-----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, VmRhHaLfXyxNuN3mNMgVnuMiMrlKKdHBTukmHWhsNTlRqCVa4pkrBE3/9vC2fhYa kHUEYqKcy52bK1Wj1WkBrw== 0001047469-98-041527.txt : 19981123 0001047469-98-041527.hdr.sgml : 19981123 ACCESSION NUMBER: 0001047469-98-041527 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROFIELD GRAPHICS INC /OR CENTRAL INDEX KEY: 0000944947 STANDARD INDUSTRIAL CLASSIFICATION: 3577 IRS NUMBER: 930935149 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-26226 FILM NUMBER: 98754006 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 10QSB 1 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 1O-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 3, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number : 0-26226 MICROFIELD GRAPHICS, INC. (Exact name of small business issuer as specified in its charter) OREGON 93-0935149 (State or other jurisdiction (I. R. S. Employer of incorporation or organization) Identification No.) 7216 SW DURHAM RD. PORTLAND, OREGON 97224 (Address of principal executive offices and zip code) (503) 620-4000 (Issuer's telephone number including area code) Check whether the issuer (1) filed all reports required to be filed by Section 3 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] The number of shares outstanding of the Registrant's Common Stock as of October 31, 1998 was 3,684,313 shares. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] MICROFIELD GRAPHICS, INC. FORM 10-QSB INDEX
PART I FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheet - October 3, 1998 and January 3, 1998 3 Consolidated Statement of Operations -Three and Nine Months Ended October 3, 1998 and September 27, 1997 4 Consolidated Statement of Cash Flows -Nine Months Ended October 3, 1998 and September 27, 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II OTHER INFORMATION Item 1 Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 11
2 MICROFIELD GRAPHICS, INC. CONSOLIDATED BALANCE SHEET
October 3, January 3, 1998 1998 ------------ ------------ Current assets: Cash Cash and cash equivalents $ 1,378,869 $ 909,184 Accounts receivable, net of allowances of $27,293 and $24,680 843,149 1,027,902 Inventories (Note 3) 904,789 712,000 Prepaid expenses and other 151,460 216,427 ------------ ------------ Total current assets 3,278,267 2,865,513 Property and equipment, net (Note 4) 416,545 384,251 Other assets 58,783 72,444 ------------ ------------ $ 3,753,595 $ 3,322,208 ------------ ------------ ------------ ------------ Current liabilities: Current portion of debt $ 858,333 $ 1,083,333 Accounts payable 412,770 606,556 Accrued payroll and payroll taxes 108,743 193,757 Unearned income 47,845 53,745 Accrued liabilities 223,136 164,483 ------------ ------------ Total current liabilities 1,650,827 2,101,874 Long-term debt, net of current portion 27,778 90,278 ------------ ------------ 1,678,605 2,192,152 Shareholders' equity: Common stock, no par value, 25,000,000 shares authorized, 3,631,044 and 3,211,813 shares issued and outstanding 14,269,413 12,185,527 Accumulated deficit (12,194,423) (11,055,471) ------------ ------------ Total shareholders' equity 2,074,990 1,130,056 $ 3,753,595 $ 3,322,208 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 3 MICROFIELD GRAPHICS, INC. CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended Nine months ended October 4, September 27, October 4, September 27, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Sales $ 1,245,020 1,556,294 $ 5,642,067 3,924,400 Cost of goods sold 719,199 747,770 3,274,290 2,056,529 ------------ ------------ ------------ ------------ Gross profit 525,821 808,524 2,367,777 1,867,871 Operating expenses Research and development 254,862 326,801 710,360 755,779 Marketing and sales 619,413 671,684 2,050,668 2,090,462 General and administrative 236,382 229,106 705,039 694,695 ------------ ------------ ------------ ------------ 1,110,657 1,227,591 3,466,067 3,540,936 ------------ ------------ ------------ ------------ Loss from operations (584,836) (419,067) (1,098,290) (1,673,065) Other income (expense) Interest income (expense), net (7,626) (9,531) (39,384) (10,643) Other income, net 98 -- 228 4,683 ------------ ------------ ------------ ------------ Loss before provision for income taxes (592,364) (428,598) (1,137,446) (1,679,025) Provision for income taxes 800 1,061 1,505 2,317 ------------ ------------ ------------ ------------ Net loss $ (593,164) (429,659) $ (1,138,951) (1,681,342) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net loss per share Basic $ (.16) (.13) $ (.32) (.53) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Diluted $ (.16) (.13) $ (.32) (.53) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Shares used in per share calculations Basic 3,627,984 3,196,794 3,512,594 3,195,981 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Diluted 3,627,984 3,196,794 3,512,594 3,195,981 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 4 MICROFIELD GRAPHICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended --------------------------------- October 3, September 27, 1998 1997 ------------- ------------- Cash Flows From Operating Activities: Net loss $ (1,138,951) $ (1,681,342) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 143,361 190,522 Gain on sale and leaseback of property and equipment -- (1,626) Changes in assets and liabilities: Accounts receivable 184,753 (182,124) Inventories (192,789) 381,844 Prepaid expenses and other 64,967 35,635 Accounts payable (193,786) 84,081 Accrued payroll and payroll taxes (85,014) (144,797) Unearned income (5,900) 78 Accrued liabilities 58,653 120,096 ------------- ------------- Net cash used in operating activities (1,164,706) (1,197,633) Cash flows from investing activities: Acquisition of property and equipment (161,994) (46,561) ------------- ------------- Net cash used in investing activities (161,994) (46,561) Cash flows from financing activities: Payments on equipment line of credit (62,500) (55,552) Payments on capital lease obligations -- (51,493) Proceeds from (payments on) operating line of credit (225,000) 700,000 Proceeds from exercise of common stock options and warrants 93,677 4,347 Proceeds from issuance of common stock 1,990,208 -- ------------- ------------- Net cash provided by financing activities 1,796,385 597,302 Net increase (decrease) in cash and cash equivalents 469,685 (646,892) Cash and cash equivalents, beginning of period 909,184 1,867,856 ------------- ------------- Cash and cash equivalents, end of period $ 1,378,869 $ 1,220,964 ------------- ------------- ------------- ------------- Supplemental disclosure of cash flow information: Cash paid for: Interest $ 76,517 $ 48,248 ------------- ------------- ------------- ------------- $ 705 $ 2,317 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. 5 MICROFIELD GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Microfield Graphics, Inc. (the "Company") for the quarters and the nine months ended October 3, 1998 and September 27, 1997 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. The financial information as of January 3, 1998 is derived from the Company's Annual Report on Form 10-KSB. The accompanying consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles and should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended January 3, 1998. In the opinion of Company management, the unaudited consolidated financial statements for the interim periods presented include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for such interim periods. Operating results for the quarters and the nine months ended October 3, 1998 are not necessarily indicative of the results that may be expected for the full year or any portion thereof. The Company's fiscal year is the 52- or 53-week period ending on the Saturday closest to the last day of December. The Company's current fiscal year is the 52-week period ending January 2, 1999. The Company's last fiscal year was the 53-week period ended January 3, 1998. The Company's third fiscal quarters in fiscal 1998 and 1997 were the 13-week periods ended October 3, 1998 and September 27, 1997, respectively. 2. RECENTLY ISSUED ACCOUNTING STANDARDS In March 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards No. 128, "Earnings Per Share" (SFAS 128), which changes the standards for computing and presenting earnings per share and supercedes Accounting Principles Board Opinion No. 15, "Earnings Per Share." The FASB also issued SFAS 129, "Disclosure of Information About Capital Structure." Both of these are effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect the adoption of these to have a material impact on the Company's financial condition or results of operations. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which establishes requirements for disclosure of comprehensive income. SFAS 130 is effective for fiscal years beginning after December 15, 1997. 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 SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," 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. 6 3. INVENTORIES Inventories are stated at the lower of standard cost (which approximates the first-in, first-out method), or market value. Inventory costs include raw materials, direct labor and allocated overhead and consist of the following:
October 3, January 3, 1998 1998 ------------- -------------- Raw materials $ 587,248 $ 515,122 Finished goods 317,541 196,878 ------------- -------------- $ 904,789 $ 712,000 ------------- -------------- ------------- --------------
4. PROPERTY AND EQUIPMENT
October 3, January 3, 1998 1998 -------------- -------------- Machinery and equipment $ 1,204,056 $ 1,042,062 Less accumulated depreciation and amortization 787,511 657,811 -------------- -------------- $ 416,545 $ 384,251 -------------- -------------- -------------- --------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Microfield Graphics, Inc. (the "Company") develops, manufactures and markets computer conferencing and telecommunications products to facilitate group communications. The principal purpose of these products is to make meetings more productive and cost effective by capturing ideas from all meeting members (whether they are located locally or linked remotely through a computer and an audio hookup) and making the information available to all of the linked systems, where everyone involved can see and interact with the information produced and presented. The Company's product lines incorporate a series of digital whiteboards, 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 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. In July 1997 the Company entered into a General Purchase and Development Agreement with Minnesota Mining and Manufacturing Company (3M), through which 3M globally markets advanced versions of the Company's SoftBoard family of products. Under the terms of the two year agreement, the 7 Company developed specialized versions of the SoftBoard product line exclusively for 3M. The Company recorded revenue from non-recurring engineering services in the third and fourth quarters of 1997 and the first quarter of 1998. Product shipments from the Company to 3M began in the fourth quarter 1997. For the three months ended October 3, 1998 and September 27, 1997 approximately 4% and 10%, respectively, of the Company's sales were attributable to 3M. The Company's future results of operations will depend on continued and increased market acceptance of its SoftBoard 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 could have a material adverse effect on the Company's financial condition and results of operations. As with any large OEM or distributor relationship, order rates may be subject to quarterly fluctuations as demand varies and inventories are adjusted. 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 exerciseable starting on March 16, 1999 and expires on March 16, 2001. 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.
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- ----------------------- OCT. 3, SEPT. 27, OCT. 3, SEPT. 27, 1998 1997 1998 1997 -------- --------- -------- --------- Sales 100 % 100 % 100 % 100 % Cost of goods sold 58 48 58 52 -------- --------- -------- --------- Gross profit 42 52 42 48 Research and development expenses (20) (21) (13) (19) Marketing and sales expenses (50) (43) (36) (53) General and administrative expenses (19) (15) (12) (18) -------- --------- -------- --------- Loss from operations (47) (27) (19) (42) Other income (expense) (1) (1) (1) -- -------- --------- -------- --------- Loss before provision for income taxes (48) (28) (20) (42) Provision for income taxes -- -- -- -- -------- --------- -------- --------- Net loss (48) % (28) % (20) % (42) % -------- --------- -------- ---------
THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997 SALES. Sales decreased $311,000 (20%) to $1,245,000 in the third quarter of 1998 from $1,556,000 in the third quarter of 1997. Sales increased $1,718,000 (44%) to $5,642,000 in the first nine months of 1997 from $3,924,000 in the first nine months of 1997. The decrease for the three month period resulted primarily from lower revenue from 3M during the current quarter compared to the same quarter in 1997. The increase for the first nine months of this year resulted primarily from shipment of the initial commitment of product to 3M under the agreement the Company signed with it in July of 1997. SEE OVERVIEW. 8 GROSS PROFIT. Cost of goods sold includes the cost of raw materials needed to assemble the products, assembly and preparation by vendors and direct and indirect costs associated with the procurement, testing, scheduling and quality assurance functions performed by the Company. The Company's gross margin decreased to 42% in the third quarter of 1998 from 52% in the third quarter of 1997. The Company's gross margin also decreased to 42% in the first nine months of 1998 from 48% in the first nine months of 1997. The decline in gross margin during the third quarter of 1998 was due primarily to the high concentration of non-recurring engineering revenue charged to 3M during the third quarter of 1997. Much of the work associated with that revenue had been done in previous quarters, therefore the cost associated with the revenue in that quarter was low. Gross margins for the nine months decreased between years as a result of the lower margins provided from sales to 3M in the original equipment manufacturer (OEM) channel. Sales into this channel traditionally have lower average selling prices, and therefore lower margins, based on the potentially higher volumes that are anticipated in an OEM relationship. RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are expensed as incurred. These expenses decreased $72,000 (22%) to $255,000 in the third quarter of 1998 from $327,000 in the third quarter of 1997. These expenses decreased $46,000 (6%) to $710,000 in the first nine months of 1998 from $756,000 in the first nine months of 1997. These decreases were due primarily to lower new product development costs incurred during the current periods. Research and development expenses decreased as a percentage of sales to 13% in the first nine months of 1998 from 19% in the first nine months of 1997. The decrease was due primarily to the higher level of Company revenue in the first nine months of 1998 compared to the same period in 1997. MARKETING AND SALES EXPENSES. Marketing and sales expenses decreased $52,000 (8%) to $619,000 in the third quarter of 1998 from $671,000 in the third quarter of 1997. These expenses decreased $40,000 (2%) to $2,050,000 in the first nine months of 1998 from $2,090,000 in the first nine months of 1997. The decrease between quarters was due primarily to lower costs associated with the current advertising program and decreased participation in trade shows during the quarter. Marketing and sales expenses decreased as a percentage of sales to 36% in the first nine months of 1998 from 53% in the first nine months of 1997 primarily due to the higher sales volume in 1998. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $7,000 (3%) to $226,000 in the third quarter of 1998 from $229,000 in the third quarter of 1997. These expenses increased $10,000 (1%) to $705,000 in the first nine months of 1998 from $695,000 in the first nine months of 1997. General and administrative expenses decreased as a percentage of sales to 12% in the first nine months of 1998 from 18% in the first nine months of 1997 primarily due to the higher sales volume in 1998. OTHER INCOME (EXPENSE). Other income (expense) includes interest income, interest expense, and miscellaneous income. Other expense, net was ($8,000) in the third quarter of 1998 compared to ($10,000) of other expense, net in the third quarter of 1997. Other expense, net was $(39,000) in the first nine months of 1998 compared to $(6,000) of other expense, net in the first nine months of 1997. Interest expense increased as a result of increased levels of borrowing under the Company's operating line of credit. Interest income decreased as a result of lower cash balances in the first nine months of 1998 compared to the first nine months of 1997. INCOME TAXES. The Company recorded losses from operations in the third quarters of 1998 and 1997. Accordingly, no provision for income taxes, was provided for in either of these periods. 9 LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations and capital expenditures through the private and public sale of equity securities, cash from operations, and borrowings under operating lines of credit. At October 3, 1998, the Company had working capital of approximately $1.7 million and its principal source of liquidity consisted of approximately $1.4 million in cash and cash equivalents. Additionally, as of October 3, 1998, the Company had a $2,000,000 line of credit with its bank using its accounts receivable and certain of its inventory as collateral. The operating line bears interest monthly at prime (8.5 % at October 3, 1998). At October 3, 1998 $775,000 was outstanding under the line of credit. Accounts receivable decreased to $843,000 from $1,028,000 at the end of 1997, and inventory increased to $905,000 from $712,000 at the end of 1997. The Company has no commitments for capital expenditures in material amounts. The Company believes its existing cash and cash equivalents, cash available under its operating line of credit, and cash from operations may not be sufficient to fund its operations for at least the next 12 months, and is looking at alternative means of financing the business should the above sources be insufficient. IMPACT OF THE YEAR 2000 ISSUE The Company has made an assessment of the Year 2000 issue on its internal systems and equipment, its hardware and software products, and on the systems of its vendor base. Based on this assessment, the Company believes that its internal systems have been updated to address the Year 2000 issue, its hardware and software products will properly recognize calendar dates beginning in the Year 2000, and its vendor base is appropriately addressing the Year 2000 issues. Accordingly, the Company believes it is Year 2000 ready and does not currently expect to incur any material costs in connection with the Year 2000 issue. 10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 5, 1998 a former temporary leased employee filed a complaint in federal district court for the district of Oregon (Schmechel vs. Microfield Graphics, Inc.), alleging gender discrimination and harassment in addition to a state wrongful constructive discharge claim. The plaintiff has alleged emotional distress, economic loss and punitive damages totaling $1.4 million. No members of the Company's management were named in the suit. The Company believes the complaints are without merit and intends to defend these actions vigorously. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibit filed as part of this report is listed below: Exhibit No. ----------- 27 Financial data schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended October 3, 1998. 11 SIGNATURES In accordance with the requirements of the Securities and Exchange Act of 1934, the issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 17, 1998 MICROFIELD GRAPHICS, INC. By:_________________________________ John B. Conroy President and Chief Executive Officer (Principal Executive Officer) By:_________________________________ Randall R. Reed Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 12 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 17, 1998 MICROFIELD GRAPHICS, INC. By:/s/JOHN B. CONROY ----------------- John B. Conroy President and Chief Executive Officer (Principal Executive Officer) By:/s/ RANDALL R. REED ------------------- Randall R. Reed Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 13 EX-27 2 EXHIBIT 27
5 This schedule contains summary financial information extracted from the consolidated financial statements found in the Company's Form 10-QSB for the three and nine month periods ended October 3, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS JAN-02-1999 JAN-04-1998 OCT-03-1998 1,379 0 870 27 905 3,278 1,204 788 3,754 1,651 0 0 0 14,269 (12,194) 3,754 5,642 5,642 3,274 3,274 2,355 0 39 (1,137) 2 0 0 0 0 (1,139) (.32) (.32)
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