-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sdqc2scgI7Ja/syM0LnOXJYU4tNkx5eIupim4l+pfqw5Pb39HdfrAfI6rlbIm187 /RIDOolIkG178DYUNFdu2w== 0000912057-97-018046.txt : 19970520 0000912057-97-018046.hdr.sgml : 19970520 ACCESSION NUMBER: 0000912057-97-018046 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL GRAPHICS CORP /MN/ CENTRAL INDEX KEY: 0000352862 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411316712 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09899 FILM NUMBER: 97608514 BUSINESS ADDRESS: STREET 1: 350 OAK GROVE PKWY CITY: ST PAUL STATE: MN ZIP: 55127-8599 BUSINESS PHONE: 6124844874 MAIL ADDRESS: STREET 1: 350 OAK GROVE PARKWAY CITY: ST PAUL STATE: MN ZIP: 55127-8599 10-Q 1 10-Q U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 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: (612) 484-4874 Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of May 8, 1997, the Company had outstanding 2,601,041 shares of Common Stock, $.05 par value, and 444,445 shares of Class A Stock, $.05 par value. Transitional Small Business Disclosure Format: Yes No X ----- ----- PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MEDICAL GRAPHICS CORPORATION BALANCE SHEETS (in thousands)
March 31, 1997 Dec. 31, 1996 -------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash $ 630 $ 545 Accounts receivable, net of allowance for doubtful accounts of $427 and $496 4,077 4,814 Inventories: Purchased components and work in process 3,646 4,433 Finished goods 1,664 2,200 --------- -------- 5,310 6,633 Prepaid expenses 328 193 --------- -------- Total Current Assets 10,345 12,185 --------- -------- EQUIPMENT AND FIXTURES 3,869 3,857 Less accumulated depreciation 2,672 2,531 --------- -------- 1,197 1,326 SOFTWARE PRODUCTION COSTS, NET of accumulated amortization of $1,052 and $989 472 472 OTHER ASSETS 18 20 --------- -------- $ 12,032 $ 14,003 --------- -------- --------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $3,000 $2,663 Note payable 2,496 3,400 Employee compensation 748 978 Deferred service contract revenue 934 988 Warranty reserve 715 563 Other liabilities and accrued expenses 1,124 1,130 --------- -------- Total Current Liabilities 9,017 9,722 COMMITMENTS AND CONTINGENCIES LONG-TERM ACCOUNTS PAYABLE FINANCED WITH VENDORS 1,636 1,736 --------- -------- SHAREHOLDERS' EQUITY Class A stock; liquidation preference of $3.375 per share 7 --- Common stock 130 128 Additional paid-in capital 11,376 10,224 Retained deficit (10,134) (7,807) --------- -------- 1,379 2,545 --------- -------- $ 12,032 $ 14,003 --------- -------- --------- --------
See accompanying notes to financial statements (2) MEDICAL GRAPHICS CORPORATION STATEMENTS OF OPERATIONS FIRST QUARTER 1997 (UNAUDITED) (in thousands, except per share data) Three Months Ended March 31 --------------------------- 1997 1996 -------- -------- REVENUES: Equipment sales $3,623 $3,845 Service and supplies revenue 1,134 1,250 -------- -------- Total revenues 4,757 5,095 COST OF GOODS SOLD: Cost of equipment sales 2,463 2,399 Cost of service and supplies revenue 755 660 -------- -------- Total cost of goods sold 3,218 3,059 -------- -------- Gross margin 1,539 2,036 OPERATING EXPENSES: Selling 1,539 1,614 General and administrative 374 609 Research and development 522 457 Provision for restructuring 1,346 --- -------- -------- 3,781 2,680 -------- -------- LOSS FROM OPERATIONS (2,242) (644) INTEREST EXPENSE 85 31 -------- -------- LOSS BEFORE INCOME TAX BENEFIT (2,327) (675) INCOME TAX BENEFIT --- 60 -------- -------- NET LOSS $ (2,327) $ (615) -------- -------- -------- -------- NET LOSS PER SHARE OF COMMON STOCK $ (0.91) $ (0.24) -------- -------- -------- -------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,569 2,538 -------- -------- -------- -------- See accompanying notes to financial statements (3) STATEMENTS OF CASH FLOWS FIRST QUARTER 1997 (UNAUDITED) (in thousands) Three Months Ended March 31 ---------------------------- 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,327) $ (615) Adjustments to reconcile net loss to net cash provided by operating activities: Issuance of common stock warrants 608 --- Depreciation 141 109 Amortization 63 61 Changes in operating assets and liabilities: Accounts receivable 737 2,065 Inventory 1,323 (525) Prepaid expenses and other assets (133) 3 Accounts payable and accrued expenses 101 74 Warranty reserve 152 --- Deferred service contract revenue (54) 100 -------- -------- Net cash provided by operating activities 611 1,272 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Software production costs (63) (54) Capital expenditures (12) (164) -------- -------- Net cash used in investing activities (75) (218) CASH FLOWS FROM FINANCING ACTIVITIES: Net payment on bank line of credit (3,400) (1,000) Proceeds from new bank line of credit 2,496 --- Long-term accounts payable financed with vendors (100) --- Proceeds from issuances of stock 553 122 -------- -------- Net cash used in financing activities (451) (878) -------- -------- NET INCREASE IN CASH 85 176 CASH AT BEGINNING OF PERIOD 545 31 -------- -------- CASH AT END OF PERIOD $ 630 $ 207 -------- -------- -------- -------- See accompanying notes to financial statements (4) NOTES TO FINANCIAL STATEMENTS March 31, 1997 (Unaudited) 1. Management Opinion The 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, 1996 was derived from the audited financial statements at that date. Operating results for the three-month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996. 2. Provision for Restructuring During the quarter ended March 31, 1997, the Company implemented a restructuring plan which included the termination of certain employees and the renegotiation of the Company's bank line of credit. Employee severance, bank fees, and related legal, consulting and accounting expenses totaled $1,346,000. (5) 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 $2,327,000 in the three months ended March 31, 1997, $9,071,000 in 1996 and $1,731,000 in 1995; ( 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 in light of 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 the Company's product software systems to a Windows-Registered Trademark- environment; and (vi ) the Company's ability to develop future products which are technologically advanced and accepted by the marketplace. RESULTS OF OPERATIONS The Company recorded a net loss of $2,327,000, or 91 cents per share, compared with a net loss of $615,000, or 24 cents per share, in the same period last year. However, first quarter 1997 losses include a one-time restructuring charge of $1,346,000, or 52 cents per share. Excluding these one-time restructuring charges, the Company's $981,000 loss from operations shows significant improvement compared to the $7,349,000 operating loss in the fourth quarter of 1996 which included a one-time charge of $3,100,000. This improvement is a result of an aggressive expense reduction plan implemented during the first quarter. REVENUES Revenues for the quarter decreased 6.6% to $4,757,000 from $5,095,000 in 1996. Although domestic revenues increased 12.7%, European revenue declined due to closing of the Company's German subsidiary on December 31, 1996. Revenue was also adversely affected by the lingering effects of working capital constraints experienced during the fourth quarter of 1996. On April 15, 1997, the Company announced that Oxford Instruments GmbH will be its exclusive distributor and service agent in Germany. GROSS MARGIN The Company showed progress in improving gross margin. While continuing price competition resulted in a gross margin of 32.4% in the first quarter of 1997, compared with 40.0% in the first quarter of 1996, it was an improvement over the 27.8% achieved during the entire 1996 fiscal year and a substantial improvement over the negative 22% in the fourth quarter of 1996. These improvements are due to better inventory management and reductions in manufacturing overhead. (6) SELLING Selling expenses decreased 4.6% to $1,539,000 in the first quarter of 1997 from $1,614,000 in the first quarter of 1996. This decrease was the result of cost containment measures imposed in 1997. As a percentage of revenues, selling expenses increased to 32.4% in 1997 from 31.7% in 1996. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased 38.6% to $374,000 in the first quarter of 1997 from $609,000 in the first quarter of 1996 and, as a percentage of revenues, decreased to 7.9% in 1997 from 12.0% in 1996. These decreases were the result of certain one-time recruiting and employee relocation expenses incurred in the first quarter of 1996, which were not repeated in 1997. RESEARCH AND DEVELOPMENT Research and development expenses increased 14.2% to $522,000 in the first quarter of 1997 from $457,000 in the first quarter of 1996 and, as a percentage of revenues, increased to 10.9% in 1997 from 9.0% in 1996. These increases were primarily due to increased expenditures to upgrade equipment product software systems to a Windows-Registered Trademark- environment and to improve quality control. PROVISION FOR RESTRUCTURING Restructuring expenses of $1,346,000 included legal, accounting and consulting expenses; employee severance; and refinancing costs. LIQUIDITY AND FINANCIAL RESOURCES At March 31, 1997, the Company had cash of $630,000 and working capital of $1,328,000. 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. 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. Total borrowings outstanding under the credit agreement are secured by the Company's accounts receivable and inventories. The credit agreement contains certain restrictive covenants, including maintenance of minimum net worth (as defined), debt to equity restrictions, earnings requirements, and debt service requirements as well as limitations on capital expenditures and payment of dividends. The credit line allows the Company to borrow up to 75% of eligible domestic accounts receivable, 40% of eligible domestic inventory (not to exceed $1,500,000), 90% of eligible foreign accounts receivable and 75% of eligible export inventory. (7) Borrowings under the line of credit bear interest at the Norwest "base" rate plus 4.0% (12.50% at March 31, 1997). The "base" rate is equal to the interest rate publicly announced by Norwest Bank Minnesota, N.A. 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 forty-two month warrant to purchase 62,500 shares of the Company's Common Stock at an exercise price of $3.375 per share. The Company has no material commitments for capital expenditures. The Company believes that current working capital combined with projected revenues, the bank line of credit, and the equity investment discussed in Part II Item 2 below will provide sufficient working capital through 1997. (8) 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 In March 1997, the Company's Board of Directors authorized 500,000 shares of a new class of participating convertible stock (Class A stock). The Class A stock has voting rights equal to the Company's Common Stock and a liquidation preference of $3.375 per share over the Common Stock. Each share is currently convertible to one share of Common Stock. On March 31, 1997, FAMCO II LLC ("FAMCO"), a Minnesota limited liability corporation, agreed to purchase 444,445 shares of the Company's Class A Stock for $1,500,000 ($3.375 per share). FAMCO purchased 148,148 shares for $500,000 on March 31, 1997 and the additional 296,297 shares for $1,000,000 on April 15, 1997. FAMCO is managed by Family Financial Strategies, Inc. In addition, in connection with the Company's entering into a new credit facility with Norwest Business Credit, Inc. ("Norwest") as described in this Form 10-QSB, the Company granted Norwest a warrant to purchase 62,500 shares of Common Stock at a price of $3.375 per share. The warrant expires on September 30, 2000. The Company also granted a warrant to purchase 130,000 shares at a price of $4.00 to the former chairman of the Company in connection with the chairman's agreement to provide certain consulting services to the Company. The warrant expires March 31, 2000. The Company also issued 30,000 shares of Common Stock and granted to its new chairman a warrant to purchase 150,000 shares of Common Stock at a price of $3.375 per share. The warrant expires on March 31, 2002. The Company believes that each of the foregoing transactions was exempt under Section 4(2) of the Securities Act of 1933 and Rule 506 under Regulation D under the Securities Act of 1933. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits List Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K On January 23, 1997, the Company filed a Report on Form 8-K reporting that it had dismissed Ernst & Young LLP as its principal independent auditor and on March 4, 1997 filed a Report on Form 8-K indicating that it had engaged Deloitte & Touche LLP as its independent auditors for the year ended December 31, 1996. The Reports on Form 8-K also indicated that there were no disagreements between the Company and Ernst & Young LLP on any matter with respect to accounting policies or practices. (9) SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Medical Graphics Corporation - ---------------------------- (Registrant) Date May 14, 1997 /s/ Glenn D. Taylor ------------ --------------------------------------- Glenn D. Taylor, President and Chief Executive Officer (Principal Executive Officer) Date May 14, 1997 /s/ Dale H. Johnson ------------ --------------------------------------- Dale H. Johnson, Chief Financial Officer (Chief Accounting Officer) (10) INDEX TO EXHIBITS Exhibit Number Description - -------- ----------- 27 Financial Data Schedule (11) EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEDICAL GRAPHICS CORPORATION FINANCIAL STATEMENTS AS OF MARCH 31, 1997 AND DECEMBER 31, 1996, AND FOR THE 3 MONTH PERIODS ENDED MARCH 31, 1997 AND 1996, (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 630 0 4504 (427) 5310 10345 3869 (2672) 12032 9017 0 0 0 137 1242 12032 3623 4757 2463 3218 3781 0 85 (2327) 0 (2327) 0 0 0 (2327) (0.91) (0.91)
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