B. Conroy
President and Chief Executive Officer
(Principal Executive Officer)
By:
--------------------------------
Sandra K. Pleasants
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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 17, 1999
MICROFIELD GRAPHICS, INC.
By:/s/ JOHN B. CONROY
--------------------------------
John B. Conroy
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/ SANDRA K. PLEASANTS
--------------------------------
Sandra K. Pleasants
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
MICROFIELD GRAPHICS, INC.
RESTATED 1995 STOCK INCENTIVE PLAN
(Restated as of May 11, 1998)
1. PURPOSE. The purpose of this Stock Incentive Plan (the "Plan") is
to enable Microfield Graphics, Inc. (the "Company") to attract and retain the
services of (1) selected employees, officers and directors of the Company or
of any subsidiary of the Company and (2) selected nonemployee agents,
consultants, advisors, persons involved in the sale or distribution of the
Company's products and independent contractors of the Company or any
subsidiary.
2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided
below and in paragraph 13, the shares to be offered under the Plan shall
consist of Common Stock of the Company, and the total number of shares of
Common Stock that may be issued under the Plan shall not exceed 850,000
shares. The shares issued under the Plan may be authorized and unissued
shares or reacquired shares. If an option, stock appreciation right or
performance unit granted under the Plan expires, terminates or is cancelled,
the unissued shares subject to such option, stock appreciation right or
performance unit shall again be available under the Plan. If shares sold or
awarded as a bonus under the Plan are forfeited to the Company or repurchased
by the Company, the number of shares forfeited or repurchased shall again be
available under the Plan.
3. EFFECTIVE DATE AND DURATION OF PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective as of
May 11, 1995. No option, stock appreciation right or performance unit granted
under the Plan to an officer who is subject to Section 16(b) of the
Securities Exchange Act of 1934, as amended (an "Officer") or a director, and
no incentive stock option, shall become exercisable, however, until the Plan
is approved by the affirmative vote of the holders of a majority of the
shares of Common Stock represented at a shareholders meeting at which a
quorum is present and any such awards under the Plan prior to such approval
shall be conditioned on and subject to such approval. Subject to this
limitation, options, stock appreciation rights and performance units may be
granted and shares may be awarded as bonuses or sold under the Plan at any
time after the effective date and before termination of the Plan.
(b) DURATION. The Plan shall continue in effect until all
shares available for issuance under the Plan have been issued and all
restrictions on such shares have lapsed. The Board of Directors may suspend or
terminate the Plan at any time except
<PAGE>
with respect to options, performance units and shares subject to restrictions
then outstanding under the Plan. Termination shall not affect any outstanding
options, any right of the Company to repurchase shares or the forfeitability
of shares issued under the Plan.
4. ADMINISTRATION.
(a) BOARD OF DIRECTORS. The Plan shall be administered by
the Board of Directors of the Company, which shall determine and designate
from time to time the individuals to whom awards shall be made, the amount of
the awards and the other terms and conditions of the awards. Subject to the
provisions of the Plan, the Board of Directors may from time to time adopt
and amend rules and regulations relating to administration of the Plan,
advance the lapse of any waiting period, accelerate any exercise date, waive
or modify any restriction applicable to shares (except those restrictions
imposed by law) and make all other determinations in the judgment of the
Board of Directors necessary or desirable for the administration of the Plan.
The interpretation and construction of the provisions of the Plan and related
agreements by the Board of Directors shall be final and conclusive. The Board
of Directors may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any related agreement in the manner and to
the extent it shall deem expedient to carry the Plan into effect, and it
shall be the sole and final judge of such expediency.
(b) COMMITTEE. The Board of Directors may delegate to a
committee of the Board of Directors or specified officers of the Company, or
both (the "Committee") any or all authority for administration of the Plan.
If authority is delegated to a Committee, all references to the Board of
Directors in the Plan shall mean and relate to the Committee except (i) as
otherwise provided by the Board of Directors, (ii) that only the Board of
Directors may amend or terminate the Plan as provided in paragraphs 3 and 14
and (iii) that a Committee including officers of the Company shall not be
permitted to grant options to persons who are officers of the Company. If
awards are to be made under the Plan to Officers or directors, authority for
selection of Officers and directors for participation and decisions
concerning the timing, pricing and amount of a grant or award, if not
determined under a formula meeting the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, shall be delegated to a
committee consisting of two or more disinterested directors.
5. TYPES OF AWARDS; ELIGIBILITY. The Board of Directors may, from
time to time, take the following action, separately or in combination, under
the Plan: (i) grant Incentive Stock Options, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), as provided in
paragraphs 6(a) and 6(b); (ii) grant options other than Incentive Stock
Options ("Non-Statutory Stock Options") as
<PAGE>
provided in paragraphs 6(a) and 6(c); (iii) award stock bonuses as provided
in paragraph 7; (iv) sell shares subject to restrictions as provided in
paragraph 8; (v) grant stock appreciation rights as provided in paragraph 9;
(vi) grant cash bonus rights as provided in paragraph 10; (vii) grant
performance units as provided in paragraph 11 and (viii) grant foreign
qualified awards as provided in paragraph 12. Any such awards may be made to
employees, including employees who are officers or directors, and to other
individuals described in paragraph 1 who the Board of Directors believes have
made or will make an important contribution to the Company or any subsidiary
of the Company; provided, however, that only employees of the Company shall
be eligible to receive Incentive Stock Options under the Plan. The Board of
Directors shall select the individuals to whom awards shall be made and shall
specify the action taken with respect to each individual to whom an award is
made. At the discretion of the Board of Directors, an individual may be given
an election to surrender an award in exchange for the grant of a new award.
No employee may be granted options or stock appreciation rights under the
Plan for more than an aggregate of 200,000 shares of Common Stock in
connection with the hiring of the employee or 100,000 shares of Common Stock
in any calendar year otherwise.
6. OPTION GRANTS.
(a) GENERAL RULES RELATING TO OPTIONS.
(i) TERMS OF GRANT. The Board of Directors may grant
options under the Plan. With respect to each option grant, the
Board of Directors shall determine the number of shares subject to
the option, the option price, the period of the option, the time or
times at which the option may be exercised and whether the option
is an Incentive Stock Option or a Non-Statutory Stock Option. At
the time of the grant of an option or at any time thereafter, the
Board of Directors may provide that an optionee who exercised an
option with Common Stock of the Company shall automatically receive
a new option to purchase additional shares equal to the number of
shares surrendered and may specify the terms and conditions of such
new options.
(ii) EXERCISE OF OPTIONS. Except as provided in
paragraph 6(a)(iv) or as determined by the Board of Directors, no
option granted under the Plan may be exercised unless at the time
of such exercise the optionee is employed by or in the service of
the Company or any subsidiary of the Company and shall have been so
employed or provided such service continuously since the date such
option was granted. Absence on leave or on account of illness or
disability under rules established by the Board of Directors shall
not,
<PAGE>
however, be deemed an interruption of employment or service for
this purpose. Unless otherwise determined by the Board of
Directors, vesting of options shall not continue during an
absence on leave (including an extended illness) or on account
of disability. Except as provided in paragraphs 6(a)(iv) and 13,
options granted under the Plan may be exercised from time to
time over the period stated in each option in such amounts and
at such times as shall be prescribed by the Board of Directors,
provided that options shall not be exercised for fractional
shares. Unless otherwise determined by the Board of Directors,
if the optionee does not exercise an option in any one year with
respect to the full number of shares to which the optionee is
entitled in that year, the optionee's rights shall be cumulative
and the optionee may purchase those shares in any subsequent
year during the term of the option. Unless otherwise determined
by the Board of Directors, if an Officer exercises an option
within six months of the grant of the option, the shares
acquired upon exercise of the option may not be sold until six
months after the date of grant of the option.
(iii) NONTRANSFERABILITY. Each Incentive Stock Option
and, unless otherwise determined by the Board of Directors with
respect to an option granted to a person who is neither an Officer
nor a director of the Company, each other option granted under the
Plan by its terms shall be nonassignable and nontransferable by the
optionee, either voluntarily or by operation of law, except by will
or by the laws of descent and distribution of the state or country
of the optionee's domicile at the time of death.
<PAGE>
(iv) TERMINATION OF EMPLOYMENT OR SERVICE.
(A) GENERAL RULE. Unless otherwise determined by the
Board of Directors, in the event the employment or service
of the optionee with the Company or a subsidiary
terminates for any reason other than because of physical
disability or death as provided in subparagraphs
6(a)(iv)(B) and (C), the option may be exercised at any
time prior to the expiration date of the option or the
expiration of 30 days after the date of such termination,
whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at
the date of such termination.
(B) TERMINATION BECAUSE OF TOTAL DISABILITY. Unless
otherwise determined by the Board of Directors, in the
event of the termination of employment or service because
of total disability, the option may be exercised at any
time prior to the expiration date of the option or the
expiration of 12 months after the date of such
termination, whichever is the shorter period, but only if
and to the extent the optionee was entitled to exercise
the option at the date of such termination. The term
"total disability" means a medically determinable mental
or physical impairment which is expected to result in
death or which has lasted or is expected to last for a
continuous period of 12 months or more and which causes
the optionee to be unable, in the opinion of the Company
and two independent physicians, to perform his or her
duties as an employee, director, officer or consultant of
the Company and to be engaged in any substantial gainful
activity. Total disability shall be deemed to have
occurred on the first day after the Company and the two
independent physicians have furnished their opinion of
total disability to the Company.
(C) TERMINATION BECAUSE OF DEATH. Unless otherwise
determined by the Board of Directors, in the event of the
death of an optionee while employed by or providing
service to the Company or a subsidiary, the option may be
exercised at any time prior to the expiration date of the
option or the expiration of 12 months after the date of
death, whichever is the shorter period, but only if and to
the extent the optionee was entitled to exercise the
option at the date of death and only by the person or
<PAGE>
persons to whom such optionee's rights under the option
shall pass by the optionee's will or by the laws of
descent and distribution of the state or country of
domicile at the time of death.
(D) AMENDMENT OF EXERCISE PERIOD APPLICABLE TO
TERMINATION. The Board of Directors, at the time of grant
or, with respect to an option that is not an Incentive
Stock Option, at any time thereafter, may extend the
30-day and 12-month exercise periods any length of time
not longer than the original expiration date of the
option, and may increase the portion of an option that is
exercisable, subject to such terms and conditions as the
Board of Directors may determine.
(E) FAILURE TO EXERCISE OPTION. To the extent that
the option of any deceased optionee or of any optionee
whose employment or service terminates is not exercised
within the applicable period, all further rights to
purchase shares pursuant to such option shall cease and
terminate.
<PAGE>
(v) PURCHASE OF SHARES. Unless the Board of Directors
determines otherwise, shares may be acquired pursuant to an option
granted under the Plan only upon receipt by the Company of notice
in writing from the optionee of the optionee's intention to
exercise, specifying the number of shares as to which the optionee
desires to exercise the option and the date on which the optionee
desires to complete the transaction, and if required in order to
comply with the Securities Act of 1933, as amended, containing a
representation that it is the optionee's present intention to
acquire the shares for investment and not with a view to
distribution. Unless the Board of Directors determines otherwise,
on or before the date specified for completion of the purchase of
shares pursuant to an option, the optionee must have paid the
Company the full purchase price of such shares in cash (including,
with the consent of the Board of Directors, cash that may be the
proceeds of a loan from the Company (provided that, with respect to
an Incentive Stock Option, such loan is approved at the time of
option grant)) or, with the consent of the Board of Directors, in
whole or in part, in Common Stock of the Company valued at fair
market value, restricted stock, performance units or other
contingent awards denominated in either stock or cash, promissory
notes and other forms of consideration. The fair market value of
Common Stock provided in payment of the purchase price shall be
determined by the Board of Directors. If the Common Stock of the
Company is not publicly traded on the date the option is exercised,
the Board of Directors may consider any valuation methods it deems
appropriate and may, but is not required to, obtain one or more
independent appraisals of the Company. If the Common Stock of the
Company is publicly traded on the date the option is exercised, the
fair market value of Common Stock provided in payment of the
purchase price shall be the closing price of the Common Stock as
reported in THE WALL STREET JOURNAL on the last trading day
preceding the date the option is exercised, or such other reported
value of the Common Stock as shall be specified by the Board of
Directors. No shares shall be issued until full payment for the
shares has been made. With the consent of the Board of Directors
(which, in the case of an Incentive Stock Option, shall be given
only at the time of option grant), an optionee may request the
Company to apply automatically the shares to be received upon the
exercise of a portion of a stock option (even though stock
certificates have not yet been issued) to satisfy the purchase
price for additional portions of the option. Each optionee who has
exercised an option shall immediately upon notification of the
amount due, if any,
<PAGE>
pay to the Company in cash amounts necessary to satisfy any
applicable federal, state and local tax withholding
requirements. If additional withholding is or becomes required
beyond any amount deposited before delivery of the certificates,
the optionee shall pay such amount to the Company on demand. If
the optionee fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company
to the optionee, including salary, subject to applicable law.
With the consent of the Board of Directors an optionee may
satisfy this obligation, in whole or in part, by having the
Company withhold from the shares to be issued upon the exercise
that number of shares that would satisfy the withholding amount
due or by delivering to the Company Common Stock to satisfy the
withholding amount. Upon the exercise of an option, the number
of shares reserved for issuance under the Plan shall be reduced
by the number of shares issued upon exercise of the option.
(b) INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be
subject to the following additional terms and conditions:
(i) LIMITATION ON AMOUNT OF GRANTS. No employee may
be granted Incentive Stock Options under the Plan if the aggregate
fair market value, on the date of grant, of the Common Stock with
respect to which Incentive Stock Options are exercisable for the
first time by that employee during any calendar year under the Plan
and under all incentive stock option plans (within the meaning of
Section 422 of the Code) of the Company or any parent or subsidiary
of the Company exceeds $100,000.
(ii) LIMITATIONS ON GRANTS TO 10 PERCENT
SHAREHOLDERS. An Incentive Stock Option may be granted under the
Plan to an employee possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of
any parent or subsidiary of the Company only if the option price is
at least 110 percent of the fair market value, as described in
paragraph 6(b)(iv), of the Common Stock subject to the option on
the date it is granted and the option by its terms is not
exercisable after the expiration of five years from the date it is
granted.
(iii) DURATION OF OPTIONS. Subject to paragraphs
6(a)(ii) and 6(b)(ii), Incentive Stock Options granted under the
Plan shall continue in effect for the period fixed by the Board of
Directors, except that no
<PAGE>
Incentive Stock Option shall be exercisable after the expiration
of 10 years from the date it is granted.
(iv) OPTION PRICE. The option price per share shall
be determined by the Board of Directors at the time of grant.
Except as provided in paragraph 6(b)(ii), the option price shall
not be less than 100 percent of the fair market value of the Common
Stock covered by the Incentive Stock Option at the date the option
is granted. The fair market value shall be determined by the Board
of Directors. If the Common Stock of the Company is not publicly
traded on the date the option is granted, the Board of Directors
may consider any valuation methods it deems appropriate and may,
but is not required to, obtain one or more independent appraisals
of the Company. If the Common Stock of the Company is publicly
traded on the date the option is exercised, the fair market value
shall be deemed to be the closing price of the Common Stock as
reported in THE WALL STREET JOURNAL on the day preceding the date
the option is granted, or, if there has been no sale on that date,
on the last preceding date on which a sale occurred or such other
value of the Common Stock as shall be specified by the Board of
Directors.
(v) LIMITATION ON TIME OF GRANT. No Incentive Stock
Option shall be granted on or after the tenth anniversary of the
effective date of the Plan.
(vi) CONVERSION OF INCENTIVE STOCK OPTIONS. The Board
of Directors may at any time without the consent of the optionee
convert an Incentive Stock Option to a Non-Statutory Stock Option.
(c) NON-STATUTORY STOCK OPTIONS. Non-Statutory Stock Options
shall be subject to the following terms and conditions in addition to those set
forth in Section 6(a) above:
(i) OPTION PRICE. The option price for Non-Statutory
Stock Options shall be determined by the Board of Directors at the
time of grant and may be any amount determined by the Board of
Directors.
(ii) DURATION OF OPTIONS. Non-Statutory Stock Options
granted under the Plan shall continue in effect for the period
fixed by the Board of Directors.
<PAGE>
7. STOCK BONUSES. The Board of Directors may award shares under the
Plan as stock bonuses. Shares awarded as a bonus shall be subject to the
terms, conditions, and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability and
forfeiture of the shares awarded, together with such other restrictions as
may be determined by the Board of Directors. If shares are subject to
forfeiture, all dividends or other distributions paid by the Company with
respect to the shares shall be retained by the Company until the shares are
no longer subject to forfeiture, at which time all accumulated amounts shall
be paid to the recipient. The Board of Directors may require the recipient to
sign an agreement as a condition of the award, but may not require the
recipient to pay any monetary consideration other than amounts necessary to
satisfy tax withholding requirements. The agreement may contain any terms,
conditions, restrictions, representations and warranties required by the
Board of Directors. The certificates representing the shares awarded shall
bear any legends required by the Board of Directors. Unless otherwise
determined by the Board of Directors, shares awarded as a stock bonus to an
Officer may not be sold until six months after the date of the award. The
Company may require any recipient of a stock bonus to pay to the Company in
cash upon demand amounts necessary to satisfy any applicable federal, state
or local tax withholding requirements. If the recipient fails to pay the
amount demanded, the Company may withhold that amount from other amounts
payable by the Company to the recipient, including salary or fees for
services, subject to applicable law. With the consent of the Board of
Directors, a recipient may deliver Common Stock to the Company to satisfy
this withholding obligation. Upon the issuance of a stock bonus, the number
of shares reserved for issuance under the Plan shall be reduced by the number
of shares issued.
8. RESTRICTED STOCK. The Board of Directors may issue shares under
the Plan for such consideration (including promissory notes and services) as
determined by the Board of Directors. Shares issued under the Plan shall be
subject to the terms, conditions and restrictions determined by the Board of
Directors. The restrictions may include restrictions concerning
transferability, repurchase by the Company and forfeiture of the shares
issued, together with such other restrictions as may be determined by the
Board of Directors. If shares are subject to forfeiture or repurchase by the
Company, all dividends or other distributions paid by the Company with
respect to the shares shall be retained by the Company until the shares are
no longer subject to forfeiture or repurchase, at which time all accumulated
amounts shall be paid to the recipient. All Common Stock issued pursuant to
this paragraph 8 shall be subject to a purchase agreement, which shall be
executed by the Company and the prospective recipient of the shares prior to
the delivery of certificates
<PAGE>
representing such shares to the recipient. The purchase agreement may contain
any terms, conditions, restrictions, representations and warranties required
by the Board of Directors. The certificates representing the shares shall
bear any legends required by the Board of Directors. Unless otherwise
determined by the Board of Directors, shares issued under this paragraph 8 to
an Officer may not be sold until six months after the shares are issued. The
Company may require any purchaser of restricted stock to pay to the Company
in cash upon demand amounts necessary to satisfy any applicable federal,
state or local tax withholding requirements. If the purchaser fails to pay
the amount demanded, the Company may withhold that amount from other amounts
payable by the Company to the purchaser, including salary, subject to
applicable law. With the consent of the Board of Directors, a purchaser may
deliver Common Stock to the Company to satisfy this withholding obligation.
Upon the issuance of restricted stock, the number of shares reserved for
issuance under the Plan shall be reduced by the number of shares issued.
9. STOCK APPRECIATION RIGHTS.
(a) GRANT. Stock appreciation rights may be granted under
the Plan by the Board of Directors, subject to such rules, terms, and
conditions as the Board of Directors prescribes.
(b) EXERCISE.
(i) Each stock appreciation right shall entitle the
holder, upon exercise, to receive from the Company in exchange
therefor an amount equal in value to the excess of the fair market
value on the date of exercise of one share of Common Stock of the
Company over its fair market value on the date of grant (or, in the
case of a stock appreciation right granted in connection with an
option, the excess of the fair market value of one share of Common
Stock of the Company over the option price per share under the
option to which the stock appreciation right relates), multiplied
by the number of shares covered by the stock appreciation right or
the option, or portion thereof, that is surrendered. No stock
appreciation right shall be exercisable at a time that the amount
determined under this subparagraph is negative. Payment by the
Company upon exercise of a stock appreciation right may be made in
Common Stock valued at fair market value, in cash, or partly in
Common Stock and partly in cash, all as determined by the Board of
Directors.
<PAGE>
(ii) A stock appreciation right shall be exercisable
only at the time or times established by the Board of Directors. If
a stock appreciation right is granted in connection with an option,
the following rules shall apply: (1) the stock appreciation right
shall be exercisable only to the extent and on the same conditions
that the related option could be exercised; (2) the stock
appreciation rights shall be exercisable only when the fair market
value of the stock exceeds the option price of the related option;
(3) the stock appreciation right shall be for no more than 100
percent of the excess of the fair market value of the stock at the
time of exercise over the option price; (4) upon exercise of the
stock appreciation right, the option or portion thereof to which
the stock appreciation right relates terminates; and (5) upon
exercise of the option, the related stock appreciation right or
portion thereof terminates. Unless otherwise determined by the
Board of Directors, no stock appreciation right granted to an
Officer or director may be exercised during the first six months
following the date it is granted.
(iii) The Board of Directors may withdraw any stock
appreciation right granted under the Plan at any time and may
impose any conditions upon the exercise of a stock appreciation
right or adopt rules and regulations from time to time affecting
the rights of holders of stock appreciation rights. Such rules and
regulations may govern the right to exercise stock appreciation
rights granted prior to adoption or amendment of such rules and
regulations as well as stock appreciation rights granted
thereafter.
(iv) For purposes of this paragraph 9, the fair
market value of the Common Stock shall be determined as of the date
the stock appreciation right is exercised, under the methods set
forth in paragraph 6(b)(iv).
(v) No fractional shares shall be issued upon
exercise of a stock appreciation right. In lieu thereof, cash may
be paid in an amount equal to the value of the fraction or, if the
Board of Directors shall determine, the number of shares may be
rounded downward to the next whole share.
(vi) Each stock appreciation right granted in
connection with an Incentive Stock Option, and unless otherwise
determined by the Board of Directors with respect to a stock
appreciation right granted to
<PAGE>
a person who is neither an Officer nor a director of the
Company, each other stock appreciation right granted under the
Plan by its terms shall be nonassignable and nontransferable by
the holder, either voluntarily or by operation of law, except by
will or by the laws of descent and distribution of the state or
country of the holder's domicile at the time of death, and each
stock appreciation right by its terms shall be exercisable
during the holder's lifetime only by the holder.
(vii) Each participant who has exercised a stock
appreciation right shall, upon notification of the amount due, pay
to the Company in cash amounts necessary to satisfy any applicable
federal, state and local tax withholding requirements. If the
participant fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to
the participant including salary, subject to applicable law. With
the consent of the Board of Directors a participant may satisfy
this obligation, in whole or in part, by having the Company
withhold from any shares to be issued upon the exercise that number
of shares that would satisfy the withholding amount due or by
delivering Common Stock to the Company to satisfy the withholding
amount.
(viii) Upon the exercise of a stock appreciation
right for shares, the number of shares reserved for issuance under
the Plan shall be reduced by the number of shares issued. Cash
payments of stock appreciation rights shall not reduce the number
of shares of Common Stock reserved for issuance under the Plan.
<PAGE>
10. CASH BONUS RIGHTS.
(a) GRANT. The Board of Directors may grant cash bonus rights
under the Plan in connection with (i) options granted or previously granted,
(ii) stock appreciation rights granted or previously granted, (iii) stock
bonuses awarded or previously awarded and (iv) shares sold or previously sold
under the Plan. Cash bonus rights will be subject to rules, terms and conditions
as the Board of Directors may prescribe. Unless otherwise determined by the
Board of Directors with respect to a cash bonus right granted to a person who is
neither an Officer nor a director of the Company, each cash bonus right granted
under the Plan by its terms shall be nonassignable and nontransferable by the
holder, either voluntarily or by operation of law, except by will or by the laws
of descent and distribution of the state or country of the holder's domicile at
the time of death. The payment of a cash bonus shall not reduce the number of
shares of Common Stock reserved for issuance under the Plan.
(b) CASH BONUS RIGHTS IN CONNECTION WITH OPTIONS. A cash bonus
right granted in connection with an option will entitle an optionee to a cash
bonus when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part if, in the sole discretion of the Board of Directors, the bonus right will
result in a tax deduction that the Company has sufficient taxable income to use.
If an optionee purchases shares upon exercise of an option and does not exercise
a related stock appreciation right, the amount of the bonus, if any, shall be
determined by multiplying the excess of the total fair market value of the
shares to be acquired upon the exercise over the total option price for the
shares by the applicable bonus percentage. If the optionee exercises a related
stock appreciation right in connection with the termination of an option, the
amount of the bonus, if any, shall be determined by multiplying the total fair
market value of the shares and cash received pursuant to the exercise of the
stock appreciation right by the applicable bonus percentage. The bonus
percentage applicable to a bonus right, including a previously granted bonus
right, may be changed from time to time at the sole discretion of the Board of
Directors but shall in no event exceed 75 percent.
(c) CASH BONUS RIGHTS IN CONNECTION WITH STOCK BONUS. A
cash bonus right granted in connection with a stock bonus will entitle the
recipient to a cash bonus payable when the stock bonus is awarded or
restrictions, if any, to which the stock is subject lapse. If bonus stock
awarded is subject to restrictions and is repurchased by the Company or
forfeited by the holder, the cash bonus
<PAGE>
right granted in connection with the stock bonus shall terminate and may not
be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Board of Directors.
(d) CASH BONUS RIGHTS IN CONNECTION WITH STOCK PURCHASES. A
cash bonus right granted in connection with the purchase of stock pursuant to
paragraph 8 will entitle the recipient to a cash bonus when the shares are
purchased or restrictions, if any, to which the stock is subject lapse. Any
cash bonus right granted in connection with shares purchased pursuant to
paragraph 8 shall terminate and may not be exercised in the event the shares
are repurchased by the Company or forfeited by the holder pursuant to
applicable restrictions. The amount of any cash bonus to be awarded and
timing of payment of a cash bonus shall be determined by the Board of
Directors.
(e) TAXES. The Company shall withhold from any cash bonus
paid pursuant to paragraph 10 the amount necessary to satisfy any applicable
federal, state and local withholding requirements.
11. PERFORMANCE UNITS. The Board of Directors may grant performance
units consisting of monetary units which may be earned in whole or in part if
the Company achieves certain goals established by the Board of Directors over
a designated period of time, but not in any event more than 10 years. The
goals established by the Board of Directors may include earnings per share,
return on shareholders' equity, return on invested capital, and such other
goals as may be established by the Board of Directors. In the event that the
minimum performance goal established by the Board of Directors is not
achieved at the conclusion of a period, no payment shall be made to the
participants. In the event the maximum corporate goal is achieved, 100
percent of the monetary value of the performance units shall be paid to or
vested in the participants. Partial achievement of the maximum goal may
result in a payment or vesting corresponding to the degree of achievement as
determined by the Board of Directors. Payment of an award earned may be in
cash or in Common Stock or in a combination of both, and may be made when
earned, or vested and deferred, as the Board of Directors determines.
Deferred awards shall earn interest on the terms and at a rate determined by
the Board of Directors. Unless otherwise determined by the Board of Directors
with respect to a performance unit granted to a person who is neither an
Officer nor a director of the Company, each performance unit granted under
the Plan by its terms shall be nonassignable and nontransferable by the
holder, either voluntarily or by operation of law, except by will or by the
laws of descent and distribution of the state or country of the holder's
domicile at the time of death. Each participant who has been
<PAGE>
awarded a performance unit shall, upon notification of the amount due, pay to
the Company in cash amounts necessary to satisfy any applicable federal,
state and local tax withholding requirements. If the participant fails to pay
the amount demanded, the Company may withhold that amount from other amounts
payable by the Company to the participant, including salary or fees for
services, subject to applicable law. With the consent of the Board of
Directors a participant may satisfy this obligation, in whole or in part, by
having the Company withhold from any shares to be issued that number of
shares that would satisfy the withholding amount due or by delivering Common
Stock to the Company to satisfy the withholding amount. The payment of a
performance unit in cash shall not reduce the number of shares of Common
Stock reserved for issuance under the Plan. The number of shares reserved for
issuance under the Plan shall be reduced by the number of shares issued upon
payment of an award.
12. FOREIGN QUALIFIED GRANTS. Awards under the Plan may be granted
to such officers and employees of the Company and its subsidiaries and such
other persons described in paragraph 1 residing in foreign jurisdictions as
the Board of Directors may determine from time to time. The Board of
Directors may adopt such supplements to the Plan as may be necessary to
comply with the applicable laws of such foreign jurisdictions and to afford
participants favorable treatment under such laws; provided, however, that no
award shall be granted under any such supplement with terms which are more
beneficial to the participants than the terms permitted by the Plan.
13. CHANGES IN CAPITAL STRUCTURE.
(a) STOCK SPLITS; STOCK DIVIDENDS. If the outstanding Common
Stock of the Company is hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company by reason of any stock split, combination of shares or dividend payable
in shares, recapitalization or reclassification appropriate adjustment shall be
made by the Board of Directors in the number and kind of shares available for
grants under the Plan. In addition, the Board of Directors shall make
appropriate adjustment in the number and kind of shares as to which outstanding
options, or portions thereof then unexercised, shall be exercisable, so that the
optionee's proportionate interest before and after the occurrence of the event
is maintained. Notwithstanding the foregoing, the Board of Directors shall have
no obligation to effect any adjustment that would or might result in the
issuance of fractional shares, and any fractional shares resulting from any
adjustment may be disregarded or provided for in any manner determined by the
Board of
<PAGE>
Directors. Any such adjustments made by the Board of Directors shall be
conclusive.
(b) MERGERS, REORGANIZATIONS, ETC. In the event of a merger,
consolidation, plan of exchange, acquisition of property or stock, separation,
reorganization or liquidation to which the Company or a subsidiary is a party or
a sale of all or substantially all of the Company's assets (each, a
"Transaction"), the Board of Directors shall, in its sole discretion and to the
extent possible under the structure of the Transaction, select one of the
following alternatives for treating outstanding options under the Plan:
(i) Outstanding options shall remain in effect in
accordance with their terms.
(ii) Outstanding options shall be converted into
options to purchase stock in the corporation that is the surviving
or acquiring corporation in the Transaction. The amount, type of
securities subject thereto and exercise price of the converted
options shall be determined by the Board of Directors of the
Company, taking into account the relative values of the companies
involved in the Transaction and the exchange rate, if any, used in
determining shares of the surviving corporation to be issued to
holders of shares of the Company. Unless otherwise determined by
the Board of Directors, the converted options shall be vested only
to the extent that the vesting requirements relating to options
granted hereunder have been satisfied.
(iii) The Board of Directors shall provide a 30-day
period prior to the consummation of the Transaction during which
outstanding options may be exercised to the extent then
exercisable, and upon the expiration of such 30-day period, all
unexercised options shall immediately terminate. The Board of
Directors may, in its sole discretion, accelerate the
exercisability of options so that they are exercisable in full
during such 30-day period.
(c) DISSOLUTION OF THE COMPANY. In the event of the
dissolution of the Company, options shall be treated in accordance with
paragraph 13(b)(iii).
(d) RIGHTS ISSUED BY ANOTHER CORPORATION. The Board of
Directors may also grant options, stock appreciation rights, performance units,
stock bonuses and cash bonuses and issue restricted stock under the Plan having
terms, conditions and provisions that vary from those specified in this Plan
<PAGE>
provided that any such awards are granted in substitution for, or in
connection with the assumption of, existing options, stock appreciation
rights, stock bonuses, cash bonuses, restricted stock and performance units
granted, awarded or issued by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
Transaction.
14. AMENDMENT OF PLAN. The Board of Directors may at any time, and
from time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for
any other reason. Except as provided in paragraphs 6(a)(iv), 9, 10 and 13,
however, no change in an award already granted shall be made without the
written consent of the holder of such award.
15. APPROVALS. The obligations of the Company under the Plan are
subject to the approval of state and federal authorities or agencies with
jurisdiction in the matter. The Company will use its best efforts to take
steps required by state or federal law or applicable regulations, including
rules and regulations of the Securities and Exchange Commission and any stock
exchange on which the Company's shares may then be listed, in connection with
the grants under the Plan. The foregoing notwithstanding, the Company shall
not be obligated to issue or deliver Common Stock under the Plan if such
issuance or delivery would violate applicable state or federal securities
laws.
16. EMPLOYMENT AND SERVICE RIGHTS. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in
any way with the right of the Company or any subsidiary by whom such employee
is employed to terminate such employee's employment at any time, for any
reason, with or without cause, or to decrease such employee's compensation or
benefits, or (ii) confer upon any person engaged by the Company any right to
be retained or employed by the Company or to the continuation, extension,
renewal, or modification of any compensation, contract, or arrangement with
or by the Company.
17. RIGHTS AS A SHAREHOLDER. The recipient of any award under the
Plan shall have no rights as a shareholder with respect to any Common Stock
until the date of issue to the recipient of a stock certificate for such
shares. Except as otherwise expressly provided in the Plan, no adjustment
shall be made for dividends or other rights for which the record date occurs
prior to the date such stock certificate is issued.
<PAGE>
Adopted: May 11, 1995; amendments adopted February 1, 1996, January 27,
1997; restated May 8, 1998
Approved by Shareholders: June 8, 1995; amendments approved April 24, 1996,
June 3, 1997, May 19, 1999
<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 JULY 3, 1999, 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-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 405
<SECURITIES> 0
<RECEIVABLES> 539
<ALLOWANCES> 42
<INVENTORY> 710
<CURRENT-ASSETS> 1,736
<PP&E> 320
<DEPRECIATION> 100
<TOTAL-ASSETS> 2,248
<CURRENT-LIABILITIES> 1,277
<BONDS> 0
0
0
<COMMON> 15,353
<OTHER-SE> (14,433)
<TOTAL-LIABILITY-AND-EQUITY> 2,248
<SALES> 1,861
<TOTAL-REVENUES> 1,861
<CGS> 1,173
<TOTAL-COSTS> 1,173
<OTHER-EXPENSES> 2,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> (1,463)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,463)
<EPS-BASIC> (.37)
<EPS-DILUTED> (.37)
</TABLE>
