<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to ______
Commission file number 0-9899
MEDICAL GRAPHICS CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1316712
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 OAK GROVE PARKWAY, SAINT PAUL, MINNESOTA 55127-8599
--------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 484-4874
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of August 12, 1998, the Company had outstanding 5,056,975 shares of Common
Stock, $.05 par value; and 444,445 shares of Class A Stock, $.05 par value.
Each share of Class A Stock is convertible into 1.5 shares of Common Stock.
Transitional Small Business Disclosure Format: Yes No X
----- -----
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL GRAPHICS CORPORATION
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $185 $387
Accounts receivable, net of allowance for doubtful
accounts of $166 and $164 4,252 3,890
Inventories:
Purchased components and work in process 3,208 2,604
Finished goods 1,991 1,636
-------- --------
5,199 4,240
Prepaid expenses 323 272
-------- --------
Total Current Assets 9,959 8,789
-------- --------
EQUIPMENT AND FIXTURES 4,093 4,072
LESS ACCUMULATED DEPRECIATION 3,411 3,110
-------- --------
682 962
SOFTWARE PRODUCTION COSTS, NET OF ACCUMULATED
AMORTIZATION OF $1,023 AND $855 613 602
OTHER ASSETS 10 13
-------- --------
$11,264 $10,366
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $2,816 $2,261
Accounts payable financed with vendors - current 924 1,145
Line of credit 2,584 2,254
Employee compensation 653 786
Deferred service contract revenue 899 896
Warranty reserve 374 414
Other liabilities and accrued expenses 595 675
-------- --------
Total Current Liabilities 8,845 8,431
COMMITMENTS AND CONTINGENCIES
LONG-TERM ACCOUNTS PAYABLE FINANCED WITH VENDORS 397 807
SHAREHOLDERS' EQUITY
Class A stock; liquidation preference
of $3.375 per share 22 22
Common stock 168 148
Additional paid-in capital 15,346 13,727
Retained deficit (13,514) (12,769)
-------- --------
2,022 1,128
-------- --------
$11,264 $10,366
-------- --------
-------- --------
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
MEDICAL GRAPHICS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Equipment sales $3,976 $3,773 $ 7,809 $ 7,396
Service and supplies revenues 1,146 1,240 2,383 2,374
------ ------ ------- -------
Total revenues 5,122 5,013 10,192 9,770
COST OF REVENUES 3,269 3,086 6,127 6,304
------ ------ ------- -------
Gross margin 1,853 1,927 4,065 3,466
OPERATING EXPENSES:
Selling and marketing 1,520 1,531 2,730 3,070
General and administrative 534 510 1,027 884
Research and development 449 537 856 1,059
Provision for restructuring 150 1,496
------ ------ ------- -------
2,503 2,728 4,613 6,509
------ ------ ------- -------
LOSS FROM OPERATIONS (650) (801) (548) (3,043)
Interest expense (100) (63) (197) (148)
------ ------ ------- -------
LOSS BEFORE INCOME TAXES (750) (864) (745) (3,191)
Income tax benefit 0 0 0 0
------ ------ ------- -------
NET LOSS ($750) ($864) ($745) ($3,191)
------ ------ ------- -------
------ ------ ------- -------
NET LOSS PER WEIGHTED AVERAGE SHARE
Basic ($0.13) ($0.19) ($0.13) ($0.76)
Diluted ($0.13) ($0.19) ($0.13) ($0.76)
------ ------ ------- -------
------ ------ ------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 5,708 4,496 5,595 4,175
Diluted 5,708 4,496 5,595 4,175
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
MEDICAL GRAPHICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($745) ($3,191)
Adjustments to reconcile net loss to
net cash provided (used) in operating activities
Issuance of common stock warrants $608
Depreciation 301 286
Amortization 168 166
Changes in operating assets and liabilities
Accounts receivable (362) 584
Inventory (959) 2,082
Prepaid expenses and other assets (48) (49)
Accounts payable and accrued expenses 121 (407)
Warranty reserve (40) 157
Deferred service contract revenue 3 (89)
-------- -------
Net cash (used) provided in operating activities (1,561) 147
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Software production costs (179) (141)
Capital expenditures (21) (86)
-------- -------
Net cash used in investing activities (200) (227)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on bank line of credit 330 (1,483)
Payments on long-term accounts payable financed with vendors (410) (227)
Net proceeds from issuances of common stock 1,639 1,519
-------- -------
Net cash provided (used) by financing activities 1,559 (191)
-------- -------
NET DECREASE IN CASH (202) (271)
CASH AT BEGINNING OF PERIOD 387 545
-------- -------
CASH AT END OF PERIOD $185 $274
-------- -------
-------- -------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation of results have been included. The balance sheet at December
31, 1997 was derived from the audited financial statements as of that date.
Operating results for the three and six month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
2. RECLASSIFICATIONS
Certain amounts in the Company's Form 10-QSB for the three and six month
periods ended June 30, 1997 have been reclassified to conform to the 1998
presentation. These reclassifications had no effect on net loss or
shareholders' equity as previously reported.
3. PROVISION FOR RESTRUCTURING
During the quarter ended March 31, 1997, the Company implemented a
restructuring plan which included the termination of certain employees and
the renegotiation of the Company's bank line of credit. A total of $1,496,000
in restructuring expenses were recorded during the six months ended June 30,
1997 related to severance, legal, consulting and accounting expenses.
4. AMENDMENT TO BANK LINE OF CREDIT
In March, 1998, the Company amended its line of credit agreement.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", which was adopted by 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 did not have a material effect on the Company's financial
statements for the three months ended June 30, 1998 or 1997. Total
comprehensive loss for the three months ended June 30, 1998 and 1997 was
$(750,000) and $(864,000), respectively. Total comprehensive loss for the
six months ended June 30, 1998 and 1997 was $(745,000) and $(3,191,000),
respectively.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosure
about Segments on an Enterprise and Related Information". SFAS No. 131
redefines how operating segments are determined and requires disclosures of
certain financial and descriptive information about a Company's operating
segments. This statement does not have a material impact on results reported
in the financial statements.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements included in this Quarterly Report on Form 10-QSB that are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provision of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause
actual results to differ materially. Among these risks and uncertainties are
(i) the fact that the Company has incurred losses of $745,000 for the six
months ended June 30, 1998, and losses of $4,962,000, $9,071,000 and
$1,731,000 for the fiscal years ended December 31, 1997, 1996 and 1995,
respectively; (ii) the ability of the Company's distributors to successfully
market and sell the Company's product in markets outside the United States;
(iii) the Company's ability to successfully market its product in the United
States at a favorable margin considering significant price competition in the
industry; (iv) the extent to which physicians and health plan administrators
are motivated to use non-invasive diagnostic testing to detect early signs of
disease; (v) the Company's ability to successfully upgrade its product
software systems to a Windows-Registered Trademark- environment; and (vi) the
Company's ability to develop future products which are technologically
advanced and accepted by the marketplace. For a detailed description of
these and other factors, see Management's Discussion and Analysis of
Financial Condition or Plan of Operations, Forward-Looking Statements, Item
6, Part II, of 1997 Form 10-KSB.
RESULTS OF OPERATIONS
The Company recorded net losses of $750,000 and $864,000 for the three months
ended June 30, 1998 and 1997, respectively. Included in the 1997 loss was
$150,000 of restructuring expenses. For the six months ended June 30, the
Company recorded net losses of $745,000 and $3,191,000 for 1998 and 1997,
respectively. The six month loss for 1997 included $1,496,000 of
restructuring expenses.
REVENUES
Revenues consist of equipment sales and service and supply revenues.
Equipment sales reflect revenues from the Company's pulmonary function
analysis systems, gas exchange testing systems and sleep diagnostic systems.
Service and supply revenues reflect contract revenues from extended
warranties, revenues from non-warranty service visits and sales of
peripherals and supplies.
Second quarter revenues increased 2.2% to $5,122,000 in 1998 compared to
$5,013,000 in 1997. Domestic revenue increased 28.7% to $3,444,000 in 1998
compared to $2,675,000 in 1997. The increase in 1998 domestic revenue was
primarily due to sales of sleep diagnostic systems, which were introduced in
September, 1997. International revenue decreased 51.6% to $532,000 in 1998
from $1,098,000 in 1997. The strong U. S. Dollar, aggressive competition in
Europe and economic difficulties being experienced by Asian Pacific countries
all contributed to a decline in international revenue. Service and supply
revenue decreased 7.6% to $1,146,000 in 1998 from $1,240,000 in 1997 due to
decreased supply revenue offset by increased non-warranty service revenues.
For the six months ended June 30, revenues increased 4.3% to $10,192,000 in 1998
from $9,770,000 in 1997. Year to date domestic revenues increased 17.9% to
$6,385,000 in 1998
6
<PAGE>
from $5,414,000 in 1997 on the strength of sleep diagnostic systems which
were introduced in September, 1997. Internationally, revenues decreased
28.2% to $1,424,000 in 1998 from $1,982,000 in 1997 due to a strong U. S.
Dollar and aggressive European competition. Service and supply revenue is
comparable to prior year with $2,383,000 for 1998 and $2,374,000 for 1997.
GROSS MARGIN
Gross margin percentage decreased to 36.2% of revenue for the three months
ended June 30, 1998 from 38.4% in 1997. Increased average selling prices for
pulmonary and gas exchange systems were offset by lower margins associated
with sales of the Company's new sleep diagnostic systems.
For the six months ended June 30, gross margin percentage increased to 39.9%
in 1998 from 35.5% in 1997. This year to date increase reflects the
Company's ongoing efforts to decrease its costs of manufacturing through
increased efficiencies, reductions in reserves for inventory write-downs that
are no longer necessary and improved average pricing for the Company's
traditional products, partially offset by lower margins related to the
Company's new sleep diagnostic systems.
SELLING AND MARKETING
Selling and marketing expenses for the three months ended June 30, 1998
decreased modestly by 0.7% to $1,520,000 in 1998 from $1,531,000 in 1997.
Expenses associated with expanding the Company's domestic sales force has
offset savings associated with the 1997 decision to sell its asthma business
unit and reduce focus on the sports medicine market. Year to date selling
and marketing expenses decreased 11.1% to $2,730,000 in 1998 from $3,070,000
in 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 4.7% to $534,000 in the second
quarter of 1998 from $510,000 in 1997. The increase is attributed to
expenses associated with exploring strategic growth opportunities for the
Company offset by lower allowances for doubtful accounts receivable. Year to
date general and administrative expenses increased 16.2% to $1,027,000 in
1998 from $884,000 in 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 16.4% to $449,000 in the second
quarter of 1998 from $537,000 in 1997. The decrease reflects the Company's
1997 restructuring decision to use in-house software engineers rather than
independent software contractors as part of the Company's transition of its
product software to a Windows95-Registered Trademark- platform. For the six
months ended June 30, research and development expenses deceased 19.2% to
$856,000 in 1998 from $1,059,000 in 1997.
PROVISION FOR RESTRUCTURING
Restructuring expenses of $150,000 and $1,496,000 for the three and six
months ended June 30, 1997, respectively, included severance, legal,
accounting and consulting expenses associated with the restructuring
implemented during the first quarter of 1997.
7
<PAGE>
LIQUIDITY AND FINANCIAL RESOURCES
At June 30, 1998, the Company had cash of $185,000 and working capital of
$1,114,000. In addition, the Company had a balance outstanding under its bank
line of credit of $2,584,000 and additional availability of $1,049,000.
During the six months ended June 30, 1998, the Company used $1,561,000 of
cash in operating activities, primarily resulting from a net loss of $745,000
and increases of $362,000 in accounts receivable and $959,000 in inventory.
The Company used $200,000 for investing activities, consisting of software
production costs of $179,000 and capital expenditures of $21,000. The
Company generated $1,559,000 from financing activities, primarily from
$1,500,000 in proceeds from the private placement of its common stock and net
borrowings of $330,000 under its line of credit, offset by a decrease of
$410,000 in long-term accounts payable with vendors.
At June 30, 1997, the Company had cash of $274,000 and working capital of
$1,300,000.
During the six months ended June 30, 1997, the Company generated $147,000 of
cash from operating activities, primarily resulting from a loss of
$3,191,000 and a decrease of $407,000 in accounts payable and accrued
expenses which were offset by noncash common stock warrant expense of
$608,000 and depreciation and amortization expense of $452,000, in addition
to a decrease of $2,082,000 in inventory, and $584,000 in accounts
receivable. The Company used $227,000 for investing activities, consisting
of capital expenditures of $86,000 and software production costs of $141,000.
The Company expended $191,000 for financing activities, primarily as a
result of a $3,400,000 payoff of its former bank line of credit and a
decrease of $227,000 in long-term accounts payable with vendors, partially
offset by net proceeds of $1,519,000 from the private placement of its Class
A Stock and net borrowings of $1,917,000 under its existing line of credit.
At June 30, 1998 the Company had no material commitments for capital
expenditures.
The Company is currently negotiating with its bank to expand its existing
line of credit. Management believes that it will be successful in expanding
its line of credit and that cash generated from operations, together with
cash and borrowings available under its expanded line of credit facility will
be adequate to satisfy its liquidity and capital resource needs through 1998.
If negotiations with its bank are not successful, the Company would explore
raising cash from other sources.
8
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in various claims and litigation which are
incidental to its business. Management is of the opinion that ultimate
settlement of these matters will not have a material impact on its financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 13, 1998. The
shareholders took the following actions:
(a) The shareholders elected two directors to hold office until the annual
meeting of shareholders held in the year 2001. The shareholders present in
person or by proxy cast the following numbers of votes in connection with
the election of directors, resulting in the election of all of the
nominees:
<TABLE>
<CAPTION>
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
Glenn D. Taylor 3,092,534 115,075
John D. Wunsch 3,092,534 115,075
</TABLE>
(b) The shareholders ratified and approved an amendment to the Company's 1987
Stock Option Plan increasing the number of shares of Common Stock reserved
for issuance under the Plan from 900,000 shares to 950,000 shares.
1,674,977 votes were cast for the resolution, 347,698 votes were cast
against the resolution and 16,280 votes abstained.
(c) The shareholders ratified and approved an amendment to the Company's
Non-Employee Director Compensation Plan increasing the number of shares
of Common Stock reserved for issuance under the Plan from 250,000 to
450,000 shares. 1,664,530 votes were cast for the resolution; 378,815
votes were cast against the resolution; and 7,815 votes abstained.
(d) The shareholders ratified and approved the election of Deloitte & Touche
LLP as the Company's auditing firm for the fiscal year ending December 31,
1998. 3,096,824 votes were cast for the resolution; 8,865 votes were cast
against the resolution; and 3,920 votes abstained.
ITEM 5. OTHER INFORMATION
The deadline for submission of shareholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for inclusion in the
Company's proxy statement for its 1999 Annual Meeting of Shareholders is
December 30, 1998. Additionally, if the Company receives notice of a
shareholder proposal after February 28, 1998, such proposal will be
considered untimely pursuant to Rules 14a-4 and 14a-5(e) and the persons
named in proxies solicited by the Board of Directors of the Company for its
1999 Annual Meeting of Shareholders may exercise discretionary voting power
with respect to such proposal.
On August 3, 1998, the Company's Board of Directors elected Richard E. Jahnke as
president, chief executive officer and a member of its Board of Directors,
replacing Glenn D. Taylor who resigned.
9
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits List
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the quarter ended June 30,
1998.
10
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MEDICAL GRAPHICS CORPORATION
(Registrant)
Date August 13, 1998 /s/ Richard E. Jahnke
--------------- -----------------------------------
Richard E. Jahnke, President and
Chief Executive Officer (Principal
Executive Officer)
Date August 13, 1998 /s/ Dale H. Johnson
--------------- -----------------------------------
Dale H. Johnson, Chief Financial
Officer (Chief Accounting Officer)
11
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED JUNE 30,
1998, 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-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 185
<SECURITIES> 0
<RECEIVABLES> 4,418
<ALLOWANCES> (166)
<INVENTORY> 5,199
<CURRENT-ASSETS> 9,959
<PP&E> 4,093
<DEPRECIATION> (3,411)
<TOTAL-ASSETS> 11,264
<CURRENT-LIABILITIES> 8,845
<BONDS> 0
0
0
<COMMON> 190
<OTHER-SE> 1,832
<TOTAL-LIABILITY-AND-EQUITY> 11,264
<SALES> 3,976
<TOTAL-REVENUES> 5,122
<CGS> 3,269
<TOTAL-COSTS> 5,772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> (750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (750)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
