<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 September 30, 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
September 30, 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> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 2000
and January 1, 2000 3
Consolidated Statement of Operations - Three and 4
Nine Months Ended September 30, 2000 and October 2, 1999
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 2000 and October 2, 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>
September 30, January 1,
2000 2000
------------- --------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 58,525 $ 113,041
Cash and cash equivalents
Accounts receivable, net of allowances
of $10,278 and $27,153 402,919 265,524
Inventories (Note 2) 471,784 496,696
Prepaid expenses and other 35,627 120,969
------------- --------------
Total current assets 968,855 996,230
Property and equipment, net (Note 3) 163,018 244,714
Other assets 51,875 76,915
------------- --------------
$ 1,183,748 $ 1,317,859
============= ==============
Current liabilities:
Accounts payable $ 469,793 $ 338,325
Line of Credit 384,677 360,473
Accrued payroll and payroll taxes 91,516 133,650
Unearned income 32,742 77,687
Accrued liabilities 59,450 82,048
------------- --------------
Total current liabilities 1,038,178 992,183
Long-term debt, net of discount 60,453 -
Other long-term liabilities - 52,455
------------- --------------
Total liabilities 1,098,631 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 (15,665,164) (15,000,691)
------------- --------------
Total shareholders' equity 85,117 273,221
------------- --------------
$ 1,183,748 $ 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 Nine months ended
September 30 October 2, September 30 October 2,
2000 1999 2000 1999
-------------- -------------- ----------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 794,987 919,561 $ 2,318,449 2,780,309
Cost of goods sold 493,380 569,749 1,485,585 1,742,473
-------------- -------------- ----------------- -------------
Gross profit 301,607 349,812 832,864 1,037,836
Operating expenses
Research and development 51,330 56,776 185,329 582,435
Marketing and sales 149,911 304,759 561,342 1,364,475
General and administrative 244,291 168,438 700,676 657,438
-------------- -------------- ----------------- -------------
445,532 529,973 1,447,347 2,604,348
-------------- -------------- ----------------- -------------
Loss from operations (143,925) (180,161) (614,483) (1,566,512)
Other income (expense)
Interest income (expense), net (52,591) (16,066) (116,544) (43,350)
Other income, net 23,215 95 66,554 (49,424)
-------------- -------------- ----------------- -------------
Loss before provision for (173,301) (196,132) (664,473) (1,659,286)
Income taxes
Provision for income taxes -- -- -- --
-------------- -------------- ----------------- -------------
Net loss $ (173,301) (196,132) $ (664,473) (1,659,286)
============== ============== ================= =============
Net loss per share
Basic $ (.04) (.05) $ (.16) (.42)
============== ============== ================= =============
Diluted $ (.04) (.05) $ (.16) (.42)
============== ============== ================= =============
Shares used in per share
calculations
Basic 4,572,793 4,132,185 4,286,832 3,995,230
============== ============== ================= =============
Diluted 4,572,793 4,132,185 4,286,832 3,995,230
============== ============== ================= =============
</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>
Nine months ended
----------------------------------------
September 30, October 2,
2000 1999
------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (664,473) $ (1,659,286)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 96,167 146,471
Amortization of debt discount 17,872
Noncash portion of employee option exercise -- --
recorded as compensation expense 105,951 --
Changes in assets and liabilities:
Accounts receivable (137,395) 416,093
Inventories 24,912 298,646
Prepaid expenses and other 85,342 80,521
Accounts payable 131,468 (133,579)
Accrued payroll and payroll taxes (42,134) (196,419)
Unearned income (44,945) 29,189
Accrued liabilities (22,598) (33,031)
------------- --------------
Net cash used in operating activities (449,833) (1,051,395)
Cash flows from investing activities:
Acquisition of property and equipment (3,905) (30,327)
Other long-term assets 14,473 --
------------- --------------
Net cash provided by investing activities 10,568 (30,327)
Cash flows from financing activities:
Payments on equipment line of credit (52,455) (62,500)
Proceeds from (payments on) operating line of credit 24,204 (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 384,749 796,464
Net increase (decrease) in cash
equivalents (54,516) (285,258)
Cash and cash equivalents, beginning of period 113,041 739,628
============= ==============
Cash and cash equivalents, end of period $ 58,525 $ 454,370
============= ==============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest 24,720 52,709
============= ==============
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 nine months
ended September 30, 2000 and October 2, 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 September 30, 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 third
fiscal quarters in fiscal 2000 and 1999 were the 13-week periods ended
September 30, 2000 and October 2, 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>
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- --------------
<S> <C> <C>
Raw materials $ 439,300 $ 368,498
Finished goods 32,484 128,198
------------- --------------
$ 471,784 $ 496,696
============= ==============
3. PROPERTY AND EQUIPMENT
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- --------------
Machinery and equipment $ 1,200,490 $ 1,196,585
Less accumulated depreciation and
amortization 1,037,472 951,871
------------- --------------
$ 163,018 $ 244,714
============= ==============
</TABLE>
6
<PAGE>
4. SUBORDINATED NOTE AGREEMENT
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.
5. SUBSEQUENT EVENT
On September 7, 2000 the Company entered into a definitive agreement with
Greensteel Inc., a wholly-owned subsidiary of PolyVision Corporation, for the
sale of substantially all of the assets of the Company. The terms of the
asset sale call for Greensteel to pay the Company up to $3,500,000, with
$2,000,000 payable at the closing of the transaction and up to an additional
$1,500,000, to be paid in contingent earn-out payments based on net sales of
the Company's Softboard products over a 5-year period. Greensteel will
receive the assets of the Company that are utilized in operating the
SoftBoard business, which comprise substantially all the assets of the
Company. The Company will retain cash, accounts receivable, and outstanding
liabilities. Shareholders approved the agreement and asset sale and the
transaction closed on October 24, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
At September 30, 2000, Microfield Graphics, Inc. (the "Company") developed,
manufactured and marketed 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 incorporated 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.
7
<PAGE>
On September 7, 2000 the Company entered into a definitive agreement with
Greensteel, Inc., a wholly-owned subsidiary of PolyVision Corporation, for
the sale of substantially all of the assets of the Company. The terms of the
asset sale call for Greensteel to pay the Company up to $3,500,000, with
$2,000,000 paid at the closing of the transaction and up to an additional
$1,500,000, to be paid in contingent earn-out payments based on net sales of
the Company's Softboard products over a 5-year period. The Company will
retain cash, accounts receivable, and outstanding liabilities. The asset sale
to Greensteel closed on October 24, 2000. The Company has no active business
operations at this time and is exploring merger and acquisition opportunities
in other lines of business. The Company has no plans to distribute proceeds
of the asset sale at this time.
The Company was incorporated in Oregon in 1986. The Company's executive
offices are located at 16112 SW 72nd Avenue, Portland, OR 97224.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of sales, certain
consolidated statement of operations data relating to the SoftBoard Business
for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30 OCTOBER 2 SEPTEMBER 30 OCTOBER 2
2000 1999 2000 1999
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Sales 100% 100% 100% 100%
Cost of goods sold 62 62 64 63
---------------- ------------- ---------------- -------------
Gross profit 38 38 36 37
Research and development (6) (6) (8) (21)
expenses
Marketing and sales (19) (33) (24) (49)
expenses
General and administrative (31) (18) (30) (24)
expenses
---------------- ------------- ---------------- -------------
Loss from operations (18) (19) (27) (57)
Other income (expense) (4) (2) (2) (3)
---------------- ------------- ---------------- -------------
Loss before provision for
income taxes (22) (21) (29) (60)
Provision for income taxes -- -- -- --
---------------- ------------- ---------------- -------------
Net loss (22)% (21) % (29)% (60)%
================ ============= ================ =============
</TABLE>
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED WITH QUARTER ENDED OCTOBER 2, 1999
SALES. Sales decreased $125,000 (14%) to $795,000 in the third
quarter of 2000 from $920,000 in the third 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 increased from 30% in the second quarter of 2000 to
38% in the third quarter of 2000. The increase was consistent with the
Company's efforts to lower manufacturing overhead. Third quarter gross profit
results for 2000 and 1999 were comparable at 38% each.
8
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs
are expensed as incurred. These expenses decreased $6,000 (11%) to $51,000 in
the third quarter of 2000 from $57,000 in the third 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
$155,000 (51%) to $150,000 in the third quarter of 2000 from $305,000 in the
third 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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $76,000 (45%) to $244,000 in the third quarter of 2000
from $168,000 in the third quarter of 1999. The increase in administrative
expenses during the third 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 legal fees
incurred in connection with the Greensteel agreement, 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 increased
$13,000 (81%) to ($29,000) in the third quarter of 2000 from ($16,000) in the
third quarter of 1999.
INCOME TAXES. The Company recorded losses from operations in the
third 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 September 30, 2000
the Company had negative working capital of approximately $(69,000) and its
principal source of liquidity consisted of $58,525 in cash and cash
equivalents. Accounts receivable increased $137,000 to $403,000 at September
30, 2000 from $266,000 at January 1, 2000. This was primarily due to a higher
percentage of sales occurring in the last month of the quarter ended
September 30, 2000. Inventories decreased $25,000 to $472,000 at September
30, 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 $132,000 to $470,000 at
September 30, 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.
At September 30, 2000, the Company had 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 provided
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 September 30,
2000 was $111,073. The Company paid off the line of credit and terminated the
Accounts Receivable Purchase Agreement on the closing of the asset sale to
Greensteel, Inc.
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 as
they currently exist for the next twelve months.
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.
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. The ultimate outcome of
the litigation, however, is presently undeterminable.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
EXHIBIT NO.
10.18 Form of Asset Purchase Agreement between
Greensteel, Inc, and Microfield Graphics,
Inc., dated September 7, 2000, incorporated
by reference to the Company's Proxy
Statement dated October 3, 2000.
27 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 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: November 7, 2000
MICROFIELD GRAPHICS, INC.
By: /s/ JOHN B. CONROY
------------------
John B. Conroy
Chief Executive Officer
(Principal Executive and Financial Officer)
12
<PAGE>
