<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 1, 2000
[ ] 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.)
16112 SW 72ND AVENUE
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 1,
2000 was 4,572,793 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 1, 2000 and
January 1, 2000 3
Consolidated Statement of Operations - Three and 4
Six Months Ended July 1, 2000 and July 3, 1999
Consolidated Statement of Cash Flows - Six Months
Ended July 1, 2000 and July 3, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
July 1, January 1,
2000 2000
------------------- --------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 221,388 $ 113,041
Accounts receivable, net of allowances
of $11,748 and $27,153 276,390 265,524
Inventories (Note 2) 461,515 496,696
Prepaid expenses and other 84,334 120,969
------------------- --------------------
Total current assets 1,043,627 996,230
Property and equipment, net (Note 3) 189,822 244,714
Other assets 35,182 76,915
------------------- --------------------
$ 1,268,631 $ 1,317,859
=================== ====================
Current liabilities:
Accounts payable 475,021 338,325
Current portion of debt $ 285,667 $ 360,473
Accrued payroll and payroll taxes 94,227 133,650
Unearned income 41,469 77,687
Accrued liabilities 71,247 82,048
------------------- --------------------
Total current liabilities 967,631 992,183
Long-term debt, net of discount 42,582 -
Other long-term liabilities - 52,455
------------------- --------------------
Total liabilities 1,010,213 1,044,638
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized, 4,572,793 and 4,132,185 shares
issued and outstanding 15,750,281 15,273,912
Accumulated deficit (15,491,863) (15,000,691)
------------------- --------------------
Total shareholders' equity 258,418 273,221
------------------- --------------------
$ 1,268,631 $ 1,317,859
=================== ====================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
---------------- --------------- ------------------ ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 681,306 807,433 1,523,462 1,860,748
Cost of goods sold 478,735 501,433 992,205 1,172,724
---------------- --------------- -------------- ---------------
Gross profit 202,571 306,000 531,257 688,024
Operating expenses
Research and development 79,455 281,049 133,999 525,659
Marketing and sales 199,734 578,298 411,431 1,059,717
General and administrative 255,193 241,371 456,385 489,000
241,371 241,371
---------------- --------------- -------------- ---------------
534,382 1,100,718 1,001,815 2,074,376
---------------- --------------- -------------- ---------------
Loss from operations (331,811) (794,718) (470,558) (1,386,352)
Other income (expense)
Interest income (expense), net (48,530) (12,040) (63,953) (27,284)
Other income, net 44,304 (49,742) 43,339 (49,518)
---------------- --------------- -------------- ---------------
Loss before provision for (336,037) (856,500) (491,172) (1,463,154)
Income taxes
Provision for income taxes -- -- -- --
---------------- --------------- -------------- ---------------
Net loss $ (336,037) (856,500) (491,172) (1,463,154)
================ =============== ============== ===============
Net loss per share
Basic $ (.08) (.22) (.12) (.37)
================ =============== ============== ===============
Diluted $ (.08) (.22) (.12) (.37)
================ =============== ============== ===============
Shares used in per share calculations
Basic 4,160,025 3,926,753 4,146,105 3,926,753
================ =============== ============== ===============
Diluted 4,160,025 3,926,753 4,146,105 3,926,753
================ =============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
------------------------------------------------------
July 1, July 3,
2000 1999
------------------------- --------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (491,172) $ (1,463,154)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 68,570 99,845
Noncash portion of employee option exercise --- --
recorded as compensation expense 105,951 --
Changes in assets and liabilities:
Accounts receivable (10,866) 300,188
Inventories 35,181 235,798
Prepaid expenses and other 36,635 57,547
Accounts payable 136,696 (178,082)
Accrued payroll and payroll taxes (39,423) (192,572)
Unearned income (36,218) 25,046
Accrued liabilities (10,801) (6,316)
--------------------- --------------------
Net cash used in operating activities (205,447) (1,121,700)
Cash flows from investing activities:
Acquisition of property and equipment (3,905) (30,326)
Other long-term assets 31,960 --
--------------------- --------------------
Net cash provided by investing activities 28,055 (30,326)
Cash flows from financing activities:
Payments on equipment line of credit (52,455) (41,667)
Proceeds from (payments on) operating line of credit (74,805) (131,000)
Proceeds from (payments on) Long Term Note 400,000
Proceeds from exercise of common stock options
and warrants 13,000 1,210
Proceeds from issuance of common stock -- 988,754
--------------------- --------------------
Net cash provided by financing activities 285,739 817,297
Net increase (decrease) in cash and cash equivalents 108,347 (334,729)
Cash and cash equivalents, beginning of period 113,041 739,628
--------------------- --------------------
Cash and cash equivalents, end of period $ 221,388 $ 404,899
===================== ====================
Supplemental disclosure of cash flow information: Cash paid for:
Interest $ 48,530 $ 17,555
===================== ====================
Income taxes $ -- $ --
===================== ====================
Issuance of Common Stock Warrants Recorded
as debt discount $ 357,418 $ --
===================== ====================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
MICROFIELD GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Microfield Graphics, Inc. (the "Company") for the quarters and six months ended
July 1, 2000 and July 3, 1999 have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission. The financial
information as of January 1, 2000 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
1, 2000. In the opinion of Company management, the unaudited consolidated
financial statements for the interim periods presented include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results for such interim periods. Operating results for the quarter ended
July 1, 2000 are not necessarily indicative of the results that may be expected
for the full year or any portion thereof.
The Company's fiscal year is the 52- or 53-week period ending on the
Saturday closest to the last day of December. The Company's current fiscal year
is the 52-week period ending December 30, 2000. The Company's last fiscal year
was the 52-week period ended January 1, 2000. The Company's second fiscal
quarters in fiscal 2000 and 1999 were the 13-week periods ended July 1, 2000 and
July 3, 1999, respectively.
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 1, January 1,
2000 2000
-------------------- ----------------------
<S> <C> <C>
Raw materials $365,817 $368,498
Finished goods 95,698 128,198
-------------------- ----------------------
$461,515 $496,696
==================== ======================
</TABLE>
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
July 1, January 1, 2000
2000
-------------------- ----------------------
<S> <C> <C>
Machinery and equipment $1,200,490 $1,196,585
Less accumulated depreciation and
amortization 1,010,668 951,871
-------------------- ----------------------
$189,822 $244,714
==================== ======================
</TABLE>
4. SUBORDINATED NOTE AGREEMENT
6
<PAGE>
On June 30, 2000, the Company issued a Subordinated Promissory Note to a
financing company. The promissory note plus unpaid interest (payable at an
initial rate of 10 percent per annum) is due as follows: (a) interest in arrears
on the last day of each quarter beginning September 30, 2000, and (b) the
outstanding principal balance and all accrued and unpaid interest on the earlier
of (i) June 30, 2005 or (ii) demand by holder made at any time after June 30,
2003. In connection with this Subordinated Promissory Note, the Company issued
two stock warrants each to purchase individually 1,033,000 common shares at a
price of $0.50 per share or $0.38722 per share, respectively. The aggregate
estimated fair value of the warrants of $357,418 has been recorded as a debt
discount and is being amortized using the effective interest method over the
three-year term of the related debt. Amortization of the debt discount is
included in interest expense.
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, interactive 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.
During 1999, the Company experienced significantly reduced sales and negative
cash flows from operations. The reduction was due primarily to the loss of sales
from Minnesota Mining and Manufacturing Company, a major OEM customer. At the
end of the second quarter of 1999, the Company concluded that it might not have
sufficient funds to operate for at least twelve months. Management based such
conclusions on the reduction in sales and resulting losses that occurred during
the first six months of 1999, coupled with diminishing cash resources (cash and
cash equivalents, and cash available under its operating line of credit). In
response, management restructured its operations through a combination of staff
reductions, workweek reductions, temporary executive salary reductions and
reductions in general expense spending levels. However, there can be no
assurance that the Company will achieve profitability on a continuing basis.
The Company was incorporated in Oregon in 1986. The Company's executive offices
are located at 16112 SW 72nd Avenue, Portland, OR 97224.
7
<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 1 JULY 3 JULY 1 JULY 3
2000 1999 2000 1999
--------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Sales 100 % 100 % 100 % 100 %
Cost of goods sold 70 62 65 63
--------------- -------------- ------------ ----------
Gross profit 30 38 35 37
Research and development (12) (35) (9)
expenses (28)
Marketing and sales expenses (29) (72) (27)
(57)
General and administrative (37) (30) (30)
expenses (26)
--------------- -------------- ------------ ----------
Loss from operations (49) (98) (31)
(75)
Other income (expense) (1) (8) (1)
(4)
--------------- -------------- ------------ ----------
Loss before provision for (49) (106) (32)
income taxes (79)
Provision for income taxes -- -- -- --
--------------- -------------- ------------ ----------
Net loss (49) % (106) % (32) % (79) %
=============== ============== ============ ==========
</TABLE>
QUARTER ENDED JULY 1, 2000 COMPARED WITH QUARTER ENDED JULY 3, 1999
SALES. Sales decreased $126,000 (16%) to $681,000 in the second
quarter of 2000 from $807,000 in the second quarter of 1999. The decrease for
the quarter was consistent with the Company's planned reduction in expenses for
advertising and sales promotion.
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 30% in the second quarter of 2000 from 38% in the second quarter of
1999. The decrease in gross margin during the second quarter of 2000 was due
primarily to lower overall sales and a one time non-recurring compensation
charge, offset by lower manufacturing overhead expense.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. These expenses decreased $202,000 (72%) to $79,000 in the
second quarter of 2000 from $281,000 in the second quarter of 1999. The
reduction is due primarily to restructuring efforts implemented in the second
quarter of 1999 that included significant reductions in development programs.
MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased
$379,000 (66%) to $200,000 in the second quarter of 2000 from $578,000 in the
second quarter of 1999. The decrease between quarters was due primarily to lower
costs associated with the current advertising program and decreased
participation in trade shows during the quarter.
8
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $14,000 (6%) to $255,000 in the second quarter of 2000 from
$241,000 in the second quarter of 1999. The increase in administrative expenses
during the second quarter of 2000 was due primarily to legal expenses incurred
in connection with the class action lawsuit filed against the Company and its
chief executive officer in February 2000 and costs associated with a one time
non-recurring settlement of certain outstanding stock options, offset by lower
costs resulting from the restructuring implemented in the second quarter of
1999.
OTHER INCOME (EXPENSE). Other income (expense) includes interest
income, interest expense, and miscellaneous income. Other expense decreased
$58,000 (94%) to ($4,000) in the second quarter of 2000 from ($62,000) the
second quarter of 1999.
INCOME TAXES. The Company recorded losses from operations in the
second quarters of 2000 and 1999. Accordingly, no provision for income taxes was
provided for in either of these periods.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures through public and private sales of equity securities, cash from
operations, and borrowings under bank lines of credit. At July 1, 2000 the
Company had working capital of approximately $76,000 and its principal source of
liquidity consisted of $221,388 in cash and cash equivalents. Accounts
receivable increased $11,000 to $276,000 at July 1, 2000 from $265,000 at
January 1, 2000. This was primarily due to improved account collection policies
implemented as part of the restructuring and cost reduction plan. Inventories
decreased $35,000 to $462,000 at July 1, 2000 from $497,000 at January 1, 2000.
This decrease was due primarily to the lowering of inventory levels implemented
as part of the restructuring and cost reduction plan. Accounts payable increased
$137,000 to $475,000 at July 1, 2000 compared to $338,000 at January 1, 2000 as
a result of the implementation of more favorable payment terms with the
Company's vendors.
The Company has a line of credit with its bank using its accounts receivable and
certain of its inventory as collateral. The Loan Agreement for the line of
credit expired on September 8, 1999, at which time $524,000 was outstanding
under the line of credit. The Company and the bank continued to operate under
the terms of the Loan Agreement until new terms were formalized on October 25,
1999. At September 8, 1999 and at October 2, 1999, the Company was not in
compliance with the minimum tangible net worth financial covenant of its Loan
Agreement with the bank. On October 15, 1999, the bank delivered a notice of
default and the Company subsequently entered into a Forbearance Agreement which
provided for a reduction in the line of credit to $650,000, the elimination of
inventory from the collateral base over a 14 month period, an interest rate
increase, and certain financial covenants with which the Company was required to
comply. The Forbearance Agreement period ended April 30, 2000. On April 27, 2000
the Company entered into an Accounts Receivable Purchase Agreement with the
bank, which provides for financing in an amount equal to 80% of accounts
receivable up to a maximum of $750,000, interest of 3% per month on the
outstanding loan balance, repayment of the inventory portion of the collateral
base (the "Placeholder Note"), and certain financial covenants with which the
Company is required to comply. The balance of the Placeholder Note at July 1,
2000 was $109,884. The Accounts Receivable Purchase Agreement extends through
December 31, 2000.
9
<PAGE>
On June 30, 2000 the Company issued a Subordinated Promissory Note to JMW
Capital Partners, Inc. ("JMW") pursuant to which the Company borrowed $400,000
from JMW. The promissory note plus unpaid interest (payable at an initial rate
of 10 percent per annum) is due as follows: (a) interest in arrears on the last
day of each quarter beginning September 30, 2000, and (b) the outstanding
principal balance and all accrued and unpaid interest on the earlier of (i) June
30, 2005 or (ii) demand by holder made at any time after June 30, 2003. In
connection with this Subordinated Promissory Note, the Company issued to JMW two
stock warrants each to purchase 1,033,000 shares of the Company's common stock
at a price of $0.50 per share and $0.38722 per share, respectively. The
warrants, which are exercisable until June 30, 2005, have an aggregate estimated
fair value of $357,418 which has been recorded as a debt discount and is being
amortized using the effective interest method over the five year term of the
related debt. Amortization of the debt discount is included in interest expense.
The Company agreed to a number of financial and other covenants in connection
with the financing, including that the Company will default under the note if at
any time designees of JMW constitute less than forty percent of the Company's
Board of Directors. In accordance with this agreement, Robert Jesenik and Dennis
Wade, principals of JMW, were appointed to the Company's Board of Directors.
The Company believes its resources are sufficient to fund its operations until
December 31, 2000 if the Accounts Receivable Purchase Agreement is not
terminated prior to that time. In the event that the Accounts Receivable
Purchase Agreement is terminated prior to that time, and the Company is unable
to obtain substitute financing at acceptable terms, the Company's business and
financial condition will be materially and adversely affected.
The Company has no commitments for capital expenditures in material amounts.
NEW ACCOUNTING PRONOUNCEMENT
On April 3, 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of Accounting Principles Board Opinion No. 25"
(FIN 44). FIN 44 clarifies the application of Opinion No. 25 for certain issues
including the accounting consequence of various modifications to the terms of a
previously fixed stock option or award. In December 1999, the Company decreased
the exercise price of all outstanding incentive stock options to $0.22 per share
(the "repriced options"). In accordance with FIN 44, effective July 1, 2000, any
of these options which are not exercised or canceled, would be accounted for
pursuant to a variable stock option plan. Accordingly, compensation expense
would be recorded to the extent that the quoted market price of the Company's
common stock exceeded the revised exercise price of the repriced options.
Effective June 30, 2000, the Company settled all outstanding repriced options by
issuing one share of the Company's common stock for each repriced option;
405,608 of the repriced options were outstanding immediately preceding the
settlement. As a result, the Company recorded a one-time compensation charge of
$105,951, which is equal to the aggregate fair value of the common shares issued
as settlement for the repriced options. The one-time compensation charge was
recorded as expense in each department (manufacturing, sales, administration)
where the participating employees were assigned.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During February 2000, the Company was named in a class action lawsuit, ADAIR V.
MICROFIELD GRAPHICS, INC. ET ANO., 00 Civ. 0629 (MBM), United States District
Court Southern District of New York. The complaint alleges that the Company and
its Chief Executive Officer issued a series of false and misleading statements
concerning, among other things, the Company's purchase agreement with 3M. The
complaint alleges that, as a result of these allegedly material misstatements
and omissions, the Company's stock price was artificially inflated during the
period from July 23, 1998 through April 2, 1999 and requests that damages be
determined at trial. The Company denies the allegations and intends to
vigorously defend itself. However, the ultimate outcome of the litigation is
presently undeterminable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 30, 2000 the Company issued to JMW two common stock purchase warrants as
consideration for the financing the Company received from JMW. Each warrant is
exercisable for 1,033,000 shares of the Company's common stock at any time until
June 30, 2005. The exercise prices of the warrants are $0.50 per share and
$0.38722 per share, respectively. This transaction was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Act"),
because JMW is an accredited investor, as that term is defined in Rule 501 of
the Act, and the transaction fell within the parameters of Rule 506 of the Act.
ITEM 5. OTHER INFORMATION
In connection with the June 30, 2000 financing with JMW, William Cargile
resigned from the Company's Board of Directors and Robert Jesenik and Dennis
Wade, principals of JMW, were appointed to the Company's Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report is listed below:
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
10.14 Form of $400,000 Subordinated
Promissory Note issued to JMW Capital
Partners, Inc., dated June 30, 2000.
10.15 Form of Stock Purchase Warrants to
Purchase Shares of Common Stock of
Microfield Graphics, Inc. issued to
JMW Capital Partners, Inc., dated June
30, 2000.
10.16 Form of Registration Rights Agreement
between the Company and JMW Capital
Partners, Inc., dated June 30, 2000.
10.17 Form of Note and Warrant Purchase
Agreement between the Company and JMW
Capital Partners, Inc. dated June 30,
2000.
27 Financial data schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
July 1, 2000.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 15, 2000
MICROFIELD GRAPHICS, INC.
By: /s/ JOHN B. CONROY
--------------
John B. Conroy
Chief Executive Officer
(Principal Executive and Financial Officer)
12
