-----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, TFYceWp3Qz1sCjoVv4wZGBstphNWIWyMb6buP3+fajvdHH1WbYWbxZgHaIgm6L5y +5k9ax40+zCSGBQwsEcQoA== 0001047469-98-010433.txt : 19980319 0001047469-98-010433.hdr.sgml : 19980319 ACCESSION NUMBER: 0001047469-98-010433 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980318 SROS: NASD 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: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-26226 FILM NUMBER: 98568574 BUSINESS ADDRESS: STREET 1: 9216 SW DURHAM RD CITY: PORTLAND STATE: OR ZIP: 97224 BUSINESS PHONE: 5036204000 MAIL ADDRESS: STREET 1: MICRFIELD GRAPHICS INC /OR STREET 2: 9216 SW DURHAM RD CITY: PORTLAND STATE: OR ZIP: 97224 10KSB 1 10KSB 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, 3 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number : 0-26226 MICROFIELD GRAPHICS, INC. (Name of small business issuer in its charter) OREGON 93-0935149 (State or other jurisdiction (I. R. S. Employer of incorporation or organization) Identification No.) 7216 SW DURHAM ROAD PORTLAND, OREGON 97224 (Address of principal executive offices and zip code) (503) 620-4000 (Issuer's telephone number) SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year were $ 5,618,330. The aggregate market value of voting stock held by non-affiliates of the registrant at February 28, 1998 was $16,887,906, computed by reference to the average bid and asked prices as reported on the Nasdaq SmallCap Market. The number of shares outstanding of the Registrants Common Stock as of February 28, 1998 was 3,228,944 shares. The index to exhibits appears on page 15 of this document. DOCUMENTS INCORPORATED BY REFERENCE The issuer has incorporated into Part III of Form 10-KSB, by reference, portions of its Proxy Statement dated April 1, 1998. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] MICROFIELD GRAPHICS, INC. FORM 10-KSB INDEX PART I Page ---- Item 1. Description of Business 3 Item 2. Description of Property 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 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 9 Item 7. Financial Statements 14 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 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 15 Item 11. Security Ownership of Certain Beneficial Owners and Management 15 Item 12. Certain Relationships and Related Transactions 15 Item 13. Exhibits and Reports on Form 8-K 16 2 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 and digital whiteboard rear projection 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 7216 SW Durham Road, Portland, OR 97224. PRODUCTS The Company produces three Series 200 SoftBoard models: a wall-mounted SoftBoard (Model 201), a mobile SoftBoard on casters (Model 203) and a smaller SoftBoard designed for personal offices or cubicles (Model 205). 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 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 System 400 product integrates a SoftBoard into a rear-projection system. In this application the porcelain-on-steel SoftBoard writing surface is replaced with a translucent writing surface. Inside this self contained-unit an LCD projector projects the output of a connected PC onto the rear surface 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 back up 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 computer screen allowing a user to combine information already in a computer file with new information created during a collaborative session. This can be accomplished with a computer hooked up directly in the room, with a computer somewhere else on the network, or over the Internet with one or more remote sites. The System 400 enhances both single-site and multiple-site meetings due to the interactivity of the rear-projection system. The 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 System 300 product is aimed at the market that wants the interactivity that the SoftBoard input technology offers, in the customer's rear projection application. The System 300 is a Model 201 SoftBoard with a translucent writing surface in place of a porcelain writing surface. Typically, the customer has a dedicated room outfitted with a very high end, very high resolution projector. The System 300 is either built into a false wall, behind which the projector is placed, or is designed into a custom built cabinet that also houses the projector. The System 300 is then used in the same manner as the System 400. 3 Both the System 300 and System 400 products allow a roomful of people to be involved in a group working session where remote collaboration is needed and a computer is running Windows and any Windows conferencing applications such as ProShare, NetMeeting, and Netscape Collaborator. The comparative features of the Company's SoftBoard models are set forth below.
SOFTBOARD WRITING MODEL SURFACE SIZE MSRP FEATURES - --------------------------------------------------------------------------------------------------------------------- 201 40.5 x 54 inches $3,295 Wall-mounted SoftBoard; large writing area for presentations and meetings - --------------------------------------------------------------------------------------------------------------------- 203 35 x 47 inches $3,995 Mobile SoftBoard; includes storage shelf for computer equipment - --------------------------------------------------------------------------------------------------------------------- 205 24 x 25.5 inches $2,795 Personal SoftBoard for use in an office or cubicle environment; excellent for meeting preparation or private brainstorming - --------------------------------------------------------------------------------------------------------------------- 423 35 x 47 inches $23,900 Self-enclosed rear-projection system consisting of SoftBoard rear projection screen, Super VGA resolution projector, Digital Signal Processing (DSP) unit, active pen, Infra-Red (IR) electronics for the pen, and software - --------------------------------------------------------------------------------------------------------------------- 443 35 x 47 inches $29,400 Self-enclosed rear-projection system consisting of SoftBoard rear projection screen, XGA resolution projector, DSP unit, active pen, IR electronics for the pen, and software - --------------------------------------------------------------------------------------------------------------------- 301 40.5x 54 inches $6,890 Rear-projection systems with choice of mounting options, include SoftBoard frame, rear projection screen DSP 303 35 x 47 inches $6,490 unit, active pen, IR electronics for the pen and software; require a projector, enclosure and mounting. - ---------------------------------------------------------------------------------------------------------------------
Features of the Company's optional software are set forth below.
SOFTWARE MSRP FEATURES - --------------------------------------------------------------------------------------------------------------------- SBRecord System software included Provides the basic operating system software for with the purchase of a SoftBoard the SoftBoard and its communication with the attached personal computer - --------------------------------------------------------------------------------------------------------------------- SBRemote $145 per site Provides connection with a PC/SoftBoard at a remote site via modem, network or video telecommunication process - --------------------------------------------------------------------------------------------------------------------- Advanced Softkeys $129 Allows control of PC functions directly from the SoftBoard surface, i.e. print, replay and record - --------------------------------------------------------------------------------------------------------------------- SBProjection $350 Converts SoftBoard to a front projection, interactive display using any LCD projector - --------------------------------------------------------------------------------------------------------------------- SBTemplate $350 Adapts manual status board formats to SoftBoard, recording dynamic information changes on a "fill in the blank" basis and communicates to remote sites via SBRemote
The pens and erasers used with SoftBoard are available directly from the Company and from resellers. 4 SoftBoards are used by businesses, schools and governmental agencies for meetings, training and work group development sessions, to augment traditional audio and video conferencing sessions with graphics and interactivity, and for scheduling and status updates. PRODUCT DEVELOPMENT During 1997, the Company's engineering efforts were focused in three main product development areas. In July 1997, the Company announced the signing of a general purchase and development agreement with Minnesota Mining and Manufacturing Company (3M). Under the terms of that agreement, 3M paid the Company to develop, for 3M, specialized versions of the SoftBoard Series 200 product line. A substantial percentage of the time on the project was spent in developing a customized version of the SoftBoard operating software based on 3M's specifications. SEE MARKETING, SALES AND DISTRIBUTION. Also in 1997, the Company began development of an additional line of SoftBoard products. These new products will incorporate new proprietary technology that will enhance the functionality and usability of SoftBoard products. The addition of these new products will expand the Series 200 product line to include products of new dimensions to be used in a variety of applications. Other development efforts in 1997 included hardware and software that will provide further simplifications to the installation and usage of SoftBoard hardware and software products. These enhancements will increase the local productivity of existing customers, be attractive for a wider range of casual, walk-in conference room training applications, and take advantage of rapid external developments in the area of computer-aided remote conferencing. The Company intends to continue to enhance and add features to its family of proprietary software products that will provide an upgrade path for all existing customers. The Company expended approximately $1.0 million and $1.3 million in research and development costs in fiscal years 1997 and 1996, respectively. SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITEM 7. MARKETING, SALES AND DISTRIBUTION The Company markets its SoftBoard products to resellers, OEMs and directly to end users in the United States and to distributors and resellers outside the United States. The Company's Vice President, Sales oversees the resellers, OEM accounts and end user accounts. The Company's Director of International Sales manages the international distributors and resellers. The Company sells SoftBoards directly to end users through a telemarketing and telesales group at its Portland, Oregon offices. In July 1997, the Company entered into a two-year general purchase and development agreement with 3M through which 3M will market, on a global basis, advanced versions of the Company's SoftBoard products under the 3M brand name. Initial shipments to 3M began in the fourth quarter of 1997, with volume shipments scheduled to begin in the first quarter of 1998. Minimum shipments to 3M under the contract are for 1400 units over the first five months of the contract. SEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATIONS. In November 1994, the Company entered into an exclusive distributorship arrangement with Sord Computer Corporation ("SORD"), a subsidiary of Toshiba Corporation, to market SoftBoards in Japan. In 1997 and 1996, approximately 4% and 25%, respectively, of the Company's sales were attributable to SORD. The Company's agreement with SORD for exclusive distribution of SoftBoard products in Japan, expired in June of 1997. The 5 Company has no current agreement with SORD to purchase product and no assurance SORD will purchase significant quantities of SoftBoard products in the future. As with any large OEM or distributor relationship, order rates may be subject to quarterly fluctuations as demand builds and inventories are adjusted. The decrease in sales to SORD in 1997 has had an adverse effect on the Company's results of operations. 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, and metal housing and frame parts. 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. During 1996, the Company moved to a new facility. This facility increased the Company's manufacturing space from approximately 10,500 square feet to approximately 21,000 square feet. This has allowed for better organization of the raw materials flow in the manufacturing process, as well as providing room for the additional assembly area for the new System 400 product line. The new facility also has a higher clear height which will allow for additional future expansion. 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 and applications software. Although there are competitors selling electronic whiteboards and conferencing solutions, the Company believes each is focused on a slightly different part of the market, or on the edges of the Company's main markets, emphasizing different capabilities. 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 not be connected to a computer and offer no 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; there is no capability to draw or write 6 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 with certain of these software products. The Company is aware of one competitor that offers a rear-projection system. The competitive system uses 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. 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 of 1997. A related patent application is pending in Europe. In December 1996, the Company was issued U. S. Patent No. 5,583,323 for the calibration of the graphic data-acquisition tracking system, and Patent No. 5,585,605 for the optical scanner employing laser and laser safety control. 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 seven separate patents on various technology incorporated in the SoftBoard products. In addition, the Company has filed and will file other patent applications for various SoftBoard features and technology. The Company relies on copyright protection for its proprietary software. Additionally, SoftBoard-Registered Trademark-, Microfield Graphics-Registered Trademark- 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 attempts to protect 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 it complies with the applicable industry and governmental safety requirements for lasers. 7 EMPLOYEES As of February 28, 1998, the Company employed 40 persons. None of the 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 34,000 square feet, with 13,000 square feet of office space and 21,000 square feet of manufacturing space. The Company occupies this facility pursuant to a non-cancelable lease which expires in 2003. ITEM 3. LEGAL PROCEEDINGS As of February 28, 1998 there were no legal proceedings to which the Company or its subsidiaries is a party. 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 3, 1998. 8 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is quoted on the Nasdaq Small Cap Market under the symbol "MICG." The following table sets forth the high and low sales prices as reported by the Nasdaq SmallCap Market for the periods indicated.
FISCAL 1996 LOW HIGH --- ---- First Quarter $ 4 7/8 $ 8 Second Quarter $ 3 1/4 5 7/8 Third Quarter 3 1/4 6 3/4 Fourth Quarter 2 6 1/4 FISCAL 1997 First Quarter $ 1 3/8 $ 3 1/4 Second Quarter 3/4 1 3/4 Third Quarter 1 1/2 3 1/8 Fourth Quarter 2 1/16 4 1/8
It is estimated that there will be approximately 220 shareholders of record and 1,800 beneficial shareholders at March 23, 1998. There were no cash dividends declared or paid in fiscal years 1997 or 1996. The Company does not anticipate declaring such dividends in the foreseeable future. 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 and digital whiteboard rear projection 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. In July 1997, the Company entered into a general purchase and development agreement with 3M, through which 3M will globally market advanced versions of the Company's SoftBoard products under the 3M brand name "Ideaboard." Under the terms of the two-year agreement, the Company has developed specialized versions of their SoftBoard product line for 3M. Production and initial shipments of the 3M product started in the fourth quarter of 1997. In November 1994, the Company entered into an exclusive distributorship arrangement with Sord Computer Corporation, a subsidiary of Toshiba Corporation, to market SoftBoards in Japan. In 1997 and 1996, approximately 4% and 25%, respectively, of the Company's sales were attributable to SORD. The Company's agreement with SORD for exclusive distribution of SoftBoard products in Japan, expired in June of 1997. The 9 Company has no current agreement with SORD to purchase product and no assurance SORD will purchase significant quantities of SoftBoard products in the future. As with any large OEM or distributor relationship, order rates may be subject to quarterly fluctuations as demand builds and inventories are adjusted. The reduced level of sales to SORD in 1997 had an adverse effect on the Company's business. 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. 10 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 1997 FISCAL 1996 ----------- ----------- Net sales 100% 100% Cost of goods sold 56 50 ---- ---- Gross profit 44 50 Research and development expenses (17) (22) Marketing and sales expenses (50) (56) General and administrative expenses (17) (17) ---- ---- Loss from operations (40) (45) Other income, net - 2 ---- ---- Loss before income taxes (40) (43) Benefit from income taxes - - ---- ---- Net loss (40)% (43)% ---- ---- ---- ----
SALES. Sales decreased $454,000 (7%) to $5,618,000 in 1997 from $6,073,000 in 1996. The decrease was due primarily to lower sales to the Company's exclusive Japanese distributor, SORD Computer Corporation. Sales to SORD decreased $723,000 in 1997 compared to 1996. SEE OVERVIEW, ABOVE. In fiscal 1997, export sales aggregated $981,000 (17% of net sales), compared to $1,535,000 (25% of net sales) in 1996. SEE NOTE 10 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 44% in 1997, down from 50% in 1996. The decrease in gross margin was due primarily to lower absorption of manufacturing costs at the lower sales level in 1997. RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are expensed as incurred. Research and development expenses decreased $388,000 (29%) to $960,000 in 1997 from $1,348,000 in 1996. The decrease was due primarily to an decreased rate of hardware development and an increase in software development. Development expenses in 1996 included significant prototyping costs associated with the introduction of the System 400 product line Research and development expenses, as a percentage of sales, were 17% and 22% in 1997 and 1996, respectively. MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased $605,000 (18%) to $2,821,000 in 1997 from $3,426,000 in 1996. The decreases were due primarily to lower advertising and trade show expense. Also, fewer outside consultants were used in marketing during 1997. Marketing and sales expenses decreased as a percentage of sales to 50 % in 1997 from 56% in 1996. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased $69,000 (7%) to $946,000 in 1997 from $1,015,000 in 1996. The increase was due primarily to the lower director's & officer's insurance costs. General and administrative expenses, as a percentage of sales, were 17 % in both 1997 and 1996. 11 OTHER INCOME, NET. Other income, net includes interest income, interest expense and miscellaneous income. Interest income decreased in 1997 as a result of less interest earned on the lower cash balances maintained by the Company during 1997. Interest expense increased due to outstanding borrowings under an operating line of credit during 1997. INCOME TAXES. As of January 3, 1998 the Company had available net operating loss carryforwards of approximately $10.3 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 2012. Utilization of net operating loss carryforwards may be limited due to the ownership changes resulting from the Company's initial public offering in 1995 and other stock transactions. In addition, the Company has research and development credits aggregating approximately $291,000 for income tax purposes at January 3, 1998. Such credits may be used to reduce taxes payable, if any, on a consolidated basis in future years through their expiration in 2001 to 2012. 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 3, 1998 the Company has working capital of approximately $764,000 and its principal sources of liquidity consisted of $909,000 in cash and cash equivalents. Accounts receivable increased $250,000 to $1,028,000 at January 3, 1998 from $778,000 at the end of 1996. This was due to increased sales in the fourth quarter of 1997 compared to fourth quarter sales in 1996. Inventories decreased $286,000 to $712,000 at January 3, 1998 from $998,000 at the end of 1996. This reduction was due primarily to the fact that inventory at the end of 1997 is more in line with the expected sales levels. The Company had increased inventories at the end of 1996 due to lower than expected sales in the fourth quarter of 1996. Accounts payable increased $208,000 to $607,000 at January 3, 1998, from $399,000 at the end of 1996. This increase was due primarily to the purchases of inventory needed for production and shipment under the 3M general purchase agreement. Also, at January 3, 1998, the Company has a $2,000,000 line of credit, which bears interest monthly at prime (8.5% at January 3, 1998) and is secured by accounts receivable and inventory. There was $1,000,000 outstanding under the line of credit at January 3, 1998. The Company's line of credit with its bank expires on September 9, 1998. The Company expects to renew its line of credit with substantially similar terms prior to its expiration. See NOTE 6 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Company has no commitments for capital expenditures in material amounts. On March 16, 1998 the Company signed a common stock purchase agreement with Steelcase Inc. (Steelcase), under which Steelcase agreed to purchase 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 exerciseable starting on March 16, 1999 and expires on March 16, 2001. The Company believes its existing cash and cash equivalents, cash from the investment by Steelcase, amounts available under the Company's line of credit and cash generated from operations will be sufficient to fund its operations for at least the next 12 months. IMPACT OF THE YEAR 2000 ISSUE The Company has made an assessment of the Year 2000 issue on its systems, equipment and hardware and software products. Based on this assessment, the Company believes that its hardware and software products will properly recognize calendar dates beginning in the year 2000, and accordingly does not currently expect to incur material costs in connection with the Year 2000 issue. 12 RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard #128, "Earnings Per Share" (SFAS 128) which requires disclosure of basic and diluted earnings per share. The Company has adopted SFAS 128 for the year ended January 3, 1998, and all prior years have been restated to reflect its adoption. In June 1997, the FASB issued Financial Accounting Standard #130, "Reporting Comprehensive Income" (SFAS 130) which establishes requirements for disclosure of comprehensive income and is effective for the Company's year ending December 1998. Reclassification of earlier financial statements for comparative purposes is required. The Company does not expect the adoption to have a material impact on the Company's financial condition or results of operations. In June 1997, the FASB issued Financial Accounting Standard #131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which defines how operating segments are determined and requires disclosure of certain financial and descriptive information about operating segments, and is effective for the Company's fiscal year ended December 1998. Reclassification of earlier financial statements for comparative purposes is required. The Company does not expect the adoption to have a material impact on the Company's financial condition or results of operations. 13 ITEM 7. FINANCIAL STATEMENTS The Consolidated Financial Statements, together with the report thereon of Price Waterhouse LLP are included in this report as follows: Microfield Graphics, Inc.: Page ---- Report of Independent Accountants F-1 Consolidated Balance Sheets January 3, 1998 and December 28, 1996 F-2 Consolidated Statements of Operations for the years ended January 3, 1998 and December 28, 1996 F-3 Consolidated Statements of Shareholders' Equity for the years ended January 3, 1998 and December 28, 1996 F-4 Consolidated Statements of Cash Flows for the years ended January 3, 1998 and December 28, 1996 F-5 Notes to Consolidated Financial Statements F-6 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 are as follows:
NAME AGE CURRENT POSITION(S) WITH COMPANY - -------------------------------------------------------------------------- John B. Conroy 59 Chairman of the Board, President and Chief Executive Officer Scott D. McVay 58 Vice President, Sales Randall R. Reed 41 Chief Financial Officer and Secretary Michael W. Stansell 55 Vice President, Operations Donald H. Zurstadt 56 Vice President, Engineering
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 14 SCOTT D. MCVAY joined the Company in December 1993 as Vice President, Sales. Mr. McVay was Vice President, Marketing, at Mass Memory Technology, a manufacturer of PC storage products, from December 1992 to November 1993, and Vice President, Worldwide Sales, at Emulex Corp., a manufacturer of telecommunications and memory products, from April 1990 to June 1992. Mr. McVay was Vice President of Sales and Marketing at Iomega from 1983 through 1987, and held various positions at IBM over 19 years. Mr. McVay holds a BS and an MBA in marketing from the University of Colorado. RANDALL R. REED joined the Company in August 1985 as Controller and became the Company's Chief Financial Officer and Secretary in April 1990. Mr. Reed was a Tax Supervisor among other positions at Coopers and Lybrand from August 1981 to February 1985. Mr. Reed is a Certified Public Accountant and holds a BS in business administration from Southern Oregon State College. 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. DONALD H. ZURSTADT joined the Company in September 1989 as Manager of Engineering and was appointed Vice President, Engineering, in April 1990. Mr. Zurstadt has held management and engineering positions with several computer industry companies over the past 30 years including Tektronix, Inc., McDonnell Douglas Automation Corporation and Digital Equipment Corporation. Mr. Zurstadt holds a BA in physics from the University of Colorado. Information with respect to directors of the Company and Section 16(a) required by this item is included in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders under the captions ELECTION OF DIRECTORS and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING, respectively, and is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION The information required by this item is included in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders under the caption EXECUTIVE COMPENSATION AND OTHER MATTERS and is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders under the caption SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 15 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 #*10.2 1995 Stock Incentive Plan, as amended *10.3 Form of Incentive Stock Option Agreement *10.7 Form of Representative's Warrants (1)*10.8 Japanese Marketing License Agreement (1)**10.9 General Purchase and Development Agreement dated July 14, 1997 between the Registrant and 3M Company ***23 Consent of Price Waterhouse ***27 Financial Data Schedule - ---------- * Incorporated by reference to Exhibits to Registrant's Registration Statement on Form SB-2 (Registration No. 33-91890). ** Incorporated by reference to Exhibits to Registrants Quarterly Report on Form 10-QSB for the three month period ended September 27, 1997. *** Filed herewith. # This exhibit constitutes a management contract, or compensatory plan or arrangement. (1) Portions of this Exhibit 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 3, 1998. 16 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March __, 1998 MICROFIELD GRAPHICS, INC. By: --------------------------------- 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: /s/ RANDALL R. REED Chief Financial Officer and Secretary - -------------------------- (Principal Financial and Accounting Officer) Randall R. Reed Date: /s/ HERBERT S. SHAW Director - -------------------------- Date: Herbert S. Shaw /s/ WILLIAM P. CARGILE Director - --------------------------- Date: William P. Cargile 17 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 3, 1998 and December 28, 1996 and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Portland, Oregon January 17, 1998, except for Note 11, which is as of March 16, 1998 F-1 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) CONSOLIDATED BALANCE SHEET JANUARY 3, 1998 AND DECEMBER 28, 1996 - --------------------------------------------------------------------------------
1997 1996 ASSET Current assets: Cash and cash equivalents $ 909,184 $1,867,856 Accounts receivable, net (Note 3) 1,027,902 777,807 Inventories (Note 4) 712,000 997,693 Prepaid expenses and other 216,427 248,875 ---------- ---------- Total current assets 2,865,513 3,892,231 Property and equipment, net (Note 5) 384,251 542,826 Other assets 72,444 86,720 ---------- ---------- $3,322,208 $4,521,777 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit (Note 6) $1,000,000 $ -- Current portion of long-term debt (Note 6) 83,333 119,537 Accounts payable 606,556 399,011 Accrued payroll and payroll taxes 193,757 209,697 Unearned income 53,745 60,803 Other accrued liabilities 164,483 183,420 ---------- ---------- Total current liabilities 2,101,874 972,468 Long-term debt, net of current portion (Note 6) 90,278 181,956 ---------- ---------- Total liabilities 2,192,152 1,154,424 ---------- ---------- Commitments (Note 8) Shareholders' equity (Note 9): Common stock, 25,000,000 shares authorized, 3,211,813 and 3,195,575 shares issued and outstanding, respectively 12,185,527 12,152,781 Accumulated deficit (11,055,471) (8,785,428) ---------- ---------- Total shareholders' equity 1,130,056 3,367,353 ---------- ---------- $3,322,208 $4,521,777 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-2 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED JANUARY 3, 1998 AND DECEMBER 28, 1996 - --------------------------------------------------------------------------------
1997 1996 Net sales (Note 10) $5,618,330 $6,072,618 Cost of goods sold 3,140,988 3,037,508 ---------- ---------- Gross profit 2,477,342 3,035,110 ---------- ---------- Operating expenses: Research and development 959,680 1,348,148 Marketing and sales 2,821,232 3,426,418 General and administrative 945,764 1,014,743 ---------- ---------- 4,726,676 5,789,309 ---------- ---------- Loss from operations (2,249,334) (2,754,199) Other income: Interest (expense) income, net (23,142) 130,788 Loss on disposal of property and equipment - (3,205) Other income 4,750 28,746 ---------- ---------- Loss before income taxes (2,267,726) (2,597,870) Provision for income taxes (Note 7) (2,317) (1,276) ---------- ---------- Net loss $(2,270,043) $(2,599,146) ---------- ---------- ---------- ---------- Basic and diluted net loss per share $(.71) $(.82) ---------- ---------- ---------- ---------- Shares used in calculation 3,198,062 3,177,660 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-3 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) CONSOLIDATED STATEMENT OF SHREHOLDERS' EQUITY - --------------------------------------------------------------------------------
COMMON STOCK ACCUMULATED SHARES AMOUNT DEFICIT --------- ---------- ------------ Balance at December 30, 1995 3,127,954 12,060,048 $(6,186,282) Stock options exercised 66,421 87,633 - Issuance of common stock 1,200 5,100 - Net loss - - (2,599,146) ---------- ---------- ----------- Balance at December 28, 1996 3,195,575 12,152,781 (8,785,428) Stock options exercised 11,438 17,146 - Issuance of common stock 4,800 15,600 - Net loss - - (2,270,043) ---------- ---------- ----------- Balance at January 3, 1998 3,211,813 12,185,527 (11,055,471) ---------- ---------- ----------- ---------- ---------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-4 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) CONSOLIDATED STATEMENT OF CASH FLOWS JANUARY 3, 1998 AND DECEMBER 28, 1996 - --------------------------------------------------------------------------------
1997 1996 Cash flows from operating activities: Net loss $(2,270,043) $(2,599,146) Adjustments to reconcile loss from continuing operations to operating cash flows: Depreciation and amortization 255,174 300,432 Issuance of common stock for compensation 15,600 5,100 Loss on disposal of property and equipment, net Changes in assets and liabilities: Accounts receivable (250,095) 187,783 Inventories 285,693 (446,074) Prepaid expenses and other 32,448 55,909 Accounts payable 207,545 (144,596) Accrued payroll and payroll taxes (15,940) (78,117) Unearned income (7,058) 27,311 Other accrued liabilities (18,937) 143,989 ---------- ---------- Net cash used in operating activities (1,765,613) (2,544,204) ---------- ---------- Cash flows from investing activities: Proceeds from the maturity of investments - 1,564,002 Acquisition of property and equipment, net (78,856) (517,566) Purchases of patents and other (3,467) (16,220) ---------- ---------- Net cash (used in) provided by investing activities (82,323) 1,030,216 ---------- ---------- Cash flows from financing activities: Net borrowings under line of credit and term loan agreement 923,611 250,000 Net payments on capital lease obligation (51,493) (136,661) Proceeds from exercise of common stock options 17,146 87,633 ---------- ---------- Net cash provided by financing activities 889,264 200,972 ---------- ---------- Net decrease in cash and cash equivalents (958,672) (1,313,016) Cash and cash equivalents, beginning of year 1,867,856 3,180,872 ---------- ---------- Cash and cash equivalents, end of year $ 909,184 1,867,856 ---------- ---------- ---------- ---------- Cash paid for: Interest $ 69,970 $ 39,841 ---------- ---------- ---------- ---------- Income taxes $ 2,317 $ 1,276 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-5 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 3, 1998 AND DECEMBER 28, 1996 - -------------------------------------------------------------------------------- 1. THE COMPANY AND BASIS OF PRESENTATION Microfield Graphics, Inc., an Oregon corporation incorporated in October 1986, develops, manufactures and markets computer conferencing and telecommunications products to facilitate group communications. The Company's product lines incorporate a series of digital whiteboards and digital whiteboard rear projection 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 Japan, the United Kingdom and other countries. (See export sales in Note 10). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The Company operates on a 52-53 week fiscal year ending on the Saturday closest to the last day of December. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Microfield and its wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation. CONSOLIDATED STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. During the years ended January 3, 1998 and December 28, 1996, the Company issued common stock to resellers and employees, with a fair market value of $15,600 and $5,100, respectively. ACCOUNTS RECEIVABLE Accounts receivable at January 3, 1998 and December 28, 1996 are recorded net of allowances for uncollectible accounts of $34,553 and $45,649, respectively. INVENTORIES Inventories are stated at the lower of standard cost or market value. Standard costs approximate the first-in, first-out method. Inventory costs include raw materials, direct labor and allocated overhead. F-6 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 3, 1998 AND DECEMBER 28, 1996 - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated using accelerated methods over their estimated useful lives of five years. Repairs and maintenance are charged to expense as incurred; improvements are capitalized. When the Company sells or disposes of assets, the accounts are relieved of the related costs and accumulated depreciation and resulting gains and losses are reflected in operations. RESEARCH AND DEVELOPMENT Research and development expenditures are charged to operations as incurred. REVENUE RECOGNITION Revenue is recognized upon shipment of products. Revenue on warranty contracts is recognized over the life of the contract. INCOME TAXES The Company accounts for income taxes using the asset and liability approach. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in operations in the period that includes the enactment date. BASIC AND DILUTED NET LOSS PER SHARE The Company adopted SFAS No. 128, "Earnings Per Share," for the year ended January 3, 1998. SFAS No. 128 requires disclosure of basic and diluted earnings per share. All prior years have been restated to reflect the adoption of SFAS No. 128. Basic earnings per share are computed based on the weighted average number of common shares outstanding each year. Diluted earnings per share are the same as basic earnings per share as the potential effect of the conversion of any outstanding stock options is anti-dilutive. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded amounts of cash and cash equivalents, accounts receivable, accounts payable, line of credit and accrued liabilities as presented in the consolidated financial statements approximate fair value because of the short-term maturity of these instruments. The recorded amount of capital lease obligations and long-term debt approximates fair value since the imputed interest or stated interest approximates currently competitive rates. F-7 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 3, 1998 AND DECEMBER 28, 1996 - -------------------------------------------------------------------------------- 3. CONCENTRATION OF CREDIT RISK During the year ended January 3, 1998, no customer accounted for greater than 10% of net sales. One customer accounted for approximately 25% of net sales for the year ended December 28, 1996. Accounts receivable from one customer totaled approximately $277,500 at January 3, 1998, while accounts receivable from another customer totaled $126,387 at December 28, 1996. 4. INVENTORIES Inventories consist of the following:
JANUARY 3, DECEMBER 28, 1998 1996 ---------- ------------ Raw materials $515,122 $554,713 Finished 196,878 442,980 -------- -------- $712,000 $997,693 -------- -------- -------- --------
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
JANUARY 3, DECEMBER 28, 1998 1996 ---------- ------------ Furniture, machinery and equipment. $ 805,905 $ 738,431 Capitalized leased assets 236,157 224,775 ----------- --------- 1,042,062 963,206 Less accumulated depreciation and amortization 657,811 420,380 ----------- --------- $ 384,251 $ 542,826 ----------- --------- ----------- ---------
Accumulated amortization of capitalized leased assets aggregated $236,157 and $218,530 at January 3, 1998 and December 28, 1996, respectively. Such amounts are included in the above schedule. 6. DEBT At January 3, 1998, the Company had a $2,000,000 line of credit, which expires in September 1998. Borrowings under the line of credit are due on demand, bear interest payable monthly at prime, and are collateralized by inventories and accounts receivable. As of January 3, 1998, borrowings of $1,000,000 were outstanding under the line. Pursuant to the line of credit agreement, the Company is required to comply with certain financial covenants, including ratios and minimum net worth. At January 3, 1998, the Company was in violation of its covenants with respect to quarterly earnings and minimum net worth. These covenants have been waived by the bank. F-8 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 3, 1998 AND DECEMBER 28, 1996 - -------------------------------------------------------------------------------- 6. DEBT (CONTINUED) The Company's long-term debt consists of the following:
JANUARY 3, DECEMBER 28, 1998 1996 ---------- ------------ Term loan payable to bank in monthly instalments of $7,988, including interest at the prime rate plus .5% (9.0% at January 3, 1998), from February 1997 through January 2000; all assets purchased with the proceeds of this loan are pledged as collateral $173,611 $250,000 Capital lease obligation payable in monthly instalments - 51,493 -------- -------- 173,611 301,493 Less principal amounts due within one year 83,333 119,537 -------- -------- Long-term debt $ 90,278 $181,956 -------- -------- -------- --------
Remaining maturities on long-term debt are summarized as follows:
FISCAL YEAR - ----------- 1998 $ 83,333 1999 83,333 2000 6,945 -------- $173,611 -------- --------
7. INCOME TAXES The provision for income taxes of $2,317 and $1,276 for fiscal years 1997 and 1996, respectively, consists of minimum payments due and paid to the State of Oregon. The provision for income taxes for the years ended January 3, 1998 and December 28, 1996 differs from the amount which would be expected as a result of applying the statutory tax rates to the losses before income taxes due primarily to changes in the valuation allowance to fully reserve net deferred tax assets. F-9 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 3, 1998 AND DECEMBER 28, 1996 - -------------------------------------------------------------------------------- 7. INCOME TAXES (CONTINUED) Deferred tax assets (liabilities) are comprised of the following components:
JANUARY 3, DECEMBER 28, 1998 1996 ---------- ------------ Current: Allowances for uncollectible accounts $ 13,255 $ 17,511 Employee benefits 35,453 33,639 Inventory basis differences 738 1,029 Inventory, warranty, and other allowances 55,955 31,508 Unearned revenues 20,617 23,324 ---------- ---------- 126,018 107,011 ---------- ---------- Non-current: Intangible assets 9,678 4,874 Net operating loss carryforwards 3,946,873 3,039,210 Research and development credits 290,820 228,441 ---------- ---------- 4,247,371 3,272,525 ---------- ---------- Total deferred tax asset 4,373,389 3,379,536 Deferred tax asset valuation allowances (4,373,389) (3,379,536) ---------- ---------- Net deferred tax assets (liabilities) $ - $ - ---------- ---------- ---------- ----------
At January 3, 1998, the Company had available net operating loss carryforwards of approximately $10,289,000 for federal income tax purposes. Such carryforwards may be used to reduce consolidated taxable income, if any, in future years through their expiration in 2003 to 2012. Utilization of net operating loss carryforwards may be limited due to the ownership changes resulting from the Company's initial public offering in 1995. In addition, the Company has research and development credits aggregating approximately $290,820 for income tax purposes at January 3, 1998. Such credits may be used to reduce taxes payable, if any, in future years through their expiration in 2001 to 2012. F-10 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 3, 1998 AND DECEMBER 28, 1996 - -------------------------------------------------------------------------------- 8. LEASE COMMITMENTS The Company leases office space under operating leases which require future minimum lease commitments through July 2003 as follows:
FISCAL YEAR - ----------- 1998 $ 292,272 1999 292,272 2000 292,272 2001 306,882 2002 321,492 2003 106,746 ---------- Total minimum payments required $1,611,936 ---------- ----------
Rent expense totaled $345,125 and $301,795 for fiscal years ended 1997 and 1996, respectively. 9. SHAREHOLDERS' EQUITY INCENTIVE STOCK OPTION PLAN The Company has Stock Option Plans (the "Plans"). At January 3, 1998 and December 28, 1996, 1,005,228 and 757,062 shares of common stock were reserved for issuance to employees, officers, directors, and resellers. 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 nine years from the date of grant or such shorter term as provided for in the Plans. The options become exercisable over four years. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation, in 1996. SFAS No. 123 was issued by the Financial Accounting Standards Board in October 1995 and 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. Therefore, adoption of SFAS No. 123 in 1996 did not have a significant effect on the Company's financial position or results of operations. F-11 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 3, 1998 AND DECEMBER 28, 1996 - -------------------------------------------------------------------------------- 9. SHAREHOLDERS' EQUITY (CONTINUED) A summary of the status of the Company's Stock Option Plans as of January 3, 1998 and December 28, 1996 and for the years then ended is presented below:
JANUARY 3, 1998 DECEMBER 28, 1996 --------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE PERFORMANCE OPTIONS SHARES PRICE SHARES PRICE - -------------------------------- -------- --------- -------- -------- Outstanding at beginning of year 289,334 $ 4.54 303,204 $ 4.67 Granted 195,200 1.58 84,000 4.21 Exercised (11,438) 1.47 (66,421) 1.26 Forfeited (70,228) 1.67 (31,449) 6.11 -------- -------- 402,868 289,334 -------- -------- -------- -------- Options exercisable at year-end 160,062 91,824 -------- -------- -------- --------
NUMBER OF OPTIONS WEIGHTED -------------------------- AVERAGE CONTRACTUAL EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE REMAINING - -------------------- ----------- ----------- ------------------- $1.06 - 1.94 367,668 159,929 3.2 years $2.22 - 3.88 35,200 133 4.8 years ------- ------- 402,868 160,062 ------- ------- ------- -------
The Company has computed for pro forma disclosure purposes the value of all options granted during 1997 and 1996 using the Black-Scholes pricing model as prescribed by SFAS 123 and the following assumptions used for grants:
1997 1996 --------- --------- Risk-free interest rate 6.38% 6.40% Expected dividend yield 0% 0% Expected lives 4.5 years 4.5 years Expected volatility 60% 60%
Adjustments are made for options forfeited prior to vesting. Had compensation cost for the Company's Plans been determined based on the fair value at the grant dates consistent with the method of SFAS 123, the total value of options granted would be computed as follows:
Year ended January 3, 1998 $372,889 Year ended December 28, 1996 485,796
F-12 MICROFIELD GRAPHICS, INC. (d.b.a. SOFTBOARD) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 3, 1998 AND DECEMBER 28, 1996 - -------------------------------------------------------------------------------- 9. SHAREHOLDERS' EQUITY (CONTINUED) Such amounts would be amortized over the vesting period of the options. Accordingly, under SFAS 123, the Company's net loss and loss per share would have been changed to the pro forma amounts indicated below:
1997 1996 ------------ ----------- Net loss As reported $ (2,270,043) $(2,599,146) Pro forma (2,511,565) (2,755,473) Basic and diluted net loss per share As reported (.71) (.82) Pro forma (.79) (.87)
The effects of applying SFAS 123 for providing pro forma disclosures for 1997 and 1996 are not likely to be representative of the effects on reported net income (loss) and net income (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. No warrants have been exercised to date; such warrants expire in 2000. 10. EXPORT SALES Export sales aggregated $981,000 and $1,535,000 in 1997 and 1996, respectively. Such export sales were made to customers in the following countries:
YEAR ENDED JANUARY 3, DECEMBER 28, 1998 1996 ---------- ------------ Japan $239,000 $962,000 United Kingdom 306,000 249,000 Other 436,000 324,000 -------- ---------- $981,000 $1,535,000 -------- ---------- -------- ----------
11. SUBSEQUENT EVENT On March 16, 1998, the Company signed a common stock purchase agreement with Steelcase Corporation ("Steelcase") under which Steelcase agreed to invest cash of $2,012,500 for the purchase of 350,000 shares of the Company's common stock and a warrant to purchase an additional 260,000 shares at $6.75 per share. The warrant may be exercised beginning on March 16, 1999 and expires on March 16, 2001. The Company expects to consummate this purchase agreement in March 1998. F-13 EX-23 2 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-97544) of Microfield Graphics, Inc. of our report dated January 17, 1998, except for Note 11, which is as of March 16, 1998 appearing on page F-1 of this Form 10-KSB. PRICE WATERHOUSE LLP Portland, Oregon March 16, 1998 EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JANUARY 3, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-03-1998 DEC-29-1996 JAN-03-1998 909 0 1,063 (35) 712 2,866 1,042 658 3,322 2,102 0 0 0 12,185 (11,055) 3,322 5,618 5,618 3,141 4,726 4 0 (23) (2,268) 2 (2,270) 0 0 0 (2,270) (.71) (.71)
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