<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1 TO FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 0-9899
MEDICAL GRAPHICS CORPORATION
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1316712
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 OAK GROVE PARKWAY, SAINT PAUL, MINNESOTA 55127-8599
(Address of principal executive offices)
Registrant's telephone number, including area code: (651) 484-4874
Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---
As of April 30, 1998, the Company had outstanding 5,028,742 shares of Common
Stock, $.05 par value, and 444,445 shares of Class A Stock, $.05 par value.
Each share of Class A Stock is convertible into 1.5 shares of Common Stock.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL GRAPHICS CORPORATION
BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1998
(AS RESTATED DECEMBER 31,
SEE NOTE 7) 1997
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 103 $ 387
Accounts receivable, net of allowance for doubtful
accounts of $166 and $164 5,359 3,890
Inventories:
Purchased components and work in process 3,493 3,164
Finished goods 1,809 1,636
--------------- ---------------
5,302 4,800
Prepaid expenses 346 272
--------------- ---------------
Total Current Assets 11,110 9,349
--------------- ---------------
Equipment and fixtures 4,078 4,072
Less accumulated depreciation 3,261 3,110
--------------- ---------------
817 962
Software production costs, net of accumulated
amortization of $935 and $855 604 602
OTHER ASSETS 12 13
--------------- ---------------
$ 12,543 $ 10,926
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,605 $ 2,261
Accounts payable financed with vendors - current 1,022 1,145
Bank line of credit 2,951 2,254
Employee compensation 538 786
Deferred service contract revenue 942 896
Warranty reserve 374 414
Other liabilities and accrued expenses 596 675
--------------- ---------------
Total Current Liabilities 9,028 8,431
Commitments and contingencies
Long-term accounts payable financed with vendors 584 807
SHAREHOLDERS' EQUITY
Class A stock; liquidation preference
of $3.375 per share 22 22
Common stock 252 148
Additional paid-in capital 15,186 13,727
Retained deficit (12,529) (12,209)
--------------- ---------------
2,931 1,688
--------------- ---------------
$ 12,543 $ 10,926
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
MEDICAL GRAPHICS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
1998 1997
(AS RESTATED (AS RESTATED
SEE NOTE 7) SEE NOTE 7)
---------------- ---------------
<S> <C> <C>
REVENUES:
Equipment sales $ 3,833 $ 3,623
Service and supplies revenues 1,237 $ 1,134
--------------- ---------------
Total revenues 5,070 4,757
COST OF REVENUES 2,984 3,218
--------------- ---------------
Gross margin 2,086 1,539
OPERATING EXPENSES:
Selling and marketing 1,409 1,539
General and administrative 493 565
Research and development 407 522
Non-recurring Charges 1,305
--------------- ---------------
2,309 3,931
--------------- ---------------
INCOME (LOSS) FROM OPERATIONS (223) (2,392)
Interest expense (97) (85)
--------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (320) (2,477)
Income tax benefit 0 0
--------------- ---------------
NET INCOME (LOSS) $ (320) $ (2,477)
--------------- ---------------
--------------- ---------------
NET INCOME (LOSS) PER WEIGHTED AVERAGE SHARE
Basic $ (0.06) $ (0.64)
Diluted $ (0.06) $ (0.64)
--------------- ---------------
--------------- ---------------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 5,481 3,853
Diluted 5,481 3,853
</TABLE>
3
<PAGE>
MEDICAL GRAPHICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1998 1997
(AS RESTATED (AS RESTATED
SEE NOTE 7) SEE NOTE 7)
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (320) $ (2,477)
Adjustments to reconcile net income (loss) to
net cash provided (used) in operating activities
Issuance of common stock warrants $608
Depreciation 151 141
Amortization 80 63
Changes in operating assets and liabilities
Accounts receivable (1,469) 737
Inventory (502) 1,323
Prepaid expenses and other assets (73) (133)
Accounts payable and accrued expenses (106) 251
Warranty reserve (40) 152
Deferred service contract revenue 46 (54)
--------------- ---------------
Net cash (used) provided in operating activities (2,233) 611
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Software production costs (82) (63)
Capital expenditures (6) (12)
--------------- ---------------
Net cash used in investing actitivities (88) (75)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on bank line of credit 697 (904)
Payments on long-term accounts payable financed with vendors (223) (100)
Net proceeds from issuances of common stock 1,563 553
--------------- ---------------
Net cash provided (used) by financing activities 2,037 (451)
--------------- ---------------
NET (DECREASE) INCREASE IN CASH (284) 85
CASH AT BEGINNING OF PERIOD 387 545
--------------- ---------------
CASH AT END OF PERIOD $ 103 $ 630
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation of results have been included.
The balance sheet at December 31, 1997 was derived from the audited financial
statements as of that date. Operating results for the three-month period
ended March 31, 1998 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1998. For further information,
refer to the financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1997.
2. RECLASSIFICATIONS
Certain amounts in the Company's Form 10-QSB for the three-month period ended
March 31, 1997 have been reclassified to conform to the 1998 presentation.
These reclassifications had no effect on net loss or shareholders' equity as
previously reported.
3. NON-RECURRING EXPENSES
During the quarter ended March 31, 1997, the Company implemented certain cost
control strategies which included the termination of certain employees and
the renegotiation of the Company's bank line of credit. A total of $1,305,000
in non-recurring expenses were recorded during the three months ended March
31, 1997 related to severance, legal, consulting and accounting expenses.
4. RECENT SALES OF UNREGISTERED SECURITIES
On November 10, 1997, the Company entered into an agreement with four private
accredited investors to sell 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. During the first quarter, these investors purchased
363,636 shares for $1,000,000 on January 30, 1998 and 181,818 shares for
$500,000 on February 10, 1998. The Company believes that the sales were
exempt pursuant to Section 4(2) of the Securities Act of 1933, as amended,
and Regulation D, promulgated thereunder.
5. AMENDMENT TO BANK LINE OF CREDIT
In March 1998, the Company amended its line of credit agreement. As of March
31, 1998, the Company was in compliance with all covenants pursuant to the
amended line of credit agreement.
5
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6. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", which was adopted by the Company beginning January 1, 1998. SFAS No.
130 requires the disclosure of comprehensive income and its components in the
general-purpose financial statements. The adoption by the Company of SFAS No.
130 did not have a material effect on the Company's financial statements for
the three months ended March 31, 1998 or 1997. Total comprehensive loss for
the three months ended March 31, 1998 and 1997 was $320,000 and $2,477,000,
respectively.
7. RESTATEMENT
Subsequent to the issuance of the March 31, 1998 Quarterly Report on Form
10-QSB, the Company determined that inventory write-downs recorded in 1996
were overstated and that certain restructuring charges recorded in 1996 and
the first quarter of 1997 were misclassified and/or recorded in the wrong
period. As a result, the balance sheet at March 31, 1998 has been restated to
increase inventory and the statements of operations for the three months
ended March 31, 1998 and 1997, have been restated to properly classify
charges previously recorded as restructuring, to record charges previously
recorded in 1996 related to the German office closing in the three months
ended March 31, 1997, and to eliminate the reversal of certain inventory
provisions during the three months ended March 31, 1998. The effects of these
adjustments on the financial statements as of March 31, 1998, and for the
three months ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------------- ---------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
------------ --------- ------------- ------------
<S> <C> <C> <C> <C>
Cost of goods sold $2,858 $2,984
Selling and marketing 1,210 1,409
General and administrative $ 374 $ 565
Non-recurring 0 1,305
Restructuring charges 1,346 0
Net income (loss) 5 (320) (2,327) (2,477)
Net income (loss) per share
(basic and diluted) 0.00 (0.06) (0.60) (0.64)
<CAPTION>
As of
March 31, 1998
-------------------------
As
Previously As
Reported Restated
------------ ---------
<S> <C> <C>
Inventories $ 5,067 $ 5,302
Retained deficit (12,764) (12,529)
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENT
Statements included in this Quarterly Report on Form 10-QSB that are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provision of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause
actual results to differ materially. Among these risks and uncertainties are
(i) the fact that the Company has incurred losses of $5,112,000, $8,361,000
and $1,731,000 for the fiscal years ended December 31, 1997, 1996 and 1995,
respectively; (ii) the ability of the Company's distributors to successfully
market and sell the Company's product in markets outside the United States;
(iii) the Company's ability to successfully market its product in the United
States at a favorable margin considering significant price competition in the
industry; (iv) the extent to which physicians and health plan administrators
are motivated to use non-invasive diagnostic testing to detect early signs of
disease; (v) the Company's ability to successfully upgrade its product
software systems to a Windows(R) environment; and (vi) the Company's ability
to develop future products which are technologically advanced and accepted by
the marketplace.
RESULTS OF OPERATIONS
Subsequent to the issuance of the March 31, 1998 quarterly report on Form
10-QSB, the Company determined that inventory write-downs recorded in 1996
were overstated and that certain restructuring charges recorded in 1996 and
the first quarter of 1997 were misclassified and/or recorded in the wrong
period. As a result, the balance sheet at March 31, 1998 has been restated to
increase inventory and the statements of operations for the three months
ended March 31, 1998 and 1997, have been restated to properly classify
charges previously recorded as restructuring, to record charges previously
recorded in 1996 related to the German office closing in the three months
ended March 31, 1997, and to eliminate the reversal of certain inventory
provisions during the three months ended March 31, 1998. The effects of these
adjustments on the financial statements as of March 31, 1998, and for the
three months ended March 31, 1998 and 1997 are reflected in footnote 7 to
the financial statements.
For the three months ended March 31, 1998, the Company recorded a net loss of
$320,000, compared to a net loss of $2,477,000 during the same period of
1997. Included in the 1997 loss was $1,305,000 of non-recurring expenses.
REVENUES
Revenues consist of equipment sales and service and supply revenues.
Equipment sales reflect revenues from the Company's pulmonary function
analysis systems, gas exchange testing systems and sleep diagnostic systems.
Service and supply revenues reflect contract revenues from extended
warranties, revenues from non-warranty service visits and aftermarket sales
of peripherals and supplies.
First quarter revenues increased 6.6% to $5,070,000 in 1998 compared to
$4,757,000 in 1997. Domestic revenue increased 7.4% to $2,941,000 in 1998
compared to $2,738,000 in 1997. The increase in 1998 domestic revenue was
primarily due to sales of sleep diagnostic systems, which were introduced in
September, 1997. After decreasing throughout 1997 due to closing the
Company's office in Germany, international revenues were comparable to last
year's levels increasing slightly to $892,000 in 1998 compared to $885,000 in
1997. Service and supply revenue increased 9.1% to $1,237,000 in 1998 from
$1,134,000 in 1997 on the strength of increased non-warranty service income.
GROSS MARGIN
Gross margin percentage increased to 41.1% of revenue for the three months
ended March 31, 1998 from 32.4% in 1997. This increase is due to improved
average selling prices attributable to new pricing strategies and the
Company's ongoing efforts to decrease its costs of manufacturing through
increased efficiencies.
7
<PAGE>
SELLING AND MARKETING
Selling and marketing expenses for the three months ended March 31, 1998
decreased 8.4% to $1,409,000 in 1998 from $1,539,000 in 1997. This decrease
is the result of cost containment measures implemented during the first
quarter of 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 12.7% to $493,000 in the first
quarter of 1998 from $565,000 in 1997. Prior year expenses included $40,000
consulting and $65,000 of bank financing expenses that were not incurred in
1998.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 22.0% to $407,000 in the first
quarter of 1998 from $522,000 in 1997. The decrease reflects the Company's
1997 restructuring decision to use in-house software engineers rather than
independent software contractors as part of the Company's transition of its
product software to a Windows95(R) platform.
NON-RECURRING EXPENSES
Non-recurring expenses of $1,305,000 for the three months ended March 31,
1997 included severance, legal, accounting and consulting expenses associated
with the cost reduction strategies implemented during the first quarter of
1997.
LIQUIDITY AND FINANCIAL RESOURCES
At March 31, 1998, the Company had cash of $103,000 and working capital of
$2,082,000. In addition, the Company had a balance outstanding under its bank
line of credit of $2,951,000 and additional availability of $316,000.
During the three months ended March 31, 1998, the Company used $2,233,000 of
cash in operating activities, primarily resulting from increases of
$1,469,000 in accounts receivable and $502,000 in inventory. The Company used
$88,000 for investing activities, consisting of capital expenditures of
$6,000 and software production costs of $82,000. The Company generated
$2,037,000 from financing activities, primarily from $1,500,000 in proceeds
from the private placement of its common stock and net borrowings of $697,000
under its line of credit, partially offset by a decrease of $223,000 in
long-term accounts payable with vendors.
At March 31, 1997, the Company had cash of $630,000 and working capital of
$1,888,000.
During the quarter ended March 31, 1997, major sources and uses of cash were
as follows:
- - $737,000 in cash was generated through aggressive collection efforts on
accounts receivable;
- - Inventory was reduced by $1,323,000 through improvements in inventory
management;
- - $553,000 was raised through the issuance of equity securities; and
- - Borrowings under the line of credit were reduced by $904,000.
8
<PAGE>
At March 31, 1998 the Company had no material commitments for capital
expenditures.
The Company believes that cash generated from operations, together with cash
and borrowings available under its line of credit facility will be adequate
to satisfy its liquidity and capital resource needs through 1998. See Item 2
of Part II of this Form 10-QSB/A.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in various claims and litigation which are
incidental to its business. Management is of the opinion that ultimate
settlement of these matters will not have a material impact on its financial
statements.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
On November 10, 1997, the Company entered into an agreement with four private
accredited investors to sell 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. During the first quarter, these investors purchased
363,636 shares for $1,000,000 on January 30, 1998 and 181,818 shares for
$500,000 on February 10, 1998. The Company believes that the sales were
exempt pursuant to Section 4(2) of the Securities Act of 1933, as amended,
and Regulation D, promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits List
Exhibit 27 Financial Data Schedule
Exhibit 10.1 Second Amendment to Credit Agreement dated March 30, 1998
between the Company and Norwest Bank Minnesota, National
Association
Exhibit 10.2 Third Amendment to Credit and Security Agreement dated
March 26, 1998 between the Company and Norwest Business
Credit, Inc.
(b) Reports on Form 8-K
During the quarter ended March 31, 1998 the Company filed a Report on Form
8-K reporting that it had completed the second tranche of a private equity
investment with the issuance of 545,454 shares of common stock for gross
proceeds of $1,500,000. See Part II, Item 2, of this Form 10-QSB. In
addition, the Company submitted an unaudited pro forma balance sheet and
income statement as of and for the year ended December 31, 1997,
respectively. The unaudited balance sheet was filed to demonstrate the
Company's compliance with new quantitative maintenance requirements for
continued listing on the Nasdaq SmallCap Market, which were effective
February 23, 1998.
10
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this Amendment No. 1 to be signed on its behalf by the undersigned,
thereunto duly authorized.
Medical Graphics Corporation
- -----------------------------------
(Registrant)
Date April 15, 1999 /s/ Richard E. Jahnke
----------------------- ----------------------------------------------
Richard E. Jahnke, President and Chief
Executive Officer (Principal Executive
Officer)
Date April 15, 1999 /s/ Dale H. Johnson
----------------------- ----------------------------------------------
Dale H. Johnson, Chief Financial Officer
(Chief Accounting Officer)
11
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1 Second Amendment to Credit Agreement dated March 30, 1998 between the
Company and Norwest Bank Minnesota, National Association
10.2 Third Amendment to Credit and Security Agreement dated March 26, 1998
between the Company and Norwest Business Credit, Inc.
27 Financial Data Schedule.
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 103 630
<SECURITIES> 0 0
<RECEIVABLES> 5,525 6,297
<ALLOWANCES> (166) (427)
<INVENTORY> 5,302 5,870
<CURRENT-ASSETS> 11,110 10,905
<PP&E> 4,078 3,869
<DEPRECIATION> (3,261) (3,672)
<TOTAL-ASSETS> 12,543 12,592
<CURRENT-LIABILITIES> 9,028 9,017
<BONDS> 0 0
0 0
0 0
<COMMON> 190 137
<OTHER-SE> 2,741 1,802
<TOTAL-LIABILITY-AND-EQUITY> 12,543 12,592
<SALES> 3,833 3,623
<TOTAL-REVENUES> 5,070 4,757
<CGS> 2,984 3,218
<TOTAL-COSTS> 5,293 7,149
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 97 85
<INCOME-PRETAX> (320) (2,477)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (320) (2,477)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (320) (2,477)
<EPS-PRIMARY> (0.06) (0.64)
<EPS-DILUTED> (0.06) (0.64)
</TABLE>
