-----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, REFzhQ/cxTuK5eRzW2NLWYNYjG4gS7UVntKLTunP8mLC8b713UkVRSefhX0hV53B ezqmbJPPOXojjGtzy6m8AQ== 0000912057-00-018448.txt : 20000418 0000912057-00-018448.hdr.sgml : 20000418 ACCESSION NUMBER: 0000912057-00-018448 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000417 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: 10-K SEC ACT: SEC FILE NUMBER: 000-26226 FILM NUMBER: 603425 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 10-K 1 10-K 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. MICROFIELD GRAPHICS, INC. FORM 10-KSB INDEX PART I
Page 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
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. 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. 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. 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. 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. 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.
LOW HIGH --- ---- 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
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. 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. 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. FISCAL FISCAL 1999 1998 ------ ------ 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)% ---- ---- ---- ----
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. 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. 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: Microfield Graphics, Inc.: Page 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
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. 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: NAME AGE CURRENT POSITION(S) WITH COMPANY - ------------------------------------------------------------------------------------------------- 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
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 $100,000 (collectively, the "named officers") for fiscal years 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION AWARDS ANNUAL COMPENSATION ---------------- ----------------------------------------- SECURITIES UNDERLYING ALL OTHER FISCAL OPTIONS COMPENSATION YEAR SALARY($) BONUS($) (#) ($)(1) ------- ------------------ -------------- ---------------- --------------- 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
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. (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. COMMON STOCK - ---------------------------------------------------------- ---------------------------------------- FIVE PERCENT SHAREHOLDERS, DIRECTORS, DIRECTOR SHARES APPROXIMATE NOMINEES AND CERTAIN EXECUTIVE BENEFICIALLY PERCENTAGE OFFICERS OWNED (1) OWNED - ---------------------------------------------------------- ---------------------------------------- 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) - ------------------------
*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. (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. *****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. /s/ WILLIAM P. CARGILE Director - ---------------------- Date: April 10, 2000 William P. Cargile MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) CONSOLIDATED FINANCIAL STATEMENTS JANUARY 1, 2000 AND JANUARY 2, 1999 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 CONSOLIDATED BALANCE SHEETS JANUARY 1, 2000 AND JANUARY 2, 1999
1999 1998 ASSETS 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 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-2 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 1, 2000 AND JANUARY 2, 1999
1999 1998 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 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JANUARY 1, 2000 AND JANUARY 2, 1999
COMMON STOCK ----------------------------- ACCUMULATED SHARES AMOUNT DEFICIT ----------- --------------- ---------------- 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) =========== =============== ================
The accompanying notes are an integral part of these consolidated financial statements. F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JANUARY 1, 2000 AND JANUARY 2, 1999
1999 1998 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 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 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 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 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:
JANUARY 1, JANUARY 2, 2000 1999 ---------- ---------- Raw materials $ 368,498 $ 607,140 Finished goods 128,198 338,963 ---------- ---------- $ 496,696 $ 946,103 ========== ==========
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
JANUARY 1 JANUARY 2, 2000 1999 ---------- ---------- Furniture, machinery and equipment $1,196,585 $1,223,014 Less accumulated depreciation and amortization 951,871 843,557 ---------- ---------- $ 244,714 $ 379,457 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-8 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 6. DEBT (CONTINUED) The Company's long-term debt consists of the following:
JANUARY 1, JANUARY 2, 2000 1999 ----------- ----------- 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 ========= =========
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:
JANUARY 1, JANUARY 2, 2000 1999 ----------- ----------- 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 $ - $ - =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-10 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 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:
JANUARY 1, 2000 JANUARY 2, 1999 ------------------------- ------------------------ WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE PERFORMANCE OPTIONS SHARES PRICE SHARES PRICE ------------------------------ ------------ ------------ ----------- ----------- 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 ============ ===========
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:
1999 1998 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%
The accompanying notes are an integral part of these consolidated financial statements. F-12 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:
1999 1998 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)
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 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:
1999 1998 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 ============ ============
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 EX-10.12 2 EX-10.12 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. 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. 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 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. 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. 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. 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. 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. 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. 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 ----------- 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: ------------------------------------------ Title: ---------------------------------------- Address for Legal Notices to Tenant: ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- Address for Invoices to Tenant: ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- Tenant Employer Identification Number: ----------------------------------------------- EX-10.13 3 EX-10.13 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 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 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 ------------------------ EX-23 4 EX-23 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 EX-27 5 EXHIBIT 27
5 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. 1,000 YEAR JAN-01-2000 JAN-02-1999 JAN-01-2000 113 0 266 27 497 996 245 280 1,318 992 0 0 0 15,274 (15,001) 1,318 3,492 3,492 2,258 2,258 3,157 0 69 (2,030) 0 0 0 0 0 (2,030) (.50) (.50)
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