<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 September 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 November 5, 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>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 251 $ 545
Accounts receivable, net of allowance for
doubtful accounts of $198 and $496 3,265 4,814
Inventories:
Purchased components and work in process 2,951 4,433
Finished goods 2,005 2,200
-------- -------
4,956 6,633
Prepaid expenses 227 193
-------- -------
Total Current Assets 8,699 12,185
EQUIPMENT AND FIXTURES 3,964 3,857
Less accumulated depreciation 2,967 2,531
-------- -------
997 1,326
SOFTWARE PRODUCTION COSTS, net of
accumulated amortization of $776 and $569 389 472
OTHER ASSETS 15 20
-------- -------
$ 10,100 $14,003
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,591 $ 921
Accounts payable financed with vendors - current 1,179 1,742
Bank line of credit 2,557 3,400
Employee compensation 646 978
Deferred service contract revenue 882 988
Warranty reserve 720 563
Other liabilities and accrued expenses 858 1,130
-------- -------
Total Current Liabilities 8,433 9,722
COMMITMENTS AND CONTINGENCIES
LONG-TERM ACCOUNTS PAYABLE
FINANCED WITH VENDORS 1,359 1,736
SHAREHOLDERS' EQUITY
Class A stock; liquidation preference
of $3.375 per share 22 --
Common stock 131 128
Additional paid-in capital 12,340 10,224
Retained deficit (12,185) (7,807)
-------- -------
308 2,545
-------- -------
$ 10,100 $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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Equipment sales $ 3,062 $4,632 $10,458 $12,662
Service and supplies revenues 1,169 1,378 3,543 3,751
------- ------ ------- -------
Total revenues 4,231 6,010 14,001 16,413
COST OF REVENUES 2,654 3,760 8,958 9,913
------- ------ ------- -------
Gross margin 1,577 2,250 5,043 6,500
OPERATING EXPENSES:
Selling and marketing 1,511 1,997 4,581 5,502
General and administrative 574 753 1,458 2,388
Research and development 528 695 1,587 1,716
Provision for restructuring 61 -- 1,557 ---
------- ------ ------- -------
2,674 3,445 9,183 9,606
------- ------ ------- -------
LOSS FROM OPERATIONS (1,097) (1,195) (4,140) (3,106)
NONOPERATING INCOME (EXPENSE)
SensorMedics settlement income -- 1,317 -- 1,438
Interest expense (90) (49) (238) (113)
------- ------ ------- -------
LOSS BEFORE INCOME TAXES (1,187) 73 (4,378) (1,781)
INCOME TAX BENEFIT -- -- -- (60)
------- ------ ------- -------
NET (LOSS) INCOME $(1,187) $ 73 $(4,378) $(1,721)
------- ------ ------- -------
------- ------ ------- -------
NET (LOSS) INCOME PER SHARE
OF COMMON STOCK $ (0.39) $ 0.03 $ (1.52) $ (0.68)
------- ------ ------- -------
------- ------ ------- -------
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 3,050 2,556 2,874 2,539
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
MEDICAL GRAPHICS CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,378) $(1,721)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Issuance of common stock warrants 608 --
Depreciation 436 349
Amortization 208 195
Changes in operating assets and liabilities:
Accounts receivable 1,549 1,405
Inventory 1,677 (1,645)
Prepaid expenses and other assets (29) 8
Accounts payable and accrued expenses (496) 812
Warranty reserve 157 190
Income taxes -- 443
Deferred service contract revenue (106) (64
------- -------
Net cash used in operating activities (374) (28)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Software production costs (125) (190)
Capital expenditures (107) (621)
------- -------
Net cash used in investing activities (232) (811)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payment) on bank line of credit (3,400) 875
Net borrowings on new bank line of credit 2,557 ---
Payments on long-term accounts payable financed
with vendors (377) ---
Net proceeds from issuances of stock 1,532 306
------- -------
Net cash provided by financing activities 312 1,181
------- -------
NET (DECREASE) INCREASE IN CASH (294) 342
CASH AT BEGINNING OF PERIOD 545 31
------- -------
CASH AT END OF PERIOD $ 251 $ 373
------- -------
------- -------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying 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 nine-month periods ended September 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 nine-month
periods ended September 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 nine months
ended September 30, 1997 associated with this restructuring were related to
severance, legal, consulting and accounting expenses and totaled $1,557,000.
4. ISSUANCE OF CLASS A CONVERTIBLE STOCK AND COMMON 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 at a price of $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.
On November 10, 1997, Special Situations Fund III, L.P. agreed to purchase up to
484,848 shares of the Company's common stock for $2,000,000 and FAMCO II LLC
agreed to purchase up to 242,424 shares of the Company's common stock for
$1,000,000 at a price of $4.125 per share. These investors purchased 242,424
shares for $1,000,000 and 121,212 shares for $500,000 on November 10, 1997,
respectively. Under terms of the Agreement, each investor has the right to
purchase and Company has the right to require the investor to purchase such
additional shares at a purchase price of $4.125 per share, subject to certain
conditions, on or before February 23, 1998.
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.
5
<PAGE>
5. AMENDMENT TO BANK LINE OF CREDIT
In June and November 1997, the Company amended its line of credit agreement. As
of September 30, 1997, the Company was in compliance with all covenants pursuant
to the amended line of credit agreement.
6. NEW ACCOUNTING PRONOUNCEMENT
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 128 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 three and nine months ended September 30, 1997
computed under SFAS 128 is not expected to be materially different from EPS
computed under APB Opinion No. 15.
6
<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 $4,378,000 for the
nine months ended September 30, 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 September 30, 1997, the Company recorded a net loss
of $1,187,000, compared to a net loss of $1,244,000, excluding a significant
one-time lawsuit settlement gain of $1,317,000 for the same period in 1996.
Including the lawsuit settlement, the Company recognized net income of $73,000
for the third quarter in 1996. For the nine months ended September 30, 1997,
the Company incurred a net loss of $4,378,000, which includes restructuring
charges of $1,557,000, compared to a net loss of $1,721,000 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.
Third quarter revenues decreased 29.6% to $4,231,000 in 1997 from $6,010,000 in
1996. The lower revenue was primarily caused by disruptions to the Company's
business cycle occurring earlier in 1997 and six month lead times normally
associated with products sold in this segment of the medical device industry.
Domestic revenue decreased 26.9% while international revenue, which was also
adversely effected by closing of the Company's German office on December 31,
1996, declined 47.9%. Revenue for the first nine months of 1997 decreased 14.7%
to $14,001,000 from $16,413,000 in 1996, which included a 5.5% decrease in
domestic revenue and a 38.7% decrease in international revenue.
The Company's international sales for the three and nine months ended September
30, 1997 were $803,000 and $2,786,000, respectively, compared to $1,542,000 and
$4,545,000, respectively, in 1996.
7
<PAGE>
GROSS MARGIN
Gross margins of 37.3% for the three months ended September 30, 1997 were
consistent with those achieved for the same period in 1996. While gross margins
are slightly lower for the nine months ended September 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 first nine
months was 36.0% in 1997 compared to 39.6% in 1996, compared to 27.8% in all of
1996 and 32.4% in the first quarter of 1997. These favorable trends are due to
improvements in inventory management, reductions in manufacturing overhead and
steady average selling prices.
SELLING AND MARKETING
Selling and marketing expenses for the three months ended September 30 decreased
24.3% to $1,511,000 in 1997 from $1,997,000 in 1996. Year-to-date selling and
marketing expenses decreased 16.7% to $4,581,000 in 1997 from $5,502,000 in
1996. This decrease was the result of cost containment measures implemented
during the first quarter of 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 23.8% to $574,000 in the third
quarter of 1997 from $753,000 in 1996. Year-to-date general and administrative
expenses decreased 38.9% to $1,458,000 in 1997 from $2,388,000 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 24.0% to $528,000 in the third
quarter of 1997 from $695,000 in 1996, and for the first nine months of 1997
decreased 7.5% to $1,587,000 from $1,716,000 in 1996. The decrease in third
quarter 1997 represents decreased reliance on outside consultants.
PROVISION FOR RESTRUCTURING
Restructuring expenses of $1,557,000 for the nine months ended September 30,
1997 included severance, legal, accounting and consulting expenses associated
with the restructuring implemented in the first quarter of 1997.
LIQUIDITY AND FINANCIAL RESOURCES
At September 30, 1997, the Company had cash of $251,000 and working capital
of $266,000. In addition, the Company had a balance outstanding under its
bank line of credit of $2,557,000 and additional availability of $450,000.
During the nine months ended September 30, 1997, the Company used $374,000 of
cash in operating activities, primarily resulting from a net loss of $4,378,000
and a decrease of $496,000 in accounts payable and accrued expenses, which were
partially offset by noncash charges totaling $1,252,000, a decrease of
$1,677,000 in inventory and a decrease of $1,549,000 in accounts receivable.
The Company used $232,000 for investing activities, consisting of capital
expenditures of $107,000 and software production costs of $125,000. The Company
generated
8
<PAGE>
$312,000 from financing activities, primarily from $1,500,000 in proceeds
from the private placement of its Class A Stock and net borrowings of
$2,557,000 under its new line of credit, partially offset by a $3,400,000
payoff of its former bank line of credit and a decrease of $377,000 in
long-term accounts payable with vendors.
At September 30, 1997 the Company had 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 and proceeds from the
November, 1997 sale of its common stock will be adequate to satisfy its
liquidity and capital resources needs through 1997. See Item 2 of Part II of
this Form 10-QSB.
9
<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 November 10, 1997, Special Situations Fund III, L.P. agreed to purchase up to
484,848 shares of the Company's common stock for $2,000,000 and FAMCO II LLC
agreed to purchase up to 242,424 shares of the Company's common stock for
$1,000,000 at a price of $4.125 per share. These investors purchased 242,424
shares for $1,000,000 and 121,212 shares for $500,000 on November 12, 1997,
respectively. Under terms of the Agreement, each investor has the right to
purchase and Company has the right to require the investor to purchase such
additional shares at a purchase price of $4.125 per share, subject to certain
conditions, on or before February 23, 1998. 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 Small Cap Market, the Company must maintain net
tangible assets (assets, excluding goodwill, less liabilities) of at least
$1,000,000. On September 30, 1997, the Company had net tangible assets of
$308,000, which is less than the minimum net tangible asset requirement. After
giving effect to the sale of 363,636 shares of the Company's common stock for
$1,500,000 on November 12, 1997, the Company was in compliance with the minimum
net tangible asset requirement. See item 2 above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits List
Exhibit 27 Financial Data Schedule
Exhibit 99.1 Proforma Balance Sheet as of September 30, 1997
reflecting November, 1997 investment.
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the quarter ended
September 30, 1997.
10
<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 November 14, 1997 /s/ Glenn D. Taylor
-------------------- -------------------------------------
Glenn D. Taylor, President and Chief
Executive Officer (Principal Executive
Officer)
Date November 14, 1997 /s/ Dale H. Johnson
-------------------- -------------------------------------
Dale H. Johnson, Chief Financial
Officer (Chief Accounting Officer)
11
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule.
99.1 Proforma Balance Sheet as of September 30, 1997 reflecting
November, 1997 investment.
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEDICAL
GRAPHICS CORPORATION FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND DECEMBER
31, 1996, AND FOR THE 3 MONTHS AND 9 MONTHS ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 251
<SECURITIES> 0
<RECEIVABLES> 3463
<ALLOWANCES> (198)
<INVENTORY> 4956
<CURRENT-ASSETS> 8699
<PP&E> 3964
<DEPRECIATION> (2967)
<TOTAL-ASSETS> 10100
<CURRENT-LIABILITIES> 8433
<BONDS> 0
0
0
<COMMON> 153
<OTHER-SE> 155
<TOTAL-LIABILITY-AND-EQUITY> 10100
<SALES> 14001
<TOTAL-REVENUES> 14001
<CGS> 8958
<TOTAL-COSTS> 8958
<OTHER-EXPENSES> 9183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238
<INCOME-PRETAX> (4378)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4378)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4378)
<EPS-PRIMARY> (1.52)
<EPS-DILUTED> (1.52)
</TABLE>
<PAGE>
EXHIBIT 99.1
MEDICAL GRAPHICS CORPORATION
PRO FORMA BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
ACTUAL ADJUSTMENT PRO FORMA
------- ---------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 251 $1,500 $ 1,751
Accounts receivable, net 3,265 3,265
Inventories:
Purchased components and work in progress 2,951 2,951
Finished goods 2,005 2,005
-------- ------ --------
4,956 0 4,956
Prepaid expenses 227 227
-------- ------ --------
TOTAL CURRENT ASSETS 8,699 1,500 10,199
EQUIPMENT AND FIXTURES 3,964 3,964
Less accumulated depreciation 2,967 2,967
-------- ------ --------
997 0 997
SOFTWARE PRODUCTION COSTS (NET) 389 389
OTHER ASSETS 15 15
-------- ------ --------
$ 10,100 $1,500 $ 11,600
-------- ------ --------
-------- ------ --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,770 $ 30 $ 2,800
Note payable 2,557 2,557
Employee compensation 646 646
Deferred service contract revenue 882 882
Warranty reserve 720 720
Other liabilities and accrued expenses 858 858
-------- ------ --------
TOTAL CURRENT LIABILITIES 8,433 30 8,463
LONG-TERM ACCOUNTS PAYABLE FINANCED WITH VENDORS 1,359 1,359
SHAREHOLDERS' EQUITY
Common stock 153 18 171
Additional paid-in-capital 12,340 1,452 13,792
Retained deficit (12,185) (12,185)
-------- ------ --------
308 1,470 1,778
-------- ------ --------
$ 10,100 $1,500 $ 11,600
-------- ------ --------
-------- ------ --------
</TABLE>
13
