<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 March 31, 1996
--------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-9899
---------
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 Identification No.)
incorporation or organization)
350 Oak Grove Parkway
St. Paul, Minnesota 55127-8599
--------------------------------------------------
(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: 2,538,393 as of May 10, 1996
----------------------------
Transitional Small Business Disclosure Format (check one): Yes ; No X
---- ----
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FIRST QUARTER 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
---------- ----------
<S> <C> <C>
Equipment sales $3,844,552 $3,767,577
Service and supply revenue 1,250,122 1,071,280
---------- ----------
Total revenue 5,094,674 4,838,857
Cost of equipment sales 2,399,219 2,339,398
Cost of service and supply 659,735 558,380
---------- ----------
Cost of products and services 3,058,954 2,897,778
---------- ----------
Gross margin on sales 2,035,720 1,941,079
Gross margin as a percent of sales 40.0% 40.1%
Expenses:
Selling 1,613,860 1,781,570
Administrative and general 608,602 923,673
Research and development 456,785 567,962
---------- ----------
2,679,247 3,273,205
---------- ----------
Operating loss (643,527) (1,332,126)
Interest expense (31,358) (314)
---------- ----------
Loss before income taxes (674,885) (1,332,440)
Income tax benefit (60,000) (335,000)
---------- ----------
Net loss $ (614,885) $ (997,440)
---------- ----------
---------- ----------
Net loss per share $ (0.24) $ (0.40)
---------- ----------
---------- ----------
Weighted average common shares
outstanding 2,538,393 2,481,601
</TABLE>
See accompanying notes
(2)
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited) Note
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 207,173 $ 30,899
Accounts receivable, net 7,116,582 9,181,691
Inventories:
Purchased components and work in process 4,118,351 3,746,407
Finished goods 2,566,477 2,413,933
----------- -----------
6,684,828 6,160,340
Prepaid expenses and other current assets 167,609 168,661
Refundable income taxes 443,000 443,000
----------- -----------
Total Current Assets 14,619,192 15,984,591
Equipment and Fixtures 4,095,621 3,932,396
Less accumulated depreciation (2,833,884) (2,724,893)
----------- -----------
1,261,737 1,207,503
Software Production Costs, net 390,278 397,048
Other Assets 37,189 37,630
----------- -----------
$16,308,396 $17,626,772
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $2,231,695 $1,825,595
Bank line of credit 675,000 1,675,000
Employee compensation 751,508 957,447
Deferred service contract revenue 1,255,978 1,156,420
Warranty reserve 240,000 240,000
Other liabilities and accrued expenses 335,786 462,372
----------- -----------
Total Current Liabilities 5,489,967 6,316,834
Shareholders' Equity
Common stock 126,420 124,813
Additional paid-in capital 10,042,379 9,920,610
Retained earnings 649,630 1,264,515
----------- -----------
10,818,429 11,309,938
----------- -----------
$16,308,396 $17,626,772
----------- -----------
----------- -----------
</TABLE>
Note - The Balance Sheet at December 31, 1995 was derived from the
audited financial statements at that date, but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See accompanying notes
(3)
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST QUARTER 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31 March 31
1996 1995
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (614,885) $(997,440)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation 108,991 87,500
Amortization 61,208 35,028
Changes in operating assets and liabilities:
Accounts receivable 2,065,109 474,170
Inventory and prepaid expenses (523,436) (727,972)
Other assets 441 7,831
Accounts payable and accrued expense 73,575 329,530
Income taxes payable (344,294)
Deferred service contract revenue 99,558 95,651
---------- ---------
NET CASH PROVIDED BY (USED) IN
OPERATING ACTIVITIES 1,270,561 (1,039,996)
INVESTING ACTIVITIES
Software production costs (54,438) ( 33,221)
Capital expenditures (163,225) ( 137,080)
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (217,663) ( 170,301)
FINANCING ACTIVITIES
Net payment on bank line of credit (1,000,000)
Proceeds from sale of Common Stock under
Employee Stock Purchase Plan 41,126 57,352
Proceeds from stock options exercised 82,250 26,715
---------- ---------
NET CASH PROVIDED BY / (USED IN)
FINANCING ACTIVITIES (876,624) 84,067
---------- ---------
INCREASE / (DECREASE) IN CASH AND
CASH EQUIVALENTS 176,274 (1,126,230)
Cash and cash equivalents beginning
of period 30,899 1,726,241
---------- ---------
CASH AND CASH EQUIVALENTS
END OF PERIOD $207,173 $ 600,011
---------- ---------
---------- ---------
</TABLE>
See accompanying notes
(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. Operating results for the three-
month period ended March 31, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. 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, 1995.
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
The Company incurred a net loss of $614,885 for the first quarter of 1996, as
compared with a net loss of $997,440 for the same period last year. The loss
for the first quarter last year included charges 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.
Equipment sales were $3,844,552 for the first quarter of 1996, an increase of
2.0 percent from the $3,767,577 reported for the comparable quarter in 1995.
Service and supply revenues increased $178,842 or 16.7 percent over the first
quarter of 1995 due primarily to increased supply sales.
Gross margin as a percentage of sales was 40.0 percent in the first quarter of
1996 compared to 40.1 percent for the first quarter of 1995. The 1996 gross
margin was negatively impacted by price erosion in the domestic marketplace
whereas the first quarter of 1995 gross margin included a $200,000 writedown of
the value of research and development inventory.
Selling expenses of $1,613,860 in the first quarter of 1996 were $167,710 or 9.4
percent less than the comparable period in 1995. This decrease was due
primarily to unfilled vacancies in the domestic sales force and reductions in
sales management partially offset by increases in marketing expenses.
Administrative and general expenses decreased $315,071 or 34.1 percent in the
first quarter of 1996 to $608,602. The decrease relative to the comparable
quarter in 1995 was due primarily 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 in the first quarter of 1995.
(5)
<PAGE>
Research and development expenses of $456,785 were $111,177 less than the
comparable period in 1995 primarily due to a temporary decrease in staff,
consultants and reduced project expenses.
Net interest expense increased from $314 in the first quarter of 1995 to $31,358
in 1996. This was due to increased borrowing of short-term funds under the
available bank line of credit.
The Company recorded a $60,000 tax benefit in the first quarter due to the
ability to carryback a portion of the current quarter loss as an offset to prior
year taxable income. The Company has used up its prior year tax carrybacks
during the first quarter of 1996.
LIQUIDITY AND FINANCIAL CONDITION
As of March 31, 1996, the Company had cash and cash equivalents of $207,173
working capital of $9,129,225 and borrowing under the bank line of credit of
$675,000. The Company has $1,825,000 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 bank line of credit will provide sufficient
working capital through 1996.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 ("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. An initial payment of $1.5 million was
received in December, 1995 of which the Company retained
approximately $975,000 after deducting legal expenses.
Subsequent semiannual payments will be received over an
eight-year period, subject to mandatory prepayment upon the
occurrence of certain financing and other events by
SensorMedics. A judgement was entered dismissing with
prejudice all remaining claims against the Company, granting
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
None
Item 6. Reports on Form 8-K
No reports on Form 8-K were filed during the first
quarter of 1996.
(6)
<PAGE>
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 May 10, 1996 /s/ Eric W. Sivertson
-------------- ------------------------------------------
Eric W. Sivertson, Chief Executive Officer
(Principal Executive Officer)
(7)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the first
quarter 10QSB as filed by Medical Graphics Corporation and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 207,173
<SECURITIES> 0
<RECEIVABLES> 7,428,020
<ALLOWANCES> (311,439)
<INVENTORY> 6,684,828
<CURRENT-ASSETS> 14,619,192
<PP&E> 4,095,621
<DEPRECIATION> (2,833,884)
<TOTAL-ASSETS> 16,308,396
<CURRENT-LIABILITIES> 5,489,967
<BONDS> 0
0
0
<COMMON> 126,420
<OTHER-SE> 10,692,009
<TOTAL-LIABILITY-AND-EQUITY> 16,308,396
<SALES> 3,844,552
<TOTAL-REVENUES> 5,094,674
<CGS> 2,399,219
<TOTAL-COSTS> 3,058,954
<OTHER-EXPENSES> 2,679,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,358
<INCOME-PRETAX> (674,885)
<INCOME-TAX> (60,000)
<INCOME-CONTINUING> (614,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (614,885)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
