**U.S. SECURITIES AND EXCHANGE COMMISSION**

** **

**Washington, D. C. 20549**

 

**FORM 1O-KSB**

** **

| **ý** | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------|

**For thefiscal year ended December 29, 2001**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

**For thetransition periodfrom               to               **

** **

**CommissionFile Number : 0-26226**

** **

**MICROFIELD GRAPHICS, INC.**

(Exact name of smallbusiness issuer as specified in its charter)

 

| **Oregon**                                                       |   | **93-0935149**                          |
|------------------------------------------------------------------|--------|-----------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (I. R. S. Employer  Identification No.) |
| **P.O. Box 23968  Portland, Oregon 97281**                       |
| (Address of principal  executive offices and zip code)           |
| **(503) 968-4607**                                               |
| (Issuer’s telephone  number including area code)            |

 

Check whether the issuer (1) filed all reports required to be filed bySection 3 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days:

Yes ýNo o

 

Check if disclosure of delinquent filers in response to Item 405 ofRegulation S-B is not contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of the Form 10-KSBor any amendment to this Form 10-KSB. o

 

Issuer’s revenues for its most recent fiscal year were $0.

 

The aggregate market value of voting stock held by non-affiliates ofthe registrant March 15, 2002 was $252,784 computed by reference to the averagebid and asked prices as reported on the OTC Bulletin Board.

 

The index to exhibits appears on page11 of this document.

 

The number of shares outstanding of the Registrant’sCommon Stock as of December 29, 2001 was 4,596,066 shares.

 

Transitional Small Business Disclosure Format (check one): Yes oNo ý

 

 

 

**MICROFIELD GRAPHICS, INC.**

**FORM10-KSB INDEX**

** **
| **PART I**   |
|--------------|
|         |   |
| Item 1.      | Description of Business |
|         |   |
| Item 2.      | Description of Property |
|         |   |
| Item 3.      | Legal Proceedings |
|         |   |
| Item  4.     | Submission  of Matters to a Vote of Security Holders |
|         |   |
| **PART II**  |
|         |   |
| Item  5.     | Market  for Common Equity and Related Stockholder Matters |
|         |   |
| Item  6.     | Management’s  Discussion and Analysis of Financial Condition or Plan of Operation |
|         |   |
| Item 7.      | Financial Statements |
|         |   |
| Item  8.     | Changes  in and Disagreements with Accountants on Accounting And Financial Disclosures |
|         |   |
| **PART III** |
|         |   |
| Item 9.      | Directors, Executive Officers,  Promoters and Control Persons; Compliance with Section 16(a) of the Exchange  Act |
|         |   |
| Item  10.    | Executive Compensation |
|         |   |
| Item  11.    | Security  Ownership of Certain Beneficial Owners and Management |
|         |   |
| Item  12.    | Certain  Relationships and Related Transactions |
|         |   |
| Item 13.     | Exhibits and  Reports on Form 8-K |

 

2

----

 

**PART I**

 

**ITEM 1.BUSINESS**

 

**INTRODUCTION**

 

Prior to October 24, 2000, Microfield Graphics, Inc. (the “Company”)developed, manufactured, and marketed computer conferencing andtelecommunications products that facilitate group communications.  The Company’s product lines consisted of aseries of digital whiteboards, interactive rear projection systems, andinteractive plasma display systems sold under the brand name SoftBoard, alongwith a variety of application software packages, supplies and accessories.  Information written or drawn on theSoftBoard surface is recorded and displayed on a personal computersimultaneously and in color and utilized proprietary technology that had beenowned by the Company.

 

On October 24, 2000, the assets of the Company that were utilized inoperating the SoftBoard business were sold to Greensteel, Inc., a wholly-ownedsubsidiary of PolyVision Corporation. The Company has not been engaged in on going operations since thatdate.  The Company is exploring enteringinto new lines of business through specific strategic acquisitions.  While the Company has no current bindingagreements with respect to any acquisition, it is actively exploringacquisition transactions.

 

###### **EMPLOYEES**

** **

As of December 29, 2001, the Company’s sole employee was John B.Conroy, Chief Executive Officer.

 

###### **ITEM2.  PROPERTIES**

** **

The Company does not own or lease any properties or facilities at thistime.

 

**ITEM3.  LEGAL PROCEEDINGS**

** **

On January 28, 2000, a class action complaint, Adair v. MicrofieldGraphics, Inc. Et ano., was filed against the Company in United StatesDistrict Court Southern District of New York. The complaint alleged that the Company and its Chief Executive Officerissued a series of false and misleading statements concerning, among otherthings, the Company’s purchase agreement with 3M.  The complaint alleged that, as a result of these allegedlymaterial misstatements and omissions, the Company’s stock price wasartificially inflated during the period from July 23, 1998 through April 2,1999 and requests that damages be determined at trial.  The Company denied the allegations.

 

In April 2000, the Company filed a motion to transfer venue of theaction to the District of Oregon.  TheCompany’s motion was granted on November 14, 2000.  On July 13, 2001, the United States District Court for theDistrict of Oregon entered a Preliminary Order providing for, among otherthings, a fairness hearing by the Court, which was held on September 24, 2001,to consider the proposed settlement arrived at by the Company, its ChiefExecutive Officer, and the lead plaintiffs. The court entered a final judgment approving the settlement on November6, 2001, dismissing the case with prejudice. The settlement provided that all claims asserted in the action bedismissed and settled.  Under thesettlement, the Company and its Chief Executive Officer deny liability and anyand all wrongdoing.  The settlementprovided for the payment of $455,000 in full, complete, and final settlement ofany and all claims.  Payment of the$455,000 was covered in full during fiscal 2001 by the Company’s Directors andOfficers insurance provider.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matters were submitted to a vote of security holders for the quarterended December 29, 2001.

 

3

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** **

**PART II**

 

**ITEM5.  MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

 

The Company’s common stock is quoted on the OTC Bulletin Board underthe symbol “MICG.”  The following tablesets forth the high and low sales prices as reported by the OTC Bulletin Boardfor the periods indicated.

 
| **FISCAL 2000** |   | **LOW** |   | **HIGH** | ** ** |
|-----------------|--------|---------|--------|----------|------------|
| First Quarter   |   | $       | 1/8    |     | $          | 6/8 |   |
| Second Quarter  |   | 1/8     |   | 5/8      |       |
| Third Quarter   |   | 1/8     |   | 3/8      |       |
| Fourth Quarter  |   | 1/8     |   | 1/4      |       |
|                 |        |         |        |          |            |  |  |

 
| **FISCAL  2001** |   | **LOW** |   | **HIGH** |   |
|------------------|--------|---------|--------|----------|--------|
| First Quarter    |   | $       | 3/32   |     | $      | 9/32 |   |
| Second Quarter   |   | 1/16    |   | 6/32     |   |
| Third Quarter    |   | 1/32    |   | 5/32     |   |
| Fourth Quarter   |   | 1/32    |   | 5/32     |   |
|                  |        |         |        |          |        |  |  |

 

There were 161 shareholders of record and the Company believesapproximately 300 beneficial shareholders at March 19, 2002.  There were no cash dividends declared orpaid in fiscal years 2001 or 2000.  TheCompany does not anticipate declaring such dividends in the foreseeable future.

 

**ITEM6.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION OR PLAN OF OPERATIONS**

** **

#### **OVERVIEW**

 

Prior to October 24, 2000, the Company developed, manufactured, andmarketed computer conferencing and telecommunications products that facilitategroup communications.  The Company’sproduct lines consisted of a series of digital whiteboards, interactive rearprojection systems, and interactive plasma display systems sold under the brandname SoftBoard, along with a variety of application software packages, suppliesand accessories.  Information written ordrawn on the SoftBoard surface is recorded and displayed on a personal computersimultaneously and in color and utilized proprietary technology that had beenowned by the Company.

 

On October 24, 2000, the assets of the Company that were utilized inoperating the SoftBoard business were sold to Greensteel, Inc., a wholly-ownedsubsidiary of PolyVision Corporation. The Company has not been engaged in ongoing operations since thatdate.  The Company is exploring enteringinto new lines of business through specific strategic acquisitions.  While the Company has no current bindingagreements with respect to any acquisition, it is actively exploringacquisition transactions.

 

**SIGNIFICANT ACCOUNTING POLICIES ANDESTIMATES**

 

Financial Reporting Release No. 60, which was recently released by theSecurities and Exchange Commission, requires all companies to include a discussionof critical accounting policies or methods used in the preparation of financialstatements.  Note 2 of the Notes to theConsolidated Financial Statements includes a summary of the significantaccounting policies and methods used in the preparation of our ConsolidatedFinancial Statements.  The following isa brief discussion of the more significant accounting policies and methods usedby us.

 

In addition, Financial Reporting Release No. 61 (FRR 61) was recentlyreleased by the SEC to require all companies to include a discussion toaddress, among other things, liquidity, off-balance sheet arrangements,contractual obligations and commercial commitments.  The Company has implemented the reporting requirements of FRR 61for the year ended December 29, 2001.

 

4

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General

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. 

 

Income Taxes

 

The provision for income taxes for the years ended December 29, 2001and December 30, 2000 differs from the amount which would be expected as aresult of applying the statutory tax rates to the losses before income taxesdue primarily to changes in the valuation allowance to fully reserve net deferredtax assets.  At December 29, 2001, theCompany had available net operating loss carryforwards of approximately$14,976,636 for federal income tax purposes. Such carryforwards may be used to reduce consolidated taxable income, ifany, in future years through their expiration in 2004 to 2021.  Utilization of net operating losscarryforwards may be limited due to the ownership changes resulting from theCompany’s initial public offering in 1995. In addition, the Company had research and development creditsaggregating $225,671 for income tax purposes at December 29, 2001.  Such credits may be used to reduce taxespayable, if any, in future years through their expiration in 2002 to 2020.

 

# **Results of Operations**

 

As of October 24, 2000, the Company sold its SoftBoard operations toGreensteel, Inc.  The financial datapresented in the Company’s financial statements has been retroactivelyreclassified to present the Softboardoperations as discontinued operations for the periods ended December 29, 2001,and December 30, 2000.  Therefore, nocomparative data regarding sales, gross profit, research and developmentexpenses, or marketing and sales expenses have been presented as they are notrepresentative of the Company’s current activities.

 

###### **Liquidity and Capital Resources**

 

Since inception, the Company has financed its operations and capitalexpenditures through public and private sales of equity securities, cash fromoperations, and borrowings under bank lines of credit.  At December 29, 2001 the Company had workingcapital of approximately $376,000 and its source of liquidity consisted of cashand cash equivalents.  The Companybelieves that it has sufficient cash to meet its liquidity requirements for atleast the next 12 months.

 

Accounts receivable decreased $99,000 to $0 at December 29, 2001 fromDecember 30, 2000.  The decrease was dueto the Company’s change in operations. As part of the sale of the SoftBoard operations, the Company retainedall accounts receivable arising prior to October 24, 2000.  All outstanding receivables were eithercollected or deemed uncollectable at December 29, 2001.  The Company does not currently sell productsor services and therefore no accounts receivable existed at December 29, 2001.

 

Accounts payable decreased $42,000 to $45,000 at December 29, 2001compared to $87,000 at December 30, 2000. The decrease is due to the Company’s change in operations.  The Company does not currently carry inventory,therefore,  all accounts payable relateto the Company’s general and administrative expenses.

 

Other accrued liabilities decreased $182,000 to $37,000 at December 29,2001 compared to $219,000 at December 30, 2000.  The decrease is due to a reduction in accruals for bonuses,legal, and accounting expenses at December 29, 2001.

 

5

----

 

The terms of the asset sale relating to the Company’s Softboardbusiness called for Greensteel to pay the Company up to $3,500,000, with$2,000,000 payable at the closing of the transaction and up to $1,500,000 incontingent earn-out payments based on net sales of the Company’s Softboardproducts over a five-year period.  Acontingent earn-out payment in the amount of $21,903 was received during thethird quarter of 2001.

 

The Company has no commitments for capital expenditures in materialamounts.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2000 the FASB issued Statement of Financial AccountingStandards No. 138, “Accounting for Certain Derivative Instruments and CertainHedging Activities – an amendment of FASB 133” (“SFAS 138”). In June 1999 theFASB issued Statement of Financial Accounting Standards No. 137 – “Accountingfor Derivative Instruments and Hedging Activities” – (“SFAS 137”). SFAS 137 isan amendment to Statement of Financial Accounting Standards No. 133,“Accounting for Derivatives and Hedging Activities”. SFAS 133 and 138 establishaccounting and reporting standards for all derivative instruments. SFAS 133 and138 are effective for fiscal years beginning after June 30, 2000. The Companyadopted SFAS 133, 137 and 138 for its fiscal year beginning December 1, 2000.The Company does not currently have any derivative instruments nor does itparticipate in hedging activities, and therefore the adoption of thesestandards did not have any impact on its financial statements or results ofoperations.

** **

On July 20, 2001, the FASB issued SFAS No. 141, *Business Combinations.*  SFAS No. 141 establishes new standards foraccounting and reporting requirements for business combinations and willrequire that the purchase method of accounting be used for all businesscombinations initiated after June 30, 2001. Use of the pooling-of-interest method will be prohibited.  The Company adopted this statement duringthe third quarter of fiscal 2001.  Theadoption of SFAS No. 141 did not have a material impact on the Company’sconsolidated financial statements.

 

On July 20, 2001, the Financial Accounting Standards Board (FASB)issued FASB Statement No. 142 (FAS 142), *Goodwilland Other Intangible Assets. *FAS142 changes the accounting for goodwill and certain other intangible assetsfrom an amortization method to an impairment-only approach.  Upon adoption of FAS 142, goodwill andcertain other intangible assets should be tested at the reporting unit annuallyand whenever events or circumstances occur indicating that goodwill and certainother intangible assets might be impaired. The adoption date for the Company will be January 1, 2002.  FAS 142 will have no impact on the Company’sresults of operations and financial position.

 

In August 2001, the FASB approved SFAS No. 143, “Accounting for AssetRetirement Obligations” (“SFAS No. 143”), which will be effective for thefiscal year beginning January 1, 2003. SFAS No. 143 addresses the financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  In October2001, the FASB approved SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS No. 144”), which supercedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed Of” (“SFAS No. 121”) and the accounting and reporting provisionsof APB. No. 30, “Reporting the Results of Operations – Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions” for the disposal of a segmentof a business.  SFAS No. 144 retainsmany of the fundamental provisions of SFAS No. 121, but resolves certainimplementation issues associates with that Statement.  SFAS No. 144 will be effective for the fiscal year beginningJanuary 1, 2002.  The Company does notanticipate that the adoption of SFAS No. 143 and SFAS No. 144 will have amaterial impact on its financial condition or results of operations.

 

6

----

 

**ITEM7.  FINANCIAL STATEMENTS**

 

The Consolidated Financial Statements, together with the report thereonof PricewaterhouseCoopers LLP are included in this report as follows:

 
| Microfield Graphics, Inc.:                                                                                         |
|--------------------------------------------------------------------------------------------------------------------|
|                                                                                                               |
| Report of Independent  Accountants                                                                                 |
|                                                                                                               |
| Consolidated Balance Sheet  December 29, 2001 and December 30, 2000                                                |
|                                                                                                               |
| Consolidated  Statements of Operations for the years ended December 29, 2001 and December  30, 2000                |
|                                                                                                               |
| Consolidated  Statements of Shareholders’ Equity for the years ended December 29, 2001 and  December 30, 2000 |
|                                                                                                               |
| Consolidated Statements  of Cash Flows for the years ended December 29, 2001 and December 30, 2000                 |
|                                                                                                               |
| Notes to  Consolidated Financial Statements                                                                        |

 

----

 

**MicrofieldGraphics****, Inc.**

#### **ConsolidatedFinancial Statements**

**December 29, 2001 and December 30, 2000**

 

----

 

## **Report ofIndependent Accountants**

 

To the Board of Directorsand Shareholders of

Microfield Graphics, Inc.

 

In our opinion, the accompanying consolidated balance sheet and therelated consolidated statements of operations, of shareholders’ equity and ofcash flows present fairly, in all material respects, the financial position ofMicrofield Graphics, Inc. and its subsidiary at December 29, 2001 and December30, 2000 and the results of their operations and their cash flows for the yearsthen ended, in conformity with accounting principles generally accepted in theUnited States of America.  Thesefinancial statements are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements based onour audits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern.  As discussed inNote 9 to the financial statements, the Company has suffered recurring lossesfrom continuing operations and has experienced negative cash flows fromcontinuing operating activities. Additionally, the Company has no on-going operations.  Such matters raise substantial doubt aboutthe Company's ability to continue as a going concern.  Management’s plans in regard to these matters are also discussedin Note 9.  The financial statements donot include any adjustments that might result from the outcome of thisuncertainty.

 

As discussed in Notes 1 and 4 to the financial statements, as ofOctober 24, 2000, the Company disposed of its Softboard operations. Theaccompanying consolidated statements of operations and of cash flows presentthe Softboard operations as discontinued operations for each of the two yearsin the period ended December 29, 2001. Accordingly, as of October 24, 2000 and through December 29, 2001, theCompany has no ongoing operations.

 

/s/ PricewaterhouseCoopers LLP

Portland, OregonMarch 29, 2002

 

F-1

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**Microfield Graphics, Inc.**

**ConsolidatedBalance Sheet**

**December 29, 2001 and December 30,2000**

 
|                                                                                                             |   | **2001**    |       | **2000**    |       |
|------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                       |   |        | ** ** |        | ** ** |
| Current assets:                                                                                                  |   |        |       |        |       |
| Cash and cash equivalents                                                                                        |   | $           | 473,118    |        | $          | 830,634 |   |
| Accounts receivable, net (Note 2)                                                                                |   | —      |       | 99,392      |       |
| Prepaid expenses and other                                                                                       |   | —      |       | 48,337      |       |
|                                                                                                             |   |        |       |        |       |
| Total current assets                                                                                             |   | 473,118     |       | 978,363     |       |
|                                                                                                             |   |        |       |        |       |
| Other assets                                                                                                     |   | 14,992      |       | 10,267      |       |
|                                                                                                             |   |        |       |        |       |
|                                                                                                             |   | $           | 488,110    |        | $          | 988,630 |   |
|                                                                                                             |   |        |       |        |       |
| **LIABILITIES  AND SHAREHOLDERS' EQUITY**                                                                        |   |        |       |        |       |
| Current liabilities:                                                                                             |   |        |       |        |       |
| Accounts payable                                                                                                 |   | $           | 45,320     |        | $          | 86,917 |   |
| Accrued payroll and payroll taxes                                                                                |   | 15,524      |       | 8,020       |       |
| Other accrued liabilities                                                                                        |   | 36,631      |       | 219,336     |       |
|                                                                                                             |   |        |       |        |       |
| Total current liabilities                                                                                        |   | 97,475      |       | 314,273     |       |
|                                                                                                             |   |        |       |        |       |
| Commitments and  contingencies                                                                                   |   | —      |       | —      |       |
|                                                                                                             |   |        |       |        |       |
| Shareholders' equity (Note 7):                                                                                   |   |        |       |        |       |
| Common stock, 25,000,000 shares authorized, 4,596,066 and 4,597,066  shares issued and outstanding, respectively |   | 15,757,643  |       | 15,758,279  |       |
| Accumulated deficit                                                                                              |   | (15,367,008 | )          | (15,083,922 | )          |
| Total shareholders' equity                                                                                       |   | 390,635     |       | 674,357     |       |
|                                                                                                             |   |        |       |        |       |
|                                                                                                             |   | $           | 488,110    |        | $          | 988,630 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F-2

----

 

**Microfield Graphics, Inc.**

**ConsolidatedStatements of Operations**

**For the Years Ended December 29, 2001and December 30, 2000**

 
|                                                                     |   | **2001**  |     | **2000**  |   |
|--------------------------------------------------------------------------|--------|-----------|----------|-----------|--------|
| Net sales                                                                |   | $         | —   |      | $      | — |   |
| Cost of goods sold                                                       |   | —    |     | —    |   |
|                                                                     |   |      |     |      |   |
| Gross profit                                                             |   | —    |     | —    |   |
|                                                                     |   |      |     |      |   |
| Operating expenses:                                                      |   |      |     |      |   |
| General and administrative                                               |   | 396,851   |     | 185,395   |   |
|                                                                     |   |      |     |      |   |
| Loss from operations                                                     |   | (396,851  | )        | (185,395  | )      |
|                                                                     |   |      |     |      |   |
| Other income:                                                            |   |      |     |      |   |
| Interest income (expense), net                                           |   | 21,864    |     | (53,898   | )      |
| Other income, net                                                        |   | 82,056    |     | 32,170    |   |
|                                                                     |   |      |     |      |   |
| Net loss from continuing operations                                      |   | (292,931  | )        | (207,123  | )      |
|                                                                     |   |      |     |      |   |
| Discontinued operations                                                  |   |      |     |      |   |
| Loss on discontinued operations                                          |   | (12,058   | )        | (800,112  | )      |
| Gain on sale of discontinued operations                                  |   | 21,903    |     | 1,221,852 |   |
|                                                                     |   |      |     |      |   |
| Net (loss) income before extraordinary item                              |   | (283,086  | )        | 214,617   |   |
|                                                                     |   |      |     |      |   |
| Extraordinary item:                                                      |   |      |     |      |   |
| Loss on early debt extinguishment                                        |   | —    |     | (297,848  | )      |
|                                                                     |   |      |     |      |   |
| Net loss                                                                 |   | $         | (283,086 | )         | $      | (83,231 | ) |
|                                                                     |   |      |     |      |   |   |   |
| Basic and diluted net loss per share from continuing operations          |   | $         | (.06     | )         | $      | (.05 | ) |
|                                                                     |   |      |     |      |   |   |   |
| Basic and diluted net income (loss) per share before extraordinary  item |   | $         | (.06     | )         | $      | .05 |   |
|                                                                     |   |      |     |      |   |   |   |
| Extraordinary item                                                       |   | $         | —   |      | $      | (.07 | ) |
|                                                                     |   |      |     |      |   |   |   |
| Basic and diluted net loss per share                                     |   | $         | (.06     | )         | $      | (.02 | ) |
|                                                                     |   |      |     |      |   |   |   |
| Shares used in calculation                                               |   | 4,596,253 |     | 4,373,338 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F-3

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**MicrofieldGraphics, Inc.**

**ConsolidatedStatements of Shareholders’ Equity**

### **For the Years Ended December 29, 2001 and December 20,2000**

 
|                                           |   | **Common stock** |   | **Accumulated  deficit** |       |
|------------------------------------------------|--------|------------------|--------|--------------------------|------------|
|                                           |   | **Shares**       |   | **Amount**               |       |   |
| Balance at January 1, 2000                     |   | 4,132,185        |   | $                        | 15,273,912 |   | $ | (15,000,691 | ) |
|                                           |   |             |   |                     |       |   |   |   |   |
| Common stock grants to employees               |   | 14,000           |   | 3,500                    |       | — |   |
|                                           |   |             |   |                     |       |   |   |
| Common stock options exercised                 |   | 10,273           |   | 2,260                    |       | — |   |
|                                           |   |             |   |                     |       |   |   |
| Settlement of stock options                    |   | 405,608          |   | 105,951                  |       | — |   |
|                                           |   |             |   |                     |       |   |   |
| Issuance of warrants with notes payable        |   | —           |   | 357,418                  |       | — |   |
|                                           |   |             |   |                     |       |   |   |
| Common stock issued to settle accounts payable |   | 35,000           |   | 15,238                   |       | — |   |
|                                           |   |             |   |                     |       |   |   |
| Net loss                                       |   | —           |   | —                   |       | (83,231 | ) |
|                                           |   |             |   |                     |       |   |   |
| Balance at December 30, 2000                   |   | 4,597,066        |   | 15,758,279               |       | (15,083,922 | ) |
|                                           |   |             |   |                     |       |   |   |
| Common stock repurchased                       |   | (1,000           | )      | (636                     | )          | — |   |
|                                           |   |             |   |                     |       |   |   |
| Net loss                                       |   | —           |   | —                   |       | (283,086 | ) |
|                                           |   |             |   |                     |       |   |   |
| Balance at December 29, 2001                   |   | 4,596,066        |   | $                        | 15,757,643 |   | $ | (15,367,008 | ) |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F-4

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**Microfield Graphics, Inc.**

**ConsolidatedStatements of Cash Flows**

**For the Years Ended December 29, 2001 and December 30, 2000**

 
|                                                                                                |   | **2001** |     | **2000**   |   |
|-----------------------------------------------------------------------------------------------------|--------|----------|----------|------------|--------|
| Cash flows from operating activities:                                                               |   |     |     |       |   |
| Net loss                                                                                            |   | $        | (283,086 | )          | $      | (83,231 | ) |
| Add (deduct):                                                                                       |   |     |     |       |   |
| Extraordinary loss on early debt extinguishment                                                     |   | —   |     | 297,848    |   |
| Loss from discontinued operations                                                                   |   | 12,058   |     | 800,112    |   |
| Gain on sale of discontinued operations                                                             |   | (21,903  | )        | (1,221,852 | )      |
|                                                                                                |   |     |     |       |   |
| Loss from continuing operations                                                                     |   | (292,931 | )        | (207,123   | )      |
|                                                                                                |   |     |     |       |   |
| Adjustments to reconcile loss from continuing operations to net cash  used in operating activities: |   |     |     |       |   |
| Depreciation and amortization                                                                       |   | —   |     | 59,570     |   |
| Changes in assets and liabilities:                                                                  |   |     |     |       |   |
| Accounts receivable                                                                                 |   | —   |     | 166,132    |   |
| Prepaid expenses and other                                                                          |   | 43,612   |     | 51,398     |   |
| Accounts payable                                                                                    |   | (35,830  | )        | (236,170   | )      |
| Accrued payroll and payroll taxes                                                                   |   | 7,504    |     | 8,020      |   |
| Other accrued liabilities                                                                           |   | (182,705 | )        | 37,288     |   |
|                                                                                                |   |     |     |       |   |
| Net cash from operating operations                                                                  |   | (460,350 | )        | (120,885   | )      |
|                                                                                                |   |     |     |       |   |
| Net cash provided by (used in) discontinued operations                                              |   | 103,470  |     | (746,949   | )      |
|                                                                                                |   |     |     |       |   |
| Net cash used in operating activities                                                               |   | (356,880 | )        | (867,834   | )      |
|                                                                                                |   |     |     |       |   |
| Cash flows from investing activities:                                                               |   |     |     |       |   |
| Net cash used in discontinued investing activities                                                  |   | —   |     | (3,905     | )      |
| Proceeds from sale of discontinued operations                                                       |   | —   |     | 2,000,000  |   |
|                                                                                                |   |     |     |       |   |
| Net cash provided by investing activities                                                           |   | —   |     | 1,996,095  |   |
|                                                                                                |   |     |     |       |   |
| Cash flows from financing  activities:                                                              |   |     |     |       |   |
| Net payments under line of credit agreement                                                         |   | —   |     | (360,473   | )      |
| Payments on long-term debt and notes payable                                                        |   | —   |     | (452,455   | )      |
| Borrowings on notes payable                                                                         |   | —   |     | 400,000    |   |
| Proceeds from exercise of common stock options                                                      |   | —   |     | 2,260      |   |
| Payments for repurchase of common stock                                                             |   | (636     | )        | —     |   |
|                                                                                                |   |     |     |       |   |
| Net cash provided by financing activities                                                           |   | (636     | )        | (410,668   | )      |
|                                                                                                |   |     |     |       |   |
| Net decrease in cash and cash equivalents                                                           |   | (357,516 | )        | 717,593    |   |
|                                                                                                |   |     |     |       |   |
| Cash and cash equivalents, beginning of year                                                        |   | 830,634  |     | 113,041    |   |
|                                                                                                |   |     |     |       |   |
| Cash and cash equivalents, end of year                                                              |   | $        | 473,118  |       | $      | 830,634 |   |
|                                                                                                |   |     |     |       |   |   |   |
| Cash paid for:                                                                                      |   |     |     |       |   |
| Interest                                                                                            |   | $        | —   |       | $      | 143,141 |   |
| Non-cash financing activities:                                                                      |   |     |     |       |   |
| Issuance of warrants with notes payable                                                             |   | $        | —   |       | $      | 357,418 |   |
|                                                                                                |   |     |     |       |   |   |   |
| Issuance of common stock for accounts payable                                                       |   | $        | —   |       | $      | 15,238 |   |
|                                                                                                |   |     |     |       |   |   |   |
| Issuance of common stock to settle employee stock options                                           |   | $        | —   |       | $      | 105,951 |   |
|                                                                                                |   |     |     |       |   |   |   |
| Issuance of common stock grants to employees                                                        |   | $        | —   |       | $      | 3,500 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F-5

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**MicrofieldGraphics, Inc.**

**Notesto Consolidated Financial Statements**

 

**1.****              TheCompany and Basis of Presentation**

 

Microfield Graphics, Inc.(the Company), an Oregon corporation incorporated in October 1986, developed,manufactured and marketed computer conferencing and telecommunications productsto facilitate group communications.  TheCompany’s product lines incorporated a series of digital whiteboards, digitalwhiteboard rear projection systems, and interactive plasma display systemsunder the brand name Softboard, along with a variety of application softwarepackages, supplies and accessories. Information written or drawn on the Softboard surface is recorded anddisplayed on a personal computer simultaneously and in color using theCompany’s proprietary technology.  

 

The Company has a wholly-ownedforeign 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 was in theUnited States.

 

On October 24, 2000, theCompany sold substantially all its assets (see Note 4).

 

**2.****              Summaryof Significant Accounting Policies**

 

**Fiscal year**

The Company operates on a52-53 week fiscal year ending on the Saturday closest to the last day ofDecember. 

 

**Principles of consolidation**

The consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiary.  All significantintercompany transactions and balances have been eliminated in consolidation.

 

**Consolidated statement of cash flows**

For purposes of thestatement of cash flows, the Company considers all highly liquid debtinstruments purchased with an original maturity of three months or less to becash equivalents. 

 

**Accounts receivable**

At December 29, 2001, noaccounts receivable exist.  Accounts receivableat December 30, 2000 are recorded net of allowances for uncollectible accountsof $67,380.

 

F-6

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**Income taxes**

The Company accounts forincome taxes using the asset and liability approach in accordance withStatement of Financial Accounting Standards (SFAS) No. 109, *Accountingfor Income Taxes*.  The assetand liability approach requires the recognition of deferred tax liabilities andassets for the expected future tax consequences of temporary differencesbetween the carrying amounts and the tax basis of assets and liabilities.  The effect on deferred taxes of a change intax rates is recognized in operations in the period that includes the enactmentdate.

 

**Basic and diluted net loss per share**

Basic earnings (loss) percommon share is computed using the weighted-average number of common sharesoutstanding during the period.  Dilutedearnings per common share is computed using the combination of dilutive commonshare equivalents and the weighted-average number of common shares outstandingduring the period.  Diluted loss percommon share for 2001 and 2000 is based only on the weighted-average number ofcommon shares outstanding during the period, as the inclusion of 2,155,000 and2,346,000 common share equivalents would have been antidilutive. 

 

**Use of estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

**Fair value of financial instruments**

The recorded amounts ofcash and cash equivalents, accounts receivable, accounts payable and accruedliabilities as presented in the consolidated financial statements approximatefair value because of the short-term maturity of these instruments.  

 

**Comprehensive income (loss)**

Comprehensive loss equalsnet loss for all periods presented. 

 

**NewAccounting Pronouncements**

In June 2000 the FASBissued Statement of Financial Accounting Standards No. 138, “Accounting forCertain Derivative Instruments and Certain Hedging Activities – an amendment ofFASB 133” (“SFAS 138”). In June 1999 the FASB issued Statement of FinancialAccounting Standards No. 137 – “Accounting for Derivative Instruments andHedging Activities” – (“SFAS 137”). SFAS 137 is an amendment to Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivatives and HedgingActivities”. SFAS 133 and 138 establish accounting and reporting standards forall derivative instruments. SFAS 133 and 138 are effective for fiscal yearsbeginning after June 30, 2000. The Company adopted SFAS 133, 137 and 138 forits fiscal year beginning December 1, 2000. The Company does not currently haveany derivative instruments nor does it participate in

 

F-7

----

 

hedging activities, andtherefore the adoption of these standards did not have any impact on itsfinancial statements or results of operations.

 

On July 20, 2001, the FASB issued SFAS No. 141, *Business Combinations.*  SFAS No. 141 establishes new standards foraccounting and reporting requirements for business combinations and willrequire that the purchase method of accounting be used for all businesscombinations initiated after June 30, 2001. Use of the pooling-of-interest method will be prohibited.  The Company adopted this statement duringthe third quarter of fiscal 2001.  Theadoption of SFAS No. 141 did not have a material impact on the Company’sconsolidated financial statements.

 

On July 20, 2001, the Financial Accounting StandardsBoard (FASB) issued FASB Statement No. 142 (FAS 142), *Goodwill and Other Intangible Assets. *FAS 142 changes the accountingfor goodwill and certain other intangible assets from an amortization method toan impairment-only approach.  Uponadoption of FAS 142, goodwill and certain other intangible assets should betested at the reporting unit annually and whenever events or circumstancesoccur indicating that goodwill and certain other intangible assets might beimpaired.  The adoption date for theCompany will be January 1, 2002.  FAS142 will have no impact on the Company’s results of operations and financialposition.

 

In August 2001, the FASB approved SFAS No. 143,“Accounting for Asset Retirement Obligations” (“SFAS No. 143”), which will beeffective for the fiscal year beginning January 1, 2003.  SFAS No. 143 addresses the financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  In October 2001, the FASB approved SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFASNo. 144”), which supercedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS No. 121”)and the accounting and reporting provisions of APB. No. 30, “Reporting theResults of Operations – Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”for the disposal of a segment of a business. SFAS No. 144 retains many of the fundamental provisions of SFAS No. 121,but resolves certain implementation issues associates with that Statement.  SFAS No. 144 will be effective for thefiscal year beginning January 1, 2002. The Company does not anticipate that the adoption of SFAS No. 143 andSFAS No. 144 will have a material impact on its financial condition or resultsof operations.

 

**3.****              Concentrationof Credit Risk**

 

During the year ended December 29, 2001, and  December 30, 2000, no customers accountedfor 10% or more of total net sales. Accounts receivable from one customer totaled approximately $53,544 atDecember 30, 2000.

 

**4.****              DiscontinuedOperations**

 

On September 7, 2000, the Company entered into adefinitive agreement with Greensteel, Inc. (Greensteel), a wholly-ownedsubsidiary of Polyvision Corporation, for the sale of

 

F-8

----

 

substantially all of theCompany’s assets used in the Softboard operations.  The terms of the asset sale called for Greensteel to pay theCompany up to $3,500,000, with $2,000,000 payable at the closing of thetransaction and up to an additional $1,500,000 in contingent earn-out paymentsbased on net sales of the Company’s Softboard products over a five-yearperiod.  The Company retained cash,accounts receivable and the majority of the outstanding liabilities.  Shareholders approved the agreement and thetransaction was finalized on October 24, 2000 and resulted in a gain of$1,221,852.

 

A contingent earn-outpayment in the amount of $21,903 was received by the Company during the thirdquarter of 2001.** **This amount was recorded as a gain on the sale ofdiscontinued operations in the Consolidated Statements of Operations for fiscal2001.

 

As a result ofshareholder approval of the Greensteel agreement, discontinued operationsaccounting treatment has been applied to the Softboard operation.  Accordingly, the net loss incurred from theSoftboard operations is reported in loss from discontinued operations for allperiods presented to reflect the reclassification of these operations asdiscontinued.  Also, cash flows from theSoftboard operations are reported as “net cash provided by (used in)discontinued operations” whether associated with operating, investing orfinancing activities.  

 

Revenues fromdiscontinued Softboard operations were $2,526,000 from January 2, 2000 throughOctober 24, 2000, the date of disposition.

 

**5.****              Debt**

 

On June 30, 2000, theCompany issued a Subordinated Promissory Note to a financing company.  In connection with this SubordinatedPromissory Note, the Company issued two stock warrants each to purchaseindividually 1,033,000 common shares at a price of $0.50 per share and $0.38722per share, respectively. The aggregate estimated fair value of the warrants, asdetermined using the Black-Scholes pricing model, of $357,418 was recorded as adebt discount and was to be amortized over the three-year term of the relateddebt. Amortization of the discount is included in interest expense on theincome statement for the year ended December 30, 2000. On December 24, 2000,the Company repaid the Subordinated Promissory Note. As a result of the debtretirement, the Company recorded a loss on early extinguishment of $297,848,which was equal to the unamortized discount on the date of retirement.

 

**6.****              IncomeTaxes**

 

The provision for incometaxes for the years ended December 29, 2001 and December 30, 2000 differs fromthe amount which would be expected as a result of applying the statutory taxrates to the losses before income taxes due primarily to changes in thevaluation allowance to fully reserve net deferred tax assets.

 

F-9

----

 

Deferred tax assets are comprised of the followingcomponents:

 
|                                       |   | **December  29,  2001** | ** ** | **December  30,  2000** | ** ** |
|--------------------------------------------|--------|-------------------------|------------|-------------------------|------------|
| Current:                                   |   |                    |       |                    |       |
| Allowances for  uncollectible accounts     |   | $                       | —     |                    | $          | 17,091 |   |
| Employee benefits                          |   | 10,587                  |       | 4,840                   |       |
| Inventory, warranty, and  other allowances |   | —                  |       | 17,743                  |       |
|                                       |   | 10,587                  |       | 39,674                  |       |
| Non-current:                               |   |                    |       |                    |       |
| Net operating loss  carryforwards          |   | 5,745,038               |       | 5,601,432               |       |
| Research and development  credits          |   | 225,671                 |       | 249,469                 |       |
|                                       |   | 5,970,709               |       | 5,850,901               |       |
| Total deferred tax asset                   |   | 5,981,296               |       | 5,890,575               |       |
|                                       |   |                    |       |                    |       |
| Deferred tax asset  valuation allowance    |   | (5,981,296              | )          | (5,890,575              | )          |
|                                       |   |                    |       |                    |       |
| Net deferred tax assets                    |   | $                       | —     |                    | $          | — |   |

 

At December 29, 2001, theCompany had available net operating loss carryforwards of approximately$14,976,636 for federal income tax purposes. Such carryforwards may be used to reduce consolidated taxable income, ifany, in future years through their expiration in 2004 to 2021.  Utilization of net operating losscarryforwards may be limited due to the ownership changes resulting from theCompany’s initial public offering in 1995. In addition, the Company has research and development creditsaggregating $225,671 for income tax purposes at December 29, 2001.  Such credits may be used to reduce taxespayable, if any, in future years through their expiration in 2002 to 2020.

 

**7.****              Shareholders’Equity**

 

**Incentive Stock Option Plan**

The Company has StockOption Plans (the Plans).  At December29, 2001, 320,188 shares of common stock were reserved for issuance toemployees, officers, directors and consultants.   Under the Plans, the options may be granted to purchase sharesof the Company’s common stock at fair market value, as determined by theCompany’s Board of Directors, at the date of grant.  The options are exercisable over a period of up to five yearsfrom the date of grant.  The options becomeexercisable over four years.

 

The Company adopted SFASNo. 123, *Accountingfor Stock-Based Compensation*, in 1996.  SFAS No. 123 allows companies to choose whether to account forstock-based compensation on a fair value method or to continue to account forstock-based compensation under the current intrinsic value method as prescribedby APB Opinion No. 25, *Accounting for Stock Issued to Employees*.  The Company has elected to continue tofollow the provisions of APB Opinion No. 25.

** **

F-10

----

 

A summary of the status of the Company’s Stock OptionPlans as of December 29, 2001 and December 30, 2000 and for the years thenended is as follows:

 
|                              |   | **December 29, 2001** |   | **December 30, 2000**                   |   |
|-----------------------------------|--------|-----------------------|--------|-----------------------------------------|--------|
| **Performance options**           |   | **Shares**            |   | **Weighted-  average  exercise  price** |   | **Shares** |   | **Weighted-  average  exercise  price** |   |
|                              |
|                              |
|                              |
| Outstanding at beginning of  year |   | —                |   | $                                       | — |   | 491,881 |   | $ | .22 |   |
| Granted                           |   | 69,000                |   | .04                                     |   | 63,000 |   | .31 |   |
| Exercised                         |   | —                |   | —                                  |   | (10,273 | ) | .22 |   |
| Settled                           |   | —                |   | —                                  |   | (405,608 | ) | .22 |   |
| Forfeited                         |   | —                |   | —                                  |   | (139,000 | ) | .26 |   |
|                              |   |                  |   |                                    |   |   |   |   |   |
|                              |   | 69,000                |   | $                                       | .04    |   | — |   | $ | — |   |
|                              |   |                  |   |                                    |   |   |   |   |   |   |   |
| Options exercisable at  year-end  |   | 47,836                |   |                                    |   | — |   |   |   |
|                                   |        |                       |        |                                         |        |  |  |  |  |  |  |  |

 

In December 1999, theCompany decreased the exercise price of all outstanding incentive stock optionsto $0.22 per share (the repriced options). Effective June 30, 2000, the Company settled all outstanding repricedoptions by issuing one share of the Company’s common stock for each repricedoption; 405,608 of the repriced options were outstanding immediately precedingthe settlement. As a result, the Company recorded a one-time compensationcharge of $105,951, which is equal to the aggregate fair value of the commonshares issued as settlement for the repriced options.  The one-time compensation charge is reflected in loss fromdiscontinued operations for the year ended December 30, 2000.

 

All incentive stockoptions outstanding at the time of the sale of the Company’s Softboardoperations were forfeited and canceled. On October 2, 2001, the Company granted 69,000 options to purchaseshares of the Company’s common stock to directors of the Company, with 44,000shares immediately exercisable and the remaining shares to become exercisableratably over 12 months.

 

The Company has computedfor pro forma disclosure purposes the value of all options granted duringfiscal 2001 using the Black-Scholes pricing model as prescribed by SFAS No.123.  The value of options grantedduring 2000 was not calculated as all options granted during 2000 were alsocanceled during 2000.  The followingassumptions were used to calculate the value of options granted during 2001:

 

| Risk-free interest rate |   | 4.6      | %      |
|-------------------------|--------|----------|--------|
| Expected dividend yield |   | $        | — |   |   |
| Expected lives          |   | 5  years |   |
| Expected volatility     |   | 124      | %      |
|                         |        |          |        |  |  |  |  |

 

Had compensationcost for the Company’s Plans been determined based on the fair value at thegrant dates consistent with the method of SFAS No. 123, the total value ofoptions granted was $2,353 for the year ended December 29, 2001 and $0 for theyear ended December 30, 2000.  Suchamounts would be amortized over the vesting period of the options.

 

F-11

----

 

Accordingly, underSFAS No. 123, the Company’s net loss and loss per share for the year endedDecember 29, 2001,  would have beenchanged to the pro forma amounts indicated below:

 

| Net loss                             |   | As reported |   | $ | (283,086 | ) |
|--------------------------------------|--------|-------------|--------|---|----------|---|
|                                 |   | Pro forma   |   | $ | (284,717 | ) |
| Basic and diluted net loss per share |   | As reported |   | $ | (0.06    | ) |
|                                 |   | Pro forma   |   | $ | (0.06    | ) |

 

**Common stock warrants**

In connection with itsinitial public offering in 1995, the Company issued 110,000 warrants topurchase shares of Common Stock at an exercise price of $7.20 per share; suchwarrants expired unexercised in 2000. In addition, in connection with the common stock purchase agreement onMarch 16, 1998 the Company issued 260,000 warrants to purchase shares of commonstock at an exercise price of $6.75 per share. Such warrants expired unexercised in 2001.

 

On October 15, 1999 theCompany issued a warrant to certain of its debt holders to purchase 20,000shares of the Company’s common stock at an exercise price of $0.75 pershare.  In accordance with the terms ofthe warrant, the holder, in lieu of exercising the warrant, has the option toconvert the warrant into a number of shares to be determined based on a formulawhich considers the difference between the fair market value of the Company’scommon stock at the time of conversion and the exercise price of thewarrant.  The fair value of the warrantsdetermined utilizing the Black-Scholes pricing model at the time of issuance isimmaterial.  The warrant expires inOctober 2003.

 

In connection with theSubordinated Promissory Note agreement entered into on June 30, 2000, theCompany issued two stock warrants each to purchase individually 1,033,000common shares at a price of $0.50 per share and $0.38722 per share,respectively.  The fair value of thewarrants determined using the Black-Scholes pricing model at the time ofissuance was $357,418 and was recorded as a debt discount upon issuance (seeNote 5).  The warrants expire on June30, 2005.

** **

**CommonStock Grants**

In June 2000, the Company granted 14,000 shares of common stock tocertain of its employees.  As a result,the Company recorded a one-time compensation charge of $3,500, which is equalto the aggregate fair value of the common shares granted.  The one-time compensation charge isreflected in loss from discontinued operations for the year ended December 30,2000.

 

F-12

----

 

**8.****              Commitmentsand Contingencies**

** **

On January 28,2000, a class action complaint, Adair v. Microfield Graphics, Inc. Et ano.,was filed against the Company in United States District Court Southern Districtof New York.  The complaint alleged thatthe Company and its Chief Executive Officer issued a series of false andmisleading statements concerning, among other things, the Company’s purchaseagreement with 3M.  The complaintalleged that, as a result of these allegedly material misstatements andomissions, the Company’s stock price was artificially inflated during theperiod from July 23, 1998 through April 2, 1999 and requested that damages bedetermined at trial.  The Company deniedthe allegations.

** **

In April 2000, theCompany filed a motion to transfer venue of the action to the District ofOregon.  The Company’s motion wasgranted on November 14, 2000.  On July13, 2001, the United States District Court for the District of Oregon entered aPreliminary Order providing for, among other things, a fairness hearing by theCourt, which was held on September 24, 2001, to consider the proposedsettlement arrived at by the Company, its Chief Executive Officer, and the leadplaintiffs.  The court entered a finaljudgment approving the settlement on November 6, 2001, dismissing the case withprejudice. The settlement provided that all claims asserted in the action bedismissed and settled.  Under thesettlement, the Company and its Chief Executive Officer deny liability and anyand all wrongdoing.  The settlementprovided for the payment of $455,000 in full, complete, and final settlement ofany and all claims. Payment of the $455,000 was covered in full during fiscal2001 by the Company’s Directors and Officers insurance provider.

** **

**9.****              Going Concern**

 

The Company has suffered recurring losses from ongoingoperations and has experienced negative cash flows from continuing operatingactivities.  Additionally, the Companyhas no income from continuing operations. Such matters raise substantial doubt about the Company's ability tocontinue as a going concern.  Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.  TheCompany is exploring entering into new lines of business through specificstrategic acquisitions to generate income.

 

F-13

----

 

**ITEM8.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

None.

 

 

F-14

----

 

### **PARTIII**

 

**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 anddirectors are as follows:

 
| **NAME**            |   | **AGE** |   | **CURRENT  POSITION(S) WITH COMPANY**                         |   |
|---------------------|--------|---------|--------|---------------------------------------------------------------|--------|
| John B. Conroy      |   | 63      |   | Chairman of the Board, President and Chief Executive  Officer |
| Michael W. Stansell |   | 59      |   | Director                                                      |
| Herbert S. Shaw     |   | 66      |   | Director                                                      |

 

There is no family relationship among any of the directors or executiveofficers of Microfield.

 

JOHN B. CONROY joined Microfield in May 1986 and was appointedPresident and elected a Director that same month.  Mr. Conroy was designated President and Chief Executive Officerby the Board of Directors in January 1987, and appointed Chairman of the Boardof Directors in June 1996.  He serveduntil April 2000 and was appointed to that position again in October 2000.  Mr. Conroy previously held executivemanagement positions with a number of computer industry companies, has servedas a director of several, and holds a Bachelors of Science in electricalengineering from New York University.

 

HERBERT S. SHAW was appointed to the Board of Directors in June1997.  Mr. Shaw has been the ManagingPartner of NorCrest Ltd. and Chairman of NorCrest Capital Management LLC, aninvestment banking company, since January 1996.  From February 1992 to December 1995 Mr. Shaw was the Presidentand CEO of The Laughlin Group, a financial services and investment group ofcompanies.

 

MICHAEL W. STANSELL is an independent consultant.  From October 2000 through September 2001 hewas Operations Manager, Technology Division, of PolyVision Corporation.  Prior to that he served as President andChief Operating Officer of Microfield from April 2000 until October 2000.  Prior to that he served with Microfield asDirector of Manufacturing from November 1985 to January 1987 and VicePresident, Operations, from January 1987 until April 2000.  Mr. Stansell was a division manufacturingmanager, among other positions, at Tektronix Corporation from August 1965through October 1985.  He was appointedto the Board of Directors in April 2000.

 

Dennis Wade and Robert Jesenik resigned from the board of directors inDecember 2001.

 

Section 16(a) of the Exchange Act requires Microfield’s directors,executive officers and persons who beneficially own more than ten percent ofthe outstanding Common Stock to file with the Securities and ExchangeCommission certain reports with respect to each person’s beneficial ownershipof Microfield’s equity securities. Officers, directors and greater than ten percent shareholders are alsorequired to furnish Microfield with copies of all forms they file under thisregulation.  Based solely upon a reviewof the copies of these reports and certain representations of thesepersons,  Messrs. Conroy, Shaw andStansell each filed a late Form 4 and Form 5 reporting options granted inOctober 2001.

 

 

----

** **

**ITEM10.  EXECUTIVE COMPENSATION**

 

The following table provides certain summary information concerningcompensation awarded to, earned by, or paid to the Company’s Chief ExecutiveOfficer for fiscal years 2001, 2000, and 1999.   There are no other executive officers of the Company whose totalannual salary and bonus exceeded $100,000 for fiscal year 2001.

 

SUMMARY COMPENSATIONTABLE

 
|                      |   | **Annual  Compensation** |   | **Long Term  Compensation Awards** |   |
|---------------------------|--------|--------------------------|--------|------------------------------------|--------|
|                      |   | **Fiscal  Year**         |   | **Salary($)**                      |   | **Bonus($)** | ** ** | **Securities:  Underlying  Options (#)** | ** ** | **All Other  Compensation (1)** | ** ** |
| John B. Conroy            |   |                     |   |                               |   |   |   |   |   |   |   |
| Chairman of the  Board of |   | 2001                     |   | 180,000                            |   | — |   | 50,000 |   | — |   |
| Directors, and  Chief     |   | 2000                     |   | 183,023                            |   | 81,818 |   | — |   | — |   |
| Executive  Officer        |   | 1999                     |   | 185,192                            |   | — |   | 100,000 |   | — |   |

 

----

(1)  The aggregate amount of perquisites andother personal benefits was less than either $50,000 or 10% of the total annualsalary and bonus reported for Mr. Conroy.

 

Mr. Conroy’s salary has been reduced to $90,000effective January 1, 2002.

 

OPTION GRANTS IN CURRENT FISCAL YEAR

 
| **Name**                                       |   | **Number of  Securities  underlying  Options  Granted (#)** |   | **% of Total  Options  granted to  Employees in Fiscal  Year** |   | **Exercise  or Base  Price ($/Sh)** |   | **Expiration  Date** |            |
|------------------------------------------------|--------|-------------------------------------------------------------|--------|----------------------------------------------------------------|--------|-------------------------------------|--------|----------------------|-----------------|
| John B.   Conroy, Chief Executive Officer |   | 50,000                                                      |   | 100%                                                           |   |                                | $0.04  |                 | October 1, 2006 |   |
|                                                |        |                                                             |        |                                                                |        |                                     |        |                      |                 |  |

 

OPTION EXCERCISES IN LAST FISCAL YEAR

 

No options were exercised for the fiscal year ended December 29, 2001.

 

DIRECTOR COMPENSATION

 

In October 2001, options to purchase shares of the Company’s commonstock under the Company’s 1995 Stock Incentive Plan were granted to each of thefollowing non-employee directors of the Company for the amount shown oppositeeach person’s name:

 

| **Name**         |   | **Number of  Option Shares Granted** |   |
|------------------|--------|--------------------------------------|--------|
| Herbert S. Shaw  |   | 6,000                                |   |
| Michael Stansell |   | 13,000                               |   |

 

The exercise price for each option is $0.04. The options have a term of5 years and were immediately exercisable on the grant date.

 

Directors do not receive any fees for serving on Microfield’s Board ofDirectors or any committee thereof, but are reimbursed for reasonable expensesincurred in attending meetings.

 

 

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**ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table sets forth certain information regarding thebeneficial ownership of Common Stock of the Company as of March 19, 2002, as to(i) each person who is known by the Company to own beneficially more than 5% ofthe outstanding shares of Common Stock, (ii) each director or nominee fordirector of the Company, (iii) each of the named officers and (iv) alldirectors and executive officers as a group. Except as otherwise noted, the Company believes the persons listed belowhave sole investment and voting power with respect to the Common Stock owned bythem.  As of March 19, 2002, John B.Conroy, Michael W. Stansell, Herbert S. Shaw(collectively, the “Executives”),Steelcase, Inc. and the Company were parties to a Share Ownership, Voting andRight of First Refusal Agreement dated March 19, 1998, (the “Voting Agreement”)  Under the Voting Agreement, Steelcase andthe Executives are obligated to vote their shares of Common Stock to electcertain individuals to the Board of Directors of the Company, including oneindividual designated by Steelcase (James B. Keane, Steelcase’s originaldesignee, resigned on February 17, 2000, and Steelcase has not identified areplacement for his seat), Mr. Conroy and three independent directors asdirected by majority of the Board of Directors.  With regard to matters other than the election of directors,Steelcase has agreed to vote all of its shares of Common Stock that it may ownin excess of 610,000 shares in direct proportion of the votes of alloutstanding shares of Common Stock. Each party to the Voting Agreement is deemed the beneficial owner of theshares of Common Stock beneficially owned by each other party to the VotingAgreement.

 
| **Five Percent Shareholders, Directors,  Director Nominees and Certain Executive  Officers** |   | **Shares  Beneficially  Owned (1)** |   | **Approximate  Percentage  Owned** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|
| Steelcase (2)(3)  P.O. Box 1967  Grand Rapids, MI  49501-1967                           |   | 1,333,748                           |   | 29.1                               | %      |
|                                                                                         |   |                                |   |                               |   |
| 17th Avenue Properties,  LLC (5)  1631 NW Thurman Street  Portland, OR  97209           |   | 2,066,000                           |   | 44.9                               | %      |
|                                                                                         |   |                                |   |                               |   |
| John B. Conroy  (2)(3)(4)                                                                    |   | 1,333,748                           |   | 29.1                               | %      |
|                                                                                         |   |                                |   |                               |   |
| Michael W.  Stansell (2)(3)(4)                                                               |   | 1,333,748                           |   | 29.1                               | %      |
|                                                                                         |   |                                |   |                               |   |
| Herbert S. Shaw  (2)(3)(4)                                                                   |   | 1,333,748                           |   | 29.1                               | %      |
|                                                                                         |   |                                |   |                               |   |
| All directors and  executive officers as a group  (3 persons)                                |   | 1,333,748                           |   | 29.1                               | %      |

 

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(1)                                  Sharesto which the person or group has the right to acquire within 60 days afterMarch 19, 2002, are deemed to be outstanding in calculating the percentageownership of the person or group but are not deemed to be outstanding as to anyother person or group.

 

(2)                                  Includes794,445 shares held by Steelcase Inc.; 239,000 shares held by Mr. Conroy and87,033 shares held jointly by Mr. Conroy and Mr. Conroy’s wife; 139,603 sharesheld by Mr. Stansell; and 16,000 shares held by Mr. Shaw.

 

(3)                                  Includesthe following options exercisable with in 60 days after March 19, 2002:  41,667 options held by Mr. Conroy; 13,000options held by Mr. Stansell; 6,000 options held by Mr. Shaw.

 

(4)                                  Theaddress of Messrs. Conroy, Stansell, and Shaw is c/o Microfield Graphics, Inc.,P.O. Box 23968, Portland, Oregon, 97224.

 

(5)                                  Includeswarrants to purchase 2,066,000 shares exercisable within 60 days after March19, 2002.

 

 

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**ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

On March 19, 1998 the Company signed a common stock purchase agreementwith Steelcase under which Steelcase purchased 350,000 shares of the Company’scommon stock and a warrant for $2,012,500 in cash.  The warrant expired on March 19, 2001.  Pursuant to the terms of the common stock purchase agreement,James P. Keane, an officer of Steelcase, was elected to the Company’s Board ofDirectors.  Mr. Keane resigned onFebruary 17, 2000.  Steelcase has notdesignated any person to replace him. In addition, Microfield, Steelcase and certain directors and executivesof Microfield entered a Share Ownership, Voting and Right of First RefusalAgreement (“Voting Agreement”) pursuant to which the parties agreed to votetheir shares of common stock to elect certain individuals to the Board ofDirectors.  See “Security Ownership ofCertain Beneficial Owners and Management.” On March 26, 1999 Microfield sold Steelcase an additional 444,445 sharesof the Company’s common stock pursuant to a common stock purchase agreement for$1,000,000 in cash.

 

On October 22, 1998, pursuant to an executive loan program authorizedby the Board of Directors, John B. Conroy borrowed money from Microfield inorder to exercise options for 45,000 shares of the Company’s common stock.  The transaction resulted in a note dueMicrofield from Mr. Conroy in the amount of $78,750, with interest at 6% peryear, due on October 22, 2003.

 

On June 30, 2000, the Company issued a Subordinated Promissory Note toJMW Capital Partners, Inc. (“JMW”) pursuant to which the Company borrowed$400,000 from JMW.  The outstandingprincipal balance of the promissory note and all accrued and unpaid interestwas due on the earlier of (i) June 30, 2005 or (ii) demand by holder made atany time after June 30, 2003.  Inconnection with the issuance of the note, Dennis Wade and Robert Jesenik, who areprincipals of JMW, were appointed to the Company’s Board of Directors.  Also in connection with the Note, theCompany issued to JMW two stock warrants each to purchase 1,033,000 shares ofthe Company’s common stock at a price of $0.50 per share and $0.38722 pershare, respectively.  The warrants,which have since been transferred to 17th Avenue Properties, LLC, areexercisable until June 30, 2005.    Theaggregate estimated fair value of the warrants, as determined using theBlack-Scholes pricing model, of $357,418 was recorded as a debt discount andwas to be amortized over the three-year term of the related debt.  Amortization of the discount was included ininterest expense on the income statement during fiscal 2000.  On December 24, 2000, the Company repaid theSubordinated Promissory Note.  As aresult of the debt retirement, the Company recorded a loss on earlyextinguishment of $297,848, which was equal to the unamortized discount on thedate of retirement.  Messrs. Wade andJesenik resigned from the Company’s Board of Directors in December 2001.

 

 

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**Item13.  Exhibits and Reports on Form 8-K**

 

(a) The exhibits filed aspart of this report is listed below:

 
| Exhibit No.          |   |                                                                                                                                                                                                        |
|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.1                 |   | Articles of Incorporation, as amended                                                                                                                                                                       |
| *3.2                 |   | Bylaws, as amended                                                                                                                                                                                          |
| *4.1                 |   | See Article III of Exhibit 3.1 and Articles I and VI  of Exhibit 3.2                                                                                                                                        |
| #*10.1               |   | 1986 Stock Option Plan, as amended                                                                                                                                                                          |
| *10.3                |   | Form of Incentive Stock Option Agreement                                                                                                                                                                    |
| *10.7                |   | Form of Representative’s Warrants                                                                                                                                                                      |
| **10.11              |   | Restated 1995 Stock Incentive Plan dated May 11,  1998.                                                                                                                                                     |
| ***10.14             |   | Form of $400,000 Subordinated Promissory Note issued  to JMW Capital Partners, Inc., dated June 30, 2000.                                                                                                   |
| ***10.15             |   | Form of Stock Purchase Warrants to Purchase Shares  of Common Stock of Microfield Graphics, Inc. issued to JMW Capital Partners,  Inc., dated June 30, 2000.                                                |
| ***10.16             |   | Form of Registration Rights Agreement between the  Company and JMW Capital Partners, Inc., dated June 30, 2000.                                                                                             |
| ***10.17             |   | Form of Note and Warrant Purchase Agreement between  the Company and JMW Capital Partners, Inc. dated June 30, 2000.                                                                                        |
| ****10.18            |   | Form of Asset Purchase Agreement between Greensteel,  Inc., and Microfield Graphics, Inc., dated September 7, 2000, incorporated by  reference to the Company’s Proxy Statement dated October 3, 2000. |
| 21    |   | The Company has one subsidiary, MG Export, Inc., a  Barbados corporation                                                                                                                                    |
| *****23.1            |   | Consent of PricewaterhouseCoopers LLP, Independent  Accountants                                                                                                                                             |

 

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*                                         Incorporatedby reference to Exhibits 3.1, 3.2, 4.1, 10.1, 10.3, 10.7, as applicable, toRegistrant’s Registration Statement on Form SB-2 (Registration No. 33-918900).

 

**                                  Incorporatedby reference to Exhibit 10.11 to Registrants Quarterly Report on Form 10-QSBfor the three month period ended July 3, 1999.

 

***                           Incorporatedby reference to Exhibits 10.14, 10.15, 10.16, 10.17, as applicable, toRegistrants Quarterly Report on Form 10-QSB for the three month period endedJuly 1, 2000.

 

****                    Incorporatedby reference to Exhibit 10.18 to Registrants Quarterly Report on Form 10-QSBfor the three month period ended September 30, 2000.

 

*****             Exhibit 23.1 filed herewith.

 

#                                         Thisexhibit constitutes a management contract, or compensatory plan or arrangement.

 

                                                (b)Reports on Form 8-K

 

None filed for the periodended December 29, 2001.

 

 

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**SIGNATURES**

** **

Pursuant to the requirements of the Securities and Exchange Act of1934, the issuer caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

Dated:   March 29, 2002

 
|   | MICROFIELD GRAPHICS, INC.                   |
|--------|---------------------------------------------|
|   |                                        |
|   | By: /s/                                     | JOHN B. CONROY |   |
|   | John B. Conroy                              |
|   | Chief Executive Officer                     |
|   | (Principal Executive and Financial 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 theRegistrant and in the capacities and on the dates indicated:

 
| Signature               | Title                       |
|-------------------------|-----------------------------|
|                    |                        |
| /s/ John B.  Conroy     |                        | Chairman of the Board, Chief Executive Officer and  Financial Officer |
| John  B.  Conroy   | Date:  March  29, 2002 |
|                    |                        |
| /s/ HERBERT S. SHAW     |                        | Director |
| Herbert S. Shaw         | Date:  March  29, 2002 |
|                    |                        |
| /s/ MICHAEL W. STANSELL |                        | Director |
| Michael W. Stansell     | Date:  March  29, 2002 |

 

 

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