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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
Amendment No. 1 to 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, 1998.
/ / 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: (651) 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 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: $20,449,000.
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 April 12, 1999 was $5,964,000.
As of April 12, 1999, 5,613,620 shares of the registrant's Common Stock, $.05
par value, and 444,445 shares of Class A Stock, $. 05 par value were
outstanding. Each share of Class A Stock is convertible into 3.375 shares of
Common Stock.
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, 1998 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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THE FORM 10-KSB IS HEREBY AMENDED AS FOLLOWS:
ITEM 1. DESCRIPTION OF BUSINESS IS AMENDED TO READ AS FOLLOWS:
GENERAL OVERVIEW
Medical Graphics Corporation designs products and related software
that assist health care professions in the prevention, early detection and
cost-effective treatment of heart and lung disease and the evaluation of
sleep disorders. MedGraphics' pulmonary products consist of breath analysis
technology integrated with a computer and software. MedGraphics' sleep
diagnostic products consist of a recording system integrated with a computer
and software. The pulmonary systems are marketed worldwide while the sleep
diagnostic systems are marketed in the United States. More than 3,800
MedGraphics systems have been sold to customers for use in 45 countries.
PRIMARY PRODUCTS
PULMONARY FUNCTION TESTING SYSTEMS. Pulmonary function testing helps
health care professionals diagnose lung diseases, such as asthma and
emphysema, and manage treatment of their patients. Pulmonary function testing
applications include screening asthma patients, assessing preoperative and
post-operative risk of heart and lung surgery patients, evaluating lung
damage from occupational exposures and documenting responses to therapy.
MedGraphics pulmonary function testing systems are operated with the
Company's proprietary BreezePF Windows 95 software, which is designed to
operate in a simple, easy-to-use manner. These pulmonary function testing
systems are sold under the Profiler name.
The MedGraphics pulmonary function products use a patented "expert
system" to assist physicians in the interpretation of patient test results.
MedGraphics pulmonary function products also use the preVent pneumotach, a
patented disposable mouthpiece/flow device that helps prevent the
transmission of infectious diseases. The preVent gives all MedGraphics
products the capability to perform spirometry, which measures the flow rates
and pressures inside a person's lungs.
Additional capabilities are available with the Profiler Series systems.
- The Profiler DL performs spirometry and also
measures how efficiently the lungs diffuse certain gases.
The Profiler measures this lung function by using a gas
chromatograph which measures gas concentrations before the
patient breathes the gas in and after the patient breathes
the gas out. This is referred to as diffusion testing.
- The Profiler DX has all the abilities of the
Profiler DL, plus the ability to measure the volume of air
the lungs breathe in and out. This is done with a patented
nitrogen analyzer that measures the amount of nitrogen in
a person's breath.
The Profiler systems' compact design and mobility option attract a wide
variety of customers, including pulmonary laboratories in hospitals, office
based clinics, occupational medicine clinics, asthma centers and clinical
research centers.
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BODY PLETHYSMOGRAPH SYSTEMS. The Elite Series are MedGraphics' body
plethysmograph systems. A body plethysmograph is an enclosed metal and clear
acrylic chamber that offers the most sensitive method for measuring lung
function. The patient sits inside the chamber and undergoes diagnostic pulmonary
function tests.
- The Elite D performs spirometry and measures the total
volume of air and the resistance in a person's lungs.
- The Elite DL performs the same tests as the Elite
D, and performs the diffusion test the same way as the
Profiler DL.
- The Elite DX performs all the tests as an Elite
DL, and performs the lung volume test the same way as the
Profiler DX.
The Elite Series systems applications include diagnosing lung diseases
and managing their treatment, assessing the surgical risk of lung transplant and
lung reduction candidates and evaluating the impact of diseases, such as
neuromuscular disease, on breathing. The system's design optimizes patient
comfort with a clear-view acrylic enclosure and allows testing of a broad
population including pediatric patients and individuals in wheelchairs.
CARDIOPULMONARY EXERCISE TESTING SYSTEMS. The Company's
cardiopulmonary exercise testing systems measure fitness or conditioning
levels as well as help physicians diagnose heart and lung diseases. They do
this by measuring the concentrations of the oxygen and carbon dioxide in a
person's lungs and how the concentrations change as a person exercises on a
bike or treadmill. They can also measure the gas concentrations of a person
at rest to determine nutritional requirements of burned or critically ill
patients. This measurement method is called the nutrition or MAX option. The
systems measure the gas concentrations of every breath using a patented
breath by breath methodology. The cardiopulmonary systems use the same
patented preVent pneumotach as the pulmonary function testing systems and
also include a patented oxygen analyzer and a carbon dioxide analyzer.
The cardiopulmonary testing systems are sold in several different
configurations.
- The basic exercise testing system is a CPX/D
which measures patient fitness levels while exercising.
- The basic nutrition assessment system is a CCM/D
which measures the basic nutritional requirements of a
patient at rest.
- A CPX/MAX/D is a CPX/D with the nutrition option added.
- A Cardio2 is a CPX/D with a 12-lead electrocardiogram
stress option added. The electrocardiogram, which
measures heart functions, is generally referred to as
an ECG.
- A Cardio2/MAX/D is a CPX/D with a 12-lead ECG and the
Nutrition option.
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- A CPX Express is a smaller version of the CPX/D
designed for use in a physician's office. Like the CPX/D,
it can be used with a nutrition option and/or interfaced
with a 12-lead ECG system.
The CPX/D and CPX Express can also be used in conjunction with other
manufacturer's stand-alone ECG systems.
Applications for the cardiopulmonary systems include distinguishing
between 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.
MedGraphics holds several patents relating to data reporting, including two
expert system software packages for evaluating the information. Customers
include hospital cardiopulmonary laboratories, cardiology and pulmonary
office-based clinics, critical care units, cardiac rehabilitation units,
human performance laboratories and health clubs.
All the Company's cardiorespiratory and sleep diagnostic systems use
an IBM compatible computer with a Pentium processor, a full color monitor, a
printer and other peripherals.
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 that can operate at a
broad spectrum of resistance levels. The Company has two models of cycle
ergometers that are used in diagnostic, rehabilitation, training and sports
medicine applications. The ergometers are used and controlled by MedGraphics'
cardiopulmonary exercise testing systems. These ergometers are purchased
through a third party.
SLEEP DIAGNOSTICS SYSTEMS. The clinical assessment of sleep
disorders, such as sleep apnea, restless leg syndrome and sleep seizures is
performed with polysomnography, which literally means making many recordings
during sleep. Although Polysomnography is most commonly performed in a sleep
lab, with technologies such as the P-Series portable recorder, sold by
MedGraphics, the testing can now be performed in remote clinics or the home
of the patient.
The all-night polysomnograph recording typically requires electrodes
be placed on the head to measure brain activity, eye movement and muscle
tension in the chin. The measurement of brain activity is called an
Electroencephalogram, often referred to as an EEG. Electrodes are also
applied to monitor ECG. In addition, respiration, leg movements and body
position are monitored with specially developed sensors. From the records of
all these physiologic signals, the clinician can determine the different
stages of sleep, the number and duration of any abnormal breathing events,
and any other unusual activity that the patient may experience during sleep.
The diagnostic sleep systems that are sold by Medical Graphics
include software and hardware technology to help the technician and clinician
gather, analyze and report the results from all-night recordings accurately
and efficiently. The sleep diagnostic systems sold by Medical Graphics are
manufactured by Compumedics Sleep Pty Ltd, an Australian corporation.
In April 1997, Medical Graphics and Compumedics entered into a three
year original equipment manufacturer distribution agreement in which
Compumedics granted Medical Graphics rights to
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promote, market and distribute Compumedics diagnostic sleep systems in the
United States under the MedGraphics label. Under the terms of the Agreement,
Medical Graphics is required to supply a product manager for the Compumedics
account, as well as make quarterly reports on its actual marketing and sales
activity. Medical Graphics is also responsible for payment of all applicable
United States import duties for all products and service parts ordered.
Additionally, the Agreement requires Medical Graphics to inform Compumedics
in writing 120 days prior to the effective date of any agreement for
additional sleep diagnostic products, giving Compumedics the opportunity to
provide a comparable product, if it so decides. Compumedics' obligations
under the Agreement include providing marketing and service training to
Medical Graphics' designated personnel, promotional materials, FDA
documentation and notice of any adverse events that may effect the sale or
recall of the products. The Agreement contains additional customary
provisions regarding (i) the use and disclosure of proprietary information
during and after the termination of the Agreement, (ii) the intellectual
property rights of Compumedics, its products and future products, (iii)
warranties of Compumedics products, (iv) mutual indemnification, and (v)
regulatory compliance. After its original term, the Agreement automatically
renews annually unless terminated by either party by giving notice.
The parties modified the Agreement in December 1997 with a
Memorandum of Understanding ("MOU") to expand Medical Graphics' rights to
cover an additional Compumedics product line. Collectively, the Agreement and
MOU have been subsequently amended on several occasions to reflect changes to
various provisions, including those related to pricing and obligations upon
termination. Under the Agreement as amended, Medical Graphics has the rights
to sell Compumedics sleep diagnostic products in all hospitals, clinics,
physician offices and free standing sleep centers in the United States.
Medical Graphic's rights are exclusive with respect to most of Compumedics
sleep diagnostic products and non-exclusive with respect to others. Although
sales of sleep diagnostic systems accounted for more than ten percent of
revenues in 1998, there can be no assurance that sales of sleep diagnostic
systems will be a significant component of product sales in future years.
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 MedGraphics', 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 industry for companies selling cardiopulmonary diagnostic
systems and sleep disorders diagnostic systems is competitive. Our
competitors include large medical companies, some of which have greater
financial and technical resources and broader product lines than us. We
believe that the principal competitive factors in its markets are product
features, price, quality, customer service, performance, market reputation,
breadth of product offerings and effectiveness of sales and marketing efforts.
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Our success depends on our 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 of
such products. There are a number of companies that currently offer, or are
in the process of developing, products that compete with products offered by
us. Some of these competitors may have greater capital resources, research
and development staffs and experience in the medical device industry,
including experience with respect to regulatory compliance in the
development, manufacturing and sale of medical products similar to those
offered by us. We believe the principal competitors for our traditional
products are SensorMedics Corporation, a subsidiary of ThermoElectron
Corporation and Erich Jaeger GmbH & Co.
We believe that our principal competitors in the sleep diagnostic
market are SensorMedics, Healthdyne Technologies, Inc. and Nellcor Puritan
Bennett. There can be no assurance that some of these competitors will not
succeed in developing technologies and products that are more effective than
those currently used or produced by us or that would render some products
offered by us obsolete or non-competitive.
Competition based on price is expected to become an increasingly
important factor in customer purchasing patterns as a result of cost containment
pressures on, and consolidation in, the health care industry. This competition
has exerted, and is likely to continue to exert, downward pressure on the prices
we are able to charge for our products. There can be no assurance that we will
be able to offset such downward price pressure through corresponding cost
reductions. Any failure to offset such pressure could have an adverse effect on
our business, results of operations or financial condition.
MARKETING AND DISTRIBUTION
Medical Graphics markets its products in the United States through a
direct sales force that targets customers located in hospitals,
university-based medical centers and office-based clinics. Each salesperson
is responsible for a specific geographic area and sells Medical Graphics'
complete product line to customers, including hospitals and office-based
physicians, within that area. Company salespersons are compensated with a
base salary, expenses and a revenue-based commission.
Medical Graphics markets its products outside the United States
through sales organizations that operate primarily as distributors. During
1998, Medical Graphics used approximately 33 international sales
organizations to sell its products into 45 countries. These organizations
typically carry a limited inventory of our products and sell our systems in
specific geographic areas, generally on an exclusive basis. International
sales accounted for 13.1% and 18.4% of total sales in 1998 and 1997,
respectively. All of Medical Graphics' international sales are made on a
United States dollar-denominated basis to distributors. For this reason,
Medical Graphics does not believe that the impact of the conversion by eleven
member states of the European Union to a common currency , the "euro," will
be material to its business or financial condition.
Sales into foreign countries involves certain risks not ordinarily
associated with domestic business including fluctuations in exchange rates
even when product sales are denominated in dollars, reliance on distributors
and fluctuations in sales resulting from changes in local economies.
Medical Graphics 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
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international promotional efforts is product demonstrations at conventions
and customer facilities. Other promotional efforts include educational
seminars, print advertisements, direct mail campaigns and a Medical Graphics
web site (www.medgraph.com).
RESEARCH AND DEVELOPMENT
Research and development expenses for 1998 reflected extensive
efforts to convert our products to the Windows95/98 platform. Two new
Windows95/98 pulmonary function software products were introduced during
1998. The gas exchange product line is expected to be converted to the
Windows95/98 platform during 1999. In addition, MedGraphics is continuing to
add product improvements designed to enhance product reliability and improve
margins. The Company is also developing new products targeted for new growth
markets. MedGraphics believes ongoing research and development efforts have
been and will remain important to its continuing success. Research and
development expenses were $1,550,000 in 1998 compared to $1,867,000 in 1997.
MANUFACTURING
The Company currently manufactures and assembles all major analyzer
components of its pulmonary 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. The Company acquires its cycle ergometers and the
hardware and software for its sleep diagnostic systems from third parties.
Although some of the Company's components are purchased from only one or a
limited number of suppliers, the Company believes that if it is unable to obtain
components from these suppliers, it would be able to obtain comparable
components from other sources without significant additional expense or
interruption of business.
During 1997, the Company began to convert to a modified form of
cellular manufacturing, a process that has continued into 1999. 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 benefitted from
continually improving manufacturing efficiencies.
GOVERNMENT REGULATION
Products manufactured by Medical Graphics 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. Following the enactment of the Medical Device
Amendments to the Act in May 1976 (the "Amendments"), the FDA classified
medical devices in commercial distribution into one of three classes, Class
I, II or III. This classification is based on the controls necessary to
reasonably ensure the safety and efficacy of medical devices. Many Class I
devices have been exempted from pre-market notification requirements by the
FDA. These products can be adequately regulated by the same types of controls
the FDA has used on devices since the passage of the Act in 1938. These
"general controls" include provisions related to labeling, producer
registration, defect notification, records and
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reports and good manufacturing practices. The good manufacturing practice
regulation has been recently replaced by a more comprehensive Quality System
Regulation ("QSR"). As noted below, QSRs include implementation of quality
assurance programs, written manufacturing specifications and processing
procedures, written distribution procedures and record keeping requirements.
Class II devices are products for which the general controls of
Class I devices are deemed not sufficient to assure the safety and
effectiveness of the device and thus require special controls. Special
controls for Class II devices include performance standards, post-market
surveillance, patient registries and the use of FDA guidelines. Standards may
include both design and performance requirements. Class III devices have the
most restrictive controls and require pre-market approval by the FDA.
Generally, Class III devices are limited to life-sustaining, life-supporting
or implantable devices. All of Medical Graphics products are Class II devices.
Section 510(k) of the Act requires individuals or companies
manufacturing medical devices intended for use with humans to file a notice
with the FDA at least 90 days before introducing a product not exempted from
notification requirements into the marketplace. The notice (a "510(k)
Notification") must state the class in which the device is classified and the
action taken to comply with performance standards or pre-market approval that
may be needed if the device is a Class II or Class III device, respectively.
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. In the past, Medical Graphics has filed notifications with
the FDA of its intent to market its systems pursuant to Section 510(k) of the
Amendments, the FDA subsequently cleared these systems for commercial sale
and Medical Graphics is now marketing the devices under Section 510(k). The
action of the FDA does not, however, constitute approval by the FDA of
Medical Graphics' products or pass upon their safety and effectiveness.
In addition to the requirements described above, the Act requires
that all medical device manufacturers and distributors register with the FDA
annually and provide the FDA with a list of those medical devices that they
distribute commercially. The Act also requires that all manufacturers of
medical devices comply with labeling requirements and manufacture devices in
accordance with QSRs. QSRs require that companies manufacture their products
and maintain their documents in a prescribed manner with respect to
manufacturing, testing and quality control. In addition, these manufacturers
will be subject to inspection on a routine basis for compliance with the
QSRs. The FDA's Medical Device Reporting regulation requires that companies
provide information to the FDA on death or serious injuries alleged to have
been associated with the use of their products, as well as product
malfunctions that would likely cause or contribute to death or serious injury
if the malfunction were to recur. The FDA further requires that certain
medical devices not cleared with the FDA for marketing in the United States
meet specific requirements before they are exported. Medical Graphics is
registered as a manufacturer with the FDA and successfully passed an FDA
audit in 1998 with no negative observations.
If Medical Graphics does not comply with applicable regulatory
requirements, including marketing products only for approved uses, it could
be subject to fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for products,
withdrawal of approvals and criminal prosecution. In addition, changes in
existing regulations or adoption of new governmental regulations or policies
could prevent or delay regulatory approval of our products or result in
increased regulatory costs. Furthermore, once clearance or approval is
granted, subsequent modifications to the approved product or
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manufacturing process may require a new round of clearances or approvals,
that could require substantial additional clinical data and FDA review.
Medical Graphics' products are also subject to similar regulation in
various foreign countries. ISO 9001 certification indicates that Medical
Graphic's development and manufacturing processes comply with standards for
quality assurance and manufacturing process control. ISO 9001 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
not be sold in EU countries unless they display the CE Mark. Medical Graphics
received ISO 9001 certification for its development and manufacturing
processes in 1998 and passed its recertification audit in 1999. Medical
Graphics achieved CE certification for its primary cardiopulmonary testing
products. Medical Graphics expects to achieve certification for the remainder
of the product line that it markets in Europe during 1999. There can be no
assurance, however, that Medical Graphics will be able to obtain regulatory
approvals or clearances for its products in foreign countries.
Medical Graphics must comply with various federal, state and local
environmental laws and regulations. Medical Graphics believes that it is
currently in material compliance with such applicable environmental laws and
regulations.
PATENTS AND TRADEMARKS
Medical Graphics relies on a combination of patent, trademark and
trade secret laws to establish proprietary rights in its products. Medical
Graphics currently owns 20 United States domestic patents that cover the
basic aspects of Medical Graphics' core technologies, including gas pressure,
flow measurement, breath-by-breath assessment of gas exchange and some expert
systems. In addition, Medical Graphics has a number of foreign patents with
respect to technologies covered by its United States patents. The United
States patents were issued during the period from 1984 through 1999. Medical
Graphics' material United States patents are as follows:
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<CAPTION>
Patent Name Serial No. Issue Date Expiration Date
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<S> <C> <C> <C>
Pulmonary Diagnostic System 4,796,639 January 10, 1989 January 9, 2007
Flow Meter System 5,038,773 August 13, 1991 August 12, 2009
Drying Sample Line 5,042,500 August 27, 1991 August 26, 2009
Multifunction Disposable Patient Valve 5,119,825 June 9, 1992 June 8, 2010
Dynamic Transit Time Compensation 5,398,695 March 21, 1995 March 20, 2013
Dynamic Gas Density 5,502,660 March 26, 1996 March 25, 2014
</TABLE>
Foreign patents generally expire 20 years after the date of original
application, but vary from country to country. Medical Graphics intends to
aggressively enforce its intellectual property rights and has successfully
done so in the past. 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
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from competitors.
Medical Graphics seeks to protect its trade secrets and proprietary
know-how through proprietary information agreements with employees, most
consultants and other parties. Medical Graphics' proprietary information
agreements generally contain industry standard provisions requiring such
individuals to assign to Medical Graphics, without additional consideration,
any inventions conceived or reduced to practice while employed or retained by
Medical Graphics, subject to customary exceptions. Medical Graphics' officers
and other key employees also agree not to compete with Medical Graphics for a
period following termination. There can be no assurance that proprietary
information or non-compete agreements with employees, consultants and others
will not be breached, that Medical Graphics would have adequate remedies for
any breach, or that third parties will not nonetheless gain access to Medical
Graphics' technology.
The following United States registered trademarks are owned by Medical
Graphics: Medical Graphics and CPX EXPRESS. In addition, the following
trademarks are owned by Medical Graphics: PF/Dx, preVent, BREEZE, 1085 Series,
CardiO2, CPX/D, CPX/MAX/D, PS~Quest and PS~Tracker. Pentium is a trademark of
Intel Corporation. Windows is a trademark of Microsoft Corporation.
EMPLOYEES
The Company had 111 full-time and 3 part-time employees as of
December 31, 1998. No employees are represented by labor organizations and
there are no collective bargaining agreements. Management believes that
MedGraphic's relations with its employees are good.
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
that 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION IS HEREBY AMENDED TO READ AS FOLLOWS:
OVERVIEW
During 1996, Medical Graphics expanded its sales, marketing, and
research and development activities and retained new management personnel.
This expansion, in part, resulted in Medical Graphics 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
Medical Graphics' 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 Medical Graphics during the first quarter of
1997.
Subsequent to December 31, 1996, Medical Graphics retained
Manchester Business Services, Inc., to design and implement a restructuring
plan with the objective of reducing expenses and returning the company to
profitability while maintaining revenue levels. Under the restructuring plan,
Medical Graphics obtained a new line of credit, received $1,500,000 of cash
from the issuance of common stock, entered into agreements with vendors that
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%. Medical Graphics 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. Additional common stock was issued on September 30, 1998 for
$300,000 in cash and conversion of $250,000 of accounts payable owed to a
vendor. All issuances of common stock were recorded net of related issuance
costs. Other significant actions taken under the restructuring plan included
the following:
- - Reduced the workforce in January 1997.
- - Closed the unprofitable sales office in Duesseldorf, Germany.
- - Sold the asthma business unit.
- - Abandoned an effort to market MedGraphics products to sports medicine type
customers.
- - Eliminated dependence on outside consultants.
These actions resulted in significant cost reductions for both 1997 and
1998 that are discussed below under "Results of Operations." At December 31,
1998, the balance sheet does not include any remaining liability associated
with these restructuring activities.
During 1997, Medical Graphics 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, Medical
Graphics improved gross margins to 37.6% in 1997 from 29.4% in 1996 while
also reducing total operating expenses by 22.4% to $12,115,000 in 1997 from
$15,617,000 in 1996.
During 1998, Medical Graphics increased revenue by 6.7% to
$20,449,000 on the strength of domestic sales of its new cardiorespiratory
diagnostic systems and market share growth in the sleep disorder diagnostic
systems. Medical Graphics enjoyed a full year of selling its new sleep
diagnostic systems after first introducing them in September 1997. In
addition, Medical Graphics began selling two new
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pulmonary function products and software enhancements for existing products late
in the third quarter of 1998. Gross margins continued to improve to 39.2% in
1998 from 37.6% in 1997 while operating expenses decreased 24.6% to $9,130,000
in 1998.
The following discussion should be read in conjunction with Medical
Graphics' consolidated financial statements as of and for the years ended
December 31, 1998 and 1997 included in Item 7 of this Form 10-KSB/A.
RESULTS OF OPERATIONS
The following table presents selected financial data for the years
ended December 31, 1998 and 1997 (As Restated).
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YEAR ENDED DECEMBER 31
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1998 1997
---------- ----------
<S> <C> <C>
Revenues $20,449 $19,173
Cost of goods sold 12,441 11,969
--------- ---------
Gross margin 8,008 7,204
Operating expenses 9,130 12,115
--------- ---------
Loss from operations (1,122) (4,911)
Interest expense (454) (329)
Gain on sale of assets 128
--------- ---------
Loss before income tax benefit (1,576) (5,112)
--------- ---------
Net loss $(1,576) $(5,112)
--------- ---------
--------- ---------
</TABLE>
REVENUE. Total revenue increased 6.7% to $20,449,000 in 1998 from
$19,173,000 in 1997. Domestic revenue increased 13.4% and service increased
15.3% over 1997 to offset a 24.2% decline in revenue from international
sources. Revenue from domestic sales, international sources and service
represented 77.4%, 13.1% and 9.5% of 1998 revenue, respectively, compared to
72.8%, 18.4% and 8.8%, respectively, for 1997.
The increase in domestic revenue was driven by both sales of pulmonary
diagnostics systems as well as strong sales of its new sleep diagnostic systems.
Medical Graphics introduced updated models of its pulmonary function systems
in September 1998 and initial results reflected strong customer interest in
these new products. In addition, Medical Graphics enjoyed revenue for all of
1998 from its new diagnostics systems for sleep disorders that were
introduced in late September 1997.
11
<PAGE>
International revenue for 1998 continued to be depressed from the
closing of Medical Graphics' German office at the end of 1996 as part of its
overall cost reduction strategy. In addition, international revenue has been
impacted by weaker economic conditions and a stronger dollar versus the local
currencies.
GROSS MARGIN. The gross margin percentage increased to 39.2% of revenue
in 1998 from 37.6% in 1997. This margin increase was achieved through
manufacturing efficiencies resulting from the 1997 adoption of 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.
SELLING. Selling and marketing expenses decreased 10.0% to $5,653,000
in 1998 from $6,282,000 in 1997. Selling expenses as a percent of revenue
decreased to 27.6% in 1998 compared to 32.8% in 1997. Increased commissions of
$245,000 on higher domestic revenue and increased expenses associated with
expanding Medical Graphics domestic sales force were offset by savings
related to the following actions. Medical Graphics saved $348,000 due to its
1997 decision to sell the asthma business unit and reduce focus on the sports
medicine market. Moreover, nearly $500,000 in savings resulted from
reductions of marketing costs, primarily personnel and related travel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased 13.5% to $1,927,000 in 1998 from $2,228,000 in 1997. As a percent of
revenue, general and administrative expenses decreased to 9.4% in 1998 compared
to 11.6% in 1997. This decrease reflects lower consulting and bank refinancing
expenses associated with 1997 restructuring activities along with a $145,000
decrease in the provision for doubtful accounts receivable.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
17.0% to $1,550,000 in 1998 from $1,867,000 in 1997 and as a percentage of
revenue decreased to 7.6% in 1998 from 9.7% in 1997. Medical Graphics has
continued to reduce its dependence on independent software contractors in
favor of in-house software engineers. Lower costs also reflect an increasing
proficiency of Medical Graphics employees developing product software
upgrades.
12
<PAGE>
INFREQUENT CHARGES. Infrequent expenses of $1,738,000 for the year
ended December 31, 1997 represented expenses associated with the cost reduction
strategies implemented in the first quarter of 1997. Each component is described
and quantified in the following table.
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ------------------------------------------------------------------------------------ ------------------
<C> <C>
<S>
Professional fees $239,000
Consulting expenses:
Stock granted to Mr. Sheffert 101,000
Warrants and options granted to Mr. Sheffert and a former chairperson 429,000
Manchester Business Services, Inc. fees 243,000
Terminated 31 employees 344,000
Terminated 2 officers 382,000
------------------
TOTAL $1,738,000
==================
</TABLE>
Professional and consulting fees included legal, accounting and
other consulting expenses associated with the development and implementation
of Medical Graphics' restructuring activities. The amounts listed for
terminated employees and officers represent their respective severance costs.
These terminations included 7 employees in Germany and 26 in the United
States.
The stock granted to Mr. Sheffert was valued at $2.25 per share, the
closing price of Medical Graphic's stock on the grant date. The options granted
to Mr. Sheffert were valued using the Black Scholes model. Warrants granted to
Mr. Sheffert and a former chairperson of the board were also valued using the
Black Scholes model.
NET INTEREST EXPENSE. Medical Graphics incurred net interest expense
of $454,000 in 1998 compared to $329,000 in 1997, which resulted from
increased interest payments associated with higher levels of borrowings.
GAIN ON SALE OF ASSETS. In 1997, Medical Graphics sold certain
assets of its asthma line of business for approximately $144,000, which
resulted in a gain of $128,000.
INCOME TAX BENEFIT. Medical Graphics recognized no income tax
benefit for either 1998 or 1997 because Medical Graphics has established a
valuation allowance that completely offsets the benefit of any net operating
loss carryforwards due to uncertainty regarding the realization of future
income tax benefits.
NEW ACCOUNTING STANDARDS
Medical Graphics adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", effective January 1, 1998. SFAS No. 130 requires the
disclosure of comprehensive income and its components in the general-
13
<PAGE>
purpose financial statements. The adoption by Medical Graphics of SFAS No.
130 has not had a material effect on Medical Graphics' financial statements.
Total comprehensive loss for the twelve months ended December 31, 1998 and
1997 was equivalent to the net loss as reported.
Medical Graphics also adopted (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information", effective 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. This statement does not have a material impact
on results of operations or financial position.
INFLATION
Medical Graphics believes that inflation did not have a significant
impact on its operations in 1998 or 1997.
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.
14
<PAGE>
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 Products Internal Business Vendors &
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 35%
Assessment
- --------------------------------------------------------------------------------------------------------------------
Risk Completed Completed Completed 90% 15%
Assessment
- --------------------------------------------------------------------------------------------------------------------
Resolution & Completed 80% Completed 90% 0%
Remediation
- --------------------------------------------------------------------------------------------------------------------
Validation Completed 80% Completed 90% 0%
- --------------------------------------------------------------------------------------------------------------------
Contingency Completed Completed Completed 80% 0%
Plans
- --------------------------------------------------------------------------------------------------------------------
Certification Completed 10% 10% 90% 10%
& 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 February 1, 1999, the Company had received responses
from 10% 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 and mailings, with
significant vendors and service providers as part of completing validation of
these parties' compliance.
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
15
<PAGE>
recent installation of updated internal computer systems as well as the labor
cost and 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 $70,000. 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. At this time, the Company has not
completed an estimate of the overall potential financial impact of Year 2000
compliance issues relating to its Year 2000 compliance program. Such impact,
including the effect of a Year 2000 business disruption, could have a
material adverse impact on the Company's financial condition and results of
operations.
RISKS OF YEAR 2000 ISSUES
Since the Company has not yet completed its discovery and evaluation of
overall Year 2000 exposure, it cannot at this time 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.
Several months ago, the Company 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 pursuing
responses from critical and many non-critical vendors who had not responded by
January 31, 1999. 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.
16
<PAGE>
4. DISRUPTION OF THE COMPANY'S NON-COMPUTER SYSTEMS.
The Company is currently conducting a comprehensive assessment of all
non-computer systems, including utility, telecommunications, delivery and other
services. Although the Company intends to work with third party providers of
such services to ensure that there will be no disruption in the Company's
operations, the Company believes that if any disruptions do occur, such 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
While the Company recognizes the need for contingency planning, it has
not yet developed specific contingency plans for potential Year 2000
disruptions. The aforementioned 8-step program, however, does include
contingency planning by the Y2K Project Team and such plans, as developed, will
be carefully reviewed by the Company. The Company believes that details of such
plans will depend on the Company's final assessment of the problem as well as
the evaluation and success of its remediation efforts. Future disclosures will
include contingency plans as they become available.
LIQUIDITY AND CAPITAL RESOURCES
MedGraphic's balance sheet reflected no cash as of December 31, 1998
because the normal amount of outstanding checks offset cash balances deposited
in the Company's bank accounts. All cash deposits are applied to the Company's
bank line of credit to maximize the use of cash and minimize the corresponding
cost of interest expense. The Company had $744,000 in cash available under its
line of credit and working capital of $1,212,000 at December 31, 1998.
MedGraphics used $2,809,000 of cash in operations during 1998. The
Company's net loss of $1,576,000 was partially offset with $511,000 of
depreciation and $357,000 in amortization. Cash from financing activities was
generated through a net increase of $1,037,000 in borrowings under the line of
credit and $1,773,000 in net proceeds received with the issuance of common stock
in private sales to investors. This cash was used to finance the balance of
MedGraphic's operating activities, including $321,000 used for software
production costs and $67,000 used for capital expenditures.
The Company has 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, which 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 as well as limitations on capital expenditures and payment
of dividends. The credit line allows the Company to borrow up to 80% of eligible
domestic accounts receivable, 40% of eligible domestic inventory (not to exceed
$1,500,000), 90% of eligible foreign accounts receivable. MedGraphics did not
achieve technical compliance with all 1998 performance ratios stated in its
credit agreement. The bank has waived all violations and MedGraphics is in
compliance with its credit agreement at December 31, 1998.
As of December 31, 1997, the Company had cash of $387,000 and working
capital of $918,000. The Company financed part of its $5,112,000 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
17
<PAGE>
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.
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, 1999, have been classified as long-term accounts payable financed
with vendors. The amounts due under the agreements are $769,000 and $48,000 for
1999 and 2000, respectively.
In November 1997, the Company entered into agreements to sell to
private investors up to 1,090,908 shares of common stock at a price of $2.75 per
share. These investors purchased 545,454 shares for $1,500,000 on November 12,
1997. They also purchased 363,636 additional shares for $1,000,000 on January
30, 1998 and 181,818 additional shares for $500,000 on February 10, 1998.
On September 30, 1998, MedGraphics sold 550,000 shares of common stock
at a price of $1.00 per share to a private investor and Compumedics Sleep Pty,
Ltd, an Australian manufacturer of sleep diagnostic products and a supplier to
the Company. The private investor purchased 300,000 shares for cash and
Compumedics purchased 250,000 shares through conversion of $250,000 of accounts
payable to the Company.
The Company has no material commitments for 1999 capital expenditures.
The Company believes that its revenues from operations, together with cash and
borrowings available under its credit facility will be adequate to satisfy its
liquidity and capital resource needs through 1999.
18
<PAGE>
ITEM 3. FINANCIAL STATEMENTS ARE HEREBY AMENDED TO READ AS FOLLOWS:
The following consolidated financial statements of the Company are
included herein:
Independent Auditors' Report
Consolidated Balance Sheets-December 31, 1998 and 1997
Consolidated Statements of Operations-Years ended December 31, 1998 and
1997
Consolidated Statements of Shareholders' Equity-Years ended December
31, 1998 and 1997
Consolidated Statements of Cash Flows-Years ended December 31, 1998 and
1997
Notes to Consolidated Financial Statements-Years ended December 31,
1998 and 1997
19
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND INDEPENDENT AUDITORS' REPORT
<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, 1998 and 1997 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, 1998 and 1997 and the results of their operations and
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche
April 14, 1999
Minneapolis, Minnesota
F-1
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 387
Accounts receivable, less allowance for doubtful accounts
of $118 and $164, respectively $ 5,263 3,890
Inventories (Notes 1 and 2) 4,917 4,800
Prepaid expenses and other current assets 155 272
-------- ---------
Total current assets 10,335 9,349
Equipment and Fixtures (Notes 1 and 3) 4,092 4,072
Less accumulated depreciation 3,574 3,110
-------- ---------
Equipment and fixtures, net 518 962
Software Production Costs, less accumulated amortization
of $1,212 and $855, respectively (Note 1) 566 602
Other Assets 7 13
-------- ---------
$ 11,426 $ 10,926
-------- ---------
-------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,975 $ 2,261
Accounts payable financed with vendors - current (Note 1) 769 1,145
Note payable (Note 8) 3,291 2,254
Employee compensation 517 786
Deferred service contract revenue 870 896
Warranty reserve 374 414
Other liabilities and accrued expenses 327 675
-------- ---------
Total current liabilities 9,123 8,431
Long-Term Accounts Payable Financed with Vendors (Note 1) 48 807
Commitments and Contingencies (Notes 7 and 12)
Shareholders' Equity (Notes 1, 9, and 10):
Class A convertible common stock, par value $.05 per share;
500,000 shares authorized, liquidation preference of $3.38 per share,
444,000 issued and outstanding, convertible into 1,500,000 shares
of common stock 22 22
Common stock, par value $.05 per share; authorized 9,500,000 shares; issued
and outstanding 5,608,000 and 4,453,000, respectively 280 223
Additional paid-in capital 15,738 13,652
Retained deficit (13,785) (12,209)
-------- ---------
Total shareholders' equity 2,255 1,688
-------- ---------
$ 11,426 $ 10,926
-------- ---------
-------- ---------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenues (Note 4):
Equipment and supplies sales $ 18,503 $ 17,485
Service revenue 1,946 1,688
-------- ---------
Total revenues 20,449 19,173
Cost of Goods Sold 12,441 11,969
-------- ---------
Gross Margin 8,008 7,204
Operating Expenses:
Selling and marketing 5,653 6,282
General and administrative 1,927 2,228
Research and development 1,550 1,867
Infrequent charges (Note 5) 1,738
-------- ---------
Total operating expenses 9,130 12,115
-------- ---------
Income (Loss) From Operations (1,122) (4,911)
Other (Expense) Income:
Interest expense (454) (329)
Gain on sale of assets (Note 1) 128
-------- ---------
Loss Before Income Taxes (1,576) (5,112)
Income Taxes (Note 6) - -
-------- ---------
Net Loss $ (1,576) $ (5,112)
-------- ---------
-------- ---------
Net Loss per Share of Common Stock (Note 1):
Basic $ (0.26) $ (1.15)
-------- ---------
-------- ---------
Diluted $ (0.26) $ (1.15)
-------- ---------
-------- ---------
Weighted Average Common Shares Outstanding:
Basic 6,015 4,449
-------- ---------
-------- ---------
Diluted 6,015 4,449
-------- ---------
-------- ---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK COMMON STOCK ADDITIONAL
---------------- ----------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,839 $ 192 $ 10,160 $ (7,097) $ 3,255
Net loss (5,112) (5,112)
Class A stock issued in a private sale,
net of issuance costs 444 $ 22 1,434 1,456
Common stock issued to Chairman of
Board of Directors 45 2 100 102
Common stock issued in a private sale,
net of issuance costs 545 28 1,384 1,412
Common stock issued under Employee
Stock Purchase Plan 24 1 66 67
Warrants issued in conjunction with
development and implementation of
cost reduction plan (Note 5) 508 508
----- ------ ------- ------- -------- --------- ---------
Balance at December 31, 1997 444 22 4,453 223 13,652 (12,209) 1,688
Net loss (1,576) (1,576)
Common stock issued under Employee
Stock Purchase Plan 20 1 44 45
Common stock issued in private sales,
net of issuance costs (Note 9) 1,096 54 1,916 1,970
Common stock issued to a former employee 15 1 44 45
Common stock issued upon exercise of
stock options 3 8 8
Common stock issued to directors 21 1 74 75
----- ------- ------- ------- -------- --------- ---------
Balance at December 31, 1998 444 $ 22 5,608 $ 280 $ 15,738 $ (13,785) $ 2,255
===== ======= ======= ======= ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (1,576) $ (5,112)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 511 579
Amortization 357 287
Common stock issued to directors and former officers
in lieu of compensation 120
Common stock and warrants issued in conjunction with
the development and implementation of a cost
reduction plan (Note 5) 610
Changes in operating assets and liabilities:
Accounts receivable (1,373) 924
Inventory (117) 2,393
Prepaid expenses and other assets 123 (72)
Accounts payable and accrued expenses (788) (683)
Warranty reserve (40) (149)
Deferred service contract revenue (26) (92)
--------- ---------
Net cash used in operating activities (2,809) (1,315)
Cash Flows from Investing Activities:
Capital expenditures (67) (215)
Software production costs (321) (417)
--------- ---------
Net cash used in investing activities (388) (632)
Cash Flows from Financing Activities:
Borrowings under line of credit agreement 22,483 18,682
Repayments under line of credit agreement (21,446) (19,828)
Net proceeds from issuance of common stock 1,773 2,935
--------- ---------
Net cash provided by financing activities 2,810 1,789
--------- ---------
Decrease in Cash (387) (158)
Cash at Beginning of Year 387 545
--------- ---------
Cash at End of Year $ - $ 387
========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
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 noninvasive sleep diagnostic systems
from a third party.
LIQUIDITY - The Company's working capital requirements for 1998 were met
principally through amounts borrowed on the Company's line of credit
(see Note 8), the issuance of common stock under private sales to
investors (see Note 9), and credit arrangements made with the Company's
vendors during the first quarter 1997. This vendor credit consisted of
the Company entering into financing arrangements with certain vendors
that 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 $769,000 and $48,000 in
1999 and 2000, respectively. The balances outstanding at December 31,
1998 that will be paid after December 31, 1999 have been classified as
long-term accounts payable financed with vendors.
In addition, the Company incurred net losses of $1,576,000 and
$5,112,000 for the years ended December 31, 1998 and 1997, 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 terminated early in 1997 in accordance with an
exit plan adopted in the fourth quarter of 1996 (see Note 5).
INVENTORIES - Inventories are valued at the lower of cost or market
determined by the first-in, first-out method.
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. An accrual is
recorded for estimated warranty costs.
DEFERRED SERVICE CONTRACTS - Amounts billed to customers under service
contracts are deferred and recognized as income over the term of the
agreement, and costs are recognized as incurred.
F-6
<PAGE>
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.
OTHER INCOME (EXPENSE) - In 1997, the Company sold certain assets of its
asthma line of business for approximately $144,000, which resulted in a
gain of $128,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Cash, accounts receivables,
accounts payable, note payable, and accrued expenses are carried at
amounts which reasonably approximate their fair value due to the
short-term nature of these amounts or due to variable rates of interest
which are consistent with current market rates.
BASIC AND DILUTED 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. For purposes of this calculation, the convertible
Class A common shares are assumed to have been converted. Common
equivalent shares from stock options and warrants to purchase 1,697,000
and 1,342,000 shares of common stock at a range of $1.00 to $8.67 and
$1.92 to $10.00 were outstanding during 1998 and 1997, 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 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 13% and 18% of total sales in 1998 and 1997, 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.
ACCOUNTING PRONOUNCEMENT - In June 1997, the Financial Accounting
Standards Board issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which changes the way public
companies report information about operating segments. SFAS No. 131,
which is based on the management approach to segment reporting,
establishes requirements to report selected segment information and to
report entitywide disclosures about products and services, major
customers, and material countries in which the entity holds assets and
reports
F-7
<PAGE>
revenue. The Company adopted SFAS No. 131 in 1998. The Company
operates within a single operating segment.
COMPREHENSIVE EARNINGS (LOSS) - Comprehensive earnings (loss) is a
measure of all nonowner changes in shareholders' equity and includes
such items as net earnings, certain foreign currency translation items,
minimum pension liability adjustments, and changes in the value of
available-for-sale securities. In 1998 and 1997, comprehensive earnings
(loss) for the Company was the same as net earnings (loss) as reported.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997
financial statements to conform to the classifications used in 1998.
These reclassifications had no effect on previously reported net loss or
shareholders' equity.
2. INVENTORIES
The Company's inventories consisted of the following components (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
<S> <C> <C>
Purchased components and work-in-process $ 2,941 $ 3,164
Finished goods 1,976 1,636
-------- ---------
$ 4,917 $ 4,800
======== =========
</TABLE>
3. EQUIPMENT AND FIXTURES
At December 31, the Company's equipment and fixtures consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Building improvements $ 742 $ 733
Computer equipment 1,548 1,491
Manufacturing equipment 933 933
Furniture and fixtures 869 915
-------- ---------
Total equipment and fixtures, at cost 4,092 4,072
Less accumulated depreciation 3,574 3,110
-------- ---------
$ 518 $ 962
======== =========
</TABLE>
4. GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable segment.
See Note 1 for a brief description of the Company's business. As of
December 31, 1998, the Company had operations established in various
countries throughout the world. The Company is exposed to the risk of
changes in social, political, and economic conditions inherent in
foreign operations, and the Company's results of operations are affected
by fluctuations in foreign currency exchange rates. In no single country
outside the United States did operations account for more than 10% of
the Company's net sales for 1998 and 1997. Net sales by geographic area
are presented by attributing revenues from external customers on the
basis of where the products are sold. The Company does not maintain
significant assets in foreign countries.
F-8
<PAGE>
Net sales by geographic area (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
United States $ 17,770 $ 15,637
International 2,679 3,536
---------- ----------
$ 20,449 $ 19,173
---------- ----------
---------- ----------
</TABLE>
5. INFREQUENT CHARGES
GERMANY:
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 $550,000
charge to operations in the fourth quarter of 1996 related to expected
exit costs of the German office. Of this total, $250,000 was recorded as
cost of goods sold, $100,000 was recorded in general and administrative
expenses, and the remainder as an infrequent charge, primarily related
to future lease payments. During 1997, the Company recorded an
additional $150,000 infrequent charge for severance to seven employees
in its subsidiary in Germany. The change in estimated liabilities in
1998 was due to several employees leaving earlier than anticipated and a
revision in the expected ultimate lease payments.
The following table shows the activity related to severance and exit
costs of the German office (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance - January 1, 1997 $ 150
Provision 150
Payments (200)
--------
Balance - December 31, 1997 100
Provision -
Payments (40)
Change in estimate (60)
--------
Balance - December 31, 1998 $ -
--------
--------
</TABLE>
DOMESTIC:
During 1997, the Company implemented certain domestic cost-cutting
strategies that resulted in $1,588,000 of infrequent charges,
substantially all of which were paid in 1997. Approximately $1,012,000
of these charges were for professional services incurred in connection
with the development and implementation of the cost-cutting strategies.
Included in these costs was approximately $530,000 relating to the
issuance of stock and warrants. The Company granted the former
chairperson of the Company a warrant to purchase 195,000 shares of
common stock at a price of $2.67 per share in exchange for certain
consulting services to the Company. The warrant expires on March 31,
2000. The Company also issued 45,000 shares of common stock and
granted a warrant to purchase 225,000 shares of common stock at a
price of $2.25 per share to an individual for services provided in
connection with the development and implementation of the cost
reduction plan. This warrant expires on March 31, 2002. In addition,
the Company paid approximately $243,000 to the company where this
individual is president in connection with certain investment banking
and consulting services. This individual also was elected the
Chairman of the Board of Directors. The value for the warrants was
estimated using the Black-Scholes
F-9
<PAGE>
option-pricing model, and the value for the common stock was
calculated using the closing price of the stock on the day it was
granted.
The remaining $575,000 was severance costs related to the termination of
various employees. The following table shows the activity related to the
domestic severance charges (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance - January 1, 1997 $ -
Provision 576
Payments (511)
------
Balance - December 31, 1997 65
Payments (65)
------
Balance - December 31, 1998 $ -
------
------
</TABLE>
These costs included payments of cash and stock to 26 employees and cash
and warrants paid to the former president and chairperson of the Board
of Directors.
6. INCOME TAXES
Significant components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal $ - $ -
State - -
Deferred - -
-------- ---------
Income tax benefit $ - $ -
-------- ---------
-------- ---------
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Allowance for bad debts $ 42 $ 58
Inventory reserve 69 69
Warranty reserve 133 147
Other reserve 63
Vacation accrual 36 48
Deferred service contract revenue 58 60
Valuation allowance (338) (445)
-------- ---------
Total current - -
Inventory capitalization 15 3
Capitalized software and patents (201) (214)
Net operating loss and tax credit carryforwards 4,635 3,806
Valuation allowance (4,449) (3,595)
-------- ---------
Total noncurrent - -
-------- ---------
Net deferred tax assets $ - $ -
-------- ---------
-------- ---------
</TABLE>
F-10
<PAGE>
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 (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Income tax benefit at statutory rate $ (552) $ (1,789)
Increase of deferred tax asset valuation allowance 747 1,139
Utilization of net operating loss carryforward related
to IRS audit adjustments for 1994 and 1993 613
Other (195) 37
-------- ---------
$ - $ -
-------- ---------
-------- ---------
</TABLE>
As of December 31, 1998, the Company had federal net operating loss
carryforwards of $12,290,000 that expire from 2002 through 2012. The
Internal Revenue Service has examined the Company's income tax returns
through December 31, 1995. Total income taxes paid were $6,000 and
$24,000 in 1998 and 1997, respectively.
7. 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, 1998 (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 397
2000 367
2001 357
2002 172
---------
$ 1,293
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997 was $420,000
and $490,000, respectively.
8. 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 $4,100,000, at the
discretion of Norwest, and expires March 31, 2000. The credit line
allows the Company to borrow up to 80% of eligible domestic accounts
receivable, 40% of eligible domestic inventory (not to exceed
$1,500,000), and 90% of eligible foreign accounts receivable. The
Company's accounts receivable and inventories secure total borrowings
outstanding under the credit agreement. 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.
Borrowings under the line of credit bear interest at the Norwest "base"
rate plus 4.0% (11.75% at December 31, 1998). The "base" rate is equal
to the interest rate publicly announced by Norwest
F-11
<PAGE>
Bank Minnesota, National Association from time to time as its "base"
rate. The line of credit contains a minimum monthly interest charge
of $15,000. In addition, the Company granted to Norwest a three-year
warrant to purchase 93,750 shares of the Company's common stock at an
exercise price of $2.25 per share. The value of this warrant
($73,000) is being amortized to interest expense over the term of the
line of credit. The warrant contained antidilution provisions and, as
a result of the Company's September 1998 issuance of common stock,
the warrant exercise price decreased to $1.00 per share and the
shares issuable under the warrant increased to 210,937 shares.
The Company had outstanding borrowings of $3,291,000 and $2,254,000 at
December 31, 1998 and 1997, respectively, and at December 31, 1998 had
additional borrowing availability of $744,000. Total cash paid for
interest was $454,000 and $329,000 for the years ended December 31, 1998
and 1997, respectively. The Company amended its line of credit agreement
in June and November 1997 as well as March, August, and September 1998.
As of December 31, 1998, the Company was in technical default of its
minimum net income and minimum debt service coverage ratio covenants.
These technical defaults were waived through an amendment to the line of
credit agreement on March 29, 1999.
9. CAPITAL STOCK
In June 1998, the Company distributed a three-for-two stock split
effected in the form of a stock dividend. All share and per share data
have been adjusted to reflect this stock split.
In March 1997, the Company's Board of Directors authorized 500,000
shares of a new class of convertible stock (Class A stock). The Class A
stock has voting rights. Each share was originally convertible into 1.5
shares of common stock. The Company issued 444,000 shares of the new
class of stock receiving net proceeds of $1,456,000. These shares have a
liquidation preference of $3.38 per share, aggregating $1,500,000 at
December 31, 1998.
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 1,096,000 shares of
the Company's common stock at a price of $2.75 per share. The investors
purchased 545,000 shares for $1,500,000 (less costs of issuance of
$88,000) on November 10, 1997 and 545,000 shares for $1,500,000 (less
costs of issuance of $31,000) in January and February of 1998.
In September 1998, the Company's Board of Directors authorized the
issuance of additional common stock in a private sale to investors. On
September 30, 1998 the investors purchased 550,000 shares for $550,000
(less costs of issuance of $49,000).
The Company's Class A stock contained antidilution provisions. As a
result of the September 1998 offering, 444,000 shares of class A stock
are now convertible into 1,500,000 shares of common stock.
10. 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 1,350,000 shares have been reserved for issuance, with 276,000
shares remaining reserved and unissued at December 31, 1998. 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 an
officer and certain nonemployees. These options become exercisable over
a one- to ten-year period following the date of grant.
F-12
<PAGE>
The Company also has a Nonemployee Director Compensation Plan, which
provides for the granting of nonqualified options for up to 675,000
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 15,000 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 2,250 shares
(4,500 shares for the Chairman of the Board) will be granted
automatically following each board meeting personally attended by
each director, not to exceed 13,500 shares (27,000 shares for the
Chairman of the Board) per director annually. An option to purchase
750 shares will be granted automatically following each board
committee meeting personally attended by each director, not to exceed
2,250 shares per director annually. The option exercise price per
share will not be less than 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.
A summary of option activity is as follows (in thousands except per
share amounts):
<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, 1996 324 $ 4.09 591 $ 4.48
Granted 400 2.46 312 2.43
Canceled or expired (246) 4.19 (554) 4.45
----- -------
Balance at December 31, 1997 478 2.68 349 2.69
Granted 263 1.20 294 2.34
Exercised (3) 2.87
Canceled or expired (238) 2.38 (14) 4.84
----- -------
Balance at December 31, 1998 500 $ 1.96 629 $ 2.43
----- ------- ------- -------
----- ------- ------- -------
Exercisable at December 31, 1997 124 $ 3.17 214 $ 2.71
----- ------- ------- -------
----- ------- ------- -------
Exercisable at December 31, 1998 200 $ 2.53 333 $ 2.51
----- ------- ------- -------
----- ------- ------- -------
</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 5,000 shares during each purchase period and no more than
$25,000 of fair value of stock in each calendar year. A total of 300,000
shares has been authorized for issuance under the ESP Plan. Shares
issued under the ESP Plan in 1998 and 1997 were 20,000 and 24,000
shares, respectively. The ESP Plan will terminate on January 1, 2003,
unless extended by the Board of Directors.
In 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. The Company has elected to continue following the
accounting guidance of Accounting Principles
F-13
<PAGE>
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
1998 and 1997 pro forma net loss would have been $2,058,000 and
$5,535,000, respectively, and basic and dilutive net loss per share
would have been $.34 and $1.24, respectively.
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
4.7% and 6.5% in 1998 and 1997, respectively; an expected life of 5 and
7 years in 1998 and 1997, respectively; and expected volatility of 47%
and 54% in 1998 and 1997, respectively. The weighted average fair value
of options issued in 1998 and 1997 was $0.80 and $1.66, 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 did not contribute to the plan in 1998 and
expensed contributions to the plan of approximately $12,000 in 1997.
11. RELATED-PARTY TRANSACTIONS
An former officer and director of the Company is the president of
ErgometRx Corporation. 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 no royalties
for 1998 or 1997.
The current Chairman of the Board of Directors is the president of
Manchester Companies. As part of the cost reduction plan in 1997, the
Board of Directors engaged Manchester Companies to provide investment
banking and management consulting services to the Company. Fees
aggregating $120,000 and $265,000 for 1998 and 1997, respectively, were
paid to Manchester Companies for those services. In addition, the
Company was paid $10,000 for administrative services that were provided
to Manchester Companies.
12. LITIGATION
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.
F-14
<PAGE>
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K IS HEREBY AMENDED TO READ AS FOLLOWS:
(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 First Amendment to Credit Agreement Exhibit 10.2.1 to Report on Form 10-KSB
dated November 12, 1997 for the year ended December 31, 1997,
file no. 0-9899
10.2.2 Second Amendment to Credit Agreement Exhibit 10.1 to Report on Form 10-QSB
dated March 30, 1998 for the quarter ended March 31, 1998,
file no. 0-9899
10.2.3 Third Amendment to Credit Agreement Exhibit 10.2.3 to Report on Form 10-KSB
dated March 29, 1999 for the year ended December 31, 1998,
file no. 0-9899
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 First Amendment to Credit and Security Exhibit 10.3.1 to Report on Form 10-KSB
Agreement dated April 14, 1997 for the year ended December 31, 1996,
file no. 0-9899
20
<PAGE>
10.3.2 Second Amendment to Credit and Security Exhibit 10.3.2 to Report on Form 10-KSB
Agreement dated November 12, 1997 for the year ended December 31, 1997,
file no. 0-9899
10.3.3 Third Amendment to Credit and Security Exhibit 10.2 to Report on Form 10-QSB
Agreement dated March 26, 1998 for the quarter ended March 31, 1998,
file no. 0-9899
10.3.4 Fourth Amendment to Credit and Security Exhibit 10.1 to Report on Form 10-QSB
Agreement dated August 14, 1998 for the quarter ended September 30, 1998,
file no. 0-9899
10.3.5 Fifth Amendment to Credit and Security Exhibit 10.2 to Report on Form 10-QSB
Agreement dated September 10, 1998 for the quarter ended September 30, 1998,
file no. 0-9899
10.3.6 Sixth Amendment to Credit and Security Exhibit 10.3.6 to Report on Form 10-KSB
Agreement dated March 29, 1999 for the year ended December 31, 1998,
file no. 0-9899
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
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
21
<PAGE>
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)
10.1.1 Eighth Amendment to Lease for Exhibit 10.12 to Report on Form 10-KSB
350 Oak Grove Parkway, St. Paul, for the year ended December 31, 1997,
Minnesota file no. 0-9899
10.13* Employment Agreement dated August 3, Exhibit 10.13 to Report on Form 10-KSB
1998 between the Company and for the year ended December 31, 1998,
Richard E. Jahnke file no. 0-9899
10.14* Stock Option Agreement between the Exhibit 10.14 to Report on Form 10-KSB
Company and Mark W. Sheffert for the year ended December 31, 1998,
dated January 9, 1999 file no. 0-9899
10.15** OEM Distribution Agreement dated Filed electronically herewith
April 7, 1997 between Compumedics
Sleep Pty Ltd and the Company, as amended
by OEM Distribution Memorandum of
Understanding dated December 7, 1997,
Addendum dated December 1, 1998
and Addendum dated March 8, 1999
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.
**Certain information has been deleted from this Exhibit and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment under rule 24b-2.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1998.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this amendment No. 1 on Form 10-KSB/A to
be signed on its behalf by the undersigned, thereunto duly authorized.
MEDICAL GRAPHICS CORPORATION
November 5, 1999 /s/ Richard E. Jahnke
------------------------------------------------
Richard E. Jahnke, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment No. 1 on Form 10- KSB 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 November 5, 1999
- ------------------------------------ and Director
Mark W. Sheffert
/s/ Richard E. Jahnke President, Chief Executive November 5, 1999
- ------------------------------------ Officer and Director (Principal
Richard E. Jahnke Executive Officer)
/s/ Dale H. Johnson* Chief Financial Officer November 5, 1999
- ------------------------------------ (Principal Financial and
Dale H. Johnson Accounting Officer)
/s/ Gerald T. Knight* Director November 5, 1999
- ------------------------------------
Gerald T. Knight
/s/ W. Edward Mcconaghay* Director November 5, 1999
- ------------------------------------
W. Edward McConaghay
13
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/s/ Donald C. Wegmiller* Director November 5, 1999
- ------------------------------------
Donald C. Wegmiller
/s/ John C. Penn* Director November 5, 1999
- ------------------------------------
John C. Penn
/s/ John D. Wunsch* Director November 5, 1999
- ------------------------------------
John D. Wunsch
/s/ Richard E. Jahnke November 5, 1999
- ------------------------------------
Pro Se and by Power of Attorney
</TABLE>
14
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Certain information has been deleted from this exhibit and filed separately with
the Securities and Exchange Commission pursuant to a request for confidential
treatment under Rule 24b-2.
OEM DISTRIBUTION AGREEMENT
This Agreement is entered into as of April 7,1997 between COMPUMEDICS SLEEP PTY.
LTD. (ACN 006 854 897), a corporation organized and doing business under the
laws of the Commonwealth of Australia, with its principal place of business at 1
Marine Parade, Abbotsford, VIC 3067, Australia ("CPL"), and MEDICAL GRAPHICS
CORPORATION, a Minnesota corporation, with its principal place of business at
350 Oak Grove Parkway, St. Paul, Minnesota 55127-8599, United States of America
("MGC").
RECITALS
1. CPL is in the business of designing, developing, marketing and distribution
of diagnostic sleep systems, and MGC has expertise in designing,
developing, marketing and distribution of cardiopulmonary diagnostic
systems; and
2. CPL and MGC desire to combine their expertise to share in the rewards
related to the OEM manufacture, sale and distribution by MGC of CPL's
diagnostic sleep systems; and
3. CPL and MGC desire to further discuss entering into an OEM agreement for
the sale and distribution, outside of the United States, by CPL of MGC's
cardiopulmonary diagnostic systems.
NOW THEREFORE, in consideration of the mutual promises hereinafter set forth,
the parties mutually covenant and agree as follows:
1. DEFINITIONS
1.1 "AGREEMENT" means this Agreement together with the Attachments which
are attached hereto and which form an integral part hereof.
1.2 "PRODUCTS" means the (a) products, software, accessories and supplies
listed on Attachment A, (b) all repair, replacement and service parts
for such products, software, accessories and supplies, (c) all
operator and service instructions, manuals and documentation relating
to the use and operation of such products, software, accessories and
supplies, and (d) any enhancements, improvements, changes, additions,
modifications and successor-generation products, software,
accessories, supplies, parts, manuals and documentation now,
heretofore or hereafter designed, manufactured, produced, fabricated,
processed, sold or distributed by CPL.
1.3 "TERRITORY" means and includes the United States of America.
<PAGE>
1.4 "CPL CONFIDENTIAL INFORMATION" means all information, knowledge, know
how, experience, expertise and designs which have been or are in the
future disclosed by or on behalf of CPL to MGC in connection with the
Products or the business or other assets of CPL or which are
otherwise obtained by MGC in connection with the Products or the
business or other assets of CPL or which are generated by MGC in
relation to the Products or the business or other assets of CPL or
under this Agreement.
2. APPOINTMENT
2.1 RIGHTS. Subject to the terms and conditions of this Agreement, CPL
hereby appoints MGC as a distributor of Products in the Territory.
MGC acknowledges the CPL also has a distribution agreement with
ResMed Inc. for all or part of the Territory. Compumedics
acknowledges that ResMed Inc. has waived any exclusive rights to
distribute the Products in the Territory. Except as the parties
shall otherwise agree in writing, MGC shall have the right to market,
sell, promote, distribute, service and repair, and offer to sell,
service and repair, the Products in the Territory under MGC's name,
logotypes and trademarks.
2.2 NON-COMPETITION. Other than the distribution of the S-Series Product
range by ResMed, Inc. under its distribution agreement or by some
other distributor in substitution for ResMed, Inc. under a similar
distribution agreement, CPL will not appoint or authorize, or
directly or indirectly supply Products (including parts, components,
services or assistance), or future products which compete with the
Products, to any other persons who intend to, or may, or will market,
sell, promote, distribute, license the use of, service or repair the
Products in the Territory, or who have or are doing so.
MGC agrees that, during the Term of this Agreement, it is not
currently and will not directly or indirectly become involved with
the development or manufacture or distribution of sleep diagnostic
products that directly compete with the Products and without prior
written permission from CPL.
CPL agrees to forward to MGC for handling, all inquiries and sales
and marketing leads received from or relating to the purchase, sale,
distribution, use, service or repair of Products in the Territory or
which are received from persons located or otherwise doing business
in the Territory.
3. GENERAL OBLIGATIONS OF MGC
3.1 PROMOTION OF PRODUCTS. MGC agrees to promote and market the sale of
Products in the Territory in reasonable and proper ways at its own
expense.
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3.2 CUSTOMER SERVICE. MGC agrees to promptly offer to repair all
failures of Products sold by it in the Territory which are reported
by customers of MGC in good standing. Such repairs shall be
performed in accordance with CPL's instructions and training for
technical repairs, which CPL shall provide to MGC within sixty (60)
calendar days after the Effective Date. During the warranty period
only CPL agrees to provide replacement Products or repair parts for
Products to MGC at CPL's cost, including shipping costs, for Products
covered by CPL's product warranty as set forth in Paragraph 9.2
hereof. MGC may charge customers directly for all fees, costs and
expenses incurred or imposed by MGC in connection with all repairs of
the Products performed by MGC.
3.3 PRODUCT MANAGER. MGC agrees to assign a named product manager to
CPL's account to manage communications and for general liaison
proposes.
3.4 REPORTS. MGC agrees to make reports on its actual marketing and
sales activity in the territory once each quarter during the term of
this Agreement in the form as reasonably requested by CPL.
3.5 RESALE AND SERVICE PRICES. MGC may sell, license the use of, repair
and service the Products at such prices as MGC, in its sole
discretion, shall determine.
3.6 OTHER PRODUCTS. MGC intends to source and provide a full line of
sleep diagnostic and therapy products. MGC is allowed to obtain,
through agreements with other sources, such products as screeners and
sleep therapy devices. Such products cannot be a full, 16-channel
non-portable or lab-based polysomnography system. Additionally, MGC
must inform CPL, in writing, 120 days prior to the effective date of
any agreement for additional sleep diagnostic products, giving CPL
the opportunity to provide a comparable product, if it so decides.
If after the 120 day period CPL has not provided a comparable
product, MGC is free to enter into an agreement with the other source
and CPL is free to distribute any subsequently produced comparable
product in the Territory unless distributed by MGC. It is CPL's
intention to offer MGC a complete sleep diagnostic line by way of the
range of new generation S-Series wireless head-box products.
4 GENERAL OBLIGATIONS OF CPL
4.1 PRODUCTS. CPL agrees to sell Products to MGC at the prices set forth
in Attachment B of this Agreement for demonstration, resale, repair
and service purposes in the Territory, and agrees that such Products
shall perform in accordance with CPL's latest applicable published
specifications and its product warranty set forth in paragraph 9.2.
3
<PAGE>
4.2 PRODUCT LABELING. CPL agrees to manufacture Products bearing
designated MGC labeling as mutually agreed by the parties.
Labeling includes modification to appropriate software
displays as agreed to by the two parties.
4.3 DELIVERIES. CPL agrees to process orders and deliver Products in a
prompt and commercially reasonable manner; provided, that CPL shall
deliver Products, ordered in accordance with Paragraph 5.2 hereof,
not later than sixty (60) calendar days following order acceptance
unless a later delivery date is specified by MGC. All Products
shipped to MGC shall be new finished goods and CPL shall ensure that
all such Products are packaged and labeled for transportation,
distribution and sale in accordance with all applicable laws.
4.4 NOTICE OF ADVERSE EVENTS. CPL agrees to promptly notify MGC of any
reports of adverse events received by CPL from customers,
distributors or others that may have caused or contributed to death
or serious injury or that would likely cause or contribute to a death
or serious injury if the event were to reoccur from the use of
Products, or to recall, banning or other restrictions imposed upon
Products by any regulatory agency whether relating to Products sold
prior to or after the Effective Date.
4.5 MARKETING AND SERVICE TRAINING. CPL agrees to provide training to
MGC's designated personnel, in marketing, clinical applications,
installation, use, maintenance and repair of Products, as reasonably
required. Such training shall be free of charge and with respect to
marketing, sales and clinical application training ("MARKETING
TRAINING") shall take place in the location in the United States
reasonably designated by MGC and agreed to by CPL (it being
understood that all costs of providing the site for Marketing
Training shall be borne by MGC) and with respect to installation,
use, maintenance and repair training ("Service Training") shall take
place in the United States at such location as is mutually agreed to
by the parties (it being understood that all costs of providing the
site for Service Training shall be borne by MGC) (it being further
understood that in the case of both Marketing Training and Service
Training, costs of travel, board and lodging shall be borne by CPL
and MGC for their respective personnel). All training shall be
conducted by persons qualified to conduct such training, at such
dates and times as are mutually agreed to by CPL and MGC.
4.6 COMMUNICATIONS. CPL agrees to inform MGC of designated contacts for
communication and liaison with regard to orders and payments and
technical and applications support.
4.7 PROMOTIONAL MATERIALS. CPL shall furnish MGC a reasonable quantity
of CPL's brochures, product photos, and transparencies relating to
the Products, for use by MGC in preparing its own promotional and
advertising materials.
4
<PAGE>
4.8 CPL SUPPORT. CPL shall provide to MGC a complete copy of the FDA
510(k) documentation for all of the Products and documentation
demonstrating approval to safety standard UL 2601.1 for medical
devices by either UL or ETL, for the Products. CPL will label the
products by attaching a UL or ETL safety label to each product
assembly. CPL shall provide engineering and service support for the
Products for the term of this Agreement, particularly in regards to
private labeling of software displays.
4.9 PRODUCT CHANGES. CPL shall provide MGC written notice at its earnest
convenience with respect to any proposed engineering change order or
other modification, or change to any of the Products ("ECO").
4.10 EXPORT DOCUMENTATION. CPL will be responsible for obtaining all
Australian licenses and permits and for satisfying all formalities as
may be required to export Products to MGC in accordance with then
prevailing legislation and regulations.
5 ORDERS, DELIVERIES AND ACCEPTANCE
5.1 MINIMUM PURCHASE. During the first year of the Term, MGC agrees to
purchase from CPL a minimum of [CONFIDENTIAL TREATMENT REQUESTED]
S-Series Product units at the prices agreed to in Attachment B of
this Agreement. MGC agrees to order [CONFIDENTIAL TREATMENT
REQUESTED] S-Series Product units as demonstration equipment within
fourteen (14) days of the Effective Date. The purchase of the
demonstration equipment will apply to the minimum purchase. MGC
agrees to purchase an additional [CONFIDENTIAL TREATMENT REQUESTED]
systems by May 30, 1997 under the standard terms of the Agreement.
In years two and three of the term of the Agreement, MGC agrees to
purchase a minimum of [CONFIDENTIAL TREATMENT REQUESTED]S-Series
Product units per term year.
To the extent MGC in good faith fails, or is unable, to meet such
minimum requirements because of (a) delay by CPL in the performance
of its obligations or deliveries of products, (b) FDA or other
governmental filings have not been made or approvals granted,
secured, or maintained, or (c) other acts or omissions of CPL, MGC
shall be excused from meeting this minimum.
Notwithstanding any provisions of this Agreement to the contrary,
failure of MGC to meet the minimum purchase requirements shall not be
deemed a breach of the agreement and will result only in the loss of
the special pricing agreed to in Attachment B. Pricing for the
S-Series Products will then, at the discretion of CPL, revert back
to the standard distributor pricing established by CPL.
5.2 ORDERS. MGC shall deliver written purchase orders for Products and
spare parts to CPL in any reasonable manner specifying the desired
date of shipment, the number
5
<PAGE>
of Product units or spare parts to be shipped, the options to be
provided and indicating part numbers for each item at least 60 days
prior to the requested delivery date.
CPL shall acknowledge receipt and acceptance of orders in writing
within seven (7) working days. CPL's written acceptance shall
include the order origin and number, the date of receipt of the
order, the unit prices and total order price, and the scheduled
shipment date. CPL's acceptance of orders shall create a contract
for sale and purchase on terms and conditions provided for in such
purchase order, subject to the terms and conditions of this
Agreement. In the event of any conflict between the terms and
conditions of purchase orders and this Agreement, the terms and
conditions of this Agreement shall apply.
5.3 SHIPMENTS. CPL shall ship all Products and service parts ordered by
MGC, "FCA" or "Free Carrier" (as defined in the then current version
of INCOTERMS), to the destinations and via the means of
transportation specified by MGC in the order, or, if none is
specified, by an appropriate means which, in CPL's judgment, is
consistent with the requirements of the order. MGC shall bear all
transportation costs, and risk of loss and title shall pass to MGC
upon delivery to freight forwarder designated by MGC. MGC shall make
arrangement for its designated freight forwarder to accept delivery
of the Products and service parts at the premises of CPL.
5.4 IMPORT DUTIES. MGC shall pay all applicable United States import
duties for Products and service parts ordered by MGC.
5.5 ACCEPTANCE AND RETURNS. Within sixty (60) calendar days after the
Effective Date, the parties shall establish acceptance test
procedures ("ACCEPTANCE TEST PROCEDURES") for the Products, which
shall become an integral part of the Agreement. Until such written
procedures are established, CPL's published specifications for the
Products shall serve as the criteria for acceptance of Products by
MGC. The Acceptance Test Procedures may be modified by CPL at any
time.
MGC agrees to test Products in accordance with Acceptance Test
Procedures and to notify CPL of any nonconformity, damage,
discrepancy or shortages of Products within fourteen (14) calendar
days of the date of receipt of such Products by MGC. Following such
notice, CPL agrees to advise MGC within seven (7) working days of
what action it will take to promptly correct such non-conformity,
damage, discrepancy or shortage through delivery of conforming
replacement Products or components thereof, or through other
corrective actions. All shipping costs for replacement of
nonconforming products shall be borne by CPL.
6
<PAGE>
6 PRICES AND PAYMENT
6.1 PRICE SCHEDULE. The prices to be paid by MGC for the first year of
the Term for Products are set forth in U.S. dollars in Attachment B
to this Agreement. Prices to be paid by MGC for service parts shall
be quoted in U.S. dollars, and shall not exceed the OEM price list,
published by CPL, for such parts. Shipping costs, for service parts
and supplies, not covered under CPL's product warranty, would be paid
for by MGC.
Prices for the second and subsequent years of the Term shall be as
mutually agreed, after parties take into account the variations to
the costs of manufacture of the Products and the price movements of
comparable products selling in the Territory in competition with the
Products, provided that if minimum purchases described in Paragraph
5.1 are achieved, then prices shall be lower than prices at which the
same Products are provided to another distributor in the Territory in
the same year. If minimum purchases are not achieved, then prices
shall be set to CPL's then standard distributor pricing for the
Territory.
6.2 PAYMENTS. Payments to CPL for Products and service parts ordered by
MGC shall be made in U.S. dollars by wire (telegraphic transfer) or
(ACH) Automatic Clearing House transfer to the bank(s) designated by
CPL payable within sixty (60) calendar days of invoice date from CPL.
Any payment for delivered Products not made when due shall bear
interest at the lesser of 8% per annum or the highest rate permitted
by applicable law.
6.3 TERMS FOR DEMONSTRATION EQUIPMENT. Payment for the demonstration
equipment will be payable by June 30, 1997.
7 CONFIDENTIAL INFORMATION
7.1 MGC shall hold the CPL Proprietary Information in strict confidence
and shall not disclose any of the Proprietary Information to any
person except in accordance with clause 7.3 or in any other case, on
receiving the prior written consent of CPL.
7.2 MGC shall only use the CPL Proprietary Information as is necessary to
carry out the distribution of the Products and in particular MGC will
not use any CPL Proprietary Information to MGC's own advantage or to
the competitive disadvantage of CPL.
7.3 MGC may disclose the CPL Proprietary Information to such persons who
must have access to the information in connection with distribution
of the Products and who have first executed a confidentiality
undertaking in CPL's favour in a form acceptable to CPL.
7
<PAGE>
7.4 The obligations and restrictions of confidentiality imposed on MGC
under this Agreement survive termination of this Agreement for any
reason whatsoever and only terminate with respect to a part of the
information when one of the conditions of clause 7.5 applies to that
part.
7.5 The provisions of clause 7.1 and 7.2 do not apply to:
(a) information after it has entered into the public domain other
than because of a breach of confidence by MGC or a breach of this
Agreement by MGC;
(b) the use or disclosure of information after MGC has received that
information from a third party legally entitled to possess such
information and provide it to MGC where such use or disclosure
accords with the rights or permission lawfully granted to MGC by
that third person; and
(c) the disclosure by MGC of the minimum information necessary in
order to comply with any applicable law or legally binding order
of any governmental agency.
7.6 Prior to any use or disclosure in reliance on clause 7.5 (c), MGC
shall give notice to CPL of the full details of the circumstances of
the proposed use or disclosure and of the relevant information to be
used or disclosed. MGC shall give CPL a reasonable opportunity to:
(a) challenge in a court of law or other appropriate body whether the
proposed use of disclosure is in accordance with clause 7.5 (c);
(b) minimize the amount of information which is disclosed; and
(c) request that the information only be disclosed on confidential
terms.
7.7 On expiration or termination of this Agreement for any reason
whatsoever or immediately on demand by CPL, MGC shall:
(a) return to CPL all documents, reports, notes, memoranda, computer
media or other material which record, contain or relate in any
way to the CPL Proprietary Information (including all copies) and
which were provided to or obtained by MGC or prepared by MGC as a
result of or in connection with the performance of this Agreement
or the Products;
(b) delete entirely and permanently all of the CPL Proprietary
Information from every computer disk or tape or electronic
storage facility of any tape owned or used by MGC; and
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<PAGE>
(c) despite anything else in this Agreement seeks to make use of the
CPL Proprietary Information or any part of it for any purpose;
and shall confirm in writing promptly when it has complied with these
obligations.
8 INTELLECTUAL PROPERTY RIGHTS
8.1 NON-WAIVER. Nothing in this Agreement shall be construed as a grant
of any interest or right in the patents, technology, trade secrets,
know-how or other intellectual property of CPL including with respect
to the Products or future Products.
8.2 TRADE MARKS AND TRADE NAMES. MGC shall not acquire, and specifically
disclaims, unless otherwise specifically agreed in writing, any right
or licenses in the name "Compumedics", or the name of any CPL
affiliate, or any names or numbers related to the Products, or other
products of CPL or its affiliates, or any other CPL or affiliate
trademark or service mark, all of which are and shall remain the sole
and exclusive property of CPL or its affiliates; provided, however,
that CPL grants to MGC the limited right and license to use the trade
names and numbers of Products for the purposes of this Agreement.
8.3 DEFENSE OF RIGHTS. To the extent CPL becomes aware, or has reason to
believe, that any patent, copyright, trademark, trade secret or other
intellectual property right relating to any of the Products, are
being infringed or otherwise used by any other person, CPL shall
promptly notify MGC, and to the extent known of the material facts
constituting the basis thereof. CPL shall, at its own expense, act
as it sees fit to cause any such infringement or use to cease on a
basis that results in the continued exclusive availability of the
Products to MGC.
8.4 SURVIVAL. The provisions of Paragraphs 8.1 and 8.2 shall survive any
termination or expiration of the Agreement.
9 WARRANTIES
9.1 GENERAL WARRANTIES. The parties mutually warrant that they have full
power and authority to enter into this Agreement and that it does not
conflict with any other agreements to which they are a party. CPL
warrants that, to the best of its knowledge and belief, it owns or
licenses all intellectual property contained in the Products, and
that it knows of no third party claims which challenge its right to
make or sell the Products.
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9.2 PRODUCT WARRANTY. CPL represents and warrants to MGC, for the
benefit of MGC's customers, that any Product delivered to MGC
pursuant to this Agreement at time of delivery, complies with all
laws, rules and regulations applicable to the requirements for
design, manufacturing, packaging and labeling of the finished product
in the Territory, including current FDA Good Manufacturing/Quality
System Regulations and UL 2601.1 safety approval requirements. CPL
will possess a valid 510(k) marketing clearance for the Products, and
that such Products otherwise comply with all FDA requirements
including Medical Device Reporting.
CPL further represents and warrants that Product delivered to MGC
shall be new and unused and shall be free from defects in material
and workmanship for at least 12 months from the date of installation
at a MGC customer's location.
The warranty against defects shall be in force for the shorter of the
period ending 12 months from the date the corresponding Product is
installed at a MGC customer location or for a period ending 15 months
from the date of delivery of the corresponding Product to MGC. If
MGC makes a claim with respect to this warranty it shall notify CPL
in a timely manner and CPL shall perform as described in Paragraph
3.2, provided that the failure of MGC to give timely notice shall not
affect its rights except to the extent that CPL demonstrates that a
material substantive or procedural rights was materially impaired by
such failure. CPL shall honor claims of MGC's customers under this
warranty.
9.3 MGC'S OBLIGATION. Upon installation of the Product, MGC shall
complete and return to CPL an installation report, provided by CPL.
MGC shall give written notice to GPL of defective Product and parts
covered by this warranty. MGC shall be responsible for removing the
defective Product part and returning such part to CPL, per CPL's
prearranged return authorization instructions, at CPL's expense, with
all shipping and insurance charges prepaid by CPL. All service costs
and shipping costs on the return of the Products, not covered by the
warranty, shall be paid by MGC.
9.4 SCOPE OF WARRANTY. THIS WARRANTY AND THE PROVISIONS OF SECTION 4.1
IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY,
INCLUDING ANY WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. EXCEPT AS PROVIDED IN PARAGRAPH 3.2 AND THIS
SECTION 9, CPL SHALL HAVE NO FURTHER OBLIGATION OR LIABILITY WITH
RESPECT TO THE PRODUCT OR ITS SALE, OPERATION AND USE, AND CPL
NEITHER ASSUMES, NOR AUTHORIZES THE ASSUMPTION OF, ANY OBLIGATION OR
LIABILITY IN CONNECTION WITH SUCH PRODUCT.
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9.5 COMPLAINTS. Each party will promptly notify the other of complaints
received concerning the Products, and MGC will, in consultation with
CPL, determine the appropriate action(s) in compliance with all
Medical Device Reporting requirements of the Safe Medical Devices Act
of 1990 and the FDA regulations promulgated thereunder. A copy of
each Medical Device Report to be submitted by CPL shall be delivered
to MGC at least two business days prior to its submission to the FDA.
9.6 INSURANCE. Each party warrants to the other that it is currently
insured and covenants that at all times during the term of this
Agreement it will maintain a comprehensive general liability
insurance policy which (i) sufficient to adequately protect against
risks associated with its ongoing business, including the risks which
might possibly arise in connection with the transactions contemplated
by this Agreement, and (ii) provides that it cannot be terminated or
canceled without giving the other party 30 days prior written notice.
Proof of such insurance shall be provided to one party by the other.
9.7 SERVICE SUPPORT. MGC shall be responsible for installation, operator
training and ongoing service for all Products that it shall sell
during the Term of this Agreement as provided in Paragraph 3.2. CPL
shall provide necessary technical support to MGC for the production
of new operator and service manuals.
9.8 REMEDIES FOR BREACH OF WARRANTY. The remedies provided in this
Section 9 are MGC's SOLE and EXCLUSIVE REMEDIES for the breach of
this warranty. In no event shall CPL be liable for (a) damages,
including without limitations incidental, collateral, or
consequential damages, or (b) repair or replacement costs incurred
without it prior written consent.
10 INDEMNIFICATION
10.1 INDEMNIFICATION BY MGC. MGC shall and does hereby agree to indemnify
and hold harmless CPL and its affiliates from any and all liability,
loss, cost, injury, damage, demand and expense (including, without
limitation, reasonable attorneys' fees) of any kind whatsoever
arising out of, on account of, or in connection with (a) any
instruction, specification or labeling supplied by MGC regarding the
Product, unless CPL has concurred with such instruction,
specification or labeling in writing; (b) any modification of the
Product or parts therefor by MGC not approved in writing by CPL; 1(c)
any combination of the Products by MGC with any product or
accessories without prior written approval of CPL; (d) any use of the
Product by MGC in a manner other than as prescribed in writing by
CPL; or (e) any distribution, marketing, sale, installation,
servicing or repair of the Product by MGC not consistent with any
direction received from CPL. In no event shall MGC be liable for any
special, consequential or indirect loss or damages,
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including, but not limited to, loss of revenue, cost of capital,
claims of customers for service interruption, and costs incurred in
connection with substitute facilities or supply sources suffered by
CPL arising out of said action, including restraining orders or
injunctions. This indemnity shall not be affected or terminated by
reason of the termination or expiration of this Agreement.
10.2 INDEMNIFICATION BY CPL. CPL shall and hereby does agree to indemnify
and hold harmless MGC and its affiliates from and against any and all
liability, loss, cost, injury, damage, demand and expense (including,
without limitation, reasonable attorneys' fees) of any kind
whatsoever arising out of, on account of, or in connection with (a)
any design, assembly or manufacturing defect or failure of any
Product, and (b) any infringement of any third parties' intellectual
property rights (including, without limitation, any patent, trademark
or copyright) arising directly from the distribution of Products by
MGC in the Territory, in accordance with this Agreement, in the form
as supplied by CPL. Should any claim or allegations of infringement
be received by MGC, MGC shall immediately notify CPL and shall
cooperate (provided that such cooperation does not require MGC to
incur costs or expenses) with CPL in promptly resolving the matter.
However, in no event shall CPL be liable for any special,
consequential or indirect loss or damages, including, but not limited
to, loss of revenue, cost of capital, claims of customers for service
interruption, and costs incurred in connection with substitute
facilities or supply sources suffered by MGC arising out of said
action, including restraining orders or injunctions. This indemnity
shall not be affected or terminated by reason of the termination or
expiration of this Agreement.
10.3 COOPERATION AMONG CPL AND MGC. CPL and MGC shall fully cooperate
with each other (at the cost and expense of the party requesting the
cooperation):
(a) in the defense of any action brought by a third party against one
or the other of them or both of them based upon the claims
contemplated by paragraph 10.1 or 10.2 above; and
(b) in seeking to secure licenses from such third parties who may be
asserting that the Products or parts thereof infringe their
patent or other intellectual property rights, which licenses
shall be on terms acceptable to CPL (the relevant license fee
shall be borne by CPL).
10.4 LIMITATION OF LIABILITY
ANYTHING HEREIN TO THE CONTRARY NOTWITHSTANDING, IN NO EVENT SHALL
EITHER PARTY (CPL OR MGC) OR THEIR AFFILIATES BE LIABLE TO THE OTHER
OR ITS AFFILIATES FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY
OR PUNITIVE DAMAGES OR ANY LOST PROFITS OR LOST OPPORTUNITIES,
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DIRECTLY OR INDIRECTLY ARISING FROM THE PERFORMANCE, FAILURE TO
PERFORM, OR BREACH OF THIS AGREEMENT.
11 REGULATORY COMPLIANCE
11.1 FDA COMPLIANCE. CPL shall be responsible to ensure that the
marketing clearance, design and production of the Products conform to
the laws and regulations administered by the U.S. Food and Drug
Administration ("FDA") including FDA Good Manufacturing (GMP) and
Quality System Regulation (QSR) requirements. MGC shall use its best
efforts to assist CPL in such compliance (provided that such
assistance does not require MGC to incur costs or expenses).
CPL appoints MGC as its agent within the Territory for collecting
Product failure data, reports of adverse events and customer
complaints involving the Products as required by the rules of the
FDA, and MGC accepts such appointment. MGC shall provide CPL with a
monthly summary of product failures known to MGC in the format which
CPL shall specify and MGC shall promptly notify CPL of all reports of
actual or threatened permanent injury or death attributed to the
Products and known to MGC and all complaints received by MGC from
customers regarding the Products.
MGC shall have the right, at its own expense, to conduct periodic
GMP/QSR inspections of CPL's manufacturing facilities to confirm
compliance with the foregoing and the representations in Paragraph
9.2. CPL will notify MGC within fourteen (14) days on any inspection
reports or warning letters received from the FDA relating to the
Products.
11.2 NON-FDA COMPLIANCE. MGC shall be responsible for complying with any
laws, regulations or rules, other than those administered by the FDA,
which may be applicable to the marketing, selling or servicing of the
Product in the Territory, with the exception of UL 2601.1 safety
approval as described in Section 4.8.
11.3 ISO 9001. MGC shall have the right, at its own expense, to conduct
periodic inspections and to gather information regarding CPL's
manufacturing practices to confirm compliance with ISO 9001
requirements.
12 TERM AND TERMINATION
12.1 TERM. This Agreement shall go into force April 1, 1997 (the
"Effective Date") and shall continue in force from the Effective Date
hereof for an "Initial Term" of three (3) years, and shall renew
automatically thereafter, year by year, for an "Extended Term" of one
year, unless sooner terminated by either party as provided herein.
13
<PAGE>
12.2 TERMINATION WITHOUT CAUSE. Either Party may terminate this agreement
without cause by written notice to the other party given not less
than three (3) months prior to the end of the Initial Term, or three
(3) months prior to the end of the then-current Extended Term.
12.3 TERMINATION WITH CAUSE.
(a) In the event that the ability of one party (the "Changed Party")
to comply fully with the terms of this Agreement ceases or, in
the reasonable judgment of the other party, is substantially and
adversely altered, in each case, as a consequence of (i) any
action taken by governmental, judicial or any other legal
authority; or (ii) a substantial change in the financial
condition, ownership, or control of the Changed Party, the other
party shall have the right to terminate this Agreement with
immediate effect upon written notice to the Changed party.
(b) In the event that any material breach by one party occurs and
remains uncorrected ninety (90) calendar days after written
notice by the other party to the breaching party that such a
breach exists, the non-breaching party will have the right to
terminate this Agreement with immediate effect after such ninety
(90) day period.
12.4 EFFECT OF TERMINATION. In addition to the survival of specific
provisions as provided elsewhere in this Agreement, the following
shall apply in the event of termination:
(a) MGC's payment obligations hereunder shall survive until fully
discharged;
(b) unless CPL repurchases such Products from MGC, MGC may continue
marketing of the Product units in its inventory on a non-
exclusive basis after termination until such inventory is
exhausted; and
(c) For a period of one calendar year following the termination of
this Agreement, MGC shall have the right to continue providing
repair and replacement services to customers which have purchased
Products from MGC, and CPL shall continue to provide to MGC
repair, replacement and service parts for such Products upon the
same terms and conditions, including CPL warranty obligations and
price, as set forth in this Agreement.
13 MISCELLANEOUS PROVISIONS
13.1 FORCE MAJEURE. If the performance of any obligation hereunder
(except for the making of payments) is restricted, prevented or
interfered with by any reason or
14
<PAGE>
force majeure, such performance shall be excused and such excuse
shall continue as long as the condition constituting such force
majeure continues, plus 30 days after the termination of such
condition; provided that the party whose performance is postponed by
such an event shall exert its best reasonable business efforts to
remove such obstacle. For the purposes of this Agreement, force
majeure is defined as follows: Causes beyond the reasonable control
of CPL or MGC, including acts of God, acts, compliance with
regulations, laws, administrative rulings, recommendations or
sanctions of any government or governmental agency (including,
without limitation, the FDA), civil commotion, destruction of
production facilities or material by fire, earthquake or storm,
epidemics and failure of public utilities.
13.2 INDEPENDENT CONTRACTORS. MGC and CPL are independent contractors
under the terms of this Agreement and neither may or shall act as an
agent or legal representative of the other for any purpose and
neither has any right or authority to assume or create any obligation
of any kind, express or implied, on behalf of the other or bind the
other.
13.3 ASSIGNMENT. Neither party shall have the right to assign or transfer
its rights under this Agreement in whole or in part, by operation of
law, or otherwise, without the prior written consent of the other
party, and any such attempted assignment without such consent shall
be void, except that MGC shall as a part of any internal business or
corporate restructuring have the right to assign this Agreement and
any rights hereunder to any affiliate of MGC or to a purchaser of the
entire business of MGC to which this Agreement pertains, or to a
purchaser of a major part of the assets of MGC's business to which
this Agreement pertains, without the prior written consent of CPL.
13.4 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
understanding of the parties and supersedes and cancels all prior
agreements and understandings, if any, between the parties concerning
the subject matter hereof.
13.5 SEVERABILITY. Should any provision of this Agreement be finally
determined to contravene any applicable law or governmental
regulation, thereupon such provision shall be automatically
terminated and performance thereof by both parties waived, or should
such provision be considered by either party to be an essential
element of this Agreement, the parties hereto shall negotiate a new
lawful provision consistent with the original intent and agreement of
the parties.
13.6 GOVERNING LAW. The parties hereto agree that, to the extent that any
dispute arises out of this Agreement, any action or proceedings
initiated by MGC with respect to any such claims shall be governed in
all respects by the laws of the State of Victoria, Australia and any
action or proceedings initiated by CPL with respect to
15
<PAGE>
any such claims shall be governed in all respects by the laws of the
State of Minnesota, excluding all choice of law rules and excluding
the United Nations Convention of the Sale of Goods.
13.7 AMENDMENT. This Agreement may only be amended or modified in
writing, signed by duly authorized persons of each party.
13.8 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed delivered upon (a) personal delivery in
hand, (b) 24 hours after transmission by telefax, if receipt is
confirmed by telephone call to the recipient addressee, (c) 3 days
after deposit, charges prepaid, with a recognized international
courier, or (d) five (5) days after deposit in the mail, registered
or certified mail, charges prepaid, addressed to the parties at their
respective addresses specified herein:
If to MGC:
Medical Graphics Corporation
350 Oak Grove Parkway
St. Paul, Minnesota 55127-8599
Attention: Christopher Hutchison
Telefax: (612) 484-8941
Telephone: (612) 484-4874
if to Compumedics:
Compumedics Pty., Ltd.
1 Marine Parade
Abbotsford VIC 3067
Australia
Attention: David Burton
Telefax: (613) 9419 5488
Telephone: (613) 9419 5433
or to such other addresses as may be specified in the same manner by
the respective party by written notice.
13.9 PROCEEDINGS. The parties hereto agree that, to the extent that any
dispute arises out of this Agreement, any action or proceedings
initiated by MGC with respect to any such claims shall be under the
jurisdiction of the courts of Victoria and the Commonwealth of
Australia, located in Melbourne, Australia. Any action or
proceedings initiated by CPL shall be under the jurisdiction of the
state and federal courts located in the State of Minnesota, U.S.A.
The parties irrevocably waive, to
16
<PAGE>
the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of venue of any such suit, action or
proceeding brought in any such court and any claim that any such
suit, action or proceeding brought in such a court has been brought
in an inconvenient forum. The prevailing party in any such
proceeding shall be entitled to recover from the other its costs and
expenses, including reasonable attorneys' fees, incurred in
connection with such proceeding.
13.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts and each such counterpart shall be deemed an original
hereof.
SIGNATURES
For COMPUMEDICS PTY., LTD.:
By: /s/ David Burton
------------------------------------------------------
Title: Managing Director
---------------------------------------------------
For MEDICAL GRAPHICS CORPORATION:
By: /s Christopher Hutchinson
------------------------------------------------------
Title: Senior Vice President, Sales and Marketing
---------------------------------------------------
17
<PAGE>
ATTACHMENT
PRODUCTS
A S-Series Unit consists of the Preamplifier Assembly, an A/D and a DSP Board,
S-Series On-line software and Replay software. The Preamplifier Assembly
includes a head box and interface cable. An additional Preamplifier Assembly
may be purchased for each S-Series system (providing 2-bed operation). On-line
and Replay software may also be purchased separately to accommodate networked,
multi-bed installations.
The Agreement also covers all future S-Series products, including S-Series
telemetry based products to be developed by CPL.
18
<PAGE>
ATTACHMENT B
PRICING
Pricing for first year of the Term (and thereafter in accordance with paragraph
6.1).
A purchased S-Series Unit consists of the Preamplifier Assembly, an A/D-DSP
Board, S-Series On-line software and Replay software. An additional
Preamplifier Assembly may be purchased for each S-Series system (providing 2-bed
operation).
Purchase price, in U.S. dollars, charged to MGC by CPL, excluding all duties,
freight and insurance costs, which shall be paid by MGC, is as follows:
S-Series Hardware and Software
S-Series Preamplifier Assembly [CONFIDENTIAL TREATMENT REQUESTED]
A/D and DSP Boards [CONFIDENTIAL TREATMENT REQUESTED]
Combined On-line and Replay Software [CONFIDENTIAL TREATMENT REQUESTED]
Stand alone Replay Software [CONFIDENTIAL TREATMENT REQUESTED]
19
<PAGE>
ATTACHMENT C
RETURN GOODS PROCEDURE
To be Provided by CPL.
20
<PAGE>
OEM DISTRIBUTION MEMORANDUM OF UNDERSTANDING (ODMOU)
BETWEEN COMPUMEDICS SLEEP (CS) PTY LTD AND
MEDICAL GRAPHICS CORPORATION (MGC). USA
1. Compumedics grant MGC non-exclusive distribution rights of CS P-Series
products for the Hospital Products market in USA, under similar terms and
conditions to the existent MGC and CS S-Series OEM Distribution Agreement
dated April 7, 1997.
2. MGC have limited access to CS P-Series products for the USA Home Market on
a basis of supplying to valued customers or special case research reference
sites.
3. The pricing of AUD$[CONFIDENTIAL TREATMENT REQUESTED] will apply for
Special P-Series Package Pricing (which consists of 1 X P-Series plus 4X
software licenses each containing Remote, P-Manager, Replay) when orders
are greater than or equal to the following listed P-Series quantities;
2. The execution of this ODMOU will constitute an order for [CONFIDENTIAL
TREATMENT REQUESTED units for Quarter 1 of 1998. The payment terms of this
order will be extended for 30 days greater than the standard terms of
payment per the above mentioned OEM Agreement. This extended payment term
is a one of provision to allow for the delays in start-up documentation
relating to the ODMOU.
3. Quarter 2 of 1998-[CONFIDENTIAL TREATMENT REQUESTED] units
4. Quarter 3 of 1998-[CONFIDENTIAL TREATMENT REQUESTED] units
5. Quarter 4 of 1998-[CONFIDENTIAL TREATMENT REQUESTED] units
6. Quarter 5 of 1999-[CONFIDENTIAL TREATMENT REQUESTED] units
7. Quarter 6 of 1999-[CONFIDENTIAL TREATMENT REQUESTED] units
8. Quarter 7 of 1999-[CONFIDENTIAL TREATMENT REQUESTED] units
9. Quarter 8 of 1999-[CONFIDENTIAL TREATMENT REQUESTED] units
10. Quarter 9 of 2000-[CONFIDENTIAL TREATMENT REQUESTED] units
11. Quarter 10 of 2000-[CONFIDENTIAL TREATMENT REQUESTED] units
12. Quarter 11 of 2000-[CONFIDENTIAL TREATMENT REQUESTED] units
13. Quarter 12 of 2000-[CONFIDENTIAL TREATMENT REQUESTED] units
Note 1. Where each unit refers to [CONFIDENTIAL TREATMENT REQUESTED] for
Special P-Series Package which consists of Z P-Series plus 4 X software
licenses each containing Remote, P-Manager, Replay.
Note 2: Prior to the closing of each calendar month the ordering
requirements for the next month will be confirmed in writing to CS
Operational Manager to allow appropriate production planning time.
4. Where the ordering quantities do not conform to quantities as outlined in
section 3 above, then standard International prices ([CONFIDENTIAL
TREATMENT REQUESTED]% discount from list price) will apply.
5. MGC will provide master support, training and warranty for CS P-Series and
S-Series products for RM (as outlined in SMOU Agreement).
6. MGC will pay RM a [CONFIDENTIAL TREATMENT REQUESTED]% spotting fee as
determined by a separate Spotting Fee Agreement (SFMOU) between the two
Parties RM and MGC, for RM initiated S-Series and P-Series Hospital Market
leads, whcih eventuate as MGC sales.
7. RM will reciprocate section 6 above by paying MGC a [CONFIDENTIAL TREATMENT
REQUESTED]% spotting fee as determined by a separate Spotting Fee Agreement
(SFMOU) between the two Parties RM and MGC, for MGC initiated S-Series and
P-Series Home Market leads, which eventuate as RM sales.
8. MGC's compliance with the terms of this agreement will provide MGC with the
exclusive OEM distribution of any replacement product.
We the undersigned agree to points 1 to 8 above.
/s/ David Viele /s/ David Burton
- ------------------------------ -------------------------------------------
Mr. David Viele David Burton
Medical Graphics Corporation Managing Director, Compumedics Sleep Pty Ltd
Dated: 7th December, 1997 Date: 7th December, 1997
21
<PAGE>
ADDENDUM TO OEM DISTRIBUTION AGREEMENT AND
MEMORANDUM OF UNDERSTANDING BETWEEN
COMPUMEDICS SLEEP PTY. LTD.
AND MEDICAL GRAPHICS CORPORATION
DECEMBER 1, 1998
This Addendum, dated December 1, 1998, is made by and between Medical
Graphics Corporation (MGC) and Compumedics Sleep Pty. Ltd. (Compumedics).
Provisions within supersede all other documents related to transfer pricing
for products purchased by MGC from Compumedics. This addendum serves to
modify these specific items listed. All other provisions of the Agreement
(April 7, 1997), Amendment to Agreement (June 1, 1997), and Memorandum of
Understanding (December 7, 1997) remain in effect.
1. Pricing - Effective December 1, 1998, the transfer pricing for Compumedics
products sold to MGC is as follows. Furthermore, any of these systems
which are currently on order, and have not been shipped, will be invoiced
at these prices. For any system currently on order, which has been shipped
prior to the date of this Agreement, the Old Transfer Pricing will apply.
<TABLE>
<CAPTION>
PS~QUEST (S-SERIES) PRICING MGC/COMPUMEDICS OLD TRANSFER NEW TRANSFER CHANGE
PART NUMBERS PRICE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SLEEP SYSTEM HARDWARE 790146-00 & [CONFIDENTIAL TREATMENT REQUESTED]
700965-001
Preamplifier Model 111, with 11 AC-isolated SYS-SLPOEMITEM2
preamplifier boards for EEG, ECG, EMG, EOG;
specific boards for microphone, respiratory
effort, airflow, SAO, and patient position;
Patient Interface Box
Preamplifier Model 121, 18-Channel with 6 AC- Pending [CONFIDENTIAL TREATMENT REQUESTED]
isolated preamplifier boards for EEG, ECG, EMG,
EOG; specific boards for microphone,
respiratory effort, airflow, SAO, and patient
position; Patient Interface Box
Preamplifier Model 121, 24-Channel with 11 AC- 790146-101/ [CONFIDENTIAL TREATMENT REQUESTED]
isolated preamplifier boards for EEG, ECG, EMG, SYS-SLPOEMITEM3
EOG; specific boards for microphone,
respiratory effort, airflow, CPAP pressure,
SAO, and patient position; Patient Interface
Box
One (1) A-to-D & DSP Board Set 753074-001 SW- [CONFIDENTIAL TREATMENT REQUESTED]
SYS-SLPITEM17
SLEEP SYSTEM SOFTWARE
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
PS~QUEST (S-SERIES) PRICING MGC/COMPUMEDICS OLD TRANSFER NEW TRANSFER CHANGE
PART NUMBERS PRICE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PS-Quest Workstation Software with License: 790133-001 SW- [CONFIDENTIAL TREATMENT REQUESTED]
Polygraph, Replay and Data Manager for Windows PKCMWWKSTN200EM
NT
PS-Quest Reader Station Software with License: 790134-001 [CONFIDENTIAL TREATMENT REQUESTED]
Replay and Data Manager for Windows NT SW-PKCMWREAD2.00EM
PS-Quest Viewing Station Software with License: 790141-001 [CONFIDENTIAL TREATMENT REQUESTED]
Replay and Data Manager for Windows NT SW-PKCMWREADL200EM
Time-Synchronized Video Monitoring Software for 149028-001 [CONFIDENTIAL TREATMENT REQUESTED]
PS-Tracker Reader Station
SLEEP SYSTEM HARDWARE
PS~Tracker Main Unit (18 channels), Patient 790143-001 [CONFIDENTIAL TREATMENT REQUESTED]
Interface Box and cable, 2-Ni-MN batteries & SYS-PS2ITEM1B
charger, 20MB memory card, protective leather
case, carrying case, D.C. power supply, serial
lead, oximeter probe and PS~Tracker Sensor Pak
(includes reusable sensors and probes)
PS~Tracker Main Unit (18 channels), Patient 790143-001 [CONFIDENTIAL TREATMENT REQUESTED]
Interface Box and cable, 2-Ni-MN batteries & SYS-PS2ITEM4-1U &
charger, 20MB memory card, protective leather SYS-PS2ITEM1B
case, carrying case, D.C. power supply, serial
lead, oximeter probe and PS~Tracker Sensor Pak
(includes reusable sensors and probes) with
PS~Tracker Reader Station Software with License
and Operator Manuals: Portable Manager,
Portable Monitoring, Replay/Analysis and Data
Manager for Windows 95
SLEEP SYSTEM SOFTWARE
PS~Tracker Reader Station Software with License 790143-001 [CONFIDENTIAL TREATMENT REQUESTED]
and Operator Manuals: Portable Manager, SW-PKCMWREAD2.00EM+
Portable Monitoring, Replay Analysis and Data SYS-PS2ITEM4A+
Manager for Windows 95 SYS-PS2ITEM4B
PS~Tracker Software with License and Operator 790144-001 [CONFIDENTIAL TREATMENT REQUESTED]
Manuals: Portable Manager and Portable SYS-PS2ITEM4A+
Monitoring SYS-PS2ITEM4B
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PS~QUEST (S-SERIES) PRICING MGC/COMPUMEDICS OLD TRANSFER NEW TRANSFER CHANGE
PART NUMBERS PRICE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PS~Tracker Physician Viewing Station Software 790141-001 [CONFIDENTIAL TREATMENT REQUESTED]
with License: Replay and Data Manager for SW-PKCMWREADL2.00EM
Windows 95
Time-Synchronized Video Monitoring Software for 149028-001 [CONFIDENTIAL TREATMENT REQUESTED]
PS~Tracker Reader Station
</TABLE>
2. Territory - MGC maintains exclusive distribution rights for all S~Series
products in all hospital, clinics, physician offices, and free-standing
sleep centers in the United States. Additionally, MGC has exclusive rights
to sell the P-series in the hospital marketplace and non-exclusive rights
to sell the P-series in clinics, physician offices, and free-standing sleep
centers.
3. TERM AND TERMINATION - This Agreement remains in effect per the original
Agreement (April 6, 2000) and MOU (December 6, 2000). It shall renew
automatically thereafter, year by year, for an "Extended Term" of one year,
unless sooner terminated by either party as provided herein.
(a) In the event that either MGC or Compumedics fails to comply fully
with the terms of this Agreement, the other party shall have the
right to terminate this Agreement with immediate effect upon
written notice to the other.
(b) In the event MGC does not meet agreed upon sales minimums for any
90 day period, Compumedics may cancel the Agreement upon 90 day
written notice. Minimum sales volume is as follows:
Period November 19, 1998 to June 30, 1999 - $[CONFIDENTIAL
TREATMENT REQUESTED] million USD inclusive of current back
orders.
Period July 1, 1999 to December 31, 1999 - $[CONFIDENTIAL
TREATMENT REQUESTED] million USD
4. EFFECT OF TERMINATION - In addition to the survival of specific provisions
as provided elsewhere in this Agreement, the following shall apply in the
event of termination:
(a) MGC's payment obligations hereunder shall survive until fully
discharged;
24
<PAGE>
(b) Unless Compumedics repurchases such Products from MGC, MGC may
continue marketing of the Product units in its inventory on a
non-exclusive basis after termination until such inventory is
exhausted; and
(c) For a period of one calendar year following the termination of
this Agreement, MGC shall have the right to continue providing
repair and replacement services to customers which have purchased
Products from MGC, and Compumedics shall continue to provide to
MGC repair, replacement and service parts for such Products upon
the same terms and conditions, including Compumedics warranty
obligations and price, as set forth in this Agreement.
5. CUSTOMER SUPPORT FOR P~SERIES SYSTEMS NOT SOLD BY MGC - MGC will provided
training, installation, technical phone support, and warranty repair for
future customers of Compumedics products sold through other distribution in
the United States per the following:
- Training - $[CONFIDENTIAL TREATMENT REQUESTED] per 3 day class. Up
to 3 persons can attend the class per customer site. (Expense for
travel are the customers responsibility as are not included in the
price.
- Installation, technical phone support, and warranty repair -
$[CONFIDENTIAL TREATMENT REQUESTED] per P~System. Support will be
provided for only Compumedics hardware and software. Support is NOT
included for computer hardware or software networking, or any
peripherals.
6. CUSTOMER SUPPORT FOR RESMED P~SYSTEMS SOLD PRIOR TO THIS AGREEMENT - MGC
will provide technical phone support and warranty repair for customers that
purchased P-Series systems from Resmed Corporation and those customers
provided equipment for the Sleep Heart Health Study (SHHS) at the service
rates stated below:
- Phone support - $[CONFIDENTIAL TREATMENT REQUESTED] per occurrence
- Repair - $[CONFIDENTIAL TREATMENT REQUESTED] per hour plus parts
- Loaner - $[CONFIDENTIAL TREATMENT REQUESTED]/month plus shipping
(minimum 30 days)
Invoicing will be to Compumedics for warranty service. Customer may choose
to have service contract quoted from MGC.
7. ESTABLISHMENT OF COMPUMEDICS USA BASE - MGC will make available to
Compumedics suitable office and other space at current commercial rates
which will be utilized for Compumedics USA business manager. The
Compumedics Business Manager will maintain a demand management plan
specific to MGC ordering requirements and
25
<PAGE>
maintain a sales office to provide support for MGC and all other
distribution outlets in the United States. At an appropriate time and at
a sole discretion of Compumedics this office can be moved from MGC upon 30
days written notice.
We understand and agree to all points stated above.
/s/ Richard Jahnke
- ------------------------------------- --------------------------------------
Richard Jahnke, CEO Date
CEO, Medical Graphics Corporation
/s/ David Burton
- ------------------------------------- --------------------------------------
David Burton, Managing Director Date
Compumedics Sleep Party
26
<PAGE>
ADDENDUM TO OEM DISTRIBUTION AGREEMENT AND
MEMORANDUM OF UNDERSTANDING BETWEEN
COMPUMEDICS SLEEP PTY. LTD.
AND MEDICAL GRAPHICS CORPORATION
MARCH 8, 1999
This Addendum is made by and between Medical Graphics Corporation (MGC) and
Compumedics Sleep Pty. Ltd. (Compumedics). Provisions within supersede all
previous documents related to transfer pricing for products purchased by MGC
from Compumedics. This addendum serves to modify these specific items listed.
All other provisions of the Agreement (April 7, 1997), Amendment to Agreement
(June 1, 1997), and Memorandum of Understanding (December 7, 1997), and the
Memorandum of Understanding (September 1998) remain in effect.
1. Pricing - Effective January 1, 1999 the transfer pricing for Compumedics
products sold to MGC is as follows.
<TABLE>
<CAPTION>
PS~QUEST (S-SERIES) PRICING MGC/COMPUMEDICS OLD TRANSFER NEW TRANSFER CHANGE
PART NUMBERS PRICE PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SLEEP SYSTEM HARDWARE 790146-001/ [CONFIDENTIAL TREATMENT REQUESTED]
9002-1035-00
Preamplifier Model 111, with 11 AC-isolated
preamplifier boards for EEG, ECG, EMG, EOG;
specific boards for microphone, respiratory
effort, airflow, SAO, and patient position;
Patient Interface Box
Preamplifier Model 121, 19-Channel with 14 AC- 790607-202 [CONFIDENTIAL TREATMENT REQUESTED]
isolated preamplifier boards for EEG, ECG, EMG, 9402-0011-00
EOG; nasal pressure; Patient Interface Box
Preamplifier Model 121, 24-Channel with 20 AC- 790146-101 [CONFIDENTIAL TREATMENT REQUESTED]
isolated preamplifier boards for EEG, ECG, EMG, 9402-0007-00*
EOG; Nasal pressure; Patient Interface Box
One (1) A-to-D & DSP Board Set 753074-001 [CONFIDENTIAL TREATMENT REQUESTED]
ASY-COMA2D008 &
ASY-COMDSP008
Inductive Cards, Ver 9, Isolated 9002-0010-09 [CONFIDENTIAL TREATMENT REQUESTED]
SLEEP SYSTEM SOFTWARE
PS-Quest Workstation Software with License: 440130-001/ [CONFIDENTIAL TREATMENT REQUESTED]
Polygraph, Replay and Data Manager for Windows 790133-001
NT
27
<PAGE>
<CAPTION>
PS~QUEST (S-SERIES) PRICING MGC/COMPUMEDICS OLD TRANSFER NEW TRANSFER CHANGE
PART NUMBERS PRICE PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PS-Quest Reader Station Software with License: 440130-002/ [CONFIDENTIAL TREATMENT REQUESTED]
Replay and Data Manager for Windows NT 9105-0005-00
PS-Quest Viewing Station Software with License: 440130-103 [CONFIDENTIAL TREATMENT REQUESTED]
Replay and Data Manager for Windows NT 9105-0003-00
Time-Synchronized Video Monitoring Software for 149028-001/ [CONFIDENTIAL TREATMENT REQUESTED]
PS-Tracker Reader Station 8205-0006-00
SLEEP SYSTEM HARDWARE
PS~Tracker Main Unit (18 channels), Patient 790140-001 [CONFIDENTIAL TREATMENT REQUESTED]
Interface Box and cable, 1-Ni-MN batteries & 9001-1028-00
charger, 20MB memory card, protective leather
case, carrying case, serial lead, oximeter
probe and PS~Tracker Sensor Pak (includes
reusable sensors and probes)
PS~Tracker Main Unit (18 channels), Patient 790140-001 & [CONFIDENTIAL TREATMENT REQUESTED]
Interface Box and cable, 1-Ni-MN batteries & 440130-102/
charger, 20MB memory card, protective leather 9001-1028-00 &
case, carrying case, serial lead, oximeter 9101-0001-01
probe and PS~Tracker Sensor Pak (includes
reusable sensors and probes) with PS~Tracker
Reader Station Software with License and
Operator Manuals: Portable Manager, Portable
Monitoring, Replay/Analysis and Data Manager
for Windows 95
PS~Tracker Screener Unit (10 Channels), Patient PENDING/ [CONFIDENTIAL TREATMENT REQUESTED]
Interface Box and cable, 1-Ni-MN battery & 9001-1029-00*
charger, 20 MB memory card, Protective leather 9101-0006-01*
case, carrying case, serial lead, oximeter
probe and Sensor Pack with (1) PS~Tracker WITH PH
Reader Station Software with License and 9401-0004-01*
Operator Manuals: Portable manager, Portable
Monitoring, Replay/Analysis and Data Manager
for Windows 95
SLEEP SYSTEM SOFTWARE
PS~Tracker Reader Station Software with License 440130-102/ [CONFIDENTIAL TREATMENT REQUESTED]
and Operator Manuals: Portable Manager, 9101-0001-01
Portable Monitoring, Replay Analysis and Data
Manager for Windows 95
PS~Tracker Physician Viewing Station Software 440130-103 [CONFIDENTIAL TREATMENT REQUESTED]
with License: Replay and Data Manager for 9105-0003-00
Windows 95
28
<PAGE>
<CAPTION>
PS~QUEST (S-SERIES) PRICING MGC/COMPUMEDICS OLD TRANSFER NEW TRANSFER CHANGE
PART NUMBERS PRICE PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Time-Synchronized Video Monitoring Software for 149028-001 [CONFIDENTIAL TREATMENT REQUESTED]
PS~Tracker Reader Station 8205-0005-00
</TABLE>
2. MEDICAL GRAPHICS PURCHASES: MGC will purchase the minimum quantities of
product from Compumedics as defined as follows: During the period from
November 19, 1998 to June 30, 1999 MGC will purchase a minimum of
[CONFIDENTIAL TREATMENT REQUESTED] million USD of product. This includes
undelivered product ordered prior to November 19, 1998 and Product ordered
after November 19, 1998.
3. CUSTOMER SUPPORT FOR P-SERIES SYSTEMS NOT SOLD BY MGC: MGC will provide
training, technical phone support, and warranty repair for future customers
of Compumedics products sold through distribution, other than MGC, in the
United States, when specifically requested in advance in writing by
Compumedics, at the following at a rate:
- Training - $[CONFIDENTIAL TREATMENT REQUESTED] per customer per three
day class. Up to three persons can attend the class per customer
site. (Expenses for travel are the customer's responsibility and are
not included in the price.)
- Installation, technical phone support, and warranty repair -
$[CONFIDENTIAL TREATMENT REQUESTED] per P~System. Support will be
provided for all Compumedics products, including hardware and
software. Computers and peripherals will be that which is covered by
the manufacturer's warranty, managed by Medical Graphics service
department.
- Medical Graphics services will be provided at the request of
Compumedics by way of signed purchase order from Compumedics prior to
the commencement of service by Medical Graphics.
- Compumedics will provide MGC with name and pertinent account
information on a monthly basis. MGC will invoice Compumedics monthly
for services provided. Payment will be made due on a net 60 basis.
Payment for warranty will be made on a quarterly basis for each
account.
4. CATALOG PRICING: All transfer pricing not specifically addressed in this
document will be as per the International Price List dated December, 1998.
The effective date for this pricing is April 1, 1999. Any other change in
price requires 90 day written notice by Compumedics.
29
<PAGE>
WE THE UNDERSIGNED AGREE TO ALL POINTS STATED ABOVE.
/s/ RICHARD JAHNKE
- ------------------------------------------- ---------------------------------
RICHARD JAHNKE, CEO DATE
MEDICAL GRAPHICS CORPORATION
/s/ DAVID B. VIELE
- ------------------------------------------- ---------------------------------
DAVID B. VIELE, CEO DATE
COMPUMEDICS US
30
<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, No.
33-41725 and No. 33-57353 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 22, 1999 appearing in
this Annual Report on Form 10-KSB of Medical Graphics Corporation for the
year ended December 31, 1998.
April 14, 1999 /s/ 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,
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> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,381
<ALLOWANCES> (118)
<INVENTORY> 4,917
<CURRENT-ASSETS> 10,335
<PP&E> 4,092
<DEPRECIATION> (3,574)
<TOTAL-ASSETS> 11,426
<CURRENT-LIABILITIES> 9,123
<BONDS> 0
0
0
<COMMON> 218
<OTHER-SE> 2,037
<TOTAL-LIABILITY-AND-EQUITY> 11,426
<SALES> 20,449
<TOTAL-REVENUES> 20,449
<CGS> 12,441
<TOTAL-COSTS> 21,571
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454
<INCOME-PRETAX> (1,576)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,576)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,576)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
