<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended June 30, 1997
OR
( ) 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
incorporation or organization) Identification No.)
350 OAK GROVE PARKWAY, SAINT PAUL, MINNESOTA 55127-8599
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 484-4874
Indicate by check mark 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
------- -------
As of August 7, 1997, the Company had outstanding 2,605,475 shares of
Common Stock, $.05 par value, and 444,445 shares of Class A Stock, $.05 par
value.
Transitional Small Business Disclosure Format: Yes No X
------- -------
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL GRAPHICS CORPORATION
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1997 Dec. 31, 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 274 $ 545
Accounts receivable, net of allowance for
doubtful accounts of $279 and $496 4,230 4,814
Inventories:
Purchased components and work in process 2,114 4,433
Finished goods 2,437 2,200
------------- -------------
4,551 6,633
Prepaid expenses 245 193
------------- -------------
Total Current Assets 9,300 12,185
EQUIPMENT AND FIXTURES 3,943 3,857
Less: accumulated depreciation 2,817 2,531
------------- -------------
1,126 1,326
SOFTWARE PRODUCTION COSTS, net of
accumulated amortization of $734 and $989 447 472
OTHER ASSETS 17 20
------------- -------------
$10,890 $14,003
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,085 $ 921
Accounts payable financed with vendors - current 1,598 1,742
Bank line of credit 1,917 3,400
Employee compensation 820 978
Deferred service contract revenue 899 988
Warranty reserve 720 563
Other liabilities and accrued expenses 961 1,130
------------- -------------
Total Current Liabilities 8,000 9,722
COMMITMENTS AND CONTINGENCIES
LONG-TERM ACCOUNTS PAYABLE
FINANCED WITH VENDORS 1,409 1,736
SHAREHOLDERS' EQUITY
Class A stock; liquidation preference
of $3.375 per share 22 --
Common stock 130 128
Additional paid-in capital 12,327 10,224
Retained deficit (10,998) (7,807)
------------- -------------
1,481 2,545
------------- -------------
$10,890 $14,003
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements
(2)
<PAGE>
MEDICAL GRAPHICS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1997 1996 1997 1996
------ ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Equipment sales $3,773 $ 4,185 $ 7,396 $ 8,030
Service and supplies revenues 1,240 1,123 2,374 2,373
------ ------- ------- -------
Total revenues 5,013 5,308 9,770 10,403
COST OF REVENUES 3,086 3,094 6,304 6,153
------ ------- ------- -------
Gross margin 1,927 2,214 3,466 4,250
OPERATING EXPENSES:
Selling and marketing 1,531 1,892 3,070 3,505
General and administrative 510 1,026 884 1,635
Research and development 537 564 1,059 1,021
Provision for restructuring 150 -- 1,496 --
------ ------- ------- -------
2,728 3,482 6,509 6,161
------ ------- ------- -------
LOSS FROM OPERATIONS (801) (1,268) (3,043) (1,911)
NONOPERATING INCOME (EXPENSE)
SensorMedics settlement income -- 121 -- 121
Interest expense (63) (32) (148) (64)
------ ------- ------- -------
LOSS BEFORE INCOME TAXES (864) (1,179) (3,191) (1,854)
INCOME TAX BENEFIT --- --- -- (60)
------ ------- ------- -------
NET LOSS $ (864) $(1,179) $(3,191) $(1,794)
------ ------- ------- -------
------ ------- ------- -------
NET LOSS PER SHARE
OF COMMON STOCK $(0.29) $ (0.47) $ (1.15) $(0.71)
------ ------- ------- -------
------ ------- ------- -------
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 2,997 2,533 2,783 2,530
------ ------- ------- -------
------ ------- ------- -------
</TABLE>
See accompanying notes to financial statements
(3)
<PAGE>
MEDICAL GRAPHICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (864) $(1,179) $(3,191) $(1,794)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Issuance of common stock warrants -- -- 608 --
Depreciation 145 115 286 224
Amortization 103 64 166 125
Changes in operating assets and liabilities:
Accounts receivable (153) (236) 584 1,829
Inventory 759 (638) 2,082 (1,163)
Prepaid expenses and other assets 84 (338) (49) (336)
Accounts payable and accrued expenses (508) 439 (407) 513
Warranty reserve 5 -- 157 --
Income taxes -- 443 -- 443
Deferred service contract revenue (35) (68) (89) 31
-------- ------- ------- -------
Net cash provided by (used in) operating activities (464) (1,398) 147 (128)
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Software production costs (78) (59) (141) (113)
Capital expenditures (74) (343) (86) (506)
-------- ------- ------- -------
Net cash used in investing activities (152) (402) (227) (619)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payment) on bank line of credit -- 1,525 (3,400) 525
Net borrowings (payment) on new bank line of credit (579) -- 1,917 --
Payments on long-term accounts payable financed
with vendors (127) -- (227) --
Net proceeds from issuances of stock 966 102 1,519 225
-------- ------- ------- -------
Net cash provided by (used in) financing activities 260 1,627 (191) 750
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH (356) (173) (271) 3
CASH AT BEGINNING OF PERIOD 630 207 545 31
-------- ------- ------- -------
CASH AT END OF PERIOD $ 274 $ 34 $ 274 $ 34
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
See accompanying notes to financial statements
(4)
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
1. 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 notes 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. The balance sheet at December
31, 1996 was derived from the audited financial statements as of that date.
Operating results for the three- and six-month periods ended June 30, 1997
are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996.
2. RECLASSIFICATIONS
Certain amounts in the Company's Form 10-QSB for the three- and six-month
periods ended June 30, 1996 have been reclassified to conform to 1997
presentation. These reclassifications had no effect on net loss or
shareholders' equity as previously reported.
3. PROVISION FOR RESTRUCTURING
During the quarter ended March 31, 1997, the Company implemented a
restructuring plan which included the termination of certain employees and
the renegotiation of the Company's bank line of credit. Expenses incurred
during the quarter ended June 30, 1997 associated with this restructuring for
related severance, legal, consulting and accounting expenses which were not
accrued at March 31, 1997 totaled $150,000.
4. ISSUANCE OF CLASS A CONVERTIBLE STOCK
On March 31, 1997, FAMCO II LLC ("FAMCO"), a Minnesota limited liability
corporation, agreed to purchase 444,445 shares of the Company's Class A Stock
for $1,500,000 ($3.375 per share). FAMCO purchased 148,148 shares for
$500,000 on March 31, 1997 and the remaining 296,297 shares for $1,000,000 on
April 15, 1997. FAMCO is managed by Family Financial Strategies, Inc.
5. AMENDMENT TO BANK LINE OF CREDIT
In June 1997, the Company amended certain financial covenants to its line of
credit agreement. As of June 30, 1997, the Company was in compliance with all
covenants pursuant to the amended line of credit agreement.
6. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share,"
which is effective for periods ending after December 15, 1997. SFAS revises
the standards for computing and presenting earnings per share (EPS). The
Company will continue to apply APB Opinion No. 15 to compute the EPS through
the effective date. EPS for the six months ended June 30, 1997 computed under
SFAS 128 is not expected to be materially different than EPS computed under
APB Opinion No. 15.
(5)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENT
Statements included in this Quarterly Report on Form 10-QSB that are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provision of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause
actual results to differ materially. Among these risks and uncertainties are
( i ) the fact that the Company has incurred losses of $864,000 for the three
months ended June 30, 1997; $2,327,000 for the three months ended March 31,
1997; and losses of $9,071,000 and $1,731,000 for the fiscal years ended
December 31, 1996 and 1995, respectively; ( ii ) the ability of the
Company's distributors to successfully market and sell the Company's product
in markets outside the United States; ( iii ) the Company's ability to
successfully market its product in the United States at a favorable margin
considering significant price competition in the industry; ( iv ) the extent
to which physicians and health plan administrators are motivated to use
non-invasive diagnostic testing to detect early signs of disease; ( v ) the
Company's ability to successfully upgrade the Company's product software
systems to a Windows-Registered Trademark- environment; and ( vi ) the
Company's ability to develop future products which are technologically
advanced and accepted by the marketplace.
RESULTS OF OPERATIONS
For the three-months ended June 30, 1997, the Company recorded a net loss of
$864,000, which includes a restructuring charge of $150,000, compared to a
net loss of $1,179,000 for the same period in 1996. For the six months ended
June 30, 1997, the Company incurred a net loss of $3,191,000, which includes
restructuring charges of $1,496,000, compared to a net loss of $1,794,000 in
1996.
REVENUES
Revenues consist of equipment sales and service and supplies revenues.
Equipment sales reflect revenues from the Company's pulmonary function
analysis systems, gas exchange testing systems and sleep diagnostic systems.
Service and supplies revenues reflect contract revenues from extended
warranties, revenues from non- warranty service visits, and aftermarket sales
of peripherals and supplies.
Revenues decreased 5.6% to $5,013,000 from $5,308,000 in the fiscal 1996
second quarter. Although domestic revenues increased 3.0%, International
revenue declined 30.9%. Revenues for the first six months of 1997 decreased
6.1% to $9,770,000 from $10,403,000 in 1996, as a result of a 7.7% year-
to-date increase in domestic revenues offset by a 34.0% decrease in
international revenues. International revenues decreased in part as a result
of the closing of the Company's German subsidiary in December 1996.
On April 1, 1997, the Company entered into a Letter Agreement with
Oxford Instruments GmbH ("Oxford") to be the Company's distributor in
Germany. Subsequent to the completion of the Letter Agreement, however, the
Company and Oxford were unable to agree on terms for a final distribution
agreement and, therefore, the Company is seeking other distribution
alternatives in Europe. Nevertheless, the Company's international sales for
the three and six months ended June 30, 1997 were $1,098,000 and $1,982,000,
respectively.
(6)
<PAGE>
GROSS MARGIN
While gross margins are slightly lower for the three- and six- month periods
ended June 30, 1997 compared to 1996, gross margin trends continued to
improve compared to the first quarter of 1997 and the year ended December 31,
1996. Gross margin for the 1997 second quarter was 38.4% compared to 41.7% in
1996; for the first six months gross margin was 35.5% in 1997 and 40.9% in
1996. The second quarter 1997 gross margin of 38.4% represented continued
improvement over first quarter's 32.4% and gross margin of 27.8% for the year
ended December 31, 1996. These favorable trends are due to improvements in
inventory management, reductions in manufacturing overhead and steady
average selling prices.
SELLING
Selling expenses for the three months ended June 30 decreased 19.1% to
$1,531,000 in 1997 from $1,892,000 in 1996. Year-to-date selling expenses
decreased 12.4% to $3,070,000 in 1997 from $3,505,000 in 1996. This decrease
was the result of cost containment measures imposed in the first quarter of
1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 50.3% to $510,000 in the second
quarter of 1997 from $1,026,000 in 1996. Year-to- date general and
administrative expenses decreased 45.9% to $884,000 in 1997 from $1,635,000
in 1996. These decreases were primarily the result of cost containment and
restructuring measures implemented in the first quarter of 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 4.8% to $537,000 in the second
quarter of 1997 from $564,000 in 1996, and for the first six months of 1997
increased 3.7% to $1,059,000 from $1,021,000 in 1996. The decrease in second
quarter 1997 represents decreased reliance on outside consultants.
PROVISION FOR RESTRUCTURING
Restructuring expenses of $150,000 included severance, legal, accounting and
consulting expenses associated with the restructuring implemented in the
first quarter of 1997.
LIQUIDITY AND FINANCIAL RESOURCES
At June 30, 1997, the Company had cash of $274,000 and working capital of
$1,300,000. In addition, the Company had a balance outstanding of $1,917,000
and additional availability of $1,011,000 under its bank line of credit.
During the three months ended June 30, 1997, the Company used $464,000 of
cash in operating activities, primarily as a result of its net loss of
$864,000, an increase in accounts receivable of $153,000, and a decrease in
accounts payable and accrued expenses of $508,000. These uses of cash were
partially offset by a decrease in inventory of $759,000. The Company used
$152,000 in investing activities, consisting of capital expenditures of
$74,000 and software production costs of $78,000. The Company generated
$260,000 from financing activities, primarily as a result of net proceeds of
$966,000 from the private placement of its Class A Stock, partially
(7)
<PAGE>
offset by a net payment of $579,000 on its bank line of credit and a decrease
of $127,000 on long-term accounts payable with vendors.
During the six months ended June 30, 1997, the Company generated $147,000 of
cash from operating activities, primarily resulting from a loss of
$3,191,000 and a decrease of $407,000 in accounts payable and accrued
expenses which were offset by noncash common stock warrant expense of
$608,000 and depreciation and amortization expense of $452,000, in addition
to a decrease of $2,082,000 in inventory, and $584,000 in accounts
receivable. The Company used $227,000 for investing activities, consisting of
capital expenditures of $86,000 and software production costs of $141,000.
The Company expended $191,000 for financing activities, primarily as a result
of a $3,400,000 payoff of its former bank line of credit and a decrease of
$227,000 in long- term accounts payable with vendors, partially offset by
net proceeds of $1,519,000 from the private placement of its Class A Stock
and net borrowings of $1,917,000 under its existing line of credit.
The Company has no material commitments for capital expenditures.
The Company believes that its revenues from operations, together with cash
and borrowings available under its new credit facility will be adequate to
satisfy its liquidity and capital resources needs through 1997. See Item 5
of Part II of this Form 10-Q.
(8)
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in various claims and litigation which are
incidental to its business. Management is of the opinion that ultimate
settlement of these matters will not have a material impact on its financial
statements.
ITEM 2. CHANGE IN SECURITIES
On March 31, 1997, FAMCO II LLC ("FAMCO"), a Minnesota limited liability
corporation, agreed to purchase 444,445 shares of the Company's Class A Stock
for $1,500,000 ($3.375 per share). FAMCO purchased 148,148 shares for
$500,000 on March 31, 1997 and the remaining 296,297 shares for $1,000,000 on
April 15, 1997. FAMCO is managed by Family Financial Strategies, Inc. The
Company believes that each of the foregoing transactions was exempt under
Section 4(2) of the Securities Act of 1933 and Rule 506 under Regulation D
under the Securities Act of 1933.
ITEM 5. OTHER MATTERS
Under the Rules of the Nasdaq National Market, an issuer that has sustained
losses in each of its past two years must maintain net tangible assets
(assets, excluding goodwill, less liabilities) of at least $2,000,000. At
March 31, 1997, the Company had net tangible assets of $1,379,000, which is
less than the minimum net tangible asset requirement. In addition, for the
quarter ended June 30, 1997, the Company reported a loss of $864,000, and the
Company's net tangible assets as of June 30, 1997 were $1,481,000. In June
1997, the Nasdaq advised management that the Company was not in compliance
with the net tangible assets requirement and indicated that it intended to
delist the Company from the Nasdaq National Market. The Company originally
requested an exemption from the net tangible asset requirements and an oral
hearing was scheduled for August 21, 1997 with respect to this issue. The
Company considered whether it was in the best interest of the Company to
raise additional funds at the current time in order to satisfy the minimum
Nasdaq net tangible asset requirement for continued inclusion on the Nasdaq
National Market. The Company decided that its working capital position will
be adequate to satisfy its liquidity and capital resource needs through 1997
and that it was not in the best interest of the Company to raise additional
amounts at the current time. Accordingly, the Company decided not to pursue
its appeal and intends to file an application with the Nasdaq to have its
Common Stock quoted on the Nasdaq Small Cap market rather than on the Nasdaq
National Market system.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits List
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the quarter ended
June 30, 1997.
(9)
<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 August 14, 1997 /s/ Glenn D. Taylor
----------------- -------------------------------------
Glenn D. Taylor, President and Chief
Executive Officer (Principal Executive
Officer)
Date August 14, 1997 /s/ Dale H. Johnson
----------------- -------------------------------------
Dale H. Johnson, Chief Financial
Officer (Chief Accounting Officer)
(10)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
(11)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEDICAL
GRAPHICS CORPORATION FINANCIAL STATEMENTS AS OF JUNE 30, 1997 AND DECEMBER 31,
1996, AND FOR THE 3 AND 6 MONTHS ENDED JUNE 30, 1997 AND 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 274
<SECURITIES> 0
<RECEIVABLES> 4,509
<ALLOWANCES> (279)
<INVENTORY> 4,551
<CURRENT-ASSETS> 9,300
<PP&E> 3,943
<DEPRECIATION> (2,817)
<TOTAL-ASSETS> 10,890
<CURRENT-LIABILITIES> (8,000)
<BONDS> 0
0
0
<COMMON> (152)
<OTHER-SE> (1,329)
<TOTAL-LIABILITY-AND-EQUITY> (10,890)
<SALES> 7,396
<TOTAL-REVENUES> 2,374
<CGS> (6,304)
<TOTAL-COSTS> (6,509)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (70)
<INTEREST-EXPENSE> (148)
<INCOME-PRETAX> (3,191)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,191)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> 0
</TABLE>
