<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, 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
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(Exact name of small business issuer as specified in its charter)
Minnesota 41-1316712
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
350 Oak Grove Parkway
ST. PAUL, MINNESOTA 55127-8599
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(Address of principal executive offices) (Zip Code)
(612) 484-4874
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(Issuer's telephone number)
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(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: 2,541,093 AS OF AUGUST 7, 1996
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 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three-Months Ended Six-Months Ended
June 30 June 30
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Equipment sales $ 4,185 $4,360 $ 8,030 $ 8,127
Service and supply revenue 1,123 1,173 2,373 2,245
------- ------ ------- -------
Total revenue 5,308 5,533 10,403 10,372
Cost of equipment sales 2,379 2,445 4,778 4,820
Cost of service and supply 715 545 1,375 1,068
------- ------ ------- -------
Cost of products and services 3,094 2,990 6,153 5,888
------- ------ ------- -------
Gross margin on sales 2,214 2,543 4,250 4,484
Gross margin as a percent of sales 41.7% 46.0% 40.9% 43.2%
Expenses:
Selling 1,892 1,801 3,505 3,582
Administrative and general 905 670 1,514 1,594
Research and development 564 534 1,021 1,102
------- ------ ------- -------
3,361 3,005 6,040 6,278
------- ------ ------- -------
Operating loss (1,147) (462) (1,790) (1,794)
Interest expense (32) (13) (64) (13)
------- ------ ------- -------
Loss before income taxes (1,179) (475) (1,854) (1,807)
Income tax benefit -- (120) (60) (455)
------- ------ ------- -------
Net loss $(1,179) $ (355) $(1,794) $(1,352)
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------- ------ ------- -------
Net loss per share $ (0.47) $(0.15) $ (0.71) $ (0.55)
------- ------ ------- -------
------- ------ ------- -------
Weighted average common
shares outstanding 2,533,334 2,438,176 2,530,298 2,437,045
</TABLE>
See accompanying notes
(2)
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
June 30, 1996 Dec. 31, 1995
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(Unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents $ 34 $ 31
Accounts receivable, net 7,353 9,182
Inventories:
Purchased components and work in process 4,363 3,746
Finished goods 2,960 2,414
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Total Inventories 7,323 6,160
Refundable income taxes - 443
Prepaid expenses and other current assets 510 169
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Total Current Assets 15,220 15,985
Equipment and Fixtures 4,438 3,932
Less accumulated depreciation (2,949) (2,725)
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1,489 1,207
Software Production Costs, net 385 397
Other Assets 33 38
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$17,127 $17,627
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------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,454 $1,826
Bank line of credit 2,200 1,675
Employee compensation 811 957
Deferred service contract revenue 1,188 1,157
Warranty reserve 240 240
Other liabilities and accrued expenses 493 462
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Total Current Liabilities 7,386 6,317
Shareholders' Equity
Common stock 127 125
Additional paid-in capital 10,144 9,921
Retained earnings (deficit) (530) 1,264
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9,741 11,310
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$17,127 $17,627
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------- -------
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 FLOW
SECOND QUARTER 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30 June 30
1996 1995
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<S> <C> <C>
CASH FLOWS FROM:
OPERATING ACTIVITIES
Net loss $(1,794) $(1,352)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 224 173
Amortization 125 65
Changes in operating assets and liabilities:
Accounts receivable 1,829 174
Inventory and prepaid expenses (1,504) (1,061)
Other assets 5 16
Accounts payable and accrued expense 513 337
Income taxes 443 (799)
Deferred service contract revenue 31 88
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NET CASH USED IN
OPERATING ACTIVITIES (128) (2,359)
CASH FLOWS FROM:
INVESTING ACTIVITIES
Software production costs (113) (58)
Capital expenditures (506) (191)
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NET CASH USED IN INVESTING ACTIVITIES (619) (249)
FINANCING ACTIVITIES
Borrowing on bank line of credit 525 1,075
Proceeds from stock transactions 225 88
------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 750 1,163
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INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3 (1,445)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 31 1,726
------- -------
END OF PERIOD $ 34 $ 281
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------- -------
</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. Operating results for the three
and six month periods ended June 30, 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
Equipment sales, service and supply revenue were virtually flat for the first
six months of 1996 at $10,403,000 versus $10,372,000 in 1995. Second quarter
revenues of $5,308,000, were down $225,000 from 1995's second quarter.
Gross margins as a percentage of sales decreased to 41.7 percent in the
second quarter of 1996 from 46 percent for the second quarter of 1995. This
decrease in the second quarter gross margin percentage is primarily due to
lower unit selling prices as a result of marketplace competition and the
impact of lower-than-expected sales volume relative to fixed manufacturing
expenses. Gross margins for the six-month period decreased to 40.9 percent
from 43.2 percent due to the factors described above.
Selling expenses of $1,892,000 in the second quarter of 1996 were $91,000 or
5 percent more than the comparable period in 1995. This increase was due to
the timing of annual sales and marketing meetings. Selling expenses of
$3,505,000 for the six-month period were $77,000 less than the comparable
period due to delays in filling open sales and marketing vacancies.
Administrative and general expenses of $905,000 increased $235,000 in the
second quarter of 1996 over the comparable period in 1995, primarily due to a
$189,000 increase in the allowance for doubtful accounts.
Research and development expenses remained relatively stable in both the
three-month and six-month periods ended June 30, 1996. Expenses increased
$30,000 for the second quarter and decreased $81,000 for six months when
compared to the same periods a year ago.
(5)
<PAGE>
Net interest expense increases are solely due to borrowing short-term funds
under the available bank line of credit. Interest expense for the second
quarter 1996 vs. 1995 was $32,000 and $13,000, respectively. Interest
expense for the six-month period ended June 30, 1996 vs. 1995 was $64,000 and
$13,000, respectively.
The Company did not record a tax benefit for any of the second quarter net
operating loss (NOL) and only recorded a $60,000 tax benefit for the first
quarter 1996 (NOL). These unused (NOL's) will be available when the Company
again becomes profitable. Tax benefits recorded in the first and second
quarters of 1995 were $120,000 and $455,000, respectively.
The Company recorded a loss of $1,179,000 for the second quarter of 1996
compared to a loss of $355,000 for the second quarter of 1995. The decreased
quarterly earnings of $704,000 resulted primarily from: (a) the gross margin
decline from 46 to 42 percent or $329,000; (b) an increase in operating
expenses of $356,000 caused by a $189,000 increase in the allowance for
doubtful accounts; (c) inclusion of a $120,000 tax benefit credit in 1995.
FINANCIAL CONDITION
As of June 30, 1996, the Company had cash and cash equivalents of $34,000,
working capital of $7,834,000 and borrowing under the bank line of credit of
$2,200,000. The Company has $1,300,000 available to borrow under its
$3,500,000 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 1996.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company during the second quarter of 1996 received the first semiannual
payment net of legal expenses of $122,000 under the terms of a settlement
reached with SensorMedics Corporation.
SensorMedics was acquired by a third party in July 1996 and accordingly
pursuant to the terms of the Settlement Agreement a check was received, which
will result in a third quarter gain of approximately $1,300,000 after legal
expenses.
Item 4. Submission of Matters to a Vote of Security Holders
On May 23, 1996, the Company held its annual meeting of shareholders. The
Company's shareholders elected three members to the Company's Board of
Directors for terms expiring at the annual meeting in 1999 and ratified the
selection of Ernst & Young LLP as the Company's independent auditors for the
fiscal year ended December 31, 1996. The three directors elected were
Anthony J. Adducci, Gerald T. Knight and W. Edward McConaghay (1,875,223
votes in favor and 76,360 votes withheld). The terms of the other directors
of the Company, (Catherine A. Anderson, Earl E. Bakken, Eric W. Sivertson,
Donald C. Wegmiller, and Wayne G. Faris) continue after the annual meeting.
The ratification of the selection of Ernst & Young LLP as independent
auditors was by a vote of 1,935,811 in favor and 15,102 against, with 670
abstentions.
(6)
<PAGE>
Also ratified by the shareholders were:
(A) Increase in the number of shares reserved under the Company's 1987
Stock Option Plan from 650,000 to 750,000. (Votes were: 1,753,918
for, 167,703 against, and 4,706 abstained)
(B) Extend the duration of the 1987 Stock Option Plan to five years from
the date of approval by the Shareholders. (Votes were: 1,782,409
for, 162,298 against, and 6,876 abstained)
(C) Amend the 1987 Stock Option Plan to provide option limitations pursuant
to Section 162(m) of the Internal Revenue Code of 1986 (the
"Code"). (Votes were: 1,814,295 for, 99,700 against, and 12,332
abstained)
Item 6. Reports on Form 8-K
No reports on Form 8-K were filed during the first or second
quarter of 1996.
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
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(Registrant)
Date AUGUST 9, 1996 /s/ Eric W. Sivertson
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Eric W. Sivertson, Chief Executive Officer
(Principal Executive Officer)
(7)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
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27 Financial Data Schedule
(8)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEDICAL
GRAPHICS CORPORATION FOR SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 34
<SECURITIES> 0
<RECEIVABLES> 7,853
<ALLOWANCES> (500)
<INVENTORY> 7,323
<CURRENT-ASSETS> 15,220
<PP&E> 4,438
<DEPRECIATION> (2,949)
<TOTAL-ASSETS> 17,127
<CURRENT-LIABILITIES> 7,386
<BONDS> 0
0
0
<COMMON> 127
<OTHER-SE> 9,614
<TOTAL-LIABILITY-AND-EQUITY> 17,127
<SALES> 8,030
<TOTAL-REVENUES> 10,403
<CGS> 4,778
<TOTAL-COSTS> 6,153
<OTHER-EXPENSES> 6,040
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> (1,854)
<INCOME-TAX> (60)
<INCOME-CONTINUING> (1,794)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,794)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
