<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 March 31, 1999
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: (651) 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 May 12, 1999, the Company had outstanding 5,613,620 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 3.375 shares of common stock.
Transitional Small Business Disclosure Format: Yes No X
----- -----
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 149 $ --
Accounts receivable, net of allowance for doubtful
accounts of $126 and $118 4,428 5,263
Inventories:
Purchased components and work in process 3,184 2,941
Finished goods 2,049 1,976
---------- -------------
5,233 4,917
Prepaid expenses 176 155
---------- -------------
Total Current Assets 9,986 10,335
---------- -------------
Equipment and Fixtures 4,092 4,092
Less accumulated depreciation 3,664 3,574
---------- -------------
428 518
Software Production Costs, net of accumulated
amortization of $1,308 and $1,212 555 566
Other Assets 5 7
---------- -------------
$ 10,974 $ 11,426
---------- -------------
---------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,759 $ 2,975
Accounts payable financed with vendors - current 710 769
Bank line of credit 3,379 3,291
Employee compensation 403 517
Deferred service contract revenue 804 870
Warranty reserve 369 374
Other liabilities and accrued expenses 286 327
---------- -------------
Total Current Liabilities 8,710 9,123
Commitments and Contingencies
Long-Term Accounts Payable Financed with Vendors -- 48
Shareholders' Equity
Class A stock; liquidation preference
of $3.375 per share 22 22
Common stock 281 280
Additional paid-in capital 15,743 15,738
Retained deficit (13,782) (13,785)
---------- -------------
2,264 2,255
---------- -------------
$ 10,974 $ 11,426
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---------- -------------
</TABLE>
See accompanying notes to financial statements
2
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MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Equipment sales $ 4,381 $ 4,573
Service revenues 502 497
-------- --------
Total revenues 4,883 5,070
Cost of Goods Sold 2,789 2,984
-------- --------
Gross margin 2,094 2,086
Operating Expenses:
Selling and marketing 1,115 1,409
General and administrative 452 493
Research and development 402 407
-------- --------
1,969 2,309
-------- --------
Operating Income (Loss) 125 (223)
Interest expense (122) (97)
-------- --------
Income (Loss) Before Taxes 3 (320)
Income tax benefit 0 0
-------- --------
Net Income (Loss) $ 3 $ (320)
-------- --------
-------- --------
Basic and Dilutive Net Income (Loss) Per Share $ 0.00 $ (0.06)
-------- --------
-------- --------
Weighted Average Common Shares Oustanding 7,112 5,481
-------- --------
-------- --------
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 3 $ (320)
Adjustments to reconcile net income (loss) to
net cash provided (used) in operating activities:
Depreciation 90 151
Amortization 96 80
Changes in operating assets and liabilities:
Accounts receivable 835 (1,469)
Inventory (316) (502)
Prepaid expenses and other assets (19) (73)
Accounts payable and accrued expenses (430) (106)
Warranty reserve (5) (40)
Deferred service contract revenue (66) 46
--------- --------
Net cash (used) provided in operating activities 188 (2,233)
--------- --------
Cash Flows From Investing Activities:
Software production costs (85) (82)
Capital expenditures -- (6)
--------- --------
Net cash used in investing actitivities (85) (88)
--------- --------
Cash Flows From Financing Activities:
Borrowings under bank line of credit 6,003 6,175
Repayments under bank line of credit (5,915) (5,478)
Payments on long-term accounts payable financed with vendors (48) (223)
Net proceeds from issuances of common stock 6 1,563
--------- --------
Net cash provided by financing activities 46 2,037
--------- --------
Net Increase (Decrease) In Cash 149 (284)
Cash at Beginning Of Period 0 387
--------- --------
Cash at End Of Period $ 149 $ 103
--------- --------
--------- --------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 1999, the consolidated statements
of operations for the three months ended March 31, 1999 and 1998, the
consolidated statements of cash flows for the three months ended March 31, 1999
and 1998, and the related information presented in these notes have been
prepared by management 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, without audit. 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, 1998 was derived
from the audited financial statements as of that date. Operating results for the
three month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999. For further
information, refer to the financial statements and notes thereto included in
MedGraphic's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998.
Comprehensive income is a measure of all non-owner changes in stockholders'
equity and includes such items as net income, certain foreign currency
translation items, minimum pension liability adjustments and changes in the
value of available-for-sale securities. For the three months ended March 31,
1999 and 1998, comprehensive income for MedGraphics was equivalent to net income
as reported.
2. RECLASSIFICATIONS
Certain amounts in MedGraphic's Form 10-QSB for the three-month period ended
March 31, 1998 have been reclassified to conform to the 1999 presentation. These
reclassifications had no effect on net loss or shareholders' equity as
previously reported.
3. AMENDMENT TO BANK LINE OF CREDIT
In March 1999, MedGraphics amended its line of credit agreement. As of March 31,
1999, the Company was in compliance with all covenants pursuant to the amended
line of credit agreement.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENT
Statements included in this Quarterly Report on Form 10-QSB that are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provision of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially. Various forward-looking statements have been made
in this Quarterly Report on Form 10-QSB and may also be made in other
MedGraphic's 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.
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, the Company recorded a net profit of
$3,000, compared to a 1998 net loss of $320,000.
REVENUES
Revenues consist of equipment sales and service revenues. Equipment sales
reflect revenues from MedGraphics's pulmonary function analysis systems, gas
exchange testing systems, sleep diagnostic systems and aftermarket sales of
peripherals and supplies. Service revenues reflect contract revenues from
extended warranties, non-warranty service visits and training.
First quarter revenues decreased 3.7% to $4,883,000 in 1999 compared to
$5,070,000 in 1998. Domestic equipment revenue increased modestly by .8% to
$3,709,000 in 1999 compared to $3,681,000 in 1998. International equipment
revenue decreased by 24.7% to $672,000 in 1999 from $892,000 in 1998. This
international decrease continues to reflect changes in our European sales and
distribution channels as well as a stronger dollar versus other international
currencies. Service revenue increased by 1.0% to $502,000 in 1999 from $497,000
in 1998.
GROSS MARGIN
Gross margin percentage increased to 42.9% of revenue for the three months ended
March 31, 1999 from 41.1% in 1998. This margin improvement reflects MedGraphic's
ongoing efforts to decrease its costs of manufacturing through increased
efficiencies as well as reduced sales of lower margin sleep diagnostic systems.
SELLING AND MARKETING
Selling and marketing expenses for the three months ended March 31, 1999
decreased 20.9% to $1,115,000 compared to $1,409,000 in 1998. This decrease is
the result of a $127,000 reduction in personnel costs and a $53,000 reduction in
related travel expenses as well as reduced commissions on lower domestic revenue
and savings associated with other cost containment measures implemented during
the last half of 1998.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 8.3% to $452,000 in the first
quarter of 1999 from $493,000 in 1998. The decrease is attributed to $44,000 of
1998 expenses associated with exploring strategic growth opportunities for the
Company that were not incurred in 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased modestly by 1.2% to $402,000 in the
first quarter of 1999 from $407,000 in 1998. MedGraphics continues to use
in-house software engineers rather than independent software contractors as part
of the Company's transition of its product software to a Windows98(R) platform.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer equipment,
software, devices and products with imbedded technology that are time-sensitive
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
STATE OF READINESS
In late 1997, the Audit Committee of the Board of Directors of the Company
directed the Company's management to initiate a Year 2000 compliance plan. By
March 1998, management implemented a formal program to address the Company's
Year 2000 compliance by forming a Year 2000 staff consisting of personnel from
cross-functional areas of the Company, including information systems, marketing,
research and development, technical support, quality assurance and regulatory
affairs and administration (the "Y2K Project Team"). A Project Manager, who
reports to the Audit Committee of the Board, leads the Y2K Project Team to
ensure that it meets time deadlines, objectives and documents remedial action.
As part of its compliance plan, the Company's Y2K Project Team is taking
inventory of the Company's operations and dividing areas for assessment into
three categories:
- - VITAL - computer-controlled systems, programs, equipment and products
that the Company needs to function day-to-day;
- - CRITICAL - those systems which must be repaired or replaced prior to the
millennium but are not necessary for the Company's day-to-day operations;
and
- - MARGINAL - those systems for which repair and replacement are not
material to the Company's operations.
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The Y2K Project Team has also identified five areas covering the entire scope of
the Company's business and has committed to completing an 8-step program for
each area. The diagram below identifies the five areas as well as the current
and projected schedule of the 8-step program for each area.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Company OEM Internal Business Vendors &
Products Products Programming Information Suppliers
Systems
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Team Completed Completed Completed Completed Completed
Formation &
Assignment
- ----------------------------------------------------------------------------------------------------------------
Inventory Completed Completed Completed Completed 80%
Assessment
- ----------------------------------------------------------------------------------------------------------------
Compliance Completed Completed Completed Completed 70%
Assessment
- ----------------------------------------------------------------------------------------------------------------
Risk Completed Completed Completed 95% 65%
Assessment
- ----------------------------------------------------------------------------------------------------------------
Resolution & Completed Completed Completed Completed Completed
Remediation
- ----------------------------------------------------------------------------------------------------------------
Validation Completed Completed Completed Completed 70%
- ----------------------------------------------------------------------------------------------------------------
Contingency Completed Completed Completed Completed Completed
Plans
- ----------------------------------------------------------------------------------------------------------------
Certification Completed Completed Completed 95% 40%
& Sign-off
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
With respect to the Company's relationships with third parties, the Company
relies both domestically and internationally upon various vendors, governmental
agencies, utility companies, telecommunications service companies, delivery
service companies and other service providers. Although these service providers
are outside of the Company's control, the Company has mailed letters to those
with whom it believes its relationships are material and has verbally
communicated with some of its strategic business partners to determine the
extent to which electronic interfaces with such entities are vulnerable to Year
2000 issues and whether products and services purchased from or by such entities
are Year 2000 ready. As of May 1, 1999, the Company had received responses from
70% of such third parties, and all of the companies that have responded have
provided written assurances indicating that their Year 2000 issues will be
addressed on a timely basis. The Company intends to complete follow-up
activities, including but not limited to phone surveys, with significant vendors
and service providers by the third quarter of 1999.
COSTS TO ADDRESS YEAR 2000 ISSUES
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. The Company has
incurred the majority of its costs from the recent installation of updated
internal computer systems as well as the labor cost and
8
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opportunity cost of time spent by employees of the Company evaluating Year 2000
compliance matters generally. Because the Company upgraded its internal computer
systems as part of its regularly planned software and hardware upgrade efforts,
it does not consider the costs related thereto to be charges for Year 2000
compliance. The Company presently estimates the labor costs of its Year 2000
compliance efforts to date to be approximately $85,000. With respect to future
costs, the Company estimates it may spend approximately $175,000 for remediation
and validation of products and programs which the Company presently knows are
not compliant. The Company believes that these estimates are reasonable and
presently expects such to be within the Company's fiscal 1999 budget.
RISKS OF YEAR 2000 ISSUES
Although the Company is near completion of its discovery and evaluation of
overall Year 2000 exposure, it still cannot state with certainty that the Year
2000 issues will not have a material adverse impact on its financial condition,
results of operations and liquidity. Although the Company considers them
unlikely, the Company believes that the following several situations, not in any
particular order, make up the Company's "most reasonably likely worst case Year
2000 scenarios:"
1. CUSTOMER LITIGATION.
The Company has developed a program to advise all customers of Year 2000
compliance of its products and has identified upgrade and replacement products
for its customers affected by Year 2000 compliance issues. These efforts pertain
not only to the Company's internally developed products but also to externally
acquired products. Although the Company believes that its efforts will ensure no
disruption in the business or operations of its customers, the possibility
exists that some customers may experience problems that may motivate them to
commence litigation against the Company for restitution and damages that may be
related to such problems.
2. DISRUPTION OF SUPPLY MATERIALS.
During the first quarter of 1998, MedGraphics began an ongoing process of
surveying its vendors with regard to their Year 2000 readiness and is now in the
process of assessing and cataloging the survey responses. The Company is
actively pursuing responses from critical and many noncritical vendors who have
not yet responded. The Company presently expects to work with vendors that show
a need for assistance or that provide inadequate responses, and in many cases
expects that survey results will be refined significantly by such work. Where
ultimate survey results show that the need arises, the Company will arrange for
back-up vendors before the changeover date.
3. DISRUPTION OF THE COMPANY'S INTERNAL COMPUTER SYSTEMS.
The Company has completed a scheduled upgrade of its current hardware and
software systems and such process has required Year 2000 compliance in all
areas. Year 2000 testing occurred as the upgrade process proceeded and, in
addition, will continue to occur prior to the changeover date. For this reason,
the Company considers that disruption of its internal computer systems is
unlikely.
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4. DISRUPTION OF THE COMPANY'S NON-COMPUTER SYSTEMS.
MedGraphics is currently conducting a comprehensive assessment of all
non-computer systems, including utility, telecommunications, delivery and
other services. Although we intend to work with third party providers of
these services to ensure that there will be no disruption of operations, the
Company believes that if any disruptions do occur, they will be dealt with
promptly and will be no more severe with respect to correction or impact than
would be an unexpected breakdown of such services and related equipment.
CONTINGENCY PLANS
MedGraphics recognizes the need for contingency planning and is addressing this
through the aforementioned 8-step program. The details of any contingency plan
will depend on our final assessment of the problem as well as the evaluation
and success of our remediation efforts. Future disclosures will include
contingency plans as they become necessary and available.
LIQUIDITY AND CAPITAL RESOURCES
MedGraphics had cash of $149,000 and working capital of $1,276,000 as of March
31, 1999. In addition, the Company had a balance outstanding under its bank line
of credit of $3,379,000 and additional availability of $596,000.
During the three months ended March 31, 1999, MedGraphics generated $188,000 of
cash from operating activities, primarily from a $835,000 decrease in accounts
receivable offset by an increase of $316,000 in inventory and a $430,000
decrease in accounts payable and accrued expenses. We used $85,000 for investing
activities that consisted of software production costs. MedGraphics generated
$46,000 from financing activities, primarily from $88,000 in net borrowings
under its line of credit, partially offset by a decrease of $48,000 in long-term
accounts payable with vendors.
During the three months ended March 31, 1998, the Company used $2,233,000 of
cash in operating activities, primarily resulting from increases of $1,469,000
in accounts receivable and $502,000 in inventory. The Company used $88,000 for
investing activities, consisting of capital expenditures of $6,000 and software
production costs of $82,000. The Company generated $2,037,000 from financing
activities, primarily from $1,500,000 in proceeds from the private placement of
its common stock and net borrowings of $697,000 under its line of credit,
partially offset by a decrease of $223,000 in long-term accounts payable with
vendors.
At March 31, 1999 the Company had no material commitments for capital
expenditures.
MedGraphics believes that cash generated from operations, together with cash and
borrowings available under its line of credit facility will be adequate to
satisfy its liquidity and capital resource needs through 1999.
10
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in any of the legal proceedings
described in the Form 10KSB for the year ended December 31, 1998. MedGraphics
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits List
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March
31, 1999.
11
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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 MAY 14, 1999 /s/ RICHARD E. JAHNKE
------------- -------------------------------------
Richard E. Jahnke, President and
Chief Executive Officer (Principal
Executive Officer)
Date MAY 14, 1999 /s/ DALE H. JOHNSON
------------- -------------------------------------
Dale H. Johnson, Chief Financial
Officer (Chief Accounting Officer)
12
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule.
13
<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 March 31,
1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 149
<SECURITIES> 0
<RECEIVABLES> 4,428
<ALLOWANCES> (126)
<INVENTORY> 5,233
<CURRENT-ASSETS> 9,986
<PP&E> 4,092
<DEPRECIATION> (3,664)
<TOTAL-ASSETS> 12,974
<CURRENT-LIABILITIES> 8,710
<BONDS> 0
0
0
<COMMON> 303
<OTHER-SE> 1,961
<TOTAL-LIABILITY-AND-EQUITY> 10,974
<SALES> 4,883
<TOTAL-REVENUES> 4,883
<CGS> 2,789
<TOTAL-COSTS> 4,758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122
<INCOME-PRETAX> 3
<INCOME-TAX> 0
<INCOME-CONTINUING> 3
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
