<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 1O-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 1, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-26226
MICROFIELD GRAPHICS, INC.
(Exact name of small business issuer as specified in its charter)
OREGON 93-0935149
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification No.)
16112 SW 72ND AVENUE
PORTLAND, OREGON 97224
(Address of principal executive offices and zip code)
(503) 620-4000
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section 3
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days:
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of April 1,
2000 was 4,132,185 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
MICROFIELD GRAPHICS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
- ------------------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet - April 1, 2000
and January 1, 2000 3
Consolidated Statement of Operations - Quarters Ended 4
April 1, 2000 and April 3, 1999
Consolidated Statement of Cash Flows - Quarters
Ended April 1, 2000 and April 3, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
2
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MICROFIELD GRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
April 1, January 1,
2000 2000
----------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 149,159 $ 113,041
Accounts receivable, net of allowances
of $11,722 and $27,153 419,315 265,524
Inventories (Note 2) 438,056 496,696
Prepaid expenses and other 169,933 120,969
----------------- -----------------
Total current assets 1,176,463 996,230
Property and equipment, net (Note 3) 219,221 244,714
Other assets 26,837 76,915
----------------- -----------------
$ 1,422,521 $ 1,317,859
================= =================
Current liabilities:
Current portion of debt $ 510,016 $ 360,473
Accounts payable 478,032 338,325
Accrued payroll and payroll taxes 107,842 133,650
Unearned income 78,493 77,687
Accrued liabilities 130,000 82,048
----------------- -----------------
Total current liabilities 1,304,383 992,183
Long-term debt, net of current portion - -
Other long-term liabilities - 52,455
----------------- -----------------
Total liabilities 1,304,383 1,044,638
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized, 4,132,185 and 3,721,320 shares
issued and outstanding 15,273,912 15,273,912
Accumulated deficit (15,155,774) (15,000,691)
----------------- -----------------
Total shareholders' equity 118,138 273,221
----------------- -----------------
$ 1,422,521 $ 1,317,859
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
April 1, April 3,
2000 1999
---------------------- --------------------
<S> <C> <C>
Sales $ 841,155 1,053,315
Cost of goods sold 513,470 671,291
---------------------- -----------------
Gross profit 327,685 382,024
Operating expenses
Research and development 54,544 244,610
Marketing and sales 211,698 481,418
General and administrative 201,139 247,629
---------------------- -----------------
467,381 973,657
---------------------- -----------------
Loss from operations (139,696) (591,633)
Other income (expense)
Interest income (expense), net (15,387) (15,244)
Other income, net -- 222
---------------------- ----------------
Loss before provision for income taxes (155,083) (606,655)
Provision for income taxes -- --
---------------------- ----------------
Net loss $ (155,083) (606,655)
====================== ================
Net loss per share
Basic $ (.04) (.16)
====================== ================
Diluted $ (.04) (.16)
====================== ================
Shares used in per share calculations
Basic 4,029,489 3,721,320
====================== ================
Diluted 4,029,489 3,721,320
====================== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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MICROFIELD GRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------
April 1, April 3,
2000 1999
--------------------- -----------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (155,083) $ (606,655)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 34,285 49,922
Gain on sale and leaseback of property and equipment -- --
Changes in assets and liabilities:
Accounts receivable (153,791) 271,123
Inventories 58,640 198,424
Prepaid expenses and other (48,965) (7,487)
Accounts payable 139,707 (117,007)
Accrued payroll and payroll taxes (25,808) (151,461)
Unearned income 806 12,495
Accrued liabilities 47,952 42,719
----------------- -----------------
Net cash used in operating activities (102,257) (307,927)
Cash flows from investing activities:
Acquisition of property and equipment (3,905) (13,970)
Other long-term assets 45,192 --
----------------- -----------------
Net cash used in investing activities 41,287 (13,970)
Cash flows from financing activities:
Payments on equipment line of credit (52,455) (20,833)
Payments on capital lease obligations -- --
Proceeds from (payments on) operating line of credit 149,543 (102,406)
Proceeds from exercise of common stock options
and warrants -- 1,210
Proceeds from issuance of common stock -- 1,000,001
----------------- -----------------
Net cash provided by financing activities 97,088 877,972
Net increase (decrease) in cash and cash 36,118 556,075
equivalents
Cash and cash equivalents, beginning of period 113,041 739,628
----------------- -----------------
Cash and cash equivalents, end of period $ 149,159 $ 1,295,703
================= =================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 15,387 $ 17,264
================= =================
Income taxes $ -- $ --
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
MICROFIELD GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Microfield Graphics, Inc. (the "Company") for the quarters ended April 1,
2000 and April 3, 1999 have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. The financial
information as of January 1, 2000 is derived from the Company's Annual Report
on Form 10-KSB. The accompanying consolidated financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles and should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year
ended January 1, 2000. In the opinion of Company management, the unaudited
consolidated financial statements for the interim periods presented include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the results for such interim periods. Operating results
for the quarter ended April 1, 2000 are not necessarily indicative of the
results that may be expected for the full year or any portion thereof.
The Company's fiscal year is the 52- or 53-week period ending on the
Saturday closest to the last day of December. The Company's current fiscal
year is the 52-week period ending December 30, 2000. The Company's last
fiscal year was the 52-week period ended January 1, 2000. The Company's first
fiscal quarters in fiscal 2000 and 1999 were the 13-week periods ended
April 1, 2000 and April 3, 1999, respectively.
2. INVENTORIES
Inventories are stated at the lower of standard cost (which
approximates the first-in, first-out method), or market value. Inventory costs
include raw materials, direct labor and allocated overhead and consist of the
following:
<TABLE>
<CAPTION>
April 1, January 1,
2000 2000
----------------- -------------------
<S> <C> <C>
Raw materials $318,423 $368,498
Finished goods 119,633 128,198
----------------- -------------------
$438,056 $496,696
================= ===================
3. PROPERTY AND EQUIPMENT
April 1, January 1,
2000 2000
----------------- -------------------
Machinery and equipment $1,200,490 $1,196,585
Less accumulated depreciation
and amortization 981,269 951,871
----------------- -------------------
$219,221 $244,714
================= ===================
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Microfield Graphics, Inc. (the "Company") develops, manufactures and markets
computer conferencing and telecommunications products to facilitate group
communications. The principal purpose of these products is to make meetings more
productive and cost effective by capturing ideas from all meeting members
(whether they are located locally or linked remotely through a computer and an
audio hookup) and making the information available to all of the linked systems,
where everyone involved can see and interact with the information produced and
presented. The Company's product lines incorporate a series of digital
whiteboards, interactive rear projection systems, and interactive plasma display
systems under the brand name SoftBoard, along with a variety of application
software packages, supplies and accessories. Information written or drawn on the
SoftBoard surface is recorded and displayed on a personal computer
simultaneously and in color using the Company's proprietary technology. The
information is recorded in a computer file that can be replayed, printed, faxed,
e-mailed or saved for future applications. Optional proprietary software allows
the information to be communicated in real time to remote computers over
standard telephone lines, networks and the Internet.
The Company was incorporated in Oregon in 1986. The Company's executive offices
are located at 16112 SW 72nd Avenue, Portland, OR 97224.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of sales, certain
consolidated statement of operations data relating to the SoftBoard Business for
the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
APRIL 1 APRIL 3
2000 1999
-------------- --------------
<S> <C> <C>
Sales 100 % 100 %
Cost of goods sold 61 64
-------------- --------------
Gross profit 39 36
Research and development expenses (6) (23)
Marketing and sales expenses (25) (46)
General and administrative expenses (24) (23)
-------------- --------------
Loss from operations (16) (56)
Other income (expense) (2) (1)
-------------- --------------
Loss before provision for income taxes (18) (57)
Provision for income taxes -- --
-------------- --------------
Net loss (18) % (57)%
============== ==============
</TABLE>
QUARTER ENDED APRIL 1, 2000 COMPARED WITH QUARTER ENDED APRIL 3, 1999
SALES. Sales decreased $212,000 (20%) to $841,000 in the first
quarter of 2000 from $1,053,000 in the first quarter of 1999. The decrease for
the quarter was due to, and consistent with, the Company's planned reduction
in expenses for advertising and sales promotion.
7
<PAGE>
GROSS PROFIT. Cost of goods sold includes the cost of raw materials
needed to assemble the products, assembly and preparation by vendors and
direct and indirect costs associated with the procurement, testing,
scheduling and quality assurance functions performed by the Company. The
Company's gross margin increased to 39% in the first quarter of 2000 from 36%
in the first quarter of 1999. The increase in gross margin during the first
quarter of 2000 was due primarily to lower manufacturing overhead expense
which resulted from the Company's restructuring efforts implemented in the
second quarter of 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. These expenses decreased $190,000 (78%) to $55,000 in the
first quarter of 2000 from $245,000 in the first quarter of 1999. The reduction
is due primarily to the restructuring the Company implemented in the second
quarter of 1999, which included significant reductions in development programs.
MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased
$269,000 (56%) to $212,000 in the first quarter of 2000 from $481,000 in the
first quarter of 1999. The decrease between quarters was due primarily to
lower costs associated with the current advertising program and decreased
participation in trade shows during the quarter.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $47,000 (19%) to $201,000 in the first quarter of 2000
from $248,000 in the first quarter of 1999. The decrease was due primarily to
restructuring efforts. General and administrative expenses remained
unchanged as a percentage of sales at 24% in the first quarter 2000 and 1999,
respectively.
OTHER INCOME (EXPENSE). Other income (expense) includes interest
income, interest expense, and miscellaneous income. Other expense, net
remained unchanged in the first quarter of 2000 from the first quarter of
1999 at ($15,000).
INCOME TAXES. The Company recorded losses from operations in the
first quarters of 2000 and 1999. Accordingly, no provision for income taxes,
was provided for in either of these periods.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures through public and private sales of equity securities, cash from
operations, and borrowings under bank lines of credit. At April 1, 2000 the
Company had working capital of approximately $(128,000) and its principal
source of liquidity consisted of $149,000 in cash and cash equivalents.
Accounts receivable increased $154,000 to $419,000 at April 1, 2000 from
$265,000 at January 1, 2000. This was due to increased sales in the first
quarter of 2000 compared to sales in the fourth quarter of 1999 and improved
account collection policies implemented as part of the restructuring and cost
reduction plan. Inventories decreased $59,000 to $438,000 at April 1, 2000
from $497,000 at January 1, 2000. This decrease was due primarily to the
lowering of inventory levels implemented as part of the restructuring and
cost reduction plan. Accounts payable increased $140,000 to $478,000 at
April 1, 2000 compared to $338,000 at January 1, 2000 as a result of the
implementation of more favorable payment terms with the Company's vendors.
The Company has a line of credit with its bank using its accounts receivable
and certain of its inventory as collateral. The Loan Agreement for the line
of credit expired on September 8, 1999, at which time $524,000 was
outstanding under the line of credit. The Company and the bank continued to
operate under the terms of the Loan Agreement until new terms were formalized
on October 25, 1999. At September 8, 1999 and at October 2, 1999, the Company
was not in compliance with the minimum tangible net worth financial covenant
of its Loan Agreement with the bank. On October 15, 1999, the bank delivered
a notice of default and the Company subsequently entered into a Forbearance
Agreement which provided for a
8
<PAGE>
reduction in the line of credit to $650,000, the elimination of inventory
from the collateral base over a 14 month period, an interest rate increase,
and certain financial covenants with which the Company was required to
comply. The Forbearance Agreement period ended April 30, 2000. On April 27,
2000 the Company entered into an Accounts Receivable Purchase Agreement with
its bank, which provides for financing in an amount equal to 80% of accounts
receivable up to a maximum of $750,000, interest of 3% per month on the
outstanding loan balance, repayment of the inventory portion of the
collateral base, and certain financial covenants with which the Company is
required to comply. The inventory portion of the collateral base is $190,000.
The Company is to submit a repayment plan, subject to the approval of the
Company's lender, no later than May 21, 2000 outlining Company's plan to
repay amounts advanced in excess of the 80%, including the inventory portion
of the collateral base. The Accounts Receivable Purchase Agreement extends
through July 31, 2000.
The Company believes its resources are sufficient to fund its operations
until August 2000 if the Accounts Receivable Purchase Agreement is not
terminated prior to that time. In the event that the Accounts Receivable
Purchase Agreement is not extended and the Company is unable to obtain
substitute financing at acceptable terms, the Company's business and
financial condition will be materially and adversely affected.
During 1999, the Company experienced significantly reduced sales and negative
cash flows from operations. The reduction was due primarily to the loss of sales
from Minnesota Mining and Manufacturing Company, a major OEM customer. At the
end of the second quarter of 1999, the Company concluded that it might not have
sufficient funds to operate for at least twelve months. Management based such
conclusions on the reduction in sales and resulting losses that occurred during
the first six months of 1999, coupled with diminishing cash resources (cash and
cash equivalents, and cash available under its operating line of credit). In
response, management restructured its operations through a combination of staff
reductions, workweek reductions, temporary executive salary reductions and
reductions in general expense spending levels. The company anticipates spending
levels to continue to decline moderately 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 on a continuing basis.
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 significant problems complying with the Year
2000 issues and have not been informed of any significant failures of our
products from customers. These problems, however, may not be discovered until
months after January 1, 2000.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During February 2000, the company was named in a class action lawsuit, ADAIR
-----
V. MICROFIELD GRAPHICS, INC. ET ANO., 00 Civ. 0629 (MBM), United States
- -----------------------------------
District Court Southern District of New York. The complaint alleges that the
Company and its Chief Executive Officer issued a series of false and
misleading statements concerning, among other things, the Company's purchase
agreement with 3M. The complaint alleges that, as a result of these
allegedly material misstatements and omissions, the Company's stock price was
artificially inflated during the period from July 23, 1998 through April 2,
1999 and requests that damages be determined at trial. The Company denies
the allegations and intends to vigorously defend itself. However, the
ultimate outcome of the litigation is presently undeterminable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit filed as part of this report is listed below:
EXHIBIT NO.
-----------
27 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
April 1, 2000.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act
of 1934, the issuer caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 16, 2000
MICROFIELD GRAPHICS, INC.
By: /s/ JOHN B. CONROY
---------------------------------
John B. Conroy
Chief Executive Officer
(Principal Executive and Financial Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S FORM 10-QSB FOR THE
THREE MONTH PERIOD ENDED APRIL 1, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> APR-01-2000
<CASH> 149
<SECURITIES> 0
<RECEIVABLES> 431
<ALLOWANCES> 12
<INVENTORY> 438
<CURRENT-ASSETS> 1,176
<PP&E> 1,200
<DEPRECIATION> 981
<TOTAL-ASSETS> 1,423
<CURRENT-LIABILITIES> 1,304
<BONDS> 0
0
0
<COMMON> 15,274
<OTHER-SE> (15,168)
<TOTAL-LIABILITY-AND-EQUITY> 1,423
<SALES> 841
<TOTAL-REVENUES> 841
<CGS> 513
<TOTAL-COSTS> 467
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> (155)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (155)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
