<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
-------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-9899
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MEDICAL GRAPHICS CORPORATION
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1316712
- ------------------------------- --------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Oak Grove Parkway
St. Paul, Minnesota 55127-8599
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(Address of principal executive offices) (Zip Code)
(612) 484-4874
--------------------------
(Issuer's telephone number)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 2,448,637 as of August 7, 1995
------------------------------
Transitional Small Business Disclosure Format (check one): Yes ; No X
---- ----
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
SECOND QUARTER AND SIX MONTHS 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three-Months Ended Six-Months Ended
June 30 June 30
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equipment sales $ 4,359,523 $ 4,617,664 $ 8,127,100 $ 8,985,027
Service and supply revenue 1,173,171 1,088,705 2,244,451 2,134,680
----------- ----------- ----------- -----------
Total revenue 5,532,694 5,706,369 10,371,551 11,119,707
Cost of equipment sales 2,445,119 2,387,970 4,819,517 4,647,754
Cost of service and supply 544,587 497,138 1,067,967 995,409
----------- ----------- ----------- -----------
Cost of products and services 2,989,706 2,885,108 5,887,484 5,643,163
----------- ----------- ----------- -----------
Gross margin on sales 2,542,988 2,821,261 4,484,067 5,476,544
Gross margin as a percent of sales 46.0% 49.4% 43.2% 49.3%
Expenses:
Selling 1,800,710 1,520,748 3,582,280 2,994,339
Administrative and general 669,776 458,526 1,593,449 878,162
Research and development 534,041 472,870 1,102,003 914,421
----------- ----------- ----------- -----------
3,004,527 2,452,144 6,277,732 4,786,922
----------- ----------- ----------- -----------
Operating income (loss) (461,539) 369,117 (1,793,665) 689,622
Interest (expense) income (13,365) 9,605 (13,679) 17,800
----------- ----------- ----------- -----------
Income (loss) before income taxes (474,904) 378,722 (1,807,344) 707,422
Income tax (benefit) expense (120,000) 134,000 (455,000) 248,000
----------- ----------- ----------- -----------
Net income (loss) $ (354,904) $ 244,722 $(1,352,344) $ 459,422
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share $ (0.15) $ 0.10 $ (0.55) $ 0.19
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding 2,438,176 2,463,527 2,437,045 2,469,116
</TABLE>
(2)
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
June 30, 1995 Dec 31, 1994
--------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 280,703 $ 1,726,241
Accounts receivable, net 8,066,607 8,240,252
Inventories:
Purchased components and work in process 3,998,787 3,187,879
Finished goods 2,428,392 2,009,103
----------- -----------
6,427,179 5,196,982
Prepaid expenses and other current assets 599,891 314,702
Deferred income taxes 222,000 222,000
----------- -----------
Total Current Assets 15,596,380 15,700,177
Equipment and Fixtures 3,681,691 3,490,227
Less accumulated depreciation (2,516,913) (2,343,794)
----------- -----------
1,164,778 1,146,433
Software Production Costs, net 414,907 421,844
Other Assets 53,292 68,955
----------- -----------
$17,229,357 $17,337,409
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,950,034 $ 1,766,822
Bank line of credit 1,075,000 --
Employee compensation 829,255 791,841
Deferred service contract revenue 1,151,399 1,063,204
Warranty reserve 240,000 240,000
Income taxes -- 344,294
Other liabilities and accrued expenses 398,418 282,169
----------- -----------
Total Current Liabilities 5,644,106 4,488,330
Deferred Tax Liability 74,000 74,000
Shareholders' Equity
Common stock 121,939 120,865
Additional paid-in capital 9,746,045 9,658,602
Retained earnings 1,643,267 2,995,612
----------- -----------
11,511,251 12,775,079
----------- -----------
$17,229,357 $17,337,409
----------- -----------
----------- -----------
</TABLE>
(3)
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
SECOND QUARTER 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30 June 30
1995 1994
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $(1,352,344) $ 459,422
Adjustments to reconcile net income to
net cash provided by / (used in) operating activities:
Depreciation 173,119 147,372
Amortization 65,028 93,148
Changes in operating assets and liabilities:
Accounts receivable 173,645 45,415
Inventory and prepaid expenses (1,060,387) (967,801)
Other assets 15,663 15,663
Accounts payable and accrued expense 336,875 19,957
Income taxes payable (799,294) (59,493)
Deferred service contract revenue 88,195 15,833
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,359,500) (230,484)
CASH FLOWS FROM INVESTING ACTIVITIES
Software production costs (58,091) (88,122)
Capital expenditures (191,464) (386,414)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (249,555) (474,536)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing on bank line of credit 1,075,000
Proceeds from stock options exercised 88,517 73,585
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,163,517 73,585
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,445,538) (631,435)
Cash and cash equivalents beginning of period 1,726,241 2,005,794
----------- -----------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 280,703 $ 1,374,359
----------- -----------
----------- -----------
</TABLE>
(4)
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE A - MANAGEMENT OPINION
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation of results have been included. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the fiscal year
ended December 31, 1994.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Overview:
The Company incurred a net loss of $354,904 for the second quarter of
1995, as compared with net income of $244,722 for the same period last
year. The net loss for the six month period in 1995 was $1,352,344
compared to income of $459,422 for the same period in 1994. The loss
for the six month period in 1995 included charges recorded in the first
quarter totalling $550,000 pre-tax or $412,000 on an after tax basis,
which were comprised of a $250,000 reserve for employee severance and
organizational changes, a $200,000 write-down of research and
development related inventory and a $100,000 increase in the bad debt
reserve. Excluding the charges recorded in the first quarter 1995, the
six month net loss would have been $940,344.
Equipment sales of $4,359,523 for the second quarter of 1995, a 5.6 percent
decrease from the $4,617,664 reported for the comparable quarter in 1994.
Although equipment sales were less than the prior comparable period, they
increased 16 percent over the first quarter of 1995. Service and supply
revenues increased $84,466 or 7.8 percent for the second quarter of 1995 due
to increased supply sales and training revenues. Total equipment sales for the
six month period in 1995 were $8,127,100 as compared to $8,985,027 in 1994,
this $857,927 decrease is due to less than expected sales performance.
Gross margin as a percentage of sales decreased to 46.0 percent in the
second quarter of 1995 from 49.4 percent for the second quarter of
1994. This decrease in the second quarter gross margin percentage is
primarily due to an increase in manufacturing expenses over 1994 levels
and the impact of lower-than-expected sales volume relative to fixed
manufacturing expenses. Gross margins for the six month period
decreased to 43.2 percent from 49.3 percent due to the factors
described above and the $200,000 writedown of the value of research and
development inventory recorded in the first quarter of 1995.
Selling expenses of $1,800,710 in the second quarter of 1995 were
$279,962 or 18 percent more than the comparable period in 1994. This
increase was due to the addition of sales and marketing management,
domestic and international sales representatives and new business
development as well as investments in new market opportunities related
to the June 1995 introduction of the CPX Express-TM- System. Selling
expenses of $3,582,280 for the six month period were $587,941 more than
the comparable period due to the reason as described above.
(5)
<PAGE>
Administrative and general expenses of $669,776 increased $211,250 in
the second quarter of 1995 over the comparable period in 1994,
primarily due to legal fees related to the Company's lawsuit with
SensorMedics Corporation. Six month expenditures in 1995 were $715,287
more than the comparable period in 1994 due to the recording of a
$250,000 reserve for severance and related costs and an increase in the
allowance for doubtful accounts of $100,000 (both recorded in the first
quarter 1995) and legal fees related to the Company's lawsuit with
SensorMedics Corporation.
Research and development expenses of $534,041 were $61,171 more than
the comparable period in 1994 primarily due to increased staff and
project expenses related to development of the CPX Express as well as
other new products. Expenses for the six month period were $1,102,003
compared to $914,421 in 1994, primarily due to the reasons stated
above.
Net interest (expense) income decreased from $9,605 of interest income
in the second quarter of 1994 to $13,365 of interest expense in 1995.
This decrease was due to the shift of having funds available for short-
term investment in 1994 to borrowing short-term funds under the
available bank line of credit in the second quarter of 1995. Interest
expense for the six month period in 1995 was $13,679 compared to
interest income of $17,800 in 1994, due to company's cash position
shifting from having funds available for investment in 1994 to
borrowing on the bank line of credit in the second quarter of 1995.
The Company recorded a $120,000 tax benefit in the second quarter due
to the ability to carryback the current quarter loss to offset prior
year taxable income. The Company's effective income tax rate was 35.4
percent in the second quarter of 1994. The total tax benefit recorded
for the six month period in 1995 was $455,000 as compared to tax
expense of $248,000 in 1994.
The Company recorded a loss of $354,904 for the second quarter of 1995
compared to income of $244,722 for the second quarter of 1994. The
decreased quarterly earnings resulted primarily from the substantial
sales shortfall, an increase in operating expenses as the Company
expanded it's sales and marketing organization, continued investment in
research and development activities and legal costs related to the
lawsuit with SensorMedics Corporation. The loss the six month period
in 1995 amounted to $1,352,344 compared to income of $459,422 reported
for the same period in 1994.
FINANCIAL CONDITION
As of June 30, 1995, the Company had cash and cash equivalents of
$280,703, working capital of $11,027,274 and borrowing under the bank
line of credit of $1,075,000. The Company has $1,425,000 available to
borrow under it's $2,500,000 bank line of credit. The Company believes
that current working capital combined with projected revenues and the
existing bank line of credit will provide sufficient working capital
through 1995.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In April 1994, the Company filed a lawsuit in federal district court in
Minnesota against its California competitor SensorMedics Corporation
("SensorMedics"). The complaint alleges that SensorMedics has
infringed a patent of the Company, disparaged the Company's products,
engaged in deceptive trades practices, and unfair competition,
interfered with Company contractual relationships with customers and
defamed the Company. The infringement claim relates to the Company's
patent covering a cardiopulmonary exercise testing system providing
real-time, "breath-by-breath" analysis of a person's exercise capacity.
The complaint seeks unspecified damages and injunctive relief against
SensorMedics. In June 1994, SensorMedics filed counterclaims against
the Company alleging that the Company has
(6)
<PAGE>
infringed a patent of SensorMedics, disparaged SensorMedics' products,
engaged in deceptive trade practices, and unfair competition, has
attempted to monopolize the market, interfered with SensorMedics
contractual relationships with it's customers and defamed SensorMedics.
(The Company believes that its patent is valid, that it is not infringing
any valid patent of SensorMedics and that the counterclaims made by
SensorMedics are without merit.) The Company and SensorMedics have completed
the discovery phase related to this lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
On May 12, 1995, the Company held its annual meeting of shareholders.
The Company's shareholders elected two members to the Company's Board
of Directors for terms expiring at the annual meeting in 1998 and
ratified the selection of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ended December 31, 1995. The
two directors elected were Wayne G. Farris (2,036,256 votes in favor
and 45,605 votes withheld) and Brian P. King (2,036,256 votes in favor
and 57,238 votes withheld). The terms of the other directors of the
Company, Catherine A. Anderson, Earl E. Bakken, Anthony J. Adducci,
Gerald T. Knight, Donald C. Wegmiller and W. Edward McConaghay,
continued after the annual meeting. The ratification of the selection
of Ernst & Young LLP as independent auditors was by a vote of 2,076,207
in favor and 11,625 against, with 5,662 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re: Computation of per share earnings
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 1995.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Medical Graphics Corporation
- ----------------------------
(Registrant)
Date August 10, 1995 /s/ Catherine A. Anderson
-------------------- ----------------------------------------
Catherine A. Anderson,
Chief Executive Officer
(Principal Executive Officer)
Date August 10, 1995 /s/ Brian P. King
-------------------- ----------------------------------------
Brian P. King,
Vice President -- Finance
(Principal Financial and
Accounting Officer)
(7)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ---------- ----------- ----
<S> <C> <C>
11 Statement re: Computation of Per
Share Earnings (loss) 9
</TABLE>
(8)
<PAGE>
EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)
MEDICAL GRAPHICS CORPORATION
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRIMARY AND FULLY DILUTED:
Average shares outstanding 2,438,176 2,398,567 2,437,045 2,396,686
Net effect of dilutive stock options --
based on the treasury stock method
using year-end market price,
if higher than average market price -- 64,960 -- 72,430
---------- ---------- ---------- ---------
TOTAL 2,438,176 2,463,527 2,437,045 2,469,116
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net income (loss) $ (354,904) $ 244,722 $(1,352,344) $ 459,422
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net income (loss) per share of
Common Stock $ (.15) $ .10 (.55) $ .19
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
(9)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
COMPANY PREPARED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 280,703
<SECURITIES> 0
<RECEIVABLES> 8,312,913
<ALLOWANCES> 246,306
<INVENTORY> 6,427,179
<CURRENT-ASSETS> 15,596,380
<PP&E> 3,681,691
<DEPRECIATION> 2,516,913
<TOTAL-ASSETS> 17,229,357
<CURRENT-LIABILITIES> 5,644,106
<BONDS> 0
<COMMON> 121,939
0
0
<OTHER-SE> 11,389,312
<TOTAL-LIABILITY-AND-EQUITY> 17,229,357
<SALES> 0
<TOTAL-REVENUES> 10,371,551
<CGS> 5,887,487
<TOTAL-COSTS> 6,277,732
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,679
<INCOME-PRETAX> (1,807,344)
<INCOME-TAX> (455,000)
<INCOME-CONTINUING> (1,352,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,352,344)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
