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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 23, 1997
MEDICAL GRAPHICS CORPORATION
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(Exact name of Registrant as specified in its charter)
Minnesota 41-1316712
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
0-9899
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(Commission File Number)
350 Oak Grove Parkway
St. Paul, Minnesota 55127-8599
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (612)484-4874
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ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
Medical Graphics Corporation (the "Company") has dismissed Ernst & Young
LLP as its certified public accountants responsible for auditing the
Company's financial statements, effective immediately. This action was taken
by the Board of Directors on January 23, 1997, with all members of the
Board's Audit Committee in attendance and approving the decision. Ernst &
Young LLP's reports for the last two years contained no adverse opinions,
disclaimers, or qualifications or modifications as to uncertainty, audit
scope or accounting principles, and during such two year period and the
subsequent interim period since then, there have been no disagreements with
Ernst & Young LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused it to
make reference to the subject matter of the disagreement in connection with
its reports.
ITEM 5. OTHER EVENTS.
Changes in Management; Restructuring Plan. Eric W. Sivertson, President,
Chief Executive Officer and a director of the Company, has left the Company,
effective January 21, 1997. In his place, the Company's Board of Directors
has named Mark W. Sheffert as interim Chief Executive Officer. Sheffert, the
President of Manchester Companies, Inc., was also elected a member of the
Board and chairman of its executive committee.
In response to unsatisfactory 1996 results, the Company has also hired
Manchester Business Services, Inc. ("Manchester") to work with the Board to
design and implement a restructuring plan. Under the Retainer Agreement
executed with Manchester, the Company will pay to Manchester a monthly fee of
$20,000, plus out-of-pocket expenses, for the twelve month initial term of the
agreement. If the Company achieves profitability from operations and positive
cash flow by year-end 1997, Manchester will also receive warrants, exercisable
over a five year period, to purchase 50,000 shares of the Company's common stock
at a price equal to the mean between the bid and asked price of the Company's
common stock as of the date of Manchester's engagement. In addition, the
Company will issue to Manchester shares of the Company's common stock having a
value equal to (i) 10% of the first $1.0 million of the Company's 1997 operating
income (before unusual items), (ii) 20% of the next $1.0 million in operating
income and (iii) 30% of operating income in excess of $2.0 million. Such stock
shall be valued based on the average of the bid prices of the Company's common
stock during calendar year 1997 but not less than $5.00 per share. The Company
also agreed to indemnify Manchester with respect to any legal action to which
Manchester may be subject in connection with providing the services contemplated
by the Retainer Agreement.
The Board and Manchester have outlined certain initiatives in connection
with their restructuring efforts, including:
- Reducing the Company's work force. On January 21, 1997, approximately
40 of the Company's 160 employees were laid off. Additional changes in
senior management may also be considered.
- Improving the Company's cost structure and instituting rigorous new
financial management policies and procedures.
- Reorganizing the research and development function and refocusing the
Company on its core technologies.
- Retaining Steve Anderson, former president of the Company from 1978 to
1985 and a director until 1992, as Chief Operations Officer.
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Change in Banking Relationship; Default on Existing Credit Line. The
Company has reached preliminary agreement with Norwest Business Credit
("Norwest") to provide financing that will enable the Company to implement its
restructuring plans. Norwest has agreed, subject to completion of due
diligence, to provide a three-year $4.1 million committed secured revolving line
of credit, with advances to be made against eligible accounts receivable and
inventory. This facility would bear interest at 4% over Norwest's base rate and
would be secured by all assets of the Company. A minimum monthly interest fee
of $15,000 will be payable by the Company during the term of the facility, and,
if the facility is prepaid through refinancing with another institution,
prepayment fees will be assessed in an amount equal to the greater of the
remaining monthly minimum fees or 3% in the first year, 2% in the second year
and 1% thereafter. Certain other fees would also be payable to Norwest,
including an origination fee of 1% payable in 12 monthly installments, a
facility fee of 0.25% payable annually, an unused fee of 0.25% per annum
assessed quarterly on the unused portion of the facility and a success fee in
the form of shadow warrants. The shadow warrants to be issued will equal 5% of
the Company's outstanding common stock as of the date of closing, will carry an
exercise price of $4.50 per share and will be exercisable over the three year
period following closing. The value of the warrants will not exceed $600,000 or
fall below $300,000. The credit facility will also contain various financial
covenants.
The Norwest line of credit would replace the Company's existing $3.5
million credit facility with Marquette Capital Bank, N.A. (the "Bank"), which is
operating under a forbearance agreement, pursuant to which the Bank has agreed
to extend the maturity date of the note to March 31, 1997, but has indicated
that it will not extend the term beyond such date. The Bank has also increased
the interest rate payable under this loan agreement from 1.5% to 2% over the
Bank's base rate. The Company is currently in technical default under such
credit facility for a failure to meet the minimum tangible net worth and minimum
working capital requirements set forth therein.
Financial Developments. The Company announced on January 22, 1997 that it
expects to report a loss in the range of $2.35 to $2.40 per share for the fourth
quarter ending December 31, 1996. In December, the Company announced that it
expected a fourth-quarter loss of about $2.00 per share. The revised estimate
is the result of a higher-than-expected loss from operations of $1.10 to $1.15
per share and a one-time charge of $3.25 million, or about $1.25 per share.
During the quarter, the Company had lower-than-anticipated sales and
significantly higher costs. The one-time charge is primarily related to costs
to close an office in Germany, revalue inventories and accounts receivable, and
pay for an Internal Revenue Service audit.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
16.1 Letter from Ernst & Young LLP regarding change in
accountants.
99.1 Amendment No. 2 to Restated Loan Documents entered into
effective December 19, 1996 between the Company and the
Bank.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICAL GRAPHICS CORPORATION
Dated: January 23, 1997
By /s/ Mark W. Sheffert
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Mark W. Sheffert
Chief Executive Officer
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[LETTERHEAD]
EXHIBIT 16.1 TO FORM 8-K
January 23, 1997
Securities and Exchange Commission
450 Fifth Street, Northwest
Washington, DC 20549
Dear Sirs/Madams:
We have read item 4 on page 2 of Form 8-K dated January 23, 1997 of Medical
Graphics Corporation and are in agreement with the statements contained therein.
We have no basis to agree or disagree with other statements of the registrant
contained therein.
/s/ Ernst & Young LLP
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AMENDMENT NO. 2 TO
RESTATED LOAN DOCUMENTS
THIS AMENDMENT, made and entered into effective as of December 19th, 1996, by
and between MEDICAL GRAPHICS CORPORATION, a Minnesota corporation ("Borrower"),
and MARQUETTE CAPITAL BANK, N.A., a national banking association, formerly known
as Marquette Capital Bank, a Minnesota corporation with its main banking house
located in Minneapolis, Minnesota, ("Bank").
W I T N E S S E T H:
WHEREAS, the Borrower and the Bank entered into that certain restated revolving
credit agreement dated May 31, 1996, as heretofore and hereinafter amended (the
"Restated Revolving Credit Agreement") pursuant to which the Bank agreed to
extend a $3,500,000 line of credit to the Borrower (the "Revolving Loan"); and
WHEREAS, the Revolving Loan is evidenced by that certain $3,500,000 restated
revolving credit note dated May 31, 1996, executed by the Borrower and payable
to the order of the Bank, as heretofore and hereinafter amended (the "Restated
Note"); and
WHEREAS, the Borrower and the Bank amended the Restated Revolving Credit
Agreement and the Restated Note in that certain Amendment No. 1 to Restated Loan
Documents dated September 30, 1996; and
WHEREAS, the maturity date under the Restated Note is December 31, 1996, and
the Borrower has requested that such maturity date be extended; and
WHEREAS, the Bank is willing to extend the maturity date as provided below based
on the understanding and acknowledgment of the Borrower and the Bank that the
Bank shall allow no further extensions of the maturity date under the Restated
Note; and
WHEREAS, the Borrower and the Bank desire to amend the Restated Revolving Credit
Agreement, and the Restated Note, as provided below.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
A. AMENDMENT TO RESTATED NOTE. The Restated Note shall be amended as follows:
1. Paragraph 1 of the Restated Note is hereby amended by deleting the
phrase "one and one-half percent (1.50%)" and replacing it with the
phrase "two percent (2.00%)."
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2. The first sentence of Paragraph 2 of the Restated Note is hereby
deleted in its entirety and replaced with the following:
The outstanding principal balance hereof shall be due and payable
in full on March 31, 1997 (the "Expiration Date").
B. AMENDMENTS TO RESTATED REVOLVING CREDIT AGREEMENT. The Revolving Credit
Agreement shall be amended as follows:
1. The Restated Revolving Credit Agreement is hereby amended by deleting
the date referenced in Section 1.(h) as "December 31, 1996" and
replacing it with the date "March 31, 1997."
2. The Revolving Credit Agreement is hereby amended by deleting the date
referenced in Section 1.(r) as "December 31, 1996" and replacing it
with the date "March 31, 1997."
3. The Revolving Credit Agreement is hereby amended by adding the
following Section 7.A. (ii):
(ii) Within thirty (30) days after the end of each calendar quarter,
the names and addresses of the account debtors on the accounts
receivable of the Borrower as of the last day of the immediately
preceding calendar quarter.
C. LOCKBOX AND COLLATERAL ACCOUNT. Upon execution and delivery of this
Amendment, the Borrower shall execute and deliver to the Bank the
Collateral Agreement, a copy of which is attached as EXHIBIT A.
D. RELEASE. The Borrower hereby releases the Bank and each of its officers,
directors, agents, employees, legal counsel and other representatives from
any and all claims, demands, causes of action, liability, damage, loss,
cost and expense which it has paid, incurred or sustained or believe it has
paid, incurred or sustained, known or unknown, absolute or contingent,
liquidated or unliquidated, as a result of or related to their past or
present relationship with the Bank, including, but not limited to (a) the
transactions evidenced by or related to the Restated Revolving Credit
Agreement, the Restated Note, the Borrower Documents (as that term is
defined in the Restated Credit Agreement), Amendment No. 1 to Restated Loan
Document dated September 30, 1996, and any and all other documents,
agreements or instruments related thereto, or (b) any acts or omissions of
the Bank or any of its officers, directors, agents, employees, legal
counsel or other representatives in connection therewith or related
thereto, or (c) the extension or denial of credit.
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E. REPRESENTATIONS. The Borrower hereby repeats and reaffirms that (a) all
representations and warranties set forth and contained in the Restated
Revolving Credit Agreement (as such terms are referred to and defined in
the Restated Revolving Credit Agreement) are true and correct in all
material respects as the date hereof, as if said representations and
warranties were fully set forth herein and (b) no Event of Default (as that
term is defined in the Restated Revolving Credit Agreement), and no event
has occurred or is continuing as of the date hereof, unless specifically
waived in writing by the Bank.
F. LEGAL REPRESENTATION. The parties hereto each hereby warrant and represent
that they have consulted with legal counsel of their choice to review and
advise them with respect to this Amendment or have had the opportunity to
consult with legal counsel of their choice and have made their own decision
not to consult legal counsel. Without limiting the generality of
the foregoing, the parties hereto acknowledge that they have legal and
business options available to them other than the execution and delivery of
this Amendment but have nevertheless decided to execute and deliver this
Amendment and have done so voluntarily without duress.
G. INCORPORATION BY REFERENCE. Except as otherwise expressly changed,
modified or amended pursuant to this Amendment, the terms and provisions of
the Restated Revolving Credit Agreement and any and all other "Borrower
Documents" (as defined in the Restated Revolving Credit Agreement) are
hereby ratified and confirmed and such provisions are incorporated herein
by reference. The Borrower further agrees that, as except as expressly
amended herein, all the Borrower Documents remain in full force and effect
as of the date hereof and are not subject to any existing defenses,
counterclaims or rights to set-off.
H. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one agreement,
and any of the parties hereto may execute this Agreement by signing any
such counterpart.
I. HEADINGS. The description headings of this Amendment are inserted for
convenience only and shall not define or limit any of the terms or
provisions hereof.
J. INTERPRETATION AND SEVERANCE. The provisions of this Agreement shall be
applied and interpreted in a manner consistent with each other so as to
carry out the purposes and intent of the parties hereto, but if for any
reason any provision hereof is determined to be unenforceable or invalid,
such provision or part thereof as may be unenforceable or invalid shall be
deemed severed from this Amendment and the remaining provisions shall be
carried out with the same force and effect as if the severed provision or
part thereof had not been part thereof had not been part of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
MARQUETTE CAPITAL BANK, N.A. MEDICAL GRAPHICS CORPORATION
By: /s/ Margaret Mary Yanez By: /s/ Eric W. Sivertson
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Its: Vice President Its: President
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