-----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, QBUZ0o7zlXJo+eqLXZG3HVE6nzKDGc+q8klpLsiS7yg655NnF69VLdPF8yj+HaBB YxyJC8gnDM4pojIQs+7t8A== 0000912057-97-027964.txt : 19970815 0000912057-97-027964.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-027964 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHYSIO CONTROL INTERNATIONAL CORP \DE\ CENTRAL INDEX KEY: 0001003088 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 911673799 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27242 FILM NUMBER: 97662229 BUSINESS ADDRESS: STREET 1: 11811 WILLOWS RD NE CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 2068674331 MAIL ADDRESS: STREET 1: 11811 WILLOWS ROAD NE CITY: REDMOND STATE: WA ZIP: 98052 FORMER COMPANY: FORMER CONFORMED NAME: PHYSIO CONTROL HOLDING CORP \DE\ DATE OF NAME CHANGE: 19951106 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________ FORM 10-Q __________________ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1997 COMMISSION FILE NUMBER: 0-27242 __________________ PHYSIO-CONTROL INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) WASHINGTON 91-1673799 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11811 WILLOWS ROAD N.E. REDMOND, WASHINGTON 98052 (Address of principal executive offices) (425) 867-4000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- As of August 1, 1997, there were 17,256,145 shares of the Registrant's Common Stock outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1 _______________________________________________________________________________ FORM 10-Q JUNE 30, 1997 Index Page ----- ---- PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements - Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . 3 - Consolidated Statements of Operations for the three and six months ended June 30, 1997 and 1996 . . . . . . . . . . . 4 - Consolidated Statements of Changes in Stockholders' Equity for the three month periods ended March 31 and June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 - Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996. . . . . . . . . . . . . . . . . 6 - Notes to Consolidated Financial Statements. . . . . . . . . . 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . 9 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . .12 ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . .12 ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .13 2 PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS _______________________________________________________________________________ CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) - -------------------------------------------------------------------------------
JUNE 30, 1997 DECEMBER 31, 1996 ------------------- ----------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $2,742 $3,336 Accounts receivable, net 41,285 38,869 Inventories 37,552 31,811 Prepaid income taxes 1,015 3,967 Prepaid expenses 2,520 1,401 ------------------- ---------------- Total current assets 85,114 79,384 NONCURRENT ASSETS Other assets 1,009 1,180 Deferred income taxes 2,175 2,175 Property, plant and equipment, net 15,120 13,123 ------------------- ---------------- TOTAL ASSETS $103,418 $95,862 ------------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $11,540 $9,260 Accrued liabilities 16,436 19,146 Deferred income taxes 494 494 ------------------- ---------------- Total current liabilities 28,470 28,900 ------------------- ---------------- NONCURRENT LIABILITIES Long-term debt 21,694 21,031 Unfunded pension obligations 1,370 1,711 ------------------- ---------------- Total noncurrent liabilities 23,064 22,742 ------------------- ---------------- Commitments and contingencies (Note 5) STOCKHOLDERS' EQUITY Preferred stock, par value $0.01 per share, 5,000,000 shares authorized, no shares issued or outstanding Common stock, voting, par value $0.01 per share, 40,000,000 shares authorized; 17,236,133 and 17,020,245 shares issued and outstanding, respectively 173 170 Additional paid-in capital 27,993 25,707 Retained earnings 23,734 18,098 Equity adjustment from foreign currency translation (16) 245 ------------------- ---------------- Total stockholders' equity 51,884 44,220 ------------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,418 $95,862 ________________________________________________________________________________________________________
- -------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 3 _______________________________________________________________________________ CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except share and per share data) (unaudited) - -------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1997 1996 1997 1996 --------- --------- --------- --------- Net sales $45,011 $42,923 $85,738 $85,678 Cost of sales 21,959 20,715 41,805 42,147 --------- --------- --------- --------- Gross profit 23,052 22,208 43,933 43,531 --------- --------- --------- -------- Research and development 4,894 4,569 10,131 9,207 Sales and marketing 10,331 8,668 19,185 16,815 General and administrative 2,600 2,451 4,614 5,141 --------- --------- --------- -------- Operating expense 17,825 15,688 33,930 31,163 --------- --------- --------- -------- Interest expense (401) (448) (860) (874) Other expense, net (236) (182) (472) (458) --------- --------- --------- -------- Other expense (637) (630) (1,332) (1,332) --------- --------- --------- -------- Income before income tax 4,590 5,890 8,671 11,036 Income tax expense (1,607) (2,003) (3,035) (3,753) --------- --------- --------- -------- NET INCOME $2,983 $3,887 $5,636 $7,283 --------- --------- --------- -------- Net earnings per common and common equivalent share $0.17 $0.22 $0.31 $0.41 Weighted average number of common and common equivalent shares outstanding 17,846,393 17,934,734 17,963,656 17,901,956 ____________________________________________________________________________________________________________________________
- -------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 4 _______________________________________________________________________________ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (dollars in thousands, except share data) (unaudited) - -------------------------------------------------------------------------------
EQUITY ADJUSTMENT ADDITIONAL FROM FOREIGN COMMON STOCK PAID-IN RETAINED CURRENCY SHARES DOLLARS CAPITAL EARNINGS TRANSLATION TOTAL ------------- ---------- ---------- --------- ------------ --------- BALANCE AT DECEMBER 31, 1996 17,020,245 $170 $25,707 $18,098 $245 $44,220 Issuance of common shares 46,791 1 915 916 Stock issued upon exercise of options 87,405 1 407 408 Income tax benefit from exercise of stock options 428 428 Net income 2,653 2,653 Equity adjustment from foreign currency translation (324) (324) ------------- ---------- ---------- --------- ------------ --------- BALANCE AT MARCH 31, 1997 17,154,441 172 27,457 20,751 (79) 48,301 Stock issued upon exercise of options 81,692 1 217 218 Income tax benefit from exercise of stock options 319 319 Net income 2,983 2,983 Equity adjustment from foreign currency translation 63 63 ------------- ---------- ---------- --------- ------------ --------- BALANCE AT JUNE 30, 1997 17,236,133 $173 $27,993 $23,734 ($16) $51,884 ______________________________________________________ __________ __________ _________ ____________ _________
- -------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 5 _______________________________________________________________________________ CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) - -------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1997 1996 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $5,636 $7,283 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES: Depreciation and amortization 1,136 630 Increase in receivables (2,416) (5,447) Increase in inventories (5,741) (686) Decrease in prepaid income taxes 2,952 2,637 Increase in prepaid expense and other assets (1,153) (1,181) Increase (decrease) in accounts payable 2,280 (33) Decrease in accrued and other liabilities (3,051) (5,625) Increase in income taxes payable 189 ---------- --------- Net cash used in operating activities (357) (2,233) ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (2,928) (3,754) ---------- --------- Net cash used in investing activities (2,928) (3,754) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock 1,542 182 Borrowings under revolving debt 27,679 35,924 Repayments of revolving debt (27,016) (29,791) Income tax benefit from exercise of stock options 747 ---------- --------- Net cash provided by financing activities 2,952 6,315 ---------- --------- Effect of foreign currency translation (261) (119) ---------- --------- Net (decrease) increase in cash and cash equivalents (594) 209 Cash and cash equivalents at beginning of period 3,336 4,575 ---------- --------- Cash and cash equivalents at end of period $2,742 $4,784 _____________________________________________________________________ _________
- --------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 6 _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (dollars in thousands, except share and per share data) (unaudited) - ------------------------------------------------------------------------------- NOTE 1. GENERAL The consolidated financial statements of Physio-Control International Corporation (the "Company") at June 30, 1997 and for the three and six month periods then ended are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim period. The consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The results of operations for the three and six month periods ended June 30, 1997 are not necessarily indicative of the results for the entire fiscal year ending December 31, 1997. During May 1997, the Company (previously a Delaware Corporation) was re-incorporated in the State of Washington. Also in June 1997, a wholly-owned subsidiary of the Company, Physio-Control Corporation ("PCC") was re-incorporated in the State of Washington. These actions were approved by the shareholders at the Annual Meeting held May 1, 1997. See Part II, Item 4 included herein. During July 1997, the Company formed a new wholly-owned subsidiary, Physio-Control Manufacturing Corporation, ("PCMC") which was incorporated as a Washington corporation. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES EARNINGS PER SHARE Net earnings per common and common equivalent share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Fully diluted net earnings per common and common equivalent share is not materially different from primary net earnings per common and common equivalent share and is therefore not presented. RECLASSIFICATIONS Certain amounts in the prior periods have been reclassified to conform with the current period presentation. NOTE 3. INVENTORIES Inventories consist of the following: JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- Finished products $21,467 $17,318 Purchased parts and assemblies in process 8,856 6,534 Service parts 9,273 10,453 ------------- ------------------ 39,596 34,305 Less inventory allowances (2,044) (2,494) ------------- ------------------ TOTAL INVENTORIES $37,552 $31,811 ------------- ------------------ ------------- ------------------ NOTE 4. BANK BORROWINGS During June 1997, PCC refinanced its existing indebtedness and entered into a new $30.0 million revolving bank credit facility 7 ("the Agreement") of which up to $5.0 million may be used for issuance of standby letters of credit. The Agreement, which matures during May 2000, replaced an existing $30.0 million revolving bank credit agreement which was to expire during December 1998. Interest on advances under the Agreement bear interest at the borrower's option, at either (i) the reference rate (the higher of the lender's prime rate or federal funds rate plus 1%) (ii) LIBOR plus 0.5% or (iii) quoted rate (rate quoted by lender and accepted by borrower plus 0.5%). Such rates are subject to increase in the event that the Company does not meet the fixed charge coverage ratio as defined in the Agreement. The Company is required to pay a commitment fee equal to 0.125% of the amount by which the available credit exceeds the outstanding advances on a quarterly basis. This rate is subject to increase in the event that the Company does not meet the fixed charge coverage ratio as defined. The revolving credit facility is secured by a first priority security interest in and lien on all of the accounts receivable and inventories of PCC, (located in the United States) and is guaranteed by the Company and PCMC. The Agreement includes various affirmative and negative financial covenants which require, among other things, that the Company maintain a certain fixed charge coverage ratio, debt to net worth ratios, as well as a minimum tangible net worth, as defined in the Agreement. As of June 30, 1997, the Company had $19.8 million outstanding under the Agreement, including $0.6 million in letters of credit. NOTE 5: COMMITMENTS AND CONTINGENCIES LITIGATION The Company is party to certain legal actions arising in the ordinary course of its business. The Company's estimates of these exposures are based primarily on historical claims experience. The Company expects settlements related to these claims to be paid over the next several years. The majority of the costs associated with defending and disposing of these suits are covered by insurance. On November 13, 1995, the Company initiated litigation in Washington State Court against Heartstream, Inc. ("Heartstream"), a company formed to develop, manufacture and market defibrillators, as well as certain individuals who were formerly employed by the Company and who are founders of and employees of Heartstream. The Company's claims are based on its belief that Heartstream and such individuals have, among other things, misappropriated certain of the Company's intellectual property and that such individuals have breached contractual obligations to the Company. The Company received an answer to its complaint from Heartstream and in its answer, Heartstream denies the Company's claims and alleges certain counterclaims against the Company for, among other things, monopolization of the industry and tortuous interference with business opportunities. While the Company believes it has meritorious defenses against the suit, the ultimate resolution of the matter could result in a loss of up to $10 million. The parties are currently conducting discovery in this litigation and a tentative trial date has been set for March 1998. Additionally, during January 1997, Heartstream initiated litigation against the Company in U.S. District Court for the Western District of Washington alleging that the Company is infringing a Heartstream patent related to product self-test features. The Company has filed an answer denying Heartstream's claims and alleging certain counterclaims against Heartstream for infringement of a Company self-test patent. Discovery is in the initial stages in this litigation. If the Company does not prevail in these litigations or otherwise successfully resolve its claims, its ability to design and market certain future products may be adversely affected. In addition, if a court were to find in favor of Heartstream on its claims, the Company could be liable for significant damages. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position of the Company. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's future results may differ significantly from the results discussed herein due to many factors, including, but not limited to, product demand, the effect of general economic conditions, the impact of competitive products and pricing, product development, commercialization and technological difficulties, U.S. and foreign regulatory requirements, the effects of accounting policies and financing requirements, and other such risks and factors. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996 The Company reported worldwide sales of $45.0 million during the second quarter of 1997, reflecting an increase of $2.1 million or 5% from the comparable 1996 quarter. International sales of $14.0 million were up 44% from the comparable 1996 period, due in part to a Russian shipment totaling $2.1 million. Domestic sales during the current quarter aggregated $31.0 million, down 7% from the comparable 1996 quarter. Worldwide equipment sales of $29.3 million increased slightly from the comparable 1996 quarter due to the large Russian shipment, partially offset by the decrease in domestic equipment sales. Worldwide service revenue of $7.2 million increased 8% over the comparable prior year period, and supplies (disposable and accessories) revenue of $8.5 million increased 17% due to a strong demand for the Company's disposable products, primarily QUIK-COMBO-TM- electrodes. Domestic sales decreased $2.2 million from the comparable 1996 quarter mainly due to lower sales in the out-of-hospital market, which had benefited from strong 1996 sales driven by the introduction of LIFEPAK-Registered Trademark-11 products. Notwithstanding, the Company shipped orders totaling $1.9 million to Marquette Medical Systems as a result of the Companies' recent alliance announced during the first quarter of 1997. Internationally, sales increased 44% from the prior year quarter due to the $2.1 million shipment discussed above as well as higher sales in the United Kingdom and France. During the second quarter of 1997, the Company reported worldwide product orders of $36.8 million, up $4.5 million or 14% from the comparable 1996 quarter. The increase in product orders is attributed to continued strong acceptance of the Company's automated external defibrillators (AEDs), specifically the new LIFEPAK 500 defibrillator, in both the US and international markets, as well as the $1.9 million shipments to Marquette Medical Systems. Domestic and international product orders increased 12% and 17%, respectively, over the comparable 1996 quarter. Gross profit of $23.1 million increased $0.8 million during the current quarter from the $22.2 million reported during the comparable 1996 period. As a percentage of sales, gross margin decreased to 51.2% from 51.7% during the comparable 1996 quarter. The decrease in gross margin was driven primarily by aggressive pricing in Europe partly offset by a more favorable domestic product mix. Research and development ("R&D") expenditures of $4.9 million increased 7% during the current quarter from $4.6 million in the comparable 1996 period. As a percentage of sales, R&D expenses remained essentially unchanged at 11%. R&D expenditures increased over the prior year period due to the Company's continuing commitment to develop new products as well as conduct ongoing research for future products and technology. Sales and marketing expenditures of $10.3 million increased 19% from the comparable 1996 quarter. The increase resulted from enhanced sales and marketing efforts worldwide as well as approximately $0.4 million in selling expense associated with the Russian sale. General and administrative expenditures of $2.6 million increased $0.1 million from the comparable 1996 quarter. Other expenses, consisting primarily of interest expense, totaled $0.6 million and remained consistent with the comparable 1996 quarter. Income tax expense of $1.6 million reflected an increase in the Company's effective tax rate from 34% in the comparable 1996 period to 35% during the current period. As a result of the above factors, net income for the second quarter of 1997 was $3.0 million, a decrease of $0.9 million from the comparable 1996 quarter. 9 RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 The Company reported worldwide sales of $85.7 million during the six month period ended June 30, 1997, which were essentially unchanged from the comparable 1996 period. Domestic sales of $60.6 million were down $4.0 million, or 6% from the prior year period. International sales of $25.1 million, however, were up 19% or $4.0 million from the prior year period due in part to the significant Russian shipment which included both equipment and accessory products. Worldwide equipment sales of $55.4 million decreased 4% during the current six month period while worldwide service and supplies revenue totaling $30.3 million increased 9% from the $27.7 million reported in 1996. The decrease in equipment sales from the prior six month period was due primarily to lower demand in the domestic hospital market as well as a decrease in LIFEPAK 11 defibrillator sales following the introduction of this product during 1996. This decrease is partly offset by the success of the LIFEPAK 500 products in the AED market. The increase in service and supplies revenue was due primarily to strong sales of QUIK-COMBO electrodes, as well as growth in the Company's installed base of customers. During the six months ended June 30, 1997, worldwide product orders totaled $73.9 million, an increase of $6.0 million or 9% over the comparable prior year period. Domestic orders were up 6% while international orders increased 15% and included the 1997 Russian order and strong performance in the United Kingdom. Gross profit during the six months ended June 30, 1997 totaled $43.9 million, an increase of $0.4 million or 1% from the comparable prior year period. As a percentage of sales, gross profit increased from 50.8% in the prior year period to 51.2% in the current six months, largely due to favorable domestic product sales mix, partly offset by aggressive international pricing. R&D expenses for the six months ended June 30, 1997 were $10.1 million, an increase of $0.9 million or 10% over the comparable prior year period. As a percentage of sales, R&D expenses increased slightly from 11% in the comparable 1996 period to 12% during the current year period. Sales and marketing expenditures of $19.2 million during the current six month period increased $2.4 million, or 14% from the comparable 1996 period. The increase was due to costs incurred for sales and marketing efforts aimed at introducing the Company's new LIFEPAK 500 defibrillator during the first quarter of 1997, as well as a continued commitment of resources at developing the international marketplace and increasing international market share. Selling and marketing expenses in the current six month period also include $0.4 million in Russian selling expense as discussed above. As a percentage of sales, sales and marketing expenses increased from 20% during the prior year period to 22% during the current year period. General and administrative expenditures of $4.6 million decreased 10%, or $0.5 million, from the comparable prior year period mainly due to no counterpart during 1997 to the 1996 bonus accrual. As a percentage of sales, general and administrative expenses decreased from 6% during the comparable prior year period to 5% during the current year period. Other expenses, consisting primarily of interest expense, totaled $1.3 million, essentially unchanged from the prior year period. Income tax expense of $3.0 million reflected an increase in the Company's effective tax rate from 34% in the comparable 1996 period to 35% during the current six month period. As a result of the above factors, net income for the six month period ended June 30, 1997 was $5.6 million, a decrease of $1.6 million, or 23% from the comparable 1996 period. 10 LIQUIDITY AND CAPITAL RESOURCES Management assesses the Company's liquidity by its ability to generate cash to fund operations. Significant factors in the management of liquidity are: funds provided or used by operations, capital expenditures, levels of accounts receivable, inventories, accounts payable, as well as adequate lines of credit. During the six months ended June 30, 1997, the Company used $0.4 million in cash to finance operations. The use of working capital funds was attributed to increased inventories as well as higher accounts receivables resulting from an increased sales volume during the month of June 1997. Cash used in investing activities during the six months ended June 30, 1997 totaled $2.9 million and related to capital expenditures. Consistent with 1996, the majority of current capital expenditures related to the final stages of implementation of the Company's new computer business system, which was completed during the first quarter of 1997. Additional capital expenditures during the six month period ended June 30, 1997 related to purchases of research and engineering equipment and tooling for new products. The Company does not have any capital commitments outside the ordinary course of business. The Company's principal working capital requirements are financing accounts receivable and inventories. At June 30, 1997, the Company had net working capital of $56.6 million, consisting of accounts receivable of $41.3 million, inventories of $37.6 million, accounts payable of $11.5 million and accrued liabilities of $16.4 million. During June 1997, PCC refinanced its existing indebtedness and entered into a new $30.0 million revolving bank credit facility as discussed in Notes to Consolidated Financial Statements, Part 1, Item 1, included herein. The Agreement, which matures during May 2000 offers a lower cost of borrowing with reduced interest rates and affords the Company greater flexibility in cash management by consolidating the number of banking institutions at which the Company consolidates cash balances. The Company is required to pay a commitment fee equal to 0.125% of the amount by which the available credit exceeds the outstanding advances on a quarterly basis. This rate is subject to increase in the event that the Company does not meet the fixed charge coverage ratio as defined in the Agreement. The credit facility is secured by a first priority security interest in and lien on all of the accounts receivable and inventories of PCC (located in the United States) and is guaranteed by the Company and PCMC. The credit facility includes various affirmative and negative financial covenants which require, among other things, that the Company maintain a certain fixed charge coverage ratio, debt to net worth ratios, as well as a minimum tangible net worth, as defined in the Agreement. As of June 30, 1997 the Company had $19.8 million outstanding under the Agreement, including $0.6 million in letters of credit. In addition, the Company has subordinated notes payable to Eli Lilly and Company totaling $2.5 million which originated in the acquisition of PCC and certain foreign assets. Notes with a principal balance totaling $1.5 million mature on January 31, 2001 and bear interest at LIBOR plus 3.25% . A note with a principal balance of $1.0 million matures November 15, 1998 and bears interest at LIBOR plus 3.0%. The Company believes, based upon current levels of operations and anticipated growth, that funds generated from operations and available borrowings under the credit Agreement, will be sufficient over the next twelve months for the Company to make anticipated capital expenditures and fund working capital requirements. Approximately 29% of the Company's sales during the six months ended June 30, 1997 were to international customers and the Company expects that sales to international customers will continue to represent a material portion of its revenues. Certain of the Company's international receivables are denominated in foreign currencies and exchange rate fluctuations impact the carrying 11 value of these receivables. The Company has elected to hedge certain assets denominated in foreign currencies with the purchase of forward contracts. Historically, fluctuations in foreign currency exchange rates have not had a material effect on the Company's results of operations and, with certain hedging activities, the Company does not expect such fluctuations to be material in the foreseeable future. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes in the litigation reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (See Note 5 of the Notes to Consolidated Financial Statements in Part I, Item 1, above). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Shareholders held on May 1, 1997, the following actions were taken: 1. Election of Nominated Class II Directors For: 15,159,873 Withheld: 302,610 ---------- -------- 2. Approval of Re-incorporation in Washington For: 12,804,440 Against: 1,685,783 Abstain: 972,260 ---------- --------- ------- 3. Adoption of an Amended & Restated 1997 For: 10,168,523 Against: 4,340,620 Abstain: 953,340 Stock and Incentive Plan ---------- --------- ------- 4. Ratification of Price Waterhouse LLP For: 15,447,785 Against: 13,177 Abstain: 1,521 as Independent Auditors ---------- --------- -------
No other matters were submitted to or actions taken by the Shareholders at said Annual Meeting. 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 3.2 Agreement and Plan of Merger 3.2(i) Articles of Incorporation 3.2(ii) Certificate of Merger 3.2(iii) Articles of Merger 10.16 Release Agreement, dated June 3, 1997, between Physio-Control International Corporation, Physio-Control Corporation and Creditanstalt-Bankverein 10.17 Credit Agreement, dated June 3, 1997, by and among Physio-Control Corporation, certain banks and Bank of America, National Trust and Savings Association, as administrative agent 10.18 Commercial security agreement, dated June 3, 1997, between Physio-Control Corporation and Bank of America, National Trust and Savings Association, as administrative agent 10.19 Commercial Security Agreement, dated June 3, 1997, between Physio-Control Manufacturing Corporation and Bank of America National Trust and Savings Association, as administrative agent 10.20 Amended and Restated 1997 Stock and Incentive Plan (incorporated by reference to the Company's Annual Proxy Statement filed with the Securities and Exchange Commission in April 1997.) 21.1 Subsidiaries of the Company 27.1 Financial Data Schedule
No reports on Form 8-K were filed during the quarter ended June 30, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized to sign on behalf of the registrant and as the principal financial officer thereof. Dated: August 14, 1997 PHYSIO-CONTROL INTERNATIONAL CORPORATION By /s/ Joseph J. Caffarelli -------------------------------------- Joseph J. Caffarelli Executive Vice President and Chief Financial Officer 13 EX-3.2 2 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is entered into as of the 20th day of May, 1997, in accordance with Section 252 of the General Corporation Law of the State of Delaware, as amended, and RCW 23B.11.070, by and between New Physio Corporation, a Washington corporation ("Surviving Corporation"), and Physio-Control International Corporation, a Delaware corporation ("Merging Corporation"). Surviving Corporation and Merging Corporation are sometimes collectively referred to hereinafter as the "Constituent Corporations." RECITALS A. The respective boards of directors of Merging Corporation and Surviving Corporation have determined it in the best interest of each respective Constituent Corporation to merge (the "Merger") Merging Corporation with and into Surviving Corporation. B. The board of directors of Merging Corporation recommended approval of the Merger by the Merging Corporation shareholders and presented such proposal to the shareholders at the 1997 annual meeting held on May 1, 1997, and the shareholders approved such Merger at the meeting. C. The Constituent Corporations now desire the Merger to be effected pursuant to the terms and conditions of this Merger Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows: 1. GENERAL. 1.1 THE MERGER. On the Effective Date (as herein defined) of the Merger, Merging Corporation shall be merged with and into Surviving Corporation and the separate existence of Merging Corporation shall cease and Surviving Corporation shall survive such Merger. 1.2 ARTICLES OF INCORPORATION AND BYLAWS. The Articles of Incorporation of Surviving Corporation as in effect immediately prior to the Effective Date shall be the Articles of Incorporation of the Surviving Corporation, except that Article I of the Articles of Incorporation of Surviving Corporation hereby is amended and restated as follows: The name of the corporation is Physio-Control International Corporation. The By-laws of Surviving Corporation as in effect immediately prior to the Effective Date shall be the By-laws of the surviving corporation. 1.3 DIRECTORS AND OFFICERS. The directors of Merging Corporation in office on the Effective Date shall become the directors of the surviving corporation, until their successors shall have been elected and qualified. The officers of Merging Corporation in office on the Effective Date shall become the officers of the surviving corporation, until their successors shall have been elected and qualified. 1.4 PROPERTY AND LIABILITIES OF CONSTITUENT CORPORATIONS. On the Effective Date, the separate existence of Merging Corporation shall cease and Merging Corporation shall be merged into the surviving corporation. The Surviving Corporation, from and after the Effective Date, shall possess all the rights, privileges, powers and franchises of whatsoever nature and description, of a public as well as of a private nature, and be subject to all the restrictions, disabilities and duties of each of the Constituent Corporations; all rights, privileges, powers and franchises of each of the Constituent Corporations, and all property, real, personal and mixed, of and debts due to either of the Constituent Corporations on whatever account as , well for stock subscriptions as all other things in action or belonging to each of the Constituent Corporations shall be vested in the Surviving Corporation; and all property, rights, privileges, powers and franchises, and all other interests shall be thereafter as effectually the property of the surviving corporation as they were of the several and respective Constituent Corporations and the title to any real estate vested by deed or otherwise in either of the Constituent Corporations shall not revert or be in any way impaired by reason of the Merger. All rights of creditors and all liens upon the property of the Constituent Corporations shall be preserved unimpaired, and all debts, liabilities and duties of the Constituent Corporations thenceforth shall attach to the surviving corporation, and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. Any claim existing or action or proceeding, whether civil, criminal or administrative pending by or against either Constituent Corporation may be prosecuted to judgment or decree as if the Merger had not taken place, or the surviving corporation may be substituted in such action or proceeding. 1.5 FURTHER ASSURANCES. Merging Corporation agrees that, at any time, or from time to time, as and when requested by the Surviving Corporation, or by its successors and assigns, it will execute and deliver, or cause to be executed and delivered in its name by its last acting officers, or by the corresponding officers of the Surviving Corporation, all such conveyances, assignments, transfers, deeds or other instruments, and will take or cause to be taken such further or other action as the Surviving Corporation, its successors or assigns may deem necessary or desirable in order to evidence the transfer, vesting or devolution of any -2- property, right, privilege or franchise or to vest or perfect in or confirm to the Surviving Corporation, its successors and assigns, title to and possession of all the property, rights, privileges, powers, franchises and interests referred to in this Section 1 herein and otherwise to carry out the intent and purposes hereof. 1.6 SHAREHOLDER APPROVAL. In order for the Merger to be effective, a majority of the shareholders of the Merging Corporation entitled to vote thereon must approve the Merger ("Shareholder Approval") at the 1997 Annual Meeting, which Shareholder Approval was received on May 1, 1997. 1.7 EFFECTIVE DATE. With receipt of Shareholder Approval as provided in Section 1.6 above, this Merger Agreement shall become effective at 4:59 p.m. Pacific time on the later of (a) the day on which an executed counterpart of a Certificate of Ownership and Merger is filed with the Secretary of State of the State of Delaware in the manner required by the General Corporation Law of the State of Delaware and (b) the day on which an executed counterpart of Articles of Merger containing this Merger Agreement are filed with the Secretary of State of Washington in the manner required by the Washington Business Corporation Act or (c) a later specified effective date as set forth in the Articles of Merger so filed with the Secretaries of State (the "Effective Date"). 2. CAPITAL STOCK OF THE SURVIVING CORPORATION. 2.1 MERGING CORPORATION SHARES. Each share of the Common Stock of Merging Corporation issued and outstanding immediately prior to the Effective Date, upon the Effective Date, by virtue of the Merger and without any action on the part of the holder thereof, shall be converted into one validly issued, fully paid and non-assessable share of Common Stock of Surviving Corporation. 2.2 SURVIVING CORPORATION SHARES. On the Effective Date, by virtue of the Merger and without any action on the part of the holder thereof, each share of Common Stock of Surviving Corporation outstanding immediately prior thereto shall be canceled and returned to the status of authorized but unissued shares. 2.3 EXCHANGE OF STOCK CERTIFICATES. On and after the Effective Date, the shareholders of Merging Corporation may surrender to Surviving Corporation the certificate or certificates which represent shares of capital stock of Merging Corporation to an agent designated by Surviving Corporation, and shall thereupon be entitled to receive such number of shares of capital stock of Surviving Corporation in accordance with this Section 2. 2.4 STOCK OPTIONS AND EXCHANGE RIGHTS. Pursuant to the provisions of the Delaware General Corporation Law and the Washington Business Corporation Act, Surviving Corporation shall (a) assume Merging Corporation's 1997 Amended and Restated Stock and Incentive Agreement (the "1997 Plan"), Physio-Control International Corporation Employee -3- Share Purchase Plan (the "ESPP") and all obligations thereunder and stock options issued pursuant thereto, and (b) reserve for issuance upon the exercise of outstanding and future stock options granted pursuant to the 1997 Plan, and reserve for issuance shares subject to purchase under the ESPP, the number of shares of Common Stock as set forth in each plan. 3. MISCELLANEOUS. 3.1 COUNTERPARTS. This Merger Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall constitute one Merger Agreement. IN WITNESS WHEREOF, the Constituent Corporations have executed this Merger Agreement as of the date and year first above written. MERGING CORPORATION: Physio-Control International Corporation, a Delaware corporation /s/ V. Marc Droppert By______________________________________ V. Marc Droppert Secretary SURVIVING CORPORATION: New Physio Corporation, a Washington corporation /s/ V. Marc Droppert By______________________________________ V. Marc Droppert Secretary -4- EX-3.2(I) 3 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF NEW PHYSIO CORPORATION ARTICLE I - NAME The name of the corporation is New Physio Corporation (hereinafter referred to as the "Corporation"). ARTICLE II - REGISTERED AGENT AND OFFICE The address of the registered office of the Corporation in the State of Washington is 5000 Columbia Seafirst Center, 701 Fifth Avenue, Seattle, Washington 98104-7078 and the name of the registered agent of the Corporation at such address is PTSGE Corp. ARTICLE III - PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Washington Business Corporation Act, as amended from time to time (the "Act"). ARTICLE IV - CAPITAL STOCK SECTION A. AUTHORIZED CAPITAL. The maximum number of shares of stock that the Corporation is authorized to have outstanding at any one time is 45,000,000 shares consisting of 40,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock") and 5,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). SECTION B. COMMON STOCK. Except as otherwise provided by the Act, by these Articles of Incorporation and subject to the rights of holders of any series of Preferred Stock, the holders of record of Common Stock shall share ratably in all dividends payable in cash, stock or otherwise and other distributions, whether in respect of liquidation or dissolution (voluntary or involuntary) or otherwise and, are subject to all the powers, privileges, preferences and priorities of any series of Preferred Stock as provided herein or in any resolution or resolutions adopted by the board of directors pursuant to authority expressly vested in it by the provisions of Section C of this ARTICLE IV. (a) The Common Stock shall not be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same of the Corporation's capital stock. (b) No holder of Common Stock shall have any preemptive, subscription, redemption, conversion or sinking fund with respect to the Common Stock, or to any obligations convertible (directly or indirectly) into stock of the Corporation whether now or hereafter authorized. (c) Except as otherwise provided by the Act, by these Articles of Incorporation and subject to the rights of holders of any series of Preferred Stock, all of the voting power of the shareholders of the Corporation shall be vested in the holders of the Common Stock, and each holder of Common Stock shall have one vote for each share held by such holder on all matters voted upon by the shareholders of the Corporation. SECTION C. PREFERRED STOCK. Authority is hereby expressly vested in the board of directors of the Corporation, subject to the provisions of this ARTICLE IV and to the limitations prescribed by law, to authorize the issuance from time to time of one or more series of Preferred Stock. The authority of the board of directors with respect to each series shall include, but not be limited to, the determination or fixing of the following by resolution or resolutions adopted by the affirmative vote of a 70% of the total number of the directors then in office. (a) The designation of such series; (b) The dividend rate of such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes or series of the Corporation's capital stock, and whether such dividends shall be cumulative or non-cumulative; (c) Whether the shares of such series shall be subject to redemption for cash, property or , including securities of any other corporation, by the Corporation or upon the happening of a specified event, and, if made subject to any such redemption, the times or events, prices, rates, adjustments and other terms and conditions of such redemptions; (d) The terms and amount of any sinking fund provided for the purchase or redemption of the shares of such series; (e) Whether or not the shares of such series shall be convertible into, or exchangeable for, at the option of either the holder or the Corporation or upon the happening of a specified event, shares of any other class or classes or of any other series Of the same class of the Corporation's capital stock, and, if provision be made for conversion or exchange, the times or events, prices, rates, adjustments and other terms and conditions of such conversions or exchanges; (f) The restrictions, if any, on the issue or reissue of any additional Preferred Stock; (g) The rights of the holders of the shares of such series upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (h) The provisions as to voting, optional and/or other special rights and preferences, if any, including, without limitation, the right to elect one or more directors. ARTICLE V - EXISTENCE The Corporation is to have perpetual existence. ARTICLE VI - BY-LAWS In furtherance and not in limitation of the powers conferred by statute, the board of directors of the Corporation is expressly authorized to make, alter, amend, change, add to or repeal the by-laws of the Corporation by the affirmative vote of 70% of the total number of directors then in office. Any alteration or repeal of the by-laws of the Corporation by the shareholders of the Corporation shall require the affirmative vote of at least 66 2/3% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote on such alteration or repeal, subject to ARTICLE IX hereof. ARTICLE VII - SHAREHOLDERS AND DIRECTORS SECTION A. SHAREHOLDER ACTION. Election of directors need not be by written ballot unless the by-laws of the Corporation so provide. Subject to the rights of any series of Preferred Stock, (i) any action required or permitted to be taken by the shareholders of the Corporation must be effected at an annual or special meeting of shareholders of the Corporation, (ii) special meetings of shareholders of the Corporation may be called only by either the board of directors pursuant to a resolution adopted by the affirmative vote of the majority of the total number of directors then in office or by the chief executive officer of the Corporation, and (iii) advance notice of shareholder nominations of persons for election to the board of directors of the Corporation and of business to be brought before any annual meeting of the shareholders by the shareholders of the Corporation shall be given in the manner provided in the by-laws of the Corporation. shareholders of the Corporation shall not have cumulative voting rights. SECTION B. NUMBER OF DIRECTORS AND TERM OF OFFICE. Subject to any rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors which shall constitute the Board of Directors of the Corporation shall be such number as shall from time to time be fixed by resolution adopted by the affirmative vote of 70% of the total number of directors then in office. The directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Membership in such class shall be as nearly equal in number as possible. The term of office of the initial Class I directors shall expire at the annual election of directors by the stockholders of the Corporation in 1996, the term of office of the initial Class II directors shall expire at the annual election of directors by the stockholders of the Corporation in 1997, and the term of office of the initial Class III directors shall expire at the annual election of directors by the stockholders of the Corporation in 1998, or thereafter when their respective successors in each case are elected by the stockholders and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office for cause. At each succeeding annual election of directors by the stockholders of the Corporation beginning in 1996, the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed and shall be elected for a term expiring at the third succeeding annual election of directors by the stockholders of the Corporation, or thereafter when their respective successors in each case are elected by the stockholders and qualified. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. SECTION C. REMOVAL AND RESIGNATION. A director may be removed by the shareholders only at a special meeting called for the purpose of removing the director and the meeting notice shall state that the purpose, or one of the purposes, of the meeting is removal of the director. A director may be removed from office with cause only if the number of votes cast to remove the director by holders of outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors exceeds the number of votes cast not to remove the director; provided, however, that if a director is elected by the holders of one or more authorized classes or series of capital stock,, such director or directors so elected may be removed without cause only by the vote of the holders of the outstanding shares of that class or series entitled to vote. Any director may resign at any time upon written notice to the board of directors, its chairperson, the president or secretary of the Corporation. SECTION D. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject to any rights of the holders of any series of Preferred Stock to fill such newly created directorships or vacancies, any newly created directorships resulting from any increase in the authorized number of directors and any vacancies in the board of directors resulting from death, resignation, disqualification, removal or other cause shall, unless otherwise provided by law or by resolution approved by the affirmative vote of 70% of the total number of directors then in office, be filled only by resolution approved by the affirmative vote of 70% of the total number of directors then in office, and any director so chosen shall hold office until the next election of the class for which such director shall have been chosen, and until his successor shall have been duly elected and qualified, unless he shall resign, die, become disqualified or be removed for cause. ARTICLE VIII - GENERAL PROVISIONS SECTION A. DIVIDENDS. The board of directors shall have authority from time to time to set apart out of any assets of the Corporation otherwise available for dividends a reserve or reserves as working capital or for any other purpose or purposes, and to abolish or add to any such reserve or reserves from time to time as said board may deem to be in the interest of the Corporation; and said board shall likewise have power to determine in its discretion, except as herein otherwise provided, what part of the assets of the Corporation available for dividends in excess of such reserve or reserves shall be declared in dividends and paid to the shareholders of the Corporation. SECTION B. ISSUANCE OF STOCK. The shares of all classes of stock of the Corporation may be issued by the Corporation from time to time for such consideration as from time to time may be fixed by the board of directors of the Corporation. At any time, or from time to time, the Corporation may grant rights, options or warrants to purchase from the Corporation any shares of its stock of any class or classes to run for such period of time, for such consideration, upon such terms and conditions, and in such form as the board of directors may determine. When the Corporation has received such consideration and the board of directors has made a good faith determination that such consideration is adequate, the shares issued therefor are fully paid and nonassessable. SECTION C. INSPECTION OF BOOKS AND RECORDS. Shareholders of the Corporation have the right to inspect and copy certain accounts, books and records of the Corporation at the times and places and under the conditions specified in the Act. SECTION D. LOCATION OF MEETINGS, BOOKS, AND RECORDS. Except as otherwise provided in the by-laws, the shareholders of the Corporation and the board of directors may hold their meetings inside or outside of the State of Washington. ARTICLE IX - AMENDMENTS The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation in the manner now or hereinafter prescribed herein and by the Act or other laws of the State of Washington, and all rights conferred upon shareholders herein are granted subject to this reservation. These Articles of Incorporation shall not be altered, amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of at least 66 2/3% of the voting power of the then outstanding shares of capital stock of each voting group as specified in the Act entitled to vote on such alteration, amendment or repeal, as a separate voting group. ARTICLE X - LIMITATION OF DIRECTOR LIABILITY (a) To the fullest extent permitted by the Act as it now exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), and except as otherwise provided in the Corporation's by-laws, no director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director, except for: (i) Acts or omissions involving intentional misconduct by the director or a knowing violation of law by the director; (ii) Conduct violating Section 23B.08.310 of the Act (which involves certain distributions by the corporation); (iii) Any transaction from which the director will personally receive a benefit in money, property, or services to which the director is not legally entitled. (b) Any repeal or modification of the foregoing paragraph by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE XI - INDEMNIFICATION SECTION A. DEFINITIONS. As used in this Article: (a) "Agent" means an individual who is or was an agent of the Corporation or an individual who, while an agent of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise. "Agent" includes, unless the context requires otherwise, the spouse, heirs, estate and personal representative of an agent. (b) "Corporation" means the Corporation, its Subsidiaries, and any domestic or foreign predecessor entity which, in a merger or other transaction, ceased to exist. (c) "Director" means an individual who is or was a Director of the Corporation or an individual who, while a Director of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise. "Director" includes, unless the context requires otherwise, the spouse, heirs, estate and personal representative of a Director. (d) "Employee" means an individual who is or was an employee of the Corporation or an individual, while an employee of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, limited liability company, partnership, joint venture, trust, employee benefit plan, or other enterprise. "Employee" includes, unless the context requires otherwise, the spouse, heirs, estate, and personal representative of an employee. (e) "Expenses" include counsel fees. (f) "Indemnitee" means an individual made a party to a proceeding because the individual is or was a Director, Officer, Employee, or Agent of the Corporation, and who possesses indemnification rights pursuant to these Articles or other corporate action. "Indemnitee" includes, unless the context requires otherwise, the spouse, heirs, estate, and personal representative of such individuals. (g) "Liability" means the obligation to pay a judgment, settlement, penalty, fine, including an excise tax with respect to an employee benefit plan, or reasonable Expenses incurred with respect to a proceeding. (h) "Officer" means an individual who is or was an officer of the Corporation (regardless of whether or not such individual was also a Director) or an individual who, while an officer of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, limited liability company, partnership, joint venture, trust, employee benefit plan, or other enterprise. "Officer" includes, unless the context requires otherwise, the spouse, heirs, estate and personal representative of an officer. (i) "Party" includes an individual who was, is, or is threatened to be named a defendant, respondent or witness in a proceeding. (j) "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, derivative, criminal, administrative, or investigative, and whether formal or informal. (k) "Subsidiary" means any corporation or other entity that is wholly owned by the Corporation, directly or indirectly, and any other entities that are specifically designated as "Subsidiaries" for purposes of this Article by the Board of Directors. SECTION B. INDEMNIFICATION RIGHTS OF DIRECTORS AND OFFICERS. The Corporation shall indemnify its Directors and Officers to the full extent not prohibited by applicable law now or hereafter in force against liability arising out of a Proceeding to which such individual was made a Party because the individual is or was a Director or an Officer. However, such indemnity shall not apply on account of: (a) Acts or omissions of a Director or Officer finally adjudged to be intentional misconduct or a knowing violation of law; (b) Conduct of a Director or Officer finally adjudged to be in violation of Section 23B.08.310 of the Act relating to distributions by the Corporation; or (c) Any transaction with respect to which it was finally adjudged that such Director or Officer personally received a benefit in money, property, or services to which the Director or Officer was not legally entitled. Subject to the foregoing, it is specifically intended that Proceedings covered by indemnification shall include Proceedings brought by the Corporation (including derivative actions), Proceedings by government entities and governmental officials, or other third party actions. SECTION C. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The Corporation may, by action of its Board of Directors from time to time, provide indemnification and pay Expenses in advance of the final disposition of a Proceeding to Employees and Agents of the Corporation who are not also Directors, in each case to the same extent as to a Director with respect to the indemnification and advancement of Expenses pursuant to rights granted under, or provided by, the Act or otherwise. SECTION D. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled to indemnification by the Corporation for some or a portion of Expenses, liabilities, or losses actually and reasonably incurred by Indemnitee in an investigation, defense, appeal or settlement but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such Expenses, liabilities or losses to which Indemnitee is entitled. SECTION E. PROCEDURE FOR SEEKING INDEMNIFICATION AND/OR ADVANCEMENT OF EXPENSES. The following procedures shall apply in the absence of (or at the option of the Indemnitee, in lieu thereof), specific procedures otherwise applicable to an Indemnitee pursuant to a contract, trust agreement, or general or specific action of the Board of Directors: SECTION E.1. NOTIFICATION AND DEFENSE OF CLAIM. Indemnitee shall promptly notify the Corporation in writing of any proceeding for which indemnification could be sought under this Article. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. With respect to any such proceeding as to which Indemnitee has notified the Corporation: (a) The Corporation will be entitled to participate therein at its own expense; and (b) Except as otherwise provided below, to the extent that it may wish, the Corporation, jointly with any other indemnifying party similarly notified, will be entitled to assume the defense thereof, with counsel satisfactory to Indemnitee. Indemnitee's consent to such counsel may not be unreasonably withheld. After notice from the Corporation to Indemnitee of its election to assume the defense, the Corporation will not be liable to Indemnitee under this Article for any legal or other Expenses subsequently incurred by Indemnitee in connection with such defense. However, Indemnitee shall continue to have the right to employ its counsel in such proceeding, at Indemnitee's expense; and if: (i) The employment of counsel by Indemnitee has been authorized by the Corporation; (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of such defense; or (iii) The Corporation shall not in fact have employed counsel to assume the defense of such proceeding, the fees and Expenses of Indemnitee's counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any proceeding brought by or on behalf of the Corporation or as to which Indemnitee shall reasonably have made the conclusion that a conflict of interest may exist between the Corporation and the Indemnitee in the conduct of the defense. SECTION E.2. INFORMATION TO BE SUBMITTED AND METHOD OF DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION. For the purpose of pursuing rights to indemnification under this Article, the Indemnitee shall submit to the Board a sworn statement requesting indemnification and reasonable evidence of all amounts for which such indemnification is requested (together, the sworn statement and the evidence constitute an "Indemnification Statement"). Submission of an Indemnification Statement to the Board shall create a presumption that the Indemnitee is entitled to indemnification hereunder, and the Corporation shall, within sixty (60) calendar days thereafter, make the payments requested in the Indemnification Statement to or for the benefit of the Indemnitee, unless: (1) within such sixty (60) calendar day period it shall be determined by the Corporation that the Indemnitee is not entitled to indemnification under this Article; (2) such determination shall be based upon clear and convincing evidence (sufficient to rebut the foregoing presumption); and (3) the Indemnitee shall receive notice in writing of such determination, which notice shall disclose with particularity the evidence upon which the determination is based. The foregoing determination may be made: (1) by the Board of Directors by majority vote of a quorum of Directors who are not at the time parties to the proceedings; (2) if a quorum cannot be obtained, by majority vote of a committee duly designated by the Board of Directors (in which designation, Directors who are parties may participate) consisting solely of two (2) or more Directors not at the time parties to the proceeding; (3) by special legal counsel; or (4) by the shareholders as provided by Section 23B.08.550 of the Act. Any determination that the Indemnitee is not entitled to indemnification, and any failure to make the payments requested in the Indemnification Statement, shall be subject to judicial review by any court of competent jurisdiction. SECTION E.3 SPECIAL PROCEDURE REGARDING ADVANCE FOR EXPENSES. An Indemnitee seeking payment of Expenses in advance of a final disposition of the proceeding must furnish the Corporation, as part of the Indemnification Statement: (a) A written affirmation of the Indemnitee's good faith belief that the Indemnitee has met the standard of conduct required to be eligible for indemnification; and (b) A written undertaking, constituting an unlimited general obligation of the Indemnitee, to repay the advance if it is ultimately determined that the Indemnitee did not meet the required standard of conduct. Upon satisfaction of the foregoing, the Indemnitee shall have a contractual right to the payment of such Expenses. SECTION E.4 SETTLEMENT. The Corporation is not liable to indemnify Indemnitee for any amounts paid in settlement of any proceeding without the Corporation's written consent. The Corporation shall not settle any proceeding in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Corporation nor Indemnitee may unreasonably withhold its consent to a proposed settlement. SECTION F. CONTRACT AND RELATED RIGHTS. SECTION F.1 CONTRACT RIGHTS. The right of an Indemnitee to indemnification and advancement of Expenses is a contract right upon which the Indemnitee shall be presumed to have relied in determining to serve or to continue to serve in his or her capacity with the Corporation. Such right shall continue as long as the Indemnitee shall be subject to any possible proceeding. Any amendment to or repeal of this Article shall not adversely affect any right or protection of an Indemnitee with respect to any acts or omissions of such Indemnitee occurring prior to such amendment or repeal. SECTION F.2 OPTIONAL INSURANCE, CONTRACTS, AND FUNDING. The Corporation may: (a) Maintain insurance, at its expense, to protect itself and any Indemnitee against any liability, whether or not the Corporation would have power to indemnify the individual against the same liability under Section 23B.08.510 or .520 of the Act; (b) Enter into contracts with any Indemnitee in furtherance of this Article and consistent with the Act; and (c) Create a trust fund, grant a security interest, or use other means (including without limitation a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article. SECTION F.3 SEVERABILITY. If any provision or application of this Article shall be invalid or unenforceable, the remainder of this Article and its remaining applications shall not be affected thereby, and shall continue in full force and effect. SECTION F.4 RIGHT OF INDEMNITEE TO BRING SUIT. If (1) a claim under this Article for indemnification is not paid in full by the Corporation within sixty (60) calendar days after an Indemnification Statement has been received by the Corporation; or (2) a claim under this Article for advancement of Expenses is not paid in full by the Corporation within twenty (20) calendar days after a written claim has been received by the Corporation, then the Indemnitee may, but need not, at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. To the extent successful in whole or in part, the Indemnitee shall be entitled to also be paid the expense (to be proportionately prorated if the Indemnitee is only partially successful) of prosecuting such claim. Neither (1) the failure of the Corporation (including its Board of Directors, its shareholders, or independent legal counsel) to have made a determination prior to the commencement of such proceeding that indemnification or reimbursement or advancement of Expenses to the Indemnitee is proper in the circumstances; nor (2) an actual determination by the Corporation (including its Board of Directors, its shareholders, or independent legal counsel) that the Indemnitee is not entitled to indemnification or to the reimbursement or advancement of Expenses, shall be a defense to the proceeding or create a presumption that the Indemnitee is not so entitled. SECTION F.5 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the payment of Expenses incurred in defending a Proceeding in advance of its final disposition granted in this Article shall not be exclusive of any other right which any Indemnitee may have or hereafter acquire under the Act, any statute, provision of this Article or the Bylaws, agreement, vote of shareholders or disinterested directors, or otherwise. The Corporation shall have the express right to grant additional indemnity without seeking further approval or satisfaction by the shareholders. All applicable indemnity provisions and any applicable law shall be interpreted and applied so as to provide an Indemnitee with the broadest but nonduplicative indemnity to which he or she is entitled. SECTION G. CONTRIBUTION. If the indemnification provided in Section B of this Article is not available to be paid to Indemnitee for any reason other than those set forth in subparagraphs (a), (b), and (c) of Section B of this Article (for example, because indemnification is held to be against public policy even though otherwise permitted under Section B) then in respect of any proceeding in which the Corporation is jointly liable with Indemnitee (or would be if joined in such proceeding), the Corporation shall contribute to the amount of loss paid or payable by Indemnitee in such proportion as is appropriate to reflect: The relative benefits received by the Corporation on the one hand and the Indemnitee on the other hand from the transaction from which such proceeding arose, and The relative fault of the Corporation on the one hand and the Indemnitee on the other hand in connection with the events which resulted in such loss, as well as any other relevant equitable consideration. The relative benefits received by and fault of the Corporation on the one hand and the Indemnitee on the other shall be determined by a court of competent jurisdiction (which may be the same court in which the proceeding took place) with reference to, among other things, the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent the circumstances resulting in such loss. The Corporation agrees that it would not be just and equitable if a contribution pursuant to this Article was determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. SECTION H. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Corporation shall not be obligated pursuant to the terms of these Articles to indemnify or advance Expenses to Indemnitee with respect to any proceeding. SECTION H.1 CLAIMS INITIATED BY INDEMNITEE. Initiated or brought voluntarily by Indemnitee and not by way of defense, but such indemnification or advancement of Expenses may be provided by the Corporation in specific cases if the Board of Directors finds it to be appropriate. Notwithstanding the foregoing, the Corporation shall provide indemnification including the advancement of Expenses with respect to Proceedings brought to establish or enforce a right to indemnification under these Articles or any other statute or law or as otherwise required under the statute. SECTION H.2 LACK OF GOOD FAITH. Instituted by Indemnitee to enforce or interpret this Article, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous. SECTION H.3 INSURED CLAIMS. For which any of the Expenses or liabilities for indemnification is being sought have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Corporation. SECTION H.4 PROHIBITED BY LAW. If the Corporation is prohibited by the Act or other applicable law as then in effect from paying such indemnification and/or advancement of Expenses. For example, the Corporation and Indemnitee acknowledge that the Securities and Exchange Commission ("SEC") has taken the position that indemnification is not possible for liabilities arising under certain federal securities laws. Indemnitee understands and acknowledges that the Corporation has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Corporation's right to indemnify Indemnitee. SECTION I. SUCCESSORS AND ASSIGNS. All obligations of the Corporation to indemnify any Director or Officer shall be binding upon all successors and assigns of the Corporation (including any transferee of all or substantially all of its assets and any successor by merger or otherwise by operation of law). The Corporation shall not effect any sale of substantially all of its assets, merger, consolidation, or other reorganization, in which it is not the surviving entity, unless the surviving entity agrees in writing to assume all such obligations of the Corporation. ARTICLE XII - DIRECTORS The number of directors of this Corporation shall be fixed in the manner specified by the by-laws of this Corporation. The first directors of the Corporation are seven (7) in number and their names and addresses are: Richard O. Martin 11811 Willows Road Northeast Redmond, WA 98052 Stephen G. Pagliuca 11811 Willows Road Northeast Redmond, WA 98052 Robert C. Gay 11811 Willows Road Northeast Redmond, WA 98052 Robert M. Guezuraga 11811 Willows Road Northeast Redmond, WA 98052 John J. O'Malley 11811 Willows Road Northeast Redmond, WA 98052 Ronald W. Dollens 11811 Willows Road Northeast Redmond, WA 98052 Robert A. Sandler 11811 Willows Road Northeast Redmond, WA 98052 The first directors shall serve until the first annual meeting of the shareholders and until their successors are elected and qualified. ARTICLE XIII - INCORPORATOR The name and address of the incorporator is: V. Marc Droppert 11811 Willlows Road Northeast Redmond, WA 98052 The undersigned incorporator has signed these Articles of Incorporation as duplicate signed originals on May 20, 1997. /s/ V. Marc Droppert ------------------------------------- V. Marc Droppert Incorporator CONSENT TO SERVE AS REGISTERED AGENT PTSGE Corp hereby consents to serve as Registered Agent in the State of Washington for New Phyio Corporation. I understand that as agent for the corporation, it will be my responsibility to receive service of process in the name of the corporation; to forward all mail to the corporation; and to immediately notify the Office of the Secretary of State in the event of my resignation, or of any changes in the registered office of the corporation for which I am agent. May 20,1997 PTSGE Corp By: /s/ Robert Vallelunga ---------------------------- Robert Vallelunga EX-3.2(II) 4 CERTIFICATES OF MERGER CERTIFICATE OF MERGER OF A DELAWARE CORPORATION INTO A FOREIGN CORPORATION (UNDER SECTION 252 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE) NEW PHYSIO CORPORATION hereby certifies that: 1. The name and state of incorporation of each of the constituent corporations are: (a) Physio-Control International Corporation, a Delaware corporation; and (b) New Physio Corporation, a Washington corporation. 2. An agreement and plan of merger has been approved, adopted, certified, executed and acknowledged by Physio-Control International Corporation and New Physio Corporation in accordance with the provisions of subsection (c) of Section 252 of the General Corporation Law of the State of Delaware. 3. The name of the surviving corporation is New Physio Corporation 4. The certificate of incorporation of New Physio Corporation shall be the certificate of incorporation of the surviving corporation. 5. The surviving corporation is a corporation of the State of Washington. 6. The executed agreement and plan of merger is on file at the principal place of business of New Physio Corporation at 11811 Willows Road N.E., Redmond WA 98052. 7. A copy of the agreement and plan of merger will be furnished by New Physio Corporation, on request and without cost, to any stockholder of Physio-Control International Corporation or New Physio Corporation. 8. New Physio Corporation hereby agrees that it may be served with process in Delaware in any proceeding for enforcement of any obligation of Physio-Control International Corporation, as well as for enforcement of any obligation of New Physio Corporation arising from the merger, including any suit or other proceeding to enforce the right of any stockholders as determined in appraisal proceedings pursuant to 8 DEL.C. Section 262 and New Physio Corporation hereby irrevocably appoints the Secretary of State of the State of Delaware as its agent to accept service of process in any such suit or other proceedings and a copy of such process shall be mailed by the Secretary of State to New Physio Corporation at the following address: 11811 Willows Road N.E., Redmond WA 98052. IN WITNESS WHEREOF, New Physio Corporation has caused this certificate to be signed by V. Marc Droppert, its authorized officer, on the 20th day of May, 1997. NEW PHYSIO CORPORATION /s/ V. Marc Droppert By______________________________ V. Marc Droppert Secretary EX-3.2(III) 5 ARTICLES OF MERGER ARTICLES OF MERGER OF PHYSIO-CONTROL INTERNATIONAL CORPORATION WITH AND INTO NEW PHYSIO CORPORATION Pursuant to Section 23B.11.050 of the Washington Business Corporation Act (the "ACT"), New Physio Corporation, a Washington corporation (the "SURVIVING CORPORATION"), submits these Articles of Merger for filing: 1. The Agreement and Plan of Merger is attached hereto and made a part as though fully set forth herein. 2. The approval of the shareholders of Physio-Control International Corporation, a Delaware corporation, was obtained pursuant to Section 252 of the General Corporation Law of the State of Delaware. The approval of the shareholders of Surviving Corporation was obtained pursuant to Section 23B.11.030 of the WBCA. 3. The Effective Date, as provided in the Agreement and Plan of Merger, for such Merger shall be May 30, 1997. Dated: May 20, 1997. NEW PHYSIO CORPORATION a Washington Corporation /s/ V. Marc Droppert By______________________________ V. Marc Droppert Secretary EX-10.16 6 RELEASE AGREEMENT Exhibit 10.16 CREDITANSTALT-BANKVEREIN TWO GREENWICH PLAZA GREENWICH, CONNECTICUT 06836-1300 June 3, 1997 Physio-Control International Corporation Physio-Control Corporation 11811 Willows Road N.E. Redmond, WA 98073-9706 RELEASE AGREEMENT ----------------- Gentlemen: Physio-Control International Corporation, a Delaware corporation ("Parent"), and Physio-Control corporation, a Delaware corporation ("Borrower"), have entered into financing arrangements with Creditanstalt-Bankverein, a bank organized under the laws of the Republic of Austria ("Creditanstalt"), as set forth in the Amended and Restated Credit Agreement dated as of December 15, 1995 (as the same has been amended and supplemented, the "Loan Agreement"), between the borrower and Creditanstalt, and the other Loan Documents (as defined in the Loan Agreement) (all of the foregoing, together with the Loan Agreement, collectively, the "Existing Agreements") pursuant to which Creditanstalt has made loans and advances to Borrower (the "Loans") and Creditanstalt has issued the letters of credit listed on EXHIBIT A hereto for the account of borrower (collectively, the "Creditanstalt Letters of Credit"). 1. RELEASES. (a) Subject to the terms and conditions contained herein (including but not limited to Section 5), Creditanstalt hereby releases, discharges and acquits each of Parent and Borrower from any and all liabilities and obligations they may have to Creditanstalt arising out of the Existing Agreements. Anything to the contrary in this Agreement notwithstanding, any provision of any Existing Agreement that by the terms of the Existing Agreements survives the termination thereof shall not be affected by this Agreement. (b) Creditanstalt hereby terminates and releases any and all security interests in, liens and mortgages upon, and pledges of, all properties and assets of Borrower, its subsidiaries and Parent (whether personal, real or mixed, tangible or intangible) heretofore granted, pledged, assigned to, or otherwise claimed by, Creditanstalt, pursuant to the Loan Agreement and the other Existing Agreements. (c) Subject to the terms and conditions contained herein, each of Borrower and Parent, for and in consideration of the release above, hereby releases, discharges and acquits Creditanstalt and its successors and assigns from all liabilities and obligations to Borrower and Parent and their respective successors and assigns arising out of the Existing Agreements. 2. INDEMNIFICATION FOR RETURNED ITEMS. Notwithstanding anything to the contrary contained in Section 1 above, Borrower agrees to indemnify Creditanstalt from and hold Creditanstalt harmless against all loss, cost, damage or expense which Creditanstalt may suffer or incur as a result of any non-payment, claim, refund or dishonor of any checks or other items which have been credited by Creditanstalt to the account of Borrower in calculating the amount payable to Creditanstalt on the date hereof pursuant to Section 5(c) of this Agreement, together with any reasonable expenses or other reasonable and customary charges incident thereto. 3. DELIVERIES BY CREDITANSTALT. Creditanstalt agrees to deliver to Borrower, at the expense of Borrower, following the effectiveness hereof, the originals of: (a) the promissory note or notes, if any, previously executed and delivered to Creditanstalt by Borrower duly marked "paid in full"; (b) Uniform Commercial Code releases and/or terminations in form acceptable for recording covering financing statements which have been filed by Creditanstalt against Borrower or Parent; (c) trademark and patent releases or reassignments, reassigning, without representations and warranties, to Borrower and/or releasing the security interest of Creditanstalt in all trademarks, patents and related assets heretofore assigned by Borrower to Creditanstalt pursuant to the Existing Agreements; (d) discharges or satisfactions of any mortgages or deeds of trust or similar real property instruments previously executed and delivered by Borrower or Parent in favor of Creditanstalt in form acceptable for recording; and (e) any stock certificates and executed stock powers related thereto previously delivered to Creditanstalt by Borrower or Parent. 4. TERMINATION OF LOCKBOXES. Creditanstalt agrees to send written notification, upon request and at the expense of Borrower, to any bank or institution with which Creditanstalt has blocked accounts, lockbox accounts or other arrangements for the receipt or transfer to Creditanstalt of remittances or proceeds from customers of Borrower, to the effect that all such arrangements with Creditanstalt are terminated, and to the extent any such arrangements are in effect with Creditanstalt, such arrangements are hereby terminated. 5. CONDITIONS PRECEDENT. The effectiveness of this Agreement, and of any termination statements or other similar release instruments delivered by Creditanstalt hereunder, are subject to and conditioned upon the receipt by Creditanstalt of: (a) an original of this Agreement, duly executed by the parties hereto; (b) the original of each Letter of Credit, marked 'CANCELED'; and (c) payment, in immediately available funds, of $22,414,500.16 not later than 2:00 p.m. New York City time on June 4, 1997 plus $4,385.00 per day for each additional day thereafter that such payment has not been made prior to such time. 6. FURTHER ASSURANCES. Creditanstalt further agrees to furnish, at Borrower's expense, additional releases and/or termination statements and such other and further documents, instruments and agreements as may be reasonably requested by Borrower, in order to effect and evidence more fully the matters covered hereby. 7. COSTS AND EXPENSES. Borrower and Parent agree to pay all costs and expenses, including without limitation, reasonable attorneys fees, in connection with the preparation, execution, delivery, filing, recording and administration of this Release Agreement and the performance of any other acts required to effect the release of any security granted to the undersigned under the Existing Agreements. In addition, Parent and Borrower agree to pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Release Agreement and the other instruments and documents to be delivered hereunder, and agree to save the undersigned harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omitting to pay such taxes or fees. 8. GOVERNING LAW. This Agreement shall be construed in accordance with and be governed by the laws of the State of New York (without giving effect to the conflict of law principles thereof). 9. COUNTERPARTS. This Agreement may be executed in any number of counterparts each of which shall be deemed to be an original hereof and submissible into evidence and all of which together shall be deemed to be a single instrument. Very truly yours, CREDITANSTALT-BANKVEREIN By: _________________________ Name: Clifford L. Wells Title: Vice President By: _________________________ Name: Lisa D. Bruno Title: Asst. V. President ACKNOWLEDGED AND AGREED: PHYSIO-CONTROL INTERNATIONAL CORPORATION By: _________________________ By: __________________________ Name: Richard O. Martin Name: Joseph J.Caffarelli Title: Chairman and Chief Title: Executive Vice Executive Officer President/Chief Financial Officer EXHIBIT A CREDITANSTALT LETTERS OF CREDIT ------------------------------- Irrevocable Standby Letter of Credit No. 10099 Face Amount: $500,000.00 EX-10.17 7 CREDIT AGREEMENT CREDIT AGREEMENT BETWEEN PHYSIO-CONTROL CORPORATION AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION AS AGENT AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION AND MELLON BANK, N.A. AS BANKS DATED JUNE 3, 1997 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 ADJUSTED LIBOR RATE . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 ADVANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 AGENT'S RELATED PARTIES . . . . . . . . . . . . . . . . . . . . . . 1 1.4 ASSESSMENT RATE . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.5 AVAILABLE AMOUNT. . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.6 BASE RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.7 BASE RATE ADVANCES. . . . . . . . . . . . . . . . . . . . . . . . . 2 1.8 BASE RATE MARGIN. . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.9 BUSINESS DAY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.10 COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.11 COMMENCEMENT DATE . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.12 CREDIT LIMIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.13 DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.14 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.15 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.16 EXCHANGE RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.17 FED FUNDS RATE. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.18 FEE MARGIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.19 FIXED CHARGE COVERAGE RATIO . . . . . . . . . . . . . . . . . . . . 3 1.20 FIXED RATE MARGIN . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.21 GUARANTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.22 HAZARDOUS SUBSTANCES. . . . . . . . . . . . . . . . . . . . . . . . 3 1.23 INTEREST PAYMENT DATES. . . . . . . . . . . . . . . . . . . . . . . 3 1.24 INTEREST PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.25 ISSUANCE FEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.26 L/C AGREEMENT(S). . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.27 LETTER(S) OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . 3 1.28 LIBOR RATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.29 LIBOR RATE ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . 4 1.30 LOAN DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.31 LONDON BANKING DAY. . . . . . . . . . . . . . . . . . . . . . . . . 4 1.32 MAJORITY BANKS. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.33 MARGIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.34 MATERIAL SUBSIDIARY . . . . . . . . . . . . . . . . . . . . . . . . 4 1.35 MULTICURRENCY ADVANCES. . . . . . . . . . . . . . . . . . . . . . . 4 1.36 MULTICURRENCY RATE. . . . . . . . . . . . . . . . . . . . . . . . . 4 1.37 OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.38 PERSON. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.39 PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.40 PRO RATA SHARE(S) . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.41 QUOTED RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.42 REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.43 REFERENCE RATE. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.44 RESERVE ADJUSTMENT. . . . . . . . . . . . . . . . . . . . . . . . . 5 1.45 REVOLVING LOAN. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.46 SUBORDINATED DEBT . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.47 SWING LINE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.48 SWING LINE ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . 6 1.49 TANGIBLE NET WORTH. . . . . . . . . . . . . . . . . . . . . . . . . 6 1.50 TERMINATION DATE. . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE 2 REVOLVING LOAN . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1 REVOLVING LOAN FACILITY . . . . . . . . . . . . . . . . . . . . . . 6 2.2 PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.3 PROCEDURE FOR BASE RATE ADVANCES. . . . . . . . . . . . . . . . . . 7 2.4 PROCEDURE FOR LIBOR RATE ADVANCES . . . . . . . . . . . . . . . . . 7 2.5 PROCEDURE FOR MULTICURRENCY ADVANCES. . . . . . . . . . . . . . . . 7 2.6 BANK FUNDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.7 COMMITMENT FEES . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 3 LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . . 8 3.1 ISSUANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.2 FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.3 YIELD INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 4 SWING LINE . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.1 DESCRIPTION OF FACILITY . . . . . . . . . . . . . . . . . . . . . . 9 4.2 PROCEDURE FOR SWING LINE ADVANCES . . . . . . . . . . . . . . . . . 9 ARTICLE 5 RISK PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 6 COLLATERAL SECURITY. . . . . . . . . . . . . . . . . . . . . . . 10 6.1 COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.2 COLLATERAL AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.3 FINANCING STATEMENTS AND OTHER DOCUMENTS. . . . . . . . . . . . . . 10 6.4 COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.5 AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT . . . . . . . . . . . . . . 10 6.6 NEGATIVE PLEDGE . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 7 GUARANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 8 INTEREST RATE OPTIONS. . . . . . . . . . . . . . . . . . . . . . 11 8.1 INTEREST RATES AND PAYMENT DATE . . . . . . . . . . . . . . . . . . 11 8.2 OPTION RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . 11 8.3 PREPAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.4 REVERSION TO BASE RATE. . . . . . . . . . . . . . . . . . . . . . . 11 8.5 INABILITY TO PARTICIPATE IN MARKET. . . . . . . . . . . . . . . . . 11 8.6 COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.7 BASIS OF QUOTES . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 9 CONDITIONS OF LENDING. . . . . . . . . . . . . . . . . . . . . . 12 9.1 AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.2 DOCUMENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.3 REFINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.4 LEGAL OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.5 GUARANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.6 PROOF OF INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . 12 9.7 REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . 12 9.8 MATERIAL ADVERSE CHANGE . . . . . . . . . . . . . . . . . . . . . . 12 9.9 COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 -i- ARTICLE 10 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 13 10.1 EXISTENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.2 ENFORCEABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.3 NO LEGAL BAR . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.4 LIENS AND ENCUMBRANCES . . . . . . . . . . . . . . . . . . . . . . 13 10.5 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.6 PAYMENT OF TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.7 EMPLOYEE BENEFIT PLAN. . . . . . . . . . . . . . . . . . . . . . . 13 10.8 MISREPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . 13 10.9 NO DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10.10 NO BURDENSOME RESTRICTIONS . . . . . . . . . . . . . . . . . . . . 14 10.11 HAZARDOUS SUBSTANCES . . . . . . . . . . . . . . . . . . . . . . . 14 10.12 MATERIAL SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . 14 10.13 MARGIN STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10.14 MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 11 AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . 14 11.1 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . 14 11.2 FIXED CHARGE COVERAGE RATIO. . . . . . . . . . . . . . . . . . . . 14 11.3 TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . 14 11.4 DEBT RATIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 11.5 FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 15 11.6 MAINTENANCE OF EXISTENCE . . . . . . . . . . . . . . . . . . . . . 15 11.7 BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . 16 11.8 ACCESS TO PREMISES AND RECORDS . . . . . . . . . . . . . . . . . . 16 11.9 NOTICE OF EVENTS . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.10 PAYMENT OF DEBTS AND TAXES . . . . . . . . . . . . . . . . . . . . 16 11.11 FDA CONSENT DECREE . . . . . . . . . . . . . . . . . . . . . . . . 16 11.12 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.13 HAZARDOUS SUBSTANCES . . . . . . . . . . . . . . . . . . . . . . . 17 11.14 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 12 NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 17 12.1 DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 12.2 LIENS AND ENCUMBRANCES . . . . . . . . . . . . . . . . . . . . . . 18 12.3 DISPOSITION OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . 18 12.4 MERGERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 12.5 CAPITAL STRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . 18 12.6 WAGE AND HOUR LAWS . . . . . . . . . . . . . . . . . . . . . . . . 18 12.7 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 12.8 DISSOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 12.9 BUSINESS ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . 18 12.10 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 12.11 PERMISSIBLE LOANS AND INVESTMENTS. . . . . . . . . . . . . . . . . 19 ARTICLE 13 AGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 13.1 APPOINTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 13.2 SUCCESSOR AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . 19 13.3 DUTIES OF AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . 19 13.4 DELEGATION OF DUTIES . . . . . . . . . . . . . . . . . . . . . . . 20 13.5 EXCULPATORY PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 20 13.6 RELIANCE BY AGENT. . . . . . . . . . . . . . . . . . . . . . . . . 20 13.7 INSTRUCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 13.8 NOTICE OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . 20 13.9 REPRESENTATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 21 13.10 INDEPENDENT CREDIT REVIEW. . . . . . . . . . . . . . . . . . . . . 21 13.11 INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 13.12 INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 13.13 SEPARATION OF CAPACITIES . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 14 EVENTS AND CONSEQUENCES OF DEFAULT . . . . . . . . . . . . . . . 22 14.1 EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . 22 14.2 REMEDIES UPON DEFAULT. . . . . . . . . . . . . . . . . . . . . . . 23 14.3 DEFAULT INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE 15 MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . 24 15.1 MANNER OF PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . 24 15.2 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 15.3 DOCUMENTATION AND ADMINISTRATION EXPENSES. . . . . . . . . . . . . 25 15.4 COLLECTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . 26 15.5 WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 15.6 ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 15.7 MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 15.8 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 15.9 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 15.10 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 EXHIBITS: Exhibit 1 -- Prepayment Fee Exhibit Exhibit 2 -- Borrowing Notice Exhibit 3 -- Form of Participation Certificate Exhibit 4 -- Form of Guarantor CFO Certificate Exhibit 5 -- Form of Subsidiary's Certificate Schedule 10.5 - List of Pending Litigation Schedule 10.12 - List of Material Subsidiaries Schedule 12.1(b) - Disclosure List of Existing Debt Schedule 12.2(a) - Disclosure List of Existing Liens -ii- CREDIT AGREEMENT THIS CREDIT AGREEMENT ("Agreement") is made between Physio-Control Corporation, a Delaware corporation ("Borrower"), and Bank of America National Trust and Savings Association, doing business as Seafirst Bank, a national banking association, as agent ("Agent"), and the following financial institutions that are individually called a "Bank" and collectively called the "Banks," including their respective successors and/or assigns: Bank of America National Trust and Savings Association, doing business as Seafirst Bank (in its capacity as a Bank, "Seafirst"), and Mellon Bank, N.A. ("Mellon"). For mutual consideration, the parties agree as follows: ARTICLE 1 DEFINITIONS All terms defined below shall have the meaning indicated. All references in this Agreement to: (a) "dollars" or "$" shall mean U.S. dollars; (b) "Article," "Section," or "Subsection" shall mean articles, sections, and subsections of this Agreement, unless otherwise indicated; (c) all interest and fees payable on a per annum basis with regard to this Agreement shall be calculated on the basis of the actual number of days elapsed over a year of 360 days, unless otherwise specified; (d) terms defined in the Washington version of the Uniform Commercial Code, R.C.W. Section 62A.9-101, ET SEQ. ("UCC"), and not otherwise defined in this Agreement, shall have the meaning given in the UCC; and (e) an accounting term not otherwise defined in this Agreement shall have the meaning assigned to it under GAAP. 1.1 ADJUSTED LIBOR RATE shall mean for any day that per annum rate equal to the sum of (a) the Fixed Rate Margin, (b) the Assessment Rate, and (c) the quotient of (i) the LIBOR Rate as determined for such day, divided by (ii) the Reserve Adjustment. The Adjusted LIBOR Rate shall change with any change in the LIBOR Rate on the first day of each Interest Period and on the effective date of any change in the Assessment Rate or Reserve Adjustment. 1.2 ADVANCES shall mean Base Rate Advances, LIBOR Rate Advances, Swing Line Advances, and Multicurrency Advances. No Advance shall constitute a "payment order" under R.C.W. Section 62A.4A-103. 1.3 AGENT'S RELATED PARTIES shall mean Agent, its affiliates, and all officers, directors and employees of Agent and such affiliates. 1.4 ASSESSMENT RATE shall mean as of any day the minimum annual percentage rate established by the Federal Deposit Insurance Corporation (or any successor) for the assessment due from members of the Bank Insurance Fund (or any successor) in effect for the assessment period during which said day occurs based on deposits maintained at such members' offices located outside of the United States. In the event of a retroactive reduction in the Assessment Rate after a commencement of any Interest Period, Agent shall not retroactively adjust as to such Interest Period any interest rate calculated using the Assessment Rate. -1- 1.5 AVAILABLE AMOUNT shall mean at any time the amount of the Credit Limit, minus the unpaid principal balance of the Revolving Loan, minus the aggregate outstanding principal amount of all Letters of Credit, minus the sum of the U.S. dollar equivalent of the outstanding balance of all Multicurrency Advances, based on the Exchange Rate for each such Advance. 1.6 BASE RATE shall mean (a) the greater of the Reference Rate or the Fed Funds Rate, plus (b) the Base Rate Margin. 1.7 BASE RATE ADVANCES shall mean those portions of principal of the Revolving Loan accruing interest at the Base Rate. 1.8 BASE RATE MARGIN shall have the meaning given in Section 1.33. 1.9 BUSINESS DAY shall mean any day other than a Saturday, Sunday, or other day on which commercial banks in Seattle, Washington, or Pittsburgh, Pennsylvania, are authorized or required by law to close. 1.10 COLLATERAL shall have the meaning given in Section 6.1. 1.11 COMMENCEMENT DATE shall mean the first day of any Interest Period as requested by Borrower. 1.12 CREDIT LIMIT shall mean $25,000,000. 1.13 DEBT shall mean all consolidated obligations, on a GAAP basis, included in the liability section of a balance sheet of Guarantor, together with, regardless of whether such items would otherwise not be shown on the liability side of a balance sheet: (a) all obligations guaranteed or assumed by Guarantor or any subsidiary, directly or indirectly in any manner, or endorsed (other than for collection and deposit in the ordinary course of business) or discounted by Guarantor or any subsidiary with recourse, including all indebtedness guaranteed by Guarantor or any subsidiary through any agreement, contingent or otherwise; (b) all obligations for the payment of money or other property pursuant to capital leases under which Guarantor or any of its subsidiaries is leasing real or personal property; and (c) all obligations of any partnership or joint venture of which Guarantor or any of its subsidiaries is a member, if Guarantor or any such subsidiary is legally liable for such obligations. 1.14 DEFAULT shall have the meaning given in Section 14.1. 1.15 ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.16 EXCHANGE RATE shall mean the rate of exchange actually obtained by Agent for a given currency in funding a Multicurrency Advance in such currency. 1.17 FED FUNDS RATE shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of San Francisco or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on transactions received by Agent from three federal funds brokers of recognized standing selected by Agent; plus (b) 0.5%. -2- 1.18 FEE MARGIN shall have the meaning given in Section 1.33. 1.19 FIXED CHARGE COVERAGE RATIO shall mean, as to Guarantor on a consolidated basis, the ratio of: (a) earnings before interest expense, taxes, depreciation, and amortization, minus capital expenditures (excluding, through fiscal quarter ending September 30, 1997, $4,900,000 in capital expenditures consisting of soft costs of a major computer system upgrade carried out in 1996); to (b) (i) interest expense, plus (ii) the current portion of long-term Debt (excluding the Obligations), plus (iii) 20% of the outstanding principal amount of all Obligations. 1.20 FIXED RATE MARGIN shall have the meaning given in Section 1.33. 1.21 GUARANTOR shall mean Physio-Control International Corporation, a Washington corporation. 1.22 HAZARDOUS SUBSTANCES shall mean any substance or material defined or designated as hazardous or toxic wastes, a hazardous or toxic material, a hazardous, toxic, or radioactive substance, or other similar term by any applicable federal, state, or local statute, regulation, or ordinance now or hereafter in effect. 1.23 INTEREST PAYMENT DATES shall mean (a) for Multicurrency Advances, the last day of its Interest Period; (b) for Base Rate Advances, the last Business Day of each month; (c) for LIBOR Rate Advances, the last day of each Interest Period (PROVIDED, that if the Interest Period is longer than three months, the end of the third month of the Interest Period shall also be an Interest Payment Date); and (d) in each case, upon maturity, including upon maturity by acceleration. 1.24 INTEREST PERIOD shall mean the period commencing on the date of any Advance, or Multicurrency Advance, or of any conversion to an Adjusted LIBOR Rate and ending on any date thereafter as selected by Borrower. Interest Periods for Multicurrency Advances may be one week or one, two, three, or six months, and Interest Periods for LIBOR Rate Advances shall be subject to the restrictions of Section 8.2. If any Interest Period would end on a day which is not a Business Day, the Interest Period shall be extended to the next succeeding Business Day, unless the next succeeding Business Day falls in the next month, in which case the Interest Period shall be shortened to the preceding Business Day. 1.25 ISSUANCE FEE shall have the meaning assigned to it in Section 3.2. 1.26 L/C AGREEMENT(S) shall have the meaning assigned to it in Article 3. 1.27 LETTER(S) OF CREDIT shall have the meaning assigned to it in Article 3. 1.28 LIBOR RATE shall mean for any Interest Period that per annum rate equal to the arithmetic mean (rounded to the nearest hundred-thousandth of a percentage point) of the offered rates for U.S. Dollar deposits for a period equal to the Interest Period appearing on the display designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page on such service as may replace said page or, if none, on such other available service which displays two or more London interbank offered rates of major banks for U.S. Dollar deposits) as of 11:00 a.m., London time, on the day which is two London Banking Days prior to the first day of the Interest Period. If there is no period equal to the Interest Period on the display, the LIBOR Rate shall be determined by straight-line interpolation to the nearest month (or week or day if expressed in weeks or days) corresponding to the Interest Period between the two nearest neighboring periods on the display. -3- 1.29 LIBOR RATE ADVANCES shall mean those portions of principal of the Revolving Loan accruing interest at the Adjusted LIBOR Rate. 1.30 LOAN DOCUMENTS shall mean collectively this Agreement, the L/C Agreements, each guaranty of the Obligations, and all other security agreements, documents, instruments, and other agreements now or later executed in connection with this Agreement. 1.31 LONDON BANKING DAY shall mean any Business Day other than a day on which commercial banks in London, England, are authorized or required by law to close. 1.32 MAJORITY BANKS shall mean Banks holding 67% of the Pro Rata Shares. 1.33 MARGIN shall mean (a) as to Base Rate Advances the "Base Rate Margin" as determined by the following chart; (b) as to LIBOR Rate Advances, Swing Line Advances, Multicurrency Advances, and the calculation of Letter of Credit Issuance Fees, the "Fixed Rate Margin" as determined by the following chart; and (c) as to the calculation of the commitment fee under Section 2.7, the "Fee Margin" as determined by the following chart: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Fixed Charge Base Rate Margin Fixed Rate Margin Fee Margin Coverage Ratio* - -------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO 2.75 to 1 -0- 0.50% 0.125% - -------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO 2.50 to 1 -0- 0.625% 0.125% - -------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO 2.25 to 1 -0- 0.75% 0.125% - -------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO 2.00 to 1 -0- 1.0% 0.125% - -------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO 1.75 to 1 -0- 2.00% 0.25% - -------------------------------------------------------------------------------- LESS THAN 1.75 to 1 2.0% 3.00% 0.50% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- * AS DETERMINED BASED ON THE MOST RECENTLY DELIVERED QUARTERLY CONSOLIDATED FINANCIAL STATEMENT OF GUARANTOR. Upon receipt of a quarterly financial statement showing a decrease or increase in Fixed Charge Coverage Ratio which places Borrower in a new pricing category, all Advances, commitment fees, and Letter of Credit issuance fees shall begin being calculated at the higher or lower margin, as the case may be, for the period beginning on the date 30 days after the end of the quarter reported on in such statement. 1.34 MATERIAL SUBSIDIARY shall mean Physio-Control Manufacturing Corporation, and each other direct or indirect subsidiary of Guarantor which has assets in excess of 10% of Guarantor's total consolidated assets, or annual net income in excess of 10% of Guarantor's consolidated annual net income. 1.35 MULTICURRENCY ADVANCES shall have the meaning given in Subsection 2.5. 1.36 MULTICURRENCY RATE shall mean for each Multicurrency Advance (i) the per annum rate for the currency advanced, calculated on the basis of actual number of days elapsed over a year of 365/366 days as to Canadian Dollars and British Pounds Sterling, and on the basis of actual number of days elapsed over a year of 360 days as to all other currencies, determined by Agent to be the applicable borrowing rate for such currency in an amount and for the Interest Period of the Multicurrency Advance requested, as determined between 6:30 a.m. and 7:00 a.m., Seattle time, on the day which is (a) two Business Days prior to the date of such Advance as to all currencies other -4- than Canadian Dollars, and (b) one Business Day prior to the date of such Advance as to Canadian Dollars; which rate shall be a rate within 0.125% of the index rate appearing on the display designated as "Page 3740" and "Page 3750" on the Telerate Service for such currency between 6:30 a.m. and 7:00 a.m., Seattle time, on the same date; plus (ii) the Fixed Rate Margin. 1.37 OBLIGATIONS shall mean Borrower's obligation to repay all Advances, with interest, the L/C Agreements, Borrower's obligation to reimburse Banks for all amounts drawn under the Letters of Credit, and all fees, costs, expenses, and indemnifications due to Agent and/or Banks under this Agreement. 1.38 PERSON shall mean any individual, partnership, corporation, business trust, unincorporated organization, joint venture, or any governmental entity, department, agency, or political subdivision. 1.39 PLAN shall mean any employee benefit plan or other plan maintained for Borrower's employees and covered by Title IV of ERISA, excluding any plan created or operated by or for any labor union. 1.40 PRO RATA SHARE(S) shall mean 50% as to Seafirst and 50% as to Mellon; or if any assignments are made by a Bank pursuant to Section 15.6, then such different percentages resulting from any such assignment; PROVIDED that, (1) after the occurrence and during the continuance of a Default, and (2) with regard to Sections 1.32, 6.2, 13.7, 13.12, and 14.2: - - Mellon's Pro Rata Share shall be the percentage arrived at by dividing: (a) the sum of (i) 50% of the sum of all outstanding Base Rate Advances, LIBOR Rate Advances, and Multicurrency Advances (based on U.S. Dollar equivalent determined as of the date of Advance) plus (ii) 50% of the sum of the combined face amount of all outstanding Letters of Credit plus the aggregate of all unreimbursed Letter of Credit draws, to (b) the combined outstanding principal balance of all Obligations (including issued but undrawn Letters of Credit); and - - Seafirst's Pro Rata Share shall be 100% minus Mellon's Pro Rata Share. 1.41 QUOTED RATE shall mean that per annum fixed rate quoted by Seafirst and accepted by Borrower as the applicable rate for a Swing Line Advance commencing on the date of advance and continuing until the next Business Day, plus an interest rate spread equal to the Fixed Rate Margin. 1.42 REAL PROPERTY shall mean any real property owned or leased by Borrower or any of its subsidiaries ("Subject Property"), or any adjacent real property affected by any Hazardous Substances stored or used in, on, under, over, or about any such Subject Property. 1.43 REFERENCE RATE shall mean the rate of interest publicly announced from time to time by Agent in San Francisco, California, as its "Reference Rate." The Reference Rate is set based on various factors, including Agent's costs and desired return, general economic conditions, and other factors, and is used as a reference point for pricing some loans. Agent may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Reference Rate. 1.44 RESERVE ADJUSTMENT shall mean as of any day the remainder of one minus that percentage (expressed as a decimal) which is the highest of any such percentages established by the Board of Governors of the Federal Reserve System (or any successor) for required reserves (including any emergency, marginal, or supplemental reserve requirement) regardless of the aggregate amount of deposits with said member bank and without benefit of any possible credit, proration, exemptions, -5- or offsets for time deposits established at offices of member banks located outside of the United States or for eurocurrency liabilities, if any. 1.45 REVOLVING LOAN shall have the meaning given in Section 2.1. 1.46 SUBORDINATED DEBT shall mean consolidated Debt of Guarantor to third parties, the repayment of which is subordinated to Banks, in form satisfactory to Banks. 1.47 SWING LINE shall have the meaning given in Section 4.1. 1.48 SWING LINE ADVANCES shall mean the disbursement of loan proceeds under the Swing Line. 1.49 TANGIBLE NET WORTH shall mean the excess of total consolidated assets over total consolidated liabilities, excluding, however, from the determination of total assets (a) all assets which should be classified as intangible assets (such as goodwill, patents, trademarks, copyrights, franchises, and deferred charges, including unamortized debt discount and research and development costs), (b) cash held in a sinking or other similar fund established for the purpose of redemption or other retirement of capital stock, (c) to the extent not already deducted from total assets, reserves for depreciation, depletion, obsolescence, or amortization of properties and other reserves or appropriations of retained earnings which have been or should be established in connection with Guarantor's business, and (d) any revaluation or other write-up in book value of assets subsequent to the fiscal year of Guarantor last ended at the date Tangible Net Worth is being measured. 1.50 TERMINATION DATE shall mean May 31, 2000, or such earlier date upon which the commitments to make Advances, and issue Letters of Credit is terminated pursuant to Subsection 14.2(a); PROVIDED, that the Termination Date may be extended on May 31, 1998, to May 31, 2001, and on May 31, 1999, to May 31, 2002, upon the mutual written consent of Borrower, Agent, and all Banks, which any one or more of them may withhold in their sole discretion. ARTICLE 2 REVOLVING LOAN 2.1 REVOLVING LOAN FACILITY. Subject to the terms and conditions of this Agreement and to the extent of its Pro Rata Share of the Credit Limit, each Bank shall make Advances (other than Swing Line Advances) to Borrower from time to time, until the Termination Date ("Revolving Loan"), with the aggregate principal amount at any one time outstanding not to exceed the Credit Limit less the aggregate outstanding principal amount of all Letters of Credit. Borrower may use the Revolving Loan by borrowing, prepaying and reborrowing the amounts available under the Revolving Loan, in whole or in part; PROVIDED that Borrower shall fully and finally pay off the Revolving Loan on the Termination Date. Each borrowing by Borrower under this Agreement shall constitute a representation and warranty by Borrower as of the date of each such borrowing that the conditions precedent contained in Sections 9.7 through 9.9 of this Agreement have been satisfied. 2.2 PAYMENTS. Except as set forth below as to Multicurrency Advances, Borrower shall repay all Advances, with interest, which shall accrue and be paid as provided in Article 8. All Advances shall be repaid on or before the Termination Date. Each of the Banks shall note on its internal records each Advance made by it, each payment of principal and/or interest received by it, and any interest rate conversions. As to Multicurrency Advances: (a) INTEREST. Each Multicurrency Advance shall bear interest from the date of Advance until the end of its respective Interest Period at the Multicurrency Rate determined by Agent for such Advance pursuant to Section 1.35. All interest accrued on each such Advance shall be due and payable in full on each Interest Payment Date applicable to such Advance. -6- (b) PRINCIPAL. Borrower shall repay in full the outstanding principal balance of each Multicurrency Advance, in the currency advanced, on the last day of its Interest Period. Such repayment may be effected either (i) by making payment to Agent in immediately available funds pursuant to Subsection 15.1(b), or (ii) by obtaining, subject to satisfaction of all conditions precedent, an Advance, pursuant to the procedures of Section 2.5, in the same currency and at least the same amount as the maturing Multicurrency Advance (but in any case not to exceed the Available Amounts), with instructions to Agent to apply the proceeds of such new Advance to the maturing Advance before disbursing the balance (if any) to Borrower. Agent and Banks shall have no liability for, nor bear any of the risk of, intra-day fluctuations in foreign exchange rates. Multicurrency Advances may not be prepaid prior to the end of their respective Interest Periods. 2.3 PROCEDURE FOR BASE RATE ADVANCES. In accordance with all terms and conditions of this Agreement, Borrower may borrow at the Base Rate under the Revolving Loan on any Business Day. Borrower shall give Agent irrevocable notice (written or oral) specifying the amount to be borrowed on or before 9:30 a.m., Seattle time, on the day that a Base Rate Advance is requested; all Base Rate Advances shall be discretionary to the extent notification by Borrower is given subsequent to that time. Agent shall advise each Bank by 10:30 a.m., Seattle time, of a request for a Base Rate Advance, and each Bank shall make available to Agent its respective Pro Rata Share of such requested Base Rate Advance no later than 12:00 noon, Seattle time, on the same day. Agent shall make such funds available to Borrower on the same Business Day. Whether or not any Bank fails to fund its Pro Rata Share of a Base Rate Advance, each Bank shall only be obligated to disburse to Agent such Bank's Pro Rata Share of such requested Base Rate Advance. 2.4 PROCEDURE FOR LIBOR RATE ADVANCES. In accordance with all terms and conditions of this Agreement, Borrower may borrow at the Adjusted LIBOR Rate under the Revolving Loan on any Commencement Date. Borrower shall, on any London Banking Day two London Banking Days before such Commencement Date, no later than 9:30 a.m., Seattle time, request Agent to give an Adjusted LIBOR Rate quote for a specified loan amount and Interest Period. Agent will then quote to Borrower the available Adjusted LIBOR Rate. Borrower shall have 60 minutes from the time of the quote to elect an Adjusted LIBOR Rate by giving Agent irrevocable notice of such election, of which election Agent will promptly notify Banks. On the Commencement Date, each Bank shall make available to Agent its respective Pro Rata Share of such requested LIBOR Rate Advance no later than 12:00 noon, Seattle time, on the specified borrowing date. Whether or not any Bank fails to fund its Pro Rata Share of a LIBOR Rate Advance, each Bank shall only be obligated to disburse to Agent such Bank's Pro Rata Share of such requested LIBOR Rate Advance. At the time that Agent is informed by any Bank of any change in the Assessment Rate or Reserve Adjustment, Agent shall notify Borrower of the change and of the impact on any LIBOR Rate Advances then outstanding. 2.5 PROCEDURE FOR MULTICURRENCY ADVANCES. Borrower may request an Advance in British Pounds Sterling, Canadian Dollars, French Francs, German Marks, Italian Lire, Dutch Guilders, Swedish Kroner, or Spanish Pesetas (each a "Multicurrency Advance"), up to the U.S. Dollar equivalent of the lesser of (a) U.S.$5,000,000, or (b) the Available Amounts, as determined by the Exchange Rate for each such currency, as determined on the date the interest rate for such Advance is determined, by delivering its borrowing notice to Agent, in the form of Exhibit 2 attached, on or before 9:30 a.m., Seattle time, on a London Banking Day at least three Business Days prior to the date the Multicurrency Advance is to be made. Such notice shall specify the currency, principal amount, and Interest Period requested. Agent shall advise each Bank of a request for a Multicurrency Advance by 10:30 a.m., Seattle time, three Business Days prior to the date the Multicurrency Advance is to be made. Each Bank shall make available to Agent its Pro Rata Share of such requested Multicurrency Advance to the account in the bank and country specified to each Bank by Agent, on the date the Advance is to be made. Multicurrency Advances shall be credited on the date of Advance to the account specified by Borrower. Each Multicurrency Advance shall be in a minimum amount equivalent to U.S.$500,000. -7- 2.6 BANK FUNDING. Agent shall have no obligation to fund any portion of an Advance which has not been funded by such time by the applicable Bank. If, however, a Bank does not fund its Pro Rata Share of a Multicurrency Advance in a timely manner, and Agent funds such Advance to Borrower before having received funding from such Bank, such Bank shall reimburse Agent for any overdraft charges and interest incurred by Agent on account of such late or failed funding. 2.7 COMMITMENT FEES. On the first Business Day of each April, July, October, and January, beginning July 1, 1997, Borrower shall pay: (A) to Agent for the account of Banks, in arrears, to be applied in accordance with their respective Pro Rata Shares, a commitment fee equal to the Fee Margin multiplied by the difference between (a) $25,000,000, and (b) the sum of (i) the daily outstanding principal balance of the Revolving Loan (with Multicurrency Advances to be valued as the U.S. Dollar equivalent of such Multicurrency Advances, based on the Exchange Rate for each such Advance); and (ii) the daily aggregate outstanding principal amount of all Letters of Credit; and (B) to Seafirst for its sole account, in arrears, a commitment fee equal to the Fee Margin multiplied by the difference between (a) $5,000,000, and (b) the daily outstanding principal balance of the Swing Line. ARTICLE 3 LETTERS OF CREDIT 3.1 ISSUANCE. Upon Borrower's execution of Seafirst's then-standard form Application and Agreement for Standby Credit ("L/C Agreement(s)"), Seafirst shall issue on Borrower's behalf standby letters of credit ("Letters of Credit") until the Termination Date, up to the Available Amount, in amounts not to exceed $5,000,000 in the aggregate, and with tenors not to extend beyond the Termination Date. If there is a draw under a Letter of Credit, Borrower shall on demand immediately reimburse Seafirst for the amount of the draw, together with interest on the amount drawn, from the date of draw until paid, at a floating rate equal to the Base Rate plus 3% per annum. Seafirst shall in addition have all rights provided in the L/C Agreement executed with respect to such Letter of Credit. Any default in the L/C Agreement shall be a Default. 3.2 FEES. Borrower shall pay to Seafirst in advance, for the account of Banks, upon issuance of each Letter of Credit, a nonreimbursable Issuance Fee equal to the greater of (a) a percentage per annum equal to the Fixed Rate Margin (as determined on the date of issuance) on the face amount of the Letter of Credit, or (b) $250. Borrower shall additionally, on demand, pay the following administrative fees to Seafirst for its own account (i.e., not for the account of the other Banks): (A) a fee of $100 for each Letter of Credit which is required to be issued on the same Business Day as application is made for such Letter of Credit by Borrower; (B) a fee of $50 for each Letter of Credit, the application for which does not have a form of letter of credit attached thereto, or where such form needs substantial re-working prior to its issuance; (C) a fee of $100 for each Letter of Credit to be confirmed, advised, or guaranteed by banks which are not a correspondent bank of Seafirst or with which Seafirst does not have other standing relationships (in each case as such categorization is reasonably determined by Seafirst); (D) reimbursement to Seafirst of all fees and charges charged to Seafirst by any advising or confirming bank with regard to any Letter of Credit; -8- plus additional transaction fees according to Seafirst's then-outstanding standard fee schedule, as delivered to Borrower, on all drafts, transfers, extensions, and other transactions in regard to the Letters of Credit, and reimburse Seafirst for all out-of-pocket costs, legal fees, and expenses. 3.3 YIELD INDEMNITY. If any law or regulation imposes or increases any reserve, special deposit, or similar requirement against letters of credit issued by Seafirst or subjects Seafirst or any Bank to any tax, charge, fee, deduction, or withholding of any kind in regard to the Letters of Credit, Borrower shall promptly on demand indemnify Seafirst or such Bank for any such increased costs, taxes, or charges. Seafirst or such Bank, as the case may be, shall provide documentation to Borrower of any such increased costs, taxes, or charges. ARTICLE 4 SWING LINE 4.1 DESCRIPTION OF FACILITY. Seafirst shall make Swing Line Advances to Borrower, PROVIDED that (a) the aggregate amount of all outstanding Swing Line Advances shall not exceed $5,000,000, and (b) each Swing Line Advance shall mature and be repaid on the earlier of (i) the next Business Day after the date such Swing Line Advance is advanced or (ii) the Termination Date (the "Swing Line"). Each Swing Line Advance shall bear interest at the Quoted Rate (or Base Rate, whichever is lower) as determined on the date the Swing Line Advance is disbursed to or for the benefit of Borrower, with all principal and accrued interest to be repaid on the next Business Day; PROVIDED, however, that Borrower may elect to pay all accrued interest on Swing Line Advances quarterly, on the last Business Day of each March, June, September, and December, in which case the Fixed Rate Margin shall be increased by 4 basis points (0.04%) for all Swing Line Advances. 4.2 PROCEDURE FOR SWING LINE ADVANCES. In accordance with all terms and conditions of this Agreement, Borrower may borrow at the Quoted Rate (or Base Rate, whichever is lower) under the Swing Line on any Business Day. Borrower shall give Agent irrevocable notice (written or oral) specifying the amount to be borrowed on or before 3:30 p.m., Seattle time, on the day that a Swing Line Advance is requested; all Swing Line Advances shall be discretionary to the extent notification by Borrower is given subsequent to that time. Agent shall advise Seafirst of a request for a Swing Line Advance, and Seafirst shall make available to Borrower its Swing Line Advance by the end of the same Business Day. ARTICLE 5 RISK PARTICIPATION Mellon agrees for the benefit of Seafirst that it hereby purchases a risk participation in the Letters of Credit and any unreimbursed Letter of Credit draws equal to Mellon's Pro Rata Share of the outstanding balance of Letters of Credit plus the aggregate unreimbursed Letter of Credit draws. Upon the occurrence of a Default, Mellon shall fund to Seafirst, pursuant to this risk participation, Mellon's Pro Rata Share of the aggregate unreimbursed Letter of Credit draws. Mellon shall have no interest in any principal, interest, fees, or expenses due to Seafirst with regard to the Swing Line. Prior to its funding under this Article, Mellon shall have no interest in any principal, interest, fees, or expenses due to Seafirst with regard to Letters of Credit, except (a) those accruing after the date such participation is funded, (b) those fees payable under Subsection 2.7, and (c) as to Issuance Fees, Mellon's Pro Rata Share of the amount of such fees. Mellon's purchase of such participations shall be evidenced by a certificate in the form of Exhibit 3 attached. -9- ARTICLE 6 COLLATERAL SECURITY 6.1 COLLATERAL. As security for the prompt satisfaction of all Obligations, Borrower hereby grants to Agent, as agent for Banks, a lien upon, and a security interest in, all of the following as described below wherever the same shall be located, whether now owned or hereafter acquired, together with all replacements therefor and proceeds (including, but without limitation, insurance proceeds) and products thereof, all of which shall be of first-lien priority: all of Borrower's accounts, all of Borrower's inventory located in the United States, and all proceeds thereof (together the "Collateral"). 6.2 COLLATERAL AGENT. To the extent required by this Agreement, Agent shall perfect all Collateral in its own name as agent for each Bank, according to its respective Pro Rata Share, and such agency shall be disclosed on any UCC filings. Agent shall only be required to perfect upon those portions of the Collateral which can be perfected by the filing of a UCC1 financing statement. 6.3 FINANCING STATEMENTS AND OTHER DOCUMENTS. Borrower shall: (a) Join with Agent in executing such UCC financing statements (including amendments thereto and continuation statements thereof) and other documents, in form satisfactory to Agent and as Agent may reasonably specify, in order to perfect, or continue the perfection of, the rights of Banks in the Collateral, with the priority of security interest required by this Agreement; (b) Pay, or reimburse Agent for paying, all costs and taxes of filing or recording the same in such public offices as Agent may reasonably designate; (c) Except as provided in Subsection (d), take such other steps as Agent may reasonably direct, including the noting of the Agent's lien on the Collateral and on any certificates of title therefor, as is necessary to perfect to Agent's satisfaction the interest of Agent, as agent for the Banks, in the Collateral; and (d) Upon a Default and notice from Agent, deliver to Agent all Collateral which is deliverable. 6.4 COSTS. If a Default has occurred and is continuing, Banks, upon unanimous agreement, shall have the right, but not the obligation, to pay taxes, assessments, charges, claims, liens or encumbrances and to cause compliance with all applicable governmental requirements if Banks, upon unanimous consent, consider it necessary to protect their security or the prospects of repayment of the Obligations. Such payments and expenses are repayable on demand with interest at a floating rate equal to the Base Rate plus 3% per annum. 6.5 AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT. Borrower hereby irrevocably constitutes and appoints Agent and any officer or agent thereof, with full power of substitution, effective upon the occurrence of and during the continuation of a Default, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Borrower and in the name of Borrower or in its own name, from time to time in accordance with this Agreement, for the purposes of exercising its rights as a secured creditor pursuant to this Agreement, to take any and all appropriate action and to execute any or all documents and instruments that may be necessary or desirable to accomplish such purposes. 6.6 NEGATIVE PLEDGE. So long as any amount is payable by Borrower under this Agreement, or any Bank is committed to make Advances or issue Letters of Credit under this Agreement, Borrower -10- shall not allow any property of Borrower, Guarantor, or any Material Subsidiary, whether real or personal, tangible or intangible, to be transferred or encumbered, or to have any lien placed upon such property, except (a) sales of inventory in the ordinary course of business, (b) patents, or intellectual or proprietary property, (c) to secure the Obligations, or (d) as otherwise expressly permitted by Sections 12.2 or 12.3. ARTICLE 7 GUARANTIES The Obligations shall be absolutely and unconditionally guaranteed by Guarantor and every Material Subsidiary of Guarantor, jointly and severally, in form satisfactory to Banks. Borrower authorizes Agent to release to any present or future guarantor all information Agent possesses concerning Borrower or any loans, credits, or other financial accommodations made to Borrower by Agent or Banks. ARTICLE 8 INTEREST RATE OPTIONS 8.1 INTEREST RATES AND PAYMENT DATE. The Revolving Loan shall bear interest from the date of Advance on the unpaid principal balance outstanding from time to time at the Base Rate or Adjusted LIBOR Rate as selected by Borrower, and all accrued interest shall be payable in arrears on each Interest Payment Date. 8.2 OPTION RESTRICTIONS. Each Interest Period for LIBOR Rate Advances shall be one week or one, two, three, or six months. In no event shall the Interest Period extend beyond the Termination Date. The minimum amount of a LIBOR Rate Advance shall be $500,000, with additional increments of $100,000 each permitted. 8.3 PREPAYMENTS. Borrower may prepay any Base Rate Advance on any Business Day without premium or penalty. If Borrower prepays all or any portion of a LIBOR Rate Advance prior to the end of an Interest Period, there shall be due at the time of any such prepayment the Prepayment Fee, determined in accordance with Form 51-6325, which shall be attached as Exhibit 1 to this Agreement, and any such prepayment may only be made if in the amount of $100,000 or more. 8.4 REVERSION TO BASE RATE. The Revolving Loan shall bear interest at the Base Rate unless an Adjusted LIBOR Rate is specifically selected. At the termination of any Interest Period, each LIBOR Rate Advance shall revert to a Base Rate Advance unless Borrower directs otherwise pursuant to Section 2.4. 8.5 INABILITY TO PARTICIPATE IN MARKET. If Agent or any Bank in good faith cannot participate in the Eurodollar market for legal or practical reasons, the Adjusted LIBOR Rate shall cease to be an interest rate option. Agent or such Bank shall notify Borrower if and when it again becomes legal or practical to participate in the Eurodollar market, at which time the Adjusted LIBOR Rate shall resume being an interest rate option. 8.6 COSTS. Borrower shall, as to LIBOR Rate Advances, reimburse Agent, for the account of Banks, for all costs, taxes, and expenses, and defend and hold Banks harmless for any liabilities, which Banks may incur as a consequence of any changes in the cost of participating in, or in the laws or regulations affecting, the Eurodollar market, including any additional reserve requirements, except to the extent such costs are already calculated into the Adjusted LIBOR Rate. This covenant shall survive this Agreement and the repayment of the Revolving Loan. Banks shall provide documentation to Borrower detailing the basis for any charges made pursuant to this Section. -11- 8.7 BASIS OF QUOTES. Borrower acknowledges that Agent or Banks may or may not in any particular case actually match-fund a LIBOR Rate Advance. Whether the mechanism for setting a particular rate in fact represents the actual cost to Banks for any particular dollar or Eurodollar deposit or any LIBOR Rate Advance will depend upon how such Bank actually chooses to fund the LIBOR Rate Advance, or any foreign exchange contract. By electing an Adjusted LIBOR Rate, Borrower waives any right to object to Agent's means of calculating the Adjusted LIBOR Rate quote accepted by Borrower. ARTICLE 9 CONDITIONS OF LENDING Banks' obligation to make the initial Advance or Swing Line Advance or issue any Letter of Credit is subject to the conditions precedent listed in Sections 9.1 through 9.6, and their obligation to make subsequent Advances and Swing Line Advances, and to issue subsequent Letters of Credit, is subject to the conditions precedent listed in Sections 9.7 through 9.9, unless waived by all Banks in writing: 9.1 AUTHORIZATION. Borrower shall have delivered to Agent a certified copy of the resolution of Borrower's board of directors authorizing the transactions contemplated by this Agreement and the execution, delivery, and performance of all Loan Documents, together with appropriate certificates of incumbency. Each corporate guarantor shall have delivered to Agent a certified copy of a resolution of such guarantor's board of directors, satisfactory in form to Agent, authorizing its guaranty. 9.2 DOCUMENTATION. Borrower shall have executed and delivered to Agent all documents to reflect the existence of the Obligations and to perfect, as a first lien, the security interests granted to Banks. 9.3 REFINANCE. Borrower shall have repaid, or shall have provided Agent with instructions sufficient to repay, from Advances and/or Swing Line Advances, all indebtedness owing to Creditanstalt-Bankverein, and all agreements and security interests relating to such facility shall have been terminated or released. 9.4 LEGAL OPINION. Borrower shall have provided to each Bank a legal opinion of Borrower's legal counsel (which may be provided by Borrower's in-house legal counsel) that the Agreement and all other Loan Documents are duly authorized, valid, and binding obligations of Borrower and/or Guarantor, as the case may be, and attesting to the truth of the representations made in Sections 10.1 through 10.5. 9.5 GUARANTIES. Guarantor and each other entity required to provide a guaranty of the Obligations pursuant to the terms of this Agreement shall have executed and delivered its guaranty to Agent, and each such guaranty shall remain in full force and effect. 9.6 PROOF OF INSURANCE. Proof of insurance as required by Section 11.12 shall have been provided to Agent. 9.7 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Borrower or Guarantor in the Loan Documents and in any certificate, document, or financial statement furnished at any time shall continue to be true and correct, except to the extent that such representations and warranties expressly relate to an earlier date. 9.8 MATERIAL ADVERSE CHANGE. No material adverse change has occurred in Borrower or Guarantor's business, property, or financial condition since the end of Guarantor's 1996 fiscal year, as reported in Guarantor's audited financial statements, and at the time of each Advance, or issuance of each Letter of Credit. -12- 9.9 COMPLIANCE. No Default or other event which, upon notice or lapse of time or both would constitute a Default, shall have occurred and be continuing, or shall exist after giving effect to the Advance or the issuance of a Letter of Credit to be made. ARTICLE 10 REPRESENTATIONS AND WARRANTIES To induce Banks to enter into this Agreement, Borrower represents, warrants, and covenants to Agent and Banks as follows: 10.1 EXISTENCE. Borrower is in good standing as a corporation under the laws of the state of Delaware, has the power, authority, and legal right to own and operate its property or lease the property it operates and to conduct its current business; and is qualified to do business and is in good standing in all other jurisdictions where the ownership, lease, or operation of its property or the conduct of its business requires such qualification. 10.2 ENFORCEABILITY. The Loan Documents, when executed and delivered by Borrower, shall be enforceable against Borrower in accordance with their respective terms. 10.3 NO LEGAL BAR. The execution, delivery, and performance by Borrower of the Loan Documents, and the use of the loan proceeds, shall not violate any existing law or regulation applicable to Borrower; any ruling applicable to Borrower of any court, arbitrator, or governmental agency or body of any kind; Borrower's organizational documents; any security issued by Borrower; or any mortgage, indenture, lease, contract, undertaking, or other agreement to which Borrower is a party or by which Borrower or any of its property may be bound. 10.4 LIENS AND ENCUMBRANCES. As of this date, Borrower and each Material Subsidiary has good and marketable title to its property free and clear of all security interests, liens, encumbrances, or rights of others, except as disclosed in writing to Banks on attached Schedule 12.2(a), and except for taxes which are not yet delinquent and for conditions, restrictions, easements, and rights of way of record which do not materially affect the use of any of Borrower's property. 10.5 LITIGATION. Except as disclosed in writing to Banks on attached Schedule 10.5, there is no threatened (to Borrower's knowledge) or pending litigation, investigation, arbitration, or administrative action which may materially adversely affect Borrower's business, property, operations, or financial condition. 10.6 PAYMENT OF TAXES. Borrower has filed or caused to be filed all tax returns when required to be filed; and has, to the best of its knowledge, paid all taxes, assessments, fees, licenses, excise taxes, franchise taxes, governmental liens, penalties, and other charges levied or assessed against Borrower or any of its property imposed on it by any governmental authority, agency, or instrumentality that are due and payable (other than those returns or payments of which the amount, enforceability, or validity are contested in good faith by appropriate proceedings and with respect to which adequate reserves in conformity with GAAP are provided on Borrower's books). 10.7 EMPLOYEE BENEFIT PLAN. Borrower is, to the best of its knowledge, in material compliance with the provisions of ERISA and the regulations and published interpretations thereunder. Borrower has not engaged in any acts or omissions which would make Borrower liable to the Plan, to any of its participants, or to the Internal Revenue Service, under ERISA. 10.8 MISREPRESENTATIONS. No information, exhibits, data, or reports furnished by Borrower or Guarantor or delivered to Agent or Banks in connection with Borrower's application for credit misstates any material fact, or omits any fact necessary to make such information, exhibits, data, or reports not misleading. -13- 10.9 NO DEFAULT. Borrower is not in default in any Loan Document, or in any material contract, agreement, or instrument to which it is a party. 10.10 NO BURDENSOME RESTRICTIONS. No contract or other instrument to which Borrower is a party, or order, award, or decree of any court, arbitrator, or governmental agency, materially impairs Borrower's ability to repay the Obligations. 10.11 HAZARDOUS SUBSTANCES. To the best of Borrower's knowledge after due and diligent inquiry, no hazardous or toxic waste or substances are being stored on any Real Property, other than in accordance with all applicable environmental laws and regulations, or as disclosed in writing to Banks at the closing of this Agreement; nor have any such waste or substances been stored or used in, on, under, over, or about the Real Property prior to or during Borrower's or any subsidiary's ownership, possession, or control of any of such Real Property, other than in accordance with all applicable environmental laws and regulations or as disclosed in writing to Banks at the closing of this Agreement. Borrower agrees to provide written notice to Agent immediately upon Borrower becoming aware that the Real Property is being or has been contaminated with hazardous or toxic waste or substances. Borrower will not cause nor permit any activities on the Real Property which directly or indirectly would be likely to result in the Real Property or any other property becoming contaminated with hazardous or toxic waste or substances. 10.12 MATERIAL SUBSIDIARIES. As of the date of this Agreement no Material Subsidiaries exist other than as listed on attached Schedule 10.12. 10.13 MARGIN STOCK. Borrower is not engaged, nor shall it engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" margin stock under Regulation U of the Board of Governors of the Federal Reserve System. Borrower shall not use any part of the proceeds of any Advance for any purpose which violates or is inconsistent with the provisions of Regulation G, T, U, or X of such Board of Governors, as the same may be amended, supplemented, or modified from time to time. 10.14 MATERIAL ADVERSE CHANGE. As of each request for an Advance or for issuance of a Letter of Credit, that no material adverse change has occurred in Borrower's or Guarantor's business, property, or financial condition since the end of Guarantor's 1996 fiscal year, as reported in Guarantor's audited financial statements, and at the time of such Advance, or at the time of issuance of such Letter of Credit. ARTICLE 11 AFFIRMATIVE COVENANTS So long as this Agreement shall remain in effect, or any liability exists under the Loan Documents, Borrower shall, as to Sections 11.1, and 11.6 through 11.14 (and shall take any action necessary to assure that each Material Subsidiary shall); and Guarantor shall, as to Sections 11.2 through 11.14: 11.1 USE OF PROCEEDS. Use the proceeds of the Revolving Loan and Swing Line for working capital, for acquisitions permitted under this Agreement, and to refinance obligations owing prior to the execution of this Agreement to Creditanstalt-Bankverein. 11.2 FIXED CHARGE COVERAGE RATIO. Maintain a Fixed Charge Coverage Ratio, measured quarterly for the four quarters then ending, of not less than 1.75 to 1. 11.3 TANGIBLE NET WORTH. Maintain a Tangible Net Worth of not less than $37,500,000, increasing each fiscal quarter, beginning quarter ending March 31, 1997, by an amount equal to 90% -14- of net income for the quarter then ending, without adjustment downward for quarters in which a net loss is incurred. 11.4 DEBT RATIO. Maintain a ratio of (a) Debt minus Subordinated Debt to (b) the sum of Tangible Net Worth plus Subordinated Debt, of not more than 1.5 to 1. 11.5 FINANCIAL INFORMATION. Maintain a standard system of accounting in accordance with GAAP and furnish to each Bank the following: (a) QUARTERLY FINANCIAL STATEMENTS. As soon as available and, in any event, within 45 days after the end of each fiscal quarter except the last fiscal quarter of each fiscal year, a copy of the consolidated statement of income and retained earnings of Guarantor for the quarter and for the current fiscal year through such quarter, and for each such quarter a copy of the consolidated balance sheet, consolidated statement of shareholders' equity, and consolidated statement of cash flow of Guarantor as of the end of such quarter, and for the current fiscal year through such quarter, setting forth, in each case, in comparative form, figures for the corresponding period of the preceding fiscal year, all in reasonable detail and satisfactory in scope to each Bank, prepared under the supervision of the chief financial officer of Guarantor, and in form and substance satisfactory to each Bank; (b) ANNUAL FINANCIAL STATEMENTS. As soon as available and, in any event, within 90 days after the end of each fiscal year, a copy of the consolidated balance sheet, consolidated statement of income and retained earnings, consolidated statement of shareholders' equity, and consolidated statement of cash flow of Guarantor for such year, setting forth in each case, in comparative form, corresponding figures from the preceding annual statements, each audited by independent certified public accountants of recognized standing selected by Guarantor and satisfactory to each Bank certifying that such statement is complete and correct, fairly presents without qualification the consolidated financial condition of Guarantor for such period, is prepared in accordance with GAAP, and has been audited in conformity with generally accepted auditing standards; (c) CONSOLIDATING STATEMENTS. If Guarantor or Borrower shall create or acquire any Material Subsidiary, Guarantor shall thereafter also provide to each Bank consolidating annual and quarterly financial statements as to each Material Subsidiary, including Borrower; (d) PROJECTIONS. By December 31 of each year, an update of Guarantor's three-year financial projections; (e) OTHER CERTIFICATES. Together with the delivery of the financial statements required by Subsections 11.5(a) and 11.5(b), a certificate of the chief financial officer of Guarantor, in the form of Exhibit 4 attached, together with the calculations made to determine compliance with Sections 11.2 through 11.5; and (f) ADDITIONAL FINANCIAL INFORMATION. As soon as available and, in any event, within ten days after request, such other data, information, or documentation as any Bank may reasonably request. 11.6 MAINTENANCE OF EXISTENCE. Preserve and maintain its existence, powers, and privileges in the jurisdiction of its formation, and qualify and remain qualified in each jurisdiction in which its presence is necessary or desirable in view of its business, operations, or ownership of its property. Borrower and Guarantor shall also maintain and preserve all of its respective property which is necessary or useful in the proper course of its business, in good working order and condition, ordinary wear and tear excepted. -15- 11.7 BOOKS AND RECORDS. Keep accurate and complete books, accounts, and records in which complete entries shall be made in accordance with GAAP, reflecting all financial transactions of Borrower or Guarantor, as the case may be. 11.8 ACCESS TO PREMISES AND RECORDS. At all reasonable times and as often as Agent or Banks may reasonably request, permit any authorized representative designated by Agent or Banks to have access to the premises, property, and financial records of Borrower or Guarantor, as the case may be, including all records relating to the finances, operations (other than relating to research and development, or any trade secrets), and procedures of Borrower or Guarantor, as the case may be, and to make copies of or abstracts from such records. 11.9 NOTICE OF EVENTS. Furnish Banks prompt written notice of: (a) PROCEEDINGS. Any proceeding instituted by or against Borrower or Guarantor, as the case may be, in any court or before any commission or regulatory body, or any proceeding threatened against it in writing by any governmental agency which if adversely determined would have a material adverse effect on Borrower's or Guarantor's business, property, or financial condition, or where the amount involved is $500,000 or more and not covered by insurance; (b) MATERIAL DEVELOPMENT. Any material development in any such proceeding referred to in Subsection 11.9(a); (c) MATERIAL SUBSIDIARIES. Creation or acquisition of any Material Subsidiary; (d) DEFAULTS. Any accident, event, or condition which is or, with notice or lapse of time or both, would constitute a Default, or a default under any other material agreement to which Borrower or Guarantor, as the case may be, is a party, along with a statement describing actions being taken to remedy such default; (e) ADVERSE EFFECT. Any other action, event, or condition of any nature which could result in a material adverse effect on the business, property, or financial condition of Borrower or Guarantor, as the case may be; and (f) CONSENT DECREE. Any violation of the Consent Decree described in Section 11.11. 11.10 PAYMENT OF DEBTS AND TAXES. Pay all Debt and perform all obligations promptly and in accordance with their terms, and pay and discharge promptly all taxes, assessments, and governmental charges or levies imposed upon Guarantor, on a consolidated basis, its property, or revenues prior to the date on which penalties attach thereto, as well as all lawful claims for labor, material, supplies, or otherwise which, if unpaid, might become a lien or charge upon the property of Guarantor, Borrower, or any Material Subsidiary. Guarantor, Borrower, and the Material Subsidiaries shall not, however, be required to pay or discharge any such tax, assessment, charge, levy, or claim so long as its enforceability, amount, or validity is contested in good faith by appropriate proceedings, and adequate reserves are maintained. 11.11 FDA CONSENT DECREE. Remain in compliance at all times with the Consent Decree dated July 24, 1992, entered into between the U.S. Food and Drug Administration ("FDA") and Borrower with respect to a civil complaint filed by the FDA for alleged violations of "good manufacturing practices" and FDA medical device reporting regulations. 11.12 INSURANCE. Maintain commercially adequate levels of coverage with financially sound and reputable insurers, including, without limitation: -16- (a) PROPERTY INSURANCE. Insurance on all property of a character usually insured by organizations engaged in the same or similar type of business as Borrower or Guarantor, as the case may be, against all risks, casualties, and losses through extended coverage or otherwise and of the kind customarily insured against by such organizations, with such policy or policies covering tangible collateral to name Agent as loss payee, as its interests may appear; (b) LIABILITY INSURANCE. Public liability insurance against tort claims which may be asserted against Borrower or Guarantor, as the case may be; and (c) ADDITIONAL INSURANCE. Such other insurance as may be required by law. 11.13 HAZARDOUS SUBSTANCES. Promptly comply, at Borrower's expense, with all statutes, regulations, and ordinances which apply to Borrower or the Real Property, and with all orders, decrees, or judgments of governmental authorities or courts having jurisdiction which Borrower is bound by, relating to the use, collection storage, treatment, control, removal, or cleanup of hazardous or toxic waste or substances in, on, under, over, or about the Real Property or in, on, under, over, or about any adjacent property that becomes contaminated with hazardous or toxic waste or substances as a result of construction, operations, or other activities on, or the contamination of, the Real Property. Borrower shall defend, protect, hold harmless, and indemnify Agent, Banks, and their affiliates, and their successors and assigns, and their shareholders, directors, officers, employees, attorneys, and agents, from and against any and all claims, demands, penalties, fees, liens, damages, losses, expenses, and liabilities arising out of or in any way connected with any alleged or actual past or future presence on or under the Real Property of any hazardous or toxic waste or substances from any cause whatsoever; it being intended that Borrower shall be strictly and absolutely liable to Agent and Banks without regard to any fault by Borrower. 11.14 COMPLIANCE WITH LAWS. Comply in all material respects with all laws and regulations applicable to Borrower or Guarantor, as the case may be, and its respective business activities. ARTICLE 12 NEGATIVE COVENANTS So long as this Agreement shall remain in effect, or any liability shall exist under the Loan Documents, neither Borrower nor Guarantor nor any Material Subsidiary shall: 12.1 DEBT. Create, incur, assume, permit to exist, or otherwise become committed for any Debt except any: (a) UNSECURED TRADE CREDIT. Unsecured, short-term Debt arising from current operations by purchasing on credit goods, services, supplies, or merchandise and not constituting borrowings; (b) EXISTING OBLIGATIONS. Debt in existence as of the date of this Agreement and disclosed to Banks in Schedule 12.1(b) attached hereto, and all renewals, modifications, and extensions thereof; (c) NEGOTIABLE INSTRUMENTS. Endorsements on negotiable instruments for deposit or collection in the ordinary course of business; (d) AFFILIATES. Guaranties by Guarantor or any Material Subsidiary of the Obligations; (e) PERFORMANCE BONDS. Performance bonds as required in the ordinary course of Borrower's business; and -17- (f) OTHER INDEBTEDNESS. Debt which in the aggregate does not exceed $500,000 outstanding at any one time. 12.2 LIENS AND ENCUMBRANCES. Create, incur, or assume, or agree to create, incur, or assume any lien, whether consensual or nonconsensual, on any of its property, or to enter into any lease with respect to any of its property except: (a) EXISTING LIENS. Liens in existence as of the date of this Agreement and disclosed to Banks in Schedule 12.2(a) attached hereto; (b) PURCHASE MONEY. Purchase money security interests on equipment acquired by Borrower through the financing which is secured by such lien; (c) TAX LIENS. Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, and for which adequate reserves are maintained; and (d) INCIDENTAL LIENS. Other liens incidental to the conduct of Borrower's business or the ownership of its property which are not incurred in connection with the borrowing of money or the obtaining of credit, and which do not in the aggregate materially impair the value or use of property. 12.3 DISPOSITION OF ASSETS. Sell, transfer, lease, or otherwise assign or dispose of more than five percent (5%) of its assets, outside the ordinary course of business (PROVIDED, that assets held less than 60 days shall be deemed sales in the ordinary course of business), in any one fiscal year; PROVIDED, that Borrower may transfer a substantial portion of its business to a wholly-owned subsidiary if (a) such subsidiary fulfills the requirements for Material Subsidiaries to guaranty the Obligations, (b) such subsidiary grants to Banks, to secure its guaranty, a first-lien security interest in all of such subsidiary's accounts and inventory, and all proceeds thereof, providing to Agent all documents and instruments necessary to create and perfect such security interests, and (c) such subsidiary shall execute and deliver to Agent the certificate in the form of Exhibit 5 attached. 12.4 MERGERS. Become a party to any merger, consolidation, or like corporate change, other than where Borrower is the surviving entity of a merger and no other provision of this Agreement is thereby violated; or make any substantial transfer or contribution to, or material investment in, stock, shares, or licenses of any Person, other than acquisitions or joint ventures involving an investment of no more than $2,000,000 in the aggregate in any one fiscal year. 12.5 CAPITAL STRUCTURE. Purchase, retire, or redeem any of its capital stock or otherwise effect any change in Borrower's capital structure, other than stock purchased pursuant to 401(k) plans. 12.6 WAGE AND HOUR LAWS. Engage in any material violation of the federal Fair Labor Standards Act or any comparable state wage and hour law. 12.7 ERISA. Engage in any act or omission which would make Borrower materially liable under ERISA to the Plan, to any of its participants, or to the Internal Revenue Service. 12.8 DISSOLUTION. Adopt any agreement or resolution for dissolving, terminating, or substantially altering Borrower's present business activities. 12.9 BUSINESS ACTIVITIES. Engage or enter into any activity which is unusual to Borrower's existing business. 12.10 DIVIDENDS. Declare or pay any dividend. -18- 12.11 PERMISSIBLE LOANS AND INVESTMENTS. Make any loan or advance to any Person otherwise than in the ordinary course of business, or make any investment outside the ordinary course of Borrower's or Guarantor's business, except: (a) CERTIFICATES OF DEPOSIT. Investments in certificates of deposit maturing within one year from the date of acquisition from any one or more of the top 100 United States commercial banks, as rated by dollar value of assets; (b) MONEY MARKET. Money market mutual funds, bankers' acceptances, eurodollar investments, repurchase agreements, and other short-term money market investments acceptable to Agent; (c) COMMERCIAL PAPER. Prime commercial paper with ratings of A-1/P-1 or better by Moody's or Standard & Poor (or equivalent rating if such rating systems change) with maturities of less than one year; and (d) U. S. GOVERNMENT PAPER. Obligations issued or guaranteed by the United States Government or its agencies with maturities of less than one year. ARTICLE 13 AGENCY 13.1 APPOINTMENT. The Banks irrevocably designate and appoint Agent as their agent under this Agreement, and irrevocably authorize Agent, as their agent, to take such action on their behalf under the provisions of this Agreement and to exercise all such powers as are expressly delegated to Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. No implied covenants, functions, responsibilities, duties, obligations, or liabilities shall be read into this Agreement or otherwise exist against Agent. Notwithstanding any provision to the contrary in this Agreement, Agent shall have no implied duties or responsibilities to take any action, except such action as it is expressly required to take under the express terms of this Agreement, and shall have no fiduciary relationship with any of the Banks as to any matter not expressly provided for by the Loan Documents including, without limitation, enforcement or collection of the Obligations. Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting upon the consent and instructions of Majority Banks. Any company into which Agent may be merged or converted or with which it may be consolidated, or any company resulting from any merger, conversion, or consolidation to which it shall be a party, or any company to which Agent may sell or transfer all or substantially all of its agency relationships, shall be the successor to Agent without any further action by Banks or Borrower and without the execution or filing of any paper. 13.2 SUCCESSOR AGENT. Agent may resign as Agent upon 30 days' notice to Banks. Upon Agent's resignation as agent under this Agreement, Banks, upon consent of Majority Banks, shall appoint from among the Banks a successor agent for the Banks. If no successor agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with Banks, a successor agent, and Agent shall remain in place until a new agent accepts such appointment. Upon the acceptance of its appointment as successor agent hereunder, (a) such successor agent shall succeed to all the rights, powers, and duties of the retiring Agent, (b) the term "Agent" shall mean such successor agent, and (c) the retiring Agent's appointment, powers, and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Agreement shall inure to such retiring Agent's benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 13.3 DUTIES OF AGENT. Agent shall service the Revolving Loan, the Swing Line, and the Letter of Credit Facility in accordance with its usual practice in connection with similar credits. In servicing and collecting the Revolving Loan, the Swing Line, and the Letter of Credit Facility and in carrying out -19- the terms and provisions of the Loan Documents, Agent shall not be liable to any of the Banks for any error of judgment, or for any action taken or omitted to be taken by it, except for gross negligence or willful misconduct. 13.4 DELEGATION OF DUTIES. Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to rely upon advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact selected by it with reasonable care or any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel. 13.5 EXCULPATORY PROVISIONS. Agent's Related Parties shall not be responsible or otherwise liable to any of Banks in any manner for: (a) ACTIONS. Any action lawfully taken or omitted to be taken by it or by such other persons or entities under or in connection with this Agreement or any other Loan Document, except for its or their own gross negligence or willful misconduct; (b) BORROWER STATEMENTS. Any recital, statement, representation, or warranty made by Borrower or any officer thereof contained in this Agreement or any other Loan Document, or in any certificate, report, statement, or other document relating to this Agreement or any other Loan Document; (c) ENFORCEABILITY. The validity, effectiveness, genuineness, enforceability, or sufficiency of this Agreement or any other Loan Document, the financial condition of Borrower, or any failure of Borrower to perform its obligations under this Agreement or any other Loan Document; (d) FAILURE TO PERFECT. Inability to perfect any Collateral to the extent required by this Agreement where such inability is due to Borrower's failure to act or take such steps as Agent may direct; or (e) INVESTIGATION. Ascertaining or inquiring as to the observance of or Borrower's performance under any Loan Document, or inspecting the property, books, or records of Borrower. 13.6 RELIANCE BY AGENT. Agent's Related Parties shall be entitled to rely, and shall be fully protected in relying upon, any note, writing, resolution, notice, consent, certificate, message, statement, order, or other document or conversation believed to have been authorized, genuine or correct, or signed, sent, or made by the proper Person, or upon advice and statements of counsel (including, without limitation, legal counsel to Agent or Borrower, and independent accountants and other experts selected by Agent). 13.7 INSTRUCTIONS. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document as Agent deems appropriate, unless it shall first receive the consent of Majority Banks or shall first be indemnified to its satisfaction by all Banks, in accordance with their respective Pro Rata Share, against all liabilities and expenses which may be incurred by it or by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting or in refraining from acting under this Agreement or any other Loan Document in accordance with the consent of Majority Banks, where required, and such request and any action taken or not taken to act pursuant thereto shall be binding upon all of the Banks and all future holders of any interest in the Obligations. 13.8 NOTICE OF DEFAULT. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default unless Agent has actual knowledge or has received notice from one or more of the Banks or Borrower referring to this Agreement, describing such Default and stating in substance -20- that such notice is a "notice of default." In the event Agent receives such a notice or has actual knowledge of any Default, Agent shall give notice thereof to all of the Banks. 13.9 REPRESENTATIONS. None of Agent's Related Parties have made any representation or warranty to Banks, and no action taken by Agent after the date of this Agreement, including any review of Borrower's affairs, shall be deemed to constitute any representation or warranty by Agent to any of the Banks. 13.10 INDEPENDENT CREDIT REVIEW. Each Bank represents to Agent that it has, independently and without reliance upon Agent, and based upon such financial statements, documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, property, operations, and financial condition of Borrower and Guarantor and made its own decision to enter into this Agreement. Each of the Banks also represents that it shall, independently and without reliance upon Agent, and based upon such financial statements, documents, and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals, and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, property, operations, and financial condition of Borrower. For purposes of determining compliance with the conditions specified in Article 9, each Bank that has executed this Agreement shall be deemed to have consented to, approved, or accepted, or to be satisfied with, each document or other matter either sent by Agent to such Bank for consent, approval, acceptance, or satisfaction, or required under said Article to be consented to or approved by or acceptable or satisfactory to such Bank, unless such Bank promptly provides Agent with notice to the contrary. 13.11 INFORMATION. Agent shall have no obligation, duty, or responsibility, either initially or on a continuing basis, to provide Banks with any credit or other information concerning the business, property, operations, or financial condition of Borrower or Guarantor which may come into possession of any of Agent's Related Parties. Although Agent may furnish to Banks, upon request, copies of documents Agent has received pursuant to this Agreement, Agent assumes no responsibility as to the authenticity, validity, or enforceability of any such documents. 13.12 INDEMNITY. The Banks shall indemnify Agent, according to their respective Pro Rata Share, from and against any and all liabilities, obligations, losses, damages, penalties, actions, suits, judgments, reasonable costs and expenses, taxes, and disbursements of any kind or nature whatsoever (except to the extent they arise from Agent's gross negligence or willful misconduct) which may at any time be imposed on, incurred by, or asserted against any of Agent's Related Parties or in any way relating to or arising out of this Agreement, any other Loan Document, or any document contemplated by or referred to therein, any transaction contemplated thereby, or any action taken or omitted by Agent under or in connection with any of the foregoing. Without limiting the foregoing, each Bank shall reimburse Agent, in accordance with such Bank's Pro Rata Share, for any costs or expenses incurred by Agent subsequent to the closing of this Agreement, including outside or in-house legal fees, which (a) are required to be reimbursed to Agent by Borrower under any of the Loan Documents, but are not so reimbursed, or (b) arise out of action taken by Agent at the unanimous consent of Banks in accordance with this Agreement. This subsection shall survive the final payment of the Obligations and payment of all other amounts due under this Agreement or the other Loan Documents. 13.13 SEPARATION OF CAPACITIES. In its capacity as a lender that is one of the Banks, Seafirst shall have the same rights and powers hereunder as the other Banks and may exercise the same as though it were not Agent. The term "Bank(s)" shall include Seafirst, in its individual capacity as a lender and not as an agent, unless the context otherwise indicates. This Agreement shall not restrict in any way any Bank's ability to enter into other credit or banking facilities with Borrower or Guarantor, so long as such facility (a) does not violate any other provision of this Agreement and (b) is not secured by any of the Collateral; and the other Bank or Banks hereunder shall not have any rights or obligations as to any such facilities not provided by such Bank or Banks. -21- ARTICLE 14 EVENTS AND CONSEQUENCES OF DEFAULT 14.1 EVENTS OF DEFAULT. Any of the following events shall constitute a default by Borrower under the terms of this Agreement, the L/C Agreements, and all other Loan Documents ("Default"): (a) NONPAYMENT. Any payment of principal or reimbursement of a draw on a Letter of Credit is not made on the date when due, or any other payment or reimbursement due or demanded under this Agreement or any Loan Document is not made within five days of the date when due; (b) BREACH OF WARRANTY. Any material representation or warranty made or deemed made in connection with this Agreement or any other Loan Document, or any certificate, notice, or report furnished pursuant hereto, is determined by any Bank to be false in any respect when made; (c) FAILURE TO PERFORM. Any other term, covenant, or agreement contained in any Loan Document is not performed or satisfied, and, if remediable, such failure continues unremedied for 30 days after written notice thereof has been given to Borrower by Agent; (d) DEFAULTS ON OTHER OBLIGATIONS. There exists a default by Borrower, Guarantor, or any Material Subsidiary in the performance of any other agreement or obligation for the payment of borrowed money, for the deferred purchase price of property or services, or for the payment of rent under any lease, whether by acceleration or otherwise, which would permit such obligation to be declared due and payable prior to its stated maturity, with any such occurrence to be a Default immediately if the obligation concerned exceeds $500,000 or, if such occurrence is with regard to an obligation of $500,000 or less, if such default continues for 30 days after Borrower, Guarantor, or such Material Subsidiary, as the case may be, receives written notice thereof from the creditor so affected; (e) GUARANTIES. Any Guarantor or any Material Subsidiary revokes or attempts to revoke such guaranty, whether with respect to future transactions or outstanding Obligations, or otherwise breaches the terms and conditions of such guaranty, or violates any promise made pursuant to this Agreement, or any such guaranty is ruled to be invalid or unenforceable by any court of competent jurisdiction; (f) CHANGE OF CONTROL. Any Person (including any affiliated group of individuals and/or entities) shall acquire 25% or more of the outstanding voting stock of Guarantor; or Guarantor shall cease to own 100% of the outstanding voting stock of Borrower; (g) AFFILIATES. Any Material Subsidiary shall violate any of the covenants made by it in a certificate in the form of Exhibit 5 attached hereto, or any representation or warranty made or deemed made by it in such certificate is determined by any Bank to be false in any material respect when made, or any of the representations and warranties made by Guarantor in the addendum to this Agreement is determined by any Bank to be false in any material respect when made; (h) LOSS, DESTRUCTION, OR CONDEMNATION OF PROPERTY. A portion of Borrower's, Guarantor's, or any Material Subsidiary's property is affected by any uninsured loss, damage, destruction, theft, sale, or encumbrance other than created herein or is condemned, seized, or appropriated, the effect of which materially impairs Borrower's, Guarantor's, or such Material Subsidiary's financial condition or its ability to pay its debts as they come due; -22- (i) ATTACHMENT PROCEEDINGS AND INSOLVENCY. Borrower, Guarantor, or any Material Subsidiary, or any of Borrower's, Guarantor's, or any such Material Subsidiary's property is affected by any: (I) Judgment lien, execution, attachment, garnishment, general assignment for the benefit of creditors, sequestration, or forfeiture, to the extent Borrower's, Guarantor's, or such Material Subsidiary's financial condition or its ability to pay its debts as they come due is thereby materially impaired; or (II) Proceeding under the laws of any jurisdiction relating to receivership, insolvency, or bankruptcy, whether brought voluntarily or involuntarily by or against Borrower, Guarantor, or any Material Subsidiary, including, without limitation, any reorganization of assets, deferment or arrangement of debts, or any similar proceeding, and, if such proceeding is involuntarily brought against Borrower, Guarantor, or such Material Subsidiary, it is not dismissed within 60 days; (j) JUDGMENTS. Final judgment on claims not covered by insurance which, together with other outstanding final judgments against Borrower, Guarantor, or any Material Subsidiary, exceeds $500,000, is rendered against Borrower, Guarantor, or any Material Subsidiary and is not discharged, vacated, or reversed, or its execution stayed pending appeal, within 60 days after entry, or is not discharged within 60 days after the expiration of such stay; or (k) GOVERNMENT APPROVALS. Any governmental approval, registration, or filing with any governmental authority, now or later required in connection with the performance by Borrower of its obligations under the Loan Documents, is revoked, withdrawn, or withheld, or fails to remain in full force and effect, except Borrower shall have 60 days after notice of any such event to take whatever action is necessary to obtain all necessary approvals, registrations, and filings. 14.2 REMEDIES UPON DEFAULT. If any Default occurs under Subsection 14.1(i), the Banks' commitment to make Advances and Seafirst's commitment to make Swing Line Advances and issue new Letters of Credit shall immediately and automatically terminate (but Agent shall have no liability to any other Bank for, and any risk participations shall be effective as to, any Advances made by Agent or Letters of Credit issued by Seafirst prior to Agent receiving actual notice of such occurrence, absent Agent's willful misconduct or gross negligence), and all Obligations, including all accrued interest, shall immediately and automatically become due and payable, without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by Borrower, and Agent may immediately, upon receiving notice of such an occurrence, exercise any or all of the following remedies for Default; and if any other Default occurs and is continuing, Agent, upon direction of Majority Banks, shall, by notice from Agent to Borrower: (a) TERMINATE COMMITMENTS. Terminate Banks' commitment to make Advances and Seafirst's commitment to make Swing Line Advances and issue new Letters of Credit; (b) SUSPEND COMMITMENTS. Refuse to make further Advances or Swing Line Advances or issue new Letters of Credit until any Default has been cured; (c) ACCELERATE. Declare all Obligations, including all accrued interest, to be immediately due and payable without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by Borrower; (d) COLLATERAL. Proceed to realize on any or all Collateral by any available means; and/or (e) ALL REMEDIES. Pursue any other available legal and equitable remedies. -23- In addition, each Bank shall have the right to set off against, or place an administrative freeze upon, deposit accounts of Borrower at such Bank any amounts owing under the Obligations, including amounts in excess of such Bank's Pro Rata Share of the outstanding balance of the Obligations. Any such amounts, and any other amounts received by any Bank on account of the Obligations, other than from Agent, shall be delivered to Agent to be distributed to each Bank in accordance with its respective Pro Rata Share; PROVIDED, however, that if all or any portion of such payment turned over from a Bank to Agent and distributed to each Bank is thereafter recovered by Borrower from such Bank, each Bank shall, in accordance with its respective Pro Rata Share, reimburse such other Bank for the amount so recovered. All of Banks' and Agent's rights and remedies in all Loan Documents shall be cumulative and can be exercised separately or concurrently. Borrower shall have no liability to any Bank with respect to any sum that Agent receives in accordance with this Agreement and fails to distribute to such Bank as required by this Agreement. 14.3 DEFAULT INTEREST. Upon Default, whether or not acceleration has occurred, all outstanding Advances shall, upon direction by Majority Banks to Agent, accrue interest at a floating rate per annum of 3.0% above the Base Rate, as it may vary from time to time. ARTICLE 15 MISCELLANEOUS 15.1 MANNER OF PAYMENTS. (a) PAYMENTS ON NONBUSINESS DAYS. Whenever any event is to occur or any payment is to be made under any Loan Document on any day other than a Business Day, such event shall occur or such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computation of interest in connection with any such payment. (b) PAYMENTS. All payments and prepayments to be made by Borrower shall be made to Agent when due, at Agent's office as may be designated by Agent, without offsets or counterclaims for any amounts claimed by Borrower to be due from Agent or Banks, in the currency advanced, and in immediately available funds. (c) TIMING OF PAYMENTS. All payments and prepayments to be made by Borrower shall be made to Banks care of Agent, no later than 12:00 noon on the date when due (with payments received after 12:00 noon to be deemed received on the following Business Day), at Agent's office as may be designated by Agent, without offsets or counterclaims for any amounts claimed by Borrower to be due from any Bank, in the currency which was advanced to Borrower and in immediately available funds. Notwithstanding the foregoing, payments due under the Swing Line may be made until 3:30 p.m. (d) APPLICATION OF PAYMENTS. All payments made by Borrower shall be applied first against fees, expenses, and indemnities due; second, against interest due; and third, against principal, with Agent having the obligation, after a Default which is continuing, to apply any payments or collections received against the Obligations owing to the Banks in accordance with their respective Pro Rata Shares. Except for payments made by Borrower to Agent for fees and indemnities due Agent, or payments made with regard to Swing Line Advances or Letters of Credit in which no Bank has been called upon to purchase a participation pursuant to Article 5, all payments made by Borrower shall be deemed to be made to Agent, as agent for Banks in accordance with each Bank's Pro Rata Share, and shall be distributed by Agent to Banks according to their respective Pro Rata Share; PROVIDED, that while Agent will make a good faith effort to make such remittances on the same Business Day as received, if payments are received from Borrower after 12:00 noon, and if it is not practicable for Agent to make same-day remittances to the Banks, then Agent shall not be obligated to remit funds to the Banks -24- until the next Business Day, along with interest at the Fed Funds Rate. Any such payments which are received by a Bank shall be delivered immediately by such Bank to Agent for distribution to Banks in accordance with this subsection. (e) RECORDING OF PAYMENTS. Agent is authorized to record on a schedule or computer-generated statement the date and amount of each Advance and Swing Line Advance, all conversions between interest rate options, and all payments of principal and interest. All such schedules or statements shall constitute PRIMA FACIE evidence of the accuracy of the information so recorded. (f) ANTICIPATORY PAYMENTS. Agent shall have the right (but not the obligation), if it reasonably anticipates receipt of payment from Borrower but has not actually received such payment, to forward payment to each Bank of its respective Pro Rata Share; PROVIDED, that if Borrower fails within one Business Day to make such payment, each Bank shall, immediately upon the demand of Agent, return such funds to Agent. (g) PAYMENTS PURSUANT TO ADVANCES. If an Advance is repaid by means of a new Advance in a like amount, Agent shall credit such new Advance directly to repayment of the maturing Advance, and no funds shall be transferred to or from Banks. (h) MULTICURRENCY ADVANCES. If a Multicurrency Advance is not repaid on the date when due, Borrower shall indemnify Agent and all Banks for all costs, expenses, and interest incurred by Agent and each such Bank in covering any foreign exchange contracts and hedges entered into by such parties with regard to such Multicurrency Advance. 15.2 NOTICES. Agent may make Advances and conversions between interest rates, and Seafirst shall make Swing Line Advances, based on telephonic, telex, and oral requests made by any Person whom Agent in good faith believes to be authorized to act on behalf of Borrower. All other notices, demands, and other communications to be given pursuant to any of the Loan Documents shall be in writing and shall be deemed received the earlier of when actually received, or two days after being mailed, postage prepaid and addressed as follows, or as later designated in writing: AGENT: BORROWER: SEAFIRST BANK PHYSIO-CONTROL CORPORATION Seafirst Agency Services 11811 Willows Road Northeast 701 Fifth Avenue, 16th Floor Redmond, WA 98073-9706 Seattle, WA 98104 Attention: Joseph J. Caffarelli Attention: Ken Puro BANKS: SEAFIRST BANK MELLON BANK, N.A. Metropolitan Wholesale, Team 1 Western Region 701 Fifth Avenue, 13th Floor 400 South Hope Street, 5th Floor Seattle, Washington 98104 Los Angeles, California 90071-2806 Attention: Michael Collum Attention: Susan A. Dalton 15.3 DOCUMENTATION AND ADMINISTRATION EXPENSES. Borrower shall pay, reimburse, and indemnify Agent and Banks for all of Agent's and Banks' reasonable costs and expenses, including, without limitation, all accounting, appraisal, and report preparation fees or expenses, all attorneys' fees (including the allocated cost of in-house counsel), legal expenses, and recording or filing fees, incurred in connection with the negotiation, preparation, execution, and administration of this Agreement and -25- all other Loan Documents, and all amendments, supplements, or modifications thereto, and the perfection of all security interests, liens, or encumbrances that may be granted to Banks; PROVIDED, that Borrower shall pay no more than $3,000 in legal fees for the initial documentation of the facilities evidenced by this Agreement. Borrower acknowledges that any legal counsel retained or employed by Agent or Banks acts solely on the Agent's and Banks' behalf and not on Borrower's behalf, despite Borrower's obligation to reimburse Agent and Banks for the cost of such legal counsel, and that Borrower has had sufficient opportunity to seek the advice of its own legal counsel with regard to this Agreement. 15.4 COLLECTION EXPENSES. The nonprevailing party shall, upon demand by the prevailing party, reimburse the prevailing party for all of its costs, expenses, and reasonable attorneys' fees (including the allocated cost of in-house counsel) incurred in connection with any controversy or claim between said parties relating to this Agreement or any of the other Loan Documents, or to an alleged tort arising out of the transactions evidenced by this Agreement, including those incurred in any action, bankruptcy proceeding, arbitration or other alternative dispute resolution proceeding, or appeal, or in the course of exercising any judicial or nonjudicial remedies. 15.5 WAIVER. No failure to exercise and no delay in exercising, on the part of Agent or Banks, any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right, power, or privilege. Further, no waiver or indulgence by Agent or Banks of any Default shall constitute a waiver of Agent's and Banks' right to declare a subsequent similar failure or event to be a Default. 15.6 ASSIGNMENT. This Agreement is made expressly for the sole benefit of Borrower and for the protection of Agent and Banks and their respective successors and assigns. The rights of Borrower hereunder shall not be assignable by operation of law or otherwise, without the prior written consent of Agent and Banks. Upon any assignment, the assigning Bank shall pay Agent an assignment fee of $2,500. Either Bank may at any time sell, assign, grant participations in, or otherwise transfer to any other financial institution (a "Participant") all or any part of its obligations under the Letters of Credit and its rights under this Agreement and the Loan Documents, with assignments only to be made with the consent of Borrower, which shall not be unreasonably withheld. Participations may be sold without the consent of Borrower, PROVIDED that any voting rights of such participants shall be limited to matters of principal amount, interest rates, fees, payment dates, release of any Collateral or any guarantors, and extensions of the Termination Date or other maturities. Banks acknowledge and agree that any such disposition will not alter or affect such Bank's direct obligations under this Agreement and under the Letters of Credit and its participation therein. Borrower acknowledges that any such Participant will become an owner PRO RATA of the Obligations, and Borrower waives any right it may have to setoff the Obligations against any claims or counterclaims it may have against the Bank selling such participation. Assignments by Banks, as opposed to participations, must be in minimum amounts of $5,000,000, and may only be made with the prior written consent of Borrower and Agent. It is the intention of the parties that Borrower's obligation to pay or reimburse expenses will not be increased because of an assignment or the creation or transfer of a participation interest. Notwithstanding anything in this Agreement to the contrary, Borrower shall not be required to pay or reimburse Agent or Banks for any fees, costs, or expenses, including attorneys' fees, relating to the creation or transfer of any assignment or participation interest. Neither shall Borrower be required to pay or reimburse Agent or Banks for any documentation and administration expenses incurred by an assignee or Participant except to the extent that such expenses are in lieu of, and not in addition to, expenses incurred by Seafirst or Mellon. 15.7 MERGER. The rights and obligations set forth in this Agreement shall not merge into or be extinguished by any of the Loan Documents, but shall continue and remain valid and enforceable. This Agreement and the other Loan Documents constitute Agent's and Banks' entire agreement with Borrower with regard to the Revolving Loan, the Swing Line, and the Letters of Credit, and supersede all prior writings and oral negotiations. No oral or written representation, covenant, commitment, -26- waiver, or promise of either Agent, any Bank or Borrower shall have any effect, whether made before or after the date of this Agreement, unless contained in this Agreement or another Loan Document, or in an amendment complying with Section 15.8. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. 15.8 AMENDMENTS. Any amendment or waiver of, or consent to any departure by Borrower from any provision of, this Agreement or any other Loan Document shall be in writing signed by each party to be bound thereby, and shall be effective only in the specific instance and for the specific purpose for which given. Banks authorize Agent (i) to make the following amendments only upon the prior written consent of all Banks: (a) increase the Credit Limit or the maximum amounts permitted for the Swing Line or issuance of Letters of Credit; (b) extend the Termination Date; (c) release any guaranty of the Obligations, or release any Collateral; (d) reduce the principal, interest, or interest rate on the Revolving Loan or Swing Line, or the issuance fees charged with regard to Letters of Credit, or fees otherwise accruing under this Agreement, from that otherwise required under this Agreement; or (e) postpone the date fixed for payment of any principal, interest, or fees; and (ii) to waive, change, or release Borrower from any affirmative or negative covenant under this Agreement only upon the prior written consent of Majority Banks. Seafirst shall not make Swing Line Advances after the occurrence of and during the continuance of a Default without the consent of all Banks. 15.9 CONSTRUCTION. Each term of this Agreement and each Loan Document shall be binding to the extent permitted by law and shall be governed by the laws of the State of Washington, excluding its conflict of laws rules. If one or more of the provisions of this Agreement should be invalid, illegal, or unenforceable in any respect, the remaining provisions of this Agreement shall remain effective and enforceable. If there is a conflict among the provisions of any Loan Documents, the provisions of this Agreement shall be controlling. The captions and organization of this Agreement are for convenience only, and shall not be construed to affect any provision of this Agreement. 15.10 COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures to such counterparts were upon the same instrument. This Agreement shall become effective when Agent shall have received counterparts of the Agreement signed by all of the parties to the Agreement. -27- DATED June 3, 1997. BORROWER: AGENT: PHYSIO-CONTROL CORPORATION SEAFIRST BANK By By -------------------------------- ------------------------------ Title Title ----------------------------- --------------------------- By -------------------------------- Title ----------------------------- BANKS: SEAFIRST BANK MELLON BANK, N.A. By By -------------------------------- ------------------------------ Title Title ----------------------------- --------------------------- CONSENT OF GUARANTOR The undersigned Guarantor acknowledges receipt of a copy of the above Agreement, consents to its contents, and agrees to comply with the covenants of Sections 11.2 through 11.14 thereof. By submitting each of the financial statements required by Subsection 11.5(a) and 11.5(b), Guarantor is deemed to represent and warrant that: (a) such statement is complete and correct and fairly presents the consolidated financial condition of Guarantor as of the date of such statement; (b) such statement discloses all liabilities of Guarantor that are required to be reflected or reserved against under GAAP, whether liquidated or unliquidated, fixed or contingent; and (c) such statement has been prepared in accordance with GAAP. As of the date of execution of this Agreement, there has been no adverse change in Guarantor's financial condition since preparation of the last such financial statements delivered to Banks which would materially impair Guarantor's ability to honor Guarantor's guaranty of the Obligations. Guarantor hereby adopts and repeats, as to Guarantor, all representations and warranties made by Borrower as to Borrower in Article 10 of the above Agreement. -28- DATED June 3, 1997. GUARANTOR: PHYSIO-CONTROL INTERNATIONAL CORPORATION By -------------------------------- Title ----------------------------- By -------------------------------- Title ----------------------------- -29- EXHIBIT 1 TO CREDIT AGREEMENT PREPAYMENT FEES If the principal balance of this note is prepaid in whole or in part, whether by voluntary prepayment, operation of law, acceleration or otherwise, a prepayment fee, in addition to any interest earned, will be immediately payable to the holder of this note. The amount of the prepayment fee depends on the following: (1) The amount by which interest reference rates as defined below have changed between the time the loan is prepaid and either a) the time the loan was made for fixed rate loans, or b) the time the interest rate last changed (repriced) for variable rate loans. (2) A prepayment fee factor (see "Prepayment Fee Factor Schedule" on reverse). (3) The amount of principal prepaid. If the proceeds from a CD or time deposit pledged to secure the loan are used to prepay the loan resulting in payment of an early withdrawal penalty for the CD, a prepayment fee will not also be charged under the loan. DEFINITION OF PREPAYMENT REFERENCE RATE FOR VARIABLE RATE LOANS The "Prepayment Reference Rate" used to represent interest rate levels for variable rate loans shall be the index rate used to determine the rate on this loan having maturities equivalent to the remaining period to interest rate change date (repricing) of this loan rounded upward to the nearest month. The "Initial Prepayment Reference Rate" shall be the Prepayment Reference Rate at the time of last repricing and a new Initial Prepayment Reference Rate shall be assigned at each subsequent repricing. The "Final Prepayment Reference Rate" shall be the Prepayment Reference Rate at the time of prepayment. DEFINITION OF PREPAYMENT REFERENCE RATE FOR FIXED RATE LOANS The "Prepayment Reference Rate" used to represent interest rate levels on fixed rate loans shall be the bond equivalent yield of the average U.S. Treasury rate having maturities equivalent to the remaining period to maturity of this loan rounded upward to the nearest month. The "Initial Prepayment Reference Rate" shall be the Prepayment Reference Rate at the time the loan was made. The "Final Prepayment Reference Rate" shall be the Prepayment Reference Rate at time of prepayment. The Prepayment Reference Rate shall be interpolated from the yields as displayed on Page 119 of the Dow Jones Telerate Service (or such other page or service as may replace that page or service for the purpose of displaying rates comparable to said U.S. Treasury rates) on the day the loan was made (Initial Prepayment Reference Rate) or the day of prepayment (Final Prepayment Reference Rate). CALCULATION OF PREPAYMENT FEE If the Initial Prepayment Reference Rate is less than or equal to the Final Prepayment Reference Rate, there is no prepayment fee. If the Initial Prepayment Reference Rate is greater than the Final Prepayment Reference Rate, the prepayment fee shall be equal to the difference between the Initial and Final Prepayment Reference Rates (expressed as a decimal), multiplied by the appropriate factor from the Prepayment Fee Factor Schedule, multiplied by the principal amount of the loan being prepaid. EXAMPLE OF PREPAYMENT FEE CALCULATION VARIABLE RATE LOAN: A non-amortizing 6-month LIBOR based loan with principal of $250,000 is fully prepaid with 3 months remaining until next interest rate change date (repricing). An Initial Prepayment Reference Rate of 7.0% was assigned to the loan at last repricing. The Final Prepayment Reference Rate (as determined by the 3-month LIBOR index) is 6.5%. Rates therefore have dropped 0.5% since last repricing and a prepayment fee applies. A prepayment fee factor of 0.31 is determined from Table 3 below and the prepayment fee is computed as follows: Prepayment Fee = (0.07 - 0.065) x (0.31) x ($250,000) = $387.50 FIXED RATE LOAN: An amortizing loan with remaining principal of $250,000 is fully prepaid with 24 months remaining until maturity. An Initial Prepayment Reference Rate of 9.0% was assigned to the loan when the loan was made. The Final Prepayment Reference Rate (as determined by the current 24-month U.S. Treasury rate on Page 119 of Telerate) is 7.5%. Rates therefore have dropped 1.5% since the loan was made and a prepayment fee applies. A prepayment fee factor of 1.3 is determined from Table 1 below and the prepayment fee is computed as follows: Prepayment Fee = (0.09 - 0.075) x (1.3) x ($250,000) = $4,875 PREPAYMENT FEE FACTOR SCHEDULE TABLE I: FULLY AMORTIZING LOANS
Proportion of Remaining Principal Amount Being Prepaid Months Remaining To Maturity/Repricing(1) - -------------------------------------------------------------------------------------------------------------------------- 0 3 6 9 12 24 36 48 60 84 120 240 360 - -------------------------------------------------------------------------------------------------------------------------- 90-100% 0 .21 .36 .52 .67 1.3 1.9 2.5 3.1 4.3 5.9 10.3 13.1 60-89% 0 .24 .44 .63 .83 1.6 2.4 3.1 3.9 5.4 7.5 13.2 17.0 30-59% 0 .28 .53 .78 1.02 2.0 3.0 4.0 5.0 7.0 9.9 18.5 24.4 0-29% 0 .31 .63 .92 1.22 2.4 3.7 5.0 6.3 9.0 13.4 28.3 41.8
TABLE II: PARTIALLY AMORTIZING (BALLOON) LOANS
Proportion of Remaining Principal Amount Being Prepaid Months Remaining To Maturity/Repricing(1) - -------------------------------------------------------------------------------------------------------------------------- 0 3 6 9 12 24 36 48 60 84 120 240 360 - -------------------------------------------------------------------------------------------------------------------------- 90-100% 0 .26 .49 .71 .94 1.8 2.7 3.4 4.2 5.6 7.4 11.6 14.0 60-89% 0 .30 .59 .86 1.15 2.2 3.3 4.3 5.3 7.1 9.4 15.0 18.1 30-59% 0 .31 .63 .95 1.27 2.6 3.9 5.3 6.6 9.1 12.6 21.2 26.2 0-29% 0 .31 .63 .95 1.27 2.6 4.0 5.4 7.0 10.2 15.7 33.4 46.0
TABLE III: NONAMORTIZING (INTEREST ONLY) LOANS
Proportion of Remaining Principal Amount Being Prepaid Months Remaining To Maturity/Repricing(1) - -------------------------------------------------------------------------------------------------------------------------- 0 3 6 9 12 24 36 48 60 84 120 240 360 - -------------------------------------------------------------------------------------------------------------------------- 0-100% 0 .31 .61 .91 1.21 2.3 3.4 4.4 5.3 6.9 8.9 13.0 14.8
(1) For the remaining period to maturity/repricing between any two maturities/repricings shown in the above schedules, interpolate between the corresponding factors to the closest month. The holder of this note is not required to actually reinvest the prepaid principal in any U.S. Government Treasury Obligations, or otherwise prove its actual loss, as a condition to receiving a prepayment fee as calculated above. EXHIBIT 2 TO CREDIT AGREEMENT FORM OF MULTICURRENCY BORROWING NOTICE To: Seafirst Agency Services 701 Fifth Ave., 16th Floor Seattle, Washington 98104 Attention: ----------------------- Phone: (206) 358-0078 Fax: (206) 358-0971 BORROWING INSTRUCTIONS: Date of Borrowing: ---------------------------- Specify New Advance or Rollover: ---------------------------- Currency Type: ---------------------------- Amount requested (in applicable currency): ---------------------------- Interest Period: ---------------------------- WIRE INSTRUCTIONS: Bank Name: ---------------------------- Swift Code: ---------------------------- Account Name: ---------------------------- Account Number: ---------------------------- Attention: ---------------------------- Phone Number: ---------------------------- Borrower hereby represents and warrants to Banks that as of the date hereof (a) the statements set forth in Article 10 of the Credit Agreement dated June 3, 1997, among Physio-Control Corporation, Bank of America National Trust and Savings Association, doing business as Seafirst Bank as Agent, and Bank of America National Trust and Savings Association, doing business as Seafirst Bank, and Mellon Bank, N.A., as Banks (the "Credit Agreement") are true and correct; and (b) no Default (as defined in the Credit Agreement) has occurred and is continuing or will result from disbursement of the requested Advance. DATED: . -------------------------------------- PHYSIO-CONTROL CORPORATION By -------------------------------- Title ----------------------------- EXHIBIT 3 TO CREDIT AGREEMENT FORM OF PARTICIPATION CERTIFICATE $ Date: ---------------------- --------------------- Bank of America National Trust and Savings Association, a national banking association, doing business as Seafirst Bank (the "Issuing Bank"), for and in consideration of the mutual covenants and agreements of the Issuing Bank and Mellon Bank, N.A. (the "Participating Bank") set forth in that certain Credit Agreement dated June 3, 1997 ("Credit Agreement") among Physio-Control Corporation ("Borrower"), the Issuing Bank, and the Participating Bank, hereby assigns to Participating Bank a 50% interest (the "Participation Interest") in all of its rights and obligations under the following letters of credit issued by the Issuing Bank for the account of Borrower, including all rights of the Issuing Bank relating thereto under the Credit Agreement and any L/C Agreement: --------------------------------------------------------------------------- Such Participation Interest is equal to $ . ---------------------------------- All capitalized terms used in this certificate and not otherwise defined shall have the meaning given in the Credit Agreement. The Participation Interest granted hereby and the respective rights and duties of the Issuing Bank and the Participating Bank are governed by the terms of the Credit Agreement referred to above. Dated as of the date first set forth above. SEAFIRST BANK By -------------------------- Title ----------------------- EXHIBIT 4 TO CREDIT AGREEMENT [Form of Certificate to be sent with financial reports] [Date] Seafirst Bank Seafirst Agency Services 701 Fifth Avenue, 16th Floor Seattle, WA 98104 Attention: Ken Puro Re: Certificate of Chief Financial Officer Ladies and Gentlemen: With respect to that certain Credit Agreement between Physio-Control Corporation ("Borrower") and Physio-Control International Corporation ("Guarantor"), Bank of America National Trust and Savings Association, doing business as Seafirst Bank as Agent, and Bank of America National Trust and Savings Association, doing business as Seafirst Bank, and Mellon Bank, N.A., as Banks, dated June 3, 1997 (the "Credit Agreement"), we hereby represent to you the following (capitalized terms used in this certificate shall have the same meaning as in the Credit Agreement): 1. Enclosed are financial statements dated as of _________________________ required by Section 11.5 of the Credit Agreement. 2. As of the date of such financial statements, Guarantor's Tangible Net Worth is $________________________. 3. As of the date of such financial statements, Guarantor's ratio of Debt to Tangible Net Worth is ________________________. 4. As of the date of such financial statements, Guarantor's Fixed Charge Coverage Ratio is ________________________. 5. As of the date of such financial statements, the following entities constitute all of Guarantor's Material Subsidiaries:______________________ __________________________________________________________________________. 6. Such financial statements are complete and correct, fairly present, without qualification, the financial condition of Guarantor for such period, and are prepared in accordance with GAAP. 7. No Default exists, nor any event which, with lapse of time or upon the giving of notice, would constitute a Default under the Credit Agreement. Sincerely, PHYSIO-CONTROL INTERNATIONAL CORPORATION By ------------------------------------ Chief Financial Officer EXHIBIT 5 TO CREDIT AGREEMENT FORM OF SUBSIDIARY'S CERTIFICATE The undersigned corporation, which is a corporation organized under the laws of the state of _________________________________ (the "Company"), and which is a "Material Subsidiary" as such term is defined in the Credit Agreement dated June 3, 1997 ("Credit Agreement"), among Physio-Control Corporation ("Borrower"), Bank of America National Trust and Savings Association, doing business as Seafirst Bank, a national banking association, as agent ("Agent"), and Seafirst Bank and Mellon Bank, N.A. as "Banks," makes this certificate with respect to the Credit Agreement. Terms defined in the Credit Agreement have the same meaning when used in this certificate. The Company acknowledges that it is a Material Subsidiary, and hereby adopts and repeats, as to itself and as of the date of this certificate, all representations and warranties made by Borrower as to Borrower in Article 10 of the Credit Agreement; and agrees to comply with, as to the Company, all the covenants made by Borrower as to Borrower in Articles 11 and 12 of the Credit Agreement. DATED , 199 . ------------------------- ---- COMPANY: ---------------------------- By -------------------------- Title ----------------------- EX-10.18 8 COMMERCIAL SECURITY AGREEMENT Exhibit 10.18 [SEAFIRST BANK LOGO] BORROWER: PHYSIO-CONTROL CORPORATION LENDER: "LENDER" 11811 WILLOWS ROAD N.E. C/0 CLSC-W REDMOND, WA 98052 800 FIFTH AVE (FAB-13) SEATTLE, WA 98104 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN PHYSIO-CONTROL CORPORATION (REFERRED TO BELOW AS "GRANTOR"); AND "LENDER" (REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW. DEFINITIONS. The following words shall have the following meanings when used in this AGREEMENT. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. GRANTOR. The word "Grantor" means PHYSIO-CONTROL CORPORATION, ITS SUCCESSORS AND ASSIGNS. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: ORGANIZATION. Grantor is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Delaware. AUTHORIZATION. The execution, delivery, and performance of this Agreement by Grantor have been duly authorized by all necessary action by Grantor and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Grantor or (b) any law, governmental regulation, court decree, or order to Grantor. PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing statements and to take whatever other actions are reasonably requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Granter, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the assumed business names of Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO LENDER. PAGE 2 COMMERCIAL SECURITY AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Washington, without the prior written consent of Lender. TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sales or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. TITLE. Grantor represents and warrants to Lender that it holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists of inventory, Grantor shall deliver to Lender, as often as Lender shall require, such list, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral involving Collateral exceeding $500,000.00 in the aggregate, of any request for credit or adjustment or of any other dispute arising with respect to the Collateral involving Collateral exceeding $500,000.00 in the aggregate, and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender' sole opinion. If the Collateral is subjected to a lien which is not discharged within (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly with laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lenders's interest in the Collateral, in Lenders' opinion, is not jeopardized. HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral other than in compliance with applicable laws and regulations, used for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any hazardous waste or substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations, adopted pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least forty five (45) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. PAGE 3 COMMERCIAL SECURITY AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any loss or damage to the Collateral exceeding $500,000 in the aggregate. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor for the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement for the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured; (e) the current value on the basis of which insurance has been obtained and the manner of determining that value; and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for the purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Indebtedness from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Indebtedness and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Indebtedness or (c) be treated as a balloon payment which will be due and payable at the Indebtedness' maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Washington Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the PAGE 4 COMMERCIAL SECURITY AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenue therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity or otherwise. CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement. AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in the is Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Washington. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts situated in King County, the State of Washington. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. ATTORNEY'S FEES; EXPENSES. Grantor agrees to pay upon demand all of Lender's costs and expense, including reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expense of such enforcement. Costs and expense include Lender's attorneys' fees and legal expense whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor. This means that each of the persons signing below is responsible for ALL obligations in this Agreement. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change it address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current address(es). Grantor will give Lender prior written notice of any change of either Grantor's legal structure or of any change of Grantor's chief executive office, or if Grantor has no place of business, Grantor's residence, and change of records location. POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted preference claim in Borrower's bankruptcy will become a part of the Indebtedness and, at Lender's option, shall be payable by Borrower as provided above in the "EXPENDITURES BY LENDER" paragraph. SEVERABILITY. If a court of competent jurisdication finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other repsecces shall remain valid and enforceable. SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with PAGE 5 COMMERCIAL SECURITY AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent of subsequent instances where such consent is required and all cases such consent may be granted or withheld in the sole discretion of Lender. WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for the Indebtedness, Borrower irrevocably waivers, disclaims and relinquishes all claims against such other person which Borrower has or would otherwise have by virtue of payment of the Indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration. ADDITIONAL PROVISION. "LENDER" means (a) as to the granting clause of this Agreement, Bank of America National Trust and Savings Association, doing business as Seafirst Bank ("Seafirst"), as agent for itself and Mellon Bank, N.A. ""Mellon"), and means (b) as to all other provisions of this Agreement both Bank of America National Trust and Savings Association, doing business as Seafirst Bank, and Mellon Bank, N.A., and their respective successors and assigns. "INDEBTEDNESS" shall mean all the "Obligations", as such term is defined in the Credit Agreement dated as of June 3, 1997 (including all amendments thereto and restatements thereof, the "Credit Agreement"), between Borrower and Lender, including all renewals, modifications, and extensions thereof and all obligations of Grantor under this Agreement. Grantor acknowledges and agrees that all rights, powers, and privileges for either Seafirst or Mellon, in their respective individual capacities as Banks, may be exercised by Seafirst in its capacity as agent for the Banks; and the Grantor is neither permitted nor required to inquire as to Seafirst's authority to act for the Banks when its it purporting to act in its capacity as Agent. This provision does not hinder in any way each Bank's right to demand performance in its individual capacity. "COLLATERAL" shall have the meaning given to such term in the Credit Agreement. "EVENTS OF DEFAULT" shall mean each of the events which constitutes a "Default" under the terms of the Credit Agreement. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 3, 1997. GRANTOR: PHYSIO-CONTROL CORPORATION By: Richard O. Martin, Chairman & CEO --------------------------------- J.J. Caffarelli, Exec. V.P./CFO --------------------------------- EX-10.19 9 COMM SEC AGREEMENT GRANTOR PHYSIO CONTROL Exhibit 10.19 [SEAFIRST BANK LOGO] BORROWER: PHYSIO-CONTROL CORPORATION LENDER: "LENDER" 11811 WILLOWS ROAD N.E. C/0 CLSC-W REDMOND, WA 98052 800 FIFTH AVE (FAB-13) SEATTLE, WA 98104 GRANTOR: PHYSIO-CONTROL MANUFACTURING CORPORATION 11811 WILLOWS ROAD N.E. REDMOND, WA 98052 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN PHYSIO-CONTROL CORPORATION (REFERRED TO BELOW AS "GRANTOR"); AND "LENDER" (REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW. DEFINITIONS. The following words shall have the following meanings when used in this AGREEMENT. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. GRANTOR. The word "Grantor" means PHYSIO-CONTROL CORPORATION, ITS SUCCESSORS AND ASSIGNS. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: ORGANIZATION. Grantor is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Delaware. AUTHORIZATION. The execution, delivery, and performance of this Agreement by Grantor have been duly authorized by all necessary action by Grantor and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Grantor or (b) any law, governmental regulation, court decree, or order to Grantor. PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing statements and to take whatever other actions are reasonably requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Granter, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the assumed business names of Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO LENDER. PAGE 2 COMMERCIAL SECURITY AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Washington, without the prior written consent of Lender. TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sales or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. TITLE. Grantor represents and warrants to Lender that it holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists of inventory, Grantor shall deliver to Lender, as often as Lender shall require, such list, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral involving Collateral exceeding $500,000.00 in the aggregate, of any request for credit or adjustment or of any other dispute arising with respect to the Collateral involving Collateral exceeding $500,000.00 in the aggregate, and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender' sole opinion. If the Collateral is subjected to a lien which is not discharged within (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly with laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lenders's interest in the Collateral, in Lenders' opinion, is not jeopardized. HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral other than in compliance with applicable laws and regulations, used for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any hazardous waste or substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations, adopted pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least forty five (45) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. PAGE 3 COMMERCIAL SECURITY AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any loss or damage to the Collateral exceeding $500,000 in the aggregate. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor for the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement for the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured; (e) the current value on the basis of which insurance has been obtained and the manner of determining that value; and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for the purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Indebtedness from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Indebtedness and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Indebtedness or (c) be treated as a balloon payment which will be due and payable at the Indebtedness' maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Washington Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the PAGE 4 COMMERCIAL SECURITY AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenue therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity or otherwise. CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement. AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in the is Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Washington. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts situated in King County, the State of Washington. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. ATTORNEY'S FEES; EXPENSES. Grantor agrees to pay upon demand all of Lender's costs and expense, including reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expense of such enforcement. Costs and expense include Lender's attorneys' fees and legal expense whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor. This means that each of the persons signing below is responsible for ALL obligations in this Agreement. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change it address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current address(es). Grantor will give Lender prior written notice of any change of either Grantor's legal structure or of any change of Grantor's chief executive office, or if Grantor has no place of business, Grantor's residence, and change of records location. POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted preference claim in Borrower's bankruptcy will become a part of the Indebtedness and, at Lender's option, shall be payable by Borrower as provided above in the "EXPENDITURES BY LENDER" paragraph. SEVERABILITY. If a court of competent jurisdication finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other repsecces shall remain valid and enforceable. SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with PAGE 5 COMMERCIAL SECURITY AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent of subsequent instances where such consent is required and all cases such consent may be granted or withheld in the sole discretion of Lender. WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for the Indebtedness, Borrower irrevocably waivers, disclaims and relinquishes all claims against such other person which Borrower has or would otherwise have by virtue of payment of the Indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration. ADDITIONAL PROVISION. "LENDER" means (a) as to the granting clause of this Agreement, Bank of America National Trust and Savings Association, doing business as Seafirst Bank ("Seafirst"), as agent for itself and Mellon Bank, N.A. ""Mellon"), and means (b) as to all other provisions of this Agreement both Bank of America National Trust and Savings Association, doing business as Seafirst Bank, and Mellon Bank, N.A., and their respective successors and assigns. "INDEBTEDNESS" shall mean all the "Obligations", as such term is defined in the Credit Agreement dated as of June 3, 1997 (including all amendments thereto and restatements thereof, the "Credit Agreement"), between Borrower and Lender, including all renewals, modifications, and extensions thereof and all obligations of Grantor under this Agreement. Grantor acknowledges and agrees that all rights, powers, and privileges for either Seafirst or Mellon, in their respective individual capacities as Banks, may be exercised by Seafirst in its capacity as agent for the Banks; and the Grantor is neither permitted nor required to inquire as to Seafirst's authority to act for the Banks when its it purporting to act in its capacity as Agent. This provision does not hinder in any way each Bank's right to demand performance in its individual capacity. "COLLATERAL" shall have the meaning given to such term in the Credit Agreement. "EVENTS OF DEFAULT" shall mean each of the events which constitutes a "Default" under the terms of the Credit Agreement. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 3, 1997. BORRWER: PHYSIO-CONTROL CORPORATION By: V Marc Droppert --------------------------------- J.J. Caffarelli, Exec. V.P./CFO --------------------------------- GRANTOR: PHYSIO-CONTROL MANUFACTURING CORPORATION By: V. Marc Droppert --------------------------------- By: J.J. Caffarelli, Exec. V.P./CFO --------------------------------- EX-21.1 10 LIST OF SUBSIDIARIES Exhibit 21.1 LIST OF SUBSIDIARIES OF PHYSIO-CONTROL INTERNATIONAL CORPORATION ---------------------------------------------------------------- The following is a list of the entities that are wholly owned subsidiaries of Physio-Control International Corporation, a Washington corporation. If indented, the entity is a wholly owned subsidiary of the entity under which it is listed unless otherwise noted, The entities listed below all do business under the name "Physio-Control". Jurisdiction of Name of Organization Organization -------------------- ---------------- Physio-Control Corporation Washington Physio-Control International Sales Corporation Barbados Physio-Control GmbH Germany Physio-Control Netherlands Services B.V. Netherlands Physio-Control s.r.o. The Czech Republic Corporation Physio-Controle Canada Canada Physio-Control UK Limited United Kingdom Physio-Control Hungaria Kft. Hungary Physio-Control Poland, Sp.zo.o. Poland Physio-Control Italia, s.r.l.(1) Italy Physio-Control Medizintechnik Handels, Austria GmbH Physio-Control Manufacturing Corporation Washington __________________________ 1 Two percent of the outstanding common stock is owned by Physio-Control Netherlands Services B.V. EX-27 11 EXHIBIT 27
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 2,742 0 42,037 752 37,552 85,114 17,931 2,811 103,418 28,470 0 0 0 173 51,711 103,418 85,738 85,738 41,805 41,805 0 0 860 8,671 3,035 5,636 0 0 0 5,636 0.31 0
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