<PAGE>
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, 1996
/ / 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
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
350 OAK GROVE PARKWAY
SAINT PAUL, MINNESOTA 55127
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
Issuer's telephone number: (612) 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is 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. /X/
State issuer's revenues for its most recent fiscal year: $20,288,675.
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 National
Market on March 28, 1997 was $8,297,000.
As of March 28, 1997, 2,571,041 shares of the registrant's Common Stock were
outstanding.
<PAGE>
The following Section is hereby amended to read as follows:
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders, a copy of which is attached hereto as Exhibit 20.1, are
incorporated by reference into Items 9, 10, 11 and 12 of Part III.
Transitional Small Business Disclosure Formats (check one): Yes No X
--- ---
Part III, Items 9, 10, 11, 12 and 13 are hereby amended to read as follows:
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained under the headings "Election of Directors",
"Executive Officers of the Company", and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement for its 1997
Annual Meeting of Shareholders, a copy of which is attached hereto as Exhibit
20.1, is hereby incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in the
Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders, a copy of which is attached hereto as Exhibit 20.1, is hereby
incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 1997 Annual Meeting of Shareholders, a copy of which is attached hereto
as Exhibit 20.1, is hereby incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" in the
Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders, a copy of which is attached hereto as Exhibit 20.1, is hereby
incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page Number or Incorporation
Number Description by Reference to
- ------ ----------- -----------------------------
<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,
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
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
of Class A Stock of the Company
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
between the Company and Norwest Bank
Minnesota, N.A.
10.3 Credit and Security Agreement dated
March 31, 1997 between the Company
and Norwest Business Credit, Inc.
10.3.1 Letter Amendment dated April 14, 1997
10.4 Warrant between the Company and
Norwest Business Credit, Inc.
dated March 27, 1997
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 the Company
and Catherine A. Anderson dated
March 25, 1997
10.8* Non-Employee Director Stock Exhibit 10(g) to Report on Form 10-KSB
Option Plan for the year ended December 31, 1992,
file no. 0-9899
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
10.10 Stock Purchase Agreement dated March
31, 1997 between the Company and
FAMCO II LLC
10.11 Registration Rights Agreement between
</TABLE>
3
<PAGE>
the Company and FAMCO II LLC
20.1 Proxy Statement for the 1997 Annual
Meeting of Shareholders
21.1 The Company has one wholly-owned
subsidiary, Medical Graphics
Corporation GmbH, located in Germany.
23.1 Independent Auditors' Consent of
Deloitte & Touche LLP
23.2 Independent Auditors' Consent of Ernst
& Young LLP
27.1 Financial Data Schedule
_____________________________
*Indicates compensatory contract or arrangement
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended December
31, 1996. During the quarter ended March 31, 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.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registration has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEDICAL GRAPHICS CORPORATION
May 15, 1997 /s/ Glenn D. Taylor
-----------------------------
Glenn D. Taylor, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Mark W. Sheffert Chairman of the Board May 15, 1997
- ------------------------ and Director
Mark W. Sheffert
/s/ Glenn D. Taylor President, Chief Executive May 15, 1997
- ------------------------ Officer and Director
Glenn D. Taylor (Principal Executive
Officer)
/s/ Dale H. Johnson Chief Financial Officer May 15, 1997
- ------------------------ (Principal Financial and
Dale H. Johnson Accounting Officer)
/s/ Anthony J. Adducci Director May 15, 1997
- ------------------------
Anthony J. Adducci
/s/ Gerald T. Knight Director May 15, 1997
- ------------------------
Gerald T. Knight
/s/ W. Edward McConaghay Director May 15, 1997
- ------------------------
W. Edward McConaghay
/s/ Donald C. Wegmiller Director May 15, 1997
- ------------------------
Donald C. Wegmiller
/s/ John C. Penn Director May 15, 1997
- ------------------------
John C. Penn
/s/ John D. Wunsch Director May 15, 1997
- ------------------------
John D. Wunsch
5
<PAGE>
Exhibit 20.1
MEDICAL GRAPHICS CORPORATION
350 OAK GROVE PARKWAY
SAINT PAUL, MINNESOTA 55127
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 22, 1997
TO THE SHAREHOLDERS:
You are cordially invited to attend the Annual Meeting of Shareholders of
Medical Graphics Corporation, a Minnesota corporation (the "Company"), to be
held on Thursday, May 22, 1997, at 10:00 a.m. local time, at the Company's
offices at 350 Oak Grove Parkway, Saint Paul, Minnesota for the following
purposes:
1. To elect three directors to serve for a period of three years and two
directors to serve for a period of one year;
2. To approve an increase in the number of shares reserved under the
Company's 1987 Stock Option Plan (the "1987 Plan") from 750,000 to
900,000;
3. To approve an increase in the number of shares reserved under the
Company's Non-Employee Director Stock Option Plan (the "Director
Plan") from 150,000 to 250,000;
4. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending December 31, 1997;
5. To act upon such other business as may properly come before the Annual
Meeting, or any adjournment or adjournments thereof; and
6. To answer questions you might have with respect to the operations of
the Company.
Shareholders of record at the close of business on April 4, 1997 are
entitled to notice of and to vote at the Annual Meeting or any adjournment or
adjournments thereof.
Accompanying this Notice of Annual Meeting is a Proxy Statement, form
of Proxy and the Company's Annual Report to Shareholders for the fiscal year
ended December 31, 1996.
By Order of the Board of Directors,
Mark W. Sheffert,
Chairman
Saint Paul, Minnesota
Dated: May 2, 1997
WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE SIGN, DATE AND RETURN YOUR PROXY IN
THE REPLY ENVELOPE PROVIDED.
6
<PAGE>
MEDICAL GRAPHICS CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
MAY 22, 1997
PROXY STATEMENT
This Proxy Statement is submitted in support of a proxy solicitation by the
Board of Directors of Medical Graphics Corporation (the "Company"), 350 Oak
Grove Parkway, Saint Paul, Minnesota 55127, in connection with the 1997 Annual
Meeting of Shareholders to be held on Thursday, May 22, 1997 at 10:00 a.m. local
time, at the Company's offices, Saint Paul, Minnesota. The Company expects that
the Notice of Annual Meeting, Proxy Statement and form of proxy will be mailed
to shareholders on or about May 5, 1997.
Shareholders of record at the close of business on April 4, 1997 will be
entitled to vote at the Annual Meeting and any adjournment thereof. As of
April 4, 1997, the Company had 2,601,041 shares of its Common Stock, $0.05
par value (the "Common Stock"), issued, outstanding and entitled to be voted
at the Annual Meeting. In addition, on April 4, 1997, the Company had
148,148 shares of Class A Stock (the "Class A Stock") issued, outstanding and
entitled to be voted at the Annual Meeting. The Common Stock and Class A
Stock are the only classes of voting securities of the Company. Each holder
of outstanding shares of the Common Stock and Class A Stock is entitled to
one vote per share on all matters being presented at the Annual Meeting.
There is no cumulative voting. If a shareholder abstains from voting as to
any matter, then the shares held by such shareholder shall be deemed present
at the Annual Meeting for purposes of determining a quorum and for purposes
of calculating the vote with respect to such matter, but shall not be deemed
to have been voted in favor of such matter. If a broker returns a "non-vote"
proxy, indicating a lack of authority to vote on such matter, then the shares
covered by such non-vote shall be deemed present at the Annual Meeting for
purposes of determining a quorum but shall not be deemed to be represented at
the meeting for purposes of calculating the vote with respect to such matter.
The enclosed proxy, when properly signed and returned to the Company, will
be voted by the persons named therein at the Annual Meeting as directed therein.
Proxies in which no designation is made with respect to the various matters of
business to be transacted at the Annual Meeting will be voted for the nominees
for directors as proposed herein; for the increase in shares for the Company's
1987 Plan; for the increase in shares in the Company's Director Plan; for the
ratification of the appointment of Deloitte & Touche LLP as independent auditors
of the Company for the current year; and in the best judgment of the persons
named in the proxy as to any other matters which may properly come before the
Annual Meeting.
A proxy may be revoked at any time prior to its being exercised at the
Annual Meeting by written notification to the Secretary of the Company.
Personal attendance at the Annual Meeting is not sufficient to revoke a proxy
unless a written notice of proxy termination is filed with an officer of the
Company at the Annual Meeting.
The solicitation expenses incurred herein will be borne by the Company, and
this solicitation will be distributed by mail to the shareholders. Some of the
officers, directors and regular management employees of the Company may also
solicit proxies on behalf of management in person or by facsimile transmission
or telephone. No additional compensation will be paid to such persons
therefore; however, any costs thereof will be borne by the Company. The Company
will reimburse brokerage firms, banks, and other custodians, nominees and
fiduciaries for their expenses reasonably incurred in forwarding solicitation
material to the beneficial owners of the Common Stock.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following information concerning beneficial ownership of the Common
Stock of the Company is furnished as of the record date, except as noted, with
respect to (i) all persons known by the Company to be the beneficial owner of
more than five percent of the outstanding Common Stock, (ii) each of the
directors and nominees for election to the Board of Directors of the Company,
(iii) each of the executive officers of the Company named in the Summary
Compensation Table below, and (iv) all directors and executive officers as a
group. Unless otherwise indicated, the shareholders listed in the table have
sole voting and investment power with respect to the shares indicated.
Shares
Name and Address of Beneficially Percent
Beneficial Owner Owned (1) of Class (2)
- ------------------- ------------ ------------
Heartland Advisors, Inc.
790 North Milwaukee St.
Milwaukee, WI 53202............... 609,400(3) 23.4
Mark W. Sheffert (4)
3650 IDS Center
80 South Eighth Street
Minneapolis, MN 55402.............. 500,439(5) 17.2
Austin W. Marxe and
AWM Investment Company, Inc.
153 East 53 Street
New York, NY 10022................ 393,600(6) 15.1
Catherine A. Anderson
1690 World Trade Center
Saint Paul, MN 55127.............. 315,206(5)(7) 11.5
John C. Penn (4)
350 Oak Grove Parkway
Saint Paul, MN 55127............... 300,606(5) 11.0
Michael J. Paulucci
525 Lake Avenue South
Duluth, MN 55802.................. 186,125(8) 7.2
FAMCO II LLC
c/o Family Financial Strategies, Inc.
Interchange Tower, Suite 850
600 South Highway 169
Minneapolis, MN 55426.............. 148,148(9) 5.4
John D. Wunsch (4)
Interchange Tower, Suite 850
600 South Highway 169
Minneapolis, MN 55426.............. 148,148(10) 5.4
Eric W. Sivertson (11)
11710 Irish Avenue North
Stillwater, MN 55082............... 85,000 3.2
2
<PAGE>
Anthony J. Adducci (12)
350 Oak Grove Parkway
Saint Paul, MN 55127............... 33,200 1.3
Gerald T. Knight (12)
350 Oak Grove Parkway
Saint Paul, MN 55127............... 31,000 1.2
W. Edward McConaghay (12)
350 Oak Grove Parkway
Saint Paul, MN 55127............... 31,000(13) 1.2
Donald C. Wegmiller (4)
350 Oak Grove Parkway
Saint Paul, MN 55127............... 30,000 1.1
Douglas H. Ward
82 Comtempra Circle
Tappan, NY 10983................... - 0 - *
Glenn D. Taylor (4)
350 Oak Grove Parkway
Saint Paul, MN 55127............... - 0 - *
Christopher R. Hutchison
350 Oak Grove Parkway
Saint Paul, MN 55127............... - 0 - *
All directors and executive officers
as a group (twelve persons)........ 702,571 23.3
- ------------
* Less than one percent.
(1) The table above contains options and warrants exercisable within 60
days of April 4, 1997 in the following amounts: Mark W. Sheffert -
170,833 shares; Catherine A. Anderson - 130,000 shares; Eric W.
Sivertson - 75,000 shares; Anthony J. Adducci - 15,000 shares; Gerald
T. Knight - 21,000 shares; W. Edward McConaghay - 25,000 shares; Donald
C. Wegmiller - 25,000 shares; and all directors and executive officers
as a group (twelve persons) - 416,481 shares.
(2) Shares not outstanding but deemed beneficially owned by virtue of
the right to acquire them as of April 4, 1997 or within sixty days of
such date are treated as outstanding when determining the percentage
shown for a person or group, but are not treated as outstanding when
determining the percentages shown for any other person or group.
(3) Shares are held in investment advisory accounts of Heartland
Advisors, Inc. As a result, various persons have the right to receive
or the power to direct the receipt of dividends from, or the proceeds
from the sale of, the shares. The interests of one such account,
Heartland Value Fund, a series of Heartland Group, Inc., a registered
investment company, relates to more than 5% of the class. This
disclosure is based on a Schedule 13G, dated as of March 10, 1997,
filed with the Securities and Exchange Commission.
(4) Currently a member of, and nominee for election to, the Board of
Directors of the Company.
(5) In connection with her resignation as a member of the Board of
Directors in March 1997 and her agreement to serve as a consultant to
the Company, Ms. Anderson agreed to vote her shares in favor of the
directors nominated by the Board of Directors of the Company at any
Annual or Special Meeting held prior to July 1, 1999 and granted Mr.
Sheffert and Mr. Penn the right to vote all shares held by her or which
may be acquired in the future in favor of such directors. See "Certain
Transactions." As a result, the shares shown for Mr. Sheffert and Mr.
Penn in the table above
3
<PAGE>
include Ms. Anderson's 169,606 shares and 130,000 shares issuable upon a
currently exercisable warrant. Mr. Sheffert and Mr. Penn disclaim any
beneficial ownership with respect to such shares owned by Ms. Anderson.
(6) Of the 393,600 shares beneficially owned by Austin W. Marxe and AWM
Investment Company, Inc. ("AWM"), 283,900 shares are owned by the
Special Situations Fund III L.P. (the "Fund"), 109,700 shares are owned
by the Special Situations Cayman Fund, L.P. (the "Cayman Fund"), and
283,900 shares are beneficially owned by the Fund and MGP Advisers L.P.
("MGP"). Austin W. Marxe is the principal owner and President of AWM.
AWM is the sole general partner of MGP, a registered investment
adviser. MGP is a general partner of and investment adviser to the
Fund. AWM is also a registered investment adviser and general partner
of the Cayman Fund. This disclosure is based on a Schedule 13G, dated
as of February 7, 1997, filed with the Securities and Exchange
Commission.
(7) Ms. Anderson resigned as Chairman of the Board and as a director of
the Company effective March 21, 1997. Includes 15,600 shares held by
Mrs. Anderson's husband. Each disclaims beneficial ownership of the
other's stock. Excludes 3,500 shares held by the STA Trust, the
beneficiaries of which are the Anderson's children; the Andersons each
disclaim beneficial ownership of such shares.
(8) Includes 110,000 shares held in the Michael J. Paulucci Northland
Funds Trust, of which Mr. Paulucci is beneficiary, and 44,500 shares
held by Mr. Paulucci's spouse and children, of which Mr. Paulucci may
be deemed the beneficial owner. Mr. Paulucci's ownership is stated as
of February 1997 and disclosure is made in reliance upon a report on
Form 4, dated March 7, 1997 filed with the Securities and Exchange
Commission.
(9) Includes 148,148 shares of Class A Stock, convertible
share-for-share into Common Stock. Subsequent to the record date,
FAMCO II LLC acquired an additional 296,297 shares of Class A Stock and
currently owns a total of 444,445 shares, representing 14.7% ownership,
if converted, of the Company's Common Stock. Information with respect
to FAMCO is based upon a 13G dated April 15, 1997 filed with the
Securities and Exchange Commission.
(10) Includes 148,148 shares of Class A Stock, convertible
share-for-share into Common Stock, owned by FAMCO II LLC. FAMCO is
managed by Family Financial Strategies, Inc., of which Mr. Wunsch is
the Chief Executive Officer. As a result of this affiliation, Mr.
Wunsch may be deemed to beneficially own all shares owned by FAMCO and
may be deemed to hold shared voting and investment power with respect
to such shares owned by FAMCO. Mr. Wunsch disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(11) Mr. Sivertson resigned as a director and as President and Chief
Executive Officer of the Company effective January 21, 1997.
(12) Currently a member of the Board of Directors of the Company.
(13) Includes 2,000 shares held by Mr. McConaghay's wife.
4
<PAGE>
ELECTION OF DIRECTORS
PROPOSAL NO. 1
The number of members of the Board of Directors is currently set at eight,
and the directors are divided into Class A (currently consisting of two
directors whose term ends in 1998), Class B (currently consisting of three
directors whose term ends in 1999) and Class C (currently consisting of three
directors whose term ends in 1997). The members of each class are elected to
serve three-year terms with the term of office of each class ending in
successive years. Mark W. Sheffert, John C. Penn and Donald C. Wegmiller are
the Class C directors whose terms expire at the Annual Meeting. Glenn D. Taylor
and John D. Wunsch are the Class A directors. Anthony J. Adducci, Gerald T.
Knight and W. Edward McConaghay are the Class B directors. The Board of
Directors has nominated Messrs. Sheffert, Penn and Wegmiller for election to the
Board at the Annual Meeting for terms expiring at the annual meeting in 2000.
In addition, Messrs. Taylor and Wunsch were elected as Class A directors in
March 1997 in order to fill vacancies on the Board. Under Minnesota law, as
well as the Company's Articles of Incorporation and Bylaws, directors elected to
fill vacancies serve only until the next annual meeting of shareholders.
Therefore, the Company is requesting that the shareholders elect Messrs. Taylor
and Wunsch to serve until the expiration of the term of Class A directors. The
other directors of the Company will continue in office for their existing terms.
Proxies solicited by the Board of Directors will, unless otherwise
directed, be voted to elect Messrs. Sheffert, Penn, Wegmiller, Taylor and
Wunsch. If a shareholder of record returns a proxy withholding authority to
vote the proxy with respect to any of the nominees, then the shares of the
Common Stock covered by such proxy shall be deemed present at the Annual Meeting
for purposes of determining a quorum and for purposes of calculating the vote
with respect to such nominee or nominees, but shall not be deemed to have been
voted for such nominee or nominees. The affirmative vote of a majority of the
outstanding shares of the Common Stock is necessary to elect each nominee.
Cumulative voting is not permitted. In the unlikely event that any of the
nominees is not a candidate for election at the Annual Meeting, the persons
named in the accompanying form of proxy will vote for such other persons as the
Board of Directors may designate. The Board of Directors has no reason to
believe that any nominee will not be a candidate for election.
Certain biographical information furnished by the Company's Board of
Directors is set forth below.
NAME, BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS AND SELECTED
OTHER INFORMATION CONCERNING DIRECTORS AND NOMINEES
- --------------------------------------------------------
CLASS C (TERM ENDING IN 2000)
- --------------------------------------------------------
Mark W. Sheffert President
Director since January 1997 Manchester Companies
Age -- 49
Mr. Sheffert has over 25 years of financial and financial services experience.
He is the founder of Manchester Companies, Inc. ("MCI") whose business is
investment banking, management consulting, corporate renewal and commercial
finance. Prior to founding MCI in January 1993, Mr. Sheffert was a founder and
managing partner of Sheffert & Wein, Inc. ("SWI") a private investment and
management consulting firm specializing in the acquisition and turn-around of
operationally/financially distressed companies. Before founding SWI in October
1990, Mr. Sheffert was a senior executive with First Bank System for over eight
years where he served in various high-level management capacities and was
eventually named one of two President's of First Bank System. Before joining
First Bank System, Mr. Sheffert was Chief Operating Officer and Director of
North Central Life Insurance Company. Mr. Sheffert serves and has served on the
Board of Directors of several publicly and privately held corporations, as well
as community organizations.
- --------------------------------------------------------
John C. Penn President and Chief Executive Officer
Director since December 1996 CDI Management Corp.
Age -- 57
Mr. Penn has served as President and Chief Executive Officer of CDI Management
Corp. since 1990. From 1988 to 1990, he served as President and Chief Executive
Officer of Benson Optical Company. During 1987, he served as Director -
Business Reorganization Group of Coopers & Lybrand and during 1986 he founded
John Penn & Associates, a bankruptcy and acquisition consulting firm. During
the previous 24 years, he served in various senior operations capacities for
various companies. Mr. Penn serves and has served on the Board of Directors of
several privately held corporations.
5
<PAGE>
- --------------------------------------------------------
Donald C. Wegmiller President of Management Compensation
Director since 1988 Group/HealthCare Compensation
Age -- 58
Mr. Wegmiller has been President of Management Compensation Group/HealthCare
Compensation, an executive and physician compensation consulting firm for
healthcare organizations, since 1993. From 1992 to 1993, he was Vice Chairman
and President of HealthSpan Health System, a Minneapolis-based diversified
health services organization. From 1978 to 1992, he was President and Chief
Executive Officer of HealthSpan. From 1986 to 1988, he served as Chairman of
the Board of the American Hospital Association.
- --------------------------------------------------------
CLASS A (TERM ENDING IN 1998)
- --------------------------------------------------------
Glenn D. Taylor President and Chief Executive Officer
Director since March 1997 Medical Graphics Corporation
Age -- 44
Mr. Taylor has been President and Chief Executive Officer of Medical Graphics
Corporation since March 1997. He served as President and Chief Operating
Officer of Avecor Cardiovascular, Inc., a manufacturer of cardiopulmonary bypass
and long term respiratory support devices, from 1996 to 1997. From 1993 to
1995, he served as General Manager - Medical Products Division of Graphic
Controls Corporation, a manufacturer of products used to record, archive and
retrieve medical information. From 1989 to 1992, he served as General Manager
of ENSR Health Sciences a health professional consulting firm in Alameda,
California. From 1986 to 1989, he was Vice President of Corporate Development
of MedChem Products, Inc., a manufacturer of viscoelastics in Woburn,
Massachusetts. During the previous nine years, Mr. Taylor served in marketing
and sales capacities for various medical device and pharmaceutical companies.
- --------------------------------------------------------
John D. Wunsch President and Chief Executive Officer
Director since March 1997 Family Financial Strategies, Inc.
Age -- 48
Mr. Wunsch has been President and Chief Executive Officer of Family Financial
Strategies, Inc., a registered investment advisory firm, since January 1, 1997.
Family Financial Strategies, Inc., specializing in services to high net worth
families, manages a diversified investment strategy including several equity
pools and direct investments in real estate, venture capital, energy and other
non-traditional investments throughout the country. From 1990 to January 1997,
he served as President of Perrybell Investments, Inc., a registered investment
advisory firm. Mr. Wunsch is a director of ADC Telecommunications, Inc.
- --------------------------------------------------------
CLASS B (TERM ENDING IN 1999)
- --------------------------------------------------------
Anthony J. Adducci President of Technology Enterprises
Director since 1980
Age -- 59
Mr. Adducci has been President of Technology Enterprises, a private venture
capital firm, since June 1981. Prior to June 1981, Mr. Adducci was a founder and
served as Executive Vice President of Cardiac Pacemakers, Inc., a manufacturer
of cardiac pacemakers located in Arden Hills, Minnesota.
- --------------------------------------------------------
Gerald T. Knight Vice President -- Finance and Chief
Director since October 1990 Financial Officer of The Toro Company
Age -- 49
Mr. Knight served as Chairman of the Board at Medical Graphics Corporation from
May 1995 to December 1995. He has been Vice President -- Finance and Chief
Financial Officer of The Toro Company, a manufacturer of turf maintenance and
irrigation equipment, since April 1992. From December 1990 to March 1992, Mr.
Knight was Executive Director -- Finance and Corporate Controller of NeXT
Computer, Inc., a manufacturer of computer workstations. From November 1985
through
6
<PAGE>
December 1990 he served in several executive level financial positions
for The Pillsbury Company. During the previous fifteen years, Mr.
Knight served in a number of financial positions with General Electric
Company.
- --------------------------------------------------------
W. Edward McConaghay President of and Chief Executive Officer of
Director since March 1994 Telident, Inc.
Age -- 48
Mr. McConaghay has been the President and Chief Executive Officer of Telident,
Inc., specializing in enhanced 9-1-1 response technology, since April 1, 1997.
He was President and Chief Executive Officer of Digital Technics, a
telecommunications firm, from 1996 to 1997. During 1995 he was a principal in
Key Indicators, a consulting firm specializing in new product and market
development for information and technology based businesses. He was Senior Vice
President of Sales and Marketing for Deluxe Corporation, a Minnesota check and
business forms printing company, from December 1993 to January 1995. From 1983
to 1993, he served in various management positions at Northern Telecom, Inc.
- --------------------------------------------------------
BOARD OF DIRECTORS' COMMITTEES AND MEETINGS
The Board of Directors held ten meetings during the Company's fiscal year
ended December 31, 1996. All directors and nominees for director attended at
least eighty percent of the meetings held during 1996 of the Board of Directors
and all Committees on which the director served. Directors who are not
employees of the Company historically received $750 for each meeting of the
Board attended and $250 for each Committee meeting attended. Due to the
Company's financial position, however, the Directors have, to date, suspended
any 1997 cash director meeting fees. The Company anticipates that any future
fees may be in the form of options or the Company's Common Stock.
The Company has three standing committees of the Board of Directors, as follows:
NAME OF COMMITTEE MEMBERSHIP
- --------------------------- ----------------
Audit Committee.................... Gerald T. Knight (Chair), John C. Penn
and John D. Wunsch
Compensation Committee............. Donald C. Wegmiller (Chair), Anthony J.
Adducci and W. Edward McConaghay
Nominating Committee............... John C. Penn (Chair) and Mark W.
Sheffert
The Audit Committee is responsible for reviewing the services provided by
the Company's independent auditors and comments made by the independent auditors
in letters of recommendation to management, and reviewing internal accounting
controls and procedures and discussing the same with the Company's Chief
Financial Officer. The Compensation Committee is responsible for reviewing and
approving compensation to be paid to officers, key employees and directors. The
Nominating Committee is responsible for director nominations and will not
consider nominations recommended by shareholders. The Audit and Compensation
Committees held one meeting and five meetings, respectively, in 1996, while the
Nominating Committee did not meet.
7
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE TITLE
- ---- --- -----
Mark W. Sheffert 49 Chairman
Glenn D. Taylor 44 President and Chief Executive Officer
Christopher R. Hutchison 35 Senior Vice President - Sales and
Marketing
Dale H. Johnson 52 Chief Financial Officer
Stephen T. Anderson 50 Chief Technology Officer
Rex Fasching 56 Chief Operations Officer
Mike Snow 47 Vice President - Research and
Development
Terrance J. Kapsen 46 Vice President - Marketing
- --------------
Mark W. Sheffert. Biographical information on Mr. Sheffert is provided
elsewhere in this Proxy Statement under "Election of Directors."
Glenn D. Taylor. Biographical information on Mr. Taylor is provided elsewhere
in this Proxy Statement under "Election of Directors."
Christopher R. Hutchison. Mr. Hutchison joined the Company in September 1996 as
Vice President - Sales and Marketing and was promoted to Senior Vice President -
Sales and Marketing in March 1997. Prior to joining the Company , he held
various sales and marketing positions at McGaw, Incorporated from 1984 to 1996.
He holds a B.S. in Management from the University of Minnesota.
Dale H. Johnson, CPA. Mr. Johnson joined the Company in January 1997 and was
appointed Chief Financial Officer in March 1997. Prior to joining the Company,
he served as a consultant to companies in financial distress from 1995 to 1997.
From 1994 to 1995, he served as Chief Financial Officer to Larson Companies, a
privately-owned group of heavy truck dealerships. From 1991 to 1994, he served
as Chief Financial Officer to the National Marrow Donor Program. From 1971 to
1986, he served as Chief Financial Officer for the Pepsi subsidiary of MEI
Corporation. In 1986, MEI was acquired by PepsiCo, Inc., and thereafter Mr.
Johnson served as Area Chief Financial Officer to PepsiCo, Inc. During the
previous five years, he worked as an accountant with Arthur Andersen & Co. and
served as a finance officer in the United States Army. Mr. Johnson holds a B.A.
in Economics and Accounting from St. John's University and is a Certified Public
Accountant.
Stephen T. Anderson. Mr. Anderson re-joined the Company in January 1997 as
Chief Operations Officer and was subsequently named Chief Technology Officer.
Mr. Anderson co-founded the Company in 1979 and served the Company until 1992 in
various leadership positions including Member of the Board of Directors,
Chairman, Vice President - Sales, Managing Director - International Sales and
Vice President - New Business Development. From 1992 to 1997, he was Founder
and President of ErgometRx Corp., a manufacturer of aerobic and anaerobic
exercise testing and training equipment and software. Mr. Anderson holds a B.S.
in Electrical Engineering from the University of Minnesota.
Rex T. Fasching. Mr. Fasching joined the Company in January 1997 as a consultant
and was named Chief Operations Officer in March 1997. Prior to joining the
Company, Mr. Fasching owned and operated a manufacturing consulting business
from 1991 to 1997. From 1992 to 1995, he also served as Executive Vice
President of ErgometRx Corporation, a manufacturer of aerobic and anaerobic
exercise testing and training equipment and software. Mr. Fasching's other
experiences during over 20 years in executive manufacturing management include
purchasing two financially distressed manufacturing companies, successfully
turning them around to profitability, and selling them.
8
<PAGE>
Michael G. Snow. Mr. Snow was named Vice President of Research and Development
in March 1997. He re-joined the Company in October 1995 as Vice President,
Quality Assurance/Regulatory Affairs after managing Respiratory Care Services
and Pulmonary Physiology and Research at California Pacific Medical Center for
five years. He has over 25 years experience in the cardiopulmonary field and
has authored over 50 scientific papers. Prior to joining the California Pacific
Medical Center, Mr. Snow served as Vice President of Research and Development at
the Company and held other technology-related positions with the Company since
1984. He majored in Quantitative Analysis/Business Administration at National
University in San Diego and holds an A.S. in Cardiopulmonary/Biomedical
Technology from Grossmont College. Mr. Snow is a former president of the
National Board for Respiratory Care, the national accreditation agency for the
Company's core market.
Terrance J. Kapsen. Mr. Kapsen has been a Vice President of the Company since
December 1981, most recently as Vice President - Marketing since 1997. Mr.
Kapsen has had various sales, marketing and technology-related positions since
joining the Company in 1981. From 1973 to 1980, Mr. Kapsen was an Assistant
Scientist at the University of Minnesota working in the area of pulmonary
medicine and also served as a department supervisor.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company and each of the Company's most highly paid executive
officers whose total annual salary and bonus exceeded $100,000.
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards
---------------------------------- ---------------
Other Restricted Securities
Name and Annual Stock Underlying All Other
Principal Compen- Award(s) Options Compen-
Position Year Salary ($) Bonus ($) sation ($)(1) ($) (#)(2) sation ($)(3)
- ------------------------ ---- ---------- --------- ------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Eric W. Sivertson(4) 1996 225,961 -0- 326,997 75,000(5) 150,000 653
Chief Executive
Officer
Catherine A. Anderson (4) 1996 236,845 -0- -- -0- 25,000 8,987
Chairman 1995 208,047 -0- -- -0- -0- 3,635
1994 194,250 13,126 -- -0- -0- 1,750
Christopher R. Hutchison 1996 117,180 -0- -- -0- 10,000 -0-
Vice President-Sales and
Marketing
Terrance J. Kapsen 1996 111,283 -0- -- -0- -0- 1,649
Executive Vice President- 1995 90,666 -0- -- -0- 5,000 2,720
Global Sales 1994 103,627 -0- -- -0- 5,000 1,554
Douglas H. Ward(4) 1996 108,769 -0- -- -0- -0- 1,547
Vice President-Operations 1995 110,769 10,000 -- -0- 10,000 -0-
</TABLE>
- ------------
(1) The compensation reported represents perquisites paid for by the Company,
including $103,410 for relocation expenses which consisted partly of rent
and a loss incurred by Mr. Sivertson in the sale of his home during
relocation, as well as reimbursement of taxes incurred by Mr. Sivertson for
receipt of such perquisites and other awards.
9
<PAGE>
(2) Represents securities underlying stock options granted, except as otherwise
noted, under the Company's 1987 Plan, as amended. The 1987 Plan does not
provide for the granting of stock appreciation rights ("SARs").
(3) The compensation reported represents Company matching contributions under
the Company's Employee Savings Incentive Plan, a 401(k) retirement plan.
For Mr. Sivertson and Ms. Anderson, the amount reported also includes
payments for life insurance that will benefit these executives directly.
(4) Mr. Sivertson, Ms. Anderson and Mr. Ward have resigned their positions at
the Company.
(5) In connection with his hiring as Chief Executive Officer and President of
the Company in January 1996, Mr. Sivertson was granted 10,000 shares of the
Company's Common Stock, which were to vest over a five year period. In
connection with his entering into a Separation Agreement dated April 18,
1997, the Company and Mr. Sivertson agreed that vesting of all 10,000
shares would be accelerated and would occur immediately.
STOCK OPTION GRANTS AND EXERCISES TABLES
The following tables summarize stock option grants and exercises during
fiscal 1996 to or by the executive officers named in the Summary Compensation
Table above. Because the 1987 Plan does not provide for the granting of SARs,
no SARs were granted or exercised during fiscal 1996.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------------------------
Number of
Securities Underlying % of total Options Exercise or
Options Granted Granted to Employees Base Price Expiration
Name (#)(1) in Fiscal 1996 ($/Sh)(2) Date
- ---------------------- --------------------- -------------- --------- ----
<S> <C> <C> <C> <C>
Eric W. Sivertson (3) 20,000 21.0% 5.25 01/10/06
Catherine A. Anderson (4) 15,000 15.8% 5.25 01/10/06
10,000 10.5% 7.25 05/24/06
Christopher R. Hutchison 10,000 10.5% 5.88 09/03/06
Terrance J. Kapsen -0- -0-
Douglas H. Ward -0- -0-
</TABLE>
- -----------
(1) Each stock option granted has a ten-year term. The options granted vest
and become exercisable as follows: Mr. Sivertson's option - 25% cumulative
installments over a four year period beginning after the first year; Ms.
Anderson's 15,000 share option - 20% cumulative installments over a five
year period beginning after the first year and her 10,000 share option -
immediately; Mr. Hutchison's option - 5,000 shares vest over four years in
25% cumulative installments and 5,000 shares vest according to performance
of the Company over a three year period.
(2) All stock options were granted with an exercise price equal to the fair
market value of the Common Stock on the date of grant, which was the
closing price of the Common Stock as reported on the Nasdaq National Market
System on such date.
(3) In connection with the execution of a Separation Agreement in April 1997,
all 20,000 of Mr. Sivertson's options were canceled.
10
<PAGE>
(4) In connection with Ms. Anderson's resignation from the Board in March 1997,
and the execution of a consulting agreement and receipt of a warrant, all
of Ms. Anderson's options and any future right to receive options were
canceled. See "Certain Transactions." Such options and future rights
covered a total of 180,000 shares.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND
OPTION VALUES AT END OF FISCAL 1996
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money Options
Shares at December 31, 1996 (#) at December 31, 1996($)(1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($)(1) Unexercisable Unexercisable
- -------------------------- ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C>
Eric W. Sivertson -0- -0- -0- / 20,000 -0- / -0-
Catherine A. Anderson 20,000 23,000 130,500 / 19,500 -0- / -0-
Christopher R. Hutchison -0- -0- -0- / 10,000 -0- / -0-
Terrance J. Kapsen -0- -0- 9,500 / 5,500 555 / 1,295
Douglas H. Ward -0- -0- -0- / -0- -0- / -0-
</TABLE>
- ----------
(1) "Value" has been determined based upon the difference between the per share
option exercise price and the market value of the Common Stock at the date
exercised or December 31, 1996.
APPROVAL OF AN INCREASE IN THE NUMBER OF SHARES RESERVED
UNDER THE COMPANY'S 1987 STOCK OPTION PLAN
PROPOSAL NO. 2
INCREASE OF THE AUTHORIZED SHARES
The 1987 Plan authorizes the issuance of up to 750,000 shares of Common
Stock. At April 30, 1997, the Company had issued 233,187 shares under the Plan,
had outstanding options to purchase an additional 327,050 shares and had 189,763
shares reserved for future issuance. In order to reserve sufficient shares for
future options, the Board of Directors proposes that the number of shares
reserved under the 1987 Plan be increased from 750,000 to 900,000 shares. The
Board believes that granting fairly priced stock options to employees is an
effective means to promote the future growth and development of the Company.
Such options increase employees' proprietary interest in the Company's success
and enables the Company to attract and retain qualified personnel.
SUMMARY OF 1987 PLAN
A general description of the basic features of the 1987 Plan, assuming the
amendment described above is approved by the shareholders, is outlined below.
This summary is qualified in its entirety by the terms of the 1987 Plan, a copy
of which, in its amended form, may be obtained from the Secretary of the
Company.
GENERAL. The 1987 Plan provides for the granting to participating eligible
employees of the Company of the (a) options to purchase Common Stock that
qualify as "incentive stock options" within the meaning of Section 422 of the
Code ("Incentive Stock Options") and (b) options to purchase Common Stock that
do not qualify as incentive stock options ("Non-Qualified Options"). The 1987
Plan is administered by the Compensation Committee, which (other than with
respect to automatic grants of options to non-employee directors) selects the
participants to be granted options under the 1987 Plan, determines the amount of
grants to participants and prescribes discretionary terms and conditions
11
<PAGE>
of each grant not otherwise fixed under the 1987 Plan. As of April 30, 1997,
there were approximately 134 employees of the Company who may be deemed to be
eligible employees under the 1987 Plan, of whom 30 were participants. The 1987
Plan will terminate on March 11, 2002, and may be terminated before that date by
action of the Board. No options will be granted after the termination of the
1987 Plan. The maximum number of shares of Company Common Stock that may be
issued under the 1987 Plan is currently 750,000 and proposed to be increased to
900,000.
STOCK OPTIONS. Incentive Stock Options must be granted with an exercise
price equal to at least the fair market value of the Common Stock on the date of
grant (or, in the case of participants owning more than 10% of the total
combined voting power of all classes of stock of the Company, at least equal to
110% of the fair market value on the date of grant); Non-Qualified Options may
be granted with an exercise price less than 100% of the fair market value of the
Common Stock on the date of grant.
For Incentive Stock Options granted after December 31, 1986, the aggregate
fair market value (determined as of the time the Incentive Stock Option is
granted) of shares of Common Stock with respect to which Incentive Stock Options
become exercisable for the first time by a participant under the 1987 Plan
during any calendar year may not exceed $100,000. On April 4, 1997, the closing
price of a share of Company Common Stock as reported by the Nasdaq National
Market System was $3.375. Incentive Stock Options have a maximum term fixed by
the Compensation Committee, not to exceed 10 years from the date of grant (five
years in the case of an Incentive Stock Option granted to participants owning
more than 10% of the total combined voting power of all classes of stock of the
Company). Non-Qualified Options have a maximum term fixed by the Compensation
Committee, not to exceed 10 years from the date of grant. Stock options become
exercisable during their terms in the manner determined by the Compensation
Committee. Stock options may not be transferred other than by will or the laws
of descent and distribution; during the lifetime of a participant they may be
exercised only by the participant.
FEDERAL INCOME TAX CONSEQUENCES. The following description of federal
income tax consequences is based on current statutes, regulations and
interpretations. The description does not include state or local income tax
consequences. In addition, the description is not intended to address specific
tax consequences applicable to an individual participant who receives an award.
INCENTIVE STOCK OPTIONS. There will not be any federal income tax
consequences to either the participant or the Company as a result of the grant
to a participant of an Incentive Stock Option under the 1987 Plan. The exercise
by a participant of an Incentive Stock Option also will not result in any
federal income tax consequences to the Company or the participant, except that
(i) an amount equal to the excess of the fair market value of the shares
acquired upon exercise of the Incentive Stock Option, determined at the time of
exercise, over the consideration paid for the shares by the participant will be
a tax preference item for purposes of the alternative minimum tax, and (ii) the
participant may be subject to an additional excise tax if any amounts are
treated as "excess parachute payments" within the meaning of the Code.
If a participant disposes of the shares acquired upon exercise of an
Incentive Stock Option, the federal income tax consequences will depend upon how
long the participant has held the shares. If the participant does not dispose
of the shares within two years after the Incentive Stock Option was granted, nor
within one year after the participant exercised the Incentive Stock Option and
the shares were transferred to the participant, then the participant will
recognize a long-term capital gain or loss. The amount of the long-term capital
gain or loss will be equal to the difference between (i) the amount the
participant realized on disposition of the shares, and (ii) the option price at
which the participant acquired the shares. The Company is not entitled to any
compensation expense deduction under these circumstances.
If the participant does not satisfy both of the above holding period
requirements (a "disqualifying disposition"), then the participant will be
required to report as ordinary income, in the year the participant disposes of
the shares, the amount by which the lesser of (i) the fair market value of the
shares at the time of exercise of the Incentive Stock Option (or, for directors,
officers or greater-than 10% shareholders of the Company, the fair market value
of the shares six months after exercise, unless such persons file an election
under Section 83(b) of the Code within 30 days of the date of exercise) or (ii)
the amount realized on the disposition of the shares (if the disposition is the
result of a sale or exchange to one other than a related taxpayer), exceeds the
option price for the shares. The Company will be entitled
12
<PAGE>
to a compensation expense deduction in an amount equal to ordinary income
includable in the taxable income of the participant. This compensation income
may be subject to withholding, and the Company may be required to withhold in
order to receive, a deduction. The remainder of the gain or loss recognized on
the disposition, if any, will be treated as long-term or short-term capital gain
or loss, depending on the holding period.
NON-QUALIFIED OPTIONS. Neither the participant nor the company incurs any
federal income tax consequences as a result of the grant of a Non-Qualified
Option. Upon exercise of a Non-Qualified Option, a participant will recognize
ordinary income, subject to withholding, on the "Includability Date" in an
amount equal to the difference between (i) the fair market value of the shares
purchased, determined on the Includability Date, and (ii) the
consideration paid for the shares. The Includability Date generally will be the
date of exercise of the Non-Qualified Option. The participant may be subject to
an additional excise tax if any amounts are treated as "excess parachute
payments" within the meaning of the Code.
At the time of a subsequent sale or disposition of any shares of Common
Stock obtained upon exercise of a Non-Qualified Option, any gain or loss will be
a capital gain or loss. Such capital gain or loss will be long-term capital
gain or loss if the sale or disposition occurs more than one year after the
Includability Date and short-term capital gain or loss if the sale or
disposition occurs one year or less after the Includability Date.
In general, the company will be entitled to a compensation expense
deduction in connection with the exercise of a Non-Qualified Option for any
amounts includable in the taxable income of a participant as ordinary income.
The Company will be entitled to the deduction in the Company's tax year in which
the participant is taxed.
REGISTRATION WITH SEC
The Company has filed Registration Statements covering the original 750,000
shares offered under the 1987 Plan with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended. If Proposal Two is adopted,
the Company intends to file a similar Registration Statement covering the
150,000 additional shares available for issuance under the Stock Plan.
VOTE REQUIRED
Shareholder approval of the amendment to the 1987 Plan requires the
affirmative vote by the holders of a majority of shares of Common Stock
represented at the Annual Meeting and entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE AMENDMENT AS SET FORTH IN PROPOSAL TWO.
APPROVAL OF AN INCREASE IN THE NUMBER OF SHARES RESERVED UNDER
THE COMPANY'S NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
PROPOSAL NO. 3
INCREASE OF THE AUTHORIZED SHARES
The Director Plan authorizes the issuance of up to 150,000 shares of Common
Stock at April 30, 1997. The Company had issued no shares under the Plan, had
outstanding options to purchase an additional 124,000 shares and had 26,000
shares reserved for future issuance. In order to reserve sufficient shares for
future options, the Board of Directors proposes that the number of shares
reserved under the Director Plan be increased from 150,000 to 250,000 shares.
The Board believes that granting fairly priced stock options to non-employee
directors is an effective means to promote the future growth and development of
the Company. Such options increase the directors' proprietary interest in the
Company's success and enables the Company to attract and retain qualified
directors. The Board therefore recommends that all shareholders vote in favor
of increasing the number of shares reserved under the Director Plan from 150,000
to 250,000 shares.
13
<PAGE>
SUMMARY OF THE DIRECTOR PLAN
A general description of the basic features of the Directors Plan, assuming
the amendment described above is approved by the shareholders, is outlined
below. This summary is qualified in its entirety by the terms of the Director
Plan, a copy of which, in its amended form, may be obtained from the Secretary
of the Company.
GENERAL. The Medical Graphics Corporation Non-Employee Director Stock
Option Plan (the "Director Plan") was adopted by the Company's Board of
Directors (the "Board") on March 16, 1994 and by the Company's shareholders on
May 11, 1994. The Director Plan became effective upon shareholder approval.
The Director Plan is intended to aid the Company in attracting and retaining
independent directors capable of assuring the future success of the Company, to
offer such individuals incentives to put forth maximum efforts for the success
of the Company's business and to afford such individuals an opportunity to
acquire a proprietary interest in the Company. The Director Plan is not subject
to any provisions of the Employee Retirement Income Security Act of 1974 and is
not qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
A total of 150,000 shares of the Company's Common Stock, par value $.05 per
share (the "Common Stock"), were originally available for the granting of
options under the Director Plan. Any non-employee director of the Company is
eligible to receive awards under the Director Plan. Options granted under the
Director Plan shall only be granted during a 10-year period beginning on the
effective date of the Director Plan. However, unless otherwise expressly
provided in the Director Plan or an applicable option agreement, any option
granted may extend beyond the end of such 10-year period.
ADMINISTRATION AND TYPE OF AWARD. The Director Plan permits the granting
of stock options that do not meet the requirements of Section 422 of the Code.
The Director Plan is administered by a committee of the Board consisting
exclusively of three or more persons appointed by the Board of Directors. The
members of the Committee are appointed from time to time by the Board. Grants
of stock options under the Director Plan and the amendment and nature of the
awards to be granted shall be automatic as described in Section 6 of the
Director Plan. Determinations and interpretations with respect to the Director
Plan will be in the sole discretion of the Committee, whose determinations and
interpretations will be binding on all interested parties.
Awards shall be granted for no cash consideration or for such minimal cash
consideration as may be required by applicable law. Options shall provide that
upon exercise thereof the holder will receive shares of Common Stock.
The exercise price per share under any stock option shall not be less than
100% of the fair market value of the Company's Common Stock on the date of the
grant of such option. Options shall be exercised by payment in full of the
exercise price in cash (including check, bank draft or money order).
If any shares of Common Stock subject to any option are not purchased or
are forfeited, or if any such award terminates without the delivery of options
or other consideration, the shares previously used for such options will be
available for future awards under the Director Plan. All shares relating to
options granted will be counted against the aggregate number of shares available
for granting options under the Director Plan.
The Board may amend, alter or discontinue the Director Plan at any time.
FEDERAL INCOME TAX MATTERS. Options granted under the Plan have tax
consequences similar to Non-qualified Options under the Company's 1984 Plan
described above.
REGISTRATION WITH SEC
The Company has filed Registration Statements covering the original 750,000
shares offered under the 1987 Plan with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended. If Proposal Two is adopted,
the Company intends to file a similar Registration Statement covering the
150,000 additional shares available for issuance under the Stock Plan.
14
<PAGE>
VOTE REQUIRED
Shareholder approval of the amendment to the 1987 Plan requires the
affirmative vote by the holders of a majority of shares of Common Stock
represented at the Annual Meeting and entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE AMENDMENT AS SET FORTH IN PROPOSAL THREE.
CERTAIN TRANSACTIONS
In January 1997, the Company retained Manchester Business Services, Inc.,
an organizational renewal firm of which Mark W. Sheffert is Chairman, to design
and implement a restructuring plan. In connection with the engagement of
Manchester, Mr. Sheffert was elected as a director of the Company. On March 25,
1997, Mr. Sheffert became Chairman of the Board of the Company. Under the
Retainer Agreement executed with Manchester, the Company agreed to pay
Manchester a monthly fee of $20,000, plus out-of-pocket expenses, for the twelve
month initial term of the agreement. 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. In connection with the engagement of Manchester, Mr. Sheffert's
compensation, as amended in March 1997, consisted of the following: a stock
grant of 30,000 shares, an option for 50,000 shares at $3.375 and a five-year
warrant for 150,000 shares at $3.375. Subsequent to the engagement of
Manchester in March 1997, the Company obtained a new line of credit, received
$1,500,000 of cash from the issuance of equity securities, entered into
agreements with vendors which provide 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%.
On March 31, 1997, FAMCO II LLC ("FAMCO") agreed to purchase 444,445 shares
of the Company's Class A Stock at a price of $3.375 per share of Class A Stock.
FAMCO purchased 148,148 shares on March 31, 1997 and the additional 296,297
shares on April 15, 1997. FAMCO is managed by Family Financial Strategies, Inc.
of which Mr. Wunsch is Chief Executive Officer. In connection with this equity
investment, Mr. Wunsch was elected as a director of the Company.
Catherine A. Anderson was a co-founder of the Company and held various
leadership positions with the Company, most recently serving as the Company's
President and Chief Executive Officer from May 1995 until December 1995 and
serving as Chairman of the Board during 1996. Ms. Anderson is also President of
e-med.OnCall, Inc ("E-med"). During 1996, Ms. Anderson began a transition from
the Company to E-med and the Company established a separate chairman's office
that also served as the executive offices of E-med. During 1996, the Company
transferred equipment with a net asset value of approximately $75,000 to the new
office of Ms. Anderson and paid certain administrative expenses in the amount of
approximately $60,000 with respect to that office. As part of this transition,
and in connection with the election of Mr. Sheffert as Chairman of the Board and
director and the appointment of Mr. Taylor as President and Chief Executive
Officer in March 1997, Ms. Anderson resigned as Chairman of the Board and as a
director of the Company. Concurrent with her resignation, the Company agreed to
make a one-time lump sum payment of $25,000 to Ms. Anderson for settlement of
any obligations Ms. Anderson may have incurred in her capacity as an employee,
officer or director of the Company. In addition, Ms. Anderson entered into a
consulting agreement with the Company under which Ms. Anderson agreed to serve
the Company as a consultant through December 31, 1997 and will be paid a monthly
consulting fee of $10,000. In addition, the Company granted Ms. Anderson a
three-year warrant to purchase 130,000 shares of the Company's Common Stock at
$4.00 per share and the Company and Ms. Anderson agreed that all other options
held by Ms. Anderson will be canceled. Apart from the 130,000 warrant, Ms.
Anderson will not receive any additional options in 1997 for her service as a
director or for serving as Chairman. The total options canceled, plus the
options that Ms. Anderson would have received had she continued to serve as
Chairman and a director, was 180,000 options.
Stephen L. Anderson rejoined the Company in 1997 as Chief Operations
Officer and has subsequently been named Chief Technology Officer. Mr. Anderson
was a co-founder of the Company and served the Company until 1992 in various
leadership positions. Mr. Anderson is also the President of ErgometRx
Corporation and the husband of Catherine A. Anderson. ErgometRx Corporation
possesses certain proprietary information and prototype hardware relating to
exercise equipment used for stress testing and physical exercise. The Company
has obtained an exclusive license to manufacture and
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sell products using this proprietary information in certain markets under a
five-year royalty agreement. Under this agreement, the Company paid royalties
of $40,000 in 1996. During 1996, the Company advanced ErgometRx Corporation
approximately $165,000 in cash and products, which has been fully reserved for
at December 31, 1996.
Eric W. Sivertson served as President and Chief Executive Officer of the
Company since January 1996. Mr. Sivertson left the Company effective January
21, 1997. In connection with his execution of a Separation Agreement with the
Company, the Company agreed to pay Mr. Sivertson five months of his normal
salary, to provide for the vesting of all 10,000 shares granted to Mr. Sivertson
under his 1996 Restricted Stock Award Agreement in connection with his
employment, to forgive an obligation in the amount of $32,500 owed the Company
by Mr. Sivertson and to allow Mr. Sivertson to retain a laptop computer valued
at $6,621 which the Company provided Mr. Sivertson in connection with his
employment. In addition, the Company accelerated the vesting of an option held
by Mr. Sivertson to purchase 75,000 shares at $5.25. Such option is subject to
a divestment schedule over a 270 day period from April 18, 1997 to the extent
Mr. Sivertson does not exercise his option.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and all persons who beneficially own more than ten percent of
the outstanding shares of the Company's Common Stock to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of such Common Stock. Officers, directors and greater than ten
percent beneficial owners are also required to furnish the Company with copies
of all Section 16(a) reports they file. To the Company's knowledge, based upon
a review of the copies of such reports furnished to the Company and written
representations that no other reports were required during the fiscal year ended
December 31, 1996, all Section 16(a) filing requirements applicable to the
Company's directors, executive officers and greater than ten percent beneficial
owners were satisfied.
RATIFICATION OF APPOINTMENT OF AUDITORS
PROPOSAL NO. 4
The Company engaged Deloitte &Touche LLP as its independent auditors
responsible for auditing the Company's financial statements. During the two
year period prior to the engagement of Deloitte & Touche LLP, the Company did
not consult with Deloitte & Touche LLP with respect to any matter with respect
to the application of accounting principles to any specific matters or in
connection with any accounting, auditing or financial statement reporting
issues. The Board of Directors recommends that the shareholders ratify the
appointment of Deloitte & Touche LLP as independent auditors for the Company for
the fiscal year ending December 31, 1997. Deloitte & Touche LLP provided
services in connection with the audit of the financial statements of the Company
for the fiscal year ended December 31, 1996, including the Company's annual
report on Form 10-KSB filed with the Securities and Exchange Commission, and
matters relating to accounting and financial reporting generally.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting and will be given an opportunity to make a statement if they so
desire and to respond to appropriate questions. If the appointment of Deloitte
& Touche LLP is not ratified by the shareholders, the Board of Directors is not
obligated to appoint other auditors, but the Board of Directors will give
consideration to such unfavorable vote.
The Company dismissed Ernst & Young LLP as its certified public accountants
responsible for auditing the Company's financial statements. 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.
The Board of Directors recommends that you vote FOR ratification of the
appointment of Deloitte & Touche LLP as the Company's independent auditors.
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SHAREHOLDER PROPOSALS
Any proposal by a shareholder which may properly be presented at the next
Annual Meeting of the Company's shareholders must be received at the Company's
principal executive offices, 350 Oak Grove Parkway, Saint Paul, Minnesota 55127,
not later than December 30, 1997.
OTHER BUSINESS
Management is not aware of any matters to be presented for action at the
Annual Meeting, except matters discussed in this Proxy Statement. If any other
matters properly come before the Annual Meeting, it is intended that the shares
represented by proxy will be voted in accordance with the judgment of the
persons named in the accompanying form of proxy.
FORM 10-KSB
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB (EXCLUDING
EXHIBITS) FILED WITH THE SECURITIES AND EXCHANGE COMMISSION HAS BEEN
FURNISHED, FREE OF CHARGE, TO SHAREHOLDERS OF RECORD ON APRIL 4, 1997.
ADDITIONAL PERSONS WISHING TO RECEIVE A COPY, FREE OF CHARGE, SHOULD SUBMIT A
WRITTEN REQUEST TO:
Chief Financial Officer
Medical Graphics Corporation
350 Oak Grove Parkway
Saint Paul, Minnesota 55127
PLEASE SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors,
Mark W. Sheffert,
Chairman
May 2, 1997
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MEDICAL GRAPHICS CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
MAY 22, 1997
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby constitutes and
appoints Mark W. Sheffert, John C. Penn and Glenn D. Taylor, and each of them,
with full power of substitution, as proxies to vote all shares of capital stock
of Medical Graphics Corporation held by the undersigned at the Annual Meeting of
Shareholders of the company to be held on May 22, 1997, and at any adjournments
thereof, as designated below on the matters referred to and in their discretion
upon such other business as may properly come before the Annual Meeting.
(1) ELECTION OF DIRECTORS:
/ / FOR ALL nominees listed below / / WITHHOLD AUTHORITY
(except as marked to the contrary to
vote for ALL nominees listed below)
Class C Mark W. Sheffert, John C. Penn, Donald C. Wegmiller
Class A Glenn D. Taylor, John D. Wunsch
(INSTRUCTION: To WITHHOLD authority to vote for any individual nominee,
write that nominee's name on the space provided below)
-------------------------------------------------------
(2) The proposal to increase the number of shares reserved under the Company's
1987 Stock Option Plan by 150,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
(3) The proposal to increase the number of shares reserved under the Company's
Non-employee Director Stock Option Plan by 100,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
(4) The proposal to ratify the appointment of Deloitte & Touche LLP as
independent auditors of the company for the fiscal year ending December 31,
1997.
/ / FOR / / AGAINST / / ABSTAIN
(5) In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY WILL BE VOTED AS SPECIFIED HEREIN. IF NO INSTRUCTIONS ARE
INDICATED, PROXIES WILL BE VOTED FOR THE ELECTION OF NOMINEES NAMED HEREIN AND
FOR THE OTHER PROPOSALS. Please sign exactly as your name appears below. When
shares are held by joint tenants, both must sign. Fiduciaries should indicate
title and authority.
Date: ______________________ , 1997
___________________________________
(Signature)
___________________________________
(Signature, if held jointly)
___________________________________
(Title or Authority)
PLEASE SIGN, DATE AND RETURN THIS
PROXY PROMPTLY IN THE ENVELOPE
PROVIDED.
