-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, He1QGpXFva4wKjOx5r4A3O7e1drNEtHUPBICbTI9gtdA3ibXjKV2t0j34zZTRvRL 1cotCa2ucIjBRxWXCkrjRA== 0000912057-00-011848.txt : 20000317 0000912057-00-011848.hdr.sgml : 20000317 ACCESSION NUMBER: 0000912057-00-011848 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 20000316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROFIELD GRAPHICS INC /OR CENTRAL INDEX KEY: 0000944947 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 930935149 STATE OF INCORPORATION: OR FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-26226 FILM NUMBER: 571047 BUSINESS ADDRESS: STREET 1: 9216 SW DURHAM RD CITY: PORTLAND STATE: OR ZIP: 97224 BUSINESS PHONE: 5036204000 MAIL ADDRESS: STREET 1: MICRFIELD GRAPHICS INC /OR STREET 2: 9216 SW DURHAM RD CITY: PORTLAND STATE: OR ZIP: 97224 10KSB/A 1 FORM 10SB/A U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 1O-KSB AMENDMENT NO. 1 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January, 2 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number : 0-26226 MICROFIELD GRAPHICS, INC. (Name of small business issuer in its charter) OREGON 93-0935149 (State or other jurisdiction (I. R. S. Employer of incorporation or organization) Identification No.) 7216 SW DURHAM ROAD PORTLAND, OREGON 97224 (Address of principal executive offices and zip code) (503) 620-4000 (Issuer's telephone number) SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year were $ 6,646,000. The aggregate market value of voting stock held by non-affiliates of the registrant at February 28, 1999 was $7,604,231, computed by reference to the average bid and asked prices as reported on the Nasdaq SmallCap Market. The number of shares outstanding of the Registrant's Common Stock as of February 28, 1999 was 3,686,900 shares. The index to exhibits appears on page 15 of this document. DOCUMENTS INCORPORATED BY REFERENCE The issuer has incorporated into Part III of Form 10-KSB, by reference, portions of its Proxy Statement dated April 19, 1999. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] MICROFIELD GRAPHICS, INC. FORM 10-KSB INDEX PART I
Page Item 7. Financial Statements 14 (Amended to add second paragraph to Report of Independent Accountants and Footnote 12 to the financial statements.)
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: March 15, 2000 MICROFIELD GRAPHICS, INC. By: /s/ JOHN B. CONROY ----------------------- John B. Conroy Chairman of the Board, President, and Chief Executive Officer REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Microfield Graphics, Inc. (d.b.a. Softboard) In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Microfield Graphics, Inc. (d.b.a. Softboard) and its subsidiary at January 2, 1999 and January 3, 1998 and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As more fully described in Note 12, the Company during 1999 experienced reduced sales and negative cash flows from operations. Further, the Company's bank has declared an event of default and entered into a Forbearance Agreement relating to the Company's existing Loan Agreement. Accordingly, the Company has concluded that it might not have resources sufficient to sustain its operations over the next twelve months unless it can obtain continued and adequate financing on acceptable terms. Management's plans with respect to these uncertainties are also discussed in Note 12. PricewaterhouseCoopers LLP Portland, Oregon January 29, 1999, except for Note 11, which is as of March 26, 1999, and except for Note 12, which is as of February 6, 2000. F-1 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) CONSOLIDATED BALANCE SHEET JANUARY 2, 1999 AND JANUARY 3, 1998 - -------------------------------------------------------------------------------
1998 1997 ASSETS Current assets: Cash and cash equivalents $ 739,628 $ 909,184 Accounts receivable, net (Note 3) 797,543 1,027,902 Inventories (Note 4) 946,103 712,000 Prepaid expenses and other 156,627 216,427 ------------- ------------- Total current assets 2,639,901 2,865,513 Property and equipment, net (Note 5) 379,457 384,251 Other assets 226,140 72,444 ------------- ------------- $ 3,245,498 $ 3,322,208 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit (Note 6 and Note 12) $ 655,000 $ 1,000,000 Current portion of long-term debt (Note 6) 83,333 83,333 Accounts payable 532,308 606,556 Accrued payroll and payroll taxes 255,698 193,757 Unearned income 56,101 53,745 Other accrued liabilities 186,403 164,483 ------------- ------------- Total current liabilities 1,768,843 2,101,874 Long-term debt, net of current portion (Note 6 and Note 12) 6,945 90,278 Other long-term liabilities 77,220 -- ------------- ------------- Total liabilities 1,853,008 2,192,152 ------------- ------------- Commitments and contingencies (Note 8) Shareholders' equity (Notes 9 and 11): Common stock, 25,000,000 shares authorized, 3,686,775 and 3,211,813 shares issued and outstanding, respectively 14,362,698 12,185,527 Accumulated deficit (12,970,208) (11,055,471) ------------- ------------- Total shareholders' equity 1,392,490 1,130,056 ------------- ------------- $ 3,245,498 $ 3,322,208 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-2 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 2, 1999 AND JANUARY 3, 1998 - -------------------------------------------------------------------------------
1998 1997 Net sales (Note 10) $ 6,646,148 $ 5,618,330 Cost of goods sold 3,893,541 3,140,988 ------------ ------------ Gross profit 2,752,607 2,477,342 ------------ ------------ Operating expenses: Research and development 997,929 959,680 Marketing and sales 2,657,581 2,821,232 General and administrative 960,498 945,764 ------------ ------------ 4,616,008 4,726,676 ------------ ------------ Loss from operations (1,863,401) (2,249,334) Other income: Interest expense, net (50,176) (23,142) Other income 346 4,750 ------------ ------------ Loss before income taxes (1,913,231) (2,267,726) Provision for income taxes (Note 7) (1,506) (2,317) ------------ ------------ Net loss $(1,914,737) $(2,270,043) ------------ ------------ ------------ ------------ Basic and diluted net loss per share $ (.54) $ (.71) ------------ ------------ ------------ ------------ Shares used in calculation 3,552,706 3,198,062 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED JANUARY 2, 1999 AND JANUARY 3, 1998 - -------------------------------------------------------------------------------
COMMON STOCK ACCUMULATED SHARES AMOUNT DEFICIT ----------- ------------- -------------- Balance at December 28, 1996 3,195,575 $ 12,152,781 $ (8,785,428) Stock options exercised 11,438 17,146 - Issuance of common stock 4,800 15,600 - Net loss - - (2,270,043) ----------- ------------- -------------- Balance at January 3, 1998 3,211,813 $ 12,185,527 $(11,055,471) Stock options exercised 124,962 187,643 - Issuance of common stock and warrants, net of related expenses 350,000 1,989,528 - Net loss - - (1,914,737) ----------- ------------- -------------- ----------- ------------- -------------- Balance at January 2, 1999 3,686,775 $ 14,362,698 $(12,970,208) ----------- ------------- -------------- ----------- ------------- --------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 2, 1999 AND JANUARY 3, 1998 - -------------------------------------------------------------------------------
1998 1997 Cash flows from operating activities: Net loss $(1,914,737) $(2,270,043) Adjustments to reconcile loss from continuing operations to operating cash flows: Depreciation and amortization 209,990 255,174 Issuance of common stock for compensation - 15,600 Changes in assets and liabilities: Accounts receivable 230,359 (250,095) Inventories (234,103) 285,693 Prepaid expenses and other (34,692) 32,448 Accounts payable (74,248) 207,545 Accrued payroll and payroll taxes 61,941 (15,940) Unearned income 2,356 (7,058) Other accrued liabilities 99,140 (18,937) ------------ ------------ Net cash used in operating activities (1,653,994) (1,765,613) ------------ ------------ Cash flows from investing activities: Acquisition of property and equipment, net (185,650) (78,856) Loan to employee (78,750) - Purchases of patents and other - (3,467) ------------ ------------ Net cash used in investing activities (264,400) (82,323) ------------ ------------ Cash flows from financing activities: Net borrowings (payments) under line of credit and term loan agreement (345,000) 923,611 Net payments on capital lease obligation (83,333) (51,493) Proceeds from exercise of common stock options 187,643 17,146 Proceeds from issuance of common stock 1,989,528 - ------------ ------------ Net cash provided by financing activities 1,748,838 889,264 ------------ ------------ Net decrease in cash and cash equivalents (169,556) (958,672) Cash and cash equivalents, beginning of year 909,184 1,867,856 ------------ ------------ Cash and cash equivalents, end of year $ 739,628 $ 909,184 ------------ ------------ ------------ ------------ Cash paid for: Interest $ 94,804 $ 69,970 ------------ ------------ ------------ ------------ Income taxes $ 1,506 $ 2,317 ------------ ------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART of THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 2, 1999 AND JANUARY 3, 1998 - ------------------------------------------------------------------------------- 1. THE COMPANY AND BASIS OF PRESENTATION Microfield Graphics, Inc., an Oregon corporation incorporated in October 1986, develops, manufactures and markets computer conferencing and telecommunications products to facilitate group communications. The Company's product lines incorporate a series of digital whiteboards, digital whiteboard rear projection systems and interactive plasma display systems under the brand name SoftBoard, along with a variety of application software packages, supplies and accessories. Information written or drawn on the SoftBoard surface is recorded and displayed on a personal computer simultaneously and in color using the Company's proprietary technology. The Company has a wholly owned foreign sales corporation in Barbados. Hereafter in these consolidated financial statements, the term "Company" refers to Microfield Graphics, Inc. and its subsidiary. The Company's primary market is in the United States; however, there are export sales to France, the United Kingdom, Japan and other countries. (See export sales in Note 10). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The Company operates on a 52-53 week fiscal year ending on the Saturday closest to the last day of December. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Microfield and its wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation. CONSOLIDATED STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. During the year ended January 3, 1998, the Company issued common stock to resellers and employees, with a fair market value of $15,600. ACCOUNTS RECEIVABLE Accounts receivable at January 2, 1999 and January 3, 1998 are recorded net of allowances for uncollectible accounts of $44,553 and $34,553, respectively. INVENTORIES Inventories are stated at the lower of standard cost or market value. Standard costs approximate the first-in, first-out method. Inventory costs include raw materials, direct labor and allocated overhead. F-6 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 2, 1999 AND JANUARY 3, 1998 - ------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated using accelerated methods over their estimated useful lives of five years. Repairs and maintenance are charged to expense as incurred; improvements are capitalized. When the Company sells or disposes of assets, the accounts are relieved of the related costs and accumulated depreciation and resulting gains and losses are reflected in operations. RESEARCH AND DEVELOPMENT Research and development expenditures are charged to operations as incurred. REVENUE RECOGNITION Revenue is recognized upon shipment of products. Revenue on warranty contracts is recognized over the life of the contract. INCOME TAXES The Company accounts for income taxes using the asset and liability approach. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in operations in the period that includes the enactment date. BASIC AND DILUTED NET LOSS PER SHARE The Company adopted SFAS No. 128, "Earnings Per Share," during the year ended January 3, 1998. SFAS No. 128 requires disclosure of basic and diluted earnings (loss) per share. Basic earnings (loss) per share are computed based on the weighted average number of common shares outstanding each year. Diluted net loss per share is the same as basic net loss per share because the potential effect of the conversion of any outstanding stock options is anti-dilutive. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded amounts of cash and cash equivalents, accounts receivable, accounts payable, line of credit and accrued liabilities as presented in the consolidated financial statements approximate fair value because of the short-term maturity of these instruments. The recorded amount of capital lease obligations and long-term debt approximates fair value since the imputed interest or stated interest approximates currently competitive rates. F-7 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 2, 1999 AND JANUARY 3, 1998 - ------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME (LOSS) Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), defines comprehensive income (loss) as the changes in equity of a business enterprise during a period that result from transactions and other economic events and circumstances from non-shareholder sources. Since the Company's only component of comprehensive income (loss) is net loss, SFAS 130 imposes no additional reporting requirements on the Company. 3. CONCENTRATION OF CREDIT RISK During the year ended January 2, 1999 one customer accounted for approximately 38% of net sales. During the year ended January 3, 1998 no customer accounted for greater than 10% of net sales. Accounts receivable from one customer totaled approximately $210,443 at January 2, 1999, while accounts receivable from another customer totaled $277,500 at January 3, 1998. 4. INVENTORIES Inventories consist of the following:
January 2, January 3, 1999 1998 ----------- ----------- Raw materials $ 607,140 $ 515,122 Finished goods 338,963 196,878 ----------- ----------- $ 946,103 $ 712,000 ----------- ----------- ----------- -----------
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
JANUARY 2, JANUARY 3, 1999 1998 ----------- ----------- Furniture, machinery and equipment $ 986,857 $ 805,905 Capitalized leased assets 236,157 236,157 ----------- ----------- 1,223,014 1,042,062 Less accumulated depreciation and amortization 843,557 657,811 ----------- ----------- $ 379,457 $ 384,251 ----------- ----------- ----------- -----------
Accumulated amortization of capitalized leased assets aggregated $236,157 at January 2, 1999 and January 3, 1998. Such amounts are included in the above schedule. F-8 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 2, 1999 AND JANUARY 3, 1998 - ------------------------------------------------------------------------------- 6. DEBT At January 2, 1999, the Company had a $2,000,000 line of credit, which expires in September 1999. Borrowings under the line of credit are due on demand, bear interest payable monthly at prime (7.75% at January 2, 1999), and are collateralized by inventories and accounts receivable. As of January 2, 1999, borrowings of $655,000 were outstanding under the line. Pursuant to the line of credit agreement, the Company is required to comply with certain financial covenants, including ratios and minimum net worth. At January 2, 1999, the Company was in violation of its covenants with respect to its quick ratio and minimum net worth. These covenants have been waived by the bank. See Note 12. The Company's long-term debt consists of the following:
JANUARY 2, JANUARY 3, 1999 1998 Term loan payable to bank in monthly installments of $7,988, including interest at the prime rate plus .5% (8.25% at January 2, 1999), from February 1997 through January 2000; all assets purchased with the proceeds of this loan are pledged as collateral $ 90,278 $ 173,611 Less principal amounts due within one year (83,333) (83,333) -------------- ----------- Long-term debt $ 6,945 $ 90,278 -------------- -----------
Remaining maturities on long-term debt are summarized as follows:
FISCAL YEAR ----------- 1999 $ 83,333 2000 6,945 ----------- $ 90,278 -----------
7. INCOME TAXES The provision for income taxes of $1,506 and $2,317 for fiscal years 1998 and 1997, respectively, consists of minimum payments due and paid to various state tax authorities. The provision for income taxes for the years ended January 2, 1999 and January 3, 1998 differs from the amount which would be expected as a result of applying the statutory tax rates to the losses before income taxes due primarily to changes in the valuation allowance to fully reserve net deferred tax assets. F-9 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 2, 1999 AND JANUARY 3, 1998 - ------------------------------------------------------------------------------- 7. INCOME TAXES (CONTINUED) Deferred tax assets are comprised of the following components:
JANUARY 2, JANUARY 3, 1999 1998 ------------ ------------ Current: Allowances for uncollectible accounts $ 18,560 $ 13,255 Employee benefits 31,125 35,453 Inventory basis differences 689 738 Inventory, warranty, and other allowances 58,577 55,955 Unearned revenues 21,520 20,617 ------------ ------------ 130,471 126,018 ------------ ------------ Non-current: Intangible assets 15,368 9,678 Net operating loss carryforwards 4,702,432 3,946,873 Research and development credits 272,471 290,820 ------------ ------------ 4,990,271 4,247,371 ------------ ------------ Total deferred tax asset 5,120,742 4,373,389 Deferred tax asset valuation allowance (5,120,742) (4,373,389) ------------ ------------ Net deferred tax assets $ - $ - ------------ ------------ ------------ ------------
At January 2, 1999, the Company had available net operating loss carryforwards of approximately $12,148,702 for federal income tax purposes. Such carryforwards may be used to reduce consolidated taxable income, if any, in future years through their expiration in 2003 to 2012. Utilization of net operating loss carryforwards may be limited due to the ownership changes resulting from the Company's initial public offering in 1995. In addition, the Company has research and development credits aggregating $272,471 for income tax purposes at January 2, 1999. Such credits may be used to reduce taxes payable, if any, in future years through their expiration in 2001 to 2012. F-10 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 2, 1999 AND JANUARY 3, 1998 - ------------------------------------------------------------------------------- 8. LEASE COMMITMENTS AND CONTINGENCIES The Company leases office space under operating leases which require future minimum lease commitments through July 2003 as follows:
FISCAL YEAR ----------- 1999 $ 292,272 2000 292,272 2001 306,882 2002 321,492 2003 106,746 ------------ Total minimum payments required $ 1,319,664 ------------ ------------
Rent expense totaled $355,246 and $345,125 for fiscal years ended 1998 and 1997, respectively. A former temporary leased employee filed a complaint in federal district court alleging gender discrimination and harassment in addition to a state wrongful constructive discharge claim. The plaintiff has alleged emotional distress, economic loss and punitive damages totaling $1.4 million. No members of the Company's management were named in the suit. The Company believes the complaints are without merit and intends to defend these actions vigorously. 9. SHAREHOLDERS' EQUITY INCENTIVE STOCK OPTION PLAN The Company has Stock Option Plans (the "Plans"). At January 2, 1999 and January 3, 1998, 1,005,162 and 1,005,228 shares of common stock were reserved for issuance to employees, officers, directors and consultants. Under the Plans, the options may be granted to purchase shares of the Company's common stock at fair market value, as determined by the Company's Board of Directors, at the date of grant. The options are exercisable over a period of up to five years from the date of grant. The options become exercisable over four years. See Note 12. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," in 1996. SFAS No. 123 allows companies to choose whether to account for stock-based compensation on a fair value method or to continue to account for stock-based compensation under the current intrinsic value method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue to follow the provisions of APB Opinion No. 25. F-11 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 2, 1999 AND JANUARY 3, 1998 - ------------------------------------------------------------------------------- 9. SHAREHOLDERS' EQUITY (CONTINUED) A summary of the status of the Company's Stock Option Plans as of January 2, 1999 and January 3, 1998 and for the years then ended is presented below:
January 2,1999 January 3, 1998 ---------------------------- --------------------------- Weighted Weighted average average exercise exercise Performance options Shares price Shares price - ------------------------------------ ------------ ----------- ----------- -------------- Outstanding at beginning of year 402,868 $ 3.69 289,334 $ 4.54 Granted 212,500 4.04 195,200 1.58 Exercised (124,962) 1.50 (11,438) 1.47 Forfeited (47,993) 2.07 (70,228) 1.67 ----------- ---------- 442,413 402,868 ----------- ---------- ----------- ---------- Options exercisable at year-end 144,046 160,062 ----------- ---------- ----------- ----------
Number of options Weighted ----------------------------- average contractual Exercise price Outstanding Exercisable life remaining ------------------------------- ------------- ------------- --------------------- $1.06-1.75 201,399 117,843 2.6 years $2.22-4.06 241,014 26,203 4.3 years ------------- ------------- 442,413 144,046 ------------- -------------
The Company has computed for pro forma disclosure purposes the value of all options and warrants granted during 1998 and 1997 using the Black-Scholes pricing model as prescribed by SFAS 123 and the following assumptions used for grants:
1998 1997 -------------- -------------- Risk-free interest rate 4.31% 6.38% Expected dividend yield 0% 0% Expected lives 4.5 years 4.5 years Expected volatility 102% 60%
Adjustments are made for options forfeited prior to vesting. Had compensation cost for the Company's Plans been determined based on the fair value at the grant dates consistent with the method of SFAS 123, the total value of options and warrants granted would be computed as follows: Year ended January 2, 1999 $ 642,370 Year ended January 3, 1998 372,889
F-12 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 2, 1999 AND JANUARY 3, 1998 - ------------------------------------------------------------------------------- 9. SHAREHOLDERS' EQUITY (CONTINUED) Such amounts would be amortized over the vesting period of the options. Accordingly, under SFAS 123, the Company's net loss and loss per share would have been changed to the pro forma amounts indicated below:
1998 1997 ------------ -------------- Net Loss As reported $(1,914,737) $ (2,270,043) Pro Forma (2,243,091) (2,511,565) Basic and diluted net loss per share As reported (.54) (.71) Pro Forma (.63) (.79)
The effects of applying SFAS 123 for providing pro forma disclosures for 1998 and 1997 are not likely to be representative of the effects on reported net loss and net loss per share for future years, because options vest over several years and additional awards generally are made each year. COMMON STOCK WARRANTS In connection with its initial public offering in 1995, the Company issued 110,000 warrants to purchase shares of common stock at an exercise price of $7.20 per share; such warrants expire in 2000. In addition, in connection with the common stock purchase agreement on March 16, 1998 the Company issued 260,000 warrants to purchase shares of common stock at an exercise price of $6.75 per share. Such warrants may be exercised beginning March 1999 and expire in March 2001. 10. EXPORT SALES Export sales aggregated $1,822,000 and $981,000 in 1998 and 1997, respectively. Such export sales were made to customers in the following countries:
YEAR ENDED JANUARY 2, JANUARY 3, 1999 1998 -------------- -------------- Japan $ 114,000 $ 239,000 United Kingdom 520,000 306,000 France 854,000 - Other 334,000 436,000 -------------- -------------- $ 1,822,000 $ 981,000 -------------- -------------- -------------- --------------
F-13 MICROFIELD GRAPHICS, INC. (D.B.A. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 2, 1999 AND JANUARY 3, 1998 - ------------------------------------------------------------------------------- 11. SUBSEQUENT EVENTS On March 26, 1999, the Company signed a common stock purchase agreement with Steelcase Corporation ("Steelcase") under which Steelcase purchased 444,445 shares of the Company's common stock for $1,000,001 ($2.25 per share) in cash. 12. SUBSEQUENT EVENTS During 1999, the Company experienced significantly reduced sales and negative cash flows from operations. 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 conclusion 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 Company during 1999 was not in compliance with the minimum tangible net worth financial covenant of its Loan Agreement with its bank. As a result, the bank on October 15, 1999 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 comply. The Forbearance Agreement period is through April 30, 2000. The balance outstanding under the line of credit agreement aggregates $354,000 at January 1, 2000. 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. Effective December 20, 1999, the Company repriced all of its outstanding stock options. As a result, the exercise price for all outstanding options was reduced to $.22 per share of common stock. 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 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. The Company denies the allegations and intends to vigorously defend itself. However, the ultimate outcome of the litigation is presently undeterminable. F-14 EX-23 2 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-97544) of Microfield Graphics, Inc. of our report dated January 29, 1999, except for Note 11, which is as of March 26, 1999 and except for Note 12, which is as of February 6, 2000, relating to the financial statements which appear in this Form 10-KSBA. PricewaterhouseCoopers LLP Portland, Oregon March 10, 2000 -----END PRIVACY-ENHANCED MESSAGE-----