<PAGE>
ANNUAL REPORT ON FORM 10-KSB
MEDICAL GRAPHICS CORPORATION
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION, Washington, D.C. 20549
Form 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Fiscal Year ended DECEMBER 31, 1995 Commission File number 0-9899
MEDICAL GRAPHICS CORPORATION
MINNESOTA 41-1316712
350 OAK GROVE PARKWAY, ST. PAUL, MINNESOTA 55127
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (612) 484-4874
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.05 PER SHARE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes _X_ No
___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. _X_
State issuer's revenues for its most recent fiscal year: $21,639,587.
State the aggregate market value of the voting stock (Common Stock) held by non-
affiliates of the registrant based on the closing sale price as reported by The
Nasdaq Stock Market on March 22, 1996: $13,097,565.*
As of March 22, 1996, 2,538,393 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Shareholders for the year ended
December 31, 1995 are incorporated by reference into Items 6 and 7 of Part II.
Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 23, 1996 are incorporated by reference into Items 9,
10, 11 and 12 of Part III.
Transitional Small Business Disclosure Formats (check one): Yes ___ No _X_
- -----------------------------------------
*Shares of Common Stock held beneficially be directors, executive officers and
persons known to own beneficially in excess of 5 percent of the Common Stock
have been excluded in calculating this value.
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<PAGE>
PART I
Unless the context indicates otherwise, all references to the "Company",
"Registrant' or the "Issuer" in this Annual Report on Form 10-KSB relate to
Medical Graphics Corporation and its subsidiary.
The following United States registered trademarks appear in this Annual Report
on Form 10-KSB and are owned by the Company: MedGraphics.
The following Company trademarks appear in this Annual Report on Form 10-KSB:
PF/Dx, preVent, BREEZE, 1085 Series, CardiO(2), CPX/D, CPX/MAX/D, and CPX
EXPRESS. CardiO-KEY is a trademark of ErgometRx Corporation.
Item 1. Description of Business
GENERAL DEVELOPMENT
Medical Graphics Corporation was incorporated as a Minnesota corporation in
1977. The Company designs and produces innovative non-invasive diagnostic
systems for the prevention, early detection, and cost-effective treatment of
heart and lung disease. Medical Graphics Corporation has grown from providing
computerized lung function test graphics to a wide-ranging line of diagnostic
systems featuring patented hardware and software sold under the MedGraphics-
Registered Trademark- trade name.
Primary products include pulmonary function testing systems and cardiopulmonary
exercise testing systems. Most of the Company's revenues are generated from
sales into the hospital cardiopulmonary market, with a growing percentage of
revenues coming from the office-based physician market. Revenues from service
and supplies accounted for 22 percent of total revenues in 1995, up from 19
percent in 1994. Today, Medical Graphics Corporation sells its products and
services in over 50 countries, has 135 employees, and operates a wholly owned
subsidiary in Dusseldorf, Germany.
PRIMARY PRODUCTS
PULMONARY FUNCTION TESTING SYSTEM. The PF/Dx-TM- System is a complete pulmonary
function testing lab which helps health care professionals diagnose lung
diseases and manage treatment of their patients. Applications include screening
asthma patients, assessing pre-operative and postoperative risk of lung
transplantation patients, evaluating lung damage from occupational exposures,
and documenting outcomes and responses to therapy.
The system's compact design and mobility options result in a wide variety of
customers, including cardiopulmonary laboratories in hospitals, office-based
clinics, occupational medicine clinics, asthma centers, and clinical research
centers. The system utilizes the preVent-TM- Pneumotach, a pneumotach designed
to help prevent the communication of infectious diseases. Its snap-in, snap-out
design allows health care professionals to easily change pneumotachs between
patient tests. The PF/Dx's unique features also include BREEZE-TM- software,
designed to be easy to learn and use.
BODY PLETHYSMOGRAPHY SYSTEMS. The 1085 Series-TM- offers four body
plethysmography systems for lung function testing. Body plethysmography is the
most sensitive method for identifying lung diseases, including difficult-to-
detect diseases such as asthma. Applications include diagnosing lung diseases
and managing their treatment, assessing surgical risk of lung transplant and
lung reduction surgery candidates, and evaluating the impact of neuromuscular
disease on breathing.
- 3 -
<PAGE>
Options included in the 1085 Series systems include the preVent pneumotach for
helping to prevent the spread of infectious diseases between patient tests. The
system's design optimizes patient comfort with clear-view acrylic enclosures and
enables testing of a broad population including individuals using wheelchairs
and pediatric patients.
CARDIOPULMONARY EXERCISE TESTING SYSTEMS. The Company's cardiopulmonary
exercise systems help physicians diagnose heart and lung diseases by measuring
the gas exchange of the patient's lungs in conjunction with the electrical
activity of their heart. Should there be a limitation in the heart or lungs or
in the level of conditioning, these systems help detect and quantify the degree
of impairment by measuring the amount of oxygen consumed during exercise.
MedGraphics cardiopulmonary exercise testing systems include the CardiO(2)-TM-
System, CPX/D-TM- System, CPX/MAX/D-TM- System, and CPX EXPRESS-TM- System
introduced in 1995. The systems are used for differential diagnosis of
cardiovascular and pulmonary disease, screening for early signs of cardiac and
pulmonary dysfunction, establishing exercise prescriptions and training
programs, and evaluating the efficacy of prescribed therapy. Test results are
displayed in easy-to-interpret graphs and summary reports. Customers include
hospital cardiopulmonary laboratories, cardiology and pulmonary office-based
clinics, and cardiac rehabilitation units.
CYCLE ERGOMETERS. The Company offers several models of cycle ergometers
providing physicians and patients a tool for more successful outcomes in
clinical rehabilitation and athletic training. The CardiO(2) Cycle Series
incorporates patented CardiO-KEY-TM- technology, a key capable of storing
exercise protocols and recording exercise session data. The key is used to
individualize exercise sessions and monitor progress.
COMPETITION AND INDUSTRY
Medical Graphics Corporation is the third largest producer of non-invasive
cardiorespiratory diagnostic systems in the world. More than 3,000 MedGraphics
systems now operate in over 50 countries. The company's technology is regarded
as the industry's finest, with computer software providing unparalleled
accuracy, speed, and ease-of-use, and other features, including infection
control, not presently found in competitive products.
The principal competitive factors in the Company's markets are quality of system
performance, software which is technologically advanced, and customer service.
Medical Graphics Corporation's markets are characterized by intense competition.
Some companies with which the Company competes have greater financial, human and
technological resources than Medical Graphics Corporation. The competitive
marketplace has in some circumstances led to price discounting and Medical
Graphics Corporation has, from time to time, reduced its prices in response to
competitive pressures and may do so again in the future.
The medical device industry in which the Company operates is characterized by
rapid technological change. Accordingly, the Company must continually implement
improvements in its core technologies and products. The Company's success
depends on its ability to anticipate changes in technology and industry
standards and to develop and successfully introduce new and enhanced products on
a timely basis, and on the market acceptance of such products.
- 4 -
<PAGE>
DISTRIBUTION AND MARKETING
Currently, the core markets for MedGraphics products are the pulmonary and
cardiology markets, with customers located in hospitals, university-based
medical centers, and office-based clinics. With the introduction of the CPX
EXPRESS System in 1995, the Company expanded its product line into the office-
based stress testing market and the health club market.
In the U.S., Medical Graphics Corporation markets its products through a direct
sales force. To enhance long-term growth of the Company, management expanded
the Company's sales and marketing organization beginning in the second half of
1994 and continued through 1995. Although the costs associated with the
organizational changes negatively impacted earnings, the Company believes
continued expansion of its sales and marketing organization is essential to
long-term shareholder value. Company sales representatives are compensated with
a base salary, expenses and a commission based on sales.
Domestic equipment sales decreased 10.7% to $10,904,447 in 1995 compared to
$12,210,002 in 1994 and $10,117,947 in 1993. The decrease in sales from 1994 to
1995 resulted primarily from reduced selling prices and a change in product mix
to lower-priced products.
The Company markets its products into international markets through independent
international sales organizations. A wholly owned subsidiary, MedGraphics GmbH,
directly markets the Company's products in Germany. International sales
decreased 8.6 percent in 1995 to $5,976,008, compared to $6,535,965 in 1994 and
$5,299,029 in 1993. The decrease is attributable to a reduction in product
sales in the Pacific Rim partially offset by increased sales in Europe.
Conducting business in foreign countries involves certain risks not ordinarily
associated with domestic business, including changes in foreign currency
exchange rates and the possible imposition of exchange controls or other
governmental laws or restrictions that could adversely affect pricing of, and
the Company's ability to market, its products.
The Company's promotional efforts include product demonstrations at conventions,
educational seminars, advertisements, direct mail campaigns, and telemarketing.
The Company's future profitability will depend, in part, on the success of its
marketing ability to expand knowledge of the applications of its technology.
RESEARCH AND DEVELOPMENT
The Company's research and development expenses were substantially the same
level as in 1994. Research and development expenses increased 25.4% in 1994,
from $1,545,821 in 1993 to $1,937,821 in 1994; representing 8.4% of revenues in
1994, compared to 8.1% in 1993. This increase was related to development of the
Company's new CPX EXPRESS system. In its current research and development
efforts, the Company emphasizes improvements to existing products to enhance its
position in the marketplace as well as development of new products targeted for
growth markets to diversify and grow the Company. The Company believes ongoing
research and development efforts have been and will remain important to its
continuing success
SOURCES OF SUPPLY
The Company currently manufactures all major analyzer components of its systems
including a waveform analyzer, gas chromatograph, nitrogen analyzer and oxygen
analyzer. Sheet metal, electrical components and some measurement devices are
purchased from outside vendors and are tested,
- 5 -
<PAGE>
assembled and packaged by Company personnel into fully integrated systems.
General purpose computers available from multiple sources are sold with the
Company's transducer modules. The Company develops and supports its own
software. The Company's policy is to maintain operating inventory levels
based on anticipated sales levels over the succeeding three months. The
Company does not anticipate any difficulties in obtaining raw materials
sufficient to manufacture products in the quantities forecasted.
BACKLOG
The Company fills orders as they are received and has had no significant order
backlogs. Accordingly, the Company periodically has experienced month-to-month
fluctuations in its net sales. The Company has experienced and may in the
future experience periods in which low unit volume could result in operating
losses.
GOVERNMENT REGULATION
Products manufactured by Medical Graphics Corporation are "devices" as defined
in the Federal Food, Drug and Cosmetic Act (the "Act") and are subject to the
regulatory authority of the Food and Drug Administration (FDA) over the
manufacture and distribution and related record keeping, labeling and
advertising thereof. The Medical Device Amendments of 1976 (the "Amendments")
amended the Act and substantially increased the regulatory authority of the FDA
over medical devices. Devices manufactured by the Company must comply with the
provisions of this law. Under the Amendments, the FDA must determine the extent
of control necessary to assure the safety and effectiveness of devices, and must
define these control levels by the promulgation of regulations and standards.
The Company has filed notifications with the FDA of its intent to market its
systems pursuant to Section 510(k) of the Amendments. Under Section 510(k), a
medical device can be marketed if the FDA determines that the device is
substantially equivalent to similar devices marketed prior to May 28, 1976. The
FDA made such determinations for those systems, and the Company is marketing the
devices under Section 510(k).
The action of the FDA does not, however, constitute approval by the FDA of the
Company's products or pass upon their safety and effectiveness. The FDA has
increased the depth of its inspections for compliance with Good Manufacturing
Practices Regulations covering software documentation, as well as hardware
documentation.
The Company's products are also subject to similar regulation in various foreign
countries. In Europe, the Medical Device Directive (MDD) which covers all
devices that are not active implantables (e.g. pacemakers) or IN VITRO devices,
came into force January 1, 1995 with a three and one-half year transition
period. To meet the essential requirements of the MDD, the Company is actively
pursuing ISO 9000 Certification followed by CE Marketing of the Company's
products which will allow the Company to market its products freely anywhere in
the European Community without further control.
The regulation of medical devices in the U.S., in conjunction with the ISO 9000
Certification and CE Marketing in Europe, can increase the time and cost
associated with the development and introduction of new and enhanced products,
can delay the Company's ability to introduce and market such products and, if
the Company is found to be in violation of regulations, could adversely affect
the Company's business. The Company believes that it is currently in material
compliance with such applicable regulations.
- 6 -
<PAGE>
Federal, state and load environmental laws and regulations do not materially
affect the Company's operations and the Company believes that it is currently in
material compliance with such applicable environmental laws and regulations.
PATENTS
Medical Graphics Corporation owns patents on its inventions essential to its
competitive technological advantages. There is no assurance that the Company's
patents will afford it a significant competitive advantage. The Company
believes that the knowledge, skills and creativity of its employees are more
important than patent protection.
EMPLOYEES
As of December 31, 1995, the Company had a total of 136 employees, of which 134
were full-time employees. No employees are represented by labor organizations
and there arc no collective bargaining agreements. Employee relations are
believed to be good.
Item 2. Description of Property
The Company currently leases a 52,250 square foot building for its office,
assembly and warehouse facilities located in St. Paul, Minnesota. The Company
expanded its St. Paul facilities by 13,250 square feet in 1995, primarily by
adding manufacturing and warehouse space. In conjunction, the Company extended
its lease of the facility until June 30, 2002. The facilities are in good
condition. Annual rental costs will be approximately $420,000 over the next
five years. Rent expense for the years ended December 31, 1995, 1994 and 1993
was $301,000, $278,000 and $263,000, respectively.
Item 3. Legal Proceedings
Medical Graphics Corporation v. SensorMedics Corporation, Case No. 3-94-525
(Minn. D. Ct.). On April 15, 1994, the Company commenced an action (the
"action") against SensorMedics Corporation, a California corporation
("SensorMedics"), alleging that SensorMedics had infringed the Company's patent
on a cardiopulmonary diagnostic exercise testing system and for various acts of
unfair competition. SensorMedics denied the allegations and asserted
counterclaims against the Company for patent infringement and unfair
competition. The Company denied those allegations.
In various pretrial rulings, the court dismissed SensorMedics' claim of patent
infringement and certain of its unfair competition claims against the Company.
Prior to the commencement of trial, the Company and SensorMedics reached a
settlement. While the precise terms of the settlement are confidential, the
settlement agreement states that the Company will receive aggregate payments of
$4.35 million from which the Company will retain approximately $2.83 million
after deducting legal expenses associated with the litigation including an
initial payment of $1.5 million of which the Company retained approximately
$975,000 after deducting legal expenses and subsequent semi-annual payments
over an eight-year period, subject to mandatory prepayment upon the occurrence
of certain financing and other events by SensorMedics.
A judgment was entered dismissing with prejudice all remaining claims against
the Company, granting the Company the right to proceed against one of
SensorMedics' insurers for an additional $250,000, and upholding the validity,
enforceability, and infringement of the Company's patent.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
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<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Market Information
The Company's common stock trades on The Nasdaq Stock Market (on the
National Market System) under the symbol MGCC. The following table shows
the range of high and low bid prices for the Company's Common Stock on The
Nasdaq Stock Market for the fiscal quarters indicated, as reported by
Nasdaq in its "Monthly Statistical Report". The quotations represent
prices in The Nasdaq Stock Market between dealers in securities, and do not
include retail mark-up, mark-down or commission, and may not represent
actual transactions.
Bid Prices
-----------
High Low
---- ---
1995
First Quarter $ 6 1/2 $ 5 3/8
Second Quarter 6 1/4 5
Third Quarter 6 3/4 4 3/8
Fourth Quarter 6 1/4 4 3/8
1994
First Quarter $ 8 1/4 $ 5 3/4
Second Quarter 7 1/4 5 1/4
Third Quarter 7 1/2 5 1/2
Fourth Quarter 7 1/4 5 1/4
____________________________________________________
(b) Approximate Number of Holders of Common Equity
Approximate Number of
Record Holders
Title of Class (as of March 22, 1996)
-------------- ----------------------
Common Stock, par value of $.05 2,500
(c) Dividends
The Company has not paid any dividends on its Common Stock, and the Board
of Directors intends to retain earnings for the foreseeable future for use
in the expansion of the Company's business.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1995
Annual Report to Shareholders is hereby incorporated by reference.
- 8 -
<PAGE>
Item 7. Financial Statements
The following financial statements of the Company, included in the 1995 Annual
Report to Shareholders, pages 11 through 16, are incorporated herein by
reference:
(i) Consolidated Statement of Financial Position-December 31, 1995 and 1994
(ii) Consolidated Statements Operations-Years ended December 31, 1995, 1994
and 1993
(iii) Consolidated Statements of Shareholders' Equity-Years ended December 31,
1995, 1994 and 1993
(iv) Consolidated Statements of Cash Flows-Years ended December 31, 1995, 1994
and 1993
(v) Notes to Consolidated Financial Statements- December 31, 1995
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
- 9 -
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information contained under the headings "Election of Directors", "Executive
Officers of the Company", and "Section 16(a) Reporting" in the Company's
definitive proxy statement for its annual meeting of shareholders to be held May
23, 1996, is hereby incorporated by reference.
Item 10. Executive Compensation
The information contained under the heading "Executive Compensation" in the
Company's definitive proxy statement for its annual meeting of shareholders to
be held May 23, 1996, is hereby incorporated by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its annual meeting of shareholders to be held May 23, 1996, is hereby
incorporated by reference.
Item 12. Certain Relationships and Related Transactions
The information contained under the heading "Certain Transactions" in the
Company's definitive proxy statement for its annual meeting of shareholders to
be held May 23, 1996, is hereby incorporated by reference.
Item 13. Exhibits and Reports on Form 8-K
The following portions of Item 13 are submitted as separate sections of this
report:
(a) (1) -List of financial statements
(a) (2) -List of exhibits
(a) (3) -Exhibits
(b) Reports on Form 8-K-No reports on Form 8-K were filed during the three
months ended December 31, 1995.
- 10 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registration has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEDICAL GRAPHICS CORPORATION
March 22, 1996 /s/ Eric W. Sivertson
- -------------- -----------------------------
Date Eric W. Sivertson, President
and Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
Signature Title Date
/s/ Eric W. Sivertson March 22, 1996
- ------------------------
Eric W. Sivertson President, Chief Executive
Officer and Director (Principal
Executive Officer)
/s/ Catherine A. Anderson March 22, 1996
- -------------------------
Catherine A. Anderson Chairman of the Board and
Director
/s/ Brian P. King March 22, 1996
- -------------------------
Brian P. King Vice President-Finance and
Administration, Treasurer
(Principal Financial and
Accounting Officer)
/s/ Anthony J. Adducci March 22, 1996
- -------------------------
Anthony J. Adducci Director
/s/ Earl E. Bakken March 22, 1996
- -------------------------
Earl E. Bakken Director
/s/ Wayne G. Faris March 22, 1996
- -------------------------
Wayne G. Faris Director
/s/ Gerald T. Knight March 22, 1996
- -------------------------
Gerald T. Knight Director
/s/ W. Edward McConaghay March 22, 1996
- --------------------------
W. Edward McConaghay Director
/s/ Donald C. Wegmiller March 22, 1996
- --------------------------
Donald C. Wegmiller Director
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<PAGE>
ANNUAL REPORT ON FORM 10-KSB
ITEM 13(a)(1)
LIST OF FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
MEDICAL GRAPHICS CORPORATION
SAINT PAUL, MINNESOTA
The following financial statements of Medical Graphics Corporation included in
the annual report of the Registrant to its shareholders for the year ended
December 31, 1995 are incorporated by reference in Item 7:
Consolidated Statements of Financial Position-December 31, 1995 and 1994
Consolidated Statements of Operations-Years ended December 31, 1995, 1994 and
1993.
Consolidated Statements of Shareholders' Equity-Years ended December 31, 1995,
1994 and 1993
Consolidated Statements of Cash Flows-Years ended December 31, 1995, 1994 and
1993
Notes to Consolidated Financial Statements-December 31, 1995.
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<PAGE>
ANNUAL REPORT ON FORM 10-KSB
ITEM 13(a)(2)-LISTING OF EXHIBITS
AND
ITEM 13(a)(3)-EXHIBITS
YEAR ENDED DECEMBER 31, 1995
MEDICAL GRAPHICS CORPORATION
SAINT PAUL, MINNESOTA
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number or Incorporation by
Exhibit Number Description Reference to
- -------------- ----------- --------------------------------
<S> <C> <C>
3(a) Restated Articles of Incorporation, Exhibit 3(a) to Report for the year
as amended ended December 31, 1991, file no. 0-9899
3(b) Amended bylaws Exhibit 3(b) to Report on Form 10-
KSB for the year ended December 31,
1992, file No. 0-9899
4(a) Specimen Common Stock Exhibit 4(a) to Report on Form 10-
Certificate KSB for the year ended December 31,
1992, file no. 0-9899
10(b) Seventh Amendment to Lease for Exhibit 10(b) to Report on Form 10-
350 Oak Grove Parkway, St. Paul, KSB for the year ended December 31,
Minnesota 1994, file no. 0-9899
10(c) Revolving Credit Agreement, dated Exhibit 10(b) to Report on Form 10-
August 31, 1993, between the KSB for the year ended December 31,
Company and Marquette Capital 1993, file no. 0-9899
Bank, Minneapolis
10(d) Amendment No. 1 to Loan Exhibit 10(d) to Report on Form 10-
Documents dated March 29, 1995, KSB for the year ended December 31,
between the Company and 1994, file no. 0-9899
Marquette Capital Bank,
Minneapolis
10(e)* 1987 Stock Option Plan Exhibit 10(d) to Report on Form 10-
KSB for the year ended December, 31,
1992, file no. 0-9899
10(f) Sub-license Agreement between the Exhibit 10(e) to REport on Form 10-
company and ErgometRx KSB for the year ended December 31,
Corporation (formally Scientific 1992, file no 0-9899
Exercise Prescriptions
Incorporated), dated February 11,
1993
10(g)* Employee Stock Purchase Plan Exhibit 10(e) to Report on Form 10-
KSB for the year ended December 31,
1993, file no. 0-9899
</TABLE>
- -----------------------------------------
* Being filed pursuant to Item 601(b)(10)(ii)(A) of Regulation S-B
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<PAGE>
<TABLE>
<CAPTION>
Page Numbers or Incorporation by
Exhibit Number Description Reference to
- -------------- ----------- --------------------------------
<S> <C> <C>
10(h)* Stock Option Agreement between Exhibit 10(g) to Report on Form 10-
the Company and Catherine A. KSB for the year ended December 31,
Anderson 1992, file no. 0-9899
10(i)* Non-Employee Director Stock Exhibit 10(g) to Report on Form 10-
Option Plan KSB for the year ended December 31,
1992, file no. 0-9899
10(j)* Stock Option Agreement between Exhibit 10(h) to Report on Form 10-
the Company and Donald C. KSB for the year ended December 31,
Wegmiller 1993, file no. 0-9899
11 Statement re: Computation of Per
Share Earnings
12 Portions of 1995 Annual Report to
Shareholders Incorporated by
Reference
21 Subsidiaries of the Registrar
23 Consent of Ernst & Young LLP
</TABLE>
- -----------------------------------------
* Being filed pursuant to Item 601(b)(10)(ii)(A) of Regulation S-B
- 15 -
<PAGE>
EXHIBIT 11-STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
MEDICAL GRAPHICS CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Primary
Average shares outstanding 2,449,760 2,404,707 2,373,213
Net effect of dilutive stock options-
based on the treasury stock method
using the average market price - - - 72,224 65,542
----------- --------- ---------
TOTAL 2,449,760 2,476,931 2,438,755
----------- --------- ---------
-- -------- --------- ---------
Net income (loss) $(1,731,097) $ 657,865 $ 851,204
----------- --------- ---------
----------- --------- ---------
Net income (loss) per share of
Common Stock $ (.71) $ .27 $ .35
----------- --------- ---------
----------- --------- ---------
Fully Diluted
Average shares outstanding 2,449,760 2,404,707 2,373,213
Net effect of dilutive stock options-
based on the treasury stock method
using year-end market price,
if higher than average market price - - - 72,224 65,542
----------- ---------- ---------
TOTAL 2,449,760 2,476,931 2,438,755
----------- ----------- ---------
----------- ----------- ---------
Net income (loss) $(1,731,097) $ 657,865 $ 851,204
----------- ---------- ---------
----------- ---------- ---------
Net income (loss) per share of
Common Stock $ (.71) $ .27 $ .35
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of products sold 57.0 51.2 49.3
----------------------
Gross Margin 43.0 48.8 50.7
Selling 33.5 28.3 27.7
Administration and general 14.0 8.2 9.1
Research and development 8.9 8.4 8.1
----------------------
Total 56.4 44.9 44.9
Income (loss) from operations (13.4) 3.9 5.8
Other income 4.5
Net interest (expense) income (0.5) 0.1 0.1
----------------------
Income (loss) before
Income Taxes (9.4) 4.0 5.9
Income Taxes (benefit) (1.4) 1.2 1.4
----------------------
Net Income (loss) (8.0)% 2.8% 4.5%
- ------------------------------------------------------------
RESULTS OF OPERATIONS
SALES Net sales of $21,639,587 in 1995 decreased 6.2% compared to sales of
$23,078,578 in 1994. Sales in 1994 increased 20.9% from $19,076,502 in 1993.
The decrease in sales from 1994 to 1995 resulted primarily from a 10%
decrease in domestic and international equipment sales partially offset by a
10% increase in service and supply revenues.
Domestic equipment sales decreased 10.7% to $10,904,447 in 1995 compared to
sales of $12,210,002 in 1994 and $10,117,947 in 1993. The decrease in sales
resulted primarily from reduced selling prices and a change in product mix to
lower priced products.
International sales decreased 8.6% to $5,976,008 in 1995 compared to sales of
$6,535,965 in 1994 and $5,299,029 in 1993. This decrease is attributable to a
reduction in product sales in the Pacific Rim region partially offset by
increased sales in Europe.
Service and Supply sales increased 9.8% to $4,759,132 compared to $4,332,611
in 1994 and $3,659,526 in 1993. These steady sales increases are primarily
the result of increased sales of disposables used with our newest line of
products.
GROSS MARGIN Gross margin for 1995 was 43.0% of net sales compared to 48.8%
for 1994. This decrease in gross margin percentage is attributable to price
competition in the domestic marketplace, reduced sales volume related to fixed
manufacturing expenses and $370,000 in inventory writedowns of R&D and other
inventory.
Gross margin as a percentage of sales decreased from 50.7% in 1993 to 48.8%
in 1994. This gross margin decrease is due to a product mix shift to lower
margin systems, and continued price competition.
SELLING Selling expenses increased 11.1% from $6,529,918 in 1994 to
$7,253,096 in 1995. During 1995, the Company added a new marketing manager
and product managers to strengthen its marketing department, invested in
developing alternative markets, established a national accounts program and
added additional sales and service representatives in Germany.
Selling expenses increased 23.6% in 1994. This increase was due to the
continued strengthening of the Company's sales and marketing areas by
expanding the number of domestic sales representatives in the field and by
adding sales and marketing management.
ADMINISTRATIVE AND GENERAL Administrative and general expenses increased
60.7% in 1995 as the Company incurred significant expenses related to its
lawsuit with SensorMedics Corporation, employee termination expenses,
recruiting expenses and increases in its accounts receivable reserves.
In 1994 general and administrative expenses increased 8.5% from $1,740,142 in
1993 to $1,887,282 in 1994. This increase is primarily due to increased legal
and investor relations expenditures during the year.
RESEARCH AND DEVELOPMENT Research and development expenses in 1995 were at
substantially the same level as 1994.
Research and development expenses in 1994 increased 25.4% from $1,545,821 in
1993 to $1,937,821 in 1994. This increase is due to additional staffing,
equipment testing and validation, consulting and material costs primarily
supporting the development of the Company's new CPX EXPRESS product.
OTHER INCOME The Company received payments of $1,500,000 related to the
settlement of a lawsuit with SensorMedics Corporation, of which it retained
$975,000 after deducting legal expenses.
NET INTEREST (EXPENSE) INCOME In 1995, the Company incurred net interest
expense of $104,608 as compared to interest income of $26,302 in 1994. The
interest expense resulted from interest payments related to borrowings under
the Company's working capital line of credit used to fund operations in 1995.
In 1994 interest income increased slightly over 1993, primarily as a result
of higher short-term interest rates, which were partially offset by a lower
average short-term investment balance during the year.
INCOME TAXES The Company recorded an income tax benefit of $307,000 in 1995,
which is due to the carryback of the current year's operating loss to income
recorded in prior years offset against a valuation allowance related to the
prior year net deferred tax assets.
The effective tax rate for 1994 was 29% as compared to 24% in 1993. This
increase in the effective tax rate in 1994 is attributable to the decrease of
the valuation allowance related to deferred taxes and the limitation of the
deductibility of the operating loss of the Company's foreign subsidiary.
MEDICAL GRAPHICS CORPORATION 10
<PAGE>
NET INCOME The Company incurred a loss of $1,731,097 in 1995 due primarily to
lower gross margins on sales as well as increased operating expenses.
Net income decreased 22.7% in 1994 from $851,204 in 1993 to $657,865 in 1994,
due primarily to increased expenses and reduced gross margins.
IMPACT OF INFLATION The Company believes that, during 1995, inflation has had
no appreciable effect on the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1995, the company had cash
and cash equivalents of $30,899 and working capital of $9,667,757. Cash and
cash equivalents decreased $1,695,342 from December 31, 1994, and borrowings
under the Company's working capital line of credit increased $1,675,000
primarily to fund the 1995 operating loss of $1,731,097 and provide for an
increase in inventories of $817,317 and accounts receivable of $941,439 as
well as the purchases of equipment and fixtures.
The Company has a $2,500,000 bank line of credit available under which
$1,675,000 was utilized as of December 31, 1995. The Company believes that
current working capital combined with projected earnings from operations and
the current bank line of credit will provide sufficient working capital
through 1996.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 30,899 $ 1,726,241
Accounts receivable, less allowance of $363,000 and
$162,000 in 1995 and 1994, respectively 9,181,691 8,240,252
Inventories:
Purchased components and work in process 3,746,407 3,187,879
Finished goods 2,413,933 2,009,103
----------------------------
6,160,340 5,196,982
Refundable income taxes 443,000
Prepaid expenses and other current assets 168,661 314,702
Deferred income taxes 222,000
----------------------------
Total Current Assets 15,984,591 15,700,177
EQUIPMENT AND FIXTURES 3,932,396 3,490,227
Less accumulated depreciation (2,724,893) (2,343,794)
----------------------------
1,207,503 1,146,433
SOFTWARE PRODUCTION COSTS, less accumulated
amortization of $718,923 and $530,458 in 1995
and 1994, respectively 397,048 421,844
OTHER ASSETS 37,630 68,955
----------------------------
$17,626,772 $17,337,409
- ---------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,825,595 $ 1,766,822
Note payable 1,675,000
Employee compensation 957,447 791,841
Deferred service contract revenue 1,156,420 1,063,204
Warranty reserve 240,000 240,000
Income taxes 344,294
Other liabilities and accrued expenses 462,372 356,169
----------------------------
Total Current Liabilities 6,316,834 4,562,330
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, par value $.05 per share; authorized
10,000,000 shares; issued and outstanding 2,496,261
and 2,417,304 in 1995 and 1994, respectively 124,813 120,865
Additional paid-in capital 9,920,610 9,658,602
Retained earnings 1,264,515 2,995,612
----------------------------
11,309,938 12,775,079
----------------------------
$17,626,772 $17,337,409
- ----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
11 MEDICAL GRAPHICS CORPORATION
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equipment sales $16,880,455 $18,745,967 $15,416,976
Service and supply revenue 4,759,132 4,332,611 3,659,526
----------- ----------- -----------
Total Revenue 21,639,587 23,078,578 19,076,502
Cost of equipment sales 9,991,247 9,723,042 7,678,044
Cost of service and supply revenue 2,337,253 2,098,952 1,727,351
----------- ----------- -----------
Cost of Goods Sold 12,328,500 11,821,994 9,405,395
Gross Margin 9,311,087 11,256,584 9,671,107
Operating expenses:
Selling 7,253,096 6,529,918 5,284,458
Administration and general 3,032,797 1,887,282 1,740,142
Research and development 1,933,683 1,937,821 1,545,821
----------- ----------- -----------
12,219,576 10,355,021 8,570,421
Income (Loss) from operations (2,908,489) 901,563 1,100,686
Other Income - SensorMedics Settlement 975,000
Interest Income (Expense) (104,608) 26,302 24,518
----------- ----------- -----------
Income (Loss) Before Income Taxes (2,038,097) 927,865 1,125,204
Income taxes (Benefit) (307,000) 270,000 274,000
----------- ----------- -----------
Net Income (Loss) $(1,731,097) $ 657,865 $ 851,204
Net income (Loss) per share of Common Stock $ (.71) $ .27 $ .35
- ------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares outstanding 2,449,760 2,476,931 2,438,755
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1992 2,363,563 $118,178 $9,451,044 $1,486,543 $11,055,765
Net income for the year 851,204 851,204
Common Stock issued upon exercise
of stock options 15,917 796 48,173 48,969
Tax benefits arising from disqualifying
dispositions of stock acquired through
exercise of stock options 14,656 14,656
-------------------------------------------------------------
Balance December 31, 1993 2,379,480 118,974 9,513,873 2,337,747 11,970,594
Net income for the year 657,865 657,865
Common Stock issued upon exercise of stock
options 20,450 1,022 65,990 67,012
Common Stock issued under Employee Stock
Purchase Plan 17,374 869 78,739 79,608
-------------------------------------------------------------
Balance December 31, 1994 2,417,304 120,865 9,658,602 2,995,612 12,775,079
Net loss for the year (1,731,097) (1,731,097)
Common Stock issued upon exercise of stock
options 57,707 2,885 166,458 169,343
Common Stock issued under Employee Stock
Purchase Plan 21,250 1,063 95,550 96,613
-------------------------------------------------------------
Balance December 31, 1995 2,496,261 $124,813 $9,920,610 $ 1,264,515 $11,309,938
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
MEDICAL GRAPHICS CORPORATION 12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (Loss) $(1,731,097) $ 657,865 $ 851,204
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation 381,099 321,743 272,967
Amortization 188,465 163,196 193,503
Provision for deferred taxes 148,000 38,000 (144,000)
Changes in operating assets and liabilities:
Accounts receivable (941,439) 12,796 (828,776)
Inventory and prepaid expenses (817,317) (1,064,995) (50,129)
Other assets 31,325 31,325 (58,216)
Refundable income taxes (443,000)
Accounts payable and accrued expenses 60,288 (4,010) 975,142
Deferred service contract revenue 93,216 228,759 (12,488)
---------------------------------------
Net Cash (Used in) Provided by Operating Activities (3,030,460) 384,679 1,199,207
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (442,169) (674,869) (433,208)
Software production costs (163,669) (135,984) (146,954)
---------------------------------------
Net Cash Used in Investing Activities (605,838) (810,853) (580,162)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit agreement 1,675,000
Proceeds from sale of Common Stock under Employee Stock Purchase Plan 96,613 79,608
Proceeds from stock options exercised 169,343 67,012 48,969
--------------------------------------
Net Cash Provided by Financing Activities 1,940,956 146,620 48,969
--------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (1,695,342) (279,554) 668,014
Cash and cash equivalents beginning of year 1,726,241 2,005,795 1,337,781
--------------------------------------
Cash and Cash Equivalents End of Year $ 30,899 $1,726,241 $2,005,795
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
REPORT OF INDEPENDENT AUDITORS
MEDICAL GRAPHICS CORPORATION
BOARD OF DIRECTORS
We have audited the accompanying consolidated balance sheets of Medical
Graphics Corporation as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medical
Graphics Corporation at December 31, 1995 and 1994, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Minneapolis, Minnesota
February 16, 1996 Ernst & Young LLP
13 MEDICAL GRAPHICS CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION Medical Graphics Corporation (the Company) designs and produces
innovative noninvasive diagnostic systems for the prevention, early detection
and cost-effective treatment of heart and lung disease. The financial
statements include the accounts of the Company and its wholly owned
subsidiary, Medical Graphics Corporation, GmbH. All intercompany transactions
have been eliminated.
CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the
Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES Inventories are valued at the lower of cost or market determined
by the first-in, first-out method.
EQUIPMENT AND FIXTURES Equipment and Fixtures are stated at cost. The Company
provides for depreciation using straight line and accelerated methods at
rates designed to amortize the cost of equipment and fixtures over their
estimated useful lives.
SOFTWARE PRODUCTION COSTS Software production costs are capitalized once
technological feasibility has been established, and all research and
development activities for other components of the product are completed. The
costs are amortized at a three- to five-year straight line amortization.
SERVICE CONTRACTS Amounts billed to customers under service contracts are
recognized in income over the term of the agreement and costs are recognized
as incurred.
INCOME TAXES Income taxes are recorded under the liability method. Deferred
income taxes are recorded to reflect the tax consequences on future years of
differences between the bases of assets and liabilities for income tax and
for financial reporting purposes using enacted tax rates in effect for the
year in which the differences are expected to reverse.
NET INCOME (LOSS) PER SHARE Net income (loss) per share of Common Stock is
computed by dividing net income by the weighted average number of shares
outstanding and the dilutive effect of common stock equivalents during each
year. Common equivalent shares from stock options and warrants are excluded
from the computation of net loss per share of common stock as their effect is
antidilutive.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from the
estimates.
IMPAIRMENT OF LONG-LIVED ASSETS The Company records losses on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount.
NOTE 2 STOCK OPTIONS AND WARRANTS
The Company has an Employee Incentive Stock Option Plan. Options granted are
generally exercisable over a one- to five-year period from date of grant at
prices not less than the fair market value at the date the options are
granted. Also under the 1987 Option Plan nonqualified options have been issued
to members of the Board of Directors and other non-employees. These options
are exercisable over a one- to five-year period from date of grant.
In May 1994, the Company adopted a Non-Employee Director Stock Option Plan,
which provides for the grant of nonqualified options for a total of up to
150,000 shares of Common Stock to non-employee members of the Board of
Directors. Under the Plan an option to purchase 10,000 shares of Common Stock
will be granted automatically when an eligible director is first elected to
the Board of Directors of the Company. An option to purchase 2,000 shares
will be granted automatically following each Annual Meeting of the
Shareholders in which the director is serving in office. After the
non-employee director has served more than three years in office the annual
grant increases to 3,000. The option exercise price per share will equal the
fair market value of the Common Stock on the date of grant. All options
granted under the Plan become exercisable one year after the date of grant.
There are 636,422 shares of Common Stock reserved for issuance upon exercise
of stock options as of December 31, 1995.
MEDICAL GRAPHICS CORPORATION 14
<PAGE>
A summary of the activity is as follows:
<TABLE>
<CAPTION>
COMBINED OPTIONS OUTSTANDING
--------------------------------------
SHARES RESERVED SHARES
UNDER STOCK -------------------- PRICE
OPTION PLANS TOTAL EXERCISABLE PER SHARE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 560,895 405,525 220,601 $2.50 / $15.00
Additional shares reserved 150,000
Granted 62,000 142,950 10,000 5.25 / 7.75
Options becoming exercisable _ _ 100,666 3.50 / 15.00
Exercised (20,450) (20,450) (20,450) 2.50 / 5.50
-----------------------------------------------------
Canceled or expired _ (19,990) (11,550) 3.50 / 6.50
Balance at December 31, 1994 752,445 508,035 299,267 2.50 / 15.00
Granted _ 90,750 2,000 4.63 / 6.50
Options becoming exercisable _ _ 79,627 4.00 / 13.50
Exercised (64,023) (64,023) (64,023) 2.50 / 4.00
Canceled or expired (52,000) (82,592) (26,192) 2.63 / 8.75
-----------------------------------------------------
BALANCE AT DECEMBER 31, 1995 636,422 452,170 290,679 $2.50 / $15.00
- ------------------------------------------------------------------------------------------------
</TABLE>
A breakdown between the Employee Incentive Stock Option Plan (EISO) and the
nonqualified options outstanding as of December 31, 1995, is as follows:
OPTIONS OUTSTANDING
--------------------------------------
SHARES
----------------------- PRICE
TOTAL EXERCISABLE PER SHARE
- --------------------------------------------------------------------
EISO 220,870 116,415 $3.50 / $13.50
Nonqualified 231,300 174,264 3.50 / 15.00
--------------------------------------
BALANCE AT
DECEMBER 31, 1995 452,170 290,679 $3.50 / $15.00
- --------------------------------------------------------------------
In September 1991, the Company granted the underwriter of its public offering
a warrant to purchase 25,000 shares of Common Stock at $11.75 per share. The
warrant became exercisable on September 10, 1992, and will expire on
September 10, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has not determined the impact of the new statement
on its financial statements.
NOTE 3 INCOME TAXES
Significant components of the provision for income taxes are as follows:
1995 1994 1993
- --------------------------------------------------------------------
Current:
U.S. federal $(443,000) $200,000 $398,000
State 32,000 20,000
------------------------------------
(443,000) 232,000 418,000
Deferred:
U.S. federal 136,000 38,000 (144,000)
------------------------------------
$(307,000) $270,000 $ 274,000
- --------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1995 and 1994, are as follows:
1995 1994
- --------------------------------------------------------------------
Deferred tax assets:
Bad debts reserve $138,000 $ 62,000
Inventory reserve 103,000 61,000
Self-insurance reserve 25,000
Warranty reserve 91,000 91,000
Vacation accrual 35,000 35,000
Tax credit carryforwards 385,000 68,000
--------------------
Total deferred tax assets 752,000 342,000
Deferred tax liabilities:
Tax over book depreciation 81,000 74,000
Tax inventory capitalization 8,000 23,000
Capitalized Software and Patents 128,000 97,000
--------------------
Total deferred tax liabilities 217,000 194,000
--------------------
Net deferred tax asset 535,000 148,000
Valuation allowance 535,000
--------------------
Net Deferred tax assets $ _ $148,000
--------------------
15 MEDICAL GRAPHICS CORPORATION
<PAGE>
The reconciliation of income tax computed at the U.S.
federal statutory tax rate to income tax expense is:
1995 1994 1993
- --------------------------------------------------------------------
Taxes at statutory rate of 34% $(693,000) $316,000 $ 383,000
Limitation due to net
operating loss of
foreign operation 25,000 151,000
Benefit of foreign sales
corporation (68,000) (48,000)
Recognition of tax
credit carryforwards (13,000) --
State taxes, net of
federal benefit 21,000 55,000
SensorMedics settlement (157,000)
Increase (Decrease) of
deferred tax asset
valuation allowance 535,000 -- (277,000)
Other 8,000 (11,000) 10,000
------------------------------------
Net Tax Expense (Benefit) $(307,000) $270,000 $ 274,000
- --------------------------------------------------------------------
Effective Tax Rate 15% 29% 24%
As of December 31, 1995, the Company has research and development tax
credits, alternative minimum tax and state net operating loss carryforwards
totaling approximately $385,000 for income tax purposes that expire from 2002
through 2010. Total income taxes paid were $165,000, $324,000 and $253,000 in
1995, 1994 and 1993, respectively.
NOTE 4 LEASES
The Company leases office and manufacturing facilities, automobiles and
various office accessories. The building leases expire in 2002, at which time
they may be renewed for another four years. The Company has the option to
purchase the building at the end of each expiration period at the building's
fair market value.
Future minimum payments by year in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more,
consisted of the following at December 31, 1995:
1996 $406,000
1997 427,000
1998 419,000
1999 419,000
2000 348,000
Thereafter 522,000
----------
$2,541,000
- -------------------------------------------------
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$301,000, $278,000 and $263,000, respectively.
NOTE 5 NOTE PAYABLE TO BANK
The Company has a working capital line of credit with a bank whereby it may
borrow up to $2,500,000 with interest at prime (8.5% at December 31, 1995).
Interest is due on the first day of each month. The working capital line
expires on April 1, 1996. All borrowings are secured by the Company's
inventories and accounts receivable. As of December 31, 1995, the Company had
borrowings of $1,675,000 under the working capital line of credit. There were
no borrowings outstanding in 1994 and 1993. Total interest paid was $105,000,
$4,000 and $46,000 for 1995, 1994 and 1993, respectively.
NOTE 6 BENEFIT PLANS
Substantially all employees of the Company may participate in a defined
contribution plan established under the provisions of Section 401(k) of the
Internal Revenue Code. The Plan generally provides for a contribution by the
employee of up to 17% of their gross earnings with a 25% matching
contribution by the Company on the first 6% of gross earnings. The expense of
the Plan was approximately $73,000 in 1995, $52,000 in 1994 and $41,000 in
1993.
The Company's Employee Stock Purchase Plan, a qualified plan pursuant to
Internal Revenue Code Section 423, became effective in May 1993. The Plan
gives eligible employees an opportunity to purchase the Company's Common
Stock beginning July 1, 1993. Payroll deductions not exceeding 15% of
eligible compensation may be used to purchase stock at a per-share price of
85% of the lesser of the fair value on the first day or the last day of each
six-month purchase period. The six-month purchase periods begin on July 1st
and January 1st of each year. Participating employees may purchase a maximum
of 5,000 shares during each purchase period and no more than $25,000 of fair
value of stock in each calendar year. A total of 200,000 shares has been
authorized for issuance under the Plan. In 1995, 21,250 shares were issued
under the Plan. In 1994, 17,374 shares were issued under the Plan. Since the
Plan's first purchase period ended December 31, 1993, no shares were issued
under the Plan in 1993. The Plan will terminate on January 1, 2003, unless
extended by the Board of Directors.
NOTE 7 NATURE OF BUSINESS AND SEGMENT INFORMATION
The Company designs and manufactures innovative noninvasive diagnostic
systems for the prevention, early detection and cost-effective treatment of
heart and lung disease. The Company manufactures and sells its products to
customers primarily in the medical field. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. The Company requires irrevocable letters of credit on
sales to certain foreign customers. Receivables
MEDICAL GRAPHICS CORPORATION 16
<PAGE>
generally are due within 30 days for domestic customers. Credit losses
relating to customers consistently have been within management's
expectations. Export sales to foreign countries primarily in Europe accounted
for 28% of total sales in each of the years ended December 31, 1995, 1994 and
1993, respectively.
NOTE 8 RELATED PARTY TRANSACTION
A former Director of the Company is also the President of ErgometRx
Corporation. ErgometRx Corporation possesses certain proprietary information
and prototype hardware relating to an exercise bike used for stress testing
and physical exercise. The Company has obtained an exclusive license to
manufacture and sell products utilizing ErgometRx proprietary information in
certain markets under a five-year royalty agreement. Under this agreement, the
Company paid royalties of $96,000, $129,000 and $42,000 in 1995, 1994 and
1993, respectively.
NOTE 9 LITIGATION
Medical Graphics Corporation vs. SensorMedics Corporation, Case No. 3-94-525
(Minn. D. Ct.). On April 15, 1994, the Company commenced an action (the
"action") against SensorMedics Corporation, a California corporation
("SensorMedics"), alleging that SensorMedics had infringed the Company's
patent on a cardiopulmonary diagnostic exercise testing system and for
various acts of unfair competition. SensorMedics denied the allegations and
asserted counterclaims against the Company for patent infringement and unfair
competition. The Company denied those allegations. In various pretrial
rulings, the court dismissed SensorMedics' claim of patent infringement and
certain of its unfair competition claims against the Company. Prior to the
commencement of trial, the Company and SensorMedics reached a settlement.
While the precise terms of the settlement are confidential, the settlement
agreement states that the Company will receive aggregate payments of $4.35
million from which the Company will retain approximately $2.83 million after
deducting legal expenses associated with the litigation, including an initial
payment of $1.5 million, of which the Company retained approximately $975,000
after deducting legal expenses and subsequent semiannual payments over an
eight-year period, subject to mandatory prepayment upon the occurrence of
certain financing and other events by SensorMedics. A judgment was entered
dismissing with prejudice all remaining claims against the Company, granting
the Company the right to proceed against one of SensorMedics' insurers for an
additional $250,000, and upholding the validity, enforceability and
infringement of the Company's patent.
17 MEDICAL GRAPHICS CORPORATION
<PAGE>
EXHIBIT 21-SUBSIDIARIES OF THE REGISTRANT
MEDICAL GRAPHICS CORPORATION
Percentage
Subsidiary Name Owned Jurisdiction
- --------------- ----- ------------
Medical Graphics Corporation GmbH 100% German
- 17 -
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-KSB) of Medical Graphics Corporation of our report dated February 16,
1996, included in the 1995 Annual Report to Shareholders of Medical Graphics
Corporation.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-15765) pertaining to the 1987 Stock Option Plan of
Medical Graphics Corporation and in the Registration Statement (Form S-8 No.
33-47993) pertaining to the Medical Graphics Corporation 1987 Stock Option
Plan and 1991 Anderson Stock Option Agreement and in the Registration
Statement (Form S-8 No. 33-64430) pertaining to the Medical Graphics
Corporation 401(k) Savings Plan and in the Registration Statement (Form S-8
No. 33-64432) pertaining to the Medical Graphics Corporation Employee Stock
Purchase Plan and in the Registration Statement (Form S-8 No. 33-80596)
pertaining to the Medical Graphics Corporation Non-Employee Director Stock
Option Plan and in the Registration Statement (Form S-8 N. 33-80386)
pertaining to the Medical Graphics Corporation 1993 MacCarter Stock Option
Agreement and Medical Graphics Corporation 1993 Wegmiller Stock Option
Agreement of our report dated February 16, 1996, with respect to the
consolidated financial statements of Medical Graphics Corporation
incorporated by reference in the Annual Report (Form 10-KSB) for the year
ended December 31, 1995.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 28, 1996
- 18 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
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