<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
<TABLE>
<S> <C>
Check the appropriate box:
[ ] Revised Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to [ ] Rule [ ] Confidential, for Use of the
240.14a-11(c) or Commission Only (as permitted
[ ] Rule 240.14a-12 by Rule 14a-6(e)(2))
</TABLE>
Medical Graphics Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] $125 per Exchange Act Rule o-11(c)(1)(ii), 14a-6(i)(1) or Item 22(a)(2) of
Schedule 14A
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction: $
(5) Total fee paid: $
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
MEDICAL GRAPHICS CORPORATION
PROXY STATEMENT
PROPOSED MERGER -- YOUR VOTE IS IMPORTANT
The boards of directors of Medical Graphics Corporation and Angeion
Corporation have approved a merger and entered into an agreement and plan of
merger in which a newly formed, wholly-owned subsidiary of Angeion will merge
into Medical Graphics. Medical Graphics and Angeion cannot complete the merger
unless Medical Graphics shareholders approve and adopt the merger agreement. We
have called a special meeting of shareholders to vote on this matter.
The Medical Graphics board is providing you with this document, including
the attached appendices, and soliciting your proxy to approve and adopt the
merger agreement that will result in:
- ANG Acquisition Corp., a wholly-owned subsidiary of Angeion, merging with
and into Medical Graphics, with Medical Graphics as the surviving
corporation; and
- each outstanding share of Medical Graphics common stock held immediately
prior to the effective time of the merger (other than shares held by
shareholders as to which dissenters' rights have been perfected) being
converted into the right to receive $2.15 in cash payable to the holders
thereof, without interest.
A special committee of the board of directors of Medical Graphics and the
full board of directors of Medical Graphics have each unanimously determined
that the terms of the merger are fair to, and in the best interests of, Medical
Graphics shareholders and unanimously recommend that shareholders vote "FOR"
approval and adoption of the merger agreement. Only shareholders of record of
Medical Graphics on November 10, 1999 are entitled to attend and vote at the
special meeting.
The date, time and place of the meeting is as follows:
December 21, 1999
9:00 a.m., local time
Medical Graphics Corporation
350 Oak Grove Parkway
Saint Paul, MN 55127
Your vote is very important. Whether or not you plan to attend the special
meeting, please take the time to vote by completing the enclosed proxy card and
returning it in the enclosed addressed envelope. If you sign, date and mail your
proxy card without indicating how you want to vote, your proxy will be voted and
counted in favor of the merger agreement.
This proxy statement contains answers to frequently asked questions and a
summary description of the merger (beginning on page 1), followed by a more
detailed discussion of the merger and other related matters. We urge you to read
this proxy statement in its entirety.
/s/ Thomas G. Lovett IV
Thomas G. Lovett IV
Secretary
Medical Graphics has furnished all the information in this proxy statement
concerning Medical Graphics and Angeion has furnished all the information
concerning Angeion.
This proxy statement is dated November 29, 1999 and was first mailed to
shareholders on or about November 30, 1999.
<PAGE> 3
MEDICAL GRAPHICS CORPORATION
350 OAK GROVE PARKWAY
SAINT PAUL, MINNESOTA 55127
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 21, 1999
To the Shareholders of Medical Graphics Corporation:
The Medical Graphics board of directors is pleased to provide you with
notice of and cordially invites you to attend in person or by proxy the special
meeting of Medical Graphics shareholders. The special meeting will be held at
Medical Graphics, 350 Oak Grove Parkway, Saint Paul, Minnesota 55127, on
December 21, 1999 at 9:00 a.m., local time. The purpose of the special meeting
will be to (1) approve the agreement and plan of merger among Medical Graphics,
Angeion Corporation, and ANG Acquisition Corp., a newly formed, wholly-owned
subsidiary of Angeion, and (2) transact such other business as may properly come
before the special meeting or any adjournment or postponements thereof. In the
merger, Medical Graphics shareholders (other than shareholders who have
perfected their dissenters' rights) will receive $2.15 in cash, without
interest, for each Medical Graphics share owned.
We have described the merger in more detail in the accompanying proxy
statement, which you should read in its entirety before voting. A copy of the
merger agreement is attached as Appendix A to the proxy statement.
The Medical Graphics board has fixed the close of business on November 10,
1999 as the record date for determining the shareholders entitled to notice of,
and to vote at, the Medical Graphics special meeting or any adjournment or
postponement of the special meeting. Only holders of record of Medical Graphics
shares at the close of business on the record date may vote at the Medical
Graphics special meeting.
The affirmative vote of a majority of the voting power of all shares of
Medical Graphics entitled to vote, and at least one half of the Class A stock,
is required to approve and adopt the merger agreement.
You may revoke your proxy in the manner described in the accompanying proxy
statement at any time before it is voted at the Medical Graphics special
meeting. If you sign, date and mail your proxy card without indicating how you
want to vote, your proxy will be voted and counted in favor of the merger
agreement. If you fail to return a properly executed proxy card, the effect will
be a vote against the merger agreement.
By Order of the Board of Directors,
Thomas G. Lovette IV
Thomas G. Lovett IV
Secretary
Saint Paul, Minnesota
Dated: November 29, 1999
Whether or not you plan to attend, please sign, date and return your proxy
as promptly as possible in the reply envelope provided.
DO NOT SEND YOUR MEDICAL GRAPHICS COMMON STOCK CERTIFICATES TO MEDICAL
GRAPHICS WITH YOUR PROXY CARDS. IF THE MERGER IS APPROVED AND CONSUMMATED YOU
WILL RECEIVE A LETTER CONTAINING INSTRUCTIONS FOR THE SURRENDER OF YOUR
CERTIFICATES IN EXCHANGE FOR $2.15 IN CASH PER SHARE.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
FREQUENTLY ASKED QUESTIONS AND ANSWERS ABOUT THE MERGER..... 1
SUMMARY..................................................... 3
The Companies............................................. 3
Information Regarding The Medical Graphics Special
Meeting................................................... 3
Time, Date, Place and Purpose.......................... 3
Record Date and Voting Power........................... 3
Vote Required.......................................... 4
Share Ownership of Management.......................... 4
Proxies................................................ 4
Information Regarding the Merger Agreement................ 4
What Holders of Medical Graphics Common Stock Will
Receive................................................ 4
Reasons for the Merger................................. 4
Effective Time of the Merger........................... 5
Conditions to the Merger Agreement..................... 5
No Solicitation by Medical Graphics.................... 5
Termination of the Merger Agreement.................... 5
Termination Fees and Expenses.......................... 6
Financing for the Merger............................... 6
Accounting Treatment................................... 6
Rights of Dissenting Shareholders...................... 6
Market Price Information.................................. 7
FORWARD-LOOKING STATEMENTS.................................. 8
WHERE YOU CAN FIND MORE INFORMATION......................... 8
THE MEDICAL GRAPHICS SPECIAL MEETING........................ 9
Time, Place and Date...................................... 9
Purpose of the Special Meeting............................ 9
Record Date, Outstanding Shares and Voting................ 9
Quorum.................................................... 9
Vote Required............................................. 9
Voting of Proxies......................................... 10
Revocation of Proxies..................................... 10
Solicitation of Proxies................................... 10
THE MERGER.................................................. 11
Background of the Merger.................................. 11
Medical Graphics Reasons For the Merger................... 15
Recommendation of the Board of Directors and Special
Committee of Medical Graphics............................. 16
Interests of Directors and Executive Officers in the
Merger.................................................... 16
Ownership and Voting Stock............................. 16
Employment and Severance Arrangements.................. 16
Agreements with Manchester............................. 17
Indemnification and Insurance.......................... 18
Continuing Directors................................... 18
Treatment of Medical Graphics Class A Stock in the Merger
Agreement................................................. 18
Financing for the Merger.................................. 18
Anticipated Accounting Treatment of the Merger............ 18
Material United States Federal Income Tax
Considerations............................................ 18
Delisting and Deregistration of Medical Graphics Common
Stock..................................................... 19
</TABLE>
i
<PAGE> 5
<TABLE>
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PAGE
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<S> <C>
THE MERGER AGREEMENT........................................ 20
The Merger................................................ 20
Treatment of Medical Graphics Securities.................. 20
Treatment of Medical Graphics Class A Stock............ 20
Treatment of Medical Graphics Common Stock............. 20
Procedures for Exchange of Stock Certificates............. 20
Treatment of Employee and Director Options, Warrants and
Accrued Interests under Medical Graphics Employee Stock
Purchase Plan.......................................... 21
Representations and Warranties............................ 21
Covenants Pending the Merger.............................. 22
Conduct of Medical Graphics Business................... 22
Further Negotiations................................... 23
Additional Agreements.................................. 23
Conditions to the Merger.................................. 24
Termination............................................... 25
Dissenters' Rights........................................ 26
Minnesota Dissenters' Rights Statute................... 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 28
Overview.................................................. 28
Results Of Operations..................................... 29
Revenue................................................ 29
Gross Margin........................................... 29
Selling................................................ 30
General and Administrative............................. 30
Research and Development............................... 30
Infrequent Charges..................................... 30
Net Interest Expense................................... 31
Gain On Sale Of Assets................................. 31
Income Tax Benefit..................................... 31
New Accounting Standards.................................. 31
Inflation................................................. 31
Liquidity and Capital Resources........................... 31
Year 2000................................................. 32
INFORMATION CONCERNING MEDICAL GRAPHICS..................... 33
General Overview.......................................... 33
Primary Products.......................................... 33
Pulmonary Function Testing Systems..................... 33
Body Plethysmograph Systems............................ 33
Cardiopulmonary Exercise Testing Systems............... 34
Cycle Ergometers....................................... 34
Sleep Diagnostics Systems.............................. 34
Industry.................................................. 35
Competition............................................... 35
Marketing and Distribution................................ 36
Research and Development.................................. 36
Manufacturing............................................. 37
Government Regulation..................................... 37
Patents and Trademarks.................................... 38
Employees................................................. 39
Description of Property................................... 39
</TABLE>
ii
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Legal Proceedings........................................... 39
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
OF MEDICAL GRAPHICS....................................... 41
INFORMATION CONCERNING ANGEION.............................. 43
SHAREHOLDER PROPOSALS....................................... 43
INDEPENDENT PUBLIC ACCOUNTANTS.............................. 43
MEDICAL GRAPHICS FINANCIAL STATEMENTS....................... F-1
</TABLE>
Appendices
A Merger Agreement
B Minnesota Dissenters' Rights Statute
iii
<PAGE> 7
FREQUENTLY ASKED QUESTIONS AND ANSWERS
ABOUT THE MERGER
Q: Why are the Medical Graphics
board
and special committee
proposing the
merger? A: The Medical Graphics board and special
committee have determined that the
transaction is fair to and in the best
interests of Medical Graphics
shareholders because it offers a
premium over the present trading price
of Medical Graphics common stock. Our
board, special committee and management
also believe that the merger will
benefit the combined company and its
customers and employees in a manner
that Medical Graphics could not achieve
on its own. See page 16.
Q: What will I receive in the
merger? A: You will receive $2.15 in cash, without
interest, for each Medical Graphics
share of common stock you own unless
you perfect dissenters' rights.
Q: What are the tax consequences
of the
merger? A: Receiving cash for your shares will be
a taxable transaction for federal
income tax purposes. See page 18.
Q: What do I need to do now? A: After you carefully read this document,
please complete, sign, date and mail
your proxy card in the enclosed return
envelope as soon as possible. That way,
your shares can be represented at the
special meeting.
Medical Graphics and Angeion cannot
complete the merger unless a majority
of the voting power of the outstanding
Medical Graphics shares and at least
one-half of the Class A stock approve
the merger agreement -- your vote is
very important.
Q: Should I send in my stock
certificates
now? A: No. If the merger is completed, Angeion
will send you written instructions for
submitting your Medical Graphics stock
certificates. You must follow those
instructions and return your stock
certificates accordingly. You will
receive your cash payment as soon as
practicable after Angeion receives your
Medical Graphics stock certificates
along with the other documents
requested in those instructions.
Q: Will I have the right to have
my shares
appraised if I dissent from
the merger? A: Yes. You will have dissenters' rights.
If you wish to exercise dissenters'
rights you must not vote in favor of
the merger and you must strictly follow
the requirements of Minnesota law. A
summary describing the requirements you
must meet in order to exercise your
dissenters' rights is provided in the
section entitled "The Merger
Agreement -- Dissenters' Rights" on
page 26 of this proxy statement.
Q: Who must approve the merger? A: In addition to approvals by the Medical
Graphics, Angeion and ANG Acquisition
Corp. boards of directors, all of which
have already been obtained, the merger
must be approved by the holders of a
majority of the voting power of all
shares of Medical Graphics entitled to
vote and at least one half of the Class
A stock.
1
<PAGE> 8
Q: Do Angeion shareholders vote
on the
merger? A: No. Only Medical Graphics shareholders
vote on the merger.
Q: When do you expect to
complete the
merger? A: We are working to complete the merger
as quickly as possible. Currently we
expect to complete the merger by the
end of 1999.
Q: If my shares are held in
"street name"
by my broker, will my broker
vote my
shares for me? A: No. Your broker will not vote your
shares for you unless you provide
instructions on how to vote. It is
important therefore that you follow the
directions provided by your broker
regarding how to instruct the broker to
vote your shares.
Q: May I change my vote after I
have
mailed in my signed and dated
proxy
card? A: Yes. You may change your vote at any
time before your proxy is voted at the
special meeting. You may do this in one
of two ways:
- You may send the Medical Graphics
Secretary a written notice stating
that you would like to revoke your
proxy; or
- You may complete and submit a new
proxy card.
If you choose either of the options,
you must submit your notice of
revocation or your new proxy card to
Medical Graphics at the address on page
10.
If you have instructed a broker to
vote your shares, you must follow the
directions you received from your
broker to change your vote.
Q: Whom should I call if I want
to request
an additional copy of this
document? A: You may call Medical Graphics directly
at (651) 484-4874 to request an
additional copy of this document.
Q: On what other matters will
Medical
Graphics shareholders vote at
the
special meeting? A: Medical Graphics does not expect to ask
shareholders to vote on any other
matters at the special meeting.
Q: Where can I find more
information
about Medical Graphics? A: Various sources described under "Where
You Can Find More Information" on page
8 of this document provide further
information.
Q: Who can help answer my
questions? A: If you have more questions about the
merger or need directions to the
special meeting, you should contact:
Medical Graphics Corporation, 350 Oak
Grove Parkway, Saint Paul, Minnesota
55127, Attn: Dale Johnson, (651)
484-4874.
2
<PAGE> 9
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
proposal for the special meeting fully and for a more complete description of
the terms of the merger, you should read carefully this entire document and the
documents to which we have referred you. See "Where You Can Find More
Information" on page 8. We have included page references to direct you to a more
complete description of the topics in this summary.
THE COMPANIES
Medical Graphics Corporation
350 Oak Grove Parkway
Saint Paul, MN 55127
Medical Graphics Corporation designs products and related software that
assist health care professionals in the prevention, early detection and
cost-effective treatment of heart and lung disease and the evaluation of sleep
disorders. Medical Graphics products include pulmonary testing equipment,
cardiopulmonary exercise testing systems and computerized sleep diagnostic
systems.
Angeion Corporation
7601 Northland Drive
Brooklyn Park, MN 55428
Angeion Corporation was founded in 1986 and began to develop implantable
cardioverter defibrillators (ICDs) in 1991. It implemented a restructuring
program in the second quarter of 1999 to (i) refocus its business, (ii)
significantly reduce operating expenses and (iii) explore strategic
alternatives.
ANG Acquisition Corp.
7601 Northland Drive
Brooklyn Park, MN 55428
ANG Acquisition Corp. is a newly formed Minnesota corporation and
wholly-owned subsidiary of Angeion.
INFORMATION REGARDING THE MEDICAL GRAPHICS SPECIAL MEETING
Time, Date, Place and Purpose
Medical Graphics will hold a special meeting of shareholders on December
21, 1999 at 9:00 a.m. local time at Medical Graphics, 350 Oak Grove Parkway,
Saint Paul, Minnesota 55127.
At the Medical Graphics special meeting, the holders of shares of Medical
Graphics common stock and Class A stock will vote on:
- the approval and adoption of the merger agreement; and
- the transaction of such other business as may properly come before the
Medical Graphics special meeting.
Record Date and Voting Power
You are entitled to vote at the Medical Graphics special meeting if you
owned shares of Medical Graphics common stock or Class A stock as of the close
of business on the record date of November 10, 1999. On the record date, there
were 5,650,947 shares of Medical Graphics common stock outstanding held by
approximately 1,400 record holders and 444,445 shares of Class A stock
convertible into 1,500,000 shares of common stock held by one holder.
You are entitled to one vote for each share of Medical Graphics common
stock you own on the record date. Each holder of Class A stock is entitled to
3.375 votes per share of Class A stock owned on the record
3
<PAGE> 10
date. The holders of a majority of the shares entitled to vote at the Medical
Graphics special meeting must be present in person or by proxy in order to
constitute a quorum for all matters to come before the special meeting.
Vote Required
The affirmative vote of a majority of the voting power of all shares of
Medical Graphics entitled to vote, and at least one half of the Class A stock,
is required to approve and adopt the merger agreement and to consummate the
merger.
Share Ownership of Management
As of the record date (excluding currently exercisable options and
warrants) directors and executive officers of Medical Graphics and their
affiliates have the right to vote at the special meeting an aggregate of
2,394,954 shares of Medical Graphics common stock outstanding on the record date
and all the outstanding shares of Class A stock, which have voting rights equal
to 1,500,000 shares of common stock. By virtue of this ownership, directors and
executive officers control 33.5% of the voting power of shares entitled to vote
at the special meeting. These directors, executive officers and affiliates have
advised Medical Graphics that they intend to vote all shares held by them in
favor of the approval and adoption of the merger agreement.
Some directors and executive officers of Medical Graphics have interests in
the merger that are different from, or in addition to, your interests as a
shareholder. These interests may relate to or arise from, among other things,
stock options and potential change in control payments and employment agreements
that are discussed in more detail in "The Merger -- Interests of Directors and
Executive Officers in the Merger" on page 16.
Proxies
Medical Graphics will bear its own cost of solicitation of proxies. In
addition to soliciting proxies by mail, Medical Graphics' directors, officers
and employees, without receiving additional compensation, may solicit proxies by
telephone, telecopy or in person. Medical Graphics will reimburse brokerage
houses, fiduciaries, nominees and others for their out-of-pocket expenses in
forwarding proxy materials to beneficial owners of Medical Graphics common stock
held in their names.
INFORMATION REGARDING THE MERGER AGREEMENT
The merger agreement is attached as Appendix A to this document. We
encourage you to read the merger agreement as it is the legal document that
governs the merger.
What Holders of Medical Graphics Common Stock Will Receive
Each share of your Medical Graphics common stock held immediately prior to
the effective time of the merger (other than shares with respect to which
dissenters' rights have been perfected) will be converted into the right to
receive $2.15 in cash, without interest. Shares held by shareholders who have
perfected their dissenters' rights will be entitled to the rights set forth in
"The Merger Agreement -- Dissenters' Rights" on page 26.
Medical Graphics shareholders should not send in their stock certificates
until instructed to do so if and after the merger is completed.
Reasons for the Merger
The merger is being proposed by the special committee and the board of
directors of Medical Graphics because the value to be received by shareholders
is a premium over recent prices of Medical Graphics common stock. The special
committee and board also believe that the merger will benefit the combined
company and its customers and employees in a manner that Medical Graphics could
not achieve on its own.
4
<PAGE> 11
Effective Time of the Merger
The merger will become effective when articles of merger are filed with the
Minnesota Secretary of State or at such later time as may be specified in the
articles of merger.
Conditions to the Merger Agreement
The merger is subject to various conditions, including the approval of the
Medical Graphics shareholders.
No Solicitation by Medical Graphics
Subject to fiduciary exceptions, Medical Graphics has agreed that it will
not solicit or engage in any discussion regarding a merger or other acquisition
proposal between Medical Graphics and any other party or endorse or agree to any
other merger or acquisition proposal.
Termination of the Merger Agreement
The companies may, by mutual written consent, agree to terminate the merger
agreement without completing the merger. In addition, the companies may
terminate the merger agreement if any of the following occurs:
1. the merger is not completed by February 29, 2000 and the
terminating party is not in breach of any of its obligations;
2. any of the conditions of a party's obligation to consummate the
merger becomes impossible to satisfy;
3. a court or other governmental authority permanently prohibits the
merger; or
4. the approval of the shareholders of Medical Graphics is not
obtained.
Angeion can terminate the merger agreement if any of the following occurs:
5. the Medical Graphics board:
- withdraws or modifies in an adverse manner its recommendation of
the merger agreement or the merger, or its recommendation to the
Medical Graphics shareholders to approve the merger agreement;
- recommends another proposal to Medical Graphics shareholders or
fails to reconfirm its recommendation upon Angeion's request; or
- fails to recommend that its shareholders reject any tender offer
or exchange offer that would result in a party obtaining 25% or
more of the Medical Graphics common stock.
6. Medical Graphics fails to convene the Medical Graphics special
meeting in breach of the merger agreement.
Medical Graphics can terminate the merger agreement if any of the following
occurs:
7. Medical Graphics receives an unsolicited proposal for the
acquisition of Medical Graphics on financial terms more favorable than the
merger and the Medical Graphics board determines in good faith to withdraw
or modify its recommendation of the merger agreement and the merger or its
recommendation to the Medical Graphics shareholders to approve the merger
agreement, based upon the written advice of outside counsel that such
action is necessary to prevent breach of the board's fiduciary duty, in
order to execute a definitive acquisition agreement or to approve a tender
or exchange offer for the stock of Medical Graphics; or
8. a temporary or preliminary injunction is in effect that prohibits
or enjoins the merger in connection with certain litigation brought on
behalf of the holders of notes issued under Angeion's indenture, if the
injunction is in effect on (a) the later of (i) the day before the special
meeting is
5
<PAGE> 12
scheduled to be held, or (ii) if requested by Angeion, on the day before a
rescheduled meeting at least 30 days after adjournment or postponement of
the originally scheduled special meeting or (b) if the special meeting is
held by Medical Graphics while an injunction is in effect, if the closing
of the merger is not effected within 30 days after approval of the merger
by Medical Graphics shareholders.
Termination Fees and Expenses
If Angeion terminates the merger agreement under paragraph 5 or 6 above or
Medical Graphics terminates the merger agreement under paragraph 7 above, the
merger agreement requires that Medical Graphics pay Angeion the amount of
$600,000. In addition, if the merger agreement is otherwise terminated, Angeion,
with certain exceptions, is entitled to a payment in the amount of $600,000 if
(a) a third party who at the date of the merger agreement did not own 25% or
more of Medical Graphics shares is the beneficial owner of 25% or more of its
shares at the time of termination or (b) an alternative transaction is
consummated within 18 months after the termination date.
Medical Graphics is also required to reimburse Angeion for its expenses up
to $300,000 in the following circumstances:
- if the $600,000 payment is due to Angeion;
- if the merger agreement is terminated because of a breach of
representations, warranties or covenants by Medical Graphics; or
- if the merger agreement is terminated because of the failure of the
shareholders to vote for the merger, the failure of Medical Graphics to
convene the special meeting or because the holders of more than 10% of
the outstanding shares of Medical Graphics exercise dissenters' rights.
If Medical Graphics terminates the merger agreement as set forth in
paragraph 8 above, Angeion must reimburse Medical Graphics for its expenses up
to $150,000.
Financing for the Merger
Angeion intends to fund the merger consideration from current cash. At
September 22, 1999, Angeion had sufficient cash to finance the merger. In
September 1999, Angeion also entered into an agreement to grant Medtronic, Inc.
a non-exclusive license to all of Angeion's patents and patent applications for
cardiac stimulation devices. Angeion also agreed to sell to Medtronic its
unfiled patent disclosures for cardiac stimulation devices. In exchange, Angeion
will receive $9 million in cash from Medtronic. Closing of the Medtronic
transaction is subject to the approval of Angeion shareholders and noteholders.
On September 24, 1999, an action was commenced by the trustee on behalf of the
holders of notes issued under Angeion's indenture, alleging that an event of
default has occurred, and seeking, among other things, payment of 101% of the
principal amount of the notes (which payment would be $20,806,707 as of November
21, 1999) and to enjoin Angeion from using its available cash for the merger.
Angeion has advised Medical Graphics that it does not believe that an event of
default has occurred and that it intends to vigorously defend this action.
Accounting Treatment
The merger will be treated as a "purchase" in accordance with generally
accepted accounting principles.
Rights of Dissenting Shareholders
Any shareholder who does not wish to accept the merger consideration has
the right under the Minnesota Business Corporation Act to receive the "fair
value" of the shareholder's shares as determined by a Minnesota court. This
"dissenters' right" is subject to a number of restrictions and technical
requirements. Generally, in order to perfect dissenters' rights a dissenting
shareholder (a) must not vote in favor of adopting and approving the merger
agreement and (b) must make a written demand before the vote on the merger
agreement. Merely voting against the merger agreement will not protect the right
to dissent. Appendix B to this proxy statement contains the applicable
provisions of the Minnesota Business Corporation Act relating to dissenters'
rights.
6
<PAGE> 13
Shareholders who may be interested in exercising dissenters' rights should
review these provisions carefully. See "Merger Agreement -- Dissenters' Rights"
on page 26.
MARKET PRICE INFORMATION
Medical Graphics common stock is quoted on Nasdaq under the symbol "MGCC."
The following tables set forth the high and low last sale prices of Medical
Graphics common stock as reported on The Nasdaq SmallCap System for the quarters
indicated. Medical Graphics' fiscal year end is December 31. Prices have been
adjusted to reflect Medical Graphics' 3-for-2 stock split effective June 8,
1998.
<TABLE>
<CAPTION>
LAST SALE
--------------
HIGH LOW
----- -----
<S> <C> <C>
1997
First Quarter............................................. $3.50 $1.75
Second Quarter............................................ 2.92 1.75
Third Quarter............................................. 3.92 2.50
Fourth Quarter............................................ 3.46 2.67
1998
First Quarter............................................. $2.24 $1.72
Second Quarter............................................ 3.75 1.81
Third Quarter............................................. 2.88 0.88
Fourth Quarter............................................ 1.19 0.75
1999
First Quarter............................................. $1.88 $0.81
Second Quarter............................................ 1.69 0.88
Third Quarter............................................. 2.00 1.25
Fourth Quarter (through November 29, 1999)................ 1.91 1.72
</TABLE>
Medical Graphics has not declared any cash dividends on its common stock
for the periods indicated above and under agreements with its lender can only do
so under certain circumstances. Set forth below are the high, low and closing
sale prices of Medical Graphics common stock on September 22, 1999 and November
29, 1999. September 22, 1999 was the last full trading day prior to the public
announcement of the current cash for stock merger, and November 29, 1999 was the
last practicable trading day for which information was available prior to the
date of the first mailing of this document.
Medical Graphics Common Stock
<TABLE>
<CAPTION>
HIGH LOW CLOSE
----- ----- -----
<S> <C> <C> <C>
September 22, 1999........................ $1.56 $1.56 $1.56
November 29, 1999......................... $1.88 $1.75 $1.75
</TABLE>
We urge you to obtain current market quotations of Medical Graphics common
stock.
7
<PAGE> 14
FORWARD-LOOKING STATEMENTS
We believe that some of the information in this document constitutes
forward-looking statements within the definition of the Private Securities
Litigation Reform Act of 1995. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. You should read statements that
contain these words carefully because they discuss future expectations, contain
projections of future results of operations or financial condition or state
other "forward-looking" information.
We believe that it is important to communicate our expectations to the
Medical Graphics shareholders. There may be events in the future, however, that
Medical Graphics is not able to accurately predict or over which it has no
control. The factors listed below and cautionary language in this document
provide examples of risks, uncertainties and events that may cause actual
results to differ materially from the expectations described in this document in
its forward-looking statements.
Specifically, actual results relating to, among other things, product
performance, the introduction of products and services by competitors, general
economic and business conditions and the inability to accurately predict market
trends could differ materially from those currently anticipated in such
statements. Factors affecting forward-looking statements include:
- technological changes and innovations;
- changes in availability of, unavailability of or delay in receiving
components and raw materials;
- changes in economic conditions;
- changes in seasonal demand for products; and
- pending litigation brought on behalf of the Angeion noteholders.
Medical Graphics and Angeion do not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions, or changes in other factors affecting such forward-looking
statements.
WHERE YOU CAN FIND MORE INFORMATION
As required by law, Medical Graphics files annual, quarterly and special
reports, proxy statements and other information with the SEC. These reports,
proxy statements and other information contain additional information about
Medical Graphics. You may read and copy any reports, statements or other
information we file at the SEC's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Our SEC filings are also available to the
public from commercial document retrieval services and at the web site
maintained by the SEC at www.sec.gov.
You should rely only on the information contained in this document to vote
on the proposals at the special meeting. We have not authorized anyone to
provide you with information that is different from what is contained in this
document. This document is dated November 29, 1999. You should not assume that
the information contained in this document is accurate as of any date other than
November 29, 1999, and the mailing of the document to you shall not create any
implication to the contrary.
8
<PAGE> 15
THE MEDICAL GRAPHICS SPECIAL MEETING
TIME, PLACE AND DATE
This document is being furnished to Medical Graphics shareholders as part
of the solicitation of proxies by the Medical Graphics board for use at a
special meeting of shareholders of Medical Graphics to be held on December 21,
1999, at 9:00 a.m., local time, at Medical Graphics, 350 Oak Grove Parkway,
Saint Paul, Minnesota 55127 and at any adjournment or postponement thereof. This
document and the enclosed form of proxy are first being mailed to shareholders
of Medical Graphics on or about November 30, 1999.
PURPOSE OF THE SPECIAL MEETING
At the Medical Graphics special meeting, the holders of shares of Medical
Graphics common stock and Class A stock will vote on:
- the approval and adoption of the merger agreement; and
- the transaction of such other business as may properly come before the
Medical Graphics special meeting.
A special committee of the Medical Graphics board consisting of three
outside directors and the Medical Graphics board, after careful consideration,
have each unanimously determined that the terms of the merger are fair to, and
in the best interests of, Medical Graphics shareholders, have unanimously
approved the merger agreement, and recommend a vote "FOR" approval and adoption
of the merger agreement.
RECORD DATE, OUTSTANDING SHARES AND VOTING
Holders of record of Medical Graphics common stock and Class A stock at the
close of business on the record date of November 10, 1999, are entitled to
notice of and to vote at the Medical Graphics special meeting. On the record
date, there were 5,650,947 shares of Medical Graphics common stock outstanding
held by approximately 1,400 holders and there was one holder of 444,445 shares
of Class A stock, each share of which is convertible into 3.375 shares of common
stock. Each share of Medical Graphics common stock as of the record date
entitles its owner to one vote and each share of Class A stock entitles its
owner to 3.375 votes.
QUORUM
The representation, in person or by properly executed proxy, of the holders
of a majority of all of the shares of stock entitled to vote at the Medical
Graphics special meeting is necessary to constitute a quorum at the Medical
Graphics special meeting.
VOTE REQUIRED
The holders of a majority of the voting power of all shares of Medical
Graphics entitled to vote and at least half of the Class A stock outstanding on
the record date must vote affirmatively to approve and adopt the merger
agreement.
Shares of Medical Graphics common stock and Class A stock represented in
person or by proxy will be counted for the purposes of determining whether a
quorum is present at the Medical Graphics special meeting. Shares that abstain
from voting will be treated as shares that are present and entitled to vote at
the Medical Graphics special meeting for purposes of determining whether a
quorum exists, but abstentions will have the same effect as votes against
approval of the merger agreement. Proxies that are not returned will have the
same effect as a vote against approval of the merger agreement, because the
affirmative vote of the holders of a majority of the voting power of all
outstanding shares entitled to vote (as well as at least one half of the Class A
stock) is required to approve the merger agreement.
Brokers who hold shares in street name for customers have the authority to
vote on "routine" proposals when they have not received instructions from
beneficial owners; however, brokers are precluded from exercising their voting
discretion with respect to the approval of non-routine matters such as the
merger
9
<PAGE> 16
agreement and, thus, absent specific instructions from the beneficial owner of
such shares, brokers are not empowered to vote such shares with respect to the
approval of non-routine proposals (i.e., "broker non-votes"). Abstentions and
properly executed broker non-votes will be treated as shares that are present
and entitled to vote at the special meeting for purposes of determining whether
a quorum exists. Because the vote of a majority of the voting power of all
outstanding shares is required, abstentions and broker non-votes will have the
same effect as votes against approval of the merger agreement.
As of the record date, directors and executive officers of Medical Graphics
and their affiliates may be deemed to be beneficial owners of approximately
33.5% of the outstanding voting power of Medical Graphics shares entitled to
vote, including the Class A stock but excluding currently exercisable options
and warrants, and of 100% of the Class A stock and have expressed their intent
to vote their shares in favor of the approval and adoption of the merger
agreement.
VOTING OF PROXIES
All shares of Medical Graphics common stock that are entitled to vote and
are represented at the Medical Graphics special meeting by properly executed
proxies received prior to or at such meeting, and not revoked, will be voted at
the Medical Graphics special meeting in accordance with the instructions
indicated on such proxies. If no instructions are indicated, these proxies,
other than broker non-votes, will be voted for approval and adoption of the
merger agreement.
The Medical Graphics board does not know of any matters other than those
described in the notice of the Medical Graphics special meeting that are to come
before the Medical Graphics special meeting. If any other matters are properly
presented at the Medical Graphics special meeting for consideration, including
consideration of a motion to adjourn or postpone such meeting to another time or
place for the purposes of soliciting additional proxies or allowing additional
time for the satisfaction of conditions to the merger, the persons named in the
enclosed form of proxy and acting under such proxy generally will have
discretion to vote on such matters in accordance with their best judgment.
REVOCATION OF PROXIES
Any proxy given in accordance with this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by:
- giving the Secretary of Medical Graphics, at or before the taking of the
vote at the Medical Graphics special meeting, a written notice of
revocation bearing a later date than the proxy; or
- executing a later-dated proxy relating to the same shares and delivering
it to the Secretary of Medical Graphics before the taking of the vote at
the Medical Graphics special meeting.
Any written notice of revocation or subsequent proxy should be sent to
Medical Graphics Corporation, 350 Oak Grove Parkway, Saint Paul, Minnesota
55127, Attention: Secretary, or hand delivered to the Secretary of Medical
Graphics at or before the taking of the vote at the Medical Graphics special
meeting. Shareholders that have instructed a broker to vote their shares must
follow the directions received from such broker in order to change their vote,
or to vote in person at the Medical Graphics special meeting.
SOLICITATION OF PROXIES
Medical Graphics will bear its own cost of solicitation of proxies. Medical
Graphics will reimburse brokerage houses, fiduciaries, nominees and others for
their out-of-pocket expenses in forwarding proxy materials to beneficial owners
of Medical Graphics common stock held in their names.
In addition to the solicitation of proxies by mail, certain of Medical
Graphics directors, officers and employees may solicit proxies by telephone,
telecopy and personal contact, without separate compensation for such
activities.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES AT THIS TIME. If the merger
is consummated, you will be sent instructions regarding the procedures for
exchanging your existing stock certificates for a cash payment.
10
<PAGE> 17
THE MERGER
BACKGROUND OF THE MERGER
In October 1997, Medical Graphics engaged Goldsmith Agio Helms and Company
as its financial advisor to assist it in exploring potential strategic
alternatives, including the sale of Medical Graphics. In a November 1997 press
release, Medical Graphics announced that it had retained Goldsmith.
In November 1997, Goldsmith began contacting potential strategic and
financial partners to ascertain their interest in pursuing an acquisition of, or
a merger with, Medical Graphics. Over the course of the next several weeks,
Medical Graphics, after execution of confidentiality agreements, shared selected
non-public information with several of these parties. In December 1997, Medical
Graphics and Goldsmith requested from two of these parties non-binding
indication of interest letters that stipulated the basic terms upon which these
parties would be interested in exploring a potential acquisition of, or merger
with, Medical Graphics. Company A provided such a letter and Company B asked for
additional time before presenting such a letter. Company A was a European
company that was a competitor of Medical Graphics. Company B was a European
company that was engaged in the management and sale of medical products and
components and engineering products.
In March 1998, the Medical Graphics board determined that a transaction
with Company A would more likely be accomplished if Manchester Financial Group,
Inc., a private investment banking firm that is headed by Medical Graphics'
Chairman, Mark Sheffert, became involved in the investment banking aspects of
the proposed transaction. Medical Graphics terminated its engagement of
Goldsmith effective at the end of May 1998. A provision in the October 1997
Goldsmith Agreement provided that if Medical Graphics engaged in a transaction
with any person that was contacted by Goldsmith pursuant to Medical Graphics
engagement of Goldsmith within 12 months of the termination of the Goldsmith
engagement, then Goldsmith would be entitled to a fee. During the week of April
28, 1998, Medical Graphics' then Chief Executive Officer Glenn Taylor and Mr.
Sheffert visited Company A in Europe, and engaged in extensive discussions and
exchanged additional non-public information with Company A.
Discussions with Company A continued until the end of July 1998. In the
course of detailed discussions between Company A and its shareholders and
Medical Graphics, it was ultimately determined that it would be difficult to
structure a transaction that would meet the needs of each party.
On August 3, 1998, Mr. Jahnke was hired as President and Chief Executive
Officer of Medical Graphics to succeed Mr. Taylor.
On September 30, 1998, Medical Graphics issued 550,000 shares of its common
stock at a price of $1.00 per share for $300,000 in cash and conversion of
$250,000 in indebtedness from a supplier to improve its working capital position
and ensure that it had sufficient shareholders' equity to remain in compliance
with the Nasdaq SmallCap listing requirements. Medical Graphics subsequently
reported a net loss of $529,000 on revenues of $4,488,000 for the quarter ended
September 30, 1998.
On October 5, 1998, Company B, which had completed an acquisition of a
competitor of Medical Graphics early in 1998, entered into a confidentiality
agreement with Medical Graphics and representatives of Company B met with Mr.
Sheffert and Mr. Jahnke at Medical Graphics' offices.
In December 1998, Company B contacted Medical Graphics through Goldsmith
about pursuing a merger or acquisition of Medical Graphics. On December 8 and 9,
1998, representatives of Company B met with Mr. Sheffert, Mr. Jahnke, and
representatives of Goldsmith and Manchester in the Twin Cities.
In December 1998, Medical Graphics entered into an engagement agreement
with Manchester under which Manchester agreed to provide investment banking
services to Medical Graphics, including the possible merger, sale or acquisition
of Medical Graphics by a specified group of companies.
On January 19, 1999, representatives of Company B met with Mr. Sheffert and
Mr. Jahnke and representatives of Goldsmith and Manchester in the Twin Cities.
Company B representatives indicated that they would submit a "conditional offer"
to acquire Medical Graphics.
11
<PAGE> 18
On February 25, 1999, Medical Graphics announced that it had achieved net
income of $23,000 on revenues of $5,769,000 in the fourth quarter ended December
31, 1998.
At a March 2, 1999 regular board meeting, the Medical Graphics board
discussed the anticipated "conditional offer" from Company B and authorized Mr.
Sheffert and Mr. Jahnke to negotiate with Company B.
On March 3, 1999, Medical Graphics received a "conditional offer" from
Company B to purchase Medical Graphics. The offer was subject to a number of
conditions, including Company B's need to arrange private equity financing to
complete the transaction. At a special telephonic board meeting on March 17,
1999, the Medical Graphics board of directors authorized the Medical Graphics'
officers to advise Company B that the offer was too low, but to continue to
negotiate with Company B.
On March 26, 1999, Manchester Companies, Inc., the parent of Manchester
Financial Group, Inc., entered into a 12-month agreement with Angeion pursuant
to which Manchester agreed to provide certain services to Angeion relative to
Angeion's financing and capitalization, management of expenses, restructuring of
obligations, financial and accounting support, and Nasdaq listing.
On April 23, 1999, Company B presented a revised "conditional offer" to
purchase Medical Graphics. The offer was subject to a number of conditions,
including Company B obtaining private equity financing to complete the
transaction. At a special telephonic board meeting held on April 30, 1999, the
Medical Graphics board discussed the revised conditional offer. In discussing
the offer, the board noted that Thermedics, Inc., a publicly held subsidiary of
Thermo Electron Corporation had announced that it had signed a non-binding
letter of intent to acquire Erich Jaeger GmbH & Co. Both Jaeger and
SensorMedics, another subsidiary of Thermo Electron Corporation, were
competitors of Medical Graphics and the merger would result in increased
consolidation in the industry. The board raised a number of issues that had to
be resolved, but directed the Medical Graphics officers, together with
Manchester and Goldsmith, to respond to Company B's proposal and to continue to
move forward.
On May 7, 1999, following an Angeion board meeting that Mr. Sheffert
attended in his capacity as a principal of Manchester, Mr. Sheffert talked
generally with Mr. James Hickey, the President and Chief Executive Officer of
Angeion, about various alternatives available to Angeion, including acquisition
candidates. In the course of the discussion, Mr. Sheffert mentioned the
possibility of an acquisition of Medical Graphics by Angeion, but the parties
did not engage in any detailed discussion of such a transaction.
On May 10, 1999, Mr. Jahnke had a previously-scheduled luncheon meeting
with Mr. Hickey during which they generally discussed both Medical Graphics' and
Angeion's prospects and general industry conditions and the general possibility
of combining the corporations, but did not engage in a detailed substantial
discussion regarding the combination.
On May 14, 1999, Medical Graphics reported a net profit of $3,000 on
revenues of $4,883,000 for the quarter ended March 31, 1999, its second
consecutive profitable quarter.
During the period from April 23, 1999 through May 27, 1999, Medical
Graphics, together with Goldsmith and Manchester, continued discussions with
Company B. At the May 27, 1999 board meeting, Mr. Sheffert reported that he
expected principals of Company B to meet with Mr. Sheffert and Mr. Jahnke in
early June 1999.
In May and June 1999, the Company also had very limited discussions with
Company C, a European medical device manufacturer, with respect to either making
an investment in or combining with Medical Graphics. On June 9 and 10, 1999,
representatives of Company C met with Mr. Jahnke and Mr. Sheffert in the Twin
Cities. On June 25, 1999, Company C sent to Manchester a letter expressing an
interest in combining Medical Graphics and Company C and proposing a preliminary
valuation. The valuation was significantly less than the valuation of Company B
and the valuation subsequently proposed by Angeion, and Medical Graphics did not
actively pursue the proposal.
On June 15 and 16, 1999, Mr. Sheffert and Mr. Jahnke met with
representatives of Company B in Minnesota. In connection with the meeting, Mr.
Sheffert advised Company B that Medical Graphics was also
12
<PAGE> 19
at various stages of discussions with other corporations. On June 17, 1999,
Medical Graphics held a special board meeting and representatives of Company B
made a presentation to the board. After the meeting with the representatives,
the Medical Graphics board authorized its management to enter into a non-binding
letter of intent with Company B. The letter anticipated that the companies would
move toward the execution of a definitive merger agreement, but the letter was
subject to a number of terms being finalized, including financing.
On June 28, 1999, Company B sent Medical Graphics a revised non-binding
proposal that included new terms, including a break-up fee and a period of
exclusivity.
On June 28, 1999, Mr. Jahnke and Mr. Sheffert discussed the possibility of
Mr. Jahnke and Mr. Hickey meeting to explore the possibility of combining
Medical Graphics and Angeion. Mr. Jahnke and Mr. Hickey then spoke by telephone
on that date regarding setting up a future meeting about combining Medical
Graphics and Angeion.
On June 29, 1999, following an Angeion board meeting that Mr. Sheffert
attended in his capacity as a principal of Manchester, Mr. Sheffert had a
substantive discussion with one of the directors of Angeion about the possible
acquisition of Medical Graphics by Angeion.
On June 30, 1999, Mr. Hickey and Mr. Jahnke met at Medical Graphics to
discuss future strategy and prospects for Medical Graphics with a view to
determining whether a possible acquisition of Medical Graphics by Angeion was in
the best interests of the two companies.
In July 1999, Medical Graphics terminated its December 1998 agreement with
Manchester and entered into an agreement dated July 1, 1999 with Manchester
Companies, Inc. that covered just a transaction with Angeion. Subsequent to the
execution of this agreement, Manchester and Medical Graphics prepared materials
for presentation to Angeion regarding a strategic acquisition of Medical
Graphics by Angeion. On July 20, 1999, Medical Graphics and Angeion entered into
a confidentiality agreement.
On July 22, 1999, Medical Graphics reported net income of $221,000 on
revenues of $5,548,000 for the quarter ended June 30, 1999, its third profitable
quarter in a row.
On July 23, 1999, at a regularly scheduled board meeting of Angeion,
Manchester provided the Angeion board with a presentation with respect to
Medical Graphics and its business and why an acquisition of Medical Graphics by
Angeion might make business sense for both companies.
On July 27, 1999 Mr. Hickey and Mr. Jahnke met at Medical Graphics' offices
to review the business and growth possibilities of a combined Medical Graphics
and Angeion.
On July 28, 1999, Mr. Hickey sent a letter to Medical Graphics stating that
Angeion was seriously interested in pursuing an acquisition of Medical Graphics
on certain proposed terms and wished to commence due diligence immediately.
At a regularly scheduled Medical Graphics board meeting on July 28, 1999,
Manchester reported on the developments with respect to Company B and Angeion.
Manchester reported to the board that Company B had agreed to some of the
Medical Graphics' requests and was requesting that Medical Graphics agree to a
standstill and break-up fee as a condition to moving forward. The board was
concerned that the proposed transaction was subject to a significant financial
contingency and that Company B had not yet conducted necessary due diligence on
Medical Graphics that might have the effect of delaying a transaction. The Board
authorized the officers of Medical Graphics to continue to discuss the possible
transaction with Company B, but also to inform Company B that Medical Graphics
was considering other alternatives.
In connection with these discussions and at the various board meetings,
Manchester disclosed to management of Angeion and Medical Graphics and to their
respective legal counsel and to the full board of directors of each corporation,
the nature of its relationship with the other corporation and potential
conflicts of interest as a result of this dual representation and that
Manchester was not acting as an adviser to Angeion in connection with any
Angeion-Medical Graphics transaction.
13
<PAGE> 20
At the July 28, 1998 board meeting, the Medical Graphics board authorized
Medical Graphics and Manchester to inform Angeion that Medical Graphics was
interested in the possible merger, pending negotiation of a definitive
agreement. Medical Graphics also advised Angeion that it was in discussions with
Company B, without disclosing the identity of Company B.
In light of Medical Graphics' continuing discussions with Company B and
Angeion, and the potential conflicts of interest that might arise with Mr.
Sheffert as the Chairman of Medical Graphics and a principal of Manchester, Mr.
Sheffert requested, and the board established a committee consisting of John
Penn, John Wunsch and Gerald T. Knight to serve as a special committee of the
board of directors with Mr. Penn as its Chairman (the "Special Committee"),
which had the power and authority to review and evaluate any proposed
transactions that the Special Committee believed may serve the best interests of
Medical Graphics and enhance shareholder value and to bring a recommendation to
the full board of directors with respect to whether to proceed with a
transaction with any of the strategic partners, or continue to follow Medical
Graphics' current business plan and maintain the continued independence of
Medical Graphics.
Simultaneous with Angeion's due diligence, Manchester continued to
negotiate with Company B with respect to its proposal. In mid-August 1999,
Company B informed Manchester that it would be willing to make certain
improvements to its merger proposal, but that it would also request Medical
Graphics enter into a "standstill" agreement requiring Medical Graphics to cease
negotiations with any other strategic parties. After speaking with members of
the Special Committee, Manchester requested that Company B present its new
proposal in writing.
During the period from July 28, 1999 to August 23, 1999, Mr. Hickey and
representatives of Angeion met with Mr. Jahnke and other officers of Medical
Graphics, and Angeion conducted due diligence regarding the possibility of an
acquisition of Medical Graphics by Angeion.
On August 6, 1999, Mr. Sheffert and Mr. Jahnke met with the Angeion board
of directors to present information regarding Medical Graphics' growth strategy
and how that strategy could be effectively implemented if Medical Graphics were
acquired by Angeion. During this period, the Special Committee also had
discussions with representatives of Angeion concerning the pricing of a possible
transaction with Angeion.
On August 23, 1999, Company B presented an updated written proposal for a
binding agreement between it and Medical Graphics. Company B did not present
Medical Graphics with a form of merger agreement.
On August 24, 1999, Angeion presented Medical Graphics with proposed terms
and conditions for its purchase of Medical Graphics and a form of merger
agreement at a price less than $2.15 per share. The Special Committee reviewed
both proposals and recommended that the board reject both proposals, but
continue discussions with both companies. On August 25, 1999, the Special
Committee indicated to Angeion that it did not believe Angeion's August 24, 1999
proposal would be acceptable to the Medical Graphics board, and on August 26,
1999, Angeion reconfirmed the terms of its proposal without change.
On August 27, 1999, the Medical Graphics board met to consider both
proposals. The board rejected both proposals for different reasons but indicated
that Medical Graphics was willing to continue discussions with both parties.
During the period from August 28, 1999 through September 3, 1999, members
of the Medical Graphics Special Committee met and spoke by telephone with
members of a committee authorized by the Angeion board to negotiate the
transaction. As a result of these discussions, on September 3, 1999, Angeion
provided Medical Graphics with a new proposal letter for the acquisition of
Medical Graphics by Angeion at a price of $2.15 per share, requesting a 10-day
exclusive period to negotiate a merger agreement.
On September 7, 1999, the Medical Graphics Special Committee recommended
that the board approve Angeion's proposal and move toward the negotiation of a
definitive agreement. At a telephonic meeting, the board agreed to move forward
to negotiate a definitive merger agreement on the terms proposed and agreed to
grant Angeion a 10-day exclusive period to negotiate a definitive merger
agreement.
During the period from September 7, 1999 through September 17, 1999,
Medical Graphics and Angeion negotiated the terms of a definitive merger
agreement. On September 17, 1999, the Medical Graphics board
14
<PAGE> 21
met and reviewed the revised merger agreement. The Medical Graphics board
determined that the terms and conditions of the merger were fair, from a
financial point of view, to the shareholders of Medical Graphics. After a review
of relevant legal considerations and other discussions among the Medical
Graphics board, the board voted unanimously to (i) approve the merger agreement,
(ii) authorize the execution of the merger agreement, subject to negotiation of
remaining issues identified by the Medical Graphics board, including termination
fees and expense reimbursement provisions, and (iii) subject to the resolution
of these issues, recommended that Medical Graphics shareholders approve and
adopt the merger agreement.
Between September 17, 1999 and September 22, 1999, representatives of the
parties met at various times to resolve these issues and on September 22, 1999,
the parties executed the merger agreement and other transaction documents.
MEDICAL GRAPHICS REASONS FOR THE MERGER
In reaching its determination that the merger is fair to, and in the best
interest of, Medical Graphics shareholders, and to recommend that Medical
Graphics shareholders vote to approve and adopt the merger agreement, the
Medical Graphics board and Special Committee considered a number of factors,
including the following:
- The Medical Graphics board and Special Committee considered the
information and presentations by Medical Graphics management, and its
legal advisors and Manchester concerning the terms of the merger and the
business, technology, products, operations, financial condition,
organizational structure and industry position of Medical Graphics, on
both a historical and prospective basis;
- The board and Special Committee noted the value to be received per share
of Medical Graphics common stock in the merger represented a premium over
the average closing sale price of Medical Graphics common stock for the
period from January 1999 through August 1999 and concluded that the price
was fair considering the levels at which its common stock had traded over
the past year;
- The board and Special Committee considered the prospects for Medical
Graphics' business, including the potential for further consolidation
within the industry and the need for substantial capital in order for
Medical Graphics to reduce debt and implement its growth plan, which
could result in substantial dilution to Medical Graphics' existing
shareholders;
- The board and Special Committee considered that, although Medical
Graphics had achieved profitability for three consecutive quarters, it
had losses of $8.4 million in 1996, $5.1 million in 1997 and $1.6 million
in 1998 and its stock price had fallen below $1.00 per share in late 1998
and early 1999;
- The board and Special Committee evaluated the financial condition,
results of operations, business and prospects of Medical Graphics,
including the increasingly competitive nature of the markets in which
Medical Graphics operated, the future prospects of Medical Graphics,
whether the merger consideration was fair and whether the time was
appropriate to engage in the proposed merger;
- The board and Special Committee concluded that there could be no
assurance that the price of the common stock would achieve the level
offered in the merger for a period of one year;
- The board and Special Committee considered that since October 1997, with
the assistance of legal and financial advisors, Medical Graphics had
thoroughly explored various alternatives to the proposed merger,
including remaining as an independent publicly held company, or merging
with or being acquired by other companies in its industry;
- The board and Special Committee also considered the fact that the
proposed merger would provide Medical Graphics with the capital to more
aggressively implement its growth strategy and would allow the current
Medical Graphics board to assist in implementation of the strategy
through representation on the Angeion board; and
15
<PAGE> 22
- The board and Special Committee also considered the fact that Angeion was
based in Minnesota and the proposed merger would enable Medical Graphics
to continue to operate its business without any anticipated layoffs.
The Medical Graphics board and Special Committee also took into account
negative factors associated with the merger including that as a result of the
merger, Medical Graphics shareholders would no longer participate in any future
growth and prospects of Medical Graphics. The Medical Graphics board and Special
Committee believed, however, that a sale of Medical Graphics under the terms of
the merger would achieve greater value at this time for the Medical Graphics
shareholders as compared with remaining a public company. The Medical Graphics
board and Special Committee concluded that the potential benefits of the merger
outweighed the negative factors.
The Medical Graphics board and Special Committee did not quantify or
otherwise assign relative weights to these factors or determine that any factor
was more important than another. Rather, the Medical Graphics board and Special
Committee made their recommendation based on the totality of the information
presented to and considered by them.
RECOMMENDATION OF THE BOARD OF DIRECTORS AND SPECIAL COMMITTEE OF MEDICAL
GRAPHICS
The Medical Graphics Special Committee and board have each unanimously
determined that the merger agreement is fair to and in the best interests of
Medical Graphics and its shareholders. Accordingly, the Medical Graphics Special
Committee and board have each unanimously approved the merger agreement and
recommend that Medical Graphics shareholders vote in favor of approval and
adoption of the merger agreement at the Medical Graphics special meeting.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
In considering the recommendations of the Medical Graphics Special
Committee and board, Medical Graphics shareholders should be aware that the
directors and executive officers of Medical Graphics may have interests in the
merger that are different from, or in addition to, the interests of Medical
Graphics shareholders generally, and that may create potential conflicts of
interest. The Medical Graphics Special Committee and board were each aware of
these interests and considered them, among other factors, in approving the
merger agreement. These interests are summarized below.
Ownership and Voting Stock
As of the record date, directors and executive officers of Medical Graphics
and their affiliates may be deemed to be beneficial owners of approximately
33.5% of the outstanding voting shares of Medical Graphics stock, including the
Class A stock, but excluding currently exercisable options and warrants, and
100% of the Class A stock. As a result of the merger, employee and director
options, whether or not then vested or exercisable, will be canceled in exchange
for a payment equal to the excess, if any, of $2.15 over the per share exercise
price of each outstanding option. Employees, including executive officers, with
amounts contributed to the Medical Graphics Employee Stock Purchase Plan will be
entitled to either (a) the issuance of Medical Graphics common stock under the
plan for a purchase price of $1.063 per share or (b) receive $1.087 for each
share of Medical Graphics common stock otherwise issuable under the plan and a
refund of amounts contributed ($1.063 per otherwise issuable share) by employees
under the plan and held by Medical Graphics. The officers and directors will be
entitled to receive cash payments upon consummation of the merger equal to
$5,149,151 in exchange for Medical Graphics stock and $587,678 in exchange for
the cancellation of options.
Employment and Severance Arrangements
Medical Graphics is a party to employment or severance agreements with
three executive officers of Medical Graphics: Richard E. Jahnke, Michael G. Snow
and Terrance J. Kapsen. Under these agreements, some terms of which are
substantially identical, if Medical Graphics is sold, merged, reorganized or
otherwise acquired at a time when the executive is still employed by Medical
Graphics, and if employment of any executive is terminated other than for
"cause," as defined in the employment or severance agreement, then
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such executive will be entitled to, in the case of Messrs. Snow and Kapsen, a
lump sum payment in the amount of such executive's salary for one year. For Mr.
Snow, the aggregate payment would be $132,000 and for Mr. Kapsen it would be
$138,000. In the case of Mr. Jahnke, the payment would be two times his gross
annual salary, or $480,000.
In connection with the execution of the merger agreement, Angeion required
that Mr. Jahnke agree to enter into a new employment agreement that will be
effective upon consummation of the merger. The new agreement will replace Mr.
Jahnke's existing agreement. Mr. Jahnke will become President and Chief
Executive Officer of Angeion. Mr. Jahnke's new employment agreement would
increase his base compensation to $265,000 from $240,000 and provides for annual
cash bonus compensation for each year up to a target of 35% of his annual salary
and an over-achievement bonus of up to an additional 35% of his annual salary.
Mr. Jahnke would also receive a restricted stock award of 20,000 shares of
Angeion common stock and options to purchase an additional 180,000 shares of
Angeion common stock at the closing bid price for Angeion's shares as reported
on September 22, 1999. Mr. Jahnke would also have a right to up to two times his
base salary in the event of a change in control of Angeion. Mr. Jahnke's
agreement to the terms of his employment was a condition to Angeion entering
into the merger agreement and his execution of the new employment agreement at
the closing is a condition to Angeion's obligation to close on the merger.
Agreements with Manchester
In January 1997, Medical Graphics retained Manchester Business Services,
Inc., an organizational renewal firm of which Mark W. Sheffert is Chairman, to
design and implement a restructuring plan. In connection with the engagement of
Manchester, Mr. Sheffert was elected as a director of Medical Graphics. On March
25, 1997, Mr. Sheffert became Chairman of the Board of Medical Graphics. Under
the Retainer Agreement executed with Manchester, as amended, Medical Graphics
agreed to pay Manchester a monthly fee of $20,000 in 1997 and $10,000 in 1998,
plus out-of-pocket expenses. The Retainer Agreement ended in December 1998.
Medical Graphics entered into a new agreement with Manchester in December
1998 under which Manchester agreed to provide investment banking services to
Medical Graphics, including services in connection with the possible merger,
sale or acquisition of Medical Graphics by a specified group of companies.
Medical Graphics agreed to pay Manchester $5,000 per month though May 1999 under
this Agreement. The agreement was terminated effective June 30, 1999 but
included a provision that entitled Manchester to a fee if a transaction was
consummated with any person contacted by Manchester and identified by Manchester
to Medical Graphics. In connection with Medical Graphics' decision to negotiate
with Angeion as a potential merger partner, Medical Graphics and Manchester
Companies, Inc. entered into a supplemental agreement dated July 1, 1999 that
covered just a transaction with Angeion. Manchester Business Services, Inc. was
a wholly-owned subsidiary of Manchester Companies, Inc., that has, in essence,
assumed the obligation of Manchester Business Services, Inc. Under the
agreement, Manchester is entitled to a success fee if Angeion acquires Medical
Graphics. Based on aggregate consideration to shareholders of approximately
$16.2 million, Manchester would be entitled to a success fee of approximately
$371,000. Manchester has agreed, however, that its fee in connection with the
transaction will be equal to $350,000, less Medical Graphics' expenses,
including legal, accounting, printing, broker's or finder's fees incurred in
connection with the transactions contemplated by the Merger Agreement.
Manchester also agreed to provide Medical Graphics with public relations,
shareholders communications and related services in 1999 for aggregate
compensation of $38,000, of which $20,000 had been prepaid as of December 31,
1998.
Manchester has also provided and is providing certain services to Angeion.
Angeion entered into a 12-month agreement with Manchester beginning on March 26,
1999, pursuant to which Manchester has provided and is providing, among others,
the following services: evaluating Angeion's financing and capitalization and
making recommendations for improvements; managing obligations to reduce monthly
expenses; developing a restructuring and reorganization strategy for Angeion;
and restructuring obligations owed to creditors. Manchester also provided under
the agreement general financial and accounting support functions for Angeion for
an interim period of time and worked with Angeion to maintain its Nasdaq listing
(in the context of Angeion's license and disposition of certain assets). The
agreement provides for compensation to
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Manchester of $22,500 per month in retainer fees, plus reimbursement of
out-of-pocket expenses. Manchester has not acted as a financial advisor to
Angeion in connection with the merger.
Indemnification and Insurance
Medical Graphics presently has directors' and officers' liability
insurance. Under the terms of the merger agreement, the surviving corporation is
required to maintain liability insurance for six years after the proposed merger
for any acts, errors or omissions by the directors and officers occurring prior
to the merger. Under the terms of the merger agreement, the surviving
corporation is obligated to indemnify and hold harmless each person who is now,
or has been at any time prior to the merger, an officer or director of Medical
Graphics to the extent provided under Medical Graphics articles and by-laws in
effect on the date of the merger agreement, but subject to any limitation under
applicable law.
Continuing Directors
Under the terms of the merger agreement, up to three directors of Medical
Graphics, including Mr. Jahnke, may become directors of Angeion.
TREATMENT OF MEDICAL GRAPHICS CLASS A STOCK IN THE MERGER AGREEMENT
It is a condition to the closing of the merger that all shares of Class A
stock will be converted to common stock. The holder of the Class A stock has
advised Medical Graphics that it intends to convert its Class A stock to common
stock immediately prior to the merger.
FINANCING FOR THE MERGER
Angeion intends to fund the merger consideration through current cash. At
September 22, 1999, Angeion had sufficient cash to finance the merger. In
September 1999, Angeion also entered into an agreement to grant Medtronic, Inc.
a non-exclusive license to all of Angeion's patents and patent applications for
cardiac stimulation devices. Angeion also agreed to sell to Medtronic its
unfiled patent disclosures for cardiac stimulation devices. In exchange, Angeion
will receive $9 million in cash from Medtronic. Closing of the Medtronic
transaction is subject to the approval of Angeion shareholders and noteholders.
On September 24, 1999, an action was commenced on behalf of the noteholders
alleging that an event of default has occurred under Angeion's indenture and
seeking, among other things, payment of 101% of the principal amount of the
notes (which payment would be $20,806,707 as of November 21, 1999) and to enjoin
Angeion from using its available cash for the merger. Angeion has advised
Medical Graphics that it does not believe that an event of default has occurred
and that it intends to vigorously defend this action.
ANTICIPATED ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for using the purchase method of accounting
for financial reporting purposes under U.S. generally accepted accounting
principles. Under this method of accounting, the aggregate consideration paid by
Angeion in connection with the merger will be allocated to Medical Graphics'
assets and liabilities based on their fair values, with any excess being treated
as goodwill. Goodwill from such an acquisition is generally amortized on a
straight-line basis over a period of time and is not deductible for federal
income taxes. The assets and liabilities and results of operations of Medical
Graphics will be consolidated into the assets and liabilities and results of
operations of Angeion from the date of the merger.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Upon consummation of the merger, each outstanding share of Medical Graphics
common stock (except for those shares with respect to which dissenters' rights
are perfected) will be converted into the right to receive $2.15 in cash,
without interest. The following discussion is a summary of the principal federal
income tax consequences of the merger to the shareholders of Medical Graphics
whose shares of common stock are surrendered pursuant to the merger (including
any cash amounts received by dissenting shareholders pursuant to the exercise of
dissenters' rights). The discussion does not purport to deal with all aspects of
federal income
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taxation that may affect particular shareholders in light of their individual
circumstances, and is not intended for shareholders subject to special treatment
under the federal income tax law, including insurance companies, tax exempt
organizations, financial institutions, broker-dealers, foreign persons,
shareholders who hold their stock as part of a hedge, appreciated financial
position, straddle or conversion transaction, shareholders who do not hold their
stock as capital assets and shareholders who have acquired their stock upon the
exercise of employee options or otherwise as consideration. In addition, the
discussion does not consider the effect of any applicable state, local or
foreign tax laws. The discussion is based upon current provisions of the
Internal Revenue Code of 1986, as amended, currently applicable treasury
regulations, and judicial and administrative decisions and rulings. Future
legislative changes, judicial administrative changes or interpretations could
alter or modify the statements and conditions set forth herein, and these
changes or interpretations could be retroactive and could affect the tax
consequences to the shareholders of Medical Graphics.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE INCLUDED FOR
GENERAL INFORMATION PURPOSES ONLY AND ARE BASED UPON PRESENT LAW. BECAUSE
INDIVIDUAL CIRCUMSTANCES MAY DIFFER, YOU ARE URGED TO CONSULT YOUR OWN TAX
ADVISOR TO DETERMINE THE APPLICABILITY OF THE RULES DISCUSSED BELOW TO YOU AND
THE PARTICULAR TAX EFFECTS OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT
OF STATE, LOCAL AND OTHER TAX LAWS.
The receipt of cash pursuant to the merger (including any cash amounts
received by dissenting shareholders pursuant to the exercise of dissenters'
rights) will be a taxable transaction for federal income tax purposes under the
Internal Revenue Code of 1986, as amended. In general, for federal income tax
purposes, a shareholder will recognize gain or loss equal to the difference
between the cash received by the shareholder pursuant to the merger agreement
and the shareholder's adjusted tax basis in the shares of common stock
surrendered pursuant to the merger agreement. Such gain or loss will be a
capital gain or loss. The rate at which any such gain will be taxed to
non-corporate shareholders (including individuals, estates and trusts) will, as
a general matter, depend upon each shareholder's holding period for the shares
of common stock at the effective time of the merger. If a non-corporate
shareholder's holding period for the shares of common stock is more than one
year, either a 20 percent or a 10 percent capital gains rate generally will
apply to such gain, depending on the amount of taxable income of such
shareholder for such year. If the shareholder's holding period for the shares of
common stock is one year or less, such gain will be taxed at the same rates as
ordinary income. Capital losses generally are deductible only to the extent of
capital gains plus ordinary income of up to $3,000 per year. Net capital losses
in excess of $3,000 may be carried forward to subsequent taxable years.
For corporations, capital losses are allowed only to the extent of capital
gains, and net capital gains are taxed at the same rate as ordinary income.
Corporations generally may carry capital losses back up to three years and
forward up to five years.
Payment in connection with the merger may be subject to "backup
withholding" at a 31% rate. Backup withholding generally applies if the
shareholder fails to furnish such shareholder's social security number or other
taxpayer identification number ("TIN"), or furnishes an incorrect TIN. Backup
withholding is not an additional tax but merely a creditable advance payment
which may be refunded to the extent it results in an overpayment of tax,
provided that specific required information is furnished to the Internal Revenue
Service. Certain persons generally are exempt from backup withholding, including
corporations and financial institutions. Certain penalties apply for failure to
furnish correct information and for failure to include reportable payments in
income. Shareholders should consult with their own tax advisers as to the
qualifications and procedures for exemption from backup withholding.
DELISTING AND DEREGISTRATION OF MEDICAL GRAPHICS COMMON STOCK
Medical Graphics common stock currently is listed for quotation on Nasdaq
under the symbol "MGCC." Upon consummation of the merger, Medical Graphics
common stock will be delisted from Nasdaq and deregistered under the Securities
Exchange Act of 1934. Following the merger, Medical Graphics shareholders will
be instructed to exchange their outstanding stock certificates for the merger
consideration. See "The Merger Agreement -- Procedures for Exchange of Stock
Certificates" on page 21.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement, a copy of which is attached as Appendix A to this document and is
incorporated in this document by reference. The summary is not complete and is
qualified in its entirety by reference to the merger agreement. We urge all
shareholders of Medical Graphics to read the merger agreement in its entirety
for a more complete description of the terms and conditions of the merger.
THE MERGER
The merger agreement provides that ANG Acquisition Corp., a wholly owned
subsidiary of Angeion, will be merged with and into Medical Graphics. At the
time of the merger, the separate corporate existence of ANG Acquisition Corp.
will cease and Medical Graphics will continue as the surviving corporation. The
merger will become effective at such time as articles of merger are filed with
the Secretary of State of the State of Minnesota or at such later time as may be
agreed to by the companies. The filing is expected to occur promptly after
approval of the merger agreement by the Medical Graphics shareholders at the
special meeting and satisfaction or waiver of the other conditions to the merger
contained in the merger agreement. Medical Graphics cannot assure that all
conditions to the merger contained in the merger agreement will be satisfied or
waived.
TREATMENT OF MEDICAL GRAPHICS SECURITIES
Treatment of Medical Graphics Class A Stock. It is a condition to the
merger that all shares of Class A stock be converted to common stock so that at
the time of the merger no shares of Class A stock will be outstanding.
Treatment of Medical Graphics Common Stock. At the time of the merger, each
issued and outstanding share of Medical Graphics common stock (other than shares
of common stock with respect to which dissenters' rights have been perfected)
will be converted into the right to receive $2.15 in cash without interest.
PROCEDURES FOR EXCHANGE OF STOCK CERTIFICATES
Angeion has designated Norwest Bank Minnesota, N.A. to serve as paying
agent and to exchange certificates representing Medical Graphics common stock
for the payment of merger consideration. As soon as reasonably practicable after
the merger, the paying agent will mail to each record holder of certificates
representing shares of Medical Graphics common stock, a letter of transmittal
and instructions for use in surrendering the certificates for payment. Holders
of certificates who surrender their certificates to the paying agent together
with a duly completed and validly executed letter of transmittal will receive
$2.15 in cash per share, without interest. The surrendered Medical Graphics
certificates will be canceled.
At the time of the merger, the stock transfer books of Medical Graphics
will be closed and there will be no further registration of transfers of shares
of Medical Graphics common stock on the records of Medical Graphics.
Six months after the merger, the surviving corporation can require the
paying agent to deliver to the surviving corporation all cash and other
instruments in its possession relating to the merger and which have not been
distributed. After such six month period, each holder of a Medical Graphics
certificate must look only to the surviving corporation for payment of the
consideration under the merger agreement.
The paying agent or the surviving corporation is entitled to deduct and
withhold from the consideration otherwise payable to any holder of Medical
Graphics common stock the amounts it is required to deduct and withhold under
the Internal Revenue Code or any provision of state, local or foreign tax law,
or any court order. Any amounts withheld will be treated as having been paid to
the holder of the shares of Medical Graphics common stock.
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If any Medical Graphics certificate is lost, stolen or destroyed, the
Medical Graphics shareholder must provide an appropriate affidavit of that fact.
The surviving corporation may require the owner of such lost, stolen or
destroyed Medical Graphics certificate to deliver a written indemnity agreement
and a bond as indemnity against any claim that may be made against the surviving
corporation with respect to the Medical Graphics certificate alleged to have
been lost, stolen or destroyed.
Medical Graphics shareholders should not send in their certificates until
they receive a letter of transmittal and instructions from the paying agent.
TREATMENT OF EMPLOYEE AND DIRECTOR OPTIONS, WARRANTS AND ACCRUED INTERESTS UNDER
MEDICAL GRAPHICS EMPLOYEE STOCK PURCHASE PLAN
As a result of the merger, employee and director options, whether or not
then vested or exercisable, will be canceled in exchange for a payment equal to
the excess, if any, of $2.15 over the per share exercise price of each
outstanding option. Warrant holders will be entitled to receive the excess, if
any, of $2.15 over the per share exercise price of each warrant. The total
payments with respect to canceled options and warrants will not exceed $830,256.
Employees with amounts contributed to the Medical Graphics Employee Stock
Purchase Plan will be entitled to either (a) the issuance of Medical Graphics
common stock under the plan for a purchase price of $1.063 per share or (b) the
receipt of $1.087 for each share of Medical Graphics common stock otherwise
issuable under the plan and a refund of amounts contributed ($1.063 per
otherwise issuable share) by employees under the plan and held by Medical
Graphics. Medical Graphics estimated that the total amount contributed through
October 2, 1999, the last date on which contributions were permitted, is
approximately $19,000.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties made by
Medical Graphics, relating to, among other things:
- required consents and approvals under any material contract of Medical
Graphics;
- compliance with laws, including health care laws;
- Medical Graphics' timely filing of all required reports, registrations
and statements required to be filed since January 1, 1997 with the SEC
and the accuracy of the information contained in those filings;
- absence of undisclosed liabilities;
- absence of material adverse changes of Medical Graphics since its June
30, 1999 balance sheet;
- litigation;
- taxes;
- employee benefit plans and employment matters;
- intellectual property;
- environmental matters;
- title to properties;
- permits and licenses;
- material contracts and absence of defaults;
- insurance;
- product warranties;
- business practices;
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- brokers', finders' and investment bankers' fees;
- transactions with affiliates;
- the vote of shareholders required to approve the merger; and
- the organization and capitalization of Medical Graphics and the ownership
and organization of its subsidiaries.
In addition, the merger agreement contains representations and warranties
made by Angeion relating to, among other things:
- organization;
- required consents and approvals;
- compliance with laws;
- litigation; and
- brokers', finders' and investment bankers' fees.
COVENANTS PENDING THE MERGER
Conduct of Medical Graphics Business. The merger agreement provides for
covenants pending the merger. Medical Graphics has agreed that until the merger,
Medical Graphics and its subsidiaries will:
- conduct business in the ordinary course consistent with past practice;
- use commercially reasonable efforts to preserve intact its business
organization and goodwill;
- use commercially reasonable efforts to keep available the services of its
present officers and key employees and persons having business
relationships with Medical Graphics;
- notify Angeion of any material litigation, complaints or adverse changes
to its business; and
- perform its obligations under contracts and agreements.
The merger agreement also restricts the ability of Medical Graphics and its
subsidiaries to:
- grant, confer or award any options or rights to equity securities;
- issue, sell, pledge, dispose of or encumber any capital stock, except
upon the exercise of outstanding options or upon conversion of the Class
A stock;
- merge, consolidate or enter into any business combination (other than the
merger with Angeion) or release or relinquish any contract rights or
sell, or make any acquisition or disposition of any assets, except in the
ordinary course of business and consistent with past practice and not
relating to the borrowing of money;
- amend its organizational documents;
- amend any existing or adopt any new employee benefit plan;
- split, combine or reclassify any capital stock, or declare, set aside or
pay any dividend, except for dividends by Medical Graphics' subsidiaries
to Medical Graphics;
- redeem, purchase or acquire or offer to acquire any of Medical Graphics
or its subsidiaries' capital stock;
- incur or guarantee any indebtedness or sell any debt securities or
warrants other than in the ordinary course of business and subject to
certain other limitations;
- make loans, advances or capital contributions to or investments in any
other person other than between or with Medical Graphics and any Medical
Graphics subsidiaries;
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- pay, discharge or satisfy any claims, liabilities or obligations other
than in the ordinary course of business consistent with past practice;
- materially change its practices with respect to taxes or change any
accounting practices;
- increase officer compensation or, except increases in accordance with
past practice that are not material, employee compensation;
- enter into any collective bargaining agreement;
- grant severance or termination pay to any employee; and
- make any capital expenditures in excess of $50,000 in the aggregate.
Medical Graphics further represents and warrants in the merger agreement
that none of Medical Graphics or any of its subsidiaries has any agreements or
understandings with any potential acquirer that would be violated or require any
payments by reason of the execution, delivery or consummation of the merger
agreement.
Further Negotiations. Medical Graphics has agreed to cease any existing
discussions or negotiations regarding any acquisition proposal concerning
Medical Graphics or its assets and to not directly or indirectly solicit,
initiate, take any action to facilitate or encourage any inquiries, proposals or
offers from or with any third party with respect to an acquisition proposal.
Medical Graphics has also agreed that it will not recommend, agree to or enter
into any acquisition proposal, enter into or continue any discussions or
negotiations, or grant any waiver under any standstill or similar agreement with
respect to Medical Graphics stock that it may have.
Medical Graphics may, however, in response to an unsolicited acquisition
proposal:
- furnish information pursuant to a confidentiality agreement no less
favorable to Medical Graphics than those contained in the confidentiality
agreement with Angeion;
- engage in discussions or negotiations with a third party that has made a
bona fide acquisition proposal; and
- withdraw or modify the board's recommendation of the merger agreement.
However, Medical Graphics may so respond in each case only if the Medical
Graphics board has concluded in good faith (a) on the basis of written advice
from outside counsel that such action is required to prevent a breach of the
board's fiduciary duties and (b) that such acquisition proposal is reasonably
likely to be consummated and would, if consummated, result in a more favorable
transaction than the merger.
The merger agreement provides that Medical Graphics will not take any
action with respect to an acquisition proposal unless Medical Graphics has given
Angeion reasonable notice of its intention to take such action and has informed
Angeion of the terms and conditions of the proposal and the identity of the
person making the proposal.
When used in this document, the term "acquisition proposal" means, with
respect to Medical Graphics, any bona fide inquiry, proposal or offer from any
party other than Angeion with respect to, or that could reasonably be expected
to lead to, any acquisition or purchase of 25% or more of the assets of Medical
Graphics or a 25% or more voting equity interest in stock of Medical Graphics,
including through a tender offer or exchange offer, or any merger,
consolidation, statutory share exchange, sale of substantial assets,
recapitalization or restructuring, or any other transaction which would be
reasonably expected to interfere with the merger.
Additional Agreements. Angeion and Medical Graphics have also agreed to,
among other things:
- cooperate with one another to prepare, file and furnish all necessary
information to obtain all approvals and authorizations of third parties
to any material agreements and any governmental authorities in connection
with consummation of the transactions contemplated by the merger
agreement; and
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- make such filings as may be required under the Hart-Scott-Rodino Act and
cooperate with each other and use reasonable efforts to obtain the
requisite approval of the Federal Trade Commission and the Justice
Department.
The parties have determined that no filing is required under the
Hart-Scott-Rodino Act.
CONDITIONS TO THE MERGER
The respective obligations of each party to effect the merger are subject
to the satisfaction or waiver of the following conditions:
- approval of the merger agreement by the Medical Graphics shareholders;
- any applicable waiting period under the Hart-Scott-Rodino Act shall have
expired or been terminated; and
- no judgment, injunction, order, or decree nor any provision of any
applicable legal requirement prohibiting or enjoining the consummation of
the merger shall exist.
The obligation of Angeion to consummate the merger is also subject to the
satisfaction or waiver of the following conditions:
- the representations and warranties of Medical Graphics set forth in the
merger agreement shall be true and correct in all material respects as of
the date of the merger agreement and as of the closing date;
- Medical Graphics shall have performed in all material respects its
agreements and covenants in the merger agreement;
- no action by any person to enjoin the transaction that could reasonably
be expected to materially damage Angeion or materially adversely affect
Medical Graphics;
- receipt of all third-party consents and approvals required to consummate
the transactions contemplated by the merger agreement;
- holders of not more than ten percent (10%) of the total outstanding
Medical Graphics stock shall have exercised dissenters' rights for their
shares under the Minnesota Business Corporation Act;
- no material adverse change (and no events or conditions which would
reasonably be expected to cause a material adverse change) shall have
occurred with respect to Medical Graphics since June 30, 1999;
- conversion of all outstanding shares of Class A stock to Medical Graphics
common stock;
- Richard Jahnke, president and chief executive officer of Medical
Graphics, will still be employed by Medical Graphics and not have given
any indication that he would not continue to be available to provide
services to Medical Graphics, and will enter into an employment agreement
with Angeion to take effect after the merger;
- up to three members of the Medical Graphics board of directors will have
agreed to serve on the Angeion board of directors after the merger; and
- Medical Graphics will provide evidence that its fees and expenses in
connection with the merger, including legal, accounting, printing,
broker's or finder's fees, will not exceed $350,000.
The obligation of Medical Graphics to consummate the merger is also subject
to the satisfaction or waiver by Medical Graphics of the following condition:
- the representations and warranties of Angeion set forth in the merger
agreement shall be true and correct in all material respects as of the
date of the merger agreement and as of the closing date, except that
those representations and warranties that address matters only as of a
particular date shall remain true and correct as of such particular date.
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TERMINATION
The merger agreement may be terminated at any time prior to the effective
time of the merger:
1. by mutual written consent of Medical Graphics and Angeion.
2. by Angeion or Medical Graphics:
- if the closing date of the merger shall not have occurred on or
before February 29, 2000, provided that the party seeking to
terminate shall not be in material breach of its obligations under
the merger agreement;
- if any of the conditions to the terminating party's obligation to
consummate the merger shall have become impossible to satisfy;
- if any law makes consummation of the merger illegal or if there is
any permanent judgment, injunction, order or decree enjoining a
party from consummating the merger which is final and
non-appealable; and
- if the Medical Graphics shareholders shall not have approved or
adopted the merger agreement at the Medical Graphics shareholders'
meeting or any adjournment of that meeting.
3. by Medical Graphics if Medical Graphics receives an unsolicited
proposal for the acquisition of Medical Graphics on financial terms more
favorable than the merger and the Medical Graphics board determines in good
faith to withdraw or modify its recommendation of the merger agreement and
the merger or its recommendation to the Medical Graphics shareholders to
approve the merger agreement, based upon the written advice of outside
counsel that such action is necessary to prevent breach of the board's
fiduciary duty, in order to execute a definitive acquisition agreement or
to approve a tender or exchange offer for the stock of Medical Graphics;
4. by Medical Graphics if a temporary or preliminary injunction is in
effect that prohibits or enjoins the merger in connection with certain
litigation brought on behalf of the holders of notes issued under Angeion's
indenture, if the injunction is in effect on (a) the later of the day
before the special meeting is scheduled to be held or, if requested by
Angeion, on the day before a rescheduled meeting at least 30 days after
adjournment or postponement of the originally scheduled special meeting or
(b) if the special meeting is held by Medical Graphics while an injunction
is in effect, if the closing of the merger is not effected within 30 days
after approval of the merger by Medical Graphics shareholders;
5. by Angeion:
- if the Medical Graphics board shall have withdrawn or materially
and adversely modified or amended its recommendation of the merger
agreement or the merger or its recommendation to the Medical
Graphics shareholders to approve the merger agreement;
- if the Medical Graphics board shall have recommended to the Medical
Graphics shareholders that they approve an acquisition proposal, as
defined in the merger agreement, other than contemplated by the
merger agreement or fails to reconfirm its recommendation of the
merger agreement within five business days of Angeion's request
that it do so;
- if the Medical Graphics board fails to recommend to the Medical
Graphics shareholders that they reject a third-party tender offer
or exchange offer which, if successful, would result in a person or
group becoming the beneficial owner of 25% or more of the Medical
Graphics common stock within 10 days of its commencement;
- if the Medical Graphics board fails to call and hold the Medical
Graphics shareholders meeting by February 29, 2000 or fails to
promptly mail to shareholders the special meeting proxy statement
or fails to include in such statement its recommendation for the
merger; or
- if Medical Graphics publicly announces its intention to do any of
the foregoing.
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If the merger agreement is terminated for any of the following reasons,
then Medical Graphics shall pay to Angeion a fee of $600,000, plus reimburse
Angeion's out-of-pocket fees and expenses up to $300,000:
- by Medical Graphics as provided in paragraph 3 above;
- by Angeion as provided in paragraph 5 above; or
- if (a) any third party not already a shareholder of Medical Graphics is
the beneficial owner of 25% or more of the outstanding common stock of
Medical Graphics at the time of termination or (b) within 18 months after
the merger agreement is terminated, Medical Graphics effects a
transaction, or enters into a definitive agreement with a third party to
effect a transaction, which would qualify as an "acquisition proposal"
under the merger agreement AND the merger agreement has been terminated
for any reason other than (1) by mutual agreement, (2) because of a
material breach by Angeion of its representations, warranties or
covenants, (3) because a judgment, injunction, order or decree is in
effect (except as a result of an act or omission of Medical Graphics)
that prohibits consummation of the merger, or (4) by Medical Graphics as
provided in paragraph 4 above.
In addition, if the merger agreement is terminated for any of the following
reasons, then Medical Graphics shall reimburse Angeion's out-of-pocket fees and
expenses up to $300,000 (but shall not pay the $600,000 fee except as provided
above):
- the closing of the merger has not occurred by February 29, 2000 either
because the required vote and approval of Medical Graphics shareholders
was not obtained or because more than 10% of Medical Graphics
shareholders properly exercised their dissenters' rights; or
- the representations and warranties of Medical Graphics were not true and
correct in all material respects or Medical Graphics did not perform all
of its covenants and agreements under the merger agreement.
If Medical Graphics terminates the merger agreement set forth in paragraph
4 above, Angeion must reimburse Medical Graphics for its expenses up to
$150,000.
DISSENTERS' RIGHTS
Under the Minnesota Business Corporation Act, the holders of Medical
Graphics stock are entitled to certain dissenters' rights with respect to the
merger. Angeion shall not be obligated to consummate the merger if the number of
shares of Medical Graphics stock for which dissenters' rights have been
exercised exceeds 10% of the shares of Medical Graphics common stock outstanding
immediately prior to the merger. The following is a summary of the rights of
Medical Graphics shareholders who dissent from the merger. It does not purport
to be complete and is qualified in its entirety by reference to Sections
302A.471 and 302A.473 of the Minnesota Business Corporation Act (the "Minnesota
Dissenters' Rights Statute," a copy of which is attached as Appendix B hereto).
Minnesota Dissenters' Rights Statute. Under the Minnesota Business
Corporation Act, Medical Graphics shareholders have the right to dissent from
the merger and, subject to certain conditions provided for under Minnesota law,
are entitled to receive payment of the fair value of their stock. Medical
Graphics shareholders will be bound by the terms of the merger unless they
dissent by complying with all of the requirements of the Minnesota Dissenters'
Rights Statute. Any Medical Graphics shareholder contemplating exercising the
right to demand such payment should carefully review the Minnesota Dissenters'
Rights Statute, a copy of which is included as Appendix B to this proxy
statement, and in particular the procedural steps. A MEDICAL GRAPHICS
SHAREHOLDER WHO FAILS TO COMPLY WITH THESE PROCEDURAL REQUIREMENTS MAY LOSE THE
RIGHT TO DISSENT.
Set forth below, to be read in conjunction with the full text of the
Minnesota Dissenters' Rights Statute, is a summary of the procedures relating to
the exercise of dissenters' rights by Medical Graphics shareholders.
Any Medical Graphics shareholder who wishes to dissent must deliver to
Medical Graphics, prior to the vote on the merger agreement, a written notice of
intent to demand payment for such shareholder's shares if the merger is
effectuated. In addition, such shareholder must not vote its shares of Medical
Graphics stock in
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<PAGE> 33
favor of the merger. A Medical Graphics shareholder who fails to deliver the
notice on time or who votes in favor of the merger agreement will not have any
dissenters' rights. If a Medical Graphics shareholder returns a signed proxy but
does not specify a vote against approval of the merger agreement or a direction
to abstain, the proxy will be voted for approval of the Merger Agreement, which
will have the effect of waiving such shareholder's dissenters' rights.
If the merger agreement is approved by Medical Graphics shareholders,
Medical Graphics is required to deliver a written dissenters' notice to all
Medical Graphics shareholders who gave timely notice of intent to demand payment
and who did not vote in favor of the merger agreement. The notice must (i) state
where the payment demand and certificates of certificated shares must be sent in
order to obtain payment and the date by which they must be received; (ii) inform
shareholders of uncertificated shares to what extent transfer of the shares will
be restricted after the payment is received; (iii) supply a form for demanding
payment and requiring the dissenting shareholder to certify the date on which
such shareholder acquired the shares of Medical Graphics stock; and (iv) be
accompanied by a copy of the Minnesota Dissenters' Rights Statute.
A shareholder who receives the dissenters' notice described above must
demand payment within 30 days following the date of notice, deposit such
shareholder's certificates of Medical Graphics stock and complete other
information as required by such notice. A shareholder who demands payment and
deposits its certificates of Medical Graphics stock as requested by the
dissenters' notice retains all other rights of a Medical Graphics shareholder
until such rights are canceled by the consummation of the merger. Medical
Graphics may restrict the transfer of uncertificated shares from the date of the
demand for payment until the merger is consummated; however, the holder of
uncertificated shares retains all other rights of a shareholder until those
rights are canceled by the consummation of the merger.
Except for shares of Medical Graphics stock acquired by a dissenter after
the date of the first announcement to the public of the merger, upon the
consummation of the merger or upon receipt of the payment demand (whichever is
later), Medical Graphics must pay each dissenter who complies with the foregoing
requirements the amount Medical Graphics estimates to be the fair value of the
dissenter's shares of Medical Graphics stock plus accrued interest. The payment
must be accompanied by certain financial information concerning Medical
Graphics, a statement of Medical Graphics' estimate of the fair value of the
shares, an explanation of the method used to reach the estimate, a brief
description of the procedure to be followed to demand supplemental payment and a
copy of the Minnesota Dissenters' Rights Statute.
A dissenter may notify Medical Graphics in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and the amount of interest
due, if different from Medical Graphics' estimate, and may demand payment of the
dissenter's estimate, by following the procedures set forth in the Minnesota
Dissenters' Rights Statute.
Any Medical Graphics shareholder contemplating the exercise of dissenters'
rights is urged to review the full text of the Minnesota Dissenters' Rights
Statute.
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<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
During 1996, Medical Graphics expanded its sales, marketing, and research
and development activities and retained new management personnel. This
expansion, in part, resulted in Medical Graphics reaching its borrowing base
limit on its credit line, entering into a forbearance agreement with its lender
and becoming unable to pay vendors' accounts payable when due, all of which
occurred during the fourth quarter of 1996. These events restricted Medical
Graphics' 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 Medical Graphics during the first quarter of 1997.
Subsequent to December 31, 1996, Medical Graphics retained Manchester
Business Services, Inc., to design and implement a restructuring plan with the
objective of reducing expenses and returning the company to profitability while
maintaining revenue levels. Under the restructuring plan, Medical Graphics
obtained a new line of credit, received $1,500,000 of cash from the issuance of
Class A stock, entered into agreements with vendors that provided 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%. Medical
Graphics obtained an additional $1,500,000 of cash from the issuance of common
stock on November 12, 1997 and $1,000,000 and $500,000 from the issuance of
common stock in January and February 1998, respectively. Additional common stock
was issued on September 30, 1998 for $300,000 in cash and conversion of $250,000
of accounts payable owed to a vendor. All issuances of common stock were
recorded net of related issuance costs. Other significant actions taken under
the restructuring plan included the following:
- Reduced the workforce in January 1997;
- Closed the unprofitable sales office in Duesseldorf, Germany;
- Sold the asthma business unit;
- Abandoned an effort to market Medical Graphics products to sports
medicine type customers; and
- Eliminated dependence on outside consultants.
These actions resulted in significant cost reductions for both 1997 and
1998 that are discussed below under "Results of Operations." At December 31,
1998, the balance sheet does not include any remaining liability associated with
these restructuring activities.
During 1997, Medical Graphics withstood the initial challenge of its
liquidity crisis and the ensuing disruptions associated with important
restructuring decisions and numerous personnel changes to generate total revenue
of $19,173,000, only 5.5% lower than 1996. In addition, Medical Graphics
improved gross margins to 37.6% in 1997 from 29.4% in 1996 while also reducing
total operating expenses by 22.4% to $12,115,000 in 1997 from $15,617,000 in
1996.
During 1998, Medical Graphics increased revenue by 6.7% to $20,449,000 on
the strength of domestic sales of its new cardiorespiratory diagnostic systems
and market share growth in the sleep disorder diagnostic systems. Medical
Graphics enjoyed a full year of selling its new sleep diagnostic systems after
first introducing them in September 1997. In addition, Medical Graphics began
selling two new pulmonary function products and software enhancements for
existing products late in the third quarter of 1998. Gross margins continued to
improve to 39.2% in 1998 from 37.6% in 1997 while operating expenses decreased
24.6% to $9,130,000 in 1998.
During the first nine months of 1999, Medical Graphics has experienced very
positive acceptance of its new cardiorespiratory diagnostic systems that began
shipping in the third quarter of 1998. Bottom line improvement has resulted from
Medical Graphics' continuing focus on improving efficiencies and profitability.
Gross margins have continued to improve due to value engineering and
manufacturing efficiency efforts along with favorable product mix changes.
Decreased operating expenses reflect steps taken to manage our infrastructure to
a level consistent with the size of our business.
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<PAGE> 35
The following discussion should be read in conjunction with Medical
Graphics' consolidated financial statements as of and for the years ended
December 31, 1998 and 1997 and its unaudited financial statements for the nine
months ended September 30, 1999 and 1998 included in this proxy statement.
RESULTS OF OPERATIONS
The following table presents selected financial data for the years ended
December 31, 1998 and 1997 and for the nine months ended September 30, 1999 and
1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
------------------ ------------------
1999 1998 1998 1997
------- ------- ------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................ $16,128 $14,680 $20,449 $19,173
Cost of goods sold.................................. 8,674 9,015 12,441 11,969
------- ------- ------- -------
Gross margin...................................... 7,454 5,665 8,008 7,204
Operating expenses.................................. 6,567 6,952 9,130 12,115
------- ------- ------- -------
Income (loss) from operations....................... 887 (1,287) (1,122) (4,911)
Interest expense.................................. (419) (312) (454) (329)
Gain on sale of assets............................ -- -- -- 128
------- ------- ------- -------
Income (loss) before income tax benefit............. 468 (1,599) (1,576) (5,112)
------- ------- ------- -------
Net income (loss)................................... $ 468 $(1,599) $(1,576) $(5,112)
======= ======= ======= =======
</TABLE>
REVENUE. For the nine months ended September 30, revenue increased 9.9% to
$16,128,000 in 1999 from $14,680,000 in 1998. Domestic revenue increased 14.5%
to $12,934,000 in 1999 from $11,299,000 in 1998. This growth is due to a 46.4%
increase in sales of cardiopulmonary products, including our new pulmonary
function testing systems and software upgrade products, offset by a 66.0%
decline in sales of sleep diagnostic systems. Internationally, year to date
revenue is down 10.6% on 1999 revenue of $1,750,000 compared to $1,958,000 in
1998 because of previous changes in our European distribution channels and a
stronger dollar versus other international currencies, offset by renewed
interest in our new pulmonary function testing systems. Service revenue
increased slightly to $1,444,000 in 1999 from $1,423,000 in 1998.
Total revenue increased 6.7% to $20,449,000 in 1998 from $19,173,000 in
1997. Domestic revenue increased 13.4% and service revenue increased 15.3% over
1997 to offset a 24.2% decline in revenue from international sources. Revenue
from domestic sales, international sources and service represented 77.4%, 13.1%
and 9.5% of 1998 revenue, respectively, compared to 72.8%, 18.4% and 8.8%,
respectively, for 1997.
The increase in domestic revenue was driven by both sales of pulmonary
diagnostics systems as well as strong sales of its new sleep diagnostic systems.
Medical Graphics introduced updated models of its pulmonary function systems in
September 1998 and initial results reflected strong customer interest in these
new products. In addition, Medical Graphics enjoyed revenue for all of 1998 from
its new diagnostics systems for sleep disorders that were introduced in late
September 1997.
International revenue for 1998 continued to be depressed from the closing
of Medical Graphics' German office at the end of 1996 as part of its overall
cost reduction strategy. In addition, international revenue has been impacted by
weaker economic conditions and a stronger dollar versus the local currencies.
GROSS MARGIN. For the nine months ended September 30, gross margin
percentage increased to 46.2% in 1999 from 38.6% in 1998. This margin increase
reflects Medical Graphic's continuing efforts to decrease its costs of
manufacturing through increased efficiencies and value engineering. In addition,
the period was favorably influenced by product mix changes from reduced sales of
lower margin sleep diagnostic systems and increased sales of higher margin
cardiopulmonary systems and software upgrade products.
The gross margin percentage increased to 39.2% of revenue in 1998 from
37.6% in 1997. This margin increase was achieved through manufacturing
efficiencies resulting from the 1997 adoption of a modified
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<PAGE> 36
version of cellular manufacturing under which major systems are produced in one
continuous process over a shorter period of time rather than producing several
subassemblies requiring longer throughput times. These process revisions not
only reduce manufacturing costs but require significantly lower levels of
inventory.
SELLING. For the nine months ended September 30, selling and marketing
expenses decreased 12.0% to $3,761,000 in 1999 from $4,275,000 in 1998. Reduced
headcount has led to lower personnel costs and reductions in travel expenses.
Those savings combined with reduced consulting costs and lower expenses
associated with trade shows have resulted in reductions aggregating $611,000,
which is offset by a $42,000 increase in commissions. These overall decreases
are the result of cost containment measures implemented during the last half of
1998.
Selling and marketing expenses decreased 10.0% to $5,653,000 in 1998 from
$6,282,000 in 1997. Selling expenses as a percent of revenue decreased to 27.6%
in 1998 compared to 32.8% in 1997. Increased commissions of $245,000 on higher
domestic revenue and increased expenses associated with expanding Medical
Graphics domestic sales force were offset by savings related to the following
actions. Medical Graphics saved $348,000 due to its 1997 decision to sell the
asthma business unit and reduce its focus on the sports medicine market.
Moreover, nearly $500,000 in savings resulted from reductions of marketing
costs, primarily personnel and related travel.
GENERAL AND ADMINISTRATIVE. For the nine months ended September 30, general
and administrative expenses increased by 13.6% to $1,670,000 for 1999 from
$1,470,000 in 1998. Medical Graphics incurred an aggregate increase of $388,000
through higher personnel costs, depreciation expenses, professional fees and a
higher provision for doubtful accounts. These increases were offset by decreases
in consulting expenses and travel expenses aggregating $176,000.
General and administrative expenses decreased 13.5% to $1,927,000 in 1998
from $2,228,000 in 1997. As a percent of revenue, general and administrative
expenses decreased to 9.4% in 1998 compared to 11.6% in 1997. This decrease
reflects lower consulting and bank refinancing expenses associated with 1997
restructuring activities along with a $145,000 decrease in the provision for
doubtful accounts receivable.
RESEARCH AND DEVELOPMENT. For the nine months ended September 30, research
and development expenses decreased 5.9% to $1,136,000 in 1999 from $1,207,000 in
1998. For the years ended December 31, research and development expenses
decreased 17.0% to $1,550,000 in 1998 from $1,867,000 in 1997 and as a
percentage of revenue decreased to 7.6% in 1998 from 9.7% in 1997. Medical
Graphics continues to use in-house software engineers rather than independent
software contractors as part of the Company's transition of its product software
to a Windows 98(R) platform. Additionally, the 1998 costs associated with
re-engineering the Company's pulmonary testing hardware were not incurred in
1999.
INFREQUENT CHARGES. Infrequent expenses of $1,738,000 for the year ended
December 31, 1997 represented expenses associated with the cost reduction
strategies implemented in the first quarter of 1997. Each component is described
and quantified in the following table.
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- ----------
<S> <C>
Professional fees........................................... $ 239,000
Consulting expenses:
Stock granted to Mr. Sheffert............................. 101,000
Warrants and options granted to Mr. Sheffert and a former
chairperson............................................ 429,000
Manchester Business Services, Inc. fees................... 243,000
Terminated 31 employees..................................... 344,000
Terminated 2 officers....................................... 382,000
----------
TOTAL..................................................... $1,738,000
==========
</TABLE>
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Professional and consulting fees included legal, accounting and other
consulting expenses associated with development and implementation of the
Company's restructuring activities. The amounts listed for terminated employees
and officers represent their respective severance costs. These terminations
included 7 employees in Germany and 26 employees in the United States.
The stock granted to Mr. Sheffert was valued at $2.25 per share, the
closing price of Medical Graphic's stock on the grant date. The options granted
to Mr. Sheffert were valued using the Black Scholes model. Warrants granted to
Mr. Sheffert and a former chairperson of the board were also valued using the
Black Scholes model.
NET INTEREST EXPENSE. Medical Graphics incurred net interest expense of
$419,000 in the nine months ended September 30, 1999 compared to $312,000 in the
nine months ended September 30, 1998 and incurred interest expense of $454,000
in 1998 compared to $329,000 in 1997. The increases resulted from increased
interest payments associated with higher levels of borrowings.
GAIN ON SALE OF ASSETS. In 1997, Medical Graphics sold certain assets of
its asthma line of business for approximately $144,000, which resulted in a gain
of $128,000.
INCOME TAX BENEFIT. Medical Graphics recognized no income tax benefit for
1999, 1998 or 1997 because Medical Graphics has established a valuation
allowance that completely offsets the benefit of any net operating loss
carryforwards due to uncertainty regarding the realization of future income tax
benefits.
NEW ACCOUNTING STANDARDS
Medical Graphics adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," effective January 1, 1998. SFAS No. 130 requires the disclosure of
comprehensive income and its components in the general-purpose financial
statements. The adoption by Medical Graphics of SFAS No. 130 has not had a
material effect on Medical Graphics' financial statements. Total comprehensive
income (loss) for the nine months ended September 30, 1999 and the twelve months
ended December 31, 1998 and 1997 was equivalent to the net income (loss) as
reported.
Medical Graphics also adopted (SFAS) No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective January 1, 1998. SFAS No.
131 redefines how operating segments are determined and requires disclosures of
certain financial and descriptive information about a Company's operating
segments. This statement does not have a material impact on results of
operations or financial position.
INFLATION
Medical Graphics believes that inflation did not have a significant impact
on its operations in the first nine months in 1999 or in 1998 or 1997.
LIQUIDITY AND CAPITAL RESOURCES
Medical Graphics had cash of $117,000 and working capital of $1,909,000 as
of September 30, 1999, compared to no cash and working capital of $1,212,000 as
of December 31, 1998. In addition, on September 30, 1999, Medical Graphics had a
balance outstanding under its bank line of credit of $3,595,000 and additional
availability of $453,000.
During the nine months ended September 30, 1999, Medical Graphics generated
$73,000 of cash from operating activities. Principal sources of cash included
net income before depreciation and amortization of $999,000 and a $694,000
decrease in accounts receivable. Uses of cash included an increase of $632,000
in inventory and a $1,024,000 decrease in accounts payable and accrued expenses.
We used $300,000 for investing activities, consisting of software production
costs of $281,000 and capital expenditures of $19,000. Medical Graphics
generated $344,000 from financing activities, primarily from $304,000 in net
borrowings under its line of credit.
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<PAGE> 38
During the nine months ended September 30, 1998, the Company used
$2,536,000 of cash in operating activities, primarily resulting from a net loss
of $1,599,000, increases of $267,000 in accounts receivable and $463,000 in
inventory and a decrease of $956,000 in accounts payable and accrued expenses.
The Company used $279,000 for investing activities, consisting of software
production costs of $256,000 and capital expenditures of $23,000. The Company
generated $2,428,000 from financing activities, primarily from $2,169,000 in net
proceeds from the private placement of its common stock and net borrowings of
$259,000 under its line of credit.
At September 30, 1999 Medical Graphics had no material commitments for
capital expenditures.
Medical Graphics 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 1999.
At September 30, 1999, Medical Graphics had a bank working capital line of
credit that provides for total borrowings of up to $4,100,000, based on
available collateral, at the discretion of the lender and expires March 31,
2000. On October 13, 1999, Medical Graphics amended its line of credit agreement
to increase the maximum amount to $4,500,000 and provide for additional working
capital. At September 30, 1999, Medical Graphics' total borrowings under the
line of credit were $3,595,000. Medical Graphics is dependent upon this credit
facility to meet its working capital requirements. Borrowings under the credit
agreement are secured by all of the assets of Medical Graphics. The credit
agreement contains covenants that require that Medical Graphics achieve and
maintain net worth and net income requirements.
The bank has the ability to accelerate the debt in the event Medical
Graphics defaults on the bank loan. The credit agreement limits Medical
Graphics' annual capital expenditures, which were set at $250,000 for 1999.
Medical Graphics is also required to obtain the bank's consent before paying any
dividends. Medical Graphics was unable to comply with all the 1998 net worth and
net income requirements stated in the credit agreement twice in 1998 and amended
its credit agreement to waive noncompliance and establish new requirements. At
September 30, 1999, Medical Graphics was in compliance with all covenants under
the amended line of credit agreement.
YEAR 2000
Medical Graphics is taking appropriate steps to ensure that its computer
systems will properly recognize date sensitive information when the year changes
to 2000 or "00." Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. Medical Graphics has been
evaluating its systems and those of its third party business partners through a
detailed formal process since March 1998. All significant systems have been
tested and all major issues have been addressed. Medical Graphics is also
communicating with key suppliers and vendors to coordinate their Year 2000
compliance. Costs associated with Medical Graphics Year 2000 issues are expected
to total approximately $180,000. Medical Graphics believes this estimate is
reasonable and within its fiscal 1999 budget.
Medical Graphics believes that the Year 2000 issue will not pose
significant operational problems for Medical Graphics and, therefore, will not
have a significant impact on the operations of Medical Graphics. The highest
risk area for Medical Graphics related to the Year 2000 issue is noncompliance
by third parties and related disruptions in supply chains. At this time, Medical
Graphics believes these risks have been adequately addressed but is presently
formulating contingency plans in the event that they are not.
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INFORMATION CONCERNING MEDICAL GRAPHICS
GENERAL OVERVIEW
Medical Graphics designs products and related software that assist health
care professions in the prevention, early detection and cost-effective treatment
of heart and lung disease and the evaluation of sleep disorders. Medical
Graphics' pulmonary products consist of breath analysis technology integrated
with a computer and software. Medical Graphics' sleep diagnostic products
consist of a recording system integrated with a computer and software. The
pulmonary systems are marketed worldwide while the sleep diagnostic systems are
marketed in the United States. More than 3,800 Medical Graphics systems have
been sold to customers for use in 45 countries.
PRIMARY PRODUCTS
PULMONARY FUNCTION TESTING SYSTEMS. Pulmonary function testing helps health
care professionals diagnose lung diseases, such as asthma and emphysema, and
manage treatment of their patients. Pulmonary function testing 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 responses to therapy.
Medical Graphics pulmonary function testing systems are operated with
Medical Graphics' proprietary BreezePF Windows 95 software, which is designed to
operate in a simple, easy-to-use manner. These pulmonary function testing
systems are sold under the Profiler name.
The Medical Graphics pulmonary function products use a patented "expert
system" to assist physicians in the interpretation of patient test results.
Medical Graphics pulmonary function products also use the preVent pneumotach, a
patented disposable mouthpiece/flow device that helps prevent the transmission
of infectious diseases. The preVent gives all Medical Graphics products the
capability to perform spirometry, which measures the flow rates and pressures
inside a person's lungs.
Additional capabilities are available with the Profiler Series systems.
- The Profiler DL performs spirometry and also measures how efficiently the
lungs diffuse certain gases. The Profiler measures this lung function by
using a gas chromatograph which measures gas concentrations before the
patient breathes the gas in and after the patient breathes the gas out.
This is referred to as diffusion testing.
- The Profiler DX has all the abilities of the Profiler DL, plus the
ability to measure the volume of air the lungs breathe in and out. This
is done with a patented nitrogen analyzer that measures the amount of
nitrogen in a person's breath.
The Profiler systems' compact design and mobility option attract a wide
variety of customers, including pulmonary laboratories in hospitals, office
based clinics, occupational medicine clinics, asthma centers and clinical
research centers.
BODY PLETHYSMOGRAPH SYSTEMS. The Elite Series are Medical Graphics' body
plethysmograph systems. A body plethysmograph is an enclosed metal and clear
acrylic chamber that offers the most sensitive method for measuring lung
function. The patient sits inside the chamber and undergoes diagnostic pulmonary
function tests.
- The Elite D performs spirometry and measures the total volume of air and
the resistance in a person's lungs.
- The Elite DL performs the same tests as the Elite D, and performs the
diffusion test the same way as the Profiler DL.
- The Elite DX performs all the same tests as an Elite DL, and performs the
lung volume test the same way as the Profiler DX.
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The Elite Series systems applications include diagnosing lung diseases and
managing their treatment, assessing the surgical risk of lung transplant and
lung reduction candidates and evaluating the impact of diseases, such as
neuromuscular disease, on breathing. The system's design optimizes patient
comfort with a clear-view acrylic enclosure and allows testing of a broad
population including pediatric patients and individuals in wheelchairs.
CARDIOPULMONARY EXERCISE TESTING SYSTEMS. Medical Graphics' cardiopulmonary
exercise testing systems measure fitness or conditioning levels as well as help
physicians diagnose heart and lung diseases. They do this by measuring the
concentrations of the oxygen and carbon dioxide in a person's lungs and how the
concentrations change as a person exercises on a bike or treadmill. They can
also measure the gas concentrations of a person at rest to determine nutritional
requirements of burned or critically ill patients. This measurement method is
called the nutrition or MAX option. The systems measure the gas concentrations
of every breath using a patented breath by breath methodology. The
cardiopulmonary systems use the same patented preVent pneumotach as the
pulmonary function testing systems and also include a patented oxygen analyzer
and a carbon dioxide analyzer.
The cardiopulmonary testing systems are sold in several different
configurations.
- The basic exercise testing system is a CPX/D which measures patient
fitness levels while exercising.
- The basic nutrition assessment system is a CCM/D which measures the basic
nutritional requirements of a patient at rest.
- A CPX/MAX/D is a CPX/D with the nutrition option added.
- A CardiO2 is a CPX/D with a 12-lead electrocardiogram stress option
added. The electrocardiogram, which measures heart functions, is
generally referred to as an ECG.
- A CardiO2/MAX/D is a CPX/D with a 12-lead ECG and the Nutrition option.
- A CPX Express is a smaller version of the CPX/D designed for use in a
physician's office. Like the CPX/D, it can be used with a nutrition
option and/or interfaced with a 12-lead ECG system.
The CPX/D and CPX Express can also be used in conjunction with other
manufacturer's stand-alone ECG systems.
Applications for the cardiopulmonary systems include distinguishing between
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. Medical Graphics holds
several patents relating to data reporting, including two expert system software
packages for evaluating the information. Customers include hospital
cardiopulmonary laboratories, cardiology and pulmonary office-based clinics,
critical care units, cardiac rehabilitation units, human performance
laboratories and health clubs.
All Medical Graphics' cardiorespiratory and sleep diagnostic systems use an
IBM compatible computer with a Pentium processor, a full color monitor, a
printer and other peripherals.
CYCLE ERGOMETERS. Medical Graphics 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 that can operate at a broad
spectrum of resistance levels. Medical Graphics has two models of cycle
ergometers that are used in diagnostic, rehabilitation, training and sports
medicine applications. The ergometers are used and controlled by Medical
Graphics' cardiopulmonary exercise testing systems. These ergometers are
purchased through a third party.
SLEEP DIAGNOSTICS SYSTEMS. The clinical assessment of sleep disorders, such
as sleep apnea, restless leg syndrome and sleep seizures is performed with
polysomnography, which literally means making many recordings during sleep.
Although Polysomnography is most commonly performed in a sleep lab, with
technologies such as the P-Series portable recorder, sold by Medical Graphics,
the testing can now be performed in remote clinics or the home of the patient.
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The all-night polysomnograph recording typically requires electrodes be
placed on the head to measure brain activity, eye movement and muscle tension in
the chin. The measurement of brain activity is called an Electroencephalogram,
often referred to as an EEG. Electrodes are also applied to monitor ECG. In
addition, respiration, leg movements and body position are monitored with
specially developed sensors. From the records of all these physiologic signals,
the clinician can determine the different stages of sleep, the number and
duration of any abnormal breathing events, and any other unusual activity that
the patient may experience during sleep.
The diagnostic sleep systems that are sold by Medical Graphics include
software and hardware technology to help the technician and clinician gather,
analyze and report the results from all-night recordings accurately and
efficiently. The sleep diagnostic systems sold by Medical Graphics are
manufactured by Compumedics Sleep Pty Ltd, an Australian corporation.
In April 1997, Medical Graphics and Compumedics entered into a three year
original equipment manufacturer distribution agreement in which Compumedics
granted Medical Graphics non-exclusive rights to promote, market and distribute
Compumedics diagnostic sleep systems in the United States under the MedGraphics
label. Under the terms of the Agreement, Medical Graphics is required to supply
a product manager for the Compumedics account, as well as make quarterly reports
on its actual marketing and sales activity. Medical Graphics is also responsible
for payment of all applicable United States import duties for all products and
service parts ordered. Additionally, the Agreement requires Medical Graphics to
inform Compumedics in writing 120 days prior to the effective date of any
agreement for additional sleep diagnostic products, giving Compumedics the
opportunity to provide a comparable product, if it so decides. Compumedics'
obligations under the Agreement include providing marketing and service training
to Medical Graphics' designated personnel, promotional materials, FDA
documentation and notice of any adverse events that may effect the sale or
recall of the products. The Agreement contains additional customary provisions
regarding (i) the use and disclosure of proprietary information during and after
the termination of the Agreement, (ii) the intellectual property rights of
Compumedics, its products and future products, (iii) warranties of Compumedics
products, (iv) mutual indemnification, and (v) regulatory compliance. After its
original term, the Agreement automatically renews annually unless terminated by
either party by giving notice.
The parties modified the Agreement in December 1997 with a Memorandum of
Understanding ("MOU") to expand Medical Graphics' rights to cover an additional
Compumedics product line. Collectively, the Agreement and MOU have been
subsequently amended on several occasions to reflect changes to various
provisions, including those related to pricing and obligations upon termination.
Although sales of sleep diagnostic systems accounted for more than ten percent
of revenues in 1998, there can be no assurance that sales of sleep diagnostic
systems will be a significant component of product sales in future years.
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 Medical Graphics', 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 industry for companies selling cardiopulmonary diagnostic systems and
sleep disorders diagnostic systems is competitive. Medical Graphics' competitors
include large medical companies, some of which have greater financial and
technical resources and broader product lines than us. Medical Graphics believes
that the principal competitive factors in its markets are product features,
price, quality, customer service, performance, market reputation, breadth of
product offerings and effectiveness of sales and marketing efforts.
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<PAGE> 42
Medical Graphics' 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. There are a number of companies that currently offer, or are in the
process of developing, products that compete with products offered by Medical
Graphics. Some of these competitors may have greater capital resources, research
and development staffs and experience in the medical device industry, including
experience with respect to regulatory compliance in the development, manufacture
and sale of medical products similar to those offered by Medical Graphics.
Medical Graphics believes the principal competitors for its traditional products
are SensorMedics Corporation, a subsidiary of Thermo Electron Corporation and
Erich Jaeger, a subsidiary of Thermedics, which is a publicly-traded subsidiary
of Thermo Electron Corporation.
Medical Graphics believes that its principal competitors in the sleep
diagnostic market are SensorMedics, Healthdyne Technologies, Inc. and Nellcor
Puritan Bennett. There can be no assurance that some of these competitors will
not succeed in developing technologies and products that are more effective than
those currently used or produced by Medical Graphics or that would render some
products offered by Medical Graphics obsolete or non-competitive.
Competition based on price is expected to become an increasingly important
factor in customer purchasing patterns as a result of cost containment pressures
on, and consolidation in, the health care industry. This competition has
exerted, and is likely to continue to exert, downward pressure on the prices we
are able to charge for our products. There can be no assurance that we will be
able to offset such downward price pressure through corresponding cost
reductions. Any failure to offset such pressure could have an adverse effect on
Medical Graphics' business, results of operations or financial condition.
MARKETING AND DISTRIBUTION
Medical Graphics markets its products in the United States through a direct
sales force that targets customers located in hospitals, university-based
medical centers and office-based clinics. Each salesperson is responsible for a
specific geographic area and sells Medical Graphics' complete product line to
customers, including hospitals and office-based physicians, within that area.
Company salespersons are compensated with a base salary, expenses and a
revenue-based commission.
Medical Graphics markets its products outside the United States through
sales organizations that operate primarily as distributors. During 1998, Medical
Graphics used approximately 33 international sales organizations to sell its
products into 45 countries. These organizations typically carry a limited
inventory of our products and sell our systems in specific geographic areas,
generally on an exclusive basis. International sales accounted for 13.1% and
18.4% of total sales in 1998 and 1997, respectively. All of Medical Graphics'
international sales are made on a United States dollar-denominated basis to
distributors. For this reason, Medical Graphics does not believe that the impact
of the conversion by eleven member states of the European Union to a common
currency, the "euro," will be material to its business or financial condition.
Sales into foreign countries involve certain risks not ordinarily
associated with domestic business including fluctuations in exchange rates even
when product sales are denominated in dollars, reliance on distributors and
fluctuations in sales resulting from changes in local economies.
Medical Graphics 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 Medical Graphics web site (www.medgraph.com).
RESEARCH AND DEVELOPMENT
Research and development expenses for 1998 reflected extensive efforts to
convert our products to the Windows 95/98 platform. Two new Windows 95/98
pulmonary function software products were introduced during 1998. Initial
releases of the Windows-based gas exchange product line software is expected to
be
36
<PAGE> 43
introduced by the end of 1999. Medical Graphics expects to complete conversion
of its remaining software programs to a Windows platform during the year 2000.
In addition, Medical Graphics is continuing to add product improvements designed
to enhance product reliability and improve margins. Medical Graphics is also
developing new products targeted for new growth markets. Medical Graphics
believes ongoing research and development efforts have been and will remain
important to its continuing success. Research and development expenses were
$1,550,000 in 1998 compared to $1,867,000 in 1997.
MANUFACTURING
Medical Graphics currently manufactures and assembles all major analyzer
components of its pulmonary 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. Medical Graphics also acquires general purpose computers, monitors and
printers from a variety of sources and integrates its proprietary transducer
modules into these systems. Medical Graphics acquires its ergometers and the
hardware and software for its sleep diagnostic systems from third parties.
Although some of Medical Graphics' components are purchased from only one or a
limited number of suppliers, Medical Graphics 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.
During 1997, Medical Graphics began to convert to a modified form of
cellular manufacturing, a process that has continued into 1999. Cellular
manufacturing utilizes an employee team to plan and schedule production,
manufacture the product and ensure the achievement of quality standards. This
process facilitates faster throughput of manufactured product and requires lower
inventory support levels. Medical Graphics has already benefitted from
continually improving manufacturing efficiencies.
GOVERNMENT REGULATION
Products manufactured by Medical Graphics are "devices" as defined in the
Federal Food, Drug and Cosmetic Act (the "Act") and are subject to regulatory
authority of the Food and Drug Administration ("FDA"), which regulates the
manufacture, distribution, related record keeping, labeling and advertising of
such devices. Following the enactment of the Medical Device Amendments to the
Act in May 1976 (the "Amendments"), the FDA classified medical devices in
commercial distribution into one of three classes, Class I, II or III. This
classification is based on the controls necessary to reasonably ensure the
safety and efficacy of medical devices. Many Class I devices have been exempted
from pre-market notification requirements by the FDA. These products can be
adequately regulated by the same types of controls the FDA has used on devices
since the passage of the Act in 1938. These "general controls" include
provisions related to labeling, producer registration, defect notification,
records and reports and good manufacturing practices. The good manufacturing
practice regulation has been recently replaced by a more comprehensive Quality
System Regulation ("QSR"). As noted below, QSRs include implementation of
quality assurance programs, written manufacturing specifications and processing
procedures, written distribution procedures and record keeping requirements.
Class II devices are products for which the general controls of Class I
devices are deemed not sufficient to assure the safety and effectiveness of the
device and thus require special controls. Special controls for Class II devices
include performance standards, post-market surveillance and the use of FDA
guidelines. Standards may include both design and performance requirements.
Class III devices have the most restrictive controls and require pre-market
approval by the FDA. Generally, Class III devices are limited to
life-sustaining, life-supporting or implantable devices. All of Medical Graphics
products are Class II devices.
Section 510(k) of the Act requires individuals or companies manufacturing
medical devices intended for use with humans to file a notice with the FDA at
least 90 days before introducing a product not exempted from notification
requirements into the marketplace. The notice (a "510(k) Notification") must
state the class in which the device is classified and the action taken to comply
with performance standards or pre-market approval that may be needed if the
device is a Class II or Class III device, respectively. Under
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<PAGE> 44
Section 510(k), a medical device can be marketed if the FDA determines that the
device is substantially equivalent to similar devices marketed prior to May 28,
1976. In the past, Medical Graphics has filed notifications with the FDA of its
intent to market its systems pursuant to Section 510(k) of the Amendments, the
FDA subsequently cleared these systems for commercial sale and Medical Graphics
is now marketing the devices under Section 510(k). The action of the FDA does
not, however, constitute approval by the FDA of Medical Graphics' products or
pass upon their safety and effectiveness.
In addition to the requirements described above, the Act requires that all
medical device manufacturers and distributors register with the FDA annually and
provide the FDA with a list of those medical devices that they distribute
commercially. The Act also requires that all manufacturers of medical devices
comply with labeling requirements and manufacture devices in accordance with
QSRs. QSRs require that companies manufacture their products and maintain their
documents in a prescribed manner with respect to manufacturing, testing and
quality control. In addition, these manufacturers will be subject to inspection
on a routine basis for compliance with the QSRs. The FDA's Medical Device
Reporting regulation requires that companies provide information to the FDA on
death or serious injuries alleged to have been associated with the use of their
products, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. The FDA further
requires that certain medical devices not cleared with the FDA for marketing in
the United States meet specific requirements before they are exported. Medical
Graphics is registered as a manufacturer with the FDA and successfully passed an
FDA audit in 1998 with no negative observations.
If Medical Graphics does not comply with applicable regulatory
requirements, including marketing products only for approved uses, it could be
subject to fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the government to grant
premarket clearance or premarket approval for products, withdrawal of approvals
and criminal prosecution. In addition, changes in existing regulations or
adoption of new governmental regulations or policies could prevent or delay
regulatory approval of our products or result in increased regulatory costs.
Furthermore, once clearance or approval is granted, subsequent modifications to
the approved product or manufacturing process may require a new round of
clearances or approvals, that could require substantial additional clinical data
and FDA review.
Medical Graphics' products are also subject to similar regulation in
various foreign countries. ISO 9001 certification indicates that Medical
Graphic's development and manufacturing processes comply with standards for
quality assurance and manufacturing process control. ISO 9001 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. Medical Graphics received ISO 9001
certification for its development and manufacturing processes in 1998 and passed
its recertification audit in 1999. Medical Graphics achieved CE certification
for its primary cardiopulmonary testing products. Medical Graphics expects to
achieve certification for the remainder of the product line that it markets in
Europe during 1999. There can be no assurance, however, that Medical Graphics
will be able to obtain regulatory approvals or clearances for its products in
foreign countries.
Medical Graphics must comply with various federal, state and local
environmental laws and regulations. Medical Graphics believes that it is
currently in material compliance with such applicable environmental laws and
regulations.
PATENTS AND TRADEMARKS
Medical Graphics relies on a combination of patent, trademark and trade
secret laws to establish proprietary rights in its products. Medical Graphics
currently owns 20 United States domestic patents that cover the basic aspects of
Medical Graphics' core technologies, including gas pressure, flow measurement,
breath-by-breath assessment of gas exchange and some expert systems. In
addition, Medical Graphics has a number of foreign patents with respect to
technologies covered by its United States patents. The United
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<PAGE> 45
States patents were issued during the period from 1984 through 1999. Medical
Graphics' material United States patents are as follows:
<TABLE>
<CAPTION>
PATENT NAME SERIAL NO. ISSUE DATE EXPIRATION DATE
- ----------- ---------- ---------------- ---------------
<S> <C> <C> <C>
Pulmonary Diagnostic System................ 4,796,639 January 10, 1989 January 9, 2007
Flow Meter System.......................... 5,038,773 August 13, 1991 August 12, 2009
Drying Sample Line......................... 5,042,500 August 27, 1991 August 26, 2009
Multifunction Disposable Patient Valve..... 5,119,825 June 9, 1992 June 8, 2010
Dynamic Transit Time Compensation.......... 5,398,695 March 21, 1995 March 20, 2013
Dynamic Gas Density........................ 5,502,660 March 26, 1996 March 25, 2014
</TABLE>
Foreign patents generally expire 20 years after the date of original
application, but vary from country to country. Medical Graphics intends to
aggressively enforce its intellectual property rights and has successfully done
so in the past. 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.
Medical Graphics seeks to protect its trade secrets and proprietary
know-how through proprietary information agreements with employees, most
consultants and other parties. Medical Graphics' proprietary information
agreements generally contain industry standard provisions requiring such
individuals to assign to Medical Graphics, without additional consideration, any
inventions conceived or reduced to practice while employed or retained by
Medical Graphics, subject to customary exceptions. Medical Graphics' officers
and other key employees also agree not to compete with Medical Graphics for a
period following termination. There can be no assurance that proprietary
information or non-compete agreements with employees, consultants and others
will not be breached, that Medical Graphics would have adequate remedies for any
breach, or that third parties will not nonetheless gain access to Medical
Graphics' technology.
The following United States registered trademarks are owned by Medical
Graphics: Medical Graphics and CPX EXPRESS. In addition, the following
trademarks are owned by Medical Graphics: PF/Dx, preVent, BREEZE, 1085 Series,
CardiO2, CPX/D, CPX/MAX/D, PS-Quest and PS-Tracker. Pentium is a trademark of
Intel Corporation. Windows is a trademark of Microsoft Corporation.
EMPLOYEES
Medical Graphics had 127 employees as of September 30, 1999. No employees
are represented by labor organizations and there are no collective bargaining
agreements. Management believes that Medical Graphics' relations with its
employees are good.
DESCRIPTION OF PROPERTY
Medical Graphics currently leases a 52,250 square foot building for its
office, assembly and warehouse facilities located in suburban Saint Paul,
Minnesota. The lease expires June 30, 2002, at which time Medical Graphics has
an option to renew the lease for an additional four years. Medical Graphics has
the option to purchase the building at the end of each lease expiration period
at the building's fair market value. Annual rental costs will be approximately
$345,000 over the next four years. Rent expense for the years ended December 31,
1998 and 1997 was $344,000 and $348,000, respectively.
LEGAL PROCEEDINGS
There have been material developments regarding two of the legal
proceedings described in our Form 10-KSB for the year ended December 31, 1998.
The lawsuit known as John Gefroh v. Trinity Hospital, Medical Graphics
Corporation and IPC Automation, Inc., has been settled. In addition, the lawsuit
known as Copelco Capital, Inc. v. Memorial Hospital, a division of Sisters of
Charity of Nazareth Health Systems, Inc., has been settled. Both matters were
resolved on terms and conditions that do not have a material impact on Medical
Graphic's financial statements. Management is of the opinion that ultimate
settlement of the remaining lawsuit will not have a material impact on its
financial statements.
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<PAGE> 46
In conjunction with the liquidation of Medical Graphics GmbH, a suit was
filed against a physician in Augsburg, Germany for non-payment of approximately
50,000 DM for goods sold in 1995. In mid-1999, the court rendered a judgment in
favor of Medical Graphics GmbH. The physician has since filed an appeal to a
higher court in Munich. Medical Graphics has instructed its German legal counsel
to represent Medical Graphics' interests throughout the appeal process.
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<PAGE> 47
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS
AND MANAGEMENT OF MEDICAL GRAPHICS
On November 10, 1999, there were more than 1,400 record or beneficial
holders of 5,650,947 shares of outstanding Medical Graphics common stock and one
holder of 444,445 shares of outstanding Medical Graphics Class A stock. Each
share of common stock is entitled to one vote per share and each share of Class
A stock is entitled to 3.375 votes, with no right of cumulative voting. Medical
Graphics has not paid cash dividends in the past 10 years. Medical Graphics
credit and security agreement prohibits the payment of dividends without the
prior written consent of Medical Graphics' lender. Medical Graphics has no other
voting securities outstanding.
The following table describes the beneficial ownership of Medical Graphics
common stock as of November 10, 1999 for each shareholder known by Medical
Graphics to be the beneficial owner of more than five percent of Medical
Graphics common stock, each Medical Graphics director, each Medical Graphics
executive officer, and all Medical Graphics directors and executive officers as
a group. Unless otherwise noted, the address for Medical Graphics officers and
directors is 350 Oak Grove Parkway, Saint Paul, MN 55127. For purposes of this
table, all shares of Class A stock are treated as if converted to common stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED VOTING SECURITIES(1)
- ------------------- ------------------ --------------------
<S> <C> <C>
JOHN D. WUNSCH(2)(3)(4)................................. 2,197,886 30.6
FAMCO II LLC
Family Financial Strategies, Inc.
Interchange Tower, Suite 850
600 South Highway 169
Minneapolis, MN 55426
AUSTIN W. MARXE(5)...................................... 682,272 9.5
AWM Investment Company, Inc.
153 East 53 Street
New York, NY 10022
HEARTLAND ADVISORS, INC.(6)............................. 680,700 9.5
790 North Milwaukee Street
Milwaukee, WI 53202
MARK W. SHEFFERT(4)..................................... 494,000 6.5
3650 IDS Center
Minneapolis, MN 55402
GERALD T. KNIGHT(4)..................................... 86,002 1.2
DONALD C. WEGMILLER(4).................................. 70,252 *
W. EDWARD MCCONAGHAY(3)(4).............................. 57,751 *
JOHN C. PENN(4)......................................... 48,750 *
RICHARD E. JAHNKE(4).................................... 106,000 1.5
TERRANCE J. KAPSEN(4)................................... 72,527 1.0
DALE H. JOHNSON(4)...................................... 33,676 *
REX T. FASCHING(4)...................................... 33,334 *
MICHAEL G. SNOW(4)...................................... 19,334 *
All current directors and............................... 3,219,962 40.4
executive officers as a Group(4)
(12 persons)
</TABLE>
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<PAGE> 48
- ---------------
(1) The percentage of ownership of all current directors and executive officers
as a group, excluding all currently exercisable options and warrants held by
such group, is 33.5%.
(2) Includes 444,445 shares of Medical Graphics' Class A stock, and 663,636
shares of common stock, all owned by FAMCO II LLC which is managed by Family
Financial Strategies, Inc., of which Mr. Wunsch is the Chief Executive
Officer. Mr. Wunsch disclaims beneficial ownership of such shares. Mr.
Wunsch's total also includes 26,250 shares subject to exercisable options
held by Mr. Wunsch.
(3) The number of shares shown includes shares as to which the nominees and all
current directors and executive officers as a group have disclaimed
beneficial ownership, as follows: John D. Wunsch -- 444,445 shares of
Medical Graphics' Class A stock and 663,636 shares of common stock, all
owned by FAMCO II LLC which is managed by Family Financial Strategies, Inc.,
of which Mr. Wunsch is the Chief Executive Officer; W. Edward
McConaghay -- 3,000 shares held by Mr. McConaghay's wife.
(4) The table includes options under Medical Graphics' stock option plans or
outstanding warrants which are or will become exercisable within 60 days of
November 10, 1999 in the following amounts. Mark W. Sheffert, 494,000
shares; Gerald T. Knight, 39,002 shares; Donald C. Wegmiller, 41,752 shares;
W. Edward McConaghay, 45,751 shares; John C. Penn, 36,750 shares; Richard E.
Jahnke, 100,000 shares; Terrance J. Kapsen, 26,501 shares; Dale H. Johnson,
23,334 shares; Rex T. Fasching, 33,334 shares; and Michael G. Snow, 18,334
shares and all current directors and executive officers as a group, 825,008
shares.
(5) Of the 682,272 shares beneficially owned by Austin W. Marxe and AWM
Investment Company, Inc. ("AWM"), 242,727 shares are owned by the Special
Situations Fund III L.P. (the "Fund"), 85,909 shares are owned by the
Special Situations Cayman Fund, L.P. (the "Cayman Fund"), and 353,636 shares
are beneficially owned by the Special Situations Private Equity Fund, L.P.
(the "Equity Fund"). Austin W. Marxe is the principal owner and President of
AWM. AWM is the sole general partner of MGP, a registered investment
adviser, and the general partner and investment adviser to the Fund and the
Cayman Fund. This disclosure is based on a written representation provided
to Medical Graphics on September 8, 1999.
(6) Shares are held in investment advisory accounts of Heartland Advisors, Inc.
As a result, various persons have the right to receive or the power to
direct the receipt of dividends from, or the proceeds from the sale of, the
shares. The interests of one such account, Heartland Value Fund, a series of
Heartland Group, Inc., a registered investment company, relates to more than
5% of the class. This disclosure is based on a Schedule 13G/A, dated as of
February 2, 1999, filed with the Securities and Exchange Commission.
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<PAGE> 49
INFORMATION CONCERNING ANGEION
Angeion Corporation was founded in 1986 and began to develop implantable
cardioverter defibrillators (ICDs) in 1991. The Company has been exploring
strategic alternatives to provide greater shareholder value since December 1998.
In the second quarter of 1999, Angeion began to implement a major restructuring
plan to refocus its business, conserve cash and significantly reduce operating
expenses.
In August 1999, Angeion announced an agreement to transfer certain assets
and grant a non-exclusive, royalty-free, one-way license of substantially all of
its patents, patent applications and related intellectual property rights for
cardiac stimulation devices to ELA Medical, a wholly-owned subsidiary of
Sanofi-Synthelabo, a French pharmaceutical company. In exchange, Angeion will
receive back from Sanofi-Synthelabo all of Angeion's outstanding shares and
warrants held by Sanofi-Synthelabo representing approximately 44.7% of Angeion's
fully diluted shares. In September 1999, Angeion entered into an agreement to
grant Medtronic, Inc. a non-exclusive license to all of Angeion's patents and
patent applications for cardiac stimulation devices. Angeion also agreed to sell
to Medtronic its unfiled patent disclosures for cardiac stimulation devices. In
exchange, Angeion will receive $9 million in cash from Medtronic.
Closing on the ELA Medical and Medtronic transactions is subject to the
approval of Angeion shareholders and receipt of consent from its noteholders.
Angeion plans to hold a meeting of shareholders later this year to vote on a
proposal to permit the consummation of the transactions contemplated by each of
the agreements, and plans to concurrently request consents from its noteholders.
On September 24, 1999, an action was commenced on behalf of the noteholders
alleging that an event of default has occurred under Angeion's indenture and
seeking, among other things, payment of 101% of the principal amount of the
notes (which payment would be $20,806,707 as of November 21, 1999) and to enjoin
Angeion from using its available cash for the merger. Angeion has advised
Medical Graphics that it does not believe that an event of default has occurred
and that it intends to vigorously defend this action. In the event Angeion is
enjoined from using its available cash for the merger, Angeion would not have
sufficient funds on hand to consummate the merger without obtaining additional
sources of financing.
SHAREHOLDER PROPOSALS
Due to the contemplated consummation of the merger, Medical Graphics does
not currently expect to hold a 2000 Annual Meeting of Shareholders, as Medical
Graphics common stock will not be publicly traded after the merger. If the
merger is not consummated and such a meeting is held, shareholder proposals for
inclusion in proxy materials for such meeting would have to be submitted to
Medical Graphics' offices, 350 Oak Grove Parkway, Saint Paul, Minnesota 55127
addressed to Investor Relations, no later than January 3, 2000. Such proposals
must also meet the other requirements of the rules of the SEC relating to
shareholders' proposals.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Deloitte & Touche, LLP, independent accountants, are
expected to be present at the Medical Graphics special meeting with an
opportunity to make a statement if they desire to do so and such representatives
are expected to be available to respond to appropriate questions.
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<PAGE> 50
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Medical Graphics Corporation
We have audited the accompanying consolidated balance sheets of Medical Graphics
Corporation and Subsidiary (the Company) as of December 31, 1998 and 1997 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Medical Graphics Corporation and
Subsidiary at December 31, 1998 and 1997 and the results of their operations and
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche
April 14, 1999
Minneapolis, Minnesota
F-1
<PAGE> 51
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30, --------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 117 $ 387
Accounts receivable, less allowance for doubtful accounts
of $136, $118, and $164, respectively.................. 4,569 $ 5,263 3,890
Inventories (Notes 1 and 2)............................... 5,549 4,917 4,800
Prepaid expenses and other current assets................. 120 155 272
-------- -------- --------
Total current assets................................. 10,355 10,335 9,349
Equipment and Fixtures (Notes 1 and 3)...................... 4,111 4,092 4,072
Less accumulated depreciation............................. 3,844 3,574 3,110
-------- -------- --------
Equipment and fixtures, net.......................... 267 518 962
Software Production Costs, less accumulated amortization of
$1,473, $1,212, and $855, respectively (Note 1)........... 586 566 602
Other Assets................................................ 1 7 13
-------- -------- --------
$ 11,209 $ 11,426 $ 10,926
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,058 $ 2,975 $ 2,261
Accounts payable financed with vendors -- current (Note
1)..................................................... 408 769 1,145
Note payable (Note 8)..................................... 3,595 3,291 2,254
Employee compensation..................................... 739 517 786
Deferred service contract revenue......................... 900 870 896
Warranty reserve.......................................... 339 374 414
Other liabilities and accrued expenses.................... 407 327 675
-------- -------- --------
Total current liabilities............................ 8,446 9,123 8,431
Long-Term Accounts Payable Financed with Vendors (Note 1)... 48 807
Commitments and Contingencies (Notes 7 and 12)
Shareholders' Equity (Notes 1, 9, and 10):
Class A convertible common stock, par value $.05 per
share; 500,000 shares authorized, liquidation
preference of $3.38 per share, 444,445 issued and
outstanding, convertible into 1,500,000 shares of
common stock........................................... 22 22 22
Common stock, par value $.05 per share; authorized
24,500,000 shares; issued and outstanding 5,651,000,
5,608,000 and 4,453,000, respectively.................. 283 280 223
Additional paid-in capital................................ 15,775 15,738 13,652
Retained deficit.......................................... (13,317) (13,785) (12,209)
-------- -------- --------
Total shareholders' equity........................... 2,763 2,255 1,688
-------- -------- --------
$ 11,209 $ 11,426 $ 10,926
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 52
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
1999 1998 1998 1997
---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues (Note 4):
Equipment and supplies sales.......................... $14,684 $13,257 $18,503 $17,485
Service revenue....................................... 1,444 1,423 1,946 1,688
------- ------- ------- -------
Total revenues................................... 16,128 14,680 20,449 19,173
Cost of Goods Sold...................................... 8,674 9,015 12,441 11,969
------- ------- ------- -------
Gross Margin............................................ 7,454 5,665 8,008 7,204
Operating Expenses:
Selling and marketing................................. 3,761 4,275 5,653 6,282
General and administrative............................ 1,670 1,470 1,927 2,228
Research and development.............................. 1,136 1,207 1,550 1,867
Infrequent charges (Note 5)........................... 1,738
------- ------- ------- -------
Total operating expenses......................... 6,567 6,952 9,130 12,115
------- ------- ------- -------
Income (Loss) From Operations........................... 887 (1,287) (1,122) (4,911)
Other (Expense) Income:
Interest expense...................................... (419) (312) (454) (329)
Gain on sale of assets (Note 1)....................... -- -- -- 128
------- ------- ------- -------
Income (Loss) Before Income Taxes....................... 468 (1,599) (1,576) (5,112)
Income Taxes (Note 6)................................... -- -- -- --
------- ------- ------- -------
Net Income (Loss)....................................... $ 468 $(1,599) $(1,576) $(5,112)
======= ======= ======= =======
Net Income (Loss) per Share of Common Stock (Note 1):
Basic................................................. $ .07 $ (.28) $ (0.26) $ (1.15)
======= ======= ======= =======
Diluted............................................... $ .06 $ (.28) $ (0.26) $ (1.15)
======= ======= ======= =======
Weighted Average Common Shares Outstanding:
Basic................................................. 7,128 5,646 6,015 4,449
======= ======= ======= =======
Diluted............................................... 7,246 5,646 6,015 4,449
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 53
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK COMMON STOCK ADDITIONAL
---------------- ---------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ---------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............... 3,839 $192 $10,160 $ (7,097) $ 3,255
Net loss................................. (5,112) (5,112)
Class A stock issued in a private sale,
net of issuance costs.................. 444 $22 1,434 1,456
Common stock issued to Chairman of Board
of Directors........................... 45 2 100 102
Common stock issued in a private sale,
net of issuance costs.................. 545 28 1,384 1,412
Common stock issued under Employee Stock
Purchase Plan.......................... 24 1 66 67
Warrants issued in conjunction with
development and implementation of cost
reduction plan (Note 5)................ 508 508
--- --- ----- ---- ------- -------- -------
Balance at December 31, 1997............... 444 22 4,453 223 13,652 (12,209) 1,688
Net loss................................. (1,576) (1,576)
Common stock issued under Employee Stock
Purchase Plan.......................... 20 1 44 45
Common stock issued in private sales, net
of issuance costs (Note 9)............. 1,096 54 1,916 1,970
Common stock issued to a former
employee............................... 15 1 44 45
Common stock issued upon exercise of
stock options.......................... 3 8 8
Common stock issued to directors......... 21 1 74 75
--- --- ----- ---- ------- -------- -------
Balance at December 31, 1998............... 444 22 5,608 280 15,738 (13,785) 2,255
Net income (unaudited)................... 468 468
Common stock issued under Employee Stock
Purchase Plan (unaudited).............. 24 2 17 19
Common stock issued to directors
(unaudited)............................ 19 1 20 21
--- --- ----- ---- ------- -------- -------
Balance at September 30, 1999
(unaudited).............................. 444 $22 5,651 $283 $15,775 $(13,317) $ 2,763
=== === ===== ==== ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 54
MEDICAL GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- --------------------
1999 1998 1998 1997
---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................. $ 468 $ (1,599) $ (1,576) $ (5,112)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation................................... 270 450 511 579
Amortization................................... 261 264 357 287
Common stock issued to directors and former
officers in lieu of compensation............. 120
Common stock and warrants issued in conjunction
with the development and implementation of a
cost reduction plan (Note 5)................. 610
Changes in operating assets and liabilities:
Accounts receivable.......................... 694 (267) (1,373) 924
Inventory.................................... (632) (463) (117) 2,393
Prepaid expenses and other assets............ 41 83 123 (72)
Accounts payable and accrued expenses........ (1,024) (956) (788) (683)
Warranty reserve............................. (35) (40) (40) (149)
Deferred service contract revenue............ 30 (8) (26) (92)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities.............................. 73 (2,536) (2,809) (1,315)
Cash Flows from Investing Activities:
Capital expenditures.............................. (19) (23) (67) (215)
Software production costs......................... (281) (256) (321) (417)
-------- -------- -------- --------
Net cash used in investing activities..... (300) (279) (388) (632)
Cash Flows from Financing Activities:
Borrowings under line of credit agreement......... 17,343 17,303 22,483 18,682
Repayments under line of credit agreement......... (17,039) (17,044) (21,446) (19,828)
Net proceeds from issuance of common stock........ 40 2,169 1,773 2,935
-------- -------- -------- --------
Net cash provided by financing
activities.............................. 344 2,428 2,810 1,789
-------- -------- -------- --------
Increase (Decrease) in Cash......................... 117 (387) (387) (158)
Cash at Beginning of Year........................... 387 387 545
-------- -------- -------- --------
Cash at End of Period or Year....................... $ 117 $ -- $ -- $ 387
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 55
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
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. In addition, the Company
purchases noninvasive sleep diagnostic systems from a third party.
Liquidity -- The Company's working capital requirements for 1998 were met
principally through amounts borrowed on the Company's line of credit (see Note
8), the issuance of common stock under private sales to investors (see Note 9),
and credit arrangements made with the Company's vendors during the first quarter
1997. This vendor credit consisted of the Company entering into financing
arrangements with certain vendors that provided for payment of outstanding
balances in equal monthly installments for up to 36 months. The remaining
amounts due under these vendor agreements are payable in the amount of $769,000
and $48,000 in 1999 and 2000, respectively. The balances outstanding at December
31, 1998 that will be paid after December 31, 1999 have been classified as
long-term accounts payable financed with vendors.
In addition, the Company incurred net losses of $1,576,000 and $5,112,000
for the years ended December 31, 1998 and 1997, respectively. Management plans
to generate profitable operations by increasing revenues, improving gross
margins, and controlling expenses. There can be no assurance the Company will be
able to generate profitable operations in the future.
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. The operations of
MGCG were terminated early in 1997 in accordance with an exit plan adopted in
the fourth quarter of 1996 (see Note 5).
Unaudited Consolidated Financial Statements -- The consolidated financial
statements as of September 30, 1999 and for the nine months ended September 30,
1999 and 1998 are unaudited. In the opinion of management, such unaudited
consolidated financial statements include all adjustments, consisting of only
normal, recurring accruals, necessary for a fair presentation thereof. The
results of operations for any interim period are not necessarily indicative of
the results of operations for the year.
Inventories -- Inventories are valued at the lower of cost or market
determined by the first-in, first-out method.
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.
Revenue Recognition -- Sales are recorded by the Company when products are
shipped or services are provided to the customer. An accrual is recorded for
estimated warranty costs.
Deferred Service Contracts -- Amounts billed to customers under service
contracts are deferred and recognized as 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
F-6
<PAGE> 56
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1. DESCRIPTION OF BUSINESS, LIQUIDITY, AND SIGNIFICANT ACCOUNTING
POLICIES -- CONTINUED
the differences are expected to reverse. Deferred tax asset valuation allowances
are recorded to reduce deferred tax assets to the amount expected to be
realized.
Other Income (Expense) -- In 1997, the Company sold certain assets of its
asthma line of business for approximately $144,000, which resulted in a gain of
$128,000.
Fair Value of Financial Instruments -- Cash, accounts receivables, accounts
payable, note payable, and accrued expenses are carried at amounts which
reasonably approximate their fair value due to the short-term nature of these
amounts or due to variable rates of interest which are consistent with current
market rates.
Basic and Diluted Net Loss Per Share -- In 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.
Basic 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. For
purposes of this calculation, the convertible Class A common shares are assumed
to have been converted. Common equivalent shares from stock options and warrants
to purchase 1,697,000 and 1,342,000 shares of common stock at a range of $1.00
to $8.67 and $1.92 to $10.00 were outstanding during 1998 and 1997,
respectively, but are excluded from the computation of dilutive net loss per
share as their effect is antidilutive. Therefore, basic and dilutive net loss
per share amounts are equal for each of the periods presented.
Sales and Segment Information -- The Company manufactures and sells its
products to customers 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 13% and 18% of total sales in 1998 and 1997, 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. To the extent long-lived assets are considered impaired,
such assets are adjusted to their estimated fair values with fair value
determined by the present value of discounted future cash flows or, to the
extent such long-lived assets are held for sale, the estimated sales proceeds
less costs of disposal.
Accounting Pronouncement -- In June 1997, the Financial Accounting
Standards Board issued SFAS No. 131, Disclosure about Segments of an Enterprise
and Related Information, which changes the way public companies report
information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information and to report entitywide disclosures about products
and services, major customers, and material countries in which the entity holds
assets and reports revenue. The Company adopted SFAS No. 131 in 1998. The
Company operates within a single operating segment.
F-7
<PAGE> 57
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1. DESCRIPTION OF BUSINESS, LIQUIDITY, AND SIGNIFICANT ACCOUNTING
POLICIES -- CONTINUED
Comprehensive Earnings (Loss) -- Comprehensive earnings (loss) is a measure
of all nonowner changes in shareholders' equity and includes such items as net
earnings, certain foreign currency translation items, minimum pension liability
adjustments, and changes in the value of available-for-sale securities. In 1998
and 1997, comprehensive earnings (loss) for the Company was the same as net
earnings (loss) as reported.
Reclassifications -- Certain reclassifications have been made to the 1997
financial statements to conform to the classifications used in 1998. These
reclassifications had no effect on previously reported net loss or shareholders'
equity.
2. INVENTORIES
The Company's inventories consisted of the following components (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30, ----------------
1999 1998 1997
------------- ------ ------
<S> <C> <C> <C>
Purchased components and work-in-process................ $3,303 $2,941 $3,164
Finished goods.......................................... 2,246 1,976 1,636
------ ------ ------
$5,549 $4,917 $4,800
====== ====== ======
</TABLE>
3. EQUIPMENT AND FIXTURES
At December 31, the Company's equipment and fixtures consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Building improvements....................................... $ 742 $ 733
Computer equipment.......................................... 1,548 1,491
Manufacturing equipment..................................... 933 933
Furniture and fixtures...................................... 869 915
------ ------
Total equipment and fixtures, at cost....................... 4,092 4,072
Less accumulated depreciation............................... 3,574 3,110
------ ------
$ 518 $ 962
====== ======
</TABLE>
4. GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable segment.
See Note 1 for a brief description of the Company's business. As of December 31,
1998, the Company had operations established in various countries throughout the
world. The Company is exposed to the risk of changes in social, political, and
economic conditions inherent in foreign operations, and the Company's results of
operations are affected by fluctuations in foreign currency exchange rates. In
no single country outside the United States did operations account for more than
10% of the Company's net sales for 1998 and 1997. Net sales by geographic area
are presented by attributing revenues from external customers on the basis of
where the products are sold. The Company does not maintain significant assets in
foreign countries.
F-8
<PAGE> 58
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
4. GEOGRAPHIC INFORMATION -- CONTINUED
Net sales by geographic area (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
United States............................................... $17,770 $15,637
International............................................... 2,679 3,536
------- -------
$20,449 $19,173
======= =======
</TABLE>
5. INFREQUENT CHARGES
Germany:
During December 1996, the Board of Directors approved closing the Company's
sales and marketing subsidiary in Germany and authorized implementation of a
restructuring plan. The Company recorded a $550,000 charge to operations in the
fourth quarter of 1996 related to expected exit costs of the German office. Of
this total, $250,000 was recorded as cost of goods sold, $100,000 was recorded
in general and administrative expenses, and the remainder as an infrequent
charge, primarily related to future lease payments. During 1997, the Company
recorded an additional $150,000 infrequent charge for severance to seven
employees in its subsidiary in Germany. The change in estimated liabilities in
1998 was due to several employees leaving earlier than anticipated and a
revision in the expected ultimate lease payments.
The following table shows the activity related to severance and exit costs
of the German office (in thousands):
<TABLE>
<S> <C>
Balance -- January 1, 1997.................................. $150
Provision................................................. 150
Payments.................................................. (200)
----
Balance -- December 31, 1997................................ 100
Provision................................................. --
Payments.................................................. (40)
Change in estimate........................................ (60)
----
Balance -- December 31, 1998................................ $--
====
</TABLE>
Domestic:
During 1997, the Company implemented certain domestic cost-cutting
strategies that resulted in $1,588,000 of infrequent charges, substantially all
of which were paid in 1997. Approximately $1,012,000 of these charges were for
professional services incurred in connection with the development and
implementation of the cost-cutting strategies. Included in these costs was
approximately $530,000 relating to the issuance of the stock and warrants. The
Company granted the former chairperson of the Company a warrant to purchase
195,000 shares of common stock at a price of $2.67 per share in exchange for
certain consulting services to the Company. The warrant expires on March 31,
2000. The Company also issued 45,000 shares of common stock and granted a
warrant to purchase 225,000 shares of common stock at a price of $2.25 per share
to an individual for services provided in connection with the development and
implementation of the cost reduction plan. This warrant expires on March 31,
2002. In addition, the Company paid approximately $243,000 to the company where
this individual is president in connection with certain investment banking and
consulting services. This individual also was elected the chairman of the Board
of Directors. The value for the warrants
F-9
<PAGE> 59
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
5. INFREQUENT CHARGES -- CONTINUED
was estimated using the Black-Scholes option-pricing model, and the value for
the common stock was calculated using the closing price of the stock on the day
it was granted.
The remaining $575,000 was severance costs related to the termination of
various employees. The following table shows the activity related to the
domestic severance charges (in thousands):
<TABLE>
<S> <C>
Balance -- January 1, 1997.................................. $--
Provision................................................. 576
Payments.................................................. (511)
-----
Balance -- December 31, 1997................................ 65
Payments.................................................. (65)
-----
Balance -- December 31, 1998................................ $--
=====
</TABLE>
These costs included payments of cash and stock to 26 employees and cash
and warrants paid to the former president and chairperson of the Board of
Directors.
6. INCOME TAXES
Significant components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current:
Federal................................................... $ -- $ --
State..................................................... -- --
Deferred.................................................... -- --
------- -------
Income tax benefit.......................................... $ -- $ --
======= =======
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Allowance for bad debts..................................... $ 42 $ 58
Inventory reserve........................................... 69 69
Warranty reserve............................................ 133 147
Other reserve............................................... 63
Vacation accrual............................................ 36 48
Deferred service contract revenue........................... 58 60
Valuation allowance......................................... (338) (445)
------- -------
Total current............................................. -- --
Inventory capitalization.................................... 15 3
Capitalized software and patents............................ (201) (214)
Net operating loss and tax credit carryforwards............. 4,635 3,806
Valuation allowance......................................... (4,449) (3,595)
------- -------
Total noncurrent.......................................... -- --
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
</TABLE>
F-10
<PAGE> 60
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
6. INCOME TAXES -- CONTINUED
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 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Income tax benefit at statutory rate........................ $ (552) $(1,789)
Increase of deferred tax asset valuation allowance.......... 747 1,139
Utilization of net operating loss carryforward related to
IRS audit adjustments for 1994 and 1993................... 613
Other....................................................... (195) 37
------- -------
$ -- $ --
======= =======
</TABLE>
As of December 31, 1998, the Company had federal net operating loss
carryforwards of $12,290,000 that expire from 2002 through 2012. The Internal
Revenue Service has examined the Company's income tax returns through December
31, 1995. Total income taxes paid were $6,000 and $24,000 in 1998 and 1997,
respectively.
7. 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,
1998 (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 397
2000...................................................... 367
2001...................................................... 357
2002...................................................... 172
------
$1,293
======
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997 was $420,000
and $490,000, respectively.
8. NOTE PAYABLE TO BANK
In March 1997, the Company obtained a new credit agreement with Norwest
Business Credit, Inc. (Norwest) that provides for total borrowings, based on
available collateral as defined, of up to $4,100,000, at the discretion of
Norwest, and expires March 31, 2000. The credit line allows the Company to
borrow up to 80% of eligible domestic accounts receivable, 40% of eligible
domestic inventory (not to exceed $1,500,000), and 90% of eligible foreign
accounts receivable. The Company's accounts receivable and inventories secure
total borrowings outstanding under the credit agreement. The credit agreement
contains certain restrictive covenants, including maintenance of minimum net
worth (as defined), earnings requirements, and debt service requirements as well
as limitations on capital expenditures and payment of dividends.
F-11
<PAGE> 61
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
8. NOTE PAYABLE TO BANK -- CONTINUED
Borrowings under the line of credit bear interest at the Norwest "base"
rate plus 4.0% (11.75% at December 31, 1998). The "base" rate is equal to the
interest rate publicly announced by Norwest Bank Minnesota, National Association
from time to time as its "base" rate. The line of credit contains a minimum
monthly interest charge of $15,000. In addition, the Company granted to Norwest
a three-year warrant to purchase 93,750 shares of the Company's common stock at
an exercise price of $2.25 per share. The value of this warrant ($73,000) is
being amortized to interest expense over the term of the line of credit. The
warrant contained antidilution provisions and, as a result of the Company's
September 1998 issuance of common stock, the warrant exercise price decreased to
$1.00 per share and the shares issuable under the warrant increased to 210,937
shares.
The Company had outstanding borrowings of $3,291,000 and $2,254,000 at
December 31, 1998 and 1997, respectively, and at December 31, 1998 had
additional borrowing availability of $744,000. Total cash paid for interest was
$454,000 and $329,000 for the years ended December 31, 1998 and 1997,
respectively. The Company amended its line of credit agreement in June and
November 1997 as well as March, August, and September 1998. As of December 31,
1998, the Company was in technical default of its minimum net income and minimum
debt service coverage ratio covenants. These technical defaults were waived
through an amendment to the line of credit agreement on March 29, 1999.
9. CAPITAL STOCK
In June 1998, the Company distributed a three-for-two stock split effected
in the form of a stock dividend. All share and per share data have been adjusted
to reflect this stock split.
In March 1997, the Company's Board of Directors authorized 500,000 shares
of a new class of convertible stock (Class A stock). The Class A stock has
voting rights. Each share was originally convertible into 1.5 shares of common
stock. The Company issued 444,445 shares of the new class of stock receiving net
proceeds of $1,456,000. These shares have a liquidation preference of $3.38 per
share, aggregating $1,500,000 at December 31, 1998.
In October 1997, the Company's Board of Directors authorized the issuance
of additional common stock in a private sale to investors. On November 10, 1997
the Company agreed to sell up to 1,096,000 shares of the Company's common stock
at a price of $2.75 per share. The investors purchased 545,000 shares for
$1,500,000 (less costs of issuance of $88,000) on November 12, 1997 and 545,000
shares for $1,500,000 (less costs of issuance of $31,000) in January and
February of 1998.
In September 1998, the Company's Board of Directors authorized the issuance
of additional common stock in a private sale to investors. On September 30, 1998
the investors purchased 550,000 shares for $550,000 (less costs of issuance of
$49,000).
The Company's Class A stock contained antidilution provisions. As a result
of the September 1998 offering, 444,445 shares of class A stock are now
convertible into 1,500,000 shares of common stock.
10. STOCK OPTION PLANS, EMPLOYEE STOCK PURCHASE PLAN, AND 401(K) PLAN
The Company has an Employee Incentive Stock Option Plan under which a total
of 1,350,000 shares have been reserved for issuance, with 276,000 shares
remaining reserved and unissued at December 31, 1998. 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
F-12
<PAGE> 62
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
10. STOCK OPTION PLANS, EMPLOYEE STOCK PURCHASE PLAN, AND 401(K)
PLAN -- CONTINUED
to an officer and certain nonemployees. These options become exercisable over a
one- to ten-year period following the date of grant.
The Company also has a Nonemployee Director Compensation Plan, which
provides for the granting of nonqualified options for up to 675,000 shares of
common stock to nonemployee members of the Board of Directors as well as the
Chairman of the Board. Under the plan, an option to purchase 15,000 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 2,250
shares (4,500 shares for the Chairman of the Board) will be granted
automatically following each board meeting personally attended by each director,
not to exceed 13,500 shares (27,000 shares for the Chairman of the Board) per
director annually. An option to purchase 750 shares will be granted
automatically following each board committee meeting personally attended by each
director, not to exceed 2,250 shares per director annually. The option exercise
price per share will not be less than 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 option activity is as follows (in thousands except per share
amounts):
<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, 1996............. 324 $4.09 591 $4.48
Granted................................ 400 2.46 312 2.43
Canceled or expired.................... (246) 4.19 (554) 4.45
---- ----- ---- -----
Balance at December 31, 1997............. 478 2.68 349 2.69
Granted................................ 263 1.20 294 2.34
Exercised.............................. (3) 2.87
Canceled or expired.................... (238) 2.38 (14) 4.84
---- ----- ---- -----
Balance at December 31, 1998............. 500 $1.96 629 $2.43
==== ===== ==== =====
Exercisable at December 31, 1997......... 124 $3.17 214 $2.71
==== ===== ==== =====
Exercisable at December 31, 1998......... 200 $2.53 333 $2.51
==== ===== ==== =====
</TABLE>
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 5,000 shares during each purchase period and
no more than $25,000 of fair value of stock in each calendar year. A total of
300,000 shares has been authorized for issuance under the ESP Plan. Shares
issued under the ESP Plan in 1998 and 1997 were 20,000 and 24,000 shares,
respectively. The ESP Plan will terminate on January 1, 2003, unless extended by
the Board of Directors.
In 1996, the Company adopted 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
F-13
<PAGE> 63
MEDICAL GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
10. STOCK OPTION PLANS, EMPLOYEE STOCK PURCHASE PLAN, AND 401(K)
PLAN -- CONTINUED
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 at the
grant date, based on the fair value provisions of SFAS No. 123, the Company's
1998 and 1997 pro forma net loss would have been $2,058,000 and $5,535,000,
respectively, and basic and dilutive net loss per share would have been $.34 and
$1.24, 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 4.7% and 6.5% in
1998 and 1997, respectively; an expected life of 5 and 7 years in 1998 and 1997,
respectively; and expected volatility of 47% and 54% in 1998 and 1997,
respectively. The weighted average fair value of options issued in 1998 and 1997
was $0.80 and $1.66, 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 Company did not contribute
to the plan in 1998 and expensed contributions to the plan of approximately
$12,000 in 1997.
11. RELATED-PARTY TRANSACTIONS
An former officer and director of the Company is the president of ErgometRx
Corporation. 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 no
royalties for 1998 or 1997.
The current Chairman of the Board of Directors is the president of
Manchester Companies. As part of the cost reduction plan in 1997, the Board of
Directors engaged Manchester Companies to provide investment banking and
management consulting services to the Company. Fees aggregating $120,000 and
$265,000 for 1998 and 1997, respectively, were paid to Manchester Companies for
those services. In addition, the Company was paid $10,000 for administrative
services that were provided to Manchester Companies.
12. LITIGATION
The Company is a defendant in various claims and litigation which are
incidental to its business. Management is of the opinion that certain of these
matters are covered by insurance and that ultimate settlement of these matters
will not have a material impact on its consolidated financial statements.
F-14
<PAGE> 64
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MEDICAL GRAPHICS CORPORATION,
A MINNESOTA CORPORATION,
ANGEION CORPORATION,
A MINNESOTA CORPORATION,
AND
ANG ACQUISITION CORP.,
A MINNESOTA CORPORATION
DATED: SEPTEMBER 22, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 65
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I. DEFINITIONS...................................... 1
1.1. Defined Terms...................................... 1
1.2. Other Defined Terms................................ 6
1.3. Interpretation Provisions.......................... 7
ARTICLE II. THE MERGER...................................... 7
2.1. The Merger......................................... 7
2.2. Effective Time..................................... 7
2.3. Closing............................................ 7
2.4. Articles of Incorporation and By-laws.............. 8
2.5. Directors.......................................... 8
2.6. Officers........................................... 8
2.7. Effect of Merger................................... 8
ARTICLE III. EFFECT OF MERGER ON SECURITIES OF SUB AND THE
COMPANY................................................... 8
3.1. Effect on Capital Stock............................ 8
3.2. Payment; Exchange of Certificates.................. 9
3.3. Treatment of Employee and Director Options;
Warrants; Class A Stock; Accrued Interests in Stock
Purchase Plan...................................... 11
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY... 12
4.1. Organization and Capitalization.................... 12
4.2. Authorization...................................... 13
4.3. Subsidiaries....................................... 13
4.4. No Conflict........................................ 13
4.5. SEC Documents...................................... 14
4.6. Compliance with Health Care Laws................... 14
4.7. Undisclosed Liabilities............................ 15
4.8. Absence of Certain Changes or Events............... 15
4.9. Contracts; No Defaults............................. 16
4.10. Transactions with Affiliates....................... 18
4.11. Machinery and Equipment and Other Property......... 18
4.12. Intellectual Property.............................. 18
4.13. Real Property...................................... 18
4.14. Litigation and Proceedings......................... 19
4.15. Employee Benefit Plans............................. 19
4.16. Labor Relations.................................... 21
4.17. Legal Compliance................................... 22
4.18. Environmental Matters.............................. 22
4.19. Taxes.............................................. 23
4.20. Governmental Authorities; Consents................. 24
4.21. Licenses, Permits and Authorizations............... 24
4.22. Insurance.......................................... 25
4.23. Customers and Suppliers............................ 25
4.24. Year 2000 Compatibility............................ 25
4.25. Brokers' Fees...................................... 25
4.26. Board Recommendation............................... 25
4.27. Required Company Vote.............................. 26
4.28. Proxy Statement.................................... 26
4.29. Full Disclosure.................................... 26
</TABLE>
i
<PAGE> 66
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT AND
SUB......................................................... 26
5.1. Organization....................................... 26
5.2. Authorization...................................... 26
5.3. No Conflict........................................ 26
5.4. Litigation and Proceedings......................... 27
5.5. Governmental Authorities; Consents................. 27
5.6. Brokers' Fees...................................... 27
5.7. Proxy Statement.................................... 27
5.8. Full Disclosure.................................... 27
ARTICLE VI. COVENANTS OF THE COMPANY, PARENT AND SUB........ 27
6.1. Conduct of Business Prior to Closing............... 27
6.2. Investigation by Parent; Confidentiality........... 29
6.3. Consents and Efforts............................... 29
6.4. No Solicitation.................................... 30
6.5. Meeting of Shareholders............................ 32
6.6. Proxy Statement.................................... 32
6.7. Director and Officer Liability..................... 32
6.8. Notices of Certain Events.......................... 33
6.9. Further Assurances................................. 33
6.10. Financial Statements, Etc.......................... 33
6.11. Year 2000 Remediation.............................. 33
ARTICLE VII. CONDITIONS TO THE MERGER....................... 34
7.1. Conditions to the Obligations of each Party........ 34
7.2. Conditions to the Obligations of the Company....... 34
7.3. Conditions to the Obligations of Sub and Parent.... 34
ARTICLE VIII. MISCELLANEOUS................................. 35
8.1. Termination........................................ 35
8.2. Assignment......................................... 37
8.3. Notices............................................ 37
8.4. Entire Agreement; Waivers.......................... 38
8.5. Multiple Counterparts.............................. 38
8.6. Invalidity......................................... 38
8.7. Fees and Expenses.................................. 38
8.8. Cumulative Remedies................................ 38
8.9. Governing Law...................................... 38
8.10. Amendment.......................................... 38
8.11. Public Announcements............................... 38
8.12. Enforcement of Agreement........................... 38
8.13. Non-Survival of Representations, Warranties........ 39
8.14. No Third Party Beneficiaries....................... 39
</TABLE>
ii
<PAGE> 67
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated September 22,
1999, is by and among MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the
"Company"), ANGEION CORPORATION, a Minnesota corporation ("Parent"), and ANG
ACQUISITION CORP., a Minnesota corporation ("Sub").
RECITALS
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have approved this Agreement and deem it advisable and in the best interests of
Parent, Sub and the Company and of their respective shareholders to consummate
the transaction provided for herein in which Sub will merge with and into the
Company (the "Merger");
WHEREAS, pursuant to the Merger, each outstanding share of the common
stock, par value $0.05 per share, of the Company (the "Company Common Stock")
shall be converted into the right to receive the Merger Consideration (as
defined below), upon the terms and subject to the conditions set forth herein;
WHEREAS, Parent, Sub and the Company (Sub and the Company sometimes being
referred to herein as the "Constituent Corporations") are hereby adopting a plan
of merger, providing for the merger of Sub with and into the Company, with the
Company being the surviving corporation. The Merger will be consummated in
accordance with this Agreement upon the filing by the Company and Sub of
Articles of Merger with the Minnesota Secretary of State (the "Articles of
Merger"), such Merger to be consummated as of the Effective Time (as defined
below) of the Merger;
WHEREAS, upon consummation of the Merger, the separate corporate existence
of Sub shall cease and the Company, as the surviving corporation in the Merger
(hereinafter referred to for the periods at and after the Effective Time of the
Merger as the "Surviving Corporation"), shall continue its corporate existence
under the Minnesota Business Corporation Act (the "MBCA"); and
WHEREAS, the Board of Directors of each of the Constituent Corporations has
directed that this Agreement be submitted to a vote of the shareholders of the
Constituent Corporations in accordance with the MBCA, and Parent, as sole
shareholder of Sub, has duly approved this Agreement in accordance with the
MBCA.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.1. Defined Terms. As used herein, the terms below shall have the
following meanings:
"Affiliate" shall mean, with respect to any Person, any other Person
which controls, is controlled by, or is under common control with, such
Person. For purposes of the preceding sentence, the term "control" shall
mean the power, direct or indirect, to direct or cause the direction of the
management and policies of a Person through the ownership of voting
securities, by contract or otherwise, whether or not such power is
exercised.
"Assets" shall mean all of the Company's and its Subsidiaries' right,
title and interest in and to all properties, assets and rights of any kind,
whether tangible or intangible, real or personal, owned by the Company or
any of its Subsidiaries or in which the Company or any of its Subsidiaries
has any interest whatsoever.
1
<PAGE> 68
"Benefit Arrangement" shall mean any employment, consulting, severance
or other similar contract, arrangement or policy (written or oral) and each
plan, arrangement, program, agreement or commitment (written or oral)
providing for insurance coverage (including, without limitation, any
self-insurance arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
life, health or accident benefits (including, without limitation, any
"voluntary employees' beneficiary association" as defined in Section
501(c)(9) of the Code providing for the same or other benefits) or for
deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation rights, stock purchases or other forms of incentive
compensation or post-retirement insurance, compensation or benefits which
(i) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (ii) is
entered into, maintained, contributed to or required to be contributed to,
as the case may be, by the Company, its Subsidiaries or any ERISA Affiliate
or under which the Company, its Subsidiaries or any ERISA Affiliate may
incur any liability, and (iii) covers any employee or former employee of
the Company, its Subsidiaries or any ERISA Affiliate (with respect to their
relationship with any such entity).
"Class A Stock" shall mean that certain class of Company stock issued
pursuant to the Certificate of Rights and Preferences of Class A Stock of
Medical Graphics Corporation filed with the Minnesota Secretary of State on
March 31, 1997.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreement" shall mean the Confidential Information
Agreement dated July 20, 1999, by and between Parent and the Company.
"Contract" shall mean any agreement, contract, lease, note, loan,
evidence of Indebtedness, purchase order, letter of credit, franchise
agreement, undertaking, covenant not to compete, employment agreement,
license, instrument, obligation, commitment, purchase and sale order,
quotation or other commitment to which the Company or its Subsidiaries is a
party or which relates to the Company's or its Subsidiaries' businesses or
any of the Assets, whether oral or written, express or implied, and which
pursuant to its terms has not expired, terminated or been fully performed
by the parties thereto.
"Dissenting Shareholders" shall mean those Shareholders who hold
Dissenting Shares.
"Dissenting Shares" shall mean any shares held by Shareholders who are
entitled to exercise dissenters' rights with respect to their shares under
the MBCA, and who have properly exercised their dissenters' rights by
filing with the Company a written notice of intent to demand the fair value
of their shares of Company Common Stock under the MBCA, perfected their
dissenters' rights and not subsequently withdrawn or lost their dissenters'
rights with respect to their Company Common Stock in accordance with the
MBCA.
"Employee Plans" shall mean all Benefit Arrangements, Multiemployer
Plans, Pension Plans, and Welfare Plans.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, encumbrance or other right of
third parties, whether voluntarily incurred or arising by operation of law,
and includes, without limitation, any agreement to give any of the
foregoing in the future, and any contingent or conditional sale agreement
or other title retention agreement or lease in the nature thereof.
"Environmental Claims" shall mean all notices of violation, liens,
claims, demands, suits, and causes of action for any damage, including,
without limitation, personal injury, property damage (including, without
limitation, any depreciation or diminution of property values), lost use of
property or consequential damages, arising directly or indirectly out of
Environmental Conditions or Environmental Laws. By way of example only (and
not by way of limitation), Environmental Claims include (i) violations of
or obligations under any Contract or Permit related to Environmental Laws
or Environmental Conditions between the Company or its Subsidiaries and any
other Person, (ii) actual or threatened damages to natural resources, (iii)
claims for nuisance or its statutory equivalent, (iv) claims for the
recovery of
2
<PAGE> 69
response costs, or administrative or judicial orders directing the
performance of investigations, responses or remedial actions under any
Environmental Laws, (v) requirements to implement "corrective action"
pursuant to any order or permit issued pursuant to any Environmental Law,
(vi) claims related to Environmental Laws or Environmental Conditions for
restitution, contribution, or indemnity, (vii) fines, penalties or liens of
any kind against property related to Environmental Laws or Environmental
Conditions, (viii) claims related to Environmental Laws or Environmental
Conditions for injunctive relief or other orders or notices of violation
from any Governmental Authority, and (ix) claims relating to exposure to or
injury from Environmental Conditions.
"Environmental Conditions" shall mean the state of the environment,
including natural resources (e.g., flora and fauna), soil, surface water,
ground water, any present or potential drinking water supply, subsurface
strata or ambient air.
"Environmental Laws" shall mean all applicable foreign, federal,
state, district and local laws, all rules or regulations promulgated
thereunder, and all orders, consent decrees, judgments, notices and Permits
relating to pollution or protection of the environment (including, without
limitation, ambient air, surface water, ground water, land surface, or
subsurface strata), including, without limitation, (i) laws relating to
emissions, discharges, releases or threatened releases of Hazardous
Substances into the environment and (ii) laws relating to the
identification, generation, manufacture, processing, distribution, use,
treatment, storage, disposal, recovery, transport or other handling of
Hazardous Substances. Environmental Laws shall include, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), the Toxic Substances Control Act, as amended,
the Hazardous Materials Transportation Act, as amended, the Resource
Conservation and Recovery Act, as amended ("RCRA"), the Clean Water Act, as
amended, the Safe Drinking Water Act, as amended, the Clean Air Act, as
amended and all analogous laws promulgated or issued by any Governmental
Authority.
"Environmental Reports" shall mean any and all written analyses,
summaries or explanations, in the possession or control of the Company or
its Subsidiaries, of (i) any Environmental Conditions in, on or about the
current or former properties of the Company or its Subsidiaries or (ii) the
Company's or its Subsidiaries' compliance with, or liability under, any
Environmental Laws.
"Equity Securities" of any Person shall mean (i) shares of capital
stock or other equity securities of such Person, including, with respect to
the Company, the Company Common Stock and the Class A Stock, (ii)
subscriptions, calls, warrants, options or commitments of any kind or
character relating to, or entitling any Person to purchase or otherwise
acquire, any capital stock or other equity securities of such Person, (iii)
securities convertible into or exercisable or exchangeable for shares of
capital stock or other equity securities of such Person, and (iv) equity
equivalents, interests in the ownership or earnings of, or stock
appreciation, phantom stock or other similar rights of, or with respect to,
such Person.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" shall mean any entity which is (or at any relevant
time was) a member of a "controlled group of corporations" with, under
"common control" with, or a member of an "affiliated service group" with,
or otherwise required to be aggregated with, the Company or any of its
Subsidiaries as set forth in Section 414(b), (c), (m) or (o) of the Code.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Facilities" shall mean all plants, offices, manufacturing facilities,
stores, warehouses, administration buildings and all real property and
related facilities owned, leased or used by the Company or its
Subsidiaries.
"GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
"Governmental Authority" means any court, tribunal, arbitrator,
authority, agency, commission, official or other instrumentality of any
government, including the United States or any state, county, city or other
political subdivision or any foreign government.
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<PAGE> 70
"Hazardous Substances" shall mean all pollutants, contaminants,
chemicals, wastes, and any other carcinogenic, ignitable, corrosive,
reactive, toxic or otherwise hazardous substances or materials (whether
solids, liquids or gases) subject to regulation, control or remediation
under Environmental Laws. By way of example only, the term Hazardous
Substances includes petroleum, urea formaldehyde, flammable, explosive and
radioactive materials, PCBs, pesticides, herbicides, asbestos, sludge,
slag, acids, metals, solvents and waste waters.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"Improvements" shall mean any buildings, facilities, other structures
and improvements, building systems and fixtures located on or under any
real property owned or leased by the Company or its Subsidiaries.
"Indebtedness" of any Person means all obligations of such Person (i)
for borrowed money, (ii) evidenced by notes, bonds, debentures or similar
instruments, (iii) for the deferred purchase price of goods or services
(other than trade payables incurred in the ordinary course of business),
(iv) under capital leases or (v) in the nature of guarantees of the
obligations described in clauses (i) through (iv) above of any other
Person.
"June 30 Balance Sheet" shall mean the consolidated balance sheet of
the Company and its consolidated Subsidiaries as of June 30, 1999.
"June 30 Balance Sheet Date" shall mean June 30, 1999.
"Laws" means all laws, statutes, rules, regulations, ordinances,
policies and other pronouncements having the effect of law of any
Governmental Authority.
"Leases" shall mean all of the leases or subleases for personal or
real property to which the Company or its Subsidiaries is a party or by
which the Company, its Subsidiaries or any of the Assets is bound.
"Material Adverse Effect" or "Material Adverse Change" or a similar
phrase shall mean, with respect to any Person, any material adverse effect
on or material adverse change with respect to (i) the business, operations,
assets, liabilities, condition (financial or otherwise), or results of
operations of such Person and its Subsidiaries, taken as a whole, (ii) the
relations with customers, suppliers, distributors or employees of such
Person and its Subsidiaries, taken as a whole, or (iii) the right or
ability of such Person or its Subsidiaries to consummate any of the
transactions contemplated hereby; provided that a "Material Adverse Effect"
or "Material Adverse Change" shall not be deemed to included (1) changes in
GAAP or (2) in the case of the Company, acts or omissions of the Company
taken with the prior written consent of Parent in contemplation of the
Merger.
"Multiemployer Plan" shall mean any "multiemployer plan," as defined
in Section 4001(a)(3) or 3(37) of ERISA, (i) which the Company, its
Subsidiaries or any ERISA Affiliate maintains, administers, contributes to
or is required to contribute to, or, after September 25, 1980, maintained,
administered, contributed to or was required to contribute to, or under
which the Company, its Subsidiaries or any ERISA Affiliate may incur any
liability and (ii) which covers any employee or former employee of the
Company, its Subsidiaries or any ERISA Affiliate (with respect to their
relationship with any such entity).
"Options" shall mean the options to purchase shares of Company Common
Stock issued to employees and non-employee directors of the Company
pursuant to the Stock Option Plans.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Pension Plan" shall mean any "employee pension benefit plan" as
defined in Section 3(2) of ERISA (other than a Multiemployer Plan) (i)
which the Company, its Subsidiaries or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or, within the
five years prior to the Closing Date, maintained, administered, contributed
to or was required to contribute to, or under which the Company, its
Subsidiaries or any ERISA Affiliate may incur any liability (including,
without limitation, any contingent liability) and (ii) which covers any
employee or former employee of
4
<PAGE> 71
the Company, its Subsidiaries or any ERISA Affiliate (with respect to their
relationship with any such entity).
"Permits" shall mean all licenses, permits, franchises, approvals,
authorizations, consents or orders of, or filings with, or notifications
to, any Governmental Authority, necessary or desirable for the operation of
the business of the Company or its Subsidiaries as currently conducted.
"Permitted Encumbrances" shall mean (a) liens for Taxes or
governmental charges or claims (i) not yet due and payable or (ii) being
contested in good faith, in each case, if a reserve or other appropriate
provision as may be required by GAAP shall have been made therefor, (b)
statutory liens of landlords, liens of carriers, warehouse persons,
mechanics and material persons and other liens imposed by law incurred in
the ordinary course of business for sums (i) not yet due and payable or
(ii) being contested in good faith, in each case, if a reserve or other
appropriate provision as may be required by GAAP shall have been made
therefor and (c) easements, rights-of-way, restrictions and other similar
charges or encumbrances on real property, in each case, which do not
interfere with the ordinary conduct of business of the Company or its
Subsidiaries and do not materially detract from the use or value of the
property to which such encumbrance relates.
"Person" shall mean any natural person, corporation, limited
partnership, general partnership, limited liability company, joint stock
company, joint venture, association, company, trust or other organization,
or any Governmental Authority.
"Personnel" shall mean all directors, officers, employees and agents
of the Company or its Subsidiaries.
"Returns" shall mean any and all returns, reports, declarations and
information statements with respect to Taxes required to be filed by or on
behalf of the Company or its Subsidiaries with any Governmental Authority
or Tax authority or agency, whether domestic or foreign, including, without
limitation, consolidated, combined and unitary returns and all amendments
thereto or thereof.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shareholders" shall mean the record holders of Company Common Stock
and Class A Stock.
"Stock Purchase Plan" shall mean the Medical Graphics Corporation
Employee Stock Purchase Plan of the Company effective May 11, 1993.
"Stock Option Plans" shall mean, collectively, (i) the Medical
Graphics Corporation 1987 Stock Plan, effective March 12, 1987 (the "1987
Stock Plan"), and (ii) the Medical Graphics Corporation Restated
Non-Employee Director Compensation Plan, effective May 22, 1997 (the
"Directors' Stock Plan").
"Subsidiary" shall mean, with respect to any Person, any corporation
or other business entity, whether or not incorporated, (i) of which at
least 50% of the Equity Securities having, by their terms, ordinary voting
power to elect members of the board of directors, or other persons
performing similar functions with respect to such entity, are held,
directly or indirectly, by such Person or any of its Subsidiaries or (ii)
the operations of which are consolidated with such Person, pursuant to
GAAP, for financial reporting purposes.
"Tax(es)" shall mean all taxes, estimated taxes, withholding taxes,
assessments, levies, imposts, fees and other charges, including, without
limitation, any interest, penalties, additions to tax or additional amounts
that may become payable in respect thereof, imposed by any foreign,
federal, state or local government or taxing authority, which taxes shall
include, without limitation, all income taxes, payroll and employee
withholding taxes, unemployment insurance, social security, sales and use
taxes, value-added taxes, excise taxes, franchise taxes, gross receipts
taxes, occupation taxes, real and personal property taxes, stamp taxes,
transfer taxes, workers' compensation and other obligations of the same or
of a similar nature.
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"Taxpayers" shall mean (i) the Company, (ii) each Subsidiary of the
Company and (iii) each consolidated or affiliated group of which the
Company or any of its Subsidiaries is or has been a part.
"Warrants" shall mean warrants to purchase shares of Company Common
Stock under the Warrant Agreements.
"Warrant Agreements" shall mean (i) the Warrant dated March 25, 1997,
expiring March 31, 2000, to Catherine A. Anderson to purchase 195,000
shares of Company Common Stock at a price of $2.67 per share, (ii) the
Warrant dated March 27, 1997, expiring September 30, 2000, to Norwest
Business Credit, Inc. to purchase 93,750 shares of Company Common Stock at
a price of $2.25 per share (which, after giving effect to antidilution
provisions in the warrant, results in the right to purchase 210,937.50
shares at a price of $1.00 per share); and (iii) the Warrant dated March
25, 1997, expiring March 31, 2002, to Mark W. Sheffert to purchase 225,000
shares of Company Common Stock at a price of $2.25 per share.
"Welfare Plan" shall mean any "employee welfare benefit plan" as
defined in Section 3(1) of ERISA, (a) which the Company, its Subsidiaries
or any ERISA Affiliate maintains, administers, contributes to or is
required to contribute to, or under which the Company, its Subsidiaries or
any ERISA Affiliate may incur any liability and (b) which covers any
employee or former employee of the Company, its Subsidiaries or any ERISA
Affiliate (with respect to their relationship with any such entity).
1.2. Other Defined Terms.
In addition to the terms defined in Section 1.1 of this Agreement, the
following terms shall have the meanings defined for such terms in the Sections
set forth below:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
"Acquisition Proposal".................................... 6.4(a)
"Articles of Merger"...................................... Recitals
"CERCLA".................................................. 4.18(d)
"Certificates"............................................ 3.2(b)
"Closing"................................................. 2.3
"Closing Date"............................................ 2.3
"Company Common Stock".................................... Recitals
"Constituent Corporations"................................ Recitals
"Disclosure Schedule"..................................... Article IV Preamble
"Effective Time".......................................... 2.2
"Employment Laws"......................................... 4.16
"Financial Statements".................................... 4.5(c)
"Financing"............................................... 6.3(b)
"Financing Documents"..................................... 6.3(b)
"FDA"..................................................... 4.6(a)
"Intellectual Property"................................... 4.12
"Key Employee"............................................ 4.31
"Key Employee Agreement".................................. 4.31
"Leased Real Property".................................... 4.13(a)
"Machinery and Equipment"................................. 4.11
"Material Contract"....................................... 4.9(a)
"Merger".................................................. Recitals
"Merger Consideration".................................... 3.1(c)
"MBCA".................................................... Recitals
"Paying Agent"............................................ 3.2(a)
"Payment Event"........................................... 6.4(b)
"Permitted Party"......................................... 6.4(b)
"Programs"................................................ 4.6(d)
"Proxy Statement"......................................... 6.6(a)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
"Required Vote"........................................... 4.28
"SEC Documents"........................................... 4.5(a)
"Special Meeting"......................................... 4.29
"Sub Common Stock"........................................ 3.1(a)
"Surviving Corporation"................................... Recitals
"Tax Returns"............................................. 4.19(a)
"Third Party"............................................. 6.4(a)
</TABLE>
1.3. Interpretation Provisions.
(a) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement refer to this Agreement as a whole and
not to any particular provision of this Agreement, and article, section,
schedule and exhibit references are to this Agreement unless otherwise
specified. The meaning of defined terms shall be equally applicable to the
singular and plural forms of the defined terms. The term "or" is
disjunctive but not necessarily exclusive. The terms "include" and
"including" are not limiting and mean "including without limitation."
(b) References to agreements and other documents shall be deemed to
include all subsequent amendments and other modifications thereto.
(c) References to statutes shall include all regulations promulgated
thereunder and references to statutes or regulations shall be construed as
including all statutory and regulatory provisions consolidating, amending
or replacing the statute or regulation.
(d) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the construction of this Agreement.
(e) The language used in this Agreement shall be deemed to be the
language chosen by the parties to express their mutual intent, and no rule
of strict construction shall be applied against either party.
(f) The annexes, schedules and exhibits to this Agreement are a
material part hereof and shall be treated as if fully incorporated into the
body of the Agreement.
ARTICLE II.
THE MERGER
2.1. The Merger. Upon the terms and subject to the satisfaction or waiver,
if permissible, of the conditions hereof, and in accordance with the MBCA, at
the Effective Time, Sub shall be merged with and into the Company. Upon the
effectiveness of the Merger, the separate corporate existence of Sub shall cease
and the Company shall continue as the Surviving Corporation.
2.2. Effective Time. On the Closing Date, the parties shall cause the
Merger to be consummated by causing the Articles of Merger to be executed by the
Constituent Corporations and filed in accordance with the relevant provisions of
the MBCA. The Merger shall become effective at the time of filing of the
Articles of Merger (the "Effective Time").
2.3 Closing. Upon the terms and subject to the conditions of this
Agreement, the consummation of the Merger (the "Closing") shall take place (a)
at the offices of Faegre & Benson, 2200 Norwest Center, 90 South Seventh Street,
Minneapolis, Minnesota 55402 at 10:00 a.m., local time, on the business day as
soon as practicable following the day on which the last to be satisfied or
waived of the conditions set forth in Article VII (other than those conditions
that by their nature are to be satisfied at the Closing, but subject to the
satisfaction or waiver of those conditions) shall be satisfied or waived in
accordance herewith or (b) at such other time, date or place as the Parent and
the Company may agree. The date on which the Closing occurs is herein referred
to as the "Closing Date."
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2.4. Articles of Incorporation and By-laws.
(a) At the Effective Time, and without any further action on the part
of the Company or Sub, the articles of incorporation of Sub, in the form
attached hereto as Exhibit A, shall be the articles of incorporation of the
Surviving Corporation following the Merger, until thereafter further
amended as provided therein and under the MBCA, provided that at the
Effective Time, Article I of such articles of incorporation shall be
amended, by virtue of this Agreement and the Merger and without further
action on the part of the Company or Sub, so that the name of the Surviving
Corporation shall be Medical Graphics Corporation.
(b) At the Effective Time, and without any further action on the part
of the Company or Sub, the by-laws of Sub as in effect immediately prior to
the Effective Time shall be the bylaws of the Surviving Corporation
following the Merger until thereafter changed or amended as provided
therein, in the articles of incorporation of the Surviving Corporation and
under the MBCA.
2.5. Directors. The directors of Sub immediately prior to the Effective
Time shall be the initial directors of the Surviving Corporation and shall hold
such positions until their respective successors are duly elected and qualified,
or their earlier death, resignation or removal or as otherwise provided in the
articles of incorporation or bylaws of the Surviving Corporation.
2.6. Officers. The officers of the Company immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation and
shall hold office until their respective successors are duly elected and
qualified, or their earlier death, resignation or removal or as otherwise
provided in the articles of incorporation or bylaws of the Surviving
Corporation.
2.7. Effect of Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of the
MBCA. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time the Surviving Corporation shall thereupon and thereafter
possess all of the rights, privileges, immunities, powers, and franchises, of a
public as well as a private nature, of the Constituent Corporations, and shall
become subject to all of the duties, liabilities and obligations of each of the
Constituent Corporations; and all rights, privileges, immunities, powers and
franchises of each Constituent Corporation, and all property, real, personal and
mixed, and all debts to each such Constituent Corporation, on whatever account,
and all choses in action belonging to each such corporation, shall become vested
in the Surviving Corporation; and all property, rights, privileges, powers and
franchises, and, without any further action or deed, all and every other
interest shall become thereafter the property of the Surviving Corporation as
they are of the Constituent Corporations; and the title to any real property
vested by deed or otherwise or any other interest in real estate vested by any
instrument or otherwise in either of such Constituent Corporations shall not
revert or become in any way impaired by reason of the Merger; but all rights of
creditors and Encumbrances upon any property of either Constituent Corporation
shall therefore attach to the Surviving Corporation and shall be preserved
unimpaired, and all debts, liabilities, obligations and duties of each
Constituent Corporation shall attach to the Surviving Corporation and may be
enforceable against it to the same extent as if said debts, liabilities,
obligations and duties had been incurred or contracted by it; all of the
foregoing in accordance with the applicable provisions of the MBCA.
ARTICLE III.
EFFECT OF MERGER ON SECURITIES OF SUB AND THE COMPANY
3.1. Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holders of any shares of
Company Common Stock or any shares of capital stock of Sub:
(a) Conversion of Common Stock of Sub. Each share of common stock, par
value $0.01 per share, of Sub (the "Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into
one validly issued, fully paid and nonassessable share of common stock, par
value $0.01 per share, of the Surviving Corporation, which, immediately
after the Effective Time, shall be all of the issued and outstanding
capital stock of the Surviving Corporation.
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(b) Cancellation of Stock Held by Company. Each share of Company
Common Stock and all other shares of capital stock of the Company that are
owned by the Company or by any Subsidiary of the Company shall
automatically be canceled and retired and shall cease to exist and no
consideration shall be delivered or deliverable in exchange therefor.
(c) Conversion of Company Common Stock. Except as otherwise provided
herein and subject to Section 3.1(d), each issued and outstanding share of
Company Common Stock shall be converted into the right to receive $2.15 in
cash per share without interest (the "Merger Consideration"), payable to
the holder thereof upon surrender of the certificate formerly representing
such share of Company Common Stock in the manner provided in Section 3.2.
All such shares of Company Common Stock, when so converted, shall no longer
be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each certificate previously representing any such
shares shall cease to have any rights with respect thereto, except the
right to receive the Merger Consideration therefor upon the surrender of
such certificates in accordance with Section 3.2.
(d) Shares of Dissenting Holders.
(i) Notwithstanding any provision of this Agreement to the
contrary, each share of Company Common Stock (including each share of
Company Common Stock held by any holder of Class A Stock who has
converted his Class A Stock to Company Common Stock immediately upon
approval of the Merger by the Required Vote) held by a Dissenting
Shareholder who has demanded and perfected his demand for dissenters'
rights with respect to such shares in accordance with Sections 302A.471
and 302A.473 of the MBCA and as of the Effective Time has neither
effectively withdrawn nor lost such rights shall not be converted into
or represent a right to receive any of the Merger Consideration for such
shares pursuant to Section 3.1(c) above, but in lieu thereof the holder
thereof shall be entitled to only such rights as are granted by the
MBCA.
(ii) Notwithstanding the provisions of Section 3.1(d)(i) above, if
any Dissenting Shareholder demanding dissenters' rights with respect to
such Dissenting Shareholder's Dissenting Shares under the MBCA shall
effectively withdraw or lose (through failure to perfect or otherwise)
his dissenters' rights, then as of the Effective Time or the occurrence
of such event, whichever later occurs, such Dissenting Shares shall
automatically be converted into and represent only the right to receive
the Merger Consideration as provided in Section 3.1(c) above upon
surrender of the certificate or certificates representing such
Dissenting Shares.
(iii) The Company shall give Parent prompt written notice of any
demands by a Dissenting Shareholder for payment, or notices of intent to
demand payment received by the Company under Section 302A.473 of the
MBCA and any withdrawal of such notice of intent to demand payment and
Parent shall have the right to participate in all negotiations and
proceedings with respect to such demands. The Company shall not, except
with the prior written consent of Parent or as otherwise required by
law, make any payment with respect to, or settle, or offer to settle,
any such demands.
3.2. Payment; Exchange of Certificates.
(a) Paying Agent; Payment Fund. Prior to the Effective Time, Parent
shall designate a bank or trust company which shall be reasonably
satisfactory to the Company to act as paying agent in the Merger (the
"Paying Agent"), and on or prior to the Closing Date, Parent shall deposit
or cause to be deposited with the Paying Agent for the benefit of the
holders of the Company Common Stock (other than the Company and holders of
Dissenting Shares) cash in an amount necessary for the payment of the
Merger Consideration as provided in Section 3.1 upon surrender of
certificates representing shares of Company Common Stock as part of the
Merger. Funds deposited with the Paying Agent shall be invested by the
Paying Agent as directed by Parent or, after the Effective Time, the
Surviving Corporation, provided that such investments shall only be in
obligations of or guaranteed by the United States of America, or in
certificates of deposit, bank repurchase agreements or banker's acceptances
of commercial banks with capital exceeding $100 million or in money market
funds which are invested solely in such permitted investments. Any interest
earned on such funds shall be for the benefit of the Surviving
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<PAGE> 76
Corporation and the Parent may cause the Paying Agent to remit any interest
earned from time to time to the Surviving Corporation. The Paying Agent
shall, pursuant to irrevocable instructions from Parent and the Surviving
Corporation, use the funds deposited with the Paying Agent to pay the
holders of the Company Common Stock in accordance with this Article III,
and such funds shall not be used for any other purpose.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Paying Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (the
"Certificates"), whose shares were converted pursuant to Section 3.1 into
the right to receive the Merger Consideration, (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Paying Agent and shall be in such form and have such
other provisions as Parent and the Company may reasonably specify) and (ii)
instructions to effect the surrender of the Certificates in exchange for
payment of the Merger Consideration. Upon surrender of one or more
Certificates for cancellation to the Paying Agent or to such other agent or
agents as may be appointed by Parent, which agents shall be reasonably
satisfactory to the Company, together with such letter of transmittal, duly
executed, the holder of such Certificates shall be entitled to receive in
exchange therefor the Merger Consideration for each share of Company Common
Stock formerly represented by such Certificate, and the Certificates so
surrendered shall forthwith be canceled. Except as required by law, no
interest shall be paid on the Merger Consideration payable upon surrender
of any Certificate. If payment of the Merger Consideration is to be made to
a person other than the person in whose name the surrendered Certificate is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or shall be otherwise in proper form
for transfer and that the Person requesting such payment shall have paid
any transfer and other taxes required by reason of the payment of the
Merger Consideration to a Person other than the registered holder of the
Certificate surrendered or shall have established to the satisfaction of
the Surviving Corporation that such tax either has been paid or is not
applicable. Until surrendered as contemplated by this Section 3.2, each
Certificate (other than Certificates representing Dissenting Shares) shall
be deemed at any time after the Effective Time to represent only the right
to receive the Merger Consideration in cash as contemplated by this Section
3.2.
(c) No Further Ownership Rights in Company Common Stock. All cash paid
upon the surrender of Certificates in accordance with the terms of this
Article III shall be deemed to have been paid in full satisfaction of the
rights pertaining to the shares of Company Common Stock theretofore
represented by such Certificates. At the Effective Time, the stock transfer
books of the Company shall be closed, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Paying Agent or the Surviving
Corporation, they shall be canceled and exchanged for the Merger
Consideration as provided in this Article III.
(d) Termination of Payment Fund. Any portion of the funds held by the
Paying Agent pursuant to this Section 3.2 which remain undistributed to the
holders of Company Common Stock for six months after the Effective Time
shall be delivered to the Surviving Corporation, upon demand, and any
holders of Company Common Stock who have not theretofore complied with this
Article III shall thereafter look only to the Surviving Corporation
(subject to abandoned property, escheat or other similar laws) for payment
of the Merger Consideration to which they are entitled.
(e) No Liability. None of Parent, the Company, the Surviving
Corporation or the Paying Agent shall be liable to any holder of shares of
Company Common Stock for any cash delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law. If any
Certificates shall not have been surrendered prior to five years after the
Effective Time (or immediately prior to such earlier date on which any
payment in respect thereof would otherwise escheat to or become the
property of any Governmental Authority), the payment in respect of such
Certificates shall, to the extent permitted by
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<PAGE> 77
applicable law, become the property of the Surviving Corporation, free and
clear of all claims or interest of any person previously entitled thereto.
(f) Withholding Rights. The Paying Agent or the Surviving Corporation
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company
Common Stock such amounts as the Paying Agent or the Surviving Corporation
is required to deduct and withhold with respect to the making of such
payment under the Code, or any provision of state, local or foreign tax
law, or any court order. To the extent that amounts are so withheld by the
Paying Agent or the Surviving Corporation, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the
holder of the shares of Company Common Stock in respect of which such
deduction and withholding was made by the Paying Agent or the Surviving
Corporation.
(g) Lost Certificates. In the event any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by
the holder claiming such Certificate to have been lost, stolen or
destroyed, the amount to which such holder would have been entitled under
Section 3.1 hereof but for failure to deliver such Certificate to the
Paying Agent shall nevertheless be paid to such holder, provided that the
Surviving Corporation may, in its sole discretion and as a condition
precedent to such payment, require such holder to give the Surviving
Corporation a written indemnity agreement in form and substance
satisfactory to the Surviving Corporation and a bond in such sum as it may
reasonably direct as indemnity against any claim that may be had against
the Surviving Corporation with respect to the Certificate alleged to have
been lost, stolen or destroyed.
3.3. Treatment of Employee and Director Options; Warrants; Class A Stock;
Accrued Interests in Stock Purchase Plan.
(a) Prior to the Effective Time, the Board of Directors of the Company
(or, if appropriate, any committee thereof) shall adopt appropriate
resolutions and take all other actions reasonably necessary to (i) provide
for the cancellation, effective at the Effective Time, of all the
outstanding Options and Warrants, (ii) provide that immediately prior to
the Effective Time, each Option and Warrant, whether or not then vested or
exercisable, shall no longer be exercisable but shall entitle each holder
thereof (subject to applicable withholding taxes), in cancellation and
settlement therefor, to a cash payment at the Effective Time equal to (x)
the excess, if any, of the Merger Consideration over the per share exercise
price of each Option or Warrant held by the holder, whether or not then
vested or exercisable, multiplied by (y) the number of shares of Company
Common Stock subject to such Option or Warrant; and (iii) provide that all
Stock Option Plans and Warrant Agreements will terminate as of or prior to
the Effective Time.
(b) Prior to the Closing and upon approval of the Merger by the
Required Vote, the Company shall take all actions necessary to cause the
holders of Class A Stock to convert the Class A Stock to Company Common
Stock such that no shares of Class A Stock will be issued and outstanding
at the Effective Time.
(c) As provided herein, the Stock Option Plans, the Warrant Agreements
and any other plan, program or arrangement providing for the issuance or
grant of any other interest in respect of the capital stock of the Company
or any subsidiary shall terminate as of the Effective Time. The Company
will take all action reasonably necessary to ensure that, as of the
Effective Time, none of Parent, the Company, the Surviving Corporation or
any of their respective subsidiaries is or will be bound by any Options,
other options, Warrants, warrants, rights or agreements which would entitle
any person, other than Parent or its affiliates, to own any capital stock
of the Company or the Surviving Corporation or any of their respective
subsidiaries or to receive any payment in respect thereof after the
Effective Time.
(d) On or prior to the Effective Time, the Company will either (i)
issue shares of Company Common Stock in exchange for the amount contributed
by employees to the Stock Purchase Plan and held for the issuance of shares
of Company Common Stock, in which case such shares of Company Common Stock
shall be entitled to the Merger Consideration provided in Section 3.1(c) or
(ii) with the
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consent of Parent, pay to such employees in exchange for cancellation of
all rights to the issuance of shares of Company Common Stock under the
Stock Purchase Plan, the amount of $1.087 for each Company Common Share
otherwise issuable under the Stock Purchase Plan and refund to such
employees the amount contributed ($1.063 per otherwise issuable share) by
employees under the Stock Purchase Plan and held by the Company.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Sub and Parent to enter into this Agreement, the
Company hereby makes the following representations and warranties to Sub and
Parent except as otherwise set forth in a written disclosure schedule (the
"Disclosure Schedule") delivered by the Company to Sub and Parent:
4.1. Organization and Capitalization.
(a) Organization. The Company is duly incorporated, validly existing
and in good standing under the laws of the State of Minnesota and has full
corporate power and authority to conduct its business as it is presently
being conducted and to own and lease its Assets. The Company is duly
qualified to do business as a foreign corporation and is in good standing
in each jurisdiction in which such qualification is necessary under
applicable law except where the failure to be so qualified and in good
standing would not reasonably be expected to have a Material Adverse Effect
on the Company. The Company has, prior to the date hereof, delivered to
Parent true, correct and complete copies of its articles of incorporation
and by-laws (in each case, as amended to date).
(b) Capitalization. The authorized capital stock of the Company
consists of 25,000,000 shares of stock, of which 500,000 shares are
designated as Class A Stock. The issued and outstanding shares of Company
Common Stock as of the date hereof consist solely of 5,650,947 shares of
common stock, $0.05 par value. The issued and outstanding shares of Class A
Stock as of the date hereof consist solely of 444,445 shares of Class A
Stock and are held by FAMCO II, LLC. No shares of Company Common Stock or
Class A Stock that have been repurchased by the Company are subject to
Encumbrances created by the Company with respect to such shares. As of the
date hereof, each share of Class A Stock is convertible into 3.375 shares
of Company Common Stock. As of the date hereof, Options and Warrants to
acquire 1,793,649 shares of Company Common Stock pursuant to the Stock
Option Plans and Warrant Agreements are outstanding and unexercised,
876,437 shares of which are exercisable at a price that is less than the
Merger Consideration. The total payments under Section 3.3(a) will not
exceed $830,256. Schedule 4.1(b) includes a complete and correct list of
(i) outstanding Options under such Stock Option Plans (including the name
of each Person holding Options, the number of shares of Company Common
Stock issuable upon the exercise thereof and the applicable exercise price
of each such Option). The Company has no outstanding bonds, debentures,
notes or other securities the holders of which have the right to vote (or
which are convertible into or exercisable for securities having the right
to vote) with the shareholders of the Company on any matter. All issued and
outstanding shares of Company Common Stock and Class A Stock (x) are duly
authorized, validly issued, fully paid and nonassessable, and were issued
free of any preemptive or other similar rights and (y) were issued in
compliance with all applicable Laws, including federal and applicable state
securities laws. Except as set forth in this Section 4.1(b) and shares of
Company Common Stock issuable under the Stock Purchase Plan, there are no
(i) outstanding Equity Securities of the Company or (ii) commitments or
obligations of any kind or character for (A) the issuance of Equity
Securities of the Company or (B) the repurchase, redemption or other
acquisition of any Equity Securities of the Company. Under the Company's
Stock Purchase Plan, the Company's employees have the right to purchase
shares of Company Common Stock at a price of $1.063 per share. As of
September 4, 1999, a total of $14,035.42 had been contributed to the Stock
Purchase Plan and is being held by the Company for future issuance of
shares. Upon the execution of this Agreement, the Company has closed the
Stock Purchase Plan for further contributions at the end of the payroll
period ending October 2, 1999. The Company estimates that the total amount
that will be contributed through October 2, 1999 to the Stock Purchase Plan
will be approximately $19,000. No
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shares of Company Common Stock or Class A Stock have been repurchased by
the Company since January 1, 1997.
(c) Voting Trusts, Proxies, Etc. Except as disclosed in Schedule
4.1(c), there are no shareholder agreements, voting trusts, proxies or
other agreements or understandings with respect to or concerning the
purchase, sale or voting of the Company Common Stock or Class A Stock to
which the Company or, to the knowledge of the Company, any other Person is
a party or by which the Company or, to the knowledge of the Company, any
other Person is bound.
4.2. Authorization. The Company has all necessary corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. Subject only to the approval of this Agreement and the transactions
contemplated hereby by the Required Vote of the Company's shareholders, the
consummation by the Company of the transactions contemplated hereby has been
duly authorized by all requisite corporate action. This Agreement has been duly
authorized, executed and delivered by the Company and is a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as the enforceability thereof may be limited by (a)
applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent
conveyance or similar laws in effect which affect the enforcement of creditors'
rights generally or (b) general principles of equity.
4.3. Subsidiaries.
(a) Ownership; Capitalization. Schedule 4.3(a) sets forth a list of
each Subsidiary of the Company including the jurisdiction of organization,
the number of shares of authorized capital stock, the par value of such
stock, and the number of shares which are issued and outstanding. Except as
indicated on Schedule 4.3(a), all of the issued and outstanding shares of
each Subsidiary's capital stock are owned of record and beneficially by the
Company or another wholly-owned Subsidiary of the Company, free and clear
of any Encumbrances. All of the shares of capital stock of each Subsidiary
have been duly authorized and validly issued and are fully paid and
non-assessable, were issued and sold in accordance with federal and
applicable state and foreign securities laws and were not issued in
violation, of any preemptive or other similar rights. Except for the shares
of capital stock of the Subsidiaries owned by the Company or a wholly-owned
Subsidiary of the Company, or as otherwise indicated on Schedule 4.3(a),
there are no (i) outstanding Equity Securities of the Company's
Subsidiaries or (ii) commitments or obligations of any kind or character
for (A) the issuance of Equity Securities of the Company's Subsidiaries or
(B) the repurchase, redemption or other acquisition of any Equity
Securities of the Company's Subsidiaries. There are no shareholder
agreements, voting trusts, proxies or other agreements or understandings
with respect to or concerning the purchase, sale or voting of the Equity
Securities of the Company's Subsidiaries. Except for the Equity Securities
of the Company's Subsidiaries described on Schedule 4.3(a), neither the
Company nor its Subsidiaries own Equity Securities in any Person.
(b) Organization. Each of the Company's Subsidiaries is duly
incorporated as organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has full corporate power
and authority to conduct its business as it is presently being conducted
and to own and lease its Assets. Each of the Company's Subsidiaries is duly
qualified to do business as a foreign corporation or other entity and is in
good standing in each jurisdiction in which such qualification is necessary
under applicable law except where the failure to be so qualified and in
good standing would not reasonably be expected to have a Material Adverse
Effect on the Company. The Company has delivered to Parent true, correct
and complete copies of each of its Subsidiaries' articles of incorporation
and by-laws or other organizational documents (in each case, as amended to
date).
4.4. No Conflict. Except as set forth in Schedule 4.4, the execution and
delivery of this Agreement by the Company and the consummation of the
transactions contemplated hereby does not and will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the articles of incorporation or bylaws
(or other comparable organizational documents) of the Company or any of its
Subsidiaries;
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(b) subject to obtaining the consents, approvals and actions, making
the filings and giving the notices disclosed in Schedule 4.4, conflict with
or result in a violation or breach of any term or provision of any Law
applicable to the Company or any of its Subsidiaries or any of their
respective Assets; or
(c) (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default
under, (iii) require the Company or any Subsidiary to obtain any consent,
approval or action of, make any filing with or give any notice to any
Person as a result or under the terms of, (iv) result in or give to any
Person any right of termination, cancellation, acceleration or modification
in or with respect to, or (v) result in the creation or imposition of any
Encumbrance upon the Company or any of its Subsidiaries or any of their
respective Assets under, any Material Contract or any material Permits to
which the Company or any of its Subsidiaries is a party or by which any of
their respective Assets is bound, except where such conflict, violation,
default, consent, termination, cancellation, acceleration or modification,
or Encumbrance would not reasonably be expected to have a Material Adverse
Effect on the Company.
4.5. SEC Documents.
(a) Since January 1, 1997, the Company has timely filed with the SEC
all reports, schedules, forms, statements and other documents required to
be filed (such reports, schedules, forms, statements and other documents
are hereinafter referred to as the "SEC Documents").
(b) As of their respective dates, the SEC Documents complied with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC promulgated thereunder applicable
to such SEC Documents, and none of the SEC Documents as of such dates
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(c) The consolidated financial statements of the Company and its
Subsidiaries included in the SEC Documents (the "Financial Statements")
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except in the case of
unaudited statements, as permitted by Rule 10-01 of Regulation S-X) and
fairly present the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (on
the basis stated therein and subject, in the case of unaudited quarterly
statements, to normal year-end audit adjustments).
4.6. Compliance with Health Care Laws.
(a) The operations of the Company and its Subsidiaries are, and at all
relevant times have been, in compliance in all material respects with all
laws and regulations of the United States Food and Drug Administration (the
"FDA") and all state and foreign agencies which have jurisdiction over
their products including without limitation the FDA's Good Manufacturing
Practices Regulations. Except as set forth in Schedule 4.6, the Company is
not aware of any actual or threatened enforcement action by the FDA or
state, foreign or independent agencies which have jurisdiction over its
medical products concerning its products, including, without limitation,
any fines, injunctions, civil or criminal penalties, recalls, seizures,
detentions, investigations or suspensions. All products of the Company and
its Subsidiaries are in compliance with all applicable premarketing,
facility registration and product listing requirements, as well as all
applicable manufacturing laws, regulations, standards and procedures of the
FDA and applicable state, foreign or independent authorities, including the
International Standards Organization. Each product manufactured or marketed
by the Company and its Subsidiaries with respect to which a determination
is required has been determined by the FDA to be substantially equivalent
to a similar device marketed prior to May 28, 1976, and is therefore
marketed pursuant to Section 510(k) of the Medical Devices Amendments of
1976. Except for the CardiO(2) product, each product manufactured or
marketed by the Company or its Subsidiaries for sale in countries where the
CE Mark is required is
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eligible to display the CE Mark. All manufacturing and development
processes of the Company and its Subsidiaries have received, and continue
to remain eligible to receive, ISO 9001 certification.
(b) The Company and its Subsidiaries possess such certificates,
authorizations, licenses or permits issued by the appropriate local, state,
federal or foreign regulatory agencies or bodies including, without
limitation, the FDA, as are material to, or legally required for, the
operation of its business. The Company has not received any notice of
proceedings relating to, or otherwise has knowledge that any governmental
body or agency is considering, limiting, suspending, modifying or revoking
any such certificate, authorization, license or permit.
(c) All material reports, documents, claims and notices required to be
filed, maintained, or furnished to any governmental agency by the Company
have been so filed, maintained or furnished. Except as set forth on
Schedule 4.6(c), all such reports, documents, claims and notices were
complete and correct, including having met insurance coverage and medical
necessity requirements, in all material respects on the date filed (or were
corrected in or supplemented by a subsequent filing) such that no liability
exists with respect to such filing.
(d) Neither the Company and its Subsidiaries nor its officers,
directors or managing employees have engaged in any activities which are
prohibited under federal or state criminal or civil laws (including without
limitation the federal Anti-Kickback statute, Stark law and federal False
Claims Act and any state laws prohibiting kickbacks or certain referrals),
or the regulations promulgated pursuant to such laws.
4.7. Undisclosed Liabilities. Except as set forth on Schedule 4.7, neither
the Company nor any of its Subsidiaries has any liabilities or obligations
(whether absolute or contingent, liquidated or unliquidated, or due or to become
due) of a type normally reflected or reserved for on a balance sheet prepared in
accordance with GAAP or disclosed in the notes thereto, except for liabilities
and obligations (i) reflected or reserved for on the June 30 Balance Sheet or
disclosed in the notes thereto or (ii) that have arisen since the date of the
June 30 Balance Sheet Date in the ordinary course of the operation of business
and consistent with past practice of the Company and its Subsidiaries, which
would not individually or in the aggregate reasonably be expected to have a
Material Adverse Effect on the Company.
4.8. Absence of Certain Changes or Events. Since the June 30 Balance Sheet
Date, except as disclosed on Schedule 4.8, there has not been any:
(a) condition or event that has resulted in, or which the Company
reasonably believes will result in, a Material Adverse Change in respect of
the Company and its Subsidiaries, taken as a whole;
(b) (i) except for normal periodic increases in the ordinary course of
business consistent with past practice, increase in the compensation
payable or to become payable by the Company or any of its Subsidiaries to
any of their respective Personnel, (ii) bonus, incentive compensation,
service award or other like benefit granted, made or accrued, contingently
or otherwise, for or to the credit of any of the Personnel, except in the
ordinary course of business consistent with past practices, (iii) employee
welfare, pension, retirement, profit-sharing or similar payment or
arrangement made or agreed to by the Company or any of its Subsidiaries for
any Personnel except pursuant to the existing plans and arrangements
described in the Disclosure Schedule or (iv) new employment agreement to
which the Company or any of its Subsidiaries is a party;
(c) addition to or modification of the Employee Plans other than (i)
contributions made in accordance with the normal practices of the Company
and its Subsidiaries or (ii) the extension of coverage to other Personnel
who became eligible after June 30 Balance Sheet Date;
(d) sale, assignment or transfer of any material Assets of the Company
or its Subsidiaries other than in the ordinary course of business;
(e) cancellation of any Indebtedness or waiver of any rights of
substantial value to the Company or any Subsidiary, whether or not in the
ordinary course of business;
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(f) amendment, cancellation or termination of any Material Contract,
material Permit or other instrument material to the Company or any of its
Subsidiaries;
(g) capital expenditure or the execution of any Lease or any incurring
of liability for such capital expenditure or lease by the Company or any of
its Subsidiaries, involving payments in excess of $50,000;
(h) failure to operate the business of the Company and its
Subsidiaries in the ordinary course in any material respect so as to use
reasonable efforts to preserve the business of the Company and its
Subsidiaries intact, to keep available the services of the Personnel, and
to preserve the goodwill of the Company's suppliers, customers and others
having business relations with the Company or its Subsidiaries;
(i) change in accounting methods or practices by the Company or any of
its Subsidiaries;
(j) revaluation by the Company or any of its Subsidiaries of any of
their respective Assets, including without limitation, writing off notes or
accounts receivable other than in the ordinary course of business in the
reasonable judgment of the Company;
(k) damage, destruction or loss (whether or not covered by insurance)
materially and adversely affecting the Assets, properties or business of
the Company or any of its Subsidiaries;
(l) Indebtedness incurred by the Company for borrowed money or any
commitment to incur Indebtedness entered into by the Company, or any loans
made or agreed to be made by the Company other than Indebtedness incurred
under the Company's line of credit with Norwest Bank Minnesota, N.A. in the
ordinary course to finance the Company's working capital;
(m) declaration, setting aside for payment or payment of dividends or
distributions in respect of any Equity Securities of the Company or any
redemption, purchase or other acquisition of any of the Company's or its
Subsidiaries' Equity Securities;
(n) issuance or reservation for issuance by the Company or its
Subsidiaries of, or commitment to issue or reserve for issuance of, any
Equity Securities of the Company or any of its Subsidiaries other than the
issuance of Company Common Stock to any Person exercising Options or
Warrants or the issuance of Company Common Stock pursuant to the Stock
Purchase Plan or to the holder of Class A Stock converting his Class A
Stock; or
(o) any agreement by the Company or any of its Subsidiaries to do any
of the foregoing.
4.9. Contracts; No Defaults.
(a) Schedule 4.9(a) contains a listing of all Contracts described in
(i) through (xiv) below to which the Company or any of its Subsidiaries is
a party (each, a "Material Contract"). True, correct and complete copies of
the Material Contracts have been delivered to Parent.
(i) Each Contract which involves (A) performance of services or
delivery of goods and/or materials by the Company or any of its
Subsidiaries of an amount or value in excess of $200,000 or (B)
performance of services for or delivery of goods and/or materials to the
Company or any of its Subsidiaries of an amount or value in excess of
$100,000;
(ii) Each note, debenture, other evidence of Indebtedness,
guarantee, loan, letter of credit, surety-bond or financing agreement or
instrument or other contract for money borrowed, including any agreement
or commitment for future loans, credit or financing, except for extended
payments to vendors which do not extend beyond March 31, 2000;
(iii) Each Lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other Contract affecting
the ownership of, leasing of, title to, use of, or any leasehold or
other interest in, any real or personal property having annual rental
payments in excess of $50,000;
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(iv) Each material licensing agreement or other Contract with
respect to any Intellectual Property, including agreements with current
or former employees, consultants or contractors regarding the
appropriation or the nondisclosure of Intellectual Property;
(v) Each Contract to which the Company or any of its Subsidiaries
(or to the knowledge of the Company, any of their respective employees)
is bound that (A) restricts the freedom of the Company or any of its
Subsidiaries (or, if applicable any of their respective employees) to
engage in any line of business or to compete with any other Person, or
(B) assign to any other Person rights to any material invention,
improvement, or discovery;
(vi) Each employment or severance agreement with any employee or
former employee which may not be terminated at will, or by giving notice
of 30 days or less, without cost or penalty, and each collective
bargaining agreement or other Contract to or with any employee or any
labor union or other employee representative of a group of employees
relating to wages, hours, and other conditions of employment;
(vii)Each joint venture Contract, partnership agreement, limited
liability company or other Contract (however named) involving a sharing
of profits, losses, costs, or liabilities by the Company or any of its
Subsidiaries with any other Person;
(viii)Each Contract containing covenants which restricts the
Company's or any of its Subsidiaries' business activity or limits the
freedom of the Company or any of its Subsidiaries to engage in any line
of business or to compete with any Person;
(ix) Each Contract providing for payments to or by any Person or
entity based on sales, purchases or profits, other than direct payments
for goods;
(x) Each power of attorney which is currently effective and
outstanding;
(xi) Each Contract providing for capital expenditures after the
date hereof in an amount in excess of $50,000;
(xii)Each written warranty, guaranty or other similar undertaking
with respect to contractual performance extended by the Company or any
of its Subsidiaries other than in the ordinary course of business;
(xiii)Any other Contract material to the business or operations of
the Company or its Subsidiaries; and
(xiv)Each amendment, supplement, and modification (whether written
or oral) in respect of any of the foregoing.
(b) Except as set forth on Schedule 4.9(b), each of the Material
Contracts (i) is in full force and effect, (ii) represents the legally
valid and binding obligations of the Company or the Subsidiary of the
Company party thereto and are enforceable against the Company or such
Subsidiary in accordance with their terms and (iii) to the knowledge of the
Company, represents the legally valid and binding obligations of the other
parties thereto and are enforceable against such parties in accordance with
their terms. Except as set forth on Schedule 4.9(b), no condition exists or
event has occurred which, with notice or lapse of time or both, would
constitute a default or a basis for force majeure or the claim of excusable
delay or nonperformance under any of the Material Contracts except where
such condition or event would not reasonably be expected to have a Material
Adverse Effect on the Company.
(c) Except as set forth on Schedule 4.9(c) neither the Company nor any
of its Subsidiaries has committed any act or omission which would result
in, and there has been no occurrence which would give rise to, any material
product liability or material liability for breach of warranty on the part
of the Company or any of its Subsidiaries under any of the Material
Contracts. Except as set forth on Schedule 4.9(c), no consent of any party
to any Material Contract is required in connection with the execution and
delivery by the Company under this Agreement or the consummation of the
transactions contemplated hereby.
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4.10. Transactions with Affiliates. Except as set forth on Schedule 4.10 or
described in the SEC Documents, there are no Contracts, agreements, arrangements
or understandings of any kind between any Affiliate of the Company (other than
any wholly-owned Subsidiary of the Company), on the one hand, and the Company or
any of its Subsidiaries, on the other hand.
4.11. Machinery and Equipment and Other Property. Except as set forth on
Schedule 4.11, the Company or one of its Subsidiaries owns and has good and
marketable title to the machinery, equipment, tools, spare parts, furniture,
automobiles and other tangible personal property reflected on the books of the
Company and its Subsidiaries as of the date hereof as owned by the Company or
its Subsidiaries (the "Machinery and Equipment"), free and clear of all
Encumbrances other than Permitted Encumbrances. The Machinery and Equipment,
taken as a whole, are in good operating condition and repair (subject to normal
wear and tear) and are suitable for the purposes for which they are presently or
have historically been used. Except as otherwise contemplated by this Agreement,
the Company and its Subsidiaries owns, or, in the case of leases and licenses,
has valid and subsisting leasehold interests or licenses in, all of the material
properties and assets of whatever kind (whether real or personal, tangible or
intangible) used in its business, in each case free and clear of any
Encumbrances other than Permitted Encumbrances. Such properties and assets
constitute all properties and assets necessary to conduct the business of the
Company and its Subsidiaries, as currently conducted.
4.12. Intellectual Property. Schedule 4.12 lists all of the patents,
trademarks, service marks, trade dress, logos, trade names, copyrights, mask
works and pending applications (the foregoing, together with all material
know-how, invention disclosures, trade secrets, confidential information,
software, technical information, process technology, plans, drawings and blue
prints being hereinafter collectively referred to as the "Intellectual
Property") in which the Company or any of its Subsidiaries has any interest. The
Material Contracts listed on Schedule 4.9 include all license or sublicense
agreements with respect to any Intellectual Property to which the Company or any
of its Subsidiaries is a party and which is material to the business and
operations of the Company or any of its Subsidiaries as presently being
conducted or contemplated. Except as set forth on Schedule 4.12, the Company or
one or more of its Subsidiaries owns each item of Intellectual Property, free
and clear of any Encumbrances other than Permitted Encumbrances, and no other
Person has the right to use such Intellectual Property other than pursuant to
the Contracts listed on Schedule 4.9. Except as set forth on Schedule 4.12, the
Company and its Subsidiaries' use of the Intellectual Property is not infringing
upon or otherwise violating the rights of any other Person and, to the knowledge
of the Company, no other Person is infringing or otherwise violating the rights
of the Company or any of its Subsidiaries in or to any material Intellectual
Property. The Company and its Subsidiaries have not been charged, nor to their
knowledge is the Company or any of its Subsidiaries threatened to be charged
with infringement of any unexpired patent, trademark, trade name, service mark,
copyright or other proprietary right of any Person. No claim has been asserted
by a Person, nor to the Company's knowledge is a claim threatened to be asserted
by a Person, challenging or questioning the validity, enforceability or
effectiveness of the Intellectual Property or any license or sublicense
agreements to which the Company or any of its Subsidiaries is a party. No Person
has a right to royalty or similar payment with respect to the Intellectual
Property. The Company and its Subsidiaries own or have the right to use pursuant
to a valid license, sublicense, agreement or permission all items of
Intellectual Property used in the operation of the business of the Company and
its Subsidiaries, as has been or is presently conducted. The consummation of the
transactions contemplated hereby will not alter or impair any of the
Intellectual Property. The Company has delivered to Parent true, correct and
complete copies of each agreement, registration, application and other documents
relating to the Intellectual Property.
4.13. Real Property.
(a) Schedule 4.13 describes and lists the name of the record owner of
all real property now leased or licensed for use by the Company or any of
its Subsidiaries (the "Leased Real Property"). The Company or one of its
Subsidiaries has a valid leasehold interest in, and enjoys peaceful and
undisturbed possession of, all Leased Real Property, in each case free and
clear of all Encumbrances except for Permitted Encumbrances. Except as set
forth on Schedule 4.13 there are no leases, subleases, licenses, occupancy
agreements, options, rights, concessions or other agreements or
arrangements, written or oral granting to any Person the right to purchase,
use or occupy any of the Leased Real Property. The Leased Real
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Property is all of the real property used in the business of the Company
and its Subsidiaries as currently conducted and neither the Company or any
Subsidiary owns or has owned any Real Property.
(b) All Improvements owned, leased, or used by the Company or its
Subsidiaries on the Leased Real Property are in good condition and repair
in all material respects (normal wear and tear excepted), and such
Improvements are free from material structural defects. The Company or its
Subsidiaries has obtained Permits from any Governmental Authority having
jurisdiction over any of the Leased Real Property, and any agreement,
easement or other right from any other Person, necessary to permit the
lawful use and operation of the Improvements and the Leased Real Property
or any driveways, roads and other means of egress and ingress to and from
any of the Leased Real Property and each such Permit, agreement, easement
or other right is in full force and effect, and there is no pending, or to
the knowledge of the Company threatened proceeding which could result in
the modification or cancellation thereof except, in each case, for
deviations from the foregoing which would not reasonably be expected to
materially impair the continued use of such Lease Real Property for the use
currently being made thereof. No Improvement, or the operation or
maintenance thereof, violates any restrictive covenant, or encroaches on
any property owned or leased by any other Person, which would reasonably be
expected to materially impair the continued use of such Leased Real
Property by the Company and its Subsidiaries for the use currently being
made thereof.
(c) The Leased Real Property and the Improvements are sufficiently
supplied in all material respects with utilities and other services as
necessary for the operation of such Leased Real Property and Improvements
as currently operated including adequate water, storm and sanitary sewer,
gas, electric, cable and telephone facilities, all of which run through
public rights-of-way or perpetual private easements.
(d) Neither the Company nor any of its Subsidiaries has received
notice of any special assessment relating to any Leased Real Property or
any portion thereof, and no such special assessment is pending or, to the
knowledge of the Company, threatened. There are no pending or, to the
knowledge of the Company, threatened condemnation proceedings with respect
to any of the Leased Real Property.
4.14. Litigation and Proceedings. Except as set forth on Schedule 4.14,
there are no lawsuits, actions, suits, claims or other proceedings at law or in
equity or, to the knowledge of the Company, investigations (including,
investigations by any Governmental Authority wherein a claim for improper
charges was made), before or by any Governmental Authority or before any
arbitrator pending or, to the knowledge of the Company, threatened, against the
Company or any of its Subsidiaries. Except as set forth on Schedule 4.14 there
is no unsatisfied judgment, order, injunction or decree binding upon the Company
or any of its Subsidiaries.
4.15. Employee Benefit Plans.
(a) Disclosure; Delivery of Copies of Relevant Documents and Other
Information. Schedule 4.15 contains a complete list of Employee Plans. The
Company has delivered to Parent a true and complete set of copies of (a)
all Employee Plans and related trust agreements, annuity contracts or other
funding instruments; (b) the latest Internal Revenue Service determination
letter obtained with respect to any such Employee Plan qualified or exempt
under Section 401 or 501 of the Code; (c) Forms 5500 and certified
financial statements for the most recently completed three fiscal years for
each Employee Plan required to file such form, together with the most
recent actuarial report, if any, prepared by the Employee Plan's enrolled
actuary; (d) all summary plan descriptions for each Employee Plan required
to prepare, file and distribute summary plan descriptions for the most
recently completed five fiscal years; (e) all final documents furnished
employees, officers and directors of the Company and its Subsidiaries of
all incentive compensation, other plans and fringe benefits for which a
summary plan description is not required during the most recently completed
five fiscal years; (f) current registration statements on Form S-8 and
amendments thereto with respect to any Employee Plan; (g) the forms of
notification given to employees of their rights under Section 4980B of the
Code during the most recently completed five fiscal years; and (h) the
report prepared in connection with any compliance audit undertaken with
respect to any Employee Plan.
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(b) Representations. Except as set forth in Schedule 4.15:
(i) Pension Plans
(A) No Pension Plan is subject to the provisions of Part 3 of
Title I, Subtitle B of ERISA, and neither the Company nor any ERISA
Affiliate has any liability to any such Pension Plan. Neither the
Company nor any ERISA Affiliate has any liability for unpaid
contributions with respect to any Pension Plan (other than matching
contributions for April through December 31, 1999 and subsequent
periods to the Medical Graphics Corporation 401(k) Savings Plan.
(B) Each Pension Plan which is intended to be qualified under
Section 401(a) of the Code and each related trust agreement, annuity
contract or other funding instrument has been determined by the
Internal Revenue Service to be qualified and tax-exempt under the
provisions of Sections 401(a) and 501(a) of the Code.
(C) Except for law changes the remediation time period for which
has not as of the Closing Date expired, each Pension Plan and each
related trust agreement, annuity contract or other funding instrument
is in material compliance with its terms and, both as to form and in
operation, with the requirements prescribed by any and all statutes,
orders, rules and regulations which are applicable to such plans,
including without limitation ERISA and the Code.
(D) Neither the Company nor any ERISA Affiliate has engaged in,
or is a successor or parent corporation to an entity that has engaged
in, a transaction which is described in Section 4069 of ERISA.
Neither the Company nor any ERISA Affiliate has, at any time, (1)
ceased operations at a facility so as to become subject to the
provisions of Section 4062(e) of ERISA, (2) withdrawn as a
substantial employer so as to become subject to the provisions of
Section 4063 of ERISA, or (3) ceased making contributions on or
before the Closing Date to any Pension Plan subject to Section
4064(a) of ERISA to which the Company or any ERISA Affiliate made
contributions during the prior six years.
(ii) Multiemployer Plans. There are no Multiemployer Plans, and
neither the Company nor any ERISA Affiliate has ever maintained,
contributed to, participated or agreed to participate in a Multiemployer
Plan.
(iii) Welfare Plans.
(A) Each Welfare Plan which covers or has covered employees or
former employees of the Company, its Subsidiaries or any ERISA
Affiliate (with respect to their relationship with such entities) has
been maintained, and presently is, in material compliance with its
terms and, both as to form and operation, with the requirements
prescribed by any and all statutes, orders, rules and regulations
which are applicable to such Welfare Plan, including without
limitation ERISA and the Code.
(B) None of the Company, any ERISA Affiliate or any Welfare Plan
has any present or future obligation to make any payment to, or with
respect to any present or former employee of the Company or any ERISA
Affiliate following termination of employment pursuant to, any
retiree medical benefit plan, or other Welfare Plan except as
required by Part 6 of Title I, Subtitle B of ERISA (or a comparable
state law), and, except as set forth in the terms of the Plan or
under applicable law, no condition exists which would prevent the
Company from amending or terminating any such benefit plan or Welfare
Plan.
(C) Each Welfare Plan which is a "group health plan," as defined
in Section 607(1) of ERISA, has been operated in material compliance
with the provisions of Part 6 of Title I, Subtitle B of ERISA and
Section 4980B of the Code at all times.
(iv) Benefit Arrangements. Each Benefit Arrangement is in material
compliance with its terms and with the requirements prescribed by any
and all statutes, orders, rules and regulations which are applicable to
such Benefit Arrangement, including without limitation the Code. Except
as set forth
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on Schedule 4.15 and except as provided by law, the employment of all
persons presently employed or retained by the Company and its
Subsidiaries is terminable at will.
(v) Fiduciary Duties and Prohibited Transactions. Neither the
Company nor any of its Subsidiaries or ERISA Affiliates, nor, to the
knowledge of the Company, any fiduciary of any Welfare Plan or Pension
Plan has any liability with respect to any transaction in violation of
Sections 404 or 406 of ERISA or any "prohibited transaction," as defined
in Section 4975(c)(1) of the Code, for which no exemption exists under
Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code. Neither
the Company nor any of its Subsidiaries or ERISA Affiliates has
knowingly participated in a violation of Part 4 of Title 1, Subtitle B
of ERISA by any plan fiduciary of any Welfare Plan or Pension Plan or
has any unpaid civil penalty under Section 502(l) of ERISA.
(vi) Litigation. There is no action, order, writ, injunction,
judgment or decree outstanding or claim, suit, litigation, proceeding,
arbitrator's action, governmental audit or investigation relating to or
seeking benefits under any Employee Plan that is pending, threatened or
anticipated against the Company or any ERISA Affiliate other than
routine claims for benefits. There is no filing pending under any
compliance program maintained by the Internal Revenue Service with
respect to any Pension Plan (e.g., VCR Program).
(vii) Unpaid Contributions, UBIT. Neither the Company nor any ERISA
Affiliate has any liability for unpaid contributions with respect to any
Pension Plan, Multiemployer Plan or Welfare Plan. The Company or an
ERISA Affiliate has made all required contributions under each Employee
Plan for all prior periods or proper accruals have been made and are
reflected on the appropriate balance sheet and books and records of the
Company. No Employee Plan is subject to any tax under Section 511 of the
Code.
(viii) Parachute Payments. Except for those listed in Schedule
4.15., there is no contract, agreement, plan or arrangement covering any
employee or former employee of the Company or any of its Subsidiaries
that, individually or collectively, provides for the payment by the
Company or any if its Subsidiaries of any amount (i) that is not
deductible under Section 162(a)(1) or 404 of the Code or (ii) that is an
"excess parachute payment" pursuant to Section 280G of the Code.
(ix) No Amendments. Except for changes required by changes in law,
the remediation time period for which has not as of the Closing Date
expired, neither the Company nor any ERISA Affiliate has any announced
plan or legally binding commitment to create any additional Employee
Plans which are intended to cover employees or former employees of the
Company or any of its Subsidiaries or to amend or modify any existing
Employee Plan which covers or has covered employees or former employees
of the Company or any of its Subsidiaries.
(x) No Other Material Liability. No event has occurred in
connection with which the Company or any ERISA Affiliate or any Employee
Plan, directly or indirectly, could be subject to any material liability
(A) under any statute, regulation or governmental order relating to any
Employee Plans or (B) pursuant to any obligation of the Company or any
ERISA Affiliate to indemnify any person against liability incurred under
any such statute, regulation or order as they relate to the Employee
Plans.
(xi) No Acceleration or Creation of Rights. Except for those listed
in Schedule 4.15., neither the execution and delivery of this Agreement
by the Company and its Subsidiaries nor the consummation of the
transactions contemplated hereby will result in the acceleration or
creation of any rights of any person to benefits under any Employee Plan
(including, without limitation, the acceleration of the vesting or
exercisability of any stock options, the acceleration of the vesting of
any restricted stock, the acceleration of the accrual or vesting of any
benefits under any Pension Plan or the acceleration or creation of any
rights under any severance, parachute or change in control agreement).
4.16. Labor Relations. Except as set forth on Schedule 4.16, neither the
Company nor any of its Subsidiaries has entered into any severance or similar
arrangement in respect of any present employee of the
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Company or any of its Subsidiaries that will result in any obligation (absolute
or contingent) of Parent, Sub, the Company or any of the Company's Subsidiaries
to make any payment to any present employee of the Company or any of its
Subsidiaries following termination of employment or upon a change of control of
the Company. Except as set forth on Schedule 4.16, neither the Company nor any
of its Subsidiaries has engaged in any unfair labor practice and there are no
complaints against the Company or any of its Subsidiaries pending before the
National Labor Relations Board or any similar state or local labor agency by or
on behalf of any employee of the Company or any of its Subsidiaries. Except as
disclosed on Schedule 4.16, there are no representation questions, arbitration
proceedings, labor strikes, slow downs or stoppages, grievances or other labor
disputes pending or, to the knowledge of the Company, threatened with respect to
the employees of the Company or any of its Subsidiaries, and neither the Company
nor any of its Subsidiaries has experienced any attempt by organized labor to
cause the Company or any of its Subsidiaries to comply with or conform to
demands of organized labor relating to its employees. Except as disclosed on
Schedule 4.16 the Company and its Subsidiaries have complied in all material
respects with all laws, rules and regulations relating to employment, equal
employment opportunity, nondiscrimination, immigration, wages, hours, benefits,
collective bargaining, the payment of social security and similar taxes,
occupational safety and health and plant closings (hereinafter collectively
referred to as the "Employment Laws"). Neither the Company nor any of its
Subsidiaries is liable for the payment of material fines, penalties or other
material liabilities, however designated, for failure to comply with any of the
foregoing Employment Laws.
4.17. Legal Compliance. Except as set forth on Schedule 4.17, (i) neither
the Company nor any of its Subsidiaries is, or at any time during the past three
years has been, in material violation of or in material default under any Law
applicable to the Company or any of its Subsidiaries or any of their respective
Assets, (ii) no action, proceeding, charge, complaint, claim, demand, notice or,
to the best knowledge of the Company, investigation, has been filed or commenced
against the Company or any Subsidiary alleging any such violation or default,
nor to the knowledge of the Company are any such actions threatened, and (iii)
neither the Company nor any of its Subsidiaries has, during the past three
years, to its knowledge conducted any internal investigation with respect to any
actual, potential or alleged material violation of any Law by the Company, its
Subsidiaries or any of their employees, officers, directors or agents.
4.18. Environmental Matters. Except as otherwise disclosed in Schedule
4.18:
(a) (i) The Company and its Subsidiaries are, and at all times have
been, in compliance with all Environmental Laws, (ii) the Company and its
Subsidiaries hold, and at all times have held, all Permits required under
Environmental Laws for the operation of their business, and (iii) to the
Company's knowledge, no modification or change to the operations of the
business will be required upon renewal of any such Permits.
(b) (i) There are no Environmental Claims pending or, to the knowledge
of the Company, threatened against the Company or any of its Subsidiaries,
(ii) there are no writs, injunctions, decrees, orders or judgments
outstanding, or, to the knowledge of the Company, threatened relating to
compliance with or liability under any Environmental Law, and (iii) neither
the Company nor any of its Subsidiaries has any liability under any
Environmental Law.
(c) There has been no spill, discharge, or release of Hazardous
Substances on or from, and there are no other Environmental Conditions
relating to, any current or, to the knowledge of the Company, former
property owned, leased or used by the Company or any of its Subsidiaries
that could reasonably be expected to result in (i) any investigation or
remedial action by any Governmental Authority pursuant to any Environmental
Law or (ii) any other Environmental Claim.
(d) No current or former property owned, leased or used by the Company
or its Subsidiaries or to which the Company or its Subsidiaries transported
or arranged for the transportation of any Hazardous Substances is listed or
proposed for listing on the National Priorities List promulgated pursuant
to the Comprehensive Environmental Response Cleanup and Liability Act
("CERCLA"), on CERCLIS (as defined in CERCLA) or on any similar foreign,
federal or state list of sites requiring investigation or remediation.
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(e) There are no structures, improvements, equipment, activities,
fixtures or facilities on any property owned, leased or used by the Company
that are constructed with, use or otherwise contain radioactive materials,
asbestos-containing materials, lead, urea formaldehyde or that are
contaminated by polychlorinated biphenyls, (ii) there are no underground
storage tanks, or underground piping associated with such tanks, that do
not have a full secondary containment system in place, and (iii) there are
no abandoned underground storage tanks that have not been either abandoned
in place or removed pursuant to a permit or approval issued by a
Governmental Authority.
(f) There are no liens, restrictive covenants or other land use
restrictions under Environmental Laws on any of the properties owned,
leased or used by the Company or its Subsidiaries, and no government
actions have been taken or, to the Company's knowledge, are threatened that
could subject any of such properties to such liens, restrictive covenants
or other land use restrictions, and neither the Company nor its
Subsidiaries are required to place any notice or restriction relating to
Hazardous Substances in any deed to such property.
(g) Neither the Company nor any of its Subsidiaries has released any
Person or waived any rights or defenses with respect to any Environmental
Claim or Environmental Conditions.
(h) There is no Environmental Report in the possession or control of
the Company relating to the current or prior business of the Company or its
Subsidiaries that has not been delivered to the Parent.
4.19. Taxes. Except as otherwise disclosed in Schedule 4.19:
(a) All federal, state, local, and foreign tax returns of the Company
and its Subsidiaries and of each consolidated or affiliated group which any
of the Company or any of its Subsidiaries is or has been a part ("Tax
Returns"), including those Tax Returns relating to Taxes due from and/or
withheld by or required to be withheld by any of the Company and its
Subsidiaries and of each consolidated or affiliated group which any of the
Company or any of its Subsidiaries have been a part, have been duly and
timely filed and are correct and complete.
(b) All Taxes or estimates thereof that are due from a Taxpayer, or
are claimed or asserted by any taxing authority to be due, have been timely
and appropriately paid so as to avoid penalties for underpayment.
(c) None of the Tax Returns has been audited or is being audited by
any taxing authority.
(d) No assessment, audit or other proceeding by any taxing authority,
court, or other Governmental Authority is proposed, pending, or, to the
knowledge of the Company, threatened with respect to the Tax Returns or
Taxes owed or alleged to be owed by a Taxpayer.
(e) There are no outstanding agreements, waivers, or arrangements
extending the statutory period of limitations applicable to any claim for
or the period for the collection or assessment of Taxes due from a Taxpayer
for any taxable period.
(f) All positions taken on federal Tax Returns that could give rise to
a penalty for substantial understatement pursuant to Section 6662(d) of the
Code have been disclosed on such Tax Returns.
(g) Neither the Company nor any of its Subsidiaries is a foreign
person within the meaning of Section 1445(f)(3) of the Code.
(h) No consent to the application of Section 341(f)(2) of the Code (or
any predecessor thereof) has been made or filed by or with respect to any
of the Company or its Subsidiaries or any of their Assets. None of the
Assets secures any Indebtedness, the interest on which is tax-exempt under
Section 103(a) of the Code or is an asset or property that Sub, Parent, the
Surviving Corporation or any of their Affiliates is or will be required to
treat as being (i) owned by any other Person pursuant to the provisions of
Section 168(f)(8) of the Internal Revenue Code of 1954 as amended, and in
effect immediately before the enactment of the Tax Reform Act of 1986, or
(ii) tax-exempt use property within the meaning of Section 168(h)(1) of the
Code.
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(i) No closing agreement pursuant to Section 7121 of the Code (or any
predecessor provision) or any similar provision of any state, local, or
foreign law has been entered into by or with respect to the Company or any
of its Subsidiaries or any of their Assets.
(j) Neither the Company nor any of its Subsidiaries has agreed to or
is required to make any adjustment pursuant to Section 481(a) of the Code
(or any predecessor provision) by reason of any change in any accounting
method of the Company or its Subsidiaries, neither the Company nor any of
its Subsidiaries has any application pending with any taxing authority
requesting permission for any changes in any accounting method of the
Company or any of its Subsidiaries, and the Internal Revenue Service has
not proposed any such adjustment or change in accounting method therefor.
(k) The Company has previously made available to Parent true, correct
and complete copies of each of the United States federal, state, local and
foreign income Tax Returns for its most recent taxable year, filed by the
Company and the Subsidiaries or (insofar as such returns relate to any of
the Company or the Subsidiaries) filed by any affiliated or consolidated
group of which the Company or any such Subsidiary was then a member.
(l) None of the Company or the Subsidiaries has been or is in
violation (or with notice or lapse of time or both, would be in violation)
of any applicable law relating to the payment of withholding of Taxes. The
Company and the Subsidiaries have duly and timely withheld from salaries,
wages and other compensation and paid over to the appropriate taxing
authorities all amounts required to be so withheld and paid over for all
periods under all applicable laws.
(m) None of the Company or the Subsidiaries is a party to, is bound
by, or has any obligation under any Tax sharing agreement or similar
agreement and no such agreement shall be entered into or amended by the
Company or the Subsidiaries at or prior to the Closing.
(n) No "excess loss account" or "deferred intercompany gain" (as such
terms are described in Treasury Regulation Section 1.1502) exist for,
between or with respect to the Company and its Subsidiaries.
(o) Neither the Company nor any of its Subsidiaries is partner in any
partnership.
(p) None of the Company or any of its Subsidiaries has been a United
States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
(q) None of the Company nor any of its Subsidiaries (A) has been a
member of any affiliated group filing a consolidated federal income Tax
Return (other than a group the common parent of which is the Company) and
(B) has any liability for the Taxes of any person as defined in Section
7701(a)(1) of the Code (other than the Company and the Subsidiaries) under
Treas. Reg. sec. 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
(r) No claim has ever been made by any Governmental Authority in a
jurisdiction where the Company or any of its Subsidiaries do not file Tax
Returns that any of the Company or any of its Subsidiaries are, or may be,
subject to taxation by that jurisdiction.
4.20. Governmental Authorities; Consents. No consent, approval or
authorization of, or designation, declaration, notice or filing with, any
Governmental Authority is required on the part of the Company with respect to
the Company's execution or delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) applicable requirements of the
HSR Act, if any, (ii) the filing of the Articles of Merger in the appropriate
offices in the State of Minnesota, (iii) the approval of this Agreement by the
shareholders of the Company in accordance with the MBCA and the Company's
articles of incorporation, and (iv) as otherwise disclosed in Schedule 4.20.
4.21. Licenses, Permits and Authorizations. Schedule 4.21 contains a list
of all material Permits of or with any Governmental Authority which are held by
the Company or any of its Subsidiaries. All such material Permits are in full
force and effect and there are no proceedings pending, or to the best knowledge
of the
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Company, threatened that seek the revocation, cancellation, suspension or
adverse modification thereof. Such material Permits constitute all of the
material Permits necessary to permit the Company and its Subsidiaries to own,
operate, use and maintain their Assets in the manner in which they are now
owned, operated and maintained and to conduct the business of the Company and
its Subsidiaries as currently conducted. All required filings with respect to
such material Permits have been timely made and all required applications for
renewal thereof have been timely filed.
4.22. Insurance.
(a) Schedule 4.22 contains an accurate and complete description of all
policies of property, fire and casualty, product liability, workers'
compensation, and other forms of insurance held by the Company or any of
its Subsidiaries. True, correct and complete copies of such insurance
policies have been made available to Parent.
(b) All policies listed on Schedule 4.22 (i) are valid, outstanding,
and enforceable policies, and (ii) will not terminate or lapse by reason of
the transactions contemplated by this Agreement.
(c) Neither the Company nor any of its Subsidiaries has received (i)
any notice of cancellation of any policy described in paragraph (a) hereof
or refusal of coverage thereunder, (ii) any notice that any issuer of such
policy has filed for protection under applicable bankruptcy laws or is
otherwise in the process of liquidating or has been liquidated, or (iii)
any other notice that such policies are no longer in full force or effect
or that the issuer of any such policy is no longer willing or able to
perform its obligations thereunder.
4.23. Customers and Suppliers. Schedule 4.23 sets forth a complete and
accurate list of the names of (i) the ten largest customers of the Company and
its Subsidiaries, showing the approximate total sales in dollars by the Company
and its Subsidiaries to each such customer during the 1998 fiscal year and (ii)
the ten largest suppliers of the Company and its Subsidiaries, showing the
approximate total purchases in dollars by the Company and its Subsidiaries to
each such customer during the 1998 fiscal year. Neither the Company nor any
Subsidiary has received any communication from any customer or supplier listed
on Schedule 4.23 notifying the Company or any Subsidiary of any intention to
terminate or materially reduce purchases from or supplies to the Company and its
Subsidiaries or the intention to terminate or fail to renew their current
Contracts with the Company or its Subsidiaries or fail to exercise any purchase
option thereunder.
4.24. Year 2000 Compatibility. Except as set forth on Schedule 4.24, the
Company's business systems (including the Machinery and Equipment used by the
Company and its Subsidiaries, and the products sold by the Company in the
conduct of its business as currently conducted, and the provisions sold by the
Company, whether owned by the Company or a Subsidiary of the Company or licensed
from others) have been inventoried, assessed and tested for failure or
miscalculation as a result of the change from the year 1999 to the year 2000.
Except as set forth on Schedule 4.24, to the best of the Company's knowledge,
all such business systems, will perform as designed without regard to any
references to or computations based on calendar dates or periods of elapsed
time, including but not limited to, any thereof with respect to any date or
dates in 1999 or 2000.
4.25. Brokers' Fees. Except as set forth on Schedule 4.25, no broker,
finder, investment banker or other Person is entitled to any brokerage fee,
finders' fee or other commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by the Company or
any of its Subsidiaries or Affiliates.
4.26. Board Recommendation. A special committee of the Board of Directors
of the Company satisfying the requirements of Section 302A.673 of the MBCA, at a
meeting duly called and held, has by unanimous vote approved this Agreement, the
Merger and the other transactions contemplated hereby. The Board of Directors of
the Company, at a meeting duly called and held, has by unanimous vote approved
this Agreement, the Merger and the other transactions contemplated hereby and
declared their advisability and, subject to Section 6.4 hereof, has determined
to recommend to the Company's shareholders that they vote to approve this
Agreement and the Merger. The Board of Directors of the Company has taken all
such action required to be taken by the Company to provide that this Agreement
and the transactions contemplated
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hereby and thereby shall be exempt from the requirements of any "moratorium,"
"control share," "fair price," or other anti-takeover laws or regulations of the
State of Minnesota.
4.27. Required Company Vote. The affirmative vote of a majority of all
shares of the Company entitled to vote and the affirmative vote of the holders
of at least one half of the Class A Stock, voting together as a single class
(collectively, the "Required Vote") are the only votes of the holders of any
class or series of the Company's securities necessary to approve this Agreement,
the Merger and the other transactions contemplated hereby.
4.28. Proxy Statement. The Proxy Statement to be mailed to the shareholders
of the Company in connection with the special meeting of the shareholders of the
Company (the "Special Meeting") and any amendment thereof or supplement thereto,
when, in the case of the Proxy Statement, mailed and at the time of the Special
Meeting shall not contain any untrue statement of a material fact, or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not false or misleading, and shall comply with all requirements of the Exchange
Act, provided that this Section 4.28 shall not apply to any written information
provided to the Company by the Parent or Sub expressly for use in the Proxy
Statement.
4.29. Full Disclosure. No representation or warranty made by the Company in
this Agreement, nor any document, exhibit, statement, certificate or schedule
furnished by the Company to Sub and Parent in connection with the transactions
contemplated hereby, contains any untrue statement of material fact or omits to
state any material fact necessary in order to make the statement contained
herein not misleading.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
As an inducement to the Company to enter into this Agreement, Sub and
Parent hereby make the following representations and warranties to the Company:
5.1. Organization. The Parent is duly incorporated, validly existing and in
good standing under the laws of the State of Minnesota. The Sub is duly
incorporated, validly existing and in good standing under the laws of the State
of Minnesota.
5.2. Authorization. Parent has all necessary corporate power and authority
to, and has taken all action necessary on its part to, execute and deliver this
Agreement and to consummate the transactions contemplated hereby. Sub has all
necessary corporate power and authority to, and has taken all corporate action
necessary on its part to, execute and deliver this Agreement and to consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Sub and Parent and is a legal, valid and binding obligation of Sub
and Parent, enforceable against each of them in accordance with its terms,
except as the enforceability thereof may be limited by (a) applicable
bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or
similar laws in effect which affect the enforcement of creditors' rights
generally or (b) general principles of equity.
5.3. No Conflict. Except as set forth in Schedule 5.3, the execution and
delivery of this Agreement by Parent and Sub and the consummation of the
transactions contemplated hereby does not and will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the articles of incorporation or bylaws
of Parent or Sub,
(b) conflict with or result in a violation or breach of any term or
provision of any Law applicable to Parent or Sub or any of their respective
Assets; or
(c) (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default
under, (iii) require Parent or Sub to obtain any consent, approval or
action of, make any filing with or give any notice to any Person as a
result or under the terms of, (iv) result in or give to any Person any
right of termination, cancellation, acceleration or modification in or with
respect to, or (v) result in the creation or imposition of any Encumbrance
upon the Parent or Sub
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or any of their respective assets under, any Contract to which Parent or
Sub is a party or by which any of their respective Assets is bound, except
to the extent any of the foregoing would not materially and adversely
effect Parent's or Sub's ability to consummate the transactions
contemplated hereby.
5.4. Litigation and Proceedings. At the date hereof, except as set forth in
Schedule 5.4, there are no lawsuits, actions, suits, claims or other proceedings
at law or in equity, or, to the knowledge of Parent, investigations, before or
by any Governmental Authority or before any arbitrator pending or, to the
knowledge of Parent, threatened, against Sub or Parent which, if determined
adversely, would reasonably be expected to have a material adverse effect on the
ability of either Sub or Parent to enter into and perform its respective
obligations under this Agreement. There is no unsatisfied judgment or any open
injunction binding upon Sub or Parent which would reasonably be expected to have
a Material Adverse Effect on the ability of Sub or Parent to enter into and
perform its obligations under this Agreement.
5.5. Governmental Authorities; Consents. No consent, approval or
authorization of, or designation, declaration or filing with, any Governmental
Authority or other Person is required on the part of Sub or Parent with respect
to the execution or delivery of this Agreement by Sub or Parent or the
consummation of the transactions contemplated hereby, except for (i) applicable
requirements of the HSR Act and (ii) the filing of the Articles of Merger in the
appropriate offices in the State of Minnesota.
5.6. Brokers' Fees. No broker, finder, investment banker or other Person is
entitled to any brokerage fee, finders' fee or other commission for which any
Shareholder may become liable in connection with the transactions contemplated
by this Agreement based upon arrangements made by Sub, Parent, or any of their
Affiliates.
5.7. Proxy Statement. The information concerning Sub and Parent, their
officers, directors, employees and shareholders and furnished in writing to the
Company by Sub and Parent specifically for use in the Proxy Statement will not,
when mailed to the shareholders of the Company or at the time of the Special
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
5.8. Full Disclosure. No representation or warranty made by Sub or Parent
in this Agreement, nor any document, exhibit, statement, certificate or schedule
furnished by Sub or Parent to the Company in connection with the transactions
contemplated hereby, contains any untrue statement of material fact or omits to
state any material fact necessary in order to make the statement contained
therein not misleading.
ARTICLE VI.
COVENANTS OF THE COMPANY, PARENT AND SUB
The Company, Sub and Parent covenant and agree with each other that from
the date hereof through the Closing:
6.1. Conduct of Business Prior to Closing. Prior to the Effective Time,
unless Parent has agreed otherwise in writing, the Company:
(a) shall, and shall cause each of its Subsidiaries to, conduct its
operations and business according to their usual, regular and ordinary
course consistent with past practice;
(b) shall use commercially reasonable efforts, and shall cause each of
its Subsidiaries to use commercially reasonable efforts, to preserve intact
their business organizations and goodwill, keep available the services of
their respective officers and employees and maintain satisfactory
relationships with those persons having business relationships with them;
(c) shall not, and shall cause its Subsidiaries not to, amend their
respective articles of incorporation or by-laws or comparable governing
instruments;
(d) shall promptly notify Parent of (i) any Material Adverse Change
with respect to the Company, (ii) any material litigation or material
governmental complaints, investigations or hearings (or
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communications indicating that the same may be contemplated), or (iii) the
breach of any representation or warranty contained herein;
(e) shall promptly deliver to Parent correct and complete copies of
any report, statement or schedule filed with the SEC subsequent to the date
of this Agreement;
(f) shall not, and shall not permit any of its Subsidiaries to,
authorize, propose or announce an intention to authorize or propose, or
enter into an agreement with respect to, any merger, consolidation or
business combination (other than the Merger), release or relinquish any
material contract rights, or any acquisition or disposition of Assets or
securities other than the acquisition or disposition of Assets in the
ordinary course of business consistent with past practice;
(g) shall not, and shall not permit any of its Subsidiaries to, (i)
grant, confer or award any options, warrants, conversion rights or other
rights or Equity Securities not existing on the date hereof, to acquire any
shares of its capital stock or other securities of the Company or its
Subsidiaries or (ii) accelerate, amend or change the period of
exercisability of options granted under any employee stock plan or
authorize cash payments in exchange for any options granted under any of
such plans;
(h) shall not, and shall not permit any of its Subsidiaries to, amend
the terms of the Benefit Plans, including, without limitation, any
employment, severance or similar agreements or arrangements in existence on
the date hereof, or adopt any new employee benefit plans, programs or
arrangements or any employment, severance or similar agreements or
arrangements;
(i) shall not, and shall not permit any of its Subsidiaries to, (i)
increase or agree to increase the compensation payable or to become payable
to its officers or, other than increases in accordance with past practice
which are not material, to its employees, (ii) grant any severance or
termination pay to any employee or (iii) enter into any collective
bargaining agreement;
(j) shall not, and shall not permit any of its Subsidiaries to, (i)
incur, create, assume or otherwise become liable for borrowed money or
assume, guarantee, endorse or otherwise become responsible or liable for
the obligations of any other individual, corporation or other entity or
(ii) make any loans or advances to any other person, except, in the case of
clause (i), for borrowings under existing credit facilities (excluding
arrangements presently in place under vendor payment agreements) in the
ordinary course of business which do not exceed in the aggregate the
principal amount calculated in accordance with Schedule 6.1(j) hereto and
except, in the case of clause (ii), for advances consistent with past
practice which are not material;
(k) shall not, and shall not permit any of its Subsidiaries to, (i)
materially change any practice with respect to Taxes, (ii) make, change or
revoke any material Tax election, or (iii) settle or compromise any
material dispute involving a Tax liability;
(l) shall not, and shall not permit any of its Subsidiaries to, (i)
declare, set aside or pay any dividend or make any other distribution or
payment with respect to any shares of its capital stock or other Equity
Securities (other than the declaration or payment of any dividend by any
wholly-owned Subsidiary of the Company to the Company or another
wholly-owned Subsidiary of the Company) or (ii) directly or indirectly
redeem, purchase or otherwise acquire any shares of its capital stock or
other Equity Securities or capital stock or other Equity Securities of any
of its Subsidiaries, or make any commitment for any such action or (iii)
split, combine or reclassify any of its capital stock or other Equity
Securities or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock
or other Equity Securities;
(m) shall not, and shall not permit any of its Subsidiaries to, issue,
deliver, sell, pledge or otherwise encumber any Equity Securities of the
Company or any of its Subsidiaries (other than the issuance of shares of
Company Common Stock upon the exercise of Options outstanding on the date
hereof or upon the conversion of Class A Stock, in each case in accordance
with their present terms);
(n) shall not, and shall not permit any of its Subsidiaries to, make
or agree to make any capital expenditure in excess of $50,000 in the
aggregate;
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(o) shall not, and shall not permit any of its Subsidiaries to, change
any accounting principles or practices;
(p) shall not, and shall not permit any of its Subsidiaries to, pay,
discharge, settle or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business consistent with past practice or in accordance with their terms,
of liabilities reflected or reserved against in the most recent
consolidated financial statements (or the notes thereto) of the Company
included in the Company Reports or incurred thereafter in the ordinary
course of business consistent with past practice, or waive any material
benefits of, or agree to modify in any material respect any
confidentiality, standstill, non-solicitation or similar agreement to which
the Company or any Subsidiary is a party;
(q) shall not revalue in any material respect any of its material
Assets, including, without limitation, writing down the value of any
inventory or writing off of any notes or accounts receivable other than as
required by GAAP; and
(r) shall not, and shall not permit any of its Subsidiaries to take,
or agree (in writing or otherwise) or resolve to take, any of the foregoing
actions.
6.2. Investigation by Parent; Confidentiality. The Company shall allow
Parent, its counsel, accountants, business consultants, and other
representatives and the financial institutions (and their counsel and
representatives) providing or proposed to provide financing in connection with
this Agreement and the transactions contemplated hereby, during regular business
hours upon reasonable notice, to make such reasonable inspection of the Assets,
facilities, business and operations of the Company and its Subsidiaries,
including, without limitation, the performance of environmental site
assessments, and to inspect and make copies of Contracts, books and records and
all other documents and information reasonably requested by Parent and related
to the operations and business of the Company and its Subsidiaries including,
without limitation, historical financial information concerning the business of
the Company and its Subsidiaries and to meet with designated personnel employees
and officers of the Company or its Subsidiaries and/or their representatives.
The Company and its Subsidiaries shall furnish to Parent promptly upon request
(a) all additional documents and information with respect to the affairs of the
Company and its Subsidiaries relating to their businesses and (b) access to the
Personnel and to the Company's and its Subsidiaries' accountants and counsel as
Parent, or its counsel or accountants, may from time to time reasonably request
and the Company and its Subsidiaries shall instruct their employees, officers,
accountants and counsel to cooperate with Parent, and to provide such documents
and information as Parent and its representatives may request. All information
furnished to or obtained by Parent pursuant to this Section 6.2 shall be kept
confidential in accordance with the Confidentiality Agreement.
6.3. Consents and Efforts.
Upon the terms and subject to the conditions set forth in this Agreement,
each of the parties agrees to (A) promptly make its respective filings, if any,
under the HSR Act with respect to the Merger (and to cause its Affiliates to
cooperate in any such filings) and (B) use its reasonable best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective, in the most expeditious manner practicable, the Merger and the other
transactions contemplated by this Agreement. Parent and the Company will use
their reasonable best efforts and cooperate with one another (i) in promptly
determining whether any filings are required to be made or consents, approvals,
waivers, licenses, permits or authorizations are required to be obtained (or,
which if not obtained, would result in an event of default, termination or
acceleration of any agreement or any put right under any agreement) under any
applicable law or regulation or from any Governmental Authorities or other
persons, including parties to loan agreements or other debt instruments, in
connection with the transactions contemplated by this Agreement, including the
Merger, and (ii) in promptly making any such filings, in furnishing information
required in connection therewith and in timely seeking to obtain any such
consents, approvals, permits or authorizations.
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6.4. No Solicitation.
(a) The Company shall immediately cease and cause its advisors, agents
and other intermediaries to cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any Acquisition Proposal (as hereinafter defined). Neither the
Company nor any of its Subsidiaries shall (whether directly or indirectly
through advisors, agents or other intermediaries), nor shall the Company or
any of its Subsidiaries authorize or permit any of its or their officers,
directors, agents, representatives, advisors or Subsidiaries to, (i)
solicit, initiate or take any action knowingly to facilitate or encourage
(including by way of furnishing information and assistance) the submission
of inquiries, proposals or offers from any Person or group, other than
Parent and its representatives and Affiliates, that constitute or relate to
an Acquisition Proposal or may reasonably be expected to lead to an
Acquisition Proposal, (ii) agree to or endorse any Acquisition Proposal,
(iii) enter into or participate in any discussions or negotiations with, or
in any way continue any discussions or negotiations commenced before the
date of this Agreement with, a Third Party (as defined below) regarding any
Acquisition Proposal, or otherwise cooperate in any way with, or knowingly
assist or participate in, facilitate or encourage, any effort or attempt by
any other Person or group (other than Parent and its representatives and
Affiliates) to make any Acquisition Proposal, or (iv) grant any waiver or
release under any standstill or similar agreement with respect to any
Equity Securities of the Company or any of its Subsidiaries; provided,
however, that the foregoing shall not prohibit the Company (either,
directly or indirectly, through advisors, agents or other intermediaries)
from at any time prior to receipt of the Required Vote with respect to the
Merger in response to an Acquisition Proposal made without such
solicitation, initiation or encouragement, (A) furnishing information
pursuant to an appropriate confidentiality letter (which letter shall not
be less favorable to the Company in any material respect than the
Confidentiality Agreement, and a copy of which shall be provided for
informational purposes to Parent) concerning the Company and its
businesses, properties or Assets to any person, corporation, entity or
"group," as defined in Section 13(d) of the Exchange Act, other than Parent
or any of its Affiliates (a "Third Party"), who has made an Acquisition
Proposal, (B) engaging in discussions or negotiations with such a Third
Party who has made a bona fide Acquisition Proposal or (C) withdrawing or
modifying its recommendation to the Company's shareholders with respect to
the Merger or recommending an Acquisition Proposal to the Company's
shareholders, but in each case referred to in the foregoing clauses (A)
through (C), only to the extent that (x) the Board of Directors of the
Company shall have concluded in good faith on the basis of written advice
from outside counsel that such action is required to prevent the Board of
Directors of the Company from breaching its fiduciary duties to the
shareholders of the Company under applicable law and (y) the Board of
Directors of the Company shall have concluded in good faith that such
Acquisition Proposal, if accepted, is reasonably likely to be consummated,
taking into account all legal, financial and regulatory aspects of the
proposal and the person or entity making the proposal and would, if
consummated, result in a more favorable transaction than the transaction
contemplated by this Agreement; provided, further, that the Board of
Directors of the Company shall not take any of the foregoing actions until
after giving reasonable notice to Parent with respect to its intent to take
such action and informing Parent of the terms and conditions of such
proposal and the identity of the Person making the applicable Acquisition
Proposal.
(b) For the purpose of this Agreement, "Acquisition Proposal" means
any bona fide inquiry, proposal or offer from any Person (other than Parent
or any of its Affiliates) relating to any direct or indirect: (i)
acquisition or purchase of 25% or more of the Assets or 25% or more of any
class of Equity Securities of the Company and its Subsidiaries, (ii) tender
offer (including a self tender offer) or exchange offer that if consummated
would result in any Person or group beneficially owning 25% or more of any
class of Equity Securities of the Company or any of its Subsidiaries, (iii)
merger, consolidation, statutory share exchange, recapitalization, sale of
all or any substantial portion of the assets, liquidation, dissolution or
similar transaction involving the Company or any of its Subsidiaries whose
assets, individually or in the aggregate, constitute 25% or more of the
assets of the Company and its Subsidiaries, taken as a whole, other than
the transactions contemplated by this Agreement, or (iv) other transaction
the consummation of which would reasonably be expected to impede, interfere
with, prevent or materially
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delay the Merger or which would reasonably be expected to materially dilute
the benefits to Parent of the transactions contemplated hereby.
(c) If a Payment Event (as hereinafter defined) occurs, the Company
shall pay to Sub, within five business days following such event, a
termination fee of $600,000 in cash. "Payment Event" means any of the
following events:
(i) the termination of this Agreement pursuant to Section
8.1(a)(v);
(ii) the termination of this Agreement pursuant to Section
8.1(a)(vi);
(iii) if this Agreement shall have been terminated for any reason
(other than (A) pursuant to Section 8.1(a)(i), (B) pursuant to Section
8.1(a)(ii) or Section 8.1(a)(iii) due to a failure of any of the
conditions set forth in Section 7.2(a) or Section 7.2(b) to be
satisfied, (C) pursuant to Section 8.1(a)(iv) other than because of a
judgment, injunction, order or decree attributable to any act or
omission of the Company or its Affiliates or (D) pursuant to Section
8.1(a)(viii)) and (1) any Third Party other than Parent or any of its
Affiliates or any Person that currently owns 25% or more of the
outstanding shares of Common Stock (a "Permitted Party") shall have
become the beneficial owner of 25% or more of the outstanding shares of
Company Common Stock or (2) on or prior to the date that is within 18
months of the termination of this Agreement, the Company either
consummates with a Third Party a transaction the proposal of which would
otherwise qualify as an Acquisition Proposal under Section 6.4(b) or
enters into a definitive agreement with a Third Party with respect to a
transaction the proposal of which would otherwise qualify as an
Acquisition Proposal under Section 6.4(b).
(d) Upon the occurrence of a Payment Event or upon a termination of
this Agreement (i) pursuant to Section 8.1(a)(ii) or Section 8.1(a)(iii)
due to a failure of any of the conditions set forth in Section 7.1(a) or
Section 7.3(e) to be satisfied, (ii) pursuant to Section 8.1(a)(vii), or
(iii) pursuant to 8.1(a)(ii) or Section 8.1(a)(iii) due to a failure of the
condition set forth in Section 7.3(a)(i) or Section 7.3(a)(ii) to be
satisfied, the Company shall reimburse Parent and its Affiliates not later
than five business days after submission of reasonable documentation
thereof for all of their documented out-of-pocket fees and expenses
(including, without limitation, the reasonable fees and expenses for their
counsel and investment banking fees), actually incurred by any of them or
on their behalf in connection with this Agreement and the transactions
contemplated hereby and the arrangement of, obtaining the commitment to
provide or obtaining the financing for transactions contemplated by this
Agreement (including any fees payable to the entities providing for such
financing and their respective counsel); provided that the aggregate amount
payable pursuant to this Section 6.4(d) shall not exceed $300,000.
(e) The Company acknowledges that the agreements contained in this
Section 6.4 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Sub and Parent would not
enter into this Agreement; accordingly, if the Company fails to promptly
pay any amount due pursuant to this Section 6.4, and, in order to obtain
such payment, the other party commences a suit which results in a judgment
against the Company for the fee or fees and expenses set forth in this
Section 6.4, the Company shall also pay to Sub and Parent their costs and
expenses incurred in connection with such litigation, including reasonable
attorneys' fees.
(f) The Company and its Subsidiaries shall (i) immediately notify
Parent (orally and in writing) if any offer is made, any discussions or
negotiations are sought to be initiated, any inquiry, proposal or contact
is made or any information is requested with respect to any Acquisition
Proposal, (ii) promptly notify Parent of the terms of any proposal which it
may receive in respect of any such Acquisition Proposal, including, without
limitation, the identity of the prospective purchaser or soliciting party,
(iii) promptly provide Parent with a copy of any such offer, if written, or
a written summary (in reasonable detail) of such offer, if not in writing,
and (iv) keep Parent informed of the status of such offer and the offeror's
efforts and activities with respect thereto.
(g) If this Agreement is terminated by the Company pursuant to Section
8.1(a)(viii), Parent shall reimburse the Company not later than five
business days after submission of reasonable documentation
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thereof for all of the Company's documented out-of-pocket fees and expenses
(including, without limitation, the reasonable fees and expenses for its
counsel), actually incurred by the Company or on its behalf in connection
with this Agreement and the transactions contemplated hereby; provided that
the aggregate amount payable pursuant to this Section 6.4(g) shall not
exceed $150,000.
(h) This Section 6.4 shall survive any termination of this Agreement,
however caused.
6.5. Meeting of Shareholders. The Company shall take all action necessary
in accordance with applicable law and its articles of incorporation and by-laws,
including the timely mailing of the Proxy Statement, to convene the Special
Meeting of its shareholders as promptly as practicable, and in any event on or
before February 29, 2000, to consider and vote upon the approval of this
Agreement and the transactions contemplated hereby. The Board of Directors of
the Company shall (subject only to the right of the Board of Directors to
withdraw or modify its recommendation with respect to the Merger in accordance
with Section 6.4(a)) recommend such approval, shall not withdraw or modify such
recommendation and shall take all lawful action to solicit such approval. This
Agreement shall be submitted to a vote of shareholders of the Company at the
Special Meeting regardless of whether the Board of Directors hereafter
determines that the Agreement is no longer advisable and withdraws its
recommendation of the Agreement or the Merger unless this Agreement shall have
been previously terminated pursuant to Article VIII.
6.6. Proxy Statement.
(a) Sub, Parent and the Company shall cooperate and prepare, and the
Company shall file with the SEC as soon as practicable, a proxy statement
with respect to the Special Meeting of the shareholders of the Company in
connection with the Merger (the "Proxy Statement"), respond to comments of
the staff of the SEC, clear the Proxy Statement with the staff of the SEC
and promptly thereafter mail the Proxy Statement to all holders of record
of Company Common Stock and Class A Stock. The Company shall comply in all
respects with the requirements of the Exchange Act and the rules and
regulations of the SEC thereunder applicable to the Proxy Statement and the
solicitation of proxies for the Special Meeting (including any requirement
to amend or supplement the Proxy Statement) and make such other filings
with the SEC in connection with the transactions contemplated hereby, and
each party shall furnish to the other such information relating to it and
its Affiliates and the transactions contemplated by this Agreement and such
further and supplemental information as may be reasonably requested by the
other party. The Proxy Statement shall include the recommendation of the
Company's Board of Directors in favor of the Merger (subject to the right
of the Board of Directors to withdraw or modify its recommendation with
respect to the Merger as provided in Section 6.4(a)). The Company shall use
all reasonable efforts, and Sub and Parent will cooperate with the Company,
to have all necessary state securities law or "Blue Sky" permits or
approvals required to carry out the transactions contemplated by this
Agreement and will pay all expenses incident thereto.
(b) No amendment or supplement to the Proxy Statement shall be made by
Sub, Parent, or the Company without the approval of all other parties. The
Company shall advise Sub and Parent of any request by the SEC for amendment
of the Proxy Statement or comments thereon and responses thereto or
requests by the SEC for additional information.
6.7. Director and Officer Liability.
(a) For a period of six years after the Effective Time, the Surviving
Corporation shall indemnify and hold harmless the present and former
officers and directors of the Company in respect of acts or omissions
occurring prior to the Effective Time to the extent provided under the
Company's articles of incorporation and by-laws in effect on the date
hereof; provided that such indemnification shall be subject to any
limitation imposed from time to time under applicable law. The by-laws of
the Surviving Corporation shall contain provisions substantially similar in
terms of the rights granted to the provisions with respect to
indemnification and insurance set forth in the Company's articles of
incorporation, which provisions shall not be amended in any manner that
would adversely affect the rights under those by-laws of the Company's
employees, agents, directors or officers for acts or omissions on or prior
to the Effective Time, except if such amendment is required by law. For a
period of six years after the Effective Time,
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Parent will cause the Surviving Corporation to maintain officers' and
directors' liability insurance in respect of acts or omissions occurring
prior to the Effective Time covering each such person currently covered by
the Company's officers' and directors' liability insurance policy on terms
with respect to coverage and amount no less favorable than those of such
policy in effect on the date hereof, provided that in satisfying its
obligation under this Section 6.7, Parent shall not be obligated to cause
the Surviving Corporation to pay premiums in excess of 125% of the amount
per annum the Company paid in its last full fiscal year, which amount has
been disclosed to Parent.
(b) In the event the Company or any of its successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and
assets to any Person, then, and in each such case, proper provisions shall
be made so that the successors and assigns of the Company shall assume its
obligations set forth in this Section 6.7.
6.8. Notices of Certain Events. The Company shall promptly notify Sub and
Parent of:
(a) any notice or other communication from any person alleging that
the consent of such person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any Governmental Authority
in connection with the transactions contemplated by this Agreement; and
(c) any Actions commenced or, to the best of its knowledge threatened
against, relating to or involving, or otherwise affecting the Company or
any Subsidiary which, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 4.8 or which
relate to the consummation of the transactions contemplated by this
Agreement.
6.9. Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of the Company or Sub, any deeds, bills of
sale, assignments or assurances and to take and do, in the name and on behalf of
the Company or Sub, any other actions and things to vest, perfect or confirm of
record or otherwise in the Surviving Corporation any and all right, title and
interest in, to and under any of the rights, properties or assets of the Company
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with, the Merger.
6.10. Financial Statements, Etc. Within 30 days after the end of each
calendar month, the Company and its Subsidiaries shall provide Parent with
financial statements, including a consolidated balance sheet and income
statement, relating to such calendar month. Such interim financial statements
shall (a) be in accordance with the books and records of the Company and its
Subsidiaries, (b) be prepared in accordance with GAAP consistently applied
throughout the periods covered thereby (except for the absence of footnotes and
normal year end adjustments) and present fairly and accurately in accordance
with GAAP the Assets, liabilities (including, without limitation, all reserves)
and financial condition of the Company and its Subsidiaries as of the respective
dates thereof and the results of operations for the periods covered thereby.
6.11. Year 2000 Remediation. Prior to the Effective Time, the Company shall
complete (i) the inventory and assessment of its business systems that are
susceptible to failure or miscalculation as a result of the change from the year
1999 to the year 2000 ("Y2K issues"); (ii) the remediation and replacement of
all material information technology business systems affected by Y2K issues and
(iii) the testing of all material information technology business systems
affected by Y2K issues.
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ARTICLE VII.
CONDITIONS TO THE MERGER
7.1. Conditions to the Obligations of each Party. The obligations of the
Company, Sub and Parent to effect the Merger and to consummate the transactions
contemplated hereby on the Closing Date are subject to the satisfaction, on the
Closing Date, of each of the following conditions:
(a) This Agreement shall have been approved and adopted by the holders
of the Company Common Stock in accordance with the MBCA by the Required
Vote;
(b) Any applicable waiting period under the HSR Act relating to the
Merger shall have expired or been terminated; and
(c) No provision of any applicable Law or regulation and no judgment,
order, decree or injunction shall prohibit or enjoin the consummation of
the Merger;
7.2. Conditions to the Obligations of the Company. The obligations of the
Company to consummate the transactions contemplated hereby on the Closing Date
are subject, in the sole discretion of the Company, to the satisfaction, on the
Closing Date, of the following conditions, which may be waived by the Company in
accordance with Section 8.4:
(a) All representations and warranties of Sub and Parent contained in
this Agreement shall be true and correct in all material respects at and as
of the date hereof and the Closing Date, as if such representations and
warranties were made at and as of the date hereof and the Closing Date
(except to the extent that any such representations and warranties were
made as of a specified date, which representations and warranties shall
continue on the Closing Date to be true as of such specified date).
(b) Sub and Parent shall have each performed in all material respects
all obligations arising under the agreements and covenants required hereby
to be performed by it prior to or on the Closing Date.
(c) The Company shall have received, at or prior to the Closing, a
certificate executed by an officer or member of Parent certifying that, as
of the Closing Date, the conditions set forth in Sections 7.2(a) and (b)
have been satisfied.
7.3. Conditions to the Obligations of Sub and Parent. The obligations of
Sub and Parent to consummate the transactions contemplated hereby on the Closing
Date are subject, in the sole discretion of Sub and Parent, to the satisfaction,
on the Closing Date, of each of the following conditions, any of which may be
waived by Sub and Parent in accordance with Section 8.4:
(a) Representations, Warranties and Covenants.
(i) All representations and warranties of the Company contained in
this Agreement shall be true and correct in all material respects at and
as of the date hereof and the Closing Date as if such representations
and warranties were made at and as of the date hereof and the Closing
Date.
(ii) The Company shall have performed in all material respects all
of the agreements and covenants required hereby to be performed by it
prior to or on the Closing Date.
(iii) Sub and Parent shall have received, at or prior to the
Closing, a certificate executed by the President and the Chief Financial
Officer of the Company certifying that, as of the Closing Date, the
conditions set forth in Sections 7.3(a), (b), (c), (d), (e), (f) and (g)
have been satisfied.
(b) No Proceedings or Litigation. No Actions by any Governmental
Authority or any other Person shall have been granted a temporary
restraining order for the purpose of enjoining or preventing, or which
question the validity or legality of, the transactions contemplated hereby
and which would reasonably be expected to materially damage Sub or Parent
or materially adversely affect the value of the Company Common Stock, the
Class A Stock or the Assets, or the business or operations of the Company
and its Subsidiaries or Parent's ability to own and operate the Assets,
business or operations of the Company and its Subsidiaries, if the
transactions contemplated hereby are consummated.
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(c) Consents. All consents, approvals and licenses of any Governmental
Authority or any third party (including, without limitation, any consent
listed on Schedule 4.9 of the Disclosure Schedule) required in connection
with the execution, delivery and performance of this Agreement and for the
Surviving Corporation to conduct the business of the Company in
substantially the manner now conducted, shall have been obtained.
(d) Material Changes. Since June 30, 1999, (i) there shall have been
no Material Adverse Change with respect to the Company and (ii) there shall
have been no events or conditions which would be reasonably expected to
cause a Material Adverse Change with respect to the Company.
(e) Dissenters' Rights. Dissenting Shares shall constitute not more
than ten percent of the shares of the Company Common Stock outstanding
immediately prior to the Effective Time (including shares of Company Common
Stock held by holders of Class A Stock who have converted their shares of
Class A Stock).
(f) Conversion of Class A Stock. Prior to the Closing each holder of
Class A Stock shall duly and validly converted his shares of Class A Stock
to shares of Company Common Stock in accordance with their present terms
and immediately prior to the Effective Time, the Company shall not have
issued or outstanding any Equity Securities other than Company Common Stock
or options, warrants, conversion rights or other rights to Equity
Securities other than Options and Warrants existing on the date hereof.
(g) Key Employee. Richard E. Jahnke (the "Key Employee") shall not
have terminated his employment with the Company, announced his intention to
terminate his employment with the Company, breached his existing employment
agreement with the Company or otherwise given Parent reasonable grounds to
believe that he will not be available to continue to provide services to
the Company. The Key Employee shall have executed and delivered a valid and
binding, legally enforceable agreement with the Company canceling his
existing employment agreement with the Company, effective at the Effective
Time, and replacing that employment agreement with the form of employment
agreement attached to that certain letter agreement between the Key
Employee and Parent of even date herewith (the "Key Employee Agreement").
(h) Board Seats. Up to three directors of the Company acceptable to
Parent shall have agreed to serve on the Board of Directors of Parent after
the Effective Time.
(i) Certain Fees. The Company shall have delivered to Parent evidence
reasonably satisfactory to Parent that the Company's fees and expenses
associated with the transactions contemplated by this Agreement, including,
without limitation, legal, accounting, printing and broker's or finder's
fees, will not be in excess of $350,000.
ARTICLE VIII.
MISCELLANEOUS
8.1. Termination.
(a) Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned prior to the Effective Time by
providing written notice to each of the other parties hereto as follows
(notwithstanding any approval of the Merger by the shareholders of the
Company):
(i) by mutual written consent of Parent and the Company at any
time;
(ii) by Sub, Parent, or the Company, if the Closing shall not have
occurred on or before February 29, 2000; provided that the party seeking
to exercise such right is not then in breach in any material respect of
any of its obligations under this Agreement;
(iii) by Sub, Parent, or the Company, if any of the conditions to
such party's obligation to consummate the transactions contemplated in
this Agreement shall have become impossible to satisfy;
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(iv) by the Company, Parent, or Sub, if there shall be any Law that
makes consummation of the Merger illegal or otherwise prohibited or if
any permanent judgment, injunction, order or decree enjoining a party
from consummating the Merger is entered and such judgment, injunction,
order or decree shall become final and non-appealable;
(v) by Parent, if the Board of Directors of the Company shall have
(A) withdrawn or modified or amended, in a manner adverse to Sub or
Parent, its approval or recommendation of this Agreement and the Merger
or its recommendation that shareholders of the Company adopt and approve
this Agreement and the Merger, (B) approved, recommended or endorsed an
Acquisition Proposal or shall have failed to reconfirm its
recommendation of this Agreement and the Merger within five business
days of Sub's or Parent's request that it do so, (C) failed to convene
the Special Meeting in breach of the provisions of this Agreement or
failed as promptly as practicable to mail the Proxy Statement to its
shareholders or failed to include in such statement the recommendation
referred to above, (D) in response to the commencement of any tender
offer of exchange offer for 25% or more of the outstanding shares of
Company Common Stock, not recommended rejection of such tender offer or
exchange offer within ten business after commencement of the offer; or
(E) publicly announced its intention to do any of the foregoing;
(vi) by the Company, if, prior to the Effective Time, in good
faith, based upon written advice from outside counsel that such action
is necessary in order to prevent the Board of Directors from breaching
its fiduciary duty, the Board of Directors of the Company shall have
withdrawn or modified or amended, in a manner adverse to Sub or Parent
its approval or recommendation of this Agreement and the Merger or its
recommendation that shareholders of the Company adopt and approve this
Agreement and the Merger in order to permit the Company to execute a
definitive agreement providing for the acquisition of the Company or in
order to approve a tender or exchange offer for any or all of the
Company Common Stock, in either case that is determined by the Board of
Directors of the Company to be on financial terms more favorable to the
Company's shareholders than the Merger; provided that the Company shall
be in compliance with Section 6.4;
(vii) by the Company, Parent, or Sub, if, at the Special Meeting or
any adjournment thereof at which this Agreement and the Merger is voted
upon, the Required Vote shall not have been obtained; or
(viii) by the Company, if as a result of the matters disclosed in
Schedule 5.4, there is a temporary injunction in state court or a
preliminary injunction in federal court prohibiting or enjoining the
consummation of the Merger and such injunction is in full force and
effect on the following dates: (A) the day before the date that a duly
noticed meeting of the shareholders of the Company to vote on the Merger
is scheduled to be held or, if requested by Parent, the day before the
date of a rescheduled meeting of the shareholders of the Company; it
being agreed that Parent shall have the one-time right to require the
Company to adjourn or postpone its shareholders' meeting and to
reschedule it to a date which is not less than 30 days after the
originally scheduled shareholders' meeting date if an injunction is in
effect on the day before the date the meeting was originally scheduled
to be held or (B) if the Company holds its shareholders meeting
notwithstanding that an injunction is in effect on the day before the
date the meeting was originally scheduled, if the Closing is not
effected within 30 days after receipt of the Required Vote.
(b) Effect of Termination. If this Agreement is terminated pursuant to
Section 8.1, this Agreement shall become void and of no effect with no
liability on the part of any party hereto or such party's officers,
directors, employees or representatives, except (i) that the agreements
contained in Sections 6.4 and 8.7 and this Section 8.1 hereof shall survive
the termination hereof and (ii) nothing herein shall relieve any party from
liability for any breach of this Agreement.
36
<PAGE> 103
(c) Procedure Upon Termination. In the event of termination of this
Agreement pursuant to Section 8.1:
(i) Each party shall redeliver all documents, work papers and other
material of any other party and any and all copies thereof relating to
the transactions contemplated hereby, whether obtained before or after
the execution hereof, to the party furnishing the same; and
(ii) No confidential information received by any party with respect
to the business of any other party or its Affiliates shall be disclosed
to any third party, unless required by Law.
8.2. Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned, in whole or in part, by operation of law
or otherwise by any party without the prior written consent of all other parties
to this Agreement, except that Parent and/or Sub may collaterally assign its
rights under this Agreement to parties providing financing in connection with
the transactions contemplated hereby without the prior written consent of the
Company. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, and, with respect to the provisions of Section 6.7 hereof, shall inure
to the benefit of the persons or entities benefiting from the provisions thereof
who are intended to be third-party beneficiaries thereof, and no other person
shall have any right, benefit or obligation hereunder. Each party acknowledges
that no provision hereof shall limit the ability of Parent or Sub to, between
the date hereof and the Effective Time, issue or sell shares of the capital
stock of Sub to one or more Persons not a party to, this Agreement.
8.3. Notices. All notices, requests, demands and other communications which
are required or may be given under this Agreement shall be in writing and shall
be deemed to have been duly given when received, if personally delivered; when
transmitted, if transmitted by telecopy, upon receipt of telephonic or
electronic confirmation; the day after it is sent, if sent for next day delivery
to a domestic address by recognized overnight delivery service (e.g., Federal
Express); and upon receipt, if sent by certified or registered mail, return
receipt requested. In each case notice shall be sent to:
If to the Company, addressed to:
Medical Graphics Corporation
350 Oak Grove Parkway
St. Paul, MN 55127-8599
Attention: Richard E. Jahnke
Telecopy: (651) 484-4826
With a copy to:
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Attention: Thomas G. Lovett, IV
Telecopy: (612) 371-3207
If to Parent or Sub, addressed to:
Angeion Corporation
7601 Northland Drive
Brooklyn Park, Minnesota 55428
Attention: James B. Hickey, Jr.
Telecopy: (612) 315-2059
37
<PAGE> 104
With a copy to:
Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Stephen C. Kennedy
Telecopy: (612) 336-3026
or to such other place and with such other copies as either party may designate
as to itself by written notice to the others.
8.4. Entire Agreement; Waivers. This Agreement, together with all exhibits
and schedules hereto (including, without limitation, the Disclosure Schedule),
and the other agreements referred to herein, constitute the entire agreement
among the parties pertaining to the subject matter hereof and supersedes all
prior agreements. understandings, negotiations and discussions, whether oral or
written, of the parties. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing waiver
unless otherwise expressly provided.
8.5. Multiple Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.6. Invalidity. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
8.7. Fees and Expenses. Except as provided in Section 6.4 hereof, all costs
and expenses incurred in connection with this Agreement shall be paid by the
party incurring such cost or expense.
8.8. Cumulative Remedies. All rights and remedies of either party hereto
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
8.9. Governing Law. This Agreement shall be construed under the laws of the
State of Minnesota regardless of the laws that might otherwise govern under
applicable principles of conflicts of laws.
8.10. Amendment. This Agreement may be amended by the parties hereto at any
time before or after approval of matters presented in connection with the Merger
by the shareholders of the Company, but after any such shareholder approval, no
amendment shall be made which by law requires the further approval of
shareholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
8.11. Public Announcements. None of the parties will issue any press
release or public statement with respect to the transactions contemplated by
this Agreement, including the Merger, without the other party's prior consent
(such consent not to be unreasonably withheld), except as may be required by
applicable law, court process or the quotation requirements of NASDAQ. In
addition to the foregoing, the parties will consult with each other before
issuing, and provide each other the opportunity to review and comment upon, any
such press release or other public statements with respect to such transactions.
The parties agree that the initial press release or releases to be issued with
respect to the transactions contemplated by this Agreement shall be mutually
agreed upon prior to the issuance thereof.
8.12. Enforcement of Agreement. The Company, Parent and Sub agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the Company, Parent and Sub
shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the
38
<PAGE> 105
terms and provisions hereof, this being in addition to any other remedy to which
they are entitled at law or in equity. If any action is brought by Company to
enforce this Agreement, the Parent or Sub agree to waive the defense that
Company has an adequate remedy at law and to otherwise make no objection to the
propriety of specific performance as a remedy. If any action is brought by
Parent or Sub to enforce this Agreement, the Company agrees to waive the defense
that Parent or Sub has an adequate remedy at law and to otherwise make no
objection to the propriety of specific performance as a remedy.
8.13. Non-Survival of Representations, Warranties. The representations and
warranties in this Agreement shall terminate at the Effective Time.
8.14. No Third Party Beneficiaries. Except as provided in Section 6.7, this
Agreement is for the sole benefit of the parties hereto and their permitted
assigns and nothing herein, express or implied, is intended or shall confer upon
any other person, any legal or equitable right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement. The agreements and obligations
of each party hereto shall be enforceable only against such party and no
recourse may be had to or against any shareholder, member or Affiliate of such
party with respect to the obligations of such party under this Agreement.
39
<PAGE> 106
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on their respective behalf, by their respective officers thereunto
duly authorized, all as of the day and year first above written.
MEDICAL GRAPHICS CORPORATION
By: /s/ RICHARD E. JAHNKE
------------------------------------
Name: Richard E. Jahnke
Title: President and Chief Executive
Officer
ANGEION CORPORATION
By: /s/ JAMES B. HICKEY, JR.
------------------------------------
Name: James B. Hickey, Jr.
Title: President and Chief Executive
Officer
ANG ACQUISITION CORP.
By: /s/ JAMES B. HICKEY, JR.
------------------------------------
Name: James B. Hickey, Jr.
Title: President
40
<PAGE> 107
APPENDIX B
M.S.A. SEC. 302A.471
MINNESOTA STATUTES ANNOTATED CORPORATIONS
CHAPTER 302A. BUSINESS CORPORATIONS
SHARES; SHAREHOLDERS
Current through End of 1999 Reg. Sess.
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new
class or series with similar or different voting rights; except that an
amendment to the articles of an issuing public corporation that provides
that section 302A.671 does not apply to a control share acquisition does
not give rise to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a constituent organization, except as provided in
subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares that
are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the
<PAGE> 108
terms of this section and section 302A.473, if the beneficial owner submits to
the corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
SUBD. 3. RIGHTS NOT TO APPLY. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for
the determination of shareholders entitled to receive notice of and to vote on
an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
<PAGE> 109
M.S.A. SEC. 302A.473
MINNESOTA STATUTES ANNOTATED
CORPORATIONS
CHAPTER 302A. BUSINESS CORPORATIONS
SHARES; SHAREHOLDERS
Current through End of 1999 Reg. Sess.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by the
shareholders, a shareholder who is entitled to dissent under section 302A.471
and who wishes to exercise dissenters' rights must file with the corporation
before the vote on the proposed action a written notice of intent to demand the
fair value of the shares owned by the shareholder and must not vote the shares
in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired the shares
or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description of
the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
<PAGE> 110
(1) The corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief description of
the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part
<PAGE> 111
or all of those costs and expenses against a dissenter whose action in demanding
payment under subdivision 6 is found to be arbitrary, vexatious, or not in good
faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
<PAGE> 112
MEDICAL GRAPHICS CORPORATION
SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 21, 1999
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
THE UNDERSIGNED, REVOKING ALL PRIOR PROXIES, HEREBY CONSTITUTES AND
APPOINTS MARK W. SHEFFERT, JOHN C. PENN AND RICHARD E. JAHNKE, AND EACH OF THEM,
WITH FULL POWER OF SUBSTITUTION, AS PROXIES TO VOTE ALL SHARES OF CAPITAL STOCK
OF MEDICAL GRAPHICS CORPORATION HELD BY THE UNDERSIGNED AT THE SPECIAL MEETING
OF SHAREHOLDERS OF MEDICAL GRAPHICS TO BE HELD ON DECEMBER 21, 1999, AND AT ANY
ADJOURNMENTS THEREOF, AS DESIGNATED BELOW ON THE MATTERS REFERRED TO AND IN
THEIR DISCRETION UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE
SPECIAL MEETING.
(1) THE PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER,
EFFECTIVE AS OF SEPTEMBER 22, 1999, BY AND AMONG MEDICAL GRAPHICS
CORPORATION, ANGEION CORPORATION, AND ANG ACQUISITION CORP., A WHOLLY-OWNED
SUBSIDIARY OF ANGEION, THAT WILL RESULT IN ANG ACQUISITION CORP. MERGING
WITH AND INTO MEDICAL GRAPHICS WITH MEDICAL GRAPHICS BEING THE SURVIVING
CORPORATION AND EACH OUTSTANDING SHARE OF MEDICAL GRAPHICS COMMON STOCK
BEING CONVERTED INTO THE RIGHT TO RECEIVE $2.15 IN CASH PAYABLE TO THE
HOLDERS THEREOF, WITHOUT INTEREST.
/ / FOR / / AGAINST / / ABSTAIN
(2) IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
THIS PROXY WILL BE VOTED AS SPECIFIED HEREIN. IF NO INSTRUCTIONS ARE INDICATED,
PROXIES WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
FOR THE OTHER PROPOSALS. PLEASE SIGN EXACTLY AS YOUR NAME APPEARS BELOW. WHEN
SHARES ARE HELD BY JOINT TENANTS, BOTH MUST SIGN. FIDUCIARIES SHOULD INDICATE
TITLE AND AUTHORITY.
DATE: ______________________ , 1999
------------------------------------
(SIGNATURE)
------------------------------------
(SIGNATURE, IF HELD JOINTLY)
------------------------------------
(TITLE OR AUTHORITY)
PLEASE SIGN, DATE AND RETURN THIS
PROXY PROMPTLY IN THE ENVELOPE
PROVIDED.