-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G6pagzv1vcFqmPLRVpx7RG2CeKOs6OK62Fi4Bu2QmoC46m2Yiw+as28RjyQJxjju aPnsqvbuS+6nINe+5GAdkA== 0000912057-97-013072.txt : 19970416 0000912057-97-013072.hdr.sgml : 19970416 ACCESSION NUMBER: 0000912057-97-013072 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL GRAPHICS CORP /MN/ CENTRAL INDEX KEY: 0000352862 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411316712 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09899 FILM NUMBER: 97580867 BUSINESS ADDRESS: STREET 1: 350 OAK GROVE PKWY CITY: ST PAUL STATE: MN ZIP: 55127-8599 BUSINESS PHONE: 6124844874 MAIL ADDRESS: STREET 1: 350 OAK GROVE PARKWAY CITY: ST PAUL STATE: MN ZIP: 55127-8599 10KSB40 1 FORM 10-KSB405 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1996 / / Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to ________. COMMISSION FILE NUMBER 0-9899 MEDICAL GRAPHICS CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 41-1316712 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 350 OAK GROVE PARKWAY SAINT PAUL, MINNESOTA 55127 (Address of principal executive offices and Zip Code) Issuer's telephone number: (612) 484-4874 Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.05 PER SHARE (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. /X/ State issuer's revenues for its most recent fiscal year: $20,288,675. The aggregate market value of the common stock held by non-affiliates of the registrant based on the closing sale price as reported on The Nasdaq National Market on March 28, 1997 was $8,297,000. As of March 28, 1997, 2,571,041 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's definitive Proxy Statement for the Annual Meeting of Shareholders, a definitive copy of which will be filed with the SEC within 120 days of December 31, 1996 is incorporated by reference into Items 9, 10, 11 and 12 of Part III. Transitional Small Business Disclosure Formats (check one): Yes ___ No X TABLE OF CONTENTS Page No. -------- PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . 1 Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . 6 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 6 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 6 PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 5. Market for Common Equity and Related Stockholder Matters. . . . 7 Item 6. Management's Discussion and Analysis or Plan of Operation . . . 8 Item 7. Financial Statements. . . . . . . . . . . . . . . . . . . . . .12 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . .27 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act . . . . . . .27 Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . .27 Item 11. Security Ownership of Certain Beneficial Owners and Management.27 Item 12. Certain Relationships and Related Transactions. . . . . . . . .27 Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . .28 INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 (ii) PART I Unless the context indicates otherwise, all references to the "Company" and "Registrant" in this Annual Report on Form 10-KSB relate to Medical Graphics Corporation. The following United States registered trademarks appear in this Annual Report on Form 10-KSB and are owned by the Company: MedGraphics and CPX EXPRESS. In addition, the following Company trademarks appear in this Annual Report on Form 10-KSB: PF/Dx, preVent, BREEZE, 1085 Series, CardiO2, CPX/D and CPX/MAX/D. CardiO-KEY is a trademark of ErgometRx Corporation. Pentium is a trademark of INTEL Corporation. Windows is a trademark of Microsoft Corporation. ITEM 1. DESCRIPTION OF BUSINESS GENERAL OVERVIEW Medical Graphics Corporation was incorporated as a Minnesota corporation in 1977. The Company designs and produces innovative non-invasive diagnostic systems for the prevention, early detection, and cost-effective treatment of heart and lung disease. Medical Graphics Corporation has grown from providing computerized lung function test graphics to providing a wide-ranging line of diagnostic systems featuring patented hardware and software sold under the MedGraphics trade name. Medical Graphics Corporation is a leading producer of non-invasive cardiorespiratory diagnostic systems worldwide. The Company's products consist of breath analysis technology integrated with computer and applications-specific software. More than 4,000 MedGraphics systems have been sold to customers for use in over 50 countries. The Company's primary products include pulmonary function, body plethysmography and cardiopulmonary exercise testing systems. Most of the Company's revenues are generated from sales into the hospital cardiopulmonary market and the office-based physician market. Revenues from service and supplies accounted for 24 percent of total revenues in 1996, up from 22 percent in 1995. PRIMARY PRODUCTS PULMONARY FUNCTION TESTING SYSTEM. The PF/Dx System is a complete pulmonary function testing lab which helps health care professionals diagnose lung diseases and manage treatment of their patients. The PF/Dx System currently consists of a nitrogen analyzer, a gas chromatograph, an IBM-compatible computer with Pentium processor, a full-color monitor, a printer and other peripherals. Applications include screening asthma patients, assessing pre-operative and post-operative risk of heart and lung surgery patients, evaluating lung damage from occupational exposures and documenting outcomes and responses to therapy. The PF/Dx System's compact design and mobility options attract a wide variety of customers, including cardiopulmonary laboratories in hospitals, office-based clinics, occupational medicine clinics, asthma centers and clinical research centers. The PF/Dx System utilizes the preVent Pneumotach, a mouthpiece/flow device with a snap-in, snap-out design which helps prevent the transmission of infectious diseases. The preVent Pneumotach is attached by tubing to the PF/Dx System for the measurement of patients' lung function. The PF/Dx System's unique features also include the Company's proprietary BREEZE software, which is designed to operate in a simple, easy-to-use manner. 1 BODY PLETHYSMOGRAPHY SYSTEMS. The Company's 1085 Series offers four body plethysmography systems for lung function testing. A body plethysmograph is an enclosed chamber in which the patient sits and performs diagnostic pulmonary function testing. Body plethysmography is the most sensitive method for identifying lung diseases, including difficult-to-detect diseases such as asthma. The systems are comprised of a hexagon-shaped acrylic chamber, a nitrogen analyzer, a diffusion analyzer, an IBM-compatible computer with Pentium processor, a full-color monitor, a printer and other peripherals. Applications include diagnosing lung diseases and managing their treatment, assessing surgical risk of lung transplant and lung reduction surgery candidates and evaluating the impact of neuromuscular disease on breathing. Included in the 1085 Series systems is the preVent pneumotach for helping to prevent the transmission of infectious diseases between patient tests. The system's design optimizes patient comfort with clear-view acrylic enclosures and enables testing of a broad population including pediatric patients and individuals using wheelchairs. CARDIOPULMONARY EXERCISE TESTING SYSTEMS. The Company's cardiopulmonary exercise systems both measure one's fitness or conditioning level and help physicians diagnose heart and lung diseases by measuring the gas exchange of the patient's lungs in conjunction with the electrical activity of their heart. Should there be a limitation in the heart or lungs or in the level of conditioning, these systems help detect and quantify the degree of impairment by measuring the amount of oxygen consumed during exercise. MedGraphics cardiopulmonary exercise testing systems are sold in four different models. They include the CardiO2 System, CPX/D System, CPX/MAX/D System and CPXEXPRESS System. The systems consist of an oxygen analyzer, a carbon dioxide analyzer, the preVent Pneumotach, an IBM-compatible computer with Pentium processor, a full-color monitor, a printer and other peripherals. The CardiO2 includes a full 12-lead ECG system while the other systems are designed to be used in conjunction with stand-alone ECG systems. The systems are used for differential diagnosis of cardiovascular and pulmonary disease, screening for early signs of cardiac and pulmonary dysfunction, establishing exercise prescriptions and training programs, and evaluating the efficacy of prescribed therapy. Test results are displayed in easy-to-interpret graphs and summary reports. Customers include hospital cardiopulmonary laboratories, cardiology and pulmonary office-based clinics, cardiac rehabilitation units, human performance laboratories and health clubs. CYCLE ERGOMETERS. The Company offers several models of cycle ergometers providing physicians and patients a tool for more successful outcomes in clinical rehabilitation and athletic training. A cycle ergometer is a specially designed stationary exercise bicycle which can operate at a broad spectrum of resistance levels. The Company has four models of cycle ergometers that are used in diagnostic, rehabilitation, training and sports medicine applications. Three of the four models in the CardiO2 Cycle Series incorporate patented CardiO-KEY technology, a "data key" capable of storing exercise protocols and recording exercise session data. The data key is used to individualize exercise sessions and monitor conditioning progress. 2 INDUSTRY Early detection and prevention of heart and lung diseases is becoming more commonplace as health care reform and cost containment efforts increase. Physicians and health plan administrators are becoming more motivated to use non-invasive diagnostic testing to detect early signs of disease and reverse the disease process by therapeutic treatments, rather than relying on invasive and expensive procedures to treat disease after it has already progressed. Thus, the demand for therapeutic and diagnostic products, such as the Company's, is being affected by trends in the medical profession and its approach to the treatment of illness as well as third party payment and reimbursement policies. COMPETITION The principal competitive factors in the diagnostic and therapeutic markets are quality of system performance, software which is technologically advanced and easy-to-use, and customer service. These markets are characterized by intense competition. Some companies with which the Company competes have greater financial, human and technological resources than Medical Graphics Corporation. This competitive marketplace has in some circumstances led to price discounting to which Medical Graphics Corporation has responded in kind, and may do so again in the future. The medical device industry in which the Company operates is characterized by relatively rapid technological change. Accordingly, the Company must continually implement improvements in its core technologies and products. The Company's success depends on its ability to anticipate changes in technology and industry standards, to develop and successfully introduce new and enhanced products on a timely basis and to promote market acceptance of such products. The Company believes its principal competitors are SensorMedics Corporation, a subsidiary of ThermoElectron Corporation, and Erich Jaeger GmbH & Co. KG. MARKETING AND DISTRIBUTION In the United States, the Company markets its products through a direct sales force that targets customers located in hospitals, university-based medical centers and office-based clinics. Each sales employee is assigned to one of two regional managers who report to the Company's Senior Vice President of Sales and Marketing. Each salesperson is responsible for a specific geographic area and sells the Company's complete product line within that area. Company salespersons are compensated with a base salary, expenses and a revenue- based commission. The Company markets its products outside the United States into over 50 countries through approximately 37 international sales organizations that operate primarily as distributors who carry a limited inventory of the Company's products. These organizations sell the Company's products in specific geographic areas, generally on an exclusive basis. International sales accounted for 27% and 28% of total sales in 1996 and 1995, respectively. All of the Company's international sales are made on a United States dollar-denominated basis. Conducting business in foreign countries involves certain risks not ordinarily associated with domestic business including governmental laws or restrictions that could adversely affect pricing of, and the Company's ability to, market its products. 3 The Company believes that demonstration of its products' capabilities to potential customers is one of the most significant factors in achieving sales. Consequently, the main thrust of domestic and international promotional efforts is product demonstrations at conventions and customer facilities. Other promotional efforts include educational seminars, print advertisements, direct mail campaigns, and a company web site. RESEARCH AND DEVELOPMENT Research and development expenses increased 42.8% to $2,762,000 in 1996 from $1,934,000 in 1995, representing 13.6% of revenues in 1996 compared to 8.9% of revenues in 1995. This increase was a result of significant expenditures, including the use of independent contractors, to convert the Company's product software systems to a Windows environment. The Company expects to begin shipping products with Windows-based software in the third quarter of 1997. In addition, the Company is working on a number of product improvements designed to enhance product reliability and performance. The Company is also engaged in the development of new products targeted for growth markets to diversify and grow the Company. The Company believes ongoing research and development efforts have been and will remain important to its continuing success. MANUFACTURING The Company currently manufactures and assembles all major analyzer components of its systems including a waveform analyzer, gas chromatograph, nitrogen analyzer and oxygen analyzer. Sheet metal, electrical components and some measurement devices are purchased from outside vendors and are tested, assembled and packaged by Company personnel into fully integrated systems. The Company also acquires general purpose computers, monitors and printers from a variety of sources and integrates its proprietary transducer modules into these systems. Through the use of in-house software engineers, the Company designs and develops the proprietary software used in the operation of its systems. Although some of the Company's components are available through only one or a limited number of suppliers, the Company believes that if it is unable to obtain components from these suppliers, it would be able to obtain comparable components from other sources without significant additional expense or interruption of business. Although the Company experienced difficulty in obtaining materials from suppliers during the fourth quarter of 1996 as a result of the Company's liquidity crisis, which resulted in a decrease in sales, the Company has entered into a new credit facility and has negotiated agreements with each of its principal vendors so that it will be able to acquire raw materials from these vendors without further interruptions. GOVERNMENT REGULATION Products manufactured by Medical Graphics Corporation are "devices" as defined in the Federal Food, Drug and Cosmetic Act (the "Act") and are subject to the regulatory authority of the Food and Drug Administration (FDA) over the manufacture and distribution and related record keeping, labeling and advertising thereof. The Medical Device Amendments of 1976 (the "Amendments") amended the Act and substantially increased the regulatory authority of the FDA over medical devices. Devices manufactured by the Company must comply with the provisions of this law. Under the Amendments, the FDA must determine the extent of control necessary to assure the safety and effectiveness of devices, and must define these control levels by the promulgation of regulations and standards. The Company has filed notifications with the FDA of its intent to market its systems pursuant to Section 510(k) of the Amendments. Under Section 510(k), a medical device can be marketed if the FDA determines that 4 the device is substantially equivalent to similar devices marketed prior to May 28, 1976. The FDA made such determinations for these systems, and the Company is marketing the devices under Section 510(k). The action of the FDA does not, however, constitute approval by the FDA of the Company's products or pass upon their safety and effectiveness. The FDA has increased the depth of its inspections for compliance with Good Manufacturing Practices Regulations covering software documentation, as well as hardware documentation. The Company's products are also subject to similar regulation in various foreign countries. The Company is in the process of implementing ISO 9001, a certification showing that the Company's procedures and manufacturing facilities comply with standards for quality assurance and manufacturing process control. ISO 9001 certification, along with the European Medical Device Directive ("MDD") certification, evidences compliance with the requirements that enable a company to affix the CE Mark to its products. The CE Mark denotes conformity with European standards for safety and allows certified devices to be placed on the market in all European Union ("EU") countries. After June 1998, medical devices may not be sold in EU countries unless they display the CE Mark. Because the Company is in compliance with certain aspects of MDD, it is currently eligible to use the CE Mark on its products. The Company expects to meet all of the requirements for continued use of the CE Mark in early 1998 so that it may continue to affix the CE to its product after June 1998. There can be no assurance that the Company will be able to obtain regulatory approvals or clearances for its products in foreign countries. The Company must comply with various federal, state and local environmental laws and regulations. The Company believes that it is currently in material compliance with such applicable environmental laws and regulations. PATENTS The Company currently owns 17 United States domestic patents which cover the basic aspects of the Company's core technologies, including gas pressure, flow measurement, breath-by-breath assessment of gas exchange and some expert systems. In addition, the Company has a number of foreign patents with respect to the technologies covered by its United States patents. There can be no assurance, however, that these patents, or any patents that may be issued as a result of existing or future application, will offer any degree of protection from competitors. The Company intends to aggressively enforce its intellectual property rights and has successfully done so in the past. The Company also relies on trade secrets and proprietary know-how, which it seeks to protect, in part, through proprietary information agreements with employees, consultants and other parties. EMPLOYEES As of December 31, 1996, the Company had a total of 169 employees, of which 167 were full-time employees. As part of its restructuring during the first quarter of 1997, the Company reduced its work force to 132 employees, of which 128 are full-time employees. No employees are represented by labor organizations and there are no collective bargaining agreements. Employee relations are believed to be good. 5 ITEM 2. DESCRIPTION OF PROPERTY The Company currently leases a 52,250 square foot building for its office, assembly and warehouse facilities located in St. Paul, Minnesota. The lease expires June 30, 2002. The facilities are in good condition. Annual rental costs will be approximately $420,000 over the next five years. Rent expense for the years ended December 31, 1996 and 1995 was $494,000 and $301,000, respectively. ITEM 3. LEGAL PROCEEDINGS The Company has been named as a defendant in two product liability suits as follows: JOHN GEFROH V. TRINITY HOSPITAL AND MEDICAL GRAPHICS CORPORATION, North Dakota District Court, Northwestern Judicial District, filed in March 1997. ROGER D. CROWE V. NORTHSHORE REGIONAL MEDICAL CENTER, NME HOSPITALS, INC., TENET HEALTHCARE CORPORATION, ASTRAND MANUFACTURING AND MEDICAL GRAPHICS CORPORATION, 22d Judicial District Court for the Parish of St. Tammany, State of Louisiana, Case No. JDC No. 95-14240-B, filed in November 1996. The plaintiffs in both product liability suits are seeking compensatory damages of an undisclosed amount resulting from injuries in connection with the use of one of the Company's products. The Company believes the injuries resulted from the actions of one or more third parties and did not result from any actions of the Company. The Company carries insurance in an amount that it believes is adequate to cover any liability it may be found to have arising from the claims in both of these suits. In the fourth quarter of 1996, the Company experienced a liquidity crisis and was unable to pay a significant number of its vendors when due. Subsequent to December 31, 1996, the Company negotiated agreements with vendors, who were owed $3,541,000, for payment of the outstanding balances in equal monthly installments for up to 36 months. A few vendors have refused to accept the proposed terms and in some cases have commenced litigation against the Company. See "Management's Discussion & Analysis - Liquidity and Capital Resources." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 6 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's common stock trades on The Nasdaq National Market System under the symbol MGCC. The following table shows the range of high and low bid prices for the Company's Common Stock on The Nasdaq Stock Market for the fiscal quarters indicated, as reported by Nasdaq in its "Monthly Statistical Report." The quotations represent prices in The Nasdaq Stock Market between dealers in securities, and do not include retail mark-up, mark-down or commission, and may not represent actual transactions. BID PRICES ---------- HIGH LOW ---- --- 1996 First Quarter $8 1/2 $4 5/8 Second Quarter 9 1/8 6 3/8 Third Quarter 8 3/8 5 1/2 Fourth Quarter 6 1/4 4 1995 First Quarter $6 1/2 $5 3/8 Second Quarter 6 1/4 5 Third Quarter 6 3/4 4 3/8 Fourth Quarter 6 1/4 4 3/8 ________________________________ (B) APPROXIMATE NUMBER OF HOLDERS OF COMMON EQUITY Approximate Number of Holders Title of Class (as of March 28, 1997) -------------- --------------------------------- Common Stock, par value of $.05 1,900 (C) DIVIDENDS The Company has not paid any cash dividends on its common stock, and the Board of Directors intends to retain earnings, if any, for the foreseeable future for use in the expansion of the Company's business. Under the terms of the Company's new credit agreement, the Company is prohibited from paying cash dividends unless it is in compliance with certain covenants. 7 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FORWARD LOOKING STATEMENT Statements included in this Annual Report on Form 10-KSB that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially. Among these risks and uncertainties are (i) the fact that the Company has incurred losses of $9,071,000 in 1996 and $1,731,000 in 1995; (ii) the ability of the Company's distributors to successfully market and sell the Company's products in markets outside the United States; (iii) the Company's ability to successfully market its product in the United States at a favorable margin in light of significant price competition in the industry; (iv) the extent to which physicians and health plan administrators are motivated to use non-invasive diagnostic testing to detect early signs of disease; (v) the Company's ability to successfully convert the Company's product software systems to a Windows environment; and (vi) the Company's ability to develop future products which are technologically advanced and accepted by the marketplace. OVERVIEW During 1996, the Company aggressively expanded its sales, marketing, and research and development activities and management personnel. This expansion, in part, resulted in the Company reaching its borrowing base limit on its credit line, the signing of a forbearance agreement with its lender and the inability to pay vendors' accounts payable when due, all of which occurred during the fourth quarter of 1996. These events restricted the Company's ability to produce products in the fourth quarter of 1996 and required management and the Board of Directors to devote a significant amount of time to restructuring the Company in the first quarter of 1997. Subsequent to December 31, 1996, the Company retained Manchester Business Services, Inc., to design and implement a restructuring plan. Under the restructuring plan, the Company obtained a new line of credit, received $1,500,000 of cash from the issuance of equity securities, entered into agreements with vendors which provide for payment of approximately $3,500,000 of accounts payable in equal monthly installments for up to 36 months and reduced its work force by approximately 25%. Management believes that these events provide the foundation to return the Company to profitability. The following discussion should be read in conjunction with the Company's consolidated financial statements as of and for the years ended December 31, 1996 and 1995 included in Item 7 of this Form 10-KSB. 8 RESULTS OF OPERATIONS The following table presents statement of operations data as a percentage of total revenues for the years ended December 31, 1996 and 1995. YEAR ENDED DECEMBER 31 ---------------------- 1996 1995 -------- -------- Revenues 100.0% 100.0% Cost of goods sold 72.2 57.0 -------- -------- Gross margin 27.8 43.0 -------- -------- Selling 40.3 33.5 General and administrative 21.5 14.0 Research and development 13.6 8.9 Provision for closing German office 3.5 -------- -------- Total operating expenses 78.9 56.4 -------- -------- Loss from operations (51.1) (13.4) Other income, net 6.2 4.0 -------- -------- Loss before income tax benefit (44.9) (9.4) Income tax benefit (0.2) (1.4) -------- -------- Net loss (44.7)% (8.0)% -------- -------- -------- -------- REVENUES Revenues decreased 6.2% to $20,289,000 in 1996 from $21,640,000 in 1995. The decrease in revenues from 1995 to 1996 resulted primarily from 8.3% and 9.2% decreases in domestic and international equipment sales, respectively, which were partially offset by a 2.3% increase in service and supply revenues. The decrease in domestic equipment sales resulted from lower selling prices due to a more competitive selling environment and the Company's inability to ship product in the fourth quarter of 1996 due to customer/revenue order mix and inventory issues. The decrease in international equipment sales is attributable to increased competition in Europe, partially offset by increased sales in the Pacific Rim. Increases in service and supply sales are primarily the result of increased sales of disposables used with the Company's newest line of products and an increase in the Company's installed base of products. A significant factor for the decrease in revenues resulted from a liquidity crisis occurring during the fourth quarter of 1996 which resulted in the Company's inability to produce equipment as a result of not having specific inventory components available. GROSS MARGIN The gross margin for 1996 was 27.8% of revenues, compared to 43.0% for 1995. This decrease was caused by several factors including the liquidity crisis described above, which hampered the Company's ability to acquire critical parts for manufacturing and shipping product, inventory writedowns, an increase in the Company's warranty reserve and an increase in price competition in the domestic and European marketplaces. 9 The amount of inventory writedowns affecting gross margin was $1,420,000 in 1996, compared to $370,000 in 1995. The warranty reserve increase in 1996 was approximately $325,000 and occurred primarily as a result of a more competitive five-year warranty program on certain of the Company's products. The Company discontinued this five-year warranty program for sales occurring after March 31, 1997. SELLING Selling expenses increased 12.9% to $8,186,000 in 1996 from $7,253,000 in 1995. Selling expenses as a percent of revenues increased to 40.3% in 1996 compared to 33.5% in 1995. During 1996, the Company hired sales management personnel and salespersons and invested in developing alternative markets and distribution channels for its products. GENERAL AND ADMINISTRATIVE General and administrative expenses increased 44.0% to $4,369,000 in 1996 from $3,033,000 in 1995. As a percent of revenues, general and administrative increased to 21.5% in 1996 from 14.0% in 1995. These increases were due in part to an increase in the allowance for doubtful accounts receivable and higher executive compensation resulting from additional senior management personnel. RESEARCH AND DEVELOPMENT Research and development expenses increased 42.8% to $2,762,000 in 1996 from $1,934,000 in 1995 and as a percentage of revenues increased to 13.6% in 1996 from 8.9% in 1995. These increases were primarily due to increased expenditures, including the use of independent contractors, to convert equipment product software systems to a Windows environment. OTHER INCOME The Company recognized income of $1,438,000 and $975,000 in 1996 and 1995, respectively, in connection with the settlement of a lawsuit with SensorMedics Corporation. NET INTEREST EXPENSE The Company incurred net interest expense of $189,000 in 1996 as compared to $105,000 in 1995, which resulted from increased interest payments related to higher levels of borrowings under the Company's working capital line of credit used to finance the loss from operations and working capital requirements. INCOME TAX BENEFIT The Company recognized an income tax benefit of $48,000 in 1996 compared to $307,000 in 1995. The effective tax rates for the income tax benefits were less than the statutory rates because the Company did not have sufficient taxable income in prior years to carryback these losses and because the Company increased its deferred income tax valuation allowance due to the uncertainty regarding whether future income tax benefits will be realized. 10 IMPACT OF INFLATION The Company believes that inflation did not have a significant impact on the Company's operations in 1996 or 1995. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996, the Company had cash of $545,000 and working capital of $2,463,000. The Company used $288,000 of cash in operating activities, primarily as a result of its net loss of $9,071,000, which was partially offset by a decrease in accounts receivable of $4,368,000 and an increase in accounts payable of $2,573,000. The Company used $1,229,000 in investing activities for capital expenditures of $884,000 and software production costs of $345,000. The Company generated $2,031,000 from financing activities, primarily as a result of an increase of $1,725,000 in borrowings under its line of credit. At December 31, 1996, the Company had a working capital line of credit with a bank that provided for borrowings, based on available collateral, of up to $3,500,000. The Company was under a forbearance agreement with the bank at December 31, 1996, which provided a working capital line that expired on March 31, 1997 and was replaced with a new credit agreement with an asset-based lender. The new credit agreement provides for total borrowings, based on available collateral, of up to $4,100,000, at the discretion of the lender, and expires March 31, 2000. Total borrowings outstanding under the credit agreement are secured by the Company's accounts receivable and inventories. The credit agreement contains certain restrictive covenants as well as limitations on capital expenditures and payment of dividends. The credit line allows the Company to borrow up to 75% of eligible domestic accounts receivable, 40% of eligible domestic inventory (not to exceed $1,500,000), 90% of eligible foreign accounts receivable and 75% of eligible export inventory. In March 1997, the Company's Board of Directors authorized 500,000 shares of a new Class A Stock. The stock has a liquidation preference of $3.375 per share. Each Class A share is currently convertible to one share of common stock and has voting rights equal to the common stock into which it is convertible. On March 31, 1997, the Company entered into a stock purchase agreement to issue 444,445 shares of Class A Stock. The Company received $500,000 on March 31, 1997 and issued 148,148 shares. The Company received $1,000,000 on April 15, 1997 in connection with the issuance of the remaining 296,297 shares. Subsequent to December 31, 1996, the Company entered into financing arrangements with certain vendors which provide for payment of the outstanding balances in equal monthly installments up to 36 months. The balances outstanding at December 31, 1996, which will be paid after December 31, 1997, have been classified in the December 31, 1996 consolidated balance sheet as long-term accounts payable financed with vendors. The amounts due under the agreements are $1,742,000, $996,000, and $740,000, in 1997, 1998, and 1999, respectively. At March 31, 1997, the Company had no material commitments for capital expenditures. The Company believes that its revenues from operations, together with cash and borrowings under its new credit facility will be adequate to satisfy its liquidity and capital resource needs through 1997. 11 ITEM 7. FINANCIAL STATEMENTS The following financial statements of the Company are included herein: Independent Auditors' Report for the Year ended December 31, 1996 Independent Auditors' Report for the Year ended December 31, 1995 Consolidated Balance Sheets-December 31, 1996 and 1995 Consolidated Statements of Operations-Years ended December 31, 1996 and 1995. Consolidated Statements of Shareholders' Equity-Years ended December 31, 1996 and 1995 Consolidated Statements of Cash Flows-Years ended December 31, 1996 and 1995 Notes to Consolidated Financial Statements-Years ended December 31, 1996 and 1995 12 INDEPENDENT AUDITORS' REPORT Shareholders and Board of Directors Medical Graphics Corporation We have audited the accompanying consolidated balance sheet of Medical Graphics Corporation and Subsidiaries (the "Company") as of December 31, 1996 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also incudes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such 1996 consolidated financial statements present fairly, in all material respects, the financial position of Medical Graphics Corporation and Subsidiaries at December 31, 1996 and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. April 4, 1997 /s/ Deloitte & Touche LLP (April 15, 1997 as to the third paragraph of Note 11) Minneapolis, Minnesota 13 REPORT OF INDEPENDENT AUDITORS' REPORT Board of Directors Medical Graphics Corporation We have audited the accompanying consolidated balance sheet of Medical Graphics Corporation as of December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medical Graphics Corporation at December 31, 1995, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Minneapolis, Minnesota /s/ Ernst & Young LLP February 16, 1996 14 MEDICAL GRAPHICS CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------
1996 1995 ASSETS CURRENT ASSETS: Cash $ 545 $ 31 Accounts receivable, less allowance for doubtful accounts of $496 and $363, respectively 4,814 9,182 Inventories (Notes 1 and 2) 6,633 6,160 Refundable income taxes (Note 5) 443 Prepaid expenses and other current assets 193 169 ------- ------- Total current assets 12,185 15,985 EQUIPMENT AND FIXTURES (Notes 1 and 3) 3,857 3,932 Less accumulated depreciation 2,531 2,725 ------- ------- Equipment and fixtures, net 1,326 1,207 SOFTWARE PRODUCTION COSTS, less accumulated amortization of $989 and $719, respectively (Note 1) 472 397 OTHER ASSETS 20 38 ------- ------- $14,003 $17,627 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 921 $ 1,826 Accounts payable financed with vendors - current (Note 11) 1,742 Note payable (Notes 7 and 11) 3,400 1,675 Employee compensation 978 958 Deferred service contract revenue 988 1,156 Warranty reserve 563 240 German office closing reserve (Note 4) 700 Other liabilities and accrued expenses 430 462 ------- ------- Total current liabilities 9,722 6,317 LONG-TERM ACCOUNTS PAYABLE FINANCED WITH VENDORS (Note 11) 1,736 COMMITMENTS AND CONTINGENCIES (Note 10) SHAREHOLDERS' EQUITY (Notes 1, 8, and 11): Class A stock, par value $.05 per share; 500 shares authorized, liquidation preference of $3.375 per share, none issued or outstanding Common stock, par value $.05 per share; authorized 9,500 shares; issued and outstanding 2,559 and 2,496, respectively 128 125 Additional paid-in capital 10,224 9,921 Retained (deficit) earnings (7,807) 1,264 ------- ------- 2,545 11,310 ------- ------- $14,003 $17,627 ------- ------- ------- -------
See notes to consolidated financial statements. 15 MEDICAL GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------
1996 1995 REVENUES: Equipment sales $ 15,422 $ 16,881 Service and supplies revenue 4,867 4,759 -------- -------- Total revenues 20,289 21,640 COST OF GOODS SOLD: Cost of equipment sales 11,352 9,991 Cost of service and supplies revenues 3,288 2,337 -------- -------- Total cost of goods sold 14,640 12,328 -------- -------- GROSS MARGIN 5,649 9,312 OPERATING EXPENSES: Selling 8,186 7,253 General and administrative 4,369 3,033 Research and development 2,762 1,934 Provision for closing German office (Note 4) 700 -------- -------- Total operating expenses 16,017 12,220 -------- -------- LOSS FROM OPERATIONS (10,368) (2,908) OTHER INCOME (EXPENSE): SensorMedics settlement, net of settlement costs (Note 10) 1,438 975 Interest expense (189) (105) -------- -------- Total other income, net 1,249 870 -------- -------- LOSS BEFORE INCOME TAX BENEFIT (9,119) (2,038) INCOME TAX BENEFIT (Note 5) 48 307 -------- -------- NET LOSS $ (9,071) $ (1,731) -------- -------- -------- -------- NET LOSS PER SHARE OF COMMON STOCK $ (3.56) $ (.71) -------- -------- -------- -------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,545 2,450 -------- -------- -------- --------
See notes to consolidated financial statements. 16 MEDICAL GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS) - --------------------------------------------------------------
COMMON STOCK ADDITIONAL RETAINED ------------------- PAID-IN EARNINGS SHARES AMOUNT CAPITAL (DEFICIT) TOTAL BALANCE AT DECEMBER 31, 1994 2,417 $121 $ 9,659 $ 2,995 $12,775 Net loss (1,731) (1,731) Common stock issued upon exercise of stock options 58 3 166 169 Common stock issued under Employee Stock Purchase Plan 21 1 96 97 ----- ---- ------- ------- ------- BALANCE AT DECEMBER 31, 1995 2,496 125 9,921 1,264 11,310 Net loss (9,071) (9,071) Common stock issued upon exercise of stock options 45 2 229 231 Common stock issued under Employee Stock Purchase Plan 18 1 74 75 ----- ---- ------- ------- ------- BALANCE AT DECEMBER 31, 1996 2,559 $128 $10,224 $(7,807) $ 2,545 ----- ---- ------- ------- ------- ----- ---- ------- ------- -------
See notes to consolidated financial statements. 17 MEDICAL GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS) - -----------------------------------------------------
1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(9,071) $(1,731) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 765 381 Amortization, principally software production costs 276 189 Provision for deferred taxes 148 Changes in operating assets and liabilities: Accounts receivable 4,368 (941) Inventory (473) (817) Prepaid expenses and other assets (12) 31 Refundable income taxes 443 (443) Accounts payable 2,573 59 Employee compensation, other liabilities, and accrued expenses 688 1 Warranty reserve 323 Deferred service contract revenue (168) 93 ------- ------- Net cash used in operating activities (288) (3,030) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (884) (442) Software production costs (345) (164) ------- ------- Net cash used in investing activities (1,229) (606) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit agreement 1,725 1,675 Proceeds from stock options exercised 231 169 Proceeds from sale of common stock under employee stock purchase plan 75 97 ------- ------- Net cash provided by financing activities 2,031 1,941 ------- ------- INCREASE (DECREASE) IN CASH 514 (1,695) CASH AT BEGINNING OF YEAR 31 1,726 ------- ------- CASH AT END OF YEAR $ 545 $ 31 ------- ------- ------- -------
See notes to consolidated financial statements. 18 MEDICAL GRAPHICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS, LIQUIDITY AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS - Medical Graphics Corporation (the Company) designs and produces innovative noninvasive diagnostic systems for the prevention, early detection, and cost-effective treatment of heart and lung disease. LIQUIDITY - The Company's working capital requirements for 1996 were met principally through amounts borrowed on the Company's line of credit and credit received from the Company's vendors. During the fourth quarter of 1996, the Company reached its borrowing base limit on its credit line, was under a forbearance agreement with the lender, and was delinquent in paying its vendors. Subsequent to December 31, 1996, the Company entered into the following transactions to improve its working capital position: obtained a new line of credit; entered into an agreement to issue $1,500 of Class A convertible stock; and reached vendor agreements which provide for payment of outstanding accounts payable balances in equal monthly installments for up to 36 months (see Note 11). CONSOLIDATION - The financial statements include the accounts of the Company and its wholly owned subsidiary, Medical Graphics Corporation, GmbH (MGCG). All intercompany transactions have been eliminated. In December 1996, the Board of Directors approved a plan to close MGCG (see Note 4). INVENTORIES - Inventories are valued at the lower of cost or market determined by the first-in, first-out method. The Company has a reserve of $1,678 and $271 recorded at December 31, 1996 and 1995, respectively, to reduce certain excess quantities and obsolete items to their net realizable value. EQUIPMENT AND FIXTURES - Equipment and fixtures are stated at cost. The Company provides for depreciation using straight-line and accelerated methods at rates designed to amortize the cost of equipment and fixtures over their estimated useful lives. SOFTWARE PRODUCTION COSTS - Software production costs are capitalized once technological feasibility has been established and all research and development activities for other components of the product are completed. Capitalized software production costs are amortized over three years using the straight-line method. SERVICE CONTRACTS - Amounts billed to customers under service contracts are deferred and recognized in income over the term of the agreement, and costs are recognized as incurred. INCOME TAXES - Income taxes are recorded under the liability method. Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the basis of assets and liabilities for income tax and for financial reporting purposes using enacted tax rates in effect during the year in which the differences are expected to reverse. 19 NET LOSS PER SHARE - Net loss per share of common stock is computed by dividing net loss by the weighted average number of common shares outstanding during each year. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is antidilutive. SALES AND SEGMENT INFORMATION - The Company manufactures and sells its products to customers primarily in the medical field and operates in only one business segment. The Company grants its customers credit in connection with sales of its products. It performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. The Company requires irrevocable letters of credit on sales to certain foreign customers. Receivables generally are due within 30 days for domestic customers. Credit losses relating to customers have consistently been within management's expectations. Export sales to foreign countries primarily in Europe and the Pacific Rim accounted for 27% and 28% of total sales in 1996 and 1995, respectively. USE OF ESTIMATES - The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from the estimates. IMPAIRMENT OF LONG-LIVED ASSETS - The Company records losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. 2. INVENTORIES At December 31, the Company's inventories consisted of the following components: 1996 1995 Purchased components and work-in-process $4,433 $3,746 Finished goods 2,200 2,414 ------ ------ $6,633 $6,160 ------ ------ ------ ------ 3. EQUIPMENT AND FIXTURES At December 31, the Company's equipment and fixtures consisted of the following: 1996 1995 Building improvements $ 722 $ 619 Computer equipment 1,387 1,337 Manufacturing equipment 928 971 Furniture and fixtures 820 1,005 ------ ------ Total equipment and fixtures, at cost 3,857 3,932 Less accumulated depreciation 2,531 2,725 ------ ------ $1,326 $1,207 ------ ------ ------ ------ 20 4. RESTRUCTURING RESERVE During December 1996, the Board of Directors approved the closing of the Company's subsidiary in Germany. The Company recorded a $700 charge to operations in the fourth quarter of 1996 related to expected exit costs. The major components of the provision are as follows: Inventory write-down $250 Employee severance 150 Building and automobile rent terminations 150 Accounts receivable write-down 100 Other 50 ---- $700 ---- ---- 5. INCOME TAXES Significant components of the income tax benefits are as follows: 1996 1995 Current: Federal $(28) $(443) State (20) ----- ------ (48) (443) Deferred, primarily federal 136 ----- ------ Income tax benefit $(48) $(307) ----- ------ ----- ------ Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows: 1996 1995 Allowance for bad debts $ 176 $ 138 Inventory reserve 439 103 Warranty reserve 200 91 Restructuring reserve 238 Vacation accrual 77 35 Deferred service contract revenue 35 Valuation allowance (1,165) (367) ------- ------ Total current - - Tax in excess of book depreciation (81) Tax inventory capitalization (14) (8) Capitalized software and patents (154) (128) Net operating loss and tax credit carryforwards 2,402 385 Valuation allowance (2,234) (168) ------- ------ Total noncurrent - - ------- ------ Net deferred tax assets $ - $ - ------- ------ ------- ------ 21 Reconciliations of the Company's expected income tax benefits computed at the U.S. federal statutory tax rate to the income tax benefits recorded are as follows: 1996 1995 Income tax benefit at statutory rate $(3,175) $(693) Legal settlement, not taxable (157) Foreign tax loss 172 Increase of deferred tax asset valuation allowance 2,864 535 Other 91 8 -------- ------ $ (48) $(307) -------- ------ -------- ------ As of December 31, 1996, the Company has federal and state net operating loss carryforwards of $6,041 and state research and development tax credits carryforwards of $36 for income tax purposes that expire from 2002 through 2011. Total income taxes paid were $26 and $165 in 1996 and 1995, respectively. The Company's income tax returns through December 31, 1995 have been examined by the Internal Revenue Service. The net impact of this examination resulted in additional income taxes of $238 and interest of $60. The additional income taxes which are due in 1997 as a result of this examination will be refunded in 1997 as a result of the carryback of 1996 net operating losses. 6. LEASES The Company leases office and manufacturing facilities, automobiles, and various office accessories. The building lease expires in 2002, at which time the Company has an option to renew the lease for an additional four years. The Company has the option to purchase the building at the end of each lease expiration period at the building's fair market value. Future minimum lease payments under noncancelable operating leases with remaining terms of one year or more consisted of the following at December 31, 1996: Year ending December 31: 1997 $ 497 1998 422 1999 397 2000 404 2001 354 Thereafter 174 ------ $2,248 ------ ------ Rent expense for the years ended December 31, 1996 and 1995 was $494 and $301, respectively. 7. NOTE PAYABLE TO BANK At December 31, 1996, the Company had a working capital line of credit with a bank that provided for borrowings, based on available collateral as defined, of up to $3,500 with interest at prime plus 1-1/2% (9.75% at December 31, 1996). At December 31, 1995, the interest rate was prime, 8.5%. At December 31, 1996, the Company was in violation of the terms of the credit agreement and was 22 under a forbearance agreement with the bank. This working capital line expired on March 31, 1997 (see Note 11). All borrowings were secured by the Company's accounts receivable and inventories. The Company had outstanding borrowings of $3,400 and $1,675 at December 31, 1996 and 1995, respectively. Total interest paid was $167 and $105 for the years ended December 31, 1996 and 1995. 8. STOCK OPTIONS, EMPLOYEE STOCK PURCHASE PLAN AND 401(k) The Company has an Employee Incentive Stock Option Plan under which a total of 750 shares have been reserved for issuance, with 106 shares remaining reserved and unissued at December 31, 1996. Options are generally issued at prices not less than the fair market value at the date of grant and become exercisable over a one- to five-year period. Also, under the Option Plan, nonqualified options have been issued to members of the Board of Directors and certain nonemployees. These options become exercisable over a one- to five-year period following the date of grant. The Company also has a Nonemployee Director Stock Option Plan, which provides for the grant of nonqualified options for up to 150 shares of common stock to nonemployee members of the Board of Directors. Under the plan, an option to purchase ten shares of Common Stock will be granted automatically when an eligible director is first elected to the Board of Directors of the Company. An option to purchase 3 shares will be granted automatically following each Annual Meeting of the Shareholders in which the director is serving in office. After the director has served more than three years in office, the annual grant increases to 5 shares. The option exercise price per share will equal the fair market value of the common stock on the date of grant. All options granted under the plan become exercisable one year after the date of grant. A summary of the activity is as follows:
Employee Weighted Weighted Incentive Average Nonqualified Average Stock Options Exercise Stock Options Exercise Outstanding Price Outstanding Price Balance at December 31, 1994 231 $6.18 277 $6.88 Granted 54 5.19 36 3.69 Exercised (34) 3.29 (30) 2.91 Canceled or expired (30) 4.43 (52) 5.39 --- ----- --- ----- Balance at December 31, 1995 221 6.62 231 7.54 Granted 95 5.87 165 5.52 Exercised (39) 4.50 Canceled or expired (61) 8.51 (2) 3.50 --- ----- --- ----- Balance at December 31, 1996 216 $6.14 394 $6.72 --- ----- --- ----- --- ----- --- ----- Exercisable at December 31, 1995 114 $7.60 183 $7.94 --- ----- --- ----- --- ----- --- ----- Exercisable at December 31, 1996 86 $6.70 210 $7.71 --- ----- --- ----- --- ----- --- -----
23 The Company's Employee Stock Purchase Plan (the ESP Plan), a qualified plan pursuant to Internal Revenue Code Section 423, became effective in May 1993. The ESP Plan gives eligible employees an opportunity to purchase the Company's common stock, through payroll deductions not exceeding 15% of eligible compensation, at a per share price of 85% of the lesser of the fair value on the first day or the last day of each six-month purchase period. The six-month purchase periods begin on July 1 and January 1 of each year. Participating employees may purchase a maximum of five shares during each purchase period and no more than $25 of fair value of stock in each calendar year. A total of 200 shares have been authorized for issuance under the ESP Plan. Shares issued under the ESP Plan in 1996 and 1995 were 18 and 21 shares, respectively. The ESP Plan will terminate on January 1, 2003, unless extended by the Board of Directors. In 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company has elected to continue following the accounting guidance of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for measurement and recognition of stock-based transactions with employees. No compensation cost has been recognized for options issued under the stock option plans, because the exercise price of all options granted was at least equal to the fair value of the common stock on the date of the grant. Had compensation costs for the stock options issued to certain directors and employees and common stock issued under the ESP Plan been determined based on the fair value at the grant date, consistent with the provisions of SFAS No. 123, the Company's 1996 and 1995 pro forma net loss would have been $9,303 and $1,777, respectively, and net loss per share would have been $3.66 and $.73, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0%; a risk-free interest rate of 6.1% and 6.6% in 1996 and 1995, respectively; an expected life of 10 years; and expected volatility of 44%. The weighted average fair value of options issued in 1996 and 1995 was $3.76 and $3.56, respectively. Substantially all employees of the Company may participate in a defined contribution plan established under the provisions of Section 401(k) of the Internal Revenue Code. The plan generally provides for a contribution by the employee of up to 15% of their gross earnings with a 25% matching contribution by the Company on the first 6% of gross earnings. The expense of the plan was approximately $62 and $63 in 1996 and 1995, respectively. 9. RELATED-PARTY TRANSACTIONS A current officer/former director of the Company is the president of ErgometRx Corporation and is the husband of an officer/Chairman of the Board of Directors who resigned in March 1997. ErgometRx Corporation possesses certain proprietary information and prototype hardware relating to an exercise bike used for stress testing and physical exercise. The Company has obtained an exclusive license to manufacture and sell products utilizing this proprietary information in certain markets under a five-year royalty agreement. Under this agreement, the Company paid royalties of $40 and $96 in 1996 and 1995, respectively. During 1996, the Company advanced ErgometRx Corporation approximately $165 in cash and products, which has been fully reserved for at December 31, 1996. 24 An officer/Chairman of the Board of Directors of the Company who resigned in March 1997 is also the president of e-med.OnCall, Inc.. During 1996, the Chairman began a transition from the Company to e-med.OnCall, Inc.. As part of this transition, the Company transferred equipment with a net book value of approximately $75 to a new office for the Chairman and paid certain administrative expenses in the amount of approximately $60 with respect to that office. This office also serves as the office for e-med.OnCall, Inc.. All such amounts were recorded as administrative expense during 1996. 10. LITIGATION During 1995, the Company was awarded a judgment of $4.35 million, related to a patent infringement suit against a competitor. The judgment was to be paid over an eight-year period. The Company received $975 after associated legal costs during 1995. The Company recorded the gain as cash was received due to uncertainty regarding the ultimate collectability of the judgment. During 1996, the competitor was acquired by a third party and pursuant to the terms of the settlement agreement, the Company received the net present value of the remaining payments. The Company received $1,438 after paying associated legal costs in 1996. As part of the original judgment, the Company retained the right to proceed against one of the competitors' insurers for an additional $250. The Company is unable to assess the likely outcome of this potential gain contingency at this time and has not recorded any amount related to the additional $250 in the consolidated financial statements. The Company is a defendant in various claims and litigation which are incidental to its business. Management is of the opinion that ultimate settlement of these matters will not have a material impact on its consolidated financial statements. 11. SUBSEQUENT EVENTS In March 1997, the Company obtained a new credit agreement with Norwest Business Credit Inc. (NBCI) that provides for total borrowings, based on available collateral as defined, of up to $4,100, at the discretion of NBCI, and expires March 31, 2000. Total borrowings outstanding under the credit agreement are secured by the Company's accounts receivable and inventories. The credit agreement contains certain restrictive covenants, including maintenance of minimum net worth (as defined), debt to equity restrictions, earnings requirements, and debt service requirements as well as limitations on capital expenditures and payment of dividends. The credit line allows the Company to borrow up to 75% of eligible domestic accounts receivable, 40% of eligible domestic inventory (not to exceed $1,500), 90% of eligible foreign accounts receivable and 75% of eligible export inventory. Borrowings under the line of credit bear interest at the NBCI "base" rate plus 4.0% (12.25% at December 31, 1996). The "base" rate is equal to the interest rate publicly announced by Norwest Bank Minnesota, N.A. from time to time as its "base" rate. The line of credit contains a minimum monthly interest charge of $15. In addition, the Company granted to NBCI a three-year warrant to purchase 62.5 shares of the Company's common stock at an exercise price of $3.375 per share. In March 1997, the Company's Board of Directors authorized 500 shares of a new class of participating convertible stock (Class A stock). The Class A stock has voting rights and a liquidation preference of $3.375 per share over the common stock. Each share is currently convertible to one share of common stock. On March 31, 1997, the Company entered into a stock 25 purchase agreement to issue 444 shares of the new class of stock at $3.375 per share. The Company received $500 on March 31, 1997 and the balance of $1,000 was received on April 15, 1997. Subsequent to December 31, 1996, the Company entered into financing arrangements with certain vendors which provide for payment of the outstanding balances in equal monthly installments for up to 36 months. The balances outstanding at December 31, 1996, which will be paid after December 31, 1997, have been classified as long-term accounts payable financed with vendors. The amounts due under the agreements are payable $1,742, $996, and $740, in 1997, 1998, and 1999, respectively. 26 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the quarter ended March 31, 1997, the Company filed a Report on Form 8-K reporting that it had dismissed Ernst & Young LLP as its principal independent auditor and on March 4, 1997 filed a Report on Form 8-K indicating that it had engaged Deloitte & Touche LLP as its independent auditors for the year ended December 31, 1996. The Reports on Form 8-K also indicated that there were no disagreements between the Company and Ernst & Young LLP on any matter with respect to accounting policies or practices. See Item 13. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information contained under the headings "Election of Directors", "Executive Officers of the Company", and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for its Annual Meeting of Shareholders, a definitive copy of which will be filed within 120 days of December 31, 1996, is hereby incorporated by reference. ITEM 10. EXECUTIVE COMPENSATION The information contained under the heading "Executive Compensation" in the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders, is hereby incorporated by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders, is hereby incorporated by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the heading "Certain Transactions" in the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders, is hereby incorporated by reference. 27 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS INDEX TO EXHIBITS
PAGE NUMBER OR INCORPORATION EXHIBIT NUMBER DESCRIPTION BY REFERENCE TO - -------------- ----------- ---------------------------- 3.1 Restated Articles of Incorporation, Exhibit 3(a) to Report on Form 10-KSB as amended for the year ended December 31, 1991, file no. 0-9899 3.2 Amended bylaws Exhibit 3(b) to Report on Form 10-KSB for the year ended December 31, 1992, file No. 0-9899 4.1 Certificate of Rights and Preferences of Class A Stock of the Company 10.1 Seventh Amendment to Lease for Exhibit 10(b) to Report on Form 10-KSB 350 Oak Grove Parkway, St. Paul, for the year ended December 31, 1994, Minnesota file no. 0-9899 10.2 Credit Agreement dated March 31, 1997 between the Company and Norwest Bank Minnesota, N.A. 10.3 Credit and Security Agreement dated March 31, 1997 between the Company and Norwest Business Credit, Inc. 10.3.1 Letter Amendment dated April 14, 1997 10.4 Warrant between the Company and Norwest Business Credit, Inc. dated March 27, 1997 10.5* 1987 Stock Option Plan Exhibit 10(d) to Report on Form 10-KSB for the year ended December, 31, 1992, file no. 0-9899 28 10.6 Sub-license Agreement between the Exhibit 10(e) to Report on Form 10-KSB company and ErgometRx for the year ended December 31, 1992, Corporation (formally Scientific file no 0-9899 Exercise Prescriptions Incorporated), dated February 11, 1993 10.7 Warrant Agreement between the Company and Catherine A. Anderson dated March 25, 1997 10.8* Non-Employee Director Stock Exhibit 10(g) to Report on Form 10-KSB Option Plan for the year ended December 31, 1992, file no. 0-9899 10.9* Stock Option Agreement between Exhibit 10(h) to Report on Form 10-KSB the Company and Donald C. for the year ended December 31, 1993, Wegmiller file no. 0-9899 10.10 Stock Purchase Agreement dated March 31, 1997 between the Company and FAMCO II LLC 10.11 Registration Rights Agreement between the Company and FAMCO II LLC 21.1 The Company has one wholly-owned subsidiary, Medical Graphics Corporation GmbH, located in Germany. 23.1 Independent Auditors' Consent of Deloitte & Touche LLP 23.2 Independent Auditors' Consent of Ernst & Young LLP 27.1 Financial Data Schedule
- ---------------------------------- *Indicates compensatory contract or arrangement (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the three months ended December 31, 1996. During the quarter ended March 31, 1997, the Company filed a Report on Form 8-K reporting that it had dismissed Ernst & Young LLP as its principal independent auditor and on March 4, 1997 filed a Report on Form 8-K indicating that it had engaged Deloitte & Touche LLP as its independent auditors for the year ended December 31, 1996. The reports on Form 8-K also indicated that there were no disagreements between the Company and Ernst & Young LLP on any matter with respect to accounting policies or practices. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registration has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDICAL GRAPHICS CORPORATION April 15, 1997 /s/ Glenn D. Taylor ----------------------------------- Glenn D. Taylor, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Mark W. Sheffert Chairman of the Board April 15, 1997 - -------------------- and Director Mark W. Sheffert /s/ Glenn D. Taylor President, Chief Executive April 15, 1997 - ------------------- Officer and Director (Principal Glenn D. Taylor Executive Officer) /s/ Dale H. Johnson Chief Financial Officer April 15, 1997 - ------------------- (Principal Financial and Dale H. Johnson Accounting Officer) /s/ Anthony J. Adducci Director April 15, 1997 - ---------------------- Anthony J. Adducci /s/ Gerald T. Knight Director April 15, 1997 - -------------------- Gerald T. Knight /s/ W. Edward McConaghay Director April 15, 1997 - ------------------------ W. Edward McConaghay 30 /s/ Donald C. Wegmiller Director April 15, 1997 - ----------------------- Donald C. Wegmiller /s/ John C. Penn Director April 15, 1997 - ---------------- John C. Penn /s/ John D. Wunsch Director April 15, 1997 - ------------------ John D. Wunsch 31 EX-4.1 2 EXHIBIT 4.1 CERTIFICATE OF RIGHTS AND PREFERENCES OF CLASS A STOCK OF MEDICAL GRAPHICS CORPORATION The undersigned, being the Chairman of Medical Graphics Corporation, hereby certifies that (a) the following resolution was duly adopted on March 25, 1997 by the Board of Directors of such Corporation, acting pursuant to the provision of section 302A.401, subdivision 3 of the Minnesota Business Corporation Act, for the purpose of designating a separate class of the Corporation's authorized stock as "Class A Stock" and fixing the relative rights and preferences of such class, and (b) such resolution has not been subsequently modified or rescinded: "RESOLVED, that 500,000 shares of this Corporation's authorized stock shall be designated as "Class A Stock," and the rights, preferences, privileges and restrictions granted to or imposed upon the Class A Stock are as follows: (A) VOTING RIGHTS. Each holder of Class A Stock shall have one vote on all matters submitted to the shareholders of this Corporation for each share of Common Stock $.05 par value ("Common Share") which such holder of Class A Stock would be entitled to receive upon the conversion such holder's Class A Stock pursuant to the provisions of subsection (C)(3) of this Certificate. In addition, each holder of Class A Stock shall have the special voting rights which are described in subsection (C)(4) of this Certificate. No holder of any Class A Stock shall have any cumulative voting rights. (B) PREEMPTIVE RIGHTS. No holder of Class A Stock shall be entitled as such, as a matter of right, to subscribe for, purchase or receive any part of any class of stock whatsoever, or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. (C) CLASS A STOCK. (1) DIVIDENDS. In the event that this Corporation declares and pays any cash dividends with respect to its Common Shares, the holders of Class A Stock shall be entitled to receive a cash dividend per share equal to the cash dividend that would otherwise be payable with respect to each such share if it had been converted into Common Shares pursuant to the provisions of subsection (C)(3) of this Certificate. (2) LIQUIDATION PREFERENCE. In the event of the liquidation, dissolution or winding up of this Corporation, whether voluntary or involuntary, the holders of the Class A Stock shall be entitled to receive in cash, out of the assets of this Corporation, an amount equal to $3.375 per share for each outstanding share of Class A Stock before any payment shall be made or any assets distributed to the holders of this Corporation's Common Shares or any other class of shares of this Corporation; and the holders of the Class A Stock shall not be entitled to share in any other assets of this Corporation thereafter remaining. If, upon any liquidation or dissolution of this Corporation, the assets of the Corporation are insufficient to pay such $3.375 per share for each outstanding share of Class A Stock, the holders of such shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. (3) CONVERSION RIGHTS. (a) Each share of Class A Stock shall be convertible at the option of the holder thereof into one Common Share of this Corporation, subject to adjustment as provided below. In order to exercise the conversion privilege, a holder of the Class A Stock shall surrender the certificate to the Corporation at its principal office, accompanied by written notice to the Corporation that the holder elects to convert a specified portion or all of such shares. Class A Stock shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Class A Stock, as such holder, shall cease and such holder shall be treated for all purposes as the record holder of Common Shares issuable upon conversion. As promptly as practicable on or after the conversion date, this Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of Common Shares issuable upon conversion, computed to the nearest one hundredth of a full share, and a certificate or certificates for the balance of the Class A Stock surrendered, if any, not so converted into Common Shares. (b) The number of Common Shares issuable upon the conversion of any share of Series A Stock shall be adjusted from time to time to reflect changes in the capital structure of this Corporation, and shall be determined by dividing $3.375 by the conversion price (the "Conversion Price") then in effect. The Conversion Price shall initially be $3.375 and shall be subject to adjustment from time to time as hereinafter provided: 2 (i) In case this Corporation shall declare a dividend upon its Common Shares payable otherwise than in cash out of earnings or surplus (including a dividend payable in Common Shares), then thereafter each holder of Class A Stock upon the conversion thereof will be entitled to receive the number of Common Shares into which such Class A Stock shall be converted, and, in addition and without payment therefor, the stock or other securities and other property (including Common Shares) which such holder would have received by way of dividends or distributions (otherwise than out of earnings or surplus) if continuously since the record date for any such dividend or distribution such holder (aa) has been the record holder of the number of Common Shares then received, and (bb) had retained all dividends or distributions in stock or securities payable in respect of such Common Shares or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Shares. (ii) In case this Corporation shall at any time subdivide or split its outstanding Common Shares into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision or split shall be proportionately reduced, and conversely, in case the outstanding Common Shares of this Corporation shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be appropriately increased. (iii) If and whenever this Corporation shall (a) issue or sell any of its Common Shares for a consideration per share less than the Conversion Price then in effect, (b) issue or sell warrants, options or other rights to acquire its Common Shares at a price less than the Conversion Price then in effect, or (c) issue or sell any other securities that are convertible into its Common Shares for a purchase or exchange price less than the Conversion Price then in effect, other than (i) shares subject to options and warrants outstanding as of the date hereof, and (ii) shares issued pursuant to the Corporation's Employee Stock Purchase Plan or any subsequent employee stock purchase plan adopted pursuant to Section 423 of the Internal Revenue Code of 1986, as amended, at prices lower than the Conversion Price, then, forthwith upon such issuance or sale, the Conversion Price in effect immediately prior to such issuance or sale shall be reduced to the purchase price or conversion or exchange price at which such issuance or sale is effected. (iv) Upon any adjustment of the Conversion Price, then and in each such case this Corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of the Class A Stock at the addresses of such holders as shown on the books of this Corporation, which notice shall state the Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of the Class A Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (c) In case any time: 3 (i) this Corporation shall pay any dividend payable in stock upon its Common Shares or make any distribution (other than regular cash dividends) to the holders of its Common Shares; or (ii) this Corporation shall offer by subscription pro rata to the holders of its Common Shares any additional shares of stock of any class or other rights; or (iii) there shall be any capital reorganization, reclassification of the capital stock of this Corporation, or consolidation or merger of this Corporation with, or sale of all or substantially all of its assets to another Corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of this Corporation; Then, in any one or more of said cases, this Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of the Class A Stock at the addresses of such holders as shown on the books of this Corporation, of the date on which (aa) the books of this Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (bb) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Shares of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which this Corporation's transfer books are closed in respect thereto. (4) VOTING RIGHTS. Except as otherwise required by law, so long as any shares of the Class A Stock remain outstanding, this Corporation shall not, without the vote or written consent by the holders of at least one half of the Class A Stock, voting together as a single class (a) participate in any reorganization, transfer of a substantial portion of its assets, consolidation, plan of exchange, or merger or acquisition (except for a mere reincorporation); or (b) authorize or issue any (i) preferred shares or (ii) shares of stock having priority over the Class A Stock or ranking on a parity therewith as to the payment of distribution of assets upon the liquidation or dissolution, voluntary or involuntary, of this Corporation; or (c) amend the Articles of Incorporation of this Corporation or this Certificate so as to alter any existing provision of this Certificate relating to the Class A Stock. 4 RESOLVED, FURTHER, that the appropriate officers of this Corporation are authorized and directed to file a Certificate containing the foregoing resolution with the Secretary of State of Minnesota in accordance with the applicable provisions of the Minnesota Business Corporation Act." IN WITNESS WHEREOF, the undersigned have executed this certificate as of the 31st day of March 1997. MEDICAL GRAPHICS CORPORATION By: /s/ Mark W. Sheffert, Chairman -------------------------------- MARK W. SHEFFERT, CHAIRMAN 5 EX-10.2 3 EXHIBIT 10.2 ______________________________________________ ______________________________________________ CREDIT AGREEMENT BY AND BETWEEN MEDICAL GRAPHICS CORPORATION AND NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION Dated as of: March 31, 1997 [LOGO] ______________________________________________ ______________________________________________ Table of Contents ----------------- ARTICLE I Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II Amount and Terms of the Credit Facility. . . . . . . . . . . . .10 Section 2.1 Revolving Advances. . . . . . . . . . . . . . . . . . . . . . .10 Section 2.2 Requests for Advances . . . . . . . . . . . . . . . . . . . . .10 Section 2.3 Interest; Minimum Interest Charge; Default Interest . . . . . .11 Section 2.4 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Section 2.5 Application of Payments . . . . . . . . . . . . . . . . . . . .12 Section 2.6 Capital Adequacy. . . . . . . . . . . . . . . . . . . . . . . .12 Section 2.7 Termination by Borrower . . . . . . . . . . . . . . . . . . . .13 Section 2.8 Mandatory Prepayment. . . . . . . . . . . . . . . . . . . . . .13 Section 2.9 Advances Without Request. . . . . . . . . . . . . . . . . . . .13 Section 2.10 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . .13 Section 2.11 Facility Subject to Eximbank Rules. . . . . . . . . . . . . . .14 ARTICLE III Conditions of Lending. . . . . . . . . . . . . . . . . . . . . .14 Section 3.1 Conditions Precedent to the Initial Revolving Advance . . . . .14 Section 3.2 Conditions Precedent to All Advances. . . . . . . . . . . . . .16 ARTICLE IV Representations and Warranties . . . . . . . . . . . . . . . . .16 Section 4.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax Identification Number . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Section 4.2 Authorization of Borrowing; No Conflict as to Law or Agreements . . . . . . . . . . . . . . . . . . . . . . . . .17 Section 4.3 Legal Agreements. . . . . . . . . . . . . . . . . . . . . . . .17 Section 4.4 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . .17 Section 4.5 Financial Condition; No Adverse Change. . . . . . . . . . . . .17 Section 4.6 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . .17 Section 4.7 Regulation U. . . . . . . . . . . . . . . . . . . . . . . . . .18 Section 4.8 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Section 4.9 Titles and Liens. . . . . . . . . . . . . . . . . . . . . . . .18 Section 4.10 Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Section 4.11 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Section 4.12 Environmental Matters . . . . . . . . . . . . . . . . . . . . .19 Section 4.13 Submissions to Lender . . . . . . . . . . . . . . . . . . . . .20 Section 4.14 Financing Statements . . . . . . . . . . . . . . . . . . . . .20 Section 4.15 Rights to Payment . . . . . . . . . . . . . . . . . . . . . . .20 ARTICLE V Borrower's Affirmative Covenants . . . . . . . . . . . . . . . .20 Section 5.1 Reporting Requirements. . . . . . . . . . . . . . . . . . . . .20 Section 5.2 Books and Records; Inspection and Examination . . . . . . . . .22 Section 5.3 Account Verification. . . . . . . . . . . . . . . . . . . . . .22 Section 5.4 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . .23 Section 5.5 Payment of Taxes and Other Claims . . . . . . . . . . . . . . .23 Section 5.6 Maintenance of Properties . . . . . . . . . . . . . . . . . . .23 Section 5.7 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Section 5.8 Preservation of Existence . . . . . . . . . . . . . . . . . . .24 Section 5.9 Delivery of Instruments, etc. . . . . . . . . . . . . . . . . .24 Section 5.10 Collateral Account. . . . . . . . . . . . . . . . . . . . . . .24 Section 5.11 Performance by the Lender . . . . . . . . . . . . . . . . . . .25 Section 5.12 Minimum Tangible Net Worth. . . . . . . . . . . . . . . . . . .25 ARTICLE VI Negative Covenants . . . . . . . . . . . . . . . . . . . . . . .26 Section 6.1 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Section 6.2 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . .26 Section 6.3 Guaranties. . . . . . . . . . . . . . . . . . . . . . . . . . .26 Section 6.4 Investments and Subsidiaries. . . . . . . . . . . . . . . . . .27 Section 6.5 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Section 6.6 Sale or Transfer of Assets; Suspension of Business Operations . . . . . . . . . . . . . . . . . . . . . . . . . .27 Section 6.7 Consolidation and Merger; Asset Acquisitions. . . . . . . . . .28 Section 6.8 Sale and Leaseback. . . . . . . . . . . . . . . . . . . . . . .28 Section 6.9 Restrictions on Nature of Business. . . . . . . . . . . . . . .28 Section 6.10 Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . .28 Section 6.11 Discounts, etc. . . . . . . . . . . . . . . . . . . . . . . . .28 Section 6.12 Defined Benefit Pension Plans . . . . . . . . . . . . . . . . .28 Section 6.13 Other Defaults. . . . . . . . . . . . . . . . . . . . . . . . .28 Section 6.14 Place of Business; Name . . . . . . . . . . . . . . . . . . . .28 Section 6.15 Organizational Documents; S Corporation Status. . . . . . . . .29 Section 6.16 Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . .29 ARTICLE VII Events of Default, Rights and Remedies . . . . . . . . . . . . .29 Section 7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . .29 Section 7.2 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . .30 Section 7.3 Certain Notices . . . . . . . . . . . . . . . . . . . . . . . .30 ARTICLE VIII Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . .30 Section 8.1 Addresses for Notices, Etc. . . . . . . . . . . . . . . . . . .30 Section 8.2 Servicing of Credit Facility. . . . . . . . . . . . . . . . . .30 Section 8.3 Costs and Expenses. . . . . . . . . . . . . . . . . . . . . . .31 Section 8.4 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Section 8.5 Binding Effect; Assignment; Counterparts; Exchanging Information . . . . . . . . . . . . . . . . . . . .32 -ii- Section 8.6 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. . . .33 -iii- CREDIT AGREEMENT (Eximbank Guaranteed Loan No. _____________) Dated as of March 31, 1997 MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Accounts" means the aggregate unpaid obligations of customers and other account debtors to the Borrower arising out of the sale or lease of goods or rendition of services by the Borrower on an open account or deferred payment basis, whether now existing or hereafter arising. "Advance" means a Revolving Advance. "Affiliate" or "Affiliates" means any Person controlled by, controlling or under common control with the Borrower, including (without limitation) any subsidiary of the Borrower. For purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Credit Agreement, as amended, supplemented and restated from time to time. "Availability" means the Borrowing Base reduced by the outstanding principal balance of the Revolving Advances. "Base Rate" means the rate of interest publicly announced from time to time by the Lender as its "base rate" or, if the Lender ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Banking Day" means a day on which the Federal Reserve Bank of New York is open for business. "Borrower Agreement" means the Borrower Agreement of even date herewith by and between the Borrower and the Lender in the form attached hereto as Exhibit C. "Borrowing Base" means, at any time the least of: (a) the Maximum Line; or (b) the difference of $4,100,000 and the outstanding principal balance of the NBCI Revolving Advances; or (c) subject to change from time to time in the Lender's sole discretion, the sum of: (i) 90% of Eligible Foreign Accounts; and (ii) 75% of Eligible Export Inventory. "Borrowing Base Certificate" means a certificate, substantially in the form attached hereto as Exhibit E, executed by the Borrower and accepted by the Lender. "Business Day" means any day on which the Federal Reserve Bank of New York is open for business. "Closing Date" means the date of this Agreement. "Collateral" has the meaning given in the Security Agreements. "Collateral Account" has the meaning given in the Collateral Account Agreement. "Collateral Account Agreement" means the Collateral Account Agreement by and among the Borrower, Norwest Bank International New York Branch and the Lender of even date herewith, as the same may hereafter be amended, supplemented or restated from time to time. "Collateral Pledge Agreement" means the Collateral Pledge Agreement of even date herewith pursuant to which the Borrower pledges to the Lender and NBCI all of its shares in Medical Graphics F.S.C. and ErgometRx, as the same may hereafter be amended, supplemented or restated from time to time. "Commitment" means the Lender's commitment to make Advances to or for the Borrower's account pursuant to Article II. "Country Limitation Schedule" shall mean the most recent schedule published by Eximbank and provided to the Borrower by the Lender which sets forth on a country by country basis whether and under what conditions Eximbank will provide coverage for the financing of export transactions to countries listed therein. -5- "Credit Facility" means the credit facility made available to the Borrower pursuant to Article II. "Debt" of any Person means all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet of that Person as at the date as of which Debt is to be determined. For purposes of determining a Person's aggregate Debt at any time, "Debt" shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. "Default Period" means any period of time beginning on the first day of any month during which a Default or Event of Default has occurred and ending on the date the Lender notifies the Borrower in writing that such Default or Event of Default has been cured or waived. "Default Rate" means an annual rate equal to three percent (3%) over the Floating Rate, which rate shall change when and as the Floating Rate changes. "Eligible Export Inventory" means all Inventory consisting of Items, raw materials and components to be used to manufacture Items, and work-in- process relating to Items, and raw materials and components the Borrower must purchase to manufacture Items, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Export Inventory: (i) Inventory that is: in-transit; located at any warehouse or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title; on consignment from any Person; on consignment to any Person or subject to any bailment; (ii) Inventory consisting of proprietary software; (iii) Inventory that is damaged, slow moving, obsolete, returned, defective, recalled or unfit for further processing or not currently saleable in the normal course of the Borrower's operations; (iv) Inventory that is perishable or live; (v) Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; -6- (vi) Inventory that is subject to a security interest in favor of any Person other than the Lender or NBCI; (vii) Sample or demonstration Inventory; (viii) Inventory which has been previously exported from the United States of America; (ix) Inventory which constitutes defense articles or defense services; (x) Inventory consisting of or to be incorporated into Items destined for shipment to a Prohibited Country; (xi) The Foreign Content portion of Items containing less than fifty percent (50%) US Content; (xii) For Items containing at least fifty percent (50%) US Content, any Foreign Content not incorporated into such Items in the US; (xiii) That portion of Inventory consisting of or to be incorporated into Items whose sale would result in an Account deemed ineligible under clauses (ii), (viii), (x), or (xi) of the definition of "Eligible Foreign Accounts"; and (xiv) Inventory otherwise deemed ineligible by the Lender in its discretion. "Eligible Foreign Accounts" means all Accounts owed by Account debtors located outside the US for the sale or provision of Items, except the following shall not in any event be deemed Eligible Foreign Accounts: (i) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer; (ii) That portion of Accounts not providing for payment in full within 180 days of shipment date; (iii) That portion of Accounts over 60 days past the original due date or, 90 days past the original due date if insured through Eximbank export credit insurance for comprehensive commercial and political risk, or through an Eximbank approved private insurer for comparable coverage; (iv) Accounts owed by a shareholder, Affiliate, officer or employee of the Borrower; (v) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business; (vi) Accounts not subject to a duly perfected security interest in favor of the Lender or which are subject to any lien, security interest or claim in favor of any Person other than the Lender or NBCI; -7- (vii) That portion of Accounts that constitutes finance charges, service charges or sales or excise taxes; (viii) That portion of Accounts payable in a currency other than US Dollars unless prior written approval has been received from Eximbank; (ix) That portion of Accounts owed by military buyers or for defense articles or services, except as may be approved in writing by the Lender and Eximbank; (x) That portion of Accounts due and collectible outside the United States; (xi) That portion of Accounts owed by Account debtors located in, or arising from sales of Items delivered to, a Prohibited Country; (xii) That portion of Accounts, or portions thereof, otherwise deemed uncollectible for any reason by the Lender or Eximbank in its discretion. "ErgometRx" means ErgometRx, Inc., a Minnesota corporation. "Event of Default" has the meaning specified in Section 7.1. "Eximbank" means the Export-Import Bank of the United States. "Export Order" means a bona fide written export order or contract to purchase Items from the Borrower from a customer outside the US. "Floating Rate" means an annual rate equal to the sum of the Base Rate plus four percent (4%), which annual rate shall change when and as the Base Rate changes. "Foreign Content" means that portion of the cost of an Item arising from materials which are not of US origin or from labor and services not performed in the US. "GAAP" means generally accepted accounting principles, applied on a basis consistent with the accounting practices applied in the financial statements described in Section 4.5. "Inventory" means all of the Borrower's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired. "Items" means the goods and services to be sold by the Borrower to customers located outside the United States pursuant to Export Orders. "Loan Documents" means this Agreement, the Notes, the Borrower Agreement and the Security Documents. -8- "Master Guaranty" means that certain Master Guaranty Agreement No. MN-MGA-96-001, dated as of November 13, 1996, by and between the Lender and Eximbank. "Maturity Date" means March 30, 1998. "Maximum Line" means $1,750,000. "Medical Graphics F.S.C." means Medical Graphics F.S.C., Inc., a US Virgin Island corporation. "Medical Graphics Germany" means Medical Graphics GmbH, a German corporation. "Minimum Interest Charge" has the meaning given in Section 2.3(b). "NBCI" means Norwest Business Credit, Inc., a Minnesota corporation. "NBCI Credit Agreement" means that certain Credit and Security Agreement of even date herewith by and between the Borrower and NBCI, as the same may hereafter be amended, supplemented or restated from time to time. "NBCI Credit Facility" means the credit facility extended to the Borrower pursuant to the NBCI Credit Agreement. "Net Income" means fiscal year-to-date after-tax net income as determined in accordance with GAAP. "Notes" means Revolving Note A and Revolving Note B. "Obligations" means each and every debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, including all indebtedness arising under this Agreement, the Notes or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into. "Patent and Trademark Security Agreement" means the Patent and Trademark Security Agreement by the Borrower in favor of the Lender of even date herewith, as the same may hereafter be amended, supplemented or restated from time to time. "Permitted Lien" has the meaning given in Section 6.1. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. -9- "Premises" means all premises where the Borrower conducts its business and has any rights of possession. "Prohibited Country" means any country in which Eximbank coverage is not available for commercial reasons or in which Eximbank is legally prohibited from doing business, as designated in the Country Limitation Schedule. "Revolving Advance" has the meaning given in Section 2.1. "Revolving Note A" means the Borrower's revolving promissory note, payable to the order of the Lender in substantially the form of Exhibit A hereto. "Revolving Note B" means the Borrower's revolving promissory note, payable to the order of the Lender in substantially the form of Exhibit B hereto. "Security Agreements" means Security Agreement A and Security Agreement B. "Security Agreement A" means that certain Security Agreement "A" of even date herewith by and between the Borrower and the Lender, securing payment of Revolving Note A. "Security Agreement B" means that certain Security Agreement "B" of even date herewith by and between the Borrower and the Lender, securing payment of Revolving Note B. "Security Documents" means this Agreement, the Collateral Account Agreement, the Collateral Pledge Agreement, the Patent and Trademark Security Agreement, and any other document delivered to the Lender from time to time to secure the Obligations, as the same may hereafter be amended, supplemented or restated from time to time. "Security Documents" means this Agreement, the Security Agreements and the Patent and Trademark Security Agreement. "Security Interest" means the security its granted under the Security Documents. "Servicer" means NBCI. "Tangible Net Worth" means the difference between (i) the tangible assets of the Borrower, which, in accordance with GAAP are tangible assets, after deducting adequate reserves in each case where, in accordance with GAAP, a reserve is proper and (ii) all Debt of the Borrower; PROVIDED, HOWEVER, that notwithstanding the foregoing in no event shall there be included as such tangible assets patents, -10- trademarks, trade names, copyrights, licenses, goodwill, receivables from Affiliates, directors, officers or employees, prepaid expenses, deposits, deferred charges or treasury stock or any securities or Debt of the Borrower or any other securities unless the same are readily marketable in the United States of America or entitled to be used as a credit against federal income tax liabilities, and any other assets designated from time to time by the Lender, in its sole discretion. "Termination Date" means the earliest of (i) the Maturity Date, (ii) the date the Borrower terminates the Credit Facility, or (iii) the date the Lender demands payment of the Obligations after an Event of Default pursuant to Section 7.2. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of Minnesota. "US Content" means that portion of the cost of an Item arising from materials which are of US origin or from labor and services performed in the US. ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY Section 2.1 REVOLVING ADVANCES. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances (each a "Revolving Advance") to the Borrower from time to time from the date this Agreement is signed and delivered to the Termination Date, on the terms and subject to the conditions herein set forth, to provide the Borrower with working capital to fulfill Export Orders. The Lender shall have no obligation to make a Revolving Advance to the extent that the amount of the requested Revolving Advance exceeds Availability. The Borrower's obligation to pay ninety percent (90%) of each Revolving Advance shall be evidenced by Revolving Note A and secured pursuant to Security Agreement A and the Patent and Trademark Security Agreement. The Borrower's obligation to pay the remaining ten percent (10%) of each Revolving Advance shall be evidenced by Revolving Note B and secured pursuant to Security Agreement B and the Patent and Trademark Security Agreement. Within the limits set forth in this Section 2.1, the Borrower may request Revolving Advances, prepay, and request additional Revolving Advances. Section 2.2 REQUESTS FOR ADVANCES. The Borrower shall make each request for a Revolving Advance to the Lender before 11:00 a.m. (Minneapolis time) of the day of the requested Revolving Advance. Requests may be made in writing or by telephone. The Lender will not consider any request for a Revolving Advance unless the Lender has received from the Borrower, among other things, a Borrowing Base Certificate as of a date not more than five (5) Business Days before the date of the requested Advance and copies of the Export Orders and a summary thereof against which the Borrower is requesting such Advance. Whenever the Borrower makes a request for an Advance based on Eligible Export -11- Inventory, it shall also indicate in its books and records that such Inventory has been designated to fulfill an Export Order and shall no longer be considered Eligible Inventory under the NBCI Credit Facility. Any request for an Advance shall be deemed to be a representation by the Borrower that the conditions set forth in Section 3.2 have been satisfied as of the date of the request. Section 2.3 INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST. All interest shall be payable monthly in arrears on the first day of the month and on demand. (a) NOTES. Except as set forth in subsection (c) and (d), the outstanding principal balance of the Notes shall bear interest at the Floating Rate. (b) MINIMUM INTEREST CHARGE. Notwithstanding the interest payable pursuant to subsections (a) and (c), the Borrower shall pay to the Lender interest of not less than $15,000 per calendar month during the term of this Agreement, prorated for less than full months (the "Minimum Interest Charge"), and the Borrower shall pay any deficiency between the Minimum Interest Charge and the amount of interest otherwise calculated under subsections (a) and (c) in arrears on the first day of each month, provided that the sum of the Minimum Interest Charge and the Minimum Interest Charge under the NBCI Credit Facility shall not exceed $15,000 per month. (c) DEFAULT INTEREST RATE. At any time during any Default Period, in the Lender's sole discretion and without waiving any of its other rights and remedies, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective for any periods designated by the Lender from time to time during that Default Period. (d) USURY. In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. Section 2.4 FEES. (a) ORIGINATION FEE. The Borrower hereby agrees to pay the Lender a fully earned and non-refundable origination fee of $16,000, due and payable in twelve (12) substantially equal monthly installments beginning on the first day of the first month after the Funding Date, provided that the sum of this fee and the Origination Fee under the NBCI Credit Facility shall not exceed $41,000. (b) UNUSED LINE FEE. For the purposes of this Section 2.4(b), "Unused Amount" means the Maximum Line reduced by outstanding Revolving Advances . The Borrower agrees to pay to the Lender an unused line fee at the rate of one-quarter of one percent (0.25%) per annum on the average daily Unused Amount from the date of this Agreement to and including the Termination Date, due and payable monthly in arrears on the first day of the month and on the Termination Date, provided that the -12- sum of this fee and the unused line fee under the NBCI Credit Facility shall not exceed one-quarter of one percent (0.25%) per annum times the difference of $4,100,000 and the aggregate average daily outstanding principal balance of the Revolving Advances and the revolving advances under the NBCI Credit Facility. (c) FACILITY FEES. If the Credit Facility is renewed, the Borrower shall pay the Lender a fee equal to one-quarter of one percent (0.25%) of the Maximum Line, due and payable 60 days in advance of the Maturity Date. (d) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on demand, audit fees in connection with any audits or inspections conducted by the Lender of any of the Borrower's property, operations or business at the rates established from time to time by the Lender as its audit fees (which fees are currently $62.50 per hour per auditor), together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection, provided that the Borrower shall not have to reimburse such costs and expenses to the extent it has already done so pursuant to the NBCI Credit Facility. Section 2.5 APPLICATION OF PAYMENTS. All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations 1 Banking Day after receipt by the Lender. The Lender shall apply all payments on the Obligations, (a) first, to reimburse the Lender for any and all unreimbursed costs and expenses incurred by the Lender, (b) to pay fees due to the Lender, (c) to pay interest on the Notes and (d) to pay the principal balance of the Notes. Payments applied to interest and principal shall be applied on a prorata basis to each Note. Section 2.6 CAPITAL ADEQUACY. If any Related Lender determines at any time that its Return has been reduced as a result of any Rule Change, such Related Lender may require the Borrower to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change. For purposes of this Section 2.6: (a) "Capital Adequacy Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (b) "Return", for any period, means the return as determined by such Related Lender on the Advances based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules then in effect. Return may be calculated for each calendar quarter and for the shorter -13- period between the end of a calendar quarter and the date of termination in whole of this Agreement. (c) "Rule Change" means any change in any Capital Adequacy Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Closing Date are scheduled to take place under the existing Capital Adequacy Rules or any increases in the capital that any Related Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of the financial condition of such Related Lender. (d) "Related Lender" includes (but is not limited to) the Lender, any parent corporation of the Lender and any assignee of any interest of the Lender hereunder and any participant in the loans made hereunder. Certificates of any Related Lender sent to the Borrower from time to time claiming compensation under this Section 2.6, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Related Lender hereunder to restore its Return shall be conclusive absent manifest error. In determining such amounts, the Related Lender may use any reasonable averaging and attribution methods. Section 2.7 TERMINATION BY BORROWER. The Borrower may terminate this Agreement at any time and, subject to payment and performance of all Obligations, may obtain any release or termination of the Security Interest to which the Borrower is otherwise entitled by law by giving at least 30 days' prior written notice to the Lender of the Borrower's intention to terminate this Agreement, and (i) paying the Lender a prepayment fee equal to the lesser of (A) the Minimum Interest Charge for the period from the date of prepayment through the third anniversary of the Closing Date or (B) a percentage of the Maximum Line equal to three percent (3%) if prepayment occurs before the 1st anniversary of the Closing Date, two percent (2%) if prepayment on or after the first anniversary of the Closing Date but before the second anniversary of the Closing Date, and one percent (1%) if prepayment occurs after the 2nd anniversary of the Closing Date but before the 3rd anniversary of the Closing Date. Section 2.8 MANDATORY PREPAYMENT. Without notice or demand, if the outstanding principal balance of the Revolving Advances shall at any time exceed the Borrowing Base, the Borrower shall immediately prepay the Revolving Advances to the extent necessary to eliminate such excess. Section 2.9 ADVANCES WITHOUT REQUEST. The Borrower hereby authorizes the Lender, in its discretion, at any time or from time to time without the Borrower's request, to make Revolving Advances to pay accrued interest, fees, uncollected items that have been applied to the Obligations, and other Obligations due and payable from time to time. -14- Section 2.10 USE OF PROCEEDS. The Borrower shall use the proceeds of Advances for working capital to finance the manufacture, production or purchase and subsequent sale of Items only. Without limiting the generality of the foregoing, the Borrower shall not use any proceeds of Advances for any purpose prohibited by the Borrower Agreement or (i) to acquire fixed assets or capital goods for use in the Borrower's business; (ii) to acquire, equip or rent commercial space overseas; (iii) to employ non-US residents in offices outside the US; (iv) to serve as a retainage or warranty bond; or (v) to repay pre- existing Debt or future indebtedness of the Borrower unrelated to the Advances. Section 2.11 FACILITY SUBJECT TO EXIMBANK RULES. The Borrower acknowledges that the Lender is willing to make the Credit Facility available to the Borrower because the Eximbank is willing to guaranty payment of a significant portion of the Obligations pursuant to the Master Guaranty. Accordingly, in the event of any inconsistency among the Loan Documents and the Master Guaranty or related documents, the provision that is the more stringent on the Borrower shall control. ARTICLE III CONDITIONS OF LENDING Section 3.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE. The Lender's obligation to make the initial Revolving Advance hereunder shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed by the Borrower. (b) The Notes, properly executed by the Borrower. (c) The Security Agreements, properly executed by the Borrower. (d) The Collateral Account Agreement, properly executed by the Borrower. (e) The Collateral Pledge Agreement, properly executed by the Borrower together with certificates representing all of the Borrower's shares in Medical Graphics F.S.C. and ErgometRx and stock powers with respect to such certificates. (f) The SBA/Eximbank Joint Application, properly completed and executed by the Borrower. (g) The Borrower Agreement, properly executed by the Borrower. (h) A properly completed and executed Borrowing Base Certificate as of a date not more than five (5) Business Days before the date of this Agreement. -15- (i) An exceptions approval letter, properly signed by Eximbank. (j) A participation and servicing agreement, properly signed by the Servicer. (k) Copies of the Borrower's audited financial statements with full disclosure for the last three (3) fiscal years. (l) Copies of the Borrower's federal tax return for the last year together with all schedules thereto. (m) A true and correct copy of any and all leases pursuant to which the Borrower is leasing the Premises, together with a landlord's disclaimer and consent with respect to each such lease. (n) The Patent and Trademark Security Agreement, properly executed by the Borrower. (o) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against the Borrower, (ii) no financing statements or assignments of patents, trademarks or copyrights have been filed and remain in effect against the Borrower except those financing statements and assignments of patents, trademarks or copyrights relating to Permitted Liens or to liens held by Persons who have agreed in writing that upon receipt of proceeds of the Advances, they will deliver UCC releases and/or terminations and releases of such assignments of patents, trademarks or copyrights satisfactory to the Lender, and (iii) the Lender has duly filed all financing statements necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing. (p) A certificate of the Borrower's Secretary or Assistant Secretary certifying as to (i) the resolutions of the Borrower's directors and, if required, shareholders, authorizing the execution, delivery and performance of the Loan Documents, (ii) the Borrower's articles of incorporation and bylaws, and (iii) the signatures of the Borrower's officers or agents authorized to execute and deliver the Loan Documents and other instruments, agreements and certificates, including Advance requests, on the Borrower's behalf. (q) A current certificate issued by the Secretary of State of Minnesota, certifying that the Borrower is in compliance with all applicable organizational requirements of the State of Minnesota. (r) Evidence that the Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the -16- nature of the business transacted by it makes such licensing or qualification necessary. (s) A certificate of an officer of the Borrower confirming, in his personal capacity, the representations and warranties set forth in Article IV and the Disclosure. (t) Support agreements in favor of the Lender and NBCI, properly executed by Glenn D. Taylor and Dale H. Johnson in their personal capacities. (u) An opinion of counsel to the Borrower, addressed to the Lender. (v) Certificates of the insurance required hereunder, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as an additional insured. (w) Payment of the fees and commissions due through the date of the initial Advance and expenses incurred by the Lender through such date and required to be paid by the Borrower under Section 8.3, including all legal expenses incurred through the date of this Agreement. (x) Evidence that the NBCI Credit Agreement has been executed and delivered by the Borrower and that not later than simultaneously with the initial Advance, all conditions precedent to funding under the NBCI Credit Agreement shall have been satisfied. (y) Such other documents as the Lender in its sole discretion may require. Section 3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The Lender will not consider any request for an Advance unless on such date: (a) the representations and warranties contained in Article IV and the Disclosure are correct on and as of the date of such Advance as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance which constitutes a Default or an Event of Default. -17- ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender as follows: Section 4.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER. The Borrower is a corporation, duly organized, validly existing and in good standing under the laws of the State of Minnesota and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. The Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. During its existence, the Borrower has done business solely under the names set forth in Schedule 4.1 hereto. The Borrower's chief executive office and principal place of business is located at the address set forth in Schedule 4.1 hereto, and all of the Borrower's records relating to its business or the Collateral are kept at that location. All inventory and equipment is located at that location or at one of the other locations set forth in Schedule 4.1 hereto. The Borrower's tax identification number is correctly set forth beneath its signature below. Section 4.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the Borrower's stockholders; (ii) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof; (iii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Borrower's articles of incorporation or bylaws; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; or (v) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interest) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. Section 4.3 LEGAL AGREEMENTS. This Agreement constitutes and, upon due execution by the Borrower, the other Loan Documents will constitute the legal, valid and -18- binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. Section 4.4 SUBSIDIARIES. The Borrower has no Subsidiaries other than Medical Graphics Germany which the Borrower is in the process of winding up and Medical Graphics F.S.C. Section 4.5 FINANCIAL CONDITION; NO ADVERSE CHANGE. The Borrower has heretofore furnished to the Lender its audited financial statements for its fiscal year ended December 31, 1995 and its unaudited financial statements for the fiscal year-to-date period ended December 31, 1996 and those statements fairly present the Borrower's financial condition on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the Borrower's business, properties or condition (financial or otherwise). Section 4.6 LITIGATION. Except as set forth on Schedule 4.6, there are no actions, suits or proceedings pending or, to the Borrower's knowledge, threatened against or affecting the Borrower or any of its Affiliates or the properties of the Borrower or any of its Affiliates before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Affiliates, would have a material adverse effect on the financial condition, properties or operations of the Borrower or any of its Affiliates. Section 4.7 REGULATION U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 4.8 TAXES. Except as set forth on Schedule 4.8 and described in the letter from the Borrower's accountants attached thereto, the Borrower and its Affiliates (a) have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them; (b) have filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and (c) have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due. Section 4.9 TITLES AND LIENS. The Borrower has good and absolute title to all Collateral described in the collateral reports provided to the Lender and all other Collateral, properties and assets reflected in the latest financial statements referred to in Section 4.5 and all proceeds thereof, free and clear of all mortgages, security interests, liens and -19- encumbrances, except for Permitted Liens. No financing statement naming the Borrower as debtor is on file in any office except to perfect only Permitted Liens. Section 4.10 PLANS. Except as disclosed to the Lender in writing prior to the date hereof, neither the Borrower nor any of its Affiliates maintains or has maintained any Plan. Neither the Borrower nor any Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA. No Reportable Event or other fact or circumstance which may have an adverse effect on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrower nor any of its Affiliates has: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or knows of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which or which may become payable to participants or beneficiaries of any such Plan). Section 4.11 DEFAULT. The Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a material adverse effect on the Borrower's financial condition, properties or operations. Section 4.12 ENVIRONMENTAL MATTERS. (a) DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (i) "Environmental Law" means any federal, state, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment. (ii) "Hazardous Substances" means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law. (b) To the Borrower's best knowledge, there are not present in, on or under the Premises any Hazardous Substances in such form or quantity as to create any liability or obligation for either the Borrower or the Lender under common law of any jurisdiction or under any Environmental Law except for small quantities in the ordinary course of its business and in strict compliance with all Environmental Laws, and no Hazardous Substances have ever been stored, buried, spilled, leaked, -20- discharged, emitted or released in, on or under the Premises in such a way as to create any such liability. (c) To the Borrower's best knowledge, the Borrower has not disposed of Hazardous Substances in such a manner as to create any liability under any Environmental Law. (d) There are not and there never have been any requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation, relating in any way to the Premises or the Borrower, alleging liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant thereto. To the Borrower's best knowledge, no such matter is threatened or impending. (e) To the Borrower's best knowledge, the Borrower's businesses are and have in the past always been conducted in substantial compliance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in the Borrower's possession and are in full force and effect. No permit required under any Environmental Law is scheduled to expire within 12 months and there is no threat that any such permit will be withdrawn, terminated, limited or materially changed. (f) To the Borrower's best knowledge, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database. (g) The Borrower has delivered to Lender all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to the Premises or the Borrower's businesses. Section 4.13 SUBMISSIONS TO LENDER. All financial and other information provided to the Lender by or on behalf of the Borrower in connection with the Borrower's request for the credit facilities contemplated hereby is true and correct in all material respects and, as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results. Section 4.14 FINANCING STATEMENTS. The Borrower has provided to the Lender signed financing statements sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral and all other collateral described in the Security Documents which is capable of being perfected by filing financing statements. None of the Collateral or other -21- collateral covered by the Security Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. Section 4.15 RIGHTS TO PAYMENT. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Security Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation. ARTICLE V BORROWER'S AFFIRMATIVE COVENANTS So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: Section 5.1 REPORTING REQUIREMENTS. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender: (a) as soon as available, and in any event within 90 days after the end of each fiscal year of the Borrower, the Borrower's audited financial statements prepared in accordance with GAAP; together with (i) copies of all management letters prepared by such accountants; (ii) a report signed by such accountants stating that in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Default or Event of Default hereunder and all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Section 5.12, and (iii) a certificate of the Borrower's chief financial officer stating that such financial statements have been prepared in accordance with GAAP, that they fairly present the Borrower's financial condition and the results of its operations, and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within 20 days after the end of each month, an unaudited/internal balance sheet and statement of income and retained earnings of the Borrower as at the end of and for such month and for the year to date period then ended, prepared in accordance with GAAP, subject to year-end audit adjustments; and accompanied by a certificate of the Borrower's chief financial officer, substantially in the form of Exhibit D hereto stating (i) that such financial statements have been prepared in accordance with GAAP subject to year-end audit -22- adjustments, and fairly represent the Borrower's financial condition and the results of its operations, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Section 5.12; (c) on the first Banking Day of each week as of the last Banking Day of the prior week, a properly completed Borrowing Base Certificate, signed by the Borrower's chief financial officer; (d) within 15 days after the end of each month or more frequently if the Lender so requires, agings of the Borrower's accounts receivable and its accounts payable, an inventory certification report, an accounts receivable certification and a calculation of the Borrower's Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end of such month or shorter time period; (e) at least 30 days before the beginning of each fiscal year of the Borrower, the projected balance sheets and income statements for each month of such year, each in reasonable detail, representing the Borrower's good faith projections and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrower for internal planning purposes, together with such supporting schedules and information as the Lender may in its discretion require; (f) as soon as available and in any event within ten days after they are due, copies of tax payments due and paid and written notice of any and all taxes due but not paid; (g) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request. (h) promptly upon knowledge thereof, notice of any Items (and the corresponding invoice amount) which are articles, services, or related technical data that are listed on the United States Munitions List (part 121 of title 22 of the Code of Federal Regulations); (i) immediately after a proceeding in bankruptcy or an action for debtor's relief is filed by, against, or on behalf of the Borrower; -23- (j) immediately after the Borrower fails to obtain the dismissal or termination within thirty (30) calendar days of the commencement of any proceeding or action referred to in (i) above; and (k) immediately after the Borrower begins any procedure for its dissolution or liquidation, or a procedure therefor has been commenced against it. So long as the Servicer is actively servicing the Loan Documents on behalf of the Lender as described in Section 8.2, the Borrower shall provide to the Servicer all reports required under this Section 5.1. Section 5.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. The Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the Borrower's business and financial condition and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records of the Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to the Borrower, and to discuss the Borrower's affairs with any of its directors, officers, employees or agents. The Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other collateral covered by the Security Documents or any other property of the Borrower at any time during ordinary business hours. Section 5.3 ACCOUNT VERIFICATION. The Lender may at any time and from time to time send or require the Borrower to send requests for verification of accounts or notices of assignment to account debtors and other obligors. The Lender may also at any time and from time to time telephone account debtors and other obligors to verify accounts. Section 5.4 COMPLIANCE WITH LAWS. (a) The Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. (b) Without limiting the foregoing undertakings, the Borrower specifically agrees that it will comply with all applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by any Environmental Laws, and will not generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any liability or obligation under the common law of any jurisdiction or any Environmental Law. -24- Section 5.5 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of the Borrower; provided, that the Borrower shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made. Section 5.6 MAINTENANCE OF PROPERTIES. (a) The Borrower will keep and maintain the Collateral, the other collateral covered by the Security Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 5.6 shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the Lender's judgment, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. (b) The Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) The Borrower will keep all Collateral and other collateral covered by the Security Documents free and clear of all security interests, liens and encumbrances except Permitted Liens. Section 5.7 INSURANCE. The Borrower will obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable endorsement for the Lender's benefit acceptable to the Lender. All policies of liability insurance required hereunder shall name the Lender as an additional insured. Section 5.8 PRESERVATION OF EXISTENCE. The Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in -25- the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 5.9 DELIVERY OF INSTRUMENTS, ETC. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by the Borrower. Section 5.10 COLLATERAL ACCOUNT. (a) If, notwithstanding the instructions to Account debtors located outside the United States to make payments to the Collateral Account, the Borrower receives any payments from such Account debtors, the Borrower shall deposit such payments into the Collateral Account. Until so deposited, the Borrower shall hold all such payments in trust for and as the property of the Lender and shall not commingle such payments with any of its other funds or property. (b) Amounts deposited in the Collateral Account shall not bear interest and shall not be subject to withdrawal by the Borrower, except after full payment and discharge of all Obligations. (c) All deposits in the Collateral Account shall constitute proceeds of Collateral and shall not constitute payment of the Obligations. The Lender from time to time at its discretion may, after allowing one Banking Day, apply deposited funds in the Collateral Account to the payment of the Obligations, in any order or manner of application satisfactory to the Lender, by transferring such funds to the Lender's general account. Section 5.11 PERFORMANCE BY THE LENDER. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article V or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives the Borrower written notice thereof (or in the case of the agreements contained in Sections 5.5, 5.7 and 5.10, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the -26- Floating Rate. To facilitate the Lender's performance or observance of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this Section 5.11. Section 5.12 MINIMUM TANGIBLE NET WORTH. The Borrower will maintain, during each period described below, its Tangible Net Worth, determined as at the end of each month, at an amount not less than the amount set forth opposite such period: PERIOD MINIMUM TANGIBLE NET WORTH ------ -------------------------- March 31, 1997 $300,000 April 30, 1997 $1,000,000 May 31, 1997 $1,000,000 June 30, 1997 through $1,300,000 December 31, 1997 ARTICLE VI NEGATIVE COVENANTS So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower agrees that, without the Lender's prior written consent: Section 6.1 LIENS. The Borrower will not create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness; EXCLUDING, HOWEVER, from the operation of the foregoing, the following (collectively, "Permitted Liens"): (a) in the case of any of the Borrower's property which is not Collateral or other collateral described in the Security Documents, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the Borrower's business or operations as presently conducted; -27- (b) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in Schedule 6.1 hereto, securing indebtedness for borrowed money permitted under Section 6.2; (c) the Security Interest and liens and security interests created by the Security Documents; and (d) purchase money security interests relating to the acquisition of machinery and equipment of the Borrower. Section 6.2 INDEBTEDNESS. The Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money or letters of credit issued on the Borrower's behalf, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness arising hereunder; (b) indebtedness of the Borrower in existence on the date hereof and listed in Schedule 6.2 hereto; and (c) indebtedness relating to liens permitted in accordance with Section 6.1. Section 6.3 GUARANTIES. The Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower for deposit or collection or similar transactions in the ordinary course of business; and (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons, in existence on the date hereof and listed in Schedule 6.2 hereto. Section 6.4 INVESTMENTS AND SUBSIDIARIES. (a) The Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except: (i) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by US corporations rated -28- "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (ii) the Borrower's investment, but only to the extent as of the date hereof, in Medical Graphics Germany Medical Graphics F.S.C. and ErgometRx; (iii) travel advances or loans to the Borrower's officers and employees not exceeding at any one time an aggregate of $30,000; and (iv) advances in the form of progress payments, prepaid rent not exceeding one month or security deposits. (b) The Borrower will not create or permit to exist any Subsidiaries other than Medical Graphics Germany and Medical Graphics F.S.C. Section 6.5 DIVIDENDS. The Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly. Section 6.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than the sale of Inventory in the ordinary course of business and will not liquidate, dissolve or suspend business operations. The restrictions of the preceding sentence shall not apply to , sales or leases of the Borrower's surplus, obsolete or worn-out property, sales to insurers in settlement of insurable losses and sales of property where such property is being replaced and the replacement property is subject to the Security Interest. The Borrower will not in any manner transfer any property without prior or present receipt of full and adequate consideration. Section 6.7 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. The Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person. Section 6.8 SALE AND LEASEBACK. The Borrower will not enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property -29- which the Borrower intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 6.9 RESTRICTIONS ON NATURE OF BUSINESS. The Borrower will not engage in any line of business materially different from that presently engaged in by the Borrower and will not purchase, lease or otherwise acquire assets not related to its business. Section 6.10 ACCOUNTING. The Borrower will not adopt any material change in accounting principles other than as required by GAAP. The Borrower will not adopt, permit or consent to any change in its fiscal year. Section 6.11 DISCOUNTS, ETC. The Borrower will not, after notice from the Lender, grant any discount, credit or allowance to any customer of the Borrower or accept any return of goods sold, or at any time (whether before or after notice from the Lender) modify, amend, subordinate, cancel or terminate the obligation of any account debtor or other obligor of the Borrower. Section 6.12 DEFINED BENEFIT PENSION PLANS. The Borrower will not adopt, create, assume or become a party to any defined benefit pension plan, unless disclosed to the Lender pursuant to Section 4.10. Section 6.13 OTHER DEFAULTS. The Borrower will not permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon the Borrower. Section 6.14 PLACE OF BUSINESS; NAME. The Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Borrower will not change its name. Section 6.15 ORGANIZATIONAL DOCUMENTS; S CORPORATION STATUS. The Borrower will not amend its certificate of incorporation or articles of incorporation. After prior notice to the Lender, the Borrower may amend its bylaws provided that such amendments do not adversely affect the Lender. The Borrower will not become an S Corporation within the meaning of the Internal Revenue Code of 1986, as amended. Section 6.16 SALARIES. The Borrower will not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation; or increase the salary, bonus, commissions, consultant fees or other compensation of any director, officer or consultant, or any member of their families, by more than 10% in any one year, either individually or for all such persons in the aggregate, or pay any such increase from any -30- source other than profits earned in the year of payment. The restrictions of this Section shall not apply to compensation in the form of options or warrants to acquire stock of the Borrower in favor of such Persons. ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES Section 7.1 EVENTS OF DEFAULT. An "Event of Default" as used herein shall mean any of the following: (a) Failure to pay any Obligations when they become due and payable, and in this connection Borrower hereby waives presentment, notice of dishonor and protest; (b) Any payment default shall occur under any agreement between the Borrower and NBCI, or NBCI shall accelerate or demand payment of any obligations owed to it by the Borrower, or NBCI shall exercise its remedies against the Borrower; (c) Eximbank shall repudiate, purport to revoke or fail to perform its obligations under the Master Guaranty; (d) An order for relief naming the Borrower as debtor shall be entered under the United States Bankruptcy Code; or (e) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in any Loan Document not specifically addressed in this Section 7.1, which shall remain uncured for 30 days after notice from the Lender. Section 7.2 RIGHTS AND REMEDIES. Upon the occurrence of an Event of Default or at any time thereafter, the Lender may exercise any or all of the following rights and remedies: (a) the Lender may, by notice to the Borrower, declare the Commitment to be terminated, whereupon the same shall forthwith terminate; (b) The Lender may exercise and enforce any and all rights and remedies available upon default under the Security Agreements and the Patent and Trademark Security Agreement; (c) The Lender may exercise any other rights and remedies available to it by law or agreement. The remedies provided hereunder are cumulative. -31- Section 7.3 CERTAIN NOTICES. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 8.1) at least 20 calendar days before the date of intended disposition or other action. ARTICLE VIII MISCELLANEOUS Section 8.1 ADDRESSES FOR NOTICES, ETC. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for hereunder shall be in writing and shall be (i) personally delivered, (ii) sent by first class United States mail, (iii) sent by overnight courier of national reputation, or (iv) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopy number as set forth below its signature to this Agreement. Section 8.2 SERVICING OF CREDIT FACILITY. (a) The Lender has requested that the Servicer service and enforce the Loan Documents, make all Advances and collect all Obligations on the Lender's behalf and the Servicer has agreed to do so. The Borrower acknowledges and accepts the Servicer's appointment as such. (b) The Servicer shall have no duties or responsibilities to the Borrower hereunder, but only to the Lender. Neither the Servicer nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by them hereunder or in connection herewith, unless caused by its or their willful misconduct. The Servicer's duties shall be mechanical and administrative in nature; nothing in this Agreement, express or implied, is intended to or shall be so construed as to impose upon the Servicer any obligations with respect to the Loan Documents except as expressly set forth herein. The Borrower shall not in any way be construed to be a third party beneficiary of any relationship between the Servicer and the Lender. (c) The Servicer shall be entitled to rely, and shall be fully protected in relying, upon any communication whether written or oral believed by it to be genuine and correct and to have been signed, sent or made by the proper Person, and, with respect to all legal matters pertaining to this Agreement and its duties hereunder, upon advice of counsel selected by it. (d) The Borrower shall be entitled to rely upon any communication whether written or oral sent or made by the Servicer for and on behalf of the Lender with respect to all matters pertaining to the Loan Documents and the Borrower's -32- duties and obligations hereunder, unless and until the Borrower receives written notice from the Lender that the Servicer is no longer servicing this credit facility. (e) The Servicer shall hold and be the custodian of the Loan Documents on the Lender's behalf for so long as the Servicer is servicing the Credit Facility. Section 8.3 COSTS AND EXPENSES. The Borrower agrees to pay on demand all costs and expenses (including reasonable legal fees) incurred by the Lender in connection with the Loan Documents and any other document or agreement related thereto, and the transactions contemplated hereby, including wire transfer and ACH charges, the cost of credit reports, overadvance fees, the expense of any auditors and fees and expenses in enforcing this Agreement. Section 8.4 INDEMNITY. In addition to the payment of expenses pursuant to Section 8.3, the Borrower agrees to indemnify, defend and hold harmless the Lender, and any of its participants, assigns, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the "Indemnitees") from and against any of the following (collectively, "Indemnified Liabilities"): (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement and the other Loan Documents or the making of the Advances; (ii) any and all liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with any investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or arising out of or in connection with the making of the Advances, this Agreement and the other Loan Documents or the use or intended use of the proceeds of the Advances; and (iii) any claim, loss or damage to which any Indemnitee may be subjected as a result of any violation of any federal, state, local or other governmental statute, regulation, law, or ordinance dealing with the protection of human health and the environment. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, then the Borrower or counsel designated by the Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the -33- foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrower's obligation under this Section 8.4 shall survive the termination of this Agreement and the discharge of the Borrower's other obligations hereunder. If Eximbank makes payment of a claim to the Lender under the Master Guaranty in connection with the Credit Facility, Eximbank shall be assigned all the Lender's rights and remedies under Revolving Note A, and Security Agreement A and may enforce any such rights or remedies against the Borrower and the Collateral (as defined in Security Agreement A). Additionally, the Borrower shall hold Eximbank harmless from agrees to indemnify it against any and all liabilities, damages, claims, costs and losses incurred or suffered by it resulting from (a) any materially incorrect certification or statement knowingly made by or on behalf of the Borrower to Eximbank or the Lender in connection with an Advance , this Agreement or any of the other Loan Documents or (b) any breach by the Borrower of the terms and conditions of this Agreement or any of the other Loan Documents. The Borrower also acknowledges that any statement, certification or representation made by it in connection with the Credit Facility is subject to the penalties provided in Article 18 U.S.C. Section 1001. Section 8.5 BINDING EFFECT; ASSIGNMENT; COUNTERPARTS; EXCHANGING INFORMATION. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the prior written consent of the Lender. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Without limiting the Lender's right to share information regarding the Borrower and its Affiliates with the Lender's participants, accountants, lawyers and other advisors, the Lender, Norwest Corporation, and all direct and indirect subsidiaries of Norwest Corporation, may exchange any and all information they may have in their possession regarding the Borrower and its Affiliates, and the Borrower waives any right of confidentiality it may have with respect to such exchange of such information. -34- Section 8.6 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL. This Agreement and the Note shall be governed by and construed in accordance with the laws (other than conflict laws) of the State of Minnesota. Each party consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Agreement, waives any argument that venue in any such forum is not convenient and agrees that any litigation initiated by any of them in connection with this Agreement shall be venued in either the District Court of Hennepin County, Minnesota [Signature Page Follows] -35- located in Minneapolis, Minnesota, or the United States District Court, District of Minnesota, Fourth Division. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first above written. NORWEST BANK MINNESOTA, NATIONAL MEDICAL GRAPHICS CORPORATION ASSOCIATION By By ----------------------- --------------------------- Christopher A. Cudak Glenn D. Taylor Its Vice President Its Chief Executive Officer Address: Address: Norwest Center 350 Oak Grove Parkway Sixth Street and Marquette Avenue St. Paul, Minnesota 55127 Minneapolis, Minnesota 55479-0085 Telecopy No. 612/667-2269 Telecopy No. (612) 484-8941 Federal Tax ID No. 41-1592157 Federal Tax ID No. 41-1316712 -36- Exhibit A to Credit Agreement REVOLVING NOTE A $1,575,000 Minneapolis, Minnesota ______________, 1997 For value received, the undersigned, MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the "Borrower"), hereby promises to pay ON DEMAND to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of One Million Five Hundred and Seventy-Five Thousand Dollars ($1,575,000) or, if less, the aggregate unpaid principal amount of ninety percent (90%) of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement of even date herewith by and between the Lender and the Borrower (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") together with interest on the principal amount hereunder remaining unpaid from time to time (computed on the basis of actual days elapsed in a 360-day year) from the date of the initial Advance until this Note is fully paid at the rate from time to time in effect under the Credit Agreement. This Note is Revolving Note A as defined in the Credit Agreement, is subject to the Credit Agreement and is secured pursuant to Security Agreement A and the Patent and Trademark Security Agreement as defined in the Credit Agreement. MEDICAL GRAPHICS CORPORATION By --------------------------- Glenn D. Taylor Its Chief Executive Officer Exhibit B to Credit Agreement REVOLVING NOTE B $175,000 Minneapolis, Minnesota ______________, 1997 For value received, the undersigned, MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the "Borrower"), hereby promises to pay ON DEMAND to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of One Hundred and Seventy-Five Thousand Dollars ($175,000) or, if less, ten percent (10%) of the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement of even date herewith by and between the Lender and the Borrower (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") together with interest on the principal amount hereunder remaining unpaid from time to time (computed on the basis of actual days elapsed in a 360-day year) from the date of the initial Advance until this Note is fully paid at the rate from time to time in effect under the Credit Agreement. This Note is Revolving Note B as defined in the Credit Agreement, is subject to the Credit Agreement and is secured pursuant to Security Agreement B and the Patent and Trademark Security Agreement as defined in the Credit Agreement. MEDICAL GRAPHICS CORPORATION By --------------------------- Glenn D. Taylor Its Chief Executive Officer Exhibit C to Credit Agreement FORM OF BORROWER AGREEMENT Exhibit D to Credit Agreement COMPLIANCE CERTIFICATE To: Christopher A. Cudak Norwest Bank Minnesota, National Association Warren A. Lindman Norwest Business Credit, Inc. Date: __________________, 199___ Subject: Medical Graphics Corporation Financial Statements In accordance with our Credit Agreement dated as of March 31, 1997 (the "Credit Agreement"), attached are the financial statements of Medical Graphics Corporation (the "Borrower") as of and for ________________, 19___ (the "Reporting Date") and the year-to-date period then ended (the "Current Financials"). All terms used in this certificate have the meanings given in the Credit Agreement. I certify that the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrower's financial condition as of the date thereof. EVENTS OF DEFAULT. (Check one): / / The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement. / / The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a statement of the facts with respect to thereto. I further hereby certify that pursuant to Section 5.12 of the Credit Agreement, as of the Reporting Date the Borrower's Tangible Net Worth was $____________ which / / satisfies / / does not satisfy the requirement that such amount be not less than $1,300,000 on the Reporting Date. Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP. MEDICAL GRAPHICS CORPORATION By ________________________________ Dale H. Johnson Its Chief Financial Officer -2- Exhibit E to Credit Agreement FORM OF BORROWING BASE CERTIFICATE Schedule 2.11-1 Schedule 4.1 to Credit and Security Agreement TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS, AND LOCATIONS OF COLLATERAL TRADE NAMES, DBAS MedGraphics CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS Medical Graphics Corporation 350 Oak Grove Parkway St. Paul, Minnesota 55127 OTHER INVENTORY AND EQUIPMENT LOCATIONS None. Schedule 4.1-1 Schedule 4.6 to Credit Agreement Litigation Schedule 4.1-1 Schedule 4.8 to Credit Agreement Taxes Schedule 4.1-1 Schedule 6.1 to Credit Agreement PERMITTED LIENS
CREDITOR COLLATERAL JURISDICTION FILING DATE FILING NO. -------- ---------- ------------ ----------- ---------- Norwest All Equipment, MN Secretary of March 27, 1927798 Business Inventory, State 1997 Credit, Inc. Accounts, General Intangibles, and foreign accounts (subject to an Intercreditor Agreement between Norwest Bank and the Lender).
Schedule 7.1-1 Schedule 6.2 to Credit Agreement PERMITTED INDEBTEDNESS AND GUARANTIES Indebtedness
Creditor Principal Maturity Date Monthly Collateral -------- --------- ------------- ------- ---------- Amount Payment ------ ------- Norwest $4,100,000 ________, 199 Revolving See Permitted Liens Business Line of Credit Schedule Credit, Inc.
GUARANTIES Primary Obligor Amount and Description of Beneficiary of Guaranty --------------- ------------------------- ----------------------- Obligation Guaranteed --------------------- None ---- EX-10.3 4 EXHIBIT 10.3 ______________________________________________ ______________________________________________ CREDIT AND SECURITY AGREEMENT BY AND BETWEEN MEDICAL GRAPHICS CORPORATION AND NORWEST BUSINESS CREDIT, INC. Dated as of: March 31, 1997 [LOGO] ______________________________________________ ______________________________________________ TABLE OF CONTENTS ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2 CROSS REFERENCES . . . . . . . . . . . . . . . . . . . . 9 ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY . . . . . . . . . . . 10 Section 2.1 REVOLVING ADVANCES. . . . . . . . . . . . . . . . . . . . 10 Section 2.2 INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST; ADDITIONAL INTEREST; PARTICIPATIONS; USURY . . . . . . . . . . . . . 11 Section 2.6 FEES . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.7 COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE AND PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.8 CAPITAL ADEQUACY . . . . . . . . . . . . . . . . . . . . 12 Section 2.9 VOLUNTARY PREPAYMENT; TERMINATION OF CREDIT FACILITY BY THE BORROWER; PERMANENT REDUCTION OF THE MAXIMUM LINE . . . . . . 13 Section 2.10 MANDATORY PREPAYMENT . . . . . . . . . . . . . . . . . . 14 Section 2.11 PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 2.12 PAYMENT ON NON-BANKING DAYS . . . . . . . . . . . . . . 14 Section 2.14 USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . 15 Section 2.15 LIABILITY RECORDS . . . . . . . . . . . . . . . . . . . 15 ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF . . . . . . . . . . . . 15 Section 3.1 GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . 15 Section 3.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS . . . 15 Section 3.3 ASSIGNMENT OF INSURANCE . . . . . . . . . . . . . . . . . 15 Section 3.4 OCCUPANCY . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.5 LICENSE . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.6 FINANCING STATEMENT . . . . . . . . . . . . . . . . . . . 16 Section 3.7 SETOFF . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE IV CONDITIONS OF LENDING . . . . . . . . . . . . . . . . . . . . 17 Section 4.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE . . 17 Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES . . . . . . . . . . 19 ARTICLE V REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 20 Section 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 5.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 5.3 LEGAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . 20 Section 5.4 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.5 FINANCIAL CONDITION; NO ADVERSE CHANGE . . . . . . . . . 21 Section 5.6 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.7 REGULATION U . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.8 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 5.9 TITLES AND LIENS . . . . . . . . . . . . . . . . . . . . 21 Section 5.10 PLANS . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 5.11 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 5.12 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . 22 Section 5.13 SUBMISSIONS TO LENDER . . . . . . . . . . . . . . . . . 23 Section 5.14 FINANCING STATEMENTS . . . . . . . . . . . . . . . . . . 23 Section 5.15 RIGHTS TO PAYMENT . . . . . . . . . . . . . . . . . . . 24 ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . 24 Section 6.1 REPORTING REQUIREMENTS . . . . . . . . . . . . . . . . . 24 Section 6.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION . . . . . . 27 Section 6.3 ACCOUNT VERIFICATION . . . . . . . . . . . . . . . . . . 27 Section 6.4 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . 27 Section 6.5 PAYMENT OF TAXES AND OTHER CLAIMS . . . . . . . . . . . . 28 Section 6.6 MAINTENANCE OF PROPERTIES . . . . . . . . . . . . . . . . 28 Section 6.7 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 6.8 PRESERVATION OF EXISTENCE . . . . . . . . . . . . . . . . 29 Section 6.9 DELIVERY OF INSTRUMENTS, ETC . . . . . . . . . . . . . . 29 Section 6.10 COLLATERAL ACCOUNT . . . . . . . . . . . . . . . . . . . 29 Section 6.11 PERFORMANCE BY THE LENDER . . . . . . . . . . . . . . . 29 Section 6.12 MINIMUM BOOK NET WORTH . . . . . . . . . . . . . . . . . 30 Section 6.13 MAXIMUM DEBT TO BOOK NET WORTH RATIO . . . . . . . . . . 31 Section 6.14 MINIMUM NET INCOME . . . . . . . . . . . . . . . . . . . 31 Section 6.15 MINIMUM DEBT SERVICE COVERAGE RATIO . . . . . . . . . . 31 Section 6.16 AMENDMENTS TO FINANCIAL COVENANTS BASED ON AUDIT . . . . 31 Section 6.17 NEW COVENANTS . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE VII NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 32 Section 7.1 LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 7.2 INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . 32 Section 7.3 GUARANTIES . . . . . . . . . . . . . . . . . . . . . . . 33 Section 7.4 INVESTMENTS AND SUBSIDIARIES . . . . . . . . . . . . . . 33 Section 7.5 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 7.7 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS . . . . . . 34 Section 7.8 SALE AND LEASEBACK . . . . . . . . . . . . . . . . . . . 34 -ii- Section 7.9 RESTRICTIONS ON NATURE OF BUSINESS . . . . . . . . . . . 34 Section 7.10 CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . 34 Section 7.11 ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . 35 Section 7.12 DISCOUNTS, ETC . . . . . . . . . . . . . . . . . . . . . 35 Section 7.13 DEFINED BENEFIT PENSION PLANS . . . . . . . . . . . . . 35 Section 7.14 OTHER DEFAULTS . . . . . . . . . . . . . . . . . . . . . 35 Section 7.15 PLACE OF BUSINESS; NAME . . . . . . . . . . . . . . . . 35 Section 7.16 ORGANIZATIONAL DOCUMENTS; S CORPORATION STATUS . . . . . 35 Section 7.17 SALARIES . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES . . . . . . . . . . . 36 Section 8.1 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . 36 Section 8.2 RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . 38 Section 8.3 CERTAIN NOTICES . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE IX MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 9.1 NO WAIVER; CUMULATIVE REMEDIES . . . . . . . . . . . . . 39 Section 9.2 AMENDMENTS, ETC . . . . . . . . . . . . . . . . . . . . . 39 Section 9.3 ADDRESSES FOR NOTICES, ETC . . . . . . . . . . . . . . . 39 Section 9.4 FURTHER DOCUMENTS . . . . . . . . . . . . . . . . . . . . 40 Section 9.5 COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.6 COSTS AND EXPENSES . . . . . . . . . . . . . . . . . . . 41 Section 9.7 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 9.8 PARTICIPANTS . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.9 EXECUTION IN COUNTERPARTS . . . . . . . . . . . . . . . . 42 Section 9.10 BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT; EXCHANGING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.11 SEVERABILITY OF PROVISIONS . . . . . . . . . . . . . . . 42 Section 9.12 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.13 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 -iii- CREDIT AND SECURITY AGREEMENT Dated as of March 31, 1997 MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the "Borrower"), and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. "Accounts" means all of the Borrower's accounts, as such term is defined in the UCC, including without limitation the aggregate unpaid obligations of customers and other account debtors to the Borrower arising out of the sale or lease of goods or rendition of services by the Borrower on an open account or deferred payment basis. "Advance" means a Revolving Advance. "Affiliate" or "Affiliates" means any Person controlled by, controlling or under common control with the Borrower, including (without limitation) any Subsidiary of the Borrower. For purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Credit and Security Agreement, as amended, supplemented or restated from time to time. "Availability" means the Borrowing Base less (i) the outstanding principal balance of the Revolving Note and (ii) the Reserve. "Banking Day" means a day other than a Saturday, Sunday or other day on which banks are generally not open for business in Minneapolis, Minnesota. "Base Rate" means the rate of interest publicly announced from time to time by Norwest Bank as its "base rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Book Net Worth" means the aggregate of the common and preferred stockholders' equity in the Borrower, determined in accordance with GAAP. "Borrowing Base" means, at any time, the lesser of: (a) the Maximum Line less the Norwest Bank Revolving Advances; or (b) subject to change from time to time in the Lender's sole discretion, the sum of: (i) 75% of Eligible Accounts; plus (ii) the lesser of (A) 40% of Eligible Inventory or (B) $1,500,000; plus (iii) to the extent necessary to retire the Borrower's indebtedness to Marquette Bank on the Funding Date, up to $250,000, until the earlier of (A) the Borrower receives not less than $750,000 of the Equity Infusion or (B) 90 days from the Funding Date. "Capital Expenditures" for a period means any expenditure of money for the purchase or construction of assets, or for improvements or additions thereto, which are capitalized on the Borrower's balance sheet. "Collateral" means all of the Borrower's Equipment, General Intangibles, Inventory, Receivables, all sums on deposit in any Collateral Account, and any items in any Lockbox; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) proceeds of any and all of the foregoing; (iii) in the case of all tangible goods, all accessions; (iv) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any tangible goods; and (v) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods. "Collateral Account" has the meaning given in the Collateral Account Agreement. -2- "Collateral Account Agreement" means the Collateral Account Agreement of even date herewith by and among the Borrower, Norwest Bank and the Lender. "Collateral Pledge Agreement" means the Collateral Pledge Agreement of even date herewith pursuant to which the Borrower pledges to the Lender and Norwest Bank all of its shares in Medical Graphics F.S.C. and ErgometRx, as the same may hereafter be amended, supplemented or restated from time to time. "Commitment" means the Lender's commitment to make Advances to or for the Borrower's account pursuant to Article II. "Credit Facility" means the credit facility being made available to the Borrower by the Lender pursuant to Article II. "Current Maturities of Long Term Debt" as of a given date means the amount of the Borrower's long-term debt and capitalized leases which will become due during the fiscal year beginning on the designated date. "Debt" of any Person means all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet of that Person as at the date as of which Debt is to be determined. For purposes of determining a Person's aggregate Debt at any time, "Debt" shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP. "Debt to Book Net Worth Ratio" as of a given date means the ratio of the Borrower's Debt to the Borrower's Book Net Worth. "Debt Service Coverage Ratio" means the ratio of (i) Funds from Operations MINUS Capital Expenditures to (ii) Current Maturities of Long Term Debt. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. "Default Period" means any period of time beginning on the first day of any month during which a Default or Event of Default has occurred and ending on the date the Lender notifies the Borrower in writing that such Default or Event of Default has been cured or waived. "Default Rate" means an annual rate equal to three percent (3%) over the Floating Rate, which rate shall change when and as the Floating Rate changes. -3- "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Eligible Accounts" means all unpaid Accounts, net of any credits, except the following shall not in any event be deemed Eligible Accounts: (i) That portion of Accounts over 120 days past invoice date or more than 60 days past the stated due date; (ii) That portion of Accounts that is disputed or subject to a claim of offset or a contra account; (iii) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer; (iv) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which the Borrower has provided evidence satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws); (v) Accounts owed by an account debtor located outside the United States; (vi) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business; (vii) Accounts owed by a shareholder, Subsidiary, Affiliate, officer or employee of the Borrower; (viii) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any lien, security interest or claim in favor of any Person other than the Lender and Norwest Bank including without limitation any payment or performance bond; (ix) That portion of Accounts that has been restructured, extended, amended or modified; (x) That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes; (xi) Accounts owed by an account debtor, regardless of whether otherwise eligible, if 10% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (ix) above; and -4- (xii) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its sole discretion, unless otherwise approved by the Lender on a case by case basis. "Eligible Inventory" means all Inventory of the Borrower constituting raw materials and finished goods, at the lower of cost or market value, exclusive of overhead, as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory: (i) Inventory that is: in-transit; located at any warehouse, job site or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non- negotiable warehouse receipt, bill of lading or other document of title; on consignment from or to any Person or subject to any bailment; (ii) Supplies, packaging, service parts, research, sample or demonstration Inventory; (iii) Work-in-process Inventory; (iv) Inventory that is damaged, obsolete, slow moving or not currently saleable in the normal course of the Borrower's operations; (v) Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; (vi) Inventory that is perishable or live; (vii) Inventory manufactured by the Borrower pursuant to a license unless the applicable licensor has agreed in writing to permit the Lender to exercise its rights and remedies against such Inventory; (viii) Inventory constituting Eligible Export Inventory, as defined in the Norwest Bank Credit Agreement; (ix) Inventory that is subject to a security interest in favor of any Person other than the Lender and Norwest Bank; and (x) Inventory otherwise deemed ineligible by the Lender in its sole discretion. "Environmental Laws" has the meaning specified in Section 5.12. "Equipment" means all of the Borrower's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all -5- present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by the Borrower. "Equity Infusion" has the meaning given in Section 2.13. "ErgometRx" means ErgometRx, Inc., a Minnesota corporation. "Event of Default" has the meaning specified in Section 8.1. "Facility Fees" has the meaning given in Section 2.6(d). "Floating Rate" means an annual rate equal to the sum of the Base Rate plus four percent (4.00%), which annual rate shall change when and as the Base Rate changes. "Funding Date" has the meaning given in Section 2.1. "Funds From Operations" for a given period means the sum of (i) Net Income, (ii) depreciation and amortization, (iii) deferred income taxes, and (iv) other non-cash items, each as determined for such period in accordance with GAAP. "GAAP" means generally accepted accounting principles, applied on a basis consistent with the accounting practices applied in the financial statements described in Section 5.5. "General Intangibles" means all of the Borrower's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including (without limitation) all present and future patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower's name, and the goodwill of the Borrower's business. "Hazardous Substance" has the meaning given in Section 5.12. "Inventory" means all of the Borrower's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Key Management" means Glenn D. Taylor and Dale H. Johnson. -6- "Loan Documents" means this Agreement, the Note and the Security Documents. "Lockbox" has the meaning given in the Lockbox Agreement. "Lockbox Agreement" means the Lockbox Agreement by and among the Borrower, Norwest Bank and, the Lender, of even date herewith. "Maturity Date" means April 1, 2000. "Maximum Line" means $4,100,000, unless said amount is reduced pursuant to Section 2.9, in which event it means the amount to which said amount is reduced. "Medical Graphics F.S.C." means Medical Graphics F.S.C., Inc., a US Virgin Island corporation. "Medical Graphics Germany" means Medical Graphics GmbH, a German corporation. "Minimum Interest Charge" has the meaning given in Section 2.2(b). "Net Income" means fiscal year-to-date after-tax net income, as determined in accordance with GAAP. "Norwest Bank" means Norwest Bank Minnesota, National Association, a national banking association. "Norwest Bank Credit Agreement" means that certain Credit Agreement by and between Norwest Bank and the Borrower of even date herewith. "Norwest Bank Revolving Advances" means the outstanding principal balance of the revolving advances as of a given date made by Norwest Bank to the Borrower pursuant to the Norwest Bank Credit Agreement. "Note" means the Revolving Note. "Obligations" means the Note and each and every other debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including -7- specifically, but not limited to, all indebtedness of the Borrower arising under this Agreement, the Note or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into. "Origination Fee" has the meaning given in Section 2.6(a). "Patent and Trademark Security Agreement" means the Patent and Trademark Security Agreement by the Borrower in favor of the Lender of even date herewith. "Permitted Lien" has the meaning given in Section 7.1. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained for the Borrower's employees and covered by Title IV of ERISA. "Premises" means all premises where the Borrower conducts its business and has any rights of possession, including (without limitation) the premises legally described in Exhibit C attached hereto. "Receivables" means each and every right of the Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by the Borrower or by some other person who subsequently transfers such person's interest to the Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which the Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. -8- "Reserve" means $0 from the Funding Date through the last day of the first full calendar month after the Funding Date and shall increase $25,000 on the first day of each calendar month thereafter, up to a maximum amount of $175,000. "Revolving Advance" has the meaning given in Section 2.1. "Revolving Note" means the Borrower's revolving promissory note, payable to the order of the Lender in substantially the form of Exhibit A hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. "Security Documents" means this Agreement, the Collateral Account Agreement, the Collateral Pledge Agreement, the Lockbox Agreement, the Patent and Trademark Security Agreement, and any other document delivered to the Lender from time to time to secure the Obligations, as the same may hereafter be amended, supplemented or restated from time to time. "Security Interest" has the meaning given in Section 3.1. "Subsidiary" means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. "Tax Expense" as of any date means state and federal income taxes recorded by the Borrower for the year-to-date period ending on such date. "Termination Date" means the earliest of (i) the Maturity Date, (ii) the date the Borrower terminates the Credit Facility, or (iii) the date the Lender demands payment of the Obligations after an Event of Default pursuant to Section 8.2. "UCC" means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.13 as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. "Warrant" means the Warrant to purchase not less than 62,500 shares of the Borrower's common stock, of even date herewith by the Borrower in favor of the Lender. -9- Section 1.2 CROSS REFERENCES. All references in this Agreement to Articles, Sections and subsections, shall be to Articles, Sections and subsections of this Agreement unless otherwise explicitly specified. ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY Section 2.1 REVOLVING ADVANCES. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances to the Borrower from time to time from the date all of the conditions set forth in Section 4.1 are satisfied (the "Funding Date") to the Termination Date, on the terms and subject to the conditions herein set forth (the "Revolving Advances"). The Lender shall have no obligation to make a Revolving Advance to the extent that the amount thereof would exceed Availability. The Borrower's obligation to pay the Revolving Advances shall be evidenced by the Revolving Note and shall be secured by the Collateral as provided in Article III. Within the limits set forth in this Section 2.1, the Borrower may borrow, prepay pursuant to Section 2.9 and reborrow. The Borrower agrees to comply with the following procedures in requesting Revolving Advances under this Section 2.1: (a) The Borrower shall make each request for a Revolving Advance to the Lender before 11:00 a.m. (Minneapolis time) of the day of the requested Revolving Advance. Requests may be made in writing or by telephone, specifying the date of the requested Revolving Advance and the amount thereof. Each request shall be by (i) any officer of the Borrower; or (ii) any person designated as the Borrower's agent by any officer of the Borrower in a writing delivered to the Lender; or (iii) any person whom the Lender reasonably believes to be an officer of the Borrower or such a designated agent. (b) Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall disburse the proceeds of the requested Revolving Advance by crediting the same to the Borrower's demand deposit account maintained with Norwest Bank unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Upon the Lender's request, the Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Lender. The Borrower shall repay all Advances even if the Lender does not receive such confirmation and even if the person requesting an Advance was not in fact authorized to do so. Any request for an Advance, whether written or telephonic, shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the time of the request. -10- Section 2.2 INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST; ADDITIONAL INTEREST; PARTICIPATIONS; USURY. Interest accruing on the Note shall be due and payable in arrears on the first day of each month. (a) REVOLVING NOTE. Except as set forth in Sections 2.2(c)and 2.2(d) the outstanding principal balance of the Revolving Note shall bear interest at the Floating Rate. (b) MINIMUM INTEREST CHARGE. Notwithstanding the interest payable pursuant to Section 2.2(a), the Borrower shall pay to the Lender interest of not less than $15,000 per calendar month (the "Minimum Interest Charge") during the term of this Agreement, and the Borrower shall pay any deficiency between the Minimum Interest Charge and the amount of interest otherwise calculated under Section 2.2(a) on the date and in the manner provided in Section 2.7. (c) DEFAULT INTEREST RATE. At any time during any Default Period, in the Lender's sole discretion and without waiving any of its other rights and remedies, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective for any periods designated by the Lender from time to time during that Default Period. (d) PARTICIPATIONS. If any Person shall acquire a participation in the Advances under this Agreement, the Borrower shall be obligated to the Lender to pay the full amount of all interest calculated under this Agreement, along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than the Floating Rate, or otherwise elects to accept less than its prorata share of such fees, charges and other amounts due under this Agreement. (e) USURY. In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. Section 2.6 FEES. (a) ORIGINATION FEE. The Borrower hereby agrees to pay the Lender a fully earned and non-refundable origination fee of $41,000 (the "Origination Fee"). The Origination Fee shall be due and payable in twelve (12) substantially equal monthly installments beginning on the first day of the first month after the Funding Date. The Lender acknowledges receipt of $45,000 toward payment of the Origination Fee and the fees, costs and expenses described in Sections 2.6(c) and 9.6. -11- (b) UNUSED LINE FEE. For the purposes of this Section 2.6(b), "Unused Amount" means the Maximum Line reduced by the Norwest Bank Revolving Advances and the outstanding principal balance of the Revolving Advances. The Borrower agrees to pay to the Lender an unused line fee at the rate of one-quarter of one percent (0.25%) per annum on the average daily Unused Amount from the date of this Agreement to and including the Termination Date, due and payable on the first day of each fiscal quarter of the Borrower in arrears and on the Termination Date. (c) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on demand, audit fees in connection with any audits or inspections conducted by the Lender of any Collateral or the Borrower's operations or business at the rates established from time to time by the Lender as its audit fees (which fees are currently $62.50 per hour per auditor), together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection. (d) FACILITY FEES. The Borrower shall pay the Lender an annual facility fee equal to one-quarter of one percent (0.25%) of the Maximum Line, due and payable on each anniversary of the Funding Date, provided that this fee when combined with any similar fee paid to Norwest Bank pursuant to the Norwest Bank Credit Agreement shall not exceed in total one-quarter of one percent (0.25%) of the Maximum Line. Section 2.7 COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE AND PAYABLE. Interest accruing on the outstanding principal balance of the Advances and fees hereunder outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of 360 days. Except as set forth in Section 2.2(d), interest shall be payable in arrears on the first day of each month and on the Termination Date. Section 2.8 CAPITAL ADEQUACY. If any Related Lender determines at any time that its Return has been reduced as a result of any Rule Change, such Related Lender may require the Borrower to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change. For purposes of this Section 2.8: (a) "Capital Adequacy Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (b) "Return", for any period, means the return as determined by such Related Lender on the Advances based upon its total capital requirements and a -12- reasonable attribution formula that takes account of the Capital Adequacy Rules then in effect. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement. (c) "Rule Change" means any change in any Capital Adequacy Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Funding Date are scheduled to take place under the existing Capital Adequacy Rules or any increases in the capital that any Related Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of the financial condition of such Related Lender. (d) "Related Lender" includes (but is not limited to) the Lender, any parent corporation of the Lender and any assignee of any interest of the Lender hereunder and any participant in the loans made hereunder. Certificates of any Related Lender sent to the Borrower from time to time claiming compensation under this Section 2.8, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Related Lender hereunder to restore its Return shall be conclusive absent manifest error. In determining such amounts, the Related Lender may use any reasonable averaging and attribution methods. Section 2.9 VOLUNTARY PREPAYMENT; TERMINATION OF CREDIT FACILITY BY THE BORROWER; PERMANENT REDUCTION OF THE MAXIMUM LINE. Except as otherwise provided herein, the Borrower may terminate the Credit Facility or prepay the Advances in whole at any time or from time to time in part, and, subject to payment and performance of all Obligations and termination of the Credit Facility, the Lender shall release or terminate the Security Interest and the Security Documents to which the Borrower is entitled by law. (a) TERMINATION BY BORROWER. The Borrower may terminate the Credit Facility at any time in accordance with subsection (b). (b) PERMANENT REDUCTION OF MAXIMUM LINE. The Borrower may at any time and from time to time, upon at least 30 days' prior written notice to the Lender, permanently reduce in part or completely the Maximum Line or terminate the Credit Facility in accordance with the following provisions: (i) The Borrower may not reduce the Maximum Line to an amount less than the then-aggregate outstanding balance of the Revolving Advances. (ii) If a reduction of the Maximum Line occurs at any time other than the Maturity Date, the Borrower shall pay to the Lender a premium in an amount equal to a percentage of the reduction as follows: -13- (A) Three percent (3%) if the reduction occurs on or before the first anniversary of the Funding Date; (B) Two percent (2%) if the reduction occurs after the first anniversary of the Funding Date but on or before the second anniversary of the Funding Date; and (C) One percent (1%) if the reduction occurs after the second anniversary of the Funding Date; PROVIDED, HOWEVER, that if the Borrower reduces the Maximum Line to zero, the Borrower shall pay to the Lender an amount equal to the greater of (1) the premium set forth in (A) through (C) above or (2) the product of $15,000 and the number of calendar months remaining after the such reduction occurs through the Maturity Date. (iii) Any reduction in the Maximum Line must be in an amount not less than $500,000 or an integral multiple thereof. (iv) If the Borrower reduces the Maximum Line to zero, all Obligations shall be immediately due and payable. Section 2.10 MANDATORY PREPAYMENT. Without notice or demand, if the outstanding principal balance of the Revolving Advances shall at any time exceed the Borrowing Base, the Borrower shall immediately prepay the Revolving Advances to the extent necessary to eliminate such excess. Any payment received by the Lender under this Section 2.10 or under Section 2.9 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine. Section 2.11 PAYMENT. All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations 1 Banking Day after receipt by the Lender. Notwithstanding anything in Section 2.1, the Borrower hereby authorizes the Lender, in its discretion at any time or from time to time without the Borrower's request and even if the conditions set forth in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable. Section 2.12 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be. -14- Section 2.13 EQUITY INFUSION. The Borrower intends to sell 444,444 shares of its class A convertible stock to Family Financial Strategies, Inc. in exchange for $1,500,000, of which $500,000 shall be due and payable on or before the Funding Date and $1,000,000 shall be due and payable on or before April 30, 1997 (the "Equity Infusion"). Section 2.14 USE OF PROCEEDS. The Borrower shall use the proceeds of Advances to retire its indebtedness to Marquette Capital Bank, N.A. and for ordinary working capital needs. Section 2.15 LIABILITY RECORDS. The Lender may maintain from time to time, at its discretion, liability records as to the Obligations. All entries made on any such record shall be presumed correct until the Borrower establishes the contrary. Upon the Lender's demand, the Borrower will admit and certify in writing the exact principal balance of the Obligations that the Borrower then asserts to be outstanding. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrower unless the Borrower gives the Lender specific written notice of exception within 30 days after receipt. ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF Section 3.1 GRANT OF SECURITY INTEREST. The Borrower hereby pledges, assigns and grants to the Lender a security interest (collectively referred to as the "Security Interest") in the Collateral, as security for the payment and performance of the Obligations. Section 3.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS. The Lender may at any time during a Default Period notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, in the Lender's name or in the Borrower's name, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact, notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and dispose of the Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. -15- Section 3.3 ASSIGNMENT OF INSURANCE. As additional security for the payment and performance of the Obligations, the Borrower hereby assigns to the Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrower hereby directs the issuer of any such policy to pay all such monies directly to the Lender. At any time, whether or not a Default Period then exists, the Lender may (but need not), in the Lender's name or in the Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Section 3.4 OCCUPANCY. (a) The Borrower hereby irrevocably grants to the Lender the right to take possession of the Premises at any time during a Default Period. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender may in good faith deem to be related or incidental purposes. (c) The Lender's right to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations and termination of the Commitment, and (ii) final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrower shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this Section 3.4. Section 3.5 LICENSE. Without limiting the generality of the Patent and Trademark Security Agreement, the Borrower hereby grants to the Lender a non- exclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, -16- trade names, copyrights and patents of the Borrower for the purpose of selling, leasing or otherwise disposing of any or all Collateral during any Default Period. Section 3.6 FINANCING STATEMENT. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by the Borrower is sufficient as a financing statement and may be filed as a financing statement in any state to perfect the security interests granted hereby. For this purpose, the following information is set forth: Name and address of Debtor: Medical Graphics Corporation 350 Oak Grove Parkway St. Paul, Minnesota 55127 Federal Tax Identification No. 41-1316712 Name and address of Secured Party: Norwest Business Credit, Inc. Norwest Center Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479-0152 Federal Tax Identification No. 41-1237652 Section 3.7 SETOFF. The Borrower agrees that the Lender may at any time or from time to time, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to the Borrower by the Lender, whether or not due, against any Obligation, whether or not due. In addition, each other Person holding a participating interest in any Obligations shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to the Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrower the amount of such participating interest. ARTICLE IV CONDITIONS OF LENDING Section 4.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE. The Lender's obligation to make the initial Revolving Advance hereunder shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed by the Borrower. -17- (b) The Note, properly executed by the Borrower. (c) The Warrant, properly executed by the Borrower. (d) Evidence that after giving effect to the initial Advance, and after accounting for the projected cashflow shortfall through December 31, 1997, satisfying all of the Borrower's obligations to Marquette Capital Bank, N.A., book overdrafts and closing costs at the time of closing, Availability shall be not less than $300,000. (e) A true and correct copy of any and all leases pursuant to which the Borrower is leasing the Premises, together with a landlord's disclaimer and consent with respect to each such lease. (f) The Collateral Pledge Agreement, properly executed by the Borrower together with certificates representing all of the Borrower's shares in Medical Graphics F.S.C. and ErgometRx and stock powers with respect to such certificates. (g) The Collateral Account Agreement, properly executed by the Borrower and Norwest Bank. (h) The Lockbox Agreement, properly executed by the Borrower and Norwest Bank. (i) The Patent and Trademark Security Agreement, properly executed by the Borrower. (j) Evidence that the Borrower shall receive not later than simultaneously with the making of the initial Advance, not less than $500,000 of the Equity Infusion. (k) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against the Borrower, (ii) no financing statements or assignments of patents, trademarks or copyrights have been filed and remain in effect against the Borrower except those financing statements and assignments of patents, trademarks or copyrights relating to Permitted Liens or to liens held by Persons who have agreed in writing that upon receipt of proceeds of the Advances, they will deliver UCC releases and/or terminations and releases of such assignments of patents, trademarks or copyrights satisfactory to the Lender, and (iii) the Lender has duly filed all financing statements necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing. (l) A certificate of the Borrower's Secretary or Assistant Secretary certifying as to (i) the resolutions of the Borrower's directors and, if required, -18- shareholders, authorizing the execution, delivery and performance of the Loan Documents, (ii) the Borrower's articles of incorporation and bylaws, and (iii) the signatures of the Borrower's officers or agents authorized to execute and deliver the Loan Documents and other instruments, agreements and certificates, including Advance requests, on the Borrower's behalf. (m) A current certificate issued by the Secretary of State of Minnesota, certifying that the Borrower is in compliance with all applicable organizational requirements of the State of Minnesota. (n) Evidence that the Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. (o) A certificate of an officer of the Borrower confirming, in his personal capacity, the representations and warranties set forth in Article V. (p) Support agreements in favor of the Lender, properly executed by the Key Management, each in their personal capacity. (q) An opinion of counsel to the Borrower, addressed to the Lender. (r) Certificates of the insurance required hereunder, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as an additional insured. (s) Payment of the fees and commissions due through the date of the initial Advance under Section 2.6 and expenses incurred by the Lender through such date and required to be paid by the Borrower under Section 9.6, including all legal expenses incurred through the date of this Agreement. (t) A copy of the Norwest Bank Credit Agreement and all other documents required therein, properly executed by Norwest Bank and the Borrower, together with evidence that all conditions precedent to making the initial Norwest Bank Revolving Advance shall be satisfied not later than simultaneously with the initial Advance. (u) Such other documents as the Lender in its sole discretion may require. Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The Lender's obligation to make each Advance shall be subject to the further conditions precedent that on such date: -19- (a) the representations and warranties contained in Article V are correct on and as of the date of such Advance as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance which constitutes a Default or an Event of Default. ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender as follows: Section 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER. The Borrower is a corporation, duly organized, validly existing and in good standing under the laws of the State of Minnesota and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. The Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. During its existence, the Borrower has done business solely under the names set forth in Schedule 5.1 hereto. The Borrower's chief executive office and principal place of business is located at the address set forth in Schedule 5.1 hereto, and all of the Borrower's records relating to its business or the Collateral are kept at that location. All Inventory and Equipment is located at that location or at one of the other locations set forth in Schedule 5.1 hereto. The Borrower's tax identification number is correctly set forth in Section 3.6 hereto. Section 5.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the Borrower's stockholders; (ii) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof; (iii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Borrower's articles of incorporation or bylaws; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to -20- which the Borrower is a party or by which it or its properties may be bound or affected; or (v) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interest) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. Section 5.3 LEGAL AGREEMENTS. This Agreement constitutes and, upon due execution by the Borrower, the other Loan Documents will constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. Section 5.4 SUBSIDIARIES. The Borrower has no Subsidiaries other than Medical Graphics Germany which the Borrower is in the process of winding up and Medical Graphics F.S.C. Section 5.5 FINANCIAL CONDITION; NO ADVERSE CHANGE. The Borrower has heretofore furnished to the Lender its audited financial statements for its fiscal year ended December 31, 1995 and its unaudited financial statements for the fiscal year-to-date period ended December 31, 1996 and those statements fairly present the Borrower's financial condition on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the Borrower's business, properties or condition (financial or otherwise). Section 5.6 LITIGATION. Except as set forth on Schedule 5.6, there are no actions, suits or proceedings pending or, to the Borrower's knowledge, threatened against or affecting the Borrower or any of its Affiliates or the properties of the Borrower or any of its Affiliates before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Affiliates, would have a material adverse effect on the financial condition, properties or operations of the Borrower or any of its Affiliates. Section 5.7 REGULATION U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 5.8 TAXES. Except as set forth on Schedule 5.8 and described in the letter from the Borrower's accountants attached thereto, the Borrower and its Affiliates (a) have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them; (b) have filed all federal, state and local -21- tax returns which to the knowledge of the officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and (c) have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due. Section 5.9 TITLES AND LIENS. The Borrower has good and absolute title to all Collateral described in the collateral reports provided to the Lender and all other Collateral, properties and assets reflected in the latest financial statements referred to in Section 5.5 and all proceeds thereof, free and clear of all mortgages, security interests, liens and encumbrances, except for Permitted Liens. No financing statement naming the Borrower as debtor is on file in any office except to perfect only Permitted Liens. Section 5.10 PLANS. Except as disclosed to the Lender in writing prior to the date hereof, neither the Borrower nor any of its Affiliates maintains or has maintained any Plan. Neither the Borrower nor any Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA. No Reportable Event or other fact or circumstance which may have an adverse effect on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrower nor any of its Affiliates has: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or knows of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which or which may become payable to participants or beneficiaries of any such Plan). Section 5.11 DEFAULT. The Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a material adverse effect on the Borrower's financial condition, properties or operations. Section 5.12 ENVIRONMENTAL MATTERS. (a) DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (i) "Environmental Law" means any federal, state, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment. -22- (ii) "Hazardous Substances" means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law. (b) To the Borrower's best knowledge, there are not present in, on or under the Premises any Hazardous Substances in such form or quantity as to create any liability or obligation for either the Borrower or the Lender under common law of any jurisdiction or under any Environmental Law except for small quantities in the ordinary course of its business and in strict compliance with all Environmental Laws, and no Hazardous Substances have ever been stored, buried, spilled, leaked, discharged, emitted or released in, on or under the Premises in such a way as to create any such liability. (c) To the Borrower's best knowledge, the Borrower has not disposed of Hazardous Substances in such a manner as to create any liability under any Environmental Law. (d) There are not and there never have been any requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation, relating in any way to the Premises or the Borrower, alleging liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant thereto. To the Borrower's best knowledge, no such matter is threatened or impending. (e) To the Borrower's best knowledge, the Borrower's businesses are and have in the past always been conducted in substantial compliance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in the Borrower's possession and are in full force and effect. No permit required under any Environmental Law is scheduled to expire within 12 months and there is no threat that any such permit will be withdrawn, terminated, limited or materially changed. (f) To the Borrower's best knowledge, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database. (g) The Borrower has delivered to Lender all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to the Premises or Borrower's businesses. -23- Section 5.13 SUBMISSIONS TO LENDER. All financial and other information provided to the Lender by or on behalf of the Borrower in connection with the Borrower's request for the credit facilities contemplated hereby is true and correct in all material respects and, as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results. Section 5.14 FINANCING STATEMENTS. The Borrower has provided to the Lender signed financing statements sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral and all other collateral described in the Security Documents which is capable of being perfected by filing financing statements. None of the Collateral or other collateral covered by the Security Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. Section 5.15 RIGHTS TO PAYMENT. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Security Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation. ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: Section 6.1 REPORTING REQUIREMENTS. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender: (a) as soon as available, and in any event within 90 days after the end of each fiscal year of the Borrower, the Borrower's audited financial statements with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Lender, which annual financial statements shall include the Borrower's balance sheet as at the end of such fiscal year and the related statements of the Borrower's income, retained earnings and cash flows for the fiscal year then ended, prepared, if the Lender so requests, on a consolidating and -24- consolidated basis to include any Affiliates, all in reasonable detail and prepared in accordance with GAAP, together with (i) copies of all management letters prepared by such accountants; (ii) a report signed by such accountants stating that in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Default or Event of Default hereunder and all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 6.12, 6.13, 6.14, 6.15 and 7.10; and (iii) a certificate of the Borrower's chief financial officer stating that such financial statements have been prepared in accordance with GAAP and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within 20 days after the end of each month, an unaudited/internal balance sheet and statements of income and retained earnings of the Borrower as at the end of and for such month and for the year to date period then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end audit adjustments; and accompanied by a certificate of the Borrower's chief financial officer, substantially in the form of Exhibit B hereto stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 6.12, 6.13, 6.14, 6.15 and 7.10; (c) within 15 days after the end of each month or more frequently if the Lender so requires, agings of the Borrower's accounts receivable and its accounts payable, an inventory certification report, an accounts receivable certification and a calculation of the Borrower's Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end of such month or shorter time period; (d) on the first Banking Day of each week as of the last Banking Day of the prior week, an inventory certification, signed by the Borrower's chief financial officer; (e) at least 30 days before the beginning of each fiscal year of the Borrower, the projected balance sheets and income statements for each month of such -25- year, each in reasonable detail, representing the Borrower's good faith projections and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrower for internal planning purposes, together with such supporting schedules and information as the Lender may in its discretion require; (f) as soon as possible and in any event within 15 days after the end of each month, a copy of the Borrower's checking account statement as of the last day of such month from each bank with which the Borrower maintains a checking account; (g) as soon as available and in any event within ten days after they are due, copies of tax payments and written notice of any and all taxes due but not paid; (h) immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower of the type described in Section 5.12 or which seek a monetary recovery against the Borrower in excess of $25,000 individually or $100,000 in the aggregate during any fiscal year; (i) as promptly as practicable (but in any event not later than five business days) after an officer of the Borrower obtains knowledge of the occurrence of any breach, default or event of default under any Security Document or any event which constitutes a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such breach, default or event; (j) as soon as possible and in any event within 30 days after the Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred, the statement of the Borrower's chief financial officer setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; (k) as soon as possible, and in any event within 10 days after the Borrower fails to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, the statement of the Borrower's chief financial officer setting forth details as to such failure and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; -26- (l) promptly upon knowledge thereof, notice of (i) any disputes or claims by the Borrower's customers exceeding $25,000 individually or $100,000 in the aggregate during any fiscal year; (ii) credit memos; (iii) any goods returned to or recovered by the Borrower; and (iv) any change in the persons constituting the Borrower's officers and directors; (m) promptly upon knowledge thereof, notice of any loss of or material damage to any Collateral or other collateral covered by the Security Documents or of any substantial adverse change in any Collateral or such other collateral or the prospect of payment thereof; (n) promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrower shall have sent to its stockholders; (o) promptly after the sending or filing thereof, copies of all regular and periodic reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange; (p) promptly upon knowledge thereof, notice of the Borrower's violation of any law, rule or regulation, the non-compliance with which could materially and adversely affect the Borrower's business or its financial condition; and (q) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request. The Borrower shall also deliver copies of the items required by subsections (a), (b) and (e) to each participant in the Credit Facility at the same time as they are delivered to the Lender. Section 6.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. The Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the Borrower's business and financial condition and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records of the Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to the Borrower, and to discuss the Borrower's affairs with any of its directors, officers, employees or agents. The Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other -27- collateral covered by the Security Documents or any other property of the Borrower at any time during ordinary business hours. Section 6.3 ACCOUNT VERIFICATION. The Lender may at any time and from time to time send or require the Borrower to send requests for verification of accounts or notices of assignment to account debtors and other obligors. The Lender may also at any time and from time to time telephone account debtors and other obligors to verify accounts. Section 6.4 COMPLIANCE WITH LAWS. (a) The Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. (b) Without limiting the foregoing undertakings, the Borrower specifically agrees that it will comply with all applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by any Environmental Laws, and will not generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any liability or obligation under the common law of any jurisdiction or any Environmental Law. Section 6.5 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of the Borrower; provided, that the Borrower shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made. Section 6.6 MAINTENANCE OF PROPERTIES. (a) The Borrower will keep and maintain the Collateral, the other collateral covered by the Security Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 6.6 shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such -28- discontinuance is, in the Lender's judgment, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. (b) The Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) The Borrower will keep all Collateral and other collateral covered by the Security Documents free and clear of all security interests, liens and encumbrances except Permitted Liens. Section 6.7 INSURANCE. The Borrower will obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable endorsement for the Lender's benefit acceptable to the Lender. All policies of liability insurance required hereunder shall name the Lender as an additional insured. Section 6.8 PRESERVATION OF EXISTENCE. The Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 6.9 DELIVERY OF INSTRUMENTS, ETC. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by the Borrower. Section 6.10 COLLATERAL ACCOUNT. (a) If, notwithstanding the instructions to debtors to make payments to the Lockbox, the Borrower receives any payments on Receivables, the Borrower shall deposit such payments into the Collateral Account. Until so deposited, the Borrower shall hold all such payments in trust for and as the property of the Lender and shall not commingle such payments with any of its other funds or property. -29- (b) Amounts deposited in the Collateral Account shall not bear interest and shall not be subject to withdrawal by the Borrower, except after full payment and discharge of all Obligations. (c) All items deposited in the Collateral Account shall be subject to final payment. If any such item is returned uncollected, the Borrower will immediately pay the Lender, or, for items deposited in the Collateral Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to the Borrower's commercial account or other account. The Borrower shall be liable as an endorser on all items deposited in the Collateral Account, whether or not in fact endorsed by the Borrower. Section 6.11 PERFORMANCE BY THE LENDER. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article VI or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives the Borrower written notice thereof (or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the Floating Rate. To facilitate the Lender's performance or observance of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this Section 6.11. -30- Section 6.12 MINIMUM BOOK NET WORTH. The Borrower will maintain its Book Net Worth, determined as at the end of each month listed below, at an amount not less than the amount set forth opposite such period: MONTH MINIMUM BOOK NET WORTH ----------------- ---------------------- March 31, 1997 $1,355,000 April 30, 1997 $2,200,000 May 31, 1997 $2,120,000 June 30, 1997 $2,565,000 July 31, 1997 $2,565,000 August 31, 1997 $2,660,000 September 30, 1997 $3,400,000 October 31, 1997 $3,520,000 November 30, 1997 $3,765,000 December 31, 1997 $4,570,000 -31- Section 6.13 MAXIMUM DEBT TO BOOK NET WORTH RATIO. The Borrower will maintain, during each period or as of each date described below, its Debt to its Book Net Worth Ratio, determined as at the end of each month, at not more than the ratio set forth opposite such period: PERIOD/DATE MAXIMUM DEBT TO BOOK NET WORTH RATIO March 30, 1997 7.50 to 1.00 April 30, 1997 5.25 to 1.00 May 31, 1997 5.25 to 1.00 June 30, 1997 through 5.00 to 1.00 August 31, 1997 September 30, 1997 through 4.50 to 1.00 November 30, 1997 December 31, 1997 4.00 to 1.00 Section 6.14 MINIMUM NET INCOME. The Borrower will achieve as of each date listed below, Net Income, of not less than the amount set forth opposite such date: DATE MINIMUM NET INCOME March 31, 1997 ($2,385,000) April 30, 1997 ($2,540,000) May 31, 1997 ($2,195,000) June 30, 1997 ($2,175,000) July 31, 1997 ($2,175,000) August 31, 1997 ($2,080,000) September 30, 1997 ($1,340,000) October 31, 1997 ($1,220,000) November 30, 1997 ($975,000) December 31, 1997 ($170,000) Section 6.15 MINIMUM DEBT SERVICE COVERAGE RATIO. The Borrower will achieve a Debt Service Coverage Ratio of 0.80 to 1.00 as of December 31, 1997, and 1.00 to 1.00 as of each fiscal year end thereafter. Section 6.16 AMENDMENTS TO FINANCIAL COVENANTS BASED ON AUDIT. If the Borrower's Net Income or Book Net Worth as shown on its certified financial statements for its fiscal year ended December 31, 1996 vary by more than $25,000 from those amounts provided by the Borrower to the Lender in establishing the financial covenants set forth in -32- Sections 6.12 through 6.15, the Lender may amend such financial covenants to account for such variance. Section 6.17 NEW COVENANTS. On or before January 31, 1998, The Borrower and the Lender shall agree on new covenant levels for Sections 6.12, 6.13, 6.14, 6.15 and 7.10 for periods after such date. The new covenant levels will be based on the Borrower's projections for such periods and shall be no less stringent than the present levels. ARTICLE VII NEGATIVE COVENANTS So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower agrees that, without the Lender's prior written consent: Section 7.1 LIENS. The Borrower will not create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness; EXCLUDING, HOWEVER, from the operation of the foregoing, the following (collectively, "Permitted Liens"): (a) in the case of any of the Borrower's property which is not Collateral or other collateral described in the Security Documents, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the Borrower's business or operations as presently conducted; (b) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in Schedule 7.1 hereto, securing indebtedness for borrowed money permitted under Section 7.2; (c) the Security Interest and liens and security interests created by the Security Documents; and (d) purchase money security interests relating to the acquisition of machinery and equipment of the Borrower, not exceeding $50,000 for any one purchase or $150,000 in the aggregate during any fiscal year and so long as no Default Period is then in existence and none would exist immediately after such acquisition. Section 7.2 INDEBTEDNESS. The Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money or letters of credit issued on the Borrower's behalf, or any -33- other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness arising hereunder; (b) indebtedness of the Borrower in existence on the date hereof and listed in Schedule 7.2 hereto; and (c) indebtedness relating to liens permitted in accordance with Section 7.1. Section 7.3 GUARANTIES. The Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower for deposit or collection or similar transactions in the ordinary course of business; and (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons, in existence on the date hereof and listed in Schedule 7.2 hereto. Section 7.4 INVESTMENTS AND SUBSIDIARIES. (a) The Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except: (i) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (ii) the Borrower's investment, but only to the extent as of the date hereof, in Medical Graphics Germany Medical Graphics F.S.C. and ErgometRx; -34- (iii) travel advances or loans to the Borrower's officers and employees not exceeding at any one time an aggregate of $30,000; and (iv) advances in the form of progress payments, prepaid rent not exceeding one month or security deposits. (b) The Borrower will not create or permit to exist any Subsidiaries other than Medical Graphics Germany and Medical Graphics F.S.C. Section 7.5 DIVIDENDS. The Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly. Section 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than the sale of Inventory in the ordinary course of business and will not liquidate, dissolve or suspend business operations. The restrictions of the preceding sentence shall not apply to , sales or leases of the Borrower's surplus, obsolete or worn-out property, sales to insurers in settlement of insurable losses and sales of property where such property is being replaced and the replacement property is subject to the Security Interest. The Borrower will not in any manner transfer any property without prior or present receipt of full and adequate consideration. Section 7.7 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. The Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person. Section 7.8 SALE AND LEASEBACK. The Borrower will not enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 7.9 RESTRICTIONS ON NATURE OF BUSINESS. The Borrower will not engage in any line of business materially different from that presently engaged in by the Borrower and will not purchase, lease or otherwise acquire assets not related to its business. -35- Section 7.10 CAPITAL EXPENDITURES. The Borrower will not incur or contract to incur Capital Expenditures of more than $150,000 in the aggregate during any fiscal year, or more than $50,000 in any one transaction. Section 7.11 ACCOUNTING. The Borrower will not adopt any material change in accounting principles other than as required by GAAP. The Borrower will not adopt, permit or consent to any change in its fiscal year. Section 7.12 DISCOUNTS, ETC. The Borrower will not, after notice from the Lender, grant any discount, credit or allowance to any customer of the Borrower or accept any return of goods sold, or at any time (whether before or after notice from the Lender) modify, amend, subordinate, cancel or terminate the obligation of any account debtor or other obligor of the Borrower. Section 7.13 DEFINED BENEFIT PENSION PLANS. The Borrower will not adopt, create, assume or become a party to any defined benefit pension plan, unless disclosed to the Lender pursuant to Section 5.10. Section 7.14 OTHER DEFAULTS. The Borrower will not permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon the Borrower. Section 7.15 PLACE OF BUSINESS; NAME. The Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Borrower will not change its name. Section 7.16 ORGANIZATIONAL DOCUMENTS; S CORPORATION STATUS. The Borrower will not amend its certificate of incorporation or articles of incorporation. After prior notice to the Lender, the Borrower may amend its bylaws provided that such amendments do not adversely affect the Lender. The Borrower will not become an S Corporation within the meaning of the Internal Revenue Code of 1986, as amended. Section 7.17 SALARIES. The Borrower will not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation; or increase the salary, bonus, commissions, consultant fees or other compensation of any director, officer or consultant, or any member of their families, by more than 10% in any one year, either individually or for all such persons in the aggregate, or pay any such increase from any source other than profits earned in the year of payment. The restrictions of this Section shall -36- not apply to compensation in the form of options or warrants to acquire stock of the Borrower in favor of such Persons. ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES Section 8.1 EVENTS OF DEFAULT. "Event of Default", wherever used herein, means any one of the following events: (a) Default in the payment of the Obligations when they become due and payable; (b) Default in the payment of any fees, commissions, costs or expenses required to be paid by the Borrower under this Agreement for more than three days after notice from the Lender; (c) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement; (d) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in the Norwest Bank Credit Agreement; (e) The Borrower shall be or become insolvent, or admit in writing its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or the Borrower shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower; or the Borrower shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower; (f) An order for relief naming the Borrower as debtor shall be entered under the United States Bankruptcy Code; (g) Any representation or warranty made by the Borrower in this Agreement or by the Borrower (or by any of its officers) in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or -37- delivered pursuant to or in connection with this Agreement shall prove to have been incorrect in any material respect when deemed to be effective; (h) Except for judgments against the Borrower in connection with the litigation described on Schedule 5.6 to the extent of $325,000, the rendering against the Borrower of a final judgment, decree or order for the payment of money in excess of $25,000 individually or $100,000 in the aggregate and the continuance of such judgments, decrees or orders unsatisfied and in effect for any period of 30 consecutive days without a stay of execution; (i) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower owed to any Person other than the Lender, or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease; (j) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or the Borrower shall have filed for a distress termination of any Plan under Title IV of ERISA; or the Borrower shall have failed to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a lien on the Borrower's assets in favor of the Plan; (k) An event of default shall occur under any Security Document or under any other security agreement, mortgage, deed of trust, assignment or other instrument or agreement securing any obligations of the Borrower hereunder or under any note; (l) The Borrower shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell all or substantially all of its assets, without the Lender's prior written consent; (m) The Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due (other than any tax deficiency which is being -38- contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor) or notice of any state or federal tax liens shall be filed or issued; (n) Default in the payment of any amount owed by the Borrower to the Lender other than any indebtedness arising hereunder; (o) Any event or circumstance with respect to the Borrower shall occur such that the Lender shall believe in good faith that the prospect of payment of all or any part of the Obligations or the performance by the Borrower under the Loan Documents is impaired or any material adverse change in the business or financial condition of the Borrower shall occur; (p) Mark W. Sheffert or John Penn shall cease to be a director on the Borrower's board of the directors; (q) Glenn D. Taylor shall cease to actively fulfill the duties of the Borrower's chief executive officer; or (r) Any breach, default or event of default by or attributable to any Affiliate under any agreement between such Affiliate and the Lender. Section 8.2 RIGHTS AND REMEDIES. During any Default Period, the Lender may exercise any or all of the following rights and remedies: (a) the Lender may, by notice to the Borrower, declare the Commitment to be terminated, whereupon the same shall forthwith terminate; (b) the Lender may, by notice to the Borrower, declare the Obligations to be forthwith due and payable, whereupon all Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which the Borrower hereby expressly waives; (c) the Lender may, without notice to the Borrower and without further action, apply any and all money owing by the Lender to the Borrower to the payment of the Obligations; (d) the Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, -39- the Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (e) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and (f) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in subsections (e) or (f) of Section 8.1, the Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. Section 8.3 CERTAIN NOTICES. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 9.3) at least ten calendar days before the date of intended disposition or other action. ARTICLE IX MISCELLANEOUS Section 9.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay by the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 9.2 AMENDMENTS, ETC. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 9.3 ADDRESSES FOR NOTICES, ETC. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first -40- class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopier number as set forth below: If to the Borrower: Medical Graphics Corporation 350 Oak Grove Parkway St. Paul, Minnesota 55127 Telecopier: 612/484-4874 Attention: Dale H. Johnson If to the Lender: Norwest Business Credit, Inc. Norwest Center Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479-0152 Telecopier: 612/341-2472 Attention: Warren G. Lindman or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article II shall not be effective until received by the Lender. Section 9.4 FURTHER DOCUMENTS. The Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interest or the Lender's rights under the Loan Documents (but any failure to request or assure that the Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of the Loan Documents and the Security Interest, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). Section 9.5 COLLATERAL. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Borrower is entitled to -41- any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights the Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. Section 9.6 COSTS AND EXPENSES. The Borrower agrees to pay on demand all costs and expenses, including (without limitation) reasonable attorneys' fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including without limitation all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest. Section 9.7 INDEMNITY. In addition to the payment of expenses pursuant to Section 9.6, the Borrower agrees to indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the "Indemnitees") from and against any of the following (collectively, "Indemnified Liabilities"): (a) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Loan Documents or the making of the Advances; (b) any claims, loss or damage to which any Indemnitee may be subjected if any representation or warranty contained in Section 5.12 proves to be incorrect in any respect or as a result of any violation of the covenant contained in Section 6.4(b); and (c) any and all other liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with the foregoing and any other investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or -42- arising out of or in connection with the making of the Advances and the Loan Documents or the use or intended use of the proceeds of the Advances. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon such Indemnitee's request, the Borrower, or counsel designated by the Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at the Borrower's sole costs and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrower's obligation under this Section 9.7 shall survive the termination of this Agreement and the discharge of the Borrower's other obligations hereunder. Section 9.8 PARTICIPANTS. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the Lender's participants, successors or assigns. Section 9.9 EXECUTION IN COUNTERPARTS. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Section 9.10 BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT; EXCHANGING INFORMATION. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the Lender's prior written consent. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Without limiting the Lender's right to share information regarding the Borrower and its Affiliates with the Lender's participants, accountants, lawyers and other advisors, the Lender, Norwest Corporation, and all direct and indirect subsidiaries of Norwest Corporation, may exchange any and all information they may have in their possession regarding the Borrower and its Affiliates, and the Borrower waives any right of confidentiality it may have with respect to such exchange of such information. -43- Section 9.11 SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 9.12 HEADINGS. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 9.13 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. This Agreement shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. The parties hereto hereby (i) consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Agreement; (ii) waives any argument that venue in any such forum is not convenient, (iii) agrees that any litigation initiated by the Lender or the Borrower in connection with this Agreement or the other Loan Documents shall be venued in either the District Court of Hennepin County, Minnesota, or the United States District Court, District of Minnesota, Fourth Division; and (iv) agrees that a final judgment in any such suit, action or proceeding [Signature Page Follows] -44- shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. NORWEST BUSINESS CREDIT, INC. MEDICAL GRAPHICS CORPORATION By _________________________________ By _________________________________ Warren G. Lindman Glenn D. Taylor Its Assistant Vice President Its Chief Executive Officer -45- Table of Exhibits and Schedules Exhibit A Form of Revolving Note Exhibit B Form of Compliance Certificate Exhibit C Premises ___________________ Schedule 2.14 Sources and Uses of Funds Schedule 5.1 Trade Names, Chief Executive Office, Principal Place of Business, and Locations of Collateral Schedule 5.6 Litigation Schedule 5.8 Taxes Schedule 7.1 Permitted Liens Schedule 7.2 Permitted Indebtedness and Guaranties Exhibit A to Credit and Security Agreement REVOLVING NOTE $4,100,000 Minneapolis, Minnesota March 31, 1997 For value received, the undersigned, MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the "Borrower"), hereby promises to pay on the Termination Date under the Credit Agreement (defined below), to the order of NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Four Million One Hundred Thousand Dollars ($4,100,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. MEDICAL GRAPHICS CORPORATION By _________________________________ Glenn D. Taylor Its Chief Executive Officer A-2 Exhibit B to Credit and Security Agreement COMPLIANCE CERTIFICATE To: Warren G. Lindman Norwest Business Credit, Inc. Date: _____________________, 199___ Subject: Medical Graphics Corporation Financial Statements In accordance with our Credit and Security Agreement dated as of March 31, 1997 (the "Credit Agreement"), attached are the financial statements of Medical Graphics Corporation (the "Borrower") as of and for ________________, _____ (the "Reporting Date") and the year-to-date period then ended (the "Current Financials"). All terms used in this certificate have the meanings given in the Credit Agreement. I certify that the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrower's financial condition and the results of its operations as of the date thereof. EVENTS OF DEFAULT. (Check one): / / The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement. / / The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a statement of the facts with respect to thereto. FINANCIAL COVENANTS. I further hereby certify as follows: 1. MINIMUM BOOK NET WORTH. Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, the Borrower's Book Net Worth was $____________ which / / satisfies / / does not satisfy the requirement that such amount be not less than $_____________ on the Reporting Date[ as set forth in table below: MONTH MINIMUM BOOK NET WORTH March 31, 1997 $1,355,000 April 30, 1997 $2,200,000 May 31, 1997 $2,120,000 June 30, 1997 $2,565,000 July 31, 1997 $2,565,000 August 31, 1997 $2,660,000 September 30, 1997 $3,400,000 October 31, 1997 $3,520,000 November 30, 1997 $3,765,000 December 31, 1997 $4,570,000 2. MAXIMUM DEBT TO BOOK NET WORTH RATIO. Pursuant to Section 6.13 of the Credit Agreement, as of the Reporting Date, the Borrower's Debt to its Book Net Worth Ratio was _____ to 1.00 which / / satisfies / / does not satisfy the requirement that such ratio be no more than ______ to 1.00 on the Reporting Date as set forth in table below: PERIOD/DATE MAXIMUM DEBT TO BOOK NET WORTH RATIO March 30, 1997 7.50 to 1.00 April 30, 1997 5.25 to 1.00 May 31, 1997 5.25 to 1.00 June 30, 1997 through 5.00 to 1.00 August 31, 1997 September 30, 1997 through 4.50 to 1.00 November 30, 1997 December 31, 1997 4.00 to 1.00 3. MINIMUM NET INCOME. Pursuant to Section 6.14 of the Credit Agreement, the Borrower's Net Income for the ________ period ending on the Reporting Date, was $____________, which / / satisfies / / does not satisfy the requirement that such amount be not less than $_____________ during such period as set forth in table below: B-2 DATE MINIMUM NET INCOME March 31, 1997 ($2,385,000) April 30, 1997 ($2,540,000) May 31, 1997 ($2,195,000) June 30, 1997 ($2,175,000) July 31, 1997 ($2,175,000) August 31, 1997 ($2,080,000) September 30, 1997 ($1,340,000) October 31, 1997 ($1,220,000) November 30, 1997 ($975,000) December 31, 1997 ($170,000) 4. MINIMUM DEBT SERVICE COVERAGE RATIO. Pursuant to Section 6.15 of the Credit Agreement, the Depositing Date marks the Borrower's fiscal year end and the Borrower's Debt Service Coverage Ratio on the Reporting Date was ____ to 1.00 which / / satisfies / / does not satisfy the requirement that such amount be not less than 0.80 to 1.00 on December 31, 1997 or 1.00 to 1.00 on December 31 of each year thereafter. 5. CAPITAL EXPENDITURES. Pursuant to Section 7.10 of the Credit Agreement, for the year-to-date period ending on the Reporting Date, the Borrower has expended or contracted to expend during the fiscal year ended ______________, ___, for Capital Expenditures, $__________________ in the aggregate and at most $______________ in any one transaction, which / / satisfies / / does not satisfy the requirement that such expenditures not exceed $150,000 in the aggregate and $50,000 for any one transaction during such year. 6. SALARIES. As of the Reporting Date, the Borrower / / is / / is not in compliance with Section 7.17 of the Credit Agreement concerning salaries. B-3 Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP. MEDICAL GRAPHICS CORPORATION By ____________________________ Its Chief Financial Officer B-4 Exhibit C to Credit and Security Agreement PREMISES The Premises referred to in the Credit and Security Agreement are legally described as follows: [To be completed by Borrower] Schedule 2.11-1 Schedule 5.1 to Credit and Security Agreement TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS, AND LOCATIONS OF COLLATERAL TRADE NAMES, DBAs ----------------- MedGraphics CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS -------------------------------------------------- Medical Graphics Corporation 350 Oak Grove Parkway St. Paul, Minnesota 55127 OTHER INVENTORY AND EQUIPMENT LOCATIONS --------------------------------------- None. Schedule 5.1-1 Schedule 5.6 to Credit and Security Agreement Litigation Schedule 5.1-1 Schedule 5.8 to Credit and Security Agreement Taxes Schedule 5.1-1 Schedule 7.1 to Credit and Security Agreement PERMITTED LIENS Creditor Collateral Jurisdiction Filing Date Filing No. -------- ---------- ------------ ----------- ---------- Norwest Bank All Equipment, MN Secretary of March 27, 1927796 Inventory, State 1997 Accounts, General Intangibles, and foreign accounts (subject to an Intercreditor Agreement between Norwest Bank and the Lender). Norwest Bank All Equipment, MN Secretary of March 27, 1927797 Inventory, State 1997 Accounts, General Intangibles, and foreign accounts (subject to an Intercreditor Agreement between Norwest Bank and the Lender). Schedule 7.1-1 Schedule 7.2 to Credit and Security Agreement PERMITTED INDEBTEDNESS AND GUARANTIES Indebtedness ------------ Creditor Principal Maturity Date Monthly Collateral Amount Payment -------- --------- ------------- ------- ---------- Norwest Bank $1,750,000 April 1, 1998 Revolving See Permitted Liens Line of Credit Schedule Guaranties ---------- Primary Obligor Amount and Description of Beneficiary of Guaranty Obligation Guaranteed --------------- ------------------------- ----------------------- None Schedule 7.1-1 EX-10.3-1 5 EXHIBIT 10.3.1 April 14, 1997 Medical Graphics Corporation 350 Oak Grove Parkway St. Paul, Minnesota 55127 Attention: Dale H. Johnson, CFO Glenn Taylor, CEO Re: First Letter Amendment to NBCI Credit Agreement - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Ladies and Gentlemen: Medical Graphics Corporation, a Minnesota corporation (the "Borrower") and Norwest Business Credit, Inc., a Minnesota corporation (the "Lender") are parties to a Credit and Security Agreement dated as of March 31, 1997 (the "Credit Agreement"). All terms defined in the Credit Agreement that are not otherwise defined herein have the same meaning given therein. It has come to our attention that Section 6.14 of the Credit Agreement, the minimum Net Income covenant, incorrectly states that the Borrower shall achieve, as of May 31, 1997, Net Income of not less than < 2,195,000 >. To remedy this error, the Borrower has requested, and the Lender has agreed, to amend Section 6.14 as set forth below. The Borrower and the Lender hereby agree that Section 6.14 of the Credit Agreement is hereby amended by deleting the amount "< $2,195,000 >" as set forth parallel to the date "May 31, 1997" and insert the amount "< $2,625,000 >" in place thereof. This letter shall not be deemed to be a waiver of any other Default or Event of Default now existing or hereafter arising under the Credit Agreement, whether or not known to the Lender. Except as set forth above, all of the original terms of the Credit Agreement and Loan Documents shall remain in full force and effect. Medical Graphics Corporation April 15, 1997 Page 2 Please evidence the Borrower's agreement with the terms of this letter by signing the acknowledgment on the duplicate original of this letter, faxing the signed duplicate to the Lender at (612) 673-8506, Attention: Warren Lindman and sending a duplicate original to the Lender. NORWEST BUSINESS CREDIT, INC. ________/s/_________________ Warren G. Lindman Its Assistant Vice President Acknowledgment April 14, 1997 MEDICAL GRAPHICS CORPORATION ______/s/_________________________ Dale Johnson Its CFO cc: Timothy McIntee (Lindquist & Vennum PLLP) Christopher A. Cudak (Norwest Bank Minnesota) Mr. Scott Loveless (Deloitte & Touche LLP) EX-10.4 6 EXHIBIT 10.4 WARRANT To Subscribe for and Purchase Common Stock of MEDICAL GRAPHICS CORPORATION THIS CERTIFIES THAT, for value received, NORWEST BUSINESS CREDIT, INC. (herein called "Purchaser") or registered assigns is entitled to subscribe for and purchase from MEDICAL GRAPHICS CORPORATION (herein called the "Company"), a corporation organized and existing under the laws of the State of Minnesota, at the price specified below (subject to adjustment as noted below) at any time from and after the date hereof to and including September 30, 2000, Sixty-Two Thousand Five Hundred (62,500) fully paid and nonassessable shares of the Company's Common Stock (subject to adjustment as noted below). This Warrant has been issued in connection with the issuance by the Company to Purchaser of the Company's Revolving Note pursuant to a Credit and Security Agreement between the Company and Purchaser of even date herewith. The warrant purchase price (subject to adjustment as noted below) shall be $3.375 per share. This Warrant is subject to the following provisions, terms and conditions: 1. The rights represented by this Warrant may be exercised by the holder hereof, in whole or in part, by written notice of exercise delivered to the Company 20 days prior to the intended date of exercise and by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company and upon payment to it by check of the purchase price for such shares. The Company agrees that the shares so purchased shall be and are deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. Subject to the provisions of the next succeeding paragraph, certificates for the shares of stock so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding 10 days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the holder hereof within such time. 2. Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for shares of stock upon exercise of this Warrant except in accordance with the provisions, and subject to the limitations, of paragraph 8 hereof and the restrictive legend under the heading "Restriction on Transfer" below. 3. The Company covenants and agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid and nonassessable. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 4. The above provisions are, however, subject to the following: (a) The warrant purchase price shall, from and after the date of issuance of this Warrant, be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the warrant purchase price, the holder of this Warrant shall thereafter be entitled to purchase, at the warrant purchase price resulting from such adjustment, the number of shares obtained by multiplying the warrant purchase price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the warrant purchase price resulting from such adjustment. (b) Except for issuances of shares pursuant to options and warrants outstanding as of the date of this Warrant and except for shares issuable under the Company's Employee Stock Purchase Plan (or any successor stock purchase plan that provides for the issuance of options or shares at a price equal to 85% of fair market value as defined in such plan), if and whenever the Company shall issue or sell any shares of its Common Stock for a consideration per share less than the warrant purchase price in effect immediately prior to the time of such issue or sale, and/or the Company shall issue or sell any shares of its Common Stock for a consideration per share less than the market price (as defined in paragraph 4(k) hereof) on the date of such issue or sale, then, forthwith upon such issue or sale, the warrant purchase price shall be reduced to such lesser price. No adjustment of the warrant purchase price, however, shall be made in an amount less than 2% of the warrant purchase price in effect on the date of such adjustment, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any such adjustment so carried forward, shall be an amount equal to or greater than 4% of the warrant purchase price then in effect. (c) For the purposes of paragraph (b), the following provisions (i) to (v), inclusive, shall also be applicable: (i) In case at any time the Company shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (aa) Common Stock or (bb) any obligations or any shares of stock of the Company which are convertible into or exchangeable for Common Stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (aa) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (bb) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the warrant purchase price in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in paragraph (f) below, no further adjustments of the warrant purchase price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) In case the Company shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (aa) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (bb) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the warrant purchase price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (x) except as provided in paragraph (f) below, no further adjustments of the warrant purchase price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (y) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the warrant purchase price have been or are to be made pursuant to other provisions of this paragraph (c), no further adjustment of the warrant purchase price shall be made by reason of such issue or sale. (iii) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the Company in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the Company, without deducting therefrom of any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the Company in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined by the Board of Directors of the Company of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine to be attributable to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any other corporation, the Company shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the warrant purchase price, the determination of the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such merger, conversion or sale, for purposes of paragraph (g) below, shall be made after giving effect to such adjustment of the warrant purchase price. (iv) In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (aa) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities, or (bb) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such rights of subscription or purchase, as the case may be. (v) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this paragraph (c). (d) In case the Company shall (i) declare a dividend upon the Common Stock payable in Common Stock (other than a dividend declared to effect a subdivision of the outstanding shares of Common Stock, as described in paragraph (e) below) or Convertible Securities, or in any rights or options to purchase Common Stock or Convertible Securities, or (ii) declare any other dividend or make any other distribution upon the Common Stock payable otherwise than out of earnings or earned surplus, then thereafter the holder of this Warrant upon the exercise hereof will be entitled to receive the number of shares of Common Stock to which such holder shall be entitled upon such exercise, and, in addition and without further payment therefor, each dividend described in clause (i) above and each dividend or distribution described in clause (ii) above which such holder would have received by way of dividends or distributions if continuously since such holder became the record holder of this Warrant such holder (i) had been the record holder of the number of shares of Common Stock then received, and (ii) had retained all dividends or distributions in stock or securities (including Common Stock or Convertible Securities, and any rights or options to purchase any Common Stock or Convertible Securities) payable in respect of such Common Stock or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Stock. For the purposes of the foregoing, a dividend or distribution other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend or distribution as determined by the Board of Directors of the Company. (e) In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the warrant purchase price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the warrant purchase price in effect immediately prior to such combination shall be proportionately increased. (f) If (i) the purchase price provided for in any right or option referred to in clause (i) of paragraph (c), or (ii) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or clause (ii) of paragraph (c), or (iii) the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of paragraph (c) are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the warrant purchase price then in effect shall forthwith be increased or decreased to such warrant purchase price which would have obtained had the adjustments made upon the issuance of such rights, options or Convertible Securities been made upon the basis of (i) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (ii) the issuance at the time of such change of any such options, rights or Convertible Securities then still outstanding for the consideration, if any, received by the Company therefor and to be received on the basis of such changed price; and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the warrant purchase price then in effect hereunder shall forthwith be increased to such warrant purchase price which would have obtained had the adjustments made upon the issuance of such rights or options or Convertible Securities been made upon the basis of the issuance of the shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. If the purchase price provided for in any such right or option referred to in clause (i) of paragraph (c) or the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of paragraph (c) are convertible into or exchangeable for Common Stock shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the warrant purchase price then in effect hereunder shall forthwith be decreased to such warrant purchase price as would have obtained had the adjustments made upon the issuance of such right, option or Convertible Securities been made upon the basis of the issuance of (and the total consideration received for) the shares of Common Stock delivered as aforesaid. (g) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the warrant purchase price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume, by written instrument executed and mailed to the registered holder hereof at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. (h) Upon any adjustment of the warrant purchase price, then and in each such case the Company shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company, which notice shall state the warrant purchase price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (i) In case any time: (1) the Company shall declare any cash dividend on its Common Stock at a rate in excess of the rate of the last cash dividend theretofore paid; (2) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (3) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (4) there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation; or (5) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall give written notice, by first-class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company, of the date on which (aa) the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (bb) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. (j) If any event occurs as to which in the opinion of the Board of Directors of the Company the other provisions of this paragraph 4 are not strictly applicable or if strictly applicable would not fairly protect the purchase rights of the holder of this Warrant or of Common Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such purchase rights as aforesaid. (k) No fractional shares of Common Stock shall be issued upon the exercise of this Warrant, but, instead of any fraction of a share which would otherwise be issuable, the Company shall pay a cash adjustment (which may be effected as a reduction of the amount to be paid by the holder hereof upon such exercise) in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock as of the close of business on the date of the notice required by paragraph 1 above. "Market price" for purposes of this paragraph 4(k) and for purposes of paragraphs 4(b) and 12(d) hereof shall mean, if the Common Stock is traded on a securities exchange or on the Nasdaq National Market or Nasdaq Small Cap Market, the closing price of the Common Stock on such exchange or the Nasdaq National Market or Nasdaq Small Cap Market, or, if the Common Stock is otherwise traded in the over-the-counter market, the last reported sale price, in each case averaged over a period of 20 consecutive business days prior to the date as of which "market price" is being determined. If at any time the Common Stock is not traded on an exchange or the Nasdaq National Market or Nasdaq Small Cap Market, or otherwise traded in the over-the-counter market, the "market price" shall be deemed to be the higher of (i) the book value thereof as determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of the Company as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made, or (ii) the fair value thereof determined in good faith by the Board of Directors of the Company as of a date which is within l5 days of the date as of which the determination is to be made. 5. As used herein, the term "Common Stock" shall mean and include the Company's presently authorized Common Stock and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company; provided that the shares purchasable pursuant to this Warrant shall include shares designated as Common Stock of the Company on the date of original issue of this Warrant or, in the case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in paragraph 4(g) above. 6. So long as this Warrant remains outstanding, the Company will not issue any additional capital stock of any class preferred as to dividends or as to the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up, unless the rights of the holders thereof shall be limited to a fixed sum or percentage of par, liquidation or redemption value in respect of participation in dividends and in the distribution of such assets. 7. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. 8. The holder of this Warrant, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Common Stock issuable or issued upon the exercise hereof of such holder's intention to do so, describing briefly the manner of any proposed transfer of this Warrant or such holder's intention as to the disposition to be made of shares of Common Stock issuable or issued upon the exercise hereof. Such holder shall also provide the Company with an opinion of counsel satisfactory to the Company to the effect that the proposed transfer of this Warrant or disposition of shares may be effected without registration or qualification (under any Federal or State law) of this Warrant or the shares of Common Stock issuable or issued upon the exercise hereof. Upon receipt of such written notice and opinion by the Company, such holder shall be entitled to transfer this Warrant, or to exercise this Warrant in accordance with its terms and dispose of the shares received upon such exercise or to dispose of shares of Common Stock received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by such holder to the Company, provided that an appropriate legend respecting the aforesaid restrictions on transfer and disposition may be endorsed on this Warrant or the certificates for such shares. The holder of this Warrant also agrees not to sell or otherwise transfer any Common Stock issuable or issued upon the exercise hereof before the earlier to occur of (a) April 1, 1999 or (b) the first date on which the Company no longer has a banking relationship with Norwest Business Credit, Inc. or any of its affiliates. 9. Subject to the provisions of paragraph 8 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, at the principal office of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that the bearer of this Warrant, when endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered holder hereof as the owner for all purposes. 10. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. 11. The holder of this Warrant and of the Common Stock issuable or issued upon the exercise hereof shall be entitled to the registration rights set forth in Appendix A attached hereto. 12. (a) In addition to and without limiting the rights of the holder of this Warrant under the terms of this Warrant, the holder of this Warrant shall have the right (the "Conversion Right") to convert this Warrant or any portion thereof into shares of Common Stock as provided in this paragraph 12 at any time or from time to time prior to its expiration, subject to the restrictions set forth in paragraph (c) below. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the holder of this Warrant, without payment by the holder of any exercise price or any cash or other consideration, that number of shares of Common Stock equal to the quotient obtained by dividing the Net Value (as hereinafter defined) of the Converted Warrant Shares by the fair market value (as defined in paragraph (d) below) of a single share of Common Stock, determined in each case as of the close of business on the Conversion Date (as hereinafter defined). The "Net Value" of the Converted Warrant Shares shall be determined by subtracting the aggregate warrant purchase price of the Converted Warrant Shares from the aggregate fair market value of the Converted Warrant Shares. Notwithstanding anything in this paragraph 12 to the contrary, the Conversion Right cannot be exercised with respect to a number of Converted Warrant Shares having a Net Value below $100. No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder of this Warrant an amount in cash equal to the fair market value of the resulting fractional share. (b) The Conversion Right may be exercised by the holder of this Warrant by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in paragraph (a) above as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), but not later than the expiration date of this Warrant. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right, together with a check in payment of any fractional share and, in the case of a partial exercise, a new warrant evidencing the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder of this Warrant within 15 days following the Conversion Date. (c) In the event the Conversion Right would, at any time this Warrant remains outstanding, be deemed by the Company's independent certified public accountants to give rise to a charge to the Company's earnings for financial reporting purposes, then the Conversion Right shall automatically terminate upon the Company's written notice to the holder of this Warrant of such adverse accounting treatment. (d) For purposes of this paragraph 12, the "fair market value" of a share of Common Stock as of a particular date shall be its "market price", calculated as described in paragraph 4(k) hereof. 13. All questions concerning this Warrant will be governed and interpreted and enforced in accordance with the internal law of the State of Minnesota. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated as of March 27, 1997. MEDICAL GRAPHICS CORPORATION By -------------------------- Its ---------------------- RESTRICTION ON TRANSFER The securities evidenced hereby may not be transferred without (i) the opinion of counsel satisfactory to the Company that such transfer may be lawfully made without registration under the Federal Securities Act of 1933 and all applicable state securities laws or (ii) such registration. FORM OF ASSIGNMENT (To Be Signed Only Upon Assignment) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto this Warrant, and appoints to transfer this Warrant on the books of the Company with the full power of substitution in the premises. Dated: In the presence of: ---------------------------------------- (Signature must conform in all respects to the name of the holder as specified on the face of this Warrant without alteration, enlargement or any change whatsoever, and the signature must be guaranteed in the usual manner) SUBSCRIPTION FORM To be Executed by the Holder of this Warrant if such Holder Desires to Exercise this Warrant in Whole or in Part: To: MEDICAL GRAPHICS CORPORATION (the "Company") The undersigned _________________________ Please insert Social Security or other identifying number of Subscriber: _________________________ hereby irrevocably elects to exercise the right of purchase represented by this Warrant for, and to purchase thereunder, ________ shares of the Common Stock provided for therein and tenders payment herewith to the order of the Company in the amount of $_______, such payment being made as provided on the face of this Warrant. The undersigned requests that certificates for such shares of Common Stock be issued as follows: Name: _________________________________________________________________ Address: _________________________________________________________________ Deliver to: _________________________________________________________________ Address: _________________________________________________________________ and, if such number of shares of Common Stock shall not be all the shares of Common Stock purchasable hereunder, that a new Warrant for the balance remaining of the shares of Common Stock purchasable under this Warrant be registered in the name of, and delivered to, the undersigned at the address stated above. Dated: Signature ----------------------------------- Note: The signature on this Subscription Form must correspond with the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatever. APPENDIX A to Stock Purchase Warrant REGISTRATION RIGHTS 1. REQUIRED REGISTRATION. Commencing on the earlier of (a) April 1, 1999 or (b) the first date on which the Company no longer has a banking relationship with Norwest Business Credit, Inc. or any of its affiliates, if the Company shall receive a written request therefor from any record holder or holders of an aggregate of at least a majority of the shares of Purchased Stock (as hereinafter defined) not theretofore registered under the Securities Act of 1933, as amended (the "Securities Act"), and sold, the Company shall prepare and file a registration statement under the Securities Act covering the shares of Purchased Stock which are the subject of such request and shall use its best efforts to cause such registration statement to become effective. In addition, upon the receipt of such request, the Company shall promptly give written notice to all other record holders (if any) of shares of Purchased Stock not theretofore registered under the Securities Act and sold that such registration is to be effected. The Company shall include in such registration statement such shares of Purchased Stock for which it has received written requests to register by such other record holders within 30 days after the delivery of the Company's written notice to such other record holders. The Company shall be obligated to prepare, file and cause to become effective only one registration statement (other than on Form S-3 or any successor form ("Form S-3") promulgated by the Securities and Exchange Commission (the "Commission") pursuant to this paragraph 1, and to pay the expenses associated with such registration statements; notwithstanding the foregoing, the record holder or holders of an aggregate of at least a majority of the shares of Purchased Stock not theretofore registered under the Securities Act and sold may require, pursuant to this paragraph 1, the Company to file, and to pay the expenses associated with, two additional registration statements on Form S-3, if such form is then available for use by the Company and such record holder or holders. In the event that the holders of a majority of the Purchased Stock for which registration has been requested pursuant to this paragraph 1 determine for any reason not to proceed with a registration at any time before a registration statement has been declared effective by the Commission, and such registration statement, if theretofore filed with the Commission, is withdrawn with respect to the Purchased Stock covered thereby, and the holders of such Purchased Stock agree to bear their own expenses incurred in connection therewith and to reimburse the Company for the expenses incurred by it attributable to the registration of such Purchased Stock, then the holders of such Purchased Stock shall not be deemed to have exercised their right to require the Company to register Purchased Stock pursuant to this paragraph 1. -1- If, at the time any written request for registration is received by the Company pursuant to this paragraph 1, the Company has determined to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for cash of any of its securities by it or any of its security holders, such written request shall be deemed to have been given pursuant to paragraph 1 hereof rather than this paragraph 1, and the rights of the holders of Purchased Stock covered by such written request shall be governed by paragraph 1 hereof. Without the written consent of the holders of a majority of the Purchased Stock for which registration has been requested pursuant to this paragraph 1, neither the Company nor any other holder of securities of the Company may include securities in such registration if in the good faith judgment of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the Purchased Stock or require the exclusion of any portion of the Purchased Stock to be registered. 2. INCIDENTAL REGISTRATION. Commencing on the earlier of (a) April 1, 1999 or (b) the first date on which the Company no longer has a banking relationship with Norwest Business Credit, Inc. or any of its affiliates, each time the Company shall determine to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for cash of any of its securities by it or any of its security holders (other than a registration statement on a form that does not permit the inclusion of shares by its security holders), the Company will give written notice of its determination to all record holders of Purchased Stock not theretofore registered under the Securities Act and sold. Upon the written request of a record holder of any shares of Purchased Stock given within 30 days after receipt of any such notice from the Company, the Company will, except as herein provided, cause all such shares of Purchased Stock, the record holders of which have so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Purchased Stock to be so registered; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any such registration initiated by it; provided further, however, that if the Company determines not to proceed with a registration after the registration statement has been filed with the Commission and the Company's decision not to proceed is primarily based upon the anticipated public offering price of the securities to be sold by the Company, the Company shall promptly complete the registration for the benefit of those selling security holders who wish to proceed with a public offering of their securities and who bear all expenses incurred by the Company as the result of such registration after the Company has decided not to proceed. If any registration pursuant to this paragraph 2 shall be underwritten in whole or in part, the Company may require that the Purchased Stock requested for inclusion pursuant to this paragraph 2 be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the managing underwriter of a proposed underwritten public offering the inclusion of all of the Purchased Stock originally covered by a request for registration would -2- reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of shares of Purchased Stock otherwise to be included in the underwritten public offering may be reduced pro rata (by number of shares) among the holders thereof requesting such registration, provided, however, that after any such required reduction the Purchased Stock to be included in such offering, together with any shares to be included in such offering that are being offered by other selling shareholders, shall constitute at least 25% of the total number of shares to be included in such offering. Those shares of Purchased Stock which are thus excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. 3. REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions of paragraph 1 or 2 hereof to effect the registration of shares of Purchased Stock under the Securities Act, the Company will: (a) prepare and file with the Commission a registration statement with respect to such securities, and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine months; (b) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine months; (c) furnish to the security holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating holders may reasonably request in writing within -3- 20 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) notify the security holders participating in such registration, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (f) notify such holders promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (g) prepare and file with the Commission, promptly upon the request of any such holders, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such holders (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Purchased Stock by such holder; (h) prepare and promptly file with the Commission and promptly notify such holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (i) advise such holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (j) not file any amendment or supplement to such registration statement or prospectus to which a majority in interest of such holders shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and -4- regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (k) at the request of any such holder, furnish: (i) an opinion, dated as of the closing date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request; and (ii) letters dated as of the effective date of the registration statement and as of the closing date, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request. 4. EXPENSES. With respect to each registration, including registrations pursuant to Form S-3, requested pursuant to paragraph 1 hereof (except as otherwise provided in such paragraph with respect to registrations voluntarily terminated at the request of the requesting security holders) and with respect to each inclusion of shares of Purchased Stock in a registration statement pursuant to paragraph 2 hereof (except as otherwise provided in paragraph 2 with respect to registrations initiated by the Company but with respect to which the Company has determined not to proceed), the Company shall bear the following fees, costs and expenses: all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or selling security holders are required to bear such fees and disbursements), all internal Company expenses, all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified, and the premiums and other costs of policies of insurance against liability (if any) arising out of such public offering. Fees and disbursements of counsel and accountants for the selling security holders, underwriting discounts and commissions and transfer taxes relating to the shares included in the offering by the selling security holders, and any other expenses incurred by the selling security holders not expressly included above, shall be borne by the selling security holders. -5- 5. INDEMNIFICATION. In the event that any Purchased Stock is included in a registration statement under paragraph 1 or 2 hereof: (a) The Company will indemnify and hold harmless each holder of shares of Purchased Stock which are included in a registration statement pursuant to the provisions of paragraph 1 or 2 hereof, its directors and officers, and any underwriter (as defined in the Securities Act) for such holder and each person, if any, who controls such holder or such underwriter within the meaning of the Securities Act, from and against, and will reimburse such holder and each such underwriter and controlling person with respect to, any and all loss, damage, liability, cost and expense to which such holder or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such holder, such underwriter or such controlling person in writing specifically for use in the preparation thereof. (b) Each holder of shares of Purchased Stock which are included in a registration pursuant to the provisions of this paragraph 1 or 2 hereof will indemnify and hold harmless the Company, its directors and officers, any controlling person and any underwriter from and against, and will reimburse the Company, its directors and officers, any controlling person and any underwriter with respect to, any and all loss, damage, liability, cost or expense to which the Company or any controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was -6- so made in reliance upon and in strict conformity with written information furnished by such holder specifically for use in the preparation thereof. (c) Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (a) or (b) of this paragraph 5 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, or if there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. -7- 6. SPECIAL DEFINITION. "Purchased Stock" shall mean the Warrant dated as of April __, 1997 (together with any warrant or warrants issued in substitution or exchange therefor, the "Warrant") to purchase 62,500 shares of Common Stock of the Company, and the shares of Common Stock of the Company issuable upon exercise of the Warrant and all shares of such Common Stock issued in exchange or substitution therefor, whether or not such securities (other than such Warrant) have in fact been issued, and the stock or other securities of the Company issued in a stock split or reclassification of, or a stock dividend or other distribution on or in substitution or exchange for, or otherwise in connection with, any of the foregoing securities, or in a merger or consolidation involving the Company or a sale of all or substantially all of the Company's assets. For purposes hereof, the record holder of the Warrant shall be treated as the record holder of the related Common Stock then issuable upon the exercise thereof. Nothing in this paragraph 6 shall, however, be deemed to require the Company to register the Warrant, it being understood that the registration rights granted hereby relate only to shares of Common Stock of the Company and securities issued in substitution or exchange therefor. -8- EX-10.7 7 EXHIBIT 10.7 WARRANT to Purchase 130,000 Shares of the Common Stock of Medical Graphics Corporation March 25, 1997 THIS CERTIFIES that Catherine A. Anderson or any permitted assign (the "Holder") is entitled to purchase at any time during the period commencing on the date of this Warrant and ending at 5:00 p.m., Minneapolis, Minnesota time, on March 31, 2000, One Hundred Thirty Thousand (130,000) fully paid and nonassessable shares of the common stock of Medical Graphics Corporation (the "Company"), par value $.05 per share (the "Common Stock"), or such greater or lesser number of shares as may be determined by application of the anti-dilution provisions of this Warrant (such shares or other securities purchasable upon exercise of this Warrant being herein called the "Shares"), at a purchase price of $4.00 per share. The foregoing purchase price, as it may be adjusted pursuant to the anti-dilution provisions of this Warrant, is referred to herein as the "Purchase Price." This Warrant is subject to the following provisions, terms and conditions: 1. EXERCISE; TRANSFERABILITY. (a) The rights represented by this Warrant may be exercised, in whole or in part (but not as to any fractional Share, by surrendering this Warrant, with the Purchase Form attached hereto (or a reasonable facsimile) duly executed, at the principal office of the Company and by paying the Purchase Price in full for the Shares purchasable upon such exercise in cash or by certified or official bank check payable to the order of the Company. (b) This Warrant is issued only as a registered Warrant, and, until it is transferred on the records of the Company, the Company may treat the person in whose name it is registered as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. 2. ISSUANCE OF SHARES. The Company agrees that the Shares so purchased shall be and are deemed to be issued as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such Shares. Certificates for the Shares purchased shall be delivered to the Holder within ten (10) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of Shares, if any, with respect to which this Warrant has not been exercised shall also be delivered to the Holder within such time. ___________________ THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 6 AND AT THE BOTTOM OF THE LAST PAGE HEREOF. Notwithstanding the foregoing, however, the Company shall not be required to delivery any certificates for the Shares, except in accordance with the provisions and subject to the limitations of Section 6 below. 3. COVENANTS OF COMPANY. The Company covenants and agrees that all Shares that may be issued upon the exercise of this Warrant have been duly authorized and reserved for issuance upon the exercise of this Warrant and that the Shares, when so issued, delivered and paid for upon such exercise in accordance with the terms of this Warrant, will be validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issuance thereof. The Company further covenants and agrees that until expiration of this Warrant, the Company will at all times have authorized, and reserved for the purpose of issuance or transfer upon exercise of this Warrant, a sufficient number of Shares to provide for the exercise of this Warrant. 4. ANTI-DILUTION ADJUSTMENTS. The foregoing provisions are, however, subject to the following: (a) The Purchase Price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Purchase Price, the Holder of this Warrant shall thereafter be entitled to purchase, at the Purchase Price resulting from such adjustment, the number of Shares obtained by multiplying the Purchase Price in effect immediately prior to such adjustment by the number of Shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Purchase Price resulting from such adjustment. (b) In case the Company shall at any time subdivide the outstanding Shares into a greater number of Shares or declare a dividend payable in Shares, the Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding Shares shall be combined into a smaller number of Shares, the Purchase Price in effect immediately prior to such combination shall be proportionately increased. (c) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation, shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets (including cash) with respect to or in exchange for such Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, the Holder of this Warrant shall have the right to purchase and receive on the basis and on the terms and conditions specified in this Warrant and in lieu of the Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby or upon the consummation of any such 2 transaction, such shares of stock, securities or assets as would have been issued or delivered to the Holder of this Warrant if the Holder had exercised this Warrant and received upon exercise of this Warrant the Shares prior to or upon the consummation of such reorganization, reclassification, consolidation, merger or sale, provided that the Holder shall have the right to continue to exercise this Warrant after the effective date of such reorganization, reclassification, consolidation, merger or sale only if holders of options and warrants generally have such continuing right to exercise. The Company shall not effect any such consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Company)resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the Holder at the last address of the Holder the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to purchase. (d) If the Company takes any other action, or if any other event occurs, which does not come within the scope of the provisions of Sections 4(b) or 4(c), but which should, in the Company's opinion, result in an adjustment in the Purchase Price and/or the number of Shares subject to the Warrant in order to fairly protect the rights of the Holder of this Warrant, then the Company shall make an appropriate adjustment in the Purchase Price or the number of Shares to be received upon exercise of this Warrant. (e) No adjustment of the Purchase Price shall be made if the amount of such adjustment is less than $.01 per share, but in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any other adjustment or adjustments so carried forward, shall amount to not less than $.01 per share. (f) No fractional Shares are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a Share which would otherwise be issuable in an amount equal to the same fraction of the fair market value per Share on the day of exercise as determined in good faith by the Company. (g) Upon any adjustment of the Purchase Price, the Company shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered Holder of this Warrant at the address of such Holder, which notice shall state the Purchase Price resulting from such adjustment and the increase or decrease, if any, in the number of Shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 5. NO RIGHTS AS SHAREHOLDERS. This Warrant shall not entitled the Holder to any voting rights or other rights as a shareholder of the Company. 3 6. RESTRICTIONS ON TRANSFER. The Holder, by acceptance hereof, represents and warrants that it is acquiring this Warrant for its own account for investment purposes only and not with a view to its resale or distribution, and it has no present intention to resell or otherwise dispose of all or any part of this Warrant. Other than pursuant to registration under federal and state securities laws or an exemption from such registration, the availability of which shall be reasonably determined by the Company, this Warrant may not be exercised nor may certificates be issued for Shares, and neither this Warrant nor any Shares may be sold, pledged, assigned or otherwise disposed of (whether voluntarily or involuntarily). The Company may condition such issuance or sale, pledge, assignment or other disposition on the receipt from the party to whom this Warrant is to be so transferred or to whom Shares are to be issued or so transferred of any representations and agreements requested by the Company in order to permit such issuance or transfer to be made pursuant to exemptions from registration under federal and applicable state securities laws. Each certificate representing the Warrant (or any part thereof) and any Shares shall be stamped with the appropriate legends setting forth these restrictions on transferability. The Holder, by acceptance hereof, agrees to give written notice to the Company before exercising or transferring this Warrant or transferring any Shares of the Holder's intention to do so, describing briefly the manner of any proposed exercise or transfer and providing an opinion of counsel, acceptable to the Company, that such transfer complies with federal and applicable state securities laws or exemptions thereunder. Within thirty (30) days of receiving such written notice, the Company shall notify the Holder as to whether such exercise or transfer may be effected. 7. SUCCESSORS AND ASSIGNS. All the covenants and provisions of this Warrant by or for the benefit of the Company or the Holder shall bind and inure to the benefit of their respective successors and assigns. 8. MODIFICATION OF WARRANT. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 4 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and delivered by its duly authorized officer as of the 25th day of March, 1997. MEDICAL GRAPHICS CORPORATION By: ------------------------------------- Its: ------------------------------------- THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES MAY BE MADE, IN THE ABSENCE OF SUCH REGISTRATION OR AN ACCEPTABLE OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 5 TO: MEDICAL GRAPHICS CORPORATION * * * * PURCHASE FORM -- To be Executed by the Registered Holder in Order to Exercise Warrants The undersigned hereby irrevocably elects to exercise the right of purchase represented by the attached Warrant for, and to purchase thereunder, __________ shares of Common Stock provided for therein and request that certificates for such shares be issued in the name of: Please insert social _________________________________________ security or other (Name) identifying number of registered holder of _________________________________________ certificate (Address) _________________________________________ (Address) Date: ___________________ Signature(s): ________________________________________ and if such number of shares not be all of the shares purchasable hereunder, that a new Warrant for the balance of the shares purchasable under such Warrant be registered in the name of the undersigned Holder or his or her Assignee as below indicated and delivered to the address stated below. Name of Holder or Assignee: ________________________________________ (please print) Address: ________________________________________ ________________________________________ ________________________________________ 6 ASSIGNMENT FORM -- To be Executed by the Registered Holder in Order to Transfer Warrants FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers _____ shares of the Warrants represented by the attached Warrant unto: Please insert social Please print or typewrite name security or other and adress including zip code identifying number of assignee of assignee __________________________________ __________________________________ and does hereby irrevocably constitute and appoint ________________________, Attorney to transfer the Warrant on the records of the Registrant with full power of substitution in the premises. Date: _________________ Signature(s): ___________________________________ ___________________________________ * * * * NOTICE -- The Signature(s) to the Purchase Form or the Assignment Form must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. 7 EX-10.10 8 EXHIBIT 10.10 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (including the Exhibits hereto, this "Agreement"), dated as of March 31, 1997 is entered into by and among FAMCO II LIMITED LIABILITY COMPANY, a Minnesota limited liability company (the "Subscriber"), and MEDICAL GRAPHICS CORPORATION, a Minnesota corporation (the "Company"). AGREEMENTS 1. SUBSCRIPTION FOR SHARES 1.1 NUMBER OF SHARES AND PURCHASE PRICE Subject to the terms and conditions hereof, the Company agrees to issue and sell to Investor 444,445 shares of Class A Stock at a purchase price of $3.375 per share for a total price of $1,500,001.87 (the "Purchase Price"). The shares of stock purchased by Investor hereunder are hereinafter referred to as the "Shares." 1.2 PAYMENT OF PURCHASE PRICE Five Hundred Thousand Dollars ($500,000.00) of the Purchase Price shall be payable on March 31, 1997 whereupon the number of Shares purchased thereby shall be issued. Provided there has been no occurrence of an Adverse Event (as hereinafter defined), the balance of the Purchase Price shall be payable April 15, 1997 (the "Second Payment"). An "Adverse Event" shall mean: (i) the Company has not received the proposed financing in the amount of $4.1 million from Norwest Bank Minnesota N.A. and Norwest Business Credit by April 14, 1997; or (ii) Marquette Bank terminates its forbearance agreement and proceeds to exercise its remedies against the Company; or (iii) the Company's auditors issue a qualified opinion; or (iv) any action is brought or threatened against the Company by Catherine A. Anderson or ErgometR. If an Adverse Event occurs, Subscriber shall have the option to cancel the Second Payment by sending written notice thereof to the Company whereupon Subscriber shall have no further obligation to the Company. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Subscriber as follows: 2.1 ORGANIZATION AND STANDING The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Minnesota. The Company has all requisite power and authority to own and operate its properties and assets and to carry on its business as currently conducted and as proposed to be conducted. The Company is duly qualified to do business as a foreign corporation in all jurisdictions in which the failure to be so qualified would have a material adverse effect on the Company's properties or business as now conducted or as proposed to be conducted. 2.2 CORPORATE POWER The Company has all requisite legal and corporate power to execute and deliver this Agreement and the other agreements contemplated hereby, to issue the Shares hereunder, and to carry out and perform its obligations under the terms of this Agreement. 2.3 CAPITALIZATION The authorized capital stock of the Company, the designation(s) of classes of stock and the rights and preferences of stock, if any, are set forth on Schedule 2.3. All issued and outstanding shares of the Company's capital stock as of the date hereof have been duly authorized and validly issued, are fully paid and nonassessable, and were issued in compliance with applicable federal and state securities laws. The requisite number of shares of common stock of the Company have been reserved for issuance upon conversion of the Shares. Except as set forth on Schedule 2.3, no shareholder of the Company has any rights or preferences not afforded all shareholders of the Company, including without limitation, any pre-emptive or approval right pertaining to the sale and purchase of the Shares. 2.4 AUTHORIZATION All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution, delivery and performance by the Company of this Agreement; the authorization, issuance, sales and delivery of the Shares: and the performance of all of the Company's obligations hereunder has been taken. This Agreement, when executed and delivered by the Company and Subscriber shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to laws of general application relating to bankruptcy, insolvency or creditors' rights and rules of law governing specific performance, injunctive relief or other equitable remedies. 2.5 VALID ISSUANCE The Shares, when issued, sold and delivered in accordance with this Agreement, will be duly authorized and validly issued, fully paid and nonassessable, will be free and clear of any liens or encumbrances. 2 2.6 COMPLIANCE WITH OTHER INSTRUMENTS Except as set forth on Schedule 2.6, the Company is not in violation of any term of the Articles or its Bylaws, any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree, order to which the Company is subject or any statute, rule or regulation applicable to the Company. The execution, delivery, and performance of and compliance with this Agreement and the consummation of the transactions contemplated hereby will not result in any such violation, or require consent under or be in conflict with or constitute, with or without the passage of time or giving of notice or both, a breach or default under any such term, or result in the creation of any lien, mortgage, pledge, encumbrance or charge upon any of the properties or assets of the Company. 2.7 LITIGATION Except as set forth on Schedule 2.7 hereof, there are no actions, suits, proceedings or investigations pending against the Company or any of its properties before any court or governmental agency (nor, to the Company's knowledge, is there any reasonable basis therefor or threat thereof). The Company is not a party or subject to the provisions of any order, writ, injunction, judgment, or decree of any court or governmental agency or instrumentality. There is no action, suit, proceeding, or investigation by the Company currently pending or that the Company intends to initiate. 2.8 TAX RETURNS The Company has filed all federal, state and other tax returns required to have been filed by it and has paid all taxes which have become due and payable. The Company has not been advised that any of its returns, federal, state or other, have been or are being audited as of the date thereof. There are no agreements, waivers or other arrangements providing for an extension of time with respect to the assessment of any tax or deficiency against the Company, nor are there any actions, suits, proceedings or claims now pending against the Company in respect of any tax or assessment. There is no pending or, to the Company's knowledge, threatened investigation of the Company by any federal, state, foreign or local authority relating to any taxes or assessments, or any claims for additional taxes or assessments asserted by any such authority. 2.9 GOVERNMENTAL CONSENTS No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement or the offer, sale or issuance of the Shares or the consummation of any other transaction contemplated hereby under applicable state securities laws, which filings and qualifications, if required, will be accomplished within the required statutory period, and the filing pursuant to Regulation D promulgated under the 3 Securities Act of 1933, as amended (the "1933 Act"), which filing will be made within 15 days of the execution hereof. 2.10 ACCURACY OF INFORMATION The information which has been furnished to Subscriber are true and correct and accurate in all material respects as of the date hereof except for financial data which is accurate as of the date shown therein. Other than those listed on Schedule 2.10, there are no employment agreements, stock option plans or compensation plans of the Company. 2.11 USE OF PROCEEDS The proceeds received from the sale of Shares shall be used for general business purposes of the Company. No commissions are payable in connection with the sale of the Shares. 3. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER Subscriber hereby represents and warrants, severally and not jointly, to the Company as follows: 3.1 AUTHORIZATION This Agreement, when executed and delivered by Subscriber and the Company, will constitute a valid and legally binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency or creditors' rights and rules of law governing specific performance, injunctive relief or other equitable remedies. 3.2 EXPERIENCE Subscriber has such knowledge and experience in financial and business matter that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Subscriber acknowledges that the Shares are a speculative risk. Subscriber is able to fend for itself in the transactions contemplated by this Agreement, can bear the economic risk of its investment in the Shares (including possible complete loss of such investment) for an indefinite period of time and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in the Shares. 3.3 INVESTMENT Subscriber is acquiring the Shares for investment for its own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof. 4 Subscriber understands that the Shares have not been registered under the 1933 Act by reason of a specific exemption from the registration provisions of the 1933 Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Subscriber's representations as expressed herein. The Subscriber understands that the Shares are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving any public offering and that under such laws and applicable regulations the Shares may be resold without registration under the 1933 Act only in certain limited circumstances. 3.4 ACCESS TO DATA Subscriber and its representatives have been afforded access to corporate books, financial statements, records, contracts, documents and other information concerning the Company (to the extent such exists), and to its offices and facilities, have been afforded an opportunity to ask such questions of the Company's officers, employees, agents, accountants and representatives concerning the Company's existing and proposed business, operations, financial condition, assets, liabilities and other relevant matters as they have deemed necessary or desirable, and have been given all such information as has been requested, in order to evaluate the merits and risks of the prospective investments contemplated herein. Subscriber further represents and acknowledges that it has been solely responsible for its own "due diligence" investigation of the Company and its management and business, for its own analysis of the merits and risks of this investment, and for its own analysis of the fairness and desirability of the terms of the investment. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 hereof. 3.5 RESIDENCY For purposes of the application of state securities laws, Subscriber represents that it is a resident of Minnesota 4. RIGHTS AND PREFERENCES 4.1 RIGHTS AND PREFERENCES The Shares shall have the rights and preferences set forth on the Certificate of Rights and Preferences attached hereto as Exhibit A. 4.2 REGISTRATION RIGHTS The Shares shall have the registration rights set forth in the Registration Rights Agreement attached hereto as Exhibit B. 5 5. MISCELLANEOUS 5.1 GOVERNING LAW This Agreement shall be governed by and construed under the laws of the State of Minnesota as applied to agreements among Minnesota residents made and to be performed entirely within the State of Minnesota. 5.2 SURVIVAL The representations, warranties, covenants, and agreements made herein shall survive any investigation made by Subscriber and shall survive the Closing. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto shall be deemed to be representations and warranties by the Company hereunder as of the date of such certificate or instrument. 5.3 SUCCESSORS AND ASSIGNS Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 5.4 ENTIRE AGREEMENT This Agreement, including the Exhibits hereto, constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by and representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 5.5 AMENDMENT AND WAIVER Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and Subscriber. 5.6 NOTICES All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery, facsimile transmission or deposit with the United States Post Office, by first class mail, postage prepaid, addressed: (a) if to 6 Subscriber, at Subscriber's address set forth or at such other addresses as Subscriber shall have furnished to the Company in writing, or (b) if to the Company, at 350 Oak Grove Parkway, St. Paul, MN 55127, or at such other address as the Company shall have furnished to Subscriber in writing. 5.7 COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. MEDICAL GRAPHICS CORPORATION By: /s/Dale H. Johnson ------------------------------------------ Its: Chief Financial Officer -------------------------------------- FAMCO II LIMITED LIABILITY COMPANY By its Manager Family Financial Strategies, Inc. By: /s/John D. Wunsch ----------------------------------------- Its: Chief Executive Officer -------------------------------------- 7 EX-10.11 9 EXHIBIT 10.11 Exhibit B Registration Rights Agreement 1. SHELF REGISTRATION (a) SHELF REGISTRATION. The Company shall, as promptly as practicable, after April 15, 1997 file with the SEC a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Purchased Stock (as hereinafter defined) (the "Initial Shelf Registration"). The Company shall use its best efforts to file with the SEC the Initial Shelf Registration within 30 days of April 15, 1997 and shall use its best efforts to cause such Shelf Registration to be declared effective under the Securities Act as promptly as practicable thereafter. The Initial Shelf Registration shall be on From S-1 or another appropriate form permitting registration of such Purchased Stock for resales by holders in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Company shall not permit any securities other than the Purchased Stock to be included to any Shelf Registration. The Company shall use its best efforts to keep the Initial Shelf Registration continuously effective under the Securities Act of 1933, as amended (the "Securities Act") until the date which is 36 months from the date of filing (the "Effectiveness Period") or such shorter period ending when (i) all Purchased Stock covered by the Initial Shelf Registration have been sold in the manner set forth and as contemplated in the Initial Shelf Registration or (ii) a Subsequent Shelf Registration covering all of the Purchased Stock has been declared effective under the Securities Act. (b) SUBSEQUENT SHELF REGISTRATION. If the Initial Shelf Registration or any Subsequent Shelf Registration ceases to be effective for any reasons at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder), the Company shall use its best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof, and in any event shall within 30 days of such cessation of effectiveness amend the Shelf Registration in a manner to obtain the withdrawal of the order suspending the effectiveness thereof, or file an additional "shelf" Registration Statement pursuant to Rule 415 covering all of the Purchased Stock (a "Subsequent Shelf Registration"). If a Subsequent Shelf Registration is filed, the Company shall use its best efforts to cause the Subsequent Shelf Registration to be declared effective as soon as practicable after such filing and to keep such Subsequent Shelf Registration continuously effective for a period equal to the number of days in the Effectiveness Period less the aggregate number of days during which the Initial Shelf Registration or any Subsequent Shelf Registration was previously continuously effective. As used herein, the term "Shelf Registration" means the Initial Shelf Registration and any Subsequent Shelf Registration. 1 (c) SUPPLEMENTS AND AMENDMENTS. The Company shall promptly supplement and amend any Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration, if required by the Securities Act, or if reasonably requested by the holders of a majority of the Purchased Stock covered by such Shelf Registration or by any underwriter of such Purchased Stock, in each case, with the Company's consent, which consent shall not be unreasonably withheld or delayed. 2. REQUIRED REGISTRATION. Commencing upon the expiration of the 36 month period specified in Section 1, if the Company shall receive a written request therefor from any holder of the Purchased Stock not theretofore registered under the Securities Act, and sold, the Company shall prepare and file a registration statement under the Securities Act covering the shares of Purchased Stock which are the subject of such request and shall use its best efforts to cause such registration statement to become effective. In addition, upon the receipt of such request, the Company shall promptly give written notice to all other record holders (if any) of shares of Purchased Stock not theretofore registered under the Securities Act and sold that such registration is to be effected. The Company shall include in such registration statement such shares of Purchased Stock for which it has received written requests to registered by such other record holders within 30 days after the delivery of the Company's written notice to such other record holders. The Company shall be obligated to prepare, file and cause to become effective only three registration statements pursuant to this Section 2. Without the written consent of the holders of a majority of the holders for which registration has been requested pursuant to this paragraph 2, neither the Company nor any other holder of securities of the Company may include securities in such registration if in the good faith judgment of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the Purchased Stock or require the exclusion of any portion of the Purchased Stock to be registered. 3. INCIDENTAL REGISTRATION. Each time the Company shall determine to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for cash of any of its securities by it or any of its security holders (other than a registration statement on a form that does not permit the inclusion of shares by its security holders), the Company will give written notice of its determination to all record holders of Purchased Stock not theretofore registered under the Securities Act and sold. Upon the written request of a record holder of any shares of Purchased Stock given within 30 days after receipt of any such notice from the Company, the Company will, except as herein provided, cause all such shares of Purchased Stock, the record holders of which have so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Purchased Stock to be so registered; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or 2 delaying any such registration initiated by it; provided further, however, that if the Company determines not to proceed with a registration after the registration statement has been filed with the Commission and the Company's decision not to proceed is primarily based upon the anticipated public offering price of the securities to be sold by the Company, the Company shall promptly complete the registration for the benefit of those selling security holders who wish to proceed with a public offering of their securities. If any registration pursuant to this paragraph 3 shall be underwritten in whole or in part, the Company may require that the Purchased Stock requested for inclusion pursuant to this paragraph 3 be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the managing underwriter of a proposed underwritten public offering the inclusion of all of the Purchased Stock originally covered by a request for registration would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of shares of Purchased Stock otherwise to be included in the underwritten public offering may be reduced pro rata (by number of shares) among the holders thereof requesting such registration, provided, however, that after any such required reduction the Purchased Stock to be included in such offering, together with any shares to be included in such offering that are being offered by other selling shareholders, shall constitute at least 25% of the total number of shares to be included in such offering. Those shares of Purchased Stock which are thus excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines if necessary in order to effect the underwritten public offering. 4. REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions of paragraph 1, 2 or 3 hereof to effect the registration of shares of Purchased Stock under the Securities Act, the Company will: (a) prepare and file with the Commission a registration statement with respect to such securities, and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed (i) thirty-six months in the case of the Shelf Registration specified in Section 1 and (ii) nine months with respect to a registration statement not covered by Section 1; (b) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed (i) thirty-six months in the case of the Shelf Registration specified in Section 1 and (ii) nine months with respect to a registration statement not covered by Section 1; 3 (c) furnish to the security holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating holders may reasonably request in writing within 20 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified. (e) notify the security holders participating in such registration, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (f) notify such holders promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (g) prepare and file with the Commission, promptly upon the request of any such holders, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such holders (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Purchased Stock by such holder; (h) prepare and promptly file with the Commission and promptly notify such holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (i) advise such holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any 4 proceeding for the purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (j) not file any amendment or supplement to such registration statement or prospectus to which a majority in interest of such holders shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (k) at the request of any such holder, furnish: (i) an opinion, dated as of the closing date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request; and (ii) letters dated as of the effective date of the registration statement and as of the closing date, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request. 5. EXPENSES. With respect to each registration, the Company shall bear all fees, costs and expenses including, without limitation,: all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or selling security holders are required to bear such fees and disbursements), all internal Company expenses, all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified, and the premiums and other costs of policies of insurance against liability (if any) arising out of such public offering and underwriting discounts and commissions and transfer taxes relating to the shares included in the offering by the selling security holders. 6. INDEMNIFICATION. In the event that any Purchased Stock is included in a registration statement under paragraph 1, 2 or 3 hereof: (a) The Company will indemnify and hold harmless each holder of shares of Purchased Stock which are included in a registration statement pursuant to the provisions of paragraph 1, 2 or 3 hereof, its directors and officers, and any underwriter (as defined in the Securities Act) for such holder and each person, if any, who controls 5 such holder or such underwriter within the meaning of the Securities Act, from and against, and will reimburse such holder and each such underwriter and controlling person with respect to, any and all loss, damage, liability, cost and expense to which such holder or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such holder, such underwriter or such controlling person in writing specifically for use in the preparation thereof. (b) Each holder of shares of Purchased Stock which are included in a registration pursuant to the provisions of this paragraph 1, 2 or 3 hereof will indemnify and hold harmless the Company, its directors and officers, any controlling person or any underwriter from and against, and will reimburse the Company, its directors and officers, any controlling person and any underwriter with respect to, any and all loss, damage, liability, cost or expense to which the Company or any controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by such holder specifically for use in the preparation thereof. Notwithstanding the foregoing, each holder's liability for indemnification shall be limited to the amount of the holder's original purchase price of the Purchased Stock. (c) Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (a) and (b) of this paragraph 6 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the 6 indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, or if there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. 7. SPECIAL DEFINITION. "Purchased Stock" shall mean the Company's Class A Stock purchased pursuant to the Stock Purchase Agreement dated March 31, 1997, all Common Stock issued in exchange or substitution thereof, whether or not such securities have in fact been issued, and the stock or other securities of the Company issued in a stock split or reclassification of, or a stock dividend or other distribution on or in substitution or exchange for, or otherwise in connection with, any of the foregoing securities, or in a merger or consolidation involving the Company or a sale of all or substantially all of the Company's assets. Nothing in this paragraph shall, however, be deemed to require the Company to register the Class A Stock, it being understood that the securities actually being registered are shares of Common Stock of the Company into which the Purchased Stock is convertible. 7 EX-21.1 10 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY Jurisdiction or Name of Direct Subsidiaries Organization - --------------------------- --------------- Medical Graphics Corporation GmbH Germany Name of Indirect Subsidiaries - ----------------------------- None EX-23.1 11 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT OF DELOITTE & TOUCHE LLP We consent to the incorporation by reference in Registration Statements No. 33-15765, No. 33-47993, No. 33-64430, No. 33-64432, No. 33-80596, No. 33-80386 and No. 333-14295 of Medical Graphics Corporation on Form S-8 of our report dated April 4, 1997 (April 15, 1997 as to the third paragraph of Note 11) appearing in this Annual Report on Form 10-KSB of Medical Graphics Corporation for the year ended December 31, 1996. April 15, 1997 /s/ Deloitte & Touche LLP Minneapolis, Minnesota EX-23.2 12 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-15765) pertaining to the 1987 Stock Option Plan of Medical Graphics Corporation and in the Registration Statement (Form S-8 No. 33-47993) pertaining to the Medical Graphics Corporation 1987 Stock Option Plan and 1991 Anderson Stock Option Agreement and in the Registration Statement (Form S-8 No. 33-64430) pertaining to the Medical Graphics Corporation 401(k) Savings Plan and in the Registration Statement (Form S-8 No. 33-64432) pertaining to the Medical Graphics Corporation Employee Stock Purchase Plan and in the Registration Statement (Form S-8 No. 33-80596) pertaining to the Medical Graphics Corporation Non-Employee Director Stock Option Plan and in the Registration Statement (Form S-8 No. 33-80386) pertaining to the Medical Graphics Corporation 1993 MacCarter Stock Option Agreement and Medical Graphics Corporation 1993 Wegmiller Stock Option Agreement and in the Registration Statement (Form S-8 No. 333-14295) pertaining to the 1987 Stock Option Plan, Non-Incentive Stock Option Agreement and Restricted Stock Award Agreement of Medical Graphics Corporation of our report dated February 16, 1996, with respect to the consolidated financial statements of Medical Graphics Corporation included in the Annual Report (Form 10-KSB) for the year ended December 31, 1996. Minneapolis, Minnesota /s/ Ernst & Young LLP April 15, 1997 EX-27.1 13 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 545 0 5,310 (496) 6,633 12,185 3,857 (2,531) 14,003 9,722 0 0 0 128 2,417 14,003 15,422 20,289 14,640 30,657 0 608 189 (9,119) 48 (9,071) 0 0 0 (9,071) (3.56) (3.56)
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