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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders, a definitive copy of which will be filed with the SEC within 120
days of December 31, 1996 is incorporated by reference into Items 9, 10, 11 and
12 of Part III.
Transitional Small Business Disclosure Formats (check one): Yes ___ No X
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TABLE OF CONTENTS
Page No.
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 6
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 6
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 5. Market for Common Equity and Related Stockholder Matters. . . . 7
Item 6. Management's Discussion and Analysis or Plan of Operation . . . 8
Item 7. Financial Statements. . . . . . . . . . . . . . . . . . . . . .12
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . .27
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act . . . . . . .27
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . .27
Item 11. Security Ownership of Certain Beneficial Owners and Management.27
Item 12. Certain Relationships and Related Transactions. . . . . . . . .27
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . .28
INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
(ii)
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PART I
Unless the context indicates otherwise, all references to the "Company" and
"Registrant" in this Annual Report on Form 10-KSB relate to Medical Graphics
Corporation.
The following United States registered trademarks appear in this Annual
Report on Form 10-KSB and are owned by the Company: MedGraphics and CPX EXPRESS.
In addition, the following Company trademarks appear in this Annual Report on
Form 10-KSB: PF/Dx, preVent, BREEZE, 1085 Series, CardiO2, CPX/D and CPX/MAX/D.
CardiO-KEY is a trademark of ErgometRx Corporation. Pentium is a trademark of
INTEL Corporation. Windows is a trademark of Microsoft Corporation.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
Medical Graphics Corporation was incorporated as a Minnesota corporation in
1977. The Company designs and produces innovative non-invasive diagnostic
systems for the prevention, early detection, and cost-effective treatment of
heart and lung disease. Medical Graphics Corporation has grown from providing
computerized lung function test graphics to providing a wide-ranging line of
diagnostic systems featuring patented hardware and software sold under the
MedGraphics trade name.
Medical Graphics Corporation is a leading producer of non-invasive
cardiorespiratory diagnostic systems worldwide. The Company's products consist
of breath analysis technology integrated with computer and applications-specific
software. More than 4,000 MedGraphics systems have been sold to customers for
use in over 50 countries.
The Company's primary products include pulmonary function, body
plethysmography and cardiopulmonary exercise testing systems. Most of the
Company's revenues are generated from sales into the hospital cardiopulmonary
market and the office-based physician market. Revenues from service and
supplies accounted for 24 percent of total revenues in 1996, up from 22 percent
in 1995.
PRIMARY PRODUCTS
PULMONARY FUNCTION TESTING SYSTEM.
The PF/Dx System is a complete pulmonary function testing lab which helps
health care professionals diagnose lung diseases and manage treatment of their
patients. The PF/Dx System currently consists of a nitrogen analyzer, a gas
chromatograph, an IBM-compatible computer with Pentium processor, a full-color
monitor, a printer and other peripherals. Applications include screening asthma
patients, assessing pre-operative and post-operative risk of heart and lung
surgery patients, evaluating lung damage from occupational exposures and
documenting outcomes and responses to therapy. The PF/Dx System's compact
design and mobility options attract a wide variety of customers, including
cardiopulmonary laboratories in hospitals, office-based clinics, occupational
medicine clinics, asthma centers and clinical research centers. The PF/Dx
System utilizes the preVent Pneumotach, a mouthpiece/flow device with a snap-in,
snap-out design which helps prevent the transmission of infectious diseases.
The preVent Pneumotach is attached by tubing to the PF/Dx System for the
measurement of patients' lung function. The PF/Dx System's unique features also
include the Company's proprietary BREEZE software, which is designed to operate
in a simple, easy-to-use manner.
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BODY PLETHYSMOGRAPHY SYSTEMS.
The Company's 1085 Series offers four body plethysmography systems for lung
function testing. A body plethysmograph is an enclosed chamber in which the
patient sits and performs diagnostic pulmonary function testing. Body
plethysmography is the most sensitive method for identifying lung diseases,
including difficult-to-detect diseases such as asthma. The systems are
comprised of a hexagon-shaped acrylic chamber, a nitrogen analyzer, a diffusion
analyzer, an IBM-compatible computer with Pentium processor, a full-color
monitor, a printer and other peripherals. Applications include diagnosing lung
diseases and managing their treatment, assessing surgical risk of lung
transplant and lung reduction surgery candidates and evaluating the impact of
neuromuscular disease on breathing. Included in the 1085 Series systems is the
preVent pneumotach for helping to prevent the transmission of infectious
diseases between patient tests. The system's design optimizes patient comfort
with clear-view acrylic enclosures and enables testing of a broad population
including pediatric patients and individuals using wheelchairs.
CARDIOPULMONARY EXERCISE TESTING SYSTEMS.
The Company's cardiopulmonary exercise systems both measure one's fitness
or conditioning level and help physicians diagnose heart and lung diseases by
measuring the gas exchange of the patient's lungs in conjunction with the
electrical activity of their heart. Should there be a limitation in the heart
or lungs or in the level of conditioning, these systems help detect and quantify
the degree of impairment by measuring the amount of oxygen consumed during
exercise.
MedGraphics cardiopulmonary exercise testing systems are sold in four
different models. They include the CardiO2 System, CPX/D System, CPX/MAX/D
System and CPXEXPRESS System. The systems consist of an oxygen analyzer, a
carbon dioxide analyzer, the preVent Pneumotach, an IBM-compatible computer with
Pentium processor, a full-color monitor, a printer and other peripherals. The
CardiO2 includes a full 12-lead ECG system while the other systems are designed
to be used in conjunction with stand-alone ECG systems. The systems are used
for differential diagnosis of cardiovascular and pulmonary disease, screening
for early signs of cardiac and pulmonary dysfunction, establishing exercise
prescriptions and training programs, and evaluating the efficacy of prescribed
therapy. Test results are displayed in easy-to-interpret graphs and summary
reports. Customers include hospital cardiopulmonary laboratories, cardiology
and pulmonary office-based clinics, cardiac rehabilitation units, human
performance laboratories and health clubs.
CYCLE ERGOMETERS.
The Company offers several models of cycle ergometers providing physicians
and patients a tool for more successful outcomes in clinical rehabilitation and
athletic training. A cycle ergometer is a specially designed stationary
exercise bicycle which can operate at a broad spectrum of resistance levels.
The Company has four models of cycle ergometers that are used in diagnostic,
rehabilitation, training and sports medicine applications. Three of the four
models in the CardiO2 Cycle Series incorporate patented CardiO-KEY technology, a
"data key" capable of storing exercise protocols and recording exercise session
data. The data key is used to individualize exercise sessions and monitor
conditioning progress.
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INDUSTRY
Early detection and prevention of heart and lung diseases is becoming more
commonplace as health care reform and cost containment efforts increase.
Physicians and health plan administrators are becoming more motivated to use
non-invasive diagnostic testing to detect early signs of disease and reverse the
disease process by therapeutic treatments, rather than relying on invasive and
expensive procedures to treat disease after it has already progressed. Thus,
the demand for therapeutic and diagnostic products, such as the Company's, is
being affected by trends in the medical profession and its approach to the
treatment of illness as well as third party payment and reimbursement policies.
COMPETITION
The principal competitive factors in the diagnostic and therapeutic markets
are quality of system performance, software which is technologically advanced
and easy-to-use, and customer service. These markets are characterized by
intense competition. Some companies with which the Company competes have greater
financial, human and technological resources than Medical Graphics Corporation.
This competitive marketplace has in some circumstances led to price discounting
to which Medical Graphics Corporation has responded in kind, and may do so again
in the future.
The medical device industry in which the Company operates is characterized
by relatively rapid technological change. Accordingly, the Company must
continually implement improvements in its core technologies and products. The
Company's success depends on its ability to anticipate changes in technology and
industry standards, to develop and successfully introduce new and enhanced
products on a timely basis and to promote market acceptance of such products.
The Company believes its principal competitors are SensorMedics Corporation, a
subsidiary of ThermoElectron Corporation, and Erich Jaeger GmbH & Co. KG.
MARKETING AND DISTRIBUTION
In the United States, the Company markets its products through a direct
sales force that targets customers located in hospitals, university-based
medical centers and office-based clinics. Each sales employee is assigned to
one of two regional managers who report to the Company's Senior Vice President
of Sales and Marketing. Each salesperson is responsible for a specific
geographic area and sells the Company's complete product line within that area.
Company salespersons are compensated with a base salary, expenses and a revenue-
based commission.
The Company markets its products outside the United States into over 50
countries through approximately 37 international sales organizations that
operate primarily as distributors who carry a limited inventory of the Company's
products. These organizations sell the Company's products in specific
geographic areas, generally on an exclusive basis. International sales
accounted for 27% and 28% of total sales in 1996 and 1995, respectively. All of
the Company's international sales are made on a United States dollar-denominated
basis.
Conducting business in foreign countries involves certain risks not
ordinarily associated with domestic business including governmental laws or
restrictions that could adversely affect pricing of, and the Company's ability
to, market its products.
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The Company believes that demonstration of its products' capabilities to
potential customers is one of the most significant factors in achieving sales.
Consequently, the main thrust of domestic and international promotional efforts
is product demonstrations at conventions and customer facilities. Other
promotional efforts include educational seminars, print advertisements, direct
mail campaigns, and a company web site.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 42.8% to $2,762,000 in 1996
from $1,934,000 in 1995, representing 13.6% of revenues in 1996 compared to 8.9%
of revenues in 1995. This increase was a result of significant expenditures,
including the use of independent contractors, to convert the Company's product
software systems to a Windows environment. The Company expects to begin
shipping products with Windows-based software in the third quarter of 1997. In
addition, the Company is working on a number of product improvements designed to
enhance product reliability and performance. The Company is also engaged in the
development of new products targeted for growth markets to diversify and grow
the Company. The Company believes ongoing research and development efforts have
been and will remain important to its continuing success.
MANUFACTURING
The Company currently manufactures and assembles all major analyzer
components of its systems including a waveform analyzer, gas chromatograph,
nitrogen analyzer and oxygen analyzer. Sheet metal, electrical components and
some measurement devices are purchased from outside vendors and are tested,
assembled and packaged by Company personnel into fully integrated systems. The
Company also acquires general purpose computers, monitors and printers from a
variety of sources and integrates its proprietary transducer modules into these
systems. Through the use of in-house software engineers, the Company designs
and develops the proprietary software used in the operation of its systems.
Although some of the Company's components are available through only one or a
limited number of suppliers, the Company believes that if it is unable to obtain
components from these suppliers, it would be able to obtain comparable
components from other sources without significant additional expense or
interruption of business.
Although the Company experienced difficulty in obtaining materials from
suppliers during the fourth quarter of 1996 as a result of the Company's
liquidity crisis, which resulted in a decrease in sales, the Company has entered
into a new credit facility and has negotiated agreements with each of its
principal vendors so that it will be able to acquire raw materials from these
vendors without further interruptions.
GOVERNMENT REGULATION
Products manufactured by Medical Graphics Corporation are "devices" as
defined in the Federal Food, Drug and Cosmetic Act (the "Act") and are subject
to the regulatory authority of the Food and Drug Administration (FDA) over the
manufacture and distribution and related record keeping, labeling and
advertising thereof. The Medical Device Amendments of 1976 (the "Amendments")
amended the Act and substantially increased the regulatory authority of the FDA
over medical devices. Devices manufactured by the Company must comply with the
provisions of this law. Under the Amendments, the FDA must determine the extent
of control necessary to assure the safety and effectiveness of devices, and must
define these control levels by the promulgation of regulations and standards.
The Company has filed notifications with the FDA of its intent to market
its systems pursuant to Section 510(k) of the Amendments. Under Section 510(k),
a medical device can be marketed if the FDA determines that
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the device is substantially equivalent to similar devices marketed prior to
May 28, 1976. The FDA made such determinations for these systems, and the
Company is marketing the devices under Section 510(k).
The action of the FDA does not, however, constitute approval by the FDA of
the Company's products or pass upon their safety and effectiveness. The FDA has
increased the depth of its inspections for compliance with Good Manufacturing
Practices Regulations covering software documentation, as well as hardware
documentation.
The Company's products are also subject to similar regulation in various
foreign countries. The Company is in the process of implementing ISO 9001, a
certification showing that the Company's procedures and manufacturing facilities
comply with standards for quality assurance and manufacturing process control.
ISO 9001 certification, along with the European Medical Device Directive ("MDD")
certification, evidences compliance with the requirements that enable a company
to affix the CE Mark to its products. The CE Mark denotes conformity with
European standards for safety and allows certified devices to be placed on the
market in all European Union ("EU") countries. After June 1998, medical devices
may not be sold in EU countries unless they display the CE Mark. Because the
Company is in compliance with certain aspects of MDD, it is currently eligible
to use the CE Mark on its products. The Company expects to meet all of the
requirements for continued use of the CE Mark in early 1998 so that it may
continue to affix the CE to its product after June 1998. There can be no
assurance that the Company will be able to obtain regulatory approvals or
clearances for its products in foreign countries.
The Company must comply with various federal, state and local environmental
laws and regulations. The Company believes that it is currently in material
compliance with such applicable environmental laws and regulations.
PATENTS
The Company currently owns 17 United States domestic patents which cover
the basic aspects of the Company's core technologies, including gas pressure,
flow measurement, breath-by-breath assessment of gas exchange and some expert
systems. In addition, the Company has a number of foreign patents with respect
to the technologies covered by its United States patents. There can be no
assurance, however, that these patents, or any patents that may be issued as a
result of existing or future application, will offer any degree of protection
from competitors. The Company intends to aggressively enforce its intellectual
property rights and has successfully done so in the past. The Company also
relies on trade secrets and proprietary know-how, which it seeks to protect, in
part, through proprietary information agreements with employees, consultants and
other parties.
EMPLOYEES
As of December 31, 1996, the Company had a total of 169 employees, of which
167 were full-time employees. As part of its restructuring during the first
quarter of 1997, the Company reduced its work force to 132 employees, of which
128 are full-time employees. No employees are represented by labor
organizations and there are no collective bargaining agreements. Employee
relations are believed to be good.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases a 52,250 square foot building for its office,
assembly and warehouse facilities located in St. Paul, Minnesota. The lease
expires June 30, 2002. The facilities are in good condition. Annual rental
costs will be approximately $420,000 over the next five years. Rent expense for
the years ended December 31, 1996 and 1995 was $494,000 and $301,000,
respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in two product liability suits as
follows:
JOHN GEFROH V. TRINITY HOSPITAL AND MEDICAL GRAPHICS CORPORATION, North
Dakota District Court, Northwestern Judicial District, filed in March 1997.
ROGER D. CROWE V. NORTHSHORE REGIONAL MEDICAL CENTER, NME HOSPITALS, INC.,
TENET HEALTHCARE CORPORATION, ASTRAND MANUFACTURING AND MEDICAL GRAPHICS
CORPORATION, 22d Judicial District Court for the Parish of St. Tammany,
State of Louisiana, Case No. JDC No. 95-14240-B, filed in November 1996.
The plaintiffs in both product liability suits are seeking compensatory damages
of an undisclosed amount resulting from injuries in connection with the use of
one of the Company's products. The Company believes the injuries resulted from
the actions of one or more third parties and did not result from any actions of
the Company. The Company carries insurance in an amount that it believes is
adequate to cover any liability it may be found to have arising from the claims
in both of these suits.
In the fourth quarter of 1996, the Company experienced a liquidity crisis
and was unable to pay a significant number of its vendors when due. Subsequent
to December 31, 1996, the Company negotiated agreements with vendors, who were
owed $3,541,000, for payment of the outstanding balances in equal monthly
installments for up to 36 months. A few vendors have refused to accept the
proposed terms and in some cases have commenced litigation against the Company.
See "Management's Discussion & Analysis - Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's common stock trades on The Nasdaq National Market System
under the symbol MGCC. The following table shows the range of high and low
bid prices for the Company's Common Stock on The Nasdaq Stock Market for
the fiscal quarters indicated, as reported by Nasdaq in its "Monthly
Statistical Report." The quotations represent prices in The Nasdaq Stock
Market between dealers in securities, and do not include retail mark-up,
mark-down or commission, and may not represent actual transactions.
BID PRICES
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HIGH LOW
---- ---
1996
First Quarter $8 1/2 $4 5/8
Second Quarter 9 1/8 6 3/8
Third Quarter 8 3/8 5 1/2
Fourth Quarter 6 1/4 4
1995
First Quarter $6 1/2 $5 3/8
Second Quarter 6 1/4 5
Third Quarter 6 3/4 4 3/8
Fourth Quarter 6 1/4 4 3/8
________________________________
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON EQUITY
Approximate Number of
Holders
Title of Class (as of March 28, 1997)
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Common Stock, par value of $.05 1,900
(C) DIVIDENDS
The Company has not paid any cash dividends on its common stock, and the
Board of Directors intends to retain earnings, if any, for the foreseeable
future for use in the expansion of the Company's business. Under the terms
of the Company's new credit agreement, the Company is prohibited from
paying cash dividends unless it is in compliance with certain covenants.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENT
Statements included in this Annual Report on Form 10-KSB that are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially. Among these risks and uncertainties are (i) the
fact that the Company has incurred losses of $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 products 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 convert the Company's product software systems
to a Windows environment; and (vi) the Company's ability to develop future
products which are technologically advanced and accepted by the marketplace.
OVERVIEW
During 1996, the Company aggressively expanded its sales, marketing, and
research and development activities and management personnel. This expansion,
in part, resulted in the Company reaching its borrowing base limit on its credit
line, the signing of a forbearance agreement with its lender and the inability
to pay vendors' accounts payable when due, all of which occurred during the
fourth quarter of 1996. These events restricted the Company's ability to
produce products in the fourth quarter of 1996 and required management and the
Board of Directors to devote a significant amount of time to restructuring the
Company in the first quarter of 1997.
Subsequent to December 31, 1996, the Company retained Manchester Business
Services, Inc., to design and implement a restructuring plan. Under the
restructuring plan, 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%. Management believes that these events
provide the foundation to return the Company to profitability.
The following discussion should be read in conjunction with the Company's
consolidated financial statements as of and for the years ended December 31,
1996 and 1995 included in Item 7 of this Form 10-KSB.
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RESULTS OF OPERATIONS
The following table presents statement of operations data as a percentage
of total revenues for the years ended December 31, 1996 and 1995.
YEAR ENDED DECEMBER 31
----------------------
1996 1995
-------- --------
Revenues 100.0% 100.0%
Cost of goods sold 72.2 57.0
-------- --------
Gross margin 27.8 43.0
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Selling 40.3 33.5
General and administrative 21.5 14.0
Research and development 13.6 8.9
Provision for closing German office 3.5
-------- --------
Total operating expenses 78.9 56.4
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Loss from operations (51.1) (13.4)
Other income, net 6.2 4.0
-------- --------
Loss before income tax benefit (44.9) (9.4)
Income tax benefit (0.2) (1.4)
-------- --------
Net loss (44.7)% (8.0)%
-------- --------
-------- --------
REVENUES
Revenues decreased 6.2% to $20,289,000 in 1996 from $21,640,000 in 1995.
The decrease in revenues from 1995 to 1996 resulted primarily from 8.3% and 9.2%
decreases in domestic and international equipment sales, respectively, which
were partially offset by a 2.3% increase in service and supply revenues.
The decrease in domestic equipment sales resulted from lower selling prices
due to a more competitive selling environment and the Company's inability to
ship product in the fourth quarter of 1996 due to customer/revenue order mix and
inventory issues. The decrease in international equipment sales is attributable
to increased competition in Europe, partially offset by increased sales in the
Pacific Rim. Increases in service and supply sales are primarily the result of
increased sales of disposables used with the Company's newest line of products
and an increase in the Company's installed base of products. A significant
factor for the decrease in revenues resulted from a liquidity crisis occurring
during the fourth quarter of 1996 which resulted in the Company's inability to
produce equipment as a result of not having specific inventory components
available.
GROSS MARGIN
The gross margin for 1996 was 27.8% of revenues, compared to 43.0% for
1995. This decrease was caused by several factors including the liquidity
crisis described above, which hampered the Company's ability to acquire critical
parts for manufacturing and shipping product, inventory writedowns, an increase
in the Company's warranty reserve and an increase in price competition in the
domestic and European marketplaces.
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The amount of inventory writedowns affecting gross margin was $1,420,000 in
1996, compared to $370,000 in 1995. The warranty reserve increase in 1996 was
approximately $325,000 and occurred primarily as a result of a more competitive
five-year warranty program on certain of the Company's products. The Company
discontinued this five-year warranty program for sales occurring after March 31,
1997.
SELLING
Selling expenses increased 12.9% to $8,186,000 in 1996 from $7,253,000 in
1995. Selling expenses as a percent of revenues increased to 40.3% in 1996
compared to 33.5% in 1995. During 1996, the Company hired sales management
personnel and salespersons and invested in developing alternative markets and
distribution channels for its products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 44.0% to $4,369,000 in 1996
from $3,033,000 in 1995. As a percent of revenues, general and administrative
increased to 21.5% in 1996 from 14.0% in 1995. These increases were due in part
to an increase in the allowance for doubtful accounts receivable and higher
executive compensation resulting from additional senior management personnel.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 42.8% to $2,762,000 in 1996
from $1,934,000 in 1995 and as a percentage of revenues increased to 13.6% in
1996 from 8.9% in 1995. These increases were primarily due to increased
expenditures, including the use of independent contractors, to convert equipment
product software systems to a Windows environment.
OTHER INCOME
The Company recognized income of $1,438,000 and $975,000 in 1996 and 1995,
respectively, in connection with the settlement of a lawsuit with SensorMedics
Corporation.
NET INTEREST EXPENSE
The Company incurred net interest expense of $189,000 in 1996 as compared
to $105,000 in 1995, which resulted from increased interest payments related to
higher levels of borrowings under the Company's working capital line of credit
used to finance the loss from operations and working capital requirements.
INCOME TAX BENEFIT
The Company recognized an income tax benefit of $48,000 in 1996 compared to
$307,000 in 1995. The effective tax rates for the income tax benefits were less
than the statutory rates because the Company did not have sufficient taxable
income in prior years to carryback these losses and because the Company
increased its deferred income tax valuation allowance due to the uncertainty
regarding whether future income tax benefits will be realized.
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IMPACT OF INFLATION
The Company believes that inflation did not have a significant impact on
the Company's operations in 1996 or 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash of $545,000 and working
capital of $2,463,000. The Company used $288,000 of cash in operating
activities, primarily as a result of its net loss of $9,071,000, which was
partially offset by a decrease in accounts receivable of $4,368,000 and an
increase in accounts payable of $2,573,000. The Company used $1,229,000 in
investing activities for capital expenditures of $884,000 and software
production costs of $345,000. The Company generated $2,031,000 from financing
activities, primarily as a result of an increase of $1,725,000 in borrowings
under its line of credit.
At December 31, 1996, the Company had a working capital line of credit with
a bank that provided for borrowings, based on available collateral, of up to
$3,500,000. The Company was under a forbearance agreement with the bank at
December 31, 1996, which provided a working capital line that expired on March
31, 1997 and was replaced with a new credit agreement with an asset-based
lender. The new credit agreement provides for total borrowings, based on
available collateral, of up to $4,100,000, at the discretion of the lender, 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 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.
In March 1997, the Company's Board of Directors authorized 500,000 shares
of a new Class A Stock. The stock has a liquidation preference of $3.375 per
share. Each Class A share is currently convertible to one share of common stock
and has voting rights equal to the common stock into which it is convertible.
On March 31, 1997, the Company entered into a stock purchase agreement to issue
444,445 shares of Class A Stock. The Company received $500,000 on March 31,
1997 and issued 148,148 shares. The Company received $1,000,000 on April 15,
1997 in connection with the issuance of the remaining 296,297 shares.
Subsequent to December 31, 1996, the Company entered into financing
arrangements with certain vendors which provide for payment of the outstanding
balances in equal monthly installments up to 36 months. The balances
outstanding at December 31, 1996, which will be paid after December 31, 1997,
have been classified in the December 31, 1996 consolidated balance sheet as
long-term accounts payable financed with vendors. The amounts due under the
agreements are $1,742,000, $996,000, and $740,000, in 1997, 1998, and 1999,
respectively.
At March 31, 1997, the Company had no material commitments for capital
expenditures. The Company believes that its revenues from operations, together
with cash and borrowings under its new credit facility will be adequate to
satisfy its liquidity and capital resource needs through 1997.
11
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company are included herein:
Independent Auditors' Report for the Year ended December 31, 1996
Independent Auditors' Report for the Year ended December 31, 1995
Consolidated Balance Sheets-December 31, 1996 and 1995
Consolidated Statements of Operations-Years ended December 31, 1996 and
1995.
Consolidated Statements of Shareholders' Equity-Years ended December 31,
1996 and 1995
Consolidated Statements of Cash Flows-Years ended December 31, 1996 and
1995
Notes to Consolidated Financial Statements-Years ended December 31, 1996
and 1995
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Medical Graphics Corporation
We have audited the accompanying consolidated balance sheet of Medical Graphics
Corporation and Subsidiaries (the "Company") as of December 31, 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also incudes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such 1996 consolidated financial statements present fairly, in
all material respects, the financial position of Medical Graphics Corporation
and Subsidiaries at December 31, 1996 and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
April 4, 1997 /s/ Deloitte & Touche LLP
(April 15, 1997 as to the third paragraph of Note 11)
Minneapolis, Minnesota
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS' REPORT
Board of Directors
Medical Graphics Corporation
We have audited the accompanying consolidated balance sheet of Medical Graphics
Corporation as of December 31, 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medical Graphics
Corporation at December 31, 1995, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Minneapolis, Minnesota /s/ Ernst & Young LLP
February 16, 1996
14
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 545 $ 31
Accounts receivable, less allowance for doubtful accounts
of $496 and $363, respectively 4,814 9,182
Inventories (Notes 1 and 2) 6,633 6,160
Refundable income taxes (Note 5) 443
Prepaid expenses and other current assets 193 169
------- -------
Total current assets 12,185 15,985
EQUIPMENT AND FIXTURES (Notes 1 and 3) 3,857 3,932
Less accumulated depreciation 2,531 2,725
------- -------
Equipment and fixtures, net 1,326 1,207
SOFTWARE PRODUCTION COSTS, less accumulated amortization of $989
and $719, respectively (Note 1) 472 397
OTHER ASSETS 20 38
------- -------
$14,003 $17,627
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 921 $ 1,826
Accounts payable financed with vendors - current (Note 11) 1,742
Note payable (Notes 7 and 11) 3,400 1,675
Employee compensation 978 958
Deferred service contract revenue 988 1,156
Warranty reserve 563 240
German office closing reserve (Note 4) 700
Other liabilities and accrued expenses 430 462
------- -------
Total current liabilities 9,722 6,317
LONG-TERM ACCOUNTS PAYABLE FINANCED WITH VENDORS (Note 11) 1,736
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY (Notes 1, 8, and 11):
Class A stock, par value $.05 per share; 500 shares authorized, liquidation
preference of $3.375 per share, none issued or outstanding
Common stock, par value $.05 per share; authorized 9,500 shares; issued
and outstanding 2,559 and 2,496, respectively 128 125
Additional paid-in capital 10,224 9,921
Retained (deficit) earnings (7,807) 1,264
------- -------
2,545 11,310
------- -------
$14,003 $17,627
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUES:
Equipment sales $ 15,422 $ 16,881
Service and supplies revenue 4,867 4,759
-------- --------
Total revenues 20,289 21,640
COST OF GOODS SOLD:
Cost of equipment sales 11,352 9,991
Cost of service and supplies revenues 3,288 2,337
-------- --------
Total cost of goods sold 14,640 12,328
-------- --------
GROSS MARGIN 5,649 9,312
OPERATING EXPENSES:
Selling 8,186 7,253
General and administrative 4,369 3,033
Research and development 2,762 1,934
Provision for closing German office (Note 4) 700
-------- --------
Total operating expenses 16,017 12,220
-------- --------
LOSS FROM OPERATIONS (10,368) (2,908)
OTHER INCOME (EXPENSE):
SensorMedics settlement, net of settlement costs (Note 10) 1,438 975
Interest expense (189) (105)
-------- --------
Total other income, net 1,249 870
-------- --------
LOSS BEFORE INCOME TAX BENEFIT (9,119) (2,038)
INCOME TAX BENEFIT (Note 5) 48 307
-------- --------
NET LOSS $ (9,071) $ (1,731)
-------- --------
-------- --------
NET LOSS PER SHARE OF COMMON STOCK $ (3.56) $ (.71)
-------- --------
-------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,545 2,450
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
- --------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 2,417 $121 $ 9,659 $ 2,995 $12,775
Net loss (1,731) (1,731)
Common stock issued upon exercise of
stock options 58 3 166 169
Common stock issued under Employee
Stock Purchase Plan 21 1 96 97
----- ---- ------- ------- -------
BALANCE AT DECEMBER 31, 1995 2,496 125 9,921 1,264 11,310
Net loss (9,071) (9,071)
Common stock issued upon exercise of
stock options 45 2 229 231
Common stock issued under Employee
Stock Purchase Plan 18 1 74 75
----- ---- ------- ------- -------
BALANCE AT DECEMBER 31, 1996 2,559 $128 $10,224 $(7,807) $ 2,545
----- ---- ------- ------- -------
----- ---- ------- ------- -------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
- -----------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,071) $(1,731)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 765 381
Amortization, principally software production costs 276 189
Provision for deferred taxes 148
Changes in operating assets and liabilities:
Accounts receivable 4,368 (941)
Inventory (473) (817)
Prepaid expenses and other assets (12) 31
Refundable income taxes 443 (443)
Accounts payable 2,573 59
Employee compensation, other liabilities, and accrued expenses 688 1
Warranty reserve 323
Deferred service contract revenue (168) 93
------- -------
Net cash used in operating activities (288) (3,030)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (884) (442)
Software production costs (345) (164)
------- -------
Net cash used in investing activities (1,229) (606)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit agreement 1,725 1,675
Proceeds from stock options exercised 231 169
Proceeds from sale of common stock under employee stock purchase plan 75 97
------- -------
Net cash provided by financing activities 2,031 1,941
------- -------
INCREASE (DECREASE) IN CASH 514 (1,695)
CASH AT BEGINNING OF YEAR 31 1,726
------- -------
CASH AT END OF YEAR $ 545 $ 31
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS, LIQUIDITY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Medical Graphics Corporation (the Company) designs and produces
innovative noninvasive diagnostic systems for the prevention, early
detection, and cost-effective treatment of heart and lung disease.
LIQUIDITY - The Company's working capital requirements for 1996 were met
principally through amounts borrowed on the Company's line of credit and
credit received from the Company's vendors. During the fourth quarter of
1996, the Company reached its borrowing base limit on its credit line, was
under a forbearance agreement with the lender, and was delinquent in paying
its vendors. Subsequent to December 31, 1996, the Company entered into the
following transactions to improve its working capital position: obtained a
new line of credit; entered into an agreement to issue $1,500 of Class A
convertible stock; and reached vendor agreements which provide for payment
of outstanding accounts payable balances in equal monthly installments for
up to 36 months (see Note 11).
CONSOLIDATION - The financial statements include the accounts of the Company
and its wholly owned subsidiary, Medical Graphics Corporation, GmbH (MGCG).
All intercompany transactions have been eliminated. In December 1996, the
Board of Directors approved a plan to close MGCG (see Note 4).
INVENTORIES - Inventories are valued at the lower of cost or market
determined by the first-in, first-out method. The Company has a reserve of
$1,678 and $271 recorded at December 31, 1996 and 1995, respectively, to
reduce certain excess quantities and obsolete items to their net realizable
value.
EQUIPMENT AND FIXTURES - Equipment and fixtures are stated at cost. The
Company provides for depreciation using straight-line and accelerated
methods at rates designed to amortize the cost of equipment and fixtures
over their estimated useful lives.
SOFTWARE PRODUCTION COSTS - Software production costs are capitalized once
technological feasibility has been established and all research and
development activities for other components of the product are completed.
Capitalized software production costs are amortized over three years using
the straight-line method.
SERVICE CONTRACTS - Amounts billed to customers under service contracts are
deferred and recognized in income over the term of the agreement, and costs
are recognized as incurred.
INCOME TAXES - Income taxes are recorded under the liability method.
Deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the basis of assets and liabilities for income
tax and for financial reporting purposes using enacted tax rates in effect
during the year in which the differences are expected to reverse.
19
<PAGE>
NET LOSS PER SHARE - Net loss per share of common stock is computed by
dividing net loss by the weighted average number of common shares
outstanding during each year. Common equivalent shares from stock options
and warrants are excluded from the computation as their effect is
antidilutive.
SALES AND SEGMENT INFORMATION - The Company manufactures and sells its
products to customers primarily in the medical field and operates in only
one business segment. The Company grants its customers credit in connection
with sales of its products. It performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
The Company requires irrevocable letters of credit on sales to certain
foreign customers. Receivables generally are due within 30 days for
domestic customers. Credit losses relating to customers have consistently
been within management's expectations. Export sales to foreign countries
primarily in Europe and the Pacific Rim accounted for 27% and 28% of total
sales in 1996 and 1995, respectively.
USE OF ESTIMATES - The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from the estimates.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company records losses on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amount.
2. INVENTORIES
At December 31, the Company's inventories consisted of the following
components:
1996 1995
Purchased components and work-in-process $4,433 $3,746
Finished goods 2,200 2,414
------ ------
$6,633 $6,160
------ ------
------ ------
3. EQUIPMENT AND FIXTURES
At December 31, the Company's equipment and fixtures consisted of the
following:
1996 1995
Building improvements $ 722 $ 619
Computer equipment 1,387 1,337
Manufacturing equipment 928 971
Furniture and fixtures 820 1,005
------ ------
Total equipment and fixtures, at cost 3,857 3,932
Less accumulated depreciation 2,531 2,725
------ ------
$1,326 $1,207
------ ------
------ ------
20
<PAGE>
4. RESTRUCTURING RESERVE
During December 1996, the Board of Directors approved the closing of the
Company's subsidiary in Germany. The Company recorded a $700 charge to
operations in the fourth quarter of 1996 related to expected exit costs.
The major components of the provision are as follows:
Inventory write-down $250
Employee severance 150
Building and automobile rent terminations 150
Accounts receivable write-down 100
Other 50
----
$700
----
----
5. INCOME TAXES
Significant components of the income tax benefits are as follows:
1996 1995
Current:
Federal $(28) $(443)
State (20)
----- ------
(48) (443)
Deferred, primarily federal 136
----- ------
Income tax benefit $(48) $(307)
----- ------
----- ------
Significant components of the Company's deferred tax assets and liabilities
at December 31 are as follows:
1996 1995
Allowance for bad debts $ 176 $ 138
Inventory reserve 439 103
Warranty reserve 200 91
Restructuring reserve 238
Vacation accrual 77 35
Deferred service contract revenue 35
Valuation allowance (1,165) (367)
------- ------
Total current - -
Tax in excess of book depreciation (81)
Tax inventory capitalization (14) (8)
Capitalized software and patents (154) (128)
Net operating loss and tax credit carryforwards 2,402 385
Valuation allowance (2,234) (168)
------- ------
Total noncurrent - -
------- ------
Net deferred tax assets $ - $ -
------- ------
------- ------
21
<PAGE>
Reconciliations of the Company's expected income tax benefits computed at
the U.S. federal statutory tax rate to the income tax benefits recorded are
as follows:
1996 1995
Income tax benefit at statutory rate $(3,175) $(693)
Legal settlement, not taxable (157)
Foreign tax loss 172
Increase of deferred tax asset valuation allowance 2,864 535
Other 91 8
-------- ------
$ (48) $(307)
-------- ------
-------- ------
As of December 31, 1996, the Company has federal and state net operating
loss carryforwards of $6,041 and state research and development tax credits
carryforwards of $36 for income tax purposes that expire from 2002 through
2011. Total income taxes paid were $26 and $165 in 1996 and 1995,
respectively.
The Company's income tax returns through December 31, 1995 have been
examined by the Internal Revenue Service. The net impact of this
examination resulted in additional income taxes of $238 and interest of $60.
The additional income taxes which are due in 1997 as a result of this
examination will be refunded in 1997 as a result of the carryback of 1996
net operating losses.
6. LEASES
The Company leases office and manufacturing facilities, automobiles, and
various office accessories. The building lease expires in 2002, at which
time the Company has an option to renew the lease for an additional four
years. The Company has the option to purchase the building at the end of
each lease expiration period at the building's fair market value.
Future minimum lease payments under noncancelable operating leases with
remaining terms of one year or more consisted of the following at December
31, 1996:
Year ending December 31:
1997 $ 497
1998 422
1999 397
2000 404
2001 354
Thereafter 174
------
$2,248
------
------
Rent expense for the years ended December 31, 1996 and 1995 was $494 and
$301, respectively.
7. NOTE PAYABLE TO BANK
At December 31, 1996, the Company had a working capital line of credit with
a bank that provided for borrowings, based on available collateral as
defined, of up to $3,500 with interest at prime plus 1-1/2% (9.75% at
December 31, 1996). At December 31, 1995, the interest rate was prime,
8.5%. At December 31, 1996, the Company was in violation of the terms of
the credit agreement and was
22
<PAGE>
under a forbearance agreement with the bank. This working capital line
expired on March 31, 1997 (see Note 11). All borrowings were secured by
the Company's accounts receivable and inventories. The Company had
outstanding borrowings of $3,400 and $1,675 at December 31, 1996 and 1995,
respectively. Total interest paid was $167 and $105 for the years ended
December 31, 1996 and 1995.
8. STOCK OPTIONS, EMPLOYEE STOCK PURCHASE PLAN AND 401(k)
The Company has an Employee Incentive Stock Option Plan under which a total
of 750 shares have been reserved for issuance, with 106 shares remaining
reserved and unissued at December 31, 1996. Options are generally issued at
prices not less than the fair market value at the date of grant and become
exercisable over a one- to five-year period. Also, under the Option Plan,
nonqualified options have been issued to members of the Board of Directors
and certain nonemployees. These options become exercisable over a one- to
five-year period following the date of grant.
The Company also has a Nonemployee Director Stock Option Plan, which
provides for the grant of nonqualified options for up to 150 shares of
common stock to nonemployee members of the Board of Directors. Under the
plan, an option to purchase ten shares of Common Stock will be granted
automatically when an eligible director is first elected to the Board of
Directors of the Company. An option to purchase 3 shares will be granted
automatically following each Annual Meeting of the Shareholders in which the
director is serving in office. After the director has served more than
three years in office, the annual grant increases to 5 shares. The option
exercise price per share will equal the fair market value of the common
stock on the date of grant. All options granted under the plan become
exercisable one year after the date of grant.
A summary of the activity is as follows:
<TABLE>
<CAPTION>
Employee Weighted Weighted
Incentive Average Nonqualified Average
Stock Options Exercise Stock Options Exercise
Outstanding Price Outstanding Price
<S> <C> <C> <C> <C>
Balance at December 31, 1994 231 $6.18 277 $6.88
Granted 54 5.19 36 3.69
Exercised (34) 3.29 (30) 2.91
Canceled or expired (30) 4.43 (52) 5.39
--- ----- --- -----
Balance at December 31, 1995 221 6.62 231 7.54
Granted 95 5.87 165 5.52
Exercised (39) 4.50
Canceled or expired (61) 8.51 (2) 3.50
--- ----- --- -----
Balance at December 31, 1996 216 $6.14 394 $6.72
--- ----- --- -----
--- ----- --- -----
Exercisable at December 31, 1995 114 $7.60 183 $7.94
--- ----- --- -----
--- ----- --- -----
Exercisable at December 31, 1996 86 $6.70 210 $7.71
--- ----- --- -----
--- ----- --- -----
</TABLE>
23
<PAGE>
The Company's Employee Stock Purchase Plan (the ESP Plan), a qualified plan
pursuant to Internal Revenue Code Section 423, became effective in May
1993. The ESP Plan gives eligible employees an opportunity to purchase the
Company's common stock, through payroll deductions not exceeding 15% of
eligible compensation, at a per share price of 85% of the lesser of the
fair value on the first day or the last day of each six-month purchase
period. The six-month purchase periods begin on July 1 and January 1 of
each year. Participating employees may purchase a maximum of five shares
during each purchase period and no more than $25 of fair value of stock in
each calendar year. A total of 200 shares have been authorized for
issuance under the ESP Plan. Shares issued under the ESP Plan in 1996 and
1995 were 18 and 21 shares, respectively. The ESP Plan will terminate on
January 1, 2003, unless extended by the Board of Directors.
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company has
elected to continue following the accounting guidance of Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
for measurement and recognition of stock-based transactions with employees.
No compensation cost has been recognized for options issued under the stock
option plans, because the exercise price of all options granted was at
least equal to the fair value of the common stock on the date of the grant.
Had compensation costs for the stock options issued to certain directors
and employees and common stock issued under the ESP Plan been determined
based on the fair value at the grant date, consistent with the provisions
of SFAS No. 123, the Company's 1996 and 1995 pro forma net loss would have
been $9,303 and $1,777, respectively, and net loss per share would have
been $3.66 and $.73, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0%; a risk-free interest rate of 6.1% and
6.6% in 1996 and 1995, respectively; an expected life of 10 years; and
expected volatility of 44%. The weighted average fair value of options
issued in 1996 and 1995 was $3.76 and $3.56, respectively.
Substantially all employees of the Company may participate in a defined
contribution plan established under the provisions of Section 401(k) of the
Internal Revenue Code. The plan generally provides for a contribution by
the employee of up to 15% of their gross earnings with a 25% matching
contribution by the Company on the first 6% of gross earnings. The expense
of the plan was approximately $62 and $63 in 1996 and 1995, respectively.
9. RELATED-PARTY TRANSACTIONS
A current officer/former director of the Company is the president of
ErgometRx Corporation and is the husband of an officer/Chairman of the
Board of Directors who resigned in March 1997. ErgometRx Corporation
possesses certain proprietary information and prototype hardware relating
to an exercise bike used for stress testing and physical exercise. The
Company has obtained an exclusive license to manufacture and sell products
utilizing this proprietary information in certain markets under a five-year
royalty agreement. Under this agreement, the Company paid royalties of $40
and $96 in 1996 and 1995, respectively. During 1996, the Company advanced
ErgometRx Corporation approximately $165 in cash and products, which has
been fully reserved for at December 31, 1996.
24
<PAGE>
An officer/Chairman of the Board of Directors of the Company who resigned
in March 1997 is also the president of e-med.OnCall, Inc.. During 1996,
the Chairman began a transition from the Company to e-med.OnCall, Inc.. As
part of this transition, the Company transferred equipment with a net book
value of approximately $75 to a new office for the Chairman and paid
certain administrative expenses in the amount of approximately $60 with
respect to that office. This office also serves as the office for
e-med.OnCall, Inc.. All such amounts were recorded as administrative
expense during 1996.
10. LITIGATION
During 1995, the Company was awarded a judgment of $4.35 million, related
to a patent infringement suit against a competitor. The judgment was to be
paid over an eight-year period. The Company received $975 after associated
legal costs during 1995. The Company recorded the gain as cash was
received due to uncertainty regarding the ultimate collectability of the
judgment. During 1996, the competitor was acquired by a third party and
pursuant to the terms of the settlement agreement, the Company received the
net present value of the remaining payments. The Company received $1,438
after paying associated legal costs in 1996. As part of the original
judgment, the Company retained the right to proceed against one of the
competitors' insurers for an additional $250. The Company is unable to
assess the likely outcome of this potential gain contingency at this time
and has not recorded any amount related to the additional $250 in the
consolidated financial statements.
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
consolidated financial statements.
11. SUBSEQUENT EVENTS
In March 1997, the Company obtained a new credit agreement with Norwest
Business Credit Inc. (NBCI) that provides for total borrowings, based on
available collateral as defined, of up to $4,100, at the discretion of
NBCI, 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), 90% of eligible foreign accounts receivable and 75% of eligible
export inventory.
Borrowings under the line of credit bear interest at the NBCI "base" rate
plus 4.0% (12.25% at December 31, 1996). 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. In addition, the Company granted to NBCI a
three-year warrant to purchase 62.5 shares of the Company's common stock at
an exercise price of $3.375 per share.
In March 1997, the Company's Board of Directors authorized 500 shares of a
new class of participating convertible stock (Class A stock). The Class A
stock has voting rights 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, the Company entered into a stock
25
<PAGE>
purchase agreement to issue 444 shares of the new class of stock at $3.375
per share. The Company received $500 on March 31, 1997 and the balance of
$1,000 was received on April 15, 1997.
Subsequent to December 31, 1996, the Company entered into financing
arrangements with certain vendors which provide for payment of the
outstanding balances in equal monthly installments for up to 36 months.
The balances outstanding at December 31, 1996, which will be paid after
December 31, 1997, have been classified as long-term accounts payable
financed with vendors. The amounts due under the agreements are payable
$1,742, $996, and $740, in 1997, 1998, and 1999, respectively.
26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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.
See Item 13.
PART III
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
Annual Meeting of Shareholders, a definitive copy of which will be filed
within 120 days of December 31, 1996, 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, 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, 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, is hereby incorporated by reference.
27
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE NUMBER OR INCORPORATION
EXHIBIT 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,
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
28
<PAGE>
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
the Company and FAMCO II LLC
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
</TABLE>
- ----------------------------------
*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.
29
<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
April 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 April 15, 1997
- -------------------- and Director
Mark W. Sheffert
/s/ Glenn D. Taylor President, Chief Executive April 15, 1997
- ------------------- Officer and Director (Principal
Glenn D. Taylor Executive Officer)
/s/ Dale H. Johnson Chief Financial Officer April 15, 1997
- ------------------- (Principal Financial and
Dale H. Johnson Accounting Officer)
/s/ Anthony J. Adducci Director April 15, 1997
- ----------------------
Anthony J. Adducci
/s/ Gerald T. Knight Director April 15, 1997
- --------------------
Gerald T. Knight
/s/ W. Edward McConaghay Director April 15, 1997
- ------------------------
W. Edward McConaghay
30
<PAGE>
/s/ Donald C. Wegmiller Director April 15, 1997
- -----------------------
Donald C. Wegmiller
/s/ John C. Penn Director April 15, 1997
- ----------------
John C. Penn
/s/ John D. Wunsch Director April 15, 1997
- ------------------
John D. Wunsch
31
<PAGE>
CERTIFICATE
OF
RIGHTS AND PREFERENCES
OF
CLASS A STOCK
OF
MEDICAL GRAPHICS CORPORATION
The undersigned, being the Chairman of Medical Graphics Corporation,
hereby certifies that (a) the following resolution was duly adopted on March
25, 1997 by the Board of Directors of such Corporation, acting pursuant to
the provision of section 302A.401, subdivision 3 of the Minnesota Business
Corporation Act, for the purpose of designating a separate class of the
Corporation's authorized stock as "Class A Stock" and fixing the relative
rights and preferences of such class, and (b) such resolution has not been
subsequently modified or rescinded:
"RESOLVED, that 500,000 shares of this Corporation's authorized stock
shall be designated as "Class A Stock," and the rights, preferences,
privileges and restrictions granted to or imposed upon the Class A Stock are
as follows:
(A) VOTING RIGHTS.
Each holder of Class A Stock shall have one vote on all matters
submitted to the shareholders of this Corporation for each share of Common
Stock $.05 par value ("Common Share") which such holder of Class A Stock
would be entitled to receive upon the conversion such holder's Class A Stock
pursuant to the provisions of subsection (C)(3) of this Certificate. In
addition, each holder of Class A Stock shall have the special voting rights
which are described in subsection (C)(4) of this Certificate. No holder of
any Class A Stock shall have any cumulative voting rights.
(B) PREEMPTIVE RIGHTS.
No holder of Class A Stock shall be entitled as such, as a matter of
right, to subscribe for, purchase or receive any part of any class of stock
whatsoever, or of securities convertible into or exchangeable for any stock
of any class whatsoever, whether now or hereafter authorized and whether
issued for cash or other consideration or by way of dividend.
<PAGE>
(C) CLASS A STOCK.
(1) DIVIDENDS. In the event that this Corporation declares and
pays any cash dividends with respect to its Common Shares, the holders of
Class A Stock shall be entitled to receive a cash dividend per share equal to
the cash dividend that would otherwise be payable with respect to each such
share if it had been converted into Common Shares pursuant to the provisions
of subsection (C)(3) of this Certificate.
(2) LIQUIDATION PREFERENCE. In the event of the liquidation,
dissolution or winding up of this Corporation, whether voluntary or
involuntary, the holders of the Class A Stock shall be entitled to receive in
cash, out of the assets of this Corporation, an amount equal to $3.375 per
share for each outstanding share of Class A Stock before any payment shall be
made or any assets distributed to the holders of this Corporation's Common
Shares or any other class of shares of this Corporation; and the holders of
the Class A Stock shall not be entitled to share in any other assets of this
Corporation thereafter remaining. If, upon any liquidation or dissolution of
this Corporation, the assets of the Corporation are insufficient to pay such
$3.375 per share for each outstanding share of Class A Stock, the holders of
such shares shall share pro rata in any such distribution in proportion to
the full amounts to which they would otherwise be respectively entitled.
(3) CONVERSION RIGHTS. (a) Each share of Class A Stock shall be
convertible at the option of the holder thereof into one Common Share of this
Corporation, subject to adjustment as provided below. In order to exercise
the conversion privilege, a holder of the Class A Stock shall surrender the
certificate to the Corporation at its principal office, accompanied by
written notice to the Corporation that the holder elects to convert a
specified portion or all of such shares. Class A Stock shall be deemed to
have been converted on the day of surrender of the certificate representing
such shares for conversion in accordance with the foregoing provisions, and
at such time the rights of the holder of such Class A Stock, as such holder,
shall cease and such holder shall be treated for all purposes as the record
holder of Common Shares issuable upon conversion. As promptly as practicable
on or after the conversion date, this Corporation shall issue and mail or
deliver to such holder a certificate or certificates for the number of Common
Shares issuable upon conversion, computed to the nearest one hundredth of a
full share, and a certificate or certificates for the balance of the Class A
Stock surrendered, if any, not so converted into Common Shares.
(b) The number of Common Shares issuable upon the conversion of
any share of Series A Stock shall be adjusted from time to time to reflect
changes in the capital structure of this Corporation, and shall be determined
by dividing $3.375 by the conversion price (the "Conversion Price") then in
effect. The Conversion Price shall initially be $3.375 and shall be subject
to adjustment from time to time as hereinafter provided:
2
<PAGE>
(i) In case this Corporation shall declare a dividend upon
its Common Shares payable otherwise than in cash out of earnings or surplus
(including a dividend payable in Common Shares), then thereafter each holder
of Class A Stock upon the conversion thereof will be entitled to receive the
number of Common Shares into which such Class A Stock shall be converted,
and, in addition and without payment therefor, the stock or other securities
and other property (including Common Shares) which such holder would have
received by way of dividends or distributions (otherwise than out of earnings
or surplus) if continuously since the record date for any such dividend or
distribution such holder (aa) has been the record holder of the number of
Common Shares then received, and (bb) had retained all dividends or
distributions in stock or securities payable in respect of such Common Shares
or in respect of any stock or securities paid as dividends or distributions
and originating directly or indirectly from such Common Shares.
(ii) In case this Corporation shall at any time subdivide or
split its outstanding Common Shares into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision or split
shall be proportionately reduced, and conversely, in case the outstanding
Common Shares of this Corporation shall be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
shall be appropriately increased.
(iii) If and whenever this Corporation shall (a) issue or sell
any of its Common Shares for a consideration per share less than the
Conversion Price then in effect, (b) issue or sell warrants, options or other
rights to acquire its Common Shares at a price less than the Conversion Price
then in effect, or (c) issue or sell any other securities that are
convertible into its Common Shares for a purchase or exchange price less than
the Conversion Price then in effect, other than (i) shares subject to options
and warrants outstanding as of the date hereof, and (ii) shares issued
pursuant to the Corporation's Employee Stock Purchase Plan or any subsequent
employee stock purchase plan adopted pursuant to Section 423 of the Internal
Revenue Code of 1986, as amended, at prices lower than the Conversion Price,
then, forthwith upon such issuance or sale, the Conversion Price in effect
immediately prior to such issuance or sale shall be reduced to the purchase
price or conversion or exchange price at which such issuance or sale is
effected.
(iv) Upon any adjustment of the Conversion Price, then and in
each such case this Corporation shall give written notice thereof, by
first-class mail, postage prepaid, addressed to the registered holders of the
Class A Stock at the addresses of such holders as shown on the books of this
Corporation, which notice shall state the Conversion Price resulting from
such adjustment and the increase or decrease, if any, in the number of shares
receivable at such price upon the conversion of the Class A Stock, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.
(c) In case any time:
3
<PAGE>
(i) this Corporation shall pay any dividend payable in stock
upon its Common Shares or make any distribution (other than regular cash
dividends) to the holders of its Common Shares; or
(ii) this Corporation shall offer by subscription pro rata to
the holders of its Common Shares any additional shares of stock of any class
or other rights; or
(iii) there shall be any capital reorganization,
reclassification of the capital stock of this Corporation, or consolidation
or merger of this Corporation with, or sale of all or substantially all of
its assets to another Corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of this Corporation;
Then, in any one or more of said cases, this Corporation shall give
written notice, by first-class mail, postage prepaid, addressed to the
holders of the Class A Stock at the addresses of such holders as shown on the
books of this Corporation, of the date on which (aa) the books of this
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights, or (bb) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also
specify the date as of which the holders of Common Shares of record shall
participate in such dividend, distribution or subscription rights, or shall
be entitled to exchange their Common Shares for securities or other property
deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be.
Such written notice shall be given at least 20 days prior to the action in
question and not less than 20 days prior to the record date or the date on
which this Corporation's transfer books are closed in respect thereto.
(4) VOTING RIGHTS. Except as otherwise required by law, so long as any
shares of the Class A Stock remain outstanding, this Corporation shall not,
without the vote or written consent by the holders of at least one half of
the Class A Stock, voting together as a single class (a) participate in any
reorganization, transfer of a substantial portion of its assets,
consolidation, plan of exchange, or merger or acquisition (except for a mere
reincorporation); or (b) authorize or issue any (i) preferred shares or (ii)
shares of stock having priority over the Class A Stock or ranking on a parity
therewith as to the payment of distribution of assets upon the liquidation or
dissolution, voluntary or involuntary, of this Corporation; or (c) amend the
Articles of Incorporation of this Corporation or this Certificate so as to
alter any existing provision of this Certificate relating to the Class A
Stock.
4
<PAGE>
RESOLVED, FURTHER, that the appropriate officers of this Corporation are
authorized and directed to file a Certificate containing the foregoing
resolution with the Secretary of State of Minnesota in accordance with the
applicable provisions of the Minnesota Business Corporation Act."
IN WITNESS WHEREOF, the undersigned have executed this certificate as of
the 31st day of March 1997.
MEDICAL GRAPHICS CORPORATION
By: /s/ Mark W. Sheffert, Chairman
--------------------------------
MARK W. SHEFFERT, CHAIRMAN
5
<PAGE>
______________________________________________
______________________________________________
CREDIT AGREEMENT
BY AND BETWEEN
MEDICAL GRAPHICS CORPORATION
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Dated as of: March 31, 1997
[LOGO]
______________________________________________
______________________________________________
<PAGE>
Table of Contents
-----------------
ARTICLE I Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II Amount and Terms of the Credit Facility. . . . . . . . . . . . .10
Section 2.1 Revolving Advances. . . . . . . . . . . . . . . . . . . . . . .10
Section 2.2 Requests for Advances . . . . . . . . . . . . . . . . . . . . .10
Section 2.3 Interest; Minimum Interest Charge; Default Interest . . . . . .11
Section 2.4 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Section 2.5 Application of Payments . . . . . . . . . . . . . . . . . . . .12
Section 2.6 Capital Adequacy. . . . . . . . . . . . . . . . . . . . . . . .12
Section 2.7 Termination by Borrower . . . . . . . . . . . . . . . . . . . .13
Section 2.8 Mandatory Prepayment. . . . . . . . . . . . . . . . . . . . . .13
Section 2.9 Advances Without Request. . . . . . . . . . . . . . . . . . . .13
Section 2.10 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . .13
Section 2.11 Facility Subject to Eximbank Rules. . . . . . . . . . . . . . .14
ARTICLE III Conditions of Lending. . . . . . . . . . . . . . . . . . . . . .14
Section 3.1 Conditions Precedent to the Initial Revolving Advance . . . . .14
Section 3.2 Conditions Precedent to All Advances. . . . . . . . . . . . . .16
ARTICLE IV Representations and Warranties . . . . . . . . . . . . . . . . .16
Section 4.1 Corporate Existence and Power; Name; Chief Executive Office;
Inventory and Equipment Locations; Tax Identification
Number . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Section 4.2 Authorization of Borrowing; No Conflict as to Law
or Agreements . . . . . . . . . . . . . . . . . . . . . . . . .17
Section 4.3 Legal Agreements. . . . . . . . . . . . . . . . . . . . . . . .17
Section 4.4 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . .17
Section 4.5 Financial Condition; No Adverse Change. . . . . . . . . . . . .17
Section 4.6 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . .17
Section 4.7 Regulation U. . . . . . . . . . . . . . . . . . . . . . . . . .18
Section 4.8 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Section 4.9 Titles and Liens. . . . . . . . . . . . . . . . . . . . . . . .18
Section 4.10 Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Section 4.11 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Section 4.12 Environmental Matters . . . . . . . . . . . . . . . . . . . . .19
Section 4.13 Submissions to Lender . . . . . . . . . . . . . . . . . . . . .20
Section 4.14 Financing Statements . . . . . . . . . . . . . . . . . . . . .20
Section 4.15 Rights to Payment . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE V Borrower's Affirmative Covenants . . . . . . . . . . . . . . . .20
Section 5.1 Reporting Requirements. . . . . . . . . . . . . . . . . . . . .20
<PAGE>
Section 5.2 Books and Records; Inspection and Examination . . . . . . . . .22
Section 5.3 Account Verification. . . . . . . . . . . . . . . . . . . . . .22
Section 5.4 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . .23
Section 5.5 Payment of Taxes and Other Claims . . . . . . . . . . . . . . .23
Section 5.6 Maintenance of Properties . . . . . . . . . . . . . . . . . . .23
Section 5.7 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Section 5.8 Preservation of Existence . . . . . . . . . . . . . . . . . . .24
Section 5.9 Delivery of Instruments, etc. . . . . . . . . . . . . . . . . .24
Section 5.10 Collateral Account. . . . . . . . . . . . . . . . . . . . . . .24
Section 5.11 Performance by the Lender . . . . . . . . . . . . . . . . . . .25
Section 5.12 Minimum Tangible Net Worth. . . . . . . . . . . . . . . . . . .25
ARTICLE VI Negative Covenants . . . . . . . . . . . . . . . . . . . . . . .26
Section 6.1 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Section 6.2 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . .26
Section 6.3 Guaranties. . . . . . . . . . . . . . . . . . . . . . . . . . .26
Section 6.4 Investments and Subsidiaries. . . . . . . . . . . . . . . . . .27
Section 6.5 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Section 6.6 Sale or Transfer of Assets; Suspension of Business
Operations . . . . . . . . . . . . . . . . . . . . . . . . . .27
Section 6.7 Consolidation and Merger; Asset Acquisitions. . . . . . . . . .28
Section 6.8 Sale and Leaseback. . . . . . . . . . . . . . . . . . . . . . .28
Section 6.9 Restrictions on Nature of Business. . . . . . . . . . . . . . .28
Section 6.10 Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . .28
Section 6.11 Discounts, etc. . . . . . . . . . . . . . . . . . . . . . . . .28
Section 6.12 Defined Benefit Pension Plans . . . . . . . . . . . . . . . . .28
Section 6.13 Other Defaults. . . . . . . . . . . . . . . . . . . . . . . . .28
Section 6.14 Place of Business; Name . . . . . . . . . . . . . . . . . . . .28
Section 6.15 Organizational Documents; S Corporation Status. . . . . . . . .29
Section 6.16 Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . .29
ARTICLE VII Events of Default, Rights and Remedies . . . . . . . . . . . . .29
Section 7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . .29
Section 7.2 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . .30
Section 7.3 Certain Notices . . . . . . . . . . . . . . . . . . . . . . . .30
ARTICLE VIII Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . .30
Section 8.1 Addresses for Notices, Etc. . . . . . . . . . . . . . . . . . .30
Section 8.2 Servicing of Credit Facility. . . . . . . . . . . . . . . . . .30
Section 8.3 Costs and Expenses. . . . . . . . . . . . . . . . . . . . . . .31
Section 8.4 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Section 8.5 Binding Effect; Assignment; Counterparts;
Exchanging Information . . . . . . . . . . . . . . . . . . . .32
-ii-
<PAGE>
Section 8.6 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. . . .33
-iii-
<PAGE>
CREDIT AGREEMENT
(Eximbank Guaranteed Loan No. _____________)
Dated as of March 31, 1997
MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the
"Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national
banking association (the "Lender"), hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. For all purposes of this Agreement, except
as otherwise expressly provided or unless the context otherwise requires:
"Accounts" means the aggregate unpaid obligations of customers and
other account debtors to the Borrower arising out of the sale or lease of
goods or rendition of services by the Borrower on an open account or
deferred payment basis, whether now existing or hereafter arising.
"Advance" means a Revolving Advance.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrower, including (without
limitation) any subsidiary of the Borrower. For purposes of this
definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities,
by contract or otherwise.
"Agreement" means this Credit Agreement, as amended, supplemented and
restated from time to time.
"Availability" means the Borrowing Base reduced by the outstanding
principal balance of the Revolving Advances.
"Base Rate" means the rate of interest publicly announced from time to
time by the Lender as its "base rate" or, if the Lender ceases to announce
a rate so designated, any similar successor rate designated by the Lender.
"Banking Day" means a day on which the Federal Reserve Bank of New
York is open for business.
<PAGE>
"Borrower Agreement" means the Borrower Agreement of even date
herewith by and between the Borrower and the Lender in the form attached
hereto as Exhibit C.
"Borrowing Base" means, at any time the least of:
(a) the Maximum Line; or
(b) the difference of $4,100,000 and the outstanding principal
balance of the NBCI Revolving Advances; or
(c) subject to change from time to time in the Lender's sole
discretion, the sum of:
(i) 90% of Eligible Foreign Accounts; and
(ii) 75% of Eligible Export Inventory.
"Borrowing Base Certificate" means a certificate, substantially in the
form attached hereto as Exhibit E, executed by the Borrower and accepted by
the Lender.
"Business Day" means any day on which the Federal Reserve Bank of New
York is open for business.
"Closing Date" means the date of this Agreement.
"Collateral" has the meaning given in the Security Agreements.
"Collateral Account" has the meaning given in the Collateral Account
Agreement.
"Collateral Account Agreement" means the Collateral Account Agreement
by and among the Borrower, Norwest Bank International New York Branch and
the Lender of even date herewith, as the same may hereafter be amended,
supplemented or restated from time to time.
"Collateral Pledge Agreement" means the Collateral Pledge Agreement of
even date herewith pursuant to which the Borrower pledges to the Lender and
NBCI all of its shares in Medical Graphics F.S.C. and ErgometRx, as the
same may hereafter be amended, supplemented or restated from time to time.
"Commitment" means the Lender's commitment to make Advances to or for
the Borrower's account pursuant to Article II.
"Country Limitation Schedule" shall mean the most recent schedule
published by Eximbank and provided to the Borrower by the Lender which sets
forth on a country by country basis whether and under what conditions
Eximbank will provide coverage for the financing of export transactions to
countries listed therein.
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"Credit Facility" means the credit facility made available to the
Borrower pursuant to Article II.
"Debt" of any Person means all items of indebtedness or liability
which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet of that
Person as at the date as of which Debt is to be determined. For purposes of
determining a Person's aggregate Debt at any time, "Debt" shall also
include the aggregate payments required to be made by such Person at any
time under any lease that is considered a capitalized lease under GAAP.
"Default" means an event that, with giving of notice or passage of
time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the first day
of any month during which a Default or Event of Default has occurred and
ending on the date the Lender notifies the Borrower in writing that such
Default or Event of Default has been cured or waived.
"Default Rate" means an annual rate equal to three percent (3%) over
the Floating Rate, which rate shall change when and as the Floating Rate
changes.
"Eligible Export Inventory" means all Inventory consisting of Items,
raw materials and components to be used to manufacture Items, and work-in-
process relating to Items, and raw materials and components the Borrower
must purchase to manufacture Items, at the lower of cost or market value as
determined in accordance with GAAP; provided, however, that the following
shall not in any event be deemed Eligible Export Inventory:
(i) Inventory that is: in-transit; located at any
warehouse or other premises not approved by the Lender in writing;
located outside of the states, or localities, as applicable, in
which the Lender has filed financing statements to perfect a first
priority security interest in such Inventory; covered by any
negotiable or non-negotiable warehouse receipt, bill of lading or
other document of title; on consignment from any Person; on
consignment to any Person or subject to any bailment;
(ii) Inventory consisting of proprietary software;
(iii) Inventory that is damaged, slow moving, obsolete,
returned, defective, recalled or unfit for further processing or not
currently saleable in the normal course of the Borrower's operations;
(iv) Inventory that is perishable or live;
(v) Inventory that the Borrower has returned, has attempted to
return, is in the process of returning or intends to return to the
vendor thereof;
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(vi) Inventory that is subject to a security interest in
favor of any Person other than the Lender or NBCI;
(vii) Sample or demonstration Inventory;
(viii) Inventory which has been previously exported from the
United States of America;
(ix) Inventory which constitutes defense articles or defense
services;
(x) Inventory consisting of or to be incorporated into Items
destined for shipment to a Prohibited Country;
(xi) The Foreign Content portion of Items containing less than
fifty percent (50%) US Content;
(xii) For Items containing at least fifty percent (50%) US
Content, any Foreign Content not incorporated into such Items in the
US;
(xiii) That portion of Inventory consisting of or to be
incorporated into Items whose sale would result in an Account deemed
ineligible under clauses (ii), (viii), (x), or (xi) of the definition
of "Eligible Foreign Accounts"; and
(xiv) Inventory otherwise deemed ineligible by the Lender in
its discretion.
"Eligible Foreign Accounts" means all Accounts owed by Account
debtors located outside the US for the sale or provision of Items,
except the following shall not in any event be deemed Eligible Foreign
Accounts:
(i) That portion of Accounts not yet earned by the final
delivery of goods or rendition of services, as applicable, by the
Borrower to the customer;
(ii) That portion of Accounts not providing for payment in full
within 180 days of shipment date;
(iii) That portion of Accounts over 60 days past the original
due date or, 90 days past the original due date if insured through
Eximbank export credit insurance for comprehensive commercial and
political risk, or through an Eximbank approved private insurer for
comparable coverage;
(iv) Accounts owed by a shareholder, Affiliate, officer or
employee of the Borrower;
(v) Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
(vi) Accounts not subject to a duly perfected security interest
in favor of the Lender or which are subject to any lien, security
interest or claim in favor of any Person other than the Lender or
NBCI;
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(vii) That portion of Accounts that constitutes finance
charges, service charges or sales or excise taxes;
(viii) That portion of Accounts payable in a currency other
than US Dollars unless prior written approval has been received from
Eximbank;
(ix) That portion of Accounts owed by military buyers or for
defense articles or services, except as may be approved in writing by
the Lender and Eximbank;
(x) That portion of Accounts due and collectible outside the
United States;
(xi) That portion of Accounts owed by Account debtors
located in, or arising from sales of Items delivered to, a
Prohibited Country;
(xii) That portion of Accounts, or portions thereof,
otherwise deemed uncollectible for any reason by the Lender or
Eximbank in its discretion.
"ErgometRx" means ErgometRx, Inc., a Minnesota corporation.
"Event of Default" has the meaning specified in Section 7.1.
"Eximbank" means the Export-Import Bank of the United States.
"Export Order" means a bona fide written export order or contract
to purchase Items from the Borrower from a customer outside the US.
"Floating Rate" means an annual rate equal to the sum of the Base
Rate plus four percent (4%), which annual rate shall change when and as
the Base Rate changes.
"Foreign Content" means that portion of the cost of an Item arising
from materials which are not of US origin or from labor and services not
performed in the US.
"GAAP" means generally accepted accounting principles, applied on a
basis consistent with the accounting practices applied in the financial
statements described in Section 4.5.
"Inventory" means all of the Borrower's inventory, as such term is
defined in the UCC, whether now owned or hereafter acquired.
"Items" means the goods and services to be sold by the Borrower to
customers located outside the United States pursuant to Export Orders.
"Loan Documents" means this Agreement, the Notes, the Borrower
Agreement and the Security Documents.
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"Master Guaranty" means that certain Master Guaranty Agreement
No. MN-MGA-96-001, dated as of November 13, 1996, by and between the Lender
and Eximbank.
"Maturity Date" means March 30, 1998.
"Maximum Line" means $1,750,000.
"Medical Graphics F.S.C." means Medical Graphics F.S.C., Inc., a US
Virgin Island corporation.
"Medical Graphics Germany" means Medical Graphics GmbH, a German
corporation.
"Minimum Interest Charge" has the meaning given in Section 2.3(b).
"NBCI" means Norwest Business Credit, Inc., a Minnesota corporation.
"NBCI Credit Agreement" means that certain Credit and Security
Agreement of even date herewith by and between the Borrower and NBCI, as
the same may hereafter be amended, supplemented or restated from time to
time.
"NBCI Credit Facility" means the credit facility extended to the
Borrower pursuant to the NBCI Credit Agreement.
"Net Income" means fiscal year-to-date after-tax net income as
determined in accordance with GAAP.
"Notes" means Revolving Note A and Revolving Note B.
"Obligations" means each and every debt, liability and obligation of
every type and description which the Borrower may now or at any time
hereafter owe to the Lender, including all indebtedness arising under this
Agreement, the Notes or any other loan or credit agreement or guaranty
between the Borrower and the Lender, whether now in effect or hereafter
entered into.
"Patent and Trademark Security Agreement" means the Patent and
Trademark Security Agreement by the Borrower in favor of the Lender of even
date herewith, as the same may hereafter be amended, supplemented or
restated from time to time.
"Permitted Lien" has the meaning given in Section 6.1.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
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"Premises" means all premises where the Borrower conducts its business
and has any rights of possession.
"Prohibited Country" means any country in which Eximbank coverage is
not available for commercial reasons or in which Eximbank is legally
prohibited from doing business, as designated in the Country Limitation
Schedule.
"Revolving Advance" has the meaning given in Section 2.1.
"Revolving Note A" means the Borrower's revolving promissory note,
payable to the order of the Lender in substantially the form of Exhibit A
hereto.
"Revolving Note B" means the Borrower's revolving promissory note,
payable to the order of the Lender in substantially the form of Exhibit B
hereto.
"Security Agreements" means Security Agreement A and Security
Agreement B.
"Security Agreement A" means that certain Security Agreement "A" of
even date herewith by and between the Borrower and the Lender, securing
payment of Revolving Note A.
"Security Agreement B" means that certain Security Agreement "B" of
even date herewith by and between the Borrower and the Lender, securing
payment of Revolving Note B.
"Security Documents" means this Agreement, the Collateral Account
Agreement, the Collateral Pledge Agreement, the Patent and Trademark
Security Agreement, and any other document delivered to the Lender from
time to time to secure the Obligations, as the same may hereafter be
amended, supplemented or restated from time to time.
"Security Documents" means this Agreement, the Security Agreements and
the Patent and Trademark Security Agreement.
"Security Interest" means the security its granted under the Security
Documents.
"Servicer" means NBCI.
"Tangible Net Worth" means the difference between (i) the tangible
assets of the Borrower, which, in accordance with GAAP are tangible assets,
after deducting adequate reserves in each case where, in accordance with
GAAP, a reserve is proper and (ii) all Debt of the Borrower; PROVIDED,
HOWEVER, that notwithstanding the foregoing in no event shall there be
included as such tangible assets patents,
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trademarks, trade names, copyrights, licenses, goodwill, receivables
from Affiliates, directors, officers or employees, prepaid expenses,
deposits, deferred charges or treasury stock or any securities or Debt
of the Borrower or any other securities unless the same are readily
marketable in the United States of America or entitled to be used as a
credit against federal income tax liabilities, and any other assets
designated from time to time by the Lender, in its sole discretion.
"Termination Date" means the earliest of (i) the Maturity Date, (ii)
the date the Borrower terminates the Credit Facility, or (iii) the date the
Lender demands payment of the Obligations after an Event of Default
pursuant to Section 7.2.
"UCC" means the Uniform Commercial Code as in effect from time to time
in the State of Minnesota.
"US Content" means that portion of the cost of an Item arising from
materials which are of US origin or from labor and services performed in
the US.
ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
Section 2.1 REVOLVING ADVANCES. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances (each a "Revolving
Advance") to the Borrower from time to time from the date this Agreement is
signed and delivered to the Termination Date, on the terms and subject to the
conditions herein set forth, to provide the Borrower with working capital to
fulfill Export Orders. The Lender shall have no obligation to make a Revolving
Advance to the extent that the amount of the requested Revolving Advance exceeds
Availability. The Borrower's obligation to pay ninety percent (90%) of each
Revolving Advance shall be evidenced by Revolving Note A and secured pursuant to
Security Agreement A and the Patent and Trademark Security Agreement. The
Borrower's obligation to pay the remaining ten percent (10%) of each Revolving
Advance shall be evidenced by Revolving Note B and secured pursuant to Security
Agreement B and the Patent and Trademark Security Agreement. Within the limits
set forth in this Section 2.1, the Borrower may request Revolving Advances,
prepay, and request additional Revolving Advances.
Section 2.2 REQUESTS FOR ADVANCES. The Borrower shall make each
request for a Revolving Advance to the Lender before 11:00 a.m. (Minneapolis
time) of the day of the requested Revolving Advance. Requests may be made in
writing or by telephone. The Lender will not consider any request for a
Revolving Advance unless the Lender has received from the Borrower, among other
things, a Borrowing Base Certificate as of a date not more than five (5)
Business Days before the date of the requested Advance and copies of the Export
Orders and a summary thereof against which the Borrower is requesting such
Advance. Whenever the Borrower makes a request for an Advance based on Eligible
Export
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Inventory, it shall also indicate in its books and records that such
Inventory has been designated to fulfill an Export Order and shall no longer
be considered Eligible Inventory under the NBCI Credit Facility. Any request
for an Advance shall be deemed to be a representation by the Borrower that
the conditions set forth in Section 3.2 have been satisfied as of the date of
the request.
Section 2.3 INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST. All
interest shall be payable monthly in arrears on the first day of the month and
on demand.
(a) NOTES. Except as set forth in subsection (c) and (d), the
outstanding principal balance of the Notes shall bear interest at the
Floating Rate.
(b) MINIMUM INTEREST CHARGE. Notwithstanding the interest payable
pursuant to subsections (a) and (c), the Borrower shall pay to the Lender
interest of not less than $15,000 per calendar month during the term of
this Agreement, prorated for less than full months (the "Minimum Interest
Charge"), and the Borrower shall pay any deficiency between the Minimum
Interest Charge and the amount of interest otherwise calculated under
subsections (a) and (c) in arrears on the first day of each month, provided
that the sum of the Minimum Interest Charge and the Minimum Interest Charge
under the NBCI Credit Facility shall not exceed $15,000 per month.
(c) DEFAULT INTEREST RATE. At any time during any Default Period, in
the Lender's sole discretion and without waiving any of its other rights
and remedies, the principal of the Advances outstanding from time to time
shall bear interest at the Default Rate, effective for any periods
designated by the Lender from time to time during that Default Period.
(d) USURY. In any event no rate change shall be put into effect which
would result in a rate greater than the highest rate permitted by law.
Section 2.4 FEES.
(a) ORIGINATION FEE. The Borrower hereby agrees to pay the Lender a
fully earned and non-refundable origination fee of $16,000, due and payable
in twelve (12) substantially equal monthly installments beginning on the
first day of the first month after the Funding Date, provided that the sum
of this fee and the Origination Fee under the NBCI Credit Facility shall
not exceed $41,000.
(b) UNUSED LINE FEE. For the purposes of this Section 2.4(b), "Unused
Amount" means the Maximum Line reduced by outstanding Revolving Advances .
The Borrower agrees to pay to the Lender an unused line fee at the rate of
one-quarter of one percent (0.25%) per annum on the average daily Unused
Amount from the date of this Agreement to and including the Termination
Date, due and payable monthly in arrears on the first day of the month and
on the Termination Date, provided that the
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sum of this fee and the unused line fee under the NBCI Credit Facility
shall not exceed one-quarter of one percent (0.25%) per annum times the
difference of $4,100,000 and the aggregate average daily outstanding
principal balance of the Revolving Advances and the revolving advances
under the NBCI Credit Facility.
(c) FACILITY FEES. If the Credit Facility is renewed, the Borrower
shall pay the Lender a fee equal to one-quarter of one percent (0.25%) of
the Maximum Line, due and payable 60 days in advance of the Maturity Date.
(d) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on
demand, audit fees in connection with any audits or inspections conducted
by the Lender of any of the Borrower's property, operations or business at
the rates established from time to time by the Lender as its audit fees
(which fees are currently $62.50 per hour per auditor), together with all
actual out-of-pocket costs and expenses incurred in conducting any such
audit or inspection, provided that the Borrower shall not have to reimburse
such costs and expenses to the extent it has already done so pursuant to
the NBCI Credit Facility.
Section 2.5 APPLICATION OF PAYMENTS. All payments to the Lender shall
be made in immediately available funds and shall be applied to the Obligations
1 Banking Day after receipt by the Lender. The Lender shall apply all payments
on the Obligations, (a) first, to reimburse the Lender for any and all
unreimbursed costs and expenses incurred by the Lender, (b) to pay fees due to
the Lender, (c) to pay interest on the Notes and (d) to pay the principal
balance of the Notes. Payments applied to interest and principal shall be
applied on a prorata basis to each Note.
Section 2.6 CAPITAL ADEQUACY. If any Related Lender determines at any
time that its Return has been reduced as a result of any Rule Change, such
Related Lender may require the Borrower to pay it the amount necessary to
restore its Return to what it would have been had there been no Rule Change. For
purposes of this Section 2.6:
(a) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy, or
the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules
include rules requiring financial institutions to maintain total capital in
amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.
(b) "Return", for any period, means the return as determined by such
Related Lender on the Advances based upon its total capital requirements
and a reasonable attribution formula that takes account of the Capital
Adequacy Rules then in effect. Return may be calculated for each calendar
quarter and for the shorter
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period between the end of a calendar quarter and the date of termination
in whole of this Agreement.
(c) "Rule Change" means any change in any Capital Adequacy Rule
occurring after the date of this Agreement, but the term does not include
any changes in applicable requirements that at the Closing Date are
scheduled to take place under the existing Capital Adequacy Rules or any
increases in the capital that any Related Lender is required to maintain to
the extent that the increases are required due to a regulatory authority's
assessment of the financial condition of such Related Lender.
(d) "Related Lender" includes (but is not limited to) the Lender, any
parent corporation of the Lender and any assignee of any interest of the
Lender hereunder and any participant in the loans made hereunder.
Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.6, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.
Section 2.7 TERMINATION BY BORROWER. The Borrower may terminate this
Agreement at any time and, subject to payment and performance of all
Obligations, may obtain any release or termination of the Security Interest to
which the Borrower is otherwise entitled by law by giving at least 30 days'
prior written notice to the Lender of the Borrower's intention to terminate this
Agreement, and (i) paying the Lender a prepayment fee equal to the lesser of
(A) the Minimum Interest Charge for the period from the date of prepayment
through the third anniversary of the Closing Date or (B) a percentage of the
Maximum Line equal to three percent (3%) if prepayment occurs before the 1st
anniversary of the Closing Date, two percent (2%) if prepayment on or after the
first anniversary of the Closing Date but before the second anniversary of the
Closing Date, and one percent (1%) if prepayment occurs after the 2nd
anniversary of the Closing Date but before the 3rd anniversary of the Closing
Date.
Section 2.8 MANDATORY PREPAYMENT. Without notice or demand, if the
outstanding principal balance of the Revolving Advances shall at any time exceed
the Borrowing Base, the Borrower shall immediately prepay the Revolving Advances
to the extent necessary to eliminate such excess.
Section 2.9 ADVANCES WITHOUT REQUEST. The Borrower hereby authorizes
the Lender, in its discretion, at any time or from time to time without the
Borrower's request, to make Revolving Advances to pay accrued interest, fees,
uncollected items that have been applied to the Obligations, and other
Obligations due and payable from time to time.
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Section 2.10 USE OF PROCEEDS. The Borrower shall use the proceeds of
Advances for working capital to finance the manufacture, production or purchase
and subsequent sale of Items only. Without limiting the generality of the
foregoing, the Borrower shall not use any proceeds of Advances for any purpose
prohibited by the Borrower Agreement or (i) to acquire fixed assets or capital
goods for use in the Borrower's business; (ii) to acquire, equip or rent
commercial space overseas; (iii) to employ non-US residents in offices outside
the US; (iv) to serve as a retainage or warranty bond; or (v) to repay pre-
existing Debt or future indebtedness of the Borrower unrelated to the Advances.
Section 2.11 FACILITY SUBJECT TO EXIMBANK RULES. The Borrower
acknowledges that the Lender is willing to make the Credit Facility available to
the Borrower because the Eximbank is willing to guaranty payment of a
significant portion of the Obligations pursuant to the Master Guaranty.
Accordingly, in the event of any inconsistency among the Loan Documents and the
Master Guaranty or related documents, the provision that is the more stringent
on the Borrower shall control.
ARTICLE III
CONDITIONS OF LENDING
Section 3.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE.
The Lender's obligation to make the initial Revolving Advance hereunder shall be
subject to the condition precedent that the Lender shall have received all of
the following, each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed by the Borrower.
(b) The Notes, properly executed by the Borrower.
(c) The Security Agreements, properly executed by the Borrower.
(d) The Collateral Account Agreement, properly executed by the
Borrower.
(e) The Collateral Pledge Agreement, properly executed by the
Borrower together with certificates representing all of the Borrower's
shares in Medical Graphics F.S.C. and ErgometRx and stock powers with
respect to such certificates.
(f) The SBA/Eximbank Joint Application, properly completed and
executed by the Borrower.
(g) The Borrower Agreement, properly executed by the Borrower.
(h) A properly completed and executed Borrowing Base Certificate as
of a date not more than five (5) Business Days before the date of this
Agreement.
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(i) An exceptions approval letter, properly signed by Eximbank.
(j) A participation and servicing agreement, properly signed by the
Servicer.
(k) Copies of the Borrower's audited financial statements with full
disclosure for the last three (3) fiscal years.
(l) Copies of the Borrower's federal tax return for the last year
together with all schedules thereto.
(m) A true and correct copy of any and all leases pursuant to which
the Borrower is leasing the Premises, together with a landlord's disclaimer
and consent with respect to each such lease.
(n) The Patent and Trademark Security Agreement, properly executed by
the Borrower.
(o) Current searches of appropriate filing offices showing that
(i) no state or federal tax liens have been filed and remain in effect
against the Borrower, (ii) no financing statements or assignments of
patents, trademarks or copyrights have been filed and remain in effect
against the Borrower except those financing statements and assignments of
patents, trademarks or copyrights relating to Permitted Liens or to liens
held by Persons who have agreed in writing that upon receipt of proceeds of
the Advances, they will deliver UCC releases and/or terminations and
releases of such assignments of patents, trademarks or copyrights
satisfactory to the Lender, and (iii) the Lender has duly filed all
financing statements necessary to perfect the Security Interest, to the
extent the Security Interest is capable of being perfected by filing.
(p) A certificate of the Borrower's Secretary or Assistant Secretary
certifying as to (i) the resolutions of the Borrower's directors and, if
required, shareholders, authorizing the execution, delivery and performance
of the Loan Documents, (ii) the Borrower's articles of incorporation and
bylaws, and (iii) the signatures of the Borrower's officers or agents
authorized to execute and deliver the Loan Documents and other instruments,
agreements and certificates, including Advance requests, on the Borrower's
behalf.
(q) A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in compliance with all
applicable organizational requirements of the State of Minnesota.
(r) Evidence that the Borrower is duly licensed or qualified to
transact business in all jurisdictions where the character of the property
owned or leased or the
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nature of the business transacted by it makes such licensing or
qualification necessary.
(s) A certificate of an officer of the Borrower confirming, in his
personal capacity, the representations and warranties set forth in
Article IV and the Disclosure.
(t) Support agreements in favor of the Lender and NBCI, properly
executed by Glenn D. Taylor and Dale H. Johnson in their personal
capacities.
(u) An opinion of counsel to the Borrower, addressed to the Lender.
(v) Certificates of the insurance required hereunder, with all hazard
insurance containing a lender's loss payable endorsement in the Lender's
favor and with all liability insurance naming the Lender as an additional
insured.
(w) Payment of the fees and commissions due through the date of the
initial Advance and expenses incurred by the Lender through such date and
required to be paid by the Borrower under Section 8.3, including all legal
expenses incurred through the date of this Agreement.
(x) Evidence that the NBCI Credit Agreement has been executed and
delivered by the Borrower and that not later than simultaneously with the
initial Advance, all conditions precedent to funding under the NBCI Credit
Agreement shall have been satisfied.
(y) Such other documents as the Lender in its sole discretion may
require.
Section 3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The Lender will
not consider any request for an Advance unless on such date:
(a) the representations and warranties contained in Article IV and
the Disclosure are correct on and as of the date of such Advance as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from
such Advance which constitutes a Default or an Event of Default.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
Section 4.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE
OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER. The
Borrower is a corporation, duly organized, validly existing and in good standing
under the laws of the State of Minnesota and is duly licensed or qualified to
transact business in all jurisdictions where the character of the property owned
or leased or the nature of the business transacted by it makes such licensing or
qualification necessary. The Borrower has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its properties and to
execute and deliver, and to perform all of its obligations under, the Loan
Documents. During its existence, the Borrower has done business solely under the
names set forth in Schedule 4.1 hereto. The Borrower's chief executive office
and principal place of business is located at the address set forth in Schedule
4.1 hereto, and all of the Borrower's records relating to its business or the
Collateral are kept at that location. All inventory and equipment is located at
that location or at one of the other locations set forth in Schedule 4.1 hereto.
The Borrower's tax identification number is correctly set forth beneath its
signature below.
Section 4.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR
AGREEMENTS. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's stockholders; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Borrower's articles of incorporation or bylaws;
(iv) result in a breach of or constitute a default under any indenture or loan
or credit agreement or any other material agreement, lease or instrument to
which the Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interest) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
Section 4.3 LEGAL AGREEMENTS. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and
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binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms.
Section 4.4 SUBSIDIARIES. The Borrower has no Subsidiaries other than
Medical Graphics Germany which the Borrower is in the process of winding up and
Medical Graphics F.S.C.
Section 4.5 FINANCIAL CONDITION; NO ADVERSE CHANGE. The Borrower has
heretofore furnished to the Lender its audited financial statements for its
fiscal year ended December 31, 1995 and its unaudited financial statements for
the fiscal year-to-date period ended December 31, 1996 and those statements
fairly present the Borrower's financial condition on the dates thereof and the
results of its operations and cash flows for the periods then ended and were
prepared in accordance with generally accepted accounting principles. Since the
date of the most recent financial statements, there has been no material adverse
change in the Borrower's business, properties or condition (financial or
otherwise).
Section 4.6 LITIGATION. Except as set forth on Schedule 4.6, there are
no actions, suits or proceedings pending or, to the Borrower's knowledge,
threatened against or affecting the Borrower or any of its Affiliates or the
properties of the Borrower or any of its Affiliates before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which, if determined adversely to the Borrower or any of
its Affiliates, would have a material adverse effect on the financial condition,
properties or operations of the Borrower or any of its Affiliates.
Section 4.7 REGULATION U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.
Section 4.8 TAXES. Except as set forth on Schedule 4.8 and described
in the letter from the Borrower's accountants attached thereto, the Borrower and
its Affiliates (a) have paid or caused to be paid to the proper authorities when
due all federal, state and local taxes required to be withheld by each of them;
(b) have filed all federal, state and local tax returns which to the knowledge
of the officers of the Borrower or any Affiliate, as the case may be, are
required to be filed, and (c) have paid or caused to be paid to the respective
taxing authorities all taxes as shown on said returns or on any assessment
received by any of them to the extent such taxes have become due.
Section 4.9 TITLES AND LIENS. The Borrower has good and absolute title
to all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest financial
statements referred to in Section 4.5 and all proceeds thereof, free and clear
of all mortgages, security interests, liens and
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encumbrances, except for Permitted Liens. No financing statement naming the
Borrower as debtor is on file in any office except to perfect only Permitted
Liens.
Section 4.10 PLANS. Except as disclosed to the Lender in writing prior
to the date hereof, neither the Borrower nor any of its Affiliates maintains or
has maintained any Plan. Neither the Borrower nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. Neither the Borrower nor any of its
Affiliates has:
(a) Any accumulated funding deficiency within the meaning of ERISA;
or
(b) Any liability or knows of any fact or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may
become payable to participants or beneficiaries of any such Plan).
Section 4.11 DEFAULT. The Borrower is in compliance with all
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or default
of which could have a material adverse effect on the Borrower's financial
condition, properties or operations.
Section 4.12 ENVIRONMENTAL MATTERS.
(a) DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
(i) "Environmental Law" means any federal, state, local or other
governmental statute, regulation, law or ordinance dealing with the
protection of human health and the environment.
(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions
thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.
(b) To the Borrower's best knowledge, there are not present in, on or
under the Premises any Hazardous Substances in such form or quantity as to
create any liability or obligation for either the Borrower or the Lender
under common law of any jurisdiction or under any Environmental Law except
for small quantities in the ordinary course of its business and in strict
compliance with all Environmental Laws, and no Hazardous Substances have
ever been stored, buried, spilled, leaked,
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discharged, emitted or released in, on or under the Premises in such a
way as to create any such liability.
(c) To the Borrower's best knowledge, the Borrower has not disposed
of Hazardous Substances in such a manner as to create any liability under
any Environmental Law.
(d) There are not and there never have been any requests, claims,
notices, investigations, demands, administrative proceedings, hearings or
litigation, relating in any way to the Premises or the Borrower, alleging
liability under, violation of, or noncompliance with any Environmental Law
or any license, permit or other authorization issued pursuant thereto. To
the Borrower's best knowledge, no such matter is threatened or impending.
(e) To the Borrower's best knowledge, the Borrower's businesses are
and have in the past always been conducted in substantial compliance with
all Environmental Laws and all licenses, permits and other authorizations
required pursuant to any Environmental Law and necessary for the lawful and
efficient operation of such businesses are in the Borrower's possession and
are in full force and effect. No permit required under any Environmental
Law is scheduled to expire within 12 months and there is no threat that any
such permit will be withdrawn, terminated, limited or materially changed.
(f) To the Borrower's best knowledge, the Premises are not and never
have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or
any similar federal, state or local list, schedule, log, inventory or
database.
(g) The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or the Borrower's
businesses.
Section 4.13 SUBMISSIONS TO LENDER. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's request for the credit facilities contemplated hereby is
true and correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.
Section 4.14 FINANCING STATEMENTS. The Borrower has provided to the
Lender signed financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral and
all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
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collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
Section 4.15 RIGHTS TO PAYMENT. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
ARTICLE V
BORROWER'S AFFIRMATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrower will comply with the
following requirements, unless the Lender shall otherwise consent in writing:
Section 5.1 REPORTING REQUIREMENTS. The Borrower will deliver, or
cause to be delivered, to the Lender each of the following, which shall be in
form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, the Borrower's audited financial
statements prepared in accordance with GAAP; together with (i) copies of
all management letters prepared by such accountants; (ii) a report signed
by such accountants stating that in making the investigations necessary for
said opinion they obtained no knowledge, except as specifically stated, of
any Default or Event of Default hereunder and all relevant facts in
reasonable detail to evidence, and the computations as to, whether or not
the Borrower is in compliance with the requirements set forth in
Section 5.12, and (iii) a certificate of the Borrower's chief financial
officer stating that such financial statements have been prepared in
accordance with GAAP, that they fairly present the Borrower's financial
condition and the results of its operations, and whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder and, if so, stating in reasonable detail the facts with respect
thereto;
(b) as soon as available and in any event within 20 days after the
end of each month, an unaudited/internal balance sheet and statement of
income and retained earnings of the Borrower as at the end of and for such
month and for the year to date period then ended, prepared in accordance
with GAAP, subject to year-end audit adjustments; and accompanied by a
certificate of the Borrower's chief financial officer, substantially in the
form of Exhibit D hereto stating (i) that such financial statements have
been prepared in accordance with GAAP subject to year-end audit
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adjustments, and fairly represent the Borrower's financial condition and
the results of its operations, (ii) whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder
not theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto, and (iii) all relevant facts in
reasonable detail to evidence, and the computations as to, whether or not
the Borrower is in compliance with the requirements set forth in
Section 5.12;
(c) on the first Banking Day of each week as of the last Banking Day
of the prior week, a properly completed Borrowing Base Certificate, signed
by the Borrower's chief financial officer;
(d) within 15 days after the end of each month or more frequently if
the Lender so requires, agings of the Borrower's accounts receivable and
its accounts payable, an inventory certification report, an accounts
receivable certification and a calculation of the Borrower's Accounts,
Eligible Accounts, Inventory and Eligible Inventory as at the end of such
month or shorter time period;
(e) at least 30 days before the beginning of each fiscal year of the
Borrower, the projected balance sheets and income statements for each month
of such year, each in reasonable detail, representing the Borrower's good
faith projections and certified by the Borrower's chief financial officer
as being the most accurate projections available and identical to the
projections used by the Borrower for internal planning purposes, together
with such supporting schedules and information as the Lender may in its
discretion require;
(f) as soon as available and in any event within ten days after they
are due, copies of tax payments due and paid and written notice of any and
all taxes due but not paid;
(g) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other material, reports, records
or information as the Lender may request.
(h) promptly upon knowledge thereof, notice of any Items (and the
corresponding invoice amount) which are articles, services, or related
technical data that are listed on the United States Munitions List (part
121 of title 22 of the Code of Federal Regulations);
(i) immediately after a proceeding in bankruptcy or an action for
debtor's relief is filed by, against, or on behalf of the Borrower;
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(j) immediately after the Borrower fails to obtain the dismissal or
termination within thirty (30) calendar days of the commencement of any
proceeding or action referred to in (i) above; and
(k) immediately after the Borrower begins any procedure for its
dissolution or liquidation, or a procedure therefor has been commenced
against it.
So long as the Servicer is actively servicing the Loan Documents on behalf of
the Lender as described in Section 8.2, the Borrower shall provide to the
Servicer all reports required under this Section 5.1.
Section 5.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. The
Borrower will keep accurate books of record and account for itself pertaining to
the Collateral and pertaining to the Borrower's business and financial condition
and such other matters as the Lender may from time to time request in which true
and complete entries will be made in accordance with GAAP and, upon the Lender's
request, will permit any officer, employee, attorney or accountant for the
Lender to audit, review, make extracts from or copy any and all corporate and
financial books and records of the Borrower at all times during ordinary
business hours, to send and discuss with account debtors and other obligors
requests for verification of amounts owed to the Borrower, and to discuss the
Borrower's affairs with any of its directors, officers, employees or agents. The
Borrower will permit the Lender, or its employees, accountants, attorneys or
agents, to examine and inspect any Collateral, other collateral covered by the
Security Documents or any other property of the Borrower at any time during
ordinary business hours.
Section 5.3 ACCOUNT VERIFICATION. The Lender may at any time and from
time to time send or require the Borrower to send requests for verification of
accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.
Section 5.4 COMPLIANCE WITH LAWS.
(a) The Borrower will (i) comply with the requirements of applicable
laws and regulations, the non-compliance with which would materially and
adversely affect its business or its financial condition and (ii) use and
keep the Collateral, and require that others use and keep the Collateral,
only for lawful purposes, without violation of any federal, state or local
law, statute or ordinance.
(b) Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply with all applicable Environmental
Laws and obtain and comply with all permits, licenses and similar approvals
required by any Environmental Laws, and will not generate, use, transport,
treat, store or dispose of any Hazardous Substances in such a manner as to
create any liability or obligation under the common law of any jurisdiction
or any Environmental Law.
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Section 5.5 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower will pay
or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Collateral) or upon or
against the creation, perfection or continuance of the Security Interest, prior
to the date on which penalties attach thereto, (b) all federal, state and local
taxes required to be withheld by it, and (c) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien or charge
upon any properties of the Borrower; provided, that the Borrower shall not be
required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made.
Section 5.6 MAINTENANCE OF PROPERTIES.
(a) The Borrower will keep and maintain the Collateral, the other
collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair
and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided,
however, that nothing in this Section 5.6 shall prevent the Borrower from
discontinuing the operation and maintenance of any of its properties if
such discontinuance is, in the Lender's judgment, desirable in the conduct
of the Borrower's business and not disadvantageous in any material respect
to the Lender.
(b) The Borrower will defend the Collateral against all claims or
demands of all persons (other than the Lender) claiming the Collateral or
any interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security interests,
liens and encumbrances except Permitted Liens.
Section 5.7 INSURANCE. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
keep all tangible Collateral insured against risks of fire (including so-called
extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender's loss payable endorsement
for the Lender's benefit acceptable to the Lender. All policies of liability
insurance required hereunder shall name the Lender as an additional insured.
Section 5.8 PRESERVATION OF EXISTENCE. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in
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the normal conduct of its business and shall conduct its business in an
orderly, efficient and regular manner.
Section 5.9 DELIVERY OF INSTRUMENTS, ETC. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 5.10 COLLATERAL ACCOUNT.
(a) If, notwithstanding the instructions to Account debtors located
outside the United States to make payments to the Collateral Account, the
Borrower receives any payments from such Account debtors, the Borrower
shall deposit such payments into the Collateral Account. Until so
deposited, the Borrower shall hold all such payments in trust for and as
the property of the Lender and shall not commingle such payments with any
of its other funds or property.
(b) Amounts deposited in the Collateral Account shall not bear
interest and shall not be subject to withdrawal by the Borrower, except
after full payment and discharge of all Obligations.
(c) All deposits in the Collateral Account shall constitute proceeds
of Collateral and shall not constitute payment of the Obligations. The
Lender from time to time at its discretion may, after allowing one Banking
Day, apply deposited funds in the Collateral Account to the payment of the
Obligations, in any order or manner of application satisfactory to the
Lender, by transferring such funds to the Lender's general account.
Section 5.11 PERFORMANCE BY THE LENDER. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article V or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 5.5, 5.7 and 5.10,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender's option, in
the Lender's name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including, without limitation, the payment of taxes, the satisfaction of
security interests, liens or encumbrances, the performance of obligations owed
to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
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Floating Rate. To facilitate the Lender's performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender's delegate, acting alone, as the Borrower's attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower under this Section 5.11.
Section 5.12 MINIMUM TANGIBLE NET WORTH. The Borrower will maintain,
during each period described below, its Tangible Net Worth, determined as at the
end of each month, at an amount not less than the amount set forth opposite such
period:
PERIOD MINIMUM TANGIBLE NET WORTH
------ --------------------------
March 31, 1997 $300,000
April 30, 1997 $1,000,000
May 31, 1997 $1,000,000
June 30, 1997 through $1,300,000
December 31, 1997
ARTICLE VI
NEGATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower agrees that, without the Lender's prior
written consent:
Section 6.1 LIENS. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; EXCLUDING, HOWEVER, from the operation of the
foregoing, the following (collectively, "Permitted Liens"):
(a) in the case of any of the Borrower's property which is not
Collateral or other collateral described in the Security Documents,
covenants, restrictions, rights, easements and minor irregularities in
title which do not materially interfere with the Borrower's business or
operations as presently conducted;
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(b) mortgages, deeds of trust, pledges, liens, security interests and
assignments in existence on the date hereof and listed in Schedule 6.1
hereto, securing indebtedness for borrowed money permitted under Section
6.2;
(c) the Security Interest and liens and security interests created by
the Security Documents; and
(d) purchase money security interests relating to the acquisition of
machinery and equipment of the Borrower.
Section 6.2 INDEBTEDNESS. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money or letters of credit issued on
the Borrower's behalf, or any other indebtedness or liability evidenced by
notes, bonds, debentures or similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date hereof and
listed in Schedule 6.2 hereto; and
(c) indebtedness relating to liens permitted in accordance with
Section 6.1.
Section 6.3 GUARANTIES. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower for
deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 6.2 hereto.
Section 6.4 INVESTMENTS AND SUBSIDIARIES.
(a) The Borrower will not purchase or hold beneficially any stock or
other securities or evidences of indebtedness of, make or permit to exist
any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without
limitation any partnership or joint venture, except:
(i) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued
by US corporations rated
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"A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by
Moody's Investors Service or certificates of deposit or bankers'
acceptances having a maturity of one year or less issued by members
of the Federal Reserve System having deposits in excess of
$100,000,000 (which certificates of deposit or bankers' acceptances
are fully insured by the Federal Deposit Insurance Corporation);
(ii) the Borrower's investment, but only to the extent as of the
date hereof, in Medical Graphics Germany Medical Graphics F.S.C. and
ErgometRx;
(iii) travel advances or loans to the Borrower's officers and
employees not exceeding at any one time an aggregate of $30,000; and
(iv) advances in the form of progress payments, prepaid rent not
exceeding one month or security deposits.
(b) The Borrower will not create or permit to exist any Subsidiaries
other than Medical Graphics Germany and Medical Graphics F.S.C.
Section 6.5 DIVIDENDS. The Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any
class of its stock or make any payment on account of the purchase, redemption or
other retirement of any shares of such stock or make any distribution in respect
thereof, either directly or indirectly.
Section 6.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS
OPERATIONS. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The restrictions of the preceding
sentence shall not apply to , sales or leases of the Borrower's surplus,
obsolete or worn-out property, sales to insurers in settlement of insurable
losses and sales of property where such property is being replaced and the
replacement property is subject to the Security Interest. The Borrower will not
in any manner transfer any property without prior or present receipt of full and
adequate consideration.
Section 6.7 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person.
Section 6.8 SALE AND LEASEBACK. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property
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which the Borrower intends to use for substantially the same purpose or
purposes as the property being sold or transferred.
Section 6.9 RESTRICTIONS ON NATURE OF BUSINESS. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.
Section 6.10 ACCOUNTING. The Borrower will not adopt any material
change in accounting principles other than as required by GAAP. The Borrower
will not adopt, permit or consent to any change in its fiscal year.
Section 6.11 DISCOUNTS, ETC. The Borrower will not, after notice from
the Lender, grant any discount, credit or allowance to any customer of the
Borrower or accept any return of goods sold, or at any time (whether before or
after notice from the Lender) modify, amend, subordinate, cancel or terminate
the obligation of any account debtor or other obligor of the Borrower.
Section 6.12 DEFINED BENEFIT PENSION PLANS. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 4.10.
Section 6.13 OTHER DEFAULTS. The Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement, indenture,
lease, mortgage, contract for deed, security agreement or other contractual
obligation binding upon the Borrower.
Section 6.14 PLACE OF BUSINESS; NAME. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name.
Section 6.15 ORGANIZATIONAL DOCUMENTS; S CORPORATION STATUS. The
Borrower will not amend its certificate of incorporation or articles of
incorporation. After prior notice to the Lender, the Borrower may amend its
bylaws provided that such amendments do not adversely affect the Lender. The
Borrower will not become an S Corporation within the meaning of the Internal
Revenue Code of 1986, as amended.
Section 6.16 SALARIES. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than 10% in any one year, either individually or for all
such persons in the aggregate, or pay any such increase from any
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<PAGE>
source other than profits earned in the year of payment. The restrictions of
this Section shall not apply to compensation in the form of options or
warrants to acquire stock of the Borrower in favor of such Persons.
ARTICLE VII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section 7.1 EVENTS OF DEFAULT. An "Event of Default" as used herein
shall mean any of the following:
(a) Failure to pay any Obligations when they become due and payable,
and in this connection Borrower hereby waives presentment, notice of
dishonor and protest;
(b) Any payment default shall occur under any agreement between the
Borrower and NBCI, or NBCI shall accelerate or demand payment of any
obligations owed to it by the Borrower, or NBCI shall exercise its remedies
against the Borrower;
(c) Eximbank shall repudiate, purport to revoke or fail to perform
its obligations under the Master Guaranty;
(d) An order for relief naming the Borrower as debtor shall be
entered under the United States Bankruptcy Code; or
(e) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in any Loan Document not specifically
addressed in this Section 7.1, which shall remain uncured for 30 days after
notice from the Lender.
Section 7.2 RIGHTS AND REMEDIES. Upon the occurrence of an Event of
Default or at any time thereafter, the Lender may exercise any or all of the
following rights and remedies:
(a) the Lender may, by notice to the Borrower, declare the Commitment
to be terminated, whereupon the same shall forthwith terminate;
(b) The Lender may exercise and enforce any and all rights and
remedies available upon default under the Security Agreements and the
Patent and Trademark Security Agreement;
(c) The Lender may exercise any other rights and remedies available
to it by law or agreement.
The remedies provided hereunder are cumulative.
-31-
<PAGE>
Section 7.3 CERTAIN NOTICES. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 8.1) at least 20 calendar days before
the date of intended disposition or other action.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 ADDRESSES FOR NOTICES, ETC. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for hereunder shall be in writing and shall be (i) personally
delivered, (ii) sent by first class United States mail, (iii) sent by overnight
courier of national reputation, or (iv) transmitted by telecopy, in each case
addressed or telecopied to the party to whom notice is being given at its
address or telecopy number as set forth below its signature to this Agreement.
Section 8.2 SERVICING OF CREDIT FACILITY.
(a) The Lender has requested that the Servicer service and enforce
the Loan Documents, make all Advances and collect all Obligations on the
Lender's behalf and the Servicer has agreed to do so. The Borrower
acknowledges and accepts the Servicer's appointment as such.
(b) The Servicer shall have no duties or responsibilities to the
Borrower hereunder, but only to the Lender. Neither the Servicer nor any of
its officers, directors, employees or agents shall be liable for any action
taken or omitted by them hereunder or in connection herewith, unless caused
by its or their willful misconduct. The Servicer's duties shall be
mechanical and administrative in nature; nothing in this Agreement, express
or implied, is intended to or shall be so construed as to impose upon the
Servicer any obligations with respect to the Loan Documents except as
expressly set forth herein. The Borrower shall not in any way be construed
to be a third party beneficiary of any relationship between the Servicer
and the Lender.
(c) The Servicer shall be entitled to rely, and shall be fully
protected in relying, upon any communication whether written or oral
believed by it to be genuine and correct and to have been signed, sent or
made by the proper Person, and, with respect to all legal matters
pertaining to this Agreement and its duties hereunder, upon advice of
counsel selected by it.
(d) The Borrower shall be entitled to rely upon any communication
whether written or oral sent or made by the Servicer for and on behalf of
the Lender with respect to all matters pertaining to the Loan Documents and
the Borrower's
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<PAGE>
duties and obligations hereunder, unless and until the Borrower receives
written notice from the Lender that the Servicer is no longer servicing
this credit facility.
(e) The Servicer shall hold and be the custodian of the Loan
Documents on the Lender's behalf for so long as the Servicer is servicing
the Credit Facility.
Section 8.3 COSTS AND EXPENSES. The Borrower agrees to pay on demand
all costs and expenses (including reasonable legal fees) incurred by the Lender
in connection with the Loan Documents and any other document or agreement
related thereto, and the transactions contemplated hereby, including wire
transfer and ACH charges, the cost of credit reports, overadvance fees, the
expense of any auditors and fees and expenses in enforcing this Agreement.
Section 8.4 INDEMNITY. In addition to the payment of expenses pursuant
to Section 8.3, the Borrower agrees to indemnify, defend and hold harmless the
Lender, and any of its participants, assigns, parent corporations, subsidiary
corporations, affiliated corporations, successor corporations, and all present
and future officers, directors, employees, attorneys and agents of the foregoing
(the "Indemnitees") from and against any of the following (collectively,
"Indemnified Liabilities"):
(i) any and all transfer taxes, documentary taxes, assessments
or charges made by any governmental authority by reason of the
execution and delivery of this Agreement and the other Loan Documents
or the making of the Advances;
(ii) any and all liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel) in connection with any investigative,
administrative or judicial proceedings, whether or not such Indemnitee
shall be designated a party thereto, which may be imposed on, incurred
by or asserted against any such Indemnitee, in any manner related to
or arising out of or in connection with the making of the Advances,
this Agreement and the other Loan Documents or the use or intended use
of the proceeds of the Advances; and
(iii) any claim, loss or damage to which any Indemnitee may
be subjected as a result of any violation of any federal, state, local
or other governmental statute, regulation, law, or ordinance dealing
with the protection of human health and the environment.
If any investigative, judicial or administrative proceeding arising from
any of the foregoing is brought against any Indemnitee, then the Borrower or
counsel designated by the Borrower and satisfactory to the Indemnitee, will
resist and defend such action, suit or proceeding to the extent and in the
manner directed by the Indemnitee. Each Indemnitee will use its best efforts to
cooperate in the defense of any such action, suit or proceeding. If the
-33-
<PAGE>
foregoing undertaking to indemnify, defend and hold harmless may be held to be
unenforceable because it violates any law or public policy, the Borrower shall
nevertheless make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
The Borrower's obligation under this Section 8.4 shall survive the termination
of this Agreement and the discharge of the Borrower's other obligations
hereunder. If Eximbank makes payment of a claim to the Lender under the Master
Guaranty in connection with the Credit Facility, Eximbank shall be assigned all
the Lender's rights and remedies under Revolving Note A, and Security Agreement
A and may enforce any such rights or remedies against the Borrower and the
Collateral (as defined in Security Agreement A). Additionally, the Borrower
shall hold Eximbank harmless from agrees to indemnify it against any and all
liabilities, damages, claims, costs and losses incurred or suffered by it
resulting from (a) any materially incorrect certification or statement knowingly
made by or on behalf of the Borrower to Eximbank or the Lender in connection
with an Advance , this Agreement or any of the other Loan Documents or (b) any
breach by the Borrower of the terms and conditions of this Agreement or any of
the other Loan Documents. The Borrower also acknowledges that any statement,
certification or representation made by it in connection with the Credit
Facility is subject to the penalties provided in Article 18 U.S.C. Section 1001.
Section 8.5 BINDING EFFECT; ASSIGNMENT; COUNTERPARTS; EXCHANGING
INFORMATION. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the prior written consent of the
Lender. This Agreement and other Loan Documents may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts, taken together, shall constitute but
one and the same instrument. Without limiting the Lender's right to share
information regarding the Borrower and its Affiliates with the Lender's
participants, accountants, lawyers and other advisors, the Lender, Norwest
Corporation, and all direct and indirect subsidiaries of Norwest Corporation,
may exchange any and all information they may have in their possession regarding
the Borrower and its Affiliates, and the Borrower waives any right of
confidentiality it may have with respect to such exchange of such information.
-34-
<PAGE>
Section 8.6 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL.
This Agreement and the Note shall be governed by and construed in accordance
with the laws (other than conflict laws) of the State of Minnesota. Each party
consents to the personal jurisdiction of the state and federal courts located in
the State of Minnesota in connection with any controversy related to this
Agreement, waives any argument that venue in any such forum is not convenient
and agrees that any litigation initiated by any of them in connection with this
Agreement shall be venued in either the District Court of Hennepin County,
Minnesota
[Signature Page Follows]
-35-
<PAGE>
located in Minneapolis, Minnesota, or the United States District Court, District
of Minnesota, Fourth Division. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN
ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as
of the date first above written.
NORWEST BANK MINNESOTA, NATIONAL MEDICAL GRAPHICS CORPORATION
ASSOCIATION
By By
----------------------- ---------------------------
Christopher A. Cudak Glenn D. Taylor
Its Vice President Its Chief Executive Officer
Address: Address:
Norwest Center 350 Oak Grove Parkway
Sixth Street and Marquette Avenue St. Paul, Minnesota 55127
Minneapolis, Minnesota 55479-0085
Telecopy No. 612/667-2269 Telecopy No. (612) 484-8941
Federal Tax ID No. 41-1592157 Federal Tax ID No. 41-1316712
-36-
<PAGE>
Exhibit A to Credit Agreement
REVOLVING NOTE A
$1,575,000 Minneapolis, Minnesota
______________, 1997
For value received, the undersigned, MEDICAL GRAPHICS CORPORATION, a
Minnesota corporation (the "Borrower"), hereby promises to pay ON DEMAND to the
order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking
association (the "Lender"), at its main office in Minneapolis, Minnesota, or at
any other place designated at any time by the holder hereof, in lawful money of
the United States of America and in immediately available funds, the principal
sum of One Million Five Hundred and Seventy-Five Thousand Dollars ($1,575,000)
or, if less, the aggregate unpaid principal amount of ninety percent (90%) of
all Revolving Advances made by the Lender to the Borrower under the Credit
Agreement of even date herewith by and between the Lender and the Borrower (as
the same may hereafter be amended, supplemented or restated from time to time,
the "Credit Agreement") together with interest on the principal amount hereunder
remaining unpaid from time to time (computed on the basis of actual days elapsed
in a 360-day year) from the date of the initial Advance until this Note is fully
paid at the rate from time to time in effect under the Credit Agreement.
This Note is Revolving Note A as defined in the Credit Agreement, is
subject to the Credit Agreement and is secured pursuant to Security Agreement A
and the Patent and Trademark Security Agreement as defined in the Credit
Agreement.
MEDICAL GRAPHICS CORPORATION
By
---------------------------
Glenn D. Taylor
Its Chief Executive Officer
<PAGE>
Exhibit B to Credit Agreement
REVOLVING NOTE B
$175,000 Minneapolis, Minnesota
______________, 1997
For value received, the undersigned, MEDICAL GRAPHICS CORPORATION, a
Minnesota corporation (the "Borrower"), hereby promises to pay ON DEMAND to the
order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking
association (the "Lender"), at its main office in Minneapolis, Minnesota, or at
any other place designated at any time by the holder hereof, in lawful money of
the United States of America and in immediately available funds, the principal
sum of One Hundred and Seventy-Five Thousand Dollars ($175,000) or, if less, ten
percent (10%) of the aggregate unpaid principal amount of all Revolving Advances
made by the Lender to the Borrower under the Credit Agreement of even date
herewith by and between the Lender and the Borrower (as the same may hereafter
be amended, supplemented or restated from time to time, the "Credit Agreement")
together with interest on the principal amount hereunder remaining unpaid from
time to time (computed on the basis of actual days elapsed in a 360-day year)
from the date of the initial Advance until this Note is fully paid at the rate
from time to time in effect under the Credit Agreement.
This Note is Revolving Note B as defined in the Credit Agreement, is
subject to the Credit Agreement and is secured pursuant to Security Agreement B
and the Patent and Trademark Security Agreement as defined in the Credit
Agreement.
MEDICAL GRAPHICS CORPORATION
By
---------------------------
Glenn D. Taylor
Its Chief Executive Officer
<PAGE>
Exhibit C to Credit Agreement
FORM OF BORROWER AGREEMENT
<PAGE>
Exhibit D to Credit Agreement
COMPLIANCE CERTIFICATE
To: Christopher A. Cudak
Norwest Bank Minnesota, National Association
Warren A. Lindman
Norwest Business Credit, Inc.
Date: __________________, 199___
Subject: Medical Graphics Corporation
Financial Statements
In accordance with our Credit Agreement dated as of March 31, 1997
(the "Credit Agreement"), attached are the financial statements of Medical
Graphics Corporation (the "Borrower") as of and for ________________, 19___ (the
"Reporting Date") and the year-to-date period then ended (the "Current
Financials"). All terms used in this certificate have the meanings given in the
Credit Agreement.
I certify that the Current Financials have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and fairly present the
Borrower's financial condition as of the date thereof.
EVENTS OF DEFAULT. (Check one):
/ / The undersigned does not have knowledge of the occurrence of a Default
or Event of Default under the Credit Agreement.
/ / The undersigned has knowledge of the occurrence of a Default or Event
of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto.
<PAGE>
I further hereby certify that pursuant to Section 5.12 of the
Credit Agreement, as of the Reporting Date the Borrower's Tangible Net Worth
was $____________ which / / satisfies / / does not satisfy the requirement
that such amount be not less than $1,300,000 on the Reporting Date.
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
MEDICAL GRAPHICS CORPORATION
By ________________________________
Dale H. Johnson
Its Chief Financial Officer
-2-
<PAGE>
Exhibit E to Credit Agreement
FORM OF BORROWING BASE CERTIFICATE
Schedule 2.11-1
<PAGE>
Schedule 4.1 to Credit and Security
Agreement
TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS, AND LOCATIONS
OF COLLATERAL
TRADE NAMES, DBAS
MedGraphics
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
Medical Graphics Corporation
350 Oak Grove Parkway
St. Paul, Minnesota 55127
OTHER INVENTORY AND EQUIPMENT LOCATIONS
None.
Schedule 4.1-1
<PAGE>
Schedule 4.6 to Credit Agreement
Litigation
Schedule 4.1-1
<PAGE>
Schedule 4.8 to Credit Agreement
Taxes
Schedule 4.1-1
<PAGE>
Schedule 6.1 to Credit Agreement
PERMITTED LIENS
<TABLE>
<CAPTION>
CREDITOR COLLATERAL JURISDICTION FILING DATE FILING NO.
-------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Norwest All Equipment, MN Secretary of March 27, 1927798
Business Inventory, State 1997
Credit, Inc. Accounts, General
Intangibles, and
foreign accounts
(subject to an
Intercreditor
Agreement
between Norwest
Bank and the
Lender).
</TABLE>
Schedule 7.1-1
<PAGE>
Schedule 6.2 to Credit Agreement
PERMITTED INDEBTEDNESS AND GUARANTIES
Indebtedness
<TABLE>
<CAPTION>
Creditor Principal Maturity Date Monthly Collateral
-------- --------- ------------- ------- ----------
Amount Payment
------ -------
<S> <C> <C> <C> <C>
Norwest $4,100,000 ________, 199 Revolving See Permitted Liens
Business Line of Credit Schedule
Credit, Inc.
</TABLE>
GUARANTIES
Primary Obligor Amount and Description of Beneficiary of Guaranty
--------------- ------------------------- -----------------------
Obligation Guaranteed
---------------------
None
----
<PAGE>
______________________________________________
______________________________________________
CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
MEDICAL GRAPHICS CORPORATION
AND
NORWEST BUSINESS CREDIT, INC.
Dated as of: March 31, 1997
[LOGO]
______________________________________________
______________________________________________
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 CROSS REFERENCES . . . . . . . . . . . . . . . . . . . . 9
ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY . . . . . . . . . . . 10
Section 2.1 REVOLVING ADVANCES. . . . . . . . . . . . . . . . . . . . 10
Section 2.2 INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST;
ADDITIONAL INTEREST; PARTICIPATIONS; USURY . . . . . . . . . . . . . 11
Section 2.6 FEES . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2.7 COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE
AND PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 2.8 CAPITAL ADEQUACY . . . . . . . . . . . . . . . . . . . . 12
Section 2.9 VOLUNTARY PREPAYMENT; TERMINATION OF CREDIT FACILITY
BY THE BORROWER; PERMANENT REDUCTION OF THE MAXIMUM LINE . . . . . . 13
Section 2.10 MANDATORY PREPAYMENT . . . . . . . . . . . . . . . . . . 14
Section 2.11 PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 2.12 PAYMENT ON NON-BANKING DAYS . . . . . . . . . . . . . . 14
Section 2.14 USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . 15
Section 2.15 LIABILITY RECORDS . . . . . . . . . . . . . . . . . . . 15
ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF . . . . . . . . . . . . 15
Section 3.1 GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . 15
Section 3.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS . . . 15
Section 3.3 ASSIGNMENT OF INSURANCE . . . . . . . . . . . . . . . . . 15
Section 3.4 OCCUPANCY . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 3.5 LICENSE . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 3.6 FINANCING STATEMENT . . . . . . . . . . . . . . . . . . . 16
Section 3.7 SETOFF . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE IV CONDITIONS OF LENDING . . . . . . . . . . . . . . . . . . . . 17
Section 4.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE . . 17
Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES . . . . . . . . . . 19
ARTICLE V REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 20
Section 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE
OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION
NUMBER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR
AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5.3 LEGAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . 20
Section 5.4 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>
Section 5.5 FINANCIAL CONDITION; NO ADVERSE CHANGE . . . . . . . . . 21
Section 5.6 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . 21
Section 5.7 REGULATION U . . . . . . . . . . . . . . . . . . . . . . 21
Section 5.8 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 5.9 TITLES AND LIENS . . . . . . . . . . . . . . . . . . . . 21
Section 5.10 PLANS . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.11 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.12 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . 22
Section 5.13 SUBMISSIONS TO LENDER . . . . . . . . . . . . . . . . . 23
Section 5.14 FINANCING STATEMENTS . . . . . . . . . . . . . . . . . . 23
Section 5.15 RIGHTS TO PAYMENT . . . . . . . . . . . . . . . . . . . 24
ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . 24
Section 6.1 REPORTING REQUIREMENTS . . . . . . . . . . . . . . . . . 24
Section 6.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION . . . . . . 27
Section 6.3 ACCOUNT VERIFICATION . . . . . . . . . . . . . . . . . . 27
Section 6.4 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . 27
Section 6.5 PAYMENT OF TAXES AND OTHER CLAIMS . . . . . . . . . . . . 28
Section 6.6 MAINTENANCE OF PROPERTIES . . . . . . . . . . . . . . . . 28
Section 6.7 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 6.8 PRESERVATION OF EXISTENCE . . . . . . . . . . . . . . . . 29
Section 6.9 DELIVERY OF INSTRUMENTS, ETC . . . . . . . . . . . . . . 29
Section 6.10 COLLATERAL ACCOUNT . . . . . . . . . . . . . . . . . . . 29
Section 6.11 PERFORMANCE BY THE LENDER . . . . . . . . . . . . . . . 29
Section 6.12 MINIMUM BOOK NET WORTH . . . . . . . . . . . . . . . . . 30
Section 6.13 MAXIMUM DEBT TO BOOK NET WORTH RATIO . . . . . . . . . . 31
Section 6.14 MINIMUM NET INCOME . . . . . . . . . . . . . . . . . . . 31
Section 6.15 MINIMUM DEBT SERVICE COVERAGE RATIO . . . . . . . . . . 31
Section 6.16 AMENDMENTS TO FINANCIAL COVENANTS BASED ON AUDIT . . . . 31
Section 6.17 NEW COVENANTS . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE VII NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 32
Section 7.1 LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 7.2 INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . 32
Section 7.3 GUARANTIES . . . . . . . . . . . . . . . . . . . . . . . 33
Section 7.4 INVESTMENTS AND SUBSIDIARIES . . . . . . . . . . . . . . 33
Section 7.5 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 7.7 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS . . . . . . 34
Section 7.8 SALE AND LEASEBACK . . . . . . . . . . . . . . . . . . . 34
-ii-
<PAGE>
Section 7.9 RESTRICTIONS ON NATURE OF BUSINESS . . . . . . . . . . . 34
Section 7.10 CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . 34
Section 7.11 ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . 35
Section 7.12 DISCOUNTS, ETC . . . . . . . . . . . . . . . . . . . . . 35
Section 7.13 DEFINED BENEFIT PENSION PLANS . . . . . . . . . . . . . 35
Section 7.14 OTHER DEFAULTS . . . . . . . . . . . . . . . . . . . . . 35
Section 7.15 PLACE OF BUSINESS; NAME . . . . . . . . . . . . . . . . 35
Section 7.16 ORGANIZATIONAL DOCUMENTS; S CORPORATION STATUS . . . . . 35
Section 7.17 SALARIES . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES . . . . . . . . . . . 36
Section 8.1 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . 36
Section 8.2 RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . 38
Section 8.3 CERTAIN NOTICES . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE IX MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 9.1 NO WAIVER; CUMULATIVE REMEDIES . . . . . . . . . . . . . 39
Section 9.2 AMENDMENTS, ETC . . . . . . . . . . . . . . . . . . . . . 39
Section 9.3 ADDRESSES FOR NOTICES, ETC . . . . . . . . . . . . . . . 39
Section 9.4 FURTHER DOCUMENTS . . . . . . . . . . . . . . . . . . . . 40
Section 9.5 COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . 40
Section 9.6 COSTS AND EXPENSES . . . . . . . . . . . . . . . . . . . 41
Section 9.7 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 9.8 PARTICIPANTS . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.9 EXECUTION IN COUNTERPARTS . . . . . . . . . . . . . . . . 42
Section 9.10 BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT;
EXCHANGING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.11 SEVERABILITY OF PROVISIONS . . . . . . . . . . . . . . . 42
Section 9.12 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.13 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF
JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
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CREDIT AND SECURITY AGREEMENT
Dated as of March 31, 1997
MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the
"Borrower"), and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the
"Lender"), hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accounts" means all of the Borrower's accounts, as such term is
defined in the UCC, including without limitation the aggregate unpaid
obligations of customers and other account debtors to the Borrower arising
out of the sale or lease of goods or rendition of services by the Borrower
on an open account or deferred payment basis.
"Advance" means a Revolving Advance.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrower, including (without
limitation) any Subsidiary of the Borrower. For purposes of this
definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities,
by contract or otherwise.
"Agreement" means this Credit and Security Agreement, as amended,
supplemented or restated from time to time.
"Availability" means the Borrowing Base less (i) the outstanding
principal balance of the Revolving Note and (ii) the Reserve.
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"Banking Day" means a day other than a Saturday, Sunday or other day
on which banks are generally not open for business in Minneapolis,
Minnesota.
"Base Rate" means the rate of interest publicly announced from time to
time by Norwest Bank as its "base rate" or, if such bank ceases to announce
a rate so designated, any similar successor rate designated by the Lender.
"Book Net Worth" means the aggregate of the common and preferred
stockholders' equity in the Borrower, determined in accordance with GAAP.
"Borrowing Base" means, at any time, the lesser of:
(a) the Maximum Line less the Norwest Bank Revolving Advances; or
(b) subject to change from time to time in the Lender's sole
discretion, the sum of:
(i) 75% of Eligible Accounts; plus
(ii) the lesser of (A) 40% of Eligible Inventory or
(B) $1,500,000; plus
(iii) to the extent necessary to retire the Borrower's
indebtedness to Marquette Bank on the Funding Date, up to
$250,000, until the earlier of (A) the Borrower receives
not less than $750,000 of the Equity Infusion or (B) 90
days from the Funding Date.
"Capital Expenditures" for a period means any expenditure of money for
the purchase or construction of assets, or for improvements or additions
thereto, which are capitalized on the Borrower's balance sheet.
"Collateral" means all of the Borrower's Equipment, General
Intangibles, Inventory, Receivables, all sums on deposit in any Collateral
Account, and any items in any Lockbox; together with (i) all substitutions
and replacements for and products of any of the foregoing; (ii) proceeds of
any and all of the foregoing; (iii) in the case of all tangible goods, all
accessions; (iv) all accessories, attachments, parts, equipment and repairs
now or hereafter attached or affixed to or used in connection with any
tangible goods; and (v) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
"Collateral Account" has the meaning given in the Collateral Account
Agreement.
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"Collateral Account Agreement" means the Collateral Account Agreement
of even date herewith by and among the Borrower, Norwest Bank and the
Lender.
"Collateral Pledge Agreement" means the Collateral Pledge Agreement of
even date herewith pursuant to which the Borrower pledges to the Lender and
Norwest Bank all of its shares in Medical Graphics F.S.C. and ErgometRx, as
the same may hereafter be amended, supplemented or restated from time to
time.
"Commitment" means the Lender's commitment to make Advances to or for
the Borrower's account pursuant to Article II.
"Credit Facility" means the credit facility being made available to
the Borrower by the Lender pursuant to Article II.
"Current Maturities of Long Term Debt" as of a given date means the
amount of the Borrower's long-term debt and capitalized leases which will
become due during the fiscal year beginning on the designated date.
"Debt" of any Person means all items of indebtedness or liability
which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet of that
Person as at the date as of which Debt is to be determined. For purposes of
determining a Person's aggregate Debt at any time, "Debt" shall also
include the aggregate payments required to be made by such Person at any
time under any lease that is considered a capitalized lease under GAAP.
"Debt to Book Net Worth Ratio" as of a given date means the ratio of
the Borrower's Debt to the Borrower's Book Net Worth.
"Debt Service Coverage Ratio" means the ratio of (i) Funds from
Operations MINUS Capital Expenditures to (ii) Current Maturities of Long
Term Debt.
"Default" means an event that, with giving of notice or passage of
time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the first day
of any month during which a Default or Event of Default has occurred and
ending on the date the Lender notifies the Borrower in writing that such
Default or Event of Default has been cured or waived.
"Default Rate" means an annual rate equal to three percent (3%) over
the Floating Rate, which rate shall change when and as the Floating Rate
changes.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Eligible Accounts" means all unpaid Accounts, net of any credits,
except the following shall not in any event be deemed Eligible Accounts:
(i) That portion of Accounts over 120 days past invoice date
or more than 60 days past the stated due date;
(ii) That portion of Accounts that is disputed or subject to a
claim of offset or a contra account;
(iii) That portion of Accounts not yet earned by the final
delivery of goods or rendition of services, as applicable, by the
Borrower to the customer;
(iv) Accounts owed by any unit of government, whether foreign
or domestic (provided, however, that there shall be included in
Eligible Accounts that portion of Accounts owed by such units of
government for which the Borrower has provided evidence satisfactory
to the Lender that (A) the Lender has a first priority perfected
security interest and (B) such Accounts may be enforced by the Lender
directly against such unit of government under all applicable laws);
(v) Accounts owed by an account debtor located outside the
United States;
(vi) Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
(vii) Accounts owed by a shareholder, Subsidiary, Affiliate,
officer or employee of the Borrower;
(viii) Accounts not subject to a duly perfected security
interest in the Lender's favor or which are subject to any lien,
security interest or claim in favor of any Person other than the
Lender and Norwest Bank including without limitation any payment or
performance bond;
(ix) That portion of Accounts that has been restructured,
extended, amended or modified;
(x) That portion of Accounts that constitutes advertising,
finance charges, service charges or sales or excise taxes;
(xi) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 10% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (i), (ii) or
(ix) above; and
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(xii) Accounts, or portions thereof, otherwise deemed
ineligible by the Lender in its sole discretion, unless otherwise
approved by the Lender on a case by case basis.
"Eligible Inventory" means all Inventory of the Borrower constituting
raw materials and finished goods, at the lower of cost or market value,
exclusive of overhead, as determined in accordance with GAAP; provided,
however, that the following shall not in any event be deemed Eligible
Inventory:
(i) Inventory that is: in-transit; located at any warehouse,
job site or other premises not approved by the Lender in writing;
located outside of the states, or localities, as applicable, in which
the Lender has filed financing statements to perfect a first priority
security interest in such Inventory; covered by any negotiable or non-
negotiable warehouse receipt, bill of lading or other document of
title; on consignment from or to any Person or subject to any
bailment;
(ii) Supplies, packaging, service parts, research, sample or
demonstration Inventory;
(iii) Work-in-process Inventory;
(iv) Inventory that is damaged, obsolete, slow moving or not
currently saleable in the normal course of the Borrower's operations;
(v) Inventory that the Borrower has returned, has attempted to
return, is in the process of returning or intends to return to the
vendor thereof;
(vi) Inventory that is perishable or live;
(vii) Inventory manufactured by the Borrower pursuant to a
license unless the applicable licensor has agreed in writing to permit
the Lender to exercise its rights and remedies against such Inventory;
(viii) Inventory constituting Eligible Export Inventory, as
defined in the Norwest Bank Credit Agreement;
(ix) Inventory that is subject to a security interest in favor of
any Person other than the Lender and Norwest Bank; and
(x) Inventory otherwise deemed ineligible by the Lender in its
sole discretion.
"Environmental Laws" has the meaning specified in Section 5.12.
"Equipment" means all of the Borrower's equipment, as such term is
defined in the UCC, whether now owned or hereafter acquired, including but
not limited to all
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present and future machinery, vehicles, furniture, fixtures,
manufacturing equipment, shop equipment, office and recordkeeping
equipment, parts, tools, supplies, and including specifically (without
limitation) the goods described in any equipment schedule or list herewith
or hereafter furnished to the Lender by the Borrower.
"Equity Infusion" has the meaning given in Section 2.13.
"ErgometRx" means ErgometRx, Inc., a Minnesota corporation.
"Event of Default" has the meaning specified in Section 8.1.
"Facility Fees" has the meaning given in Section 2.6(d).
"Floating Rate" means an annual rate equal to the sum of the Base Rate
plus four percent (4.00%), which annual rate shall change when and as the
Base Rate changes.
"Funding Date" has the meaning given in Section 2.1.
"Funds From Operations" for a given period means the sum of (i) Net
Income, (ii) depreciation and amortization, (iii) deferred income taxes,
and (iv) other non-cash items, each as determined for such period in
accordance with GAAP.
"GAAP" means generally accepted accounting principles, applied on a
basis consistent with the accounting practices applied in the financial
statements described in Section 5.5.
"General Intangibles" means all of the Borrower's general intangibles,
as such term is defined in the UCC, whether now owned or hereafter
acquired, including (without limitation) all present and future patents,
patent applications, copyrights, trademarks, trade names, trade secrets,
customer or supplier lists and contracts, manuals, operating instructions,
permits, franchises, the right to use the Borrower's name, and the goodwill
of the Borrower's business.
"Hazardous Substance" has the meaning given in Section 5.12.
"Inventory" means all of the Borrower's inventory, as such term is
defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or
materials, whether acquired, held or furnished for sale, for lease or under
service contracts or for manufacture or processing, and wherever located.
"Key Management" means Glenn D. Taylor and Dale H. Johnson.
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"Loan Documents" means this Agreement, the Note and the Security
Documents.
"Lockbox" has the meaning given in the Lockbox Agreement.
"Lockbox Agreement" means the Lockbox Agreement by and among the
Borrower, Norwest Bank and, the Lender, of even date herewith.
"Maturity Date" means April 1, 2000.
"Maximum Line" means $4,100,000, unless said amount is reduced
pursuant to Section 2.9, in which event it means the amount to which said
amount is reduced.
"Medical Graphics F.S.C." means Medical Graphics F.S.C., Inc., a US
Virgin Island corporation.
"Medical Graphics Germany" means Medical Graphics GmbH, a German
corporation.
"Minimum Interest Charge" has the meaning given in Section 2.2(b).
"Net Income" means fiscal year-to-date after-tax net income, as
determined in accordance with GAAP.
"Norwest Bank" means Norwest Bank Minnesota, National Association, a
national banking association.
"Norwest Bank Credit Agreement" means that certain Credit Agreement by
and between Norwest Bank and the Borrower of even date herewith.
"Norwest Bank Revolving Advances" means the outstanding principal
balance of the revolving advances as of a given date made by Norwest Bank
to the Borrower pursuant to the Norwest Bank Credit Agreement.
"Note" means the Revolving Note.
"Obligations" means the Note and each and every other debt, liability
and obligation of every type and description which the Borrower may now or
at any time hereafter owe to the Lender, whether such debt, liability or
obligation now exists or is hereafter created or incurred, whether it
arises in a transaction involving the Lender alone or in a transaction
involving other creditors of the Borrower, and whether it is direct or
indirect, due or to become due, absolute or contingent, primary or
secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including
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specifically, but not limited to, all indebtedness of the Borrower arising
under this Agreement, the Note or any other loan or credit agreement or
guaranty between the Borrower and the Lender, whether now in effect or
hereafter entered into.
"Origination Fee" has the meaning given in Section 2.6(a).
"Patent and Trademark Security Agreement" means the Patent and
Trademark Security Agreement by the Borrower in favor of the Lender of even
date herewith.
"Permitted Lien" has the meaning given in Section 7.1.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained for the
Borrower's employees and covered by Title IV of ERISA.
"Premises" means all premises where the Borrower conducts its business
and has any rights of possession, including (without limitation) the
premises legally described in Exhibit C attached hereto.
"Receivables" means each and every right of the Borrower to the
payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property, out of a rendering of services, out
of a loan, out of the overpayment of taxes or other liabilities, or
otherwise arises under any contract or agreement, whether such right to
payment is created, generated or earned by the Borrower or by some other
person who subsequently transfers such person's interest to the Borrower,
whether such right to payment is or is not already earned by performance,
and howsoever such right to payment may be evidenced, together with all
other rights and interests (including all liens and security interests)
which the Borrower may at any time have by law or agreement against any
account debtor or other obligor obligated to make any such payment or
against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans
and obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.
"Reportable Event" shall have the meaning assigned to that term in
Title IV of ERISA.
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"Reserve" means $0 from the Funding Date through the last day of the
first full calendar month after the Funding Date and shall increase $25,000
on the first day of each calendar month thereafter, up to a maximum amount
of $175,000.
"Revolving Advance" has the meaning given in Section 2.1.
"Revolving Note" means the Borrower's revolving promissory note,
payable to the order of the Lender in substantially the form of Exhibit A
hereto and any note or notes issued in substitution therefor, as the same
may hereafter be amended, supplemented or restated from time to time.
"Security Documents" means this Agreement, the Collateral Account
Agreement, the Collateral Pledge Agreement, the Lockbox Agreement, the
Patent and Trademark Security Agreement, and any other document delivered
to the Lender from time to time to secure the Obligations, as the same may
hereafter be amended, supplemented or restated from time to time.
"Security Interest" has the meaning given in Section 3.1.
"Subsidiary" means any corporation of which more than 50% of the
outstanding shares of capital stock having general voting power under
ordinary circumstances to elect a majority of the board of directors of
such corporation, irrespective of whether or not at the time stock of any
other class or classes shall have or might have voting power by reason of
the happening of any contingency, is at the time directly or indirectly
owned by the Borrower, by the Borrower and one or more other Subsidiaries,
or by one or more other Subsidiaries.
"Tax Expense" as of any date means state and federal income taxes
recorded by the Borrower for the year-to-date period ending on such date.
"Termination Date" means the earliest of (i) the Maturity Date, (ii)
the date the Borrower terminates the Credit Facility, or (iii) the date the
Lender demands payment of the Obligations after an Event of Default
pursuant to Section 8.2.
"UCC" means the Uniform Commercial Code as in effect from time to time
in the state designated in Section 9.13 as the state whose laws shall
govern this Agreement, or in any other state whose laws are held to govern
this Agreement or any portion hereof.
"Warrant" means the Warrant to purchase not less than 62,500 shares of
the Borrower's common stock, of even date herewith by the Borrower in favor
of the Lender.
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Section 1.2 CROSS REFERENCES. All references in this Agreement to
Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.
ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
Section 2.1 REVOLVING ADVANCES. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances to the Borrower
from time to time from the date all of the conditions set forth in Section 4.1
are satisfied (the "Funding Date") to the Termination Date, on the terms and
subject to the conditions herein set forth (the "Revolving Advances"). The
Lender shall have no obligation to make a Revolving Advance to the extent that
the amount thereof would exceed Availability. The Borrower's obligation to pay
the Revolving Advances shall be evidenced by the Revolving Note and shall be
secured by the Collateral as provided in Article III. Within the limits set
forth in this Section 2.1, the Borrower may borrow, prepay pursuant to Section
2.9 and reborrow. The Borrower agrees to comply with the following procedures in
requesting Revolving Advances under this Section 2.1:
(a) The Borrower shall make each request for a Revolving Advance to
the Lender before 11:00 a.m. (Minneapolis time) of the day of the requested
Revolving Advance. Requests may be made in writing or by telephone,
specifying the date of the requested Revolving Advance and the amount
thereof. Each request shall be by (i) any officer of the Borrower; or
(ii) any person designated as the Borrower's agent by any officer of the
Borrower in a writing delivered to the Lender; or (iii) any person whom the
Lender reasonably believes to be an officer of the Borrower or such a
designated agent.
(b) Upon fulfillment of the applicable conditions set forth in
Article IV, the Lender shall disburse the proceeds of the requested
Revolving Advance by crediting the same to the Borrower's demand deposit
account maintained with Norwest Bank unless the Lender and the Borrower
shall agree in writing to another manner of disbursement. Upon the Lender's
request, the Borrower shall promptly confirm each telephonic request for an
Advance by executing and delivering an appropriate confirmation certificate
to the Lender. The Borrower shall repay all Advances even if the Lender
does not receive such confirmation and even if the person requesting an
Advance was not in fact authorized to do so. Any request for an Advance,
whether written or telephonic, shall be deemed to be a representation by
the Borrower that the conditions set forth in Section 4.2 have been
satisfied as of the time of the request.
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Section 2.2 INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST;
ADDITIONAL INTEREST; PARTICIPATIONS; USURY. Interest accruing on the Note shall
be due and payable in arrears on the first day of each month.
(a) REVOLVING NOTE. Except as set forth in Sections 2.2(c)and 2.2(d)
the outstanding principal balance of the Revolving Note shall bear interest
at the Floating Rate.
(b) MINIMUM INTEREST CHARGE. Notwithstanding the interest payable
pursuant to Section 2.2(a), the Borrower shall pay to the Lender interest
of not less than $15,000 per calendar month (the "Minimum Interest Charge")
during the term of this Agreement, and the Borrower shall pay any
deficiency between the Minimum Interest Charge and the amount of interest
otherwise calculated under Section 2.2(a) on the date and in the manner
provided in Section 2.7.
(c) DEFAULT INTEREST RATE. At any time during any Default Period, in
the Lender's sole discretion and without waiving any of its other rights
and remedies, the principal of the Advances outstanding from time to time
shall bear interest at the Default Rate, effective for any periods
designated by the Lender from time to time during that Default Period.
(d) PARTICIPATIONS. If any Person shall acquire a participation in
the Advances under this Agreement, the Borrower shall be obligated to the
Lender to pay the full amount of all interest calculated under this
Agreement, along with all other fees, charges and other amounts due under
this Agreement, regardless if such Person elects to accept interest with
respect to its participation at a lower rate than the Floating Rate, or
otherwise elects to accept less than its prorata share of such fees,
charges and other amounts due under this Agreement.
(e) USURY. In any event no rate change shall be put into effect which
would result in a rate greater than the highest rate permitted by law.
Section 2.6 FEES.
(a) ORIGINATION FEE. The Borrower hereby agrees to pay the Lender a
fully earned and non-refundable origination fee of $41,000 (the
"Origination Fee"). The Origination Fee shall be due and payable in twelve
(12) substantially equal monthly installments beginning on the first day of
the first month after the Funding Date. The Lender acknowledges receipt of
$45,000 toward payment of the Origination Fee and the fees, costs and
expenses described in Sections 2.6(c) and 9.6.
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(b) UNUSED LINE FEE. For the purposes of this Section 2.6(b), "Unused
Amount" means the Maximum Line reduced by the Norwest Bank Revolving
Advances and the outstanding principal balance of the Revolving Advances.
The Borrower agrees to pay to the Lender an unused line fee at the rate of
one-quarter of one percent (0.25%) per annum on the average daily Unused
Amount from the date of this Agreement to and including the Termination
Date, due and payable on the first day of each fiscal quarter of the
Borrower in arrears and on the Termination Date.
(c) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on
demand, audit fees in connection with any audits or inspections conducted
by the Lender of any Collateral or the Borrower's operations or business at
the rates established from time to time by the Lender as its audit fees
(which fees are currently $62.50 per hour per auditor), together with all
actual out-of-pocket costs and expenses incurred in conducting any such
audit or inspection.
(d) FACILITY FEES. The Borrower shall pay the Lender an annual
facility fee equal to one-quarter of one percent (0.25%) of the Maximum
Line, due and payable on each anniversary of the Funding Date, provided
that this fee when combined with any similar fee paid to Norwest Bank
pursuant to the Norwest Bank Credit Agreement shall not exceed in total
one-quarter of one percent (0.25%) of the Maximum Line.
Section 2.7 COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE AND
PAYABLE. Interest accruing on the outstanding principal balance of the Advances
and fees hereunder outstanding from time to time shall be computed on the basis
of actual number of days elapsed in a year of 360 days. Except as set forth in
Section 2.2(d), interest shall be payable in arrears on the first day of each
month and on the Termination Date.
Section 2.8 CAPITAL ADEQUACY. If any Related Lender determines at any
time that its Return has been reduced as a result of any Rule Change, such
Related Lender may require the Borrower to pay it the amount necessary to
restore its Return to what it would have been had there been no Rule Change. For
purposes of this Section 2.8:
(a) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy, or
the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules
include rules requiring financial institutions to maintain total capital in
amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.
(b) "Return", for any period, means the return as determined by such
Related Lender on the Advances based upon its total capital requirements
and a
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reasonable attribution formula that takes account of the Capital
Adequacy Rules then in effect. Return may be calculated for each calendar
quarter and for the shorter period between the end of a calendar quarter
and the date of termination in whole of this Agreement.
(c) "Rule Change" means any change in any Capital Adequacy Rule
occurring after the date of this Agreement, but the term does not include
any changes in applicable requirements that at the Funding Date are
scheduled to take place under the existing Capital Adequacy Rules or any
increases in the capital that any Related Lender is required to maintain to
the extent that the increases are required due to a regulatory authority's
assessment of the financial condition of such Related Lender.
(d) "Related Lender" includes (but is not limited to) the Lender, any
parent corporation of the Lender and any assignee of any interest of the
Lender hereunder and any participant in the loans made hereunder.
Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.8, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.
Section 2.9 VOLUNTARY PREPAYMENT; TERMINATION OF CREDIT FACILITY BY
THE BORROWER; PERMANENT REDUCTION OF THE MAXIMUM LINE. Except as otherwise
provided herein, the Borrower may terminate the Credit Facility or prepay the
Advances in whole at any time or from time to time in part, and, subject to
payment and performance of all Obligations and termination of the Credit
Facility, the Lender shall release or terminate the Security Interest and the
Security Documents to which the Borrower is entitled by law.
(a) TERMINATION BY BORROWER. The Borrower may terminate the Credit
Facility at any time in accordance with subsection (b).
(b) PERMANENT REDUCTION OF MAXIMUM LINE. The Borrower may at any time
and from time to time, upon at least 30 days' prior written notice to the
Lender, permanently reduce in part or completely the Maximum Line or
terminate the Credit Facility in accordance with the following provisions:
(i) The Borrower may not reduce the Maximum Line to an amount
less than the then-aggregate outstanding balance of the Revolving
Advances.
(ii) If a reduction of the Maximum Line occurs at any time other
than the Maturity Date, the Borrower shall pay to the Lender a premium
in an amount equal to a percentage of the reduction as follows:
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(A) Three percent (3%) if the reduction occurs on or before
the first anniversary of the Funding Date;
(B) Two percent (2%) if the reduction occurs after the
first anniversary of the Funding Date but on or before the second
anniversary of the Funding Date; and
(C) One percent (1%) if the reduction occurs after the
second anniversary of the Funding Date;
PROVIDED, HOWEVER, that if the Borrower reduces the Maximum Line to
zero, the Borrower shall pay to the Lender an amount equal to the
greater of (1) the premium set forth in (A) through (C) above or
(2) the product of $15,000 and the number of calendar months remaining
after the such reduction occurs through the Maturity Date.
(iii) Any reduction in the Maximum Line must be in an amount
not less than $500,000 or an integral multiple thereof.
(iv) If the Borrower reduces the Maximum Line to zero, all
Obligations shall be immediately due and payable.
Section 2.10 MANDATORY PREPAYMENT. Without notice or demand, if the
outstanding principal balance of the Revolving Advances shall at any time exceed
the Borrowing Base, the Borrower shall immediately prepay the Revolving Advances
to the extent necessary to eliminate such excess. Any payment received by the
Lender under this Section 2.10 or under Section 2.9 may be applied to the
Obligations, in such order and in such amounts as the Lender, in its discretion,
may from time to time determine.
Section 2.11 PAYMENT. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations 1 Banking
Day after receipt by the Lender. Notwithstanding anything in Section 2.1, the
Borrower hereby authorizes the Lender, in its discretion at any time or from
time to time without the Borrower's request and even if the conditions set forth
in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount
equal to the portion of the Obligations from time to time due and payable.
Section 2.12 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
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Section 2.13 EQUITY INFUSION. The Borrower intends to sell 444,444
shares of its class A convertible stock to Family Financial Strategies, Inc. in
exchange for $1,500,000, of which $500,000 shall be due and payable on or before
the Funding Date and $1,000,000 shall be due and payable on or before April 30,
1997 (the "Equity Infusion").
Section 2.14 USE OF PROCEEDS. The Borrower shall use the proceeds of
Advances to retire its indebtedness to Marquette Capital Bank, N.A. and for
ordinary working capital needs.
Section 2.15 LIABILITY RECORDS. The Lender may maintain from time to
time, at its discretion, liability records as to the Obligations. All entries
made on any such record shall be presumed correct until the Borrower establishes
the contrary. Upon the Lender's demand, the Borrower will admit and certify in
writing the exact principal balance of the Obligations that the Borrower then
asserts to be outstanding. Any billing statement or accounting rendered by the
Lender shall be conclusive and fully binding on the Borrower unless the Borrower
gives the Lender specific written notice of exception within 30 days after
receipt.
ARTICLE III
SECURITY INTEREST; OCCUPANCY; SETOFF
Section 3.1 GRANT OF SECURITY INTEREST. The Borrower hereby pledges,
assigns and grants to the Lender a security interest (collectively referred to
as the "Security Interest") in the Collateral, as security for the payment and
performance of the Obligations.
Section 3.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS. The
Lender may at any time during a Default Period notify any account debtor or
other person obligated to pay the amount due that such right to payment has been
assigned or transferred to the Lender for security and shall be paid directly to
the Lender. The Borrower will join in giving such notice if the Lender so
requests. At any time after the Borrower or the Lender gives such notice to an
account debtor or other obligor, the Lender may, but need not, in the Lender's
name or in the Borrower's name, (a) demand, sue for, collect or receive any
money or property at any time payable or receivable on account of, or securing,
any such right to payment, or grant any extension to, make any compromise or
settlement with or otherwise agree to waive, modify, amend or change the
obligations (including collateral obligations) of any such account debtor or
other obligor; and (b) as the Borrower's agent and attorney-in-fact, notify the
United States Postal Service to change the address for delivery of the
Borrower's mail to any address designated by the Lender, otherwise intercept the
Borrower's mail, and receive, open and dispose of the Borrower's mail, applying
all Collateral as permitted under this Agreement and holding all other mail for
the Borrower's account or forwarding such mail to the Borrower's last known
address.
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Section 3.3 ASSIGNMENT OF INSURANCE. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether or not a Default Period then exists, the Lender may
(but need not), in the Lender's name or in the Borrower's name, execute and
deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
Section 3.4 OCCUPANCY.
(a) The Borrower hereby irrevocably grants to the Lender the right to
take possession of the Premises at any time during a Default Period.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise dispose
of goods that are Collateral and for other purposes that the Lender may in
good faith deem to be related or incidental purposes.
(c) The Lender's right to hold the Premises shall cease and
terminate upon the earlier of (i) payment in full and discharge of all
Obligations and termination of the Commitment, and (ii) final sale or
disposition of all goods constituting Collateral and delivery of all such
goods to purchasers.
(d) The Lender shall not be obligated to pay or account for any rent
or other compensation for the possession, occupancy or use of any of the
Premises; provided, however, that if the Lender does pay or account for any
rent or other compensation for the possession, occupancy or use of any of
the Premises, the Borrower shall reimburse the Lender promptly for the full
amount thereof. In addition, the Borrower will pay, or reimburse the Lender
for, all taxes, fees, duties, imposts, charges and expenses at any time
incurred by or imposed upon the Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of this
Agreement or the provisions of this Section 3.4.
Section 3.5 LICENSE. Without limiting the generality of the Patent and
Trademark Security Agreement, the Borrower hereby grants to the Lender a non-
exclusive, worldwide and royalty-free license to use or otherwise exploit all
trademarks, franchises,
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trade names, copyrights and patents of the Borrower for the purpose of selling,
leasing or otherwise disposing of any or all Collateral during any Default
Period.
Section 3.6 FINANCING STATEMENT. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of Debtor:
Medical Graphics Corporation
350 Oak Grove Parkway
St. Paul, Minnesota 55127
Federal Tax Identification No. 41-1316712
Name and address of Secured Party:
Norwest Business Credit, Inc.
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
Federal Tax Identification No. 41-1237652
Section 3.7 SETOFF. The Borrower agrees that the Lender may at any
time or from time to time, at its sole discretion and without demand and without
notice to anyone, setoff any liability owed to the Borrower by the Lender,
whether or not due, against any Obligation, whether or not due. In addition,
each other Person holding a participating interest in any Obligations shall have
the right to appropriate or setoff any deposit or other liability then owed by
such Person to the Borrower, whether or not due, and apply the same to the
payment of said participating interest, as fully as if such Person had lent
directly to the Borrower the amount of such participating interest.
ARTICLE IV
CONDITIONS OF LENDING
Section 4.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE. The
Lender's obligation to make the initial Revolving Advance hereunder shall be
subject to the condition precedent that the Lender shall have received all of
the following, each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed by the Borrower.
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(b) The Note, properly executed by the Borrower.
(c) The Warrant, properly executed by the Borrower.
(d) Evidence that after giving effect to the initial Advance, and
after accounting for the projected cashflow shortfall through December 31,
1997, satisfying all of the Borrower's obligations to Marquette Capital
Bank, N.A., book overdrafts and closing costs at the time of closing,
Availability shall be not less than $300,000.
(e) A true and correct copy of any and all leases pursuant to which
the Borrower is leasing the Premises, together with a landlord's disclaimer
and consent with respect to each such lease.
(f) The Collateral Pledge Agreement, properly executed by the
Borrower together with certificates representing all of the Borrower's
shares in Medical Graphics F.S.C. and ErgometRx and stock powers with
respect to such certificates.
(g) The Collateral Account Agreement, properly executed by the
Borrower and Norwest Bank.
(h) The Lockbox Agreement, properly executed by the Borrower and
Norwest Bank.
(i) The Patent and Trademark Security Agreement, properly executed by
the Borrower.
(j) Evidence that the Borrower shall receive not later than
simultaneously with the making of the initial Advance, not less than
$500,000 of the Equity Infusion.
(k) Current searches of appropriate filing offices showing that
(i) no state or federal tax liens have been filed and remain in effect
against the Borrower, (ii) no financing statements or assignments of
patents, trademarks or copyrights have been filed and remain in effect
against the Borrower except those financing statements and assignments of
patents, trademarks or copyrights relating to Permitted Liens or to liens
held by Persons who have agreed in writing that upon receipt of proceeds of
the Advances, they will deliver UCC releases and/or terminations and
releases of such assignments of patents, trademarks or copyrights
satisfactory to the Lender, and (iii) the Lender has duly filed all
financing statements necessary to perfect the Security Interest, to the
extent the Security Interest is capable of being perfected by filing.
(l) A certificate of the Borrower's Secretary or Assistant Secretary
certifying as to (i) the resolutions of the Borrower's directors and, if
required,
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shareholders, authorizing the execution, delivery and performance
of the Loan Documents, (ii) the Borrower's articles of incorporation and
bylaws, and (iii) the signatures of the Borrower's officers or agents
authorized to execute and deliver the Loan Documents and other instruments,
agreements and certificates, including Advance requests, on the Borrower's
behalf.
(m) A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in compliance with all
applicable organizational requirements of the State of Minnesota.
(n) Evidence that the Borrower is duly licensed or qualified to
transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary.
(o) A certificate of an officer of the Borrower confirming, in his
personal capacity, the representations and warranties set forth in
Article V.
(p) Support agreements in favor of the Lender, properly executed by
the Key Management, each in their personal capacity.
(q) An opinion of counsel to the Borrower, addressed to the Lender.
(r) Certificates of the insurance required hereunder, with all hazard
insurance containing a lender's loss payable endorsement in the Lender's
favor and with all liability insurance naming the Lender as an additional
insured.
(s) Payment of the fees and commissions due through the date of the
initial Advance under Section 2.6 and expenses incurred by the Lender
through such date and required to be paid by the Borrower under
Section 9.6, including all legal expenses incurred through the date of this
Agreement.
(t) A copy of the Norwest Bank Credit Agreement and all other
documents required therein, properly executed by Norwest Bank and the
Borrower, together with evidence that all conditions precedent to making
the initial Norwest Bank Revolving Advance shall be satisfied not later
than simultaneously with the initial Advance.
(u) Such other documents as the Lender in its sole discretion may
require.
Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The Lender's
obligation to make each Advance shall be subject to the further conditions
precedent that on such date:
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(a) the representations and warranties contained in Article V are
correct on and as of the date of such Advance as though made on and as of
such date, except to the extent that such representations and warranties
relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from
such Advance which constitutes a Default or an Event of Default.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
Section 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE
OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER. The
Borrower is a corporation, duly organized, validly existing and in good standing
under the laws of the State of Minnesota and is duly licensed or qualified to
transact business in all jurisdictions where the character of the property owned
or leased or the nature of the business transacted by it makes such licensing or
qualification necessary. The Borrower has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its properties and to
execute and deliver, and to perform all of its obligations under, the Loan
Documents. During its existence, the Borrower has done business solely under the
names set forth in Schedule 5.1 hereto. The Borrower's chief executive office
and principal place of business is located at the address set forth in Schedule
5.1 hereto, and all of the Borrower's records relating to its business or the
Collateral are kept at that location. All Inventory and Equipment is located at
that location or at one of the other locations set forth in Schedule 5.1 hereto.
The Borrower's tax identification number is correctly set forth in Section 3.6
hereto.
Section 5.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR
AGREEMENTS. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's stockholders; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Borrower's articles of incorporation or bylaws;
(iv) result in a breach of or constitute a default under any indenture or loan
or credit agreement or any other material agreement, lease or instrument to
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which the Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interest) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
Section 5.3 LEGAL AGREEMENTS. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.
Section 5.4 SUBSIDIARIES. The Borrower has no Subsidiaries other than
Medical Graphics Germany which the Borrower is in the process of winding up and
Medical Graphics F.S.C.
Section 5.5 FINANCIAL CONDITION; NO ADVERSE CHANGE. The Borrower has
heretofore furnished to the Lender its audited financial statements for its
fiscal year ended December 31, 1995 and its unaudited financial statements for
the fiscal year-to-date period ended December 31, 1996 and those statements
fairly present the Borrower's financial condition on the dates thereof and the
results of its operations and cash flows for the periods then ended and were
prepared in accordance with generally accepted accounting principles. Since the
date of the most recent financial statements, there has been no material adverse
change in the Borrower's business, properties or condition (financial or
otherwise).
Section 5.6 LITIGATION. Except as set forth on Schedule 5.6, there are
no actions, suits or proceedings pending or, to the Borrower's knowledge,
threatened against or affecting the Borrower or any of its Affiliates or the
properties of the Borrower or any of its Affiliates before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which, if determined adversely to the Borrower or any of
its Affiliates, would have a material adverse effect on the financial condition,
properties or operations of the Borrower or any of its Affiliates.
Section 5.7 REGULATION U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.
Section 5.8 TAXES. Except as set forth on Schedule 5.8 and described
in the letter from the Borrower's accountants attached thereto, the Borrower and
its Affiliates (a) have paid or caused to be paid to the proper authorities when
due all federal, state and local taxes required to be withheld by each of them;
(b) have filed all federal, state and local
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tax returns which to the knowledge of the officers of the Borrower or any
Affiliate, as the case may be, are required to be filed, and (c) have paid or
caused to be paid to the respective taxing authorities all taxes as shown on
said returns or on any assessment received by any of them to the extent such
taxes have become due.
Section 5.9 TITLES AND LIENS. The Borrower has good and absolute title
to all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest financial
statements referred to in Section 5.5 and all proceeds thereof, free and clear
of all mortgages, security interests, liens and encumbrances, except for
Permitted Liens. No financing statement naming the Borrower as debtor is on file
in any office except to perfect only Permitted Liens.
Section 5.10 PLANS. Except as disclosed to the Lender in writing prior
to the date hereof, neither the Borrower nor any of its Affiliates maintains or
has maintained any Plan. Neither the Borrower nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. Neither the Borrower nor any of its
Affiliates has:
(a) Any accumulated funding deficiency within the meaning of ERISA;
or
(b) Any liability or knows of any fact or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may
become payable to participants or beneficiaries of any such Plan).
Section 5.11 DEFAULT. The Borrower is in compliance with all
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or default
of which could have a material adverse effect on the Borrower's financial
condition, properties or operations.
Section 5.12 ENVIRONMENTAL MATTERS.
(a) DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
(i) "Environmental Law" means any federal, state, local or other
governmental statute, regulation, law or ordinance dealing with the
protection of human health and the environment.
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(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions
thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.
(b) To the Borrower's best knowledge, there are not present in, on or
under the Premises any Hazardous Substances in such form or quantity as to
create any liability or obligation for either the Borrower or the Lender
under common law of any jurisdiction or under any Environmental Law except
for small quantities in the ordinary course of its business and in strict
compliance with all Environmental Laws, and no Hazardous Substances have
ever been stored, buried, spilled, leaked, discharged, emitted or released
in, on or under the Premises in such a way as to create any such liability.
(c) To the Borrower's best knowledge, the Borrower has not disposed
of Hazardous Substances in such a manner as to create any liability under
any Environmental Law.
(d) There are not and there never have been any requests, claims,
notices, investigations, demands, administrative proceedings, hearings or
litigation, relating in any way to the Premises or the Borrower, alleging
liability under, violation of, or noncompliance with any Environmental Law
or any license, permit or other authorization issued pursuant thereto. To
the Borrower's best knowledge, no such matter is threatened or impending.
(e) To the Borrower's best knowledge, the Borrower's businesses are
and have in the past always been conducted in substantial compliance with
all Environmental Laws and all licenses, permits and other authorizations
required pursuant to any Environmental Law and necessary for the lawful and
efficient operation of such businesses are in the Borrower's possession and
are in full force and effect. No permit required under any Environmental
Law is scheduled to expire within 12 months and there is no threat that any
such permit will be withdrawn, terminated, limited or materially changed.
(f) To the Borrower's best knowledge, the Premises are not and never
have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or
any similar federal, state or local list, schedule, log, inventory or
database.
(g) The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or Borrower's businesses.
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Section 5.13 SUBMISSIONS TO LENDER. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's request for the credit facilities contemplated hereby is
true and correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.
Section 5.14 FINANCING STATEMENTS. The Borrower has provided to the
Lender signed financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral and
all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
Section 5.15 RIGHTS TO PAYMENT. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
ARTICLE VI
BORROWER'S AFFIRMATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrower will comply with the
following requirements, unless the Lender shall otherwise consent in writing:
Section 6.1 REPORTING REQUIREMENTS. The Borrower will deliver, or
cause to be delivered, to the Lender each of the following, which shall be in
form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, the Borrower's audited financial
statements with the unqualified opinion of independent certified public
accountants selected by the Borrower and acceptable to the Lender, which
annual financial statements shall include the Borrower's balance sheet as
at the end of such fiscal year and the related statements of the Borrower's
income, retained earnings and cash flows for the fiscal year then ended,
prepared, if the Lender so requests, on a consolidating and
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consolidated basis to include any Affiliates, all in reasonable detail and
prepared in accordance with GAAP, together with (i) copies of all
management letters prepared by such accountants; (ii) a report signed by
such accountants stating that in making the investigations necessary for
said opinion they obtained no knowledge, except as specifically stated, of
any Default or Event of Default hereunder and all relevant facts in
reasonable detail to evidence, and the computations as to, whether or not
the Borrower is in compliance with the requirements set forth in
Sections 6.12, 6.13, 6.14, 6.15 and 7.10; and (iii) a certificate of the
Borrower's chief financial officer stating that such financial statements
have been prepared in accordance with GAAP and whether or not such officer
has knowledge of the occurrence of any Default or Event of Default
hereunder and, if so, stating in reasonable detail the facts with respect
thereto;
(b) as soon as available and in any event within 20 days after the
end of each month, an unaudited/internal balance sheet and statements of
income and retained earnings of the Borrower as at the end of and for such
month and for the year to date period then ended, prepared, if the Lender
so requests, on a consolidating and consolidated basis to include any
Affiliates, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end audit adjustments;
and accompanied by a certificate of the Borrower's chief financial officer,
substantially in the form of Exhibit B hereto stating (i) that such
financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating in reasonable detail
the facts with respect thereto, and (iii) all relevant facts in reasonable
detail to evidence, and the computations as to, whether or not the Borrower
is in compliance with the requirements set forth in Sections 6.12, 6.13,
6.14, 6.15 and 7.10;
(c) within 15 days after the end of each month or more frequently if
the Lender so requires, agings of the Borrower's accounts receivable and
its accounts payable, an inventory certification report, an accounts
receivable certification and a calculation of the Borrower's Accounts,
Eligible Accounts, Inventory and Eligible Inventory as at the end of such
month or shorter time period;
(d) on the first Banking Day of each week as of the last Banking Day
of the prior week, an inventory certification, signed by the Borrower's
chief financial officer;
(e) at least 30 days before the beginning of each fiscal year of the
Borrower, the projected balance sheets and income statements for each month
of such
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year, each in reasonable detail, representing the Borrower's good
faith projections and certified by the Borrower's chief financial officer
as being the most accurate projections available and identical to the
projections used by the Borrower for internal planning purposes, together
with such supporting schedules and information as the Lender may in its
discretion require;
(f) as soon as possible and in any event within 15 days after the end
of each month, a copy of the Borrower's checking account statement as of
the last day of such month from each bank with which the Borrower maintains
a checking account;
(g) as soon as available and in any event within ten days after they
are due, copies of tax payments and written notice of any and all taxes due
but not paid;
(h) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or regulatory
agency affecting the Borrower of the type described in Section 5.12 or
which seek a monetary recovery against the Borrower in excess of $25,000
individually or $100,000 in the aggregate during any fiscal year;
(i) as promptly as practicable (but in any event not later than five
business days) after an officer of the Borrower obtains knowledge of the
occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default
hereunder, notice of such occurrence, together with a detailed statement by
a responsible officer of the Borrower of the steps being taken by the
Borrower to cure the effect of such breach, default or event;
(j) as soon as possible and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with respect
to any Plan has occurred, the statement of the Borrower's chief financial
officer setting forth details as to such Reportable Event and the action
which the Borrower proposes to take with respect thereto, together with a
copy of the notice of such Reportable Event to the Pension Benefit Guaranty
Corporation;
(k) as soon as possible, and in any event within 10 days after the
Borrower fails to make any quarterly contribution required with respect to
any Plan under Section 412(m) of the Internal Revenue Code of 1986, as
amended, the statement of the Borrower's chief financial officer setting
forth details as to such failure and the action which the Borrower proposes
to take with respect thereto, together with a copy of any notice of such
failure required to be provided to the Pension Benefit Guaranty
Corporation;
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(l) promptly upon knowledge thereof, notice of (i) any disputes or
claims by the Borrower's customers exceeding $25,000 individually or
$100,000 in the aggregate during any fiscal year; (ii) credit memos;
(iii) any goods returned to or recovered by the Borrower; and (iv) any
change in the persons constituting the Borrower's officers and directors;
(m) promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by the
Security Documents or of any substantial adverse change in any Collateral
or such other collateral or the prospect of payment thereof;
(n) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent
to its stockholders;
(o) promptly after the sending or filing thereof, copies of all
regular and periodic reports which the Borrower shall file with the
Securities and Exchange Commission or any national securities exchange;
(p) promptly upon knowledge thereof, notice of the Borrower's
violation of any law, rule or regulation, the non-compliance with which
could materially and adversely affect the Borrower's business or its
financial condition; and
(q) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other material, reports, records
or information as the Lender may request.
The Borrower shall also deliver copies of the items required by subsections (a),
(b) and (e) to each participant in the Credit Facility at the same time as they
are delivered to the Lender.
Section 6.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. The
Borrower will keep accurate books of record and account for itself pertaining to
the Collateral and pertaining to the Borrower's business and financial condition
and such other matters as the Lender may from time to time request in which true
and complete entries will be made in accordance with GAAP and, upon the Lender's
request, will permit any officer, employee, attorney or accountant for the
Lender to audit, review, make extracts from or copy any and all corporate and
financial books and records of the Borrower at all times during ordinary
business hours, to send and discuss with account debtors and other obligors
requests for verification of amounts owed to the Borrower, and to discuss the
Borrower's affairs with any of its directors, officers, employees or agents. The
Borrower will permit the Lender, or its employees, accountants, attorneys or
agents, to examine and inspect any Collateral, other
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collateral covered by the Security Documents or any other property of the
Borrower at any time during ordinary business hours.
Section 6.3 ACCOUNT VERIFICATION. The Lender may at any time and from
time to time send or require the Borrower to send requests for verification of
accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.
Section 6.4 COMPLIANCE WITH LAWS.
(a) The Borrower will (i) comply with the requirements of applicable
laws and regulations, the non-compliance with which would materially and
adversely affect its business or its financial condition and (ii) use and
keep the Collateral, and require that others use and keep the Collateral,
only for lawful purposes, without violation of any federal, state or local
law, statute or ordinance.
(b) Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply with all applicable Environmental
Laws and obtain and comply with all permits, licenses and similar approvals
required by any Environmental Laws, and will not generate, use, transport,
treat, store or dispose of any Hazardous Substances in such a manner as to
create any liability or obligation under the common law of any jurisdiction
or any Environmental Law.
Section 6.5 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower will pay
or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Collateral) or upon or
against the creation, perfection or continuance of the Security Interest, prior
to the date on which penalties attach thereto, (b) all federal, state and local
taxes required to be withheld by it, and (c) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien or charge
upon any properties of the Borrower; provided, that the Borrower shall not be
required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made.
Section 6.6 MAINTENANCE OF PROPERTIES.
(a) The Borrower will keep and maintain the Collateral, the other
collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair
and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided,
however, that nothing in this Section 6.6 shall prevent the Borrower from
discontinuing the operation and maintenance of any of its properties if
such
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discontinuance is, in the Lender's judgment, desirable in the conduct
of the Borrower's business and not disadvantageous in any material respect
to the Lender.
(b) The Borrower will defend the Collateral against all claims or
demands of all persons (other than the Lender) claiming the Collateral or
any interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security interests,
liens and encumbrances except Permitted Liens.
Section 6.7 INSURANCE. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
keep all tangible Collateral insured against risks of fire (including so-called
extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender's loss payable endorsement
for the Lender's benefit acceptable to the Lender. All policies of liability
insurance required hereunder shall name the Lender as an additional insured.
Section 6.8 PRESERVATION OF EXISTENCE. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.
Section 6.9 DELIVERY OF INSTRUMENTS, ETC. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6.10 COLLATERAL ACCOUNT.
(a) If, notwithstanding the instructions to debtors to make payments
to the Lockbox, the Borrower receives any payments on Receivables, the
Borrower shall deposit such payments into the Collateral Account. Until so
deposited, the Borrower shall hold all such payments in trust for and as
the property of the Lender and shall not commingle such payments with any
of its other funds or property.
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(b) Amounts deposited in the Collateral Account shall not bear
interest and shall not be subject to withdrawal by the Borrower, except
after full payment and discharge of all Obligations.
(c) All items deposited in the Collateral Account shall be subject to
final payment. If any such item is returned uncollected, the Borrower will
immediately pay the Lender, or, for items deposited in the Collateral
Account, the bank maintaining such account, the amount of that item, or
such bank at its discretion may charge any uncollected item to the
Borrower's commercial account or other account. The Borrower shall be
liable as an endorser on all items deposited in the Collateral Account,
whether or not in fact endorsed by the Borrower.
Section 6.11 PERFORMANCE BY THE LENDER. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender's option, in
the Lender's name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including, without limitation, the payment of taxes, the satisfaction of
security interests, liens or encumbrances, the performance of obligations owed
to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the Lender's performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender's delegate, acting alone, as the Borrower's attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower under this Section 6.11.
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Section 6.12 MINIMUM BOOK NET WORTH. The Borrower will maintain its
Book Net Worth, determined as at the end of each month listed below, at an
amount not less than the amount set forth opposite such period:
MONTH MINIMUM BOOK NET WORTH
----------------- ----------------------
March 31, 1997 $1,355,000
April 30, 1997 $2,200,000
May 31, 1997 $2,120,000
June 30, 1997 $2,565,000
July 31, 1997 $2,565,000
August 31, 1997 $2,660,000
September 30, 1997 $3,400,000
October 31, 1997 $3,520,000
November 30, 1997 $3,765,000
December 31, 1997 $4,570,000
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Section 6.13 MAXIMUM DEBT TO BOOK NET WORTH RATIO. The Borrower will
maintain, during each period or as of each date described below, its Debt to its
Book Net Worth Ratio, determined as at the end of each month, at not more than
the ratio set forth opposite such period:
PERIOD/DATE MAXIMUM DEBT TO BOOK
NET WORTH RATIO
March 30, 1997 7.50 to 1.00
April 30, 1997 5.25 to 1.00
May 31, 1997 5.25 to 1.00
June 30, 1997 through 5.00 to 1.00
August 31, 1997
September 30, 1997 through 4.50 to 1.00
November 30, 1997
December 31, 1997 4.00 to 1.00
Section 6.14 MINIMUM NET INCOME. The Borrower will achieve as of each
date listed below, Net Income, of not less than the amount set forth opposite
such date:
DATE MINIMUM NET INCOME
March 31, 1997 ($2,385,000)
April 30, 1997 ($2,540,000)
May 31, 1997 ($2,195,000)
June 30, 1997 ($2,175,000)
July 31, 1997 ($2,175,000)
August 31, 1997 ($2,080,000)
September 30, 1997 ($1,340,000)
October 31, 1997 ($1,220,000)
November 30, 1997 ($975,000)
December 31, 1997 ($170,000)
Section 6.15 MINIMUM DEBT SERVICE COVERAGE RATIO. The Borrower will
achieve a Debt Service Coverage Ratio of 0.80 to 1.00 as of December 31, 1997,
and 1.00 to 1.00 as of each fiscal year end thereafter.
Section 6.16 AMENDMENTS TO FINANCIAL COVENANTS BASED ON AUDIT. If the
Borrower's Net Income or Book Net Worth as shown on its certified financial
statements for its fiscal year ended December 31, 1996 vary by more than $25,000
from those amounts provided by the Borrower to the Lender in establishing the
financial covenants set forth in
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Sections 6.12 through 6.15, the Lender may amend such financial covenants
to account for such variance.
Section 6.17 NEW COVENANTS. On or before January 31, 1998, The
Borrower and the Lender shall agree on new covenant levels for Sections 6.12,
6.13, 6.14, 6.15 and 7.10 for periods after such date. The new covenant levels
will be based on the Borrower's projections for such periods and shall be no
less stringent than the present levels.
ARTICLE VII
NEGATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower agrees that, without the Lender's prior
written consent:
Section 7.1 LIENS. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; EXCLUDING, HOWEVER, from the operation of the
foregoing, the following (collectively, "Permitted Liens"):
(a) in the case of any of the Borrower's property which is not
Collateral or other collateral described in the Security Documents,
covenants, restrictions, rights, easements and minor irregularities in
title which do not materially interfere with the Borrower's business or
operations as presently conducted;
(b) mortgages, deeds of trust, pledges, liens, security interests and
assignments in existence on the date hereof and listed in Schedule 7.1
hereto, securing indebtedness for borrowed money permitted under
Section 7.2;
(c) the Security Interest and liens and security interests created by
the Security Documents; and
(d) purchase money security interests relating to the acquisition of
machinery and equipment of the Borrower, not exceeding $50,000 for any one
purchase or $150,000 in the aggregate during any fiscal year and so long as
no Default Period is then in existence and none would exist immediately
after such acquisition.
Section 7.2 INDEBTEDNESS. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money or letters of credit issued on
the Borrower's behalf, or any
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other indebtedness or liability evidenced by notes, bonds, debentures or
similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date hereof and
listed in Schedule 7.2 hereto; and
(c) indebtedness relating to liens permitted in accordance with
Section 7.1.
Section 7.3 GUARANTIES. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower for
deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 7.2 hereto.
Section 7.4 INVESTMENTS AND SUBSIDIARIES.
(a) The Borrower will not purchase or hold beneficially any stock or
other securities or evidences of indebtedness of, make or permit to exist
any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without
limitation any partnership or joint venture, except:
(i) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued
by U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a maturity of
one year or less issued by members of the Federal Reserve System
having deposits in excess of $100,000,000 (which certificates of
deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(ii) the Borrower's investment, but only to the extent as of
the date hereof, in Medical Graphics Germany Medical Graphics F.S.C.
and ErgometRx;
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(iii) travel advances or loans to the Borrower's officers and
employees not exceeding at any one time an aggregate of $30,000; and
(iv) advances in the form of progress payments, prepaid rent
not exceeding one month or security deposits.
(b) The Borrower will not create or permit to exist any Subsidiaries
other than Medical Graphics Germany and Medical Graphics F.S.C.
Section 7.5 DIVIDENDS. The Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any
class of its stock or make any payment on account of the purchase, redemption or
other retirement of any shares of such stock or make any distribution in respect
thereof, either directly or indirectly.
Section 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS
OPERATIONS. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The restrictions of the preceding
sentence shall not apply to , sales or leases of the Borrower's surplus,
obsolete or worn-out property, sales to insurers in settlement of insurable
losses and sales of property where such property is being replaced and the
replacement property is subject to the Security Interest. The Borrower will not
in any manner transfer any property without prior or present receipt of full and
adequate consideration.
Section 7.7 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person.
Section 7.8 SALE AND LEASEBACK. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.9 RESTRICTIONS ON NATURE OF BUSINESS. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.
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Section 7.10 CAPITAL EXPENDITURES. The Borrower will not incur or
contract to incur Capital Expenditures of more than $150,000 in the aggregate
during any fiscal year, or more than $50,000 in any one transaction.
Section 7.11 ACCOUNTING. The Borrower will not adopt any material
change in accounting principles other than as required by GAAP. The Borrower
will not adopt, permit or consent to any change in its fiscal year.
Section 7.12 DISCOUNTS, ETC. The Borrower will not, after notice from
the Lender, grant any discount, credit or allowance to any customer of the
Borrower or accept any return of goods sold, or at any time (whether before or
after notice from the Lender) modify, amend, subordinate, cancel or terminate
the obligation of any account debtor or other obligor of the Borrower.
Section 7.13 DEFINED BENEFIT PENSION PLANS. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10.
Section 7.14 OTHER DEFAULTS. The Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement, indenture,
lease, mortgage, contract for deed, security agreement or other contractual
obligation binding upon the Borrower.
Section 7.15 PLACE OF BUSINESS; NAME. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name.
Section 7.16 ORGANIZATIONAL DOCUMENTS; S CORPORATION STATUS. The
Borrower will not amend its certificate of incorporation or articles of
incorporation. After prior notice to the Lender, the Borrower may amend its
bylaws provided that such amendments do not adversely affect the Lender. The
Borrower will not become an S Corporation within the meaning of the Internal
Revenue Code of 1986, as amended.
Section 7.17 SALARIES. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than 10% in any one year, either individually or for all
such persons in the aggregate, or pay any such increase from any source other
than profits earned in the year of payment. The restrictions of this Section
shall
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not apply to compensation in the form of options or warrants to acquire stock
of the Borrower in favor of such Persons.
ARTICLE VIII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section 8.1 EVENTS OF DEFAULT. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of the Obligations when they become due
and payable;
(b) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement for more
than three days after notice from the Lender;
(c) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement;
(d) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in the Norwest Bank Credit Agreement;
(e) The Borrower shall be or become insolvent, or admit in writing
its inability to pay its debts as they mature, or make an assignment for
the benefit of creditors; or the Borrower shall apply for or consent to the
appointment of any receiver, trustee, or similar officer for it or for all
or any substantial part of its property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of
the Borrower; or the Borrower shall institute (by petition, application,
answer, consent or otherwise) any bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, dissolution, liquidation or similar
proceeding relating to it under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise)
against the Borrower; or any judgment, writ, warrant of attachment or
execution or similar process shall be issued or levied against a
substantial part of the property of the Borrower;
(f) An order for relief naming the Borrower as debtor shall be
entered under the United States Bankruptcy Code;
(g) Any representation or warranty made by the Borrower in this
Agreement or by the Borrower (or by any of its officers) in any agreement,
certificate, instrument or financial statement or other statement
contemplated by or made or
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delivered pursuant to or in connection with this Agreement shall prove to
have been incorrect in any material respect when deemed to be effective;
(h) Except for judgments against the Borrower in connection with the
litigation described on Schedule 5.6 to the extent of $325,000, the
rendering against the Borrower of a final judgment, decree or order for the
payment of money in excess of $25,000 individually or $100,000 in the
aggregate and the continuance of such judgments, decrees or orders
unsatisfied and in effect for any period of 30 consecutive days without a
stay of execution;
(i) A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower owed to any Person other than the Lender, or
under any indenture or other instrument under which any such evidence of
indebtedness has been issued or by which it is governed, or under any lease
of any of the Premises, and the expiration of the applicable period of
grace, if any, specified in such evidence of indebtedness, indenture, other
instrument or lease;
(j) Any Reportable Event, which the Lender determines in good faith
might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after
written notice to such effect shall have been given to the Borrower by the
Lender; or a trustee shall have been appointed by an appropriate United
States District Court to administer any Plan; or the Pension Benefit
Guaranty Corporation shall have instituted proceedings to terminate any
Plan or to appoint a trustee to administer any Plan; or the Borrower shall
have filed for a distress termination of any Plan under Title IV of ERISA;
or the Borrower shall have failed to make any quarterly contribution
required with respect to any Plan under Section 412(m) of the Internal
Revenue Code of 1986, as amended, which the Lender determines in good faith
may by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition of a
lien on the Borrower's assets in favor of the Plan;
(k) An event of default shall occur under any Security Document or
under any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrower
hereunder or under any note;
(l) The Borrower shall liquidate, dissolve, terminate or suspend its
business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without
the Lender's prior written consent;
(m) The Borrower shall fail to pay, withhold, collect or remit any
tax or tax deficiency when assessed or due (other than any tax deficiency
which is being
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contested in good faith and by proper proceedings and for which it shall
have set aside on its books adequate reserves therefor) or notice of any
state or federal tax liens shall be filed or issued;
(n) Default in the payment of any amount owed by the Borrower to the
Lender other than any indebtedness arising hereunder;
(o) Any event or circumstance with respect to the Borrower shall
occur such that the Lender shall believe in good faith that the prospect of
payment of all or any part of the Obligations or the performance by the
Borrower under the Loan Documents is impaired or any material adverse
change in the business or financial condition of the Borrower shall occur;
(p) Mark W. Sheffert or John Penn shall cease to be a director on the
Borrower's board of the directors;
(q) Glenn D. Taylor shall cease to actively fulfill the duties of the
Borrower's chief executive officer; or
(r) Any breach, default or event of default by or attributable to any
Affiliate under any agreement between such Affiliate and the Lender.
Section 8.2 RIGHTS AND REMEDIES. During any Default Period, the Lender
may exercise any or all of the following rights and remedies:
(a) the Lender may, by notice to the Borrower, declare the Commitment
to be terminated, whereupon the same shall forthwith terminate;
(b) the Lender may, by notice to the Borrower, declare the
Obligations to be forthwith due and payable, whereupon all Obligations
shall become and be forthwith due and payable, without presentment, notice
of dishonor, protest or further notice of any kind, all of which the
Borrower hereby expressly waives;
(c) the Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the Borrower
to the payment of the Obligations;
(d) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of Collateral,
or any evidence thereof, proceeding without judicial process or by judicial
process (without a prior hearing or notice thereof, which the Borrower
hereby expressly waives) and the right to sell, lease or otherwise dispose
of any or all of the Collateral, and, in connection therewith,
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the Borrower will on demand assemble the Collateral and make it available
to the Lender at a place to be designated by the Lender which is reasonably
convenient to both parties;
(e) the Lender may exercise and enforce its rights and remedies under
the Loan Documents; and
(f) the Lender may exercise any other rights and remedies available
to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
Section 8.3 CERTAIN NOTICES. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.3) at least ten calendar days before
the date of intended disposition or other action.
ARTICLE IX
MISCELLANEOUS
Section 9.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay by the
Lender in exercising any right, power or remedy under the Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy under the Loan Documents. The
remedies provided in the Loan Documents are cumulative and not exclusive of any
remedies provided by law.
Section 9.2 AMENDMENTS, ETC. No amendment, modification, termination
or waiver of any provision of any Loan Document or consent to any departure by
the Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3 ADDRESSES FOR NOTICES, ETC. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be
(a) personally delivered, (b) sent by first
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<PAGE>
class United States mail, (c) sent by overnight courier of national
reputation, or (d) transmitted by telecopy, in each case addressed or
telecopied to the party to whom notice is being given at its address or
telecopier number as set forth below:
If to the Borrower:
Medical Graphics Corporation
350 Oak Grove Parkway
St. Paul, Minnesota 55127
Telecopier: 612/484-4874
Attention: Dale H. Johnson
If to the Lender:
Norwest Business Credit, Inc.
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
Telecopier: 612/341-2472
Attention: Warren G. Lindman
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.
Section 9.4 FURTHER DOCUMENTS. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interest or the Lender's rights under the Loan
Documents (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).
Section 9.5 COLLATERAL. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to
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<PAGE>
any surplus and shall remain liable for any deficiency. The Lender's duty of
care with respect to Collateral in its possession (as imposed by law) shall
be deemed fulfilled if it exercises reasonable care in physically keeping
such Collateral, or in the case of Collateral in the custody or possession of
a bailee or other third person, exercises reasonable care in the selection of
the bailee or other third person, and the Lender need not otherwise preserve,
protect, insure or care for any Collateral. The Lender shall not be obligated
to preserve any rights the Borrower may have against prior parties, to
realize on the Collateral at all or in any particular manner or order or to
apply any cash proceeds of the Collateral in any particular order of
application.
Section 9.6 COSTS AND EXPENSES. The Borrower agrees to pay on demand
all costs and expenses, including (without limitation) reasonable attorneys'
fees, incurred by the Lender in connection with the Obligations, this Agreement,
the Loan Documents, and any other document or agreement related hereto or
thereto, and the transactions contemplated hereby, including without limitation
all such costs, expenses and fees incurred in connection with the negotiation,
preparation, execution, amendment, administration, performance, collection and
enforcement of the Obligations and all such documents and agreements and the
creation, perfection, protection, satisfaction, foreclosure or enforcement of
the Security Interest.
Section 9.7 INDEMNITY. In addition to the payment of expenses pursuant
to Section 9.6, the Borrower agrees to indemnify, defend and hold harmless the
Lender, and any of its participants, parent corporations, subsidiary
corporations, affiliated corporations, successor corporations, and all present
and future officers, directors, employees, attorneys and agents of the foregoing
(the "Indemnitees") from and against any of the following (collectively,
"Indemnified Liabilities"):
(a) any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the execution and
delivery of the Loan Documents or the making of the Advances;
(b) any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section 5.12
proves to be incorrect in any respect or as a result of any violation of
the covenant contained in Section 6.4(b); and
(c) any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel) in connection with the foregoing and any other
investigative, administrative or judicial proceedings, whether or not such
Indemnitee shall be designated a party thereto, which may be imposed on,
incurred by or asserted against any such Indemnitee, in any manner related
to or
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<PAGE>
arising out of or in connection with the making of the Advances and the
Loan Documents or the use or intended use of the proceeds of the Advances.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 9.7 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.
Section 9.8 PARTICIPANTS. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender's participants, successors or assigns.
Section 9.9 EXECUTION IN COUNTERPARTS. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
Section 9.10 BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT;
EXCHANGING INFORMATION. The Loan Documents shall be binding upon and inure to
the benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender's prior written consent.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's participants, accountants, lawyers and other
advisors, the Lender, Norwest Corporation, and all direct and indirect
subsidiaries of Norwest Corporation, may exchange any and all information they
may have in their possession regarding the Borrower and its Affiliates, and the
Borrower waives any right of confidentiality it may have with respect to such
exchange of such information.
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<PAGE>
Section 9.11 SEVERABILITY OF PROVISIONS. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.12 HEADINGS. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
Section 9.13 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Minnesota. This
Agreement shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of Minnesota. The parties hereto
hereby (i) consents to the personal jurisdiction of the state and federal courts
located in the State of Minnesota in connection with any controversy related to
this Agreement; (ii) waives any argument that venue in any such forum is not
convenient, (iii) agrees that any litigation initiated by the Lender or the
Borrower in connection with this Agreement or the other Loan Documents shall be
venued in either the District Court of Hennepin County, Minnesota, or the United
States District Court, District of Minnesota, Fourth Division; and (iv) agrees
that a final judgment in any such suit, action or proceeding
[Signature Page Follows]
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<PAGE>
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. THE PARTIES WAIVE ANY RIGHT TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS
AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
NORWEST BUSINESS CREDIT, INC. MEDICAL GRAPHICS CORPORATION
By _________________________________ By _________________________________
Warren G. Lindman Glenn D. Taylor
Its Assistant Vice President Its Chief Executive Officer
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<PAGE>
Table of Exhibits and Schedules
Exhibit A Form of Revolving Note
Exhibit B Form of Compliance Certificate
Exhibit C Premises
___________________
Schedule 2.14 Sources and Uses of Funds
Schedule 5.1 Trade Names, Chief Executive Office,
Principal Place of Business, and Locations
of Collateral
Schedule 5.6 Litigation
Schedule 5.8 Taxes
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
<PAGE>
Exhibit A to Credit and Security
Agreement
REVOLVING NOTE
$4,100,000 Minneapolis, Minnesota
March 31, 1997
For value received, the undersigned, MEDICAL GRAPHICS CORPORATION,
a Minnesota corporation (the "Borrower"), hereby promises to pay on the
Termination Date under the Credit Agreement (defined below), to the order of
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its
main office in Minneapolis, Minnesota, or at any other place designated at
any time by the holder hereof, in lawful money of the United States of
America and in immediately available funds, the principal sum of Four Million
One Hundred Thousand Dollars ($4,100,000) or, if less, the aggregate unpaid
principal amount of all Revolving Advances made by the Lender to the Borrower
under the Credit Agreement (defined below) together with interest on the
principal amount hereunder remaining unpaid from time to time, computed on
the basis of the actual number of days elapsed and a 360-day year, from the
date hereof until this Note is fully paid at the rate from time to time in
effect under the Credit and Security Agreement of even date herewith (as the
same may hereafter be amended, supplemented or restated from time to time,
the "Credit Agreement") by and between the Lender and the Borrower. The
principal hereof and interest accruing thereon shall be due and payable as
provided in the Credit Agreement. This Note may be prepaid only in accordance
with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement. This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
<PAGE>
Presentment or other demand for payment, notice of dishonor and
protest are expressly waived.
MEDICAL GRAPHICS CORPORATION
By _________________________________
Glenn D. Taylor
Its Chief Executive Officer
A-2
<PAGE>
Exhibit B to Credit and Security Agreement
COMPLIANCE CERTIFICATE
To: Warren G. Lindman
Norwest Business Credit, Inc.
Date: _____________________, 199___
Subject: Medical Graphics Corporation
Financial Statements
In accordance with our Credit and Security Agreement dated as of
March 31, 1997 (the "Credit Agreement"), attached are the financial statements
of Medical Graphics Corporation (the "Borrower") as of and for ________________,
_____ (the "Reporting Date") and the year-to-date period then ended (the
"Current Financials"). All terms used in this certificate have the meanings
given in the Credit Agreement.
I certify that the Current Financials have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and fairly present the
Borrower's financial condition and the results of its operations as of the date
thereof.
EVENTS OF DEFAULT. (Check one):
/ / The undersigned does not have knowledge of the occurrence of a Default
or Event of Default under the Credit Agreement.
/ / The undersigned has knowledge of the occurrence of a Default or Event
of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto.
FINANCIAL COVENANTS. I further hereby certify as follows:
1. MINIMUM BOOK NET WORTH. Pursuant to Section 6.12 of the Credit
Agreement, as of the Reporting Date, the Borrower's Book Net Worth was
$____________ which / / satisfies / / does not satisfy the requirement that
such amount be not less than $_____________ on the Reporting Date[ as set
forth in table below:
<PAGE>
MONTH MINIMUM BOOK NET WORTH
March 31, 1997 $1,355,000
April 30, 1997 $2,200,000
May 31, 1997 $2,120,000
June 30, 1997 $2,565,000
July 31, 1997 $2,565,000
August 31, 1997 $2,660,000
September 30, 1997 $3,400,000
October 31, 1997 $3,520,000
November 30, 1997 $3,765,000
December 31, 1997 $4,570,000
2. MAXIMUM DEBT TO BOOK NET WORTH RATIO. Pursuant to Section 6.13 of
the Credit Agreement, as of the Reporting Date, the Borrower's Debt to its
Book Net Worth Ratio was _____ to 1.00 which / / satisfies / / does not
satisfy the requirement that such ratio be no more than ______ to 1.00 on
the Reporting Date as set forth in table below:
PERIOD/DATE MAXIMUM DEBT TO BOOK NET
WORTH RATIO
March 30, 1997 7.50 to 1.00
April 30, 1997 5.25 to 1.00
May 31, 1997 5.25 to 1.00
June 30, 1997 through 5.00 to 1.00
August 31, 1997
September 30, 1997 through 4.50 to 1.00
November 30, 1997
December 31, 1997 4.00 to 1.00
3. MINIMUM NET INCOME. Pursuant to Section 6.14 of the Credit
Agreement, the Borrower's Net Income for the ________ period ending on the
Reporting Date, was $____________, which / / satisfies / / does not satisfy
the requirement that such amount be not less than $_____________ during
such period as set forth in table below:
B-2
<PAGE>
DATE MINIMUM NET INCOME
March 31, 1997 ($2,385,000)
April 30, 1997 ($2,540,000)
May 31, 1997 ($2,195,000)
June 30, 1997 ($2,175,000)
July 31, 1997 ($2,175,000)
August 31, 1997 ($2,080,000)
September 30, 1997 ($1,340,000)
October 31, 1997 ($1,220,000)
November 30, 1997 ($975,000)
December 31, 1997 ($170,000)
4. MINIMUM DEBT SERVICE COVERAGE RATIO. Pursuant to Section 6.15 of
the Credit Agreement, the Depositing Date marks the Borrower's fiscal year
end and the Borrower's Debt Service Coverage Ratio on the Reporting Date
was ____ to 1.00 which / / satisfies / / does not satisfy the requirement
that such amount be not less than 0.80 to 1.00 on December 31, 1997 or 1.00
to 1.00 on December 31 of each year thereafter.
5. CAPITAL EXPENDITURES. Pursuant to Section 7.10 of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the fiscal year ended
______________, ___, for Capital Expenditures, $__________________ in the
aggregate and at most $______________ in any one transaction, which / /
satisfies / / does not satisfy the requirement that such expenditures not
exceed $150,000 in the aggregate and $50,000 for any one transaction during
such year.
6. SALARIES. As of the Reporting Date, the Borrower / / is / / is
not in compliance with Section 7.17 of the Credit Agreement concerning
salaries.
B-3
<PAGE>
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
MEDICAL GRAPHICS CORPORATION
By ____________________________
Its Chief Financial Officer
B-4
<PAGE>
Exhibit C to Credit and Security Agreement
PREMISES
The Premises referred to in the Credit and Security Agreement are
legally described as follows:
[To be completed by Borrower]
Schedule 2.11-1
<PAGE>
Schedule 5.1 to Credit and Security
Agreement
TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS, AND LOCATIONS
OF COLLATERAL
TRADE NAMES, DBAs
-----------------
MedGraphics
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
--------------------------------------------------
Medical Graphics Corporation
350 Oak Grove Parkway
St. Paul, Minnesota 55127
OTHER INVENTORY AND EQUIPMENT LOCATIONS
---------------------------------------
None.
Schedule 5.1-1
<PAGE>
Schedule 5.6 to Credit and Security
Agreement
Litigation
Schedule 5.1-1
<PAGE>
Schedule 5.8 to Credit and Security
Agreement
Taxes
Schedule 5.1-1
<PAGE>
Schedule 7.1 to Credit and Security
Agreement
PERMITTED LIENS
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
Norwest Bank All Equipment, MN Secretary of March 27, 1927796
Inventory, State 1997
Accounts, General
Intangibles, and
foreign accounts
(subject to an
Intercreditor
Agreement
between Norwest
Bank and the
Lender).
Norwest Bank All Equipment, MN Secretary of March 27, 1927797
Inventory, State 1997
Accounts, General
Intangibles, and
foreign accounts
(subject to an
Intercreditor
Agreement
between Norwest
Bank and the
Lender).
Schedule 7.1-1
<PAGE>
Schedule 7.2 to Credit and Security
Agreement
PERMITTED INDEBTEDNESS AND GUARANTIES
Indebtedness
------------
Creditor Principal Maturity Date Monthly Collateral
Amount Payment
-------- --------- ------------- ------- ----------
Norwest Bank $1,750,000 April 1, 1998 Revolving See Permitted Liens
Line of Credit Schedule
Guaranties
----------
Primary Obligor Amount and Description of Beneficiary of Guaranty
Obligation Guaranteed
--------------- ------------------------- -----------------------
None
Schedule 7.1-1
<PAGE>
April 14, 1997
Medical Graphics Corporation
350 Oak Grove Parkway
St. Paul, Minnesota 55127
Attention: Dale H. Johnson, CFO
Glenn Taylor, CEO
Re: First Letter Amendment to NBCI Credit Agreement
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ladies and Gentlemen:
Medical Graphics Corporation, a Minnesota corporation (the "Borrower")
and Norwest Business Credit, Inc., a Minnesota corporation (the "Lender") are
parties to a Credit and Security Agreement dated as of March 31, 1997 (the
"Credit Agreement"). All terms defined in the Credit Agreement that are not
otherwise defined herein have the same meaning given therein.
It has come to our attention that Section 6.14 of the Credit
Agreement, the minimum Net Income covenant, incorrectly states that the Borrower
shall achieve, as of May 31, 1997, Net Income of not less than < 2,195,000 >.
To remedy this error, the Borrower has requested, and the Lender has agreed, to
amend Section 6.14 as set forth below.
The Borrower and the Lender hereby agree that Section 6.14 of the
Credit Agreement is hereby amended by deleting the amount "< $2,195,000 >" as
set forth parallel to the date "May 31, 1997" and insert the amount
"< $2,625,000 >" in place thereof.
This letter shall not be deemed to be a waiver of any other Default or
Event of Default now existing or hereafter arising under the Credit Agreement,
whether or not known to the Lender. Except as set forth above, all of the
original terms of the Credit Agreement and Loan Documents shall remain in full
force and effect.
<PAGE>
Medical Graphics Corporation
April 15, 1997
Page 2
Please evidence the Borrower's agreement with the terms of this letter
by signing the acknowledgment on the duplicate original of this letter, faxing
the signed duplicate to the Lender at (612) 673-8506, Attention: Warren Lindman
and sending a duplicate original to the Lender.
NORWEST BUSINESS CREDIT, INC.
________/s/_________________
Warren G. Lindman
Its Assistant Vice President
Acknowledgment
April 14, 1997
MEDICAL GRAPHICS CORPORATION
______/s/_________________________
Dale Johnson
Its CFO
cc: Timothy McIntee (Lindquist & Vennum PLLP)
Christopher A. Cudak (Norwest Bank Minnesota)
Mr. Scott Loveless (Deloitte & Touche LLP)
<PAGE>
WARRANT
To Subscribe for and Purchase Common Stock of
MEDICAL GRAPHICS CORPORATION
THIS CERTIFIES THAT, for value received, NORWEST BUSINESS CREDIT, INC.
(herein called "Purchaser") or registered assigns is entitled to subscribe for
and purchase from MEDICAL GRAPHICS CORPORATION (herein called the "Company"), a
corporation organized and existing under the laws of the State of Minnesota, at
the price specified below (subject to adjustment as noted below) at any time
from and after the date hereof to and including September 30, 2000, Sixty-Two
Thousand Five Hundred (62,500) fully paid and nonassessable shares of the
Company's Common Stock (subject to adjustment as noted below). This Warrant has
been issued in connection with the issuance by the Company to Purchaser of the
Company's Revolving Note pursuant to a Credit and Security Agreement between the
Company and Purchaser of even date herewith.
The warrant purchase price (subject to adjustment as noted below) shall be
$3.375 per share.
This Warrant is subject to the following provisions, terms and conditions:
1. The rights represented by this Warrant may be exercised by the holder
hereof, in whole or in part, by written notice of exercise delivered to the
Company 20 days prior to the intended date of exercise and by the surrender of
this Warrant (properly endorsed if required) at the principal office of the
Company and upon payment to it by check of the purchase price for such shares.
The Company agrees that the shares so purchased shall be and are deemed to be
issued to the holder hereof as the record owner of such shares as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made for such shares as aforesaid. Subject to the provisions of the
next succeeding paragraph, certificates for the shares of stock so purchased
shall be delivered to the holder hereof within a reasonable time, not exceeding
10 days, after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant representing the
number of shares, if any, with respect to which this Warrant shall not then have
been exercised shall also be delivered to the holder hereof within such time.
<PAGE>
2. Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for shares of stock upon exercise of this
Warrant except in accordance with the provisions, and subject to the
limitations, of paragraph 8 hereof and the restrictive legend under the heading
"Restriction on Transfer" below.
3. The Company covenants and agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will, upon issuance,
be duly authorized and issued, fully paid and nonassessable. The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times have
authorized, and reserved for the purpose of issue or transfer upon exercise of
the subscription rights evidenced by this Warrant, a sufficient number of shares
of its Common Stock to provide for the exercise of the rights represented by
this Warrant.
4. The above provisions are, however, subject to the following:
(a) The warrant purchase price shall, from and after the date of issuance
of this Warrant, be subject to adjustment from time to time as hereinafter
provided. Upon each adjustment of the warrant purchase price, the holder of
this Warrant shall thereafter be entitled to purchase, at the warrant purchase
price resulting from such adjustment, the number of shares obtained by
multiplying the warrant purchase price in effect immediately prior to such
adjustment by the number of shares purchasable pursuant hereto immediately prior
to such adjustment and dividing the product thereof by the warrant purchase
price resulting from such adjustment.
(b) Except for issuances of shares pursuant to options and warrants
outstanding as of the date of this Warrant and except for shares issuable under
the Company's Employee Stock Purchase Plan (or any successor stock purchase plan
that provides for the issuance of options or shares at a price equal to 85% of
fair market value as defined in such plan), if and whenever the Company shall
issue or sell any shares of its Common Stock for a consideration per share less
than the warrant purchase price in effect immediately prior to the time of such
issue or sale, and/or the Company shall issue or sell any shares of its Common
Stock for a consideration per share less than the market price (as defined in
paragraph 4(k) hereof) on the date of such issue or sale, then, forthwith upon
such issue or sale, the warrant purchase price shall be reduced to such lesser
price.
No adjustment of the warrant purchase price, however, shall be made in an
amount less than 2% of the warrant purchase price in effect on the date of such
adjustment, but any such lesser adjustment shall be carried forward and shall be
made at the time and together with the next subsequent adjustment which,
together with any such adjustment so carried forward, shall be an amount equal
to or greater than 4% of the warrant purchase price then in effect.
(c) For the purposes of paragraph (b), the following provisions (i) to
(v), inclusive, shall also be applicable:
<PAGE>
(i) In case at any time the Company shall grant (whether directly
or by assumption in a merger or otherwise) any rights to subscribe for or
to purchase, or any options for the purchase of, (aa) Common Stock or
(bb) any obligations or any shares of stock of the Company which are
convertible into or exchangeable for Common Stock (any of such obligations
or shares of stock being hereinafter called "Convertible Securities")
whether or not such rights or options or the right to convert or exchange
any such Convertible Securities are immediately exercisable, and the price
per share for which Common Stock is issuable upon the exercise of such
rights or options or upon conversion or exchange of such Convertible
Securities (determined by dividing (aa) the total amount, if any, received
or receivable by the Company as consideration for the granting of such
rights or options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of such rights or
options, plus, in the case of such rights or options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (bb) the total
maximum number of shares of Common Stock issuable upon the exercise of such
rights or options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such rights or
options) shall be less than the warrant purchase price in effect
immediately prior to the time of the granting of such rights or options,
then the total maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon the
exercise of such rights or options shall (as of the date of granting of
such rights or options) be deemed to have been issued for such price per
share. Except as provided in paragraph (f) below, no further adjustments
of the warrant purchase price shall be made upon the actual issue of such
Common Stock or of such Convertible Securities upon exercise of such rights
or options or upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities.
(ii) In case the Company shall issue or sell (whether directly or by
assumption in a merger or otherwise) any Convertible Securities, whether or
not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable
upon such conversion or
<PAGE>
exchange (determined by dividing (aa) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (bb) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the warrant purchase price in effect
immediately prior to the time of such issue or sale, then the total maximum
number of shares of Common Stock issuable upon conversion or exchange of
all such Convertible Securities shall (as of the date of the issue or sale
of such Convertible Securities) be deemed to be outstanding and to have
been issued for such price per share, provided that (x) except as provided
in paragraph (f) below, no further adjustments of the warrant purchase
price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and (y) if any such
issue or sale of such Convertible Securities is made upon exercise of any
rights to subscribe for or to purchase or any option to purchase any such
Convertible Securities for which adjustments of the warrant purchase price
have been or are to be made pursuant to other provisions of this
paragraph (c), no further adjustment of the warrant purchase price shall be
made by reason of such issue or sale.
(iii) In case any shares of Common Stock or Convertible Securities or
any rights or options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for cash, the consideration received
therefor shall be deemed to be the amount received by the Company therefor,
without deduction therefrom of any expenses incurred or any underwriting
commissions, discounts or concessions paid or allowed by the Company in
connection therewith. In case any shares of Common Stock or Convertible
Securities or any rights or options to purchase any such Common Stock or
Convertible Securities shall be issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company shall be deemed to be the fair value of such consideration as
determined by the Board of Directors of the Company, without deducting
therefrom of any expenses incurred or any underwriting commissions,
discounts or concessions paid or allowed by the Company in connection
therewith. In case any shares of Common Stock or Convertible Securities or
any rights or options to purchase such Common Stock or Convertible
Securities shall be issued in connection with any merger or consolidation
in which the Company is the surviving corporation, the amount of
consideration therefor shall be deemed to be the fair value as determined
by the Board of Directors of the Company of such portion of the assets and
business of the non-surviving corporation or corporations as such Board
shall determine to be attributable to such Common Stock, Convertible
Securities, rights or options, as the case may be. In the event of any
<PAGE>
consolidation or merger of the Company in which the Company is not the
surviving corporation or in the event of any sale of all or substantially
all of the assets of the Company for stock or other securities of any other
corporation, the Company shall be deemed to have issued a number of shares
of its Common Stock for stock or securities of the other corporation
computed on the basis of the actual exchange ratio on which the transaction
was predicated and for a consideration equal to the fair market value on
the date of such transaction of such stock or securities of the other
corporation, and if any such calculation results in adjustment of the
warrant purchase price, the determination of the number of shares of Common
Stock issuable upon exercise of this Warrant immediately prior to such
merger, conversion or sale, for purposes of paragraph (g) below, shall be
made after giving effect to such adjustment of the warrant purchase price.
(iv) In case the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them (aa) to receive a dividend
or other distribution payable in Common Stock or in Convertible Securities,
or in any rights or options to purchase any Common Stock or Convertible
Securities, or (bb) to subscribe for or purchase Common Stock or
Convertible Securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such rights of
subscription or purchase, as the case may be.
(v) The number of shares of Common Stock outstanding at any given
time shall not include shares owned or held by or for the account of the
Company, and the disposition of any such shares shall be considered an
issue or sale of Common Stock for the purposes of this paragraph (c).
(d) In case the Company shall (i) declare a dividend upon the Common Stock
payable in Common Stock (other than a dividend declared to effect a subdivision
of the outstanding shares of Common Stock, as described in paragraph (e) below)
or Convertible Securities, or in any rights or options to purchase Common Stock
or Convertible Securities, or (ii) declare any other dividend or make any other
distribution upon the Common Stock payable otherwise than out of earnings or
earned surplus, then thereafter the holder of this Warrant upon the exercise
hereof will be entitled to receive the number of shares of Common Stock to which
such holder shall be entitled upon such exercise, and, in addition and without
further payment therefor, each dividend described in
<PAGE>
clause (i) above and each dividend or distribution described in clause (ii)
above which such holder would have received by way of dividends or distributions
if continuously since such holder became the record holder of this Warrant such
holder (i) had been the record holder of the number of shares of Common Stock
then received, and (ii) had retained all dividends or distributions in stock or
securities (including Common Stock or Convertible Securities, and any rights or
options to purchase any Common Stock or Convertible Securities) payable in
respect of such Common Stock or in respect of any stock or securities paid as
dividends or distributions and originating directly or indirectly from such
Common Stock. For the purposes of the foregoing, a dividend or distribution
other than in cash shall be considered payable out of earnings or earned surplus
only to the extent that such earnings or earned surplus are charged an amount
equal to the fair value of such dividend or distribution as determined by the
Board of Directors of the Company.
(e) In case the Company shall at any time subdivide its outstanding shares
of Common Stock into a greater number of shares, the warrant purchase price in
effect immediately prior to such subdivision shall be proportionately reduced,
and conversely, in case the outstanding shares of Common Stock of the Company
shall be combined into a smaller number of shares, the warrant purchase price in
effect immediately prior to such combination shall be proportionately increased.
(f) If (i) the purchase price provided for in any right or option referred
to in clause (i) of paragraph (c), or (ii) the additional consideration, if any,
payable upon the conversion or exchange of Convertible Securities referred to in
clause (i) or clause (ii) of paragraph (c), or (iii) the rate at which any
Convertible Securities referred to in clause (i) or clause (ii) of paragraph (c)
are convertible into or exchangeable for Common Stock shall change at any time
(other than under or by reason of provisions designed to protect against
dilution), the warrant purchase price then in effect shall forthwith be
increased or decreased to such warrant purchase price which would have obtained
had the adjustments made upon the issuance of such rights, options or
Convertible Securities been made upon the basis of (i) the issuance of the
number of shares of Common Stock theretofore actually delivered upon the
exercise of such options or rights or upon the conversion or exchange of such
Convertible Securities, and the total consideration received therefor, and
(ii) the issuance at the time of such change of any such options, rights or
Convertible Securities then still outstanding for the consideration, if any,
received by the Company therefor and to be received on the basis of such changed
price; and on the expiration of any such option or right or the termination of
any such right to convert or exchange such Convertible Securities, the warrant
purchase price then in effect hereunder shall forthwith be increased to such
warrant purchase price which would have obtained had the adjustments made upon
the issuance of such rights or options or Convertible Securities been made upon
the basis of the issuance of the shares of Common Stock theretofore actually
delivered (and the total consideration received therefor) upon the exercise of
such rights or options or upon the conversion or exchange of such Convertible
Securities. If the purchase price provided for in any such right or option
referred to in clause (i) of paragraph (c) or the rate at which any Convertible
Securities referred to in clause (i) or clause (ii) of paragraph (c) are
convertible into or exchangeable for Common Stock shall decrease
<PAGE>
at any time under or by reason of provisions with respect thereto designed to
protect against dilution, then in case of the delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of any such
Convertible Security, the warrant purchase price then in effect hereunder shall
forthwith be decreased to such warrant purchase price as would have obtained had
the adjustments made upon the issuance of such right, option or Convertible
Securities been made upon the basis of the issuance of (and the total
consideration received for) the shares of Common Stock delivered as aforesaid.
(g) If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the holder
of this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustments of the warrant purchase price and of the
number of shares purchasable upon the exercise of this Warrant) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume, by written instrument executed and mailed to the registered
holder hereof at the last address of such holder appearing on the books of the
Company, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to purchase.
(h) Upon any adjustment of the warrant purchase price, then and in each
such case the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the
<PAGE>
registered holder of this Warrant at the address of such holder as shown on the
books of the Company, which notice shall state the warrant purchase price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(i) In case any time:
(1) the Company shall declare any cash dividend on its Common Stock at
a rate in excess of the rate of the last cash dividend theretofore paid;
(2) the Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash dividends)
to the holders of its Common Stock;
(3) the Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or other
rights;
(4) there shall be any capital reorganization, or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another
corporation; or
(5) there shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice,
by first-class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, of
the date on which (aa) the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights, or (bb) such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up shall take place, as the case may be. Such notice
shall also specify the date as of which the holders of Common Stock of record
shall participate in such dividend, distribution or subscription rights, or
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be. Such
written notice shall be given at least 20 days prior to the action in question
and not less than 20 days prior to the record date or the date on which the
Company's transfer books are closed in respect thereto.
(j) If any event occurs as to which in the opinion of the Board of
Directors of the Company the other provisions of this paragraph 4 are not
strictly applicable or if strictly applicable would not fairly protect the
purchase rights of the holder of this Warrant or of Common
<PAGE>
Stock in accordance with the essential intent and principles of such provisions,
then the Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such purchase rights as aforesaid.
(k) No fractional shares of Common Stock shall be issued upon the exercise
of this Warrant, but, instead of any fraction of a share which would otherwise
be issuable, the Company shall pay a cash adjustment (which may be effected as a
reduction of the amount to be paid by the holder hereof upon such exercise) in
respect of such fraction in an amount equal to the same fraction of the market
price per share of Common Stock as of the close of business on the date of the
notice required by paragraph 1 above. "Market price" for purposes of this
paragraph 4(k) and for purposes of paragraphs 4(b) and 12(d) hereof shall mean,
if the Common Stock is traded on a securities exchange or on the Nasdaq National
Market or Nasdaq Small Cap Market, the closing price of the Common Stock on such
exchange or the Nasdaq National Market or Nasdaq Small Cap Market, or, if the
Common Stock is otherwise traded in the over-the-counter market, the last
reported sale price, in each case averaged over a period of 20 consecutive
business days prior to the date as of which "market price" is being determined.
If at any time the Common Stock is not traded on an exchange or the Nasdaq
National Market or Nasdaq Small Cap Market, or otherwise traded in the
over-the-counter market, the "market price" shall be deemed to be the higher of
(i) the book value thereof as determined by any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company as of the last day of any month ending within 60 days preceding the date
as of which the determination is to be made, or (ii) the fair value thereof
determined in good faith by the Board of Directors of the Company as of a date
which is within l5 days of the date as of which the determination is to be made.
5. As used herein, the term "Common Stock" shall mean and include the
Company's presently authorized Common Stock and shall also include any capital
stock of any class of the Company hereafter authorized which shall not be
limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company;
provided that the shares purchasable pursuant to this Warrant shall include
shares designated as Common Stock of the Company on the date of original issue
of this Warrant or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in paragraph 4(g)
above.
6. So long as this Warrant remains outstanding, the Company will not
issue any additional capital stock of any class preferred as to dividends or as
to the distribution of assets
<PAGE>
upon voluntary or involuntary liquidation, dissolution or winding up, unless the
rights of the holders thereof shall be limited to a fixed sum or percentage of
par, liquidation or redemption value in respect of participation in dividends
and in the distribution of such assets.
7. This Warrant shall not entitle the holder hereof to any voting rights
or other rights as a stockholder of the Company.
8. The holder of this Warrant, by acceptance hereof, agrees to give
written notice to the Company before transferring this Warrant or transferring
any Common Stock issuable or issued upon the exercise hereof of such holder's
intention to do so, describing briefly the manner of any proposed transfer of
this Warrant or such holder's intention as to the disposition to be made of
shares of Common Stock issuable or issued upon the exercise hereof. Such holder
shall also provide the Company with an opinion of counsel satisfactory to the
Company to the effect that the proposed transfer of this Warrant or disposition
of shares may be effected without registration or qualification (under any
Federal or State law) of this Warrant or the shares of Common Stock issuable or
issued upon the exercise hereof. Upon receipt of such written notice and
opinion by the Company, such holder shall be entitled to transfer this Warrant,
or to exercise this Warrant in accordance with its terms and dispose of the
shares received upon such exercise or to dispose of shares of Common Stock
received upon the previous exercise of this Warrant, all in accordance with the
terms of the notice delivered by such holder to the Company, provided that an
appropriate legend respecting the aforesaid restrictions on transfer and
disposition may be endorsed on this Warrant or the certificates for such shares.
The holder of this Warrant also agrees not to sell or otherwise transfer
any Common Stock issuable or issued upon the exercise hereof before the earlier
to occur of (a) April 1, 1999 or (b) the first date on which the Company no
longer has a banking relationship with Norwest Business Credit, Inc. or any of
its affiliates.
9. Subject to the provisions of paragraph 8 hereof, this Warrant and all
rights hereunder are transferable, in whole or in part, at the principal office
of the Company by the holder hereof in person or by duly authorized attorney,
upon surrender of this Warrant properly endorsed. Each taker and holder of this
Warrant, by taking or holding the same, consents and agrees that the bearer of
this Warrant, when endorsed, may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the transfer hereof on the books of the Company, any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered holder hereof as the owner for all purposes.
10. This Warrant is exchangeable, upon the surrender hereof by the holder
hereof at the principal office of the Company, for new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares which may be subscribed for and purchased hereunder, each of such new
Warrants to represent the right to subscribe for and
<PAGE>
purchase such number of shares as shall be designated by said holder hereof at
the time of such surrender.
11. The holder of this Warrant and of the Common Stock issuable or issued
upon the exercise hereof shall be entitled to the registration rights set forth
in Appendix A attached hereto.
12. (a) In addition to and without limiting the rights of the holder of
this Warrant under the terms of this Warrant, the holder of this Warrant shall
have the right (the "Conversion Right") to convert this Warrant or any portion
thereof into shares of Common Stock as provided in this paragraph 12 at any time
or from time to time prior to its expiration, subject to the restrictions set
forth in paragraph (c) below. Upon exercise of the Conversion Right with
respect to a particular number of shares subject to this Warrant (the "Converted
Warrant Shares"), the Company shall deliver to the holder of this Warrant,
without payment by the holder of any exercise price or any cash or other
consideration, that number of shares of Common Stock equal to the quotient
obtained by dividing the Net Value (as hereinafter defined) of the Converted
Warrant Shares by the fair market value (as defined in paragraph (d) below) of a
single share of Common Stock, determined in each case as of the close of
business on the Conversion Date (as hereinafter defined). The "Net Value" of
the Converted Warrant Shares shall be determined by subtracting the aggregate
warrant purchase price of the Converted Warrant Shares from the aggregate fair
market value of the Converted Warrant Shares. Notwithstanding anything in this
paragraph 12 to the contrary, the Conversion Right cannot be exercised with
respect to a number of Converted Warrant Shares having a Net Value below $100.
No fractional shares shall be issuable upon exercise of the Conversion Right,
and if the number of shares to be issued in accordance with the foregoing
formula is other than a whole number, the Company shall pay to the holder of
this Warrant an amount in cash equal to the fair market value of the resulting
fractional share.
(b) The Conversion Right may be exercised by the holder of this Warrant by
the surrender of this Warrant at the principal office of the Company together
with a written statement specifying that the holder thereby intends to exercise
the Conversion Right and indicating the number of shares subject to this Warrant
which are being surrendered (referred to in paragraph (a) above as the Converted
Warrant Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"), but not later than the expiration date of this Warrant.
Certificates for the shares of Common Stock issuable upon exercise of the
Conversion Right, together with a check in payment of any fractional share and,
in the case of a partial exercise, a new warrant evidencing the shares remaining
subject to this
<PAGE>
Warrant, shall be issued as of the Conversion Date and shall be delivered to the
holder of this Warrant within 15 days following the Conversion Date.
(c) In the event the Conversion Right would, at any time this Warrant
remains outstanding, be deemed by the Company's independent certified public
accountants to give rise to a charge to the Company's earnings for financial
reporting purposes, then the Conversion Right shall automatically terminate upon
the Company's written notice to the holder of this Warrant of such adverse
accounting treatment.
(d) For purposes of this paragraph 12, the "fair market value" of a share
of Common Stock as of a particular date shall be its "market price", calculated
as described in paragraph 4(k) hereof.
13. All questions concerning this Warrant will be governed and interpreted
and enforced in accordance with the internal law of the State of Minnesota.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer and this Warrant to be dated as of March 27, 1997.
MEDICAL GRAPHICS CORPORATION
By
--------------------------
Its
----------------------
RESTRICTION ON TRANSFER
The securities evidenced hereby may not be transferred without (i) the
opinion of counsel satisfactory to the Company that such transfer may be
lawfully made without registration under the Federal Securities Act of 1933 and
all applicable state securities laws or (ii) such registration.
<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto this Warrant, and appoints
to transfer this Warrant on the books of the Company with the full power of
substitution in the premises.
Dated:
In the presence of:
----------------------------------------
(Signature must conform in all
respects to the name of the holder as
specified on the face of this Warrant
without alteration, enlargement or any
change whatsoever, and the signature
must be guaranteed in the usual manner)
<PAGE>
SUBSCRIPTION FORM
To be Executed by the Holder of this Warrant if such Holder
Desires to Exercise this Warrant in Whole or in Part:
To: MEDICAL GRAPHICS CORPORATION (the "Company")
The undersigned _________________________
Please insert Social Security or other
identifying number of Subscriber:
_________________________
hereby irrevocably elects to exercise the right of purchase represented by this
Warrant for, and to purchase thereunder, ________ shares of the Common Stock
provided for therein and tenders payment herewith to the order of the Company in
the amount of $_______, such payment being made as provided on the face of this
Warrant.
The undersigned requests that certificates for such shares of Common
Stock be issued as follows:
Name: _________________________________________________________________
Address: _________________________________________________________________
Deliver to: _________________________________________________________________
Address: _________________________________________________________________
and, if such number of shares of Common Stock shall not be all the shares of
Common Stock purchasable hereunder, that a new Warrant for the balance remaining
of the shares of Common Stock purchasable under this Warrant be registered in
the name of, and delivered to, the undersigned at the address stated above.
Dated:
Signature
-----------------------------------
Note: The signature on this
Subscription Form must correspond with
<PAGE>
the name as written upon the face of
this Warrant in every particular,
without alteration or enlargement or any
change whatever.
<PAGE>
APPENDIX A to
Stock Purchase Warrant
REGISTRATION RIGHTS
1. REQUIRED REGISTRATION. Commencing on the earlier of (a) April 1, 1999
or (b) the first date on which the Company no longer has a banking relationship
with Norwest Business Credit, Inc. or any of its affiliates, if the Company
shall receive a written request therefor from any record holder or holders of an
aggregate of at least a majority of the shares of Purchased Stock (as
hereinafter defined) not theretofore registered under the Securities Act of
1933, as amended (the "Securities Act"), and sold, the Company shall prepare and
file a registration statement under the Securities Act covering the shares of
Purchased Stock which are the subject of such request and shall use its best
efforts to cause such registration statement to become effective. In addition,
upon the receipt of such request, the Company shall promptly give written notice
to all other record holders (if any) of shares of Purchased Stock not
theretofore registered under the Securities Act and sold that such registration
is to be effected. The Company shall include in such registration statement
such shares of Purchased Stock for which it has received written requests to
register by such other record holders within 30 days after the delivery of the
Company's written notice to such other record holders. The Company shall be
obligated to prepare, file and cause to become effective only one registration
statement (other than on Form S-3 or any successor form ("Form S-3") promulgated
by the Securities and Exchange Commission (the "Commission") pursuant to this
paragraph 1, and to pay the expenses associated with such registration
statements; notwithstanding the foregoing, the record holder or holders of an
aggregate of at least a majority of the shares of Purchased Stock not
theretofore registered under the Securities Act and sold may require, pursuant
to this paragraph 1, the Company to file, and to pay the expenses associated
with, two additional registration statements on Form S-3, if such form is then
available for use by the Company and such record holder or holders. In the
event that the holders of a majority of the Purchased Stock for which
registration has been requested pursuant to this paragraph 1 determine for any
reason not to proceed with a registration at any time before a registration
statement has been declared effective by the Commission, and such registration
statement, if theretofore filed with the Commission, is withdrawn with respect
to the Purchased Stock covered thereby, and the holders of such Purchased Stock
agree to bear their own expenses incurred in connection therewith and to
reimburse the Company for the expenses incurred by it attributable to the
registration of such Purchased Stock, then the holders of such Purchased Stock
shall not be deemed to have exercised their right to require the Company to
register Purchased Stock pursuant to this paragraph 1.
-1-
<PAGE>
If, at the time any written request for registration is received by the
Company pursuant to this paragraph 1, the Company has determined to proceed with
the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for cash of any of
its securities by it or any of its security holders, such written request shall
be deemed to have been given pursuant to paragraph 1 hereof rather than this
paragraph 1, and the rights of the holders of Purchased Stock covered by such
written request shall be governed by paragraph 1 hereof.
Without the written consent of the holders of a majority of the Purchased
Stock for which registration has been requested pursuant to this paragraph 1,
neither the Company nor any other holder of securities of the Company may
include securities in such registration if in the good faith judgment of the
managing underwriter of such public offering the inclusion of such securities
would interfere with the successful marketing of the Purchased Stock or require
the exclusion of any portion of the Purchased Stock to be registered.
2. INCIDENTAL REGISTRATION. Commencing on the earlier of (a) April 1,
1999 or (b) the first date on which the Company no longer has a banking
relationship with Norwest Business Credit, Inc. or any of its affiliates, each
time the Company shall determine to proceed with the actual preparation and
filing of a registration statement under the Securities Act in connection with
the proposed offer and sale for cash of any of its securities by it or any of
its security holders (other than a registration statement on a form that does
not permit the inclusion of shares by its security holders), the Company will
give written notice of its determination to all record holders of Purchased
Stock not theretofore registered under the Securities Act and sold. Upon the
written request of a record holder of any shares of Purchased Stock given within
30 days after receipt of any such notice from the Company, the Company will,
except as herein provided, cause all such shares of Purchased Stock, the record
holders of which have so requested registration thereof, to be included in such
registration statement, all to the extent requisite to permit the sale or other
disposition by the prospective seller or sellers of the Purchased Stock to be so
registered; provided, however, that nothing herein shall prevent the Company
from, at any time, abandoning or delaying any such registration initiated by it;
provided further, however, that if the Company determines not to proceed with a
registration after the registration statement has been filed with the Commission
and the Company's decision not to proceed is primarily based upon the
anticipated public offering price of the securities to be sold by the Company,
the Company shall promptly complete the registration for the benefit of those
selling security holders who wish to proceed with a public offering of their
securities and who bear all expenses incurred by the Company as the result of
such registration after the Company has decided not to proceed. If any
registration pursuant to this paragraph 2 shall be underwritten in whole or in
part, the Company may require that the Purchased Stock requested for inclusion
pursuant to this paragraph 2 be included in the underwriting on the same terms
and conditions as the securities otherwise being sold through the underwriters.
If in the good faith judgment of the managing underwriter of a proposed
underwritten public offering the inclusion of all of the Purchased Stock
originally covered by a request for registration would
-2-
<PAGE>
reduce the number of shares to be offered by the Company or interfere with the
successful marketing of the shares of stock offered by the Company, the number
of shares of Purchased Stock otherwise to be included in the underwritten public
offering may be reduced pro rata (by number of shares) among the holders thereof
requesting such registration, provided, however, that after any such required
reduction the Purchased Stock to be included in such offering, together with any
shares to be included in such offering that are being offered by other selling
shareholders, shall constitute at least 25% of the total number of shares to be
included in such offering. Those shares of Purchased Stock which are thus
excluded from the underwritten public offering shall be withheld from the market
by the holders thereof for a period, not to exceed 90 days, which the managing
underwriter reasonably determines is necessary in order to effect the
underwritten public offering.
3. REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of paragraph 1 or 2 hereof to effect the registration of shares
of Purchased Stock under the Securities Act, the Company will:
(a) prepare and file with the Commission a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as
may be reasonably necessary to effect the sale of such securities, not to
exceed nine months;
(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein
as may be necessary to keep such registration statement effective for such
period as may be reasonably necessary to effect the sale of such
securities, not to exceed nine months;
(c) furnish to the security holders participating in such
registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters
may reasonably request in order to facilitate the public offering of such
securities;
(d) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue
sky laws of such jurisdictions as such participating holders may reasonably
request in writing within
-3-
<PAGE>
20 days following the original filing of such registration statement,
except that the Company shall not for any purpose be required to execute a
general consent to service of process or to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified;
(e) notify the security holders participating in such registration,
promptly after it shall receive notice thereof, of the time when such
registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(f) notify such holders promptly of any request by the Commission for
the amending or supplementing of such registration statement or prospectus
or for additional information;
(g) prepare and file with the Commission, promptly upon the request
of any such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such holders
(and concurred in by counsel for the Company), is required under the
Securities Act or the rules and regulations thereunder in connection with
the distribution of the Purchased Stock by such holder;
(h) prepare and promptly file with the Commission and promptly notify
such holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event
shall have occurred as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were
made, not misleading;
(i) advise such holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued;
(j) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders
shall have reasonably objected on the grounds that such amendment or
supplement does not comply in all material respects with the requirements
of the Securities Act or the rules and
-4-
<PAGE>
regulations thereunder, after having been furnished with a copy thereof at
least five business days prior to the filing thereof, unless in the opinion
of counsel for the Company the filing of such amendment or supplement is
reasonably necessary to protect the Company from any liabilities under any
applicable federal or state law and such filing will not violate applicable
law; and
(k) at the request of any such holder, furnish: (i) an opinion,
dated as of the closing date, of the counsel representing the Company for
the purposes of such registration, addressed to the underwriters, if any,
and to the holder or holders making such request, covering such matters as
such underwriters and holder or holders may reasonably request; and
(ii) letters dated as of the effective date of the registration statement
and as of the closing date, from the independent certified public
accountants of the Company, addressed to the underwriters, if any, and to
the holder or holders making such request, covering such matters as such
underwriters and holder or holders may reasonably request.
4. EXPENSES. With respect to each registration, including registrations
pursuant to Form S-3, requested pursuant to paragraph 1 hereof (except as
otherwise provided in such paragraph with respect to registrations voluntarily
terminated at the request of the requesting security holders) and with respect
to each inclusion of shares of Purchased Stock in a registration statement
pursuant to paragraph 2 hereof (except as otherwise provided in paragraph 2 with
respect to registrations initiated by the Company but with respect to which the
Company has determined not to proceed), the Company shall bear the following
fees, costs and expenses: all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for the Company,
fees and disbursements of counsel for the underwriter or underwriters of such
securities (if the Company and/or selling security holders are required to bear
such fees and disbursements), all internal Company expenses, all legal fees and
disbursements and other expenses of complying with state securities or blue sky
laws of any jurisdictions in which the securities to be offered are to be
registered or qualified, and the premiums and other costs of policies of
insurance against liability (if any) arising out of such public offering. Fees
and disbursements of counsel and accountants for the selling security holders,
underwriting discounts and commissions and transfer taxes relating to the shares
included in the offering by the selling security holders, and any other expenses
incurred by the selling security holders not expressly included above, shall be
borne by the selling security holders.
-5-
<PAGE>
5. INDEMNIFICATION. In the event that any Purchased Stock is included in
a registration statement under paragraph 1 or 2 hereof:
(a) The Company will indemnify and hold harmless each holder of
shares of Purchased Stock which are included in a registration statement
pursuant to the provisions of paragraph 1 or 2 hereof, its directors and
officers, and any underwriter (as defined in the Securities Act) for such
holder and each person, if any, who controls such holder or such
underwriter within the meaning of the Securities Act, from and against, and
will reimburse such holder and each such underwriter and controlling person
with respect to, any and all loss, damage, liability, cost and expense to
which such holder or any such underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses,
damages, liabilities, costs or expenses are caused by any untrue statement
or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any amendment
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however,
that the Company will not be liable in any such case to the extent that any
such loss, damage, liability, cost or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished by such holder,
such underwriter or such controlling person in writing specifically for use
in the preparation thereof.
(b) Each holder of shares of Purchased Stock which are included in a
registration pursuant to the provisions of this paragraph 1 or 2 hereof
will indemnify and hold harmless the Company, its directors and officers,
any controlling person and any underwriter from and against, and will
reimburse the Company, its directors and officers, any controlling person
and any underwriter with respect to, any and all loss, damage, liability,
cost or expense to which the Company or any controlling person and/or any
underwriter may become subject under the Securities Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused
by any untrue or alleged untrue statement of any material fact contained in
such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances in which they were made, not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was
-6-
<PAGE>
so made in reliance upon and in strict conformity with written information
furnished by such holder specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this paragraph 5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to
be made against the indemnifying party pursuant to the provisions of said
paragraph (a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, provided, however, if the
defendants in any action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying party, or if there is a conflict of interest
which would prevent counsel for the indemnifying party from also
representing the indemnified party, the indemnified party or parties shall
have the right to select separate counsel to participate in the defense of
such action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to
such indemnified party pursuant to the provisions of said paragraph (a) or
(b) for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the indemnified party shall
have employed counsel in accordance with the proviso of the preceding
sentence, (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after the notice of the commencement of the
action, or (iii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party.
-7-
<PAGE>
6. SPECIAL DEFINITION. "Purchased Stock" shall mean the Warrant dated as
of April __, 1997 (together with any warrant or warrants issued in substitution
or exchange therefor, the "Warrant") to purchase 62,500 shares of Common Stock
of the Company, and the shares of Common Stock of the Company issuable upon
exercise of the Warrant and all shares of such Common Stock issued in exchange
or substitution therefor, whether or not such securities (other than such
Warrant) have in fact been issued, and the stock or other securities of the
Company issued in a stock split or reclassification of, or a stock dividend or
other distribution on or in substitution or exchange for, or otherwise in
connection with, any of the foregoing securities, or in a merger or
consolidation involving the Company or a sale of all or substantially all of the
Company's assets. For purposes hereof, the record holder of the Warrant shall
be treated as the record holder of the related Common Stock then issuable upon
the exercise thereof. Nothing in this paragraph 6 shall, however, be deemed to
require the Company to register the Warrant, it being understood that the
registration rights granted hereby relate only to shares of Common Stock of the
Company and securities issued in substitution or exchange therefor.
-8-
<PAGE>
WARRANT
to Purchase 130,000 Shares of the
Common Stock of Medical Graphics Corporation
March 25, 1997
THIS CERTIFIES that Catherine A. Anderson or any permitted assign (the
"Holder") is entitled to purchase at any time during the period commencing on
the date of this Warrant and ending at 5:00 p.m., Minneapolis, Minnesota
time, on March 31, 2000, One Hundred Thirty Thousand (130,000) fully paid and
nonassessable shares of the common stock of Medical Graphics Corporation (the
"Company"), par value $.05 per share (the "Common Stock"), or such greater or
lesser number of shares as may be determined by application of the
anti-dilution provisions of this Warrant (such shares or other securities
purchasable upon exercise of this Warrant being herein called the "Shares"),
at a purchase price of $4.00 per share. The foregoing purchase price, as it
may be adjusted pursuant to the anti-dilution provisions of this Warrant, is
referred to herein as the "Purchase Price."
This Warrant is subject to the following provisions, terms and
conditions:
1. EXERCISE; TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised, in whole
or in part (but not as to any fractional Share, by surrendering this
Warrant, with the Purchase Form attached hereto (or a reasonable facsimile)
duly executed, at the principal office of the Company and by paying the
Purchase Price in full for the Shares purchasable upon such exercise in
cash or by certified or official bank check payable to the order of the
Company.
(b) This Warrant is issued only as a registered Warrant, and, until
it is transferred on the records of the Company, the Company may treat the
person in whose name it is registered as the absolute owner of this Warrant
for all purposes, notwithstanding any notice to the contrary.
2. ISSUANCE OF SHARES.
The Company agrees that the Shares so purchased shall be and are deemed to
be issued as of the close of business on the date on which this Warrant shall
have been surrendered and payment made for such Shares. Certificates for the
Shares purchased shall be delivered to the Holder within ten (10) days after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the number of Shares, if
any, with respect to which this Warrant has not been exercised shall also be
delivered to the Holder within such time.
___________________
THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION
6 AND AT THE BOTTOM OF THE LAST PAGE HEREOF.
<PAGE>
Notwithstanding the foregoing, however, the Company shall not be required to
delivery any certificates for the Shares, except in accordance with the
provisions and subject to the limitations of Section 6 below.
3. COVENANTS OF COMPANY.
The Company covenants and agrees that all Shares that may be issued upon
the exercise of this Warrant have been duly authorized and reserved for
issuance upon the exercise of this Warrant and that the Shares, when so
issued, delivered and paid for upon such exercise in accordance with the
terms of this Warrant, will be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issuance
thereof. The Company further covenants and agrees that until expiration of
this Warrant, the Company will at all times have authorized, and reserved for
the purpose of issuance or transfer upon exercise of this Warrant, a
sufficient number of Shares to provide for the exercise of this Warrant.
4. ANTI-DILUTION ADJUSTMENTS.
The foregoing provisions are, however, subject to the following:
(a) The Purchase Price shall be subject to adjustment from time to
time as hereinafter provided. Upon each adjustment of the Purchase Price,
the Holder of this Warrant shall thereafter be entitled to purchase, at the
Purchase Price resulting from such adjustment, the number of Shares
obtained by multiplying the Purchase Price in effect immediately prior to
such adjustment by the number of Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing the product thereof by
the Purchase Price resulting from such adjustment.
(b) In case the Company shall at any time subdivide the outstanding
Shares into a greater number of Shares or declare a dividend payable in
Shares, the Purchase Price in effect immediately prior to such subdivision
shall be proportionately reduced, and conversely, in case the outstanding
Shares shall be combined into a smaller number of Shares, the Purchase
Price in effect immediately prior to such combination shall be
proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets
to another corporation, shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities or assets
(including cash) with respect to or in exchange for such Common Stock,
then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, the Holder of this Warrant shall have the
right to purchase and receive on the basis and on the terms and conditions
specified in this Warrant and in lieu of the Shares immediately theretofore
purchasable and receivable upon the exercise of the rights represented
hereby or upon the consummation of any such
2
<PAGE>
transaction, such shares of stock, securities or assets as would have been
issued or delivered to the Holder of this Warrant if the Holder had
exercised this Warrant and received upon exercise of this Warrant the
Shares prior to or upon the consummation of such reorganization,
reclassification, consolidation, merger or sale, provided that the Holder
shall have the right to continue to exercise this Warrant after the
effective date of such reorganization, reclassification, consolidation,
merger or sale only if holders of options and warrants generally have
such continuing right to exercise. The Company shall not effect any such
consolidation, merger or sale unless prior to the consummation thereof the
successor corporation (if other than the Company)resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument executed and mailed to the Holder at the last
address of the Holder the obligation to deliver to such Holder such shares
of stock, securities or assets as, in accordance with the foregoing
provisions, the Holder may be entitled to purchase.
(d) If the Company takes any other action, or if any other event
occurs, which does not come within the scope of the provisions of Sections
4(b) or 4(c), but which should, in the Company's opinion, result in an
adjustment in the Purchase Price and/or the number of Shares subject to the
Warrant in order to fairly protect the rights of the Holder of this
Warrant, then the Company shall make an appropriate adjustment in the
Purchase Price or the number of Shares to be received upon exercise of this
Warrant.
(e) No adjustment of the Purchase Price shall be made if the amount
of such adjustment is less than $.01 per share, but in such case any
adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any other adjustment or
adjustments so carried forward, shall amount to not less than $.01 per
share.
(f) No fractional Shares are to be issued upon the exercise of this
Warrant, but the Company shall pay a cash adjustment in respect of any
fraction of a Share which would otherwise be issuable in an amount equal to
the same fraction of the fair market value per Share on the day of exercise
as determined in good faith by the Company.
(g) Upon any adjustment of the Purchase Price, the Company shall give
written notice thereof, by first-class mail, postage prepaid, addressed to
the registered Holder of this Warrant at the address of such Holder, which
notice shall state the Purchase Price resulting from such adjustment and
the increase or decrease, if any, in the number of Shares purchasable at
such price upon the exercise of this Warrant, setting forth in reasonable
detail the method of calculation and the facts upon which such calculation
is based.
5. NO RIGHTS AS SHAREHOLDERS.
This Warrant shall not entitled the Holder to any voting rights or other
rights as a shareholder of the Company.
3
<PAGE>
6. RESTRICTIONS ON TRANSFER.
The Holder, by acceptance hereof, represents and warrants that it is
acquiring this Warrant for its own account for investment purposes only and
not with a view to its resale or distribution, and it has no present
intention to resell or otherwise dispose of all or any part of this Warrant.
Other than pursuant to registration under federal and state securities laws
or an exemption from such registration, the availability of which shall be
reasonably determined by the Company, this Warrant may not be exercised nor
may certificates be issued for Shares, and neither this Warrant nor any
Shares may be sold, pledged, assigned or otherwise disposed of (whether
voluntarily or involuntarily). The Company may condition such issuance or
sale, pledge, assignment or other disposition on the receipt from the party
to whom this Warrant is to be so transferred or to whom Shares are to be
issued or so transferred of any representations and agreements requested by
the Company in order to permit such issuance or transfer to be made pursuant
to exemptions from registration under federal and applicable state securities
laws. Each certificate representing the Warrant (or any part thereof) and
any Shares shall be stamped with the appropriate legends setting forth these
restrictions on transferability. The Holder, by acceptance hereof, agrees to
give written notice to the Company before exercising or transferring this
Warrant or transferring any Shares of the Holder's intention to do so,
describing briefly the manner of any proposed exercise or transfer and
providing an opinion of counsel, acceptable to the Company, that such
transfer complies with federal and applicable state securities laws or
exemptions thereunder. Within thirty (30) days of receiving such written
notice, the Company shall notify the Holder as to whether such exercise or
transfer may be effected.
7. SUCCESSORS AND ASSIGNS.
All the covenants and provisions of this Warrant by or for the benefit
of the Company or the Holder shall bind and inure to the benefit of their
respective successors and assigns.
8. MODIFICATION OF WARRANT.
Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and
delivered by its duly authorized officer as of the 25th day of March, 1997.
MEDICAL GRAPHICS CORPORATION
By:
-------------------------------------
Its:
-------------------------------------
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES MAY BE MADE, IN THE
ABSENCE OF SUCH REGISTRATION OR AN ACCEPTABLE OPINION OF COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
5
<PAGE>
TO: MEDICAL GRAPHICS CORPORATION
* * * *
PURCHASE FORM -- To be Executed by the Registered Holder in Order to Exercise
Warrants
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the attached Warrant for, and to purchase thereunder,
__________ shares of Common Stock provided for therein and request that
certificates for such shares be issued in the name of:
Please insert social _________________________________________
security or other (Name)
identifying number of
registered holder of _________________________________________
certificate (Address)
_________________________________________
(Address)
Date: ___________________ Signature(s):
________________________________________
and if such number of shares not be all of the shares purchasable hereunder,
that a new Warrant for the balance of the shares purchasable under such
Warrant be registered in the name of the undersigned Holder or his or her
Assignee as below indicated and delivered to the address stated below.
Name of Holder or Assignee:
________________________________________
(please print)
Address:
________________________________________
________________________________________
________________________________________
6
<PAGE>
ASSIGNMENT FORM -- To be Executed by the Registered Holder in Order to
Transfer Warrants
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
_____ shares of the Warrants represented by the attached Warrant unto:
Please insert social Please print or typewrite name
security or other and adress including zip code
identifying number of assignee
of assignee
__________________________________
__________________________________
and does hereby irrevocably constitute and appoint ________________________,
Attorney to transfer the Warrant on the records of the Registrant with full
power of substitution in the premises.
Date: _________________ Signature(s):
___________________________________
___________________________________
* * * *
NOTICE -- The Signature(s) to the Purchase Form or the Assignment Form must
correspond to the name as written upon the face of the Warrant in every
particular without alteration or enlargement or any change whatsoever.
7
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (including the Exhibits hereto, this
"Agreement"), dated as of March 31, 1997 is entered into by and among FAMCO II
LIMITED LIABILITY COMPANY, a Minnesota limited liability company (the
"Subscriber"), and MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the
"Company").
AGREEMENTS
1. SUBSCRIPTION FOR SHARES
1.1 NUMBER OF SHARES AND PURCHASE PRICE
Subject to the terms and conditions hereof, the Company agrees to issue and
sell to Investor 444,445 shares of Class A Stock at a purchase price of $3.375
per share for a total price of $1,500,001.87 (the "Purchase Price"). The shares
of stock purchased by Investor hereunder are hereinafter referred to as the
"Shares."
1.2 PAYMENT OF PURCHASE PRICE
Five Hundred Thousand Dollars ($500,000.00) of the Purchase Price shall be
payable on March 31, 1997 whereupon the number of Shares purchased thereby shall
be issued. Provided there has been no occurrence of an Adverse Event (as
hereinafter defined), the balance of the Purchase Price shall be payable April
15, 1997 (the "Second Payment"). An "Adverse Event" shall mean: (i) the Company
has not received the proposed financing in the amount of $4.1 million from
Norwest Bank Minnesota N.A. and Norwest Business Credit by April 14, 1997; or
(ii) Marquette Bank terminates its forbearance agreement and proceeds to
exercise its remedies against the Company; or (iii) the Company's auditors issue
a qualified opinion; or (iv) any action is brought or threatened against the
Company by Catherine A. Anderson or ErgometR. If an Adverse Event occurs,
Subscriber shall have the option to cancel the Second Payment by sending written
notice thereof to the Company whereupon Subscriber shall have no further
obligation to the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Subscriber as follows:
<PAGE>
2.1 ORGANIZATION AND STANDING
The Company is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Minnesota. The Company has all
requisite power and authority to own and operate its properties and assets and
to carry on its business as currently conducted and as proposed to be conducted.
The Company is duly qualified to do business as a foreign corporation in all
jurisdictions in which the failure to be so qualified would have a material
adverse effect on the Company's properties or business as now conducted or as
proposed to be conducted.
2.2 CORPORATE POWER
The Company has all requisite legal and corporate power to execute and
deliver this Agreement and the other agreements contemplated hereby, to issue
the Shares hereunder, and to carry out and perform its obligations under the
terms of this Agreement.
2.3 CAPITALIZATION
The authorized capital stock of the Company, the designation(s) of classes
of stock and the rights and preferences of stock, if any, are set forth on
Schedule 2.3. All issued and outstanding shares of the Company's capital stock
as of the date hereof have been duly authorized and validly issued, are fully
paid and nonassessable, and were issued in compliance with applicable federal
and state securities laws. The requisite number of shares of common stock of
the Company have been reserved for issuance upon conversion of the Shares.
Except as set forth on Schedule 2.3, no shareholder of the Company has any
rights or preferences not afforded all shareholders of the Company, including
without limitation, any pre-emptive or approval right pertaining to the sale and
purchase of the Shares.
2.4 AUTHORIZATION
All corporate action on the part of the Company, its officers, directors
and shareholders necessary for the authorization, execution, delivery and
performance by the Company of this Agreement; the authorization, issuance, sales
and delivery of the Shares: and the performance of all of the Company's
obligations hereunder has been taken. This Agreement, when executed and
delivered by the Company and Subscriber shall constitute valid and legally
binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to laws of general application relating to
bankruptcy, insolvency or creditors' rights and rules of law governing specific
performance, injunctive relief or other equitable remedies.
2.5 VALID ISSUANCE
The Shares, when issued, sold and delivered in accordance with this
Agreement, will be duly authorized and validly issued, fully paid and
nonassessable, will be free and clear of any liens or encumbrances.
2
<PAGE>
2.6 COMPLIANCE WITH OTHER INSTRUMENTS
Except as set forth on Schedule 2.6, the Company is not in violation of any
term of the Articles or its Bylaws, any contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree, order to which the
Company is subject or any statute, rule or regulation applicable to the Company.
The execution, delivery, and performance of and compliance with this Agreement
and the consummation of the transactions contemplated hereby will not result in
any such violation, or require consent under or be in conflict with or
constitute, with or without the passage of time or giving of notice or both, a
breach or default under any such term, or result in the creation of any lien,
mortgage, pledge, encumbrance or charge upon any of the properties or assets of
the Company.
2.7 LITIGATION
Except as set forth on Schedule 2.7 hereof, there are no actions, suits,
proceedings or investigations pending against the Company or any of its
properties before any court or governmental agency (nor, to the Company's
knowledge, is there any reasonable basis therefor or threat thereof). The
Company is not a party or subject to the provisions of any order, writ,
injunction, judgment, or decree of any court or governmental agency or
instrumentality. There is no action, suit, proceeding, or investigation by the
Company currently pending or that the Company intends to initiate.
2.8 TAX RETURNS
The Company has filed all federal, state and other tax returns required to
have been filed by it and has paid all taxes which have become due and payable.
The Company has not been advised that any of its returns, federal, state or
other, have been or are being audited as of the date thereof. There are no
agreements, waivers or other arrangements providing for an extension of time
with respect to the assessment of any tax or deficiency against the Company, nor
are there any actions, suits, proceedings or claims now pending against the
Company in respect of any tax or assessment. There is no pending or, to the
Company's knowledge, threatened investigation of the Company by any federal,
state, foreign or local authority relating to any taxes or assessments, or any
claims for additional taxes or assessments asserted by any such authority.
2.9 GOVERNMENTAL CONSENTS
No consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement or the offer, sale or issuance of the
Shares or the consummation of any other transaction contemplated hereby under
applicable state securities laws, which filings and qualifications, if required,
will be accomplished within the required statutory period, and the filing
pursuant to Regulation D promulgated under the
3
<PAGE>
Securities Act of 1933, as amended (the "1933 Act"), which filing will be made
within 15 days of the execution hereof.
2.10 ACCURACY OF INFORMATION
The information which has been furnished to Subscriber are true and correct
and accurate in all material respects as of the date hereof except for financial
data which is accurate as of the date shown therein. Other than those listed on
Schedule 2.10, there are no employment agreements, stock option plans or
compensation plans of the Company.
2.11 USE OF PROCEEDS
The proceeds received from the sale of Shares shall be used for general
business purposes of the Company. No commissions are payable in connection with
the sale of the Shares.
3. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER
Subscriber hereby represents and warrants, severally and not jointly, to
the Company as follows:
3.1 AUTHORIZATION
This Agreement, when executed and delivered by Subscriber and the Company,
will constitute a valid and legally binding obligation of Subscriber,
enforceable against Subscriber in accordance with its terms, subject to laws of
general application relating to bankruptcy, insolvency or creditors' rights and
rules of law governing specific performance, injunctive relief or other
equitable remedies.
3.2 EXPERIENCE
Subscriber has such knowledge and experience in financial and business
matter that it is capable of evaluating the merits and risks of its investment
in the Company and has the capacity to protect its own interests. Subscriber
acknowledges that the Shares are a speculative risk. Subscriber is able to fend
for itself in the transactions contemplated by this Agreement, can bear the
economic risk of its investment in the Shares (including possible complete loss
of such investment) for an indefinite period of time and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the investment in the Shares.
3.3 INVESTMENT
Subscriber is acquiring the Shares for investment for its own account, not
as a nominee or agent, and not with a view to, or for resale in connection with,
any distribution thereof.
4
<PAGE>
Subscriber understands that the Shares have not been registered under the 1933
Act by reason of a specific exemption from the registration provisions of the
1933 Act, the availability of which depends upon, among other things, the bona
fide nature of the investment intent and the accuracy of such Subscriber's
representations as expressed herein. The Subscriber understands that the Shares
are characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving any public offering and that under such laws and applicable
regulations the Shares may be resold without registration under the 1933 Act
only in certain limited circumstances.
3.4 ACCESS TO DATA
Subscriber and its representatives have been afforded access to corporate
books, financial statements, records, contracts, documents and other information
concerning the Company (to the extent such exists), and to its offices and
facilities, have been afforded an opportunity to ask such questions of the
Company's officers, employees, agents, accountants and representatives
concerning the Company's existing and proposed business, operations, financial
condition, assets, liabilities and other relevant matters as they have deemed
necessary or desirable, and have been given all such information as has been
requested, in order to evaluate the merits and risks of the prospective
investments contemplated herein. Subscriber further represents and acknowledges
that it has been solely responsible for its own "due diligence" investigation of
the Company and its management and business, for its own analysis of the merits
and risks of this investment, and for its own analysis of the fairness and
desirability of the terms of the investment. The foregoing, however, does not
limit or modify the representations and warranties of the Company in Section 2
hereof.
3.5 RESIDENCY
For purposes of the application of state securities laws, Subscriber
represents that it is a resident of Minnesota
4. RIGHTS AND PREFERENCES
4.1 RIGHTS AND PREFERENCES
The Shares shall have the rights and preferences set forth on the
Certificate of Rights and Preferences attached hereto as Exhibit A.
4.2 REGISTRATION RIGHTS
The Shares shall have the registration rights set forth in the Registration
Rights Agreement attached hereto as Exhibit B.
5
<PAGE>
5. MISCELLANEOUS
5.1 GOVERNING LAW
This Agreement shall be governed by and construed under the laws of the
State of Minnesota as applied to agreements among Minnesota residents made and
to be performed entirely within the State of Minnesota.
5.2 SURVIVAL
The representations, warranties, covenants, and agreements made herein
shall survive any investigation made by Subscriber and shall survive the
Closing. All statements as to factual matters contained in any certificate or
other instrument delivered by or on behalf of the Company pursuant hereto shall
be deemed to be representations and warranties by the Company hereunder as of
the date of such certificate or instrument.
5.3 SUCCESSORS AND ASSIGNS
Except as otherwise expressly provided herein, the provisions hereof shall
inure to the benefit of, and be binding upon, the successors, assigns, heirs,
executors, and administrators of the parties hereto.
5.4 ENTIRE AGREEMENT
This Agreement, including the Exhibits hereto, constitute the full and
entire understanding and agreement among the parties with regard to the subjects
hereof and no party shall be liable or bound to any other party in any manner by
and representations, warranties, covenants, or agreements except as specifically
set forth herein or therein. Nothing in this Agreement, express or implied, is
intended to confer upon any party, other than the parties hereto and their
respective successors and assigns, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
5.5 AMENDMENT AND WAIVER
Any term of this Agreement may be amended and the observance of any term of
this Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively) only with the written consent of the
Company and Subscriber.
5.6 NOTICES
All notices and other communications required or permitted hereunder shall
be in writing and shall be deemed effectively given upon personal delivery,
facsimile transmission or deposit with the United States Post Office, by first
class mail, postage prepaid, addressed: (a) if to
6
<PAGE>
Subscriber, at Subscriber's address set forth or at such other addresses as
Subscriber shall have furnished to the Company in writing, or (b) if to the
Company, at 350 Oak Grove Parkway, St. Paul, MN 55127, or at such other address
as the Company shall have furnished to Subscriber in writing.
5.7 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
instrument.
MEDICAL GRAPHICS CORPORATION
By: /s/Dale H. Johnson
------------------------------------------
Its: Chief Financial Officer
--------------------------------------
FAMCO II LIMITED LIABILITY COMPANY
By its Manager
Family Financial Strategies, Inc.
By: /s/John D. Wunsch
-----------------------------------------
Its: Chief Executive Officer
--------------------------------------
7
<PAGE>
Exhibit B
Registration Rights Agreement
1. SHELF REGISTRATION
(a) SHELF REGISTRATION. The Company shall, as promptly as practicable,
after April 15, 1997 file with the SEC a Registration Statement for an
offering to be made on a continuous basis pursuant to Rule 415
covering all of the Purchased Stock (as hereinafter defined) (the
"Initial Shelf Registration"). The Company shall use its best efforts
to file with the SEC the Initial Shelf Registration within 30 days of
April 15, 1997 and shall use its best efforts to cause such Shelf
Registration to be declared effective under the Securities Act as
promptly as practicable thereafter. The Initial Shelf Registration
shall be on From S-1 or another appropriate form permitting
registration of such Purchased Stock for resales by holders in the
manner or manners designated by them (including, without limitation,
one or more underwritten offerings). The Company shall not permit any
securities other than the Purchased Stock to be included to any Shelf
Registration. The Company shall use its best efforts to keep the
Initial Shelf Registration continuously effective under the Securities
Act of 1933, as amended (the "Securities Act") until the date which is
36 months from the date of filing (the "Effectiveness Period") or such
shorter period ending when (i) all Purchased Stock covered by the
Initial Shelf Registration have been sold in the manner set forth and
as contemplated in the Initial Shelf Registration or (ii) a Subsequent
Shelf Registration covering all of the Purchased Stock has been
declared effective under the Securities Act.
(b) SUBSEQUENT SHELF REGISTRATION. If the Initial Shelf Registration or
any Subsequent Shelf Registration ceases to be effective for any
reasons at any time during the Effectiveness Period (other than
because of the sale of all of the securities registered thereunder),
the Company shall use its best efforts to obtain the prompt withdrawal
of any order suspending the effectiveness thereof, and in any event
shall within 30 days of such cessation of effectiveness amend the
Shelf Registration in a manner to obtain the withdrawal of the order
suspending the effectiveness thereof, or file an additional "shelf"
Registration Statement pursuant to Rule 415 covering all of the
Purchased Stock (a "Subsequent Shelf Registration"). If a Subsequent
Shelf Registration is filed, the Company shall use its best efforts to
cause the Subsequent Shelf Registration to be declared effective as
soon as practicable after such filing and to keep such Subsequent
Shelf Registration continuously effective for a period equal to the
number of days in the Effectiveness Period less the aggregate number
of days during which the Initial Shelf Registration or any Subsequent
Shelf Registration was previously continuously effective. As used
herein, the term "Shelf Registration" means the Initial Shelf
Registration and any Subsequent Shelf Registration.
1
<PAGE>
(c) SUPPLEMENTS AND AMENDMENTS. The Company shall promptly supplement and
amend any Shelf Registration if required by the rules, regulations or
instructions applicable to the registration form used for such Shelf
Registration, if required by the Securities Act, or if reasonably
requested by the holders of a majority of the Purchased Stock covered
by such Shelf Registration or by any underwriter of such Purchased
Stock, in each case, with the Company's consent, which consent shall
not be unreasonably withheld or delayed.
2. REQUIRED REGISTRATION. Commencing upon the expiration of the 36 month
period specified in Section 1, if the Company shall receive a written
request therefor from any holder of the Purchased Stock not theretofore
registered under the Securities Act, and sold, the Company shall prepare
and file a registration statement under the Securities Act covering the
shares of Purchased Stock which are the subject of such request and shall
use its best efforts to cause such registration statement to become
effective. In addition, upon the receipt of such request, the Company
shall promptly give written notice to all other record holders (if any) of
shares of Purchased Stock not theretofore registered under the Securities
Act and sold that such registration is to be effected. The Company shall
include in such registration statement such shares of Purchased Stock for
which it has received written requests to registered by such other record
holders within 30 days after the delivery of the Company's written notice
to such other record holders. The Company shall be obligated to prepare,
file and cause to become effective only three registration statements
pursuant to this Section 2.
Without the written consent of the holders of a majority of the holders for
which registration has been requested pursuant to this paragraph 2, neither
the Company nor any other holder of securities of the Company may include
securities in such registration if in the good faith judgment of the
managing underwriter of such public offering the inclusion of such
securities would interfere with the successful marketing of the Purchased
Stock or require the exclusion of any portion of the Purchased Stock to be
registered.
3. INCIDENTAL REGISTRATION. Each time the Company shall determine to proceed
with the actual preparation and filing of a registration statement under
the Securities Act in connection with the proposed offer and sale for cash
of any of its securities by it or any of its security holders (other than a
registration statement on a form that does not permit the inclusion of
shares by its security holders), the Company will give written notice of
its determination to all record holders of Purchased Stock not theretofore
registered under the Securities Act and sold. Upon the written request of
a record holder of any shares of Purchased Stock given within 30 days after
receipt of any such notice from the Company, the Company will, except as
herein provided, cause all such shares of Purchased Stock, the record
holders of which have so requested registration thereof, to be included in
such registration statement, all to the extent requisite to permit the sale
or other disposition by the prospective seller or sellers of the Purchased
Stock to be so registered; provided, however, that nothing herein shall
prevent the Company from, at any time, abandoning or
2
<PAGE>
delaying any such registration initiated by it; provided further,
however, that if the Company determines not to proceed with a registration
after the registration statement has been filed with the Commission and
the Company's decision not to proceed is primarily based upon the
anticipated public offering price of the securities to be sold by the
Company, the Company shall promptly complete the registration for the
benefit of those selling security holders who wish to proceed with a
public offering of their securities. If any registration pursuant to
this paragraph 3 shall be underwritten in whole or in part, the Company
may require that the Purchased Stock requested for inclusion pursuant
to this paragraph 3 be included in the underwriting on the same terms
and conditions as the securities otherwise being sold through the
underwriters. If in the good faith judgment of the managing underwriter
of a proposed underwritten public offering the inclusion of all of the
Purchased Stock originally covered by a request for registration would
reduce the number of shares to be offered by the Company or interfere
with the successful marketing of the shares of stock offered by the
Company, the number of shares of Purchased Stock otherwise to be included
in the underwritten public offering may be reduced pro rata (by number of
shares) among the holders thereof requesting such registration, provided,
however, that after any such required reduction the Purchased Stock to be
included in such offering, together with any shares to be included in such
offering that are being offered by other selling shareholders, shall
constitute at least 25% of the total number of shares to be included in
such offering. Those shares of Purchased Stock which are thus excluded
from the underwritten public offering shall be withheld from the market
by the holders thereof for a period, not to exceed 90 days, which the
managing underwriter reasonably determines if necessary in order to effect
the underwritten public offering.
4. REGISTRATION PROCEDURES. If and whenever the Company is required by the
provisions of paragraph 1, 2 or 3 hereof to effect the registration of
shares of Purchased Stock under the Securities Act, the Company will:
(a) prepare and file with the Commission a registration statement with
respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period
as may be reasonably necessary to effect the sale of such securities,
not to exceed (i) thirty-six months in the case of the Shelf
Registration specified in Section 1 and (ii) nine months with respect
to a registration statement not covered by Section 1;
(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained
therein as may be necessary to keep such registration statement
effective for such period as may be reasonably necessary to effect the
sale of such securities, not to exceed (i) thirty-six months in the
case of the Shelf Registration specified in Section 1 and (ii) nine
months with respect to a registration statement not covered by Section
1;
3
<PAGE>
(c) furnish to the security holders participating in such registration and
to the underwriters of the securities being registered such reasonable
number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such
underwriters may reasonably request in order to facilitate the public
offering of such securities;
(d) use its best efforts to register or qualify the securities covered by
such registration statement under such state securities or blue sky
laws of such jurisdictions as such participating holders may
reasonably request in writing within 20 days following the original
filing of such registration statement, except that the Company shall
not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified.
(e) notify the security holders participating in such registration,
promptly after it shall receive notice thereof, of the time when such
registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been
filed;
(f) notify such holders promptly of any request by the Commission for the
amending or supplementing of such registration statement or prospectus
or for additional information;
(g) prepare and file with the Commission, promptly upon the request of any
such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such
holders (and concurred in by counsel for the Company), is required
under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Purchased Stock by such
holder;
(h) prepare and promptly file with the Commission and promptly notify such
holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct
any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities
Act, any event shall have occurred as the result of which any such
prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading;
(i) advise such holders, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the
initiation or threatening of any
4
<PAGE>
proceeding for the purpose and promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal if
such stop order should be issued;
(j) not file any amendment or supplement to such registration statement or
prospectus to which a majority in interest of such holders shall have
reasonably objected on the grounds that such amendment or supplement
does not comply in all material respects with the requirements of the
Securities Act or the rules and regulations thereunder, after having
been furnished with a copy thereof at least five business days prior
to the filing thereof, unless in the opinion of counsel for the
Company the filing of such amendment or supplement is reasonably
necessary to protect the Company from any liabilities under any
applicable federal or state law and such filing will not violate
applicable law; and
(k) at the request of any such holder, furnish: (i) an opinion, dated as
of the closing date, of the counsel representing the Company for the
purposes of such registration, addressed to the underwriters, if any,
and to the holder or holders making such request, covering such
matters as such underwriters and holder or holders may reasonably
request; and (ii) letters dated as of the effective date of the
registration statement and as of the closing date, from the
independent certified public accountants of the Company, addressed to
the underwriters, if any, and to the holder or holders making such
request, covering such matters as such underwriters and holder or
holders may reasonably request.
5. EXPENSES. With respect to each registration, the Company shall bear all
fees, costs and expenses including, without limitation,: all registration,
filing and NASD fees, printing expenses, fees and disbursements of counsel
and accountants for the Company, fees and disbursements of counsel for the
underwriter or underwriters of such securities (if the Company and/or
selling security holders are required to bear such fees and disbursements),
all internal Company expenses, all legal fees and disbursements and other
expenses of complying with state securities or blue sky laws of any
jurisdictions in which the securities to be offered are to be registered or
qualified, and the premiums and other costs of policies of insurance
against liability (if any) arising out of such public offering and
underwriting discounts and commissions and transfer taxes relating to the
shares included in the offering by the selling security holders.
6. INDEMNIFICATION. In the event that any Purchased Stock is included in a
registration statement under paragraph 1, 2 or 3 hereof:
(a) The Company will indemnify and hold harmless each holder of shares of
Purchased Stock which are included in a registration statement
pursuant to the provisions of paragraph 1, 2 or 3 hereof, its
directors and officers, and any underwriter (as defined in the
Securities Act) for such holder and each person, if any, who controls
5
<PAGE>
such holder or such underwriter within the meaning of the Securities
Act, from and against, and will reimburse such holder and each such
underwriter and controlling person with respect to, any and all loss,
damage, liability, cost and expense to which such holder or any such
underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading;
provided, however, that the Company will not be liable in any such
case to the extent that any such loss, damage, liability, cost or
expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity
with information furnished by such holder, such underwriter or such
controlling person in writing specifically for use in the preparation
thereof.
(b) Each holder of shares of Purchased Stock which are included in a
registration pursuant to the provisions of this paragraph 1, 2 or 3
hereof will indemnify and hold harmless the Company, its directors and
officers, any controlling person or any underwriter from and against,
and will reimburse the Company, its directors and officers, any
controlling person and any underwriter with respect to, any and all
loss, damage, liability, cost or expense to which the Company or any
controlling person and/or any underwriter may become subject under the
Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue or alleged
untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or
supplement thereto, or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances in which they were made, not misleading, in each
case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was so
made in reliance upon and in strict conformity with written
information furnished by such holder specifically for use in the
preparation thereof. Notwithstanding the foregoing, each holder's
liability for indemnification shall be limited to the amount of the
holder's original purchase price of the Purchased Stock.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) and (b) of this paragraph 6 of notice of
the commencement of any action involving the subject matter of the
foregoing indemnity provisions such indemnified party will, if a claim
thereof is to be made against the indemnifying party pursuant to the
provisions of said paragraph (a) or (b), promptly notify the
6
<PAGE>
indemnifying party of the commencement thereof; but the omission to so
notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than hereunder.
In case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party shall have the right to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, provided, however, if the
defendants in any action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to
those available to the indemnifying party, or if there is a conflict
of interest which would prevent counsel for the indemnifying party
from also representing the indemnified party, the indemnified party or
parties shall have the right to select separate counsel to participate
in the defense of such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party
pursuant to the provisions of said paragraph (a) or (b) for any legal
or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed
counsel in accordance with the proviso of the preceding sentence, (ii)
the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the indemnified party within a
reasonable time after the notice of the commencement of the action, or
(iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party.
7. SPECIAL DEFINITION. "Purchased Stock" shall mean the Company's Class A
Stock purchased pursuant to the Stock Purchase Agreement dated March 31,
1997, all Common Stock issued in exchange or substitution thereof, whether
or not such securities have in fact been issued, and the stock or other
securities of the Company issued in a stock split or reclassification of,
or a stock dividend or other distribution on or in substitution or exchange
for, or otherwise in connection with, any of the foregoing securities, or
in a merger or consolidation involving the Company or a sale of all or
substantially all of the Company's assets. Nothing in this paragraph
shall, however, be deemed to require the Company to register the Class A
Stock, it being understood that the securities actually being registered
are shares of Common Stock of the Company into which the Purchased Stock is
convertible.
7
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Jurisdiction or
Name of Direct Subsidiaries Organization
- --------------------------- ---------------
Medical Graphics Corporation GmbH Germany
Name of Indirect Subsidiaries
- -----------------------------
None
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT OF
DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in Registration Statements No.
33-15765, No. 33-47993, No. 33-64430, No. 33-64432, No. 33-80596, No.
33-80386 and No. 333-14295 of Medical Graphics Corporation on Form S-8 of our
report dated April 4, 1997 (April 15, 1997 as to the third paragraph of Note
11) appearing in this Annual Report on Form 10-KSB of Medical Graphics
Corporation for the year ended December 31, 1996.
April 15, 1997 /s/ Deloitte & Touche LLP
Minneapolis, Minnesota
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT OF
ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-15765) pertaining to the 1987 Stock Option Plan of Medical
Graphics Corporation and in the Registration Statement (Form S-8 No.
33-47993) pertaining to the Medical Graphics Corporation 1987 Stock Option
Plan and 1991 Anderson Stock Option Agreement and in the Registration
Statement (Form S-8 No. 33-64430) pertaining to the Medical Graphics
Corporation 401(k) Savings Plan and in the Registration Statement (Form S-8
No. 33-64432) pertaining to the Medical Graphics Corporation Employee Stock
Purchase Plan and in the Registration Statement (Form S-8 No. 33-80596)
pertaining to the Medical Graphics Corporation Non-Employee Director Stock
Option Plan and in the Registration Statement (Form S-8 No. 33-80386)
pertaining to the Medical Graphics Corporation 1993 MacCarter Stock Option
Agreement and Medical Graphics Corporation 1993 Wegmiller Stock Option
Agreement and in the Registration Statement (Form S-8 No. 333-14295)
pertaining to the 1987 Stock Option Plan, Non-Incentive Stock Option
Agreement and Restricted Stock Award Agreement of Medical Graphics
Corporation of our report dated February 16, 1996, with respect to the
consolidated financial statements of Medical Graphics Corporation included in
the Annual Report (Form 10-KSB) for the year ended December 31, 1996.
Minneapolis, Minnesota /s/ Ernst & Young LLP
April 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 545
<SECURITIES> 0
<RECEIVABLES> 5,310
<ALLOWANCES> (496)
<INVENTORY> 6,633
<CURRENT-ASSETS> 12,185
<PP&E> 3,857
<DEPRECIATION> (2,531)
<TOTAL-ASSETS> 14,003
<CURRENT-LIABILITIES> 9,722
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 2,417
<TOTAL-LIABILITY-AND-EQUITY> 14,003
<SALES> 15,422
<TOTAL-REVENUES> 20,289
<CGS> 14,640
<TOTAL-COSTS> 30,657
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 608
<INTEREST-EXPENSE> 189
<INCOME-PRETAX> (9,119)
<INCOME-TAX> 48
<INCOME-CONTINUING> (9,071)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,071)
<EPS-PRIMARY> (3.56)
<EPS-DILUTED> (3.56)
</TABLE>
