<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 1O-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January, 2 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-26226
MICROFIELD GRAPHICS, INC.
(Name of small business issuer in its charter)
OREGON 93-0935149
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification No.)
7216 SW DURHAM ROAD
PORTLAND, OREGON 97224
(Address of principal executive offices and zip code)
(503) 620-4000
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days:
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $ 6,646,000.
The aggregate market value of voting stock held by non-affiliates of the
registrant at February 28, 1999 was $7,604,231, computed by reference to the
average bid and asked prices as reported on the Nasdaq SmallCap Market.
The number of shares outstanding of the Registrant's Common Stock as of
February 28, 1999 was 3,686,900 shares.
The index to exhibits appears on page 15 of this document.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer has incorporated into Part III of Form 10-KSB, by reference,
portions of its Proxy Statement dated April 19, 1999.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
MICROFIELD GRAPHICS, INC.
FORM 10-KSB INDEX
PART I
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Description of Business 3
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 9
Item 6. Management's Discussion and Analysis of Financial Condition or
Plan of Operation 9
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 14
Item 10. Executive Compensation 15
Item 11. Security Ownership of Certain Beneficial Owners and Management 15
Item 12. Certain Relationships and Related Transactions 15
Item 13. Exhibits and Reports on Form 8-K 16
</TABLE>
2
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Microfield Graphics, Inc. (the "Company") develops, manufactures and markets
computer conferencing and telecommunications products to facilitate group
communications. The 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.
PRODUCTS
The Company produces three SoftBoard Series 200 SoftBoard models: a
wall-mounted SoftBoard (Model 201), a mobile SoftBoard on casters (Model 203)
and a smaller SoftBoard designed for personal offices or cubicles (Model
205). Each SoftBoard can be purchased for use with either an IBM-compatible
personal computer (PC) or a Macintosh computer. Each SoftBoard includes the
Company's proprietary bundled application software that stores the
information written on SoftBoard surface in a computer file and provides
capabilities for playback, printing, distribution and use in other
applications. The playback feature uses a VCR-like interface and allows the
user to review information recorded on the SoftBoard, stroke-by-stroke,
page-by-page, or to move rapidly between multiple pages of a session. The
writing surface of each SoftBoard is high-quality, porcelain-on-steel.
The SoftBoard System 500 product was introduced in June 1998. The SoftBoard
System 500 product line currently consists of four different variations of
interactive, Softboard enhanced plasma displays. These models include a 40"
(Diagonal measurement) interactive plasma display with VGA resolution, a 50"
interactive display with 1280 X 768 resolution and two 42" interative plasma
displays with 852 X 480 resolution. The SoftBoard System 500 models
incorporate a plasma display with the SoftBoard proprietary laser scanning
data acquisition technology. The plasma displays are flat panel monitors that
can be hung on walls, or can be hung on mobile carts, and connected to a
personal computer. Through use of the SoftBoard laser scanning technology,
and SoftBoard's electronic pen, the user interacts with the software on the
surface of the plasma display in the same manner as he would by using a
mouse. By touching the front of the display the user can drive any software
program or presentation and allow a room full of meeting participants to see
the product of his work as he is creating it.
This interactive plasma display and its local computer can be connected to
other remotely located computers and plasma displays anywhere in the world.
These attached systems allow the remote users to interact with each other by
sharing each others' files and manipulating the data from any of the
locations as the work sessions dictate. The benefit of this technology is
that one can have a meeting with people from anywhere in the world, where the
participants can interact with each other, share and manipulate each others'
data, without the cost and time involved with bringing each meeting
participant to one location.
The SoftBoard System 500 uses the same SoftBoard application software as the
Series 200 products. Original information written or drawn on the plasma
display surface, is displayed simultaneously on the plasma display,
3
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in electronic ink. The information is recorded in a computer file that can be
replayed, printed, faxed, e-mailed or saved for future applications.
The SoftBoard System 400 product integrates a SoftBoard into a
rear-projection system. In this application, the porcelain-on-steel SoftBoard
writing surface is replaced with a translucent writing surface. Inside this
self-contained unit an LCD projector projects the output of a connected PC
onto the rear surface of the SoftBoard. Pen strokes on the SoftBoard surface
(using an electronic pen) are then captured and transmitted through the PC to
the LCD projector and then back up onto the rear of the SoftBoard surface, in
electronic ink. The electronic pen also acts as a mouse and allows the user
to interact with the software that is displayed on the SoftBoard surface.
This product creates a room-sized interactive computer screen allowing a user
to combine information already in a computer file with new information
created during a collaborative session. This can be accomplished with a
computer hooked up directly in the room, with a computer somewhere else on
the network, or over the Internet with one or more remote sites. The
SoftBoard System 400 enhances both single-site and multiple-site meetings due
to the interactivity of the rear-projection system. The SoftBoard System 400
allows groups of people either in one location or in multiple locations to
view the information in a room-sized setting and to interact with the
information in the computer file in all locations.
The SoftBoard System 300 product is aimed at the market that wants the
interactivity that the SoftBoard input technology offers, in the customer's
rear projection application. The SoftBoard System 300 is a Model 201
SoftBoard with a translucent writing surface in place of a porcelain writing
surface. Typically, the customer has a dedicated room outfitted with a very
high end, very high resolution projector. The SoftBoard System 300 is either
built into a false wall, behind which the projector is placed, or is designed
into a custom built cabinet that also houses the projector. The SoftBoard
System 300 is then used in the same manner as the SoftBoard System 400.
The SoftBoard Systems 300, 400, and 500 products allow a roomful of people to
be involved in a group working session where remote collaboration is needed
and a computer is running Windows and any Windows conferencing application
such as ProShare, NetMeeting, or Netscape Collaborator.
The comparative features of the Company's SoftBoard models are set forth
below.
<TABLE>
<CAPTION>
- ----------------- -------------------- --------------- --------------------------------------------------------
SOFTBOARD WRITING
MODEL SURFACE SIZE MSRP FEATURES
- ----------------- -------------------- --------------- --------------------------------------------------------
<S> <C> <C> <C>
201 40.5 x 54 inches $3,295 Wall-mounted SoftBoard; large writing area
for presentations and meetings
- ----------------- -------------------- --------------- --------------------------------------------------------
203 35 x 47 inches $3,995 Mobile SoftBoard; includes storage shelf for
computer equipment
- ----------------- -------------------- --------------- --------------------------------------------------------
205 24 x 25.5 inches $2,795 Personal SoftBoard for use in an office or
cubicle environment; excellent for meeting
preparation or private brainstorming
- ----------------- -------------------- --------------- --------------------------------------------------------
501 40" diagonal screen $18,500 Interactive plasma display for use in meetings and
50" diagonal screen presentations, consisting of a plasma display monitor
503 $32,500 with VGA resolution on the Model 501, and 1280 x 768
resolution on the Model 503, Digital Signal Processing
(DSP) unit, active pen, Infra-Red (IR) electronics for
the pen, and software
- ----------------- -------------------- --------------- --------------------------------------------------------
511 42" diagonal screen $18,500 Interactive plasma display for use in meetings and
42" diagonal screen presentations, consisting of a plasma display monitor
512 $21,500 with 852 x 480 resolution on both 42 inch models, DSP
unit, active pen, IR electronics for the pen, and
software
- ----------------- -------------------- --------------- --------------------------------------------------------
</TABLE>
4
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<TABLE>
<S> <C> <C> <C>
- ----------------- -------------------- --------------- --------------------------------------------------------
423 35 x 47 inches $18,900 Self-enclosed rear-projection system consisting of
SoftBoard rear projection screen, SVGA resolution
projector, DSP unit, active pen, IR electronics for
the pen, and software
- ----------------- -------------------- --------------- --------------------------------------------------------
443 35 x 47 inches $21,400 Self-enclosed rear-projection system consisting of
SoftBoard rear projection screen, XGA resolution
projector, DSP unit, active pen, IR electronics for
the pen, and software
- ----------------- -------------------- --------------- --------------------------------------------------------
301 40.5 x 54 inches $8,000 Rear-projection systems with choice of mounting
options, include SoftBoard frame, rear projection
303 $7,500 screen, DSP unit, active pen, IR electronics for the
35 x 47 inches pen and software; requires a projector, enclosure and
mounting.
- ----------------- -------------------- --------------- --------------------------------------------------------
</TABLE>
Features of the Company's software are set forth below. All software is
included with the purchase of a SoftBoard.
<TABLE>
<CAPTION>
- ------------------------------- --------------------------------------------------------
SOFTWARE FEATURES
- ------------------------------- --------------------------------------------------------
<S> <C>
SBMeeting, SBJournal, and Provides the basic application software for the
SBRemote SoftBoard, its communication with the attached
personal computer and viewing at a remote site via a
network and shared files.
- ------------------------------- --------------------------------------------------------
SBRemote Provides connection with a PC/SoftBoard at
a remote site via modem, network or video
telecommunication process
- ------------------------------- --------------------------------------------------------
Advanced Softkeys Allows control of PC functions directly from
the SoftBoard surface, i.e. print, replay and record
- ------------------------------- --------------------------------------------------------
SBProjection Converts SoftBoard to a front projection,
interactive display using any LCD projector;
also used with rear projection and plasma
display systems.
- ------------------------------- --------------------------------------------------------
SBTemplate Adapts manual status board formats to SoftBoard,
recording dynamic information changes on a "fill
in the blank" basis and communicates to remote
sites.
- ------------------------------- --------------------------------------------------------
SBMarkup Provides ability to annotate various Windows
application screens when used with SBProjection.
- ------------------------------- --------------------------------------------------------
</TABLE>
The pens and erasers used with SoftBoard are available directly from the
Company and from resellers.
SoftBoards are used by businesses, schools and governmental agencies for
meetings, training and work group development sessions, to augment
traditional audio and video conferencing sessions with graphics and
interactivity, and for scheduling and status updates.
PRODUCT DEVELOPMENT
During 1998, the Company's engineering efforts were focused in three main
product development areas. In June 1998, the Company introduced its newest
product, the System 500 Interactive Plasma Display. This product combines the
SoftBoard technology with the latest monitor technology, the flat screen
plasma display. This interactive plasma display allows a large screen area
for presentations and group meetings. The interactive technology gives both
local and remotely located users the ability to share control of the
computer, and images that are displayed on the plasma's screen.
5
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In June 1998 the Company introduced a new suite of software called Release
2.0. This software enhancement increases the local productivity of existing
customers, is attractive for a wider range of casual, walk-in meeting room
applications, and continues to take advantage of rapid external developments
in the area of computer-aided remote conferencing. Release 2.0 is distributed
on CD-Rom.
Also during 1998, the Company continued development of its next generation
SoftBoard Series 200 products. These new products will incorporate new
proprietary technology that will enhance the functionality and usability of
SoftBoard products. The addition of these new products will expand the Series
200 product line to include products of new dimensions to be used in a
variety of applications.
The Company intends to continue to enhance and add to its family of
proprietary hardware and software products that will provide an upgrade path
for all existing customers.
The Company expended approximately $1.0 million in research and development
costs in each of fiscal years 1998 and 1997. SEE NOTE 2 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITEM 7.
MARKETING, SALES AND DISTRIBUTION
The Company markets its SoftBoard products to resellers, OEMs and directly to
end users in the United States and to distributors and resellers outside the
United States. The Company's Vice President, Sales oversees the domestic
resellers, OEM accounts and end user accounts. The Company's Director of
International Sales manages the international distributors and resellers. The
Company sells SoftBoards directly to end users through a telemarketing and
telesales group at its Portland, Oregon offices.
In July 1997, the Company entered into a two-year general purchase and
development agreement with 3M through which 3M markets, on a global basis,
advanced versions of the Company's SoftBoard products under the 3M brand name
"Ideaboard." Shipments to 3M began in the fourth quarter of 1997, and totaled
1422 units through the end of 1998. 3M has not purchased any significant
quantities of SoftBoard products since June 1998. The agreement between 3M
and the Company expires in July 1999. There is no assurance that 3M will
renew the agreement, and there is no assurance that 3M will purchase any
significant quantities of SoftBoard products in the future. SEE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATIONS.
As with any large OEM or distributor relationship, order rates may be subject
to quarterly fluctuations as demand builds and inventories are adjusted. The
decrease in sales to 3M in the second half of 1998 had an adverse effect on
the Company's results of operations.
MANUFACTURING AND SUPPLY
The principal components of the various SoftBoard models consist of lasers,
scanners, electronic subassemblies, the porcelain-on-steel and translucent
glass writing surfaces, metal housing and frame parts, LCD projectors, and
plasma display monitors. The Company buys and tests parts manufactured to its
specifications and delivers certain electronic components to subcontractors
for subassembly. The Company assembles the final product. Final assembly
includes precise alignment of the lasers and scanners and final testing. The
Company generally ships products from its facility within one day after
receipt of an order.
Certain components of the Company's products are purchased from single
sources. The Company believes alternative sources are available and could be
located and qualified for all components. The Company does not, however, have
any long-term supply contracts with any vendors. Although a component may be
available from more than one supplier, the Company could incur delays in
switching suppliers, which could have an adverse effect on the Company's
sales and results of operations.
6
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The Company's production facility is located at its headquarters in Portland,
Oregon. It consists of approximately 21,000 square feet of space for raw
materials storage, finished goods storage and production of all of its
SoftBoard products.
COMPETITION
The Company believes the ability to compete effectively in the market for
computer-assisted conferencing and presentation products generally, and
electronic whiteboards particularly, depends upon price and key product
characteristics, including ease of use, positional accuracy, reliability,
durability and applications software.
There are a small number of competitors selling electronic whiteboards and
conferencing. Most of the competitors that manufacture electronic whiteboards
with capabilities somewhat similar to those of SoftBoard use
pressure-sensitive surfaces, which the Company believes are generally awkward
to use because of the pressure required to register the writing and which the
Company believes are less durable than SoftBoard's porcelain-on-steel writing
surface. Additionally, the Company believes SoftBoard's functionality and
long-term reliability is significantly greater than current competitors.
As a result of the Company's OEM agreement with 3M (see MARKETING, SALES &
DISTRIBUTION), 3M is selling SoftBoard products under the 3M brand name
"Ideaboard." The agreement with 3M does not contain any exclusivity relative
to selling into specific markets. Therefore, 3M is a significant competitor.
In the fourth quarter of 1998, in an effort to reduce inventories, 3M began
selling its Ideaboard products at prices significantly below the prices that
the Company charges for its products. This had a significant adverse effect
on the Company's sales volume in the fourth quarter 1998.
The Company also competes with manufacturers of simple electronic copyboards,
conferencing software and front- and rear-projection systems. Electronic copy
boards, which generally range in price from approximately $1,500 to
approximately $4,500, provide only black and white printouts on thermal
paper, may or may not be connected to a computer and offer limited ability to
store the screen image for subsequent playback and review or transmission to
remote locations. In addition, the meeting or presentation process is
typically interrupted and delayed while participants wait for the written
information to be scanned and copied.
Certain software products provide conferencing and "shared whiteboard"
capabilities in software. The users run an application on the PC that allows
them to mark up documents on computer screens and share them with other users
on a network. Input is limited to keyboard, mouse or graphics tablet; few of
these products have the capability to draw or write on a whiteboard surface.
These software-only products do not allow for a group of people in the same
room to share and interact with the information. The Company believes these
software "shared whiteboard" products are complementary to SoftBoard because
SoftBoard provides an input device that can be used directly with many of
these software products.
The Company is aware of several competitors that offer a rear-projection
system. The competitive systems use a pressure sensitive surface. With
pressure sensitive technology a limited amount of light can be projected
through the writing surface making it more difficult for the user and any
other participants to view the image on the display, thereby requiring the
lights in the meeting room to be turned off. Their product is also subject to
alignment problems if moved even slightly, and is not supplied with an
integrated LCD projector. The Company believes that the System 400 is
superior to this product because of the greater amount of light that is
delivered through the System 400 writing surface, it can be moved across the
room or around the world with minimal, and often no alignment problems, and
it is complete and ready to connect to a personal computer for immediate use.
The Company is not aware of any competitors that offer an interactive plasma
display system with the same or similar functionality that the System 500
models possess. These capabilities include the ability to interactively run
all software applications and manipulate images in fine granular detail such
as Computer Aided Design (CAD) drawings.
7
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Many of the Company's competitors are more established, benefit from greater
name recognition and have significantly greater financial, technological,
production and marketing resources than the Company. In addition, many of
these companies have large and established sales forces and have been selling
their products to the same customers targeted by the Company for a
substantial period of time. The market acceptance of certain competing
products that are based on different technologies or approaches could have
the effect of reducing the size of the market for the Company's products,
resulting in lower prices and erosion of the Company's gross profit.
INTELLECTUAL PROPERTY
The Company was issued United States Patent No. 5,248,856 in September 1993
for the main graphic data-acquisition technology incorporated in Softboard.
Canadian Patent No. 2100624 covering this technology was issued to the
Company in July of 1997. European patent No. 0600576 covering the system
technology was issued to the Company in October 1998. In April 1997, the
Company was issued U. S. Patent No. 5,623,129 covering the code-based,
electromagnetic-field-responsive graphic data-acquisition system. In
September 1997, the Company was issued U. S. Patent No. 5,665,942 for the
optical scanning system employing laser and laser safety control.
The Company currently holds eight separate patents on various technology
incorporated in the SoftBoard products. In addition, the Company will file
other patent applications for new SoftBoard product features and technology.
The Company relies on copyright protection for its proprietary software.
Additionally, SoftBoard-Registered Trademark- and Microfield
Graphics-Registered Trademark- are registered trademarks of the Company in
the United States, and trademark applications have been filed for the phrases
"See What I'm Saying," and "Group Desktop."
The Company protects its intellectual property rights through a combination
of patents, copyrights, trade secret and other intellectual property law,
nondisclosure agreements and other measures. The Company believes, however,
that its financial performance will depend more upon the innovation,
technological expertise and marketing abilities of its employees than upon
such protection.
GOVERNMENT REGULATION
SoftBoard uses low-powered infrared lasers, similar to those used in compact
disc players and laser printers. The Company has independently tested its
products and believes it complies with the applicable industry and
governmental safety requirements for lasers.
EMPLOYEES
As of February 28, 1999, the Company employed 42 persons. None of the
Company's employees are covered by collective bargaining agreements, and the
Company believes its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's facilities in Portland, Oregon, consist of approximately 34,000
square feet, with 13,000 square feet of office space and 21,000 square feet
of manufacturing space. The Company occupies this facility pursuant to a
non-cancelable lease which expires in 2003.
8
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ITEM 3. 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 law 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 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended January 2, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq SmallCap Market under the
symbol "MICG." The following table sets forth the high and low sales prices
as reported by the Nasdaq SmallCap Market for the periods indicated.
<TABLE>
<CAPTION>
LOW HIGH
--- ----
<S> <C> <C>
FISCAL 1997
First Quarter $ 1 3/8 $ 3 1/4
Second Quarter $ 3/4 1 3/4
Third Quarter 1 1/2 3 1/8
Fourth Quarter 2 1/16 4 1/8
FISCAL 1998
First Quarter $ 3 5/8 $ 8 3/4
Second Quarter 4 1/16 9 3/16
Third Quarter 2 4 15/16
Fourth Quarter 1 3/8 2 7/8
</TABLE>
There were 159 shareholders of record and the Company believes approximately
1600 beneficial shareholders at March 22, 1999. There were no cash dividends
declared or paid in fiscal years 1998 or 1997. The Company does not
anticipate declaring such dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATIONS
OVERVIEW
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
9
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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.
In July 1997, the Company entered into a general purchase and development
agreement with 3M, through which 3M globally markets advanced versions of the
Company's SoftBoard products under the 3M brand name "Ideaboard." Under the
terms of the two-year agreement, the Company developed specialized versions
of their SoftBoard product line for 3M. Production and initial shipments of
the 3M product started in the fourth quarter of 1997. There have been no
shipments of significant quantities of SoftBoard products to 3M since the end
of the second quarter 1998. The agreement between 3M and the Company expires
in July 1999. There is no assurance that 3M will renew the agreement, and
there is no assurance that 3M will purchase any significant quantities of
SoftBoard products in the future.
As with any large OEM or distributor relationship, order rates may be subject
to quarterly fluctuations as demand builds and inventories are adjusted. The
reduced level of sales to 3M in the last half of 1998 had an adverse effect
on the Company's business.
The Company's ongoing results will depend on continued and increased market
acceptance of the Company's products and the Company's ability to modify them
to meet the needs of its customers. Any reduction in demand for, or
increasing competition with respect to, these products would have a material
adverse effect on the Company's financial condition and results of operations.
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>
FISCAL FISCAL
1998 1997
------ ------
<S> <C> <C>
Net sales 100 % 100 %
Cost of goods sold 59 56
---- ----
Gross profit 41 44
Research and development expenses (15) (17)
Marketing and sales expenses (40) (50)
General and administrative expenses (14) (17)
---- ----
Loss from operations (28) (40)
Other income, net (1) -
---- ----
Loss before income taxes (29) (40)
Benefit from income taxes - -
---- ----
Net loss (29)% (40)%
---- ----
---- ----
</TABLE>
SALES. Sales increased $1,028,000 (18%) to $6,646,000 in 1998 from $5,618,000
in 1997. The increase was due primarily to shipments to 3M. Sales to 3M
accounted for $2,551,000 in 1998 compared to $524,000 in 1997. SEE OVERVIEW,
ABOVE. In fiscal 1998, export sales aggregated $1,822,000 (27% of net sales),
compared to $981,000 (17% of net sales) in 1997. SEE NOTE 10 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
10
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GROSS PROFIT. Cost of goods sold includes the cost of raw materials needed to
assemble the product, assembly and preparation by vendors and direct and
indirect costs associated with the procurement, testing, scheduling and
quality assurance functions performed by the Company. The Company's gross
margin was 41% in 1998, down from 44% in 1997. The decrease in gross margin
was due primarily to a higher proportion of total sales into the lower margin
OEM channel in 1998 compared to 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. Research and development expenses increased $38,000
(4%) to $998,000 in 1998 from $960,000 in 1997. The increase was due
primarily to increased rates of development and additional prototyping costs
connected with the Company's new interactive plasma display products and
version 2.0 SoftBoard system software. Research and development expenses, as
a percentage of sales, were 15% and 17% in 1998 and 1997, respectively.
MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased $163,000
(6%) to $2,658,000 in 1998 from $2,821,000 in 1997. The decreases were due
primarily to significantly lower advertising and trade show expense during
1998. The Company undertook changes in the methods it used to generate sales
leads during the current year. Marketing and sales expenses decreased as a
percentage of sales to 40 % in 1998 from 50% in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $14,000 (1%) to $960,000 in 1998 from $946,000 in 1997. General and
administrative expenses, as a percentage of sales, were 14% in 1998 compared
to 17 % in 1997. The decrease in percentage compared to sales was due to the
higher total sales in 1998.
OTHER EXPENSE, NET. Other expense, net includes interest income, interest
expense and miscellaneous income. Other expense, net increased by $32,000 to
$50,000 in 1998, from $18,000 in 1997. The increase was due primarily to
higher interest expense in 1998 as a result of increased borrowings under the
Company's operating line of credit.
INCOME TAXES. As of January 2, 1999 the Company had available net operating
loss carryforwards of approximately $12 million for federal income tax
purposes. Such carryforwards may be used to reduce consolidated taxable
income, if any, in future years through their expiration in 2003 to 2013.
Utilization of net operating loss carryforwards may be limited due to the
ownership changes resulting from the Company's initial public offering in
1995 and other stock transactions. In addition, the Company has research and
development credits aggregating approximately $272,000 for income tax
purposes at January 2, 1999. Such credits may be used to reduce taxes
payable, if any, on a consolidated basis in future years through their
expiration in 2001 to 2013. SEE NOTE 7 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures through public and private sales of equity securities, cash from
operations, and borrowings under bank lines of credit. At January 2, 1999 the
Company had working capital of approximately $871,000 and its principal
sources of liquidity consisted of $740,000 in cash and cash equivalents.
Accounts receivable decreased $230,000 to $798,000 at January 2, 1999 from
$1,028,000 at the end of 1997. This was due to decreased sales in the fourth
quarter of 1998 compared to fourth quarter sales in 1997. Inventories
increased $234,000 to $946,000 at January 2, 1999 from $712,000 at the end of
1997. This increase was due primarily to the fact that sales in the fourth
quarter of 1998 were lower than expected, leaving the Company's with more
inventory than anticipated. Fourth quarter 1997 inventory levels were lower
due to the Company's fourth quarter 1997 sales levels matching its
expectations.
Accounts payable decreased $75,000 to $532,000 at January 2, 1999, from
$607,000 at the end of 1997. This decrease was due to lower levels of
materials purchased at the end of 1998 compared to the end of 1997. Also, at
January 2, 1999, the Company has a $2,000,000 line of credit, which bears
interest monthly at prime (7.75% at January 2, 1999) and is secured by
accounts receivable and inventory. There was $655,000 outstanding under
11
<PAGE>
the line of credit at January 2, 1999. The Company's line of credit with its
bank expires on September 9, 1999. The Company expects to renew its line of
credit with substantially similar terms prior to its expiration. SEE NOTE 6
OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The Company has no commitments for capital expenditures in material amounts.
On March 26, 1999, the Company signed a common stock purchase agreement with
Steelcase Inc. (Steelcase), under which Steelcase purchased 444,445 shares of
the Company's common stock for $1,000,001 in cash. This investment was the
second investment made in the Company by Steelcase. On March 19, 1998 the
Company signed a common stock purchase agreement with Steelcase under which
Steelcase purchased 350,000 shares of the Company's common stock and a
warrant for $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 19, 1999 and expires
on March 19, 2001.
The Company believes its existing cash and cash equivalents (including the
proceeds of the recent sale of stock to Steelcase), 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. There is no assurance that the Company can obtain such
financing, or that such financing will be on terms acceptable to the Company.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard #128, "Earnings Per Share" (SFAS 128) which
requires disclosure of basic and diluted earnings per share. The Company has
adopted SFAS 128 for the year ended January 3, 1998, and all prior years have
been restated to reflect its adoption.
In June 1997, the FASB issued Financial Accounting Standard #130, "Reporting
Comprehensive Income" (SFAS 130) which establishes requirements for
disclosure of comprehensive income and is effective for the Company's year
ending 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.
In June 1997, the FASB issued Financial Accounting Standard #131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131), 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.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP are included in this report as follows:
<TABLE>
<CAPTION>
Microfield Graphics, Inc.: Page
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets
January 2, 1999 and January 3, 1998 F-2
Consolidated Statements of Operations for the years
ended January 2, 1999 and January 3, 1998 F-3
Consolidated Statements of Shareholders' Equity for the
years ended January 2, 1999 and January 3, 1998 F-4
Consolidated Statements of Cash Flows for the years ended
January 2, 1999 and January 3, 1998 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and positions of the Company's executive officers are
as follows:
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION(S) WITH COMPANY
- --------------------------------------------------------------------------------------------
<S> <C> <C><C>
John B. Conroy 60 Chairman of the Board, President and Chief Executive Officer
Randall R. Reed 42 Chief Financial Officer and Secretary
Michael W. Stansell 56 Vice President, Operations
Ross K. Summers 45 Vice President, Sales & Marketing
Donald H. Zurstadt 57 Vice President, Engineering
</TABLE>
JOHN B. CONROY joined the Company in May 1986 and was appointed
President and elected a Director that same month. Mr. Conroy was designated
Chief Executive Officer by the Board of Directors in January 1987, and
appointed Chairman of the Board of Directors in June 1996. Mr. Conroy
previously held executive management positions with a number of computer
industry companies, has served as a Director of several, and holds a BSEE
from New York University.
13
<PAGE>
RANDALL R. REED joined the Company in August 1985 as Controller and
became the Company's Chief Financial Officer and Secretary in April 1990. Mr.
Reed was a Tax Supervisor among other positions at Coopers and Lybrand from
August 1981 to February 1985. Mr. Reed is a Certified Public Accountant and
holds a BS in business administration from Southern Oregon State College.
MICHAEL W. STANSELL joined the Company in November 1985 as Director of
Manufacturing and was appointed Vice President, Operations, in January 1987.
Mr. Stansell was a division manufacturing manager, among other positions, at
Tektronix Corporation from August 1965 through October 1985.
ROSS K. SUMMERS joined the Company in June 1998 as Vice President Sales
& Marketing. Mr. Summers was Vice President Operations and Corporate
Development for Atlas Telecom, Inc. from April 1996 through May 1998. From
1985 to 1996 Mr. Summers also held several executive marketing positions with
Sequent Computer Systems, the last of which was Vice President Corporate
Marketing. Mr Summers holds a BS degree in Mathematical Sciences from Oregon
State University.
DONALD H. ZURSTADT joined the Company in September 1989 as Manager of
Engineering and was appointed Vice President, Engineering, in April 1990. Mr.
Zurstadt has held management and engineering positions with several computer
industry companies over the past 30 years including Tektronix, Inc.,
McDonnell Douglas Automation Corporation and Digital Equipment Corporation.
Mr. Zurstadt holds a BA in physics from the University of Colorado.
Information with respect to directors of the Company and Section 16(a)
required by this item is included in the Company's definitive proxy statement
for its 1999 Annual Meeting of Shareholders under the captions ELECTION OF
DIRECTORS and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING, respectively, and
is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's definitive
proxy statement for its 1999 Annual Meeting of Shareholders under the caption
EXECUTIVE COMPENSATION AND OTHER MATTERS and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's definitive
proxy statement for its 1999 Annual Meeting of Shareholders under the caption
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Company's definitive
proxy statement for its 1999 Annual Meeting of Shareholders under the caption
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS and is incorporated herein by
reference.
14
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herein:
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
*3.1 Articles of Incorporation, as amended
*3.2 Bylaws, as amended
*4.1 See Article III of Exhibit 3.1 and Articles I and VI of Exhibit 3.2
#*10.1 1986 Stock Option Plan, as amended
*10.3 Form of Incentive Stock Option Agreement
*10.7 Form of Representative's Warrants
(1)*10.8 Japanese Marketing License Agreement
(1)**10.9 General Purchase and Development Agreement dated
July 14, 1997 between the Registrant and 3M Company
(1)***10.10 Common Stock Purchase Agreement dated March 19, 1998 between the Registrant and
Steelcase Inc., Registration Rights Agreement dated March 19, 1998 between the
Registrant and Steelcase Inc., Stock Purchase Warrant to Purchase Shares of Common
Stock of Microfield Graphics, Inc. dated March 19, 1998 issued by the Registrant to
Steelcase Inc., and Share Ownership, Voting and Right of First Refusal Agreement
dated March 19, 1998 between the Registrant, Steelcase Inc., John B. Conroy, Scott D.
McVay, Randall R. Reed, Michael W. Stansell, Peter F. Zinsli, Donald H. Zurstadt, and
William P. Cargile.
****10.11 Restated 1995 Stock Incentive Plan dated May 11, 1998.
*****23 Consent of PricewaterhouseCoopers
*****27 Financial Data Schedule
</TABLE>
- ------------
* Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form SB-2 (Registration No. 33-91890).
** Incorporated by reference to Exhibits to Registrants Quarterly Report
on Form 10-QSB for the three month period ended September 27, 1997.
*** Incorporated by reference to Exhibits to Registrants Quarterly Report
on Form 10-QSB for the three month period ended April 4, 1998.
**** Incorporated by reference to Exhibits to Registrants Quarterly Report
on Form 10-QSB for the three month period ended July 4, 1998.
***** Filed herewith.
# This exhibit constitutes a management contract, or compensatory plan or
arrangement.
(1) Portions of this Exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for
confidential treatment.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended January 2, 1999.
15
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 2, 1999
MICROFIELD GRAPHICS, INC.
By: /s/ JOHN B. CONROY
-----------------------
John B. Conroy
Chairman of the Board, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title
- --------- -----
/s/ JOHN B. CONROY Chairman of the Board, President, and Chief
- ------------------------ Executive Officer (Principal Executive Officer)
John B. Conroy Date: April 2, 1999
/s/ RANDALL R. REED Chief Financial Officer and Secretary
- ------------------------ (Principal Financial and Accounting Officer)
Randall R. Reed Date: April 2, 1999
/s/ HERBERT S. SHAW Director
- ------------------------ Date: April 2, 1999
Herbert S. Shaw
/s/ WILLIAM P. CARGILE Director
- ------------------------ Date: April 2, 1999
William P. Cargile
/s/ JAMES P. KEANE Director
- ------------------------ Date: April 2, 1999
James P. Keane
16
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Microfield Graphics, Inc. (d.b.a. Softboard)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Microfield
Graphics, Inc. (d.b.a. Softboard) and its subsidiary at January 2, 1999 and
January 3, 1998 and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Portland, Oregon
January 29, 1999, except for Note 11,
which is as of March 26, 1999
F-1
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
CONSOLIDATED BALANCE SHEET
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 739,628 $ 909,184
Accounts receivable, net (Note 3) 797,543 1,027,902
Inventories (Note 4) 946,103 712,000
Prepaid expenses and other 156,627 216,427
------------- -------------
Total current assets 2,639,901 2,865,513
Property and equipment, net (Note 5) 379,457 384,251
Other assets 226,140 72,444
------------- -------------
$ 3,245,498 $ 3,322,208
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 6) $ 655,000 $ 1,000,000
Current portion of long-term debt (Note 6) 83,333 83,333
Accounts payable 532,308 606,556
Accrued payroll and payroll taxes 255,698 193,757
Unearned income 56,101 53,745
Other accrued liabilities 186,403 164,483
------------- -------------
Total current liabilities 1,768,843 2,101,874
Long-term debt, net of current portion (Note 6) 6,945 90,278
Other long-term liabilities 77,220 --
------------- -------------
Total liabilities 1,853,008 2,192,152
------------- -------------
Commitments and contingencies (Note 8)
Shareholders'equity (Notes 9 and 11):
Common stock, 25,000,000 shares authorized, 3,686,775 and 3,211,813
shares issued and outstanding, respectively 14,362,698 12,185,527
Accumulated deficit (12,970,208) (11,055,471)
------------- -------------
Total shareholders' equity 1,392,490 1,130,056
------------- -------------
$ 3,245,498 $ 3,322,208
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net sales (Note 10) $ 6,646,148 $ 5,618,330
Cost of goods sold 3,893,541 3,140,988
------------ ------------
Gross profit 2,752,607 2,477,342
------------ ------------
Operating expenses:
Research and development 997,929 959,680
Marketing and sales 2,657,581 2,821,232
General and administrative 960,498 945,764
------------ ------------
4,616,008 4,726,676
------------ ------------
Loss from operations (1,863,401) (2,249,334)
Other income:
Interest expense, net (50,176) (23,142)
Other income 346 4,750
------------ ------------
Loss before income taxes (1,913,231) (2,267,726)
Provision for income taxes (Note 7) (1,506) (2,317)
------------ ------------
Net loss $(1,914,737) $(2,270,043)
------------ ------------
------------ ------------
Basic and diluted net loss per share $ (.54) $ (.71)
------------ ------------
------------ ------------
Shares used in calculation 3,552,706 3,198,062
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
SHARES AMOUNT DEFICIT
----------- ------------- --------------
<S> <C> <C> <C>
Balance at December 28, 1996 3,195,575 $ 12,152,781 $ (8,785,428)
Stock options exercised 11,438 17,146 -
Issuance of common stock 4,800 15,600 -
Net loss - - (2,270,043)
----------- ------------- --------------
Balance at January 3, 1998 3,211,813 $ 12,185,527 $(11,055,471)
Stock options exercised 124,962 187,643 -
Issuance of common stock and warrants, net of related
expenses 350,000 1,989,528 -
Net loss - - (1,914,737)
----------- ------------- --------------
----------- ------------- --------------
Balance at January 2, 1999 3,686,775 $ 14,362,698 $(12,970,208)
----------- ------------- --------------
----------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,914,737) $(2,270,043)
Adjustments to reconcile loss from continuing operations
to operating cash flows:
Depreciation and amortization 209,990 255,174
Issuance of common stock for compensation - 15,600
Changes in assets and liabilities:
Accounts receivable 230,359 (250,095)
Inventories (234,103) 285,693
Prepaid expenses and other (34,692) 32,448
Accounts payable (74,248) 207,545
Accrued payroll and payroll taxes 61,941 (15,940)
Unearned income 2,356 (7,058)
Other accrued liabilities 99,140 (18,937)
------------ ------------
Net cash used in operating activities (1,653,994) (1,765,613)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment, net (185,650) (78,856)
Loan to employee (78,750) -
Purchases of patents and other - (3,467)
------------ ------------
Net cash used in investing activities (264,400) (82,323)
------------ ------------
Cash flows from financing activities:
Net borrowings (payments) under line of credit and term
loan agreement (345,000) 923,611
Net payments on capital lease obligation (83,333) (51,493)
Proceeds from exercise of common stock options 187,643 17,146
Proceeds from issuance of common stock 1,989,528 -
------------ ------------
Net cash provided by financing activities 1,748,838 889,264
------------ ------------
Net decrease in cash and cash equivalents (169,556) (958,672)
Cash and cash equivalents, beginning of year 909,184 1,867,856
------------ ------------
Cash and cash equivalents, end of year $ 739,628 $ 909,184
------------ ------------
------------ ------------
Cash paid for:
Interest $ 94,804 $ 69,970
------------ ------------
------------ ------------
Income taxes $ 1,506 $ 2,317
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART of THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
1. THE COMPANY AND BASIS OF PRESENTATION
Microfield Graphics, Inc., an Oregon corporation incorporated in October
1986, develops, manufactures and markets computer conferencing and
telecommunications products to facilitate group communications. The
Company's product lines incorporate a series of digital whiteboards,
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 Company has a wholly owned foreign sales corporation in Barbados.
Hereafter in these consolidated financial statements, the term "Company"
refers to Microfield Graphics, Inc. and its subsidiary. The Company's
primary market is in the United States; however, there are export sales to
France, the United Kingdom, Japan and other countries. (See export sales in
Note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company operates on a 52-53 week fiscal year ending on the Saturday
closest to the last day of December.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Microfield
and its wholly owned subsidiary. All significant intercompany transactions
and balances have been eliminated in consolidation.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. During the year ended January 3,
1998, the Company issued common stock to resellers and employees, with a
fair market value of $15,600.
ACCOUNTS RECEIVABLE
Accounts receivable at January 2, 1999 and January 3, 1998 are recorded net
of allowances for uncollectible accounts of $44,553 and $34,553,
respectively.
INVENTORIES
Inventories are stated at the lower of standard cost or market value.
Standard costs approximate the first-in, first-out method. Inventory costs
include raw materials, direct labor and allocated overhead.
F-6
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using
accelerated methods over their estimated useful lives of five years.
Repairs and maintenance are charged to expense as incurred; improvements
are capitalized. When the Company sells or disposes of assets, the accounts
are relieved of the related costs and accumulated depreciation and
resulting gains and losses are reflected in operations.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as
incurred.
REVENUE RECOGNITION
Revenue is recognized upon shipment of products. Revenue on warranty
contracts is recognized over the life of the contract.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
approach. The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax basis of assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in operations in the period that includes
the enactment date.
BASIC AND DILUTED NET LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," during the year
ended January 3, 1998. SFAS No. 128 requires disclosure of basic and
diluted earnings (loss) per share. Basic earnings (loss) per share are
computed based on the weighted average number of common shares outstanding
each year. Diluted net loss per share is the same as basic net loss per
share because the potential effect of the conversion of any outstanding
stock options is anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, accounts receivable,
accounts payable, line of credit and accrued liabilities as presented in
the consolidated financial statements approximate fair value because of the
short-term maturity of these instruments. The recorded amount of capital
lease obligations and long-term debt approximates fair value since the
imputed interest or stated interest approximates currently competitive
rates.
F-7
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), defines comprehensive income (loss) as
the changes in equity of a business enterprise during a period that result
from transactions and other economic events and circumstances from
non-shareholder sources. Since the Company's only component of
comprehensive income (loss) is net loss, SFAS 130 imposes no additional
reporting requirements on the Company.
3. CONCENTRATION OF CREDIT RISK
During the year ended January 2, 1999 one customer accounted for
approximately 38% of net sales. During the year ended January 3, 1998 no
customer accounted for greater than 10% of net sales. Accounts receivable
from one customer totaled approximately $210,443 at January 2, 1999, while
accounts receivable from another customer totaled $277,500 at January 3,
1998.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 607,140 $ 515,122
Finished goods 338,963 196,878
----------- -----------
$ 946,103 $ 712,000
----------- -----------
----------- -----------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
----------- -----------
<S> <C> <C>
Furniture, machinery and equipment $ 986,857 $ 805,905
Capitalized leased assets 236,157 236,157
----------- -----------
1,223,014 1,042,062
Less accumulated depreciation and amortization 843,557 657,811
----------- -----------
$ 379,457 $ 384,251
----------- -----------
----------- -----------
</TABLE>
Accumulated amortization of capitalized leased assets aggregated $236,157
at January 2, 1999 and January 3, 1998. Such amounts are included in the
above schedule.
F-8
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
6. DEBT
At January 2, 1999, the Company had a $2,000,000 line of credit, which
expires in September 1999. Borrowings under the line of credit are due on
demand, bear interest payable monthly at prime (7.75% at January 2, 1999),
and are collateralized by inventories and accounts receivable. As of
January 2, 1999, borrowings of $655,000 were outstanding under the line.
Pursuant to the line of credit agreement, the Company is required to comply
with certain financial covenants, including ratios and minimum net worth.
At January 2, 1999, the Company was in violation of its covenants with
respect to its quick ratio and minimum net worth. These covenants have been
waived by the bank.
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
<S> <C> <C>
Term loan payable to bank in monthly installments of
$7,988, including interest at the prime rate plus .5%
(8.25% at January 2, 1999), from February 1997 through
January 2000; all assets purchased with the proceeds
of this loan are pledged as collateral $ 90,278 $ 173,611
Less principal amounts due within one year (83,333) (83,333)
-------------- -----------
Long-term debt $ 6,945 $ 90,278
-------------- -----------
</TABLE>
Remaining maturities on long-term debt are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1999 $ 83,333
2000 6,945
-----------
$ 90,278
-----------
</TABLE>
7. INCOME TAXES
The provision for income taxes of $1,506 and $2,317 for fiscal years 1998
and 1997, respectively, consists of minimum payments due and paid to
various state tax authorities.
The provision for income taxes for the years ended January 2, 1999 and
January 3, 1998 differs from the amount which would be expected as a result
of applying the statutory tax rates to the losses before income taxes due
primarily to changes in the valuation allowance to fully reserve net
deferred tax assets.
F-9
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
7. INCOME TAXES (CONTINUED)
Deferred tax assets are comprised of the following components:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
------------ ------------
<S> <C> <C>
Current:
Allowances for uncollectible accounts $ 18,560 $ 13,255
Employee benefits 31,125 35,453
Inventory basis differences 689 738
Inventory, warranty, and other allowances 58,577 55,955
Unearned revenues 21,520 20,617
------------ ------------
130,471 126,018
------------ ------------
Non-current:
Intangible assets 15,368 9,678
Net operating loss carryforwards 4,702,432 3,946,873
Research and development credits 272,471 290,820
------------ ------------
4,990,271 4,247,371
------------ ------------
Total deferred tax asset 5,120,742 4,373,389
Deferred tax asset valuation allowance (5,120,742) (4,373,389)
------------ ------------
Net deferred tax assets $ - $ -
------------ ------------
------------ ------------
</TABLE>
At January 2, 1999, the Company had available net operating loss
carryforwards of approximately $12,148,702 for federal income tax purposes.
Such carryforwards may be used to reduce consolidated taxable income, if
any, in future years through their expiration in 2003 to 2012. Utilization
of net operating loss carryforwards may be limited due to the ownership
changes resulting from the Company's initial public offering in 1995. In
addition, the Company has research and development credits aggregating
$272,471 for income tax purposes at January 2, 1999. Such credits may be
used to reduce taxes payable, if any, in future years through their
expiration in 2001 to 2012.
F-10
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
8. LEASE COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases which require future
minimum lease commitments through July 2003 as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1999 $ 292,272
2000 292,272
2001 306,882
2002 321,492
2003 106,746
------------
Total minimum payments required $ 1,319,664
------------
------------
</TABLE>
Rent expense totaled $355,246 and $345,125 for fiscal years ended 1998 and
1997, respectively.
A former temporary leased employee filed a complaint in federal district
court 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.
9. SHAREHOLDERS' EQUITY
INCENTIVE STOCK OPTION PLAN
The Company has Stock Option Plans (the "Plans"). At January 2, 1999 and
January 3, 1998, 1,005,162 and 1,005,228 shares of common stock were
reserved for issuance to employees, officers, directors and consultants.
Under the Plans, the options may be granted to purchase shares of the
Company's common stock at fair market value, as determined by the Company's
Board of Directors, at the date of grant. The options are exercisable over
a period of up to five years from the date of grant. The options become
exercisable over four years.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1996. SFAS No. 123 allows companies to choose whether to
account for stock-based compensation on a fair value method or to continue
to account for stock-based compensation under the current intrinsic value
method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to continue to follow the provisions of
APB Opinion No. 25.
F-11
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
9. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's Stock Option Plans as of January
2, 1999 and January 3, 1998 and for the years then ended is presented
below:
<TABLE>
<CAPTION>
January 2,1999 January 3, 1998
---------------------------- ---------------------------
Weighted Weighted
average average
exercise exercise
Performance options Shares price Shares price
- ------------------------------------ ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 402,868 $ 3.69 289,334 $ 4.54
Granted 212,500 4.04 195,200 1.58
Exercised (124,962) 1.50 (11,438) 1.47
Forfeited (47,993) 2.07 (70,228) 1.67
----------- ----------
442,413 402,868
----------- ----------
----------- ----------
Options exercisable at year-end 144,046 160,062
----------- ----------
----------- ----------
</TABLE>
<TABLE>
<CAPTION>
Number of options Weighted
----------------------------- average contractual
Exercise price Outstanding Exercisable life remaining
------------------------------- ------------- ------------- ---------------------
<S> <C> <C> <C>
$1.06-1.75 201,399 117,843 2.6 years
$2.22-4.06 241,014 26,203 4.3 years
------------- -------------
442,413 144,046
------------- -------------
</TABLE>
The Company has computed for pro forma disclosure purposes the value of all
options and warrants granted during 1998 and 1997 using the Black-Scholes
pricing model as prescribed by SFAS 123 and the following assumptions used
for grants:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Risk-free interest rate 4.31% 6.38%
Expected dividend yield 0% 0%
Expected lives 4.5 years 4.5 years
Expected volatility 102% 60%
</TABLE>
Adjustments are made for options forfeited prior to vesting.
Had compensation cost for the Company's Plans been determined based on the
fair value at the grant dates consistent with the method of SFAS 123, the
total value of options and warrants granted would be computed as follows:
<TABLE>
<S> <C>
Year ended January 2, 1999 $ 642,370
Year ended January 3, 1998 372,889
</TABLE>
F-12
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
9. SHAREHOLDERS' EQUITY (CONTINUED)
Such amounts would be amortized over the vesting period of the options.
Accordingly, under SFAS 123, the Company's net loss and loss per share
would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------ --------------
<S> <C> <C> <C>
Net Loss As reported $(1,914,737) $ (2,270,043)
Pro Forma (2,243,091) (2,511,565)
Basic and diluted net loss per share As reported (.54) (.71)
Pro Forma (.63) (.79)
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures for
1998 and 1997 are not likely to be representative of the effects on
reported net loss and net loss per share for future years, because options
vest over several years and additional awards generally are made each year.
COMMON STOCK WARRANTS
In connection with its initial public offering in 1995, the Company issued
110,000 warrants to purchase shares of common stock at an exercise price of
$7.20 per share; such warrants expire in 2000. In addition, in connection
with the common stock purchase agreement on March 16, 1998 the Company
issued 260,000 warrants to purchase shares of common stock at an exercise
price of $6.75 per share. Such warrants may be exercised beginning March
1999 and expire in March 2001.
10. EXPORT SALES
Export sales aggregated $1,822,000 and $981,000 in 1998 and 1997,
respectively. Such export sales were made to customers in the following
countries:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 2, JANUARY 3,
1999 1998
-------------- --------------
<S> <C> <C>
Japan $ 114,000 $ 239,000
United Kingdom 520,000 306,000
France 854,000 -
Other 334,000 436,000
-------------- --------------
$ 1,822,000 $ 981,000
-------------- --------------
-------------- --------------
</TABLE>
F-13
<PAGE>
MICROFIELD GRAPHICS, INC.
(D.B.A. SOFTBOARD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND JANUARY 3, 1998
- -------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS
On March 26, 1999, the Company signed a common stock purchase agreement
with Steelcase Corporation ("Steelcase") under which Steelcase purchased
444,445 shares of the Company's common stock for $1,000,001 ($2.25 per
share) in cash.
F-14
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 (No. 33-97544) of Microfield Graphics, Inc. of our report
dated January 29, 1999, except for Note 11, which is as of March 26, 1999
appearing on page F-1 of this Form 10-KSB.
PricewaterhouseCoopers LLP
Portland, Oregon
April 1, 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 REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 740
<SECURITIES> 0
<RECEIVABLES> 842
<ALLOWANCES> (44)
<INVENTORY> 946
<CURRENT-ASSETS> 2,640
<PP&E> 1,223
<DEPRECIATION> 844
<TOTAL-ASSETS> 3,245
<CURRENT-LIABILITIES> 1,769
<BONDS> 0
0
0
<COMMON> 14,363
<OTHER-SE> (12,970)
<TOTAL-LIABILITY-AND-EQUITY> 3,245
<SALES> 6,646
<TOTAL-REVENUES> 6,646
<CGS> 3,894
<TOTAL-COSTS> 4,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (50)
<INCOME-PRETAX> (1,913)
<INCOME-TAX> 2
<INCOME-CONTINUING> (1,915)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,915)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
