<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, 1 2000
/ / 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.)
16112 SW 72nd
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 $ 3,492,238.
The aggregate market value of voting stock held by non-affiliates of the
registrant at March 10, 2000 was $1,163,528 computed by reference to the average
bid and asked prices as reported on the OTC Bulletin Board.
The number of shares outstanding of the Registrant's Common Stock as of March
10, 2000 was 4,132,185 shares.
The index to exhibits appears on page 14 of this document.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/.
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<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 9
Item 3. Legal Proceedings 9
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 10
Item 7. Financial Statements 13
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 13
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 14
Item 11. Security Ownership of Certain Beneficial Owners and Management 14
Item 12. Certain Relationships and Related Transactions 14
Item 13. Exhibits and Reports on Form 8-K 14
</TABLE>
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
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, 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.
The Company was incorporated in Oregon in 1986. The Company's executive offices
are located at 16112 SW 72nd, Portland, OR 97224.
PRODUCTS
The Company currently offers five product lines: the SoftBoard Series 200
Digital Whiteboards, the SoftBoard System 300 In-Wall Interactive Rear
Projection Systems, the SoftBoard System 400 Mobile Interactive Rear Projection
Systems, the SoftBoard System 500 Interactive Plasma Display Systems, and the
SoftBoard Series 500K Interactive Enhancement Kits for Plasma Displays.
The SoftBoard Series 200 Digital Whiteboards includes three models, the Model
201, a 67" diagonal writing surface, the Model 203, a 58.5" diagonal writing
surface, and the Model 205, a 42.5" diagonal writing surface. 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 300 product line includes the Model 301 and the Model 303.
The SoftBoard System 300 is a SoftBoard with a translucent writing surface in
place of the porcelain writing surface. Designed for group presentations and
interaction, the SoftBoard System 300 is either built into a false wall, behind
which the projector is placed, or is designed into a custom cabinet that also
houses the projector. The SoftBoard interactive technology then enables the user
to interact with the application and the data displayed on the screen.
The SoftBoard System 400 product line integrates a SoftBoard into a mobile
rear-projection system. In this application, the porcelain-on-steel SoftBoard
writing surface is replaced with a translucent writing surface. Integrated into
the unit is an LCD projector which projects the output of a connected PC onto
the rear surface of the translucent screen 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 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 multimedia computer
screen, allowing a user to combine information already in a computer file with
new information created during a collaborative session. The data can be shared
with a computer hooked up directly in the
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
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 500 product line currently consists of seven different
models. The SoftBoard System 500 models integrate the SoftBoard proprietary
laser scanning data acquisition technology with a gas plasma display. The plasma
displays are large flat panel monitors that can be hung on walls, mounted on
mobile carts or stands, 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. The user can interact with any software
program, presentation, or conferencing software 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 groups of people located 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 Series 500K Interactive Enhancement Kit product line currently
consists of seven models which enable a user to integrate the SoftBoard
interactive technology with the gas plasma display of their choice. Kits are
currently available for Pioneer, Fujitsu, NEC, and Sony plasma displays. Once
assembled, the integrated system has the full interactive display capabilities
of the System 500 product line.
SoftBoard System 300, 400, 500 and 500K products are marketed under the
trademark Group Desktop-TM- Products.
PRODUCT DEVELOPMENT
During 1999, the Company's engineering efforts were primarily focused on new
product development of advanced versions of 200 Series products, additional
System 500K interactive plasma display kits for new plasma display models and
System 400 upgrades for new projector models.
MARKETING, SALES AND DISTRIBUTION
The Company markets its SoftBoard products to resellers, OEMs, and end users in
the United States and to distributors, resellers, and end users outside the
United States.
In July 1997, the Company entered into a two-year general purchase and
development agreement with 3M through which 3M marketed, 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 expired in July 1999. SEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OR PLAN OF OPERATIONS.
In April 1999, the Company was informed by 3M of its decision to exit the
Advanced Meeting Solutions (AMS) Project under which the SoftBoard family of
products was marketed by 3M. The Company reached an agreement with 3M under
which the Company assumed responsibility for 3M's global distribution network of
whiteboard products. In this role, the Company will support digital whiteboard
product sales, service and warranty obligations for all of 3M's installed base
and dealer network affected by their withdrawal from the AMS Project. The
reduced level of sales to 3M and their announced exit from the AMS program has
had a material adverse effect on the Company's business. The Company believes
that 3M's
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
liquidation of its inventory of Ideaboard products negatively impacted
sales of its SoftBoard digital whiteboard products during the first half of
1999. Unit sales in this product line have been strengthening, reflecting
completion of the 3M liquidation program, the recent expansion of the Company's
dealer base as previously announced, and new product pricing strategies which
the Company introduced in mid-1999.
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.
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. 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.
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
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
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 aware of several competitors that offer an interactive kit for
plasma displays with the same or similar functionality that the System 500K
models possess. These competitive products typically utilize pressure sensitive
technology with its inherent disadvantages of diminished brightness, smudging,
and reduced viewing angle.
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 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-TM- and Microfield Graphics-TM- 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 they comply with the applicable industry and governmental
safety requirements for lasers.
EMPLOYEES
As of March 10, 2000 the Company employed 20 persons. None of the
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
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 12,000
square feet of office and manufacturing space. The Company occupies this
facility pursuant to a lease, commencing April 1, 2000 and expiring on June 30,
2003, at a base rent of $6,720 per month.
ITEM 3. 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 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 1, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since October 30, 1999, the Company's common stock has been quoted on the OTC
Bulletin Board under the symbol "MICG." Prior to that date the Company's common
stock was quoted on the Nasdaq SmallCap Market under the same symbol. The
following table sets forth the high and low sales prices as reported by the OTC
Bulletin Board or the Nasdaq SmallCap Market,as appropriate, for the periods
indicated.
<TABLE>
<CAPTION>
LOW HIGH
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<S> <C> <C>
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
FISCAL 1999
First Quarter $ 1 7/8 $ 2 3/8
Second Quarter 15/16 2 1/16
Third Quarter 9/16 1 1/16
Fourth Quarter 1/4 5/8
</TABLE>
There were 143 shareholders of record and the Company believes approximately
1600 beneficial shareholders at April 10, 2000. There were no cash dividends
declared or paid in fiscal years 1999 or 1998. The Company does not anticipate
declaring such dividends in the foreseeable future.
On October 5, 1999, the Company issued to its bank a warrant to purchase 20,000
shares of the Company's common stock at a purchase price of $0.75 per share. The
warrant was issued in connection with the Forebearance Agreement dated October
15, 1999 between the Company and the bank. The Company received no cash
consideration for the warrant. The warrant
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
expires in October 2003. The issuance was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Act), because the bank 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 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, interactive rear
projection systems, interactive plasma display systems, and interactive
enhancement kits for plasma displays 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.
In July 1997 the Company entered into a General Purchase and Development
Agreement with Minnesota Mining and Manufacturing Company (3M), under which 3M
globally marketed advanced versions of the Company's SoftBoard family of
products. Under the terms of the two year agreement, the Company developed
specialized versions of the SoftBoard product line exclusively for 3M. Shipments
from the Company to 3M began in the fourth quarter of 1997 and continued through
the second quarter of 1998. For the year ended January 1, 2000 and January 2,
1999, approximately 0% and 38%, respectively, of the Company's sales were
attributable to 3M.
In April 1999, the Company was informed by 3M of its decision to exit the
Advanced Meeting Solutions (AMS) Project under which the SoftBoard family of
products was marketed. The Company reached an agreement with 3M under which the
Company assumed responsibility for 3M's global distribution network of
whiteboard products. In this role, the Company will support digital whiteboard
product sales, service, and warranty obligations for all of 3M's installed base
and dealer network affected by their withdrawal from the AMS Project. The
reduced level of sales to 3M and their announced exit from the AMS program has
had a material adverse effect on the Company's business. The Company believes
that 3M's liquidation of its inventory of Ideaboard products negatively impacted
sales of its SoftBoard digital whiteboard products during 1999. Unit sales in
this product line have been strengthening, reflecting completion of the 3M
liquidation program, the recent expansion of the Company's dealer base as
previously announced, and new product pricing strategies which the Company
introduced in mid 1999.
In March 1998 the Company signed a Common Stock Purchase Agreement with
Steelcase Inc. (Steelcase), pursuant to which Steelcase purchased 350,000 shares
of the Company's common stock and a warrant for a total of $2,012,500 in cash.
The warrant gives Steelcase the right to purchase an additional 260,000 shares
of the Company's common stock at $6.75 per share. The warrant is exercisable
starting on March 16, 1999 and expires on March 16, 2001. In March 1999,
Steelcase purchased an additional 444,445 shares for a total of $1,000,001 in
cash. As of January 1, 2000 Steelcase owned 19% of the outstanding common stock
of the Company.
At the end of the second quarter of 1999, the Company introduced a major
restructuring to realign operating expenses with sales levels while retaining
critical functions in key operational areas. Total overhead expense was reduced
by approximately 50% through a combination of staff reductions, workweek
reductions, temporary executive salary reductions, and reductions in general
expense spending levels, including negotiating a satisfactory termination of the
company's existing facilities lease in January 2000 and entering into a lease
for a new facility with a lower lease cost. As a result, the
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
Company has delayed the previously reported Joint Development Agreement with
Steelcase Inc. entered into in the first quarter of 1999. In the near term, the
Company is focusing efforts on expanding product offerings based on its current
technology. It is the Company's intention to resume the joint product
development program with Steelcase when the Company achieves profitability on a
sustainable basis. There is no assurance that the development program will be
resumed or that the restructuring will return the Company to profitability. Also
at the end of the second quarter of 1999, the Company introduced a product price
reduction in its 200 Series digital whiteboard product line. Prices were
adjusted to achieve closer parity with competing products in the marketplace.
The Company's 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>
FISCAL FISCAL
1999 1998
------ ------
<S> <C> <C>
Net sales 100 % 100 %
Cost of goods sold 65 59
---- ----
Gross profit 35 41
Research and development expenses (18) (15)
Marketing and sales expenses (47) (40)
General and administrative expenses (25) (14)
---- ----
Loss from operations (55) (28)
Other expense, net (3) (1)
---- ----
Loss before income taxes (58) (29)
Benefit from income taxes - -
---- ----
Net loss (58)% (29)%
---- ----
---- ----
</TABLE>
SALES. Total sales decreased $3,153,910 (48%) to $3,492,238 in 1999 from
$6,646,148 in 1998. In fiscal 1999, export sales aggregated $665,000 (19% of net
sales), compared to $1,826,703 (27% of net sales) in 1998. The decline in sales,
including export sales, was due primarily to 3M's decision to exit the Advanced
Meeting Solutions (AMS) Project under which the SoftBoard family of products was
marketed. Sales to 3M accounted for $2,551,000 in 1998. There were no sales to
3M in 1999.
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 35%
in 1999, down from 41% in 1998. The decrease in gross margin was primarily the
result of lower sales volumes resulting in decreased manufacturing overhead
absorption in 1999 compared to 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are expensed
as incurred. Research and development expenses decreased $363,000 (36%) to
$635,000 in 1999 from $998,000 in 1998. The decrease was due primarily to the
Company restructuring implemented at the end of the second quarter. Research and
development expenses, as a percentage of sales, were 18% and 15% in 1999 and
1998, respectively.
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased $1,003,000
(38%) to $1,655,000 in 1999 from $2,658,000 in 1998. The decreases were due
primarily to significantly lower advertising and trade show expense during 1999.
The Company undertook changes in the methods it used to generate sales leads
during the current year. Marketing and sales expenses increased as a percentage
of sales to 47% in 1999 from 40% in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $93,000 (10%) to $867,000 in 1999 from $960,000 in 1998. The
restructuring efforts were the primary cause of the decrease in general and
administrative expenses. General and administrative expenses, as a percentage of
sales, were 25% in 1999 compared to 14% in 1998. The increase in percentage
compared to sales was due to the lower total sales in 1999.
OTHER INCOME (EXPENSE). Other income (expense) includes interest income,
interest expense and miscellaneous income. Other expense increased by $57,000 to
107,000 in 1999, from $50,000 in 1998. The increase was primarily due to a legal
settlement and related expenses of approximately $23,000 and a one time
non-recurring charge of $26,000 related to the restructuring. (See Overview)
INCOME TAXES. As of January 1, 2000 the Company had available net operating loss
carryforwards of approximately $14 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 2020. 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 $285,000 for income tax purposes at January 1, 2000.
Such credits may be used to reduce taxes payable, if any, on a consolidated
basis in future years through their expiration in 2001 to 2020. 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 1, 2000 the
Company had working capital of approximately $4,000 and its principal sources
of liquidity consisted of $113,000 in cash and cash equivalents. Accounts
receivable decreased $532,000 to $266,000 at January 1, 2000 from $798,000 at
January 2, 1999. This was due to decreased sales in the fourth quarter of 1999
compared to fourth quarter sales in 1998 and to improved account collection
policies implemented as part of the restructuring and cost reduction plan.
Inventories decreased $449,000 to $497,000 at January 1, 2000 from $946,000 at
January 2, 1999. This decrease was due primarily to the lowering of inventory
levels implemented as part of the restructuring and cost reduction plan, and to
the lower level of sales in the fourth quarter of 1999. Accounts payable
decreased $194,000 to 338,000 at January 1, 2000 compared to 532,000 at January
2, 1999 as a result of the improved purchasing policies implemented as part of
the restructuring and cost reduction plan.
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
provides 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 must comply.
The Forbearance Agreement period is through April 30, 2000. The operating line
bears interest monthly at prime plus 2.5% under terms of the Forbearance
Agreement. At January 1, 2000 $296,000 was available on the line of credit. The
interest rate in effect on January 1, 2000 was 11%. In the event that the
Forbearance Agreement is not extended or the Loan Agreement is not renewed, and
the
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
company is unable to obtain substitute financing at acceptable terms, the
Company's business and financial condition will be materially and adversely
affected.
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 3M, 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. The company anticipates
spending levels to continue to decline over the next several months as the
effect of the implemented restructuring stabilize. However, there can be no
assurance that the Company will achieve profitability.
In March 1998 the Company signed a Common Stock Purchase Agreement with
Steelcase Inc. (Steelcase), pursuant to which Steelcase purchased 350,000 shares
of the Company's common stock and a warrant for a total of $2,012,500 in cash.
The warrant gives Steelcase the right to purchase an additional 260,000 shares
of the Company's common stock at $6.75 per share. The warrant is exercisable
starting on March 16, 1999 and expires on March 16, 2001. In March 1999,
Steelcase purchased an additional 444,445 shares for a total of $1,000,001 in
cash. As of January 1, 2000 Steelcase owned 19% of the outstanding common stock
of the Company.
The Company has no commitments for capital expenditures in material amounts.
IMPACT OF THE YEAR 2000 ISSUE
Many computer systems have been expected to experience problems distinguishing
between dates in different centuries because such systems were developed using
two digits rather than four digits to determine the applicable year.
Consequently, there was concern that these systems would be unable to
distinguish between dates in different centuries and could have experienced
errors resulting in system failures or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities. To
date, we have not experienced any problems complying with the Year 2000 issues
and have not been informed of any failures of our products from customers. These
problems, however, may not be discovered until months after January 1, 2000.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP are included in this report as follows:
<TABLE>
Microfield Graphics, Inc.: Page
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets
January 1, 2000 and January 2, 1999 F-2
Consolidated Statements of Operations for the years
ended January 1, 2000 and January 2, 1999 F-3
Consolidated Statements of Shareholders' Equity for the
years ended January 1, 2000 and January 2, 1999 F-4
Consolidated Statements of Cash Flows for the years ended
January 1, 2000 and January 2, 1999 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
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 and
directors are as follows:
<TABLE>
NAME AGE CURRENT POSITION(S) WITH COMPANY
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
John B. Conroy 61 Chairman of the Board, President and Chief Executive Officer
Michael W. Stansell 57 Vice President, Operations and Sales
William P. Cargile 58 Director
Herbert S. Shaw 64 Director
</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.
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.
WILLIAM P. CARGILE was elected to the Board of Directors in February 1989. Mr
Cargile was a General Partner of Crosspoint Venture Partners from April 1983
until December 1995, at which time he became a Venture Partner of Crosspoint
Venture Partners.
HERBERT S. SHAW was elected to the Board of Directors in June 1997. Mr. Shaw has
been the Managing Partner of NorCrest Ltd. and Chairman of NorCrest Capital
Management LLC, an investment banking company, since January 1996. From February
1992 to December 1995 Mr. Shaw was the President and CEO of The Laughlin Group,
a financial services and investment group of companies.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation
awarded to, earned by or paid to the Company's Chief Executive Officer and other
executive officers of the Company whose total annual salary and bonus exceeded
$100,000 (collectively, the "named officers") for fiscal years 1999, 1998 and
1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------
----------------------------------------- SECURITIES
UNDERLYING ALL OTHER
FISCAL OPTIONS COMPENSATION
YEAR SALARY($) BONUS($) (#) ($)(1)
------- ------------------ -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
John B. Conroy 1999 185,192 -- 100,000 --
Chairman of the Board of 1998 219,154 -- 75,000 --
Director, President, and 1997 206,451 -- 60,000 --
Chief Executive Officer
</TABLE>
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
(1) The aggregate amount of perquisites and other personal benefits was less
than either $50,000 or 10% of the total of the annual salary and bonus
reported for each of the names officers.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of March 10, 2000 as to (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director or nominee for director
of the Company, (iii) each of the executive officers named in the Summary
Compensation Table below and (iv) all directors and executive officers as a
group. Except as otherwise noted, the Company believes the persons listed below
have sole investment and voting power with respect to the Common Stock owned by
them. As of March 10, 2000 John B. Conroy, William P. Cargile, Michael W.
Stansell (collectively, the "Executives"), Steelcase Inc. and the Company were
parties to a Share Ownership, Voting and Right of First Refusal Agreement dated
March 19, 1998 (the "Voting Agreement"). On the date of the Voting Agreement,
the Executives were directors and executives of the Company. Pursuant to the
Voting Agreement, Steelcase and the Executives are obligated to vote their
shares of Common Stock to elect certain individuals to the Board of Directors of
the Company, including one individual designated by Steelcase (James B. Keane,
Steelcase's original designee, resigned on February 17, 2000 and Steelcase has
not identified a replacement for his seat.), Mr. Conroy and three independent
directors as directed by majority of the Board of Directors (currently only
Messrs. Shaw and Cargile have been designated). With regard to matters other
than the election of directors, Steelcase has agreed to vote all of its shares
of Common Stock that it may own in excess of 610,000 shares in direct proportion
of the votes of all outstanding shares of Common Stock. Each party to the Voting
Agreement is deemed the beneficial owner of the shares of Common Stock
beneficially owned by each other party to the Voting Agreement.
<TABLE>
COMMON STOCK
- ---------------------------------------------------------- ----------------------------------------
FIVE PERCENT SHAREHOLDERS, DIRECTORS, DIRECTOR SHARES APPROXIMATE
NOMINEES AND CERTAIN EXECUTIVE BENEFICIALLY PERCENTAGE
OFFICERS OWNED (1) OWNED
- ---------------------------------------------------------- ----------------------------------------
<S> <C> <C>
Steelcase Inc.(6) 1,459,228 35.3 %
P. O. Box 1967
Grand Rapids, MI 49501-1967
John. B. Conroy (2) (3) 1,459,228 35.3 %
William P. Cargile (2) (4) 1,459,228 35.3 %
Herbert S. Shaw (2) (5) 13,000 *
All directors and executive officers as a 1,459,228 35.3 %
group (5 persons) (7)
- ------------------------
</TABLE>
*Less than 1%
(1) Shares to which the person or group has the right to acquire within 60
days after March 2, 2000 are deemed to be outstanding in calculating the
percentage ownership of the person or group but are not deemed to be
outstanding as to any other person or group.
(2) The address of Messrs. Conroy, Cargile, and Shaw, is c/o Microfield
Graphics, Inc., 16112 SW 72nd, Portland, Oregon 97224.
(3) Includes 45,000 shares held by Mr. Conroy, 91,033 shares held by Mr.
Conroy's wife, and 49,750 shares subject to options exercisable within
60 days after March 10, 2000.
(4) Includes 190,000 shares held by Mr. Cargile and 16,000 shares subject to
options exercisable within 60 days after March 10, 2000.
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
(5) Includes 13,000 shares subject to options exercisable within 60 days
after March 10, 2000.
(6) Includes 794,445 shares held by Steelcase Inc. and 260,000 shares
subject to warrants exercisable by Steelcase within 60 days after March
10, 2000.
(7) Includes 78,750 shares subject to options and 260,000 shares subject to
warrants exercisable within 60 days after March 10, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 exercisable starting on March 19, 1999 and
expires on March 19, 2001. As a part of the transaction Steelcase was granted a
seat on the Board of Directors. James P. Keane was appointed as their
representative on the board in March 1998. Mr. Keane resigned in March 2000. No
Steelcase representative has been appointed to replace him. In addition, the
Company, Steelcase and certain directors and executives of the Company entered a
Share Ownership, Voting and Right of First Refusal Agreement ("Voting
Agreement") pursuant to which the parties agreed to vote their shares of common
stock to elect certain individuals to the Board of Directors. See "Security
Ownership of Certain Beneficial Owners and Management." On March 26, 1999 the
Company sold Steelcase on additional 444,445 shares of the Company's common
stock for $1,000,001. The Company also granted Steelcase registration rights for
its shares of the Company's common stock in connection with these two stock
sales. Steelcase has the right, at any time after March 19, 2000, to require the
Company to effect the registration under the Securities Act of 1933 of the
common stock owned by Steelcase, subject to certain limitations.
On October 22, 1998, pursuant to an executive loan program authorized by the
Board of Directors, John B. Conroy borrowed money from the Company in order
to exercise options for 45,000 shares of the Company's Common Stock. The
transaction resulted in a note due the Company from Mr. Conroy in the amount
of $75,000, with interest at 6% per year, due on October 22, 2003.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herein:
Exhibit No.
-----------
*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)
(1)*10.8 Japanese Marketing License Agreement (1)
(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.
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
*****10.12 Form of Lease between Microfield Graphics and Pacific
Realty Associates, LLP, dated January 24, 2000.
*****10.13 Form of Forbearance Agreement between Silicon Valley Bank
and Microfield Graphics, Inc. dated November 3, 1999.
*****23 Consent of PricewaterhouseCoopers
*****27 Financial Data Schedule
------------
* Incorporated by reference to Exhibits 3.1, 3.2, 4.1, 10.1, 10.3, 10.7,
10.8, as applicable, to Registrant's Registration Statement on Form SB-2
(Registration No. 33-91890).
** Incorporated by reference to Exhibit 10.9 to Registrants Quarterly Report
on Form 10-QSB for the three month period ended September 27, 1997.
*** Incorporated by reference to Exhibit 10.10 to Registrants Quarterly
Report on Form 10-QSB for the three month period ended April 4, 1998.
**** Incorporated by reference to Exhibits 10.11 to Registrants Quarterly
Report on Form 10-QSB for the three month period ended July 3, 1999.
***** Exhibits 10.12, 10.13, 23, 27 filed herewith.
# This exhibit constitutes a management contract, or compensatory plan or
arrangement.
(1) Portions of Exhibit 10.8, 10.9, and 10.10 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 1, 2000.
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 10, 2000
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 10, 2000
/s/ HERBERT S. SHAW Director
- ---------------------- Date: April 10, 2000
Herbert S. Shaw
SoftBoard and Microfield are registered trademarks and SBRecord, SBRemote,
SBView, and SBProjection are trademarks of Microfield Graphics, Inc. All other
trademarks and registered trademarks are the property of their respective
owners. All prices and specifications are subject to change without notice.
Prices may be higher outside the continental United States.
<PAGE>
/s/ WILLIAM P. CARGILE Director
- ---------------------- Date: April 10, 2000
William P. Cargile
<PAGE>
MICROFIELD GRAPHICS, INC.
(d.b.a. SOFTBOARD)
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000 AND JANUARY 2, 1999
<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 1, 2000 and
January 2, 1999 and the results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States. 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 auditing standards generally accepted in the
United States, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency at January 1, 2000. In addition, as discussed
in Note 6, the Company during 1999 was not in compliance with certain covenants
related to its line of credit and, as a result, received a notice of default
from its bank and entered into a forbearance agreement with the bank. Such
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Notes 6 and 12. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
March 10, 2000
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 2000 AND JANUARY 2, 1999
<TABLE>
<CAPTION>
1999 1998
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 113,041 $ 739,628
Accounts receivable, net (Note 3) 265,524 797,543
Inventories (Note 4) 496,696 946,103
Prepaid expenses and other 120,969 156,627
---------- ----------
Total current assets 996,230 2,639,901
Property and equipment, net (Note 5) 244,714 379,457
Other assets 76,915 226,140
---------- ----------
$1,317,859 $3,245,498
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 6) $ 353,528 $ 655,000
Current portion of long-term debt (Note 6) 6,945 83,333
Accounts payable 338,325 532,308
Accrued payroll and payroll taxes 133,650 255,698
Unearned income 77,687 56,101
Other accrued liabilities 82,048 186,403
---------- ----------
Total current liabilities 992,183 1,768,843
Long-term debt, net of current portion (Note 6) - 6,945
Other long-term liabilities 52,455 77,220
---------- ----------
Total liabilities 1,044,638 1,853,008
========== ==========
Commitments and contingencies (Note 8)
Shareholders' equity (Notes 9 and 11):
Common stock, 25,000,000 shares authorized,
4,132,185 and 3,686,775 shares issued and
outstanding, respectively 15,273,912 14,362,698
Accumulated deficit (15,000,691) (12,970,208)
---------- ----------
Total shareholders' equity 273,221 1,392,490
---------- ----------
$1,317,859 $3,245,498
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 1, 2000 AND JANUARY 2, 1999
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net sales (Note 10) $ 3,492,238 $ 6,646,148
Cost of goods sold 2,258,204 3,893,541
------------ ------------
Gross profit 1,234,034 2,752,607
------------ ------------
Operating expenses:
Research and development 635,020 997,929
Marketing and sales 1,655,452 2,657,581
General and administrative 867,001 960,498
------------ ------------
3,157,473 4,616,008
------------ ------------
Loss from operations (1,923,439) (1,863,401)
Other income:
Interest expense, net (58,099) (50,176)
Other (expense) income, net (48,945) 346
------------ ------------
Loss before income taxes (2,030,483) (1,913,231)
Provision for income taxes (Note 7) - (1,506)
------------ ------------
Net loss $ (2,030,483) $ (1,914,737)
============ ============
Basic and diluted net loss per share $ (.50) $ (.54)
============ ============
Shares used in calculation 4,029,489 3,552,706
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 1, 2000 AND JANUARY 2, 1999
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT
----------- --------------- ----------------
<S> <C> <C> <C>
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 350,000 1,989,528 -
Net loss - - (1,914,737)
----------- --------------- ----------------
Balance at January 2, 1999 3,686,775 14,362,698 (12,970,208)
Stock options exercised 965 1,210 -
Issuance of common stock and warrants, net of
issuance costs 444,445 910,004 -
Net loss - - (2,030,483)
----------- --------------- ----------------
Balance at January 1, 2000 4,132,185 $ 15,273,912 $ (15,000,691)
=========== =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 1, 2000 AND JANUARY 2, 1999
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,030,483) $(1,914,737)
Adjustments to reconcile loss from continuing operations to operating
cash flows:
Depreciation and amortization 280,271 209,990
Changes in assets and liabilites:
Accounts receivable 532,019 230,359
Inventories 449,407 (234,103)
Prepaid expenses and other 35,658 (34,692)
Accounts payable (193,983) (74,248)
Accrued payroll and payroll taxes (122,048) 61,941
Unearned income 21,586 2,356
Other accrued liabilities (104,355) 99,140
------------ ------------
Net cash used in operating activities (1,131,928) (1,653,994)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment, net (75,053) (185,650)
Loan to employee - (78,750)
------------ ------------
Net cash used in investing activities (75,053) (264,400)
------------ ------------
Cash flows from financing activities:
Net borrowings (payments) under line of credit and term loan
agreement (301,472) (345,000)
Net payments on long-term debt (108,098) (83,333)
Proceeds from exercise of common stock options 1,210 187,643
Proceeds from issuance of common stock 988,754 1,989,528
------------ ------------
Net cash provided by financing activities 580,394 1,748,838
------------ ------------
Net decrease in cash and cash equivalents (626,587) (169,556)
Cash and cash equivalents, beginning of year 739,628 909,184
------------ ------------
Cash and cash equivalents, end of year $ 113,041 $ 739,628
============ ============
Cash paid for:
Interest $ 67,898 $ 94,804
============ ============
Income taxes $ - $ 1,506
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
Microfield Graphics, Inc. (the Company), 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
the United Kingdom, China, Japan and other countries (see 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 the Company
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.
ACCOUNTS RECEIVABLE
Accounts receivable at January 1, 2000 and January 2, 1999 are recorded net
of allowances for uncollectible accounts of $27,153 and $44,553,
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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
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 in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. 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
Basic earnings (loss) per common share is computed using the
weighted-average number of common shares outstanding during the period.
Diluted earnings per common share is computed using the combination of
dilutive common share equivalents and the weighted-average number of common
shares outstanding during the period. Diluted loss per common share for
1999 and 1998 is based only on the weighted-average number of common shares
outstanding during the period, as the inclusion of 481,881 and 442,413
common share equivalents would have been antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 long-term
debt approximates fair value since the imputed interest or stated interest
approximates currently competitive rates.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
The Company has adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, as of
January 4, 1998. Comprehensive loss equals net loss for all periods
presented.
3. CONCENTRATION OF CREDIT RISK
During the year ended January 1, 2000 no customers accounted for 10% or
more of total net sales. During the year ended January 2, 1999 one customer
accounted for approximately 38% of net sales. Accounts receivable from one
customer totaled approximately $210,000 at January 2, 1999.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
Raw materials $ 368,498 $ 607,140
Finished goods 128,198 338,963
---------- ----------
$ 496,696 $ 946,103
========== ==========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 1 JANUARY 2,
2000 1999
---------- ----------
<S> <C> <C>
Furniture, machinery and equipment $1,196,585 $1,223,014
Less accumulated depreciation and amortization 951,871 843,557
---------- ----------
$ 244,714 $ 379,457
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
6. DEBT
At January 1, 2000, the Company had a $650,000 line of credit with a bank.
Borrowings under the line of credit are due on demand, bear interest
payable monthly at prime plus 2.5% (11% at January 1, 2000), and are
collateralized by accounts receivable and a portion of inventory. As of
January 1, 2000, borrowings of $353,528 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.
During 1999, the Company was not in compliance with the minimum tangible
net worth financial covenant of its Loan Agreement with its bank. As a
result, on October 15, 1999 the bank delivered a notice of default and the
Company subsequently entered into a Forbearance Agreement with the bank.
The Forbearance Agreement provides for a reduction in the line of credit to
$650,000, the elimination of inventory from the collateral base over a
fourteen-month period, an increase in the interest rate from prime to prime
plus 2.5% and certain financial covenants with which the Company must
apply. The Forbearance Agreement period is through April 30, 2000.
Pursuant to the Forbearance Agreement, the Company must maintain a balance
of accounts receivable not less than (i) 125% of the outstanding advances
under the line of credit, minus (ii) 50% of the value of the Company's
inventory, capped at $220,000 (the Inventory Cap Amount) at January 1,
2000. To the extent the Company obtains initial deposits on contracts that
reduce overall accounts receivable, the Bank may elect to include such
deposits, as reflected in the balance sheet category of unearned income, as
accounts receivable. The Inventory Cap Amount will reduced by $10,000 each
month through March 31, 2000 and further reduced by $25,000 each month
ending thereafter.
In the event that the Forbearance Agreement is not extended or the Loan
Agreement is not renewed, the Company's business and financial condition
could be materially and adversely affected. Under such circumstances the
Company believes that it would not have resources sufficient to fund its
operations for the next twelve months unless it is able to obtain
alternative financing on terms acceptable to the Company.
The Company is exploring alternative means of financing the business.
However, there can be no assurance that the Company can obtain such
financing, or that such financing will be on terms acceptable to the
Company.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
6. DEBT (CONTINUED)
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
----------- -----------
<S> <C> <C>
Term loan payable to bank in monthly installments of $7,988, including
interest at the prime rate plus 2.5% (11.5% at January 1, 2000), from
February 1997 through January 2000; all assets purchased with the
proceeds of this loan are pledged
as collateral $ 6,945 $ 90,278
Less principal amounts due within one year (6,945) (83,333)
--------- ---------
Long-term debt $ - $ 6,945
========= =========
</TABLE>
7. INCOME TAXES
The provision for income taxes of $1,506 for fiscal year 1998 consists of
minimum payments due and paid to various state tax authorities.
The provision for income taxes for the years ended January 1, 2000 and
January 2, 1999 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.
Deferred tax assets are comprised of the following components:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
----------- -----------
<S> <C> <C>
Current:
Allowances for uncollectible accounts $ 7,588 $ 18,560
Employee benefits 20,281 31,125
Inventory, warranty, and other allowances 29,837 59,266
Unearned revenues 29,801 21,520
----------- -----------
87,507 130,471
----------- -----------
Non-current:
Intangible assets 19,331 15,368
Net operating loss carryforwards 5,525,432 4,702,432
Research and development credits 284,854 272,471
----------- -----------
5,829,617 4,990,271
----------- -----------
Total deferred tax asset 5,917,124 5,120,742
Deferred tax asset valuation allowance (5,917,124) (5,120,742)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
7. INCOME TAXES (CONTINUED)
At January 1, 2000, the Company had available net operating loss
carryforwards of approximately $14,404,155 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 2020. 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
$284,854 for income tax purposes at January 1, 2000. Such credits may be
used to reduce taxes payable, if any, in future years through their
expiration in 2001 to 2020.
8. LEASE COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases. Subsequent to
January 1, 2000, the Company entered into a new lease agreement for
different office space. At the same time, the Company was discharged from
its existing lease arrangement. Under the terms of the new lease agreement,
the Company has a future minimum lease commitment equivalent to six months
of lease payments. Total future minimum lease commitments under the new
lease agreement are $40,320.
Rent expense totaled $328,459 and $355,246 for fiscal years ended 1999 and
1998, respectively.
9. SHAREHOLDERS' EQUITY
INCENTIVE STOCK OPTION PLAN
The Company has Stock Option Plans (the Plans). At January 1, 2000 and
January 2, 1999, 1,305,162 and 1,005,162 shares, respectively, 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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
INCENTIVE STOCK OPTION PLAN (CONTINUED)
A summary of the status of the Company's Stock Option Plans as of January
1, 2000 and January 2, 1999 and for the years then ended is presented
below:
<TABLE>
<CAPTION>
JANUARY 1, 2000 JANUARY 2, 1999
------------------------- ------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
PERFORMANCE OPTIONS SHARES PRICE SHARES PRICE
------------------------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 442,413 $ 4.66 402,868 $ 3.69
Granted 344,100 .93 212,500 4.04
Exercised (965) 1.25 (124,962) 1.50
Forfeited (303,667) 2.39 (47,993) 2.07
------------ ------------ -----------
481,881 $ .22 442,413
============ ============ ===========
Options exercisable at year-end 174,987 144,046
============ ===========
</TABLE>
Effective December 20, 1999, the Company decreased the exercise price for
all outstanding common stock options to $0.22 per share. As a result, the
exercise price for all of the outstanding options (to purchase an aggregate
of 481,881 shares of common stock) has been repriced to $0.22 per share as
shown in the above table, as of January 1, 2000. Pursuant to the provisions
of a proposed financial intepretation to existing accounting
pronouncements, the Company may be required to account for its repriced
options as variable rather than fixed options. Accordingly, the Company
may be required to record compensation expense to the extent that the
quoted market price of the Company's common stock exceeds the related
quoted market price as of June 30, 2000, the proposed effective date of
the proposed interpretation. Such compensation expense would be
recognized over the period from June 30, 2000 through the dates of
exercise of the repriced options.
The weighted-average contractual remaining life is 8.7 years for all
outstanding common stock options as of January 1, 2000.
The Company has computed for pro forma disclosure purposes the value of all
options and warrants granted during 1999 and 1998 using the Black-Scholes
pricing model as prescribed by SFAS No. 123 and the following assumptions:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Risk-free interest rate 6.36% 4.31%
Expected dividend yield 0% 0%
Expected lives 4.5 years 4.5 years
Expected volatility 117% 102%
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
INCENTIVE STOCK OPTION PLAN (CONTINUED)
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 No. 123,
the total value of options and warrants granted would be computed as
follows:
Year ended January 1, 2000 $ 292,462
Year ended January 2, 1999 642,370
Such amounts would be amortized over the vesting period of the options.
Accordingly, under SFAS No. 123, the Company's net loss and loss per share
would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C> <C>
Net loss As reported $(2,030,483) $(1,914,737)
Pro forma (2,173,162) (2,243,091)
Basic and diluted net loss per share As reported (.50) (.54)
Pro forma (.54) (.63)
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma disclosures
for 1999 and 1998 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.
In connection with a forbearance agreement entered into on October 15, 1999
with the Company's debt holders (see Note 6), the Company issued a warrant
to purchase 20,000 shares of the Company's Common Stock at an exercise
price of $0.75 per share. In accordance with the terms of the warrant, the
holder, in lieu of exercising the warrant, has the option to convert the
warrant into a number of shares to be determined based on a formula which
considers the difference between the fair market value of the Company's
Common Stock at the time of conversion and the exercise price of the
warrant. The fair value of the warrants determined utilizing the
Black-Scholes pricing model at the time of issuance is immaterial. The
warrant expires in October 2003.
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
10. EXPORT SALES
Export sales aggregated $665,000 and $1,826,703 in 1999 and 1998,
respectively. Such export sales were made to customers in the following
countries:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
China $ 150,000 $ 4,703
Japan 111,000 114,000
United Kingdom 182,000 520,000
France - 854,000
Other 222,000 334,000
------------ ------------
$665,000 $1,826,703
============ ============
</TABLE>
11. SUBSEQUENT EVENTS
During February 2000, the Company was named in a class action lawsuit. 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 Minnesota Mining and Manufacturing
Company. 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. The Company denies the allegations and intends to vigorously defend
itself. However, the ultimate outcome of the litigation is presently
undeterminable.
12. GOING CONCERN
During 1999, the Company experienced significantly reduced sales and
negative cash flows from operations. Such 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
the next 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. As a result, the Company
delayed certain product development programs and focused its efforts on
expanding product offerings based on its current technology. It is the
Company's intention to resume its product development programs when and if
it achieves profitability on a sustainable basis. However, there can be no
assurance that the Company will achieve profitability or resume its
development programs.
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE>
LEASE
DATED: JANUARY 24, 2000
BETWEEN: PACIFIC REALTY ASSOCIATES, L.P.,
A DELAWARE LIMITED PARTNERSHIP LANDLORD
AND: MICROFIELD GRAPHICS, INC.,
AN OREGON CORPORATION TENANT
Tenant wishes to lease from Landlord the following described property,
hereinafter referred to as "the Premises":
Approximately 12,000 square feet of warehouse and office space located
in Building No. 18, Oregon Business Park I, 16112 S.W. 72nd Avenue, Portland,
Oregon 97224, and as further described on the attached Exhibits A, B and C.
Landlord leases the Premises to Tenant for a term of thirty-nine
(39) months commencing approximately April 1, 2000 and continuing through
June 30, 2003 at a base rent of Six Thousand Seven Hundred Twenty and No/100
Dollars ($6,720.00) per month. If the term commences on a date different than
the one set forth above, Landlord and Tenant shall execute a supplemental
agreement setting forth the commencement date and termination date. See
Paragraph 20 of this lease for renewal options.
Rent for the first month of the Lease term shall be paid upon
execution of this Lease. All rent, including base rent together with the
charges, taxes and expenses to be paid to Landlord specified in Paragraphs 3 and
4 of this Lease, is payable in advance on the first day of each calendar month.
If Landlord consents, Tenant may occupy the Premises prior to such commencement
date on a rent free basis.
Delivery of possession shall occur when the Premises are occupied by
Tenant or are ready to be occupied by Tenant with all work to be performed by
Landlord substantially completed. Interior shall be substantially complete and
suitable for Tenant's required use. Exterior shall be sufficiently complete to
permit ingress and egress, employee, customer and vendor parking, and truck
staging area, all on finished asphalt. If Landlord is unable to deliver
possession of the Premises to Tenant because of strikes, acts of God, or any
other cause beyond Landlord's control, then Tenant may take possession when
Landlord notifies Tenant that the Premises are ready for possession, and the
term of this Lease shall commence on the first day of the first month following
such date and continue for the specified number of months thereafter,
notwithstanding the commencement and termination dates stated above. Tenant
shall owe no rent until the Premises are ready for possession. Landlord may
cancel this Lease without liability if permission to construct, use, or furnish
necessary utilities to the Premises is denied or revoked by any governmental
agency or public utility with such authority.
This Lease is subject to the following additional terms to which the
parties agree.
1. USE OF THE PROMISES.
1.1. Tenant shall use the Premises only for the purpose of conducting
the following business:
Development, manufacturing, marketing and sales of computer peripheral
equipment.
If such use is prevented by any law or governmental regulation, Tenant
may use the Premises for other reasonable uses. Landlord shall construct the
Premises and tenant improvements therein so as to be in compliance with all
applicable laws, rules and regulations in effect as of the commencement date of
this Lease.
<PAGE>
1.2. In connection with its use, Tenant shall at its expense comply
with all applicable laws, ordinances, and regulations of any public
authority, including those requiring alteration of the Premises because of
Tenant's specific use; shall create no nuisance nor allow any objectionable
liquid, odor, or noise to be emitted from the Premises; shall store no
gasoline or other highly combustible materials on the Premises which would
violate any applicable fire code or regulation nor conduct any operation that
will increase Landlord's fire insurance rates for the Premises; and shall not
overload the floors or electrical circuits of the Premises. Landlord shall
have the right to approve the installation of any power-driven machinery by
Tenant and may select a qualified electrician whose opinion will control
regarding electrical circuits and a qualified engineer or architect whose
opinion will control regarding floor loads. Allowable ground floor load shall
be 300 pounds per square foot.
1.3. Tenant may erect a sign stating its name, business, and product
after first securing Landlord's written approval of the size, color, design,
wording, and location, and all necessary governmental approvals. No signs shall
be painted on the Building or exceed the height of the Building. All signs
installed by Tenant shall be removed upon termination of this Lease with the
sign location restored to its former state.
1.4. Tenant shall make no alterations, additions, or improvements to
the Premises or change the color of the exterior without Landlord's prior
written consent and without a valid building permit issued by the appropriate
governmental agency. Upon termination of this Lease, any such alterations.
additions, or improvements (including without limitation all electrical,
lighting, plumbing, heating and air-conditioning equipment, doors, windows,
partitions, drapery, carpeting, shelving, counters, and physically attached
fixtures) shall at once become part of the realty and belong to Landlord unless
the terms of the applicable consent provide otherwise, or Landlord requests that
part or all of the additions, alterations. or improvements be removed. In such
case, Tenant shall at its sole cost and expense promptly remove the specified
additions, alterations, or improvements and repair and restore the Premises to
its original condition.
2. SECURITY DEPOSIT.
Landlord currently holds a security deposit totaling $26,791.00,
$20,071.00 of which shall be applied to Tenant's rental obligations for space it
currently leases from Landlord in Building P, PacTrust Business Center, 7216
S.W. Durham Road, Suite 100, Portland, Oregon 97224, with the remaining balance
of $6,720.00 applied as a security deposit for the Premises which are the
subject of this Lease, hereinafter referred to as "the Security Deposit," to
secure the faithful performance by Tenant of each term, covenant, and condition
of this Lease. If Tenant shall at any time fail to make any payment or fail to
keep or perform any term, covenant, and condition on its part to be made or
performed or kept under this Lease, Landlord may, but shall not be obligated
to and without waiving or releasing Tenant from any obligation under this Lease,
use, apply or retain the whole or any part of the Security Deposit (i) to the
"tent of any sum due to Landlord; or (ii) to make any required payment on
Tenants behalf; or (iii) to compensate Landlord for any loss, damage, attorneys,
fees, or expense sustained by Landlord due to Tenant's default. In such event,
Tenant shall, within five (5) days of written demand by Landlord, remit to
Landlord sufficient funds to restore the Security Deposit to its original sum;
Tenant's failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep the Security Deposit separate from its general
funds, and Tenant shall not be entitled to interest on such deposit. Should
Tenant comply with all of the terms, covenants, and conditions of this Lease and
at the end of the term of this Lease leave the Premises in the condition
required by this Lease, then the Security Deposit, less any sums owing to
Landlord, shall be returned to Tenant (or, at Landlord's option, to the last
assignee of Tenant's interests hereunder) within thirty (30) days after the
termination of this Lease and vacancy of the Premises by Tenant.
3. UTILITY CHARGES; MAINTENANCE.
3.1. Tenant shall pay when due all charges for electricity, natural
gas, water, garbage collection, janitorial service, sewer, and all other
utilities of any kind furnished to the Premises during the lease term. If
charges are not separately metered or stated, Landlord shall apportion the
utility charges on an equitable basis. Landlord shall have no liability
resulting from any interruption of utility services caused by fire or other
casualty, strike, riot, vandalism, the making of necessary repairs or
improvements, or any other cause beyond Landlord's reasonable control. Tenant
shall control the temperature in the Premises to prevent freezing of any
sprinkler system.
<PAGE>
3.2. Landlord shall repair and maintain the roof, gutters,
downspouts, exterior walls, building structure, foundation exterior paved
areas, and curbs of the Premises in good condition. Except for such
obligations of Landlord, Tenant shall keep the Premises neatly maintained and
in good order and repair. Tenant's responsibility shall include maintenance
and repair of the wiring system (including connected light fixtures, switches
and outlets), plumbing and air conditioning and heating systems within the
Premises which are not under the Building concrete floor slab (unless damaged
by Tenant's negligence), overhead and personnel doors, and the replacement of
all broken or cracked glass with glass of the same quality. Landlord shall
warrant the proper performance of such items for one year following
completion. Tenant shall refrain from any discharge that will damage the
septic tank or sewers serving the Premises and will pay for any damage caused
by Tenant's improper discharges or use.
3.3. If the Premises have a separate entrance, Tenant shall keep
the sidewalks abutting the Premises or the separate entrance free and clear
of snow, ice, debris, and obstructions of every kind. The cost of performing
such task, if any, shall be an operating expense as defined in Paragraph 4 of
this lease.
4. TAXES, ASSESSMENTS, AND OPERATING EXPENSES.
4.1. In conjunction with monthly rent payments, Tenant shall each
month pay a sum representing Tenant's proportionate share of real property
taxes and operating expenses for the Premises. Such amount shall annually be
estimated by Landlord in good faith to reflect actual or anticipated costs.
Upon termination of this Lease or at periodic intervals during the term
hereof, Landlord shall compute its actual costs for such expenses during such
period. Any overpayment by Tenant shall be credited to Tenant, and any
deficiency shall be paid by Tenant within fifteen (15) days after receipt of
Landlord's statement. Landlord's records of expenses for taxes and operating
expenses may be inspected by Tenant at reasonable times and intervals.
4.2. Tenant's proportionate share of real property taxes shall. mean
that percentage of the total assessment affecting the Premises which is the same
as the percentage which the rentable area of the Premises bears to the total
rentable area of all buildings covered by the tax statement. Tenant's
proportionate share of operating expenses for the Building shall be computed by
dividing the rentable area of the Premises by the total rentable area of the
Building. If in Landlord's reasonable judgment either of these methods of
allocation results in an inappropriate allocation to Tenant, Landlord shall
select some other reasonable method of determining Tenant's proportionate share.
4.3. Real property taxes charged to Tenant hereunder shall include
all general real property taxes assessed against the Premises or payable
during the lease term, installment payments on Bancrofted special
assessments, and any rent tax, tax on Landlord's interest under this Lease,
or any tax in lieu of the foregoing, whether or not any such tax is now in
effect. Tenant shall not, however, be obligated to pay any tax based upon
Landlord's net income
4.4. Operating expenses charged to Tenant hereunder shall include all
usual and necessary costs of operating and maintaining the Premises, Building,
and any surrounding common areas including, but not limited to, the cost of all
utilities or services not paid directly by Tenant, property insurance, property
management, maintenance and repair of landscaping, parking areas, and any other
common facilities. Operating expenses shall not include roof replacement or
correction of structural deficiencies of the Building.
5. PARKING AND STORAGE AREAS.
5.1. Landlord shall provide a minimum of twenty (20) parking spaces in
a portion of the parking lot adjacent to the Premises for use by Tenant, which
shall include all visitor and code required handicap parking. Such parking
spaces are generally shown on the attached Exhibit B. Tenant shall control the
use of such parking spaces so that there will be no unreasonable interference
with the normal traffic flow, and shall permit no parking on any landscaped or
unpaved surface. Under no circumstances shall trucks serving the Premises be
permitted to block streets.
5.2. Tenant shall not store any materials, supplies, or equipment
outside in any unapproved or unscreened area. If Tenant erects any visual
barriers for storage areas, Landlord shall
<PAGE>
have the right to approve the design and location. Trash and garbage receptacles
shall be kept covered at all times.
6. TENANT'S INDEMNIFICATION; LIABILITY INSURANCE.
6.1. Tenant shall not allow any liens to attach to the Premises as a
result of its activities. Tenant shall indemnify and defend Landlord from any
claim, liability, damage, or loss arising out of any activity on the Premises or
within the Building or the common areas serving the Building, by Tenant, its
agents, or invitees or resulting from Tenant's failure to comply with any term
of this Lease.
6.2. Tenant shall carry general liability insurance on an occurrence
basis with combined single limits of not less than $1,000,000. Such insurance
shall be provided by an insurance carrier reasonably acceptable to Landlord and
shall be evidenced by a certificate delivered to Landlord stating that the
coverage will not be canceled or materially altered without ten (10) days'
advance written notice to Landlord. Landlord shall be named as an additional
insured on such policy.
7. PROPERTY DAMAGE; SUBROGATION WAIVER.
7.1. If fire or other casualty causes damage to the Building or the
Premises in an amount exceeding thirty percent (30%) of the full
construction-replacement cost of the Building or Premises, respectively,
Landlord may elect to terminate this Lease as of the date of the damage by
notice in writing to Tenant within thirty (30) days after such date. Otherwise,
Landlord shall promptly repair the damage and restore the Premises to their
former condition as soon as practicable. Rent shall be reduced during the period
to the extent the Premises are not reasonably usable for the use permitted by
this Lease because of such damage and required repairs.
7.2. Landlord shall be responsible for insuring the Building, and
Tenant shall be responsible for insuring its personal property and trade
fixtures located on the Premises.
7.3. Neither party shall be liable to the other for any loss or damage
caused by water damage, sprinkler leakage, or any of the risks covered by a
standard fir insurance policy with extended coverage and sprinkler leakage
endorsements, and there shall be no subrogated claim by one party's insurance
carrier against the other party arising out of any such loss.
8. CONDEMNATION.
If a condemning authority takes the entire Premises or a portion
sufficient to render the remainder unsuitable for Tenant's use, then either
party may elect to terminate this Lease effective on the date that title
passes to the condemning authority. Otherwise, Landlord shall proceed as soon
as practicable to restore the remaining Premises to a condition comparable to
that existing at the time of the taking. Rent shall be abated during the
period of restoration to the extent the Premises are not reasonably usable by
Tenant, and rent shall be reduced for the remainder of the term in an amount
equal to the reduction in rental value of the Premises caused by the taking.
All condemnation proceeds shall belong to Landlord.
9. ASSIGNMENT AND SUBLETTING.
9.1. Tenant shall not assign its interest under this Lease nor sublet
the Premises without first obtaining Landlord's consent in writing. Such consent
shall not be unreasonably withheld, however, it shall not be unreasonable for
Landlord to withhold its consent to any assignment, sublease or other transfer
of the Tenant's interest in this lease if a proposed transferee's anticipated
use of the Premises involves the generation, storage use, sale, treatment,
release or disposal of Hazardous Substance. This provision shall apply to all
transfers by operation of law or through mergers and changes in control of
Tenant. No assignment shall relieve Tenant of its obligation to pay rent or
perform other obligations required by this Lease and no one assignment or
subletting shall be a consent to any further assignment or subletting.
9.2. Subject to the above limitations on transfer of Tenant's
interest, this Lease shall bind and inure to the benefit of the parties,
their respective heirs, successors, and assigns.
<PAGE>
10. DEFAULT.
Any of the following shall constitute a default by Tenant under this
Lease:
10.1. Tenant's failure to pay rent or any other charge under this
Lease within ten (10) days after it is due, or failure to comply with any
other term or condition within twenty (20) days following written notice from
Landlord specifying the noncompliance. If such noncompliance cannot be cured
within the twenty (20) day period, this provision shall be satisfied if
Tenant commences correction within such period and thereafter proceeds in
good faith and with reasonable diligence to effect compliance as soon as
possible.
10.2. Tenant's insolvency; assignment for the benefit of its
creditors; Tenants voluntary petition in bankruptcy or adjudication as bankrupt,
or the appointment of a receiver for Tenant's properties.
11. REMEDIES FOR DEFAULT.
In case of default as described in Paragraph 10 above, Landlord shall
have the right to the following remedies which are intended to be cumulative and
in addition to any other remedies provided under applicable law:
11.1. Terminate this Lease without relieving Tenant from its
obligation to pay damages.
11.2. Retake possession of the Premises by summary proceedings or
otherwise, in which case Tenant's liability to Landlord for damages shall
survive the tenancy. Landlord may, after such retaking of possession, relet the
Premises upon any reasonable terms. No such reletting shall be construed as an
acceptance of a surrender of Tenant's leasehold interest.
11.3. Recover damages caused by Tenant's default which shall
include reasonable attorneys' fees at trial and on any appeal therefrom.
Landlord may sue periodically to recover damages as they occur throughout the
lease term, and no action for accrued damages shall bar a later action for
damages subsequently accruing. Landlord may elect in any one action to
recover accrued damages plus damages attributable to the remaining term of
the Lease equal to the difference between the rent under this Lease and the
reasonable rental value of the Premises for the remainder of the term,
discounted to the time of judgment at the rate of six (6%) percent per annum.
11.4. Make any payment or perform any obligation required of Tenant so
as to cure Tenant's default, in which case Landlord shall be entitled to recover
all amounts so expended from Tenant, plus interest at the rate of ten percent
(10%) per annum from the date of the expenditure.
12. SURRENDER ON TERMINATION.
12.1. On expiration or early termination of this Lease, Tenant
shall deliver all keys to Landlord, have final utility readings made on the
date of move out, and surrender the Premises clean and free of debris inside
and out, with all mechanical, electrical, and plumbing systems in good
operating condition, all signing removed and defacement corrected, and all
repairs called for under this Lease completed. The Premises shall be
delivered in the same condition as at the commencement of the term, subject
only to depreciation and wear from ordinary use. Tenant shall remove all of
its furnishings and trade fixtures that remain its property and restore all
damage resulting from such removal. Failure to remove said property shall be
an abandonment of same, and Landlord may dispose of it in any manner without
liability.
12.2. If Tenant fails to vacate the Premises when required,
Landlord may elect either to treat Tenant as a tenant from month to month,
subject to all provisions of this Lease except the provision for term and at
a base rental of 120% of that specified in this lease, or to eject Tenant
from the Premises and recover damages caused by wrongful holdover.
13. LANDLORD'S LIABILITY.
13.1. Landlord warrants that so long as Tenant complies with all
terms of this Lease it shall be entitled to peaceable and undisturbed
possession of the Premises free from any eviction or disturbance by Landlord
or persons claiming through Landlord.
<PAGE>
13.2. All persons dealing with Pacific Realty Associates, L.P.
("Partnership") must look solely to the property and assets of Partnership
for the payment of any claim against Partnership or for the performance of
any obligation of Partnership as neither the general partner, limited
partners, employees, nor agents of Partnership assume any personal liability
for obligations entered into on behalf of Partnership (or its predecessors in
interest) and their respective properties shall not be subject to the claims
of any person in respect of any such liability or obligation. As used herein,
the words "property and assets of partnership" exclude any rights of
Partnership for the payment of capital contributions or other obligations to
it by the general partner or any limited partner in such 9 capacity.
14. MORTGAGE OR SALE BY LANDLORD; ESTOPPEL CERTIFICATES.
14.1. This Lease is and shall be prior to any mortgage or deed of
trust ("Encumbrance") recorded after the date of this Lease and affecting the
Building and the land upon which the Building is located. However, if any lender
holding an Encumbrance secured by the Building and the land underlying the
Building requires that this Lease be subordinate to the Encumbrance, then Tenant
agrees that this Lease shall be subordinate to the Encumbrance if the holder
thereof agrees in writing with Tenant that so long as Tenant performs its
obligations under this Lease no foreclosure, deed given in lieu of the
foreclosure, or sale pursuant to the terms of the Encumbrance, or other steps or
procedures taken under the Encumbrance shall affect Tenant's rights under this
Lease. If the foregoing condition is met, Tenant shall execute the written
agreement and any other documents required by the holder of the Encumbrance to
accomplish the purposes of this paragraph.
14.2. If the Building is sold as a result of foreclosure of any
Encumbrance thereon or otherwise transferred by Landlord or any successor,
Tenant shall attorn to the purchaser or transferee, and the transferor shall
have no further liability hereunder.
14.3. Either party shall within twenty (20) days after notice from
the other execute and deliver to the other party a certificate stating
whether or not this Lease has been modified and is in full force and effect
and specifying any modifications or alleged breaches by the other party. The
certificate shall also state the amount of monthly base rent, the dates to
which rent has been paid in advance, and the amount of any security deposit
or prepaid rent. Failure to deliver the certificate within the specified time
shall be conclusive upon the party of whom the certificate was requested that
the Lease is in full force and effect and has not been modified except as may
be represented by the party requesting the certificate.
15. DISPUTES - ATTORNEYS' FEES.
In the event of any litigation arising out of this Lease, the
prevailing party shall be entitled to recover from the other party, in addition
to all other relief provided by law or judgement, its reasonable costs and
attorneys' fees incurred both at and in preparation for trial and any appeal or
review, such amount to be as determined by the court(s) before which the matter
is heard. Disputes between the parties which are to be litigated shall be tried
before a judge without a jury.
16. SEVERABILITY.
If any provision of this Lease is held to be invalid, unenforceable or
illegal the remaining provisions shall not be affected and shall be enforced to
the fullest extent permitted by law.
17. INTEREST AND LATE CHARGES.
Rent not paid within ten (10) days of when due shall bear interest
from the date due until paid at the rate of ten percent (10%) per annum.
Landlord may at its option impose a late charge of $.05 for each $1.00 of rent
for rent payments made more than ten (10) days late in addition to interest and
other remedies available for default.
18. GENERAL PROVISIONS.
18.1. Waiver by either party of strict performance of any provision of
this Lease shall not be a waiver of nor prejudice the party's right otherwise
to require performance of the same provision or any other provision.
<PAGE>
18.2. Subject to the limitations on transfer of Tenant's interest,
this Lease shall bind and inure to the benefit of the parties, their respective
heirs, successors, and assigns.
18.3. Landlord shall have the right to enter upon the Premises at any
time to determine Tenant's compliance with this Lease, to make necessary repairs
to the Building or the Premise, or to show the Premises to any prospective
tenant or purchasers. During the last two months of the term, Landlord may place
and maintain upon the Premises notices for leasing or sale of the Premises.
18.4. If this Lease commences or terminates at a time other than
the beginning or end of one of the specified rental periods, then the rent
(including Tenant's share of real property taxes, if any) shall be prorated
as of such date, and in the event of termination for reasons other than
default all prepaid rent shall be refunded to Tenant or paid on its account.
18.5. Notices between the parties relating to this Lease shall be in
writing, effective when delivered, or if mailed, effective on the second day
following mailing, postage prepaid, to the address for the party stated in this
Lease or to such other address as either party may specify by notice to the
other. Rent shall be payable to Landlord at the same address and in the same
manner.
19. ENVIRONMENTAL
19.1. DEFINITIONS. The term "Environmental Law" shall mean any
federal, state or local statute, regulation or ordinance or any judicial or
other governmental order pertaining to the protection of health, safety or
the environment. The term "Hazardous Substance" shall mean any hazardous, toxic,
infectious or radioactive substance, waste and material as defined or listed by
any Environmental Law and shall include, without limitation, petroleum oil and
its fractions.
19.2. USE OF HAZARDOUS SUBSTANCES. Tenant shall not cause or permit
any Hazardous Substance to be spilled, leaked, disposed of or otherwise
released on or under the Premises. Tenant may use and sell on the Premises
only those Hazardous Substances typically used and sold in the prudent and
safe operation of the business permitted by Paragraph 1 of this Lease. Tenant
may store such Hazardous Substances on the Premises, but only in quantities
necessary to satisfy Tenant's reasonably anticipated needs. Tenant shall
comply with all Environmental Laws and exercise the highest degree of care in
the use, handling and storage of Hazardous Substances and shall take all
practicable measures to minimize the quantity and toxicity of Hazardous
Substances used, handled or stored on the Premises.
19.3. NOTICES. Tenant shall immediately notify Landlord upon becoming
aware of the following: (a) any spill, leak, disposal or other release of a
Hazardous Substance on, under or adjacent to the Premises; (b) any notice or
communication from a governmental agency or any other person relating to any
Hazardous Substance on, under or adjacent to the Premises; or (c) any violation
of any Environmental Law with respect to the Premises or Tenant's activities on
or in connection with the Premises.
19.4. SPILLS AND RELEASES. In the event of a spill, leak, disposal or
other release of a Hazardous Substance on or under the Premises caused by Tenant
or any of its contractors, agents or employees or invitees, or the suspicion or
threat of the same, Tenant shall (i) immediately undertake all emergency
response necessary to contain, cleanup and remove the released Hazardous
Substance, (ii) promptly undertake all investigatory, remedial, removal and
other response action necessary or appropriate to ensure that any Hazardous
Substances contamination is eliminated to Landlord's reasonable satisfaction,
and (iii) provide Landlord copies of all correspondence with any governmental
agency regarding the release (or threatened or suspected release) or the
response action, a detailed report documenting all such response action, and a
certification that any contamination has been eliminated. All such response
action shall be performed, all such reports shall be prepared and all such
certifications shall be made by an environmental consultant reasonably
acceptable to Landlord.
19.5. CONDITION UPON TERMINATION. Upon expiration of this Lease or
sooner termination of this Lease for any reason, Tenant shall remove all
Hazardous Substances and facilities used for the storage or handling of
Hazardous Substances from the Premises and restore the affected areas by
repairing any damage caused by the installation or removal of the facilities.
Following such removal, Tenant shall certify in writing to Landlord that all
such removal is complete.
<PAGE>
19.6. ASSIGNMENT AND SUBLETTING. Notwithstanding the provisions of
Paragraph 9 of this Lease, it shall not be unreasonable for Landlord to withhold
its consent to any assignment, sublease or other transfer of the Tenant's
interest in this Lease if a proposed transferee's anticipated use of the
Premises involves the generation, storage, use, sale, treatment, release or
disposal of any Hazardous Substance.
19.7. INDEMNITY.
19.7.1. BY TENANT. Tenant shall indemnify, defend and hold
harmless Landlord, its employees and agents, any persons holding a security
interest in the Premises, and the respective successors and assigns of each
of them from and against any and all claims, demands, liabilities, damages,
fines, losses, costs (including without limitation the cost of any
investigation, remedial, removal or other response action required by
Environmental Law) and expenses (including without limitation attorneys' fees
and expert fees in connection with any trial, appeal, petition for review or
administrative proceeding) arising out of or in any way relating to the use,
treatment, storage, generation, transport, release, leak, spill, disposal or
other handling of Hazardous Substances on the Premises by Tenant or any of
its contractors, agents or employees or invitees. Tenants obligations under
this paragraph shall survive the expiration or termination of this Lease for
any reason. Landlord's rights under this paragraph are in addition to and not
in lieu of any other rights or remedies to which Landlord may the entitled
under this agreement or otherwise.
19.7.2 BY LANDLORD. Landlord shall indemnify, defend and hold
harmless Tenant and its employees and agents and the respective successors and
assigns of each of them from and against any and all claims, demands,
liabilities, damages, fines, losses, costs (including without limitation the
cost of any investigation, remedial, removal or other response action required
by Environmental Law) and expenses (including without limitation attorneys' fees
and expert fees in connection with any trial, appeal, petition for review or
administrative proceeding) arising out of or in any way relating to the actual
or alleged use, treatment, storage, generation, transport, release, leak, spill,
disposal or other handling of Hazardous Substances on the Premises by Landlord,
or any of its contractors, agents or employees or by Landlord's previous tenants
of the Premises. Landlord's obligations under this paragraph shall survive the
expiration or termination of this Lease for any reason. Tenant's rights under
this paragraph are in addition to and not in lieu of any other rights or
remedies to which Tenant may be entitled under this Agreement or otherwise.
20. RENEWAL OPTION.
If not then in default, Tenant shall have the option to renew this
lease for two additional three-year terms by giving Landlord written notice
of its intent to extend at least 120 days prior to expiration of the
preceding term. All provisions of this lease shall apply during the extended
term, except that rent for the renewal period shall be an amount agreed upon
by the parties at least 90 days prior to commencement of the renewal period,
but in no case less than the rent applicable during the preceding term. If
Landlord and Tenant cannot agree on a rental rate at least 90 days prior to
commencement of the renewal period, each party shall designate a commercial
real estate broker familiar with lease rates for properties similar to the
Premises and the two selected shall designate a third broker having similar
qualifications.
21. OPTION TO TERMINATE.
Tenant may terminate this lease at any time during the term hereof by
providing Landlord 180 days advance written notice of its intent to do so.
22. FIRST RIGHT OF NOTICE.
Tenant shall have the First Right of Notice for any available space
within the Building. Landlord shall notify Tenant of the availability of such
space, and Tenant shall have five (5) business days after Landlord notifies
Tenant of such availability to enter into good faith negotiations for the Right
of First Notice space. Landlord agrees to negotiate in good faith with Tenant
for the lease of such First Right of Notice space.
<PAGE>
23. TENANT IMPROVEMENTS.
Landlord shall, at its sole cost and expense, construct improvements
generally as shown on the attached Exhibit C. The improvements shall be done in
a workmanlike manner and shall be to Oregon Business Park I tenant finish
standards. Adjustments to the scope of work identified on Exhibit C shall be by
agreed change orders only. Any increased cost resulting from Tenant requested
adjustments or requests for additional work beyond the allowance noted therein
shall be reimbursed to Landlord by Tenant within 30 days of receipt of invoice
from Landlord, but not earlier than occupancy of the Premises.
24. SPECIAL PROVISIONS.
Tenant currently leases space from Landlord in Building P, PacTrust
Business Center, 7216 S.W. Durham Road, Suite 100, Portland, Oregon 97224 ("the
Present Premises'). Upon execution of this Lease and payment of a total of
$113,804.00 (inclusive of the $20,071.00 referenced in Paragraph 2 hereof),
representing base rent, taxes and operating expenses for the months of December,
1999, and January, February, and March 2000, by March 31, 2000, Tenant's
obligation for the Present Premises shall terminate and the lease agreement for
the Present Premises shall be of no further force or affect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the respective dates set opposite their signatures below, but this Agreement on
behalf of such party shall be deemed to have been dated as of the date first
above written.
LANDLORD:
PACIFIC REALTY ASSOCIATES, L.P.,
a Delaware limited partnership
By: PacTrust Realty, Inc.,
a Delaware corporation,
its General Partner
By: /s/ Leon M. Hartvickson
---------------------------------
Leon M. Hartvickson
Vice President
Date: 1-24 , 2000
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Address for Notices/Rent Payments to Landlord:
15350 S.W. Sequoia Parkway, #300-WPMC
Portland, OR 97224
TENANT:
MICROFIELD GRAPHICS, INC.,
an Oregon corporation
Date: Jan 24 , 2000 By: /s/ John B. Conroy
----------- -------------------------------
Name: John B. Conroy
-----------------------------
Title: President & CEO
----------------------------
Date: , 2000 By:
----------- -------------------------------------------
Name:
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Title:
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Address for Legal Notices to Tenant:
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Address for Invoices to Tenant:
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Tenant Employer Identification Number:
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<PAGE>
FORBEARANCE AGREEMENT
This Forbearance Agreement (this "Agreement") is entered into as of the
October 25, 1999, by and between Silicon Valley Bank ("Bank") and Microfield
Graphics, Inc. ("Borrower").
RECITALS
--------
A. Borrower and Bank are parties to that certain Loan and Security
Agreement dated as of September 9, 1996, together with any and all Schedules
and modifications (the "Loan Agreement"). The Loan Agreement provided for,
among other things, a Secured Accounts Receivable Line of Credit in the
original principal amount of Two Million Dollars ($2,000,000)(the "Line of
Credit") and a Secured Equipment Term Loan in the original principal amount
of Two Hundred Fifty Thousand Dollars ($250,000)(the "Equipment Term Loan").
The Loan Agreement, together with any and all other documents evidencing or
securing the obligations owed by Borrower to Bank are referred to in this
Agreement as a "Loan Document" or the "Loan Documents."
B. Borrower acknowledges that as of October 15, 1999, there was due,
owing and payable to Bank the principal amount of Five Hundred Twenty Four
Thousand Dollars ($524,000) under the Line of Credit and the principal amount
of Twenty Seven Thousand Seven Hundred Seventy Seven and 92/100 Dollars
($27,777.92) under the Equipment Term Loan, together with accrued but unpaid
interest, attorneys' fees and costs. Such amounts are hereinafter sometimes
referred to herein as the "Existing Debt."
C. One or more Events of Default have occurred under the Loan Documents
by virtue of, among other things, Borrower's failure to meet certain
financial covenants under the Loan Documents, more particularly, (1)
Borrower's minimum Tangible Net Worth as of March 31, 1999 and June 30, 1999.
Borrower's subsequent financial statements indicate that Borrower continues
not to comply with the Tangible Net Worth covenant. Borrower's Borrower has
asked Bank to forbear from exercising any remedies available under the Loan
Documents as a result of such Events of Default and Bank has agreed, provided
Borrower enters into this Agreement.
NOW, THEREFORE, for good and valuable consideration, the parties agree
as follows:
D. REPAYMENT OF OBLIGATIONS. As of the date of this Agreement,
interest payable by Borrower on all amounts outstanding on the Line of Credit
and the Equipment Term Loan, including accrued but unpaid interest,
reasonable attorneys' fees and necessary attorneys' fees and costs shall be
increased to a per annum rate equal to the Prime Rate plus two and one half
percentage points (2.50)(subject to increase pursuant to Section 6(d) and
Section 8 of this Agreement). Borrower shall pay all fees and expenses
(including reasonable and necessary attorneys' fees) incurred in connection
with the preparation of this Agreement and the protection of the Bank's
interests under the Loan Documents.
E. DECREASE OF SECURED ACCOUNTS RECEIVABLE LINE OF CREDIT. The
principal amount of the Line of Credit is hereby decreased to Six Hundred
Fifty Thousand Dollars ($650,000).
F. FORBEARANCE ON EXISTING LOANS. Subject to the execution, delivery
and performance by Borrower of all the terms of this Agreement, Bank shall
forbear until April 30, 2000 (the "Forbearance Period") from exercising any
remedies that it may have against Borrower as a result of the occurrence of
the Events of Default described in Recital C of this Agreement. Such
forbearance does not apply to any other Event of Default or other failure by
Borrower to perform in accordance with the Loan Documents. this forbearance
shall not be deemed a continuing waiver or forbearance with respect to any
Event of Default that may occur after the date of this Agreement.
1
<PAGE>
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense.
J. DEFAULT. A failure to perform any covenant or other agreement
contained in this Agreement or any of the Loan Documents, or any agreement
for borrowed money or factored receivables, or leased equipment under capital
leases with any third party shall constitute an Event of Default hereunder
and under all of the Loan Documents and shall result in immediate termination
of the Forbearance Period. Whereas, upon such Event of Default all amounts
outstanding under any Loan Documents shall become immediately due and
payable. Bank shall immediately and without notice apply all amounts in any
collateral account against any amounts due under any of the Loan Documents.
In addition, Bank shall have the right immediately and without notice to
Borrower to exercise any remedies available under the Loan Documents and
applicable law. All amounts then owing to Bank shall bear interest, from and
after the occurrence of an Event of Default, at a rate equal to the 5
percentage points per annum above the interest rate applicable immediately
prior to the occurrence of an Event of Default.
K. WAIVER OF NOTICE AND CURE. With respect to the Events of Default as
described in Recital C, Borrower acknowledges that an Event of Default
occurred under the Loan Documents that, but for this Agreement, would have
entitled Bank to exercise all the remedies available to Bank under the Loan
Documents and applicable law. Borrower waives all notices of default and
rights to cure that are otherwise provided in the Loan Documents or
applicable law, including rights to notice and redemption under the Oregon
Uniform Commercial Code, including, without limitation, SS9-503(3), 9-504 and
9-505 of the Uniform Commercial Code.
L. FEES AND EXPENSES. Borrower shall also pay Bank on the date of this
Agreement all out-of-pocket costs, including reasonable and necessary
attorneys' fees and legal costs, that Bank has incurred in connection with
this Agreement.
M. RELEASE. Borrower acknowledges that it has no defenses against its
obligation to pay any reasonable amounts or perform any obligations under the
Loan Documents and releases Bank and any of Bank's officers, directors and
employees from any known or unknown claims now existing or hereafter arising
out of the Loan Documents or the transactions contemplated thereby.
N. FURTHER ASSURANCES. Borrower will cooperate with Bank in connection
with Bank's verification of all eligible accounts receivable. Borrower shall
use its best efforts to assist Bank in obtaining subordination agreements
from such persons and on such terms as Bank may request from time to time.
Borrower will take such actions as Bank may reasonably request from time to
time to perfect or continue Bank's security interests in Borrower's property,
including without limitation vehicles, and to accomplish the objective of
this Agreement.
O. MISCELLANEOUS.
1. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of Borrower and Bank and their respective
successors and assigns; provided, however, that the foregoing shall not
authorize any assignment by Borrower of its rights or duties hereunder.
2. ENTIRE AGREEMENT. This Agreement and the Loan Documents
contain the entire agreement of the parties hereto and supersede any other
oral or written agreements or understandings.
3. COURSE OF DEALING; WAIVERS. No course of dealing on the part of
Bank or its officers, nor any failure or delay in the exercise of any right
by Bank, shall operate as a waiver thereof, and any single or partial
exercise of any such right shall not preclude any later exercise of any such
right. Bank's failure at any time to require strict performance by Borrower
of any provision shall not affect any right of Bank thereafter to demand
strict compliance and performance. Any suspension or waiver of a right must
be in writing signed by an officer of Bank.
3
<PAGE>
4. TIME IS OF THE ESSENCE. Time is of the essence as to each and
every term and provision of this Agreement and the other Loan Documents.
5. COUNTERPARTS. This Agreement may be signed in counterparts and
all of such counterparts when properly executed by the appropriate parties
thereto together shall serve as a fully executed document, binding upon the
parties.
6. APPOINTMENT OF BANK AS BORROWER'S ATTORNEY-IN-FACT. Borrower
hereby irrevocably designates, makes, constitutes and appoints Bank, and all
individuals, persons and entities designated by Bank, as Borrower's true and
lawful agent and attorney-in-fact (which appointment shall for all purposes
be deemed to be coupled with an interest and shall be irrevocable) and
authorizes Bank, in Bank's and/or Borrower's name, to take any and all
actions Bank deems appropriate in connection with Bank's administration of
this Agreement or any other Loan Documents.
7. LEGAL EFFECT. Except as amended by this Agreement, the Loan
Documents remain in full force and effect. If any provision of this Agreement
conflicts with applicable law, such provision shall be deemed severed from
this Agreement, and the balance of this Agreement shall remain in full force
and effect.
8. WAIVER OF JURY. Bank and Borrower acknowledge and agree that
the time and expense required for trial by jury exceed the time and expense
required for a bench trial and hereby waive, to the extent permitted by law,
trial by jury.
9. CONDITIONS. The effectiveness of this Forbearance Agreement is
conditioned upon Bank's receipt of a loan fee in the amount of $1,250 and
Bank's receipt of an executed Warrant Agreement.
IN WITNESS WHEREOF the undersigned have executed this Agreement as of
the first date above written.
MICROFIELD GRAPHICS, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Title: Chief Financial Officer
------------------------
11/3/99
SILICON VALLEY BANK
By: /s/ [ILLEGIBLE]
---------------------------
Title: SVP
------------------------
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 (No. 33-97544 and 333-33294)of Microfield Graphics, Inc.
of our report dated March 10, 2000 relating to the financial statements, which
appear in this Annual Report on Form 10-KSB.
PricewaterhouseCoopers LLP
April 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S FORM 10-KSB FOR THE
FISCAL YEAR ENDED JANUARY 1, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-02-1999
<PERIOD-END> JAN-01-2000
<CASH> 113
<SECURITIES> 0
<RECEIVABLES> 266
<ALLOWANCES> 27
<INVENTORY> 497
<CURRENT-ASSETS> 996
<PP&E> 245
<DEPRECIATION> 280
<TOTAL-ASSETS> 1,318
<CURRENT-LIABILITIES> 992
<BONDS> 0
0
0
<COMMON> 15,274
<OTHER-SE> (15,001)
<TOTAL-LIABILITY-AND-EQUITY> 1,318
<SALES> 3,492
<TOTAL-REVENUES> 3,492
<CGS> 2,258
<TOTAL-COSTS> 2,258
<OTHER-EXPENSES> 3,157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> (2,030)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,030)
<EPS-BASIC> (.50)
<EPS-DILUTED> (.50)
</TABLE>
