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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997.
|_| 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 registrant as specified in its charter)
MINNESOTA 41-1316712
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
350 OAK GROVE PARKWAY
SAINT PAUL, MINNESOTA 55127
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(Address of principal executive offices and 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 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
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is 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. |_|
State issuer's revenues for its most recent fiscal year: $19,173,000.
The aggregate market value of the common stock held by non-affiliates of the
registrant based on the closing sale price as reported on The Nasdaq SmallCap
Market on March 25, 1998 was $6,934,000.
As of March 26, 1998, 3,352,495 shares of the registrant's Common Stock, $.05
par value, and 444,445 shares of Class A Stock, $. 05 par value were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, a definitive copy of which will be filed with the SEC within
120 days of December 31, 1997 are incorporated by reference into Items 9, 10,
11 and 12 of Part III.
Transitional Small Business Disclosure Formats (check one): Yes No X
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TABLE OF CONTENTS
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PART I .........................................................................................................1
Item 1. Description of Business........................................................................1
Item 2. Description of Property........................................................................7
Item 3. Legal Proceedings..............................................................................7
Item 4. Submission of Matters to a Vote of Security Holders............................................7
PART II .........................................................................................................8
Item 5. Market for Common Equity and Related Stockholder Matters.......................................8
Item 6. Management's Discussion and Analysis or Plan of Operation.....................................10
Item 7. Financial Statements..........................................................................17
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure...........................................................32
PART III ........................................................................................................32
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act........................................................32
Item 10. Executive Compensation........................................................................32
Item 11. Security Ownership of Certain Beneficial Owners and Management................................32
Item 12. Certain Relationships and Related Transactions................................................32
Item 13. Exhibits and Reports on Form 8-K..............................................................33
INDEX TO EXHIBITS................................................................................................33
SIGNATURES.......................................................................................................36
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PART I
Unless the context indicates otherwise, all references to the
"Company" and "Registrant" in this Annual Report on Form 10-KSB relate to
Medical Graphics Corporation.
The following United States registered trademarks appear in this
Annual Report on Form 10-KSB and are owned by the Company: MedGraphics and
CPXEXPRESS. In addition, the following Company trademarks appear in this
Annual Report on Form 10-KSB: PF/Dx, preVent, BREEZE, 1085 Series, CardiO2,
CPX/D, CPX/MAX/D, PS~Quest and PS~Tracker. CardiO-KEY is a trademark of
ErgometRx Corporation. Pentium is a trademark of Intel Corporation. Windows
is a trademark of Microsoft Corporation.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
Medical Graphics Corporation was incorporated as a Minnesota
corporation in 1977. The Company designs and provides solutions for
innovative non-invasive diagnostic systems for the prevention, early
detection and cost-effective treatment of heart and lung disease and for
evaluation of sleep disorders. Medical Graphics Corporation provides a
wide-ranging line of diagnostic systems featuring patented hardware and
software sold under the MedGraphics trade name.
Medical Graphics Corporation is a leader in providing non-invasive
cardiorespiratory diagnostic systems worldwide. The Company's products
consist of breath analysis technology integrated with a computer and
applications-specific software. More than 3,300 MedGraphics systems have been
sold to customers for use in over 50 countries.
The Company's primary products include pulmonary function, body
plethysmography, cardiopulmonary exercise testing systems and computerized
sleep diagnostic systems along with an information management platform which
converts these products to hospital information systems, physician office and
health management organizations systems. Most of the Company's revenues are
generated from sales into the hospital cardiopulmonary market, sleeping
disorders centers and the office-based physician market. Revenue from service
and supplies accounted for 24.4 percent of total revenues in 1997, up from
24.0 percent in 1996.
On October 30, 1997 the Company announced that it had retained the
investment banking firm of Goldmsith, Agio, Helms and Company ("Goldsmith
Agio") to explore strategic options for the Company. Goldmsith Agio,
headquartered in Minneapolis with offices in Florida and California, is a
nationally recognized investment banking firm specializing in merger and
acquisition transactions.
PRIMARY PRODUCTS
PULMONARY FUNCTION TESTING SYSTEM. The PF/Dx System is a complete
pulmonary function testing lab which helps health care professionals diagnose
lung diseases and manage treatment of their patients. The PF/Dx System
currently consists of a flow sensor, a patented nitrogen analyzer, a gas
chromatograph, an IBM-compatible computer with Pentium processor, a
full-color monitor, a printer and other peripherals. Applications include
screening asthma patients, assessing pre-operative and post-operative risk of
heart and lung surgery patients, evaluating lung damage from occupational
exposures and documenting outcomes and
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responses to therapy. The PF/Dx System's compact design and mobility options
attract a wide variety of customers, including cardiopulmonary laboratories
in hospitals, office-based clinics, occupational medicine clinics, asthma
centers and clinical research centers. The PF/Dx System utilizes the preVent
pneumotach, a patented mouthpiece/flow device with a snap-in, snap-out design
which helps prevent the transmission of infectious diseases. The preVent
pneumotach is attached by tubing to the PF/Dx System for the measurement of
patients' lung function. The PF/Dx System's unique features also include the
Company's proprietary BreezePF Windows95 software, which is designed to
operate in a simple, easy-to-use manner. Additionally, the product uses a
patented "expert system" to assist physicians in the interpretation of
patient test results.
BODY PLETHYSMOGRAPHY SYSTEMS. The Company's 1085 Series offers four
body plethysmography systems for lung function testing. A body plethysmograph
is an enclosed chamber in which the patient sits and performs diagnostic
pulmonary function testing. Body plethysmography is the most sensitive method
for identifying lung diseases, including difficult-to-detect diseases such as
asthma. The systems are comprised of a clear acrylic chamber, a patented
nitrogen analyzer, a gas chromatograph, an IBM-compatible computer with
Pentium processor, a full-color monitor, a printer and other peripherals.
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.
Included in the 1085 Series systems is the patented preVent pneumotach for
helping to prevent the transmission 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 pediatric
patients and individuals using wheelchairs. Additionally, the product uses a
patented "expert system" to assist physicians in the interpretation of
patient test results.
CARDIOPULMONARY EXERCISE TESTING SYSTEMS. The Company's
cardiopulmonary exercise systems both measure one's fitness or conditioning
level and 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 are sold in
four different models. They include the CardiO2 System, CPX/D System,
CPX/MAX/D System and CPX EXPRESS System. The systems use a patented breath by
breath methodology, which consists of a patented oxygen analyzer, a carbon
dioxide analyzer, the patented preVent pneumotach, an IBM-compatible computer
with Pentium processor, a full-color monitor, a printer and other
peripherals. The CardiO2 includes a full 12-lead ECG system while the other
systems are designed to be used in conjunction with stand-alone ECG systems.
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. Medical Graphics Corporation
has several patents relating to data reporting, including two expert systems
for evaluating the information. Test results are displayed in
easy-to-interpret graphs and summary reports. Customers include hospital
cardiopulmonary laboratories, cardiology and pulmonary office-based clinics,
cardiac rehabilitation units, human performance laboratories and health clubs.
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. A cycle ergometer
is a specially designed stationary exercise bicycle which can operate at a
broad spectrum of
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resistance levels. The Company has four models of cycle ergometers that are
used in diagnostic, rehabilitation, training and sports medicine
applications. Three of the four models in the CardiO2 Cycle Series
incorporate patented CardiO-KEY technology, a "data key" capable of storing
exercise protocols and recording exercise session data. The data key is used
to individualize exercise sessions and monitor conditioning progress.
SLEEP DIAGNOSTICS SYSTEMS. During 1997 the Company obtained
non-exclusive rights to sell computerized polysomnography systems in the
United States. With its new PS~Quest polysomnography system, the Company has
entered the growing sleep diagnostics market. The standard system includes a
workstation computer with Pentium processor, a 17 or 21 inch high resolution
color monitor and a preamplifier. The PS~Quest is designed to meet the needs
of all modern sleep laboratories. Advanced system features include a flexible
24-channel preamplifier, remote control of all gain and filter settings from
the workstation computer, data sample rates as high as 500 Hz per channel and
fully configurable montages and polygraphs. In addition, WindowsNT software
and local area networking allow customers to monitor more than one patient on
one screen with split time base displays. In December 1997, the Company
obtained similar rights to sell PS~Tracker, a portable version of the
PS~Quest.
INDUSTRY
Early detection and prevention of heart and lung diseases is
becoming more commonplace as health care reform and cost containment efforts
increase. Physicians and health plan administrators are becoming more
motivated to use non-invasive diagnostic testing to detect early signs of
disease and reverse the disease process by therapeutic treatments, rather
than relying on invasive and expensive procedures to treat disease after it
has already progressed. Thus, the demand for therapeutic and diagnostic
products, such as the Company's, is being affected by trends in the medical
profession and its approach to the treatment of illness as well as third
party payment and reimbursement policies.
COMPETITION
The principal competitive factors in diagnostic markets are quality
and reliability, price performance, software that is flexible, yet
easy-to-use, and technical support. These markets are characterized by
intense competition. Some companies with which the Company competes have
greater financial, human and technological resources than Medical Graphics
Corporation. This competitive marketplace has in some circumstances led to
price discounting to which Medical Graphics Corporation has responded in
kind, and may do so again in the future. Recently, the marketplace has begun
to request an increased focus on management of information obtained in the
laboratory as well as other value added programs. To address this request,
Medical Graphics Corporation established networking and financial services
programs which should allow the Company to compete more effectively.
The medical device industry in which the Company operates is
characterized by relatively 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, to develop and successfully introduce
new and enhanced products on a timely basis and to promote market acceptance
by demonstrating positive outcomes of such products. The Company believes its
principal competitors are SensorMedics Corporation, a subsidiary of
ThermoElectron Corporation, Warren E. Collins Company and Erich Jaeger GmbH &
Co. KG.
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MARKETING AND DISTRIBUTION
In the United States, the Company markets its products through a
direct sales force that targets customers located in hospitals,
university-based medical centers and office-based clinics. Each sales person
is assigned to one of two regional managers who report to the Company's Vice
President of Sales. Each salesperson is responsible for a specific geographic
area and sells the Company's complete product line within that area. Company
salespersons are compensated with a base salary, expenses and a revenue-based
commission.
The Company markets its products outside the United States into over
40 countries through approximately 32 international sales organizations that
operate primarily as distributors who carry a limited inventory of the
Company's products. These organizations sell the Company's products in
specific geographic areas, generally on an exclusive basis. International
sales accounted for 18% and 27% of total sales in 1997 and 1996,
respectively. All of the Company's international sales are made on a United
States dollar-denominated basis.
Conducting business in foreign countries involves certain risks not
ordinarily associated with domestic business including governmental laws or
restrictions that could adversely affect pricing of, and the Company's
ability to, market its products.
The Company believes that demonstration of its products'
capabilities to potential customers is one of the most significant factors in
achieving sales. Consequently, the main thrust of domestic and international
promotional efforts is product demonstrations at conventions and customer
facilities. Other promotional efforts include educational seminars, print
advertisements, direct mail campaigns and a company web site.
RESEARCH AND DEVELOPMENT
Research and development expenses for 1996 reflected the extensive
use of independent software contractors as part of a general transition to
the Windows95 platform. The Company made a restructuring decision to continue
this project in 1997 with in-house software engineers. Pulmonary function
products began shipping with the Company's software based on Windows95 in
December 1997. The remainder of the software product line is scheduled for
conversion during 1998. In addition, the Company is finishing development of
a number of product improvements designed to enhance product reliability and
improve margins. The Company is also developing new products targeted for new
growth markets. The Company believes ongoing research and development efforts
have been and will remain important to its continuing success.
MANUFACTURING
The Company currently manufactures and assembles 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,
assembled and packaged by Company personnel into fully integrated systems.
The Company also acquires general purpose computers, monitors and printers
from a variety of sources and integrates its proprietary transducer modules
into these systems. Although some of the Company's components are available
through only one or a limited number of suppliers, the Company believes that
if it is unable to obtain components
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from these suppliers, it would be able to obtain comparable components from
other sources without significant additional expense or interruption of
business. Additionally, the Company has entered into a distribution agreement
with an OEM manufacturer of sleep products.
During 1997, the Company began to convert to a modified form of
cellular manufacturing, a process that should be completed in 1998. Cellular
manufacturing utilizes an employee team to plan and schedule production,
manufacture the product and ensure the achievement of quality standards. This
process facilitates faster throughput of manufactured product and requires
lower inventory support levels. The Company has already benefited from
continually improving manufacturing efficiencies. In addition, the Company
has established a manufacturing engineering department to assist in
identifying and achieving further efficiencies associated with the
manufacturing process.
Although the Company experienced difficulty in obtaining materials
from suppliers during the first quarter of 1997 as a result of its 1996
liquidity crisis, the Company negotiated agreements with each of its
principal vendors so that it was able to acquire raw materials from these
vendors without further interruptions. See Item 6, "Management's Discussion
and Analysis of Financial Condition or Plan of Operation - Overview".
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 regulatory authority of the Food and Drug Administration ("FDA")
which regulates the manufacture, distribution, related record keeping,
labeling and advertising of such devices. 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 these 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. The Company is in the process of implementing ISO
9001, a certification showing that the Company's procedures and manufacturing
facilities comply with standards for quality assurance and manufacturing
process control. ISO 9001 certification, along with the European Medical
Device Directive ("MDD") certification, evidences compliance with the
requirements that enable a company to affix the CE Mark to its products. The
CE Mark denotes conformity with European standards for safety and allows
certified devices to be placed on the market in all European Union ("EU")
countries. After June 1998, medical devices may
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not be sold in EU countries unless they display the CE Mark. The Company
expects to meet all of the requirements for continued use of the CE Mark so
that it may continue to affix the CE to its product after June 1998. There
can be no assurance, however, that the Company will be able to obtain
regulatory approvals or clearances for its products in foreign countries.
The Company must comply with various federal, state and local
environmental laws and regulations. The Company believes that it is currently
in material compliance with such applicable environmental laws and
regulations.
PATENTS
The Company currently owns 17 United States domestic patents which
cover the basic aspects of the Company's core technologies, including gas
pressure, flow measurement, breath-by-breath assessment of gas exchange and
some expert systems. In addition, the Company has a number of foreign patents
with respect to technologies covered by its United States patents. There can
be no assurance, however, that these patents, or any patents that may be
issued as a result of existing or future application, will offer any degree
of protection from competitors. The Company intends to aggressively enforce
its intellectual property rights and has successfully done so in the past.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, through proprietary information agreements with
employees, consultants and other parties.
EMPLOYEES
As of December 31, 1997, the Company had 140 full-time employees. As
part of its restructuring during the first quarter of 1997, the Company
reduced its work force to 132 employees from a total of 169 full-time
employees as of December 31, 1996. Attrition and selective layoffs have
reduced the workforce to 121 full-time employees as of March 1, 1998. No
employees are represented by labor organizations and there are no collective
bargaining agreements. Management believes that the Company's relations with
its employees are good.
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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
lease expires June 30, 2002, at which time the Company has an option to renew
the lease for an additional four years. The Company has the option to
purchase the building at the end of each lease expiration period at the
building's fair market value. Annual rental costs will be approximately
$345,000 over the next five years. Rent expense for the years ended December
31, 1997 and 1996 was $348,000 and $340,000, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in two product liability
suits as follows:
JOHN GEFROH V. TRINITY HOSPITAL AND MEDICAL GRAPHICS CORPORATION,
North Dakota District Court, Northwestern Judicial District, filed
in March 1997.
ROGER D. CROWE V. NORTHSHORE REGIONAL MEDICAL CENTER, NME HOSPITALS,
INC., TENET HEALTHCARE CORPORATION, ASTRAND MANUFACTURING AND MEDICAL
GRAPHICS CORPORATION, 22d Judicial District Court for the Parish of
St. Tammany, State of Louisiana, Case No. JDC No. 95-14240-B, filed in
November 1996.
The plaintiffs in both product liability suits are seeking
compensatory damages of an undisclosed amount resulting from injuries in
connection with the use of one of the Company's products. The Company
believes the injuries resulted from the actions of one or more third parties
and did not result from any actions of the Company. The Company carries
insurance in an amount that it believes is adequate to cover any liability it
may be found to have arising from the claims in both of these suits.
In the fourth quarter of 1996, the Company experienced a liquidity
crisis and was unable to pay a significant number of its vendors when due.
Subsequent to December 31, 1996, the Company negotiated agreements with
vendors, who were owed $3,541,000, for payment of the outstanding balances in
equal monthly installments for up to 36 months. While a few vendors initially
refused to accept the proposed terms and in some cases commenced litigation,
the Company ultimately reached agreement with all vendors regarding payment
of the outstanding balances. See Item 6, "Management's Discussion & Analysis
Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock trades on The Nasdaq SmallCap Market
System under the symbol MGCC. The following table shows the range of high and
low bid prices for the Company's common stock for the fiscal quarters
indicated, as reported by Nasdaq in its "Monthly Statistical Report" for the
Nasdaq SmallCap Market from August 20, 1997 through December 31, 1997 and on
the Nasdaq National Market from January 1, 1996 through August 19, 1997. 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.
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Bid Prices
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High Low
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1997
First Quarter $5 5/8 $2 1/2
Second Quarter 4 3/8 2 5/8
Third Quarter 5 7/8 3 3/4
Fourth Quarter 5 3/8 3 3/4
1996
First Quarter $8 1/2 $4 5/8
Second Quarter 9 1/8 6 3/8
Third Quarter 8 3/8 5 1/2
Fourth Quarter 6 1/4 4
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APPROXIMATE NUMBER OF HOLDERS OF COMMON EQUITY
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Approximate Number of
Holders
Title of Class (as of March 26, 1998)
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Common Stock, par value of $.05 1,900
Class A Stock, par value of $.05 1
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DIVIDENDS
The Company has not paid any cash dividends on its common stock, and
the Board of Directors intends to retain earnings, if any, for the
foreseeable future for use in expansion of the Company's business. Under the
terms of the Company's credit agreement, the Company is prohibited from
paying cash dividends unless it is in compliance with certain covenants.
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RECENT SALES OF UNREGISTERED SECURITIES
In November 1997, the Company entered into agreements to sell to
four private, accredited investors up to 727,272 shares of common stock at a
price of $4.125 per share. These investors purchased 363,636 shares for
$1,500,000 on November 12, 1997. Subsequent to December 31, 1997, these
investors purchased 242,424 shares for $1,000,000 on January 30, 1998 and
121,212 shares for $500,000 on February 10, 1998. The Company believes that
the sales were exempt pursuant to Section 4(2) of the Securities Act of 1933,
as amended, and Regulation D, promulgated thereunder.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATION
FORWARD-LOOKING STATEMENTS
Statements included in this Annual Report on Form 10-KSB that are
not historical or current facts are "forward-looking statements" made
pursuant to the safe harbor provisions 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. Various forward-looking
statements have been made in this Annual Report on Form 10-KSB and may also
be made in the Company's other reports filed under the Securities Exchange
Act of 1934, in its press releases and in other documents. In addition, from
time to time, the Company through its management may make oral
forward-looking statements.
Forward-looking statements are subject to risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from such statements. The words "anticipate", "believe", "expect",
"intend", "optimistic", "will" or similar expressions are intended to
identify forward- looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of
the date on which they are made. The Company undertakes no obligation to
update publicly or revise any forward-looking statements.
Important factors that could cause actual results to differ
materially from the Company's forward- looking statements, as well as affect
the Company's ability to achieve its financial and other goals, include, but
are not limited to, the following:
TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT. The markets for
the Company's products are characterized by rapidly changing technology. The
Company's future success will continue to depend upon its ability to enhance
its current products and to develop and introduce new products that keep pace
with technological developments and evolving industry standards, respond to
changes in customer requirements and achieve market acceptance. Any failure
by the Company to anticipate or respond adequately to technological
developments and customer requirements, or any significant delays in product
development or introduction, could have a material adverse effect on the
Company's business, results of operations, financial condition and liquidity.
In addition, there can be no assurance the new products and services or
product and service enhancements, if any, developed by the Company will
achieve market acceptance.
CYCLICAL CAPITAL SPENDING BY CUSTOMERS. A significant portion of the
Company's revenues are derived from sales to various segments of the health
care industry, such as the hospital cardiopulmonary market, sleeping
disorders centers and office-based physician market. The markets for these
segments, and for the health care industry in general, can be cyclical,
resulting in varying amounts of capital spending. Any significant downturn in
capital spending in these markets, or in any other market served by the
Company's products, could have a material adverse effect on the Company's
business and results of operations.
PROPRIETARY TECHNOLOGY. The Company relies heavily on its pulmonary
function, body plethysmography and cardiopulmonary exercise testing systems,
along with proprietary software technology. Although the Company in the past
has been issued patents, or obtained licenses to patents on certain
technology and currently has patents pending on new technologies, it also
relies on protecting its proprietary information as trade secrets. There can
be no assurance that the steps taken by the Company will be adequate to
prevent misappropriation of its technology by third parties or will be
adequate under the laws of some
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foreign countries, which may not protect the Company's proprietary rights to
the same extent as do laws of the United States. In addition, the possibility
exists that others may "reverse engineer" the Company's products in order to
determine their method of operation and then introduce competing products.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The Company has
experienced quarterly fluctuations in operating results and anticipates that
these fluctuations will continue. These fluctuations have been caused by
various factors, including the order flow of its customers, and the timing of
product shipments and marketing. Future operating results may fluctuate as a
result of these and other factors, including the Company's ability to
continue to develop innovative products, the announcement or introduction of
new products by the Company's competitors, the Company's product and customer
mix, the level of competition and overall trends in the economy.
DEPENDENCE ON OUTSIDE CONTRACTORS AND SUPPLIERS. The Company
currently contracts with third parties for a portion of its components and
assembly needs. Although the Company endeavors to inspect and internally test
most components prior to final assembly and has established a vendor audit
process, reliance on outside vendors reduces its control over quality and
delivery schedules. The failure by one or more of these vendors to deliver
quality components in a timely manner could have a material adverse effect on
the Company's results of operations, In addition, a number of the components
integral to the functioning of the Company's products are available from only
a single supplier or from a limited number of suppliers. Any interruption in
or termination of supply of these components, or a material change in the
purchase terms, including pricing, of any of these components, or a reduction
in their quality or reliability, could have a material adverse effect on the
Company's business or results of operations.
INTERNATIONAL REVENUE. In the years ended December 31, 1997, 1996
and 1995, sales of the Company's products to customers outside North America
accounted for approximately 18.4%, 26.7% and 27.6%, respectively, of the
Company's net revenue. The Company anticipates that international revenue
will continue to account for a significant portion of its net revenue. The
Company's operating results are subject to the risks inherent in
international sales, including various regulatory requirements, political and
economic changes and disruptions, transportation delays and difficulties in
staffing and managing foreign sales operations and distributor relationships.
In addition, fluctuations in exchange rates may render the Company's products
less price competitive relative to local product offerings. There can be no
assurance that these factors will not have a material adverse effect on the
Company's future international revenue and, consequently, on the Company's
operating results.
COMPETITION. The Company competes with other vendors of pulmonary
function, body plethysmography, cardiopulmonary exercise testing systems and
computerized sleep diagnostic systems, some of which may have greater
financial and other resources than the Company. There can be no assurance
that the Company will be able to compete successfully in the future or that
the Company will not be required to incur significant costs in connection
with its engineering research, development, marketing and customer service
efforts to remain competitive. Competitive pressures may result in price
erosion or other factors which will adversely affect the Company's financial
performance.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large
part upon the continued services of many of its highly skilled personnel
involved in management, research and product development, sales and
marketing, and upon its ability to attract and retain additional highly
qualified employees. The loss of services of these key personnel could have a
material adverse effect on the Company. The Company does not have key-person
life insurance on any of its employees.
11
<PAGE>
OVERVIEW
During 1996, the Company aggressively expanded its sales, marketing,
and research and development activities and management personnel. This
expansion, in part, resulted in the Company reaching its borrowing base limit
on its credit line, entering into a forbearance agreement with its lender and
becoming unable to pay vendors' accounts payable when due, all of which
occurred during the fourth quarter of 1996. These events restricted the
Company's ability to produce products in the fourth quarter of 1996 and
required management and the Board of Directors to devote a significant amount
of time to restructuring the Company during the first quarter of 1997.
Subsequent to December 31, 1996, the Company retained Manchester
Business Services, Inc., to design and implement a restructuring plan. Under
the restructuring plan, the Company obtained a new line of credit, received
$1,500,000 of cash from the issuance of common stock, entered into agreements
with vendors which provided for payment of approximately $3,500,000 of
accounts payable in equal monthly installments for up to 36 months and
reduced its work force by approximately 25%. The Company obtained an
additional $1,500,000 of cash from the issuance of common stock on November
12, 1997 and $1,000,000 and $500,000 from the issuance of common stock in
January and February 1998, respectively. All issuances of common stock were
recorded net of related issuance costs.
During 1997, the Company withstood the initial challenge of its
liquidity crisis and the ensuing disruptions associated with important
restructuring decisions and numerous personnel changes to generate total
revenue of $19,173,000, only 5.5% lower than 1996. In addition, the Company
improved gross margins to 36.7% in 1997 from 27.8% in 1996 while also
reducing total operating expenses by 27.2% to $11,662,000 in 1997 from
$16,017,000 in 1996.
The following discussion should be read in conjunction with the
Company's consolidated financial statements as of and for the years ended
December 31, 1997 and 1996 included in Item 7 of this Form 10- KSB.
12
<PAGE>
RESULTS OF OPERATIONS
The following table presents statement of operations data as a
percentage of total revenues for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1997 1996
--------- -------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of goods sold 63.3 72.2
--------- -------
Gross margin 36.7 27.8
--------- -------
Selling and marketing 32.8 40.3
General and administrative 9.4 21.5
Research and development 9.7 13.6
Restructuring 8.9 3.5
--------- -------
Total operating expenses 60.8 78.9
--------- -------
Loss from operations (24.1) (51.1)
Other income (expense), net (1.8) 6.2
--------- -------
Loss before income tax benefit (25.9) (44.9)
Income tax benefit 0.0 0.2
--------- -------
Net loss (25.9)% (44.7)%
--------- -------
--------- -------
</TABLE>
REVENUE. Total revenue decreased 5.5% to $19,173,000 in 1997 from
$20,289,000 in 1996. Domestic revenue increased 9.6% over 1996 to partially
offset a 34.8% decline in revenue from international sources while revenue
from service and supplies was relatively flat.
The increase in domestic revenue reflected a late September
introduction of the Company's new diagnostics system for sleep disorders and
the restructuring strategy of refocusing its efforts on domestic core
products. The Company has a non-exclusive agreement to sell sleep diagnostic
systems in the United States and in December 1997 acquired similar rights to
sell a companion portable version. International revenue for 1997 was
depressed by closing of the Company's German office at the end of 1996 as
part of its overall restructuring plan. In addition, continued strength of
the dollar has negatively affected European revenue.
GROSS MARGIN. The gross margin percentage increased to 36.7% of
revenue in 1997 from 27.8% in 1996. This margin increase was achieved through
improved manufacturing efficiencies and better control over technical service
costs. In addition, inventory write-downs that had affected gross margin in
1996 were not incurred in 1997.
The Company's manufacturing process was revised during 1997 to a
modified version of cellular manufacturing under which major systems are
produced in one continuous process over a shorter period of time rather than
producing several subassemblies requiring longer throughput times. These
process revisions not only reduce manufacturing costs but require
significantly lower levels of inventory. Technical service
13
<PAGE>
costs were also reduced by repairing more systems on site in lieu of
returning them to a central location. In addition, the Company made several
engineering revisions to its system's material components that have improved
their reliability and consequently reduced the incidence of service. In
addition, the amount of inventory write-downs affecting gross margin was only
$50,000 in 1997 compared to $1,420,000 in 1996. Moreover, the warranty
reserve was increased in 1996 to reflect the cost of offering a more
competitive five-year warranty program on certain of the Company's products.
The Company discontinued this five-year warranty program for systems sold
after March 31, 1997.
SELLING. Selling and marketing expenses decreased 23.3% to
$6,282,000 in 1997 from $8,186,000 in 1996. Selling expenses as a percent of
revenue decreased to 32.8% in 1997 compared to 40.3% in 1996. The Company's
restructuring actions of closing its German office and discontinuing its
asthma business unit reduced expenses by $788,000 and $207,000, respectively,
in 1997. Selling expenses also decreased with improved management of customer
incentives, seminar expenses and costs of demonstrating Company products. In
addition, management reduced the cost of attending trade shows by being more
selective and improving management of related expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased 58.8% to $1,802,000 in 1997 from $4,369,000 in 1996. As a percent
of revenue, general and administrative expenses decreased to 9.4% in 1997
compared to 21.5% in 1996. These decreases were principally due to a lower
allowance for doubtful accounts receivable established in 1997 and lower
executive compensation and recruiting expenses associated with former senior
management personnel. In addition, management's restructuring actions and
discipline resulted in reductions for most expense categories.
RESEARCH AND DEVELOPMENT. Research and development expenses
decreased 32.4% to $1,867,000 in 1997 from $2,762,000 in 1996 and as a
percentage of revenue decreased to 9.7% in 1997 from 13.6% in 1996. During
1996 the Company incurred significant expenses associated with the use of
independent contractors to convert product software to a Windows95
environment. The Company not only reduced its dependence on independent
contractors but also reduced its personnel costs in 1997. The Company, in
December 1997, successfully released its new Windows95 based BreezePF
software which is used on the majority of its products. In addition, the
Company made significant strides in redesigning several products to improve
serviceability and reduce associated manufacturing expenses. The Company
expects to benefit from these efforts in 1998.
RESTRUCTURING EXPENSES. Restructuring expenses of $1,711,000 for the
year ended December 31, 1997 included severance, legal, accounting and
consulting expenses associated with the restructuring activities implemented
in the first quarter of 1997.
OTHER INCOME. The Company recognized income of $1,438,000 in 1996
in connection with the settlement of a lawsuit with SensorMedics Corporation.
NET INTEREST EXPENSE. The Company incurred net interest expense of
$329,000 in 1997 compared to $189,000 in 1996, which resulted from increased
interest payments related to higher rates of interest and levels of
borrowings under the Company's working capital line of credit used to finance
losses from operations and working capital requirements.
INCOME TAX BENEFIT. The Company recognized no income tax benefit
for 1997 compared to $48,000 recognized in 1996. Effective tax rates for
income tax benefits are less than the statutory rates because the
14
<PAGE>
Company does not have sufficient taxable income in prior years to carry back
recent losses and because the Company has increased its deferred income tax
valuation allowance due to uncertainty regarding the realization of future
income tax benefits.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which will be effective for the Company beginning
January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive income
and its components in the general-purpose financial statements. The adoption
by the Company of SFAS No. 130 is not expected to have a material effect on
results of operations or financial position.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which will be
effective for the Company beginning January 1, 1998. SFAS No. 131 redefines
how operating segments are determined and requires disclosures of certain
financial and descriptive information about a Company's operating segments.
Although the Company has not completed its analysis of operating segments on
which it will report, the adoption by the Company of SFAS No. 131 is not
expected to have a material effect on results of operations or financial
position.
INFLATION
The Company believes that inflation did not have a significant
impact on the Company's operations in 1997 or 1996.
YEAR 2000
The Company has assessed the impact of the transition to the year
2000 on its software applications. Management does not believe that any
material issues exist with internally developed software and has received
confirmation from vendors of certain purchased software that current releases
or upgrades, if installed, are year 2000 compliant. The Company plans to
install current releases or upgrades at a cost approximating $30,000. Failure
to implement such releases or upgrades, or the failure of software vendors to
have eliminated the issues as represented, could materially and adversely
affect the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash of $387,000 and
working capital of $358,000. The Company financed part of its $4,962,000 net
loss with a $2,393,000 decrease in inventory and a $924,000 decrease in
accounts receivable. Cash provided from financing activities was generated
through the issuance of common stock in private sales to investors for net
proceeds of $2,935,000. The cash provided from financing activities was used
to reduce net borrowings under the Company's line of credit by $1,146,000 and
for investing in capital expenditures of $215,000 and software production
costs of $417,000.
As of December 31, 1996, the Company had cash of $545,000 and
working capital of $2,463,000. The Company used $288,000 of cash in operating
activities, primarily as a result of its net loss of $9,071,000, which was
partially offset by a decrease in accounts receivable of $4,368,000 and an
increase in accounts payable of $2,573,000. The Company used $1,229,000 in
investing activities for capital expenditures of $884,000 and software
production costs of $345,000. The Company generated $2,031,000 from financing
activities, primarily as a result of an increase of $1,725,000 in borrowings
under its line of credit.
At December 31, 1997, the Company had a working capital line of
credit with a bank that provides for total borrowings, based on available
collateral, of up to $4,100,000, at the discretion of the lender, and expires
March 31, 2000. Total borrowings outstanding under the credit agreement are
secured by the Company's accounts receivable and inventories. The credit
agreement contains certain restrictive covenants
15
<PAGE>
as well as limitations on capital expenditures and payment of dividends. The
credit line allows the Company to borrow up to 75% of eligible domestic
accounts receivable, 40% of eligible domestic inventory (not to exceed
$1,500,000), and 90% of eligible foreign accounts receivable.
During 1997, the Company entered into financing arrangements with
certain vendors which provide for payment of outstanding balances in equal
monthly installments for up to 36 months. The balances which will be paid
after December 31, 1998, have been classified as long-term accounts payable
financed with vendors. The amounts due under the agreements are $748,000 and
$59,000 for 1999 and 2000, respectively.
In November 1997, the Company entered into agreements to sell to
private investors up to 727,272 shares of common stock at a price of $4.125
per share. These investors purchased 363,636 shares for $1,500,000 on
November 12, 1997. Subsequent to December 31, 1997, these investors purchased
242,424 additional shares for $1,000,000 on January 30, 1998 and 121,212
additional shares for $500,000 on February 10, 1998.
The Company has no material commitments for 1998 capital
expenditures. The Company believes that its revenues from operations and the
$1,500,000 of proceeds received from the sale of common stock in January and
February 1998, together with cash and borrowings under its credit facility
will be adequate to satisfy its liquidity and capital resource needs through
1998.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are
included herein:
Independent Auditors' Report
Consolidated Balance Sheets-December 31, 1997 and 1996
Consolidated Statements of Operations-Years ended December 31, 1997
and 1996
Consolidated Statements of Shareholders' Equity-Years ended December
31, 1997 and 1996
Consolidated Statements of Cash Flows-Years ended December 31, 1997
and 1996
Notes to Consolidated Financial Statements-Years ended December 31,
1997 and 1996
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Medical Graphics Corporation
We have audited the accompanying consolidated balance sheets of Medical
Graphics Corporation and Subsidiary (the Company) as of December 31, 1997 and
1996 and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 consolidated financial statements present fairly, in all
material respects, the financial position of Medical Graphics Corporation and
Subsidiary at December 31, 1997 and 1996 and the results of their operations
and of their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
February 13, 1998 /s/ Deloitte & Touche LLP
Minneapolis, Minnesota
18
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 387 $ 545
Accounts receivable, less allowance for doubtful
accounts of $164 and $496, respectively 3,890 4,814
Inventories (Notes 1 and 2) 4,240 6,633
Prepaid expenses and other current assets 272 193
----------- ----------
Total current assets 8,789 12,185
EQUIPMENT AND FIXTURES (Notes 1 and 3) 4,072 3,857
Less accumulated depreciation 3,110 2,531
----------- ----------
Equipment and fixtures, net 962 1,326
SOFTWARE PRODUCTION COSTS, less accumulated
amortization of $855 and $568, respectively (Note 1) 602 472
OTHER ASSETS 13 20
$ 10,366 $ 14,003
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,261 $ 921
Accounts payable financed with vendors - current (Note 1) 1,145 1,742
Note payable (Note 7) 2,254 3,400
Employee compensation 786 978
Deferred service contract revenue 896 988
Warranty reserve 414 563
German office closing reserve (Note 4) 179 700
Other liabilities and accrued expenses 496 430
----------- ----------
Total current liabilities 8,431 9,722
LONG-TERM ACCOUNTS PAYABLE FINANCED WITH VENDORS (Note 1) 807 1,736
COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)
SHAREHOLDERS' EQUITY (Notes 1, 8, 9 and 12):
Class A stock, par value $.05 per share; 500 shares authorized,
liquidation preference of $3.38 per share, 444 issued and
outstanding 22
Common stock, par value $.05 per share; authorized 9,500 shares;
issued and outstanding 2,969 and 2,559, respectively 148 128
Additional paid-in capital 13,727 10,224
Retained deficit (12,769) (7,807)
----------- ----------
Total shareholders' equity 1,128 2,545
----------- ----------
$ 10,366 $ 14,003
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
REVENUES:
Equipment sales $ 14,492 $ 15,422
Service and supplies revenue 4,681 4,867
----------- ----------
Total revenues 19,173 20,289
COST OF GOODS SOLD:
Cost of equipment sales 9,635 11,352
Cost of service and supplies revenues 2,509 3,288
----------- ----------
Total cost of goods sold 12,144 14,640
----------- ----------
GROSS MARGIN 7,029 5,649
OPERATING EXPENSES:
Selling and marketing 6,282 8,186
General and administrative 1,802 4,369
Research and development 1,867 2,762
Restructuring (Note 4) 1,711 700
----------- ----------
Total operating expenses 11,662 16,017
----------- ----------
LOSS FROM OPERATIONS (4,633) (10,368)
OTHER (EXPENSE) INCOME:
SensorMedics settlement, net of settlement costs (Note 11) 1,438
Interest expense (329) (189)
----------- ----------
Total other (expense) income, net (329) 1,249
----------- ----------
LOSS BEFORE INCOME TAX BENEFIT (4,962) (9,119)
INCOME TAX BENEFIT (Note 5) 48
----------- ----------
NET LOSS $ (4,962) $ (9,071)
----------- ----------
----------- ----------
BASIC AND DILUTIVE NET LOSS PER SHARE OF COMMON STOCK (Note 1) $ (1.67) $ (3.56)
----------- ----------
----------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,966 2,545
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
CLASS A STOCK COMMON STOCK PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 2,496 $ 125 $ 9,921 $ 1,264 $ 11,310
Net loss (9,071) (9,071)
Common stock issued upon exercise of
stock options 45 2 229 231
Common stock issued under Employee
Stock Purchase Plan 18 1 74 75
--------- --------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1996 2,559 128 10,224 (7,807) 2,545
Net loss (4,962) (4,962)
Class A stock issued in a private sale,
net of issuance costs 444 $ 22 1,434 1,456
Common stock issued to a director 30 1 101 102
Common stock issued in a private sale,
net of issuance costs 364 18 1,394 1,412
Common stock issued under Employee
Stock Purchase Plan 16 1 66 67
Warrants issued in conjunction with
restructuring the Company (Note 4) 508 508
---- --------- --------- --------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 444 $ 22 2,969 $ 148 $ 13,727 $ (12,769) $ 1,128
---- --------- --------- --------- ---------- ---------- ----------
---- --------- --------- --------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,962) $ (9,071)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 579 765
Amortization, principally software production costs 287 276
Common stock and warrants issued in conjunction with
restructuring the Company (Note 4) 610
Changes in operating assets and liabilities:
Accounts receivable 924 4,368
Inventory 2,393 (473)
Prepaid expenses and other assets (72) (12)
Refundable income taxes 443
Accounts payable (186) 2,573
Employee compensation, other liabilities and
accrued expenses (126) 688
Warranty reserve (149) 323
Germany office closing reserve (521)
Deferred service contract revenue (92) (168)
------------ ----------
Net cash used in operating activities (1,315) (288)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (215) (884)
Software production costs (417) (345)
------------ ----------
Net cash used in investing activities (632) (1,229)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under line of credit agreement (1,146) 1,725
Proceeds from stock options exercised 231
Net proceeds from sale of Class A stock and common stock 2,935 75
----------- ----------
Net cash provided by financing activities 1,789 2,031
----------- ----------
(DECREASE) INCREASE IN CASH (158) 514
CASH AT BEGINNING OF YEAR 545 31
----------- ----------
CASH AT END OF YEAR $ 387 $ 545
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND
1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS, LIQUIDITY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - 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. In addition, the Company purchases for resale under its own
name noninvasive sleep diagnostic systems.
LIQUIDITY - The Company's working capital requirements for 1997 were
met principally through amounts borrowed on the Company's line of
credit (see Note 7), the issuance of Class A stock and common stock
under private sales to investors (see Note 8) and credit arranged with
the Company's vendors. This vendor credit consisted of the Company
entering into financing arrangements with certain vendors which
provided for payment of outstanding balances in equal monthly
installments for up to 36 months. The remaining amounts due under these
vendor agreements are payable in the amount of $1,145, $748, and $59,
in 1998, 1999 and 2000, respectively. The balances outstanding at
December 31, 1997 which will be paid after December 31, 1998 have been
classified as long-term accounts payable financed with vendors.
In addition, the Company incurred net losses of $4,962 and $9,071 for
the years ended December 31, 1997 and 1996, respectively. Management
plans to generate profitable operations by increasing revenues,
improving gross margins and controlling expenses. There can be no
assurance the Company will be able to generate profitable operations in
the future.
CONSOLIDATION - The financial statements include the accounts of the
Company and its wholly owned subsidiary, Medical Graphics Corporation,
GmbH (MGCG). All intercompany transactions have been eliminated. The
operations of MGCG were discontinued early in 1997 (see Note 4).
INVENTORIES - Inventories are valued at the lower of cost or market
determined by the first-in, first-out method. The Company has a reserve
of $636 and $1,678 recorded at December 31, 1997 and 1996,
respectively, to reduce certain excess quantities and obsolete items to
their net realizable value.
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. Capitalized software production costs are amortized over
three years using the straight-line method.
REVENUE RECOGNITION - Sales are recorded by the Company when products
are shipped or services are provided to the customer.
23
<PAGE>
DEFERRED SERVICE CONTRACTS - Amounts billed to customers under service
contracts are deferred and 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 in
future years of differences between the basis of assets and liabilities
for income tax and for financial reporting purposes using enacted tax
rates in effect during the year in which the differences are expected
to reverse. Deferred tax asset valuation allowances are recorded to
reduce deferred tax assets to the amount expected to be realized.
BASIC AND DILUTIVE NET LOSS PER SHARE - In 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS
PER SHARE. Basic net loss per share of common stock is computed by
dividing net loss by the weighted average number of common shares
outstanding during each year. Net loss per share amounts presented for
1996 have been restated for the adoption of SFAS No. 128. Common
equivalent shares from stock options and warrants to purchase 895 and
610 shares of common stock at a range of $2.88 to $15.00 and $4.50 to
$15.00 were outstanding during 1997 and 1996, respectively, but are
excluded from the computation of dilutive net loss per share as their
effect is antidilutive. Therefore, basic and dilutive net loss per
share amounts are equal for each of the periods presented.
SALES AND SEGMENT INFORMATION - The Company manufactures and sells its
products to customers primarily in the medical field and operates in
only one business segment. The Company grants its customers credit in
connection with sales of its products. It 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 generally are
due within 30 days for domestic customers. Credit losses relating to
customers have consistently been within management's expectations.
Export sales to foreign countries primarily in Europe and the Pacific
Rim accounted for 18% and 27% of total sales in 1997 and 1996,
respectively.
USE OF ESTIMATES - The preparation of the consolidated 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 carrying amount. To the extent
long-lived assets are considered impaired, such assets are adjusted to
their estimated fair values with fair value determined by the present
value of discounted future cash flows or, to the extent such long-lived
assets are held for sale, the estimated sales proceeds less costs of
disposal.
RECLASSIFICATIONS - Certain reclassifications have been made to the
1996 financial statements to conform to the classifications used in
1997. These reclassifications had no effect on previously reported net
loss or shareholders' equity.
24
<PAGE>
2. INVENTORIES
At December 31, the Company's inventories consisted of the following
components:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Purchased components and work-in-process $ 2,604 $ 3,195
Finished goods 1,636 3,438
----------- ----------
$ 4,240 $ 6,633
----------- ----------
----------- ----------
</TABLE>
3. EQUIPMENT AND FIXTURES
At December 31, the Company's equipment and fixtures consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Building improvements $ 733 $ 722
Computer equipment 1,491 1,387
Manufacturing equipment 933 928
Furniture and fixtures 915 820
----------- ----------
Total equipment and fixtures, at cost 4,072 3,857
Less accumulated depreciation 3,110 2,531
----------- ----------
$ 962 $ 1,326
----------- ----------
----------- ----------
</TABLE>
4. RESTRUCTURING
During December 1996, the Board of Directors approved closing the
Company's sales and marketing subsidiary in Germany and authorized
implementation of a restructuring plan. The Company recorded a $700
charge to operations in the fourth quarter of 1996 related to expected
exit costs of the German office. During 1997, the Company implemented a
restructuring plan that included the termination of certain employees
and the renegotiation of the Company's bank line of credit (see Note
7). Restructuring expenses of $1,711 for 1997 included employee
severance, write off of deferred financing fees, and related legal,
consulting and accounting expenses.
In connection with the restructuring plan, the Company granted, in
1997, the former chairman of the Company a warrant to purchase 130
shares of common stock at a price of $4.00 per share in exchange for
certain consulting services to the Company. The warrant expires on
March 31, 2000. The Company also issued 30 shares of common stock and
granted a warrant to purchase 150 shares of common stock at a price of
$3.38 per share to an individual for services provided in connection
with the restructuring of the Company's operations. This individual
also was elected the Chairman of the Board of Directors.
The warrant expires on March 31, 2002.
25
<PAGE>
5. INCOME TAXES
Significant components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current:
Federal $ - $ (28)
State (20)
----------- -----------
Income tax benefit $ - $ (48)
----------- -----------
----------- -----------
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Allowance for bad debts $ 58 $ 176
Inventory reserve 226 439
Warranty reserve 147 200
Restructuring reserve 63 238
Vacation accrual 48 77
Deferred service contract revenue 60 35
Valuation allowance (602) (1,165)
------------ -----------
Total current - -
Inventory capitalization 3 (14)
Capitalized software and patents (214) (154)
Net operating loss and tax credit carryforwards 4,003 2,402
Valuation allowance (3,792) (2,234)
----------- ----------
Total noncurrent - -
----------- ---------
Net deferred tax assets $ - $ -
----------- ---------
----------- ---------
</TABLE>
Reconciliations of the Company's expected income tax benefits computed
at the U.S. federal statutory tax rate to the income tax benefits
recorded are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Income tax benefit at statutory rate $ (1,737) $ (3,175)
Foreign tax loss 172
Increase of deferred tax asset valuation allowance 995 2,864
Utilization of net operating loss carryforward related
to IRS audit adjustments for 1994 and 1993 613
Other 129 91
----------- ----------
$ - $ (48)
----------- ----------
----------- ----------
</TABLE>
26
<PAGE>
As of December 31, 1997, the Company has federal and state net
operating loss carryforwards of $11,274 that expire from 2002 through
2012. The Company's income tax returns through December 31, 1995 have
been examined by the Internal Revenue Service. Total income taxes paid
were $24 and $26 in 1997 and 1996, respectively.
6. LEASES
The Company leases office and manufacturing facilities, automobiles,
and various office accessories. The building lease expires in 2002, at
which time the Company has an option to renew the lease for an
additional four years. The Company has the option to purchase the
building at the end of each lease expiration period at the building's
fair market value.
Future minimum lease payments under noncancelable operating leases with
remaining terms of one year or more consisted of the following at
December 31, 1997:
Year ending December 31:
<TABLE>
<S> <C>
1998 $ 420
1999 381
2000 357
2001 351
2002 172
Thereafter 0
----------
$ 1,681
----------
----------
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was $490
and $494, respectively.
7. NOTE PAYABLE TO BANK
In March 1997, the Company obtained a new credit agreement with Norwest
Business Credit Inc. (Norwest) that provides for total borrowings,
based on available collateral as defined, of up to $4,100, at the
discretion of Norwest, and expires March 31, 2000. Total borrowings
outstanding under the credit agreement are secured by the Company's
accounts receivable and inventories. The credit agreement contains
certain restrictive covenants, including maintenance of minimum net
worth (as defined), earnings requirements, and debt service
requirements as well as limitations on capital expenditures and payment
of dividends. The credit line allows the Company to borrow up to 75% of
eligible domestic accounts receivable, 40% of eligible domestic
inventory (not to exceed $1,500), and 90% of eligible foreign accounts
receivable.
Borrowings under the line of credit bear interest at the Norwest "base"
rate plus 4.0% (12.5% at December 31, 1997). The "base" rate is equal
to the interest rate publicly announced by Norwest Bank Minnesota,
National Association from time to time as its "base" rate. The line of
credit contains a minimum monthly interest charge of $15. In addition,
the Company granted to Norwest a three-year warrant to purchase 62.5
shares of the Company's common stock at an exercise price of $3.38 per
share.
27
<PAGE>
The Company had outstanding borrowings of $2,254 and $3,400 at December
31, 1997 and 1996, respectively. Total interest paid was $329 and $167
for the years ended December 31, 1997 and 1996, respectively. In June
and November 1997, the Company amended its line of credit agreement. As
of December 31, 1997, the Company was in compliance with all financial
covenants pursuant to the amended line of credit agreement.
8. CAPITAL STOCK
In March 1997, the Company's Board of Directors authorized 500 shares
of a new class of participating convertible stock (Class A stock). The
Class A stock has voting rights and a liquidation preference of $3.38
per share over the common stock. Each share is currently convertible to
one share of common stock. The Company issued 444 shares of the new
class of stock at $3.38 per share, for net proceeds of $1,456.
In October 1997, the Company's Board of Directors authorized the
issuance of additional common stock in a private sale to investors. On
November 10, 1997 the Company agreed to sell up to 727 shares of the
Company's common stock at a price of $4.13 per share. The investors
purchased 364 shares for $1,500 (less costs of issuance of $88) on
November 12, 1997 and 363 shares for $1,500 (less costs of issuance of
$31) in 1998 (see Note 12).
9. STOCK OPTION PLANS, EMPLOYEE STOCK PURCHASE PLAN AND 401(k) PLAN
The Company has an Employee Incentive Stock Option Plan under which a
total of 900 shares have been reserved for issuance, with 322 shares
remaining reserved and unissued at December 31, 1997. Options are
generally issued at prices not less than the fair market value at the
date of grant and become exercisable over a one- to five-year period.
Also, under the Option Plan, nonqualified options have been issued to
certain nonemployees. These options become exercisable over a one- to
five-year period following the date of grant.
The Company also has a Nonemployee Director Compensation Plan, which
provides for the granting of nonqualified options for up to 250 shares
of common stock to nonemployee members of the Board of Directors as
well as the Chairman of the Board. Under the plan, an option to
purchase 10 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 1.5 shares (3 shares for the Chairman of
the Board) will be granted automatically following each Board Meeting
personally attended by each director, not to exceed 9 shares (18 shares
for the Chairman of the Board) per director annually. An option to
purchase .5 shares will be granted automatically following each Board
Committee Meeting personally attended by each director, not to exceed
1.5 shares per director annually. 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.
28
<PAGE>
A summary of option activity is as follows:
<TABLE>
<CAPTION>
Employee Weighted Weighted
Incentive Average Nonqualified Average
Stock Options Exercise Stock Options Exercise
Outstanding Price Outstanding Price
<S> <C> <C> <C> <C>
Balance at December 31, 1995 221 $6.62 231 $7.54
Granted 95 5.87 165 5.52
Exercised (39) 4.50
Canceled or expired (61) 8.51 (2) 3.50
------- -------
Balance at December 31, 1996 216 6.14 394 6.72
Granted 267 3.69 208 3.64
Canceled or expired (164) 6.28 (369) 6.68
------- -------
Balance at December 31, 1997 319 $4.02 233 $4.03
------- ----- ------- -----
------- ----- ------- -----
Exercisable at December 31, 1996 86 $6.70 210 $7.71
------- ----- ------- -----
------- ----- ------- -----
Exercisable at December 31, 1997 83 $4.75 143 $4.06
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
The Company's Employee Stock Purchase Plan (the ESP Plan), a qualified
plan pursuant to Internal Revenue Code Section 423, became effective in
May 1993. The ESP Plan gives eligible employees an opportunity to
purchase the Company's common stock, through payroll deductions not
exceeding 15% of eligible compensation, 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
1 and January 1 of each year. Participating employees may purchase a
maximum of 5 shares during each purchase period and no more than $25 of
fair value of stock in each calendar year. A total of 200 shares have
been authorized for issuance under the ESP Plan. Shares issued under
the ESP Plan in 1997 and 1996 were 16 and 18 shares, respectively. The
ESP Plan will terminate on January 1, 2003, unless extended by the
Board of Directors.
In 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The
Company has elected to continue following the accounting guidance of
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, for measurement and recognition of stock-based
transactions with employees. No compensation cost has been recognized
for options issued under the stock option plans, because the exercise
price of all options granted was at least equal to the fair value of
the common stock on the date of the grant. Had compensation costs for
the stock options issued to certain directors and employees and common
stock issued under the ESP Plan been determined at the grant date,
based on the fair value provisions of SFAS No. 123, the Company's 1997
and 1996 pro forma net loss would have been $5,385 and $9,303,
respectively, and basic and dilutive net loss per share would have been
$1.82 and $3.66, respectively.
29
<PAGE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions: dividend yield of 0%; a risk-free
interest rate of 6.5% and 6.1% in 1997 and 1996, respectively; an
expected life of 7 and 10 years in 1997 and 1996, respectively; and
expected volatility of 54% and 44% in 1997 and 1996, respectively. The
weighted average fair value of options issued in 1997 and 1996 was
$2.49 and $3.76, respectively.
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 15% of their gross earnings with
a 25% matching contribution by the Company on the first 6% of gross
earnings. The Company expensed contributions to the plan of
approximately $12 and $62 in 1997 and 1996, respectively.
10. RELATED-PARTY TRANSACTIONS
An officer and former director of the Company who resigned in October
1997 is the president of ErgometRx Corporation and is the husband of an
officer/Chairman of the Board of Directors who resigned in March 1997.
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 this proprietary information in
certain markets under a five-year royalty agreement. Under this
agreement, the Company paid royalties of $0 and $40 in 1997 and 1996,
respectively. During 1996, the Company advanced ErgometRx Corporation
approximately $165 in cash and products, which was fully reserved for
at December 31, 1996.
An officer/Chairman of the Board of Directors of the Company who
resigned in March 1997 is also the president of e-med. OnCall, Inc.
During 1996, the Chairman began a transition from the Company to
e-med.OnCall, Inc. As part of this transition, the Company transferred
equipment with a net book value of approximately $75 to a new office
for the Chairman and paid certain administrative expenses in the amount
of approximately $60 with respect to that office. This office also
serves as the office for e-med.OnCall, Inc. All such amounts were
recorded as administrative expense during 1996.
The current Chairman of the Board of Directors is the president of
Manchester Companies. As part of the restructuring plan in 1997, the
Board of Directors engaged Manchester Companies to provide investment
banking and management consulting services to the Company. During 1997,
$265 was paid to Manchester Companies for those services. In addition,
the Company was paid $10 for administrative services that were provided
to Manchester Companies.
11. LITIGATION
During 1995, the Company was awarded a judgment of $4.35 million,
related to a patent infringement suit against a competitor. The
judgment was to be paid over an eight-year period. The Company received
$975 after associated legal costs during 1995. The Company recorded the
gain as cash was received due to uncertainty regarding the ultimate
collectibility of the judgment. During 1996, the competitor was
acquired by a third party and pursuant to the terms of the settlement
agreement, the Company received the net present value of the remaining
payments. The Company received $1,438 after paying associated legal
costs in 1996.
30
<PAGE>
The Company is a defendant in various claims and litigation which are
incidental to its business. Management is of the opinion that certain
of these matters are covered by insurance and that ultimate settlement
of these matters will not have a material impact on its consolidated
financial statements.
12. SUBSEQUENT EVENTS
In November 1997, the Company entered into agreements with investors
for the issuance of up to 727 shares of the Company's common stock at a
price of $4.13 per share. These investors purchased 364 shares on
November 12, 1997 (see Note 8). Under the terms of the agreement, each
investor had the right to purchase and the Company had the right to
require the investor to purchase such additional shares at a purchase
price of $4.13 per share, subject to certain conditions, on or before
February 23, 1998. These investors purchased 242 shares for $1,000 on
January 30, 1998 and 121 shares for $500 on February 10, 1998. The
following unaudited pro forma shareholders' equity as of December 31,
1997 gives effect to issuances of common stock subsequent to December
31, 1997:
<TABLE>
<CAPTION>
Unaudited
Pro Forma
Amount
<S> <C>
Class A stock $ 22
Common stock 166
Additional paid-in capital 15,178
Retained deficit (12,769)
-------------
Pro forma shareholders' equity $ 2,597
-------------
-------------
</TABLE>
31
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 24, 1997, the Company filed a Report on Form 8-K
reporting that it had dismissed Ernst & Young LLP as its principal
independent auditor and on March 4, 1997 filed a Report on Form 8-K
indicating that it had engaged Deloitte & Touche LLP as its independent
auditors for the year ended December 31, 1996. The Reports on Form 8-K also
indicated that there were no disagreements between the Company and Ernst &
Young LLP on any matter with respect to accounting policies or practices.
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)
Beneficial Ownership Reporting Compliance" in the Company's definitive proxy
statement for its Annual Meeting of Shareholders, a definitive copy of which
will be filed within 120 days of December 31, 1997, 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 1998 Annual Meeting of
Shareholders, 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 1998 Annual Meeting of Shareholders, 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 1998 Annual Meeting of
Shareholders, is hereby incorporated by reference.
32
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description Exhibit Method of Filing
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation, Exhibit 3(a) to Report on Form 10-KSB
as amended for the year ended December 31, 1991,
file no. 0-9899
3.2 Amended bylaws Exhibit 3(b) to Report on Form 10-KSB
for the year ended December 31, 1992,
file no. 0-9899
4.1 Certificate of Rights and Preferences Exhibit 4.1 to Report on Form 10-KSB
of Class A Stock of the Company for the year ended December 31, 1996,
file no. 0-9899
10.1 Seventh Amendment to Lease for Exhibit 10(b) to Report on Form 10-KSB
350 Oak Grove Parkway, St. Paul, for the year ended December 31, 1994,
Minnesota file no. 0-9899
10.2 Credit Agreement dated March 31, 1997 Exhibit 10.2 to Report on Form 10-KSB
between the Company and Norwest Bank for the year ended December 31, 1996,
Minnesota, N.A. file no. 0-9899
10.2.1 Letter Amendment dated Filed electronically herewith
November 12, 1997
10.3 Credit and Security Agreement dated Exhibit 10.3 to Report on Form 10-KSB
March 31, 1997 between the Company for the year ended December 31, 1996,
and Norwest Business Credit, Inc. file no. 0-9899
10.3.1 Letter Amendment dated April 14, 1997 Exhibit 10.3.1 to Report on Form 10-KSB
for the year ended December 31, 1996,
file no. 0-9899
10.3.2 Letter Amendment dated Filed electronically herewith
November 12, 1997
10.4 Warrant between the Company Exhibit 10.4 to Report on Form 10-KSB
and Norwest Business Credit, Inc. for the year ended December 31, 1996,
dated March 27, 1997 file no. 0-9899
33
<PAGE>
10.5* 1987 Stock Option Plan Exhibit 10(d) to Report on Form 10-KSB
for the year ended December, 31,
1992, file no. 0-9899
10.6 Sub-license Agreement between the Exhibit 10(e) to Report on Form 10-KSB
company and ErgometRx for the year ended December 31, 1992,
Corporation (formally Scientific file no 0-9899
Exercise Prescriptions
Incorporated), dated February 11, 1993
10.7 Warrant Agreement between Exhibit 4.1 to Report on Form S-8
the Company and Catherine A. filed on May 16, 1997,
Anderson dated March 25, 1997 file no. 333-27251
10.8* Non-Employee Director Exhibit 4.1 to Report on Form S-8
Compensation Plan filed on December 8, 1997,
file no. 333-41725
10.9* Stock Option Agreement between Exhibit 10(h) to Report on Form 10-KSB
the Company and Donald C. for the year ended December 31, 1993,
Wegmiller file no. 0-9899
10.10 Registration Rights Agreement between Exhibit 10.11 to Report on Form 10-KSB
the Company and FAMCO II LLC for the year ended December 31, 1996,
file no. 0-9899
10.11 Registration Rights Agreement between Exhibit 4 to Schedule 13D/A filed on
the Company and FAMCO II LLC, November 21, 1997 with respect to FAMCO
Special Situations Fund III, L.P., II LLC and Family Financial Strategies, Inc.
Special Situations Private Equity Fund
L.P.(4), Special Situations Cayman Fund
L.P.(4)
10.12 Eighth Amendment to Lease for Filed electronically herewith
350 Oak Grove Parkway, St. Paul,
Minnesota.
21.1 The Company has one wholly-owned subsidiary, Medical Graphics Corporation GmbH,
located in Germany.
23.1 Independent Auditors' Consent of Filed electronically herewith
Deloitte & Touche LLP
27.1 Financial Data Schedule Filed electronically herewith
</TABLE>
- -----------------------------
*Indicates compensatory contract or arrangement.
34
<PAGE>
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1997. During the quarter ended March 31, 1998 the Company filed a
Report on Form 8-K reporting that it had completed the second tranche of a
private equity investment with the issuance of 363,636 shares of common stock
for gross proceeds of $1,500,000. See Part II, Item 6, "Liquidity and Capital
Resources". In addition, the Company submitted an unaudited pro forma balance
sheet and income statement as of and for the year ended December 31, 1997,
respectively. The unaudited balance sheet illustrates the Company's compliance
with new quantitative maintenance requirements for continued listing on the
Nasdaq SmallCap Market, which were effective February 23, 1998.
35
<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 26, 1998 /s/ Glenn D. Taylor
----------------------------
Glenn D. Taylor, President
and Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ------
<S> <C> <C>
/s/ Mark W. Sheffert Chairman of the Board March 26, 1998
- ------------------------------------ and Director
Mark W. Sheffert
/s/ Glenn D. Taylor President, Chief Executive March 26, 1998
- ------------------------------------ Officer and Director (Principal
Glenn D. Taylor Executive Officer)
/s/ Dale H. Johnson Chief Financial Officer March 26, 1998
- ------------------------------------ (Principal Financial and
Dale H. Johnson Accounting Officer)
/s/ Anthony J. Adducci Director March 26, 1998
- ------------------------------------
Anthony J. Adducci
/s/ Gerald T. Knight Director March 26, 1998
- ------------------------------------
Gerald T. Knight
36
<PAGE>
/s/ W. Edward McConaghay Director March 26, 1998
- ------------------------------------
W. Edward McConaghay
/s/ Donald C. Wegmiller Director March 26, 1998
- ------------------------------------
Donald C. Wegmiller
/s/ John C. Penn Director March 26, 1998
- ------------------------------------
John C. Penn
/s/ John D. Wunsch Director March 26, 1998
- ------------------------------------------
John D. Wunsch
</TABLE>
37
<PAGE>
EXHIBIT 10.2.1
FIRST AMENDMENT TO CREDIT AGREEMENT
(Eximbank Guaranteed Loan No. AP072067XX)
This Amendment, dated as of November 12, 1997, is made by and between
MEDICAL GRAPHICS CORPORATION, a Minnesota Corporation
(the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
a national banking association (the "Lender").
Recitals
The Borrower and the Lender have entered into a Credit Agreement
dated as of March 31, 1997 (the "Credit Agreement"). Capitalized terms used
in these recitals have the meanings given to them in the Credit Agreement
unless otherwise specified.
The Borrower is in default of its Tangible Net Worth covenant as
described below. Due to such default and for other reasons, the Credit
Agreement will be amended as set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Capitalized terms used in this Amendment which
are defined in the Credit Agreement shall have the same meanings as defined
therein, unless otherwise defined herein. In addition, Section 1.1 of the
Credit Agreement is amended by deleting the definition of "Eligible Export
Inventory", and amending the following definition:
"'Borrowing Base' means, at any time the least of:
(a) the Maximum Line; or
(b) the difference of $4,100,000 and the outstanding
principal balance of the NBCI Revolving Advances; or
(c) subject to change from time to time in the Lender's sole
discretion, 90% of Eligible Foreign Accounts."
2. REQUESTS FOR ADVANCES. Section 2.2 of the Credit Agreement is
hereby modified to read as follows:
"Section 2.2 REQUESTS FOR ADVANCES. The Borrower shall make each
request for a Revolving Advance to the Lender before 11:00 a.m.
(Minneapolis time) of the day of the requested Revolving Advance. Requests
may be made in writing or by telephone. The Lender will not consider any
request for a Revolving Advance unless the Lender has received from the
Borrower, among other things, a Borrowing Base
<PAGE>
Certificate as of a date not more than five (5) Business Days before the
date of the requested Advance and copies of the Export Orders and a
summary thereof against which the Borrower is requesting such Advance.
Any request for an Advance shall be deemed to be a representation by the
Borrower that the conditions set forth in Section 3.2 have been satisfied
as of the date of the request."
3. FINANCIAL COVENANTS. Section 5.12 of the Credit Agreement is
amended to read as follows:
"Section 5.12 MINIMUM TANGIBLE NET WORTH. The Borrower will maintain,
during each period described below, its Tangible Net Worth, determined as
at the end of each month, at an amount not less than the amount set forth
opposite such period:
Period Minimum Tangible Net Worth
------ --------------------------
November 30, 1997 $300,000
through
March 30, 1998
4. NO OTHER CHANGES. Except as explicitly amended by this
Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect.
5. WAIVER OF DEFAULTS. The Borrower is in default of Section 5.12
of the Credit Agreement (the "Defaults") as set forth below:
<TABLE>
<CAPTION>
Period Required Tangible Net Worth Actual Tangible Net Worth
------ --------------------------- -------------------------
<S> <C> <C>
May 31, 1997 $1,000,000 $865,000
June 30, 1997 $1,300,000 $1,219,000
July 31, 1997 $1,300,000 $875,000
August 31, 1997 $1,300,000 $218,000
September 30, 1997 $1,300,000 $65,000
October 31, 1997 $1,300,000 Unknown
</TABLE>
Upon the terms and subject to the conditions set forth in this Amendment, the
Lender hereby waives the Defaults. This waiver shall be effective only in this
specific instance and for the specific purpose for which it is given, and this
waiver shall not entitle the Borrower to any other or further waiver in any
similar or other circumstances.
6. CONDITIONS PRECEDENT.
(a) This Amendment, not including the new financial covenants set
forth in Paragraph 3 hereof or the waiver set forth in Paragraph 5
hereof, shall be effective when the Lender shall have received an
executed original hereof and such other matters as the Lender may require
in its sole discretion.
-2-
<PAGE>
(b) The new financial covenants set forth in Paragraph 3 and the
waiver set forth in Paragraph 5 shall be effective when the Lender
shall have received an executed original hereof, together with each of
the following, each in substance and form acceptable to the Lender in
its sole discretion:
(i) evidence that the Borrower has received a cash equity
infusion of not less than $ 1,500,000, PROVIDED HOWEVER, that the
borrower must receive such cash equity infusion by November 14,
1997 or the waiver set forth in Paragraph 5 shall not be
effective;
(ii) the Amendment Fee described in Paragraph 6 of the
Second Amended and Restated Credit and Security Agreement by
and between the Borrower and Norwest Business Credit, Inc. of
even date herewith; and
(iii) such other matters as the Lender may require in its
sole discretion.
7. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute
this Amendment and to perform all of its obligations hereunder, and
this Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of
this Amendment have been duly authorized by all necessary corporate
action and do not (i) require any authorization, consent or approval by
any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the
articles of incorporation or by-laws of the Borrower, or (iii) result
in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound
or affected.
(c) All of the representations and warranties contained in the
Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
8. REFERENCES. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents and the Loan Documents
shall be deemed to refer to the Credit Agreement as amended hereby.
-3-
<PAGE>
9. NO OTHER WAIVER. Except as set forth in Paragraph 5 hereof, the
execution of this Amendment and acceptance of any documents related hereto
shall not be deemed to be a waiver of any Default or Event of Default under the
Credit Agreement or breach, default or event of default under any Security
Document or other document held by the lender, whether or not known to the
lender and whether or not existing on the date of this Amendment.
10. RELEASE. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all participants,
parent corporations, subsidiary corporations, affiliated corporations,
insurers, indemnitors, successors and assigns thereof, together with all of the
present and former directors, officers, agents and employees of any of the
foregoing, from any and all claims, demands or causes of action of any kind,
nature or description, whether arising in law or equity or upon contract or
tort or under any state or federal law or otherwise, which the Borrower has
had, now has or has made claim to have against any such person for or by reason
of any act, omission, matter, cause or thing whatsoever arising from the
beginning of time to and including the date of this Amendment, whether such
claims, demands and causes of action are matured or unmatured or known or
unknown.
11. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement
under the Credit Agreement to pay or reimburse the Lender on demand for all
costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation
of this Amendment and the documents and instruments incidental hereto. The
Borrower hereby agrees that the Lender may, at any time or from time to time in
its sole discretion and without further authorization by the Borrower, make a
loan to the Borrower under the Credit Agreement, or apply the proceeds of any
loan, for the purpose of paying any such fees, disbursements, costs and
expenses.
-4-
<PAGE>
12. MISCELLANEOUS. This Amendment may be executed in any number
of counterparts, each of which when so executed and delivered shall be
deemed an original and all of which counterparts, taken together, shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the date first written above.
NORWEST BANK MINNESOTA MEDICAL GRAPHICS CORPORATION
NATIONAL ASSOCIATION
By NORWEST BUSINESS CREDIT, INC.,
as Servicer
By /s/Warren G. Lindman By /s/Dale H. Johnson
----------------------------- ---------------------------
Warren G. Lindman CFO
---------------------------
Its Assistant Vice President
---------------------------
-5-
<PAGE>
EXHIBIT 10.3.2
SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMEENT
This Amendment, dated as of November 12, 1997, is made by and between
MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the "Borrower") and
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into a Credit and Security
Agreement dated as of March 31, 1997 and amended by First Amendment to Credit
and Security Agreement dated as of July 10, 1997 (as so amended, the "Credit
Agreement"). Capitalized terms used in these recitals have the meanings given
to them in the Credit Agreement unless otherwise specified.
The Borrower has requested that the Lender waive certain Defaults and
reset the financial covenants to the Credit Agreement, which the Lender is
willing to do pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. FINANCIAL COVENANTS. Sections 6.12, 6.13, 6.14 and 6.15 of the
Credit Agreement are hereby amended in their entirety and replaced with the
following new sections:
"Section 6.12 MINIMUM BOOK NET WORTH. The Borrower will maintain its
Book Net Worth, determined as at the end of each month listed below, at an
amount not less than the amount set forth opposite such period:
MONTH MINIMUM BOOK NET WORTH
October 31, 1997 < $480,000 >
November 30, 1997 $725,000
December 31, 1997 $885,000
"Section 6.13 [Section intentionally left blank.]
<PAGE>
"Section 6.14 MINIMUM NET INCOME. The Borrower will achieve as of each
date listed below, Net Income, of not less than the amount set forth
opposite such date:
DATE MINIMUM NET INCOME
October 31, 1997 < $5,165,000 >
November 30, 1997 < $5,460,000 >
December 31, 1997 < $5,300,000 >
"Section 6.15 MINIMUM DEBT SERVICE COVERAGE RATIO. For each fiscal year
after December 31, 1997, the Borrower will achieve a Debt Service Coverage
Ratio of 1.00 to 1.00 as of each fiscal year end for the fiscal year then
ending."
2. LIENS. Section 7.1(d) of the Credit Agreement is hereby
amended in its entirety and replaced with the following new paragraph:
"(d) purchase money security interests relating to the acquisition of
machinery and equipment of the Borrower, not exceeding $50,000 for any one
purchase or $200,000 in the aggregate during any fiscal year and so long
as no Default Period is then in existence and none would exist immediately
after such acquisition."
3. CAPITAL EXPENDITURES. Section 7.10 of the Credit Agreement is
hereby amended in its entirety and replaced with the following new section:
"Section 7.10 CAPITAL EXPENDITURES. The Borrower will not incur or
contract to incur Capital Expenditures of more than $200,000 in the
aggregate during any fiscal year, or more than $50,000 in any one
transaction."
4. NO OTHER CHANGES. Except as explicitly amended by this Amendment,
all of the terms and conditions of the Credit Agreement shall remain in full
force and effect and shall apply to any advance or letter of credit
thereunder.
-2-
<PAGE>
5. WAIVER OF DEFAULTS. The Borrower is in default of the
following provisions of the Credit Agreement (collectively, the
"Defaults"):
<TABLE>
<CAPTION>
SECTION/COVENANT PERIOD REQUIRED ACTUAL
<S> <C> <C> <C>
6.12 Minimum Book Net Worth 8/97 not less than $885,000 $537,000
9/97 not less than $ 1,385,000 $308,000
6.13 Maximum Debt to Book
Net Worth 8/97 not more than 9.05 to 1.00 17.61 to 1.00
9/97 not more than 6.75 to 1.00 31.90 to 1.00
10/97 not more than 6.10 to 1.00 unknown
6.14 Minimum Net Income 8/97 not less than < $3,800,000> < $4,148,000 >
9/97 not less than < $3,300,000> < $4,378,000 >
</TABLE>
Upon the terms and subject to the conditions set forth in this Amendment,
the Lender hereby waives the Defaults. This waiver shall be effective only
in this specific instance and for the specific purpose for which it is
given, and this waiver shall not entitle the Borrower to any other or
further waiver in any similar or other circumstances.
6. AMENDMENT FEE. The Borrower shall pay the Lender as of the
date hereof a fully earned, non-refundable fee in the amount of $10,000
in consideration of the Lender's execution of this Amendment.
7. CONDITIONS PRECEDENT. This Amendment, and the waiver set forth
in Paragraph 5 hereof, shall be effective when the Lender shall have received
an executed original hereof, together with each of the following, each in
substance and form acceptable to the Lender in its sole discretion:
(a) evidence that the Borrower has received a cash equity
infusion of not less than $1,500,000, PROVIDED HOWEVER, that the Borrower
must receive such cash equity infusion by November 14, 1997;
(b) payment of the fee described in Paragraph 6; and
(c) such other matters as the Lender may require in its sole
discretion.
8. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute
this Amendment and to perform all of its obligations hereunder, and this
Amendment has
-3-
<PAGE>
been duly executed and delivered by the Borrower and constitutes the legal,
valid and binding obligation of the Borrower, enforceable in accordance with
its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the articles
of incorporation or by-laws of the Borrower, or (iii) result in a breach
of or constitute a default under any indenture or loan or credit agreement
or any other agreement, lease or instrument to which the Borrower is a
party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
9. REFERENCES. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby.
10. NO OTHER WAIVER. Except as set forth in Paragraph 5 hereof, the
execution of this Amendment and acceptance of any documents related hereto
shall not be deemed to be a waiver of any Default or Event of Default under the
Credit Agreement or breach, default or event of default under any Security
Document or other document held by the Lender, whether or not known to the
Lender and whether or not existing on the date of this Amendment.
11. RELEASE. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all participants,
parent corporations, subsidiary corporations, affiliated corporations,
insurers, indemnitors, successors and assigns thereof, together with all of the
present and former directors, officers, agents and employees of any of the
foregoing, from any and all claims, demands or causes of action of any kind,
nature or description, whether arising in law or equity or upon contract or
tort or under any state or federal law or otherwise, which the Borrower has
had, now has or has made claim to have against any such person for or by reason
of any act, omission, matter, cause or thing whatsoever arising from the
beginning of time to and including the date of this Amendment, whether such
claims, demands and causes of action are matured or unmatured or known or
unknown.
-4-
<PAGE>
12. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement
under the Credit Agreement to pay or reimburse the Lender on demand for all
costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation
of this Amendment and the documents and instruments incidental hereto. The
Borrower hereby agrees that the Lender may, at any time or from time to time in
its sole discretion and without further authorization by the Borrower, make a
loan to the Borrower under the Credit Agreement, or apply the proceeds of any
loan, for the purpose of paying any such fees, disbursements, costs and
expenses.
13. MISCELLANEOUS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first written above.
NORWEST BUSINESS CREDIT, INC. MEDICAL GRAPHICS CORPORATION
By /s/Warren G. Lindman By /s/Dale H. Johnson
--------------------------- -----------------------------
Warren G. Lindman CFO
-----------------------------
Its Assistant Vice President
-----------------------------
-5-
<PAGE>
EXHIBIT 10.12
EIGHTH AMENDMENT TO LEASE
THIS AMENDMENT is entered into as of this 29th day of March, 1995,
between Oak Grove Parkway Building Partners, a Minnesota general
partnership ("Landlord") and Medical Graphics Corporation, a Minnesota
corporation ("Tenant").
RECITALS
1. Landlord and Tenant entered into that certain Lease Agreement dated
August 5, 1985, as amended by the First Amendment to Lease Agreement dated
August 29, 1985, the Second Amendment to Lease Agreement dated September 13,
1985, the Agreement with Respect to Lease dated September 18, 1985, the
Amendment dated August 1, 1989, the Fourth Amendment to Lease dated August 1,
1990, the Fifth Amendment to Lease dated October 17, 1990, the Sixth Amendment
to Lease dated October 17, 1990 and the Seventh Amendment to Lease dated
March 6, 1995 (the "Lease"), covering certain real property in Vadnais Heights,
Ramsey County, Minnesota.
2. Landlord and Tenant desire to amend the Seventh Amendment to
Lease pursuant to the terms and conditions contained herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants, terms and
conditions contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereby
agree to enter into the following agreement:
1. The fifth sentence of Section 11 of the Seventh Amendment to Lease is
hereby deleted and replaced in its entirety by the following: "From and after
the Second Expansion Premises Commencement Date, Tenant hereby agrees that in
addition to the rent as provided in paragraph three hereof, Tenant shall
monthly reimburse the Landlord in the amount of Three Hundred Seventy-three and
25/100 Dollars ($373.25) for each monthly payment of Six Hundred Forty-nine and
98/100 Dollars ($649.98) paid by the Landlord after the Second Expansion
Premises Commencement Date."
2. Except as modified herein, the terms of the Lease shall remain in
full force and effect.
-1-
<PAGE>
Dated the day and year first stated above.
LANDLORD: OAK GROVE PARKWAY BUILDING
PARTNERS, a Minnesota partnership
By [SIGNATURE]
--------------------------------------
Its General Partner
TENANT: MEDICAL GRAPHICS CORPORATION, a
Minnesota corporation
By [SIGNATURE]
--------------------------------------
Its Vice President
-----------------------------------
The undersigned hereby consents to this Eighth Amendment pursuant to the
terms and conditions set forth herein.
AMERICAN BANK NATIONAL ASSOCIATION, a
national banking association
By [SIGNATURE]
---------------------------------------
Its Assistant Vice President
------------------------------------
397583/032395
-2-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Jurisdiction or
Name of Direct Subsidiaries Organization
- --------------------------- ---------------
Medical Graphics Corporation GmbH Germany
Name of Indirect Subsidiaries
None
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT OF
DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in Registration Statements No.
33-15765, No. 33-47993, No. 33-64430, No. 33-64432, No. 33-80596, No.
33-80386, No. 33-14295, No. 33-27251, No. 33-32465, No. 33-32469 and No.
33-41725 of Medical Graphics Corporation on Form S-8 and in Registration
Statements No. 33-32467 and No. 33-41721 of Medical Graphics Corporation on
Form S-3 and our report dated February 13, 1998 appearing in this Annual
Report on Form 10-KSB of Medical Graphics Corporation for the year ended
December 31, 1997.
March 26, 1998 Deloitte & Touche LLP
Minneapolis, Minnesota
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 387
<SECURITIES> 0
<RECEIVABLES> 4,054
<ALLOWANCES> (164)
<INVENTORY> 4,240
<CURRENT-ASSETS> 8,789
<PP&E> 4,072
<DEPRECIATION> (3,110)
<TOTAL-ASSETS> 10,366
<CURRENT-LIABILITIES> 8,431
<BONDS> 0
0
0
<COMMON> 171
<OTHER-SE> 957
<TOTAL-LIABILITY-AND-EQUITY> 10,366
<SALES> 14,492
<TOTAL-REVENUES> 19,173
<CGS> 12,144
<TOTAL-COSTS> 23,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 145
<INTEREST-EXPENSE> 329
<INCOME-PRETAX> (4,962)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,962)
<EPS-PRIMARY> (1.67)
<EPS-DILUTED> (1.67)
</TABLE>
