<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______________ to _____________
Commission file number 0-9899
MEDICAL GRAPHICS CORPORATION
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1316712
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 OAK GROVE PARKWAY, SAINT PAUL, MINNESOTA 55127-8599
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 484-4874
Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---
As of April 30, 1998, the Company had outstanding 3,352,495 shares of Common
Stock, $.05 par value, and 444,445 shares of Class A Stock, $.05 par value.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL GRAPHICS CORPORATION
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 103 $ 387
Accounts receivable, net of allowance for
doubtful accounts of $166 and $164 5,359 3,890
Inventories:
Purchased components and work in process 3,258 2,604
Finished goods 1,809 1,636
-------- --------
5,067 4,240
Prepaid expenses 346 272
-------- --------
Total Current Assets 10,875 8,789
-------- --------
EQUIPMENT AND FIXTURES 4,078 4,072
LESS ACCUMULATED DEPRECIATION 3,261 3,110
-------- --------
817 962
SOFTWARE PRODUCTION COSTS, NET OF ACCUMULATED
AMORTIZATION OF $935 AND $855 604 602
OTHER ASSETS 12 13
-------- --------
$ 12,308 $ 10,366
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,605 $ 2,261
Accounts payable financed with vendors -
current 1,022 1,145
Bank line of credit 2,951 2,254
Employee compensation 538 786
Deferred service contract revenue 942 896
Warranty reserve 374 414
Other liabilities and accrued expenses 596 675
-------- --------
Total Current Liabilities 9,028 8,431
COMMITMENTS AND CONTINGENCIES
LONG-TERM ACCOUNTS PAYABLE FINANCED WITH
VENDORS 584 807
SHAREHOLDERS' EQUITY
Class A stock; liquidation preference
of $3.375 per share 22 22
Common stock 168 148
Additional paid-in capital 15,270 13,727
Retained deficit (12,764) (12,769)
-------- --------
2,696 1,128
-------- --------
$ 12,308 $ 10,366
-------- --------
-------- --------
</TABLE>
See accompanying notes to financial statements
2
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MEDICAL GRAPHICS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
------ ------
<S> <C> <C>
REVENUES:
Equipment sales $3,833 $ 3,623
Service and supplies revenues 1,237 1,134
------ -------
Total revenues 5,070 4,757
COST OF REVENUES 2,858 3,218
------ -------
Gross margin 2,212 1,539
OPERATING EXPENSES:
Selling and marketing 1,210 1,539
General and administrative 493 374
Research and development 407 522
Provision for restructuring 1,346
------ -------
2,110 3,781
------ -------
INCOME (LOSS) FROM OPERATIONS 102 (2,242)
Interest expense (97) (85)
------ -------
INCOME (LOSS) BEFORE INCOME TAXES 5 (2,327)
Income tax benefit 0 0
------ -------
NET INCOME (LOSS) $ 5 $(2,327)
------ -------
------ -------
NET INCOME (LOSS) PER WEIGHTED AVERAGE
SHARE
Basic $ 0.00 $ (0.91)
Diluted $ 0.00 $ (0.91)
------ -------
------ -------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 3,654 2,569
Diluted 3,807 2,569
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
MEDICAL GRAPHICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 5 $(2,327)
Adjustments to reconcile net income (loss) to
net cash provided (used) in operating activities
Issuance of common stock warrants $ 608
Depreciation 151 141
Amortization 80 63
Changes in operating assets and liabilities
Accounts receivable (1,469) 737
Inventory (827) 1,323
Prepaid expenses and other assets (73) (133)
Accounts payable and accrued expenses (106) 101
Warranty reserve (40) 152
Deferred service contract revenue 46 (54)
------- -------
Net cash (used) provided in operating
activities (2,233) 611
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Software production costs (82) (63)
Capital expenditures (6) (12)
------- -------
Net cash used in investing activities (88) (75)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on bank line of credit 697 (904)
Payments on long-term accounts payable financed (223) (100)
with vendors
Net proceeds from issuances of common stock 1,563 553
------- -------
Net cash provided (used) by financing
activities 2,037 (451)
------- -------
NET (DECREASE) INCREASE IN CASH (284) 85
CASH AT BEGINNING OF PERIOD 387 545
------- -------
CASH AT END OF PERIOD $ 103 $ 630
------- -------
------- -------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation of results have been included. The balance sheet at December
31, 1997 was derived from the audited financial statements as of that date.
Operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
2. RECLASSIFICATIONS
Certain amounts in the Company's Form 10-QSB for the three-month period
ended March 31, 1997 have been reclassified to conform to the 1998
presentation. These reclassifications had no effect on net loss or
shareholders' equity as previously reported.
3. PROVISION FOR RESTRUCTURING
During the quarter ended March 31, 1997, the Company implemented a
restructuring plan which included the termination of certain employees and
the renegotiation of the Company's bank line of credit. A total of $1,346,000
in restructuring expenses were recorded during the three months ended March
31, 1997 related to severance, legal, consulting and accounting expenses.
4. RECENT SALES OF UNREGISTERED SECURITIES
On November 10, 1997, the Company entered into an agreement with four private
accredited investors to sell up to 727,272 shares of common stock at a price
of $4.125 per share. These investors purchased 363,636 shares for $1,500,000
on November 12, 1997. During the first quarter, these investors purchased
242,424 shares for $1,000,000 on January 30, 1998 and 121,212 shares for
$500,000 on February 10, 1998. The Company believes that the sales were
exempt pursuant to Section 4(2) of the Securities Act of 1933, as amended,
and Regulation D, promulgated thereunder.
5. AMENDMENT TO BANK LINE OF CREDIT
In March 1998, the Company amended its line of credit agreement. As of March
31, 1998, the Company was in compliance with all covenants pursuant to the
amended line of credit agreement.
6. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which was adopted by the Company beginning
January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive
income and its components in the general-purpose financial statements.
The adoption by the Company of SFAS No. 130 did not have a material
effect on the Company's financial statements for the three months ended
March 31, 1998 or 1997. Total comprehensive income (loss) for the three
months ended March 31, 1998 and 1997 was $5,000 and $(2,327,000),
respectively.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENT
Statements included in this Quarterly Report on Form 10-QSB that are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provision of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause
actual results to differ materially. Among these risks and uncertainties are
(i) the fact that the Company has incurred losses of $4,962,000, $9,071,000
and $1,731,000 for the fiscal years ended December 31, 1997, 1996 and 1995,
respectively; (ii) the ability of the Company's distributors to successfully
market and sell the Company's product in markets outside the United States;
(iii) the Company's ability to successfully market its product in the United
States at a favorable margin considering significant price competition in the
industry; (iv) the extent to which physicians and health plan administrators
are motivated to use non-invasive diagnostic testing to detect early signs of
disease; (v) the Company's ability to successfully upgrade its product
software systems to a Windows-Registered Trademark- environment; and (vi) the
Company's ability to develop future products which are technologically
advanced and accepted by the marketplace.
RESULTS OF OPERATIONS
For the three months ended March 31, 1998, the Company recorded a net profit
of $5,000, compared to a 1997 net loss of $2,327,000. Included in the 1997
loss was $1,346,000 of restructuring expenses.
REVENUES
Revenues consist of equipment sales and service and supply revenues.
Equipment sales reflect revenues from the Company's pulmonary function
analysis systems, gas exchange testing systems and sleep diagnostic systems.
Service and supply revenues reflect contract revenues from extended
warranties, revenues from non-warranty service visits and aftermarket sales
of peripherals and supplies.
First quarter revenues increased 6.6% to $5,070,000 in 1998 compared to
$4,757,000 in 1997. Domestic revenue increased 7.4% to $2,941,000 in 1998
compared to $2,738,000 in 1997. The increase in 1998 domestic revenue was
primarily due to sales of sleep diagnostic systems, which were introduced in
September, 1997. After decreasing throughout 1997 due to closing the
Company's office in Germany, international revenues were comparable to last
year's levels increasing slightly to $892,000 in 1998 compared to $885,000 in
1997. Service and supply revenue increased 9.1% to $1,237,000 in 1998 from
$1,134,000 in 1997 on the strength of increased non-warranty service income.
GROSS MARGIN
Gross margin percentage increased to 43.6% of revenue for the three months
ended March 31, 1998 from 32.4% in 1997. This increase is due to improved
average selling prices attributable to new pricing strategies, the Company's
ongoing efforts to decrease its costs of manufacturing through increased
efficiencies and reductions in redundant reserves for inventory write-downs
that are no longer necessary.
6
<PAGE>
SELLING AND MARKETING
Selling and marketing expenses for the three months ended March 31, 1998
decreased 21.4% to $1,210,000 in 1998 from $1,539,000 in 1997. This decrease
is the result of cost containment measures implemented during the first
quarter of 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 31.8% to $493,000 in the first
quarter of 1998 from $374,000 in 1997. The increase is attributed to filling
management positions that were vacant in 1997 and expenses associated with
exploring strategic growth opportunities for the Company.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 22.0% to $407,000 in the first
quarter of 1998 from $522,000 in 1997. The decrease reflects the Company's
1997 restructuring decision to use in-house software engineers rather than
independent software contractors as part of the Company's transition of its
product software to a Windows95-Registered Trademark- platform.
PROVISION FOR RESTRUCTURING
Restructuring expenses of $1,346,000 for the three months ended March 31,
1997 included severance, legal, accounting and consulting expenses associated
with the restructuring implemented during the first quarter of 1997.
LIQUIDITY AND FINANCIAL RESOURCES
At March 31, 1998, the Company had cash of $103,000 and working capital of
$1,847,000. In addition, the Company had a balance outstanding under its bank
line of credit of $2,951,000 and additional availability of $316,000.
During the three months ended March 31, 1998, the Company used $2,233,000 of
cash in operating activities, primarily resulting from increases of
$1,469,000 in accounts receivable and $827,000 in inventory. The Company
used $88,000 for investing activities, consisting of capital expenditures of
$6,000 and software production costs of $82,000. The Company generated
$2,037,000 from financing activities, primarily from $1,500,000 in proceeds
from the private placement of its common stock and net borrowings of $697,000
under its line of credit, partially offset by a decrease of $223,000 in
long-term accounts payable with vendors.
At March 31, 1997, the Company had cash of $630,000 and working capital
of $1,328,000.
During the quarter ended March 31, 1997, major sources and uses of cash
were as follows:
- - $737,000 in cash was generated through aggressive collection efforts
on accounts receivable;
- - inventory was reduced by $1,323,000 through improvements in inventory
management;
- - $553,000 was raised through the issuance of equity securities; and
- - borrowings under the line of credit were reduced by $904,000.
At March 31, 1998 the Company had no material commitments for capital
expenditures.
The Company believes that cash generated from operations, together with cash
and borrowings available under its line of credit facility will be adequate
to satisfy its liquidity and capital resource needs through 1998. See Item 2
of Part II of this Form 10-QSB.
7
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in various claims and litigation which are
incidental to its business. Management is of the opinion that ultimate
settlement of these matters will not have a material impact on its financial
statements.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
On November 10, 1997, the Company entered into an agreement with four private
accredited investors to sell up to 727,272 shares of common stock at a price
of $4.125 per share. These investors purchased 363,636 shares for $1,500,000
on November 12, 1997. During the first quarter, these investors purchased
242,424 shares for $1,000,000 on January 30, 1998 and 121,212 shares for
$500,000 on February 10, 1998. The Company believes that the sales were
exempt pursuant to Section 4(2) of the Securities Act of 1933, as amended,
and Regulation D, promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits List
Exhibit 10.1 Second Amendment to Credit Agreement dated March 30, 1998
between the Company and Norwest Bank Minnesota, National
Association
Exhibit 10.2 Third Amendment to Credit and Security Agreement dated
March 26, 1998 between the Company and Norwest Business
Credit, Inc.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1998 the Company filed a Report on Form
8-K reporting that it had completed the second tranche of a private equity
investment with the issuance of 363,636 shares of common stock for gross
proceeds of $1,500,000. See Part II, Item 2, of this Form 10-QSB. In
addition, the Company submitted an unaudited pro forma balance sheet and
income statement as of and for the year ended December 31, 1997,
respectively. The unaudited balance sheet was filed to demonstrate the
Company's compliance with new quantitative maintenance requirements for
continued listing on the Nasdaq SmallCap Market, which were effective
February 23, 1998.
8
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MEDICAL GRAPHICS CORPORATION
- ----------------------------
(Registrant)
Date May 12, 1998 /s/ GLENN D. TAYLOR
------------------ --------------------------
Glenn D. Taylor, President and
Chief Executive Officer
(Principal Executive Officer)
Date May 12, 1998 /s/ DALE H. JOHNSON
------------------ --------------------------
Dale H. Johnson, Chief Financial
Officer (Chief Accounting Officer)
9
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
10.1 Second Amendment to Credit Agreement dated March 30, 1998 between the
Company and Norwest Bank Minnesota, National Association
10.2 Third Amendment to Credit and Security Agreement dated March 26, 1998
between the Company and Norwest Business Credit, Inc.
27 Financial Data Schedule.
10
<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
(EXIMBANK GUARANTEED LOAN NO. AP072067XX)
This Amendment, dated as of March 30, 1998, is made by and between
MEDICAL GRAPHICS CORPORATION, a Minnesota corporation ("the Borrower") and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association
(the "Lender").
Recitals
The Borrower and the Lender have entered into a Credit Agreement dated
as of March 31, 1997 as amended by First Amendment to Credit Agreement dated
as of November 12, 1997 (as so amended, the "Credit Agreement"). Capitalized
terms used in these recitals have the meanings given to them in the Credit
Agreement unless otherwise specified.
The Borrower has requested that the Lender extend the Maturity Date by
one year and make other amendments to the Credit Agreement. The Lender is
willing to grant the Borrower's request pursuant to the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Capitalized terms used in this Amendment which are
defined in the Credit Agreement shall have the same meanings as defined therein,
unless otherwise defined herein. In addition, Section 1.1 of the Credit
Agreement is amended by adding or amending, as the case may be, the following
definitions:
"'Maturity Date' means March 29, 1999."
2. NO OTHER CHANGES. Except as explicitly amended by this Amendment,
all of the terms and conditions of the Credit Agreement shall remain in full
force and effect and shall apply to any advance or letter of credit thereunder.
3. FEES.
(a) APPLICATION FEE. The Borrower shall reimburse the Lender for the
$100 application fee payable to Eximbank in connection with the renewal
application.
<PAGE>
(b) FACILITY FEE. The Borrower shall pay the Lender a fully earned
and non-refundable facility fee of $4,375, due and payable upon the date of
this Amendment.
4. CONDITIONS PRECEDENT. This Amendment shall be effective when the
Lender shall have received an executed original hereof, together with each of
the following, each in substance and form acceptable to the Lender in its sole
discretion:
(a) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact that the articles
of incorporation and bylaws of the Borrower, which were certified and
delivered to the Lender pursuant to its Certificate of Authority dated as
of March 31, 1997 continue in full force and effect and have not been
amended or otherwise modified except as set forth in the Certificate to be
delivered, and (iii) certifying that the officers and agents of the
Borrower who have been certified to the Lender, pursuant to the Certificate
of Authority dated as of March 31, 1997, as being authorized to sign and to
act on behalf of the Borrower continue to be so authorized or setting forth
the sample signatures of each of the officers and agents of the Borrower
authorized to execute and deliver this Amendment and all other documents,
agreements and certificates on behalf of the Borrower.
(b) The SBA/Eximbank Joint Application, properly completed and
executed by the Borrower.
(c) An Exceptions Approval Letter, properly signed by Eximbank.
(d) Payment of the fee described in Paragraph 3.
(e) Receipt by the Lender of the executed Loan Authorization Notice.
(f) Such other matters as the Lender may require.
5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute
this Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ,
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<PAGE>
injunction or decree presently in effect, having applicability to the
Borrower, or the articles of incorporation or by-laws of the Borrower,
or (iii) result in a breach of or constitute a default under any indenture
or loan or credit agreement or any other agreement, lease or instrument to
which the Borrower is a party or by which it or its properties may be
bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
6. REFERENCES. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby.
7. NO WAIVER. The execution of this Amendment and acceptance of any
documents related hereto shall not be deemed to be a waiver of any Default or
Event of Default under the Credit Agreement or breach, default or event of
default under any Security Document or other document held by the Lender,
whether or not known to the Lender and whether or not existing on the date of
this Amendment.
8. RELEASE. The Borrower, hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
9. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement
under the Credit Agreement to pay or reimburse the Lender on demand for all
costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation of
this Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make an Advance
under the Credit Agreement, or
-3-
<PAGE>
apply the proceeds of any Advance, for the purpose of paying any such
fees, disbursements, costs and expenses and the fee required under
Paragraph 3 hereof.
10. MISCELLANEOUS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first written above.
NORWEST BUSINESS CREDIT, INC. MEDICAL GRAPHICS CORPORATION
/s/ Christopher A. Cudak /s/ Glenn D. Taylor
- -------------------------------- ----------------------------------
Christopher A. Cudak Glenn D. Taylor
Its Vice President Chief Executive Officer
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<PAGE>
EXHIBIT 10.2
THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of March 26, 1998, is made by and between
MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the "Borrower") and
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into a Credit and Security
Agreement dated as of March 31, 1997 as amended by First Amendment to Credit
and Security Agreement dated as of July 10, 1997 and Second Amendment to
Credit and Security Agreement dated as of November 12, 1997 (as so amended,
the "Credit Agreement"). Capitalized terms used in these recitals have the
meanings given to them in the Credit Agreement unless otherwise specified.
The Borrower has requested that the Lender waive certain Defaults
and reset the financial covenants to the Credit Agreement, which the Lender
is willing to do pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. FINANCIAL COVENANTS. Sections 6.12, 6.14 and 6.15 of the Credit
Agreement are hereby amended in their entirety and replaced with the
following new sections:
"Section 6.12 MINIMUM BOOK NET WORTH. The Borrower will maintain its
Book Net Worth, determined as of each date below, at an amount not less
than the amount set forth opposite the applicable date described below:
<TABLE>
---------------------------------------------------------
DATE MINIMUM BOOK NET WORTH
---------------------------------------------------------
<S> <C>
March 31, 1998 $1,878,000
---------------------------------------------------------
June 30,1998 $2,078,000
---------------------------------------------------------
September 30, 1998 $2,228,000
---------------------------------------------------------
December 31, 1998 $2,828,000
---------------------------------------------------------
</TABLE>
<PAGE>
"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:
<TABLE>
DATE MINIMUM NET INCOME
---- ------------------
<S> <C>
March 31, 1998 ($750,000)
June 30, 1998 ($550,000)
September 30, 1998 ($400,000)
December 31, 1998 $200,000
</TABLE>
In addition, beginning February 1, 1998 and continuing thereafter, the
Borrower must achieve Net Income of not less than ($500,000) during each
month.
"Section 6.15 MINIMUM DEBT SERVICE COVERAGE RATIO. The Borrower will
achieve a Debt Service Coverage Ratio of .85 to 1.00 as of each fiscal year
end beginning with December 31, 1998."
2. CAPITAL EXPENDITURES. Section 7.10 of the Credit Agreement is
hereby amended in its entirety and replaced with the following new section:
"Section 7.10 CAPITAL EXPENDITURES. The Borrower will not incur or
contract to incur Capital Expenditures of more than $250,000 in the
aggregate during any fiscal year, or more than $60,000 in any one
transaction."
3. NO OTHER CHANGES. Except as explicitly amended by this
Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect and shall apply to any advance or letter of
credit thereunder.
4. WAIVER OF DEFAULT. The Borrower is in default of Section 6.17
of the Credit Agreement which provides that new covenants will be set on or
before January 31, 1998 (the "Default"). Upon the terms and subject to the
conditions set forth in this Amendment, the Lender hereby waives the Default.
This waiver shall be effective only in this specific instance and for the
specific purpose for which it is given, and this waiver shall not entitle the
Borrower to any other or further waiver in any similar or other circumstances.
5. CONDITIONS PRECEDENT. This Amendment, and the waiver set forth
in Paragraph 4 hereof, shall be effective when the Lender shall have received
an executed original hereof, together with such other matters as the Lender
may require in its sole discretion.
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<PAGE>
6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute
this Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action
and do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the articles
of incorporation or by-laws of the Borrower, or (iii) result in a breach
of or constitute a default under any indenture or loan or credit agreement
or any other agreement, lease or instrument to which the Borrower is a
party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
7. REFERENCES. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended
hereby; and any and all references in the Security Documents to the Credit
Agreement shall be deemed to refer to the Credit Agreement as amended hereby.
8. NO OTHER WAIVER. Except as set forth in Paragraph 4 hereof, the
execution of this Amendment and acceptance of any documents related hereto
shall not be deemed to be a waiver of any Default or Event of Default under
the Credit Agreement or breach, default or event of default under any
Security Document or other document held by the Lender, whether or not known
to the Lender and whether or not existing on the date of this Amendment.
9. RELEASE. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all participants,
parent corporations, subsidiary corporations, affiliated corporations,
insurers, indemnitors, successors and assigns thereof, together with all of
the present and former directors, officers, agents and employees of any of
the foregoing, from any and all claims, demands or causes of action of any
kind, nature or description, whether arising in law or equity or upon
contract or tort or under any
-3-
<PAGE>
state or federal law or otherwise, which the Borrower has had, now has or has
made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of
time to and including the date of this Amendment, whether such claims,
demands and causes of action are matured or unmatured or known or unknown.
10. COSTS AND EXPENSES. The Borrower hereby reaffirms its
agreement under the Credit Agreement to pay or reimburse the Lender on demand
for all costs and expenses incurred by the Lender in connection with the
Credit Agreement, the Security Documents and all other documents contemplated
thereby, including without limitation all reasonable fees and disbursements
of legal counsel. Without limiting the generality of the foregoing, the
Borrower specifically agrees to pay all fees and disbursements of counsel to
the Lender for the services performed by such counsel in connection with the
preparation of this Amendment and the documents and instruments incidental
hereto. The Borrower hereby agrees that the Lender may, at any time or from
time to time in its sole discretion and without further authorization by the
Borrower, make a loan to the Borrower under the Credit Agreement, or apply
the proceeds of any loan, for the purpose of paying any such fees,
disbursements, costs and expenses.
11. MISCELLANEOUS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the date first written above.
NORWEST BUSINESS CREDIT, INC. MEDICAL GRAPHICS CORPORATION
/s/ Roger Pfiffner /s/ Dale H. Johnson
- ----------------------------- -----------------------------
Roger Pfiffner Dale H. Johnson
Its Vice President Chief Financial Officer
-4-
<PAGE>
Exhibit B to Credit and Security
Agreement
COMPLIANCE CERTIFICATE
To: Diane G. Conley
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, as amended.
/ / 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 the table below:
<PAGE>
<TABLE>
DATE MINIMUM BOOK NET WORTH
---- ----------------------
<S> <C>
March 31, 1998 $1,878,000
June 30,1998 $2,078,000
September 30, 1998 $2,228,000
December 31, 1998 $2,828,000
</TABLE>
2. MINIMUM NET INCOME. Pursuant to Section 6.14 of the Credit
Agreement, the Borrower's Net Income
(a) for the month ending on the Reporting Date, was $____________,
which / / satisfies / / does not satisfy the requirement that such
amount be not less than ($500,000) during any one month; and
(b) for the period ending on the Reporting Date, was $____________,
which / / satisfies / / does not satisfy the requirement that such
amount be not less than $_____________ for such period as set forth in
the table below:
<TABLE>
DATE MINIMUM NET INCOME
---- ------------------
<S> <C>
March 31, 1998 ($750,000)
June 30, 1998 ($550,000)
September 30, 1998 ($400,000)
December 31, 1998 $200,000
</TABLE>
3. MINIMUM DEBT SERVICE COVERAGE RATIO. (To be completed for each
fiscal year end beginning with December 31, 1998.) Pursuant to Section 6.15 of
the Credit Agreement, the Reporting 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 .85 to 1.00.
4. 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
$250,000 in the aggregate and $60,000 for any one transaction during such year.
-2-
<PAGE>
5. SALARIES. As of the Reporting Date, the Borrower / / is / / is
not in compliance with Section 7.17 of the Credit Agreement concerning
salaries.
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
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 103
<SECURITIES> 0
<RECEIVABLES> 5,525
<ALLOWANCES> (166)
<INVENTORY> 5,067
<CURRENT-ASSETS> 10,875
<PP&E> 4,078
<DEPRECIATION> (3,261)
<TOTAL-ASSETS> 12,308
<CURRENT-LIABILITIES> 9,028
<BONDS> 0
0
0
<COMMON> 190
<OTHER-SE> 2,506
<TOTAL-LIABILITY-AND-EQUITY> 12,308
<SALES> 3,833
<TOTAL-REVENUES> 5,070
<CGS> 2,858
<TOTAL-COSTS> 4,968
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 5
<INCOME-TAX> 0
<INCOME-CONTINUING> 5
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
