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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Amendment No. 3)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SCHERER HEALTHCARE, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: N/A.
(2) Aggregate number of securities to which transaction applies: N/A.
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined): N/A.
(4) Proposed maximum aggregate value of transaction: $11,916,500*.
(5) Total fee paid: $2,383.30*.
/X/ Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $1,211.30.
---------
(2) Form, Schedule or Registration Statement No.: Schedule 14A.
------------
(3) Filing Party: Marquest Medical Products, Inc. (SEC No. 0-11484).
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(4) Date Filed: April 10, 1997.
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- ---------------
* This Schedule 14A is filed in connection with the proposed acquisition of
Marquest Medical Products, Inc. ("Marquest"), a majority owned subsidiary
of the Registrant, by Vital Signs, Inc. ("VSI") and the proposed purchase
by VSI of certain assets of the Registrant. VSI will pay an aggregate of
$12,583,031 in cash for the acquisition of Marquest, including $6,056,500
to be paid to the Registrant in exchange for its common stock and warrants
of Marquest (the "Merger Consideration"). VSI will pay to the Registrant
an additional $5,860,000 for the purchase of assets and a covenant not to
compete. Marquest previously paid the filing fee with respect to the
Merger Consideration.
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SCHERER HEALTHCARE, INC.
SUITE 300
2859 PACES FERRY ROAD,
ATLANTA, GEORGIA 30339
Dear Stockholder:
You are cordially invited to attend a Special Meeting of stockholders of
Scherer Healthcare, Inc. (the "Company") which will be held on July 28, 1997,
at the offices of LeBoeuf, Lamb, Greene & MacRae, LLP, Suite 2000, 633 17th
Street, Denver, Colorado 80202. The meeting will start at 9:00 a.m., local
time.
At this important meeting, the holders of the Company's common stock (the
"Company Common Stock") will be asked to consider and vote upon a (1)
proposal to grant the Board of Directors authority to vote the shares of
common stock of Marquest Medical Products, Inc. ("MMPI") owned by the Company
to approve the Agreement and Plan of Merger dated as of March 14, 1997 (the
"Merger Agreement"), by and among Vital Signs, Inc. ("VSI"), VSI Acquisition
Corporation, a wholly owned subsidiary of VSI ("Newco"), and MMPI providing
for the merger of Newco with and into MMPI (the "Merger"), with MMPI
surviving the Merger as a wholly-owned subsidiary of VSI, and, whereby, with
certain exceptions and limitations, upon effectiveness of the Merger, all
then outstanding MMPI common stock, no par value (the "MMPI Common Stock"),
will be converted into the right to receive $0.797 per share of MMPI Common
Stock in cash, without interest, and (2) a proposal to approve and adopt the
Scherer Healthcare Inducement Agreement dated as of March 14, 1997 (the "SH
Inducement Agreement"), among the Company, VSI and MMPI which provides for
the sale by the Company to VSI of certain assets of the Company leased or
licensed by the Company to MMPI and used by MMPI in the manufacture and sale
of arterial blood gas products and the execution by the Company of a covenant
not to compete for the benefit of VSI for an aggregate consideration of
$5,860,000. Stockholders of the Company will not receive any cash payments
as a result of the transactions contemplated by the Merger Agreement or the
SH Inducement Agreement. The Company holds 7,211,192 shares of MMPI Common
Stock which represents approximately 51% of all outstanding shares of MMPI
Common Stock. Following the merger, the Company will have no further interest
in MMPI. It is anticipated that the Company will use approximately $1.9
million of the proceeds that it receives from the transactions to repay
indebtedness and the balance for working capital and other purposes.
Each of the foregoing proposals (collectively, the "Scherer Stockholder
Proposals") must be approved by the holders of at least a majority of the
outstanding shares of Company Common Stock. If the stockholders approve one
proposal but not the other, the Merger Agreement and the SH Inducement
Agreement will be terminated as described in the attached Proxy Statement.
Accordingly, consummation of the transactions contemplated by the Scherer
Stockholder Proposals is contingent upon receipt of stockholder approval for
both proposals. Robert P. Scherer, Jr., Chairman of the Board and Chief
Executive Officer of both the Company and MMPI, is the beneficial owner of,
and has the authority to vote, 2,591,180 shares of Company Common Stock, or
60.1% of the shares of Company Common Stock which were issued and outstanding
on the Record Date. Mr. Scherer has agreed with VSI, subject to his
fiduciary obligations as a director and majority stockholder of the Company
and as trustee of certain voting trusts, to vote all shares of Company Common
Stock over which he has voting authority to adopt each of the Scherer
Stockholder Proposals. If Mr. Scherer votes all of the shares of Company
Common Stock over which he has voting authority to adopt the Scherer
Stockholder Proposals, the requisite vote for adoption of each of the Scherer
Stockholder Proposals will have been obtained.
The accompanying Proxy Statement and the Annexes thereto contain a
summary description of the Merger Agreement, the SH Inducement Agreement, the
transactions contemplated thereby and the Scherer Stockholder Proposals
(beginning on page 2) followed by a more detailed discussion of the Merger
Agreement, the SH Inducement Agreement, the transactions contemplated thereby
and the Scherer Stockholder Proposals, including the reasons for, and the
benefits of, the Merger Agreement, the SH Inducement Agreement, the
transactions contemplated thereby and the Scherer Stockholder Proposals.
Because a summary is not, by its nature, complete, stockholders are urged to
read the Proxy Statement and Annexes in their entirety.
The Board of Directors believes that the Merger Agreement, the SH
Inducement Agreement, the transactions contemplated thereby and the Scherer
Stockholder Proposals are advisable, are in the best interest of the Company
and its stockholders and offers the Company a greater return than would be
available if MMPI were to remain a stand-alone entity.
The Board of Directors has received the opinion of its financial advisor,
Summit Investment Corporation, that as of the date of the opinion (March 17,
1997) and based on the factors and assumptions described in such opinion, the
transactions contemplated by the Merger Agreement and the SH Inducement
Agreement are fair, from a financial point of view, to the holders of Company
Common Stock.
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS
AND CONDITIONS OF THE MERGER AGREEMENT, THE SH INDUCEMENT AGREEMENT AND THE
SCHERER STOCKHOLDER PROPOSALS,
BELIEVES THAT THEY ARE IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS, AND RECOMMENDS A VOTE FOR APPROVAL OF EACH OF THE SCHERER
STOCKHOLDER PROPOSALS.
Even if you plan to attend the meeting, we urge you to mark, sign and
date the enclosed proxy and return it promptly. You have the option to
revoke it at any time or to vote your shares personally on request if you
attend the meeting.
IF YOU DO NOT RETURN THE PROXY CARD AND DO NOT VOTE AT THE MEETING, IT
WILL HAVE THE SAME EFFECT AS IF YOU VOTED AGAINST THE SCHERER STOCKHOLDER
PROPOSALS.
Holders of record of Company Common Stock at the close of business on
June 27, 1997 will be entitled to one vote for each share of Company Common
Stock they hold. Your vote is important no matter how many shares you hold.
Sincerely,
/S/ Robert P. Scherer, Jr.
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
July 2, 1997
2
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SCHERER HEALTHCARE, INC.
2859 PACES FERRY ROAD, SUITE 300
ATLANTA, GEORGIA 30339
(770) 333-0066
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 28, 1997
TO THE STOCKHOLDERS OF SCHERER HEALTHCARE, INC.:
A Special Meeting of Stockholders (the "Special Meeting") of Scherer
Healthcare, Inc., a Delaware corporation (the "Company"), will be held on
July 28, 1997, at 9:00 a.m., local time, at the offices of LeBoeuf, Lamb,
Greene & MacRae, LLP, Suite 2000, 633 17th Street, Denver, Colorado 80202,
for the following purposes:
1. To consider and vote upon a proposal to grant the Board of
Directors authority to vote the shares of common stock of Marquest
Medical Products, Inc. ("MMPI") owned by the Company to approve the
Agreement and Plan of Merger dated as of March 14, 1997 (the "Merger
Agreement"), by and among Vital Signs, Inc. ("VSI"), VSI
Acquisition Corporation, a wholly owned subsidiary of VSI ("Newco"),
and MMPI providing for the merger of Newco with and into MMPI (the
"Merger"), with MMPI surviving the Merger as a wholly-owned subsidiary
of VSI, and, whereby, with certain exceptions and limitations, upon
the effectiveness of the Merger, all then-outstanding shares of MMPI
common stock, no par value (the "MMPI Common Stock"), will be
converted into the right to receive $0.797 per share of MMPI Common
Stock in cash, without interest;
2. To consider and vote upon a related proposal to approve and adopt
the Scherer Healthcare Inducement Agreement dated as of March 19, 1997
(the "SH Inducement Agreement"), among the Company, VSI and MMPI which
provides for the sale by the Company to VSI of certain assets of the
Company leased or licensed by the Company to MMPI and used by MMPI in
the manufacture and sale of arterial blood gas products and the
execution by the Company of a covenant not to compete for the benefit
of VSI for an aggregate consideration of $5,860,000; and
3. To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
The transactions contemplated by the Merger Agreement and the SH
Inducement Agreement are contingent upon receipt of stockholder approval of
both Proposal 1 and Proposal 2. If the stockholders of the Company do not
approve Proposal 1 and Proposal 2, the Merger Agreement and the SH Inducement
Agreement will be terminated as described in the Attached Proxy Statement.
Stockholders of record at the close of business on June 27, 1997
will be entitled to notice of and to vote at the Special Meeting or at any
adjournment(s) thereof. EVEN IF YOU NOW EXPECT TO ATTEND THE SPECIAL
MEETING, YOU ARE REQUESTED TO MARK, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY IN THE ENCLOSED ADDRESSED, POSTAGE-PAID ENVELOPE. If you do attend the
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Special Meeting, you may vote in person, whether or not you have sent in your
proxy. If you do not vote at the meeting and do not send in your proxy, it
will have the same effect as if you voted against adoption of the Proposals 1
and 2.
When the proxies are executed and returned, the Company's outstanding
Common Stock, $.01 par value (the "Company Common Stock"), represented
thereby will be voted in accordance with the indicated instructions either
"for" or "against." IF NO INSTRUCTIONS HAVE BEEN SPECIFIED ON A RETURNED
SIGNED PROXY, THE COMPANY COMMON STOCK REPRESENTED THEREBY WILL BE COUNTED
FOR DETERMINING WHETHER A QUORUM IS PRESENT AND WILL BE VOTED "FOR" THE
APPROVAL OF PROPOSALS 1 AND 2. Abstentions and broker non-votes will have
the effect of a vote against the adoption of the Proposals.
By Order of the Board of Directors,
/s/ Amy M. Murphy
Secretary
Atlanta, Georgia
July 2, 1997
2
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SCHERER HEALTHCARE, INC.
PROXY STATEMENT
July 2, 1997
This Proxy Statement is being furnished by Scherer Healthcare, Inc., a
Delaware corporation (the "Company"), in connection with a special meeting of
holders of the Company's Common Stock to be held on July 28, 1997, at 9:00
a.m., local time, at the offices of LeBoeuf, Lamb, Greene & MacRae, LLP,
Suite 2000, 633 17th Street, Denver, Colorado 80202, and any and all
adjournments or postponements thereof (the "Special Meeting").
At the Special Meeting, holders of the Company's Common Stock will be
asked to consider and vote upon (1) a proposal to grant the Board of
Directors the authority to vote the shares of common stock of Marquest
Medical Products, Inc. ("MMPI") owned by the Company to approve the Agreement
and Plan of Merger dated as of March 14, 1997 (the "Merger Agreement"), by
and among Vital Signs, Inc., a New Jersey corporation ("VSI"), VSI
Acquisition Corporation, a Colorado corporation and a wholly owned subsidiary
of VSI ("Newco") , and MMPI which provides for the merger (the "Merger") of
Newco with and into MMPI whereby, with certain exceptions and limitations all
shares of common stock, no par value, of MMPI (the "MMPI Common Stock")
outstanding at the effective time of the Merger will be converted into the
right to receive $0.797 per share of MMPI Common Stock in cash, without
interest (Proposal 1), and (2) a proposal to approve and adopt the Scherer
Healthcare Inducement Agreement date as of March 14, 1997 (the "SH Inducement
Agreement"), among the Company, VSI and MMPI which provides for the sale by
the Company to VSI of certain assets of the Company leased or licensed by the
Company to MMPI (the "ABG Assets") and used by MMPI in the manufacture and
sale of arterial blood gas products (the "ABG Products") and the execution by
the Company of a three-year covenant not to compete with respect to the
manufacture or sale of ABG Products for the benefit of VSI (the "Covenant Not
To Compete") for an aggregate consideration of $5,860,000 ("Proposal 2" and
collectively with Proposal 1, the "Scherer Stockholder Proposals").
Stockholders also will be asked to consider and vote upon any other matters
as may properly come before the Special Meeting.
The transactions contemplated by the Merger Agreement and the SH Inducement
Agreement are contingent upon receipt of stockholder approval of both Proposal 1
and Proposal 2. If the stockholders of the Company do not approve Proposal 1
and Proposal 2, the Merger Agreement and the SH Inducement Agreement will be
terminated as described herein. The sale by the Company of the ABG Assets and
will occur immediately following, the consummation of the Merger. The
transactions contemplated by the Merger Agreement and the SH Inducement
Agreement, including the Merger, the sale of the ABG Assets by the Company to
VSI and the execution by the Company of the Covenant Not to Compete, are
hereinafter collectively referred to as the "Scherer Transactions."
Pursuant to the SH Inducement Agreement, the Company has agreed, subject
to its fiduciary obligations as a controlling stockholder of MMPI, to vote
the shares of MMPI Common Stock owned by it in favor of the Merger Agreement
and the transactions contemplated thereby provided that the Scherer
Stockholder Proposals are approved at the Special Meeting and Summit
Investments Corporation ("Summit"), which has rendered its opinion dated
March 17, 1997, that the Scherer Transactions are fair from a financial point
of view to the stockholders of the Company, confirms, immediately prior to
the Special Meeting, that it still believes that the Scherer Transactions are
fair, from a financial point of view, to the stockholders of the Company.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE BY STOCKHOLDERS OF THE COMPANY
FOR APPROVAL OF THE SCHERER STOCKHOLDER PROPOSALS.
This Proxy Statement and the accompanying form of proxy are being mailed
to all holders of Company Common Stock of record as of June 27, 1997 (the
"Record Date") and are first being sent to such stockholders on or about the
date hereof. ONLY STOCKHOLDERS OF RECORD ON THE RECORD DATE ARE ENTITLED TO
VOTE AT THE SPECIAL MEETING.
Adoption of each of the Scherer Stockholder Proposals requires the
affirmative vote of a majority of the outstanding shares of Company Common
Stock entitled to vote at the Special Meeting. Robert P. Scherer, Jr.,
Chairman of the Board and Chief Executive Officer of both the Company and
MMPI, is the beneficial owner of, and has the authority to vote, 2,591,180
shares of Company Common Stock, or 60.1% of the shares of Company Common
Stock which were issued and outstanding on the Record Date. Mr. Scherer has
agreed with VSI, subject to his fiduciary obligations as a director and
majority stockholder of the Company and as trustee of certain voting trusts,
to vote all shares of Company Common Stock over which he has voting authority
to approve and adopt each of the Scherer Stockholder Proposals. If Mr.
Scherer votes all of the shares of Company Common Stock over which he has
voting authority to approve and adopt each of the Scherer Stockholder
Proposals, the requisite vote for adoption of the Scherer Stockholder
Proposals will have been obtained.
The Company's principal executive offices are located at 2859 Paces Ferry
Road, Suite 300, Atlanta, Georgia 30339, and its telephone number is (770)
333-0066. The cost of solicitation of proxies will be borne by the Company.
The date of this Proxy Statement is July 2, 1997
2
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TABLE OF CONTENTS
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Special Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Date, Time and Place . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Purpose of the Special Meeting . . . . . . . . . . . . . . . . . . . . . 1
Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Record Date; Stockholders Entitled to Vote . . . . . . . . . . . . . . . 2
Voting Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Scherer Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 2
Proposal 1: The Merger . . . . . . . . . . . . . . . . . . . . . . . . 2
Proposal 2: The SH Inducement Agreement . . . . . . . . . . . . . . . . 3
Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Reasons for the Scherer Transactions . . . . . . . . . . . . . . . . . . . 4
Recommendation of the Company's Board of Directors . . . . . . . . . . . . 5
Opinion of the Financial Advisor . . . . . . . . . . . . . . . . . . . . . 5
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Certain Federal Income Tax Consequences. . . . . . . . . . . . . . . . . . 6
Sources and Amount of Funds. . . . . . . . . . . . . . . . . . . . . . . . 6
Business of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Price Range of Company Common Stock and Dividends. . . . . . . . . . . . . 6
Selected Historical and Pro Forma Consolidated Financial Data. . . . . . . 7
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Pro Forma Condensed Consolidated Balance Sheet . . . . . . . . . . . . . . 11
Pro Forma Condensed Consolidated Statements of Continuing Operations . . . 13
Notes to Pro Forma Condensed Consolidated Financial Information. . . . . . 18
THE SCHERER TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 20
The Scherer Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 20
Proposal 1: The Merger . . . . . . . . . . . . . . . . . . . . . . . . 20
Proposal 2: The SH Inducement Agreement . . . . . . . . . . . . . . . . 20
Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Dealer Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
The RPS Inducement Agreement . . . . . . . . . . . . . . . . . . . . . . 21
Agreement to Pay Certain Expenses of the Company . . . . . . . . . . . . 22
Background of the Scherer Transactions . . . . . . . . . . . . . . . . . . 22
Reasons for the Scherer Transactions . . . . . . . . . . . . . . . . . . . 25
Recommendations of the Company's Board of Directors. . . . . . . . . . . . 26
Opinion of the Financial Advisor . . . . . . . . . . . . . . . . . . . . . 27
Historical Financial Position. . . . . . . . . . . . . . . . . . . . . . 28
Historical Stock Price Information . . . . . . . . . . . . . . . . . . . 28
Purchase Price Analysis. . . . . . . . . . . . . . . . . . . . . . . . . 28
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Analysis of Comparable Publicly Traded Companies . . . . . . . . . . . . 29
Comparable Merger and Acquisition Transactions . . . . . . . . . . . . . 30
Discounted Cash Flow Analysis. . . . . . . . . . . . . . . . . . . . . . 30
Source and Amount of Funds . . . . . . . . . . . . . . . . . . . . . . . . 31
Certain Federal Income Tax Consequences. . . . . . . . . . . . . . . . . . 31
Interests of Certain Persons in the Scherer Transactions . . . . . . . . . 32
Severance Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Early Vesting of Stock Options . . . . . . . . . . . . . . . . . . . . . 32
Director Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 32
Robert P. Scherer, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . 32
Amy M. Murphy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Antitrust Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Other Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . 34
Certain Terms of the SH Inducement Agreement . . . . . . . . . . . . . . . 34
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The Company's Representations. . . . . . . . . . . . . . . . . . . . . . 34
The Company's Covenants. . . . . . . . . . . . . . . . . . . . . . . . . 35
Sale of the ABG Assets . . . . . . . . . . . . . . . . . . . . . . . . . 35
Cashless Exercise of Warrants. . . . . . . . . . . . . . . . . . . . . . 36
VSI's Representations. . . . . . . . . . . . . . . . . . . . . . . . . . 36
VSI's Covenants With Respect to the Proxy Statement. . . . . . . . . . . 36
Certain Terms of the Merger Agreement. . . . . . . . . . . . . . . . . . . 37
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Representations and Warranties of MMPI . . . . . . . . . . . . . . . . . 37
Representations and Warranties of VSI. . . . . . . . . . . . . . . . . . 37
Certain Covenants of MMPI. . . . . . . . . . . . . . . . . . . . . . . . 37
Certain Covenants of VSI . . . . . . . . . . . . . . . . . . . . . . . . 39
Certain Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . 39
Conditions to Obligations of VSI and Newco . . . . . . . . . . . . . . . 39
Conditions to Obligations of MMPI. . . . . . . . . . . . . . . . . . . . 40
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
BENEFICIAL OWNERSHIP OF SECURITIES AND OTHER MATTERS . . . . . . . . . . . . 44
Beneficial Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Business of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . 45
Information Concerning MMPI. . . . . . . . . . . . . . . . . . . . . . . . 45
Information Concerning VSI and Newco . . . . . . . . . . . . . . . . . . . 46
INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . 46
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Annex Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ii
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ANNEXES
Annex I: Agreement and Plan of Merger, dated as of March 14, 1997, by and
among Marquest Medical Products, Inc., Vital Signs, Inc., and
VSI Acquisition Corporation
Annex II: Scherer Healthcare Inducement Agreement
Annex III: Robert Scherer Inducement Agreement
Annex IV: Fairness Opinion of Summit Investment Corporation
Annex V: The Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997
Annex VI: MMPI s Annual Report on Form 10-K for the fiscal year ended
March 29, 1997
iii
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT AND DOES NOT PURPORT TO BE COMPLETE. ALL STATEMENTS IN
THE FOLLOWING SUMMARY ARE QUALIFIED BY AND ARE MADE SUBJECT TO THE MORE
DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT AND THE
ANNEXES HERETO. THE ANNEXES ATTACHED TO THIS PROXY STATEMENT CONSTITUTE A
PART OF THIS PROXY STATEMENT AND SHOULD BE CONSIDERED AS SUCH. STOCKHOLDERS
ARE URGED TO READ THIS PROXY STATEMENT, INCLUDING THE ANNEXES, IN ITS
ENTIRETY. THE FULL TEXT OF THE MERGER AGREEMENT AND THE SH INDUCEMENT
AGREEMENT ARE ATTACHED HERETO AS ANNEXES I AND II, RESPECTIVELY, AND SHOULD BE
READ IN THEIR ENTIRETY.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting of the stockholders of the Company will be held on
July 28, 1997, at 9:00 a.m., local time, at the offices of LeBoeuf, Lamb,
Greene & MacRae, LLP, Suite 2000, 633 17th Street, Denver, Colorado 80202.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, stockholders of the Company will be asked to
consider and vote upon the Scherer Stockholder Proposals which, if adopted,
will provide the Board of Directors of the Company with the authority to vote
the MMPI Common Stock owned by the Company to approve the Merger and the
other transactions contemplated by the Merger Agreement (Proposal 1) and, to
sell the ABG Assets to VSI and to grant to VSI the Covenant Not To Compete as
provided in the SH Inducement Agreement (Proposal 2). Stockholders also will
be asked to vote on any other matters as may properly come before the Special
Meeting and any postponement or adjournment thereof. The Merger Agreement
provides for the merger of Newco with and into MMPI, with MMPI being the
surviving corporation following the Merger. Effective as of the consummation
of the Merger, all then-outstanding shares of MMPI Common Stock owned by the
Company will be converted into the right to receive $0.797 per share of MMPI
Common Stock in cash, without interest (the "Merger Consideration"). As a
result of the Merger, MMPI will become a wholly-owned subsidiary of VSI and
the Company will receive an aggregate of approximatley $6,057,000 in respect
of its shares of MMPI Common Stock and warrants for the purchase of MMPI
Common Stock. Pursuant to the SH Inducement Agreement, the Company will
receive $5,860,000 for the sale to VSI of the ABG Assets and the granting to
VSI of the Covenant Not To Compete.
QUORUM
A majority of shares of Company Common Stock entitled to vote, represented
in person or by proxy, will constitute a quorum at the Special Meeting.
Abstentions, broker non-votes and proxies returned without instructions will be
counted for purposes of determining whether a quorum is present at the Special
Meeting.
<PAGE>
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
The Company Common Stock is the only class of securities of the Company
entitled to vote at the Special Meeting. Holders of record of Company Common
Stock on the books of the Company on June 27, 1997, are entitled to notice of
and to vote at the Special Meeting. On the Record Date, there were
4,314,223 shares of Company Common Stock outstanding, which were held of
record by approximately 2,040 persons.
VOTING REQUIREMENTS
Adoption of each of the Scherer Stockholder Proposals requires the
affirmative vote of a majority of the outstanding shares of Company Common
Stock entitled to vote at the meeting. Each holder of record of Company
Common Stock will be entitled to one vote per share of Company Common Stock
on each proposal voted on at the Special Meeting or any and all adjournments
or postponements thereof. A SIGNED PROXY RETURNED WITHOUT INSTRUCTIONS WILL
BE VOTED TO APPROVE AND ADOPT EACH OF THE SCHERER STOCKHOLDER PROPOSALS.
Abstentions will have the effect of a vote against each of the Scherer
Stockholder Proposals. Broker non-votes are counted as present, but are
deemed not entitled to vote on proposals for which brokers do not have
discretionary authority, and, therefore, will have the effect of a vote
against the Scherer Stockholder Proposals. Any proxy given may be revoked
either by a written notice duly signed and delivered to the Secretary of the
Company prior to the exercise of the proxy, by execution of a subsequent
proxy or by voting in person at the Special Meeting.
Robert P. Scherer, Jr., Chairman of the Board and Chief Executive Officer
of the Company and MMPI, is beneficial owner of, and has the authority to
vote, 2,591,180 shares of Company Common Stock, or 60.1% of the aggregate
number of shares of Company Common Stock issued and outstanding on the Record
Date. Mr. Scherer has agreed with VSI that he will, subject to his fiduciary
obligations as a director and majority stockholder of the Company and as
trustee of certain voting trusts, vote all of the shares of Company Common
Stock over which he has voting authority to approve and adopt each of the
Scherer Stockholder Proposals. If Mr. Scherer votes all of the shares of
Company Common Stock over which he has voting authority to adopt the Scherer
Stockholder Proposals, the requisite vote for adoption of each of the Scherer
Stockholder Proposals will have been obtained.
THE SCHERER TRANSACTIONS
PROPOSAL 1: THE MERGER
As a result of the Merger, each outstanding share of MMPI Common Stock
(other than shares of MMPI Common Stock held by VSI, Newco or any of their
subsidiaries, or in the treasury of MMPI, all of which will be cancelled, and
shares of MMPI Common Stock held by stockholders of MMPI Common Stock who
perfect their dissenters' rights under Article 113 of the Colorado
2
<PAGE>
Business Corporation Act (the "BCA")) will be converted into the right to
receive the Merger Consideration, and MMPI will become a wholly-owned
subsidiary of VSI. Upon consummation of the Merger, the Company will receive
an aggregate of approximately $6,057,000 in respect of MMPI Comon Stock and
warrants to purchase MMPI Common Stock owned by the Company. Stockholders of
the Company will not receive any cash payments as a result of the Merger. See
"The Merger--Principal Effects of the Merger."
The Merger will become effective (the "Effective Time of the Merger") upon
the filing of the certificate of merger with the Secretary of State of the State
of Colorado. It is anticipated that, subject to the satisfaction or waiver, if
permissible, of the conditions set forth in the Merger Agreement, such filing
will be made promptly after the Merger has been approved by holders of MMPI
Common Stock (the "MMPI Stockholders"). See "The Merger."
It is a condition precedent to the Effective Time of the Merger that the
Merger be approved by the vote of two-thirds of the shares of MMPI Common
Stock issued and outstanding on the record date for a special meeting of the
MMPI Stockholders called for the purpose of obtaining such approval. The
special meeting of the MMPI Stockholders will be held on July 28, 1997,
at 10:00 a.m., local time, at the offices of LeBoeuf, Lamb, Greene &
MacRae, LLP, Suite 2000, 633 17th Street, Denver, Colorado 80202, and any and
all adjournments or postponements thereof (the "MMPI Special Meeting"). The
record date for the MMPI Special Meeting has been established as of June 27,
1997 (the "MMPI Record Date").
On the MMPI Record Date, the Company owned 7,211,192, or approximately
51%, of the issued and outstanding shares of MMPI Common Stock. Mr. Scherer
owned beneficially and has voting authority over, or had voting authority
pursuant to a voting trust for his adult children over an additional 2,061,856
shares, or 14.42%, of the issued and outstanding shares of MMPI Common Stock.
Mr. Scherer has informed the Company and MMPI that, subject to his fiduciary
obligations as a director and principal stockholder of MMPI and as trustee of
the voting trust, he intends to vote the shares of MMPI Common Stock over which
he has voting authority in favor of the Merger Agreement and the transactions
contemplated thereby. Accordingly, the Company and Mr. Sherer will have the
ability to vote or direct the voting of approximately 64.86% of the outstanding
shares of MMPI Common Stock, or approximately 97% of the shares of MMPI Common
Stock necessary to approve the Merger.
The Merger Agreement and the transactions contemplated thereby are
contingent upon the perfomance by the Company of its obligations under the SH
Inducement Agreement. Accordingly, even if the stockholders approve
Proposal 1, the Merger Agreement will be terminated unless the stockholders
also approve Proposal 2.
PROPOSAL 2: THE SH INDUCEMENT AGREEMENT
Pursuant to the SH Inducement Agreement, the Company has agreed, subject to
the consummation of the Merger, to sell the ABG Assets to VSI and to grant the
Covenant Not To Compete to VSI for an aggregate consideration of $5,860,000.
The Company currently licenses or leases the ABG Assets to MMPI, which has a
contractual right to purchase the ABG Assets from the Company (the "MMPI
Repurchase Option") at a price equal to $4,500,000 plus $22,500 for each full or
partial month during the period from June 1993 through the date of
repurchase. Pursuant to the Covenate Not to Compete, the Company will agree not
to compete with VSI with respect to the manufacture or sale of ABG Products
for a period of three years following the Effective Time of the Merger.
The SH Inducement Agreement and the transactions contemplated thereby are
contingent upon consummation of the Merger. Accordingly, even if the
stockholders approve Proposal 2, the SH Inducement Agreement will be
terminated unless the stockholders also approve Proposal 1.
RELATED TRANSACTIONS
As part of the transactions contemplated by the Merger Agreement, VSI and
MMPI have entered into a Dealer Agreement dated March 14, 1997 pursuant to
which VSI is entitled to distribute MMPI
3
<PAGE>
products in the United States, Canada and Puerto Rico as well as certain
international territories. MMPI has provided 28 of its 29 domestic hospital
specialty dealers notice terminating its distribution agreements with such
dealers at the end of the applicable notice period which in each case expired
by June 13, 1997. Subsequent to terminating those dealer agreements, MMPI
entered into new arrangements with five of the dealers which provided MMPI
with improved margins. Following the termination of the dealers, one dealer
commenced a lawsuit against MMPI and VSI alleging, among other things, that
the termination of such dealer's distribution agreement with MMPI was
unlawful. MMPI has commenced a lawsuit against another dealer seeking to
enjoin that dealer from violating its distribution agreement during the
period prior to termination of that agreement by soliciting customers to
purchase products of other manufacturers. MMPI's motion for a temporary
restraining order restraining this dealer from violating the terms of its
distribution agreement with MMPI has been denied, and the dealer commenced a
separate action against MMPI and VSI alleging, among other claims, that VSI
is using confidential information of that dealer in the sale of MMPI
products. Neither the Company nor MMPI is able to predict the outcome of
either lawsuit or whether other lawsuits will be filed by other dealers as a
result of their termination.
Simultaneously with the execution of the Merger Agreement and the SH
Inducement Agreement, Mr. Scherer entered into the Robert Scherer Inducement
Agreement dated March 14, 1997 with VSI (the "RPS Inducement Agreement")
pursuant to which he agreed, among other agreements, to execute a covenant
not to compete at the Effective Time of the Merger in exchange for payment of
$140,000. The covenant not to compete will provide that Mr. Scherer will not
compete with VSI in the manufacture and sale of ABG Products for a period of
three years.
REASONS FOR THE SCHERER TRANSACTIONS
The Company has made substantial investments in MMPI beginning to initial
investment in 1993. The Scherer Transactions allow the Company to liquidate
that investment on favorable terms.
Since the Company made its initial investment in MMPI, the method by
which medical devices are distributed in the United States has undergone, and
continues to undergo, significant structural changes. These structural
changes have had a significant negative impact on smaller medical device
manufacturers such as MMPI that have limited or non-proprietary product lines
and cost structures which make it difficult to compete on a basis where price
is the primary purchasing factor. In recognition of the structural changes
in the medical device market and MMPI's own limited ability to meet the
challenges posed by those changes because of its limited financial resources,
the Company's Board of Directors (with Mr. Scherer abstaining) has concluded
that the Scherer Transactions provide a greater return to the Company from
its investment in MMPI than any of the other alternatives available to the
Company. In reaching this conclusion, the Board considered the fact that
the per share price offered by VSI was approximately 29% less than the market
price of MMPI Common Stock at the time the Merger was announced but concluded
that such price was not necessarily indicative of the fair value of the MMPI
Common Stock because of the volatility of the stock's market price. The Board
compared the price offered by VSI to the average market price of the MMPI
Common Stock during the three calendar months and the calendar month preceding
the announcement of the Merger and to the book value per share of MMPI Common
Stock and found that the price offered by VSI was approximately 11.0% higher
than the average price of MMPI Common Stock during the three calendar months
4
<PAGE>
preceding the month in which the Scherer Transactions were announced, was
approximately 14.3% higher than the average price of the MMPI Common Stock
for the calendar month preceding the month in which the Merger was announced
and was more than twice the per share book value of the MMPI Common Stock as
of December 28, 1996, the date of MMPI's most recent quarterly statements
preceeding the date on which the Merger was announced. The Board also
considered (i) the financial terms of the Scherer Transactions, (ii) the
financial condition, results of operations and future prospects of MMPI,
(iii) the business operations, earnings and financial condition, including
the capital levels and asset quality, of the Company on a historical and pro
forma basis, (iv) the opinion of Summit that the Scherer Transactions are
fair to the Company and its stockholders from a financial point of view and
(v) the terms of the Company's Series A Preferred Stock which provides that
the Company begin paying a dividend on such stock if MMPI reaches certain
profitability targets. See "The Scherer Transactions-Reasons for the Scherer
Transactions."
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Company's Board recommends (with Mr. Scherer abstaining) that the
Company's stockholders vote to approve and adopt each of the Scherer
Stockholder Proposals and approve the Scherer Transactions.
The Company's Board provided its recommendation after consideration of a
number of factors, which are described under the heading "The Scherer
Transactions--Recommendation of the Board." In considering the
recommendation of the Company's Board, stockholders should be aware that
certain members of the Company's management and Board have certain interests
in the Scherer Transactions that are in addition to the interests of the
Company's stockholders. The Company's Board was aware of these interests and
considered them, among other matters, in recommending the adoption of the
Scherer Stockholder Proposals. See "-- Related Transactions," "The Scherer
Transactions -- Related Transactions" and "Interests of Certain Persons in
the Scherer Transactions."
OPINION OF THE FINANCIAL ADVISOR
The Company engaged Summit to act as its financial advisor in connection
with the Scherer Transactions. On March 14, 1997, Summit delivered to the
Company's Board its oral opinion, which was followed by a written opinion dated
March 17, 1997 (the "Summit Opinion"), that the consideration to be received by
the Company pursuant to the Merger is fair to the stockholders of the Company
from a financial point of view (excluding Robert P. Scherer, Jr. as to whom no
view was expressed).
The full text of the Summit Opinion, which sets forth the procedures
followed, matters considered and assumptions made in connection with rendering
such opinion, is attached as Annex IV to this Proxy Statement. The Summit
Opinion will be updated and presented to stockholders at the Special Meeting.
See "The Scherer Transactions--Opinion of the Financial Advisor." STOCKHOLDERS
OF THE COMPANY ARE URGED TO READ THE SUMMIT OPINION IN ITS ENTIRETY.
ACCOUNTING TREATMENT
The Company intends to account for the Scherer Transactions as a
discontinued operation in its consolidated financial statements. The Company
has made certain estimates (see "Selected
5
<PAGE>
Historical and Pro Forma Consolidated Financial Data" and "Unaudited Pro
Forma Condensed Consolidated Financial Information"); however, the final
amounts are dependent upon the timing of the Scherer Transactions.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Company's receipt of cash for its shares of MMPI Common Stock as a
result of the Merger, the sale of the ABG Assets and the Covenant Not to
Compete will be a taxable transaction to the Company for federal and state
income tax purposes. See "The Scherer Transactions--Certain Income Tax
Consequences."
SOURCES AND AMOUNT OF FUNDS
The total amount of funds required by VSI for the payment of the Merger
Consideration, to repay certain indebtedness owed by MMPI, to purchase the ABG
Assets and the covenants not to compete from the Company and Mr. Scherer and to
pay related fees and expenses, is expected to be approximately $25.0 million.
VSI has advised the Company that it will pay for such obligations primarily from
cash on hand. VSI has also advised the Company that on the date of this Proxy
Statement, it had cash reserves in excess of $40 million.
BUSINESS OF THE COMPANY
The Company is a holding company, which, through its subsidiaries,
manufactures, distributes and sells specialized health care products and
services. Through its investment in MMPI, the Company manufactures and sells
medical devices and surgical/safety disposables. Through its majority owned
partnership, BioSystems Partners, and subsidiary, Medical Waste Systems, Inc.,
the Company provides medical waste management services. Through its subsidiary,
Scherer Laboratories Inc., the Company markets and sells consumer health care
products. See "Business of the Company." Upon consummation of the Scherer
Transactions, the Company will have disposed of its entire medical device and
surgical/safety disposables line of business.
PRICE RANGE OF COMPANY COMMON STOCK AND DIVIDENDS
The Company Common Stock is traded on the Nasdaq National Market under the
ticker symbol SCHR. As of the Record Date, the number of record holders of
Company Common Stock was approximately 2,040 persons. The table below shows
the quarterly high and low sales prices for the Company's fiscal periods
indicated. All quotations were reported to the Company by Nasdaq and represent
actual transactions and not inter-dealer quotations.
6
<PAGE>
QUARTERLY HIGH AND LOW SALES PRICES
HIGH LOW
---- ---
FISCAL 1995
First Quarter $23.000 $ 18.500
Second Quarter 23.000 20.000
Third Quarter 23.000 20.000
Fourth Quarter 20.125 5.000
FISCAL 1996
First Quarter $ 7.000 $ 5.000
Second Quarter 5.500 2.000
Third Quarter 5.000 2.500
Fourth Quarter 5.000 2.250
FISCAL 1997
First Quarter $ 5.500 $ 3.875
Second Quarter 4.625 2.250
Third Quarter 3.750 2.000
Fourth Quarter 2.625 2.000
FISCAL 1998
First Quarter $ 2.250 $ 1.500
On March 14, 1997, the last full trading day prior to the announcement of
the Scherer Transactions, the reported last transaction price per share of
Company Common Stock reported to the Company by Nasdaq was $2.25. On July 1,
1997, the last full trading day prior to the date of this Proxy Statement, the
last transaction sales price of Company Common Stock reported to the Company
by Nasdaq was $2.125 per share of Company Common Stock. STOCKHOLDERS ARE
URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR COMPANY COMMON STOCK.
While there are no restrictions on the payment of dividends, the Company
has not declared any cash dividends in its history and does not anticipate
that dividends will be paid in the foreseeable future.
7
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables set forth selected historical and pro forma
consolidated financial data of the Company. The historical consolidated
financial data as of and for each of the years in the five year period ended
March 31, 1997, is qualified in its entirety by, and should be read in
conjunction with, the detailed information and financial statements,
including the notes thereto, appearing in the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1997 attached hereto as Annex V.
The historical consolidated financial data is not necessarily indicative of
the results of operations for any future period.
The pro forma consolidated financial data as of and for each of the years
in the four year period ended March 31, 1997 reflect the effects on the
historical results of the Company of the Scherer Transactions. The
operations of MMPI, which have been included in the Company's consolidated
financial statements since the first quarter of fiscal 1994, are included in
the Company's Medical Device and Surgical/Safety Disposables Segment along
with the operations of Scherer Healthcare, Ltd. ("Scherer Ltd."), a limited
partnership that was 65% owned by the Company, whose assets and businesses
were sold in October 1995 and October 1996, respectively. Upon the
consummation of the Merger, the operations of the Medical Device and
Surgical/Safety Disposables Segment of the Company will be accounted for as a
discontinued segment and, accordingly, the operations of MMPI and Scherer
Ltd. will be segregated and reported as discontinued operations in the
Company's consolidated financial statements. The pro forma consolidated
financial data reflects the accounting treatment of this segment as a
discontinued operation for the periods being presented.
The pro forma consolidated financial data is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that actually would have occurred, nor is it necessarily
indicative of future operating results or financial position.
The historical financial statements of MMPI are included in MMPI's Annual
Report on Form 10-K for the fiscal year ended March 29, 1997, attached hereto
as Annex VI. Such report is attached for informational purposes.
8
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(In Thousands of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $36,226 $41,857 $42,802 $41,229 $20,323
Income (loss) from
continuing operations $114 $2,668 $(4,637) $157 $1,135
Net income (loss) $(261) $1,748 $(10,171) $(3,963) $(1,471)
Income (loss) from
continuing operations
per common share $0.03 $0.60 $(1.09) $0.04 $0.29
Net income (loss) per
common share $(0.06) $0.40 $(2.39) $(1.00) $(0.38)
BALANCE SHEET DATA:
Total assets $32,194 $34,410 $40,639 $51,424 $28,975
Total long-term liabilities $6,971 $5,638 $5,316 $4,617 $511
Book value per
common share $3.61 $3.66 $3.41 $6.24 $5.28
Cash dividends
declared per
common share $0.00 $0.00 $0.00 $0.00 $0.00
</TABLE>
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
(In Thousands of Dollars, Except Per Share Amounts)
YEAR ENDED MARCH 31,
------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales $13,112 $11,859 $11,023 $10,672
Income (loss) from
continuing operations $446 $58 $(2,794) $1,763
Net income (loss) $(261) $1,748 $(10,171) $(3,963)
Income (loss) from con-
tinuing operations per
common share $0.10 $0.01 $(0.66) $0.45
Net income (loss) per
common share $(0.06) $0.40 $(2.39) $(1.00)
9
<PAGE>
AT MARCH 31,
------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
BALANCE SHEET DATA:
Total assets $21,322 $21,299 $27,123 $34,725
Net assets of discontin-
ued operations (1) $6,961 $7,996 $11,178 $14,646
Total long-term liabilities $2,371 $648 $726 $591
Book value per
common share $3.61 $3.66 $3.41 $6.24
Cash dividends declared
per common share $0.00 $0.00 $0.00 $0.00
- ----------------
(1) Reflects the net assets of MMPI and Scherer Ltd. which will be
accounted for as discontinued operations upon the consummation of
the Merger. Additionally, includes the net assets of Biofor, Inc.
whose operations were discontinued in fiscal 1996.
10
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
OVERVIEW
The following unaudited pro forma condensed consolidated balance sheet as
of March 31, 1997, and the unaudited pro forma condensed consolidated
statements of continuing operations for the years ended March 31, 1997, 1996,
1995, and 1994 give effect to the Scherer Transactions (the Merger of Newco
into MMPI, the sale of the ABG Assets to VSI and the execution of the
Covenant Not to Compete). Pursuant to the Merger Agreement, the MMPI
Stockholders will receive $0.797 per share for each outstanding share, at the
Effective Time of the Merger, of MMPI Common Stock. The Company owns
7,211,192 shares of MMPI Common Stock directly and holds warrants to purchase
an additional 6,580,000 shares of MMPI Common Stock at an exercise price of
$0.75 per share.
In connection with the transactions contemplated by the Merger Agreement,
the Company entered into the SH Inducement Agreement pursuant to which the
Company has agreed, provided the Merger is consummated, to sell the ABG
Assets to VSI and to enter into the Covenant Not to Compete for an aggregate
price of $5,860,000. As part of the investment made in MMPI by the Company
in June 1993, the Company acquired title to the ABG Assets which it
licenses back to MMPI. In connection with that transaction,
the Company granted to MMPI the MMPI Repurchase Option pursuant to which MMPI
has an option to repurchase the ABG Assets from the Company at a purchase
price equal to $4,500,000 plus $22,500 per month during the period from June
1993 through the date of repurchase. VSI has agreed to purchase the ABG
Assets from the Company for a purchase price equal to the purchase price
under the MMPI Repurchase Option. The consideration for the Covenant Not to
Compete will be the difference between $5,860,000 and the amount paid by VSI
for the ABG Assets.
The unaudited pro forma condensed consolidated financial information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that actually would have occurred
if the Scherer Transactions had been consummated as of such dates in
accordance with the assumptions set forth below, nor is it necessarily
indicative of future operating results or financial position.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet
gives effect to the Scherer Transactions as if they had occurred on March 31,
1997. The unaudited condensed consolidated balance sheet is based on
previously described financial information of the Company as of March 31,
1997 and the pro forma adjustments described in the Notes to Pro Forma
Condensed Consolidated Financial Information included herein.
11
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Company Pro Forma Company
As Reported Adjustments Pro Forma
----------- ------------ -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $3,237,000 $(13,000)(a) $13,183,000
4,099,000 (b)
5,860,000 (c)
Accounts receivable, net 6,087,000 (3,392,000)(a) 2,695,000
Current maturities of notes receivable 223,000 (47,000)(a) 176,000
Inventories 3,453,000 (3,283,000)(a) 170,000
Prepaid and other 218,000 (152,000)(a) 66,000
----------- ---------- -----------
Total current assets 13,218,000 3,072,000 16,290,000
PROPERTY AND EQUIPMENT 16,792,000 (8,838,000)(a) 7,709,000
(245,000)(c)
Less accumulated depreciation (6,586,000) 2,369,000 (a) (4,047,000)
170,000 (c)
----------- ---------- -----------
Net property and equipment 10,206,000 (6,544,000) 3,662,000
OTHER ASSETS
Costs in excess of net assets
acquired, net 6,404,000 (3,918,000)(c) 2,486,000
Intangibles, net 309,000 (68,000)(a) 241,000
Other 1,706,000 -- 1,706,000
Net assets of discounted operations 351,000 -- 351,000
----------- ---------- -----------
Total other assets 8,770,000 (3,986,000) 4,784,000
----------- ---------- -----------
TOTAL ASSETS $32,194,000 $(7,458,000) $24,736,000
----------- ---------- -----------
----------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Company Pro Forma Company
As Reported Adjustments Pro Forma
----------- ------------ ---------
CURRENT LIABILITIES
Accounts payable $1,808,000 $(831,000)(a) $ 977,000
Accrued expenses 4,107,000 (2,737,000)(a) 1,770,000
400,000 (d)
Current maturities of debt obligations 1,397,000 (842,000)(a) 214,000
(341,000)(b)
Other 57,000 140,000 (e) 197,000
----------- ---------- -----------
Total current liabilities 7,369,000 (4,211,000) 3,158,000
LONG-TERM DEBT, NET OF CURRENT MATURITIES 6,646,000 (4,600,000)(a) 429,000
(1,617,000)(b)
OTHER LIABILITIES 325,000 235,000 (c) 560,000
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY 1,891,000 (1,891,000)(a) --
STOCKHOLDERS' EQUITY 15,963,000 4,626,000 (f) 20,589,000
----------- ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,194,000 $(7,458,000) $24,736,000
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See Notes to Pro Forma Condensed Consolidated Financial Information.
12
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF CONTINUING OPERATIONS
The following unaudited pro forma condensed consolidated statements of
continuing operations for the years ended March 31, 1997, 1996, 1995 and
1994, present the operating results of the Company as if the transactions had
occurred at April 1, 1993. The statements are based on previously described
financial information of the Company for the respective periods and the pro
forma adjustments described in the Notes to Pro Forma Condensed Consolidated
Financial Information included herein.
MMPI's operations are included in the Company's Medical Device and
Surgical/Safety Disposables Segment along with the operations of Scherer
Ltd., a limited partnership that was 65% owned by the Company. In October
1995, Scherer Ltd. sold certain of its assets that were used in connection
with its business of packing and distributing medical supplies for surgical
procedures and providing nonwoven medical drapes, gowns and accessory items
to hospitals and other healthcare providers (the "Medical Business"). In
October 1996, Scherer Ltd. sold substantially all of its remaining assets
that were used in its business of providing nonwoven apparel for industrial
uses (the "Industrial Business"). Upon the consummation of the Merger, the
operations of the Medical Device and Surgical/Safety Disposables Segment of
the Company will be accounted for as a discontinued segment and, accordingly,
the operations of Scherer Ltd. and MMPI will be segregated and reported as
discontinued operations in the Company's consolidated financial statements.
Therefore, the operations of Scherer Ltd. in addition to the operations of
MMPI are being eliminated for the periods indicated in the pro forma
condensed consolidated statements of continuing operations.
13
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Company As Adjustments for Adjustments for Pro Forma Company
Reported Scherer Ltd. (g) MMPI (h) Adjustments Pro Forma
---------- ---------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
NET SALES $36,226,000 $(1,069,000) $(22,045,000) $ -- $13,112,000
COSTS AND EXPENSES
Costs of goods sold 23,660,000 (1,043,000) (14,984,000) -- 7,633,000
Selling, general and
administrative 11,548,000 (338,000) (6,057,000) (192,000)(i) 4,961,000
Research and development 286,000 -- (286,000) -- --
---------- ---------------- --------------- --------------- -----------
Total costs and expenses 35,494,000 (1,381,000) (21,327,000) (192,000) 12,594,000
---------- ---------------- --------------- --------------- -----------
OPERATING INCOME 732,000 312,000 (718,000) 192,000 518,000
OTHER INCOME
(EXPENSE) NET (971,000) 67,000 836,000 188,000 (j) 120,000
---------- ---------------- --------------- --------------- -----------
Income (loss) from continuing
operations before minority
interest and income taxes (239,000) 379,000 118,000 380,000 638,000
Minority interest in net loss of
subsidiary and partnerships 359,000 (126,000) (233,000) -- --
---------- ---------------- --------------- --------------- -----------
Income from continuing
operations before income taxes 120,000 253,000 (115,000) 380,000 638,000
Provision for income taxes (6,000) 2,000 -- -- (k) (4,000) (k)
---------- ---------------- --------------- --------------- -----------
Income from continuing
operations $114,000 $255,000 $(115,000) $380,000 $634,000
---------- ---------------- --------------- --------------- -----------
---------- ---------------- --------------- --------------- -----------
Income from continuing
operations per common share $0.03 $0.14
---------- ----------
---------- ----------
Weighted average common
shares outstanding 4,418,483 4,418,483
---------- ----------
---------- ----------
</TABLE>
See Notes to Pro Forma Condensed Consolidated Financial Information.
14
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Company as Adjustments for Adjustments for Pro Forma Company
Reported Scherer Ltd. (g) MMPI (h) Adjustments Pro Forma
---------- ---------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
NET SALES $41,857,000 $(7,555,000) $(22,443,000) $ -- $11,859,000
COSTS AND EXPENSES
Cost of goods sold 28,194,000 (6,518,000) (14,960,000) -- 6,716,000
Selling, general and
administrative 13,115,000 (1,371,000) (6,473,000) (208,000)(i) 5,063,000
Research and development 155,000 -- (155,000) -- -
---------- ---------------- --------------- --------------- -----------
Total costs and expenses 41,464,000 (7,889,000) (21,588,000) (208,000) 11,779,000
---------- ---------------- --------------- --------------- -----------
OPERATING INCOME 393,000 334,000 (855,000) 208,000 80,000
OTHER INCOME
(EXPENSE), NET 2,828,000 (2,760,000) (267,000) 518,000 (j) 319,000
---------- ---------------- --------------- --------------- -----------
Income from continuing
operations before minority
interest and income taxes 3,221,000 (2,426,000) (1,122,000) 726,000 399,000
Minority interest in net
(income) loss of subsidiary
and partnerships (5,000) 70,000 (65,000) -- --
---------- ---------------- --------------- --------------- -----------
Income from continuing
operations before
income taxes 3,216,000 (2,356,000) (1,187,000) 726,000 399,000
Benefit (provision) for
income taxes (548,000) 28,000 697,000 -- (k) 177,000 (k)
---------- ---------------- --------------- --------------- -----------
Income from continuing
operations $2,668,000 $(2,328,000) $(490,000) $726,000 $576,000
---------- ---------------- --------------- --------------- -----------
---------- ---------------- --------------- --------------- -----------
Income from continuing
operations per common share $0.60 $0.13
---------- -----------
---------- -----------
Weighted average common
shares outstanding 4,418,483 4,418,483
---------- -----------
---------- -----------
</TABLE>
See Notes to Pro Forma Condensed Consolidated Financial Information.
15
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS
For the Year Ended March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
(g) (h)
PRO FORMA PRO FORMA
COMPANY ADJUSTMENTS ADJUSTMENTS PRO FORMA COMPANY
AS REPORTED FOR SCHERER LTD. FOR MMPI ADJUSTMENTS PRO FORMA
------------- ---------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
NET SALES................................ $42,802,000 $(11,203,000) $(20,576,000) $ -- $11,023,000
COSTS AND EXPENSES
Cost of goods sold..................... 31,514,000 (10,281,000) (15,171,000) -- 6,062,000
Selling, general, and administrative... 14,776,000 (1,831,000) (7,516,000) (183,000)(i) 5,246,000
Research and development............... 140,000 -- (140,000) -- --
Nonrecurring charge.................... 2,000,000 -- -- -- 2,000,000
------------ ------------- ------------- ----------- ------------
Total costs and expenses............. 48,430,000 (12,112,000) (22,827,000) (183,000) 13,308,000
------------ ------------- ------------- ----------- ------------
OPERATING LOSS........................... (5,628,000) 909,000 2,251,000 183,000 (2,285,000)
OTHER INCOME (EXPENSE), net.............. (1,133,000) 36,000 524,000 544,000 (j) (29,000)
------------ ------------- ------------- ----------- -----------
Loss from continuing operations before
minority interest and income taxes..... (6,761,000) 945,000 2,775,000 727,000 (2,314,000)
Minority interest in net (income) loss of
subsidiary and partnerships............ 1,927,000 -- (2,001,000) -- (74,000)
----------- -------------- -------------- ------------ -----------
Loss from continuing operations
before income taxes.................... (4,834,000) 945,000 774,000 727,000 (2,388,000)
Benefit for income taxes................. 197,000 (59,000) -- -- (k) 138,000 (k)
------------ -------------- -------------- ------------ -----------
Loss from continuing operations.......... $(4,637,000) $ 886,000 $ 774,000 $ 727,000 $(2,250,000)
------------ -------------- -------------- ------------ ------------
------------ -------------- -------------- ------------ ------------
Loss from continuing operations
per common share....................... $ (1.09) $ (0.53)
------------ ------------
------------ ------------
Weighted average common shares
outstanding............................ 4,254,327 4,254,327
------------ -----------
------------ -----------
See notes to pro forma condensed consolidated financial statements.
</TABLE>
16
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS
For the Year Ended March 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
(g) (h)
PRO FORMA PRO FORMA
COMPANY ADJUSTMENTS ADJUSTMENTS PRO FORMA COMPANY
AS REPORTED FOR SCHERER LTD. FOR MMPI ADJUSTMENTS PRO FORMA
----------- ---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
NET SALES..................................... $41,229,000 $(8,091,000) $(22,466,000) $ -- $10,672,000
COSTS AND EXPENSES
Cost of goods sold.......................... 30,641,000 (7,027,000) (17,699,000) -- 5,915,000
Selling, general, and administrative........ 13,533,000 (1,485,000) (7,058,000) (140,000)(i) 4,850,000
Research and development.................... 126,000 -- (126,000) -- --
----------- ----------- ------------ ---------- ----------
Total costs and expenses.................. 44,300,000 (8,512,000) (24,883,000) (140,000) 10,765,000
----------- ----------- ------------ ---------- ----------
OPERATING LOSS................................ (3,071,000) 421,000 2,417,000 140,000 (93,000)
OTHER INCOME (EXPENSE), net................... 218,000 124,000 400,000 252,000(j) 994,000
----------- ----------- ------------ ---------- ----------
Income (loss) from continuing operations
before minority interest and income
taxes....................................... (2,853,000) 545,000 2,817,000 392,000 901,000
Minority interest in net loss of
subsidiary and partnerships................. 1,992,000 (68,000) (1,924,000) -- --
----------- ----------- ------------ ---------- ----------
Income (loss) from continuing operations
before income taxes......................... (861,000) 477,000 893,000 392,000 901,000
Benefit for income taxes...................... 1,018,000 96,000 -- -- (k) 1,114,000 (k)
----------- ----------- ------------ ---------- ----------
Income from continuing operations............. $ 157,000 $ 573,000 $ 893,000 $ 392,000 $2,015,000
----------- ----------- ------------ ---------- ----------
----------- ----------- ------------ ---------- ----------
Income from continuing operations
per common share............................ $ 0.04 $ 0.51
----------- ----------
----------- ----------
Weighted average common shares
oustanding.................................. 3,953,544 3,953,544
----------- ----------
----------- ----------
</TABLE>
See notes to pro forma condensed consolidated financial statements
17
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(a) Reflects the pro forma effects of the proposed Merger on the Company's
51% interest in MMPI as if the Merger had occurred on March 31, 1997.
MMPI has been included in the Company's consolidated financial statements
since the first quarter of fiscal 1994. Minority interest represents the
equity interest in MMPI of outside investors.
(b) Pursuant to the terms of the Merger Agreement, the MMPI Stockholders
will receive $0.797 in cash for each outstanding share of MMPI Common
Stock. In total, the Company will receive approximately $6,057,000 in
cash for the 7,211,192 shares of MMPI Common Stock that it owns
18
<PAGE>
directly and the warrants that it holds for the purchase of an additional
6,580,000 shares of MMPI Common Stock at an exercise price of $0.75 per
share. The Company plans to use a portion of the proceeds from the
Scherer Transactions to repay the balance of a promissory note ($1,958,000
as of March 31, 1997).
(c) Represents the $5,860,000 in cash proceeds the Company will receive in
exchange for the ABG Assets owned by the Company and the Covenant Not to
Compete. The purchase price for the ABG Assets will be the exercise
price of the MMPI Repurchase Option and the consideration for the
Covenant Not to Compete will be the difference between $5,860,000 and
the purchase price of the ABG Assets. Assuming a July 1997 closing of
the Scherer Transactions, the purchase price for the ABG Assets will be
approximately $5,625,000 and the consideration for the Covenant Not to
Compete will be approximately $235,000, which will be reported as
deferred income and amortized over a three year period from the date
of closing.
(d) Reflects the accrual of estimated transaction costs associated with the
Scherer Transactions.
Due to their non-recurring nature, the estimated transaction costs
associated with the Scherer Transactions were not considered in the pro
forma condensed consolidated statements of continuing operations for the
years ended March 31, 1997, 1996, 1995 and 1994.
(e) Reflects estimated federal and state income taxes associated with the
Scherer Transactions. Federal income taxes are at a rate significantly
less than the federal statutory rate due to the availability of net
operating loss carryforwards and the application of the alternative
minimum tax.
(f) Reflects the estimated impact to stockholders' equity from the Scherer
Transactions as follows:
Merger Agreement:
Cash proceeds (see Note (b) above) $6,057,000
----------
Investment in MMPI, at cost 5,215,000
Allocation of the Company's portion
of MMPI's accumulated losses
through March 31, 1997 (2,692,000)
-----------
Net investment in MMPI 2,523,000
-----------
Estimated gain before income taxes 3,534,000
Estimated income taxes on gain (63,000)
-----------
Estimated gain, net of tax $3,471,000
-----------
-----------
ABG Assets:
Cash proceeds (see Note (c) above) $5,625,000
----------
Net book value of ABG Assets 3,993,000
----------
Estimated gain before income taxes 1,632,000
Estimated income taxes on gain (77,000)
----------
Estimated gain, net of tax $1,555,000
----------
----------
The estimated gain from the Merger will be further adjusted by MMPI's
operations from April 1, 1997 through the date of closing.
Additionally, the Company has estimated $400,000 in transaction costs
associated with the Scherer Transactions (see Note (d) above).
Due to their non-recurring nature, the estimated gains from the Scherer
Transactions were not considered in the pro forma condensed consolidated
statements of continuing operations for the years ended March 31, 1997, 1996,
1995, and 1994.
(g) Reflects the elimination of the operations related to the Medical
Business, which was sold in October 1995, and the Industrial Business,
which was sold in October 1996, of Scherer Ltd. for the years ended March
31, 1997, 1996, 1995, and 1994. The operations of Scherer Ltd. that are
being eliminated include a pretax gain of approximately $2,800,000, or
$0.63 per share, from the sale of the Medical Business during the year
ended March 31, 1996. The operations of Scherer Ltd. were included with
the operations of MMPI in the Company's Medical Device and Surgical/Safety
Disposables Segment. The operations of this segment will be accounted
for as a discontinued segment upon the consummation of the Merger and,
accordingly, the operations of Scherer Ltd. and MMPI will be segregated
and reported as a discontinued operation in the Company's consolidated
financial statements.
(h) Reflects the elimination of the operations of MMPI for the years ended
March 31, 1997, 1996, 1995, and 1994.
(i) Reflects the eliminaton of amortization and depreciation expense
associated with the ABG Assets for the years ended March 31, 1997, 1996,
1995, and 1994.
(j) Reflects the elimination of interest expense associated with the
repayment of a promissory note (debt payable to an affiliated company
prior to March 1997) for the years ended March 31, 1997, 1996, 1995
and 1994.
(k) There is no income tax effect related to the pro forma adjustments. The
Company's income taxes are at a rate significantly less than the statutory
rate due to amortization of non-deductible goodwill, miscellaneous federal
and state tax refunds, and changes in the valuation allowance related to
net deferred tax assets.
19
<PAGE>
THE SCHERER TRANSACTIONS
The information contained in this Proxy Statement with respect to the
Scherer Transaction is qualified in its entirety by reference to the complete
text of the Merger Agreement and the SH Inducement Agreement, which are
attached to this Proxy Statement as Annexes I and II and incorporated by
reference herein. STOCKHOLDERS ARE URGED TO READ THE MERGER AGREEMENT AND
THE SH INDUCEMENT AGREEMENT IN THEIR ENTIRETY FOR A MORE COMPLETE DESCRIPTION
OF THE SCHERER TRANSACTIONS.
THE SCHERER TRANSACTIONS
On the date of this Proxy Statement, the Company owned 7,211,192 shares
of MMPI Common Stock and warrants to purchase an additional 6,580,000 shares
at an exercise price of $0.75 per share. The Company also owned the ABG
Assets which it leases and licenses to MMPI subject to the MMPI Repurchase
Option.
As a result of the Scherer Transactions, the Company will receive an
aggregate of approximately $11,917,000 in cash, including approximately
$6,057,000 in cash for its shares of MMPI Common Stock and warrants to
purchase MMPI Common Stock and $5,860,000 for the sale of the ABG Assets and
the execution of the Covenant Not to Compete. Following the Scherer
Transactions, the Company will not have any ownership interests in MMPI or
the ABG Assets. The price VSI will pay per share of MMPI Common Stock was
determined through arms length negotiations between MMPI and VSI. The
purchase price of the ABG Assets is equal to the exercise price of the ABG
Assets pursuant to the MMPI Repurchase Option. The consideration to be paid
for the Covenant Not to Compete was determined through arms length
negotiations between the Company and VSI.
PROPOSAL 1: THE MERGER
Upon consummation of the Merger, Newco will be merged with and into MMPI,
with MMPI being the surviving corporation. If the Merger is consummated,
MMPI will become a wholly-owned subsidiary of VSI, and the Company will no
longer have an equity interest in MMPI and will not share in its future
earnings or growth, if any. Instead, the Company will receive $5,747,320 in
exchange for the shares of MMPI Common Stock owned by it and $309,260 through
the exercise of its warrants for the purchase of MMPI Common Stock.
PROPOSAL 2: THE SH INDUCEMENT AGREEMENT
The ABG Assets were acquired by the Company from MMPI in June 1993. When
the Company acquired the ABG Assets from MMPI, it leased and licensed the ABG
Assets back to MMPI and granted MMPI the MMPI Repurchase Option. Pursuant to
the MMPI Repurchase Option, MMPI has an option to repurchase the ABG Assets
at a purchase price equal to $4,500,000 plus $22,500 per month during the
period from June 13, 1993 through the date of repurchase. If MMPI were to
exercise the MMPI Repurchase Option on July 31, 1997, the purchase price for
the ABG Assets pursuant to the MMPI Repurchase Option would be $5,625,000.
20
<PAGE>
Pursuant to the SH Inducement Agreement, the Company will, at the
Effective Time of the Merger, sell the ABG Assets to VSI for a purchase price
equal to the price for which MMPI would be able to purchase the ABG Assets
pursuant to the MMPI Repurchase Option, but not more then $5,860,000.
Simultaneously, the Company will enter into the Covenant Not to Compete for
additional consideration, if any, equal to the difference between $5,860,000
and the purchase price paid by VSI for the ABG Assets. Assuming that the
Effective Date of the Merger is July 31, 1997, the Company will receive
approximately $235,000 for the Covenant Not To Compete. Pursuant to the
Covenant Not to Compete, the Company will agree not to compete with VSI with
respect to the manufacture or sale of ABG Products for a period of three
years following the Effective Time of the Merger.
RELATED TRANSACTIONS
DEALER AGREEMENT
Simultaneous with the execution of the Merger Agreement, MMPI and VSI
entered into a Dealer Agreement (the "Dealer Agreement") pursuant to which
VSI is authorized to sell MMPI products for a period of two years and MMPI
provided 28 of its 29 existing domestic specialty dealers with notices of
termination of their dealer agreements which, as a general matter, allow for
termination on 30 to 90 days' notice. MMPI has since negotiated new
agreements with five of the terminated dealers which provides MMPI with
better margins. MMPI negotiated the Dealer Agreement with VSI to protect
itself from the product revenue loss that MMPI anticipated would otherwise
occur as its existing dealers de-emphasized the sale of MMPI products in
anticipation of being terminated by VSI as dealers following the Effective
Time of the Merger. If the Merger does not occur for any reason, MMPI believes
that using VSI as its principal domestic dealer will enhance its sales as a
result of VSI's strong sales force. The Dealer Agreement may be terminated by
MMPI if VSI does not meet certain specified sales quotas after June 30, 1997.
The Dealer Agreement otherwise provides for what MMPI believes to be market
terms.
One of MMPI's dealers has commenced a lawsuit against MMPI and VSI
alleging, among other things, that the termination of the distribution
agreement between MMPI and the dealer was unlawful. MMPI has commenced a
lawsuit against another dealer seeking to enjoin this dealer from violating
its distribution agreement by soliciting customers of MMPI products to
purchase competing products manufactured by other manufacturers. MMPI's
motion for a temporary restraining order restraining this dealer from
violating the terms of its distribution agreement with MMPI has been denied
and the dealer has commenced a separate action against MMPI and VSI alleging,
among other claims, that VSI is using confidential information of that dealer
in the sale of MMPI products. Neither the Company nor MMPI is able to predict
the outcome of either lawsuit or whether other lawsuits will be filed by other
dealers as a result of their termination.
THE RPS INDUCEMENT AGREEMENT
Pursuant to the RPS Inducement Agreement, Mr. Scherer is required to
enter into a covenant not to compete pursuant to which he agrees that for a
period of three years following the Effective Time of the Merger, he will not
engage in the business of manufacturing or selling ABG Products. In
consideration of this covenant not to compete, VSI has agreed to pay Mr.
Scherer $140,000.
AGREEMENT TO PAY CERTAIN EXPENSES OF THE COMPANY
MMPI has agreed to reimburse the Company for up to $25,000 of expenses
of the Company incurred in connection with the Scherer Transactions and the
Special Meeting.
21
<PAGE>
BACKGROUND OF THE SCHERER TRANSACTIONS
On October 1, 1991, the United States Food and Drug Administration issued
a cease and desist order to MMPI which had the immediate effect of stopping
the manufacture and sale of MMPI's products for approximately three months
and a long term negative impact on MMPI's business. As a result of the
financial and business distress caused by this shutdown, MMPI sought
investments from third parties.
In June 1993, the Company made an initial investment in MMPI by (i)
purchasing the ABG Assets from MMPI for $4,500,000 and leasing and licensing
these assets back to MMPI, and (ii) participating with MMPI in an exchange
offer pursuant to which certain outstanding indebtedness of MMPI was
exchanged for new notes of MMPI, shares of Series A convertible preferred
stock of the Company and warrants to purchase MMPI Common Stock. In
consideration for the issuance of its Preferred Stock as part of the exchange
offer, the Company received a $4,352,000 note of MMPI which was, at the
election of the Company, convertible into MMPI Common Stock (the "MMPI
Note"). In consideration for its agreement to enter into the sale and
leaseback of the ABG Assets, the Company received warrants to purchase
5,780,000 shares of MMPI Common Stock.
In May 1994, the Company converted $2,500,000 of the MMPI Note into
3,333,333 shares of MMPI Common Stock.
Although the Company's investment provided MMPI with the financial
resources to survive, MMPI was unable to return its operations to
profitability in an increasingly competitive industry. Because of MMPI's
ongoing financial problems and the changing and increasingly competitive
medical device market, in the second and third quarters of 1995 MMPI's
management undertook a rigorous review of the strategic alternatives
available to MMPI. The strategic alternatives investigated included seeking
protection under the United States Bankruptcy Code, the sale of all or part
of MMPI's assets, the acquisition or divestiture of product lines, funding a
new three year strategic plan through the raising of additional capital and a
strategic combination of MMPI with another medical device manufacturer or
distributor. As part of this review, in August 1995, MMPI retained Triad
Partners, Inc., a private merchant banking firm, to assist it in devising a
long range strategy. MMPI's management concluded that MMPI should try to
implement a three year plan to reduce expenses, mechanize production and
diversify product lines, all of which would require MMPI to reduce its
leverage and attract additional capital. In addition, MMPI's management also
concluded that MMPI should consider proposals from third parties desiring to
acquire MMPI as an alternative to the three year plan.
While MMPI's management was evaluating its strategic alternatives, the
Company and MMPI received a number of inquiries from strategic or financial
parties expressing varying degrees of interest in effecting a transaction
with MMPI or with the Company for its equity position in MMPI. MMPI's and
the Company's management evaluated each proposal and
22
<PAGE>
determined that none of the proposals provided adequate consideration for the
MMPI Stockholders and proceeded to implement MMPI's "stand-alone" plan.
In March 1996, the Company converted the remaining principal balance of
the MMPI Note into 2,645,143 shares of MMPI Common Stock and received an
additional 1,232,716 shares of MMPI Common Stock in satisfaction of certain
other obligations of MMPI to it.
Toward the end of fiscal 1996, MMPI received an inquiry by a small
manufacturer of plastic products which after several meetings and discussions
led to a formal expression of interest to acquire MMPI for approximately
$0.78 per share of MMPI Common Stock. The expression of interest was
reviewed with MMPI's Board which indicated that it was not willing to
entertain a sale of MMPI for the consideration under discussion at that time.
However, as a result of the continued difficulties in returning MMPI to
profitability and the acceleration in the ongoing changes in the medical
device market, MMPI's Board directed MMPI's management to review the
companies which had previously expressed an interest in acquiring MMPI and
any other additional companies to determine whether a transaction that would
be in the best interests of MMPI Stockholders could be consummated with any
one of them. VSI was included in the companies contacted by MMPI.
During a meeting on August 20, 1996, among Terry Wall, President and
Chief Executive Officer of VSI, Anthony Dimun, Executive Vice President and
Chief Financial Officer of VSI, Robert P. Scherer, Jr., Chairman of the Board
and Chief Executive Officer of the Company and MMPI, Amy M. Murphy, Vice
President of Corporate Operations and Secretary of the Company, and Richard
Trenkmann, President of Triad Partners, VSI expressed interest in acquiring
MMPI. On September 16, 1996, VSI sent a letter to MMPI outlining, in general
terms, VSI's interest in acquiring MMPI. A further meeting to discuss the
terms on which VSI might be willing to acquire MMPI and the ABG Assets was
held among the above parties on September 26, 1996.
At a meeting in Atlanta, Georgia on October 2, 1996, Mr. Dimun, Jay
Sturm, General Counsel of VSI, Ms. Murphy, Mr. Trenkmann and representatives
of Lowenstein Sandler Kohl Fisher & Boylan, counsel to VSI, and LeBoeuf,
Lamb, Greene & MacRae, L.L.P., counsel to MMPI, met to discuss the details of
a potential acquisition of MMPI and the ABG Assets by VSI. A preliminary
consensus was reached at this meeting that any potential acquisition of MMPI
would be structured as a tax-free transaction with the holders of MMPI Common
Stock receiving shares of VSI Common Stock in exchange for each share of MMPI
Common Stock. This "preliminary consensus" was subject to agreement on price
and to a number of material contingencies, including due diligence, agreement
as to the definitive terms of the transaction and approval by the MMPI and
VSI Boards of Directors.
From October 8, 1996 through October 10, 1996, representatives of VSI met
with MMPI's senior management personnel and representatives of LeBoeuf, Lamb,
Greene & MacRae, L.L.P. in Denver, Colorado to commence due diligence by VSI
of MMPI. Due diligence efforts continued through October and mid-November 1996,
as did the negotiation of definitive acquisition documents.
On October 21, 1996, MMPI engaged Hanifen Imhoff, Inc. ("Hanifen") to
render an opinion as to the fairness of the proposed transactions to MMPI
Stockholders.
23
<PAGE>
In October 1996, William Thompson, the President and Chief Operating
Officer of MMPI, and Robert Fenwick, Senior Vice President of Sales and
Marketing of MMPI, met with Terry Wall, Barry Wicker and other members of
VSI's sales and marketing staff to discuss how to market MMPI's products
during the period from announcement of the Merger Agreement to the closing of
the transaction.
On November 19, 1996, Mr. Dimun met with Mr. Scherer, Ms. Murphy and Mr.
Trenkmann in Chicago, Illinois. At this meeting, VSI informed MMPI and the
Company that it was not prepared to go forward with the acquisition of MMPI
and the ABG Assets on the same economic basis as previously discussed. At
that point, discussions between MMPI and VSI were suspended to allow both
parties to re-evaluate their positions.
In early January 1997, Triad Partners re-established contact with VSI and
suggested a meeting to consider whether any basis existed on which the
parties would be willing to go forward. On January 15, 1997, Mr. Trenkmann
and Ms. Murphy met with Messrs. Wall, Dimun and Sturm at VSI's offices to
discuss whether a transaction could be structured which would be acceptable
to VSI, MMPI and the Company. At that meeting, representations of VSI stated
that VSI might be willing to go forward with a taxable transaction which
provided that each share of MMPI Common Stock would be converted into $0.75
payable in cash in a taxable transaction, subject to certain adjustments.
At a telephonic meeting of MMPI's Board of Directors held on February 11,
1997, the revised terms of the VSI proposal were discussed and MMPI's
management team was authorized to continue negotiating with VSI. While
MMPI's Board believed there appeared to be a basis for further negotiations,
the Board expressed concern over the damage to MMPI that would result if
discussions continued for an extended period of time. Triad Partners was
instructed to conclude the discussions as expeditiously as possible. The
Board also considered the risk of the loss of product revenues that MMPI
would face during the period between the date on which a transaction with VSI
was announced and the closing and whether those risks could be minimized by
appointing VSI as a MMPI dealer.
From February 12, 1997 through early March 1997, representatives of the
Company, VSI, MMPI, Triad Partners and their respective counsel negotiated
the terms of the Merger Agreement, the Dealer Agreement, the SH Inducement
Agreement and the RPS Inducement Agreement. These negotiations resulted in
the cash purchase price being increased to $0.797 per share of MMPI Common
Stock, VSI agreeing to pay MMPI liquidated damages of $800,000 if it refused
to close the transaction without cause, and the parties agreeing to the terms
of an agreement whereby VSI would distribute MMPI products pending the closing
of the Merger.
The Company engaged Summit in mid February 1997 to render an opinion as
to the fairness of the proposed transactions to the Company's stockholders.
On March 6, 1997, the Company entered into an engagement agreement with
Summit.
On March 12, 1997, VSI's Board approved the acquisition of MMPI and the
ABG Assets.
On March 13, 1997, separate meetings of the Boards of Directors of MMPI
and the Company were held in Denver, Colorado to consider, on a preliminary
basis, the offer made by
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VSI. During the meeting of the MMPI Board, the Board heard oral
presentations from MMPI's management which discussed certain operational
aspects of the transaction, from Triad Partners which outlined the principal
terms of the transactions, and from LeBoeuf, Lamb, Greene & MacRae, L.L.P. on
certain legal implications of the terms and conditions of the Merger
Agreement. In addition, MMPI's Board heard a preliminary presentation from
Hanifen on the fairness of the transaction from a financial point of view to
the MMPI Stockholders. During the meeting of the Company's Board, the Board
heard a presentation by a representative of Long Aldridge Norman LLP, counsel
to the Company, as to certain legal aspects of the Scherer Transactions and a
presentation by Summit on the fairness of the Scherer Transactions from a
financial point of view to the stockholders of the Company and in which
Summit summarized the analysis described under "Opinion of the Financial
Advisor."
Both MMPI's Board and the Company's Board re-convened by telephone on
March 14, 1997, each unanimously approved the Scherer Transactions (with Mr.
Scherer abstaining) subject to receipt of fairness opinions from their
respective financial advisors. Hanifen delivered its written opinion to MMPI
on March 14, 1997. Summit issued its oral fairness opinion to the Company on
March 14, 1997, and followed up with a written fairness opinion dated March
17, 1997. The Scherer Transactions were publicly announced at 4:30 p.m.
Mountain Standard Time on March 14, 1997.
REASONS FOR THE SCHERER TRANSACTIONS
The Company's investment in MMPI (including the ABG Assets) is a
significant investment by the Company and represents a material part of the
Company's consolidated operations. Therefore, maximizing the return to the
Company from its investment in MMPI is crucial to maximizing the return to
the Company's stockholders.
The method by which medical devices such as those manufactured by MMPI,
are distributed in the United States is in the process of a significant
structural change. Historically, the decision as to which medical device to
purchase has been made by individual hospitals or other healthcare providers
which purchased from vendors with specialized product lines. However, the
purchasing decision is rapidly moving away from individual hospitals or other
healthcare providers to large buying groups which purchase only from a
limited number of vendors that are able to provide complete product lines on
a "just in time" basis where price is the primary purchasing criterion.
This structural change has had a significant negative impact on smaller
medical device manufacturers such as MMPI that have limited or
non-proprietary product lines and cost structures which make it difficult to
compete on a basis where price is the primary purchasing factor. In
recognition of the structural changes in the medical device market and MMPI's
own limited ability to meet the challenges posed by those changes because of
its limited financial resources, the Company's Board of Directors concluded
that the sale of its MMPI Common Stock and the ABG Assets would provide a
greater return to its stockholders than any of the other alternatives
considered by the Board. These alternatives included holding its interest in
MMPI with MMPI continuing its current operations or restructuring its
business through the sale
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or other disposition of product lines so that MMPI would become primarily
involved in the manufacture and sale of ABG Products. In both cases, the
Company's Board determined that because of efficiencies which could be
achieved through the integration of MMPI's business with that of VSI, VSI was
prepared to pay a higher price per share of MMPI Common Stock than the
Company could reasonably expect to receive in the market if MMPI continued as
a stand-alone entity. In addition, although MMPI had no other outstanding
offers for its acquisition by, or proposals for a strategic merger with,
another medical device manufacturer or distributor, the Company's Board
considered the possibility of whether such offers could be obtained or such
proposals could be developed and the likely ranges of value that such offers
or proposals would provide to the Company's stockholders.
The Company's Board also considered the fact that the per share
price offered by VSI was approximately 29% less than the market price
of MMPI Common Stock at the time the Merger was announced, but concluded that
the market price of the MMPI Common Stock on that date was not necessarily
indicative of the fair value of the stock because of the volatility of the
stock's market price. The Board compared the price per share offered by VSI
to the average market price of the MMPI Common Stock during the three
calendar months and the calendar month preceding the date on which the Merger
was announced and to the per share book value of the MMPI Common Stock. The
Board found that the price offered by VSI was approximately 11.0% higher than
the average price of MMPI Common Stock during the three calendar months
preceding the month in which the Scherer Transactions were announced, was
approximately 14.3% higher than the average price of MMPI Common Stock during
the calendar month preceding the month in which the Scherer Transactions were
announced, and was more than twice the book value per share of the MMPI Common
Stock on December 29, 1996, the date of MMPI's most recent quarterly financial
statements preceding the date of public announcement of the Scherer
Transactions. The Board also considered the possibility that the Company would
have to pay dividends on its Series A Preferred Stock in the event MMPI met
certain profitability benchmarks.
RECOMMENDATIONS OF THE COMPANY'S BOARD OF DIRECTORS
The Company's Board of Directors believes that the Scherer Transactions are
advisable, are in the best interest of the Company and its stockholders and
offer the stockholders a greater return than would be available if the Company
did not liquidate its investments in MMPI.
In its deliberations with respect to the Scherer Transactions, the
Company's Board considered the following factors: (i) MMPI's current
businesses, operations and prospects and the possibility that MMPI's sales
and operating results could decline in the future, (ii) the significant
structural change in the manner in which medical devices are marketed and the
negative effect that the change has had, and will continue to have, on MMPI's
business and business prospects given MMPI's limited capital resources; (iii)
the opinion of Summit, the Company's financial advisor, that the
consideration to be received by the Company in the Scherer Transactions is
fair to the Company's stockholders from a financial point of view; (iv) the
ability successfully to consummate the Scherer Transactions in light of the
terms of the Merger Agreement and SH Inducement Agreement and the high
likelihood that MMPI would be able to satisfy the conditions precedent to
consummating the Merger; (v) the negative effect that the announcement of the
Scherer Transactions would likely have on MMPI's existing distribution
channels and the willingness of VSI to enter into the Dealer Agreement to
minimize the impact that the announcement would have on MMPI; (vi) the fact
that the Merger would be taxable to the Company thereby reducing the value of
the Merger Consideration; (vii) a comparison of the benefits of the Scherer
Transactions to the Company's stockholders with the likely return from
continuing the Company's investment in MMPI; (viii) a comparison of the
consideration to be received by the Company with the market price of MMPI
Common Stock at the time the Merger was approved and the average market price
during the preceding thirty days and three calendar months and (ix) the
financial condition of the Company and the impact of the Scherer Transactions
on such
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condition. See "Background of the Scherer Transactions" and "Reasons for the
Scherer Transactions."
In reaching its determination that the Scherer Transactions are in the
best interests of the Company and its Stockholders, the Company's Board of
Directors determined that it would be unlikely that MMPI would be able to
develop sufficient capital resources to compete effectively as a stand alone
entity in light of the structural changes in the manner in which medical
products are being marketed. Without the necessary capital resources, the
Board concluded that if MMPI was not acquired by a third party, MMPI would
not be able to maintain its current sales levels and operating results which
would have an increasing negative impact on its stock price and the value of
the Company's investment in MMPI. Based on its analysis of the market for
MMPI, the Board determined that it was unlikely that another bidder for MMPI
would offer to acquire MMPI on terms more favorable than the terms of the
Scherer Transactions.
In its deliberations concerning the Scherer Transactions, the Board of
Directors of the Company considered the fact that the Merger Consideration of
$0.797 per share was approximately 29% less than the $1.125 closing price for
MMPI's Common Stock on March 14, 1997, the last trading day prior to the
announcement of the Merger. However, the Board concluded that it would be
unlikely that MMPI's Common Stock price could be maintained at that level,
which was considerably higher than the stock's recent average price.
The foregoing discussion of the information and factors considered by the
Company's Board of Directors is not intended to be exhaustive, but includes
the material factors considered by the Company's Board. In voting to approve
the Scherer Transactions and to recommend the adoption of each of the Scherer
Stockholder Proposals by the Company's stockholders, the members of the
Company's Board did not indicate the relative or specific weight that they
assigned to the foregoing factors, and individual directors may have given
different weight to different factors. Throughout its deliberations, the
Company's Board received the advice of counsel.
THE COMPANY'S BOARD BELIEVES THAT THE SCHERER TRANSACTIONS ARE IN THE
BEST INTERESTS OF THE STOCKHOLDERS OF THE COMPANY AND RECOMMENDS THAT THE
STOCKHOLDERS OF THE COMPANY VOTE TO ADOPT EACH OF THE SCHERER STOCKHOLDER
PROPOSALS.
In considering the recommendations of the Company's Board with respect to
the Scherer Stockholder Proposals, a stockholder of the Company should be
aware that the Company's management and certain members of the Company's
Board had certain interests in the Scherer Transactions which are in addition
to the interest of the Company's stockholders generally. The Company's Board
was aware of these interests and considered them, among other matters, in
approving the Scherer Transactions. See "Related Transactions" and
"Interests of Certain Persons in the Scherer Transactions."
OPINION OF THE FINANCIAL ADVISOR
The Company retained Summit to act as the Company's financial advisor and
to render an opinion to the Company's Board of Directors in connection with the
Scherer Transactions and related matters. Summit was not instructed to seek
other potential parties interested in acquiring MMPI or the ABG Assets. The
Company selected Summit because it is an investment banking firm with
substantial experience in the valuation of businesses and their securities in
connection with mergers and acquisitions and valuations for corporate purposes.
There were no limits imposed on the scope of Summit's investigation. The
Company will pay to Summit a fee of $35,000 for delivery of the fairness
opinion. On March 14, 1997, Summit delivered its oral opinion, which was
followed by a written opinion dated March 17, 1997 (the "Summit Opinion"), to
the Company's Board of Directors to the effect that, as of the date of such
opinion and subject to certain considerations and assumptions set forth therein,
the consideration to be received by the Company from VSI in the Scherer
Transactions is fair to stockholders of the Company (excluding Robert P.
Scherer, Jr. as to whom no opinion was expressed) from a financial point of
view.
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THE FULL TEXT OF THE SUMMIT OPINION, WHICH SETS FORTH ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED, LIMITATIONS ON, AND THE SCOPE OF THE
REVIEW BY, SUMMIT IN RENDERING THE SUMMIT OPINION, IS ATTACHED TO THIS PROXY
STATEMENT AS ANNEX IV AND IS INCORPORATED BY REFERENCE HEREIN. THE SUMMIT
OPINION IS DIRECTED TO THE COMPANY'S BOARD OF DIRECTORS AND TO THE FAIRNESS OF
THE CONSIDERATION TO BE RECEIVED BY THE COMPANY IN THE SCHERER TRANSACTIONS FROM
A FINANCIAL POINT OF VIEW, AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE
SCHERER TRANSACTIONS, NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER
OF THE COMPANY AS TO HOW TO VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE
SUMMIT OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE SUMMIT OPINION. STOCKHOLDERS OF THE COMPANY
ARE ENCOURAGED TO READ THE SUMMIT OPINION IN ITS ENTIRETY.
HISTORICAL FINANCIAL POSITION
In rendering its opinion, Summit reviewed and analyzed the historical and
current financial condition of MMPI and the Company which included among other
things (i) an assessment of recent financial statements; (ii) an analysis of
revenue growth, margin trends and other operating performance indicators; and
(iii) an analysis of capital structure.
HISTORICAL STOCK PRICE PERFORMANCE
In rendering its opinion, Summit reviewed and analyzed the daily market
(bid) prices and trading volume for MMPI Common Stock and Company Common Stock
from the beginning of 1996 to March 7, 1997. Summit also compared the movement
of such daily prices with the movement of the Morgan Stanley Health Care Product
Index over the same period.
PURCHASE PRICE ANALYSIS
Based on the average daily price of $0.68 per share of MMPI Common Stock
over the three month period ended March 7, 1997, the proposal of $0.797 per
share of MMPI Common Stock in cash represented a premium 17.2%. Based on the
average daily price of $0.69 per share of MMPI Common Stock over the one
month period ended March 7, 1997, the proposal of $0.797 per share of MMPI
Common Stock in cash represented a premium of 15.5%. The proposal of $0.797
per share of MMPI Common Stock in cash represented a discount of 29.2% from
the closing price of $1.125 on March 14, 1997, the day of the announcement of
the proposed Merger. Due to the highly volatile trading price of MMPI Common
Stock and the small number of shares in the public float (number of freely
tradeable shares) relative to the total number of shares outstanding, Summit
determined that use of an average price was more meaningful for the purpose
of computing an acquisition premium as compared to the use of a single day's
price immediately
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prior to or on the day of the announcement of the Merger. Summit also noted
that approximately 51% of the outstanding MMPI Common Stock is held by the
Company.
ANALYSIS OF COMPARABLE PUBLICLY TRADED COMPANIES
This analysis examines a company's financial condition, operating
performance and outlook relative to a group of publicly traded peers to
determine an implied unaffected market trading value. Summit compared
certain financial data of MMPI to corresponding data for selected publicly
traded companies engaged in businesses which Summit judged to be similar to
the business of MMPI. The companies selected by Summit were Allied
Healthcare Products, Inc.; Ballard Medical Products, Inc.; Chad Therapeutics,
Inc.; Criticare Systems, Inc.; Marquette Medical Systems, Inc.; Medical
Graphics Corporation; Respironics, Inc.; Protocol Systems, Inc.; Resmed,
Inc.; Sunrise Medical Systems, Inc.; and VSI. Summit calculated equity
market values as multiples to latest twelve months ("LTM") net income,
current fiscal year estimated net income, next fiscal year estimated net
income (estimates of future net income were compiled by Institutional Brokers
Estimate System) and book value. The respective multiples of the comparable
publicly traded companies were between the following ranges: (i) LTM net
income: 15.4x to 21.4x (with a median of 20.7x); (ii) current fiscal year
estimated net income: 13.1x to 21.7x (with a median of 18.9x); next fiscal
year net income: 10.2x to 19.7x (with a median of 16.7); and book value:
0.8x to 8.1x (with a median of 2.4x). These ratios compare to 2.4x book
value for MMPI (based on the average daily trading price for the three months
ended March 7, 1997). Equity value as multiples of LTM net income, current
fiscal year estimated net income and next fiscal year estimated net income
were not meaningful due to current and estimated net losses of MMPI. Summit
calculated enterprise value (defined as equity market value plus total debt
less cash) as multiples to LTM revenue, LTM earnings before interest and
taxes ("EBIT") and LTM earnings before interest, taxes, depreciation and
amortization ("EBITDA") of the comparable publicly traded companies. The
respective multiples of the comparable publicly traded companies were between
the following ranges: (i) LTM revenue: 0.5x to 5.4x (with a median of 1.5x);
(ii) LTM EBIT: 10.2x to 67.1x (with a median of 12.2x); and (iii) LTM EBITDA:
6.6x to 17.8x (with a median of 11.0x). The ratios compare to .7x LTM
revenue, 25.0x EBIT and 10.4x EBITDA for MMPI (based on the average daily
trading price for the three months ended March 7, 1997).
Summit also analyzed operating statistics of the comparable publicly
traded companies including, among other things, operating margins, net profit
margins, three-year historical revenue growth, return on equity, and debt
capitalization ratios, in each case as compared to MMPI. Based on this
analysis, MMPI underperformed either all of or the majority of the comparable
publicly traded companies and Summit concluded that MMPI maintained high
relative risk. Summit then derived from this and other data (based on the
relative comparability of the comparable publicly traded companies to that of
MMPI) including an assessment of, among other things, MMPI's competitive
position, industry conditions, potential dilution of earnings per share due
to the exercise of outstanding warrants and uncertainty regarding its
financial ability to exercise the MMPI Repurchase Option with respect to the ABG
Assets the ranges of these multiples deemed most meaningful for its analysis
and applied these multiples to MMPI. This analysis resulted in a public
market reference range for MMPI of between $0.28 to $0.50 per share. Because
the value being offered to the MMPI stockholders in the merger significantly
exceeded the upper end of Summit's range of values for MMPI, Summit found
this analysis to be supportive of its fairness determination. Summit noted
that its comparable publicly traded company analysis did not give effect to
any change-of-control premium that may arise in connection with a transaction
such as the Merger.
No company used in the comparable publicly traded company analysis is
identical to MMPI. Accordingly, an analysis of the results of the foregoing
is not entirely mathematical; rather, it involves complex considerations and
judgments concerning the differences in financial and operating characteristics
of the comparable publicly traded companies and other factors that can affect
the public trading value of the comparable publicly traded companies to which
MMPI is being compared.
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COMPARABLE MERGER AND ACQUISITION TRANSACTIONS
Summit reviewed publicly available financial information for merger and
acquisition transactions pending or completed since January 1994 involving
manufacturers of medical devices and equipment. Summit considered only those
companies purchased for cash consideration and with equity values less than
$250 million. Such analysis resulted in six comparable transactions as
follows: Sun Healthcare Group, Inc. / Contour Medical, Inc.; Furon Company /
Medex, Inc.; U.S. Surgical Corp. / Circon Corporation; Getinge Industrier AB
/ MDT Corporation; Thermo Electron Corporation / Bird Medical Technologies,
Inc.; and Schering AG Germany / Medrad, Inc. Summit compared selected
financial data including equity value as a multiple of LTM net income,
enterprise value as a multiple of LTM revenue, LTM EBIT, LTM EBITDA and the
premium paid over the market price five days prior to the announcement of the
transaction ("acquisition premium paid"). The respective multiples of the
comparable merger and acquisition transactions were between the following
ranges: LTM net income: 22.2x to 45.5x (with a median of 43.6x); LTM
revenue: 0.5x to 2.0x (with a median of 1.5x); LTM EBIT: 13.7 to 70.5x (with
a median of 28.8x); LTM EBITDA: 11.0x to 27.6x (with a median of 19.1x); and
acquisition premium paid: 25.7% to 71.4% (with a median of 48.6%). These
ratios compared to .7 x LTM revenue, 26.4 x LTM EBIT and 11.1 x LTM EBITDA
for MMPI based on the value being offered to the MMPI stockholders in the
Merger. Equity value as a multiple of LTM net income was not meaningful due
to MMPI's losses. Summit applied a range of multiples derived from such
analysis to the corresponding financial data of MMPI (based on the relative
comparability of MMPI to the comparable companies acquired in the
transactions including an assessment of, among other things, MMPI's
competitive position, industry conditions, potential dilution of earnings per
share due to the exercise of outstanding warrants and uncertainty regarding
its financial ability to exercise the MMPI Repurchase Option with respect to the
ABG Assets) and arrived at an estimated range of equity values for MMPI of
between $0.46 to $0.80 per share. Because the value being offered to the
MMPI stockholders in the Merger approximated the upper end of Summit's range
of values for MMPI, Summit found this analysis to be supportive of its
fairness determination. Summit noted that its comparable merger and
acquisition transaction analysis did give effect to a change-of-control
premium.
Because the reasons for and the circumstances surrounding
each of the transactions analyzed were specific to each transaction and
because of the inherent differences between the business, operations and
prospects of MMPI, and the acquired companies in such transactions, Summit
believed that an appropriate use of a comparable merger and acquisition
transaction analysis in this instance also would involve qualitative
judgments concerning differences between the characteristics of the Scherer
Transactions and these transactions.
DISCOUNTED CASH FLOW ANALYSIS
Summit performed a discounted cash flow analysis of MMPI based upon
estimates of projected financial performance prepared by MMPI (the "Base Case
Projections"). Summit calculated a range of implied equity values of MMPI based
upon the discounted present value of the sum of (i) the projected three-year
stream of unleveraged free cash flow and (ii) the projected terminal value at
the year 2000 based upon a range of unleveraged free cash flow growth rates in
perpetuity. In conducting this analysis, Summit applied discount rates ranging
from 14.0% to 16.0% and unleveraged free cash flow growth rates, in perpetuity,
ranging from 3.0% to 5.0%. To test the sensitivity of value to changes in
revenue growth, Summit constructed its own set of projections for MMPI under the
guidance and approval of MMPI's management (the "Growth Case Projections").
Summit increased the fiscal 1999 and 2000 estimated growth rate in revenue
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to 5.0% and held operating margins equal to that used in the Base Case
Projections. In calculating the projected terminal value at the year 2000,
Summit applied unleveraged free cash flow growth rates, in perpetuity,
ranging from 3.0% to 5.0%. Summit then calculated ranges of implied equity
value per share by dividing the implied equity values by the outstanding
shares of MMPI Common Stock.
The range of discount rates and perpetual growth rates of unleveraged
free cash flow used in the analysis described above were chosen to reflect
the growth prospects and risks of MMPI including an assessment of, among
other things, MMPI's competitive position, industry conditions, potential
dilution of earnings per share due to the exercise of outstanding warrants
and uncertainty regarding its financial ability to exercise the MMPI Repurchase
Option with respect to the ABG Assets.
Based on this analysis, Summit derived an implied equity value per share of
(i) $0.17 based on the Base Case Projections and (ii) $0.70 based on the Growth
Case Projections. Because the value being offered to the MMPI stockholders
in the Merger exceeded the upper end of Summit's range of estimated
values, Summit found this analysis to be supportive of its fairness
determination. Summit noted that its discounted cash flow analysis did not
give effect to any change-of-control premium that may arise in connection with
transactions such as the Scherer Transactions.
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required by VSI for the payment of the Merger
Consideration, to repay certain indebtedness owed by MMPI, to purchase the ABG
Assets and to pay related fees and expenses, is expected to be approximately
$25.0 million. VSI has advised the Company that it will pay for such
obligations primarily from cash on hand. VSI has informed the Company that on
the date of this Proxy Statement, VSI had cash resources in excess of
$40,000,000.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash for MMPI Common Stock pursuant to the Merger and the
purchase price of the ABG Assets will be a taxable transaction to the Company
for federal and state income tax purposes. In general, for federal income tax
purposes, the Company will recognize gain or loss equal to the difference
between its adjusted tax basis in its MMPI Common Stock and the ABG Assets and
the amount of cash received in exchange for such MMPI Common Stock and for the
sale of the ABG Assets. Gain or loss must be determined separately for each
block of MMPI Common Stock (i.e., MMPI Common Stock acquired at the same cost in
a single transaction) converted into cash in the Merger. The Scherer
Transactions will not result in any taxable income to the stockholders of the
Company except to the extent such stockholders also own shares of MMPI Common
Stock.
INTERESTS OF CERTAIN PERSONS IN THE SCHERER TRANSACTIONS
Certain officers and directors of the Company have interests in the Scherer
Transactions that are in addition to their interests as stockholders of the
Company and have participated in the negotiations of the terms of the Merger
Agreement and the transactions contemplated thereby. The Company's Board was
aware of these interests and considered them along with the other matters
described above. See "Recommendation of the Board of Directors."
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SEVERANCE BENEFITS
Mr. Thompson currently serves as President and Chief Operating Officer of
MMPI and the Company. He also serves as a director of MMPI and the Company.
Pursuant to an employment agreement, dated November 1, 1996 between Mr. Thompson
and MMPI, Mr. Thompson is entitled to a lump sum severance benefit equal to his
base salary under the employment agreement from the date of his termination
through February 28, 1999, if his employment is involuntarily terminated for
reasons other than cause following a change of control of MMPI. The Merger will
constitute a change of control within the meaning of Mr. Thompson's employment
agreement. As required by the Merger Agreement, Mr. Thompson has agreed that
his employment with MMPI will terminate at the Effective Time of the Merger and
the Company has agreed that it will pay the full amount of the severance
benefits to which Mr. Thompson will become entitled. These severance benefits
are estimated to be $190,000, if the Effective Time of the Merger occurs on
July 28, 1997.
EARLY VESTING OF STOCK OPTIONS
Mr. Thompson holds options covering shares of MMPI Common Stock under
MMPI's Incentive and Non-Qualified Stock Option Plan (the "Option Plan") which,
pursuant to the terms of the Option Plan, vest upon the occurrence of a change
of control. Mr. Thompson holds options for 150,000 shares of MMPI Common Stock,
of which 75,000 are exercisable at $0.6875 per share and the remaining 75,000
are exercisable at a price in excess of the per share Merger Consideration.
DIRECTOR COMPENSATION
Robert P. Scherer, Jr., Stephen Lukas, Kenneth H. Robertson and Mr.
Thompson serve on both the Company's and MMPI's Boards of Directors. MMPI
has agreed to pay each of its outside directors $10,000 as partial
compensation for their services to MMPI. Director Mack D. Tindal, who is a
director of MMPI but not the Company, will receive an additional $10,000 in
recognition of his exceptional service to MMPI in negotiating the Merger
Agreement. As a result, Mr. Lukas and Mr. Robertson, who are also directors
of MMPI, will each receive $10,000 from MMPI.
ROBERT P. SCHERER, JR.
Robert P. Scherer, Jr., Chairman of the Board and Chief Executive Officer
of the Company and MMPI, is beneficial owner of 1,546,392 shares of MMPI Common
Stock for which he will receive $1,232,474.42 upon the consummation of the
Merger. Mr. Scherer also has voting authority over an additional 515,464 shares
of MMPI Common Stock as trustee of a voting trust for shares of MMPI Common
Stock which are beneficially owned by Mr. Scherer's adult children. In
addition, Mr. Scherer holds a convertible promissory note of the Company in
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the principal amount of $700,000 which he has agreed to convert immediately
prior to the Effective Time of the Merger into a total of 1,000,000 shares of
MMPI Common Stock for which he will receive $797,000 at the Effective Time of
the Merger (the "Scherer Note").
In addition to his ownership of MMPI Common Stock, Mr. Scherer
beneficially owns 2,591,180 shares or 60.1% of the issued and outstanding
shares of Company Common Stock.
As part of the transactions contemplated by the Merger Agreement, Mr.
Scherer entered into the RPS Inducement Agreement pursuant to which Mr.
Scherer has agreed that, subject to his fiduciary obligations as a director
and majority stockholder of the Company and trustee of certain voting trusts,
he will vote his shares of Company Common Stock in favor of approval of the
Scherer Stockholder Proposal at the Special Meeting. Mr. Scherer has also
informed the Company that, subject to his fiduciary obligations as a director
and principal stockholder of MMPI and trustee of certain voting trusts, he
intends to vote all of his shares of MMPI Common Stock, including the shares
over which he has voting authority pursuant to the voting trust for the
benefit of his adult children, in favor of the Merger.
Mr. Scherer also agreed in the RPS Inducement Agreement not to sell or
transfer any of his Company Common Stock, except that he may transfer shares
of Company Common Stock if, after such transfer, the outstanding Company
Common Stock that he and his transferee continue to own represent more than
50% of the outstanding Company Common Stock calculated on a fully-diluted
basis and, prior to such transfer, such transferee executes an agreement, in
form and substance reasonably satisfactory to VSI, to vote such shares in
favor of the Scherer Stockholder Proposal. Mr. Scherer also agreed not to
sell or otherwise transfer the Scherer Note or any interest therein nor will
he demand payment thereunder, until the Merger Agreement is terminated.
Pursuant to the RPS Inducement Agreement, Mr. Scherer will execute a
covenant not to compete at the Effective Time of the Merger in exchange for a
payment by VSI of $140,000. See "Related Transactions."
AMY M. MURPHY
It is anticipated that the Company will pay to Amy M. Murphy, Vice
President of Corporate Operations and Secretary of the Company, a bonus of
$100,000 in recognition of her exceptional service to the Company in connection
with negotiating the terms of the Scherer Transactions on behalf of the Company
and MMPI.
REGULATORY MATTERS
ANTITRUST MATTERS
Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), provides that certain acquisition transactions may
not be consummated until certain information has been furnished to the
Antitrust Division of the Department of Justice (the "Antitrust Division")
and the Federal Trade Commission (the "FTC") and the waiting period under the
HSR Act has terminated. Mr. Scherer (as controlling stockholder of the
Company and MMPI) and VSI filed information and material with the Antitrust
Division and the FTC with respect to the Scherer Transactions on March 18,
1997. The waiting period under the HSR Act
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with respect to VSI's acquisition of all of the MMPI Common Stock pursuant to
the Merger and VSI's acquisition of the ABG Assets pursuant to the SH
Inducement Agreement was terminated on March 31, 1997.
Transactions such as the Scherer Transactions may be investigated by the
Antitrust Division or the FTC notwithstanding the termination of the waiting
period applicable to the Scherer Transactions under the HSR Act. Before or
after the consummation of such transactions, the Antitrust Division or the
FTC could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the transaction
or seeking divestiture of all MMPI Common Stock or the ABG Assets so acquired
or divestiture of substantial assets of VSI and/or MMPI. Private parties may
also bring legal action under antitrust laws under certain circumstances.
OTHER GOVERNMENTAL APPROVALS
Other than as described above and the issuance of a certificate of
merger by the Secretary of State of Colorado, the Company is not aware of any
other federal or state regulatory requirements that must be complied with or
approvals that must be obtained prior to the consummation of the Scherer
Transactions.
CERTAIN TERMS OF THE SH INDUCEMENT AGREEMENT
The following is a brief summary of certain provisions of the SH
Inducement Agreement, which is attached hereto as Annex II and is
incorporated by reference. This summary is qualified in its entirety by
reference to the SH Inducement Agreement.
GENERAL
The SH Inducement Agreement provides for the sale of the ABG Assets by
the Company to VSI pursuant to the terms of the MMPI Repurchase Option. The
SH Inducement Agreement also provides for the grant by the Company of the
Covenant Not To Compete.
THE COMPANY'S REPRESENTATIONS
The SH Inducement Agreement contains representations by the Company
relating to, among other things: (a) its organization, qualification and
similar corporate matters; (b) sufficiency of an affirmative vote of a
majority of the shares of the outstanding Company Common Stock to approve the
Scherer Stockholder Proposal; (c) the Scherer Stockholder Proposal; (d) the
Company's review of the warranties and representations made by MMPI to VSI in
the Merger Agreement and the Company's lack of actual knowledge that any of
such warranties and representations are inaccurate in any material respect;
(e) the authorization, execution, delivery, performance and enforceability of
the SH Inducement Agreement; (f) the
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Company's ownership of MMPI Common Stock, including the pledge of such stock
pursuant to the terms of the Amended and Restated Non-Negotiable Note dated
as of January 17, 1997 from the Company to Scherer Capital Company L.L.C. and
the related Amended and Restated Stock Pledge Agreement (the "Pledge
Agreements"), which Pledge Agreements have been assigned by Scherer Capital
Company L.L.C. to the four adult children of Robert P. Scherer, Jr.; (g) the
exercise price of the MMPI Repurchase Option regarding the ABG Assets; (h)
the Company's right, title and interest in and to all of the ABG Assets and
certain improvements thereto (the "Scheduled Assets"); (i) the extension of
the exercise period of the MMPI Repurchase Option; (j) the accuracy of the
factual representations regarding the Company and its equity interests in
MMPI; and (k) the outstanding shares of Company Common Stock.
The Company has represented that the information set forth in this Proxy
Statement with respect to the Company does not contain any untrue statements
of material fact and does not omit to state any material fact required to be
stated herein or necessary to make the statements herein not misleading.
THE COMPANY'S COVENANTS
Pursuant to the SH Inducement Agreement, the Company has agreed with
VSI, among other things, that: (a) the Company will not exercise its warrants
for MMPI Common Stock on or before the earlier of the Effective Time of the
Merger or the date of the termination of the Merger Agreement; (b) the
Company will cooperate with VSI in preparing, filing and mailing this Proxy
Statement; (c) the Company will call the Special Meeting and the Board of
Directors will recommend that the stockholders approve the Scherer
Stockholder Proposal, subject to the exercise by the members of the Board of
Directors of their fiduciary duties; (d) prior to the Effective Time of the
Merger or the date on which the Merger Agreement is terminated, the Company
will not sell or otherwise transfer any shares of MMPI Common Stock,
provided, however, that the Company may pledge or transfer any of its shares
of MMPI Common Stock (i) pursuant to the requirements of the Pledge
Agreements or (ii) to a transferee (a "Scherer Permitted Transferee") if,
prior to such pledge or transfer, the Scherer Permitted Transferee executes
an agreement, in form and substance reasonably satisfactory to VSI, to vote
such shares in favor of the Merger and Merger Agreement; (e) if the
stockholders of the Company approve the Scherer Stockholder Proposal and
receive an updated Summit Opinion as of the date of the Special Meeting, the
Company will vote all of the shares of MMPI Common Stock that it owns in
favor of the Merger and the Merger Agreement; and (f) until the earlier of
the Effective Time of the Merger and the termination of the Merger Agreement,
the Company will, assuming that it has an ability to pay, honor all of its
obligations under the Pledge Agreements.
SALE OF THE ABG ASSETS
Provided that certain conditions set forth in the SH Inducement Agreement
have been satisfied, immediately after the Company and VSI determine that the
Merger is effective under
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Colorado law, VSI will purchase from the Company the ABG Assets at a price
equal to the exercise price of the ABG Assets pursuant to the MMPI Repurchase
Option. The Company will also assign to VSI all of its rights as the lessor
under the equipment lease and as the licensor under the license of intangible
property pursuant to which it leases and licenses the ABG Asset to MMPI. VSI
will assume all of the Company's obligations as lessor under the equipment
lease and licensor under the license of intangible property, all pursuant to
the terms of an assignment and assumption agreement in form and substance
reasonably satisfactory to VSI and the Company.
VSI agrees in the SH Inducement Agreement that on and after the date of the
closing of the purchase and sale of the ABG Assets, the Company shall not be
liable to VSI, its subsidiaries or MMPI for any loss, claim, demand, liability,
cost, damage, or expense of any kind, caused or alleged to be caused, directly
or indirectly, by the condition of the ABG Assets, or by any inadequacy thereof
for any purpose, or by any defects with respect to the ABG Assets or in the use
or maintenance of such assets.
The Company has also agreed to execute and deliver to VSI the Covenant Not
To Compete in exchange for an amount equal to the amount by which $5,860,000
exceeds the purchase price paid to ABG Assets.
The Company has also agreed to deliver to MMPI a release, in form and
substance reasonably satisfactory to VSI and MMPI, pursuant to which the Company
will release MMPI from all of its obligations to provide indemnification to the
Company under the equipment lease and the license of intangible property and
from all of MMPI's other obligations to the Company. VSI has agreed to deliver
to the Company an agreement, in form and substance reasonably satisfactory to
the Company, pursuant to which VSI will provide to the Company the
indemnification provided (prior to such release) to the Company under certain
sections of the license of intangible property and the equipment lease, in an
amount not to exceed certain monetary limits set forth in the SH Inducement
Agreement.
Under the SH Inducement Agreement, the obligations of the parties to
consummate the sale of ABG Assets are conditioned upon satisfaction of the
following conditions: (a) consummation of the Merger; (b) receipt of all
approvals required by law to consummate the sale of the ABG Assets; (c)
veracity in all material respects of all of the Company's representations set
forth in the SH Inducement Agreement when made and (with certain exceptions)
as of the date of the sale of the ABG Assets; and (d) no discovery by VSI
that the Company has taken any action or omitted to take any action between
the date of the SH Inducement Agreement and the closing date of the sale of
the ABG Assets which would materially adversely affect the title in and to
the ABG Assets.
Pursuant to the SH Inducement Agreement, MMPI has consented to the
Company's sale of the ABG Assets and the assignment to VSI of the equipment
lease and license of intangible
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property pursuant to which the ABG Assets are leased and licensed to MMPI.
MMPI has acknowledged that, upon consummation of the closing pursuant to the
SH Inducement Agreement, MMPI will have no right to exercise the purchase
option.
CASHLESS EXERCISE OF WARRANTS
Under the SH Inducement Agreement, immediately after the Effective Time
of the Merger, the Company will tender its warrants for MMPI Common Stock to
VSI and VSI will, upon receipt of such tender, deliver to the Company a check
in an amount equal to $0.047 multiplied by the number of shares of MMPI
Common Stock covered by the warrants so tendered. This has the effect of
paying the Company the difference between the exercise price of those
warrants and the Merger Consideration payable to the Company in respect of
the shares of MMPI Common Stock underlying the Company's warrants.
VSI'S REPRESENTATIONS
The SH Inducement Agreement contains representations by VSI relating to,
among other things, the execution, delivery and performance of the SH
Inducement Agreement by VSI.
VSI'S COVENANTS WITH RESPECT TO THE PROXY STATEMENT
Under the SH Inducement Agreement, VSI agreed to cooperate with the
Company in preparing this Proxy Statement. VSI has represented that the
information supplied by VSI to the Company for this Proxy Statement with
respect to VSI (excluding MMPI) does not contain any untrue statements of
material fact and does not omit to state any material fact required to be
stated herein or necessary to make the statements herein not misleading.
CERTAIN TERMS OF THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, which is attached as Annex I and is incorporated herein by
reference. See also "Payment of the Merger Consideration" and "-Options,
Warrants and Other Rights" for summaries of certain other provisions of the
Merger Agreement. All such summaries are qualified in their entirety by
reference to the Merger Agreement.
GENERAL
At the Effective Time of the Merger, pursuant to the Merger Agreement,
Newco will merge with and into MMPI. MMPI will be the surviving corporation and
will become a wholly- owned subsidiary of VSI. At the Effective Time of the
Merger, the separate existence and corporate organization of Newco will cease.
MMPI, as the surviving corporation, will succeed,
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insofar as permitted by law, to all of the rights, assets, liabilities and
obligations of Newco in accordance with the BCA.
REPRESENTATIONS AND WARRANTIES OF MMPI
The Merger Agreement contains representations and warranties by MMPI
relating to, among other things: (a) its organization and qualification, its
subsidiaries' organization and qualification and similar corporate matters;
(b) its capital structure; (c) its ABG Products and related business; (d) its
filings with the Securities and Exchange Commission ("SEC") and the accuracy
of the information contained therein; (e) its owned and leased real and
personal property, including intangible personal property; (f) its accounts
receivable and inventory; (g) its material contracts; (h) its customers and
suppliers; (i) transactions with directors, officers, employees and
affiliates; (j) litigation; (k) insurance; (l) licenses and permits; (m)
authorization, execution, delivery, performance and enforceability of the
Merger Agreement and related matters, including regulatory and statutory
approvals; (n) compliance with applicable laws and environmental matters; (o)
ERISA and employment matters; (p) reports and financial statements; (q)
certain tax matters; (r) business changes; (s) brokers and finders fees; (t)
industrial revenue bonds; (u) the SH Inducement Agreement and the RPS
Inducement Agreement; (v) accuracy of information; (w) certain agreements
with the Company relating to the ABG Products and MMPI's related business;
and (x) FDA matters.
REPRESENTATIONS AND WARRANTIES OF VSI
The Merger Agreement contains representations and warranties by VSI
relating to, among other things: (a) its organization and qualification; (b)
authorization, execution, delivery, performance and enforceability of the Merger
Agreement and related matters; and (c) brokers and finders fees.
CERTAIN COVENANTS OF MMPI
Pursuant to the Merger Agreement, MMPI has agreed that, during the
period from the date of the Merger Agreement until the Effective Time of the
Merger, except as permitted under the Merger Agreement or any other agreement
executed by VSI or as otherwise consented to in writing by VSI, MMPI will,
among other things, carry on its business diligently and in the ordinary
course and use reasonable efforts to preserve its present business
organization intact and preserve its present relationship with persons having
business dealings with it. In addition, MMPI has agreed that, prior to the
Effective Time of the Merger, it will not do any of the following, among
other things, without VSI's written consent: (a) amend its Articles of
Incorporation or Bylaws; (b) issue, sell, deliver, grant or declare any stock
dividend or stock split or other distributions in respect of, any of the MMPI
Common Stock or any securities convertible or exchangeable into or
exercisable for any such stock, or any options or warrants to purchase MMPI
Common Stock, except the issuance of shares of MMPI Common Stock
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pursuant to certain options, warrants or a convertible note exercisable or
convertible by their terms and outstanding on the date the Merger Agreement
was executed; (c) except in the ordinary course of business or as required
upon exercise of directors' fiduciary duties, mortgage or pledge any of its
assets; (d) except in the ordinary course of business, borrow or agree to
borrow any funds (other than pursuant to MMPI's existing credit facilities up
to certain amounts); (e) except in the ordinary course of business,
voluntarily incur any obligation or liability, cancel any material debts of
third parties or claims against third parties, lease, sell, transfer or grant
any preferential rights to lease or acquire any of its material assets,
property or rights or substantively amend or terminate any material contract,
agreement, license or other right of which MMPI is a party; (f) adopt,
materially amend or terminate any employee benefit plan or materially
increase compensation or other benefits payable to any of the Company's
employees; (g) acquire control of, or an ownership interest in, any other
business entity or a substantial portion of the assets thereof; (h) solicit,
encourage or authorize any inquiry, proposal, offer or possible offer from a
third party relating to a change in control or ownership or other transaction
that would constitute a "Takeover Proposal" as defined in the Merger
Agreement or, subject to the fiduciary obligations of MMPI's Board of
Directors, provide to any person information or assistance or negotiate with
any person in furtherance of a Takeover Proposal; (i) except in the ordinary
course of business and consistent with practices customary for MMPI and
except for the buy-out of certain equipment leases, incur or discharge any
material obligation or liability; (j) enter into any material licensing or
marketing arrangement or other material contract with any party other than
VSI; (k) settle any pending litigation in a manner that is materially adverse
to MMPI or commence any material litigation; and (l) take certain other
actions, all as more fully described in the Merger Agreement.
In addition, the Merger Agreement contains certain covenants of MMPI
prior to the Effective Time of the Merger regarding, among other things, (a)
no breaches, violations or defaults with respect to material contracts or
applicable laws; (b) maintaining its insurance policies; (c) filing tax
returns and other reports and returns required to be filed with applicable
governmental authorities and paying tax liabilities; (d) advising VSI of
certain material adverse changes; (e) advising VSI of any Takeover Proposal
or related inquiry; (f) obtaining necessary approvals, authorizations, and
consents of governmental and regulatory authorities and completing required
filings; (g) allowing VSI to review and investigate the business and
financial condition of MMPI; (h) fulfilling and satisfying certain conditions
to the Closing; (i) performing certain matters required to be performed by
MMPI at or prior to the Closing; (j) the accuracy of MMPI's warranties and
representations in the Merger Agreement; (k) maintenance of its property and
assets; (l) furnishing VSI with information required to prepare a Current
Report on Form 8-K; (m) calling MMPI's special meeting; (n) not triggering
anti-dilution provisions of securities exercisable for or convertible into
shares of MMPI Common Stock or changing the applicable exercise price; (o)
amending MMPI's Rights Agreement; (p) filing with the SEC all required
reports and statements under the 1934 Act; (q) advising VSI of any notice of
intent to demand dissenters' rights and giving VSI the opportunity to direct
any negotiations and proceedings with respect thereto; (r) establishing a
separate account for funds received upon the
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exercise of any option or warrant prior to the Effective Time of the Merger;
and (s) not exercising the MMPI Repurchase Option relating to the ABG Assets.
CERTAIN COVENANTS OF VSI
The Merger Agreement contains certain covenants of VSI prior to the
Effective Time of the Merger regarding, among other things: (a) fulfilling
and satisfying certain conditions to the Closing; (b) performing certain
matters required to be performed by VSI at or prior to the Closing; (c) the
accuracy of VSI's warranties and representations in the Merger Agreement; and
(d) obtaining necessary approvals, authorizations, and consents of
governmental and regulatory authorities and completing required filings.
CERTAIN OTHER AGREEMENTS
Pursuant to the Merger Agreement, VSI and MMPI have agreed to make
required filings promptly pursuant to the Hart Scott Rodino Act and to use
their best efforts and cooperate to effect compliance with the Hart Scott
Rodino Act. MMPI has further agreed to provide to VSI a consolidated balance
sheet prior to Closing and a sales statement with respect to certain "Special
Treatment Sales" (generally defined as foreign sales and domestic OEM,
government and home health care sales) each together with a certificate from
MMPI's Chief Financial Officer as to compliance with certain preparation
parameters. In addition, MMPI has represented and covenanted with VSI as to
(a) the compliance of the MMPI proxy statement with the 1934 Act and the
rules and regulations promulgated thereunder; (b) the accuracy and
completeness of the information contained in the MMPI proxy statement (other
than with respect to information regarding VSI); and (c) compliance in the
MMPI proxy statement with notifications regarding dissenters' rights as are
required by the BCA.
CONDITIONS TO OBLIGATIONS OF VSI AND NEWCO
The Merger Agreement provides that the respective obligations of VSI and
Newco to consummate the Merger are subject to satisfaction of the following
conditions, among others: (a) the accuracy in all material respects of the
representations and warranties of MMPI contained in the Merger Agreement; (b)
MMPI's performance and compliance in all material respects with all covenants,
agreements and conditions required by the Merger Agreement to be performed or
complied with by MMPI prior to or on the Closing Date; (c)(i) no order of any
court or administrative agency being in effect which restrains or prohibits any
transaction contemplated by the Merger Agreement or the SH Inducement Agreement
or the RPS Inducement Agreement or which would limit or affect VSI's ownership
of MMPI or of the ABG Assets; (ii) no suit, action (other than the exercise of
dissenters' rights), investigation, inquiry or proceeding pending or threatened
against VSI, Newco, any subsidiary of VSI or MMPI, challenging the validity or
legality, or seeking to restrain or limit the consummation, of the transactions
contemplated by the Merger Agreement or the SH Inducement Agreement or the RPS
Inducement Agreement; and
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(iii) no written advice having been received by VSI, Newco or the Company
from any governmental body and remaining in effect threatening to commence an
action or proceeding seeking to invalidate, restrain or limit the Merger, the
SH Inducement Agreement or the RPS Inducement Agreement or the transactions
contemplated thereby or otherwise affect VSI's ownership of the Company or
the ABG Assets; (d)(i) obtaining approval of the Merger by the MMPI
Stockholders, the Stockholders and all other necessary or specified
governmental and non-governmental consents and approvals, including the
expiration or termination of all applicable waiting periods under the Hart
Scott Rodino Act; (ii) no such consent or approval having imposed a condition
to such consent or approval, and no condition having been imposed in
connection with any filings made under the Hart Scott Rodino Act or under any
other law, which condition in the opinion of VSI is unduly burdensome to the
consolidated financial condition or operations of VSI or to the business of
MMPI and its subsidiaries taken as a whole; and (iii) all conditions required
to be satisfied prior to the Effective Time of the Merger pursuant to such
consents and approvals having been satisfied; (e) VSI and Newco having
received an acceptable opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.,
counsel to MMPI, as to the corporate existence and good standing of MMPI, the
authority of MMPI to enter into the Merger Agreement, the valid issuance of
the MMPI Common Stock, the absence of material litigation and the absence of
conflicts with other agreements and similar matters; (f) as of the Closing Date,
MMPI not being indebted for borrowed money in an aggregate amount in excess of
$6.4 million (subject to certain exceptions); (g)(i) MMPI having furnished VSI
with satisfactory closing certificates of MMPI, signed by its President or an
Executive Vice President, regarding the accuracy in all material respects of
the representations and warranties of MMPI in the Merger Agreement and MMPI's
compliance in all material respects with all terms, covenants and provisions
of the Merger Agreement with which it is required to comply prior to or on
the Closing Date and (ii) the Company having furnished VSI with satisfactory
certificates of the Company, signed by its President or Executive Vice
President, to the same effect with respect to the SH Inducement Agreement;
(h) MMPI, William J. Thompson and the Company having entered into an
agreement pursuant to which Mr. Thompson's existing employment agreement with
MMPI will terminate as of the Effective Time of the Merger; (i) the Company
having amended the Rights Agreement in such a manner that the execution of
the Merger Agreement and the consummation of the Merger will not cause any of
the Rights to become exercisable and, prior to the consummation of the
Closing, no Rights thereunder having been exercised; (j)(i) the accuracy in
all material respects of the Company's and Robert P. Scherer, Jr.'s
respective representations and warranties contained in the SH Inducement
Agreement and the RPS Inducement Agreement; (ii) their performance and
compliance in all material respects with the applicable covenants, agreements
and conditions as required by the SH Inducement Agreement and the RPS
Inducement Agreement; and (iii) the Company, Mr. Scherer and VSI having
agreed upon the form and substance of all documents to be executed and
delivered at the closings contemplated by the SH Inducement Agreement and the
RPS Inducement Agreement; (k) VSI having received such additional
documentation at the Closing as VSI and its counsel may reasonably require to
evidence compliance by MMPI with all of its obligations under the Merger
Agreement and to evidence compliance by the Company and Mr. Scherer with all
of their obligations under the SH Inducement Agreement and the RPS Inducement
Agreement.
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CONDITIONS TO OBLIGATIONS OF MMPI
The Merger Agreement provides that obligations of MMPI to consummate the
Merger are subject to satisfaction of the following conditions, among others:
(a) the accuracy in all material respects of the representations and
warranties of VSI contained in the Merger Agreement; (b) VSI's and Newco's
respective performance and compliance in all material respects with each
covenant, agreement and condition required by the Merger Agreement to be
performed or complied with by it prior to or on the Closing Date; (c)(i) no
order of any court or administrative agency being in effect which restrains
or prohibits any transaction contemplated by the Merger Agreement; (ii) no
suit, action (other than the exercise of dissenters' rights), investigation,
inquiry or proceeding pending or threatened against VSI, Newco or MMPI
challenging the validity or legality of, or seeking to restrain, the
consummation of the transactions contemplated by, the Merger Agreement; and
(iii) no written advice having been received by VSI, Newco or MMPI or their
respective counsel from any governmental body, and remaining in effect,
threatening to commence an action or proceeding seeking to invalidate or
restrain the Merger; (d) obtaining the approval of the MMPI Stockholders of
the Merger and the approval of the Company's stockholders of the Scherer
Stockholder Proposal and all necessary or specified governmental and
non-governmental consents and approvals, including the expiration or
termination of all applicable waiting periods under the Hart Scott Rodino
Act; (e) MMPI having received a satisfactory opinion of Lowenstein, Sandler,
Kohl, Fisher & Boylan, P.C., counsel to VSI, dated the Closing Date and
addressed to MMPI as to the corporate existence and good standing of VSI, the
authority of VSI to enter into the Merger Agreement, the absence of material
litigation and the absence of conflicts with other agreements and similar
matters; (f) VSI and Newco both having furnished MMPI with satisfactory closing
certificates, signed by their respective Presidents or Executive Vice
Presidents, regarding the accuracy in all material respects of the
representations and warranties of such corporations contained in the Merger
Agreement and such corporations' compliance in all material respects with all
terms, covenants and provisions of the Merger Agreement with which they are
required to comply prior to or on the Closing Date; and (g) MMPI having received
such additional documentation at the Closing as MMPI and its counsel may
reasonably require to evidence compliance by VSI and Newco with all of their
respective obligations under the Merger Agreement.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
before the Effective Time of the Merger, notwithstanding approval of the
Merger by the stockholders of MMPI or Newco (a) by mutual written consent of
VSI, Newco and MMPI; (b) by VSI or MMPI if (i) the Company's stockholders
fail to grant the Company's Board of Directors the authority to approve the
Scherer Transactions at the Special Meeting, (ii) the MMPI Stockholders fail
to approve the Merger at the MMPI special meeting, (iii) the Board of
Directors of MMPI fails to recommend, withdraws or conditions its
recommendation that the MMPI Stockholders approve the Merger Agreement and
the Merger or resolves to do so, or (iv) the Board of Directors fails to
recommend, withdraws or conditions its recommendation to the Stockholders or
resolves to do so. In addition, VSI may terminate the Merger Agreement if
(a) there has been a material
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misrepresentation or breach by MMPI of any of its representations or
warranties in the Merger Agreement or any material failure by MMPI to comply
with its obligations under the Merger Agreement; (b) MMPI's Special Treatment
Sales for the period from December 29, 1996 through the date seven days prior
to the Closing (the "Pre-Closing Date") are less than eighty percent (80%) of
MMPI's "Special Treatment Sales" (as defined in the Merger Agreement) during
the period from the first day of MMPI's fiscal quarter commencing in December
1995 through the date one year prior to the Pre-Closing Date; (c) there has
been a material misrepresentation or breach by the Company or Mr. Scherer
(together, the "Scherer Parties") in any of the representations or warranties
of any of the Scherer Parties set forth in the SH Inducement Agreement and
the RPS Inducement Agreement; (d) there has been any material failure by
either of the Scherer Parties to comply with its or his respective
obligations under the SH Inducement Agreement and the RPS Inducement
Agreement; (e) there has been a failure to satisfy any of the conditions to
VSI's obligation to consummate the Merger or to VSI's obligation to
consummate the transactions contemplated by the SH Inducement Agreement and
RPS Inducement Agreement as of the Closing Date. MMPI may terminate the
Merger Agreement if there has been (a) a material misrepresentation or breach
by VSI or Newco of any of the respective representations or warranties of VSI
and Newco set forth in the Merger Agreement, (b) any material failure by VSI
or Newco to comply with their respective obligations under the Merger
Agreement, or (c) a failure to satisfy any of the conditions to MMPI's
obligation to consummate the Merger as of the Closing Date. Either MMPI or
VSI, at their discretion, may terminate the Merger Agreement if the Effective
Time of the Merger has not occurred by August 29, 1997, except that a party
whose breach of the Merger Agreement has caused such a delay in the
consummation of the Merger will not be entitled to terminate the Merger
Agreement. If the Merger Agreement is terminated, the Merger will be
abandoned without further action by MMPI.
If the Merger Agreement is terminated and the Merger is abandoned, no
party to the Merger Agreement will have any liability or further obligation
to any other party to the Merger Agreement except as follows: (a) a party
will be liable for damages incurred by the other parties to the Merger
Agreement if (and only if) (i) such breach is a material breach of a material
covenant and (ii) the party asserting such breach gives the breaching party
notice of such breach and such breach is not cured within twenty days (or a
longer reasonable period not to extend beyond August 29, 1997). If VSI
terminates the Merger Agreement as a result of any such material breach of a
covenant and is entitled to damages under the Merger Agreement, MMPI will be
liable to VSI only to the extent that such damages are proximately caused by
such breach. If MMPI terminates the Merger Agreement as a result of a breach
of any material covenants by VSI or Newco and is entitled to damages under
the Merger Agreement, MMPI will be entitled to $800,000 as liquidated damages.
In addition, if the Merger Agreement is terminated by VSI or MMPI pursuant
to specified provisions of the Merger Agreement, and prior to the date on which
the Merger Agreement is terminated (a) an offer is made contemplating certain
events, including a Purchase Event (as defined below) or "Takeover Proposal" (as
defined in the Merger Agreement), (b) a claim is
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made that such offer could result in greater value to the MMPI Stockholders
than the value to be received by them upon consummation of the Merger, and
(c) after such offer is known to MMPI or any of its officers or directors,
the MMPI Stockholders do not approve the Merger, the Stockholders fail to
grant the Company's Board of Directors the authority to approve the Merger,
MMPI breaches any of its obligations under the Merger Agreement or the
conditions precedent to the Merger Agreement are not satisfied, and within
twenty-four months after the termination of the Merger Agreement, a Purchase
Event occurs, MMPI will pay to VSI, no later than the date on which such
Purchase Event occurs, a cash fee equal to $1,500,000. The term "Purchase
Event" means any of the following events: (a) without VSI's prior written
consent, MMPI or any of its officers or directors have recommended, proposed
or announced an intention to authorize, recommend or propose, or entered into
an agreement with any person (other than VSI or any subsidiary of VSI) to
effect (i) a merger, consolidation or similar transaction involving MMPI or
any "Significant Subsidiary" as defined in Rule 405 of the Securities Act of
1933, as amended; (ii) the disposition of MMPI or of 25% or more of the
consolidated assets of MMPI; or (iii) the issuance, sale or other disposition
by MMPI of securities representing 25% or more of the voting power of MMPI or
any of its Significant Subsidiaries, other than, in the case of (i), (ii) or
(iii), any merger, consolidation or similar transaction in which the voting
securities of MMPI outstanding immediately prior thereto continue to
represent at least 75% of the combined voting power of the voting securities
of MMPI or the surviving entity outstanding immediately after the
consummation of such transaction; or (b) any person or group (other than the
Company, affiliates of the Company, VSI or any subsidiary of VSI or a group
consisting solely thereof) acquires beneficial ownership of, or the right to
acquire beneficial ownership of, 25% or more of the voting power of MMPI or
any of its Significant Subsidiaries. Notwithstanding the foregoing, MMPI is
not obligated to pay the $1,500,000 fee in the event that each of the
following circumstances occurs in the following order: (a) the Merger
Agreement is terminated after a public announcement is made that a specific
third-party other than the Company (the "Potential Acquirer") has proposed a
transaction which, if consummated, would constitute a Purchase Event; (b)
after termination of the Merger Agreement, a public announcement is made that
the Potential Acquirer no longer intends to pursue such a transaction and, in
fact, does not; (c) MMPI offers VSI the opportunity to enter into an
agreement and plan of merger substantially identical to the Merger Agreement
and the Company and Mr. Scherer offer to VSI the opportunity to enter into
agreements which are substantially identical to the SH Inducement Agreement
and the RPS Inducement Agreement; and (d) VSI either declines in writing to
pursue such offers or fails to respond to MMPI, the Company and Mr. Scherer
within twenty days after receipt of such offers. In addition, MMPI will not
be obligated to pay the $1,500,000 fee if, after the events described in
clauses (a), (b) and (c) of the preceding sentence occur in that order, each
of the following occurs in the following order: (a) MMPI and VSI enter into
an agreement and plan of merger substantially identical to the Merger
Agreement (the "New Agreement") and VSI enters into inducement agreements
substantially identical to the SH Inducement Agreement and the RPS Inducement
Agreement; (b) after the execution of the New Agreement, the New Agreement is
terminated for reasons that would not give rise to the payment of any sum by
MMPI and at a time when the Company has made no public announcement of any
intention to acquire MMPI; and (c) after such termination, the Company
determines to pursue the merger of MMPI with the Company or a wholly-owned
subsidiary of the Company and such transaction is consummated.
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BENEFICIAL OWNERSHIP OF SECURITIES AND OTHER MATTERS
BENEFICIAL OWNERSHIP
The following table sets forth information as of June 2, 1997, regarding
the ownership of Company Common Stock by each person known to the Company to
be the beneficial owner of more than 5% of the outstanding Company Common
Stock, each executive officer and each director of the Company, and all
directors and officers of the Company as a group. The Company believes that
each person named has sole investment and voting power with regard to the
shares of Company Common Stock shown except as otherwise noted.
SHARES BENEFICIALLY
BENEFICIAL OWNER OWNED (1) PERCENT OF CLASS
---------------- ------------------- ----------------
Robert P. Scherer, Jr. 2,607,980 (2) 60.2%
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER
AND PRINCIPAL STOCKHOLDER
RPS Investments, Inc. 1,244,234.5 28.8%
PRINCIPAL STOCKHOLDER
Settlement Voting Trust 562,738.5 (3) 13.0%
PRINCIPAL STOCKHOLDER
SunTrust Bank 340,224 (4) 7.9%
PRINCIPAL STOCKHOLDER
William J. Thompson 65,000 (5) 1.5%
DIRECTOR AND PRESIDENT
Kenneth H. Robertson 1,000 *
DIRECTOR
Stephen Lukas, Sr. - -
DIRECTOR
All current directors and
executive officers as a
group (6 persons) 2,673,980 (6) 61.2%
_______________
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* Less than one percent.
(1) Beneficial ownership as reported in the table has been determined in
accordance with Securities Exchange Commission regulations and, as a
result, certain outstanding shares are deemed to be beneficially owned by
more than one person.
(2) The shares owned by Mr. Scherer include 1,244,234.5 shares owned by RPS
Investments, Inc. As Chairman of RPS Investments, Inc. Mr. Scherer is
deemed to be the beneficial owner of the shares. The shares shown also
include 562,738.5 shares that Mr. Scherer holds as trustee of a voting
trust for the benefit of his adult children. The shares shown also include
340,224 shares that Mr. Scherer holds as co-trustee with SunTrust Bank of a
residuary trust for the benefit of his family. Voting and investment power
is shared with regard to such shares. The shares shown as owned by Mr.
Scherer also include 16,800 shares that Mr. Scherer may acquire upon
exercise of outstanding stock options. The address of Mr. Scherer, RPS
Investments, Inc., and Settlement Voting Trust is 2859 Paces Ferry Road,
Suite 300, Atlanta, Georgia 30339.
(3) The shares shown are held in a voting trust for the benefit of Mr.
Scherer's four adult children with Mr. Scherer as trustee. See Note (2)
above.
(4) The shares shown are held as co-trustee of a residuary trust for the
benefit of Mr. Scherer's family and voting and investment power is shared
with Mr. Scherer, co-trustee of the residuary trust. See Note (2) above.
SunTrust Bank's address is 25 Park Place, N.E., Atlanta, Georgia 30303.
(5) Mr. Thompson may acquire the shares shown upon exercise of outstanding
stock options.
(6) The shares shown include 2,147,197 shares with respect to which voting or
investment power is shared and 81,800 shares that may be acquired upon
exercise of outstanding stock options, as described in the Notes above.
BUSINESS OF THE COMPANY
The Company is a holding company, which, through its subsidiaries,
manufactures, distributes and sells specialized health care products and
services. Through its investment in MMPI, the Company manufactures and sells
medical devices and surgical/safety disposables. Through its majority owned
partnership, BioSystems Partners, and subsidiary, Medical Waste Systems,
Inc., the Company provides waste management services. Through its
subsidiary, Scherer Laboratories, Inc., the Company markets and sells
consumer health care products. Upon consummation of the Scherer Transactions,
the Company will have disposed of its entire medical device and
surgical/safety line of business.
Additional information regarding the business and properties of the
Company is contained in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997 which is attached as Annex V to this Proxy
Statement. See "Annexes."
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INFORMATION CONCERNING MMPI
The principal office of MMPI is 11039 East Lansing Circle, Englewood,
Colorado 80112, and the telephone number is (303) 790-4835. The MMPI Common
Stock is quoted on the Nasdaq SmallCap Market under the symbol "MMPI."
Additional information regarding the business and properties of MMPI is
contained in MMPI's Annual Report on Form 10-K for the fiscal year ended
March 29, 1997, which is attached as Annexes VI to this Proxy Statement.
See "Annexes."
INFORMATION CONCERNING VSI AND NEWCO
The following information has been provided by VSI:
The principal executive office for each of VSI and Newco is 20 Campus
Road, Totowa, New Jersey 07512, and the telephone number is (201) 790-1330.
VSI, together with its subsidiaries, design, manufacture and market
single-use medical products for anesthesia, respiratory and critical care
applications. Newco is a newly-formed Colorado corporation that has not
conducted any business except in connection with the transactions related to
the Merger. VSI's common stock is quoted on the Nasdaq National Market under
the symbol "VITL."
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, the Company's independent public accountants, will
not have a representative at the Special Meeting.
AVAILABLE INFORMATION
Each of the Company, MMPI and VSI is subject to the informational filing
or submission requirements of the Exchange Act, and in accordance therewith
are required to file or submit periodic reports and other information with
the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") relating to
their business, financial condition and other matters. Such reports, proxy
statements and other information may be inspected, without charge, and copies
may be obtained at prescribed rates, at the Commission's public reference
facility at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located in Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, 13th Floor, New York, New York 10048 and can also be reviewed through
the
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Commission's Electronic Data Gathering, Analysis and Retrieval System which
is publicly available through the Commission's Web site (http://www.sec.gov).
All information contained herein with respect to the Company has been
supplied by the Company, and all information with respect to VSI has been
supplied by VSI.
No person has been authorized to give any information or to make any
representation other than those contained or incorporated by reference in
this Proxy Statement and, if given or made, such information or
representation should not be relied upon as having been authorized by the
Company, MMPI or VSI. The delivery of this Proxy Statement shall not, under
any circumstances, create any implication that there has been no change in
the affairs of the Company, MMPI or VSI or any subsidiary thereof since the
date hereof or that the information contained or incorporated by reference
herein is correct as of any time subsequent to the date hereof or thereof.
This Proxy Statement does not constitute the solicitation of a proxy in any
jurisdiction to or from any person to whom it is not lawful to make any such
solicitation in such jurisdiction.
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ANNEX INDEX
NUMBER DESCRIPTION
I Agreement and Plan of Merger, dated as of March 14, 1997, by and
among MMPI, VSI, and Newco
II Scherer Healthcare Inducement Agreement dated as of March 14, 1997, by
and among the Company, VSI and MMPI
III Robert Scherer Inducement Agreement dated as of March 14, 1997, by and
among Robert P. Scherer, Jr. and VSI
IV Fairness Opinion of Summit Investment Corporation
V The Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997
VI MMPI's Annual Report on Form 10-K for the fiscal year ended March 29,
1997
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ANNEX I
MERGER AGREEMENT
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of March 14,
1997, by and among VITAL SIGNS, INC., a New Jersey corporation having its
principal place of business at 20 Campus Road, Totowa, New Jersey ("VSI"), VSI
ACQUISITION CORPORATION, a Colorado corporation and a wholly-owned subsidiary of
VSI, having its principal place of business at 20 Campus Road, Totowa, New
Jersey ("Newco"), and MARQUEST MEDICAL PRODUCTS, INC., a Colorado corporation
having its principal place of business at 11039 East Lansing Circle, Englewood,
Colorado (the "Company"),
WITNESSETH THAT:
WHEREAS, the Boards of Directors of VSI, Newco and the Company, deeming it
advisable for the mutual benefit of VSI, Newco and the Company and their
respective shareholders, that VSI acquire the Company by the merger of the
Company and Newco under the terms and conditions hereinafter set forth (the
"Merger"), have approved this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto hereby agree
that the Company and Newco shall be merged in accordance with the terms of this
Agreement and that the terms and conditions of the Merger and the mode of
carrying the same into effect shall be as follows:
ARTICLE I
PLAN OF MERGER
SECTION 1.1 STRUCTURE. Upon performance of all of the covenants and
obligations of the parties contained herein and upon fulfillment (or waiver) of
all of the conditions to the obligations of the parties contained herein, at the
Effective Time of the Merger (as hereinafter defined) and pursuant to the
Business Corporation Act of the State of Colorado (the "BCA"), the following
shall occur:
1.1.1 Newco shall be merged with and into the Company. The
Company shall be the surviving corporation (the "Surviving Corporation")
and upon consummation of the Merger shall become a wholly-owned subsidiary
of VSI. The separate existence and corporate organization of Newco shall
cease at the Effective Time of the Merger, and thereupon the Company and
Newco shall be a single corporation, the name of which shall be Marquest
Medical Products, Inc. The Company, as the Surviving Corporation, shall
succeed, insofar as permitted by law, to all of the rights, assets,
liabilities and obligations of Newco in accordance with the BCA.
1.1.2 The Articles of Incorporation of the Company shall be
amended to contain such provisions as VSI shall determine prior to the
Effective Time of the Merger and as such shall be the Articles of
Incorporation of the Surviving Corporation until amended as provided by
law.
<PAGE>
1.1.3 The By-Laws of the Company shall be amended to contain such
provisions as VSI shall determine prior to the Effective Time of the Merger
and as such shall be the by-laws of the Surviving Corporation until amended
as provided by law.
1.1.4 Until changed in accordance with the articles of
incorporation and by-laws of the Surviving Corporation, the directors of
Newco immediately prior to the Effective Time of the Merger shall be the
directors of the Surviving Corporation.
1.1.5 Until changed in accordance with the articles of
incorporation and by-laws of the Surviving Corporation, the officers of
Newco immediately prior to the Effective Time of the Merger shall be the
officers of the Surviving Corporation.
1.1.6 As soon as practicable after the terms and conditions of
this Agreement have been satisfied, and upon consummation of the closing
referred to in Article IX hereof (the "Closing"), articles of merger
consistent with this Agreement, in the form prescribed by, and properly
executed in accordance with, the BCA and in form and substance satisfactory
to the parties hereto (the "Articles of Merger"), shall be filed with the
Secretary of State of the State of Colorado. The Merger shall become
effective when the Articles of Merger are so filed. The date and time when
the Merger shall become effective is referred to in this Agreement as the
"Effective Time of the Merger".
SECTION 1.2 COMMON STOCK OF SURVIVING CORPORATION. Upon consummation
of the Merger, each of the issued and outstanding shares of common stock of
Newco shall be automatically converted into such number of shares of the common
stock of the Surviving Corporation as shall equal the "Outstanding Number".
Each such share shall be held by VSI and shall be fully paid and non-assessable.
For purposes of this Agreement, the term "Outstanding Number" shall mean the
aggregate number of shares of Company Common Stock (as hereinafter defined)
outstanding immediately prior to the Effective Time of the Merger divided by the
number of shares of common stock of Newco outstanding immediately prior to the
Effective Time of the Merger.
SECTION 1.3 CANCELLATION OR CONVERSION OF COMPANY COMMON STOCK. As of the
Effective Time of the Merger, by virtue of the Merger and without any action on
the part of any shareholder:
1.3.1 Any shares of the Company's common stock, no par value
("Company Common Stock"), held in the treasury of the Company, and any
shares of Company Common Stock issued and outstanding immediately prior to
the Effective Time of the Merger which are owned by VSI or Newco, shall be
canceled and retired. No cash, securities or other consideration shall be
paid or delivered in exchange for such Company Common Stock under this
Agreement.
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1.3.2 Except as provided herein with respect to Dissenting Shares
(as hereinafter defined), the following provisions shall apply with respect
to all shares of Company Common Stock outstanding immediately prior to the
Effective Time of the Merger other than the shares canceled pursuant to
Section 1.3.1 hereof:
1.3.2.1 Subject to Section 1.3.2.4 hereof, at the Effective Time of
the Merger, each such share of Company Common Stock outstanding shall be
converted, without any action by the holder thereof, into the right to
receive from VSI $0.797 in cash, without interest (the "Purchase Price").
1.3.2.2 At the Effective Time of the Merger, (i) VSI shall
deliver to American Stock Transfer and Trust Company or such other
institution as shall be designated by VSI as exchange agent (the
"Exchange Agent") $12,497,360 in immediately available funds and (ii)
the Company shall deliver to the Exchange Agent immediately available
funds equal to the amount of consideration received by the Company
after the date hereof and prior to the Effective Time of the Merger
from the exercise of options and warrants, such amounts to be held by
the Exchange Agent, to effect conversions of outstanding Company
Common Stock into cash pursuant to Section 1.3.2.1 hereof and to
effect exercises of options and warrants that remain exercisable for
cash after the Effective Time of the Merger (as described in Section
1.4 hereof), in accordance with the terms of an exchange agency
agreement between VSI and the Exchange Agent.
1.3.2.3 At the Effective Time of the Merger and subject to
Section 1.3.2.4 hereof, each holder of an outstanding certificate or
certificates representing Company Common Stock ("Company Stock
Certificates") shall, upon surrender thereof to the Exchange Agent
together with a letter of transmittal in the form of the letter of
transmittal furnished by VSI pursuant to Section 1.3.3 hereof, be
entitled to receive a cash amount equal to the Purchase Price, without
interest, in exchange for each share of Company Common Stock
surrendered. Until so surrendered, each outstanding Company Stock
Certificate shall be deemed for all purposes to represent the right to
receive the Purchase Price in cash without interest. Whether or not a
Company Stock Certificate is surrendered, from and after the Effective
Time of the Merger such certificate shall under no circumstances
evidence, represent or otherwise constitute any stock or other
interest whatsoever in the Company, the Surviving Corporation, VSI or
any other person, firm or corporation.
1.3.2.4 VSI and the Exchange Agent shall not be required to
pay a fraction of a penny to any former shareholder of the Company.
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In lieu of paying any such fraction, VSI and the Exchange Agent shall
determine the aggregate consideration payable to each shareholder with
respect to all of such shareholder's shares of Company Common Stock
and upon tender of all such shares in accordance with the provisions
of this Agreement, shall round such consideration up to the nearest
whole penny.
1.3.3 Promptly after the Effective Time of the Merger, VSI
shall deliver to holders of Company Stock Certificates letters of
transmittal pursuant to which such certificates may be submitted to
the Exchange Agent.
SECTION 1.4 OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES. The
Company covenants, warrants and represents as follows:
1.4.1 OPTION PLAN. As of the date hereof, options covering 633,166
shares of Company Common Stock are outstanding under the Company's
Incentive and Non-Qualified Stock Option Plan (the "Stock Option Plan").
Of these "Employee Options" (as defined in Section 2.2 hereof), options
covering 297,168 shares of Company Common Stock have per share exercise
prices that are less than the Purchase Price. At least 35 days prior to
the Effective Time of the Merger, the Company shall provide to each holder
of an Employee Option a notice, in accordance with Section 4.2 of the Stock
Option Plan, advising each such holder of the terms of the Merger and
describing the consequences of the Merger to holders of Employee Options.
By virtue of such notice, all outstanding Employee Options shall become
exercisable in full and all Employee Options which are not exercised prior
to the Effective Time of the Merger shall terminate as of the Effective
Time of the Merger. As a result of such termination, neither the Company
nor VSI shall have any obligation under the Employee Options at or after
the Effective Time of the Merger.
1.4.2 DIRECTOR OPTIONS. Options covering 150,000 shares of Company
Common Stock granted to directors of the Company pursuant to Non-Qualified
Director Stock Option Agreements were canceled on March 14, 1997. As a
result of such cancellations, neither the Company nor VSI shall have any
obligation under any such agreements at or after the Effective Time of the
Merger.
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1.4.3 CONVERTIBLE SECURITIES. Pursuant to the terms of the "Robert
Scherer Inducement Agreement" (as defined in Section 2.27 hereof), Robert
P. Scherer, Jr. has agreed to convert all principal payable under the
"Convertible Note" (as defined in Section 2.2 hereof) into a total of
1,000,000 shares of Company Common Stock prior to the Effective Time of the
Merger. By virtue of such conversion, there will be no obligation to pay
any interest under the Convertible Note to Robert P. Scherer, Jr. after the
effective date of such conversion. There are no other debt or equity
instruments outstanding which are convertible into the Company's Common
Stock.
1.4.4 SCHERER HEALTHCARE WARRANTS. Pursuant to the terms of the
"Scherer Healthcare Inducement Agreement" (as defined in Section 2.27
hereof), Scherer Healthcare, Inc. ("Scherer") has agreed that as of the
Effective Time of the Merger, it will exchange the "First ABG Warrants" and
"Second ABG Warrants" (as defined in Section 2.2 hereof) and the "Current
Warrants" (as defined in Section 2.2 hereof) for a payment equal to
$309,260 (representing the number of shares of Company Common Stock covered
by the First ABG Warrants, the Second ABG Warrants and the Current Warrants
(6,580,000) multiplied by the amount by which the Purchase Price exceeds
$0.75, the per share exercise price of the First ABG Warrants, the Second
ABG Warrants and the Current Warrants).
1.4.5 SWISS WARRANTS. As of the date hereof, "Swiss Warrants" (as
defined in Section 2.2 hereof) covering 1,083,317 shares of Company Common
Stock are outstanding. Pursuant to the Swiss Warrant Agreement (as defined
in Section 2.2 hereof), the Company and VSI are not required to provide the
holders of the Swiss Warrants or any other person or entity any notice
describing the consequences of the Merger to holders of Swiss Warrants. By
virtue of the provisions of the Swiss Warrant Agreement, upon consummation
of the Merger, each outstanding Swiss Warrant shall be converted, without
any action by the holder thereof, into the right to receive, upon exercise
thereof pursuant to the terms of the Swiss Warrant and the Swiss Warrant
Agreement, an amount of cash equal to the Purchase Price in lieu of each
share of Company Common Stock deliverable upon such exercise.
1.4.6 SETTLEMENT OPTIONS. Pursuant to promissory notes (the
"Settlement Notes") issued in accordance with the "Settlement Agreement"
(as defined in Section 2.2 hereof), two individuals each have an option to
acquire 100,000 shares of Company Common Stock by reducing the principal
amount of the Settlement Notes. The Company shall pay the holders of the
Settlements Notes all amounts outstanding under the Settlement Notes prior
to the Effective Time of the Merger. As a result, no obligation to issue
capital stock or otherwise will exist after the Effective Time of the
Merger pursuant to the Settlement Notes.
1.4.7 CONSULTANT'S OPTIONS. As of the date hereof, the Company is
obligated to issue 50,000 shares of Company Common Stock pursuant to the
Consultant's Options (as defined in Section 2.2 hereof) at an exercise
price of $0.75 per share. At least 35 days prior to the Effective Time of
the Merger, the Company shall provide to the holder of the Consultant's
Option a notice, in accordance with Section 5(b) of the agreement setting
forth the terms of the Consultant's Options, advising such holder of the
terms of the Merger and describing the consequences of the Merger to
holders of Employee Options. By virtue of such notice, all of the
Consultant's Options which are not exercised prior to the Effective Time of
the Merger shall terminate as of the Effective Time of the Merger. As a
result of such termination, neither the Company nor VSI shall have any
obligation under the Consultant's Options at or after the Effective Time of
the Merger.
I-5
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1.4.8 RUSSELL WARRANTS. As of the date hereof, the Company is
obligated to issue 75,326 shares of Company Common Stock pursuant to the
Russell Warrants (as defined in Section 2.2 hereof) at an exercise price of
$1.50 per share. At least 15 days prior to the Effective Time of the
Merger, the Company shall provide to the holder of the Russell Warrants the
notice required pursuant to Section "e" of the Russell Warrant Agreement
(as defined in Section 2.2 hereof). By virtue of the provisions of the
Russell Warrant Agreement, upon consummation of the Merger, each
outstanding Russell Warrant shall be converted, without any action by the
holder thereof, into the right to receive, upon exercise thereof pursuant
to the terms of the Russell Warrant and the Russell Warrant Agreement, an
amount of cash equal to the Purchase Price in lieu of each share of Company
Common Stock deliverable upon such exercise.
1.4.9 ITT WARRANTS. As of the date hereof, the Company is obligated
to issue 10,000 shares of Company Common Stock pursuant to the ITT Warrants
(as defined in Section 2.2 hereof) at an exercise price of $4.00 per share.
At least 25 days prior to the Effective Time of the Merger, the Company
shall provide to the holder of the ITT Warrants the notice required
pursuant to Section 4(f) of the ITT Warrant Agreement (as defined in
Section 2.2 hereof). By virtue of the provisions of the ITT Warrant
Agreement, upon consummation of the Merger, each outstanding ITT Warrant
shall be converted, without any action by the holder thereof, into the
right to receive, upon exercise thereof pursuant to the terms of the ITT
Warrant and the ITT Warrant Agreement, an amount of cash equal to the
Purchase Price in lieu of each share of Company Common Stock deliverable
upon such exercise.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
References herein to the "Disclosure Letter" shall mean the letter from the
Company to VSI, dated the date hereof, pursuant to which the Company has made
certain representations and described certain exceptions to the representations
set forth in this Article II by means of express cross-references to the
Sections hereof requiring that exceptions be made. Except as set forth in the
Disclosure Letter, the Company hereby represents, warrants, and agrees as
follows:
SECTION 2.1 ORGANIZATION. The Company is a corporation, duly
organized, validly existing, and in good standing under the laws of the State of
Colorado, and has all requisite corporate power and authority to own its
property and conduct the business in which it is engaged. The Disclosure Letter
contains an accurate and complete list of the dates of filing of the Company's
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articles of incorporation and all amendments thereto with the Colorado Secretary
of State and the date of the Company's current by-laws.
SECTION 2.2 CAPITALIZATION. The Company is solely authorized to
issue 50,000,000 shares of Company Common Stock. As of the date hereof, there
were 14,296,773 shares of Company Common Stock issued and outstanding (the
"Outstanding Common Shares"). The Outstanding Common Shares include 25,000
shares of Company Common Stock which were initially issued to Jack L. York as
restricted shares, all of which restrictions have lapsed. The Outstanding Common
Shares do not include any restricted shares issued to any other director of the
Company. If the Effective Time of the Merger occurs prior to August 31, 1997,
any restricted shares outstanding on the date hereof, other than the restricted
shares owned by Jack L. York, will, by their terms, be forfeited and deemed not
to be outstanding as of the Effective Time of the Merger. All of the Outstanding
Common Shares have been fully paid, have been validly issued, and are
nonassessable. No shares of Company Common Stock have been issued in violation
of the preemptive rights of any person or entity and the holders of Outstanding
Common Shares do not possess preemptive rights. Except with respect to (i)
options covering not more than 633,166 shares of Company Common Stock granted
pursuant to the Company's Incentive and Non- Qualified Stock Option Plan (the
"Stock Option Plan"), (ii) warrants covering up to 1,083,317 shares of Company
Common Stock which were granted to former holders of Swiss bonds at an exercise
price of $.75 per share pursuant to a warrant agreement (the "Swiss Warrant
Agreement"), dated June 15, 1993, between the Company and Chemical Trust Company
of California, as warrant agent (the "Swiss Warrants"), (iii) warrants to
purchase through March 31, 1999 up to 1,530,000 shares of Company Common Stock
at an exercise price of $.75 per share (the "First ABG Warrants"), which First
ABG Warrants were granted to Scherer pursuant to an omnibus agreement, dated
April 12, 1993, between the Company and Scherer (the "Omnibus Agreement"), (iv)
warrants to purchase through March 31, 2003 up to 4,250,000 shares of Company
Common Stock at an exercise price of $.75 per share (the "Second ABG Warrants"),
which Second ABG Warrants were granted to Scherer pursuant to the Omnibus
Agreement, (v) warrants to purchase through March 31, 1999 up to 800,000 shares
of Company Common Stock at an exercise price of $.75 per share (the "Current
Warrants"), which Current Warrants were granted to Scherer pursuant to a warrant
agreement dated April 12, 1993, (vi) a convertible secured promissory note in
the principal amount of $700,000 entitling the holder thereof to acquire up to
1,000,000 shares of Company Common Stock upon conversion thereof (the
"Convertible Note"), which Convertible Note was issued to Scherer Capital, LLC
on March 28, 1996 and which currently is owned by Robert P. Scherer, Jr., (vii)
stock options covering up to 50,000 shares of Company Common Stock granted by
the Company to David Hagelstein at an exercise price of $.75 per share (the
"Consultant Options"), the terms of which Consultant Options are reflected in an
option agreement, dated August 26, 1993, (viii) options granted pursuant to a
settlement agreement dated April 30, 1995 (the "Settlement Agreement"), which
options (the "Settlement Options") entitle the holders thereof to purchase up to
200,000 shares of Company Common Stock at an exercise price of $1.00 per share,
which price is payable by reducing amounts otherwise payable by the Company,
(ix) Warrants to purchase through September 30, 1997 up to 10,000 shares of
Company Common Stock at an exercise price of $4.00
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per share (the "ITT Warrants"), which ITT Warrants were granted to ITT
Commercial Finance Corporation pursuant to a warrant agreement dated October 1,
1992 (the "ITT Warrant Agreement"), (x) warrants to purchase through December
20, 1997 up to 75,326 shares of Company Common Stock at an exercise price of
$1.50 per share (the "Russell Warrants"), which Russell Warrants were granted to
Robert A. Russell pursuant to a warrant agreement dated November 18, 1992 (the
"Russell Warrant Agreement"), and (xi) certain rights (the "Rights") granted
pursuant to the Company's Rights Agreement, dated as of August 8, 1991, between
the Company and Bank of America National Trust & Savings Association, as amended
(the "Rights Agreement"), the Company does not have outstanding any options or
warrants to purchase, or contracts to issue, or contracts or any other rights
entitling anyone to acquire, shares of its capital stock of any class or kind,
or securities convertible into or exchangeable for such shares. In light of
commitments made by Robert P. Scherer, Jr. and Scherer to VSI in the Inducement
Agreements with respect to the Convertible Note, the First ABG Warrants, the
Second ABG Warrants and the Current Warrants, immediately prior to the Effective
Time of the Merger the outstanding shares of Company Common Stock shall not
exceed the above-mentioned 14,296,773 Outstanding Common Shares plus (a) up to
633,166 shares of Company Common Stock which may be issued between the date
hereof and the Closing Date upon the exercise of options previously granted
pursuant to the Option Plan, (b) up to 1,083,317 shares of Company Common Stock
which may be issued between the date hereof and the Closing Date upon exercise
of the Swiss Warrants, (c) up to 800,000 shares of Company Common Stock which
may be issued by the Company upon the exercise of the Current Warrants, (d) the
1,000,000 shares of Company Common Stock to be issued upon conversion of the
Convertible Note, (e) up to 50,000 shares of Company Common Stock which may be
issued upon the exercise of the Consultant's Options, (f) up to 200,000 shares
of Company Common Stock which may be issued upon the exercise of the Settlement
Options, (g) up to 10,000 shares of Company Common Stock which may be issued
upon exercise of the ITT Warrants and (h) up to 75,326 shares of Company Common
Stock which may be issued upon exercise of the Russell Warrants. The Disclosure
Letter contains a complete and accurate schedule setting forth the names of each
holder of the options currently outstanding under the Option Plan ("Plan
Options" or "Employee Options"), the First ABG Warrants, the Second ABG
Warrants, the Current Warrants, the Convertible Note, the Consultant's Options,
the Settlement Options, the ITT Warrants and the Russell Warrants, the number of
shares of Company Common Stock currently issuable to each such holder pursuant
to such options, warrants and Convertible Note (after giving effect to the anti-
dilution provisions applicable thereto), the current exercise price of each of
such options, warrants and Convertible Note (after giving effect to the anti-
dilution provisions applicable thereto), the dates on which each such option or
warrant granted to such holder becomes exercisable (or if such option becomes
exercisable in installments, the dates and percentages applicable to such
installments) and the date on which each such option or warrant terminates. The
Company has amended its Rights Agreement in such a manner that the execution of
this Agreement and the consummation of the Merger will not cause any of the
Rights to become exercisable with or without the passage of time.
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SECTION 2.3 SUBSIDIARIES. The Company's subsidiaries (collectively,
the "Subsidiaries" and each such entity individually, a "Subsidiary") are
corporations duly organized, validly existing and in good standing under the
laws of their respective jurisdictions of incorporation, and each Subsidiary has
all requisite corporate power and authority to own its respective property and
conduct the respective business in which it is engaged. The Disclosure Letter
contains an accurate and complete list of (i) all of the Subsidiaries and (ii)
the dates of filing of each Subsidiary's articles of incorporation and all
amendments thereto with the Secretary of State of the applicable jurisdiction of
organization and the dates of the current by-laws of each such Subsidiary. The
Company has no equity interest in any corporation, partnership, limited
liability company or other entity other than its interests in the Subsidiaries.
All of the Subsidiaries are inactive.
SECTION 2.3A ABG. As set forth in the Omnibus Agreement, Scherer
leases to the Company certain equipment pursuant to the "Equipment Lease" (as
such phrase is defined in the Omnibus Agreement) and licenses to the Company
certain intellectual property pursuant to the "License of Intellectual Property"
(as such phrase is defined in the Omnibus Agreement). The assets leased and
licensed by Scherer to the Company pursuant to the Equipment Lease and the
License of Intellectual Property, together with any "Improvements" (as such term
is defined in the License of Intellectual Property), are all included within the
definition of Scheduled Assets in the Scherer Healthcare Inducement Agreement
and comprise the only assets of the blood gas collection product line marketed
and sold by the Company (such assets and Improvements being hereinafter referred
to as the "ABG Assets", such product line being hereinafter referred to as the
"ABG Product Line" and the business presently operated by the Company with
respect to the ABG Product Line being hereinafter referred to as the "ABG
Business") that are owned by any entity other than the Company. All of the
equipment leased by Scherer pursuant to the Equipment Lease is located in the
Company's premises in Englewood, Colorado. With the exception of the Terumo
litigation referred to herein, the Company is not aware of any basis or claim
for material indemnification by Scherer against the Company under the Equipment
Lease or the License of Intellectual Property.
SECTION 2.4 QUALIFICATIONS. The Disclosure Letter contains an
accurate and complete list of all States in which the Company and each
Subsidiary are qualified to do business. The Company and each Subsidiary are
qualified to do business in each State and in each foreign country in which
their failure to so qualify would have a material adverse effect on the
financial condition, assets, business or operations of the Company and its
Subsidiaries, taken as a whole.
SECTION 2.5 SEC FILINGS. Since March 30, 1994, the Company has filed
with the Securities and Exchange Commission (the "SEC") all reports and
statements (consisting solely of those reports described in the Disclosure
Letter) which it was required to file with the SEC pursuant to the Securities
Exchange Act of 1934 (the "1934 Act"). None of the reports and
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statements filed by the Company with the SEC pursuant to the 1934 Act from March
30, 1994 through the date hereof (collectively, the "Reports") contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading.
SECTION 2.6 OWNED REAL ESTATE. The only real estate owned by the
Company or any of its Subsidiaries is the real estate on which the Company's
principal office is located at 11039 East Lansing Circle, Englewood, Colorado.
None of the ABG Assets constitute real estate. All buildings located on such
owned real estate (the "Owned Buildings") comply in all material respects with
all municipal, state and federal statutes, ordinances, rules and regulations
applicable to the construction of such buildings and their actual use.
SECTION 2.7 LEASED REAL ESTATE. The Company and its Subsidiaries do
not lease any real estate other than pursuant to two real estate leases (the
"Leases"). The Business is conducted solely from either the Owned Buildings or
from real estate subject to the Leases. The Disclosure Letter contains an
accurate and complete list of the dates of the Leases and any amendments
thereto. The Company and the Subsidiaries are not in material default under the
Leases and the Company is not aware of any facts which, with notice and/or the
passage of time, would constitute such a default. Consent is required under
both of the Leases in connection with the Merger.
SECTION 2.8 LEASED TANGIBLE PERSONAL PROPERTY. The Company and its
Subsidiaries do not lease any personal property other than pursuant to (i)
leases which expire on not more than 90 days notice by the Company or a
Subsidiary, (ii) leases which require annual rentals of not more than $25,000,
(iii) the "Equipment Lease" (as defined in the Omnibus Agreement) and (iv)
leases ("Personalty Leases") listed in the Disclosure Letter. Scherer is not a
lessee of any of the ABG Assets. The Company and the Subsidiaries are not in
material default under any of the Personalty Leases or the Equipment Lease and
the Company is not aware of any fact which, with notice and/or passage of time,
would constitute such a default. No consent is required under the Personalty
Leases or the Equipment Lease in connection with the Merger.
SECTION 2.9 Intentionally Omitted.
SECTION 2.10 INTANGIBLE PERSONAL PROPERTY. The Disclosure Letter
contains an accurate and complete list of all distributorship, franchise and
license agreements (whether the Company or any of its Subsidiaries is the
grantor or grantee of such distributorship, franchise or license), and all
patents, patent applications, trademarks, trademark applications and trade names
(whether the Company or any of its Subsidiaries owns such items or is licensed
to use them) currently
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owned or used by the Company or, with respect to the ABG Assets, Scherer (the
"Intellectual Property"). The Company or a wholly-owned Subsidiary of the
Company, or, with respect to the ABG Assets, Scherer, is the sole and exclusive
owner of, or (in the case of the Company or any of its Subsidiaries) is a valid
licensee or lessee of, or has the right to use in the manner currently used,
each of said items of Intellectual Property and has the right to use in the
manner currently used all other items of intangible personal property
(including, without limitation, copyrights) owned or used by the Company or any
of its Subsidiaries in any of their businesses or used by Scherer, the Company
or any of its Subsidiaries with respect to the ABG Assets or the ABG Business
(together with the Intellectual Property, the "Intangible Property"); said items
of Intangible Property represent the only intangible personal property required
by the Company and its Subsidiaries in order to operate the ABG Business and the
businesses presently conducted by the Company and its Subsidiaries; there are no
claims or demands against Scherer, the Company or any of its Subsidiaries with
respect to any of such items of Intangible Property, and no proceedings have
been instituted, are pending, or to the knowledge of the Company have been
threatened to terminate or cancel any such agreements or which challenge the
right of Scherer, the Company or any of its Subsidiaries with respect to any of
said items of Intangible Property; and there are no facts known to the Company
which make it likely that any such agreements will not be renewed at their next
expiration date or which might reasonably serve as the basis, in whole or in
part, of any claim that any part of the business carried on by the Company or
any of its Subsidiaries infringes the patent, trademark, trade name, copyright,
or other rights of any other person. With respect to the Terumo litigation
referenced in the Disclosure Letter, the Company makes no representation as to
the likelihood of any ultimate determination, whether positive or negative.
Subject to the interests of the Company's distributors in information generated
by such distributors, the Company and its Subsidiaries have the unrestricted
right to use, free from any rights or claims of others, all trade secrets and
customer lists which the Company or any of its Subsidiaries has used or which
the Company or any of its Subsidiaries is now using in connection with the sale
of any and all products or services which have been or are being sold by the
Company or any of its Subsidiaries, including assets included within the ABG
Business.
SECTION 2.11 ACCOUNTS RECEIVABLE AND INVENTORY.
2.11.1 All accounts receivable of the Company and its Subsidiaries
have originated in the ordinary course of business, are valid and are not
subject, to any material extent, to any defense, counterclaim or setoff.
2.11.2 All inventory in the possession of the Company or any of its
Subsidiaries is owned by the Company or one or more of its Subsidiaries and
recorded on such entities' books and records in accordance with generally
accepted accounting principles consistently applied. All such inventory has
been valued at the lower of cost, calculated on a FIFO method, or market. No
inventory in the possession of the Company or any of its Subsidiaries has been
consigned. The Company believes that the reserves for inventory obsolescence
contained in the Company's December 31, 1995 and September 29, 1996 consolidated
financial statements are adequate. No inventory relating to the ABG Business is
owned by Scherer.
SECTION 2.12 TITLE TO ASSETS.
2.12.1 The Company and its Subsidiaries have good and marketable
title in and to all of their property reflected in the December 28, 1996
consolidated balance sheet referred to in Section 2.22.1 hereof (the "Balance
Sheet") plus all assets purchased by the Company and its Subsidiaries since
December 28, 1996, less all assets which the Company or its Subsidiaries have
disposed of in the ordinary course since such date, which property presently
owned by the Company or any of its Subsidiaries is free and clear of all
security interests, consignments, liens, judgments, encumbrances, restrictions,
or claims of any kind except (a) those items that secure liabilities that are
reflected on the Balance Sheet or that are described in the notes thereto, (b)
with respect to owned real property, title imperfections accurately and
completely noted in the title reports listed in the Disclosure Letter, and minor
title imperfections which do not, in the aggregate, adversely affect the
Company's ability to use such property as it is currently being used, and (c)
liens for current taxes or assessments not yet due or delinquent.
2.12.2 To the best of the Company's knowledge, Scherer has good
and marketable title in and to all of the ABG Assets to the extent described in
the Disclosure Letter, which property presently owned by Scherer is free and
clear of all security interests, consignments, liens, judgments, encumbrances,
restrictions, or claims of any kind except (a) Scherer's obligations under the
Equipment Lease and the License of Intellectual Property and (b) liens for
current taxes or assessments not yet due or delinquent.
SECTION 2.13 MATERIAL CONTRACTS.
2.13.1 The Disclosure Letter accurately identifies all of the
following contracts or other obligations (and any amendments thereto) to
which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound: (a) any written contracts
with or loans to any of the Company's, or any of the Subsidiaries',
shareholders (including, without limitation, Scherer and its affiliates),
officers, directors, employees, consultants, salespersons, distributors or
sales representatives; (b) any employee benefit plan made available by the
Company or any of its Subsidiaries to any of their employees, including
without limitation any medical benefits payable to retired employees of the
Company or its Subsidiaries; (c) any collective bargaining agreement; (d)
any outstanding option plans, options, warrants, warrant agreements and
rights agreements; (e) any contracts with customers and suppliers other
than purchase orders delivered in the ordinary course of business; (f) any
deeds of trust, mortgages, conditional sales contracts, security
agreements, pledge agreements,
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trust receipts, or any other agreements or arrangements whereby any
material amount of the assets of the Company or any Subsidiary are subject
to a lien, encumbrance, charge or other restriction; (g) any loan
agreements, letters of credit or lines of credit, including without
limitation any documents pertaining to the Company's Swiss bonds and Swiss
notes; (h) any contracts restricting the Company or any Subsidiary from
doing business in any areas or in any way limiting competition; (i) any
contracts calling for aggregate payments by the Company or any Subsidiary
in excess of $25,000 and which are not terminable without cost or liability
on notice of 90 days or less; (j) any joint venture, partnership or limited
partnership agreement or limited liability company operating agreement
involving the Company or any Subsidiary; (k) any guarantees by the Company
or any Subsidiary of the obligations of any other party except those
resulting from the endorsement of checks deposited by the Company or any
Subsidiary for collection; (l) any engagement letter relating to the
Merger; (m) any other contracts which could have a material impact on the
Company's consolidated results of operations or consolidated financial
condition; and (n) any commitments to enter into any of the types of
contracts and obligations referred to in this Section 2.13.1. The Company
and its Subsidiaries are not in material default under any of such
contracts, obligations or commitments and the Company is not aware of any
facts which, with notice and/or the passage of time, would constitute such
a default and are not aware of any default by any party thereto which would
have a materially adverse effect upon the results of operations or
financial condition of the Company and its Subsidiaries taken as a whole.
No consent is required under any of the contracts, obligations and
commitments referred to in this Section 2.13.1 in connection with the
Merger.
2.13.2 No purchase commitment of the Company or any of its
Subsidiaries is substantially in excess of the normal, ordinary, and usual
requirements of the business of the Company and its Subsidiaries.
2.13.3 The Company and its Subsidiaries are not a party to or
otherwise bound by any contract, agreement, plan, lease, license, commitment, or
undertaking which is materially adverse, materially onerous, or materially
harmful to any aspect of the businesses of the Company and its Subsidiaries;
provided, however, that no representation is made in this Section 2.13.3 with
respect to any agreement that has been identified in any section of the
Disclosure Letter.
2.13.4 To the best of the Company's knowledge, Scherer is not under
any material contractual obligation with respect to the ABG Product Line other
than as set forth in the Omnibus Agreement, the Equipment Lease and the License
of Intangible Property.
SECTION 2.14 CUSTOMERS AND SUPPLIERS. The Disclosure Letter contains
a complete and accurate list setting forth, for the ten months ended January 25,
1997, all customers who purchased more than $100,000 in goods from the Company
and its Subsidiaries and all suppliers from whom the Company and its
Subsidiaries purchased more than $100,000 in products, the total value of
business transacted by the Company and its Subsidiaries with such customers or
suppliers during such period, and, if applicable, the reasons that any such
contracts
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were terminated. Except as set forth in the Disclosure Letter and subject to
arrangements agreed upon by the Company and VSI with respect to the distribution
of the Company's products subsequent to the date hereof, the Company has not
been notified that any of such customers or suppliers intends to terminate or
change significantly its relationship with the Company and its Subsidiaries on
or after the Effective Time of the Merger. None of the Company's presently
outstanding proposals to customers which are subject to competitive bidding
would, if accepted, materially adversely affect the Company's profit margins.
For the twelve months ended December 28, 1996, approximately 40% of the
Company's business was subject to competitive bidding. For the twelve months
ending December 28, 1997, the Company does not reasonably expect that more than
approximately 40% of its business will be subject to competitive bidding.
SECTION 2.15 TRANSACTIONS WITH DIRECTORS, OFFICERS, EMPLOYEES AND
AFFILIATES. Except as disclosed in reports filed by the Company with the SEC,
there have been no transactions since July 1, 1993 between the Company and any
director, officer, employee or affiliate (as defined in Rule 405 promulgated by
the SEC, it being agreed by the parties that Scherer and its officers, directors
and 10% shareholders shall be deemed "affiliates" of the Company for purposes of
this Agreement) of the Company, except on an arm's length basis in accordance
with normal business practices. Since July 1, 1993, none of the officers,
directors or affiliates of the Company, or any member of the immediate family of
any such persons, has been a director or officer of, or has had a material
interest in, any firm, corporation, association or business enterprise which
during such period has been a material supplier, customer or sales agent of the
Company or any of its Subsidiaries or has competed to a material extent with the
Company or any of its Subsidiaries.
SECTION 2.16 LITIGATION.
2.16.1 Except as disclosed in the Reports: (i) there are no legal,
administrative, arbitration or other proceedings or claims pending or to the
knowledge of the Company threatened against the Company or any of its
Subsidiaries (other than proceedings or claims which are reasonably likely not
to have a material adverse effect upon the Company's financial condition or
results of operations); (ii) the Company and its Subsidiaries are not subject to
any existing judgment; (iii) the Company and its Subsidiaries have not received
any inquiry from any agency of the federal or of any state or local government
about the transactions contemplated hereby, or about any violation or possible
violation of any law, regulation or ordinance affecting its business, its
assets, the ABG Business, the ABG Assets or the ABG Product Line; and (iv) the
Company and its Subsidiaries have not been subject to any products liability
claims during the three years ended on the date of this Agreement. During the
three year period ending on the date of this Agreement, no claim has been made,
and to the best of the knowledge of the Company, no basis exists for any claim,
by any current or former director, officer, employee or other agent of the
Company or any of its Subsidiaries seeking indemnification, whether pursuant to
statute, court rule, contract, by-law, a provision in an article of association
or otherwise, based on such person's involvement in the business of the Company
or any of its Subsidiaries.
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2.16.2 To the best of the Company's knowledge, (i) there are no
legal, administrative, arbitration or other proceedings or claims pending or
threatened against Scherer with respect to the ABG Product Line or the ABG
Assets (other than proceedings or claims which, if made against the Company,
would not be reasonably likely to have a material adverse effect upon the
Company's financial condition or results of operations); (ii) Scherer is not
subject to any existing judgment which would adversely affect Scherer's
obligations to convey the ABG Assets upon exercise of the Repurchase Option (as
hereinafter defined); and (iii) Scherer has not received any inquiry from any
agency of the federal or of any state or local government about the transactions
contemplated hereby, about any exercise of the Repurchase Option or about any
violation or possible violation of any law, regulation or ordinance affecting
the ABG Assets, the ABG Business or the ABG Product Line.
SECTION 2.17 INSURANCE. The Disclosure Letter contains an accurate
and complete list of all insurance coverage maintained by the Company and its
Subsidiaries on the date hereof. Except as otherwise indicated in the Disclosure
Letter, such coverage applies to the Company's interests in the ABG Product
Line. The Company and its Subsidiaries have not received any notice of
cancellation with respect to any insurance policy relating to such coverage. All
premiums due under any such insurance policy have been paid in full.
SECTION 2.18 LICENSES AND PERMITS. The Company and its Subsidiaries
and the employees and agents of the Company and its Subsidiaries have all
material licenses, permits, orders, approvals and authorizations required for
the conduct of their respective businesses as presently conducted, including
without limitation the ABG Business. In all material respects, the Company and
its Subsidiaries are acting within the terms of such licenses, permits, orders,
approvals and authorizations, and, to the best knowledge of the Company, no
suspension or cancellation thereof has been threatened.
SECTION 2.19 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEABILITY. The
execution, delivery and performance of this Agreement by the Company (A) are
within the legal capacity and power of the Company; (B) have been duly
authorized by all requisite corporate action on the part of the Company, other
than shareholder approval; (C) require the approval or consent of, or filing
with, no persons, entities or agencies, other than such approvals as shall be
required under the 1934 Act and state securities laws and such filings as shall
be required pursuant to the Hart Scott Rodino Antitrust Improvements Act (the
"Hart Scott Rodino Act"); and neither violate nor constitute a default under,
nor create a lien or breach under, the terms of the articles of incorporation
and by-laws of the Company or any Subsidiary or of any material agreement,
document or instrument binding upon the Company or any Subsidiary. This
Agreement is a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except insofar as the
enforcement thereof may be limited by bankruptcy, insolvency, moratorium or
similar laws affecting the enforcement of creditors' rights generally and
subject to equitable principles limiting the availability of equitable remedies.
At the Special Meeting (as hereinafter defined), approval of the Merger by
holders of two-thirds of the shares of Company
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Common Stock outstanding on the applicable record date will be sufficient to
constitute shareholder approval of the Merger under Colorado law and under the
Company's articles of incorporation and by-laws.
SECTION 2.20 COMPLIANCE WITH APPLICABLE LAWS; ENVIRONMENTAL MATTERS.
2.20.1 The Company and its Subsidiaries and all real property
now owned by the Company and its Subsidiaries ("Company Owned Real Property")
are in compliance in all material respects with all federal, state, county, and
municipal laws, ordinances, regulations, rules, reporting requirements,
judgments, orders, decrees and requirements of common law applicable to the
conduct of the Company and its Subsidiaries and to the assets owned, used or
occupied by the Company and its Subsidiaries (collectively referred to
hereinafter as the "General Laws"), including without limitation all applicable
federal, state, county and municipal laws, ordinances, regulations, rules,
reporting requirements, judgments, orders, decrees and requirements of common
law concerning or relating to the protection of health and the environment
(collectively referred to hereinafter as the "Environmental Laws"). To the best
of the Company's knowledge, all real property owned, operated, used or leased
by, to or for the Company and its Subsidiaries, with respect to any aspect of
their businesses including, without limitation, the ABG Business, at any time
since 1990 other than the Company Owned Real Property (the "Company
Leased/Previously Owned Property"), was and is in compliance in all material
respects with the General Laws and the Environmental Laws. The Company and its
Subsidiaries have not received any notification of violation, citation,
complaint, request for information, order, directive, compliance schedule or
other similar enforcement order, or any other notice from any administrative or
governmental agency or entity, indicating that any business or operation of or
any real property owned, operated, used or leased by, to or for the Company or
any Subsidiary, was not or currently is not in compliance in all material
respects with all Environmental Laws and General Laws. To the best of the
Company's knowledge, Scherer has not received any notification of violation,
citation, complaint, request for information, order, directive, compliance
schedule or other similar enforcement order, or any other notice from any
administrative or governmental agency or entity, indicating that any aspect of
the ABG Business was not or currently is not in compliance in all material
respects with all Environmental Laws and General Laws.
2.20.2 All businesses and operations of the Company and its
Subsidiaries (including without limitation the ABG Business), the Company
Owned Real Property and, to the best of the Company's knowledge, the
Company Leased/Previously Owned Property, are in compliance in all material
respects with all: (i) judgments, orders, directives, decrees or awards of
any court, arbitrator or administrative or governmental agency or entity
concerning compliance with the Environmental Laws; and (ii) consent
decrees, administrative orders, settlement agreements or other settlement
documents
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entered into with any administrative or governmental agency or entity
concerning compliance with the Environmental Laws.
2.20.3 All assets owned, leased, licensed or otherwise used by the
Company or any of its Subsidiaries, including, without limitation, the
Company Owned Real Property, and, to the best of the Company's knowledge,
the Company Leased/Previously Owned Property, are free of all materials
designated as hazardous substances, wastes, hazardous materials, pollutants
or contaminants under any Environmental Law (collectively, "Hazardous
Materials") and physical conditions which violate any Environmental Laws;
all storage tanks and associated pipes, pumps and structures (whether above
or below ground) located in or on the Company Owned Real Property and, to
the best of the Company's knowledge, the Company Leased/Previously Owned
Property, have been identified in the Disclosure Letter, are in sound
condition, free of corrosion, meet all design and performance standards
required by all Environmental Laws, and do not now, and did not at any time
in the past, evidence impaired integrity or leakage. No Hazardous
Materials used or generated by the Company or any of its Subsidiaries or
generated at the Company Owned Real Property or, to the best of the
Company's knowledge, generated at the Company Leased/Previously Owned
Property, have been treated, stored, transported or disposed of in
violation of any Environmental Laws; and all Hazardous Materials which have
been utilized in the business or operation of the Company or any of its
Subsidiaries (including without limitation the ABG Business) or which have
been removed, released, discharged or emitted from the Company Owned Real
Property or, to the best of the Company's knowledge, from the Company
Leased/Previously Owned Property, were and are documented, transported and
disposed of in compliance in all material respects with all Environmental
Laws.
2.20.4 The Disclosure Letter lists all permits, licenses and other
authorizations issued by administrative or governmental agencies or
entities under the General Laws and the Environmental Laws which are held
by the Company or any of its Subsidiaries or which are held by Scherer with
respect to the ABG Business (the "General and Environmental Permits"). The
General and Environmental Permits include all such permits which are
necessary to the business and operations of the Company and its
Subsidiaries (including without limitation the ABG Business) and the
Company, the Subsidiaries and, to the best of the Company's knowledge,
Scherer are and have been in compliance in all material respects with the
terms and conditions of the General and Environmental Permits. Under the
General Laws, the Environmental Laws and the General and Environmental
Permits, the consummation of the transactions contemplated by this
Agreement and any exercise of the Repurchase Option do not and will not:
(i) affect the validity of the General and Environmental Permits; or (ii)
require the consent of any governmental authority or third party.
SECTION 2.21 ERISA AND EMPLOYMENT MATTERS.
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2.21.1 The Disclosure Letter contains an accurate and complete list
of all funded or unfunded, written or oral, employee benefit plans, contracts,
agreements, incentives and salary, wage or other compensation plans or
arrangements, including but not limited to all pension and profit sharing plans,
savings plans, bonus plans, deferred compensation plans, incentive compensation
plans, stock purchase plans, supplemental retirement plans, severance or
termination pay plans, stock option plans, hospitalization plans, medical plans,
life insurance plans, dental plans, disability plans, cafeteria plans, dependent
care plans, tuition reimbursement plans, educational assistance plans, salary
continuation plans, vacation plans, supplemental unemployment benefit plans,
collective bargaining agreements, employment contracts, consulting agreements,
retiree benefits and agreements, severance agreements and each other employee
benefit program, plan, policy or arrangement (each a "Benefit Plan") maintained,
contributed to, or required to be contributed to by the Company or any
Subsidiary with respect to any current or former employees, directors, officers,
agents or consultants of the Company or any Subsidiary, or for which the Company
or any Subsidiary may be responsible or with respect to which it may have any
liability, whether or not subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). The Disclosure Letter indicates whether each
Benefit Plan is funded or unfunded, and insured or uninsured.
2.21.2 The Disclosure Letter contains an accurate and complete list
of all documents embodying or relating to the Benefit Plans and of all employee
handbooks and policy manuals utilized by the Company or any of the Subsidiaries
within the past five years. Each of the Benefit Plans listed in the Disclosure
Letter is and has at all times been in compliance in all material respects with
all applicable provisions of ERISA, the Code, the Age Discrimination in
Employment Act of 1967, the Americans with Disabilities Act of 1990, the Family
Medical Leave Act of 1993 and all other laws applicable to the Benefit Plans.
2.21.3 Each Company "employee pension benefit plan" as defined in
Section 3(2) of ERISA (each a "Pension Plan") which is intended to meet the
requirements of Section 401(a) of the Code now meets, and since its inception
has met, the requirements for qualification under Section 401(a) of the Code and
nothing has occurred which would adversely affect the qualified status of any
such Pension Plan. The Internal Revenue Service has issued a favorable
determination letter with respect to the qualification under the Code (including
without limitation the Tax Reform Act of 1986) of each Pension Plan, the
Disclosure Letter contains an accurate and complete list of the dates of such
letters and the Internal Revenue Service has not taken any action to revoke any
such letter.
2.21.4 Each fiduciary and every plan official of each Benefit Plan is
bonded to the extent required by Section 412 of ERISA. The Company and the
Subsidiaries have not maintained, contributed to or been required to contribute
to (i) any Pension Plan under which more than one employer makes contributions
(as contemplated by Section 4064(a) of ERISA) or (ii) a "multiemployer plan" as
defined in Section 3(37)(A) and (D) of ERISA, nor have they withdrawn from any
Pension Plan as a "substantial employer" as defined in Section 4001(a)(2) of
ERISA so as to become subject to the provisions of Section 4063 of ERISA, or
ceased operations at any facility so as to become subject to the provisions of
Section 4062 of ERISA. The
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Disclosure Letter sets forth an accurate and complete list of all annual reports
filed during the last three years with the Internal Revenue Service, the
Department of Labor or the Pension Benefit Guaranty Corporation by or on behalf
of every Benefit Plan.
2.21.5 The execution and performance of the transactions contemplated
by this Agreement will not, alone or together with any other event, constitute
an event under any Benefit Plan or individual agreement that will result in any
payment (whether of severance pay or otherwise), or acceleration, vesting or
increase in benefits, with respect to any current or former employee, officer,
consultant, agent or director of the Company or any Subsidiary.
2.21.6 Long-term disability benefits for any employee of the Company
and each Subsidiary who has become disabled (including without limitation any
individual who is disabled but has not satisfied any applicable waiting period)
and death benefits for any employee of the Company and each Subsidiary who has
died are described in the Disclosure Letter and are insured in amounts and with
insurance companies described in the Disclosure Letter.
2.21.7 Each group health plan (within the meaning of Section
5000(b)(1) of the Code) maintained by the Company or any Subsidiary has been
administered in substantial compliance with the coverage continuation
requirements contained in the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") and as provided under Section 4980B of the Code and any
regulations promulgated or proposed under the Code. No current or former
employee, officer, consultant, agent or director of the Company and the
Subsidiaries, and/or their spouses or dependents, is presently entitled or may
be entitled in the future to any post-termination employment, health, dental,
disability or life insurance benefits, except to the minimum extent required by
COBRA.
2.21.8 The Company and the Subsidiaries have made all contributions
required to be made to each Benefit Plan under the terms of the plan and
applicable law, and are not in default under any Benefit Plan. No prohibited
transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) has
occurred with respect to any Benefit Plan which could subject any Benefit Plan
or any related trust, the Company, any Subsidiary, the Surviving Corporation or
any director or employee of any of them to any tax or penalty imposed under
Section 4975 of the Code or Section 502(i) or 502(1) of ERISA, either directly
or indirectly, and whether by way of indemnity or otherwise. No event or set of
circumstances has occurred under which the Company, any of its Subsidiaries, any
Benefit Plan, or any fiduciary thereof, could directly or indirectly be subject
to any other liability (other than benefits payable in accordance with the terms
of such Benefit Plan and related expenses) under ERISA (including, but not
limited to, Sections 409, 510, 4062, 4064 or 4069 thereof), the Code (including,
but not limited to, Sections 4971, 4972, 4976 or 4980B thereof), the Family
Medical Leave Act of 1993 or any other applicable law.
2.21.9 The Company or the plan "administrator" (as defined in Section
3(16) of ERISA) of each Benefit Plan has timely filed all ERISA and Code
required reporting and
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disclosure forms, including, but not limited to, the Form 5500 series, with the
appropriate government agencies, with respect to every Benefit Plan required to
file such forms.
2.21.10 There are and there have been no inquiries, proceedings,
claims, audits or suits pending or, to the best knowledge of any Company
Party, threatened by any governmental agency or authority or by any
participant or beneficiary against the Company, any of its Subsidiaries,
any of their respective directors, officers or employees, any Benefit Plan
of the Company or any of its Subsidiaries, or any fiduciary of a Benefit
Plan, with respect to the operation of any Benefit Plan.
2.21.11 Neither the Company nor any of its Subsidiaries have any
obligation to pay medical benefits to retired employees.
2.21.12 The Disclosure Letter contains a list, as of the date hereof,
showing the names of all employees of the Company and the Subsidiaries, their
original dates of employment, their job titles and their hourly rates.
2.21.13 All employees of the Company and the Subsidiaries are
employees at will who may be terminated by the Company at any time with no
obligation to make any payment except wages to the date of termination and such
other amounts as may be required by law.
2.21.14 The Company and the Subsidiaries are in compliance in all
material respects with all federal and state laws respecting employment, wages
and hours. Such entities have not engaged in any discriminatory hiring or
employment practices or any unfair labor practices nor have any employment
discrimination or unfair labor practice complaints against such entities been
filed, or, to the knowledge of the Company, been threatened to be filed, with
any federal or state agency having jurisdiction over the labor matters of the
Company and the Subsidiaries. There are no outstanding threats by any former
employee of the Company or its Subsidiaries of any suit alleging wrongful
termination. The Company has no knowledge of facts which might form a basis for
any complaint or suit of a type described in this Section 2.21.14. The Company
and the Subsidiaries have no actual knowledge that they employ any alien who
does not have a valid permit to work in the United States of America.
2.21.15 To the best of the knowledge of the Company's executive
officers, no current employee of the Company or any of the Subsidiaries is bound
by any previous non-competition agreement (other than agreements given to the
Company) and no employee, in his or her capacity as an agent of the Company, has
violated a confidentiality agreement or non-compete agreement with an unrelated
entity.
2.21.16 With respect to each facility in which the Company or any of
its Subsidiaries does business, the Company and its Subsidiaries and each
such facility are in compliance in all material respects with the Americans
With Disabilities Act.
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2.21.17 During the three years ended December 28, 1996, there has not
been any labor dispute (including a strike, slowdown or work stoppage) or
threat of a labor dispute involving the Company or any of its Subsidiaries
or any attempt or threat of an attempt by a labor union to organize any
employees of the Company or any of its Subsidiaries. No employee of the
Company or any of its Subsidiaries is a member of or represented by any
labor union.
2.21.18 Intentionally omitted.
SECTION 2.22 FINANCIAL STATEMENTS.
2.22.1 Prior to the date hereof, the Company has delivered to VSI
its consolidated Balance Sheet dated December 28, 1996, its consolidated
income statement for the three months then ended and its consolidated
statement of cash flows for the three months then ended (such financial
statements are referred to herein as the "December Financial Statements").
The December Financial Statements and the consolidated financial statements
of the Company included within the Reports filed with the SEC since January
1, 1996 fairly present the consolidated financial position of the Company
and the consolidated results of operations of the Company as at the dates
and for the periods to which they apply; such statements have been prepared
in conformity with generally accepted accounting principles, applied on a
consistent basis throughout the periods involved, and such financial
statements comply with all applicable provisions of Regulation S-X of the
SEC. The December Financial Statements and the interim financial
statements presented in such Reports include all adjustments (subject only
to normal recurring year-end adjustments) necessary for a fair presentation
of the Company's consolidated financial position and consolidated results
of operations as of the dates and for the periods presented therein.
2.22.2 On March 30, 1996 and December 28, 1996, the Company and its
Subsidiaries had no material liabilities (whether absolute, accrued,
contingent or otherwise) which were required to be reflected in and
disclosed on the Company's March 30, 1996 audited consolidated balance
sheet or the Balance Sheet (as to December 28, 1996) or in the notes
thereto pursuant to Regulation S-X of the SEC or in accordance with
generally accepted accounting principles, consistently applied, but were
not so reflected and disclosed. Since December 28, 1996, the Company and
its Subsidiaries have incurred no liabilities (whether absolute, accrued,
contingent or otherwise) in addition to those reflected in or disclosed on
the Balance Sheet or the related notes, except liabilities incurred in the
ordinary course of business and the execution by the Company of this
Agreement.
2.22.3 The books, records and system of internal accounting
controls of the Company and its Subsidiaries comply in all material
respects with Section 13(b) of the 1934 Act.
2.22.4 The Disclosure Letter contains an accurate and complete list
of the most recent management letters received by the Company or any of its
Subsidiaries.
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SECTION 2.23 TAXES.
2.23.1 All tax and information returns required to have been filed
by the Company and its Subsidiaries have been filed with the appropriate
authority; and all federal, state and local taxes (including without
limitation income, franchise, property, sales, use, value-added,
withholding, excise, capital or other tax liabilities), charges,
assessments, penalties and interest of the Company and its Subsidiaries
("Tax Liabilities") required to be paid on or before December 28, 1996 were
paid on or before that date or accrued on the books of the Company and its
Subsidiaries as of that date. Such returns were correct in all material
respects as filed. No assessments or additional Tax Liabilities have been
proposed or threatened against the Company or any of its Subsidiaries or
any of their assets, and neither the Company nor any of its Subsidiaries
have executed any waiver of the statute of limitations on the assessment or
collection of any Tax Liabilities. The Balance Sheet includes adequate
provision for Tax Liabilities incurred or accrued as of December 28, 1996.
The Disclosure Letter contains an accurate and complete list of the dates
of filing of the Company's and each Subsidiary's most recent federal, state
and local tax returns.
2.23.2 The federal tax returns of the Company and its Subsidiaries
have been audited or examined by the Internal Revenue Service through the
dates specified in the Disclosure Letter. Adjustments, if any, to all such
returns have been agreed upon and paid by the Company or its Subsidiaries
or are being contested as indicated in the Disclosure Letter. There are no
pending investigations of the Company or any of its Subsidiaries or their
tax returns by any federal, state or local taxing authority and there are
no federal, state or local tax liens upon any of the assets of the Company
or any of its Subsidiaries. The Disclosure Letter contains an accurate and
complete description of the Company's transfer pricing policy and such
transfer pricing policy is in accordance with the specific pricing methods
described in regulations promulgated by the Internal Revenue Service under
Section 482 of the Code. To the best of the Company's knowledge, as of
March 30, 1996, the Company had net operating loss carryforwards totaling
$23,084,830, of which $7,329,242 were encumbered by the restrictions under
Section 382 of the Code (the "restricted NOLs"). The "section 382 annual
limitation" (within the meaning of Section 382 of the Code) with respect to
the restricted NOLs is $486,900. The Disclosure Letter contains an
accurate and complete list of (i) the years in which the Company's net
operating loss carryforwards expire, (ii) the amount of net operating loss
carryforwards which will expire in each of those years (separately broken
out to indicate the restricted NOLs and the nonrestricted NOLs) and (iii)
the extent of any "owner shift" or "equity structure shift" (within the
meaning of Section 382 of the Code) as of the date of this Agreement.
SECTION 2.24 BUSINESS CHANGES. Except for the transactions
contemplated by this Agreement, since March 30, 1996 there has not been:
2.24.1 any reduction through December 28, 1996 in the Company's
"Special Treatment Sales" (as defined herein), as compared with Special
Treatment Sales during the comparable period in the immediately preceding
fiscal year (it being understood that the term "Special Treatment Sales"
shall mean all of the Company's sales
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other than sales made through the Company's United States (including Puerto
Rico) dealers and sales made through distributors of the Company's medical-
surgical products);
2.24.2 any damage, destruction or loss (whether or not covered by
insurance) materially and adversely affecting the business of the Company
and its Subsidiaries taken as a whole (including without limitation the ABG
Business) or any material deterioration in (x) the condition of the Owned
Buildings or the personal property owned by the Company or any of its
Subsidiaries or leased, licensed or otherwise used by the Company or any of
its Subsidiaries in their respective businesses (including without
limitation the ABG Business) or (y) the condition or operation of the
heating, air conditioning, plumbing and electrical systems of the Owned
Buildings, excluding ordinary wear and tear;
2.24.3 any disposition, mortgage, pledge, or subjection to any
lien, claim, charge, option, or encumbrance of any property or asset of the
Company or any of its Subsidiaries or, to the best of the Company's
knowledge, of any of the assets included within the ABG Product Line, or
any cancellation or compromise of any debt or claim of the Company or any
of its Subsidiaries otherwise than in the ordinary course of business;
2.24.4 any acquisition by the Company or any of its Subsidiaries of
the assets or capital stock of another business entity;
2.24.5 any distribution or disposition of the assets of the Company
or any of its Subsidiaries other than in the ordinary course of business or
any distribution by Scherer of any of the ABG Assets;
2.24.6 any action taken by the United States Food and Drug
Administration (the "FDA"), including without limitation the delivery of a
report on Form 483, which could have a material adverse effect upon the
Company's consolidated financial condition or consolidated results of
operations;
2.24.7 any statute, order, judgment, writ, injunction, decree,
permit, rule or regulation of any court or any governmental or regulatory
body adopted or entered or proposed to be adopted or entered which may
materially and adversely affect the property or business of the Company or
any of its Subsidiaries (including without limitation the ABG Business),
other than those statutes, orders, judgments, writs, injunctions, decrees,
permits, rules or regulations which are applicable to the business of
health care generally or the business of manufacturing and selling medical
products generally and which do not and will not have a disproportionate
effect on the business of the Company or any of its Subsidiaries (including
without limitation the ABG Business) relative to the effect on other
entities in the business of manufacturing and selling similar medical
products; or
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2.24.8 any dividend or distribution declared, set aside or paid in
respect of the Company Common Stock or any repurchase by the Company of
shares of Company Common Stock.
SECTION 2.25 BROKERAGE. Except as described in the Disclosure
Letter, neither the Company nor any of its Subsidiaries has engaged any broker
or finder to render services in connection with this Agreement or in connection
with any fairness opinions to be delivered in connection with this Agreement.
SECTION 2.26 INDUSTRIAL REVENUE BONDS. The Company and its
Subsidiaries are not indebted under any industrial revenue bonds.
SECTION 2.27 INDUCEMENT AGREEMENTS. Concurrent with the execution of
this Agreement, Scherer has delivered to VSI an inducement agreement, a copy of
which has been furnished to the Company (the "Scherer Healthcare Inducement
Agreement"), and Robert Scherer has delivered to VSI an inducement agreement, a
copy of which has been furnished to the Company (the "Robert Scherer Inducement
Agreement" and, collectively with the Scherer Healthcare Inducement Agreement,
the "Inducement Agreements"). The Company understands that the receipt of the
Inducement Agreements by VSI represents a material inducement to VSI to enter
into this Agreement and that VSI has relied upon the Inducement Agreements in
entering into this Agreement.
SECTION 2.28 INFORMATION. Any information in written or electronic
format provided or to be provided by or on behalf of the Company, Scherer or
their representatives to VSI or its representatives in connection with this
Agreement or the Merger (the "Information") has been, and will be, accurate in
all material respects. The Company has disclosed to VSI all information
regarding the Company and its Subsidiaries (including without limitation the ABG
Business) which is material to VSI's determination to execute this Agreement.
SECTION 2.29 REORGANIZATION. The Company has not taken any action
other than relating to the consummation of the Merger, and is not aware of any
actions which have been taken or may be taken by any person, which would further
limit the Company's ability to utilize its net operating loss carryforwards
under Section 382 of the Code from the amounts described in Section 2.23.2
hereof.
SECTION 2.30 ABG PRODUCT LINE. Scherer has agreed to extend the
repurchase option described in Section 2.03 of the Omnibus Agreement (the
"Repurchase Option") until June 15, 1999. The aggregate purchase price required
for the Company to exercise the Repurchase Option currently is $5,535,000, which
amount increases by $22,500 per month as
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of the first day of each calendar month. The Company has delivered to VSI's
counsel copies of each bill of sale, assignment and other instrument of transfer
and conveyance pursuant to which Scherer acquired the Purchased Assets from the
Company pursuant to the Omnibus Agreement. The Disclosure Letter sets forth the
calculation of all amounts paid by the Company to Scherer by calendar year
pursuant to the Equipment Lease and the License of Intellectual Property. The
Company has paid to Scherer all amounts due to Scherer under the Equipment Lease
and the License of Intellectual Property through January 25, 1997 and the
Company will have no obligation to pay any amounts to Scherer with respect to
the period from such date until the Effective Time of the Merger other than to
pay to Scherer an amount equal to 3.25% of the Company's net sales of the ABG
Product Line during such period.
SECTION 2.31 FDA MATTERS. The Company and its Subsidiaries are in
compliance in all material respects with the United States Food, Drug and
Cosmetics Act, with all rules and regulations of the FDA applicable to the
Company or any of its Subsidiaries (including without limitation all Good
Manufacturing Practices regulations) and with all comparable state laws, rules
and regulations applicable to the Company or any of its Subsidiaries
(collectively, the "Device Laws"). The Disclosure Letter contains an accurate
and complete list of all dates of inspections of the Company or any of its
Subsidiaries made by the FDA or any similar state agencies during the six years
ended on the date of this Agreement, the dates of all correspondence between the
Company or any Subsidiary and the FDA or any such state agency with respect to
any such inspections and the dates of all reports delivered during such six year
period by any third-parties to the Company or any of its Subsidiaries with
respect to the compliance by the Company or any of its Subsidiaries with the
Device Laws. The Disclosure Letter contains an accurate and complete list of
the dates of all notices received by the Company or any of its Subsidiaries
within such six year period from the FDA or any other agency that enforces any
of the Device Laws. The Company has made available to representatives of VSI
all complaint files maintained by the Company and its Subsidiaries and all other
files maintained by the Company and its Subsidiaries with respect to compliance
with any aspect of the Device Laws. During the three years ended February 28,
1997, neither the FDA nor any comparable state agency has taken any action which
has had a material adverse effect upon the Company's consolidated financial
condition, results of operations, business or prospects.
SECTION 2.32 FULL DISCLOSURE. No representation or warranty made by
the Company in this Agreement or the Disclosure Letter, no certification
furnished or to be furnished by the Company to VSI pursuant to this Agreement,
and no document or electronic transmission delivered by the Company to VSI or
its counsel hereunder, including without limitation the Information, contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements contained herein or
therein not misleading. All documents delivered or to be delivered by the
Company to VSI and/or its counsel in connection with the negotiation, execution
and performance of this Agreement and the matters ancillary hereto are and will
be accurate and complete, and will contain all amendments through the date of
such delivery.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VSI
VSI hereby represents, warrants and agrees as follows:
SECTION 3.1 ORGANIZATION. VSI is a corporation, duly organized,
validly existing, and in good standing under the laws of the State of New
Jersey, and has all requisite corporate power and authority to own its property
and conduct the business in which it is engaged.
SECTION 3.2 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEABILITY. The
execution, delivery and performance of this Agreement are (A) within the legal
capacity and power of VSI and Newco; (B) have been duly authorized by all
requisite corporate action on the part of VSI and Newco; (C) require the
approval or consent of, or filing with, no persons, entities or agencies, other
than the approval of one or more institutions that have extended credit to VSI
and the New Jersey Economic Development Authority and filings to be made
pursuant to the Hart Scott Rodino Act; and (D) neither violate, nor constitute a
default under, nor create a lien or breach under the terms of, the certificate
of incorporation and by-laws of VSI or Newco or any other subsidiary of VSI or
of any material agreement, document or instrument binding upon VSI or Newco or
any other subsidiary of VSI (other than loan agreements as to which appropriate
consents or waivers shall avoid any defaults). This Agreement is a legal, valid
and binding obligation of VSI and Newco enforceable against VSI and Newco in
accordance with its terms, except insofar as the enforcement thereof may be
limited by bankruptcy, insolvency, moratorium or similar laws affecting the
enforcement of creditors' rights generally and subject to equitable principles
limiting the availability of equitable remedies.
SECTION 3.3 BROKERAGE. VSI has not engaged any broker or finder to
render services in connection with this Agreement.
SECTION 3.4 FULL DISCLOSURE. No representation or warranty made by
VSI in this Agreement, no certification furnished or to be furnished by VSI to
the Company pursuant to this Agreement, and no document or electronic
transmission delivered by VSI to the Company or its counsel hereunder, contains
or will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements contained herein or
therein not misleading.
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ARTICLE IV
COVENANTS OF THE COMPANY
SECTION 4.1 REGULAR COURSE OF BUSINESS. Except as otherwise
consented to in writing by VSI prior to the Effective Time of the Merger or as
contemplated by this Agreement or any other agreement executed by VSI, the
Company will (and will cause each of its Subsidiaries to) carry on its business
(including without limitation the ABG Business) diligently and in the ordinary
course and use reasonable efforts to preserve its present business (including
without limitation the ABG Business) organization intact, keep available the
services of its present executive officers and preserve its present
relationships with persons having business dealings with it.
SECTION 4.2 RESTRICTED ACTIVITIES AND TRANSACTIONS. Except as
otherwise consented to in writing by VSI, prior to the Effective Time of the
Merger the Company will not and the Company will cause each of its Subsidiaries
not to:
4.2.1 amend its articles of incorporation or by-laws;
4.2.2 issue, sell or deliver, or agree to issue, sell or
deliver, or grant, or declare any stock divided or stock split with respect
to, any shares of any class of capital stock of the Company or any
securities convertible or exchangeable into any such shares or convertible
or exchangeable into securities in turn so convertible or exchangeable, or
any options, warrants or other rights calling for the issuance, sale or
delivery of any such shares or any such convertible or exchangeable
securities, except that the Company may issue shares of Company Common
Stock pursuant to the Employee Options, the Director Options, the Swiss
Warrants, the Consultant's Options, the Russell Warrants, the ITT Warrants,
the Convertible Note or the Settlement Agreement, provided that such
options, warrants or Note are exercisable by their terms on the date of
such issuance and are outstanding on the date hereof and provided that the
applicable provisions of the Convertible Note and the Settlement Agreement
remain in full force and effect on the date of such issuance;
4.2.3 except in the ordinary course of business or as
required upon exercise of directors' fiduciary duties, mortgage or pledge
any of its assets, tangible or intangible;
4.2.4 (i) borrow, or agree to borrow, any funds, other than
in the ordinary course of business pursuant to the Company's existing
credit facilities in amounts that will not preclude the Company from
satisfying the condition set forth in Section 7.6 hereof, or (ii) except in
the ordinary course of business (and consistent with
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past practice), voluntarily incur, assume or become subject to, whether
directly or by way of guarantee or otherwise, any obligation or liability
(absolute or contingent), (iii) except in the ordinary course of business
(and consistent with past practice), cancel or agree to cancel any material
debts of third-parties or claims against third-parties, (iv) except in the
ordinary course of business (and consistent with past practice), lease,
sell or transfer, or grant or agree to grant any preferential rights to
lease or acquire, any of its material assets, property or rights, or (v)
except in the ordinary course of business (and consistent with past
practice), make or permit any substantive amendment or termination of any
material contract, agreement, license or other right of which it is a
party;
4.2.5 adopt, materially amend or terminate any employee benefit
plan or materially increase the compensation or other benefits payable to
any of its employees; provided, however, that the Company may pay fiscal
year-end bonuses to its employees in an aggregate amount up to the amount
disclosed to VSI's Chief Financial Officer immediately prior to the
execution of this Agreement;
4.2.6 acquire control of, or an ownership interest in, any other
corporation, association, joint venture, partnership, business trust,
limited liability company or other business entity, or acquire control or
ownership of all or a substantial portion of the assets of any of the
foregoing, or enter into any agreement providing for any of the foregoing;
4.2.7 directly or indirectly solicit, encourage or authorize any
individual, corporation or entity (including without limitation its
directors, officers, employees, attorneys, accountants and investment
bankers) to directly or indirectly solicit or encourage any inquiry,
proposal, offer or possible offer from a third party relating to (i) the
purchase of shares of any class of capital stock of the Company or any
securities convertible or exchangeable into any such shares or convertible
or exchangeable into securities in turn so convertible or exchangeable, or
the acquisition of any option, warrant or other right to purchase or
otherwise acquire any such shares or convertible/exchangeable securities,
(ii) a tender or exchange offer for any shares of Company Common Stock,
(iii) a purchase, lease or other acquisition of the shares of Company
Common Stock owned by Scherer or all or a substantial portion of the assets
of the Company or any product line or line of business of the Company or
any of its Subsidiaries, or any other material asset of the Company or any
of its Subsidiaries, or (iv) a merger, consolidation or other combination
involving the Company (any such inquiry, proposal, offer or possible offer
being hereinafter referred to as a "Takeover Proposal"); or, subject to the
fiduciary obligations of the Company's Board of Directors, provide any
individual, corporation or other entity with information or assistance or
negotiate with any individual, corporation or entity in furtherance of any
Takeover Proposal;
4.2.8 enter into any agreement with any third-party with respect
to any of the types of transactions referred to in Section 4.2.7 hereof,
other than pursuant to the exercise by the Company's Board of Directors of
its fiduciary duties;
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4.2.9 except in the ordinary course of business and consistent
with practices customary for the Company during the current fiscal year and
except for the buy-out of certain leases entered into with Finova for which
the Company has received comparable sums from Nexstar, enter into or agree
to enter into any transaction, or incur or discharge any obligation or
liability, material to the business of the Company and its Subsidiaries
taken as a whole;
4.2.10 except with respect to dividend or distribution payments
made to the Company or any Subsidiary wholly-owned by the Company, declare
or pay any dividend on its capital stock in cash, stock or property, or
redeem, purchase or otherwise acquire any shares of capital stock or any
options or warrants to purchase any shares of its capital stock;
4.2.11 enter into any material licensing or marketing arrangement
or other material contract with any party other than VSI or the Premier
purchasing group;
4.2.12 settle any pending litigation in a manner that is materially
adverse to the Company or commence any material litigation; or
4.2.13 take any action, or omit to take any action, the results of
which will prevent any of the warranties and representations set forth in
Article II hereof from being true in all material respects (or, in the case
of a representation or warranty that is, by its terms, qualified as to
materiality, from being true and accurate in all respects) as of the
Effective Time of the Merger.
SECTION 4.3 NO DEFAULT OR VIOLATION. Except as otherwise consented
to in writing by VSI, prior to the Effective Time of the Merger the Company will
(and will cause each of its Subsidiaries to) use its best efforts not to (i)
violate, or commit a breach of or a default under, any material contract,
obligation or commitment to which it is a party or to which any of its assets
may be subject or (ii) violate any applicable federal, state or municipal
statutes, regulations or ordinances or any injunctions, orders or judgments
binding upon the Company or its Subsidiaries, the effect of which in any such
case would be materially adverse to the business of the Company and its
Subsidiaries taken as a whole.
SECTION 4.4 INSURANCE. Except as otherwise consented to in writing
by VSI, prior to the Effective Time of the Merger, the Company will (and will
cause its Subsidiaries to) maintain in full force and effect all policies of
insurance in substantially the same amounts and types of coverage as are
presently in effect on the date of this Agreement or in such greater amounts or
with such expanded coverage as the Company shall determine in good faith to be
appropriate.
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SECTION 4.5 REPORTS; TAXES; ETC. Except as otherwise consented to in
writing by VSI, prior to the Effective Time of the Merger:
4.5.1 the Company will (and will cause each of its
Subsidiaries to) duly and timely (by the due date or any duly granted
extension thereof) file all reports and returns required to be filed with
all applicable federal, state and local authorities; and
4.5.2 unless it is contesting the same in good faith and, if
appropriate, has established reasonable reserves therefor, the Company will
(and will cause each of its Subsidiaries to) (i) promptly pay all Tax
Liabilities indicated by such returns or otherwise lawfully levied or
assessed upon it or any of its properties and (ii) withhold or collect and
pay to the proper governmental authorities or hold in separate bank
accounts for such payment all taxes and other assessments which it believes
in good faith to be required by law to be so withheld or collected;
provided, however, that this Section 4.5.2 shall not affect the Company's
plans to pay out approximately $640,000 over time in order to discharge
certain tax liens, as described in the Disclosure Letter.
SECTION 4.6 ADVICE OF CHANGES. The Company will promptly advise VSI
orally and in writing of (i) any event occurring subsequent to the date of this
Agreement which would render any representation or warranty of the Company
contained in this Agreement, if made on or as of the date of such event or the
Closing Date, untrue, inaccurate or incomplete in any material respect (or, in
the case of a representation or warranty that is, by its terms, qualified as to
materiality, untrue, inaccurate or incomplete in any respect) and (ii) any
material adverse change in the consolidated working capital, financial
condition, assets, liabilities (whether absolute, accrued contingent or
otherwise), operating profits, business or prospects of the Company and its
Subsidiaries taken as a whole.
SECTION 4.7 NOTIFICATION OF TAKEOVER PROPOSAL AND OTHER MATTERS. The
Company shall promptly advise VSI orally and in writing of any Takeover Proposal
or of any inquiry or proposal which the Company has reason to believe may lead
to a Takeover Proposal. The Company shall promptly advise VSI orally and in
writing of the receipt by the Company of any notification submitted to the
Company pursuant to any law of any purchase or proposed purchase of any
securities of the Company by any person.
SECTION 4.8 CONSENTS, APPROVALS AND FILINGS. The Company will (and
will cause each of its Subsidiaries to) use its best efforts to obtain as
promptly as possible all necessary approvals, authorizations, consents,
licenses, clearances or orders of governmental and regulatory authorities and to
complete all filings required in order for the Company to perform all of its
obligations hereunder.
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SECTION 4.9 ACCESS TO RECORDS AND PROPERTIES. VSI may, prior to the
Effective Time of the Merger, through its employees, agents and representatives,
make or cause to be made a detailed review of the business (including without
limitation the ABG Business) and financial condition of the Company and its
Subsidiaries and make or cause to be made such investigation as it deems
necessary or advisable of the properties, assets, businesses (including without
limitation the ABG Business), books and records of the Company and its
Subsidiaries. The Company agrees (and will cause its Subsidiaries to agree) to
assist VSI in conducting such review and investigation and will provide, and
will cause its Subsidiaries and its independent public accountants to provide,
VSI and its employees, agents and representatives full access to, and complete
information concerning, all aspects of the businesses of the Company and its
Subsidiaries, including their books, records (including tax returns filed or in
preparation), personnel and premises, the audit work papers and other records of
their independent public accountants and any documents (including any documents
filed on a confidential basis) included in any report filed with the SEC.
Neither any investigation by VSI nor the receipt by VSI of any data or
information from the Company shall impair the right of VSI to terminate this
Agreement as provided in Article X hereof.
SECTION 4.10 BEST EFFORTS. The Company shall use its best efforts
(a) to cause to be fulfilled and satisfied all of the conditions to the Closing
to be fulfilled and satisfied by the Company and (b) to cause to be performed
all of the matters required of the Company at or prior to the Closing. The
Company shall use its best efforts to make all of its warranties and
representations contained in this Agreement (except those representations and
warranties regarding the number of shares of Company Common Stock issued and
outstanding on the date hereof set forth in Section 2.2 hereof) true and correct
in all material respects as at the Closing, with the same effect as if the same
had been made and this Agreement had been dated as at the Closing.
SECTION 4.11 MAINTENANCE OF ASSETS. The Company shall (and shall
cause its Subsidiaries to) keep the property and assets used in its businesses
(including without limitation the ABG Business) in good order, repair and
operating condition.
SECTION 4.12 8-K. At least 10 days prior to the Effective Time of
the Merger, the Company shall furnish VSI with all such information and
financial statements as VSI may reasonably require in order for VSI to prepare a
Current Report on Form 8-K (describing the Merger pursuant to Items 2 and 7 of
such Form) for filing with the SEC promptly after the Effective Time of the
Merger. Immediately prior to the Closing, the Company shall cause its
independent accountants to provide any report of such accountants which VSI
determines must be included in such filing on Form 8-K and a consent (in form
and substance satisfactory to VSI) to the filing of any report of such
accountants which VSI determines must be included or incorporated by reference
in such filing on Form 8-K.
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SECTION 4.13 SHAREHOLDERS' MEETING. The Company shall call a special
meeting of its shareholders (the "Special Meeting"), to be held as soon as
practicable after the Proxy Statement (as hereinafter defined) is mailed to the
Company's shareholders, for the purpose of voting upon the Merger and this
Agreement. Notwithstanding the foregoing, the Special Meeting shall not be held
until after Scherer shall have conducted a meeting of its shareholders for the
purpose of seeking approval from the shareholders of Scherer for Scherer to vote
its shares of Company Common Stock in favor of the Merger and to consummate the
transactions contemplated by the Scherer Healthcare Inducement Agreement (the
"Scherer Shareholder Approval"). In connection with the Company's meeting, the
members of the Company's Board of Directors shall recommend that the Company's
shareholders approve the Merger and this Agreement and use their best efforts to
obtain such shareholder approval, subject to the exercise by the members of such
Board of Directors of their fiduciary duties.
SECTION 4.14 ANTI-DILUTION. The Company shall not permit any event
to occur that will trigger the anti-dilution provisions of any option, warrant,
Convertible Note or other security (collectively, the "Subscription Securities")
in a manner that would change in any respect the number of shares of Company
Common Stock issuable pursuant to any such Subscription Securities from the
number of shares set forth with respect to such Subscription Securities in
Section 2.2 hereof and Exhibit 2.2 to the Disclosure Letter or that would change
in any respect the exercise price applicable to any such Subscription Securities
from the exercise price set forth with respect to such Subscription Securities
in Exhibit 2.2 to the Disclosure Letter.
SECTION 4.15 RIGHTS PLAN. The Company shall amend the Rights
Agreement in such a manner that the execution of this Agreement and the
consummation of the Merger will not cause any of the Rights to become
exercisable with or without the passage of time.
SECTION 4.16 SEC REPORTS. Between the date hereof and the Closing
Date, the Company shall timely file with the SEC (and, contemporaneously with
such filings, shall deliver to VSI a copy of) all reports and statements
required to be filed by the Company under the 1934 Act. None of such reports or
statements shall contain an untrue statement of a material fact or shall omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
SECTION 4.17 NOTIFICATION REGARDING DISSENTERS' SHARES. The Company
shall give VSI (i) prompt notice of any notice of intent to demand fair value
for any shares of Company Common Stock, any withdrawals of such notices, and any
other instruments served pursuant to the Appraisal Laws and received by the
Company and (ii) the opportunity to direct any negotiations and proceedings with
respect to demands for fair value for shares of Company Common Stock under the
Appraisal Laws. The Company shall not, without the prior written consent of
VSI, voluntarily make payment with respect to any demands for fair value of
shares of Company Common Stock or offer to settle or settle any such demands.
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SECTION 4.18 SEPARATE FUNDS. The Company shall establish and
maintain a separate account in which it shall deposit all funds it receives
between the date hereof and the Closing Date upon the exercise of any option or
warrant. Such funds shall be held in such account until such time as they are to
be delivered to the Exchange Agent pursuant to Section 1.3.2.2 hereof.
SECTION 4.19 Intentionally Omitted.
SECTION 4.20 REPURCHASE OPTION. The Company shall not exercise the
Repurchase Option under the Omnibus Agreement at any time prior to the earlier
of the Effective Time of the Merger or the date on which this Agreement is
terminated.
ARTICLE V
COVENANTS OF VSI
SECTION 5.1 BEST EFFORTS. VSI shall use its best efforts (a) to
cause to be fulfilled and satisfied all of the conditions to the Closing to be
fulfilled and satisfied by it, and (b) to cause to be performed all of the
matters required of it at or prior to the Closing. VSI shall use its best
efforts to make all of its warranties and representations contained in this
Agreement true and correct in all material respects as at the Closing, with the
same effect as if the same had been made and this Agreement had been dated as at
the Closing.
SECTION 5.2 CONSENTS, APPROVALS AND FILINGS. VSI will use its best
efforts to obtain as promptly as possible all necessary approvals,
authorizations, consents, licenses, clearances or orders of governmental and
regulatory authorities and to complete all filings required in order for VSI to
perform its obligations hereunder.
SECTION 5.3 ADVICE OF CHANGES. VSI will promptly advise the Company
orally and in writing of (i) any event occurring subsequent to the date of this
Agreement which would render any representation or warranty of VSI contained in
this Agreement, if made on or as of the date of such event or the Closing Date,
untrue, inaccurate or incomplete in any material respect (or, in the case of a
representation or warranty that is, by its terms, qualified as to materiality,
untrue, inaccurate or incomplete in any respect).
ARTICLE VI
HART SCOTT RODINO, INTERIM BALANCE SHEET
AND PROXY STATEMENT MATTERS
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SECTION 6.1 HART SCOTT RODINO FILINGS. VSI and the Company agree to
make any required filings promptly pursuant to the Hart Scott Rodino Act, and to
use their best efforts, and to cooperate with each other in their efforts, to
effect compliance with the Hart Scott Rodino Act. If the parties should receive
a second request for information from either the Federal Trade Commission or the
United States Department of Justice, VSI and the Company shall use their best
efforts to comply promptly with such request and to persuade the agency seeking
such information to permit the parties to consummate the Merger.
Notwithstanding any provision herein to the contrary, VSI shall not be required
to enter into any consent decree or to make any divestitures, before or after
Closing, of its assets or of the assets to be acquired from the Company pursuant
to this Agreement.
SECTION 6.2 INTERIM BALANCE SHEET; STATEMENT OF SPECIAL TREATMENT
SALES At least ten days prior to the Closing Date, the Company shall deliver to
VSI a consolidated balance sheet of the Company as of the last day of the
calendar month immediately prior to the calendar month in which the Closing will
be held, or if the Closing is to be held within the first twenty days of a
calendar month, as of the last day of the calendar month which is two calendar
months prior to the calendar month in which the Closing will be held (the
"Interim Balance Sheet"). The Interim Balance Sheet shall be prepared in
accordance with generally accepted accounting principles, in a manner consistent
with the preparation of the Balance Sheet. Contemporaneous with the delivery of
the Interim Balance Sheet, the Company shall deliver to VSI a certificate of the
chief financial officer of the Company certifying that the Interim Balance Sheet
has been prepared in accordance with this Section 6.2 and shall provide VSI's
representatives with access to such documentation as they shall require in order
to review and evaluate the Interim Balance Sheet delivered by the Company. At
least two days prior to the Closing Date, the Company shall deliver to VSI a
statement (the "Sales Statement"), prepared in accordance with generally
accepted accounting principles consistently applied, setting forth the Company's
Special Treatment Sales (as defined in Section 2.24.1 hereof) for the period
from the date hereof through the seventh day prior to the Closing Date and for
the comparable period in 1996. Contemporaneous with the delivery of the Sales
Statement, the Company shall deliver to VSI a certificate of the chief financial
officer of the Company certifying that the Sales Statement has been prepared in
accordance with this Section 6.2 and shall provide VSI's representatives with
access to such documentation as they shall require in order to review and
evaluate the Sales Statement delivered by the Company.
SECTION 6.3. PROXY STATEMENT. Promptly after this Agreement is
executed, VSI and the Company shall cooperate in preparing a proxy statement
(describing the Merger) for filing with the SEC and ultimately for mailing to
the Company's shareholders (the "Proxy Statement"). The Company shall not file
the Proxy Statement preliminarily or in final form unless and until VSI consents
to such filings. VSI shall not unreasonably withhold or delay any such consent.
The Proxy Statement shall contain such notifications regarding dissenters'
rights as are required by the BCA. The Company represents and warrants to, and
covenants with, VSI that the Proxy Statement will comply in all material
respects with the 1934 Act and the rules and regulations promulgated thereunder,
that the Proxy Statement will not contain any untrue statements of material fact
and will not omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
such representation, warranty and covenant shall not apply with respect to any
information regarding VSI. The Company will promptly advise VSI in
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writing if at any time prior to the Effective Time of the Merger it shall obtain
knowledge of any facts that might make it necessary or appropriate to amend or
supplement the Proxy Statement in order to make the statements contained or
incorporated by reference therein not misleading or to comply with applicable
law. At VSI's request, the mailing of the Proxy Statement shall be delayed
until VSI or the Company shall have received, from such accountants as VSI shall
specify, letters of the type contemplated by Statement on Auditing Standards No.
72 and based upon procedures carried out to such date as VSI shall reasonably
specify. After VSI consents to the mailing of the Proxy Statement and all
necessary SEC filing requirements have been satisfied, the Company shall mail
the Proxy Statement to its shareholders in accordance with all applicable
federal and state securities laws and shall use its best efforts to solicit
proxies in favor of the Merger.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF
VSI AND NEWCO
The obligations of VSI and Newco under this Agreement to consummate the
Merger shall be subject to the satisfaction, or to the waiver by them in the
manner contemplated by Section 11.2 hereof, on or before the Closing Date, of
the following conditions:
SECTION 7.1 COMPANY REPRESENTATIONS AND WARRANTIES TRUE. The
representations and warranties of the Company contained in this Agreement shall
be true and accurate in all material respects (or, in the case of a
representation or warranty that is, by its terms, qualified as to materiality,
shall be true and accurate in all respects) as of the date when made, and,
except as to representations and warranties (consisting solely of
representations and warranties regarding the number of shares of Company Common
Stock issued and outstanding on the date hereof set forth in Section 2.2 hereof)
which are expressly limited to a state of facts existing at a time prior to the
Closing Date, shall be true and accurate in all material respects (or, in the
case of a representation or warranty that is, by its terms, qualified as to
materiality, shall be true and accurate in all respects) at and as of the
Closing Date as if made on the Closing Date, without giving effect to any funds
received by the Company after December 28, 1996 upon the exercise of any option
or warrant or to the reduction of indebtedness resulting from the conversion of
any promissory note or other instrument convertible into shares of the Company's
capital stock.
SECTION 7.2 PERFORMANCE OF COVENANTS. The Company shall have
performed and complied in all material respects with each and every covenant,
agreement and condition required by this Agreement to be performed or complied
with by the Company prior to or on the Closing Date.
SECTION 7.3 NO GOVERNMENTAL OR OTHER PROCEEDING OR LITIGATION. No
order of any court or administrative agency shall be in effect which restrains
or prohibits any transaction contemplated hereby or transactions contemplated by
the Inducement Agreements or which would limit or affect VSI's ownership of the
Company or any of its Subsidiaries or of the ABG Assets; no suit, action (other
than the exercise of dissenters' rights), investigation, inquiry or proceeding
by any governmental body or other person or entity shall be pending or
threatened against VSI, Newco or any subsidiary of VSI or the Company, which
challenges the validity or legality, or seeks to restrain the consummation, of
the transactions contemplated hereby or by the Inducement Agreements or which
seeks to limit or otherwise affect VSI's ownership of the Company or any of its
Subsidiaries or of the ABG Assets; and no written advice shall have been
received by VSI, Newco or the Company, or their respective counsel from any
governmental body, and remain in effect, stating that an action or proceeding
will, if the Merger is consummated or sought to be consummated, be filed seeking
to invalidate or restrain the Merger or the transactions
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contemplated by the Inducement Agreements or limit or otherwise affect VSI's
ownership of the Company or any of its Subsidiaries or of the ABG Assets.
SECTION 7.4 APPROVALS AND CONSENTS. The approval of the shareholders
of the Company referred to in Section 8.4 hereof, the Scherer Shareholder
Approval, and all approvals of applications to public authorities, Federal,
state, or local, if any, the expiration of all waiting periods under the Hart
Scott Rodino Act and any other applicable law and all consents or approvals of
any non-governmental persons, the granting or expiration of which is necessary
for the consummation of the Merger and the consummation of the transactions
contemplated by this Agreement and the Scherer Inducement Agreements or for
preventing the termination or breach of any material real property lease, right,
privilege, license or agreement of VSI or its subsidiaries or of the Company or
its Subsidiaries or pertaining to the ABG Assets, or which is necessary for
preventing any material loss or disadvantage to VSI and its subsidiaries taken
as a whole or the Company and its Subsidiaries taken as a whole, by reason of
the Merger and the consummation of the transactions contemplated hereby and by
the Inducement Agreements, shall have been obtained; and no such consent or
approval shall have imposed a condition to such consent or approval, and no
condition shall have been imposed in connection with any filings made under the
Hart Scott Rodino Act or under any other law, which condition in the opinion of
VSI is unduly burdensome to the consolidated financial condition or operations
of VSI or to the business of the Company and its subsidiaries taken as a whole.
All conditions required to be satisfied prior to the Effective Time of the
Merger by the terms of such approvals and consents shall have been satisfied;
and all statutory waiting periods applicable to the parties hereto and the
parties to the Inducement Agreements (including without limitation all
applicable waiting periods under the Hart Scott Rodino Act) shall have expired.
SECTION 7.5 OPINION OF COUNSEL. VSI and Newco shall have received an
opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the Company, dated
the Closing Date and addressed to VSI and Newco, in form and substance and
covering such matters as are reasonably agreed to by the parties. LeBoeuf,
Lamb, Greene & MacRae, L.L.P. may rely upon certificates with respect to factual
matters.
SECTION 7.6 INDEBTEDNESS. As of the Closing Date, the Company and
its Subsidiaries shall not be indebted with respect to "Debt" (as defined
herein) in an aggregate amount in excess of $6.4 million. For purposes of this
Agreement, the term "Debt" shall mean all amounts owed by the Company and its
Subsidiaries (i) to financial institutions, Scherer and affiliates of Scherer,
(ii) on capital leases, (iii) to the Internal Revenue Service and (iv) to
holders of the Company's 8.0% Notes due March 31, 1999 issued pursuant to
Section 3.03 of the Omnibus Agreement. At the Closing, the Company's chief
financial officer shall have delivered a certificate to VSI specifying the
amount of such Debt as of the Closing Date.
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SECTION 7.7 CERTIFICATES. The Company shall have furnished VSI with
certificates of the Company, in form and substance satisfactory to VSI, signed
by its president or executive vice president, to the effect that the
representations and warranties of the Company contained in this Agreement are
true and correct in all material respects (or, in the case of representations or
warranties that are, by their terms, qualified as to materiality, are true and
accurate in all respects) on and as of the Closing Date as though such
representations and warranties were made at such time (except as contemplated in
Section 7.1 hereof) and that the Company has complied in all material respects
with all terms, covenants and provisions of this Agreement required to be
complied with by it prior to or on the Closing Date. Scherer shall have
furnished VSI with a certificates of Scherer, in form and substance satisfactory
to VSI, signed by its president or executive vice president, to the effect that
the representations and warranties of Scherer contained in the Scherer
Inducement Agreement are true and correct in all material respects (or, in the
case of representations or warranties that are, by their terms, qualified as to
materiality, are true and accurate in all respects) on and as of the Closing
Date as though such representations and warranties were made at such time and
that Scherer has complied in all material respects with all terms, covenants and
provisions of the Scherer Healthcare Inducement Agreement required to be
complied with by it prior to or on the date of the closings referenced to
therein.
SECTION 7.8 EXCHANGE AGENCY AGREEMENT. VSI shall have entered into
an agreement, in form and substance satisfactory to VSI, with American Stock
Transfer and Trust Company or another institution satisfactory to VSI, pursuant
to which such institution shall serve as exchange agent for the Merger in
accordance with the terms of this Agreement.
SECTION 7.9 EMPLOYMENT AGREEMENT. The Company, William Thompson
("Thompson") and Scherer shall have entered into an agreement pursuant to which
Thompson's existing employment agreement with the Company (the "Employment
Agreement") shall terminate as of the Effective Time of the Merger and the
Company thereafter shall have no liabilities under the Employment Agreement.
SECTION 7.10 RIGHTS AGREEMENT. The Company shall have amended the
Rights Agreement in such a manner that the execution of this Agreement and the
consummation of the Merger will not cause any of the Rights to become
exercisable with or without the passage of time. Prior to the consummation of
the Closing, no Rights shall have been exercised under the Rights Agreement.
SECTION 7.11 SCHERER MATTERS.
7.11.1 The representations and warranties of Scherer and Robert
Scherer contained in the Inducement Agreements shall be true and accurate in all
material respects (or, in the case of a representation or warranty that is, by
its terms, qualified as to materiality, shall be true and accurate in all
respects) as of the date when made, and shall be true and accurate in all
material respects (or, in the case of a representation or warranty that is, by
its terms, qualified as
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to materiality, shall be true and accurate in all respects) at and as of the
Closing Date as if made on the Closing Date.
7.11.2 Scherer and Robert Scherer shall have performed and complied
in all material respects with each and every covenant, agreement and condition
required by the Inducement Agreements to be performed or complied with by such
entity or person prior to or on the Closing Date and on the dates of the
closings referred to therein.
7.11.3 Scherer, Robert Scherer and VSI shall have agreed upon the
form and substance of all documents to be executed and delivered at the closings
contemplated by the Inducement Agreements.
SECTION 7.12 CLOSING DOCUMENTATION. VSI shall have received such
additional documentation at the Closing as VSI and its counsel may reasonably
require to evidence compliance by the Company with all of their obligations
hereunder and to evidence compliance by Scherer and Robert Scherer with all of
their obligations under the Inducement Agreements.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement to consummate the
Merger shall be subject to the satisfaction, or to the waiver by it in the
manner contemplated by Section 11.2 hereof, on or before the Closing Date of the
following conditions:
SECTION 8.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations
and warranties of VSI contained in this Agreement shall be true and accurate in
all material respects (or, in the case of a representation or warranty that is,
by its terms, qualified as to materiality, shall be true and accurate in all
respects) as of the date when made, and shall be true and accurate in all
material respects (or, in the case of a representation or warranty that is, by
its terms, qualified as to materiality, shall be true and accurate in all
respects) at and as of the Closing Date as if made on the Closing Date.
SECTION 8.2 PERFORMANCE OF COVENANTS. VSI and Newco shall have
performed and complied in all material respects with each and every covenant,
agreement and condition required by this Agreement to be performed or complied
with by it prior to or on the Closing Date.
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SECTION 8.3 NO GOVERNMENTAL OR OTHER PROCEEDINGS OR LITIGATION. No
order of any court or administrative agency shall be in effect which restrains
or prohibits any transaction contemplated hereby; no suit, action (other than
the exercise of dissenters' rights), investigation, inquiry or proceeding by any
governmental body or other person or entity shall be pending or threatened
against VSI, Newco or the Company, which challenges the validity or legality, or
seeks to restrain the consummation, of the transactions contemplated hereby; and
no written advice shall have been received by VSI, Newco or the Company or their
respective counsel from any governmental body, and remain in effect, stating
that an action or proceeding will, if the Merger is consummated or sought to be
consummated, be filed seeking to invalidate or restrain the Merger.
SECTION 8.4 APPROVALS. The Company's shareholders shall have
approved the Merger by the requisite vote under the BCA and the Company's
articles of incorporation, the Scherer Shareholder Approval shall have been
obtained, and all approvals of applications to public authorities, Federal,
state or local, the granting of which is necessary for the consummation of the
Merger, shall have been obtained. All conditions required to be satisfied prior
to the Effective Time of the Merger by the terms of such approvals shall have
been satisfied; and all applicable statutory waiting periods under the Hart
Scott Rodino Act and under all other laws shall have expired.
SECTION 8.5 OPINION OF COUNSEL. The Company shall have received an
opinion of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.C., counsel to VSI,
dated the Closing Date and addressed to the Company, in form and substance and
covering such matters as are reasonably agreed to by the parties. Lowenstein,
Sandler, Kohl, Fisher & Boylan, P.C. may rely upon the written opinion of Krys,
Boyle, Freedman, Scott & Sawyer with respect to matters of Colorado law and upon
certificates with respect to factual matters.
SECTION 8.6 CERTIFICATES. VSI and Newco shall have furnished the
Company with certificates of VSI and Newco, respectively, in form and substance
satisfactory to the Company, signed by their respective presidents or executive
vice presidents, to the effect that the representations and warranties of such
corporations contained in this Agreement are true and correct in all material
respects (or, in the case of representations or warranties that are, by their
terms, qualified as to materiality, are true and accurate in all respects) on
and as of the Closing Date as though such representations and warranties were
made at such time and that such corporations have complied in all material
respects with all terms, covenants and provisions of this Agreement required to
be complied with by them prior to or on the Closing Date.
SECTION 8.7 CLOSING DOCUMENTATION. The Company shall have received
such additional documentation at the Closing as the Company and its counsel may
reasonably require to evidence compliance by VSI and Newco with all of their
obligations under this Agreement.
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ARTICLE IX
CLOSING; CLOSING DATE
Unless this Agreement shall have been terminated and the Merger herein
contemplated shall have been abandoned pursuant to a provision of Article X
hereof, a closing (the "Closing") will be held on a date mutually acceptable to
VSI and the Company as soon as practicable after the latest to occur of (i) the
Special Meeting referred to in Section 4.13 hereof, (ii) the receipt of all
consents and approvals referred to in Sections 7.4 and 8.4 hereof or the waiver
thereof by VSI in the case of consents by private parties, and (iii) the
expiration of all waiting periods referred to in Sections 7.4 and 8.4 hereof, at
the offices of VSI's special Colorado counsel, Krys, Boyle, Freedman, Scott &
Sawyer, at Dominion Plaza, Suite 2700, South Tower, Denver, Colorado, commencing
at 10:00 A.M. At such time, date (the "Closing Date") and place, the documents
referred to in Articles VII and VIII hereof will be exchanged by the parties
and, promptly thereafter, the Articles of Merger will be filed by Newco and the
Company with the Secretary of State of the State of Colorado; provided, however,
that if any of the conditions provided for in Articles VII and VIII hereof shall
not have been met or waived by the date on which the Closing is otherwise
scheduled, then, subject to Section 10.1.4 hereof, the party to this Agreement
which is unable to meet such condition or conditions shall be entitled to
postpone the Closing for a reasonable period of time by notice to the other
parties until such condition or conditions shall have been met (which such
notifying party will seek to cause to happen at the earliest practicable date)
or waived.
ARTICLE X
TERMINATION
SECTION 10.1 TERMINATION AND ABANDONMENT. This Agreement may be
terminated and the Merger may be abandoned before the Effective Time of the
Merger, notwithstanding any approval and adoption of this Agreement by the
shareholders of the Company or Newco:
10.1.1 by the mutual written consent of VSI, Newco and the
Company; or
10.1.2 by VSI or the Company, if (w) the shareholders of the
Company fail to approve the Merger at the Special Meeting, (x) the
shareholders of Scherer fail to give the Scherer Shareholder Approval at a
meeting of Scherer's shareholders convened to vote upon the Scherer
Shareholder Approval, (y) the Board of Directors of the Company shall fail
to recommend or shall withdraw or condition its recommendation that the
shareholders of the Company approve this Agreement and the Merger or shall
have resolved to do so or (z) the Board of Directors of Scherer shall fail
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to recommend or shall withdraw or condition its recommendation that the
shareholders of Scherer give the Scherer Shareholder Approval or shall have
resolved to do so; or
10.1.3 by VSI if there has been a misrepresentation or breach
on the part of the Company in any of the representations or warranties of
the Company set forth herein that are, by their terms, qualified as to
materiality, or if there has been a material misrepresentation or breach on
the part of the Company in any of the representations or warranties of the
Company set forth herein that are not so qualified, or if there has been
any material failure on the part of the Company to comply with its
obligations hereunder, or if the Company's Special Treatment Sales (as
defined in Section 2.24.1 hereof) for the period from December 29, 1996
through the date seven days prior to the Closing (the "Pre-Closing Date")
are less than eighty percent (80%) of the Company's Special Treatment Sales
during the period from the first day of the Company's fiscal quarter
commencing in December 1995 through the date one year prior to the Pre-
Closing Date, or if there has been a misrepresentation or breach on the
part of Scherer or Robert Scherer (collectively, the "Scherer Parties") in
any of the representations or warranties of any of the Scherer Parties set
forth in the Inducement Agreements that are, by their terms, qualified as
to materiality, or if there has been a material misrepresentation or breach
on the part of any of the Scherer Parties in any of the representations or
warranties of the Scherer Parties set forth in the Inducement Agreements
that are not so qualified, or if there has been any material failure on the
part of any of the Scherer Parties to comply with such entity's or such
person's obligations under the Inducement Agreements, or if any of the
conditions to VSI's obligation to consummate the Merger set forth in
Article VII or to VSI's obligation to consummate the transactions
contemplated by the Inducement Agreements has not been satisfied as of the
Closing Date, or by the Company if there has been a misrepresentation or
breach on the part of VSI or Newco in any of the representations or
warranties of VSI or Newco set forth herein that are, by their terms,
qualified as to materiality, or if there has been a material
misrepresentation or breach on the part of VSI in any of the
representations or warranties of VSI set forth herein that are not so
qualified, or if there has been any material failure on the part of VSI or
Newco to comply with their respective obligations hereunder, or if any of
the conditions to the Company's obligation to consummate the Merger set
forth in Article VIII hereof has not been satisfied as of the Closing Date;
or
10.1.4 by either the Company or VSI, at its discretion, if the
Merger is not effective by July 31, 1997, except that a party whose breach
of this Agreement has caused a delay in the consummation of the Merger
shall not be entitled to terminate this Agreement pursuant to this Section
10.1.4.
SECTION 10.2 TERMINATION PROCEDURES. The power of termination
provided for by this Article X will be effective only after written notice
thereof, signed on behalf of the party for which it is given by its President or
other duly authorized officer, shall have been given to the other parties
hereto. If this Agreement is terminated in accordance with this Article X, then
the
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Merger shall be abandoned without further action by the Company, VSI and Newco,
and their officers shall not file the Articles of Merger with the Secretary of
State of the State of Colorado.
SECTION 10.3 LIABILITY UPON TERMINATION. In the event of termination
of this Agreement and abandonment of the Merger pursuant to this Article X, no
party hereto shall have any liability or further obligation to any other party
hereto except as follows:
10.3.1 A party that is in breach of its representations or
warranties hereunder shall not be liable for damages incurred by the other
parties hereto as a result of such breach. A party that is in breach of
its covenants hereunder shall be liable for damages incurred by the other
parties hereto only if (i) such breach is a material breach of a material
covenant and (ii) the party asserting such breach gives the breaching party
notice of such breach and such breach is not cured within twenty days
thereafter (provided, however, that if such breach is not reasonably
curable within such twenty day period but is curable prior to the date set
forth in Section 10.1.4 hereof, no party shall be entitled to damages
pursuant to this Section 10.3. if the breaching party diligently seeks to
effect such cure and does in fact effect such cure prior to the date set
forth in Section 10.1.4 hereof). If VSI terminates this Agreement as a
result of any such material breach of a covenant and is entitled to damages
pursuant to this Section 10.3.1, the Company shall be liable to VSI only to
the extent that such damages are proximately caused by such breach. The
parties acknowledge that it is not possible to calculate the damages that
the Company would suffer in the event that VSI were to materially breach
any of its material covenants hereunder. Accordingly, if the Company
terminates this Agreement as a result of one or more material breaches of
material covenants by VSI or Newco and is entitled to damages pursuant to
this Section 10.3, the parties hereby agree that the Company shall be
entitled to the sum of $800,000 (and no more) as liquidated damages with
respect to such breaches.
10.3.2 In the event that (x) this Agreement is terminated by
any party pursuant to Section 10.1.2, by VSI pursuant to Section 10.1.3 or
by VSI pursuant to Section 10.1.4, (y) prior to the date on which this
Agreement is terminated (i) an offer is made in any manner contemplating a
merger with the Company, an acquisition of the Company or its assets, a
tender or exchange offer with respect to the Company, a consolidation with
the Company, a liquidation of the Company, a recapitalization of the
Company or any other Purchase Event (as defined below) or Takeover Proposal
(as defined in Section 4.2.7 hereof), (ii) a claim is made that such offer
could result in greater value to the Company's shareholders than the value
to be received by them upon consummation of the Merger and (iii) after such
offer is known to the Company or any of its officers or directors, the
shareholders of the Company do not approve the Merger, the shareholders of
Scherer fail to grant the Scherer Shareholder Approval, the Company
breaches any of its obligations hereunder or all of the conditions
precedent described in Article VII hereof are not satisfied, and (z) within
twenty-four months after the
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termination of this Agreement, a Purchase Event occurs, the Company shall
pay to VSI, no later than the date on which such Purchase Event occurs, a
cash fee equal to $1,500,000. For purposes of this Agreement, the term
"Purchase Event" means any of the following events:
10.3.2.1 Without VSI's prior written consent, the Company or any
of its officers or directors shall have recommended, publicly proposed or
publicly announced an intention to authorize, recommend or propose, or
entered into an agreement with any person (other than VSI or any subsidiary
of VSI) to effect (A) a merger, consolidation or similar transaction
involving the Company or any Subsidiary which would constitute a
"significant subsidiary" within the meaning of Rule 405 of the SEC (a
"Significant Subsidiary") (other than transactions solely between the
Company's Subsidiaries that are not violative of this Agreement), (B) the
disposition, by sale, lease, exchange or otherwise, of the Company or of
assets of the Company or any of its Subsidiaries representing 25% or more
of the consolidated assets of the Company and its Subsidiaries or (C) the
issuance, sale or other disposition by the Company of (including by way of
merger, consolidation, share exchange or any similar transaction)
securities representing 25% or more of the voting power of the Company or
any of its Significant Subsidiaries, other than, in the case of (A), (B) or
(C), any merger, consolidation or similar transaction involving the Company
or any of its Subsidiaries in which the voting securities of the Company
outstanding immediately prior thereto continue to represent (by either
remaining outstanding or being converted into the voting securities of the
surviving entity of any such transaction) at least 75% of the combined
voting power of the voting securities of the Company or the surviving
entity outstanding immediately after the consummation of such merger,
consolidation, or similar transaction (provided any such transaction is not
violative of this Agreement); or
10.3.2.2 any person (other than Scherer, affiliates of Scherer, VSI
or any subsidiary of VSI) shall have acquired beneficial ownership (as such term
is defined in Rule 13d- 3 promulgated under the 1934 Act) of or the right to
acquire beneficial ownership of, or any "group" (as such term is defined in
Section 13(d)(3) of the 1934 Act), other than a group of which Scherer,
subsidiaries of Scherer, VSI or a subsidiary of VSI are the sole members, shall
have been formed which beneficially owns, or has the right to acquire beneficial
ownership of, 25% or more of the voting power of the Company or any of its
Significant Subsidiaries.
10.3.3 Notwithstanding the foregoing, the Company shall not be
obligated to pay the $1,500,000 amount set forth in Section 10.3.2 hereof in the
event that each of the following circumstances occur in the following order:
10.3.3.1 this Agreement is terminated after a public
announcement is made that a specific third-party other than Scherer (such
third-party being hereinafter referred to as the "Potential Acquirer") is
proposing one or more transactions which, if consummated, would constitute
a Purchase Event;
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10.3.3.2 subsequent to the termination of this Agreement, a
public announcement is made that the Potential Acquirer no longer intends to
pursue any transactions which would constitute a Purchase Event and, in fact,
the potential purchaser does not pursue a Purchase Event;
10.3.3.3 the Company offers in writing to VSI the opportunity
to enter into an agreement and plan of merger which is, in all substantial
respects (including, without limitation, the nature and amount of the
consideration payable by VSI thereunder), identical to this Agreement and
Scherer and Robert Scherer offer in writing to VSI the opportunity to enter
into agreements which are, in all substantial respects (including, without
limitation, the amounts payable by VSI thereunder), identical to the Inducement
Agreements; and
10.3.3.4 VSI either declines in writing to pursue such offers or
fails to respond to the Company, Robert Scherer and Scherer within 20 days after
receipt of notice given in accordance with Section 11.7 hereof.
10.3.4 In addition, the Company shall not be obligated to pay the
$1,500,000 amount set forth in Section 10.3.2 hereof in the event that each of
the following circumstances occur in the following order:
10.3.4.1 this Agreement is terminated after a public
announcement is made that a Potential Acquirer other than Scherer is proposing
one or more transactions which, if consummated, would constitute a Purchase
Event;
10.3.4.2 subsequent to the termination of this Agreement, a
public announcement is made that the Potential Acquirer no longer intends to
pursue any transactions which would constitute a Purchase Event and, in fact,
the potential purchaser does not pursue a Purchase Event;
10.3.4.3 the Company offers in writing to VSI the opportunity
to enter into an agreement and plan of merger which is, in all substantial
respects (including, without limitation, the nature and amount of the
consideration payable by VSI thereunder), identical to this Agreement and
Scherer and Robert Scherer offer in writing to VSI the opportunity to enter
into agreements which are, in all substantial respects (including, without
limitation, the amounts payable by VSI thereunder), identical to the Inducement
Agreements;
10.3.4.4 the Company and VSI enter into such an agreement and
plan of merger (the "New Agreement") and VSI enters into such inducement
agreements;
10.3.4.5 subsequent to the execution of the New Agreement, the
New Agreement is terminated for reasons that would not give rise to the payment
of any sum by the Company pursuant to the section of the New Agreement that is
analogous to Section 10.3.2 hereof and at a time when Scherer has made no public
announcement of any intention to acquire the Company; and
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10.3.4.6 subsequent to such termination of the New Agreement,
Scherer determines to pursue the merger of the Company with Scherer or a wholly-
owned subsidiary of Scherer and such transaction is consummated.
ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.1 AMENDMENT AND MODIFICATION. To the fullest extent
permitted by applicable law, this Agreement may be amended, modified and
supplemented with respect to any of the terms contained herein by mutual consent
of the Company, VSI and Newco by an appropriate written instrument executed by
each of such parties at any time prior to the Effective Time of the Merger;
provided, however, that following an affirmative vote at the Special Meeting,
this Agreement may not be amended to reduce the consideration payable in the
Merger in respect of shares of Company Common Stock without obtaining the
approval of the Company's shareholders in the manner required by law.
SECTION 11.2 WAIVER OF COMPLIANCE. To the fullest extent permitted by
law, each of VSI, Newco and the Company may, by an instrument in writing, extend
the time for or waive the performance of any of the obligations of the other
parties hereto or waive compliance by the other parties hereto with any of the
covenants, or waive any of the conditions of its obligations, contained herein;
provided, however, that the obtaining of the approval of the Company's
shareholders referred to in Sections 7.4 and 8.4 hereof and the expiration of
all applicable waiting periods under the Hart Scott Rodino Act shall not be
waivable. No such extension of time or waiver shall operate as a waiver of, or
estoppel with respect to, any subsequent or other failure.
SECTION 11.3 SURVIVAL. The respective representations and warranties of
each party hereto contained herein shall not be deemed to be waived or otherwise
affected by any investigation made by the other parties hereto. None of the
representations or warranties of the parties hereto set forth in Articles II and
III hereof, or in any document furnished pursuant hereto, shall survive the
Merger. The terms and conditions set forth in Sections 10.3, 11.4, 11.5 and
11.6 hereof, as well as this Section 11.3, shall survive any termination of this
Agreement.
SECTION 11.4 NO THIRD PARTY RIGHTS. Except as otherwise expressly
provided in this Agreement, nothing herein expressed or implied is intended, nor
shall be construed, to confer upon or give any person, firm or corporation,
other than VSI, Newco and the Company and their respective security holders, any
rights or remedies under or by reason of this Agreement.
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SECTION 11.5 CONFIDENTIALITY. VSI and the Company shall honor the
confidentiality agreements previously delivered by each such party to the other
with respect to matters pertaining to the Merger.
SECTION 11.6 EXPENSES. Each party hereto will bear all expenses incurred
by it in connection with this Agreement and the transactions contemplated
hereby.
SECTION 11.7 NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand or when mailed by
registered or certified mail, postage prepaid, or when given by telex or
facsimile transmission (promptly confirmed in writing), as follows:
(a) If to the Company:
Marquest Medical Products, Inc.
11039 East Lansing Circle
Englewood, Colorado 80112
Attn: William Thompson
Telephone: 800-525-1882, ext. 404
Telecopy: 303-792-5028
with a copy to:
Thomas Moore, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
633 Seventeenth Street
Suite 2800
Denver, Colorado 80202
Telephone: 303-291-2644
Telecopy: 303-297-0422
or to such other person as the Company shall designate in writing, such writing
to be delivered to VSI in the manner provided in this Section 11.7;
(b) If to VSI or Newco:
Vital Signs, Inc.
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20 Campus Road
Totowa, New Jersey 07512
Attn: Mr. Anthony J. Dimun
Telephone: 201-790-1330, ext. 371
Telecopy: 201-790-3842
with a copy to:
Jay Sturm, Esq.
General Counsel
Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Telephone: 201-790-1330, ext. 372
Telecopy: 201-790-3842
and with a copy to:
Peter H. Ehrenberg, Esq.
Lowenstein, Sandler, Kohl,
Fisher & Boylan, P.C.
65 Livingston Avenue
Roseland, New Jersey 07068
Telephone: 201-992-8003
Telecopy: 201-992-5820
or to such other person as VSI shall designate in writing, such writing to be
delivered to the Company in the manner provided in this Section 11.7.
SECTION 11.8 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties
hereto; provided, however, that Newco may assign this Agreement and its rights,
interests and
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obligations hereunder to another directly or indirectly wholly-owned subsidiary
of VSI without the consent of the Company.
SECTION 11.9 GOVERNING LAW. This Agreement and the legal relations
between the parties hereto shall be governed by and construed in accordance with
the laws of the State of New Jersey.
SECTION 11.10 COUNTERPARTS. This Agreement may be executed simultaneously
in two or more counterparts and by the different parties hereto on separate
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 11.11 HEADINGS AND REFERENCES. The headings of the Sections and
Articles of this Agreement are inserted for convenience of reference only and
shall not constitute a part hereof. All references herein to Sections and
Articles are to sections and articles of this Agreement, unless otherwise
indicated.
SECTION 11.12 ENTIRE AGREEMENT. This Agreement (including the Disclosure
Letter and the documents and agreements referred to herein, all of which form a
part hereof), any other document executed by the parties hereto concurrently
herewith, the confidentiality agreements delivered by VSI and the Company to
each other and any other document signed by the parties hereto referencing this
Section 11.12 contain the entire understanding of the parties hereto in respect
of the subject matter contained herein and supersede all prior agreements and
understandings between the parties with respect to such subject matter. SECTION
SECTION 11.13 PUBLICITY. Except as otherwise required by law or the rules
of the Nasdaq Stock Market, so long as this Agreement is in effect, neither VSI
nor the Company shall issue or cause the publication of any press release with
respect to the transactions contemplated by this Agreement without the consent
of the other parties hereto, which consent shall not be unreasonably withheld or
delayed.
SECTION 11.14 GENERAL INTERPRETIVE PRINCIPLES. For purposes of this
Agreement, except as otherwise expressly provided or unless the context
otherwise requires:
11.14.1 the terms defined in this Agreement have the meanings
assigned to them in this Agreement and include the plural as well as the
singular, and the use of any gender herein shall be deemed to include the other
genders;
11.14.2 accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles;
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11.14.3 a reference to a Section or Article without further reference
to Subsections within such Section or without further reference to Subsections
or Sections within such Article shall constitute a reference to all Subsections
within such Section or all Sections and Subsections within such Article unless
the context otherwise expressly indicates;
11.14.4 the words "herein", "hereof", "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
provision;
11.14.5 the term "include" or "including" shall mean without
limitation by reason of enumeration; and
11.14.6 the parties hereto do not intend for this Agreement or any
other document prepared in connection with the Merger to be construed against
the party that drafted this Agreement or such other document merely by virtue of
the fact that such party drafted this Agreement or such other document.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date and year first written above.
VITAL SIGNS, INC.
By: /s/ Anthony J. Dimun
-------------------------------
Anthony J. Dimun,
Executive Vice President
VSI ACQUISITION CORPORATION
By: /s/ Anthony J. Dimun
-------------------------------
Anthony J. Dimun,
Executive Vice President
MARQUEST MEDICAL PRODUCTS, INC.
By: /s/ William J. Thompson
-------------------------------
William J. Thompson,
President and Chief Operating Officer
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<PAGE>
ANNEX II
SCHERER HEALTHCARE INDUCEMENT AGREEMENT
<PAGE>
SCHERER HEALTHCARE INDUCEMENT AGREEMENT
This AGREEMENT, dated this 14th day of March, 1997, by and between SCHERER
HEALTHCARE, INC., a Delaware corporation having its principal place of business
at 2589 Paces Ferry Road, Suite 300, Atlanta, Georgia ("Scherer Healthcare"),
VITAL SIGNS, INC., a New Jersey corporation having its principal place of
business at 20 Campus Road, Totowa, New Jersey ("VSI"), and MARQUEST MEDICAL
PRODUCTS, INC., a Colorado corporation having its principal place of business at
11039 East Lansing Circle, Englewood, Colorado ( "Marquest"),
WITNESSETH THAT
WHEREAS, Scherer Healthcare is the principal shareholder of Marquest;
WHEREAS, contemporaneously with the execution of this Agreement, Marquest
and VSI have entered into an agreement of even date herewith pursuant to which
VSI will acquire Marquest by means of a cash merger (the "Merger Agreement");
WHEREAS, Scherer Healthcare is the owner of warrants to purchase through
March 31, 1999 up to 1,530,000 shares of Marquest's common stock, no par value
(the "Marquest Common Stock"), at a purchase price of $.75 per share (the "First
ABG Warrants"), which First ABG Warrants were granted to Scherer Healthcare
pursuant to an omnibus agreement, dated April 12, 1993, between Marquest and
Scherer Healthcare (the "Omnibus Agreement");
WHEREAS, Scherer Healthcare is the owner of warrants to purchase through
March 31, 2003 up to 4,250,000 shares of Marquest Common Stock at a purchase
price of $.75 per share (the "Second ABG Warrants"), which Second ABG Warrants
were granted to Scherer Healthcare pursuant to the Omnibus Agreement;
WHEREAS, Scherer Healthcare is the owner of warrants to purchase through
March 31, 1999 up to 800,000 shares of Marquest Common Stock at an exercise
price of $.75 per share (the "Current Warrants"), which Current Warrants were
granted to Scherer Healthcare pursuant to a warrant agreement dated April 12,
1993;
WHEREAS, Scherer Healthcare has indicated that it will not vote its shares
of Marquest Common Stock in favor of the Merger Agreement and the transactions
contemplated thereby unless the shareholders of Scherer Healthcare authorize
Scherer Healthcare to take such action and to effect the transactions
contemplated hereby (such authorization being hereinafter referred to as the
"Scherer Shareholder Approval");
WHEREAS, pursuant to the Omnibus Agreement, Scherer Healthcare purchased
from Marquest the "ABG Purchased Assets" (as defined in the Omnibus Agreement)
and then agreed to lease and license the ABG Purchased Assets back to Marquest
pursuant to an "Equipment Lease" (as defined in the Omnibus Agreement) and a
"License of Intangible Property" (as defined in the Omnibus Agreement);
WHEREAS, pursuant to the Omnibus Agreement, Scherer Healthcare has granted
to Marquest a "Repurchase Option" (as defined in the Merger Agreement) that
grants to Marquest the right to repurchase the ABG Purchased Assets and
"Improvements" (as defined in the License of Intangible Property) from Scherer
Healthcare in exchange for a cash exercise price (the "Exercise Price");
WHEREAS, Scherer Healthcare desires to sell its rights in the ABG Purchased
Assets and the Improvements in exchange for a payment equal to the Exercise
Price;
<PAGE>
WHEREAS, upon consummation of the closing described in the Merger
Agreement, VSI is willing to purchase the ABG Purchased Assets and the
Improvements from Scherer Healthcare, subject to the Equipment Lease, the
License of Intellectual Property and the Repurchase Option, for a purchase price
equal to the Exercise Price and in accordance with the terms set forth herein,
provided that Scherer Healthcare agrees to execute the covenant against
competition described herein;
WHEREAS, Scherer Healthcare is prepared to execute such covenant against
competition, provided that it receives suitable compensation therefor; and
WHEREAS, VSI will pay such compensation provided for herein in accordance
with the terms set forth herein, provided that Scherer Healthcare agrees to the
terms set forth herein,
NOW THEREFORE, in consideration of the mutual covenants set forth herein,
the parties hereto hereby agree as follows:
1. CERTAIN DEFINITIONS. All capitalized terms set forth herein that are
not defined herein shall have the definitions set forth in the Merger Agreement.
2. SCHERER HEALTHCARE'S REPRESENTATIONS. Scherer Healthcare hereby
warrants and represents to VSI as follows:
2.1 Scherer Healthcare is a Delaware Corporation. Under Delaware law
and Scherer Healthcare's certificate of incorporation and by-laws, the
affirmative vote of a majority of Scherer Healthcare's outstanding shares of
Common Stock will be sufficient in order for the shareholders of Scherer
Healthcare to give the Scherer Shareholder Approval.
2.2 The Board of Directors of Scherer Healthcare has approved
resolutions, certified copies of which shall promptly be provided to VSI, (i)
authorizing Scherer Healthcare to vote Scherer Healthcare's shares of Marquest
Common Stock in favor of the Merger Agreement, subject to the receipt by the
Board of Directors of Marquest of the opinion of Hanifen, Imhoff Inc. as to the
fairness of the transactions contemplated by the Merger Agreement, from a
financial point of view, to the stockholders of record of Marquest (the
"Marquest Opinion") and the receipt by the Board of Directors of Scherer
Healthcare of the opinion of Summit Investment Corporation as to the fairness of
the transactions contemplated by the Merger Agreement and the transactions
contemplated hereby, from a financial point of view, to the stockholders of
record of Scherer Healthcare (the "Scherer Healthcare Opinion"), in the case of
the Marquest Opinion as of the date hereof and in the case of the Scherer
Healthcare Opinion as of the date hereof and as of the date of the meeting at
which Scherer Healthcare's shareholders will vote on such matters, (ii)
recommending that Scherer Healthcare's shareholders vote in favor of the Merger
Agreement and the transactions contemplated hereby and (iii) submitting such
matters to Scherer Healthcare's shareholders for their approval.
2.3 The execution, delivery and performance of this Agreement by
Scherer Healthcare (A) are within the legal capacity and power of Scherer
Healthcare; (B) have been duly authorized by all requisite corporate action on
the part of Scherer Healthcare, other than shareholder approval; and (C) require
the approval or consent of, or filing with, no persons, entities or agencies
other than (i) the Scherer Shareholder Approval, (ii) approval of certain
transactions contemplated by this Agreement and the Merger Agreement pursuant to
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (iii) any filings
required to effect the transfer of intangible assets pursuant to this Agreement.
2.4 Scherer Healthcare has reviewed the warranties and
representations made by Marquest to VSI in the Merger Agreement. Scherer
Healthcare has no actual knowledge that any of such warranties and
representations are inaccurate in any material respect. Scherer Healthcare shall
promptly notify VSI in writing (in the manner in which Marquest is required to
notify VSI pursuant
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to the Merger Agreement) if, between the date hereof and the earlier of the
Effective Time of the Merger and the date on which the Merger Agreement
terminates, Scherer Healthcare discovers that any of its representations and
warranties herein are inaccurate in any material respect. It is understood
that (i) this Section 2.4 shall not survive the consummation of the Merger,
(ii) Scherer Healthcare shall not be liable for monetary damages in the event
that this Section 2.4 is inaccurate in any respect and (iii) VSI's sole right
in the event that it determines that this Section 2.4 is materially
inaccurate either at the time that this Agreement is executed or as of the
time of the closings described herein shall be for VSI to assert its rights
under the Merger Agreement to terminate the Merger Agreement (in which case
the transactions contemplated hereby will not be consummated). It is further
understood that the "actual knowledge of Scherer Healthcare" shall be deemed
to be the actual knowledge of only Robert P. Scherer, Jr. and Amy Murphy.
2.5 Scherer Healthcare owns 4,778,941 shares of Marquest Common
Stock free and clear of any security interests, consignments, liens, judgments,
encumbrances, restrictions, or claims of any kind and 2,432,251 shares of
Marquest Common Stock which have been pledged by Scherer Healthcare pursuant to
the terms of the Amended and Restated Non-Negotiable Note dated as of January
17, 1997 from Scherer Healthcare to Scherer Capital Company L.L.C. and the
related Amended and Restated Stock Pledge Agreement (the "Pledge Agreements"),
which Pledge Agreements have been assigned by Scherer Capital Company L.L.C. to
the four adult children of Robert P. Scherer, Jr.
2.6 The, execution, delivery and performance of this Agreement by
Scherer Healthcare neither violates nor constitutes a default under, nor
creates a lien or breach under, the terms of the certificate of incorporation
and by-laws of Scherer Healthcare or of any material agreement, document or
instrument binding upon Scherer Healthcare. This Agreement is a legal, valid
and binding obligation of Scherer Healthcare enforceable against Scherer
Healthcare in accordance with its terms, except insofar as the enforcement
thereof may be limited by bankruptcy, insolvency, moratorium or similar laws
affecting the enforcement of creditors' rights generally and subject to
equitable principles limiting the availability of equitable remedies.
2.7 If the Closing and the Effective Time of the Merger were to occur
on the date hereof and, immediately after the Effective Time of the Merger, the
Repurchase Option were exercised, the aggregate amount of the Exercise Price
payable by such designee upon such exercise would be $5,535,000.
2.8 Scherer Healthcare has all of the right, title and interest in and
to all of the ABG Purchased Assets and Improvements described in SCHEDULE 2.8
hereof (the "Scheduled Assets") that it acquired from Marquest upon Scherer's
original acquisition of such assets pursuant to the Omnibus Agreement. Scherer
Healthcare has not granted to any third-party any security interest, pledge or
encumbrance with respect to any of the Scheduled Assets. Scherer Healthcare does
not have any ownership interest in any ABG Purchased Assets or any Improvements
other than the Scheduled Assets.
2.9 Scherer Healthcare has extended the exercise period of the
Repurchase Option through June 15, 1999 on the terms set forth in the Omnibus
Agreement as originally executed by the parties to the Omnibus Agreement.
2.10 The factual representations regarding Scherer Healthcare and its
equity interests in Marquest set forth in the "WHEREAS" clauses herein are
accurate in all material respects.
2.11 There are 4,314,223 shares of the Common Stock, par value $.01
per share, of Scherer Healthcare (the "Scherer Healthcare Common Stock")
outstanding on the date hereof. Scherer Healthcare is obligated to issue a total
of an additional 218,056 shares of Scherer Healthcare Common
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Stock pursuant to outstanding exercisable stock options, warrants, convertible
securities and other contractual arrangements entitling third-parties to acquire
shares of Scherer Healthcare Common Stock. There are no classes of capital stock
of Scherer Healthcare entitled to vote with respect to the Scherer Shareholder
Approval other than the Scherer Healthcare Common Stock.
3. SCHERER HEALTHCARE'S COVENANTS. Scherer Healthcare hereby covenants
and agrees with VSI as follows:
3.1 Scherer Healthcare will not exercise the first ABG Warrants, the
Second ABG Warrants or the Current Warrants at any time on or before the earlier
of the Effective Time of the Merger or the date of the termination of the Merger
Agreement.
3.2 Intentionally omitted.
3.3 Promptly after this Agreement is executed, Scherer Healthcare
will cooperate with VSI in preparing a proxy statement (describing a proposal
to grant the Scherer Shareholder Approval)) for filing with the Securities and
Exchange Commission (the "SEC") and ultimately for mailing to Scherer
Healthcare's shareholders (the "Proxy Statement"). Scherer Healthcare shall not
file the Proxy Statement preliminarily or in final form unless and until VSI
consents to such filings. VSI shall not unreasonably withhold or delay any such
consent. Scherer Healthcare represents and warrants to VSI that the Proxy
Statement will comply in all material respects with the Securities Exchange Act
of 1934 and the rules and regulations promulgated thereunder, that the Proxy
Statement will not contain any untrue statements of material fact regarding
Scherer Healthcare and will not omit to state any material fact regarding
Scherer Healthcare required to be stated therein or necessary to make the
statements therein not misleading. Scherer Healthcare will promptly advise VSI
in writing if at any time prior to the Effective Time of the Merger it shall
obtain knowledge of any facts that might reasonably be expected to make it
necessary or appropriate to amend or supplement the Proxy Statement in order to
make the statements contained or incorporated by reference therein not
misleading or to comply with applicable law. After VSI consents to the mailing
of the Proxy Statement and all necessary SEC filing requirements have been
satisfied, Scherer Healthcare shall mail the Proxy Statement to its shareholders
in accordance with all applicable federal and state securities laws and, subject
to the exercise by the members of Scherer Healthcare's Board of Directors of
their fiduciary duties, shall use its reasonable best efforts to solicit proxies
in favor of the Scherer Shareholder Approval.
3.4 Scherer Healthcare shall call a special meeting of its
shareholders (the "Scherer Healthcare Meeting"), to be held as soon as
practicable after the Proxy Statement is mailed to Scherer Healthcare's
shareholders, for the purpose of seeking the Scherer Shareholder Approval from
the shareholders of Scherer Healthcare. In connection with the Scherer
Healthcare Meeting, the members of Scherer Healthcare's Board of Directors shall
recommend that Scherer Healthcare's shareholders grant the Scherer Shareholder
Approval, subject to the exercise by the members of Scherer Healthcare's Board
of Directors of their fiduciary duties.
3.5 Prior to the Effective Time of the Merger or the date on which
the Merger Agreement is terminated, Scherer Healthcare will not sell,
dispose, pledge, encumber or otherwise transfer any shares of Marquest Common
Stock; provided, however, that this Section 3.5 shall not preclude Scherer
Healthcare from pledging or transferring any of its shares of Marquest Common
Stock (i) pursuant to the requirements of the Pledge Agreements or (ii) to a
transferee (a "Scherer Permitted Transferee") if, prior to such pledge or
transfer, the Scherer Permitted Transferee executes an agreement, in form and
substance reasonably satisfactory to VSI, to vote such shares in favor of the
Merger and Merger Agreement.
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<PAGE>
3.6 If Scherer Healthcare's shareholders approve the Merger Agreement
and the transactions contemplated thereby and receive an updated Scherer Opinion
as of the date of the Scherer Healthcare Meeting, Scherer Healthcare shall vote
all of the shares of Marquest Common Stock that it owns in favor of the Merger
and the Merger Agreement..
3.7 Intentionally omitted.
3.8 Until the earlier of the Effective Time of the Merger and the
termination of the Merger Agreement, Scherer Healthcare shall, assuming that it
has an ability to pay, honor all of its obligations under the Pledge Agreements.
4. SALE OF THE SCHEDULED ASSETS.
4.1 Marquest hereby consents to the sale of the Scheduled Assets
and the assignment of the Equipment Lease and License of Intellectual Property
by Scherer Healthcare pursuant to this Section 4 and acknowledges that if it
exercises the Repurchase Option subsequent to such sale, Marquest's rights shall
be to purchase the applicable assets from the purchaser of the Scheduled Assets
hereunder. Scherer Healthcare acknowledges that upon consummation of the closing
described in Section 4.3 hereof, Scherer Healthcare shall have no right to
acquire shares of Marquest's Common Stock pursuant to Section 2.05 of the
Omnibus Agreement.
4.2 During the week immediately prior to the Closing under the Merger
Agreement, Scherer Healthcare and VSI shall cooperate in calculating the
Exercise Price.
4.3 Provided that the conditions set forth in Section 4.4 hereof have
been satisfied, then immediately after Scherer Healthcare and VSI determine that
the Merger is effective under Colorado law, Scherer Healthcare and VSI shall
conduct a closing (the "Scheduled Assets Closing") at the same location as the
location of the Closing under the Merger Agreement. Provided that the conditions
set forth in Section 4.4 hereof have been satisfied, at the Scheduled Assets
Closing:
4.3.1 VSI or a designee of VSI (for purposes hereof, either such
entity being referred to herein as the "Purchaser") shall purchase from Scherer
Healthcare, and Scherer Healthcare shall sell to the Purchaser, the Scheduled
Assets, at a price equal to the Exercise Price as of the date of the Scheduled
Assets Closing (such price being hereinafter referred to as the "Closing
Exercise Price") and in accordance with the terms set forth herein. Scherer
Healthcare shall assign to the Purchaser all of Scherer Healthcare's rights as
the lessor under the Equipment Lease and as the licensor under the License of
Intangible Property, and VSI shall assume all of Scherer Healthcare's
obligations as lessor under the Equipment Lease and licensor under the License
of Intangible Property, all pursuant to the terms of an assignment and
assumption agreement in form and substance reasonably satisfactory to VSI and
Scherer Healthcare.
4.3.2 Payment of the Closing Exercise Price shall be by means of
a certified or bank cashier's check payable to Scherer Healthcare.
4.3.3 Scherer Healthcare will transfer all of the Scheduled
Assets to the Purchaser by delivering to the Purchaser all such assets and by
evidencing such conveyance with a bill of sale and general assignment in the
form of the bill of sale and general assignment dated June 15, 1993 and
delivered by Marquest pursuant to the Omnibus Agreement and such other forms of
conveyance as either would be required by Section 3 of the Omnibus Agreement if
Marquest were exercising the Repurchase Agreement or as are reasonably requested
by the Purchaser to confer upon the Purchaser the same title to the Scheduled
Assets as Scherer Healthcare holds immediately prior to the Scheduled Assets
Closing. Scherer Healthcare will
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<PAGE>
transfer such assets to such entity free and clear of any security interests,
pledges, encumbrances or restrictions that Scherer Healthcare may have
created. Thereafter, Scherer Healthcare shall reasonably cooperate with the
Purchaser in furnishing to the Purchaser such further instruments as the
Purchaser shall reasonably request to affirm the Purchaser's ownership of
such assets free and clear of all such security interests, pledges,
encumbrances and restrictions. SCHERER HEALTHCARE MAKES NO REPRESENTATIONS,
PROMISES, STATEMENTS, OR WARRANTIES, EXPRESSED OR IMPLIED, WITH RESPECT TO
THE MERCHANTABILITY, SUITABILITY, OR FITNESS FOR ANY PURPOSE OF THE SCHEDULED
ASSETS AND MAKES NO REPRESENTATION THAT SCHEDULED ASSETS ARE IN COMPLIANCE
WITH ANY APPLICABLE LAW, ORDINANCE OR OTHER GOVERNMENTAL REGULATION. VSI
agrees on behalf of itself, and on behalf of the Purchaser if VSI is not the
Purchaser, that on and after the date of the Scheduled Assets Closing,
Scherer Healthcare shall not be liable to VSI, the Purchaser or Marquest for
any loss, claim, demand, liability, cost, damage, or expense of any kind,
caused or alleged to be caused, directly or indirectly, by the condition of
the Scheduled Assets, or by any inadequacy thereof for any purpose, or by any
defects therein or in the use or maintenance thereof, or by any damage
whatsoever and whosoever caused other than damages resulting from Scherer
Healthcare's failure to transfer its ownership interest in the Scheduled
Assets in the manner described herein. VSI agrees on behalf of itself, and on
behalf of the Purchaser if VSI is not the Purchaser, that its obligations
hereunder shall not in any way be affected by any defect in the condition or
failure of performance of the Scheduled Assets. IN NO EVENT SHALL SCHERER
HEALTHCARE HAVE ANY LIABILITY ON AND AFTER THE DATE OF THE SCHEDULED ASSETS
CLOSING FOR, NOR SHALL VSI, PURCHASER OR MARQUEST HAVE ANY REMEDY ON AND
AFTER THE DATE OF THE SCHEDULED ASSETS CLOSING AGAINST SCHERER HEALTHCARE
FOR, ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, ANY LOSS OF PROFITS OR SAVINGS,
LOSS OF USE, OR ANY OTHER COMMERCIAL LOSS OF WHATEVER NATURE ARISING FROM THE
SALE OF THE SCHEDULED ASSETS.
4.3.4 Scherer Healthcare shall execute and deliver to the
Purchaser a covenant against competition in the form and substance of the
covenant against competition annexed hereto as EXHIBIT A.
4.3.5 In consideration for Scherer Healthcare's executing such
covenant against competition, VSI (or, if VSI is not the Purchaser, VSI shall
cause the Purchaser to) deliver to Scherer Healthcare its certified check or a
bank cashier's check in an amount equal to the amount by which five million
eight hundred and sixty thousand dollars ($5,860,000) exceeds the Closing
Exercise Price.
4.3.6 At the Scheduled Assets Closing, (i) Scherer Healthcare
shall deliver to Marquest a release, in form and substance reasonably
satisfactory to VSI and Marquest, pursuant to which Scherer shall release
Marquest from all of its obligations to provide indemnification to Scherer
Healthcare under the Equipment Lease and the License of Intangible Property and
from all of Marquest's other obligations to Scherer Healthcare arising pursuant
to the Omnibus Agreement and the agreements executed pursuant thereto and (ii)
VSI shall deliver to Scherer Healthcare an agreement, in form and substance
reasonably satisfactory to Scherer Healthcare, pursuant to which VSI shall
provide to Scherer Healthcare the indemnification provided (prior to such
release) to Scherer Healthcare under Sections 12, 13 and 14 of the License of
Intangible Property and Section 5 of the Equipment Lease; provided, however,
that the agreement furnished by VSI to Scherer Healthcare pursuant to this
Section 4.3.6 shall expressly state that the aggregate liability that VSI and
its subsidiaries (including Marquest after the Scheduled Assets Closing) shall
have to Scherer pursuant to such agreement shall not exceed two million dollars
($2,000,000) with respect to matters unrelated to the Terumo litigation
referenced in the
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<PAGE>
Disclosure Letter and shall not exceed four million dollars ($4,000,000) with
respect to matters related to the Terumo litigation referenced in the
Disclosure Letter, less in each such case (i.e., the $2,000,000 limitation
and the $4,000,000 limitation) the attorneys' and experts' fees and
disbursements incurred by VSI and its subsidiaries subsequent to the
Scheduled Assets Closing reasonably allocable to matters undertaken on behalf
of Scherer Healthcare. It is understood that there will be no allocation of
such fees and expenses to Scherer Healthcare with respect to a matter if
Scherer Healthcare is not a party to such matter.
4.4 Notwithstanding any provision herein to the contrary, the
obligations of the parties hereto to consummate the Scheduled Assets Closing are
conditioned upon satisfaction of the following conditions:
4.4.1 The Merger shall have been consummated and Scherer
Healthcare and VSI shall have determined that the Merger is effective under
Colorado law.
4.4.2 All approvals required by law in order for Scherer
Healthcare and VSI to consummate the Scheduled Assets Closing (the "Sale
Approvals") shall have been obtained. VSI and Scherer Healthcare shall use their
respective best efforts to obtain all such Sale Approvals.
4.4.3 Each of Scherer Healthcare's representations set forth in
this Agreement shall have been true in all material respects when made and (with
the exception of the representation set forth in Section 2.7 hereof) shall be
true in all material respects as of the date of the Scheduled Assets Closing.
4.4.4 VSI shall not have discovered that Scherer Healthcare
shall have taken any action or omitted to take any action between the date
hereof and the Scheduled Assets Closing which will materially adversely affect
the title in and to the Scheduled Assets which the Purchaser will acquire upon
consummation of the Scheduled Assets Closing.
5. CASHLESS EXERCISE OF WARRANTS. If the Merger is consummated, then
immediately after the Effective Time of the Merger, (i) Scherer Healthcare shall
tender the Current Warrants, the First ABG Warrants and the Second ABG Warrants
to VSI or the Exchange Agent and shall deliver to VSI or the Exchange Agent any
letter of transmittal reasonably requested by VSI and (ii) VSI shall, upon
receipt of such tender, deliver or cause the Exchange Agent to deliver to
Scherer Healthcare a check in an amount equal to the "Excess Amount" (as defined
herein) multiplied by the number of shares of Marquest Common Stock covered by
the First ABG Warrants, Second ABG Warrants and Current Warrants so tendered.
For purposes of this Agreement, the term "Excess Amount" shall mean the amount
by which the "Purchase Price" (as such term is defined in the Merger Agreement)
exceeds seventy-five cents ($.75). Thereafter, Scherer Healthcare shall have no
rights with respect to the First ABG Warrants, Second ABG Warrants or Current
Warrants other than to receive payment therefor in accordance with this Section
5.
6. VSI'S REPRESENTATIONS. VSI hereby warrants and represents as follows:
6.1 The execution, delivery and performance of this Agreement by VSI
(A) are within the legal capacity and power of VSI; (B) have been duly
authorized by all requisite corporate action on the part of VSI; and (C) require
the approval or consent of, or filing with, no persons, entities or agencies
other than (i) approval of certain transactions contemplated by this Agreement
and the Merger Agreement pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1986 and approvals of the type required by VSI to consummate
the Merger Agreement and (ii) any filings required to effect the transfer of
intangible assets pursuant to this Agreement.
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<PAGE>
6.2 The, execution, delivery and performance of this Agreement by VSI
neither violates nor constitutes a default under, nor creates a lien or breach
under, the terms of the certificate of incorporation and by-laws of VSI or,
subject to the receipt of any necessary approvals, of any material agreement,
document or instrument binding upon VSI. This Agreement is, and the
indemnification agreement referenced in Section 4.3.6 will be, a legal, valid
and binding obligation of VSI enforceable against VSI in accordance with its
terms, except insofar as the enforcement thereof may be limited by bankruptcy,
insolvency, moratorium or similar laws affecting the enforcement of creditors'
rights generally and subject to equitable principles limiting the availability
of equitable remedies.
7. VSI'S COVENANTS WITH RESPECT TO THE PROXY STATEMENT. Promptly after
this Agreement is executed, VSI will cooperate with Scherer Healthcare in
preparing the Proxy Statement. VSI shall not unreasonably withhold or delay
any consent requested by Scherer Healthcare pursuant to Section 3.3 hereof. VSI
represents and warrants to Scherer Healthcare that the information to be
supplied by VSI to Scherer Healthcare for the Proxy Statement with respect to
VSI (excluding Marquest) will not contain any untrue statements of material fact
and will not omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. VSI will promptly
advise Scherer Healthcare in writing if at any time prior to the Effective Time
of the Merger it shall obtain knowledge of any facts that might reasonably be
expected to make it necessary or appropriate to amend or supplement the Proxy
Statement in order to make the statements contained or incorporated by reference
therein not misleading or to comply with applicable law.
8. REPURCHASE OPTION. Scherer and Marquest hereby confirm to VSI that the
Repurchase Option has been extended until June 15, 1999 upon the terms
originally set forth in the Omnibus Agreement.
9. NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand or when mailed by registered or certified
mail, postage prepaid, or when given by telex or facsimile transmission
(promptly confirmed in writing), as follows:
(a) If to Scherer Healthcare, to:
Scherer Healthcare, Inc.
2589 Paces Ferry Road
Suite 300
Atlanta, Georgia 30339
Telephone: 770-333-0066
Telecopy: 770-333-0068
with a copy to:
David M. Calhoun, Esq.
Long Aldridge Norman LLP
Suite 5300
One Peachtree Center
303 Peachtree Street
Atlanta, Georgia 30308
Telephone: 404-527-4947
Telecopy: 404-527-4198
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<PAGE>
or to such other persons as Scherer Healthcare shall designate in writing, such
writing to be delivered to VSI in the manner provided in this Section 9;
(b) If to VSI, to:
Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Attn: Mr. Anthony J. Dimun
Telephone: 201-790-1330, ext. 371
Telecopy: 201-790-3842
with a copy to:
Jay Sturm, Esq.
General Counsel
Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Telephone: 201-790-1330, ext. 372
Telecopy: 201-790-3842
and with a copy to:
Peter H. Ehrenberg, Esq.
Lowenstein, Sandler, Kohl,
Fisher & Boylan, P.C.
65 Livingston Avenue
Roseland, New Jersey 07068
Telephone: 201-992-8700
Telecopy: 201-992-5820
or to such other persons as VSI shall designate in writing, such writing to be
delivered to Scherer Healthcare in the manner provided in this Section 9.
10. ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties hereto.
11. GOVERNING LAW. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the laws
of the State of Delaware.
12. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts and by the different parties hereto on separate counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
13. HEADINGS AND REFERENCES. The headings of the Sections of this
Agreement are inserted for convenience of reference only and shall not
constitute a part hereof. All references herein to Sections are to sections of
this Agreement, unless otherwise indicated.
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<PAGE>
14. INTERPRETATION. The parties hereto do not intend for this Agreement
to be construed against the party that drafted this Agreement merely by
virtue of the fact that such party drafted this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth above.
SCHERER HEALTHCARE, INC.
By: /S/ ROBERT P. SCHERER, JR.
---------------------------
Chief Executive Officer
VITAL SIGNS, INC.
By: /S/ ANTHONY J. DIMUN
---------------------
Anthony J. Dimun, Executive Vice President
MARQUEST MEDICAL PRODUCTS, INC.
By: /S/ WILLIAM THOMPSON
--------------------
President
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<PAGE>
ANNEX III
ROBERT SCHERER INDUCEMENT AGREEMENT
<PAGE>
ROBERT SCHERER INDUCEMENT AGREEMENT
This AGREEMENT, dated this 14th day of March, 1997, is given by ROBERT P.
SCHERER, JR., a Georgia resident ("Scherer"), to VITAL SIGNS, INC., a New
Jersey corporation having its principal place of business at 20 Campus Road,
Totowa, New Jersey ("VSI"),
WITNESSETH THAT
WHEREAS, Scherer is the principal shareholder of Scherer Healthcare, Inc.
("Scherer Healthcare");
WHEREAS, Scherer Healthcare is the principal shareholder of Marquest
Medical Products, Inc. ("Marquest");
WHEREAS, Marquest is in the process of negotiating an agreement with VSI
pursuant to which VSI would acquire Marquest by means of a cash merger (the
"Merger Agreement");
WHEREAS, Scherer is the owner of a promissory note of Marquest in the
principal amount of $700,000, which promissory note is convertible into a total
of 1,000,000 shares of Marquest Common Stock (the "Promissory Note");
WHEREAS, Scherer Healthcare has indicated that it will not vote its shares
of Marquest Common Stock in favor of the Merger Agreement, the merger
contemplated thereby (the "Merger") and the other transactions contemplated by
the Merger Agreement unless the shareholders of Scherer Healthcare authorize
Scherer Healthcare to take such action and a related action involving the sale
of a product line by Scherer Healthcare to VSI (such authorization being
hereinafter referred to as the "Scherer Shareholder Approval");
WHEREAS, VSI has advised Scherer that VSI will not enter into the Merger
Agreement unless Scherer executes and delivers this Inducement Agreement;
WHEREAS, Scherer desires to induce VSI to enter into the Merger Agreement
and acknowledges that VSI will rely upon this Inducement Agreement in entering
into the Merger Agreement; and
WHEREAS, contemporaneous with the execution of this Agreement, it is
contemplated that Scherer Healthcare, Marquest and VSI will enter into an
agreement, captioned the "Scherer Healthcare Inducement Agreement" (the "Scherer
Healthcare Inducement Agreement"), pursuant to which the parties thereto will
make certain representations and covenants relating primarily to the Merger,
other matters contemplated by the Merger Agreement and a sale of assets to VSI,
NOW THEREFORE, to provide VSI with the inducements that it requires,
Scherer hereby warrants and covenants to VSI as follows:
1. REPRESENTATIONS OF SCHERER. Scherer hereby warrants and represents to
VSI as follows:
1.1 Scherer has (i) the sole power to vote and dispose of 1,688,361.5
shares of the Common Stock, par value $.01 per share, of Scherer Healthcare (the
"Scherer Healthcare Common Stock") and (ii) the sole power to vote and shared
power to dispose of 562,594.5 shares of Scherer Healthcare Common Stock, which
shares are owned by the four adult children of Scherer and are subject to a
Voting Trust dated as of February 23, 1997 for which Scherer acts as the sole
trustee (the "Voting Trust"). The shares described in clause (i) above include
1,244,378.5 shares owned by RPS Investments, Inc., a corporation wholly-owned by
Scherer.
<PAGE>
1.2 Scherer has not entered into any agreement which would preclude
or otherwise affect in any respect Scherer's ability to provide the
representations set forth in this Section 1 or the covenants set forth in
Section 2 hereof. Scherer has not pledged or otherwise encumbered any of the
shares of Scherer Healthcare Common Stock, or options or warrants to purchase
Scherer Healthcare Common Stock, that he owns. Scherer has the authority to
execute this Agreement with respect to all of the shares referenced in the first
sentence of Section 1.1 hereof.
1.3 Intentionally omitted.
1.4 Scherer owns the Promissory Note free and clear of any security
interests, consignments, liens, judgments, encumbrances, restrictions, or claims
of any kind.
1.5 Each of the factual representations regarding Scherer set forth
in the "WHEREAS" clauses of this Agreement are accurate.
1.6 Scherer has no actual knowledge that any of the warranties and
representations made by Marquest to VSI in the Merger Agreement are inaccurate
in any material respect. It is understood that (i) this Section 1.6 shall not
survive the consummation of the Merger, (ii) Scherer shall not be liable for
monetary damages in the event that this Section 1.6 is inaccurate in any respect
and (ii) VSI's sole right in the event that it determines that this Section 1.6
is materially inaccurate either at the time that this Agreement is executed or
as of the time of the closing described in the Merger Agreement shall be for VSI
to assert its rights under the Merger Agreement to terminate the Merger
Agreement (in which case the transactions contemplated by the Scherer Healthcare
Inducement Agreement will not be consummated).
.
2. COVENANTS OF SCHERER. Scherer hereby covenants and agrees with VSI as
follows:
2.1 At the meeting of Scherer Healthcare's shareholders called to
vote upon the Scherer Shareholder Approval, Scherer will, subject to his
fiduciary obligations as a director of Scherer Healthcare, as a majority
shareholder of Scherer Healthcare and as a trustee the Voting Trusts and subject
to the receipt by the Board of Directors of Scherer Healthcare of the "Scherer
Opinion" (as defined in the Scherer Healthcare Inducement Agreement) at the
times contemplated by the Scherer Healthcare Inducement Agreement, vote all of
the shares of Scherer Healthcare Common Stock referenced in the first sentence
of Section 1.1 hereof and any other shares of Scherer Healthcare Common Stock
that he may acquire subsequent to the date hereto in favor of granting the
Scherer Shareholder Approval.
2.2 Prior to the earlier of the Effective Time of the Merger (as
defined in the Merger Agreement) or the date of the termination of the Merger
Agreement, Scherer will not sell, dispose, pledge, encumber or otherwise
transfer any of the shares of Scherer Healthcare Common Stock referenced in
Section 1.1 hereof or any other shares of Scherer Healthcare Common Stock that
he may acquire subsequent to the date hereof or any right to acquire such stock;
provided, however, that this Section 2.2 shall not preclude Scherer from (a)
disposing of shares of Scherer Healthcare Common Stock if, after such transfer,
the outstanding shares of Scherer Healthcare Common Stock that he and his
"Permitted Transferees" (as defined herein) continue to own represent more than
50% of the outstanding Scherer Healthcare Common Stock calculated on a fully
diluted basis (after taking into account all shares of Scherer Healthcare Common
Stock issuable pursuant to outstanding stock options, warrants, convertible
securities and other contractual arrangements entitling third-parties to acquire
shares of Scherer Healthcare Common Stock) and (b) transferring any of his
shares of Scherer Healthcare Common Stock to a transferee (a "Permitted
Transferee") if, prior to such transfer, such Permitted Transferee executes an
agreement, in form and substance reasonably satisfactory to VSI, to vote such
shares in favor of the Scherer Shareholder Approval.
III-2
<PAGE>
2.3 Scherer will not sell, give, devise, encumber, pledge or
otherwise transfer the Promissory Note or any interest therein unless and until
the Merger Agreement is terminated.
2.4 Scherer will not demand payment under the Promissory Note unless
and until the Merger Agreement is terminated.
2.5 At the Closing under the Merger but prior to the Effective Time
of the Merger, Scherer will convert the Promissory Note in the aggregate
principal amount of $700,000 into a total of 1,000,000 shares of Marquest Common
Stock.
2.6 Upon consummation of the "Scheduled Asset Closing" (as such term
is defined in an agreement of even date herewith (captioned as the Scherer
Healthcare Inducement Agreement) executed by Scherer Healthcare, Marquest and
VSI and referred to herein as the "Scherer Healthcare Inducement Agreement"),
Scherer agrees to execute and deliver to VSI a covenant against competition in
the form of the covenant against competition annexed hereto as EXHIBIT A in
exchange for a payment of one hundred and forty thousand dollars ($140,000).
3. NOTICES. Any notices, requests, demands and other communications
to VSI required or permitted hereunder shall be in writing and shall be deemed
to have been duly given when delivered by hand or when mailed by registered or
certified mail, postage prepaid, or when given by telex or facsimile
transmission (promptly confirmed in writing), as follows:
Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Attn: Mr. Anthony J. Dimun
Telephone: 201-790-1330, ext. 371
Telecopy: 201-790-3842
with a copy to:
Jay Sturm, Esq.
General Counsel
Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Telephone: 201-790-1330, ext 372
Telecopy: 201-790-3842
and with a copy to:
Peter H. Ehrenberg, Esq.
Lowenstein, Sandler, Kohl,
Fisher & Boylan, P.C.
65 Livingston Avenue
Roseland, New Jersey 07068
Telephone: 201-992-8700
Telecopy: 201-992-5820
or to such other persons as VSI shall designate to Scherer in writing.
III-3
<PAGE>
4. ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon Scherer and shall inure to the benefit of VSI and its successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by VSI without the prior
written consent of Scherer.
5. GOVERNING LAW. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the laws of
the State of Delaware.
6. HEADINGS AND REFERENCES. The headings of the Sections of this
Agreement are inserted for convenience of reference only and shall not
constitute a part hereof. All references herein to Sections are to sections of
this Agreement, unless otherwise indicated.
7. INTERPRETATION; DEFINITIONS.
Scherer does not intend for this Agreement to be construed against VSI merely by
virtue of the fact that VSI's representatives drafted this Agreement.
Capitalized terms not defined herein shall have the definitions given to such
terms in the Merger Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the
date first set forth above.
/s/ Robert P. Scherer, Jr.
--------------------------
Robert P. Scherer, Jr.
By execution of this Agreement, Vital Signs, Inc. agrees only that (i) upon
consummation of the Scheduled Asset Closing and delivery by Robert P. Scherer,
Jr. of the covenant against competition provided for in Section 2.6 of this
Agreement, Vital Signs, Inc. shall deliver to Robert P. Scherer, Jr. a certified
or bank cashier's check in an amount equal to one hundred and forty thousand
dollars ($140,000) and (ii) the limitations on VSI's rights described in Section
1.6 of this Agreement are accepted by Vital Signs, Inc.
VITAL SIGNS, INC.
By: /s/ Anthony J. Dimun
--------------------
Anthony J. Dimun,
Executive Vice President
The undersigned agrees that its shares of Scherer Healthcare Common Stock
shall be voted in the manner, and subject to the conditions, described in
Section 2.1 of this Agreement.
RPS INVESTMENTS, INC.
By: /s/ Robert P. Scherer, Jr.
---------------------------
Robert P. Scherer, Jr.
III-4
<PAGE>
ANNEX IV
FAIRNESS OPINION OF SUMMIT INVESTMENT CORPORATION
<PAGE>
SUMMIT INVESTMENT CORPORATION
CORPORATE FINANCE GROUP
March 17, 1997
Board of Directors
Scherer Healthcare, Inc.
2859 Paces Ferry Road, Suite 300
Atlanta, GA 30339
Members of the Board:
We understand that Marquest Medical Products, Inc. ("Marquest" or the "Company")
and Vital Signs, Inc. ("VSI") have entered into an Agreement and Plan of Merger,
dated as of March 14, 1997 (the "Merger Agreement"), pursuant to which Vital
Signs will acquire all of the common stock of Marquest (including warrants and
options to be exercised) for $0.797 per share in cash (the "Merger"). As more
fully described therein and in the Scherer Healthcare, Inc. ("Scherer
Healthcare") Inducement Agreement between Scherer Healthcare, VSI and Marquest
(the "Inducement Agreement"), the Merger Agreement and Inducement Agreement also
provide for (i) the sale by Scherer Healthcare to VSI or a subsidiary of VSI of
certain assets that Scherer Healthcare currently leases to Marquest, relating to
the ABG product line ("ABG Assets"), (ii) an agreement of Scherer Healthcare not
to compete in the blood gas collection products business for a three-year
period, (iii) payment of approximately $140,000 by VSI to Robert P. Scherer, Jr.
("Robert Scherer") for an agreement not to compete and (iv) the assumption by
Scherer Healthcare of Marquest's obligation under an employment agreement
between Marquest and William J. Thompson (President and Chief Operating Officer
of Marquest) which will require Scherer Healthcare to make an approximate
$200,000 payment to William J. Thompson, on the closing date of the Merger
(together with the Merger, the "Transaction"). VSI will pay to Scherer
Healthcare an aggregate of $5,860,000 as the purchase price for the ABG Assets
and the payment for the agreement not to compete. We understand that Scherer
Healthcare owns 7,211,192 shares of Marquest common stock (equal to 50.4% of the
outstanding common stock of Marquest) and warrants for the purchase of an
additional 6,580,000 shares of Marquest common stock. In addition, Robert
Scherer owns 1,546,392 shares of Marquest common stock (equal to 10.8% of the
outstanding common stock of Marquest). Furthermore, we understand that Robert
Scherer owns approximately 39.1% of the outstanding common stock of Scherer
Healthcare.
Suite 500 - 900 Second Avenue - Minneapolis, Minnessota 55402-4027
Office (612) 338-1400 - (800) 328-4000 - FAX (612)337-3248
<PAGE>
Board of Directors
Scherer Healthcare, Inc.
March 17, 1997
Page Two
You have requested our opinion as to whether (i) the consideration to be
received by the holders of the shares of Marquest common stock pursuant to the
Merger Agreement and (ii) the Transaction taken as a whole, is fair from a
financial point of view to Scherer Healthcare stockholders (other than Robert
Scherer).
Summit Investment Corporation ("Summit"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, initial and secondary
underwritings, private placements and valuations for estate, corporate and other
purposes.
In developing our opinion, we have, among other things:
1. Reviewed certain publicly available financial statements and other
information of Marquest and Scherer Healthcare;
2. Reviewed certain internal financial statements and other financial and
operating data concerning Marquest and Scherer Healthcare prepared by their
respective managements;
3. Analyzed certain financial projections of Marquest prepared by the
management of the Company;
4. Discussed the past and current operations and financial condition and the
prospects of Marquest and Scherer Healthcare with senior executives of
Marquest and Scherer Healthcare;
5. Reviewed the reported prices and trading activity for the Marquest common
stock and the Scherer Healthcare common stock;
6. Compared the financial performance of Marquest and the prices and trading
activity of the common stock with that of certain other comparable
publicly-traded companies and their securities;
7. Reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions;
8. Reviewed the Merger Agreement and Inducement Agreement; and
9. Performed such other analyses as we deemed appropriate.
IV-2
<PAGE>
Board of Directors
Scherer Healthcare, Inc.
March 17, 1997
Page Three
In our review and analysis, and in arriving at our opinion, we have relied upon
and assumed the completeness and accuracy of all the factual, historical,
financial and other information and data publicly available or furnished to us
by Marquest and Scherer Healthcare. We have assumed that the financial
projections provided to us were reasonably prepared on bases reflecting the best
currently available estimates and judgements of the senior management of
Marquest. In addition, we have not made nor been provided with an independent
evaluation or appraisal of the assets of Marquest or the ABG Assets. Our
opinion is necessarily based on economic, stock market and other conditions as
they exist and can be evaluated as of the date hereof.
This opinion has been prepared for the use of the Board of Directors of Scherer
Healthcare and does not constitute a recommendation for any stockholders as to
how such stockholder should vote. We hereby consent, however, to the inclusion
of this opinion as an exhibit to any proxy statement distributed in connection
with the Merger.
Based upon our analysis and review and subject to the assumptions we have
stated, we are of the opinion that as of the date hereof, (i) the consideration
to be received by the holders of the shares of Marquest common stock pursuant to
the Merger Agreement and (ii) the Transaction taken as a whole, is fair from a
financial point of view to Scherer Healthcare stockholders (other than Robert
Scherer as to whom we express no opinion).
Very truly yours,
SUMMIT INVESTMENT CORPORATION
IV-3
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(As amended by Form 10-K/A-1
filed on June 26, 1997)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
COMMISSION FILE NO. 0-10552
SCHERER HEALTHCARE, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 59-0688813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2859 PACES FERRY ROAD, SUITE 300, ATLANTA, GEORGIA 30339
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code:
(770) 333-0066
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered (Title of Class) pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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 .
------ -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates of the Registrant on June 10, 1997 was $3,876,847. There were
4,314,223 Shares of Common Stock outstanding on June 10, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders
are incorporated by reference into Parts I and III of this report.
<PAGE>
SCHERER HEALTHCARE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
Number Number
------ ------
PART I
<S> <C>
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . 13
4a. Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters. . . 14
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . 14
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . 21
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . 21
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 21
12. Security Ownership of Certain Beneficial Owners and Management . . . . . . 22
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . 22
SIGNATURES. . . . . . . . . . . . . 24
INDEX OF EXHIBITS . . . . . . . . . 25
</TABLE>
<PAGE>
SCHERER HEALTHCARE, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
OVERVIEW
Scherer Healthcare, Inc. (the "Company") was incorporated under the laws of the
State of Delaware on December 18, 1981 as the successor to Aloe Creme
Laboratories, Inc., incorporated on February 7, 1953. The Company's Common
Stock is listed on The Nasdaq National Market under the symbol "SCHR".
The Company's strategy has focused on the manufacture, distribution, and sale of
specialized healthcare and industrial safety room products and services. At
March 31, 1997, the Company, through its subsidiaries and majority owned
partnership, operated in the following business segments:
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT:
Marquest Medical Products, Inc., a Colorado corporation, is 51% owned by
the Company.
WASTE MANAGEMENT SERVICES SEGMENT:
(a) Bio Systems Partners, a Georgia partnership, is 60% owned by the
Company.
(b) Medical Waste Systems, Inc., a Delaware corporation, is 100% owned by
the Company.
CONSUMER HEALTHCARE PRODUCTS SEGMENT:
Scherer Laboratories Inc., a Texas corporation, is 100% owned by the
Company.
As used herein, the term "Company" includes Scherer Healthcare, Inc. and, where
appropriate, its subsidiaries and majority owned partnerships.
RECENT DEVELOPMENTS
SALE OF SCHERER HEALTHCARE, LTD. INDUSTRIAL BUSINESS ASSETS. On October 29,
1996, Scherer Healthcare, Ltd. ("Scherer, Ltd."), which was a majority owned
partnership of the Company doing business as Protective Disposable Apparel, sold
substantially all of its assets to a subsidiary of Health-Pak, Inc. for
approximately $254,000, plus the assumption by Health-Pak of $319,000 in
accounts payable. The assets sold were those used in connection with Scherer,
Ltd.'s business of providing nonwoven disposable industrial apparel and related
products to the industrial safety, environment-controlled clean room and
scientific markets. In October 1995, Scherer, Ltd. sold its assets used in the
Medical Business (as hereinafter defined) to a subsidiary of Cordis
Corporation. See "Medical Device and Surgical/Safety Disposables Segment -
Scherer Healthcare, Ltd.".
EXECUTION OF DEFINITIVE MERGER AGREEMENT BETWEEN MARQUEST MEDICAL PRODUCTS, INC.
AND VITAL SIGNS, INC.
On March 14, 1997, Marquest Medical Products, Inc. ("Marquest") and Vital Signs,
Inc. ("VSI") announced the execution of a definitive Agreement and Plan of
Merger dated such date (the "Merger Agreement") providing for VSI to acquire
Marquest. In the transaction, which the Company and Marquest expect to
consummate in late July 1997, Marquest would become a wholly owned subsidiary of
VSI and VSI would pay Marquest shareholders $0.797 per share in cash for each
outstanding share of Marquest Common Stock. The Company owns 7,211,192 shares
of Marquest Common Stock directly and holds warrants to purchase an additional
6,580,000 shares of Marquest Common Stock at an exercise price of $0.75 per
share. In connection with the Merger Agreement, the Company and VSI entered
into an agreement pursuant to which VSI has agreed, provided the Merger
Agreement is consummated, to purchase from the Company certain assets and
product rights previously sold by Marquest to the Company and the Company has
agreed to enter into a covenant not to compete for an aggregate purchase price
of $5,860,000.
-3-
<PAGE>
The Company has agreed, subject to approval by the Company's shareholders and to
certain other conditions, to vote its shares of Marquest Common Stock in favor
of the Merger. The Company also will agree not to compete with VSI in the sale
or manufacture of arterial blood gas products. The Merger Agreement and the
transactions contemplated thereby are subject to a number of conditions,
including approval by the shareholders of Marquest and the Company. See
"Medical Device and Surgical/Safety Disposables Segment - Marquest" for further
discussion.
FINANCIAL INFORMATION RELATING TO SEGMENT OPERATIONS. Set forth below is
certain financial information with respect to each of the Company's operating
segments.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net Sales:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 22,045 $ 22,443 $ 20,576
Scherer Healthcare, Ltd. (a) 1,067 7,555 11,203
Waste Management Services Segment 11,836 10,753 10,039
Consumer Healthcare Products Segment 1,276 1,106 984
----------- ----------- -----------
Total $ 36,226 $ 41,857 $ 42,802
----------- ----------- -----------
----------- ----------- -----------
Operating Income (Loss) from Continuing Operations:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 363 $ 510 $ (2,696)
Scherer Healthcare, Ltd. (a) (323) (335) (912)
Waste Management Services Segment 1,073 924 790
Consumer Healthcare Products Segment 467 368 244
Corporate (b) (848) (1,074) (3,054)
----------- ----------- -----------
Total $ 732 $ 393 $ (5,628)
----------- ----------- -----------
----------- ----------- -----------
Identifiable Assets:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 13,424 $ 15,393 $ 13,992
Scherer Healthcare, Ltd. (a) - 909 6,233
Waste Management Services Segment 9,589 9,370 9,524
Consumer Healthcare Products Segment 111 153 139
Corporate (c) 9,070 8,585 10,751
----------- ----------- -----------
Total $ 32,194 $ 34,410 $ 46,639
----------- ----------- -----------
----------- ----------- -----------
Depreciation Expense:
Medical Device and Surgical/Safety Disposables Segment
Marquest Medical Products, Inc. $ 793 $ 1,046 $ 1,364
Scherer Healthcare, Ltd. (a) 3 74 128
Waste Management Services Segment 816 731 717
Consumer Healthcare Products Segment 1 1 1
Corporate 65 72 66
----------- ----------- -----------
Total $ 1,678 $ 1,924 $ 2,276
----------- ----------- -----------
----------- ----------- -----------
Capital Expenditures:
Medical Device and Surgical/Safety Disposables Segment
Marquest Medical Products, Inc. $ 207 $ 66 $ 666
Scherer Healthcare, Ltd. (a) - 47 268
Waste Management Services Segment 1,106 626 715
Consumer Healthcare Products Segment 6 - -
Corporate 5 - 15
----------- ----------- -----------
Total $ 1,324 $ 739 $ 1,664
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(a) The assets and businesses of Scherer Healthcare, Ltd. were sold in two
separate transactions in October 1995 and October 1996. See Note 5 to
Notes to Consolidated Financial Statements inlcuded elsewhere herein.
-4-
<PAGE>
(b) Amount includes a nonrecurring charge of $2,000,000 for fiscal year 1995
relating to the write down of two waste incinerator investments.
(c) Amount includes net assets of discontinued operations of $351,000,
$556,000, and $9,000 for fiscal years 1997, 1996, and 1995, respectively.
See Note 4 to Notes to Consolidated Financial Statements included elsewhere
herein.
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT
Set forth below is information regarding the two companies that comprised this
segment during fiscal 1997.
MARQUEST MEDICAL PRODUCTS, INC.
OVERVIEW. Marquest was incorporated in 1979 under the laws of the State of
Colorado. During the first half of calendar year 1993, the Company and Marquest
structured several transactions whereby the Company obtained a controlling
interest in Marquest. Marquest has been included in the Company's consolidated
financial statements beginning with the fiscal year ending March 31, 1994.
Marquest's common stock is listed for trading on The Nasdaq Small Cap Market
under the symbol "MMPI".
MERGER AGREEMENT. On March 14, 1997, Marquest and VSI entered into a Merger
Agreement pursuant to which, and subject to the satisfaction of certain
conditions precedent, a subsidiary of VSI will be merged (the "Merger") into
Marquest with the result that Marquest will become a wholly owned subsidiary of
VSI and VSI would pay Marquest shareholders $0.797 per share in cash for each
outstanding share of Marquest Common Stock. As of March 31, 1997, the Company
owned 7,211,192 shares of Marquest Common Stock directly and held warrants to
purchase an additional 6,580,000 shares of Marquest Common Stock at an exercise
price of $0.75 per share.
In connection with the Merger Agreement, the Company and VSI entered into an
agreement pursuant to which VSI has agreed, provided the Merger is consummated,
to purchase certain assets owned by the Company and licensed back to Marquest
and the Company has agreed to enter into a covenant not to compete for an
aggregate purchase price of $5,860,000. The assets to be acquired by VSI are
those assets owned by the Company but used by Marquest in the manufacture and
sale of its arterial blood gas ("ABG") product line. In connection with its
investment in Marquest, the Company purchased the ABG product line for
$4,5000,000 in cash and it licenses the product line back to Marquest in
exchange for 3.25% of Marquest's net ABG product sales. Marquest has the option
to repurchase the ABG product line from the Company (the "Repurchase Option")
for $4,500,000 plus $22,500 for each month lapsed between June 1993 and the date
of repurchase. VSI has agreed to purchase the ABG product line from the Company
for a purchase price equal to the purchase price under the Repurchase Option.
Additionally, the Company is obligated to enter into a covenant not to compete
at the time of the Merger pursuant to which it will not engage in the business
of manufacturing or selling ABG products for a period of three years from the
effective date of the Merger. The consideration for the covenant not to compete
will be the difference between $5,860,000 and the amount paid by VSI for the ABG
product line.
See "Transactions with the Company" for further discussion of the Company's
investment in Marquest and its purchase of the ABG product line.
These pending transactions are subject to approval by the shareholders of
Marquest and the Company, and to other standard conditions. The Company
anticipates that the closing will take place in late July 1997.
PRODUCTS. Marquest manufactures and distributes four major groups of products
for use in the respiratory care, cardiopulmonary support and anesthesia
markets. The largest of these product groups is the Blood Collection Systems
for Diagnostic Testing group. This group includes a broad line of Marquest
disposable blood gas syringes. Most revenues in this group are from the sales
of proprietary-designed syringes, which are marketed under the trade names
Gas-Lyte and Quik-ABG.
Marquest's disposable blood gas syringes are used to collect blood for blood gas
analysis routinely performed in hospitals on patients suspected of having
metabolic, respiratory or other cardiopulmonary difficulties. The blood sample
collected is processed through a blood gas analyzer which is manufactured by
other companies. In order for the analysis to be meaningful, the collected
sample must remain as free from contamination as possible. Marquest syringes are
specifically designed to minimize contamination.
-5-
<PAGE>
Marquest's second largest product group is the Aerosolized Medication Delivery
Systems group, consisting primarily of disposable nebulizers. Nebulizers
atomize medications for inhalation into the lungs. Marquest offers different
nebulizers to accommodate user preferences as well as the requirements for
different types of respiratory treatment. Nebulizers are marketed under the
trade names Acorn II-Registered Trademark- and Whisperjet. The Acorn
II-Registered Trademark- nebulizer is used as part of a circuit package sold
under the name "RespirGard II-Registered Trademark- Nebulizer System".
The RespirGard II-Registered Trademark- Nebulizer System is a device designed
for the administration of aerosolized pentamidine (NebuPent-Registered
Trademark-, a registered trademark of Fujisawa Pharmaceutical Company), a drug
used in the treatment of certain respiratory complications that result from the
AIDS virus (pneumocystis carinii pneumonia). RespirGard -Registered
Trademark-II is the only nebulizer system specifically recommended by Fujisawa
and referenced in their labeling and use instructions.
Heated Humidification Systems products comprise Marquest's third product group.
These systems consist of three subgroups - humidifiers, heated wire circuits and
humidification chambers. Heated Humidification Systems provide a flow of moist,
warm air to patients who are at risk from loss of body temperature and drying of
the lung linings. There are applications for this product group in both
respiratory care and anesthesia.
The fourth product group is the Anesthesia and Respiratory Breathing Systems
group, which includes numerous disposable products for use in respiratory care
and anesthesia. These products include standard respiratory and anesthesia
circuits, masks, filters, and hyperinflation systems, as well as other
accessories for use in either respiratory therapy or anesthesia administration
applications.
The circuits range from a simple hose connecting the patient to the anesthesia
machine in the operating room to more sophisticated circuits that allow
monitoring of gas temperature and flow into and out of the patient. Marquest's
disposable masks are designed to eliminate resterilization costs of conventional
reusable masks and represent further steps to reduce the possibility of
cross-contamination in operating rooms.
Marquest's filters are designed to filter particulates and bacteria from any air
or anesthesia line carrying gases to or from a patient. The filter market
continues to rapidly expand as healthcare providers have increased the emphasis
placed on infection control. Marquest's filters are marketed for use in
respiratory support, principally on ventilators, and anesthesia circuits.
These filters are marketed under the trade names RespirGard, HydroGard, OxyGard,
and SpiroGard.
MARKETING AND DISTRIBUTION. During fiscal 1997, Marquest marketed its products
domestically and internationally through company sales personnel and independent
distributors. As of March 31, 1997 and 1996, all of Marquest's operations and
assets were located in the United States with the exception of approximately
$219,000 and $131,000, respectively, of inventory at a warehouse facility of one
of its European distributors. The domestic (United States and Canada) and
export sales for the last three fiscal years are presented in the table below.
FY 1997 FY 1996 FY 1995
------- ------------ -------
(In Thousands)
Net Sales:
United States and Canada $15,957 $16,699 $16,023
Export Sales $ 6,088 $ 5,744 $ 4,553
Marquest focuses substantial resources on marketing and sales. It emphasizes
in-service training for its clinical customers, distributor training and direct
marketing. In-service training educates customers about Marquest's products and
is supported by continuing efforts to introduce product design changes that
eliminate application difficulties, such as converting from liquid heparin to a
dried form to eliminate dilutional errors in blood gas analysis tests. Close
working relationships with medical personnel also have led to the development of
better and safer applications for Marquest's products, such as development of
the RespirGard II -Registered Trademark- nebulizer system circuit, which is used
in the treatment of AIDS-associated respiratory illnesses.
Marquest has identified and pursued opportunities to modify common medical
devices to improve and expand their applications. Marquest believes that
innovative product line expansion and clinical marketing have been and will
continue to be essential factors in gaining market acceptance for Marquest's
products.
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During fiscal 1997, Marquest distributed most of its manufactured products
through a network of respiratory or anesthesia distributors. Historically, this
network included 29 hospital specialty dealers as well as several
medical-surgical dealers and over one thousand home healthcare dealers who
distribute certain Marquest of products for use in the home.
On March 14, 1997, in conjunction with the execution of the Merger Agreement,
VSI and Marquest entered into a Dealer Agreement which authorizes VSI to
distribute Marquest's products in the United States, Canada, Puerto Rico and
certain other international territories for a period of two years. Marquest has
given 28 of its 29 hospital specialty dealers notice terminating its dealer
agreements with such dealers at the end of the required notice period, generally
30 to 90 days from the date of notice. Marquest entered into the Dealer
Agreement with VSI, who distributes its products through an internal sales
force, primarily to provide protection from the possibility that Marquest's
hospital specialty dealers would try to shift customers away from Marquest's
products while the Merger is pending. The Dealer Agreement may be terminated by
Marquest if VSI does not meet certain specified sales quotas after June 30,
1997.
Subsequent to giving the hospital specialty dealers notice of termination,
Marquest entered into new arrangements with some of the dealers pursuant to
which these certain dealers may continue to distribute Marquest's products.
Marquest's international sales and marketing efforts are managed from the
corporate offices in Englewood, Colorado. The European, Middle Eastern, Asian
and Pacific Rim territories are managed by independent field sales
representatives and specialty distributors. Mexican, Central American, South
American, and South African territories are managed using independent specialty
distributors. Marquest also participates in major international trade shows
annually.
During Fiscal 1997, 1996 and 1995, Marquest had one distributor, Tri-Anim Health
Services, Inc. ("THS") of Sylmar, California, that accounted for 18%, 19% and
19%, respectively, of Marquest's sales. THS was terminated as a distributor of
Marquest's products effective June 15, 1997.
PRODUCTION AND RAW MATERIALS. Marquest's manufacturing and assembly operations
consist primarily of the injection molding and extrusion of certain components
and the assembly and packaging of final products from both purchased and
internally-manufactured sources. All of Marquest's manufactured products are
disposable and are principally fabricated from molded resins.
Due to economies of scale in production, Marquest purchases certain standardized
components, including needles, syringe barrels, and other supplies from
qualified external sources. Marquest's material procurement consists of
multiple single source vendors, all of which are subject to qualification
criteria in accordance with Marquest's quality control procedures and policies.
While Marquest endeavors to avoid being dependent on a single source of supply
for any component or raw material by establishing qualified alternate suppliers,
in certain cases it is not economical to use more than one source. Marquest
emphasizes vendor certification and quality programs to ensure uninterrupted
supplies of raw materials and components.
Historically, Marquest has not had a significant backlog of firm orders for its
products. With the exception of orders for future delivery or for specially
assembled products, most orders are shipped within one week of receipt and
Marquest maintains predetermined levels of finished goods inventories to ensure
timely delivery. Marquest had a backlog of orders to ship its products of
approximately $249,000 and $158,000 at March 31, 1997 and 1996, respectively.
SEASONALITY. Historically, Marquest has experienced approximately 45% of its
net sales in the first and second quarters of its fiscal year and 55% in the
third and fourth quarters. Net sales are influenced by patterns in hospital
admissions and discharges.
COMPETITION. The method by which medical devices are distributed in the United
States has undergone, and continues to undergo, significant structural changes.
These structural changes have had a significant negative impact on smaller
medical device manufacturers such as Marquest that have limited on
non-proprietary product lines and cost structures which make it difficult to
compete on a basis where price is the primary purchasing factor.
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The markets for Marquest's products are highly competitive. There are three
major competitors in blood gas collection systems, four major competitors in
anesthesia, respiratory and nebulizer products, and two major competitors in
heated humidification products.
PRODUCT DEVELOPMENT. Marquest's product development is guided by its marketing
and sales personnel. Through their daily contact with existing and potential
customers, marketing and sales personnel attempt to identify needs for new
products and improvements for existing products.
Many risks exist in new product development and there is no assurance that any
of the products currently under development by Marquest can be successfully
developed or, if introduced, will prove to be commercially successful products.
PATENTS, TRADEMARKS, LICENSES AND FRANCHISES. Marquest holds numerous patents
for its manufactured products. It also holds licenses from individuals to
manufacture a number of proprietary products. Marquest makes renewal filings on
patents and trademarks periodically in accordance with Federal regulations.
Patents, trademarks and licenses afford Marquest a measure of protection for its
proprietary products, and Marquest has taken a posture of defending to the
fullest extent possible the rights attendant to the patents, trademarks and
licenses. However, it has been Marquest's experience that patents offer limited
protection because the degree of specialization in its products is so extensive
that the patents on them can, in some cases, be circumvented.
REGULATION. Marquest and its products are subject to regulation by the Food and
Drug Administration ("FDA") and virtually all of Marquest's products are subject
to validation as required by Good Manufacturing Practices ("GMP") of the FDA.
The FDA engages in periodic inspections of Marquest's facilities, its products,
and its manufacturing processes. A May 1991 FDA inspection of Marquest noted
significant deviations from GMP. This report and a subsequent civil complaint
filed by the FDA culminated in a suspension of Marquest's United States
operations pursuant to a five-year Consent Decree effective October 1, 1991.
The suspension was lifted by the FDA on January 9, 1992 after Marquest
demonstrated substantial compliance with GMP and the Consent Decree expired on
October 1, 1996 and is of no further force and effect.
During fiscal 1994, the FDA completed a routine inspection of Marquest for
compliance with GMP. The FDA's inspection report noted two deficiencies which
were addressed and corrected by Marquest. There were no FDA inspections of
Marquest in fiscal 1995.
The FDA conducted another inspection of Marquest's compliance with GMP in fiscal
1996. Marquest was issued an inspection report from the FDA with three
observations noted. In May 1996, the FDA inspected Marquest's operations and
issued a report with six observations noted. Many of the deficiencies noted in
the FDA's reports refer to the lack of training regarding assembly, testing and
sampling. Marquest has taken corrective action in response to the FDA's
concerns and has submitted written documentation to the FDA describing the
employee retraining and other changes it has implemented. Marquest was again
inspected by the FDA in September 1996, and was issued a Form 483, Inspection
Observations, containing three alleged nonconformances with GMP. Marquest
continues to work with the FDA to address the issues raised from these
inspections.
TRANSACTIONS WITH THE COMPANY. During fiscal 1994, the Company and Marquest
completed a series of transactions designed to improve Marquest's liquidity and
cash flows. As part of these transactions, Marquest sold to the Company its
arterial blood gas ("ABG") product line, including related equipment, for
$4,500,000 in cash. The Company then leased the ABG line to Marquest in
exchange for a royalty equal to 3.25% of net ABG product line sales. Marquest
had the option to repurchase the ABG product line at any time on or prior to May
31, 1996 for $4,500,000 plus $22,500 for each month lapsed between the sale and
the repurchase. In May 1996, the Company and Marquest agreed to extend the
option period through June 15, 1999. In 1994, Marquest granted to the Company
warrants to purchase up to 6,580,000 shares of Marquest Common Stock at $.75 per
share as consideration for the original product line repurchase option.
The Company also participated in Marquest's exchange offer for approximately
$12,650,000 of defaulted Marquest Swiss Bonds. In connection with the exchange
offer, the Company issued 43,516 shares of the Company's 5% Convertible
Preferred Stock to the former holders of the Marquest Swiss Bonds. As
consideration for the Company's issuance of its Preferred Stock, Marquest issued
to the Company $4,352,000 aggregate principal amount of its 8% Convertible
Promissory Notes due March 1999. The 8% Notes were convertible into shares of
Marquest Common
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Stock. During fiscal 1995, the Company converted $2,500,000 of the Marquest 8%
Notes into 3,333,333 shares of Marquest Common Stock at a conversion price of
$.70 per share..
On March 28, 1996, the Company and Marquest entered into an agreement pursuant
to which the Company converted the remaining balance of $1,852,000 and the
associated accrued interest of $487,000 on the Marquest six-year 8% Notes into
3,340,245 shares of Marquest Common Stock at a conversion price of $.70 per
share. Additionally, the Company agreed to convert $376,000 in accrued but
unpaid management fees owed to the Company by Marquest into 537,614 shares of
Marquest Common Stock. As of March 31, 1997, the Company owned approximately
51% of Marquest's Common Stock. Marquest has a significant number of warrants,
stock options, and convertible notes that could be converted into Marquest
Common Stock. Depending upon the amount and timing of conversion of any of
these securities, the Company's ownership percentage in Marquest could vary from
42% to 66%. Additionally, the Company has the right to appoint a majority of
the members of Marquest's Board of Directors.
RELATED PARTY TRANSACTIONS. In March 1996, Scherer Capital Company, L.L.C.
("Scherer Cap"), an entity controlled by Robert P. Scherer, Jr. who is the
Chairman of the Board and Chief Executive Officer of the Company and Marquest
and is the majority stockholder of the Company, and Marquest signed a loan and
security agreement (the "Loan Agreement") from which Marquest borrowed $700,000
to repay $700,000 that Marquest borrowed from Scherer Cap in December 1995 for
working capital purposes. The Loan Agreement contemplated the possibility of
additional borrowings of $800,000. Borrowings under the Loan Agreement are
represented by convertible notes due April 1, 2001 (the "Scherer Cap Notes"),
are secured by Marquest's inventory, building, and equipment, and bear interest
at prime rate plus 1.5%, adjusted quarterly. Pursuant to the Loan Agreement,
which expires February 28, 2001, the Scherer Cap Notes are convertible at the
option of Scherer Cap into shares of Marquest's Common Stock at a conversion
price of $.70 per share. As of March 31, 1997, Marquest had borrowed $700,000
under the Loan Agreement and the Scherer Cap Notes and the interest rate was
9.75%. Additionally, on March 29, 1996 Scherer Cap purchased 2,061,856 shares of
Marquest Common Stock, representing approximately 14% of the shares outstanding,
for an aggregate purchase price of $1,000,000. In connection with its
dissolution in March 1997, Scherer Cap assigned the Loan Agreement and the
Scherer Cap Notes, and transferred 1,546,392 shares of the Marquest Common Stock
that it owned to Mr. Scherer, Jr. The remaining 515,464 shares of Marquest
Common Stock owned by Scherer Cap were transferred into a voting trust for the
benefit of Mr. Scherer, Jr.'s adult children. Mr. Scherer, Jr. is entitled to
vote the shares held in the voting trust.
INTERNAL REVENUE SERVICE AUDITS. During fiscal 1994, Marquest received a
federal income tax refund of approximately $745,000 due to the carryback to
prior years of losses incurred during a temporary suspension of its operations.
Subsequently, the Internal Revenue Service ("IRS") conducted an audit of
Marquest and, in July 1994, determined that Marquest could not carryback the
losses and issued an assessment against Marquest for the return of the full
amount of the refund plus interest. In June 1995, Marquest negotiated a
repayment plan with the IRS whereby Marquest paid the IRS $400,000 in June 1995
and the remaining balance will be paid in equal monthly installments over a
two-year period. The IRS has placed a lien on Marquest's manufacturing facility
in Englewood, Colorado to secure payment of these taxes.
EMPLOYEES. At May 30, 1997, Marquest had a total of 253 employees. Marquest's
employees are not represented by a labor union, and Marquest considers its
employee relations to be good.
SCHERER HEALTHCARE, LTD.
The Company owned a 65% interest in Scherer, Ltd., and, through a wholly owned
subsidiary, was the sole general partner. Scherer, Ltd. was formed in 1987 and
had been doing business as Custom Medical Products until October 1995. On
October 3, 1995, Scherer, Ltd. sold certain of its assets to Cordis Medical
Products, Inc., ("Cordis Medical"), a wholly owned subsidiary of Cordis
Corporation ("Cordis") for approximately $6,527,000. The assets sold to Cordis
Medical were those used in connection with Scherer, Ltd.'s business of packing
and distributing medical supplies for surgical procedures and providing nonwoven
medical drapes, gowns and accessory items to hospitals and other healthcare
providers (the "Medical Business"). The assets acquired by Cordis Medical
consisted primarily of Scherer, Ltd.'s plant and land located in Asheville,
North Carolina, furniture and fixtures, machinery and equipment, inventory, and
other intangible property related to the Medical Business. Cordis Medical also
agreed to assume all accounts payable related to the Medical Business and
certain other specifically identified liabilities, including the mortgage on
Scherer, Ltd.'s Asheville facility. Scherer, Ltd. continued in the business of
providing nonwoven disposable industrial apparel and related products to the
industrial safety, environment-controlled clean room and scientific markets (the
"Industrial Business") under the name Protective Disposable Apparel. Its line
of disposable industrial apparel included protective coveralls, frocks, boot
covers, and headware.
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On October 29, 1996, Scherer, Ltd. sold substantially all of its remaining
assets to a subsidiary of Health-Pak, Inc. for approximately $254,000, plus the
assumption by Health-Pak of $319,000 in accounts payable. The assets acquired
by Health-Pak were those used in connection with Scherer, Ltd.'s Industrial
Business and included accounts receivable, inventory and furniture and
fixtures. Additionally, Health-Pak agreed to assume certain accounts payable
and liabilities related to the Industrial Business.
The two transactions discussed above eliminated substantially all of the assets
of Scherer, Ltd.; therefore, Scherer, Ltd. was dissolved on December 2, 1996.
WASTE MANAGEMENT SERVICES SEGMENT
OVERVIEW. The Company operates its Medical Waste Management Services Segment
through Bio Systems Partners and Medical Waste Systems, Inc. (collectively, "Bio
Systems"). The Company owns a 60% general partner interest in Biosystems
Partners, a Georgia partnership. Medical Waste Systems, Inc. is a Delaware
corporation and is wholly owned by the Company. Bio Systems assists hospitals,
clinics, doctors and other healthcare facilities with the control and disposal
of infectious medical waste, including sharp-edged waste such as scalpels,
syringes and needles.
Bio Systems provides services throughout the Northeastern and Mid-Atlantic
states.
Bio Systems' sharp-edged medical waste management programs are designed to
reduce a medical facility's costs and risks associated with disposal of used
scalpels, needles, syringes, and other sharp-edged waste. Bio Systems
incorporates reusable containers in its systems, providing the medical facility
with a more environmentally friendly alternative to traditional disposable
plastic containers.
Bio Systems maintains a fleet of licensed trucks and trailers to transport
medical waste to its processing facility, where it is sterilized, pulverized and
made available for recycling or disposal via landfill or incineration. During
fiscal 1996, Bio Systems consolidated its operations by transferring the medical
waste processing operations at its facility located near Philadelphia,
Pennsylvania to its processing facility in Long Island, New York. The
Pennsylvania facility is used to assemble, manage and store its reusable medical
waste containers..
MARKETING. Bio Systems markets its services through advertising in hospital
industry publications, direct mail and direct contact by Bio Systems' sales
personnel. Customers include hospitals, clinics, and physician offices.
Services to hospitals are typically provided under contracts of at least one
year. No single customer accounts for over 10% of Bio Systems' sales revenues.
Bio Systems operates 365 days a year. Its services are not seasonal or subject
to backlog.
COMPETITION. Bio Systems has three major competitors. Even though Bio Systems
faces significant competition in each of its market areas it believes it has a
strong competitive position because of its reusable sharps containers and
personalized services.
REGULATION. The waste management business is subject to a variety of federal,
state and local regulations concerning the collection, transportation,
processing, and disposal of medical and infectious waste. New regulations are
frequently promulgated, compliance with which could have a material adverse
effect on Bio Systems' business. Management is not aware of any pending
regulations that would have such a material adverse effect.
EMPLOYEES. Bio Systems has approximately 119 employees. Drivers, technicians
and processing personnel in New York and drivers and warehouse personnel in
Pennsylvania are covered by collective bargaining agreements representing
approximately 66% of Bio Systems employees. Bio Systems entered into a
three-year collective bargaining contract in June 1996 with the union for its
New York employees and a three-year contract in October 1996 with the union for
its Pennsylvania employees. Management considers its employee relations to be
good.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
OVERVIEW. In 1981, the Company acquired Scherer Laboratories, Inc., ("Scherer
Labs"), a Texas corporation originally incorporated in 1903. Scherer Labs
markets brand name and generic over-the-counter drugs. These products are
primarily used for treatment of colds and coughs, eye and ear irritations and
insect bites. In early fiscal 1997, Scherer Labs discontinued the sale of its
one remaining prescription drug for which sales were $12,000 and $24,000 in
fiscal 1996 and 1995, respectively. The loss of these sales did not have a
material effect on the Company. Scherer Labs' products are manufactured by
third party contractors using Scherer Labs' formulas. Scherer Labs carries an
inventory sufficient to cover planned sales requirements. Scherer Labs' return
policy is
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consistent with the drug industry, with annual returns during the last three
years of less than 1.5% of total annual sales.
Scherer Labs employs one individual in Dallas, Texas as the division's Vice
President - General Manager who administers all sales, marketing, and purchasing
and handles relations with customers, suppliers and contractors. Warehousing
and distribution services are performed on a contract basis with a public
warehouse. Two employees at the Company's corporate headquarters in Atlanta,
Georgia perform all accounting and customer service functions including order
processing, accounts receivable, accounts payable and inventory control.
SEASONALITY. The sales of most of Scherer Labs' products are evenly distributed
throughout the year. However, the majority of three of Scherer Labs products
are purchased by consumers during the summer months. As a result of this
seasonal activity, approximately 33% of Scherer Labs' sales occur during the
first fiscal quarter (April through June) of each fiscal year.
CUSTOMERS. Scherer Labs markets its products primarily to drug and food stores,
mass market retailers, drug wholesalers, and government agencies. The majority
of the sales are through retailers located in the Southwest region of the United
States with approximately 35% of sales to retail outlets located in other areas
of the country. Sales to Wal-Mart Stores, Inc. represented approximately 55%,
45% and 45% of total sales for fiscal 1997, 1996 and 1995, respectively. These
sales were through McKesson Drug Co., Wal-Mart's primary wholesaler, and
account for over 80% of McKesson's total purchases from Scherer Labs. The loss
of Wal-Mart's business would have a material adverse effect on Scherer Labs'
ability to continue to operate profitably.
COMPETITION. Scherer Labs' products are subject to competition from national,
regional, and store brands of similar or identical formulations. Emphasis is
placed on Scherer Labs' long history, product quality and pricing at or near the
pricing levels of generic products. Marketing activities focus on in-store
price specials and other promotional allowances.
REGULATION. Scherer Labs' products are regulated by the FDA. Also, licensing
and product registration is required by certain states where product sales occur
and are renewed annually. There have been no government inspections of Scherer
Labs in the last three years and there are no pending matters between Scherer
Labs and any federal, state or local governmental regulatory agency.
DISCONTINUED PHARMACEUTICAL RESEARCH AND DEVELOPMENT SEGMENT
Biofor, Inc. ("Biofor"), a majority owned subsidiary of the Company which had
been operating the Company's Pharmaceutical Research and Development Segment,
was engaged in research to identify and develop new drug compounds. From its
inception on June 29, 1986 until its closure in March 1996, Biofor had expended
over $20 million in cash funding from the Company and affiliates of the
Company. In July 1995, after attempts to locate a purchaser for Biofor, Biofor
ceased further drug design efforts and concentrated solely on the Ono research
contract discussed below. When the Ono contract expired in March 1996, Biofor
discontinued all operations and the Company abandoned all operations of Biofor.
Prior to the discontinuance of its operations, Biofor focused its drug design
efforts on arthritis and osteoarthritis as well as the treatment for acute pain.
Biofor's lead compound, BF-389, is an anti-inflammatory analgesic which
preliminary Phase I clinical trials indicated was not sufficiently bioavailable
when administered orally in humans. Other delivery methods that would allow
oral administration of the compound were pursued by Biofor without success.
Beginning in October 1990, Biofor and Ono Pharmaceutical Company, Ltd. ("Ono")
entered into two research and collaboration agreements pursuant to which they
jointly researched compounds. Biofor utilized its exclusive
M-CADD "artificial intelligence" software and its scientists experienced in
using M-CADD while Ono provided funding and clinical testing of any compounds
discovered. The first contract expired in fiscal 1994 and the second expired
March 1996. Substantially all of Biofor's revenues from 1990 forward were
derived from these contracts.
The remaining property and equipment of Biofor primarily consists of land, a
30,000 square foot building owned by Biofor, and computer and laboratory
equipment. The Company intends to sell the remaining assets of Biofor, which
have been written down to their estimated net realistic value, but it
anticipates that it may take several years to sell all of the assets.
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ITEM 2. PROPERTIES
The Company's major facilities follow:
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT:
Marquest Medical Products, Inc.
Englewood, Colorado - 88,000 square foot facility owned by
Marquest which includes 58,000 square feet of manufacturing
and warehouse space and 30,000 square feet of
administrative offices.
Aurora, Colorado - 45,000 square foot leased warehouse.
WASTE MANAGEMENT SERVICES SEGMENT:
Bio Systems Partners
Farmingdale, New York - 17,000 square foot facility leased by Bio
Systems Partners which includes 3,000 square feet of
administrative office space and 14,000 square feet of space
housing Bio Systems' medical waste processing operations.
Medical Waste Systems, Inc.
Warminster, Pennsylvania - 11,900 square foot facility leased by
Medical Waste Systems, Inc. which includes 1,900 square feet
of administrative office space and 10,000 square feet of
warehouse and storage space.
Haverhill, Massachusetts - 4,000 square foot transfer station
leased by Medical Waste Systems, Inc.
CONSUMER HEALTHCARE PRODUCTS SEGMENT:
Scherer Laboratories, Inc.
Plano, Texas - 300 square foot facility leased by Scherer Labs
and used as a sales office.
CORPORATE SEGMENT:
Scherer Healthcare, Inc.
Atlanta, Georgia - 10,100 square feet of leased office space
shared with RPS Investments, Inc. See "Item 13. Certain
Relationships and Related Transactions."
Biofor, Inc.
Waverly, Pennsylvania - 30,000 square foot building owned by
Biofor.
The Company believes the facilities in all locations are adequate for the
current and anticipated future level of activities.
ITEM 3. LEGAL PROCEEDINGS
A products liability action was filed against Marquest in California in 1990
which was defended and settled during the trial by its insurance company,
Hartford Specialty Company ("Hartford"). Under the insurance policy, Marquest
may have been responsible for a $250,000 self insured retention plus the cost of
defense. Marquest claimed that Hartford mishandled the lawsuit and declined to
pay. Marquest was sued by Hartford in District Court, Arapahoe County, Colorado
in February 1994 alleging damages of up to $540,000. In May 1996, Marquest
entered into a settlement agreement with Hartford pursuant to which Marquest
paid Hartford $170,000.
On April 9, 1997, Tri-Anim Health Services ("THS"), Marquest's largest domestic
distributor, filed a complaint against Marquest and VSI in the Superior Court of
the State of California for the County of Los Angeles alleging that Marquest had
breached a Confidentiality Agreement between THS and Marquest. Marquest filed a
motion to move the California action to federal district court and filed a
motion to compel arbitration of all issues in Colorado. Marquest intends to
vigorously contest THS' suit against Marquest.
On March 24, 1997, Chesapeake Medical, Inc. and Chesapeake Breathing Services,
Inc. (collectively referred to as "Chesapeake"), two of Marquest's distributors,
filed a lawsuit against Marquest and VSI in the United States District Court
for the District of New Jersey, alleging that Marquest terminated the Dealer
Agreement between Marquest and Chesapeake in a commercially unreasonable manner
and that Marquest disclosed confidential information. Marquest is vigorously
contesting this matter.
Marquest believes that its position in the preceding two matters is meritorious,
but Marquest is unable to predict the outcome of either lawsuit or whether other
lawsuits will be filed by other dealers as a result of their termination. (See
"Medical Device and Surgical/Safety Disposables Segment - Marquest").
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Terumo K.K. ("Terumo"), a competitor of Marquest, filed a complaint in September
1996 in the Tokyo District Court against Chiron K.K. ("Chiron"), Marquest's
distributor of arterial blood gas samplers in Japan, alleging that the blood
samplers infringe upon a Japanese patent owned by Terumo. The complaint does
not name Marquest; however, Marquest has agreed to pay the cost of Chiron's
defense and indemnify Chiron from Terumo's claim. Terumo is requesting an
injunction against Chiron from importing and selling blood samplers as well as
137,000,000 yen (approximately $1,100,000 as of March 31, 1997) for damages with
regard to Chiron's sale of blood samplers from January 1993 through December
1995. Terumo may increase the damages requested from 1996 to the present. Due
to the preliminary nature of this litigation, Marquest cannot predict the
Court's opinion or the impact, if any, on Marquest's market for blood gas
samplers in Japan.
The Company, through a subsidiary, owns a 60% partnership interest in Bio
Systems Partners ("BSP") which operates in the Company's Waste Management
Services Segment. Pursuant to summary judgment granted in a civil action filed
in the United States District Court for the Eastern District of New York in
March 1994, the Company's subsidiary is required to purchase the minority
partner's 40% equity interest valued as of November 30, 1993. Pursuant to the
partnership agreement, the Company and the minority partner performed separate
appraisals of the minority interest. The separate appraisals were not
consistent; therefore, a third appraiser, selected by the partners, has been
retained to review each of the valuations and determine the final valuation and
purchase price. Recently, the District Court rejected the minority partner's
request for prejudgement interest on the final valuation.
The Company is a party to certain other legal proceedings, however, it does not
anticipate that any of such proceedings will have any material adverse affect on
its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders for vote during the quarter
ended March 31, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The names, ages at June 1, 1997, and positions with the Company of the executive
officers, including all positions and offices with the Company held by such
persons, are listed below. Unless otherwise stated, each executive officer has
held their position for at least the last five years. All officers are elected
for one year terms or until their respective successors are chosen. There are
no family relationships among the executive officers nor is there any agreement
or understanding between any officer and any other person pursuant to which the
officer was elected.
NAME AND AGE POSITIONS WITH THE COMPANY
Robert P. Scherer, Jr., 64 Director of the Company since 1977; Chairman
of the Board of Directors and Chief Executive
Officer of the Company since February 1995.
Chairman of the Board, Director and Chief
Executive Officer of Marquest since February
1995. A Director, executive officer and
controlling stockholder of RPS Investments,
Inc. since its formation.
William J. Thompson, 63 President, Chief Operating Officer and
Director of the Company since August 1984.
President and Chief Operating Officer of
Marquest since February 1995 and Director
since 1993.
Amy M. Murphy, 30 Vice President of Corporate Operations and
Secretary of the Company since February 1995;
Executive Vice President and Secretary of RPS
Investments, Inc. since February 1995.
Executive Assistant to the President for
CompuPharm, Inc. from November 1994 to
February 1995; various positions with RPS
Investments, Inc. and affiliates from May
1992 to November 1994 and Assistant to the
Provost, University of Maine from 1987 to
1992.
Gary W. Ruffcorn, 35 Director of Finance and Accounting of the
Company since April 1995; Principal Financial
and Accounting Officer of the Company since
August 1995. Prior to joining the Company,
Mr. Ruffcorn held various accounting
positions with Ogden Projects, Inc.,
including Assistant Controller/Director of
Accounting, from March 1988 to March 1995.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK
At March 31, 1997, there were approximately 2,058 shareholders of record of the
Company's Common Stock. The Company's Common Stock is traded on The Nasdaq
National Market under the symbol "SCHR". The following table sets forth the
high and low closing sale prices per share as reported by Nasdaq for the periods
indicated:
Fiscal Fiscal
1997 1996
-------------------- ------------------
High Low High Low
---- --- ---- ---
First Quarter $5-1/2 $3-7/8 $7 $5
Second Quarter 4-5/8 2-1/4 5-1/2 2
Third Quarter 3-3/4 2 5 2-1/2
Fourth Quarter 2-5/8 2 5 2-1/4
On June 10, 1997, the closing price of the Common Stock was $2-1/4.
While there are no restrictions to prevent the payment of dividends, the Company
has not paid a cash dividend in its history and does not anticipate paying a
cash dividend in the near future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data concerning the Company for and as of the
end of each of the years in the five year period ended March 31, 1997 are
derived from the financial statements of the Company. The selected financial
data is qualified in its entirety by the more detailed information and financial
statements, including the notes thereto, included elsewhere in this report. The
financial statements of the Company as of March 31, 1997 and 1996 and for each
of the years in the three year period ended March 31, 1997, and the report of
Arthur Andersen LLP thereon, are included elsewhere in this report.
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $36,226 $41,857 $42,802 $41,229 $20,323
Cost of goods sold. . . . . . . . . . . . . . . . . . $23,660 $28,194 $31,514 $30,641 $14,303
Selling, general and administrative expenses. . . . . $11,548 $13,115 $14,776 $13,533 $6,102
Research and development expenses . . . . . . . . . . $286 $155 $140 $126 -
Nonrecurring charges. . . . . . . . . . . . . . . . . - - $2,000 - -
Other (expense) income. . . . . . . . . . . . . . . . $(971) $2,828 $(1,133) $218 $1,518
Minority interest in net loss (income). . . . . . . . $359 $(5) $1,927 $1,992 $(17)
Income (loss) from continuing operations. . . . . . . $114 $2,668 $(4,637) $157 $1,135
Income (loss) from continuing operations per share. . $0.03 $0.60 $ (1.09) $ 0.04 $0.29
Loss from discontinued operations . . . . . . . . . . $(375) $(920) $(5,534) $(4,795) $(2,606)
Net (loss) income . . . . . . . . . . . . . . . . . . $(261) $1,748 $(10,171) $(3,963) $(1,471)
Net (loss) income per share . . . . . . . . . . . . . $(0.06) $0.40 $(2.39) $(1.00) $(0.38)
Average shares outstanding . . . . . . . . . . . . . 4,418 4,418 4,254 3,954 3,919
Total assets. . . . . . . . . . . . . . . . . . . . . $32,194 $34,410 $40,639 $51,424 $28,975
Total long-term liabilities . . . . . . . . . . . . . $6,971 $5,638 $5,316 $ 4,617 $511
Stockholders' equity. . . . . . . . . . . . . . . . . $15,963 $16,174 $14,486 $24,657 $20,708
Cash dividends. . . . . . . . . . . . . . . . . . . . - - - - -
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company, through its subsidiaries and majority owned partnership, operates
in several areas of the healthcare industry. It manufactures and distributes
healthcare products, provides disposal of certain medical waste, and markets
certain over-the-counter and generic drugs. See "Item 1. Business" for a more
detailed description and discussion of each of the Company's segments.
RESULTS OF OPERATIONS
The assets and business of Scherer, Ltd.'s Medical Business were sold in October
1995 and the assets and business of Scherer Ltd.'s Industrial Business were sold
in October 1996. See "Item 1. Business - Scherer Healthcare, Ltd." for a more
detailed description of the two transactions.
NET SALES. The following table sets forth the net sales of each segment of the
Company's business for the last three fiscal years (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
Medical Device and
Surgical/Safety Disposables Segment
Marquest $22,045 60.9% $22,443 53.6% $20,576 48.1%
Scherer, Ltd. 1,069 2.9 7,555 18.0 11,203 26.2
Waste Management Services Segment 11,836 32.7 10,753 25.7 10,039 23.4
Consumer Healthcare Products Segment 1,276 3.5 1,106 2.7 984 2.3
------- ----- ------- ------ ------- ------
Company Totals $36,226 100.0% $41,857 100.0% $42,802 100.0%
------- ----- ------- ------ ------- ------
------- ----- ------- ------ ------- ------
</TABLE>
FISCAL 1997 VS. FISCAL 1996 (NET SALES)
The Company's net sales decreased by 13% to $36,226,000 for fiscal 1997 from
$41,857,000 for fiscal 1996; however, fiscal 1996 includes six months of net
sales, or $5,344,000, for the Medical Business, which was sold in October 1995.
Additionally, fiscal 1996 includes twelve months of net sales of $2,211,000 for
the Industrial Business and fiscal 1997 only includes six full months of net
sales of $1,069,000 for the Industrial Business, which was sold in October 1996.
Marquest's net sales decreased approximately 2% to $22,045,000 for fiscal 1997
from $22,443,000 in fiscal 1996. The decrease in net sales is primarily due to
a decrease in sales of Marquest's medication delivery devices. Sales of these
devices are down approximately $800,000 in fiscal 1997 compared to fiscal 1996,
the majority of the decrease is attributable to one major customer who placed a
large sales order in fiscal 1996 and who did not place a sales order in fiscal
1997. The decrease in sales of the medication delivery devices was partially
offset by an increase in sales of Marquest's ABG products which increased
approximately $270,000 in fiscal 1997 compared to fiscal 1996. The increase in
the ABG sales can be attributable to a long term contract signed with a major
customer in late fiscal 1996 for these products.
Scherer Ltd.'s net sales decreased approximately 86% to $1,069,000 in fiscal
1997 from $7,555,000 in fiscal 1996; however, fiscal 1996 includes six months of
net sales, or $5,344,000, for the Medical Business, which was sold in October
1995. Additionally, fiscal 1996 includes twelve months of net sales of
$2,211,000 for the Industrial Business and fiscal 1997 only includes six full
months of net sales of $1,069,000 for the Industrial Business, which was sold in
October 1996. Prior to the sale of the Industrial Business in October 1996, one
of Scherer Ltd.'s significant distributors had substantially reduced its sales
orders with Scherer Ltd.
Net sales in the Company's Waste Management Services Segment, which operates
through Bio Systems, increased 10% to $11,836,000 in fiscal 1997 from
$10,753,000 in fiscal 1996. In fiscal 1997, Bio Systems increased its net sales
by approximately $810,000 by securing new medical waste disposal contracts with
hospitals. Bio Systems feels that hospitals have been more receptive to
out-sourcing the disposal of their medical waste, and attributes its success in
obtaining new hospital contracts to its reusable containers which are more cost
effective.
-15-
<PAGE>
Net sales for Scherer Labs, which operates in the Company's Consumer Healthcare
Products Segment, increased approximately 15% to $1,276,000 in fiscal 1997 from
$1,106,000 in fiscal 1996. The increase in net sales can be attributed to
securing new customers and retail outlets during fiscal 1997.
FISCAL 1996 VS. FISCAL 1995 (NET SALES)
The Company's net sales decreased by 2% to $41,857,000 for fiscal 1996 from
$42,802,000 for fiscal 1995; however, fiscal 1995 includes twelve months of net
sales for the Medical Business, or $9,865,000, and fiscal 1996 includes only six
months of net sales for the Medical Business, or $5,344,000, which was sold in
October 1995.
Marquest's net sales increased 9% to $22,443,000 in fiscal 1996 from $20,576,000
in fiscal 1995. Marquest's sales for the first quarter of fiscal 1995 were low
due to a decline in sales to hospitals which Marquest believes was due primarily
to the uncertainties relating to proposed healthcare reform. Also, many of
Marquest's distributors purchased high levels of product during the fourth
quarter of fiscal 1994 which depressed Marquest's sales in the first quarter of
fiscal 1995. In fiscal 1996, Marquest implemented a network of independent
manufacturer's representatives which supplements its sales force.
Scherer, Ltd.'s net sales decreased 33% to $7,555,000 in fiscal 1996 from
$11,203,000 in fiscal 1995; however, fiscal 1995 includes twelve months of net
sales for the Medical Business, or $9,865,000, and fiscal 1996 includes only six
months of net sales for the Medical Business, or $5,344,000. Scherer, Ltd.'s
net sales for the Industrial Business increased 65% to $2,211,000 for fiscal
1996 from $1,338,000 in fiscal 1995. This increase in net sales was primarily
due to the introduction of products fabricated from two new fabric lines in late
fiscal 1995.
Net sales for Bio Systems increased approximately 7% to $10,753,000 in fiscal
1996 from $10,039,000 in fiscal 1995. The increase in sales was due to the
continuing acquisition of new medical waste disposal contracts with hospitals.
Net sales for the Consumer Healthcare Products Segment increased 12% to
$1,106,000 for fiscal 1996 from $984,000 for fiscal 1995. This segment achieved
a record level of sales of certain over-the-counter products during the first
quarter of fiscal 1996. The sales growth can be attributed to an increase in
sales to a primary wholesaler to Wal-Mart.
COSTS AND EXPENSES. The following table sets forth the percentage relationship
which the expense line items in the consolidated statement of operations bear to
total revenue:
Percentage of Revenue
Year Ended March 31,
--------------------------------
1997 1996 1995
------ ------ -------
Net Sales 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of good sold 65.3 67.4 73.6
Selling, general, and administrative 31.9 31.3 34.5
Research and development 0.8 0.4 0.3
Nonrecurring charges - - 4.7
------ ------ -------
Operating income (loss) 2.0% 0.9% (13.1)%
------ ------ -------
------ ------ -------
The following table sets forth the Company's operating margins by operating
segment and on a consolidated basis:
Year Ended March 31,
--------------------------------
1997 1996 1995
---- ---- ----
Medical Device and Surgical/Safety
Disposables Segment:
Marquest 1.6% 2.3% (13.1)%
Scherer, Ltd. (30.2) (4.4) (8.1)
Waste Management Services Segment 9.1 8.6 7.9
Consumer Healthcare Products Segment 36.6 33.3 24.8
Consolidated 2.0% 0.9% (13.1)%
-16-
<PAGE>
FISCAL 1997 VS. FISCAL 1996 (COSTS AND EXPENSES)
The Company's operating income improved 86% to $732,000 in fiscal 1997 from
$393,000 in fiscal 1996. The Company's cost of goods sold decreased to
approximately 65% of net sales in fiscal 1997 from 67% of net sales in fiscal
1996. Selling, general and administrative expenses increased to 32% of net
sales in fiscal 1997 from approximately 31% of net sales in fiscal 1996.
Marquest's operating income decreased to $363,000 in fiscal 1997 from $510,000
in fiscal 1996. This decrease is primarily the result of the decrease in net
sales combined with an increase in overtime expense in the first quarter of
fiscal 1997 due to the rework of certain products. Product rework is caused by
supplier quality issues, defects in the molded products, and damage to product
during assembly and warehousing. Marquest believes that the supplier quality
and damage to product issues have been corrected; however, the molded product
defects may recur depending on the condition of the molds. In an effort to
reduce molded product defects, Marquest has implemented a preventative
maintenance program, increased inspections, and improved operator training. The
decrease in net sales and the increase in overtime expense was partially offset
by a decrease in the net operating lease expense of its idle warehouse in
Nogales, Arizona of approximately $120,000 due to the sublease of two-thirds of
the warehouse in December 1995 and the sublease of the remaining portion in
September 1996. Additionally, Marquest wrote off approximately $200,000 in
fiscal 1996 for certain expenses associated with unsuccessful financing
transactions with no corresponding expenses incurred in fiscal 1997.
Scherer Ltd.'s operating loss decreased slightly to $323,000 in fiscal 1997 from
$355,000 in fiscal 1996; however, fiscal 1996 includes $164,000 of operating
income from the Medical Business which was sold in October 1995. The Medical
Business reported operating income in fiscal 1996 primarily as a result of an
agreement, effective April 1, 1995, which required Cordis to reimburse Scherer,
Ltd. for monthly losses ($295,000 in total for the period April 1995 through
September 1995) that Scherer, Ltd. was incurring under its surgical tray
contract with Cordis. The Industrial Business of Scherer, Ltd., which was sold
in October 1996, reported an operating loss of $323,000 for fiscal 1997 compared
to an operating loss of $499,000 in fiscal 1996. The operating loss in fiscal
1997 for the Industrial Business can be attributed to the decrease in net sales
due to a substantial reduction in sales orders from one of Scherer, Ltd.'s
significant distributors combined with an inventory write down pursuant to the
physical count taken for the Health-Pak transaction in October 1996.
Bio Systems increased its operating income 16% to $1,073,000 in fiscal 1997 from
$924,000 in fiscal 1996. The improved operating performance can be attributed
to the increase in net sales from the acquisition of new hospital contracts
combined with a significant decrease in Bio Systems' workers' compensation
insurance expense. The decrease in insurance expense is primarily due to the
conversion in October 1995 of Bio Systems' insurance coverage from a
fully-insured workers' compensation program to a partially insured program, to
take advantage of Bio Systems' excellent claims history.
The Company's Consumer Healthcare Products Segment improved its operating income
27% to $467,000 in fiscal 1997 from $368,000 in fiscal 1996. While improving
its net sales by 15%, as discussed above, this Segment was able to maintain, or
improve upon, its prior level of operating costs. Cost of goods sold decreased
slightly to 37% of net sales in fiscal 1997 from approximately 38% of net sales
in fiscal 1996 and selling, general and administrative expenses decreased to 26%
of net sales in fiscal 1997 from 29% in fiscal 1996.
FISCAL 1996 VS. FISCAL 1995 (COSTS AND EXPENSES)
The Company reported operating income of $393,000 in fiscal 1996 compared to an
operating loss of $5,628,000 in fiscal 1995. The fiscal 1995 operating loss
includes a nonrecurring charge of $2,000,000 for the write down of two waste
incinerator investments.
Marquest reported operating income of $510,000 in fiscal 1996 compared to an
operating loss of $2,696,000 in fiscal 1995. This improvement is a result of
the increase in sales discussed above combined with an emphasis on cost
reduction. Marquest reduced manufacturing costs and administrative expenses by
reductions in personnel, improved operational efficiencies and increased
vertical integration of the manufacturing processes. Additionally, the increase
in the manufacturing volume helped improve overhead absorption.
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<PAGE>
Scherer, Ltd.'s operating loss decreased 63% to $335,000 in fiscal 1996 from
$912,000 in fiscal 1995. In fiscal 1995, Scherer, Ltd. experienced substantial
losses (approximately $700,000) under its surgical trays contract with Cordis.
Effective April 1, 1995, Scherer, Ltd. entered into a new agreement with Cordis
which required Cordis, among other things, to reimburse Scherer, Ltd. a monthly
shortfall amount ($52,000 per month for the period April to July 1995 and
$42,500 per month for the months of August and September 1995) to help offset
monthly losses incurred under the contract. The contract was terminated upon
the sale of the Medical Business to Cordis Medical in October 1995. Primarily
as a result of the new contract, the Medical Business reported operating income
of $164,000 in fiscal 1996 compared to an operating loss of $559,000 in fiscal
1995. The Industrial Business of Scherer, Ltd. increased its operating loss 41%
to $499,000 in fiscal 1996 from $353,000 in fiscal 1995. In late fiscal 1996,
Scherer, Ltd., which is currently operating under the name Protective Disposable
Apparel, moved the manufacture of its lab coats to a new workshop where Scherer,
Ltd. was able to negotiate better labor rates.
Bio Systems' operating income increased 17% to $924,000 in fiscal 1996 from
$790,000 in fiscal 1995. The operating improvement was attributable to a
decrease in insurance expense and a one-time sales tax expense in fiscal 1995
pursuant to a three year assessment from a sales tax audit. Prior to fiscal
1996, this segment reported consistent increases in net sales but had struggled
to improve its operating margins because of pricing pressures in both the
hospital and physician markets.
Operating income improved 51% to $368,000 in fiscal 1996 from $244,000 in fiscal
1995 at the Company's Consumer Healthcare Products Segment. This increase was
directly attributed to the increase in sales for this segment discussed above.
OTHER INCOME (EXPENSE). In fiscal 1997, the Company recorded a loss of
approximately $84,000 from the sale of the Industrial Business in October 1996
primarily due to the write-off of the remaining book value of certain intangible
assets. In fiscal 1996, the Company recorded a pretax gain of approximately
$2,781,000 from the sale of the Medical Business in October 1995. Also in
fiscal 1996, Marquest recorded a gain of approximately $200,000 from the sale of
its 10% investment in a medical device company.
In November 1995, the Company used $4,800,000 of the net proceeds from the sale
of the Medical Business to repay a portion of outstanding loans from affiliates.
Primarily as a result of the debt repayment, the Company reduced its interest
expense incurred on the affiliate debt from approximately $518,000 in fiscal
1996 to approximately $175,000 in fiscal 1997 (prior to the assignment of the
affiliate debt to a nonaffiliate in March 1997). Marquest's interest expense
incurred on affiliate debt in fiscal 1997 was $70,000 compared to $21,000 in
fiscal 1996.
In fiscal 1996, Marquest received $488,000 in a one-time royalty related to one
of Marquest's product lines. In fiscal 1997, Marquest incurred approximately
$265,000 in certain expenses associated with the merger between Marquest and
Vital Signs, Inc. (See "Item 1. Business - Recent Developments").
INCOME TAXES. The Company recorded an income tax provision of $6,000 and
$548,000 in fiscal 1997 and 1996, respectively, and had a tax benefit of
$197,000 in fiscal 1995. Marquest recorded a tax provision of $697,000 in
fiscal 1996 as a result of its settlement with the IRS with respect to tax
issues related to previous years. In fiscal 1997, the Company (excluding
Marquest) utilized tax loss carryforwards and reduced its valuation allowance
accordingly. In fiscal 1997 and in prior years, the Company significantly
increased its valuation allowance against its deferred tax assets mainly related
to the tax loss carryforwards.
The Company's ability to generate taxable income from operations is dependent
upon various factors, many of which are beyond management's control.
Accordingly, there can be no assurance that the Company will generate future
taxable income. Therefore, the realization of the deferred tax assets will be
assessed periodically based upon the Company's current and anticipated results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
CASH FLOWS FROM OPERATING ACTIVITIES. The Company's (excluding Marquest which
is described below) cash provided by operating activities from continuing
operations decreased to approximately $1,924,000 in fiscal 1997 from
approximately $2,123,000 in fiscal 1996. This slight decrease in cash provided
from continuing operations can be attributed to the
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<PAGE>
collection in fiscal 1996 of the remaining accounts receivable associated with
the Medical Business of Scherer Ltd. which was sold in October 1995. Pursuant
to the terms of the sale agreement, Scherer, Ltd. retained all accounts
receivable associated with the Medical Business, of which approximately
$1,360,000 was collected at the closing of and subsequent to the transaction.
This was partially offset by improvements, primarily due to timing, in the
collection of accounts receivable at Bio Systems and Scherer Labs of $187,000
and $75,000, respectively, in fiscal 1997 compared to fiscal 1996.
Additionally, due to the timing of payments, the Company's accounts payable and
accrued expenses increased approximately $725,000 in fiscal 1997 compared to
fiscal 1996.
Discontinuing the operations of Biofor has significantly improved the cash flow
of the Company. The net cash used by Biofor's operations was approximately
$170,000 in fiscal 1997 compared to approximately $1,564,000 in fiscal 1996.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES. The Company's (excluding
Marquest which is described below) investing activities provided cash of
approximately $8,279,000 in fiscal 1996 compared to a use of cash from investing
activities of approximately $487,000 in fiscal 1997. In fiscal 1996, the
Company used $2,989,000 of its $3,200,000 in cash investments to pay off the
then remaining balance of $2,989,000 on a line of credit arrangement it had with
Trust Company Bank (now SunTrust Bank) because the Company determined that the
credit line did not provide any net financial leverage. Prior to its
termination, the credit line was fully collateralized by the cash investments.
The Company received approximately $4,922,000 in net proceeds from the sale of
assets associated with the Medical Business of Scherer Ltd. in fiscal 1996. In
fiscal 1997, the Company received $254,000 in net proceeds from the sale of
Scherer Ltd.'s Industrial Business. Additionally, Bio Systems increased its
capital expenditures by approximately $219,000 in fiscal 1997 compared to fiscal
1996 primarily due to the purchase of new trucks used to transport medical
waste.
Cash flows from the Company's financing activities used cash of approximately
$7,340,000 in fiscal 1996 compared to a use of cash of only $108,000 in fiscal
1997. Prior to fiscal 1996, Scherer Scientific, Ltd. and Scherer Capital
Company L.L.C. ("Scherer Cap"), entities controlled by Robert P. Scherer, Jr.
who is the Chairman of the Board, Chief Executive Officer, and majority
shareholder of the Company, made loans (the "Affiliate Loans") to the Company
and its subsidiaries the proceeds of which were used primarily for working
capital and business acquisitions. The Affiliate Loans were payable on demand
and generally bore interest at prime rate plus 1%. In November 1995, the
Company used $4,800,000 of the net proceeds from the sale of the Medical
Business to repay a portion of the Affiliate Loans. In January 1997, the
Company and Scherer Cap restructured the remaining balance of $2,128,000 on the
Affiliate Loans into a five-year promissory note (the "Original Note") which
bore interest at prime rate plus 1%, adjusted quarterly, and was collateralized
by shares of Marquest Common Stock owned by the Company. In connection with the
dissolution of Scherer Cap in March 1997, the Original Note was amended (the
"Amended Note") and subsequently assigned to the four adult children of Robert
P. Scherer, Jr., who are not affiliated with the Company. In exchange for
certain considerations, $50,000 for the principal balance was forgiven and the
interest rate was reduced to prime, adjusted quarterly, in the Amended Note. As
discussed above, the Company terminated its line of credit arrangement during
the first quarter of fiscal 1996 which had borrowings outstanding of $1,944,000
at March 31, 1995.
On March 14, 1997, Marquest and VSI announced the execution of a Merger
Agreement providing for VSI to acquire Marquest. In the transaction, which is
expected to take place in July 1997, Marquest would become a wholly-owned
subsidiary of VSI and VSI would pay Marquest shareholders $0.797 per share in
cash for each outstanding share of Marquest Common Stock. The Company owns
7,211,192 shares of Marquest Common Stock directly and holds warrants to
purchase an additional 6,580,000 shares of Marquest Common Stock at an exercise
price of $0.75 per share. In connection with the Merger Agreement, the Company
and VSI entered into an agreement pursuant to which VSI has agreed, provided the
Merger Agreement is consummated, to purchase certain assets and product rights
previously sold by Marquest to the Company and to enter into a covenant not to
compete for an aggregate purchase price of $5,860,000. The Company expects to
receive approximately $11,900,000, before the payment of transaction costs and
associated income taxes, in total from the above transactions if they are
consummated. The Company plans to use a portion of the proceeds to repay the
Amended Note which had a balance of $1,958,000 as of March 31, 1997. The
Company will evaluate its long-term options with regard to the remaining
proceeds; however, on a short-term basis it plans to invest the proceeds,
principally in U.S. Treasuries.
Management of the Company believes that its current cash on hand of
approximately $3,225,000 as of March 31, 1997 and its current cash flow are
sufficient to maintain its current operations.
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<PAGE>
MARQUEST
With the exception of executive management, Marquest operates independently of
the Company.
CASH FLOWS FROM OPERATING ACTIVITIES. Marquest's cash used from operating
activities increased from $79,000 in fiscal 1996 to $1,178,000 in fiscal 1997
primarily due to a decrease in accounts payable and accrued expenses. The
decrease in accounts payable and accrued expenses is due to the payment in
fiscal 1997 of consulting fees and other costs related to Marquest's financing
transactions (discussed below), and the payment of income taxes and certain
legal settlements.
Simultaneous with the execution of the Merger Agreement with VSI, Marquest and
VSI entered into a Dealer Agreement which authorizes VSI to distribute
Marquest's products for a period of two years. Marquest has given 28 of its 29
hospital specialty dealers notice terminating its agreements with such dealers
at the end of the required notice period, generally 30 to 90 days from the date
of notice. These dealers provided Marquest with approximately $9,687,000 of
revenue in fiscal 1997. It is uncertain whether the sales through the Dealer
Agreement with VSI will reach the level of sales achieved by the terminated
dealers.
Primarily as a result of the termination notices, two of Marquest's dealers have
filed lawsuits against Marquest and VSI (see "Item 3. Legal Proceedings").
These dealers have informed Marquest that they are withholding further payment
of amounts owed to Marquest pending the settlement of the issues raised in their
respective lawsuits. The two dealers combined outstanding accounts receivable
as of May 31, 1997 was approximately $714,000 ($564,000 through sales in April
and May 1997), before certain rebate adjustments. Marquest intends to
vigorously contest the lawsuits and pursue the collection of the outstanding
accounts receivable.
CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES. On June 30, 1994, Marquest
refinanced $1,300,000 of Douglas County Industrial Revenue Bonds (the "Bonds'),
due on December 31, 1993, with a term loan from Colorado National Bank (the
"Bank"), the same bank holding the Bonds. In fiscal 1996, Marquest and the Bank
executed an amendment to the term loan agreement, whereby Marquest made a
principal payment of $160,000 and the term of the loan was shortened from July
31, 2004 to January 31, 2000 and the Bank released Marquest's inventory and
accounts receivable as collateral for the loan. The loan will continue to
amortize over its original term with a balloon payment on January 31, 2000.
In fiscal 1996, Scherer Cap, an entity controlled by Robert P. Scherer, Jr.,
made an investment in Marquest of approximately $1,588,000, net of related
transaction costs. In March 1996, Marquest and Scherer Cap entered into the
Loan Agreement, from which Marquest borrowed $700,000 to repay $700,000 that
Marquest borrowed from Scherer Cap in December 1995 for working capital
purposes. The Loan Agreement contemplated the possibility of additional
borrowings of $800,000. Borrowings under the Loan Agreement, which expires
February 28, 2001, bear interest at prime rate plus 1.5%, are secured by
Marquest's inventory, building, and equipment, and are represented by the
Scherer Cap Notes that are convertible, at the option of Scherer Cap, into
shares of Marquest Common Stock at a conversion price of $0.70 per share.
Additionally, Scherer Cap invested $1,000,000 in Marquest in March 1996 through
the purchase of 2,061,856 shares of Marquest Common Stock. In connection with
its dissolution in March 1997, Scherer Cap assigned the Loan Agreement and the
Scherer Cap Notes, and transferred 1,546,392 shares of the Marquest Common Stock
that it owned to Mr. Scherer, Jr. The remaining 515,464 shares of Marquest
Common Stock owned by Scherer Cap were transferred into a voting trust for the
benefit of Mr. Scherer, Jr.'s adult children. Mr. Scherer, Jr. is entitled to
vote the shares held in the voting trust.
In November 1996, Marquest obtained a revolving line of credit from Norwest
Business Credit, Inc. ("Norwest") which expires February 28, 1999. Any amounts
borrowed against the line of credit will primarily be secured by Marquest's
trade accounts receivable and will bear interest at Norwest's prime rate plus
2.25% (the rate was 10.75% as of March 31, 1997). The maximum amount of the
line of credit is 80% of Marquest's eligible domestic accounts receivable plus
70% of eligible international accounts receivable or $2,000,000, whichever is
less. As of March 31, 1997, Marquest had borrowed $125,000 against an available
borrowing limit on the line of approximately $1,400,000.
As of March 31, 1997, Marquest was not in compliance with a covenant requiring a
specified debt service coverage rate and a covenant that Marquest not incur an
after tax loss greater than a specified amount. Norwest has waived the
requirement of compliance with these covenants as of March 31, 1997, and
Marquest has negotiated new covenants with Norwest providing for a maximum net
loss for the first four months of fiscal 1998 (through July
-20-
<PAGE>
1997) of $1,018,000 and a minimum net worth of $3,364,000 at the end of July
1997 and each subsequent month thereafter.
Marquest's management expects that the pending Merger with VSI will be
consummated by the end of July 1997. However, if the Merger is delayed or does
not occur, Marquest's management anticipates taking the following actions during
fiscal 1998: (i) continue marketing and selling its products through
medical-surgical dealers and through the dealer arrangement with VSI in domestic
markets where VSI has strategic presence; (ii) renegotiate its current line of
credit with Norwest and pursue additional financing opportunities that may be
available; (iii) continue to reduce costs and operating expenses; and (iv)
restrict expenditures for capital assets to maintenance of existing equipment
and facilities until Marquest generates positive operating cash flow.
The viability of Marquest during fiscal 1998 will be dependent on the
consummation of the Merger with VSI, or , if the Merger is delayed or does not
occur, on the successful implementation of some or all of the above actions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are set forth on pages F-3 through F-23
of this report. The reporting of selected quarterly financial data specified by
Item 302 of Regulation S-K is not required for the Company.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this report but is
incorporated herein by reference to the Company's definitive Proxy Statement for
the 1997 Annual Meeting of Shareholders (the "Proxy Statement"). Such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after March 31, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
In accordance with General Instruction G(3) of the Form 10-K, the information
relating to the directors of the Company, including directors who are executive
officers of the Company, is set forth under the caption "Election of Directors"
in the Proxy Statement and is incorporated herein by reference. Pursuant to
Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of
Form 10-K, information relating to the executive officers of the Company is set
forth under the caption "Executive Officers of the Company" in Part I, Item 4A
of this report. Compliance with Section 16(a) of the Securities Exchange Act of
1934: Section 16(a) of the Securities Exchange of 1934, as amended, and
regulations of the Securities and Exchange Commission thereunder require the
Company's directors and executive officers and any persons who own more than 10%
of the Company's Common Stock, as well as certain affiliates of such persons, to
file reports with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. with respect to their ownership of the
Company's Common Stock. Directors, executive officers and persons owning more
than 10% of the Company's Common Stock are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
reports they file. Based solely on its review of the copies of such reports
received by it and written representations that no other reports were required
of those persons, the Company believes that during fiscal 1997, all filing
requirements applicable to its directors and executive officers were complied
within a timely manner, except that Amy M. Murphy and Gary W. Ruffcorn have
filed their Form 3s late. The Company is not aware of any other persons other
than directors and executive officers and their affiliates who own more than 10%
of the Company's Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with General Instruction G(3) of Form 10-K, the information
relating to executive compensation set forth under the caption "Compensation of
Executive Officers" in the Proxy Statement is incorporated herein by reference;
provided, such incorporation by reference shall not be deemed to include or
incorporate by reference the information referred to in Item 402 (a)(8) of
Regulation S-K.
-21-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3) of Form 10-K, the information
relating to security ownership by certain persons set forth under the captions
"Principal Stockholders" and "Election of Directors" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3) of Form 10-K, the information
relating to certain relationships and related transactions set forth under the
caption "Related Party Transactions" in the Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements.
The financial statements of the Company and the related report of
independent accountants thereon are set forth immediately following the
Index to Financial Statements and Financial Statement Schedules which
appears on page F-1 of this report.
(2) Financial Statement Schedules.
Financial statement schedules begin on page S-1 of this report. All other
schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted
because such schedules are not required under the related instructions or
are not applicable or because the information required is included in the
consolidated financial statements or notes thereto.
(3) Exhibits.
The following exhibits are filed with or incorporated by reference in this
report. Where filing is made by incorporation by reference to a previously
filed registration statement or report, such registration statement or
report is identified in parenthesis. The Company will furnish any exhibit
upon request to Amy M. Murphy, Secretary, Scherer Healthcare, Inc., 2859
Paces Ferry Road, Suite 300, Atlanta, Georgia 30339. There is a charge of
$.50 per page to cover expenses for copying and mailing.
3.1 Articles of Incorporation of the Company, as amended
(Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994).
3.2 By-Laws of the Company (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1994).
4 Certificate of Designation, Preferences and Rights of
Preferred Stock by Resolution of the Board of Directors
Providing for an Issue of 7,000 Shares of Preferred Stock
Designated "Series A" Cumulative Convertible Preferred Stock
(Exhibit 4 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994).
10.1 Property Lease between Bio Systems Partners and Flushing
Operating Corp. for 210 Sherwood Avenue, Farmingdale, New
York, and Addendum (Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1994).
10.2 Property Lease between Med X Services of PA, Inc. and
successors and Mark Hankin and Hamnar Associates XVII for
380 Constance Drive, Warminster, Pennsylvania, and Addendum
(Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994).
10.3 Asset Purchase Agreement dated October 3, 1995 among Cordis
Medical Products, Inc., Scherer Healthcare, Ltd. d/b/a
Custom Medical Products, ASH Enterprises, Inc., Out-Patient
Products Company, Inc., Scherer Healthcare, Inc. and Cordis
Corporation (Exhibit 2 to the Company's Current Report on
Form 8-K dated October 19, 1995).
-22-
<PAGE>
10.4 Conversion Agreement dated March 28, 1996 by and between
Marquest Medical Products, Inc. and Scherer Healthcare, Inc.
(Exhibit 10 to the Company's Current Report on Form 8-K
dated April 17, 1996)
10.5 Amended and Restated Non-Negotiable Note dated January 17,
1997 by Scherer Healthcare, Inc. to Scherer Capital Company
L.L.C.-filed herewith.
10.6 Agreement and Plan of Merger dated March 14, 1997 by and
among Vital Signs, Inc., VSI Acquisition Corporation, and
Marquest Medical Products, Inc. (Exhibit 2.1 to the
Company's Current Report on Form 8-K dated March 21, 1997)
10.7 Scherer Healthcare Inducement Agreement dated March 14, 1997
by and between Scherer Healthcare, Inc., Vital Signs, Inc.
and Marquest Medical Products, Inc. (Exhibit 2.2 to the
Company's Current Report on Form 8-K dated March 21, 1997)
21 Subsidiaries of Registrant - filed herewith.
25 Powers of Attorney - filed herewith.
27 Financial Data Schedule (included only in EDGAR filing)
99.1 Robert Scherer Inducement Agreement dated March 14, 1997 by
Robert P. Scherer, Jr. to Vital Signs, Inc. (Exhibit 99.2 to
the Company's Current Report on Form 8-K dated March 21,
1997)
(b) REPORTS ON FORM 8-K.
The following Current Reports on form 8-K were filed by the Company during
the quarter ended March 31, 1997:
March 21, 1997 - announcing that Marquest entered into a definitive
merger agreement with Vital Signs, Inc. providing for Vital Signs to
acquire Marquest.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on June 26, 1997.
SCHERER HEALTHCARE, INC.
By: /s/Robert P. Scherer, Jr.
-------------------------
Robert P. Scherer, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on June 26, 1997.
Signature Title
- --------- -----
/s/Robert P. Scherer, Jr. Chairman of the Board, Director and
- ------------------------------- Chief Executive Officer
Robert P. Scherer, Jr.
/s/William J. Thompson * President and Director
- ------------------------------
William J. Thompson
/s/Gary W. Ruffcorn Director of Finance and Accounting
- ------------------------------ (Principal Financial and Accounting Gary
Gary W. Ruffcorn Officer)
/s/Stephen Lukas, Sr. * Director
- ------------------------------
Stephen Lukas, Sr.
/s/Kenneth H. Robertson * Director
- ------------------------------
Kenneth H. Robertson
*By:/S/Robert P. Scherer, Jr
--------------------------
Robert P. Scherer, Jr.
as Attorney-in-Fact
-24-
<PAGE>
SCHERER HEALTHCARE, INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and schedules of the Registrant
and its subsidiaries are submitted herewith in response to Item 8:
Report of Independent Public Accountants . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets--March 31, 1997 and 1996 . . . . . . . . . F-3
Consolidated Statements of Operations--Years Ended
March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity--Years
Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows--
Years Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-9
The following financial statement schedules of the Registrant and its
subsidiaries are submitted herewith in response to Item 14(a)(2):
Schedule I--Condensed Financial Information of Registrant. . . . . . . S-1
Schedule II--Valuation and Qualifying Accounts . . . . . . . . . . . . S-4
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of
Scherer Healthcare, Inc.
We have audited the accompanying consolidated balance sheets of SCHERER
HEALTHCARE, INC. (a Delaware corporation) AND SUBSIDIARIES as of March 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended March 31, 1997. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Scherer Healthcare, Inc. and
subsidiaries as of March 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements and financial statement schedules are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state, in all material
respects, the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, Georgia
June 6, 1997
F-2
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,237,000 $ 3,622,000
Accounts receivable, less allowance for doubtful
accounts of $289,000 in 1997 and $243,000 in 1996 6,087,000 6,092,000
Current maturities of notes receivable 223,000 393,000
Inventories 3,453,000 3,936,000
Prepaid and other 218,000 331,000
------------ -------------
Total current assets 13,218,000 14,374,000
------------ -------------
PROPERTY AND EQUIPMENT 16,792,000 15,749,000
Less accumulated depreciation (6,586,000) (5,146,000)
------------ -------------
Net property and equipment 10,206,000 10,603,000
------------ -------------
OTHER ASSETS
Cost in excess of net assets acquired, net 6,404,000 6,721,000
Other investments, at cost 650,000 651,000
Notes receivable, less current portion 371,000 506,000
Intangibles 309,000 365,000
Deferred income taxes 329,000 329,000
Other 356,000 305,000
Net assets of discontinued operations 351,000 556,000
------------ -------------
Total other assets 8,770,000 9,433,000
------------ -------------
TOTAL ASSETS $32,194,000 $34,410,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
AS OF MARCH 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,808,000 $ 2,150,000
Accrued expenses 4,107,000 5,002,000
Line of credit and current maturities of debt obligations 1,397,000 981,000
Payables to affiliates - 2,286,000
Other 57,000 49,000
------------ -------------
Total current liabilities 7,369,000 10,468,000
------------ -------------
LONG-TERM DEBT
Note payable to affiliate 700,000 700,000
Notes, obligations, and other, net of current maturities 5,946,000 4,591,000
------------ -------------
Total long-term debt 6,646,000 5,291,000
------------ -------------
OTHER LIABILITIES 325,000 347,000
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN SUBSIDIARY AND PARTNERSHIPS 1,891,000 2,130,000
STOCKHOLDERS' EQUITY
Convertible preferred stock - $.01 par value, 2,000,000
shares authorized; 23,541 shares issued and outstanding
in 1997 and 28,885 in 1996 - -
Common stock - $.01 par value, 12,000,000 shares authorized;
4,693,585 issued in 1997 and 4,669,928 in 1996;
4,314,223 shares outstanding in 1997 and 4,290,566 in 1996 47,000 47,000
Capital in excess of par value 22,366,000 22,316,000
Accumulated deficit (3,417,000) (3,156,000)
Less treasury stock, at cost (3,033,000) (3,033,000)
------------ -------------
Total stockholders' equity 15,963,000 16,174,000
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,194,000 $34,410,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $36,226,000 $41,857,000 $42,802,000
----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold 23,660,000 28,194,000 31,514,000
Selling, general, and administrative 11,548,000 13,115,000 14,776,000
Research and development 286,000 155,000 140,000
Nonrecurring charges - - 2,000,000
----------- ----------- -----------
Total costs and expenses 35,494,000 41,464,000 48,430,000
----------- ----------- -----------
OPERATING INCOME (LOSS) 732,000 393,000 (5,628,000)
OTHER (EXPENSE) INCOME
Interest income 178,000 266,000 696,000
Interest expense (900,000) (1,128,000) (1,257,000)
(Loss) gain on sale of assets (84,000) 3,006,000 70,000
Other, net (165,000) 684,000 (642,000)
----------- ----------- -----------
Total other (expense) income (971,000) 2,828,000 (1,133,000)
----------- ----------- -----------
(Loss) income from continuing operations before
minority interest and income taxes (239,000) 3,221,000 (6,761,000)
Minority interest in net loss (income) of
subsidiary and partnerships 359,000 (5,000) 1,927,000
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 120,000 3,216,000 (4,834,000)
(Provision) benefit for income taxes (6,000) (548,000) 197,000
----------- ----------- -----------
Income (loss) from continuing operations 114,000 2,668,000 (4,637,000)
Loss from discontinued operations, net of
income taxes of $0 (375,000) (920,000) (5,534,000)
----------- ----------- -----------
NET (LOSS) INCOME $ (261,000) $ 1,748,000 $(10,171,000)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
For the years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
(LOSS) INCOME PER COMMON SHARE
Income (loss) from continuing operations $ 0.03 $ 0.60 $ (1.09)
Loss from discontinued operations (0.09) (0.20) (1.30)
--------- --------- ---------
NET (LOSS) INCOME PER SHARE $ (0.06) $ 0.40 $ (2.39)
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,418,483 4,418,483 4,254,327
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended March 31, 1997
<TABLE>
<CAPTION>
Retained
Earnings
Preferred Common Capital In (Accu- Treasury
Preferred Stock Common Stock Excess of mulated Treasury Stock
Shares Amount Shares Amount Par Value Deficit) Shares Cost
----------- ----------- ----------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 43,516 $ - 4,605,139 $ 46,000 $22,317,000 $ 5,267,000 376,362 $(2,973,000)
Conversion of preferred
shares to common shares (8,510) - 37,675 - - - - -
Net loss - - - - - (10,171,000) - -
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
Balance at March 31, 1995 35,006 - 4,642,814 46,000 22,317,000 (4,904,000) 376,362 (2,973,000)
Conversion of preferred
shares to common shares (6,121) - 27,114 1,000 (1,000) - - -
Net income - - - - - 1,748,000 - -
Other - - - - - - 3,000 (60,000)
----------- ----------- ----------- ----------- ------------- ------------ ----------- -----------
Balance at March 31, 1996 28,885 - 4,669,928 47,000 22,316,000 (3,156,000) 379,362 (3,033,000)
Conversion of preferred
shares to common shares (5,344) - 23,657 - - - - -
Net loss - - - - - (261,000) - -
Other - - - - 50,000 - - -
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
Balance at March 31, 1997 23,541 $ - 4,693,585 $ 47,000 $22,366,000 $(3,417,000) 379,362 $(3,033,000)
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (261,000) $ 1,748,000 $(10,171,000)
Adjustments to reconcile net (loss)
income to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,777,000 2,228,000 2,658,000
Minority interest (239,000) 46,000 (1,952,000)
Deferred taxes - - 121,000
Loss (gain) on sale of assets 84,000 (3,006,000) (70,000)
Nonrecurring charges - - 2,000,000
Loss from discontinued operations 375,000 920,000 5,534,000
Other noncash charges and credits, net 55,000 34,000 (267,000)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net (382,000) 1,063,000 48,000
Inventories 174,000 (614,000) 816,000
Prepaid and other 112,000 101,000 188,000
Income taxes, net 8,000 14,000 825,000
Accounts payable and accrued expenses (935,000) (464,000) (154,000)
Other liabilities (22,000) (25,000) (221,000)
-------------- ------------- -------------
Net cash provided by (used for) operating activities of
continuing operations 746,000 2,045,000 (645,000)
Net operating activities of discontinued operations (170,000) (1,564,000) (2,105,000)
--------------- ------------- -------------
Net cash provided by (used for) operating activities 576,000 481,000 (2,750,000)
--------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (1,058,00) (670,000) (1,773,000)
Proceeds from sale of assets 254,000 5,147,000 245,000
Decrease (increase) in investments - 3,232,000 (232,000)
Decrease in notes receivable 304,000 467,000 764,000
Other investing activities, net (88,000) 82,000 (45,000)
--------------- -------------- ------------
Net cash (used for) provided by investing activities (588,000) 8,258,000 (1,041,000)
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of borrowings (171,000) (2,657,000) (1,008,000)
(Repayments to) advances from affiliated companies (202,000) (5,321,000) 2,356,000
Proceeds from investment by affiliated company - 1,588,000 -
Other financing activities, net - - 169,000
--------------- ------------- --------------
Net cash (used for) provided by financing activities (373,000) (6,390,000) 1,517,000
--------------- ------------- --------------
CHANGE IN CASH AND CASH EQUIVALENTS (385,000) 2,349,000 (2,274,000)
CASH AND CASH EQUIVALENTS, beginning of year 3,622,000 1,273,000 3,547,000
--------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 3,237,000 $ 3,622,000 $ 1,273,000
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996, AND 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES OF
CONSOLIDATION
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the parent company, Scherer Healthcare, Inc. (the "Company" or "Scherer
Healthcare"), and its subsidiaries (see Note 3). Marquest Medical Products,
Inc. ("Marquest"), a majority owned subsidiary of the Company, has a 52- or
53-week fiscal year ending on the Saturday nearest to March 31. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain 1995 and 1996 amounts have been reclassified to conform with the 1997
presentation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of March 31, 1997 and 1996, the carrying value of financial instruments
such as cash, short-term investments, trade receivables and payables and
short-term debt approximated their fair values based on the short-term
maturities of these instruments. Additionally, the carrying value of both
long-term investments and long-term debt approximated fair values.
INVENTORIES
Inventories are stated at the lower of net realizable value or cost primarily
using the first-in, first-out ("FIFO") method.
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Finished products $ 1,086,000 $ 1,746,000
Work in progress 282,000 233,000
Containers, packaging, and
raw material 2,085,000 1,957,000
------------ -------------
$ 3,453,000 $ 3,936,000
------------ -------------
------------ -------------
</TABLE>
F-9
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, and depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets as follows: furniture, fixtures and equipment--3-10 years and
buildings and leasehold improvements--5-50 years.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Land $ 1,265,000 $ 1,265,000
Building and leasehold improvements 4,870,000 4,836,000
Furniture, fixtures, and equipment 10,657,000 9,648,000
------------- -------------
$16,792,000 $15,749,000
------------- -------------
------------- -------------
</TABLE>
Depreciation expense for fiscal years 1997, 1996, and 1995 was $1,678,000,
$1,924,000, and $2,276,000, respectively.
MINORITY INTEREST
Minority interest primarily represents the equity interest in Marquest of
outside investors. Because of recent losses, there is no significant minority
interest liability related to other subsidiaries not wholly owned by the
Company.
INCOME TAXES
The Company uses the liability method to account for income taxes (see Note 11).
REVENUE RECOGNITION
Sales are recorded by the Company when products are shipped to customers or
independent distributors. Sales for services provided are recorded when the
Company has completed the service.
Geographic net sales were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
United States and Canada $30,138,000 $36,113,000 $38,249,000
Europe, Pacific Rim, Puerto
Rico and Other 6,088,000 5,744,000 4,553,000
-------------- -------------- ---------------
Net Sales $36,226,000 $41,857,000 $42,802,000
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
All of the Company's export sales are through Marquest. The operating
margins on Marquest's export sales have been comparable to those associated
with Marquest's domestic sales.
As of March 31, 1997 and 1996, Marquest had approximately $219,000 and
$131,000, respectively, in finished goods inventory at a warehouse facility
of one of its European distributors. These assets represent all of the
Company's assets located outside the United States.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenditures for the creation and application of new
products and processes are expensed as incurred.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is based upon the weighted average number of
common shares outstanding after giving effect for common stock equivalents
arising from the assumed conversion of the Company's Convertible Preferred
Stock into common stock. The common stock equivalents included in the
calculation of earnings per share are 104,260 and 127,917 for the years ended
March 31, 1997 and 1996, respectively. Because of losses, common stock
equivalents were not included in the calculation of earnings per share for
the year ended March 31, 1995.
F-10
<PAGE>
NEW ACCOUNTING STANDARDS
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and associated intangibles be written down to fair value whenever an
impairment review indicates that the carrying value cannot be recovered on an
undiscounted cash flow basis. SFAS No. 121 also requires that a company no
longer record depreciation expense on assets held for sale. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure.
SFAS No. 123 is only applicable to stock options granted in fiscal years
beginning after December 15, 1994. The Company did not grant any stock
options during fiscal years 1996 and 1997 (see Note 9); therefore, the
accounting disclosures, as required by SFAS No. 123, are not applicable to
the Company's outstanding stock options.
In fiscal 1998, the Company will adopt SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock. This Statement
replaces the presentation of primary EPS with a presentation of basic EPS and
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. This Statement also
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
The Company must adopt the new standard for the quarter ending December 31,
1997; earlier application is not permitted. This Statement requires restatement
of all prior period EPS data presented. The impact of SFAS No. 128 on the
calculations of basic and diluted EPS for these years is not expected to be
material.
NOTE 2. MARQUEST
In fiscal 1994, the Company entered into transactions to acquire Marquest and to
purchase one of Marquest's product lines for $4,500,000 in cash. Marquest is an
international manufacturer and distributor of specialty cardiopulmonary support,
respiratory and anesthesia disposable devices. Since the transactions were
completed, Marquest has been included with the Company in the consolidated
financial statements due to the Company's ability to control Marquest by virtue
of common stock, warrants and convertible debt held by the Company and the
Company's control of the Board of Directors.
As part of the acquisition, Marquest restructured its $12,650,000 of defaulted
Swiss bonds. Approximately 96% of the outstanding amount of bonds was tendered
and accepted in the Swiss bond exchange offers. A combination of approximately
43,516 shares of Scherer Healthcare 5% Convertible Preferred Stock, $2,875,000
of Marquest six-year 8% notes, and Marquest warrants for 1,597,416 Common Shares
were issued to the former bondholders who accepted the exchange offers. In
exchange for its Preferred Stock, the Company received approximately $4,352,000
of Marquest six-year 8% notes convertible into Marquest Common Stock. In
connection with the acquisition of Marquest, the Company purchased Marquest's
arterial blood gas ("ABG") product line, including related equipment, from
Marquest for $4,500,000 in cash. The Company licenses the ABG product line back
to Marquest in exchange for a royalty equal to 3.25% of Marquest's net ABG
product line sales. Marquest had the option to repurchase the ABG product line
from the Company at any time prior to May 31, 1996 for $4,500,000 plus $22,500
for each month lapsed between June 1993 and the date of repurchase. In May
1996, the Company and Marquest agreed to extend the option period through June
15, 1999. The purchase of the ABG product line by the Company resulted in
goodwill of approximately $4,255,000. Primarily as consideration for the
original product line repurchase option, the Company received warrants for
6,580,000 shares of Marquest Common Stock, exercisable at $0.75 per share. At
the Company's option, either cash or Scherer Healthcare Common Stock can be used
in exercising the warrants. On May 23, 1994, the Company converted $2,500,000
of the $4,352,000 Marquest six-year 8% note into 3,333,333 shares of Marquest
Common Stock.
F-11
<PAGE>
On March 28, 1996, the Company converted the remaining balance of $1,852,000 and
the associated accrued interest of $487,000 on the Marquest six-year 8% note
into 3,340,245 shares of Marquest Common Stock. Additionally, the Company
agreed to convert $376, 000 in accrued but unpaid management fees owed to the
Company by Marquest into 537,614 shares of Marquest Common Stock. As of March
31, 1997, the Company owns 51% of Marquest's outstanding Common Stock. Marquest
has outstanding a significant number of warrants, stock options, and convertible
notes that could be converted into Marquest Common Stock. Depending upon the
amount and timing of conversion of any of these securities, the Company's
ownership percentage in Marquest could vary from 42% to 66%.
On March 14, 1997, Marquest and Vital Signs, Inc. ("VSI") announced the
execution of a definitive merger agreement (the "Merger Agreement") providing
for VSI to acquire Marquest. In the transaction, which is expected to take
place in July 1997, Marquest would become a wholly owned subsidiary of VSI and
VSI would pay Marquest shareholders $0.797 per share in cash for each
outstanding share of Marquest Common Stock. As discussed above, the Company
owns 7,211,192 shares of Marquest Common Stock directly and holds warrants to
purchase an additional 6,580,000 shares of Marquest Common Stock at an exercise
price of $0.75 per share. In connection with the Merger Agreement, the Company
and VSI entered into an agreement pursuant to which VSI has agreed, provided the
Merger Agreement is consummated, to purchase the ABG product line from the
Company and the Company has agreed to enter into a covenant not to compete for
an aggregate purchase price of $5,860,000. The Company expects to record a gain
from these transactions, which will be reflected in the Company's consolidated
financial statements at the time the transactions become effective.
Simultaneous with the execution of the Merger Agreement, Marquest and VSI
entered into a Dealer Agreement which authorizes VSI to distribute Marquest's
products in the United States, Canada, Puerto Rico and certain other
international territories for a period of two years. Marquest has given 28 of
its 29 hospital specialty dealers notice terminating its agreements with such
dealers at the end of the required notice period, generally 30 to 90 days from
the date of notice. Primarily as a result of the termination notices, two of
Marquest's dealers have filed lawsuits against Marquest and VSI (See Note 8).
Subsequent to giving the hospital specialty dealers notice of termination,
Marquest entered into new arrangements with some of the dealers pursuant to
which these certain dealers may continue to distribute Marquest's products.
The operations of Marquest are included in the Company's Medical Device and
Surgical/Safety Disposables Segment along with the operations of Scherer
Healthcare, Ltd. ("Scherer, Ltd."). The assets and businesses of Scherer, Ltd.
were sold in two separate transactions in October 1995 and October 1996 (See
Note 5). Upon the consummation of the Merger Agreement, the operations of the
Medical Device and Surgical/Safety Disposable Segment will be accounted for as a
discontinued segment, and accordingly, the operations of Marquest and Scherer,
Ltd. will be segregated and reported as discontinued operations in the Company's
consolidated financial statements. The operations of this Segment are included
in the Company's consolidated continuing operations for the fiscal year ended
March 31, 1997 because the pending transactions with VSI are subject to approval
by the shareholders of Marquest and the Company and to other standard
conditions.
F-12
<PAGE>
NOTE 3. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------
(in thousands)
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net Sales:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 22,045 $ 22,443 $ 20,576
Scherer Healthcare, Ltd. (a) 1,069 7,555 11,203
Waste Management Services Segment 11,836 10,753 10,039
Consumer Healthcare Products Segment 1,276 1,106 984
--------- --------- ---------
Total $ 36,226 $ 41,857 $ 42,802
--------- --------- ---------
--------- --------- ---------
Operating Income (Loss) from Continuing Operations:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 363 $ 510 $ (2,696)
Scherer Healthcare, Ltd. (a) (323) (335) (912)
Waste Management Services Segment 1,073 924 790
Consumer Healthcare Products Segment 467 368 244
Corporate (b) (848) (1,074) (3,054)
--------- --------- ---------
Total $ 732 $ 393 $ (5,628)
--------- --------- ---------
--------- --------- ---------
Identifiable Assets:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 13,424 $ 15,393 $ 13,992
Scherer Healthcare, Ltd. (a) - 909 6,233
Waste Management Services Segment 9,589 9,370 9,524
Consumer Healthcare Products Segment 111 153 139
Corporate (c) 9,070 8,585 10,751
--------- --------- ---------
Total $ 32,194 $ 34,410 $ 40,639
--------- --------- ---------
--------- --------- ---------
Depreciation Expense:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 793 $ 1,046 $ 1,364
Scherer Healthcare, Ltd. (a) 3 74 128
Waste Management Services Segment 816 731 717
Consumer Healthcare Products Segment 1 1 1
Corporate 65 72 66
--------- --------- ---------
Total $ 1,678 $ 1,924 $ 2,276
--------- --------- ---------
--------- --------- ---------
Capital Expenditures:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 207 $ 66 $ 666
Scherer Healthcare, Ltd. (a) - 47 268
Waste Management Services Segment 841 626 715
Consumer Healthcare Products Segment 5 - -
Corporate 5 - 15
--------- --------- ---------
Total $ 1,058 $ 739 $ 1,664
--------- --------- ---------
--------- --------- ---------
</TABLE>
(a) The assets and businesses of Scherer Healthcare, Ltd. were sold in two
separate transactions in October 1995 and October 1996. See Note 5.
(b) Amount includes a nonrecurring charge of $2,000,000 for fiscal year 1995
relating to the write-down of two waste incinerator investments.
(c) Amount includes net assets of discontinued operations of $351,000,
$556,000, and $9,000 for fiscal years 1997, 1996, and 1995, respectively.
See Note 4.
F-13
<PAGE>
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT
MARQUEST MEDICAL PRODUCTS, INC.
See Note 2 for discussion on the acquisition of Marquest.
Marquest manufactures and distributes four major groups of products for use in
the respiratory care, cardiopulmonary support and anesthesia markets. The
largest of these product groups is the Blood Collection Systems for Diagnostic
Testing. This group includes a broad line of Marquest disposable blood gas
syringes. Most revenues in this group are from the sales of
proprietary-designed syringes, which are marketed under the trade names Gas-Lyte
and Quik-ABG.
All of Marquest's operations and assets are located in Englewood, Colorado,
except for a small amount of inventory at a warehouse facility of one of its
European distributors. Marquest markets its products domestically (United
States and Canada) and internationally. The international markets primarily
include Europe, the Pacific Rim, and Puerto Rico. Export sales accounted for
28%, 26%, and 22% of Marquest's sales for fiscal 1997, 1996, and 1995,
respectively. Marquest had one independent distributor who accounted for 18%,
19% and 19% of its sales for fiscal 1997, 1996, and 1995, respectively.
SCHERER HEALTHCARE, LTD
The Company, through a wholly owned subsidiary, was the general partner and 65%
owner of Scherer Healthcare, Ltd. ("Scherer, Ltd."), which had been doing
business as Custom Medical Products until October 1995. On October 3, 1995,
Scherer, Ltd. sold certain of its assets to Cordis Medical Products, Inc.
("Cordis Medical"), a wholly owned subsidiary of Cordis Corporation, for
approximately $6,527,000. The assets sold to Cordis Medical were those used in
connection with Scherer, Ltd.'s business of packing and distributing medical
supplies for surgical procedures and providing nonwoven medical drapes, gowns
and accessory items to hospitals and other healthcare providers. Scherer, Ltd.
continued in the business of providing nonwoven disposable industrial apparel
and related products to the industrial safety and environment-controlled clean
room and scientific markets under the name Protective Disposable Apparel.
On October 29, 1996, Scherer, Ltd. sold substantially all of its remaining
assets to a subsidiary of Health-Pak, Inc. ("Health-Pak") for approximately
$254,000, plus the assumption by Health-Pak of $319,000 in accounts payable.
The assets acquired by Health-Pak include accounts receivable, inventory and
furniture and fixtures. See Note 5 for further discussion on the transactions
with Cordis Medical and Health-Pak.
WASTE MANAGEMENT SERVICES SEGMENT
The Company operates its medical waste management services segment through Bio
Systems Partners and Medical Waste Systems, Inc. (collectively, "Bio Systems").
The Company owns a 60% general partnership interest in Bio Systems Partners, and
Medical Waste Systems, Inc. is wholly owned by the Company. Bio Systems has
developed and implemented a system to manage and to dispose of certain
infectious waste from hospitals and medical facilities--primarily injectables
and other sharp-edged waste. Bio Systems operates in the metropolitan New York
City, Pennsylvania, New Jersey, and New England areas.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
Scherer Laboratories, Inc. ("Scherer Labs"), a 100% owned subsidiary of the
Company, markets brand name and generic over-the-counter ("OTC") drugs. The OTC
products are principally products used for treatment of colds and coughs, eye
and ear irritations and insect bites. In early fiscal 1997, Scherer Labs
discontinued the sale of its one prescription drug due to an impractical
increase in the cost to manufacture. Sales of the prescription drug were
$12,000 and $24,000 in fiscal 1996 and 1995, respectively. The loss of these
sales did not have a material effect on the Company. Scherer Labs had one
customer who accounted for 55%, 45% and 45% of its total sales for fiscal 1997,
1996, and 1995, respectively.
Scherer Labs markets its products primarily to drug and food stores, mass market
retailers, drug wholesalers, and government agencies. The majority of the sales
are through retailers in the southwest region of the United States. Accounting
and customer service functions are provided by the Company at its corporate
headquarters in Atlanta, Georgia, and sales, marketing, purchasing, and
relations with suppliers and contractors are performed in Dallas, Texas.
F-14
<PAGE>
NOTE 4. DISCONTINUED OPERATIONS
Biofor, Inc. ("Biofor"), a majority owned subsidiary of the Company which had
been operating the Company's Pharmaceutical Research and Development Segment,
was engaged in research to identify and develop new drug compounds. Biofor
utilized "artificial intelligence" computer technology (known as "MultiCASE")
which employed a system of rational drug design (known as M-CADD). This
technology was used for new drug compound development and for contracted
research and development.
Biofor focused its drug design efforts on arthritis and osteoarthritis as well
as the treatment for acute pain. Biofor's lead compound, BF-389, is an
anti-inflammatory analgesic which preliminary Phase I clinical trials indicated
was not sufficiently bioavailable when administered orally in humans. Other
delivery methods that would allow oral administration of the compound were
pursued by Biofor without success.
Since October 1990, Biofor and Ono Pharmaceutical Company, Ltd. ("Ono") had
entered into two research and collaboration agreements pursuant to which they
jointly researched compounds. Biofor provided the use of its exclusive M-CADD
software and its scientists experienced in using M-CADD, while Ono provided
funding and clinical testing of any compounds discovered. The first contract
expired in fiscal 1994 and the second expired March 1996. Substantially all of
Biofor's revenues since 1990 were derived from these contracts.
Since its inception on June 29, 1986, Biofor had expended over $20 million in
cash funding from the Company and affiliates of the Company. In July 1995,
after attempts to locate a purchaser for Biofor, Biofor ceased further drug
design efforts and concentrated solely on the Ono research contract. When the
Ono contract expired in March 1996, Biofor discontinued all operations and the
Company abandoned all operations of Biofor.
The abandonment of the operations of Biofor has been accounted for as a
discontinued operation, and accordingly, its net assets have been segregated
from continuing operations in the accompanying consolidated balance sheets.
Biofor's operating results are also segregated and reported as discontinued
operations in the accompanying consolidated statements of operations and cash
flows.
The following results of operations are attributable to the discontinued
operations of Biofor:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ - $ 772,000 $ 800,000
------------ ------------ ------------
Research and development expenditures - 1,381,000 2,717,000
Nonrecurring charges - - 2,874,000
Other costs and expenses 104,000 136,000 743,000
Provision for shutdown costs - 50,000 -
Write-down of assets to net realizable value 271,000 125,000 -
------------ ------------ ------------
375,000 1,692,000 6,334,000
------------ ------------ ------------
Loss from discontinued operations $ (375,000) $ (920,000) $ (5,534,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-15
<PAGE>
The net assets of the discontinued operations of Biofor at March 31, 1997 and
1996 are as follows:
1997 1996
---------- ----------
Assets:
Property and equipment, net of disposal
costs (a) $ 393,000 $ 664,000
---------- ----------
Total assets 393,000 664,000
---------- ----------
Liabilities:
Accounts payable and accrued expenses 17,000 33,000
Other liabilities 25,000 25,000
Estimated shutdown costs - 50,000
---------- ----------
Total liabilities 42,000 108,000
---------- ----------
Net assets $ 351,000 $ 556,000
---------- ----------
---------- ----------
(a) The remaining property and equipment of Biofor consists of land, a 30,000
square foot building owned by Biofor, and computer and laboratory
equipment.
In fiscal 1996, the Company wrote down the assets of Biofor to their
then-estimated net realizable value and recorded a provision of $50,000 for the
estimated shutdown costs. However, the operating costs of Biofor for fiscal
1997 were $104,000 higher than the provision recorded in fiscal 1996 primarily
due to the cost to maintain the patents for BF-389 in various countries and the
cost for property and liability insurance. The Company intends to sell the
remaining assets of Biofor, but it now anticipates that it may take several
years (primarily to sell the building) and accordingly, has recorded an
additional charge of $271,000 for the write-down of Biofor's assets to their net
realizable value. No income taxes or interest expense was allocated to the
discontinued operations of Biofor for the fiscal years 1997, 1996 and 1995.
NOTE 5. SALE OF ASSETS
On October 3, 1995, Scherer, Ltd. sold certain of its assets to Cordis Medical,
a wholly owned subsidiary of Cordis Corporation, for $6,527,000. The assets
sold were those used in connection with Scherer, Ltd.'s business of packing and
distributing medical supplies for surgical procedures and providing nonwoven
medical drapes, gowns and accessory items to hospitals and other healthcare
providers (the "Medical Business"). Additionally, Cordis Medical agreed to
assume all accounts payable related to the Medical Business and certain other
specifically identified liabilities, including the mortgage on Scherer, Ltd.'s
facility located in Asheville, North Carolina. Scherer, Ltd. received net
proceeds, before income taxes, of $4,922,000, and the Company recorded a pretax
gain of $2,781,000 in the third quarter of fiscal 1996. Scherer, Ltd. continued
in the business of providing nonwoven apparel for industrial uses (the
"Industrial Business") under the name Protective Disposable Apparel.
On October 29, 1996, Scherer, Ltd. sold substantially all of its remaining
assets to a subsidiary of Health-Pak, Inc. for approximately $254,000, plus the
assumption by Health-Pak of $319,000 in accounts payable. The assets acquired
by Health-Pak were those used in connection with Scherer, Ltd.'s Industrial
Business and included accounts receivable, inventory and furniture and fixtures.
Additionally, Health-Pak agreed to assume certain accounts payable and
liabilities related to the Industrial Business. The Company recorded a loss
from the transaction of $84,000 in the third quarter of fiscal 1997 primarily
due to the write-off of the remaining book value of certain intangible assets.
NOTE 6. INTANGIBLES AND COSTS IN EXCESS OF NET ASSETS ACQUIRED
Intangibles are being amortized on a straight-line basis over periods ranging
from 5 to 30 years. Amortization expense amounted to $99,000, $124,000, and
$152,000 in fiscal years 1997, 1996, and 1995, respectively. Accumulated
amortization at March 31, 1997 and 1996 was $213,000 and $317,000, respectively.
F-16
<PAGE>
The cost in excess of net assets acquired ("goodwill") is being amortized on a
straight-line basis over a period of 30 years. Amortization expense amounted to
$243,000, $380,000, and $249,000 in fiscal years 1997, 1996, and 1995,
respectively. Accumulated amortization at March 31, 1997 and 1996 was
$1,408,000 and $1,155,000, respectively.
Subsequent to an acquisition, the Company periodically evaluates whether later
events and circumstances indicate that the remaining estimated useful life of
goodwill warrants revision. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of undiscounted
net income over the remaining life of the goodwill in measuring whether the
goodwill is recoverable. As of March 31, 1997, in the opinion of the Company's
management, no revision of goodwill is required.
NOTE 7. BORROWINGS
Debt and obligations at March 31, 1997 and 1996 consisted of the following:
1997 1996
----------- ----------
Swiss debt principal and accrued
interest at 9% $ 347,000 $ 397,000
Note payable to Robert P. Scherer, Jr.,
due fiscal 2002, prime plus
1.50%, 9.75% at March 31, 1997 700,000 700,000
Note payable to bank, due through
fiscal 2000; variable interest rate,
8.375% at March 31, 1997 883,000 975,000
Obligations under line of credit
arrangement, prime plus 2.25% 125,000 -
Note payable (a), due through fiscal 2002,
prime rate, 8.25% at March 31, 1997 1,958,000 -
Obligations under capital leases,
due in varying installments
through fiscal 2002 1,179,000 1,290,000
Swiss notes payable due fiscal 1999 at 8% 2,851,000 2,896,000
Other long-term debt - 14,000
----------- ----------
8,043,000 6,272,000
Less current maturities (1,397,000) (981,000)
----------- ----------
Long-term debt $ 6,646,000 $ 5,291,000
----------- ----------
----------- ----------
(a) The note is payable to the four adult children of Robert P. Scherer,
Jr., who is the Chairman of the Board and Chief Executive Officer of
the Company and Marquest and is the majority stockholder of the
Company (see Note 12).
The following is a summary of the future maturities of the obligations and notes
payable:
Year ended March 31:
1998 $ 1,397,000
1999 3,703,000
2000 1,368,000
2001 562,000
2002 1,013,000
-----------
$ 8,043,000
-----------
-----------
In June 1995, the Company terminated a $3,200,000 line of credit arrangement it
had with a bank which was collateralized by $3,200,000 of investments.
Borrowings under the line of credit were repaid with the investments that
collateralized the line.
In fiscal 1997, Marquest entered into a line of credit arrangement with Norwest
Business Credit, Inc. which is secured by its trade accounts receivable. The
maximum available under the line of credit is $2,000,000, subject to certain
restrictions. At March 31, 1997, Marquest had an available borrowing limit of
approximately $1,400,000 of which $125,000 had been borrowed.
Substantially all of the assets of Marquest (approximately $13,424,000) are
collateral on approximately $5,442,000 of the above noted debt obligations.
F-17
<PAGE>
NOTE 8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Office space, warehouse facilities, transportation equipment, and office
equipment are leased under noncancelable operating leases expiring at various
dates through 2003. Total rental expense, net of sublease income, included in
the consolidated statements of operations was approximately $820,000, $943,000,
and $1,110,000 for the years ended March 31, 1997, 1996, and 1995, respectively.
The following is a summary of future minimum lease payments required under
operating leases having noncancelable lease terms in excess of one year:
Year ended March 31:
1998 $ 919,000
1999 397,000
2000 278,000
2001 196,000
2002 172,000
Thereafter 129,000
-----------
2,091,000
Minimum sublease income (300,000)
-----------
$ 1,791,000
-----------
-----------
LEGAL PROCEEDINGS
A products liability action was filed against Marquest in California in 1990
which was defended and settled during the trial by its insurance company. Under
the insurance policy, Marquest may have been responsible for a $250,000 self
insured retention plus the cost of defense. Marquest claimed that the insurance
company mishandled the lawsuit and declined to pay. Marquest was sued by the
insurance company in District Court, Arapahoe County, Colorado in February 1994
alleging damages of up to $540,000. In May 1996, Marquest entered into a
settlement agreement with the insurance company pursuant to which Marquest paid
the insurance company $170,000.
On April 9, 1997, Tri-Anim Health Services ("THS"), Marquest's largest domestic
dealer, filed a complaint against Marquest and VSI in the Superior Court of the
State of California for the County of Los Angeles alleging that Marquest had
breached a Confidentiality Agreement between THS and Marquest. Marquest filed a
motion to move the California action to federal district court and filed a
motion to compel arbitration of all issues in Colorado. Marquest intends to
vigorously contest THS' suit against Marquest.
On March 24, 1997, Chesapeake Medical, Inc. and Chesapeake Breathing Services,
Inc. (collectively referred to as "Chesapeake"), two of Marquest's distributors,
filed a lawsuit against Marquest and VSI in the United States District Court for
the District of New Jersey, alleging that Marquest terminated the Dealer
Agreement between Marquest and Chesapeake in a commercially unreasonable manner
and that Marquest disclosed confidential information. Marquest is vigorously
contesting this matter.
Marquest believes that its position in the preceding two matters is meritorious,
but Marquest is unable to predict the outcome of either lawsuit or whether other
lawsuits will be filed by other dealers as a result of their termination. (See
Note 2)
Terumo K.K. ("Terumo"), a competitor of Marquest, filed a complaint in September
1996 in the Tokyo District Court against Chiron K.K. ("Chiron"), Marquest's
distributor of arterial blood gas samplers in Japan, alleging that the blood
samplers infringe upon a Japanese patent owned by Terumo. The complaint does
not name Marquest; however, Marquest has agreed to pay the cost of Chiron's
defense and to indemnify Chiron from Terumo's claim. Terumo is requesting an
injunction against Chiron from importing and selling blood samplers as well as
137,000,000 yen (approximately $1,100,000 as of March 31, 1997) for damages with
regard to Chiron's sale of blood samplers from January 1993 through December
1995. Terumo may increase the damages requested from 1996 to the present. Due
to the preliminary nature of this litigation, Marquest cannot predict the
Court's opinion or the impact, if any, on Marquest's market for blood gas
samplers in Japan.
F-18
<PAGE>
The Company, through a subsidiary, owns a 60% partnership interest in Bio
Systems Partners ("BSP") which operates in the Company's Waste Management
Services Segment. Pursuant to summary judgment granted in a civil action filed
in the United States District Court for the Eastern District of New York in
March 1994, the Company's subsidiary is required to purchase the minority
partner's 40% equity interest valued as of November 30, 1993. Pursuant to the
partnership agreement, the Company's subsidiary and the minority partner
performed separate appraisals of the minority interest. The separate appraisals
were not consistent; therefore, a third appraiser, selected by the partners,
has been retained to review each of the valuations and determine the final
valuation and purchase price. Recently, the District Court rejected the
minority partner's request for prejudgement interest on the final valuation.
The Company is subject to other legal proceedings and claims that arise in the
ordinary course of business. Although the outcome of such proceedings and
claims, including the cases above, cannot be determined with certainty,
management is of the opinion that their final outcome will not have a material
adverse effect on the Company's consolidated operations or financial position.
NOTE 9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has three stock option plans and a long-term incentive plan.
Options may be exercised at a rate ranging from 20% to 33% per year and expire
after eight years. At March 31, 1997, the maximum shares available under these
plans for future grants were 1,859,200. The price of options granted to date
has generally been at the fair market value of the shares on date of grant.
A summary of changes in outstanding options is as follows:
Weighted
Shares Average
Subject Price per
to Option Share
---------- -----------
Balance at March 31, 1994 199,800 $ 14.07
Options granted 241,000 10.34
Options exercised -
Options canceled and expired -
--------- ---------
Balance at March 31, 1995 440,800 12.03
Options granted -
Options exercised -
Options canceled and expired (311,000) 10.77
--------- ---------
Balance at March 31, 1996 129,800 15.05
Options granted -
Options exercised -
Options canceled and expired -
--------- ---------
Balance at March 31, 1997 129,800 $ 15.05
--------- ---------
--------- ---------
Options exercisable at March 31, 1997 113,800
---------
---------
Of the 129,800 options outstanding at March 31, 1997, 99,800 have exercise
prices between $12.50 and $14.30, with a weighted average exercise price of
$13.09 and a weighted average remaining contractual life of four years. All of
these options are exercisable as of March 31, 1997. The remaining 30,000
options have exercise prices between $20.50 and $26.88, with a weighted average
exercise price of $21.56 and a weighted average remaining contractual life of
6.7 years. Of these options, 14,000 are exercisable as of March 31, 1997.
F-19
<PAGE>
CONVERTIBLE PREFERRED STOCK
As part of the Marquest acquisition in fiscal 1994, the Company issued 43,516
shares of its 5% Convertible Preferred Stock, $.01 par value (the "Preferred
Stock") to the former holders of Marquest's defaulted Swiss bonds (see Note 2).
The Company has 2,000,000 shares of the Preferred Stock authorized. Each share
of the Preferred Stock is convertible into approximately 4.43 shares of the
Company's Common Stock. At March 31, 1997 and 1996, the Company had 23,541 and
28,885, respectively, shares of the Preferred Stock outstanding which were
convertible into approximately 104,260 and 127,917, respectively, shares of the
Company's Common Stock.
NOTE 10. RETIREMENT PLAN
A contributory 401(k) salary reduction plan (the "Plan") covers all nonunion
employees, and union employees in a few states, who are 21 years of age or older
and have been employed at least one year. Prior to April 1, 1995, an eligible
employee could elect to contribute up to 3% of their compensation and the
Company was required to make a matching contribution equal to 200% of employee
contributions for all Plan participants still employed on the last day of the
Plan year. Effective April 1, 1995, an eligible employee may elect to
contribute from 2% up to 10% of their compensation and the Company may make a
matching contribution, at its discretion, equal to a set percentage of employee
contributions for all Plan participants still employed on the last day of the
Plan year. The amount of employee contributions to which the match percentage
is applied is limited to 6% of an employee's compensation. For fiscal 1997, the
Company made a matching contribution equal to 100% of employee contributions up
to the maximum of 6% of employee compensation. Company contributions were
approximately $120,000, $108,000, and $200,000 for fiscal years 1997, 1996, and
1995, respectively.
NOTE 11. INCOME TAXES
In fiscal 1994, the Company adopted SFAS No. 109, "Accounting for Income Taxes,"
which required the use of the liability method of accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
As of March 31, the Company's net deferred tax assets consisted of the
following:
1997 1996
----------- ------------
Deferred tax assets:
Accrued expenses $ 560,000 $ 829,000
Partnership losses 601,000 577,000
Capital Losses 896,000 971,000
Net operating loss carryforwards 7,058,000 6,912,000
Other 233,000 174,000
---------- ----------
Total deferred tax assets 9,348,000 9,463,000
---------- ----------
Deferred tax liabilities:
Depreciation (512,000) (585,000)
Other - (123,000)
---------- ----------
Total deferred tax liabilities (512,000) (708,000)
---------- ----------
Valuation allowance (8,507,000) (8,426,000)
---------- ----------
Net deferred tax assets $ 329,000 $ 329,000
---------- ----------
---------- ----------
F-20
<PAGE>
A reconciliation of the income tax provision (benefit) from continuing
operations at the federal statutory rates to the actual tax provision (benefit)
from continuing operations follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------ --------------
<S> <C> <C> <C>
Computed statutory amount $ 41,000 $ 1,093,000 $ (1,644,000)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income
tax benefit 9,000 129,000 (193,000)
Minority interest in net income (loss) of
subsidiaries (136,000) 2,000 (732,000)
Amortization of goodwill 90,000 142,000 92,000
IRS settlement - 697,000 -
Net federal and state tax refunds - (150,000) (320,000)
Net change in valuation allowance 81,000 (1,172,000) 2,249,000
Other, net (79,000) (193,000) 351,000
--------- ----------- ------------
Provision (benefit) for income taxes $ 6,000 $ 548,000 $ (197,000)
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
Components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- ------------
<S> <C> <C> <C>
Current taxes:
Federal $ - $ 612,000 $ (126,000)
State 6,000 (64,000) (192,000)
--------- ----------- ------------
6,000 548,000 (318,000)
Deferred taxes - - 121,000
--------- ----------- ------------
Provision (benefit) for income taxes $ 6,000 $ 548,000 $ (197,000)
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
At March 31, 1997, the Company, excluding Marquest, has regular tax loss
carryforwards of approximately $4,670,000 expiring in varying dates through
2011. Marquest, which files a separate consolidated tax return, has tax loss
carryforwards of approximately $14,200,000 which expire at varying dates through
2011 and are limited as to their use. Marquest also has capital loss
carryforwards of approximately $2,400,000 which expire at varying dates through
1998. Due to the transactions discussed in Note 2, the future benefits
associated with the utilization of Marquest's tax loss carryforwards may be
substantially limited. Capital losses can be utilized to the extent Marquest
generates capital gains in the future.
The Company has determined, based upon its recent earnings history, that asset
valuation allowances of $8,507,000 and $8,426,000 should be established against
its deferred tax assets as of March 31, 1997 and 1996.
During fiscal 1994, Marquest received a refund of federal income taxes of
approximately $745,000 due to the carryback to prior years of losses incurred
during the temporary suspension of operations by the FDA. The Internal Revenue
Service ("IRS") completed an audit in July 1994 and determined that the losses
could not be carried back and issued an assessment to Marquest for the taxes
plus interest. In fiscal 1996, Marquest settled additional tax issues related
to audits by the IRS for fiscal years 1982-1988. Marquest recorded $697,000 of
additional taxes and interest. Marquest negotiated a repayment plan whereby
Marquest paid $400,000 in June 1995 and the remaining liability for taxes,
interest and penalties of approximately $970,000 at March 30, 1996 will be
repaid in monthly installments of $40,000. The IRS has placed a lien on
Marquest's facility in Englewood, Colorado to secure payment of the taxes.
F-21
<PAGE>
NOTE 12. RELATED-PARTY TRANSACTIONS
Prior to fiscal 1996, Scherer Capital Company L.L.C. ("Scherer Cap") and Scherer
Scientific, Ltd. ("Scherer Sci"), entities controlled by the majority
stockholder of the Company, made loans (the "Affiliate Loans") to the Company
and its subsidiaries, the proceeds of which were used for working capital and
business and equipment acquisitions. The Affiliate Loans were payable on demand
and bore interest at prime rate plus 1%. The balance of the Affiliate Loans was
approximately $2,286,000 at March 31, 1996.
In January 1997, the Company and Scherer Cap restructured the balance of
$2,128,000 on the Affiliate Loans (the Company had repaid all amounts owed to
Scherer Sci) into a promissory note (the "Original Note") to be repaid in
monthly installments of principal and interest over a five-year term with a
maturity date of December 1, 2001. The Original Note was collateralized by
2,432,251 shares of Marquest Common Stock owned by the Company, had a fixed
monthly payment of $44,437, except for the last payment, and bore interest at
prime rate plus 1%, adjusted quarterly. In connection with the dissolution of
Scherer Cap in March 1997, the Original Note was amended (the "Amended Note")
and subsequently assigned to the four adult children, who are not affiliated
with the Company, of Robert P. Scherer, Jr. who is Chairman of the Board and
Chief Executive Officer of the Company and Marquest and is the majority
stockholder of the Company. In exchange for certain considerations, $50,000 of
the principal balance was forgiven and the interest rate was reduced to prime,
adjusted quarterly, in the Amended Note. The monthly payment in the Amended
Note is fixed at $43,408, except for the last payment which will be for the
amount of the unpaid principal balance plus any unpaid accrued interest as of
December 1, 2001. The term and collateral remained the same in the Amended Note
as in the Original Note. As of March 31, 1997, the balance of the Amended
Note was approximately $1,958,000 and the interest rate was 8.25% The Company
has reported the $50,000 of debt forgiveness as an equity transaction due to the
common control at the time between the respective parties.
In March 1996, Marquest and Scherer Cap entered into a loan and security
agreement (the "Loan Agreement") from which Marquest borrowed $700,000 to repay
$700,000 that it borrowed from Scherer Cap in December 1995 for working capital
purposes. The Loan Agreement contemplated the possibility of additional
borrowings of $800,000. Borrowings under the Loan Agreement are represented by
convertible notes due April 1, 2001 (the "Scherer Cap Notes"), bear interest at
prime rate plus 1.5%, and are secured by Marquest's inventory, building, and
equipment. Pursuant to the Loan Agreement, which expires February 28, 2001, the
Scherer Cap Notes are convertible at the option of Scherer Cap into shares of
Marquest's Common Stock at a conversion price of $.70 per share. As of March
31, 1997, Marquest had borrowed $700,000 under the Loan Agreement and the
Scherer Cap Notes and the interest rate was 9.75%. Additionally, in March 1996
Scherer Cap purchased 2,061,856 shares of Marquest Common Stock for an
aggregate purchase price of $1,000,000. In connection with its dissolution in
March 1997, Scherer Cap assigned the Loan Agreement and the Scherer Cap Notes,
and transferred 1,546,392 shares of the Marquest Common Stock that it owned to
Mr. Scherer, Jr. The remaining 515,464 shares of Marquest Common Stock owned by
Scherer Cap were transferred into a voting trust for the benefit of Mr. Scherer,
Jr.'s adult children. Mr. Scherer, Jr. is entitled to vote the shares held in
the voting trust.
Effective October 1, 1995, Scherer Sci charged the Company an allocated portion
of the salary of a certain executive officer of the Company who was an employee
of Scherer Sci and not the Company. The executive officer provided the Company
with administrative and operations management. In connection with the
dissolution of Scherer Sci in March 1997, the executive officer became an
employee of the Company.
During the first quarter of fiscal 1996 and prior periods, Scherer Sci provided
to the Company and its subsidiaries administrative, accounting, management
oversight and payroll services (collectively, the "Administrative Services").
Effective July 1, 1995, Scherer Sci and the Company terminated the
Administrative Services arrangement and certain employees of Scherer Sci became
employees of the Company. As a result, the Company currently provides its own
administrative, accounting, management and payroll services.
F-22
<PAGE>
The Company was charged the following fees by the above affiliates:
1997 1996 1995
-------- -------- ---------
Management fees $ - $150,000 $ 610,000
Accounting services and
administrative management 70,000 43,000 78,000
Interest expense 245,000 539,000 544,000
-------- -------- ----------
Total $315,000 $732,000 $1,232,000
-------- -------- ----------
-------- -------- ----------
Until March 1995, Scherer Labs utilized the inventory receiving, warehousing and
distribution, customer service, and invoicing services of an entity controlled
by certain former officers of the Company and 25% owned by the majority
shareholder of the Company. The fees charged for these services were $104,000
in fiscal 1995.
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended March 31
-------------------------------------
1997 1996 1995
----------- ----------- ------------
NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Restructure of demand loan from
an affiliate into a promissory
note, net of debt forgiveness $ 2,078,000 $ - $ -
----------- ----------- -----------
----------- ----------- -----------
Conversion of notes from
Marquest to Marquest Common
Stock - $ 2,715,000 $ 2,500,000
----------- ----------- -----------
----------- ----------- -----------
Supplemental information:
Interest paid during the year $ 682,000 $ 1,395,000 $ 935,000
Income taxes paid (refunded) during
the year 451,000 471,000 (1,149,000)
F-23
<PAGE>
SCHEDULE I
SCHERER HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
MARCH 31, 1997 AND 1996
ASSETS
1997 1996
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 3,225,000 $ 1,987,000
Accounts and notes receivable 2,870,000 3,389,000
Receivable from Marquest 25,000 43,000
Inventories 170,000 542,000
Other current assets 66,000 158,000
------------- -------------
Total current assets 6,356,000 6,119,000
------------- -------------
PROPERTY AND EQUIPMENT, net 3,737,000 3,548,000
------------- -------------
INVESTMENT IN MARQUEST 6,491,000 6,882,000
GOODWILL AND OTHER INTANGIBLES, net 2,676,000 2,926,000
OTHER ASSETS 2,057,000 2,347,000
------------- -------------
$ 21,317,000 $ 21,822,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,372,000 $ 2,423,000
Payable to affiliates - 2,280,000
Current maturities of debt obligations 555,000 178,000
Other current liabilities 57,000 49,000
------------- -------------
Total current liabilities 2,984,000 4,930,000
------------- -------------
LONG-TERM DEBT, net of current maturities 2,046,000 -
OTHER LIABILITIES 325,000 718,000
STOCKHOLDERS' EQUITY 15,962,000 16,174,000
------------- -------------
$ 21,317,000 $ 21,822,000
------------- -------------
------------- -------------
The notes to consolidated financial statements are an integral part of these
condensed balance sheets.
This schedule presents Scherer Healthcare, Inc. and subsidiaries consolidated
except for its Marquest subsidiary. Marquest's assets are restricted as to
their distribution to the Company.
S-1
<PAGE>
SCHEDULE I
SCHERER HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
NET SALES $ 14,181,000 $ 19,413,000 $22,226,000
--------------- --------------- -------------
COSTS AND EXPENSES
Costs of goods sold 8,675,000 13,234,000 16,343,000
Selling, general and administrative 5,365,000 6,662,000 7,385,000
Nonrecurring charges - - 2,000,000
--------------- --------------- -------------
Total costs and expenses 14,040,000 19,896,000 25,728,000
OPERATING INCOME (LOSS) 141,000 (483,000) (3,502,000)
OTHER INCOME, net
(Loss) Gain on sale of assets (84,000) 2,781,000 -
Other, net 303,000 265,000 67,000
--------------- --------------- -------------
Total other income, net 219,000 3,046,000 67,000
--------------- --------------- -------------
Income (loss) from continuing operations before net loss from
unconsolidated subsidiary and income taxes 360,000 2,563,000 (3,435,000)
Net loss from unconsolidated subsidiary (240,000) (45,000) (1,399,000)
--------------- --------------- -------------
Income (loss) from continuing operations 120,000 2,518,000 (4,834,000)
(Provision) benefit for income taxes (6,000) 150,000 197,000
--------------- --------------- -------------
Income (loss) from continuing operations 114,000 2,668,000 (4,637,000)
Loss from discontinued operations (375,000) (920,000) (5,534,000)
--------------- --------------- -------------
NET (LOSS) INCOME $ (261,000) $ 1,748,000 $(10,171,000)
--------------- --------------- -------------
--------------- --------------- -------------
</TABLE>
The notes to consolidated financial statements are an integral part of these
condensed statements of operations.
This schedule presents Scherer Healthcare, Inc. and subsidiaries consolidated
except for its Marquest subsidiary. Marquest's assets are restricted as to
their distribution to the Company.
S-2
<PAGE>
SCHEDULE I
SCHERER HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (261,000) $ 1,748,000 $(10,171,000)
Adjustments to reconcile net (loss) income to net cash
provided by (used for) operating activities:
Depreciation and amortization 985,000 1,178,000 1,295,000
Nonrecurring charges - - 2,000,000
Net loss from unconsolidated subsidiary 240,000 45,000 1,399,000
Loss (gain) on sale of assets 84,000 (2,781,000) -
Loss from discontinued operations 375,000 920,000 5,534,000
Other, net 25,000 139,000 (224,000)
Changes in operating assets and liabilities, net 555,000 652,000 611,000
--------------- --------------- -------------
Net cash provided by operating activities of
continuing operations 2,003,000 1,901,000 444,000
Net operating activities of discontinued operations (170,000) (1,564,000) (2,105,000)
--------------- --------------- -------------
Net cash provided by (used for) operating activities 1,833,000 337,000 (1,661,000)
--------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (852,000) (605,000) (1,107,000)
Proceeds from sale of assets 254,000 4,922,000 -
Investment in Marquest - - (6,000)
Decrease in notes receivable 170,000 648,000 389,000
Decrease (increase) in investments - 3,232,000 (232,000)
Other investing activities, net (59,000) 82,000 -
--------------- --------------- -------------
Net cash (used for) provided by investing activities (487,000) 8,279,000 (956,000)
--------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) borrowings 105,000 (2,019,000) (913,000)
(Repayments to) advances from affiliates (213,000) (5,321,000) 2,356,000
--------------- --------------- -------------
Net cash (used for) provided by financing activities (108,000) (7,340,000) 1,443,000
--------------- --------------- -------------
CHANGE IN CASH AND CASH EQUIVALENTS 1,238,000 1,276,000 (1,174,000)
CASH AND CASH EQUIVALENTS, beginning of year 1,987,000 711,000 1,885,000
--------------- --------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 3,225,000 $ 1,987,000 $ 711,000
--------------- --------------- -------------
--------------- --------------- -------------
</TABLE>
The notes to consolidated financial statements are an integral part of these
condensed statements of cash flows.
This schedule presents Scherer Healthcare, Inc. and subsidiaries consolidated
except for its Marquest subsidiary. Marquest's assets are restricted as to
their distributions to the Company.
S-3
<PAGE>
SCHEDULE II
SCHERER HEALTHCARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Additions
----------------------------
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------- ------------ -------------- ------------ -------------- ------------
Balance Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts Deductions of Year
- -------------------------------- ------------ -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts $ 243,000 $ 125,000 - $ 79,000(a) $ 289,000
------------ -------------- ------------ -------------- ------------
------------ -------------- ------------ -------------- ------------
1996:
Allowance for doubtful accounts $ 228,000 $ 112,000 - $ 97,000(a) $ 243,000
------------ -------------- ------------ -------------- ------------
------------ -------------- ------------ -------------- ------------
1995:
Allowance for doubtful accounts $ 216,000 $ 86,000 - $ 74,000 (a) $ 228,000
------------ -------------- ------------ -------------- ------------
------------ -------------- ------------ -------------- ------------
</TABLE>
(a) Accounts written off, net of recoveries.
S-4
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 29, 1997 Commission File No. 0-11484
-----------------------
MARQUEST MEDICAL PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
Colorado 84-0785259
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11039 EAST LANSING CIRCLE, ENGLEWOOD, CO 80112
(Address and zip code of principal executive offices)
(303) 790-4835
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class
Common Stock, No Par Value
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
Based on the last reported sales price of $0.75 on May 30, 1997, the
aggregate market value of the voting stock held by non affiliates of the
registrant was $3,527,215.
The number of shares outstanding of the registrant's common stock, exclusive
of treasury shares, was 14,307,729 on May 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
Page 1 of 58
<PAGE>
TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 10
4. Submission of Matters to a Vote of Shareholders. . . . . . . . . . 10
Executive Officers of the Registrant . . . . . . . . . . . . . . . 11
PART II
5. Market for the Registrant's Common Stock and Related
Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . . 11
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 12
8. Consolidated Financial Statements and Supplementary Data . . . . . 19
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . . 47
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . 47
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 48
12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
13. Certain Relationships and Related Transactions . . . . . . . . . . 54
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 55
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
-2-
<PAGE>
PART I
ITEM I. BUSINESS
GENERAL: Marquest Medical Products, Inc. ("Marquest" or the "Company") was
incorporated in 1979 under the laws of the State of Colorado.
On March 14, 1997, the Company entered into a Merger Agreement with Vital
Signs, Inc., a New Jersey corporation ("VSI"), pursuant to which a subsidiary
of VSI will be merged into the Company with the result that the Company will
become a wholly-owned subsidiary of VSI and the Company's shareholders shall
receive $0.797 for each outstanding share of Company common stock. The
consummation of the merger is subject to a number of contingencies, including
obtaining the approval of the Company's shareholders and the approval of the
shareholders of Scherer Healthcare, Inc., which holds approximately 50.5% of
the Company's common stock. Assuming that these contingencies are satisfied,
it is expected that the merger will be consummated in late July 1997. See
"Merger."
Marquest manufactures and distributes four major groups of products for use
in the respiratory care, cardiopulmonary support and anesthesia markets. The
largest of these product groups is the Blood Collection Systems for
Diagnostic Testing. This group includes the broad line of Marquest disposable
blood gas syringes. Most revenues in this group are generated by the
proprietary-designed syringes, which are marketed under the trade names
Gas-Lyte and Quik-ABG. As discussed in Note 11 to the Consolidated Financial
Statements, the Company executed a sale and leaseback of this product line
during Fiscal 1994 with Scherer Healthcare, Inc. ("Scherer Healthcare") as
part of a series of transactions designed to restructure the Company
financially. See "Business Transactions with Scherer Healthcare, Inc. and
Scherer Capital, LLC/R. P. Scherer, Jr."
The Company's disposable blood gas syringes are used to collect blood for
blood gas analysis routinely performed in hospitals on patients suspected of
having metabolic, respiratory or other cardiopulmonary difficulties. The
blood sample collected is processed through a blood gas analyzer which is
manufactured by other companies. In order for the analysis to be meaningful,
the collected sample must remain as free from contamination as possible.
Contamination is principally caused by the diffusion of gases in the sample
resulting from (i) exposure to air and (ii) dilution caused by the
anticoagulant solution used to prevent the sample from clotting. Marquest
syringes are specifically designed to minimize both of these forms of
contamination.
The Company's second largest product line is Aerosolized Medication Delivery
Systems, consisting primarily of disposable nebulizers. Nebulizers atomize
medications for inhalation into the lungs. The Company offers different
nebulizers to accommodate user preferences as well as the requirements for
different types of respiratory treatment. Nebulizers are marketed under the
trade names Acorn II-Registered Trademark- and Whisperjet. The Acorn II
- -Registered Trademark- Nebulizer is used as part of a circuit package sold
under the name, "RespirGard II-Registered Trademark- Nebulizer System".
The RespirGard II-Registered Trademark- Nebulizer System is a device designed
for the administration of aerosolized pentamidine (NebuPent-Registered
Trademark-, a registered trademark of Fujisawa Pharmaceutical Company), a
drug used in the treatment of certain respiratory complications that result
from the AIDS virus (pneumocystis carinii pneumonia). RespirGard
II-Registered Trademark- is the only device specifically recommended by
Fujisawa and is referenced in their labeling and use instructions.
Heated Humidification Systems is the Company's third product group. These
systems consist of three subgroups - humidifiers, heated wire circuits and
humidification chambers. Heated Humidification Systems provide a flow of
moist, warm air to patients who are at risk from loss of body temperature and
drying of the lung linings. There are applications for this product group in
both respiratory care and anesthesia.
The fourth product group is Anesthesia and Respiratory Breathing Systems,
which includes numerous disposable products for use in respiratory care and
anesthesia. These products include standard respiratory and anesthesia
circuits, masks, filters, and hyperinflation systems, as well as other
accessories for use in either respiratory therapy or anesthesia
administration applications.
-3-
<PAGE>
The circuits range from a simple hose connecting the patient to the
anesthesia machine in the operating room to more sophisticated circuits that
allow monitoring of gas temperature and flow into and out of the patient.
Disposable masks are designed to eliminate resterilization costs of
conventional reusable masks and represent further steps to remove the
possibility of cross-contamination from the operating room.
The filters are designed to filter particulates and bacteria from any air or
anesthesia line carrying gases to or from a patient. The filter market
continues to be a rapidly expanding one as healthcare providers have
increased the emphasis placed on infection control. They are marketed for use
in respiratory support, principally on ventilators, and anesthesia circuits.
The filters, however, can be used anywhere there is a concern about what
enters or leaves a patient's lungs. These filters are marketed under the
trade names RespirGard, HydroGard, OxyGard, and SpiroGard.
Marquest produces plastic parts for use in its assembly of disposable
respiratory and anesthesia products, and is engaged in the distribution of
medical equipment.
FDA REGULATION AND ADMINISTRATIVE ACTION: The Company and its products are
subject to regulation by the United States Food and Drug Administration
("FDA") and virtually all of the Company's products are subject to validation
as required by the current Good Manufacturing Practices Regulations ("GMP")
of the FDA. As a result, the FDA engages in periodic inspections of the
Company's facilities, its products and its manufacturing processes. In May
1991, the FDA initiated such an inspection, resulting in a report dated May
31, 1991, that contained significant allegations of violations of the GMP
regulations. In the report, the FDA alleged that methods used by Marquest and
the facilities and controls used in connection with manufacturing, packaging
and storage of the medical devices were not in conformity with GMP. The FDA
also alleged that Marquest failed to make appropriate Medical Device Reports
("MDRs"). On August 8, 1991, the Company was named in a civil complaint filed
by the United States Attorney's Office for the District of Colorado seeking
an injunction against the Company and three of its officers and further
alleging that the Company was manufacturing its products in violation of GMP,
that certain devices were misbranded and adulterated and violations of
several other sections of the Food, Drug and Cosmetic Act. On October 1,
1991, the Company and one of the named individual defendants entered into a
five-year Consent Decree; the two other individual defendants named in the
complaint were dismissed as defendants. The Consent Decree provided for
suspension of the Company's United States manufacturing and distribution
operations until the Company demonstrated it had adequate controls in place
to ensure products were consistently produced in substantial compliance with
GMP regulations. The suspension continued until January 9, 1992, at which
time the FDA's Denver District office informed the Company that it was
authorized to renew its operations. See Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 7 of the Notes to
Consolidated Financial Statements.
During Fiscal 1994, the FDA completed a routine inspection of the Company's
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with two observations noted, which were
corrected; there were no inspections during Fiscal 1995.
During Fiscal 1996, the FDA again inspected the Company's operations for
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with three observations noted. The Company
responded to the observations, including providing specific corrective action.
In May, 1996, the FDA concluded an inspection with six deficiency
observations noted. Many of the observations noted refer to the lack of
training regarding assembly, testing and sampling. The Company took
corrective action, including retraining employees, and implementing other
changes in order to respond to the FDA's concerns. These changes and
corrective actions were presented to the FDA in detail in the submissions
made by the Company and the Company continues to work with the FDA to address
the issues raised. The Company was again inspected by the FDA during
September, 1996 and received a Form 483, Inspection Observations, containing
three alleged nonconformances with GMP. The Company responded to these
observations, including providing specific corrective action. Following the
September inspection, the Consent Decree expired October 1, 1996 and is of no
further force and effect.
INDUSTRY SEGMENTS AND FOREIGN SALES: The Company has one industry segment: it
manufactures and distributes medical devices and equipment to the healthcare
provider sector. All of the Company's current operations are located in the
United States. The Company has inventory at a distributor's warehouse in The
Netherlands of approximately
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$219,000 and $131,000 at March 29, 1997 and March 30, 1996 respectively.
Export sales are discussed in Note 1 to the Consolidated Financial Statements.
Most export customers have been purchasing product from the Company for
several years and are sold to on an open credit basis. New customers
generally are sold products on a letter of credit or other secured basis
until an appropriate experience level is reached. The Company does not
perceive, and has not experienced, any unusual risk in its export activity.
Export sales are billed to the Company's customers in U. S. dollars.
MARKETING AND CUSTOMERS: The Company focuses a substantial portion of its
resources on marketing and sales. It emphasizes in-service training for its
clinical customers, distributor training and direct marketing. In-service
training educates customers about the Company's products and is supported by
continuing efforts to introduce product design changes that eliminate
application difficulties, such as converting from liquid heparin to a dried
form to eliminate dilutional errors in blood gas analysis tests. Close
working relationships with medical personnel also have led to the development
of better and safer applications for the Company's products, such as
development of the RespirGard II nebulizer, which is used in the treatment of
AIDS-associated respiratory illnesses.
The Company has identified and pursued opportunities to modify common medical
devices to improve and expand their applications. The Company believes that
innovative product line expansion and clinical marketing have been and will
continue to be essential factors in gaining market acceptance for the Company
and its products.
The Company's sales and marketing program utilizes field sales
representatives, managers and corporate marketing specialists who market the
Company's manufactured products both directly and through distributors. The
representatives assist the Company's distributors by (i) making direct calls
on hospital technicians and physicians to develop sales leads for the
distributors, (ii) providing education and training programs to distributors
and healthcare professionals relating to the need for, and use of, the
Company's products, (iii) furnishing distributors with technical advice on
various aspects of the Company's products, and (iv) working with distributors
to improve joint business relationships. The field sales representatives also
sell directly to the hospitals in those market areas not serviced by
distributors.
The Company distributes most of its manufactured products through a network
of respiratory or anesthesia distributors. Domestically, this network
historically included 29 hospital specialty dealers as well as several
medical-surgical dealers and over one thousand home heathcare dealers who
distribute certain of the Company's products to be used in the home.
VSI distributes its products primarily through its internal sales force. On
March 14, 1997, in conjunction with the execution by the Company of the
Merger Agreement, VSI and the Company entered into a Dealer Agreement with
VSI which authorized VSI to distribute Company products in the United States,
Canada, Puerto Rico and certain foreign countries and provided 28 of its 29
hospital specialty dealers with notice that they were being terminated as
distributors effective as of the end of the termination notice period
specified in their dealer agreements. In addition to providing protection
from the possibility that the Company's hospital specialty dealers would try
to shift customers away from Company products while the Company's acquisition
by VSI was pending, the Company believes that appointing VSI as a national
dealer for its products will be desirable because of VSI's strong sales force
and complementary product mix even if the Company's acquisition by VSI is
never consummated.
Since providing most of its domestic hospital specialty dealers with notices
of termination, the Company has entered into new arrangements with five of
those dealers, which provide that those dealers may continue to distribute
Company products at reduced margins.
The Company's international sales and marketing efforts are managed from its
corporate offices located in Englewood, Colorado. Europe, the Middle East,
Asia and Pacific Rim territories are managed by field sales representatives
and specialty distributors. Mexico, Central America, South America, and South
Africa are managed using specialty distributors. The international
distributors act in much the same way as the domestic distributors to supply
the Company's products. The Company also participates in major international
trade shows annually.
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During Fiscal 1997, 1996, and 1995, the Company had one distributor, Tri-anim
Health Services, Inc. ("Tri-Anim") of Sylmar, California, who accounted for
18%, 19%, and 19%, respectively, of the Company's sales. Tri-Anim was
terminated as a distributor of Company products effective June 13, 1997.
MANUFACTURING SUPPLIES AND BACKLOG: The Company's manufacturing and
assembly operations consist primarily of the injection molding and
extrusion of certain components and the assembly and packaging of
final products from both purchased and internally-manufactured
sources. All of the products manufactured are disposable and are
principally fabricated from molded resins.
Due to economies of scale in production, the Company purchases certain
standardized components, including needles, syringe barrels, and other
supplies from qualified external sources. The Company's material procurement
consists of multiple single source vendors, all of which are subject to
qualification criteria in accordance with the Company's quality procedures
and policies. While the Company endeavors to avoid being dependent on a
single source of supply for any component or raw material by establishing
qualified alternate suppliers, in certain cases it is not economical to use
more than one source. The Company emphasizes vendor certification and quality
programs to ensure uninterrupted supplies of raw materials and components.
Historically, the Company has not had a significant backlog of firm orders
for its products. With the exception of orders for future delivery or for
specially assembled products, most orders have been shipped within one week
of receipt and the Company has maintained predetermined levels of finished
goods inventories to ensure that this ability is preserved. The Company had a
backlog of orders to ship of approximately $249,000 and $158,000 at March 29,
1997 and March 30, 1996, respectively.
SEASONALITY: Historically, the Company has experienced approximately 45% of
its net sales in the first and second quarters of its fiscal year and 55% in
the third and fourth quarters. Net sales are influenced generally by overall
patterns in hospital admissions and discharges, which the Company believes
reflect, among other things, a lower incidence of respiratory problems and
postponements of elective surgeries during the summer months.
COMPETITION: The medical device business is highly competitive. The Company
competes with three major competitors in the manufacture and distribution of
its blood collection systems, four major competitors in respiratory and
nebulizer products and two major competitors in its heated humidification
products. A number of the Company's competitors are larger companies with
greater resources and more diversified lines of medical products and services.
Competition in the area of manufactured products involves quality and
reliability in product performance and price competitiveness. The Company
believes that the expertise of its sales force and the strength of its
distributor network are important factors in its ability to compete in the
submarkets for manufactured products. The Company's marketing approach
emphasizes continuing efforts to educate medical personnel through in-service
training in the area of the Company's specialties and to develop and adapt
products to fit the clinical needs of its customers.
PRODUCT DEVELOPMENT: The Company's product development efforts have been
guided by its marketing and sales personnel. Through their daily contact with
existing and potential customers, marketing and sales personnel are able to
identify needs for new products and improvements for existing products.
The Company's product development program includes its internal efforts as
well as the acquisition of new products from others. In Fiscal 1997, 1996 and
1995, the Company expensed royalties and license fees of approximately
$2,800, $2,000 and $54,000, respectively, in connection with products
developed by others. The Company spent approximately $286,000, $155,000 and
$140,000, respectively, on internal product development in Fiscal 1997, 1996
and 1995.
Many risks exist in new product development and there is no assurance that
any of the products currently under development by the Company can be
successfully developed or, if introduced, will prove to be commercially
successful products.
PATENTS, TRADEMARKS, LICENSES AND FRANCHISES: The Company holds numerous
patents for its manufactured products. It also holds licenses from
individuals to manufacture a number of proprietary products. The Company
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makes renewal filings on patents and trademarks periodically in accordance
with Federal regulations. Patents, trademarks and licenses afford the Company
a measure of protection for its proprietary products, and the Company has
taken a posture of defending to the fullest extent possible the rights
attendant to the patents, trademarks and licenses. However, it has been the
Company's experience that patents offer limited protection because the degree
of specialization in its products is so extensive that the patents on them
can, in some cases, be circumvented.
EMPLOYEES: At May 30, 1997, the Company had a total of 253 employees. None of
the Company's employees are represented by a labor union and the Company
considers its employee relations to be good. The Company has experienced no
significant problems in recruiting qualified personnel.
QUASI-REORGANIZATION: During the first quarter of Fiscal 1994, the Company
completed significant changes to its operations: (i) reintroduction of
substantially all of its product lines into the market after ceasing
operations after the FDA shutdown in Fiscal 1992, (ii) consolidation of its
manufacturing facilities in Mexico and Parker, Colorado into its Englewood,
Colorado facility, (iii) changes in senior management, and (iv) successful
completion of the first exchange offer to the Swiss bondholders in which 91%
of the bonds were exchanged. Considering these changes, the Company
determined that it was appropriate to effect a quasi-reorganization. The
quasi-reorganization was approved by the Board of Directors in June, 1993,
and was effective July 3, 1993. See Note 12 to the Consolidated Financial
Statements for a discussion of the effects of the quasi-reorganization on the
accounts of the Company.
BUSINESS TRANSACTIONS WITH SCHERER HEALTHCARE, INC. AND SCHERER CAPITAL,
LLC/R. P. SCHERER, JR.: During Fiscal 1994, the Company consummated two
related financing transactions to provide the Company with necessary
liquidity and to effect an exchange offer for defaulted Swiss Bonds, pursuant
to the Omnibus Agreement between the Company and Scherer Healthcare, Inc.,
dated April 12, 1993.
The Company sold its Arterial Blood Gas product line, including $245,000 of
net book value of property connected with the product line, to Scherer
Healthcare, Inc. ("Scherer Healthcare") for $4.5 million in cash and agreed
to a six year lease back of the product line for a royalty of 3.25% of net
product line sales. The Company has the option to repurchase the product line
for $4.5 million plus $22,500 for each month elapsed between the sale and
repurchase. The option to repurchase, originally expiring on May 31, 1996,
was extended by Scherer Healthcare and the Company until June 15, 1999. The
Company granted Scherer Healthcare warrants to purchase 5,780,000 shares of
common stock of the Company at $.75 per share as consideration for the
repurchase option. Of these warrants, 1,530,000 and 4,250,000 will expire if
not exercised by March 31, 1999 and March 31, 2003, respectively. The
warrants are exercisable in exchange for cash or, if exercised by Scherer
Healthcare or a Scherer Healthcare affiliate, for common stock of Scherer
Healthcare. Scherer Healthcare may elect to exercise these warrants for no
cash if a corresponding concession is granted to the Company in the product
line repurchase price. Scherer Healthcare may elect to receive the product
line repurchase price in the form of 5,780,000 shares of the Company's common
stock, based on a value of $.75 per share, plus the balance of the purchase
price in cash. If Scherer Healthcare makes this election, the number of
warrants issued in consideration for the Company's repurchase option as
described above will be reduced by a corresponding number.
Prior to the above transaction, Scherer Healthcare had advanced the Company
$1,750,000. In consideration for that advance, the Company granted to Scherer
Healthcare warrants to purchase 800,000 shares of the Company's common stock
at $.75 per share exercisable until March 31, 1999. The advance was repaid
with the proceeds from the sale and leaseback transaction but the warrants
remain outstanding.
During Fiscal 1986, the Company issued 25,000,000 Swiss Francs of bonds due
March 11, 1994. On January 14, 1992, the Company was notified that holders of
the majority of its Swiss bonds had exercised their right to put the bonds
for redemption as of March 11, 1992. The Company was not able to honor this
put, and, accordingly, defaulted on the obligations.
During Fiscal 1994, the Company acquired approximately $4,352,000 of 5%
cumulative convertible preferred stock of Scherer Healthcare (an amount equal
to approximately 35% of the outstanding Swiss bond principal and accrued
interest tendered in the transaction described below). This preferred stock
was acquired in exchange for an 8% note, maturing on March 31, 1999. In May
1994, Scherer Healthcare converted $2,500,000 of the principal balance of the
8% note into 3,333,333 shares of the Company's common stock at $.75 per
common share. In March 1996, Scherer
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Healthcare converted the remaining balance of the 8% note of $1,851,600,
$486,571 in related accrued interest due to Scherer Healthcare and $376,330
owed to Scherer Healthcare for management fees into 3,877,859 shares of the
Company's common stock at $.70 per share. At March 29, 1997, Scherer
Healthcare owns 50.5% of the Company's outstanding common stock. The Scherer
Healthcare preferred stock is convertible into Scherer Healthcare common
stock.
In three exchange offers during Fiscal 1994, the bondholders exchanged
16,320,000 Swiss Francs in bonds, 96% of the total bonds outstanding, for a
combination of Marquest debt, warrants to purchase common stock of the
Company, and the convertible preferred stock of Scherer Healthcare. In the
exchange, the Swiss bondholders received (i) cumulative convertible preferred
stock of Scherer Healthcare for 35% of the principal and accrued interest of
the tendered bonds; (ii) unsecured 8% U.S. dollar denominated notes of the
Company maturing March 31, 1999 with an aggregate principal amount of
$2,875,000, and (iii) warrants to purchase 165,000 and 1,432,416 shares of
Marquest common stock at $.25 and $.75 per share, respectively, exercisable
until March 31, 1999.
As a result of the sale of the Arterial Blood Gas product line and the Swiss
bond refinancing, Scherer Healthcare obtained the right to acquire
approximately 65% of the outstanding common stock of the Company through the
exercise of all warrants and conversion of the note. Also, as a result of the
Omnibus Agreement, Scherer Healthcare acquired the right to name a majority
of the members of the Company's Board of Directors.
In March 1996, Scherer Capital, LLC ("Scherer Capital"), a company controlled
by the largest shareholder of Scherer Healthcare, Inc., purchased 2,061,856
shares of the Company's common stock at $.485 per common share for
$1,000,000. During the third quarter of Fiscal 1996, Scherer Capital advanced
the Company $700,000 which was used for working capital purposes. In March
1996, the Company and Scherer Capital refinanced this advance with long-term
convertible debt. The debt, which bears interest at 1-1/2% over prime, is
secured by inventory and equipment and is convertible at a rate of $.70 per
share. The debt agreement contemplated the possibility of additional
borrowings of $800,000. During Fiscal 1997, Scherer Capital transferred its
credit facility to Robert P. Scherer, Jr., the Company's Chairman of the
Board of Directors and Chief Executive Officer. Mr. Scherer has voting
authority over the Company's common stock purchased by Scherer Capital in
March 1996 either through beneficial ownership or as trustee of a voting
trust for shares owned by Mr. Scherer's adult children. These shares
represent 14.4% of the Company's outstanding common stock. Mr. Scherer is
also the majority shareholder, Chairman of the Board and Chief Executive
Officer of Scherer Healthcare.
MERGER: On March 14, 1997, the Company signed an Agreement and Plan of Merger
("Merger Agreement") between VSI; VSI Acquisition Corporation ("Newco"), a
wholly-owned subsidiary of VSI; and the Company, providing for the merger of
Newco with the Company, with the Company surviving the merger as a
wholly-owned subsidiary of VSI. Upon the effective date of the merger, all of
the Company's common stock will be converted into the right to receive $0.797
per share in cash.
DEALER AGREEMENT. Simultaneous with the execution of the Merger Agreement,
the Company and VSI entered into a Dealer Agreement whereby VSI is authorized
to sell the Company's products for a period of two years. The Company
provided 28 of its 29 existing domestic specialty dealers with notices of
termination of their dealer agreements which, as a general matter, allow for
termination on 30 to 90 days notice. The Dealer Agreement may be terminated
by the Company if VSI does not meet certain specified sales quotas after June
30, 1997. Since providing its domestic specialty dealers with notices of
termination, the Company has negotiated new arrangements with five of those
dealers which provide that those dealers may continue to distribute Company
products at reduced margins.
Two of the Company's terminated dealers have commenced lawsuits against the
Company and VSI alleging, among other things, that the termination of its
dealer agreement was unlawful and that VSI is using confidential information
of dealers in the sale of the Company's products. The Company believes that
its position in both of these matters is meritorious, but is unable to
predict the outcome of either lawsuit or whether other lawsuits will be filed
by other dealers as a result of their termination.
PURCHASE OF ABG ASSETS AND COVENANTS NOT TO COMPETE. As part of the
investment made in the Company by Scherer Healthcare in June 1993, Scherer
Healthcare acquired title to the Company's Arterial Blood Gas ("ABG") product
line which the Company leases from Scherer Healthcare. The Company has an
option to repurchase the ABG product line
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from Scherer Healthcare at a purchase price equal to $4,500,000 plus $22,500
per month during the period from June 13, 1993 through the date of
repurchase. Pursuant to an Inducement Agreement between VSI and Scherer
Healthcare (the "Scherer Healthcare Inducement Agreement"), VSI has agreed to
purchase the ABG product line from Scherer Healthcare for a purchase price
equal to the purchase price under the Company's repurchase option. If the
merger occurs on July 31, 1997, the purchase price of the ABG product line
would be $5,625,000.
Pursuant to the Scherer Healthcare Inducement Agreement, Scherer Healthcare
is obligated, at the time of the merger, to enter into a covenant not to
compete pursuant to which it agrees it will not engage in the business of
manufacturing or selling ABG products for a period of three years following
the effective date of the merger. In consideration of this covenant not to
compete, VSI has agreed to pay Scherer Healthcare an amount equal to the
difference between $5,860,000 and the purchase price of the ABG product line.
If the merger occurs on July 31, 1997, Scherer Healthcare will be paid
$235,000 for the covenant not to compete.
Robert P. Scherer, Jr., the Company's Chairman of the Board of Directors and
Chief Executive Officer, is the beneficial owner of or has voting authority
over 2,061,856 shares of the Company's common stock. Mr. Scherer also holds a
promissory note of the Company in the principal amount of $700,000 which is
convertible into the Company's common stock at a rate of $0.70 per share. Mr.
Scherer has agreed to convert the note prior to the merger into 1,000,000
shares of the Company's common stock. In addition to his ownership of the
Company's common stock, Mr. Scherer has voting authority over 61.1% of the
outstanding common stock of Scherer Healthcare.
Pursuant to an Inducement Agreement entered into between VSI and Mr. Scherer
(the "RPS Inducement Agreement"), Mr. Scherer has agreed to vote his shares
of Scherer Healthcare common stock in favor of the merger. Mr. Scherer has
also agreed to vote all of his shares of the Company's common stock in favor
of the merger. Pursuant to the RPS Inducement Agreement, Mr. Scherer is
required to enter into a covenant not to compete pursuant to which he agrees
that for a period of three years following the merger he will not engage in
the business of manufacturing or selling ABG products. In consideration of
this covenant, VSI has agreed to pay Mr. Scherer $140,000.
CONDITIONS TO CLOSING. The Merger Agreement contains a number of conditions
to closing which must be satisfied or waived prior to consummation of the
merger. These conditions include, among other conditions, the requirement
that the merger be approved by the shareholders of the Company and Scherer
Healthcare, the requirement that no material litigation is pending against
the Company or its business, and the requirement that no adverse regulatory
action has been taken against the Company. The Company believes that the
conditions to closing can be satisfied and that the closing will take place
in late July 1997.
COVENANTS OF THE MERGER AGREEMENT. Pursuant to the Merger Agreement, the
Company has agreed that, during the period from March 14, 1997 to the
effective time of the merger, except as permitted in writing by VSI, the
Company will not, among other things, (a) amend its Articles of Incorporation
or Bylaws, (b) issue, sell, deliver, grant or declare any stock dividend or
any other distribution with respect to the Company's common stock except that
the Company may issue common stock pursuant to certain options, warrants or a
convertible note exercisable or convertible in accordance with the terms of
the applicable agreements and outstanding as of March 14, 1997, (c) mortgage
or pledge any assets except in the ordinary course of business, (d) borrow or
agree to borrow any funds except in the ordinary course of business and
pursuant to the Company's existing credit facilities up to certain amounts,
(e) incur any obligation or liability, cancel any material debts of third
parties, lease, sell, transfer or grant any preferential rights to lease or
acquire any of its material assets or substantively amend or terminate any
material contract or agreement except in the ordinary course of business, (f)
adopt, materially amend or terminate any employee benefit plan or materially
increase compensation or other benefits payable to the Company's employees,
(g) acquire any other business entity, (h) solicit, encourage or authorize
any competing inquiry, proposal, offer or possible offer from a third party
relating to a change in control or ownership of the Company, (j) enter into
any material licensing or marketing arrangement or other material contract
with any party other than VSI, and (k) settle any pending litigation in a
manner that is materially adverse to the Company or commence any material
litigation.
TERMINATION OF THE MERGER. The Merger Agreement may be terminated and the
merger may be abandoned before the effective time of the merger (a) by mutual
written consent of VSI, Newco and the Company or (b) by VSI or the Company if
(i) the Company's shareholders fail to approve the merger at the special
meeting of shareholders or (ii) the shareholders of Scherer Healthcare fail
to approve the sale of the stock of the Company. In addition, VSI may
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terminate the Merger Agreement if (a) there has been a material
misrepresentation or breach by the Company of any of its representations or
warranties in the Merger Agreement, (b) the Company's Special Treatment Sales
(defined below) during the period from December 29, 1996 through the date
seven days prior to the Closing (the "Pre-Closing Date") are less than eighty
percent of the Company's Special Treatment Sales during the period from the
first day of the Company's fiscal quarter commencing in December 1995 through
the date one year prior to the Pre-Closing Date, (c) there has been any
misrepresentation by Scherer Healthcare or Mr. Scherer in any of the
representations or warranties set forth in the Inducement Agreements, or (d)
there has been any material failure by Scherer Healthcare or Mr. Scherer to
comply with their respective obligations under the Inducement Agreements.
Special Treatment Sales are all of the Company's sales other than sales made
through the Company's U.S. (including Puerto Rico) dealers and sales made
through distributors of the Company's medical-surgical products.
Either the Company or VSI, at their discretion, may terminate the Merger
Agreement if the effective date of the merger has not occurred by August 29,
1997, except that a party whose breach of the Merger Agreement has caused
such a delay in the consummation of the merger will not be entitled to
terminate the Merger Agreement. If the Company terminates the Merger
Agreement as a result of a breach of any material covenants by VSI, the
Company will be entitled to $800,000 as damages.
If the Merger Agreement is terminated by VSI or the Company because (a) an
offer is made, including a Purchase Event (defined below), (b) a claim is
made that such offer could result in greater value to the Company's
shareholders than the value to be received from VSI, and (c) after such offer
is known to the Company, the Company's shareholders do not approve the
merger, the shareholders of Scherer Healthcare do not approve the sale of the
Company's common stock, or the Company breaches any of its obligations under
the Merger Agreement, and within 24 months after the termination of the
Merger Agreement, a Purchase Event occurs, the Company will pay to VSI a cash
fee of $1,500,000. A Purchase Event means any of the following events: (a)
without VSI's written consent, the Company announces an intention to enter
into an agreement with a party other than VSI to (i) merge, (ii) dispose of
25% or more of the Company's assets or (iii) issue, sell or dispose of
securities representing 25% or more of the voting power of the Company, or
(b) any person or group other than Scherer Healthcare or VSI or their
affiliates acquires 25% or more of the voting power of the Company.
ITEM 2. PROPERTIES
The Company's principal office, which is owned by the Company, is located at
11039 E. Lansing Circle, Meridian Office Park, in Douglas County, Colorado.
This facility consists of 88,000 square feet and houses all of the Company's
manufacturing activities. The building also houses certain warehousing
functions and most administrative functions of the Company. The Company
leases approximately 45,000 square feet of warehouse space in Aurora,
Colorado pursuant to a lease that expires in April 1998. The Company believes
its owned and leased facilities are adequate for its operations in the
foreseeable future. See Notes 4 and 9 to the Consolidated Financial
Statements regarding encumbrances on the Company's manufacturing and office
facility.
In December 1992, the Company sold its Nogales, Arizona warehouse to a third
party under a 10-year sale leaseback arrangement. The Company does not
utilize the warehouse in its operations but subleases the space to an
unaffiliated entity. See Note 6 to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
See Note 10 to the Consolidated Financial Statements for a description of
legal proceedings at March 29, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of shareholders during the fourth quarter
of the fiscal year covered by this report.
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EXECUTIVE OFFICERS
The executive officers of the Company as of June 1, 1997 are listed below:
<TABLE>
NAME AND AGE POSITIONS WITH THE COMPANY
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<S> <C>
Robert P. Scherer, Jr. (64) Chairman, Chief Executive Officer and Director of the Company
since February 1995. Chairman and Chief Executive of RPS
Investments, Inc. since its formation. Director of Scherer
Healthcare, Inc., an affiliate of the Company, since 1977;
Chairman and Chief Executive Officer of Scherer Healthcare,
Inc. since February, 1995.
William J. Thompson (63) President of the Company since February 1995; Vice Chairman and
Chief Operating Officer of the Company since April 1994; Director
of the Company since August 1993. President, Chief Operating
Officer and Director of Scherer Healthcare, Inc., an affiliate
of the Company, since August, 1984.
Margaret E. Von der Schmidt (45) Vice President - Finance of the Company since February 1994;
Secretary of the Company since February 1995; Director of Finance
of the Company from November 1993 to January 1994. Pursued various
business opportunities and interests from January 1993 to November
1993. Assistant Corporate Controller, U S WEST, Inc. (a
telecommunications company), from December 1985 to December 1992.
</TABLE>
The officers serve until their successors have been elected and qualified.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS:
On July 1, 1983, the Common Stock of the Company commenced trading in the
over-the-counter market and was quoted on the Nasdaq system. From March 20,
1984 to October 14, 1994, the Company's stock was listed for trading on the
Nasdaq National Market System. Effective October 14, 1994, the Company's
Common Stock was included in the Nasdaq SmallCap Market. The Company's
Common Stock is quoted under the symbol MMPI. The table below shows, for the
period indicated, the range of high and low sales prices for Fiscal 1997 and
1996. All quotations were reported to the Company by Nasdaq and represent
actual transactions and not inter-dealer quotations.
1997 1996
---------------- -----------------
High Low High Low
------ ------ ------ ------
First Fiscal Quarter $ 2.06 $ 1.38 $ 0.63 $ 0.38
Second Fiscal Quarter 1.75 0.63 2.31 0.44
Third Fiscal Quarter 1.25 0.63 1.31 0.50
Fourth Fiscal Quarter 1.38 0.56 2.06 0.56
The closing sale price of the Company's Common Stock on May 30, 1997, as
reported on Nasdaq, was $0.75.
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As of May 30, 1997, the Company had 445 holders of record of its Common
Stock. It is estimated that the total number of holders of the Common Stock
is approximately 3,000.
The Company has not paid dividends on its Common Stock in the last six fiscal
years. Under a Term Loan Agreement dated June 30, 1994, between the Company
and Colorado National Bank and a Credit and Security Agreement dated November 5,
1996 between the Company and Norwest Business Credit, Inc., the Company may
not, without prior written consent of the lenders, pay or declare any
dividends on its Common Stock. The Company does not anticipate payment of
dividends for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA:
All amounts in thousands of dollars except per share amounts.
<TABLE>
Fiscal Fiscal Fiscal Nine Three Fiscal
Year Year Year Months Months Year
Ended Ended Ended Ended Ended Ended
March 29, March 30, April 1, April 2, July 3, April 3,
1997 1996 1995 1994 1993 1993
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $22,045 $22,443 $20,576 $17,139 $ 5,327 $ 21,935
Net loss from continuing
operations before extraordinary
item (473) (60) (3,450) (2,312) (1,042) (18,542)
Net loss (473) (60) (3,450) (2,030) (336) (18,338)
LOSS PER COMMON SHARE:
Continuing operations before
extraordinary item (0.03) (0.01) (0.46) (0.51) (0.23) (4.17)
Net loss (0.03) (0.01) (0.46) (0.45) (0.07) (4.12)
Total Assets 13,424 15,393 13,992 16,929 18,366 21,007
Long-Term Obligations 4,600 4,990 5,961 7,659 6,745 0
Cash Dividend Declared Per
Common Share 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
Effective July 3, 1993, the Company effected a quasi-reorganization as
discussed in Note 12 to the Consolidated Financial Statements. The Company
has segregated its Consolidated Statements of Operations into the three-month
period prior to and the nine-month period subsequent to the
quasi-reorganization.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
MERGER
On March 14, 1997, the Company signed an Agreement and Plan of Merger
("Merger Agreement") between VSI; VSI Acquisition Corporation ("Newco"), a
wholly-owned subsidiary of VSI; and the Company, providing for the merger of
Newco with the Company, with the Company surviving the merger as a
wholly-owned subsidiary of VSI. Upon the effective date of the merger, all
of the Company's common stock will be converted into the right to receive
$0.797 per share in cash.
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<PAGE>
DEALER AGREEMENT. Simultaneous with the execution of the Merger Agreement,
the Company and VSI entered into a Dealer Agreement whereby VSI is authorized
to sell the Company's products for a period of two years. The Company
provided 28 of its 29 existing domestic specialty dealers with notices of
termination of their dealer agreements which, as a general matter, allow for
termination on 30 to 90 days notice. The Dealer Agreement may be terminated
by the Company if VSI does not meet certain specified sales quotas after June
30, 1997. Since providing its domestic specialty dealers with notices of
termination, the Company has negotiated new arrangements with five of those
dealers which provide that those dealers may continue to distribute Company
products at reduced margins.
Two of the Company's terminated dealers have commenced lawsuits against the
Company and VSI alleging, among other things, that the termination of its
dealer agreement was unlawful and that VSI is using confidential information
of dealers in the sale of the Company's products. The Company believes that
its position in both of these matters is meritorious, but is unable to
predict the outcome of either lawsuit or whether other lawsuits will be filed
by other dealers as a result of their termination.
PURCHASE OF ABG ASSETS AND COVENANTS NOT TO COMPETE. As part of the
investment made in the Company by Scherer Healthcare in June 1993, Scherer
Healthcare acquired title to the Company's Arterial Blood Gas ("ABG") product
line which the Company leases from Scherer Healthcare. The Company has an
option to repurchase the ABG product line from Scherer Healthcare at a
purchase price equal to $4,500,000 plus $22,500 per month during the period
from June 13, 1993 through the date of repurchase. Pursuant to an Inducement
Agreement between VSI and Scherer Healthcare (the "Scherer Healthcare
Inducement Agreement"), VSI has agreed to purchase the ABG product line from
Scherer Healthcare for a purchase price equal to the purchase price under the
Company's repurchase option. If the merger occurs on July 31, 1997, the
purchase price of the ABG product line would be $5,625,000.
Pursuant to the Scherer Healthcare Inducement Agreement, Scherer Healthcare
is obligated, at the time of the merger, to enter into a covenant not to
compete pursuant to which it agrees it will not engage in the business of
manufacturing or selling ABG products for a period of three years following
the effective date of the merger. In consideration of this covenant not to
compete, VSI has agreed to pay Scherer Healthcare an amount equal to the
difference between $5,860,000 and the purchase price of the ABG product line.
If the merger occurs on July 31, 1997, Scherer Healthcare will be paid
$235,000 for the covenant not to compete.
Robert P. Scherer, Jr., the Company's Chairman of the Board of Directors and
Chief Executive Officer, is the beneficial owner of or has voting authority
over 2,061,856 shares of the Company's common stock. Mr. Scherer also holds
a promissory note of the Company in the principal amount of $700,000 which is
convertible into the Company's common stock at a rate of $0.70 per share.
Mr. Scherer has agreed to convert the note prior to the merger into 1,000,000
shares of the Company's common stock. In addition to his ownership of the
Company's common stock, Mr. Scherer has voting authority over 61.1% of the
outstanding common stock of Scherer Healthcare.
Pursuant to an Inducement Agreement entered into between VSI and Mr. Scherer
(the "RPS Inducement Agreement"), Mr. Scherer has agreed to vote his shares
of Scherer Healthcare common stock in favor of the merger. Mr. Scherer has
also agreed to vote all of his shares of the Company's common stock in favor
of the merger. Pursuant to the RPS Inducement Agreement, Mr. Scherer is
required to enter into a covenant not to compete pursuant to which he agrees
that for a period of three years following the merger he will not engage in
the business of manufacturing or selling ABG products. In consideration of
this covenant, VSI has agreed to pay Mr. Scherer $140,000.
CONDITIONS TO CLOSING. The Merger Agreement contains a number of conditions
to closing which must be satisfied or waived prior to consummation of the
merger. These conditions include, among other conditions, the requirement
that the merger be approved by the shareholders of the Company and Scherer
Healthcare, the requirement that no material litigation is pending against
the Company or its business, and the requirement that no adverse regulatory
action has been taken against the Company. The Company believes that the
conditions to closing can be satisfied and that the closing will take place
in late July 1997.
COVENANTS OF THE MERGER AGREEMENT. Pursuant to the Merger Agreement, the
Company has agreed that, during the period from March 14, 1997 to the
effective time of the merger, except as permitted in writing by VSI, the
Company will not, among other things, (a) amend its Articles of Incorporation
or Bylaws, (b) issue, sell, deliver, grant or declare any stock dividend or
any other distribution with respect to the Company's common stock except that
the Company
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<PAGE>
may issue common stock pursuant to certain options, warrants or a convertible
note exercisable or convertible in accordance with the terms of the
applicable agreements and outstanding as of March 14, 1997, (c) mortgage or
pledge any assets except in the ordinary course of business, (d) borrow or
agree to borrow any funds except in the ordinary course of business and
pursuant to the Company's existing credit facilities up to certain amounts,
(e) incur any obligation or liability, cancel any material debts of third
parties, lease, sell, transfer or grant any preferential rights to lease or
acquire any of its material assets or substantively amend or terminate any
material contract or agreement except in the ordinary course of business, (f)
adopt, materially amend or terminate any employee benefit plan or materially
increase compensation or other benefits payable to the Company's employees,
(g) acquire any other business entity, (h) solicit, encourage or authorize
any competing inquiry, proposal, offer or possible offer from a third party
relating to a change in control or ownership of the Company, (j) enter into
any material licensing or marketing arrangement or other material contract
with any party other than VSI, and (k) settle any pending litigation in a
manner that is materially adverse to the Company or commence any material
litigation.
TERMINATION OF THE MERGER. The Merger Agreement may be terminated and the
merger may be abandoned before the effective time of the merger (a) by mutual
written consent of VSI, Newco and the Company or (b) by VSI or the Company if
(i) the Company's shareholders fail to approve the merger at the special
meeting of shareholders or (ii) the shareholders of Scherer Healthcare fail
to approve the sale of the stock of the Company. In addition, VSI may
terminate the Merger Agreement if (a) there has been a material
misrepresentation or breach by the Company of any of its representations or
warranties in the Merger Agreement, (b) the Company's Special Treatment Sales
(defined below) during the period from December 29, 1996 through the date
seven days prior to the Closing (the "Pre-Closing Date") are less than eighty
percent of the Company's Special Treatment Sales during the period from the
first day of the Company's fiscal quarter commencing in December 1995 through
the date one year prior to the Pre-Closing Date, (c) there has been any
misrepresentation by Scherer Healthcare or Mr. Scherer in any of the
representations or warranties set forth in the Inducement Agreements, or (d)
there has been any material failure by Scherer Healthcare or Mr. Scherer to
comply with their respective obligations under the Inducement Agreements.
Special Treatment Sales are all of the Company's sales other than sales made
through the Company's U.S. (including Puerto Rico) dealers and sales made
through distributors of the Company's medical-surgical products.
Either the Company or VSI, at their discretion, may terminate the Merger
Agreement if the effective date of the merger has not occurred by August 29,
1997, except that a party whose breach of the Merger Agreement has caused
such a delay in the consummation of the merger will not be entitled to
terminate the Merger Agreement. If the Company terminates the Merger
Agreement as a result of a breach of any material covenants by VSI, the
Company will be entitled to $800,000 as damages.
If the Merger Agreement is terminated by VSI or the Company because (a) an
offer is made, including a Purchase Event (defined below), (b) a claim is
made that such offer could result in greater value to the Company's
shareholders than the value to be received from VSI, and (c) after such offer
is known to the Company, the Company's shareholders do not approve the
merger, the shareholders of Scherer Healthcare do not approve the sale of the
Company's common stock, or the Company breaches any of its obligations under
the merger agreement, and within 24 months after the termination of the
Merger Agreement, a Purchase Event occurs, the Company will pay to VSI a cash
fee of $1,500,000. A Purchase Event means any of the following events: (a)
without VSI's written consent, the Company announces an intention to enter
into an agreement with a party other than VSI to (i) merge, (ii) dispose of
25% or more of the Company's assets or (iii) issue, sell or dispose of
securities representing 25% or more of the voting power of the Company, or
(b) any person or group other than Scherer Healthcare or VSI or their
affiliates acquires 25% or more of the voting power of the Company.
FOOD AND DRUG ADMINISTRATION
The impact of the United States Food and Drug Administration's ("FDA") action
against the Company in August 1991 has had a significant and pervasive effect
on the Company.
On August 8, 1991, the United States Attorney's Office for the District of
Colorado filed a complaint seeking an injunction against the Company and
three of its officers. The complaint alleged that the Company was
manufacturing products in violation of the FDA's Current Good Manufacturing
Practice Regulations ("GMP"). The complaint also alleged that certain of the
Company's products were misbranded and adulterated for violating other
relevant sections of
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<PAGE>
the Federal Food, Drug and Cosmetic Act. On October 1, 1991, the Company and
one of the named individual defendants entered into a five-year Consent
Decree. The two other individuals originally named in the complaint for
injunction were dismissed as defendants.
By letter dated October 8, 1991, the District Director of the FDA's Denver
district informed the Company that, pursuant to the Consent Decree of October 1,
1991, the Company's medical device manufacturing operations were not in
substantial compliance with GMP. The Consent Decree provided for suspension
of the Company's United States manufacturing and distribution operations until
the Company demonstrated it had adequate controls in place to ensure products
were consistently produced in substantial compliance with GMP regulations.
Based upon agreements with the FDA in November and December 1991, the Company
was allowed to recondition inventories of components, sub-assemblies and
finished products which were produced prior to the October 8th shut down.
This was done in close cooperation with the FDA by the use of higher sampling
levels and tightened acceptable quality limits. The Company's facilities
were reinspected by the FDA in December, 1991 and found to have adequate
processes in place to insure devices would be manufactured in compliance with
GMP. As a result of that inspection, on January 9, 1992, the Company was
given authorization to renew its operations, including production and
distribution of all products.
During Fiscal 1994, the FDA completed a routine inspection of the Company's
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with only two deficiency observations noted,
which were corrected; there were no inspections during Fiscal 1995.
During Fiscal 1996, the FDA again inspected the Company's operations for
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with three deficiency observations noted. The
Company responded to the observations, including providing specific
corrective action.
In May, 1996, the FDA concluded an inspection with six deficiency
observations noted. Many of the deficiencies noted refer to the lack of
training regarding assembly, testing and sampling. The Company took
corrective action, including retraining employees, and implementing other
changes in order to respond to the FDA's concerns. These changes and
corrective actions were presented to the FDA in detail in the submissions
made by the Company and the Company continues to work with the FDA to address
the issues raised. The Company was again inspected by the FDA during
September, 1996 and received a Form 483, Inspection Observations, containing
three alleged nonconformances with GMP. The Company responded to these
observations, including providing specific corrective action. Following the
September inspection, the Consent Decree expired October 1, 1996 and is of no
further force and effect.
RESULTS OF OPERATIONS
FISCAL 1997 VERSUS FISCAL 1996
SALES, COST OF SALES AND GROSS PROFIT: The Company's net sales decreased
approximately 2% to $22,045,000 from $22,443,000 in Fiscal 1996. The
decrease in net sales was primarily due to a decrease in sales of the
Company's medication delivery devices. Sales of these devices were down
approximately $800,000 in Fiscal 1997 compared to Fiscal 1996; the majority
of the decrease was attributable to one major customer who placed a large
sales order in Fiscal 1996 and who did not place an order in Fiscal 1997.
The decrease in the sales of medication delivery devices was partially offset
by an increase in sale of the Company's ABG products which increased
approximately $270,000 in Fiscal 1997 due to a contract signed with a major
customer in late Fiscal 1996 for these products.
The gross margin decreased from 32% to 30.4%. This decline in gross margin
was primarily the result of the decrease in net sales combined with the rework
of certain products. Rework is caused by supplier quality issues, defects in
molded products produced due to worn tools, and damage during assembly and
warehousing. The Company believes that the supplier quality and damage
issues have been corrected; however, molded product defects may recur because
of the condition of the molds. The Company has implemented a preventative
maintenance program, and increased inspections and operator training in the
Company's molding operation.
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<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
declined 19% due to two primary items. The Company leases a warehouse in
Nogales, Arizona which was formerly used by the Company until early Fiscal
1994 when it ceased operations in Mexico. The Company was able to sublease
two-thirds of the warehouse in December 1995 and the remaining portion of the
warehouse in September 1996. (See Note 6 to the Consolidated Financial
Statements.) Net lease expense decreased approximately $120,000. During
Fiscal 1996, the Company wrote off approximately $200,000 of certain expenses
associated with unsuccessful efforts to obtain financing. These expenses
were not incurred in Fiscal 1997.
OTHER INCOME AND EXPENSE: Other income decreased due to nonrecurring income
received in Fiscal 1996. The Company received $488,000 in royalty income in
the fourth quarter of fiscal 1996 related to the Company's ABG product line
patents. The royalty agreement expired during Fiscal 1996. Also in Fiscal
1996, the Company sold a 10% investment in a medical device company for a
gain of $200,000. Other expense has increased in Fiscal 1997 due to $265,000
of expense related to the proposed merger with VSI discussed above. These
expenses were for financial advisors and for investment banking, legal and
accounting services.
FISCAL 1996 VERSUS FISCAL 1995
SALES, COST OF SALES AND GROSS PROFIT: Sales increased 9% from $20,576,000
in Fiscal 1995 to $22,443,000 in Fiscal 1996. Sales in the first quarter of
Fiscal 1995 were low due to a decline in hospital census which the Company
believes was due to the uncertainties of healthcare reform. Also, many of
the Company's distributors purchased high levels of product during the fourth
quarter of Fiscal 1994, which depressed sales in the first quarter of Fiscal
1995. This did not occur in Fiscal 1996, and sales increased to previous
levels. In Fiscal 1996, the Company implemented a network of independent
manufacturer's representatives which supplemented the Company's sales force
and increased sales.
The Company's gross margin increased from 24% in Fiscal 1995 to 32% in Fiscal
1996. The Company has reduced manufacturing costs through reductions in
personnel, improved operational efficiencies and increased its vertical
integration of the manufacturing process. The gross margin improvement was
also due to increased manufacturing volume which improved overhead absorption.
In early Fiscal 1996, the Company began manufacturing a less expensive needle
sheath holder, converted to a less expensive pallet and obtained price
reductions from suppliers for cartons and plastic resins. Average production
labor headcount was reduced 9% in Fiscal 1996 compared to Fiscal 1995.
Layoffs were effective in the first quarter of Fiscal 1996 and the savings
achieved were partially offset by increased overtime.
Expense controls in manufacturing resulted in a reduction in overhead.
Factors influencing this reduction include not immediately replacing several
salaried positions which were vacant due to attrition, and limiting travel
and the use of temporary help. Depreciation expense was reduced
approximately $285,000 during Fiscal 1996 as fixed assets became fully
depreciated. Property taxes were decreased in Fiscal 1996 approximately
$73,000 as a result of a tax appeal with the county.
The absorption of overhead costs by the Company's molding operation was also
favorably impacted by the transfer of molding production from outside vendors
in the second and third quarters of Fiscal 1996 and the increase in
production volume.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
decreased 25% from $3,193,000 in Fiscal 1995 to $2,391,000 in Fiscal 1996 due
to reductions in personnel and a decrease in legal and litigation expenses.
Legal expense decreased approximately $100,000 in Fiscal 1996 primarily due
to the settlement of litigation with former officers and directors in May
1995. Also, an additional $300,000 was accrued during Fiscal 1995 for the
settlement of this litigation; the total settlement amount was $725,000 of
which $425,000 was accrued prior to Fiscal 1995.
OTHER INCOME: Other income increased primarily due to $488,000 in royalty
income received in the fourth quarter of Fiscal 1996 on the Company's patents
related to the ABG product line. The royalty agreement expired during Fiscal
1996. In Fiscal 1996, the Company sold its 10% investment in Seabrook
Medical Systems, Inc. at a gain of $200,000.
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<PAGE>
INCOME TAXES: In Fiscal 1996 the Company settled tax issues related to
audits by the Internal Revenue Service ("IRS") for fiscal years 1982-1988.
The Company recorded $697,000 of taxes and interest related to the settlement
of these tax issues during Fiscal 1996. The Company has negotiated a
repayment plan of monthly installments of $40,000 per month through
approximately September 1998.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES: Cash used in operations increased from $79,000 in
Fiscal 1996 to $1,178,000 in Fiscal 1997, primarily due to a decrease in
payables and accrued expenses. The decrease in payables and accrued expenses
is due to the payment in Fiscal 1997 of consulting and other costs related to
the financing transactions consummated in March 1996 discussed below and
payment of income taxes and legal settlements.
FINANCING AND LIQUIDITY: On June 30, 1994, the Company refinanced $1,300,000
of Douglas County Industrial Revenue Bonds (the "Bonds"), due on December 31,
1993, with a term loan from Colorado National Bank (the "Bank"), the same
bank holding the Bonds. During Fiscal 1996, the Company and the Bank
executed an amendment to the term loan agreement, whereby the Company made a
principal payment of $160,000 and shortened the term of the loan from July
31, 2004 to January 31, 2000 and the Bank released the Company's inventory
and accounts receivable as collateral for the loan. The loan will continue
to be amortized over its original term with a balloon payment on January 31,
2000.
During the third quarter of Fiscal 1996, Scherer Capital, a company
controlled by the largest shareholder of Scherer Healthcare, advanced the
Company $700,000 which was used for working capital purposes. In March 1996,
the Company and Scherer Capital refinanced this advance with long-term
convertible debt. The debt, which bears interest at 1-1/2% over prime, is
secured by inventory and equipment and is convertible at a rate of $.70 per
share. The debt agreement contemplated the possibility of additional
borrowings of $800,000. During Fiscal 1997, Scherer Capital transferred its
credit facility to Robert P. Scherer, Jr., the Company's Chairman of the
Board of Directors and Chief Executive Officer.
In March 1996, Scherer Capital invested $1,000,000 in the Company through the
purchase of 2,061,856 shares of common stock at a rate of $.485 per share.
Robert P. Scherer, Jr. has voting authority over the Company's stock
purchased by Scherer Capital either through beneficial ownership or as
trustee of a voting trust for shares owned by Mr. Scherer's adult children.
Also in March 1996, Scherer Healthcare converted a $1.8 million note of the
Company into common stock at a rate of $.70 per share. In a related
transaction, the Company accepted a proposal to exchange the accrued interest
on the note payable to Scherer Healthcare of $487,000 as well as management
fees owed to Scherer Healthcare of $376,000 for the Company's common stock at
a rate of $.70 per share.
In November 1996, the Company obtained a revolving line of credit from
Norwest Business Credit, Inc., ("Norwest") secured by trade accounts
receivable, inventory and equipment, with an interest rate of 2.25% over
Norwest's prime rate, expiring February 28, 1999. At March 29, 1997, the
interest rate is 10.75%. The maximum line of credit to be extended is 80% of
net eligible domestic accounts receivable plus 70% of eligible international
accounts receivable or $2,000,000, whichever is less. At March 29, 1997, the
Company had an available borrowing limit of approximately $1.4 million of
which $125,000 had been borrowed.
At March 29, 1997, the Company was not in compliance with a covenant
requiring a specified debt service coverage rate and a covenant that the
Company not incur an after tax loss greater than that specified. Norwest has
waived the requirement of compliance with these covenants effective as of
March 29, 1997, and the Company and Norwest have negotiated covenants
providing for a maximum net loss for the first four months of Fiscal 1998
(through July 1997) of $1,018,000 and a minimum net worth of $3,364,000 at
the end of July 1997 and each subsequent month end.
Simultaneous with the execution of the Merger Agreement with VSI, the Company
entered into a Dealer Agreement whereby VSI is authorized to sell the
Company's products for a period of two years. The Company provided 28 of its
29 existing domestic specialty dealers with notices of termination of their
dealer agreements which allow for
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<PAGE>
termination on 30 to 90 days notice. These domestic dealers provided
$9,687,000 of revenue during Fiscal 1997. Five of these dealers have
subsequently entered into new agreements with the Company.
The Company believes that if the merger is not consummated or is delayed, VSI
will, over time, be able to replace the sales which had been made by the
terminated dealers prior to their termination. There can be no assurance,
however, that VSI will be able to generate sufficient sales to replace the
sales by the terminated dealers or that the sales of Company products by VSI
will increase quickly enough to avoid a material adverse impact on the
operations of the Company.
Two of the Company's domestic specialty dealers who were provided with
notices of termination have filed lawsuits alleging, among other claims,
breach of confidentiality and termination of a dealer agreement in a
commercially unreasonable manner. (See Note 10 to the Consolidated Financial
Statements.) The Company intends to contest these lawsuits vigorously.
These dealers, whose accounts receivable with the Company total $714,000 at
the end of May 1997 ($564,000 generated through sales subsequent to March
1997), are withholding payment pending settlement of issues raised in their
respective lawsuits. The Company intends to vigorously pursue collection of
these accounts.
The Company's management expects that the contemplated merger will be
consummated by the end of July 1997. However, if the merger is delayed or
does not occur and the sales of the terminated dealers are not replaced by
VSI in a timely manner, the Company may be unable to continue as a going
concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern. If
the merger is delayed or does not occur and VSI is unable to generate a
sufficient volume of sales of Company products, the Company would then
anticipate taking the following actions during Fiscal 1998.
1. Continue marketing and selling its products through the medical-surgical
dealers and through the distribution arrangement with VSI in the domestic
market and certain international markets where VSI has a strategic
presence.
2. Renegotiate its current line of credit with Norwest and pursue additional
financing opportunities that may be available.
3. Continue to reduce costs and operating expenses.
4. Restrict expenditures related to capital assets to maintenance of existing
equipment and facilities until the Company generates positive operating
cash flow.
5. Reduce employee headcount to support the level of sales volume.
The viability of the Company during Fiscal 1998 will be dependent on the
Company's successful completion of the merger or the successful completion of
some or all of the above activities.
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this report on
Form 10-K that are not statements of historical facts are forward-looking
statements that involve substantial risks and uncertainties. Forward-looking
statements are those relating to the Company or its operations that are
preceded by terms such as "anticipates", "expects", "believes", "intends" and
similar expressions. The Company's actual results, performance or
achievements may differ materially from those expressed or implied by such
forward-looking statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants. . . . . . . . . Page 20
Consolidated Balance Sheets . . . . . . . . . . . . . . . Page 21
Consolidated Statements of Operations . . . . . . . . . . Page 22
Consolidated Statements of Shareholders' Equity . . . . . Page 23
Consolidated Statements of Cash Flows . . . . . . . . . . Page 24
Notes to Consolidated Financial Statements. . . . . . . . Page 26
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts . . . . . Page 46
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Marquest Medical Products, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
MARQUEST MEDICAL PRODUCTS, INC. (a Colorado corporation) and
subsidiaries as of March 29, 1997 and March 30, 1996 and the related
consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended March 29, 1997.
These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Marquest
Medical Products, Inc. and subsidiaries as of March 29, 1997 and
March 30, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended March 29, 1997,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements,
substantial doubt exists about the ability of the Company to continue
as a going concern. A contemplated merger and management's other
plans regarding these matters are described in Note 2. The
accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going
concern.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
June 6, 1997.
-20-
<PAGE>
MARQUEST MEDICAL PR0DUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
March 29, March 30,
1997 1996
--------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 13 $ 1,635
Trade accounts receivable, less allowances for
doubtful accounts of $118 and $94, respectively 3,392 2,915
Notes and other receivables 47 181
Inventories 3,283 3,393
Prepaid expenses 152 173
------- -------
Total current assets 6,887 8,297
PROPERTY, PLANT AND EQUIPMENT, net (Note 3) 6,469 7,055
OTHER ASSETS 68 41
------- -------
$13,424 $15,393
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 831 $ 1,001
Accrued liabilities 2,690 3,728
Payable to related parties 47 48
Short-term debt (Note 4) 842 803
------- -------
Total current liabilities 4,410 5,580
LONG-TERM DEBT (Note 4) 4,600 4,990
------- -------
Total liabilities 9,010 10,570
------- -------
COMMITMENTS AND CONTINGENGIES (Notes 2, 6 and 14)
SHAREHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares
authorized; 14,292,613 and 14,207,435 shares issued,
respectively; 14,271,773 and 14,186,595 shares
outstanding, respectively 9,904 9,834
Warrants 593 599
Retained deficit ($20,434 of retained deficit eliminated
at July 3, 1993 relating to quasi-reorganization) (6,013) (5,540)
Treasury stock, 20,840 shares (70) (70)
------- -------
Total shareholders' equity 4,414 4,823
------- -------
$13,424 $15,393
------- -------
------- -------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
21
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
March 29, March 30, April 1,
1997 1996 1995
---------- --------- ---------
NET REVENUES $ 22,045 $ 22,443 $ 20,576
COST OF SALES (15,339) (15,305) (15,666)
---------- --------- ---------
GROSS PROFIT 6,706 7,138 4,910
COSTS AND EXPENSES
Sales and marketing (4,135) (4,082) (4,323)
General and administrative (1,922) (2,391) (3,193)
Research and development (286) (155) (140)
---------- --------- ---------
OPERATING INCOME (LOSS) 363 510 (2,746)
OTHER INCOME (EXPENSE)
Interest, dividend & other income 70 410 113
Royalty income -- 488 --
Interest expense (675) (685) (626)
Other expense (305) (114) (27)
Foreign exchange gain (loss) 74 28 (164)
---------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (473) 637 (3,450)
INCOME TAXES -- (697) --
---------- --------- ---------
NET LOSS $ (473) $ (60) $ (3,450)
---------- --------- ---------
---------- --------- ---------
Net Loss per Common Share $ (0.03) $ (0.01) $ (0.46)
---------- --------- ---------
---------- --------- ---------
Weighted average number of
common shares outstanding
during the period 14,242,879 8,268,242 7,483,612
---------- --------- ---------
---------- --------- ---------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
22
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
---------------------- Retained ------------------------
Shares Amount Deficit Shares Amount Warrants
--------- --------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, April 2, 1994 4,505,466 $3,459 ($2,030) (20,840) ($70) $632
Net loss -- -- (3,450) -- -- --
Stock issuances --
Conversion of debt 3,333,333 2,500 -- -- -- --
Warrants exercised 263,921 218 -- -- -- (20)
--------- --------- ---------- ---------- ----------- ----------
BALANCE, April 1, 1995 8,102,720 6,177 (5,480) (20,840) (70) 612
Net loss -- -- (60) -- -- --
Stock issuances --
Conversion of debt 3,877,859 2,715 -- -- -- --
Warrants exercised 165,000 54 -- -- -- (13)
Sale of stock to related party 2,061,856 1,000 -- -- -- --
Stock issuance costs -- (112) -- -- -- --
--------- --------- ---------- ---------- ----------- ----------
BALANCE, March 30, 1996 14,207,435 9,834 (5,540) (20,840) (70) 599
Net loss -- -- (473) -- --
Warrants exercised 85,178 70 -- -- -- (6)
--------- --------- ---------- ---------- ----------- ----------
BALANCE, March 29, 1997 14,292,613 $9,904 ($6,013) (20,840) ($70) $593
--------- --------- ---------- ---------- ----------- ----------
--------- --------- ---------- ---------- ----------- ----------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
23
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
Fiscal Year Ended
-------------------------------
March 29, March 30, April 1,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (473) $ (60) $(3,450)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 804 1,050 1,364
Provision for losses on accounts receivable 32 24 21
Gain from extinguishment of debt -- (32) --
Gain on sale of assets -- (225) (70)
Gain)/loss on foreign currency translation (74) (28) 164
Net change in operating assets and liabilities-
Trade accounts receivable (509) (92) 207
Notes and other receivables 134 (181) 74
Inventories and prepaid items 131 (696) 297
Other assets (38) (3) (10)
Accounts payable, accrued expenses and
payable to related parties (1,209) 115 535
Other long-term liabilities -- -- (176)
Accrued interest on Swiss bonds 24 49 50
------- ------- -------
NET CASH USED IN OPERATING ACTIVITIES (1,178) (79) (994)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on notes from related party -- -- 375
Purchases of equipment (207) (66) (666)
Proceeds from disposition of assets -- 225 245
------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (207) 159 (46)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 200 1,100 220
Payments on notes payable (75) (400) --
Principal payments on borrowings and capital leases (381) (596) (280)
Issuance of common stock, net 19 889 --
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (237) 993 (60)
------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,622) 1,073 (1,100)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,635 562 1,662
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 13 $ 1,635 $ 562
------- ------- -------
------- ------- -------
</TABLE>
(Continued on next page)
24
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
Fiscal Year Ended
-------------------------------
March 29, March 30, April 1,
(Continued from previous page) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 469 $ 462 $ 445
------- ------- -------
------- ------- -------
Income taxes 480 630 --
------- ------- -------
------- ------- -------
NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Refinancing of Swiss debt-
Notes issued -- 259 --
------- ------- -------
Bonds and accrued interest retired -- (291) --
------- ------- -------
-- (32) --
------- ------- -------
------- ------- -------
Debt conversion-
Note payable to Scherer Healthcare, Inc. -- (1,852) (2,500)
Payable to related party -- (863) --
Common stock issued -- 2,715 2,500
------- ------- -------
-- -- --
------- ------- -------
------- ------- -------
Refinancing of Industrial Revenue Bonds-
Bonds retired -- -- (1,300)
Note payable to bank -- -- 1,300
------- ------- -------
-- -- --
------- ------- -------
------- ------- -------
Warrants-
Warrants exercised (6) (13) (20)
Common stock issued 51 53 218
Swiss notes retired (45) (40) (198)
------- ------- -------
-- -- --
------- ------- -------
------- ------- -------
Capital lease-
Capital lease obligation -- (364) --
Purchase of equipment -- 364 --
------- ------- -------
-- -- --
------- ------- -------
------- ------- -------
Conversion of short-term note to long-term debt-
Short-term debt to Scherer Capital, LLC -- (700) --
Note payable to Scherer Capital, LLC -- 700 --
------- ------- -------
$ -- $ -- $ --
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
25
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ORGANIZATION. Marquest Medical Products, Inc. ("Marquest" or the
"Company") is a manufacturer and marketer of disposable medical devices,
supplies and equipment for use in the respiratory care, cardiopulmonary
support and anesthesia markets. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
REVENUE. Revenue is recognized at the time the product is shipped. The
Company's export sales for the latest three fiscal years are presented in the
table below. Profits on export sales have been comparable to those
associated with domestic sales.
($000)
-----------------------------
FY 1997 FY 1996 FY 1995
------- ------- -------
Sales by geographic location:
United States and Canada $15,957 $16,699 $16,023
------- ------- -------
------- ------- -------
Export Sales:
Europe $ 3,518 $ 3,069 $ 2,538
Pacific Rim 1,707 1,959 1,458
Puerto Rico 391 407 352
Other 472 309 205
------- ------- -------
$ 6,088 $ 5,744 $ 4,553
------- ------- -------
------- ------- -------
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Work in process and finished goods include
material costs, labor and manufacturing overhead. The Company has expensed
all inventories that cannot be used in the Company's operations. Inventories
consist of the following (in thousands of dollars):
March 29, 1997 March 30, 1996
-------------- --------------
Raw materials $ 1,931 $ 1,782
Work in process 282 233
Finished goods 1,070 1,378
------- -------
$ 3,283 $ 3,393
------- -------
------- -------
The Company has finished goods inventory at a distributor's warehouse in The
Netherlands of approximately $219,000 and $131,000 at March 29, 1997 and
March 30, 1996, respectively.
FOREIGN CURRENCY EXCHANGE GAIN/(LOSS). The Company had SFr 345,000, 345,000
and 720,000 of Swiss Franc denominated bonds outstanding at March 29, 1997,
March 30, 1996 and April 1, 1995, respectively. The foreign currency
gain/(loss) is the result of the difference in the exchange rate between the
Swiss Franc and the U.S. Dollar at the beginning and end of the related
period for Swiss Francs outstanding during the period. The annual interest
payments on the bonds are accrued and recorded as interest expense with the
appropriate adjustments made to reflect the current exchange rate.
PROPERTY, PLANT AND EQUIPMENT. Additions to property, plant and equipment are
recorded at acquisition cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to operations as
incurred, whereas expenditures for renewals and betterments are capitalized
and depreciated.
26
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenditures for
the creation and application of new products and processes are expensed as
incurred.
QUASI-REORGANIZATION. On June 11, 1993, the Company's Board of Directors
approved quasi-reorganization procedures which were effective July 3, 1993,
the end of the Company's first quarter of Fiscal 1994.
INCOME TAXES. The Company provides for income taxes using the asset and
liability method prescribed by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred
income taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of a
change in tax laws or tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are recognized for the
expected future effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance for the amount of any
tax benefits which, more likely than not, based on current circumstances, are
not expected to be realized.
ACCRUED LIABILITIES. Accrued liabilities consist of the following (in
thousands of dollars):
March 29, 1997 March 30, 1996
-------------- --------------
Accrued income taxes, interest and penalties $ 638 $ 997
Accrued payroll and benefits 867 932
Accrued legal settlement 224 383
Other 961 1,416
------- -------
$ 2,690 $ 3,728
------- -------
------- -------
INCOME (LOSS) PER COMMON SHARE. Income (loss) per common share is based on
the weighted average number of common and common stock equivalent shares
outstanding during each period. Common stock equivalent shares were
anti-dilutive in Fiscal 1997, 1996 and 1995 and were therefore excluded from
the computation.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
consist of cash, short-term trade receivables and payables and long-term
debt. The carrying values of these financial instruments approximate fair
value.
SIGNIFICANT CUSTOMERS. During Fiscal 1997, 1996 and 1995, the Company had
one distributor, Tri-anim Health Services, Inc. ("Tri-anim") of Sylmar,
California, which accounted for 18%, 19% and 19%, respectively, of the
Company's sales. At March 29, 1997 and March 30, 1996, respectively,
Tri-anim represented 22% and 13% of total receivables before allowances.
This distributor has been terminated effective June 13, 1997.
INDUSTRY SEGMENTS. The Company operates in the United States and has one
industry segment - it manufactures and distributes medical devices and
equipment to the healthcare provider sector.
27
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NEW ACCOUNTING STANDARDS. In Fiscal 1997, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain
identified intangibles be written down in value whenever an impairment review
indicates that the carrying value may not be recoverable. The adoption of
SFAS No. 121 did not have a material effect on the Company's consolidated
financial position or results of operations.
In Fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting
for stock-based compensation plans either through recognition or disclosure.
The Company has adopted the disclosure provisions of SFAS No. 123 but
continues to account for the stock incentive plan under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 5
to the Consolidated Financial Statements.
In Fiscal 1998, the Company will adopt SFAS No. 128, "Earnings Per Share."
This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128
requires presentation of basic and diluted earnings per share on the face of
the income statement. Adoption of the new standard will not have a material
impact on the Company's earnings per share.
2. LIQUIDITY AND BASIS OF PRESENTATION:
The Company's consolidated financial statements have been presented on the
basis that it will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The conditions and uncertainty associated with this
basis of presentation, as well as management's plans concerning these
matters, are described in the following paragraphs.
As reflected in the accompanying consolidated financial statements, the
Company has experienced cash flow deficits from its operating activities. In
addition, as part of the contemplated merger discussed in Note 14 to the
Consolidated Financial Statements, the Company has given notice of
termination to the existing hospital specialty distributors of its products
and has entered into an agreement with the merger candidate, Vital Signs,
Inc. ("VSI"), to be the distributor of its products. This has resulted in
two distributor lawsuits (see Note 10) and will likely have a negative impact
on the Company's sales revenues in the short term. These distributors, whose
accounts receivable with the Company, total $714,000 at the end of May 1997
($564,000 resulting from sales subsequent to March 29, 1997), are withholding
payment pending settlement of issues raised in their respective lawsuits.
The Company intends to vigorously pursue collection of these accounts.
The Company's management expects that the contemplated merger will be
consummated by the end of July 1997. The Company also believes that if the
merger is not consummated or is delayed, VSI will, over time, be able to
replace the sales which had been made by the terminated dealers prior to
their termination. There can be no assurance, however, that VSI will be able
to generate sufficient sales to replace the sales by the terminated dealers
or that the sales of Company products by VSI will increase quickly enough to
avoid a material adverse impact on the operations of the Company. These
circumstances indicate that the Company may be unable to continue as a going
concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
28
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the merger is delayed or does not occur and the distributor relationship
with VSI does not generate sufficient volume of sales, the Company would then
anticipate taking the following actions during Fiscal 1998.
1. Continue marketing and selling its products through the medical-surgical
dealers and through the distribution arrangement with VSI in the
domestic market and certain international markets where VSI has a
strategic presence.
2. Renegotiate its current line of credit with Norwest and pursue additional
financing opportunities that may be available.
3. Continue to reduce costs and operating expenses.
4. Restrict expenditures related to capital assets to maintenance of
existing equipment and facilities until the Company generates positive
operating cash flow.
5. Reduce employee headcount to support the level of sales volume.
The viability of the Company during Fiscal 1998 will be dependent on the
Company's successful completion of the merger or the successful completion of
some or all of the above activities.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following (in thousands of
dollars):
March 29, March 30,
1997 1996
--------- ---------
Land $ 1,265 $ 1,265
Buildings 4,985 4,985
Machinery and equipment 8,924 8,866
Other 2,555 2,523
Construction in progress 119 2
-------- --------
17,848 17,641
Less - accumulated depreciation (11,379) (10,586)
-------- --------
$ 6,469 $ 7,055
-------- --------
-------- --------
The Company depreciates buildings over 50 years, machinery and equipment
between 3 and 10 years and other fixed assets between 3 and 8 years.
29
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBT:
Short-term debt consists of the following (in thousands of
dollars):
March 29, March 30,
1997 1996
--------- ---------
Swiss Bonds, SFr 345,000 outstanding at March 29,
1997 and March 30, 1996; interest payable annually
on March 11 at a rate of 6%, increased to 9% effective
March 12, 1992; due March 11, 1994; unsecured;
including $110,000 and $107,000 accrued interest,
respectively (See Note 11) $ 347 $ 397
Borrowings on bank line of credit, interest at prime
plus 2.25% payable monthly in arrears, secured by trade
accounts receivable, inventory and equipment 125 -----
Current maturities of long-term debt and
capital lease obligations 370 406
--------- ---------
$ 842 $ 803
--------- ---------
--------- ---------
SWISS BONDS. On January 14, 1992, the Company was notified that the holders
of the majority of its Swiss bonds had exercised their right to put the bonds
for redemption as of March 11, 1992. The Company was not able to honor this
put, and accordingly defaulted on these obligations. The Company did not
make any payments of principal or interest on the Swiss bonds in Fiscal 1993.
During Fiscal 1994, the Company refinanced a significant portion of the
Swiss bonds outstanding (see Note 11). During Fiscal 1996, bonds totaling
375,000 Swiss Francs plus accrued interest were exchanged for $291,000 of
U.S. denominated 8% Swiss notes and $146,000 in cash. No bond exchanges were
made during Fiscal 1997. The remaining Swiss bonds outstanding at March 29,
1997 and March 30, 1996, including the accrued interest on these bonds, have
been classified as short-term debt.
BORROWINGS ON LINE OF CREDIT. The Company has obtained a revolving line of
credit from Norwest Business Credit, Inc. ("Norwest") secured by trade
accounts receivable, inventory and equipment, with an interest rate of 2.25%
over Norwest's prime rate, expiring February 28, 1999. At March 29, 1997,
the interest rate is 10.75%. Under the terms of the line of credit
agreement, the Company is obligated to pay a minimum interest of $15,000 per
quarter beginning November 5, 1996, the date the agreement was signed. In
addition, the Company is obligated to pay an unused line fee at the rate of
one-quarter percent (0.25%) per year on the average daily unused line of
credit. During Fiscal 1997, approximately $24,000 was expensed related to
interest and the unused line fee. Pursuant to the Credit and Security
Agreement, the Company cannot, without the written consent of Norwest,
declare or pay any dividends (other than dividends payable solely in common
stock of the Company) or purchase, redeem or retire any common stock.
The maximum line of credit to be extended is 80% of net eligible domestic
accounts receivable plus 70% of eligible international accounts receivable or
$2,000,000, whichever is less. At March 29, 1997, the Company had an
available borrowing limit of approximately $1.4 million of which $125,000 had
been borrowed.
At March 29, 1997, the Company was not in compliance with a covenant
requiring a specified debt service coverage ratio. The Company was also not
in compliance with a covenant that the Company not incur a year-to-date after
tax loss greater than that specified. Norwest has waived the requirement of
compliance with these covenants effective March 29, 1997 and the Company and
Norwest have negotiated covenants providing for a maximum net loss for the
first four months of Fiscal 1998 (through July 1997) of $1,018,000 and a
minimum net worth of $3,364,000 at the end of July 1997 and each subsequent
month end.
30
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following (in thousands of dollars):
March 29, March 30,
1997 1996
--------- ---------
Swiss notes payable; 8%; interest due semi-annually;
due March 31, 1999, unsecured; denominated in
U.S. dollars $ 2,851 $ 2,896
Note payable to bank; interest rate floats annually,
currently 8.125%; interest and principal due in
monthly installments with balloon payment at January 31,
2000; secured by building 788 858
Note payable to R. P. Scherer, Jr., interest payable
quarterly at 1-1/2% over prime; current interest rate
9.75%; due April 1, 2001; convertible into 1,000,000
shares of Marquest common stock; secured by inventory,
property and equipment 700 700
Capital lease obligations 261 536
--------- ---------
$ 4,600 $ 4,990
--------- ---------
--------- ---------
The scheduled maturities of long-term debt beyond Fiscal 1998 are as
follows:
1999 $ 3,127
2000 794
2001 --
2002 700
Less - imputed interest on capital leases (21)
----------
Total $ 4,600
----------
----------
NOTE PAYABLE TO BANK. During Fiscal 1996, the Company and Colorado
National Bank (the "Bank") executed an amendment to the Term Loan Agreement
dated June 30, 1994, whereby the Company made a principal payment of $160,000
and shortened the term of the Note from July 31, 2004 to January 31, 2000 and
the Bank released the Company's inventory and accounts receivable as
collateral for the Note. The Note will continue to be amortized over the
original term of the Note with a balloon payment on January 31, 2000.
Pursuant to the Term Loan Agreement, the Company cannot, without the written
prior approval of the Bank, (1) make any expenditures for capital assets in
excess of $1 million in any fiscal year subsequent to April l, 1995 or (2)
pay or declare any dividends or purchase, redeem or otherwise acquire any of
its capital stock, or make any other distribution of any property to any of
its shareholders.
NOTE PAYABLE TO SCHERER CAPITAL/LLC/R. P. SCHERER, JR. During the third
quarter of Fiscal 1996, Scherer Capital, LLC ("Scherer Capital"), a company
controlled by the largest shareholder of Scherer Healthcare, advanced the
Company $700,000 which was used for working capital purposes. In March 1996,
the Company and Scherer Capital refinanced this advance with long-term
convertible debt. The debt, which bears interest at 1-1/2% over prime, is
convertible into the Company's common stock at a rate of $0.70 per share.
The debt agreement contemplated the possibility of additional 7borrowings of
$800,000. During Fiscal 1997, Scherer Capital transferred its credit
facility to Robert P. Scherer, Jr., the Company's Chairman of the Board of
Directors and Chief Executive Officer. After April
31
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1, 1997, the Company may, at its option, redeem the note at the following
prices, expressed as a percentage of principal amount: 1998 - 104%, 1999 -
103%, 2000 - 102%, 2001 - 101%.
CAPITAL LEASE. The Company leases certain production equipment under a
capital lease arrangement. The gross amount of equipment and accumulated
depreciation recorded under capital leases was $1,133,000 and $595,000,
respectively, at March 29, 1997.
5. STOCK OPTIONS AND WARRANTS:
STOCK OPTION PLAN. The Company has an Incentive and Non-Qualified Stock
Option Plan (the "Plan") for executives and key employees, which is
administered by the Compensation Committee of the Board of Directors. Shares
approved for the plan total 1,750,000, of which 790,161 are available for
grant at March 29, 1997. Options vest in periods ranging from three to five
years and expire seven years from the date of the grant.
As a result of the proposed merger discussed in Note 14 and in accordance
with the Plan, the Company will provide notice to the Plan's option holders
that they may exercise their options, whether vested or not, prior to the
effective time of the merger. All such options which are not exercised prior
to the merger will terminate.
During Fiscal 1997, Marquest adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," but continues to account for
the plan under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Had compensation cost for the Plan been
determined consistent with the fair value based accounting method under SFAS
No. 123, the pro forma net loss and loss per share would have been the
following:
Fiscal Years Ended
----------------------------------------------
March 29, 1997 March 30, 1996
----------------------------------------------
Loss Loss
Net Loss Per Share Net Loss Per Share
--------- ------------ ----------- -----------
As reported $(473) $(0.03) $(60) $(0.01)
Pro forma $(494) $(0.03) $(69) $(0.01)
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation
cost over the option's vesting period and has not been applied to options
granted prior to Fiscal 1996. Accordingly, the resulting pro forma
compensation cost is not representative of what compensation cost will be in
future years.
32
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are the weighted-average assumptions used in connection with
the Black-Scholes option-pricing model to estimate the fair value of options
granted in Fiscal years 1997 and 1996:
Fiscal Year Ended
--------------------------------
March 29, 1997 March 30, 1996
-------------- --------------
Risk-free interest rate 6.54% 5.56%
Expected dividend yield None None
Expected life 3 years 3 years
Expected volatility 118.70% 154.38%
Data for outstanding options under the Plan are summarized as follows:
<TABLE>
<CAPTION>
March 29, 1997 March 30, 1996
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 555,000 $1.23 339,327 $1.91
Granted 95,000 $0.88 587,500 $0.93
Canceled or forfeited (17,434) $1.10 (371,827) $1.36
---------- --------- ---------- ---------
Outstanding, end of year 632,566 $1.18 555,000 $1.23
Exercisable at end of year 353,227 $1.52 227,096 $1.93
Weighted average fair value of
options granted during year $0.08 $0.10
</TABLE>
The following table summarizes the status of outstanding and exercisable
options under the Plan at March 29, 1997:
<TABLE>
Outstanding Options Exercisable Options
------------------------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Outstanding Life (years) Price Exercisable Price
----------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Range of Exercise Prices
- ------------------------
$0.69-$0.88 392,166 5.47 $0.73 116,827 $0.72
$1.38-$2.00 240,400 3.30 $1.92 236,400 $1.92
------- ---- ----- ------- -----
Total 632,566 4.64 $1.18 353,227 $1.52
</TABLE>
33
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON STOCK PURCHASE RIGHTS. On August 18, 1991, the Board of
Directors of the Company declared a dividend distribution of one
right (a "Right") for each outstanding share of the Company's Common
Stock to shareholders of record at the close of business on August
20, 1991 (the "Record Date"). Each Right entitles the registered
holder to purchase from the Company a unit consisting of one-half of
a share (a "Unit") of Common Stock at a purchase price of $25.00 per
Unit, subject to adjustment.
The Rights are attached to all Common Stock certificates representing
shares outstanding, and no separate Rights Certificates have been
distributed. The Rights will separate from the Common Stock and a
"Distribution Date" will occur so that the Rights become exercisable
no later than ten business days following (1) the public announcement
that a person or group (other than Scherer Healthcare, Inc. or
Scherer Capital, LLC) has acquired, or obtained the right to acquire,
15% or more of the Company's outstanding shares or (2) the
commencement of a tender or exchange offer that would result in a
person or entity (other than Scherer Healthcare, Inc. or Scherer
Capital, LLC) owning 15% or more of the Company's outstanding Common
Stock. In the event that 15% or more of the stock is actually held
by a person or group, each right not owned by such person or group
allows the holder to buy $50.00 worth of the Company's Common Stock,
based on the then-current market price, for $25.00. The Company can
redeem the rights at any time until 10 days following the above
events at a price of $.01 per Right. The Rights are not exercisable
until the Distribution Date and will expire at the close of business
on August 20, 2001.
The Rights Agreement was amended by the Board of Directors on March
14, 1997, that makes the Rights Agreement inapplicable to the
proposed merger between the Company and VSI discussed in Note 14.
SETTLEMENT PAYABLE. In July, 1993, the Company filed suit in the
United States District Court in Colorado against a former President
and Director and a former Chairman of the Board of Directors of the
Company seeking a declaratory judgment that their termination
agreements were void and for damages. The Company discontinued
making payments on these termination agreements in April, 1993. The
former President and the former Chairman counterclaimed for payments
allegedly due them under the termination agreements and the former
Chairman counterclaimed for repayment of an alleged loan made by him
to a third party for the benefit of the Company.
In May, 1995, the Company settled this litigation for $725,000 plus
interest at 9%; $200,000 paid in May, 1995 and the remaining amount
in monthly payments through September, 1998. At March 29, 1997, the
accrued balance outstanding is $224,000. As part of this settlement,
the former President and Chairman may convert amounts owed to them by
Marquest to Marquest common stock at $1.00 per share up to a maximum
of $200,000. The convertible portion of the settlement may not
exceed the balance owed. At March 29, 1997, a maximum of 200,000
common shares are issuable under the settlement agreement.
34
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the total number of the Company's
common shares which may be issued upon exercise of existing stock
options and warrants, or conversion of debt at March 29, 1997.
Fully Diluted
Percentage
Shares Ownership
---------- -------------
Shares outstanding at March 29, 1997 14,271,773 59.70%
Stock options outstanding at March 29, 1997
pursuant to the Company's Incentive and Non-
Qualified Stock Option Plan 632,566 2.64%
Stock options issued to consultant, exercisable
at $0.75 per share until August 26, 2002 50,000 0.21%
Warrants issued in connection with a Fiscal 1993
sale and leaseback of certain real estate;
exercisable at $1.50 per share until December
21, 1997 75,326 0.32%
Warrants issued in connection with a Fiscal 1993
lease termination, exercisable at $4.00 per
share until September 30, 1997 10,000 0.04%
Warrants issued to the Swiss bondholders,
exercisable at $0.75 per share until March 31, 1999 1,087,317 4.55%
Warrants issued to Scherer Healthcare, Inc.:
In connection with providing short-term
financing in Fiscal 1994, exercisable at $0.75
per share until March 31, 1999 800,000 3.34%
In connection with sale leaseback of Arterial
Blood Gas product line, exercisable at $0.75
per share; 1,530,000 and 4,250,000 exercisable
until March 31, 1999 and March 31, 2003,
respectively 5,780,000 24.18%
---------- ------
Total Scherer Healthcare, Inc. 6,580,000 27.52%
---------- ------
Convertible note payable to R. P. Scherer, Jr.,
exercisable at $0.70 per share until April 1, 2001 1,000,000 4.18%
Settlement payable, convertible into common stock
at $1.00 per share 200,000 0.84%
---------- ------
Total common shares if all options and warrants
are exercised 23,906,982 100.00%
---------- ------
---------- ------
35
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LEASING ARRANGEMENTS:
The Company leases warehouse space as well as office and transportation
equipment under non-cancelable operating leases. The following is a schedule
as of March 29, 1997, of minimum future lease payments required under these
leases:
Facilities Equipment Total
---------- --------- -----
1998 $ 347 $ 66 $ 413
1999 187 67 254
2000 172 64 236
2001 172 23 195
2002 172 -- 172
Thereafter 129 -- 129
------ ---- ------
1,179 220 1,399
Minimum sublease rentals (300) -- (300)
------ ---- ------
$879 $220 $1,099
------ ---- ------
------ ---- ------
In December 1992, the Company sold its Nogales, Arizona warehouse to a third
party under a 10-year sale leaseback arrangement with a base monthly rental
of $10,850 plus operating costs. The rent can be adjusted in years three,
five, seven and nine based upon the increase, if any, in the Consumer Price
Index for All Urban Customers ("CPI"). In December 1995, the Company
subleased two-thirds of the warehouse space to an unaffiliated entity and in
September 1996 subleased the remaining space to the same entity. The monthly
sublease income is $15,000 plus operating costs and without any escalation
for changes in the CPI. The sublease expires on November 30, 1998; however,
the sublessee has the option to extend the term of the lease for two
additional terms of two years each.
Total rent expense, net of sublease revenue, under all operating leases for
Fiscal 1997, 1996, and 1995 was $272,000, $452,000 and $560,000, respectively.
7. FOOD AND DRUG ADMINISTRATION:
The Company is subject to regulation by the United States Food and Drug
Administration ("FDA"). The FDA provides regulations governing the
manufacture and sale of the Company's products and regularly inspects the
Company and other manufacturers to determine their compliance with these
regulations.
On August 8, 1991, the United States Attorney's Office for the District of
Colorado filed a complaint for injunction against the Company and certain of
its officers. The complaint alleged that the Company was manufacturing
products in violation of the FDA's Current Good Manufacturing Practice
Regulations ("GMP"). The complaint also alleged that certain of the devices
were misbranded and adulterated for violating other relevant sections of the
Federal Food, Drug and Cosmetic Act. On October 1, 1991, the Company and a
former officer entered into a five-year Consent Decree. The two other
individuals originally named in the complaint for injunction were dismissed
as defendants.
By letter dated October 8, 1991, the District Director of the FDA's Denver
district informed the Company that, pursuant to the consent decree of October
1, 1991, the Company's medical device manufacturing operations were not in
substantial compliance with the terms of the consent decree and ordered the
Company to cease all manufacturing and distribution.
36
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based upon agreements with the FDA in November and December 1991, the Company
was allowed to recondition inventories of components, sub-assemblies and
finished products which were produced prior to the October 8th shut down.
This was done in close cooperation with the FDA by the use of higher sampling
levels and tightened acceptable quality limits. After the FDA reviewed the
Company's records of this reprocess/rework, the FDA allowed the distribution
of these products. The Company was also allowed to manufacture products
following the new, documented procedures.
By letter dated January 9, 1992, the FDA's Denver district office informed
the Company that it was authorized to renew its operations, including
production and distribution of all products.
In May 1996, the FDA concluded an inspection with six deficiency observations
noted. Many of the deficiencies noted referred to the lack of training
regarding assembly, testing and sampling. The Company took corrective
action, including retraining employees, and implemented other changes in
order to respond to the FDA's concerns. These changes and corrective actions
were presented to the FDA in detail in the submissions made by the Company
and the Company continues to work with the FDA to address the issues raised.
The Company was again inspected by the FDA during September 1996, and
received a Form 483, Inspection Observations, containing three alleged
nonconformances with GMP. The Company responded to these observations,
including providing specific corrective action. Following the September
inspection, the Consent Decree expired October 1, 1996 and is of no further
force and effect.
8. RELATED PARTY TRANSACTIONS:
SCHERER HEALTHCARE, INC. During Fiscal 1994, the Company acquired
approximately $4,352,000 of 5% cumulative convertible preferred stock of
Scherer Healthcare to be used in an exchange offer for defaulted Swiss Bonds,
pursuant to the Omnibus Agreement dated April 12, 1993 between the Company
and Scherer Healthcare (See Note 11). This preferred stock was acquired in
exchange for an 8% note, maturing on March 31, 1999. In May, 1994, Scherer
Healthcare converted $2,500,000 of the principal balance of the 8% note into
3,333,333 shares of the Company's common stock at a rate of $0.75 per share.
In March, 1996, Scherer Healthcare converted the remaining balance of the 8%
note of $1,851,600, $486,571 in related accrued interest due to Scherer
Healthcare and $376,330 owed to Scherer Healthcare for management fees into
3,877,859 shares of the Company's common stock at a rate of $0.70 per share.
At March 29, 1997, Scherer Healthcare owns 50.5% of the Company's outstanding
common stock.
As consideration for granting the Company an option to repurchase its
Arterial Blood Gas ("ABG") product line sold to Scherer Healthcare in June,
1993, and for providing a cash advance in early Fiscal 1994 (see Note 11),
Scherer Healthcare acquired 5,780,000 and 800,000 warrants, respectively, to
purchase the Company's common stock at $0.75 per share.
As a result of the Omnibus Agreement, Scherer Healthcare also acquired a
right to name a majority of the members of the Company's Board of Directors.
In connection with the sale of the Company's ABG product line to Scherer
Healthcare, the Company pays a monthly royalty to Scherer Healthcare of 3.25%
of the Company's net sales of ABG products. During Fiscal 1997, 1996 and
1995, these royalties totaled $354,000, $346,000 and $287,000, respectively.
During Fiscal 1996 and 1995, the Company expensed $150,000 and $180,000,
respectively, of interest related to the Company's 8% note payable to Scherer
Healthcare, and expensed $77,000, $164,000 and $304,000 in Fiscal 1997, 1996
and 1995, respectively, related to marketing and financial consulting
provided by Scherer Healthcare.
37
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHERER CAPITAL, LLC/R. P. SCHERER, JR. In March, 1996, Scherer Capital
purchased 2,061,856 shares of the Company's common stock at $0.485 per common
share for $1,000,000. During the third quarter of Fiscal 1996, Scherer
Capital provided a net short-term loan of $700,000 to the Company which was
used for working capital purposes. In March 1996, the Company and Scherer
Capital refinanced this advance with long-term convertible debt. The debt,
which bears interest at 1-1/2% over prime, is secured by inventory and
equipment and is convertible into the Company's common stock at a rate of
$0.70 per share. The debt agreement contemplated the possibility of
additional borrowings of $800,000.
During Fiscal 1997, Scherer Capital transferred its credit facility to Robert
P. Scherer, Jr., the Company's Chairman of the Board of Directors and Chief
Executive Officer. Mr. Scherer has voting authority over the Company's
common stock purchased by Scherer Capital in March 1996 either through
beneficial ownership or as trustee of a voting trust for shares owned by Mr.
Scherer's adult children. These shares represent 14.4% of the Company's
outstanding common stock at March 29, 1997.
During Fiscal 1997 and 1996, the Company expensed $68,250 and $20,831,
respectively, of interest related to the loan provided by Mr. Scherer.
9. INCOME TAXES:
During Fiscal 1996, the Company recorded a current federal tax provision of
$697,000 relating to its settlement with the IRS from pre-quasi reorganization
tax years. No provisions were recorded for the fiscal years ended March 29,
1997 or April 1, 1995.
The differences between the provision/(benefit) for income taxes at the
Federal statutory rate and that shown in the Consolidated Statements of
Operations are as follows (in thousands of dollars):
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
March 29, March 30, April 1,
1997 1996 1995
--------- --------- --------
Federal statutory rate 34% 34% 34%
"Expected" federal tax provision (benefit) $ (161) $ 217 $ (1,156)
Utilization of net operating loss -- (237) --
IRS settlement -- 697 --
State income taxes, net of Federal benefit (15) (2) (112)
Other items 115 10 24
------- ------- --------
(61) 685 (1,244)
Increase in valuation allowance 61 12 1,244
------- ------- --------
Tax provision $ -- $ 697 $ --
------- ------- --------
------- ------- --------
38
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under SFAS 109, deferred taxes are determined based on estimated
future tax effects of differences between the amounts reflected in
the financial statements and the tax basis of assets and liabilities
given the provisions of the enacted tax laws. The net deferred tax
assets and liabilities as of March 29, 1997 and March 30, 1996 are
comprised of the following (in thousands of dollars):
March 29, March 30,
1997 Change 1996
--------- ------ ---------
Deferred tax assets/(liabilities):
Accelerated tax depreciation in excess
of book depreciation $ (190) $ (3) $ (187)
Nondeductible accruals 272 (328) 600
Unrealized foreign exchange losses 74 (38) 112
Capital loss carryforwards 896 (75) 971
Net operating loss carryforwards 5,283 443 4,840
------- ----- -------
6,335 (1) 6,336
Valuation allowance (6,335) 1 (6,336)
------- ----- -------
$ -- $ -- $ --
------- ----- -------
------- ----- -------
During recent fiscal years, the Company has experienced losses for
financial reporting and tax purposes. Because of the uncertainty of
realization of any future tax benefits, the Company has determined
that, on a more likely than not basis, it is appropriate to reflect
a valuation allowance for the entire net deferred tax asset. At March
29, 1997, the Company had tax net operating loss carryforwards of
approximately $14,200,000, and capital loss carryforwards of
approximately $2,400,000. Tax net operating losses expire at varying
dates through 2011, and capital loss carryforwards expire at varying
dates through 1998. Due to the transactions discussed in Notes 11,
12 and 14, the future benefits associated with the utilization of net
operating loss carryforwards may be substantially limited. Capital
loss carryforwards can only be utilized to the extent the Company
generates capital gains in the future.
During Fiscal 1994, the Company received a refund of federal income
taxes of approximately $745,000 due to the carryback to prior years
of losses incurred during the temporary suspension of operations by
the FDA. The Internal Revenue Service ("IRS") completed an audit,
and in July 1994, determined that the losses could not be carried
back and issued an assessment to the Company for the taxes plus
interest. In June 1995, the Company negotiated a repayment plan with
the IRS whereby the Company paid $400,000 in June 1995, and the
remaining balance to be paid in equal monthly installments over a
two-year period.
In Fiscal 1996, the Company settled additional tax issues related to
audits by the IRS for fiscal years 1982-1988. The Company recorded
$697,000 of additional taxes and interest.
The Company negotiated a repayment plan for both tax cases settled
whereby the Company will pay the liability for taxes, interest and
penalties in monthly installments of $40,000. The unpaid balance
outstanding included in accrued liabilities for both tax cases is
$638,000 at March 29, 1997. Interest and penalties will continue to
accrue on the unpaid balance during the repayment period. The IRS
has placed a lien on the Company's facility in Englewood, Colorado to
secure payment of the taxes, interest and penalties.
39
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LITIGATION:
A products liability action was filed against the Company in
California in 1990 which was defended and settled during the trial by
the Company's insurance company. Under the insurance policy, the
Company may have been responsible for a $250,000 self-insured
retention plus the cost of defense. The Company claimed that the
insurance company mishandled the lawsuit and declined to pay. The
Company was sued by the insurance company in District Court, Arapahoe
County, Colorado in February, 1994 alleging damages of either $540,000
or $290,000. In May, 1996, the Company settled with the insurance
company for $170,000.
On March 28, 1997, the Company filed an action in the United States
District Court for the District of Colorado, alleging that Tri-Anim
Health Services, Inc. ("TriAnim"), the Company's largest domestic
distributor, breached a Dealer Agreement between the Company and Tri-
Anim. This action was dismissed without prejudice on May 30, 1997.
Tri-Anim filed a complaint in the Superior Court of the State of
California for the County of Los Angeles against the Company and VSI
on April 9, 1997, alleging that the Company had breached a
Confidentiality Agreement between Tri-Anim and the Company and making
a number of other claims against the Company and VSI. The Company
filed a motion to move the California action to federal district court
and filed a motion to compel arbitration of all issues in Colorado.
The Company is vigorously contesting this matter.
On March 24, 1997, Chesapeake Medical, Inc. and Chesapeake Breathing
Services, Inc. (collectively referred to as "Chesapeake"), two of the
Company's distributors, filed a lawsuit against the Company and VSI
in United States District Court for the District of New Jersey,
alleging that the Company terminated the Dealer Agreement between the
Company and Chesapeake in a commercially unreasonable manner and that
the Company disclosed confidential information. The Company is
vigorously contesting this matter.
The Company believes that its position in the above two matters is
meritorious, but is unable to predict the outcome of either lawsuit
or whether other lawsuits will be filed by other dealers as a result
of their termination.
There is litigation pending before the Tokyo District Court which was
filed by Terumo K.K. ("Terumo"), a competitor of the Company, against
Chiron K.K. ("Chiron"), the Company's distributor of arterial blood
gas samplers in Japan, alleging that the blood samplers infringe upon
a Japanese patent owned by Terumo. The litigation does not name the
Company; however, the Company has agreed to indemnify Chiron from
Terumo's claim and reimburse Chiron for its litigation cost.
Terumo is requesting an injunction against Chiron from importing and
selling blood samplers as well as 137,000,000 yen (approximately
$1,103,000 at March 29, 1997) for damages with regard to Chiron's sale
of blood samplers from January 1993 through 1995. Terumo may increase
the damages requested from 1996 to the present. Due to the
preliminary nature of this litigation, the Company cannot predict the
Court's opinion or the impact, if any, on the Company's market for
blood gas samplers in Japan.
11. REFINANCING TRANSACTIONS:
During Fiscal 1994, the Company consummated two related transactions
to provide the Company with necessary liquidity and to refinance the
Swiss Bonds.
SALE OF ARTERIAL BLOOD GAS PRODUCT LINE. The Company sold its ABG
product line, including $245,000 of net book value of property
connected with the product line, to Scherer Healthcare for $4.5
million in cash and agreed to a six year lease back of the product
line for a royalty of 3.25% of net product line sales. The Company
has the option to repurchase the product line for $4.5 million plus
$22,500 for each month elapsed between the sale and repurchase.
40
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The option to repurchase, originally expiring on May 31, 1996, was extended
by the boards of Scherer Healthcare and the Company until June 15, 1999. The
Company granted Scherer Healthcare 5,780,000 warrants to purchase common
stock of the Company at $.75 per share as consideration for the repurchase
option. These warrants were valued at $0.50 each. Of these, 1,530,000 and
4,250,000 will expire if not exercised by March 31, 1999 and March 31, 2003,
respectively. The warrants are exercisable for cash or, if exercised by
Scherer Healthcare or a Scherer Healthcare affiliate, for common stock of
Scherer Healthcare. Scherer Healthcare may elect to exercise these options
for no cash if a corresponding concession is granted to the Company in the
product line repurchase price. Scherer Healthcare may elect to receive the
product line repurchase price in the form of 5,780,000 shares of the
Company's common stock, based on a value of $.75 per share, plus the balance
of the purchase price in cash. If Scherer Healthcare makes this election,
the number of warrants issued in consideration for the Company's repurchase
option as described above will be reduced by a corresponding number.
Prior to the above transaction, Scherer Healthcare had advanced the Company
$1,750,000. In consideration for this advance, the Company also granted to
Scherer Healthcare warrants to purchase 800,000 shares of the Company's
common stock at $0.75 per share exercisable until March 31, 1999. These
warrants were also valued at $0.50 each. The advance was repaid with the
proceeds from the sale and leaseback transaction.
The Company recorded $3,290,000 related to the value of the warrants issued
to Scherer Healthcare and a deferred gain on the sale leaseback of $965,000,
representing the amount of the sale proceeds, less the value assigned to the
warrants, less the net book value of the property sold. The deferred gain
was eliminated in the quasi-reorganization discussed in Note 12.
SWISS BOND REFINANCING. During Fiscal 1986, the Company issued 25,000,000
Swiss Francs of bonds due March 11, 1994. On January 14, 1992, the Company
was notified that holders of the majority of its Swiss bonds had exercised
their right to put the bonds for redemption as of March 11, 1992. The
Company was not able to honor this put, and, accordingly, defaulted on these
obligations.
During Fiscal 1994, the Company acquired approximately $4,352,000 of 5%
cumulative convertible preferred stock of Scherer Healthcare (an amount equal
to approximately 35% of the outstanding Swiss bond principal and accrued
interest tendered in the transaction described below). This preferred stock
was acquired in exchange for an 8% note, maturing on March 31, 1999. The
note was convertible, in whole or in part, at Scherer Healthcare's option,
into Marquest common stock at a value of $.75 per share. The Scherer
Healthcare preferred stock is convertible into Scherer Healthcare common
stock. In May 1994, Scherer Healthcare converted $2,500,000 of the principal
balance of the 8% note into 3,333,333 shares of the Company's common stock.
In March 1996, Scherer Healthcare converted the remaining principal balance
of the 8% note of $1,851,600 into 2,645,143 shares of Marquest common stock
at a rate of $.70 per share.
In three exchange offers, the bondholders exchanged 16,320,000 Swiss Francs
in bonds, 96% of the total bonds outstanding. The bondholders were offered a
combination of Marquest debt, warrants to purchase common stock of the
Company, and the convertible preferred stock of Scherer Healthcare in
exchange for the outstanding Swiss debt principal and interest. In the
exchanges, the Swiss bondholders received (1) cumulative convertible
preferred stock of Scherer Healthcare for 35% of the principal and accrued
interest of the tendered bonds; (2) unsecured, 8% U.S. dollar denominated
notes of the Company maturing March 31, 1999 with an aggregate principal
amount of $2,875,000, and (3) warrants to purchase 165,000 and 1,432,416
shares of Marquest common stock at $.25 and $.75 per share, respectively,
exercisable until March 31, 1999. These warrants were also valued at $.50
each.
The Company recorded approximately $798,000 for the value assigned to the
warrants given to the Swiss bondholders, a gain of approximately $988,000 on
the extinguishment of the Swiss bonds and, because this transaction was
41
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
considered a troubled debt restructuring under SFAS No. 15, the Company also
accrued $3,226,000 in prospective interest on the notes. The prospective
interest was eliminated in the quasi-reorganization described in Note 12.
As a result of the sale of the Arterial Blood Gas product line and the Swiss
bond refinancing, Scherer Healthcare has the right to acquire approximately
65% of the outstanding common stock of the Company through the exercise of
all warrants and conversion of the note. Also as a result of the agreement
with Scherer Healthcare, Scherer Healthcare acquired the right to name a
majority of the members of the Company's Board of Directors.
12. QUASI-REORGANIZATION:
During the first quarter of Fiscal 1994, the Company completed significant
changes to its operations: (l) the reintroduction of substantially all of its
product lines into the market after ceasing operations after an FDA shutdown
in Fiscal 1992, (2) the consolidation of its manufacturing facilities in
Mexico and Parker, Colorado into its primary facility in Englewood, Colorado;
(3) the changes in management of the Company, including a new President and
CEO, Vice President of Sales and Senior Vice President of Regulatory Affairs;
and (4) the successful completion of the first exchange offer to the Swiss
bondholders in which 91% of the bonds were exchanged. Considering these
changes, the Company determined that it was appropriate to effect a
quasi-reorganization. On June 11, 1993, the Company's Board of Directors
approved quasi-reorganization accounting procedures which were effective July
3, 1993, the end of the Company's first quarter of Fiscal 1994.
Quasi-reorganization rules require that the balance sheet amounts be restated
to fair values and that the accumulated deficit be eliminated against the
paid-in-capital accounts. Therefore, the Company (1) wrote off the remaining
amount of goodwill, totaling $4,283,000 at July 3, 1993; (2) eliminated the
prospective interest on the Swiss bonds of $3,226,000 discussed in Note 11;
(3) eliminated the deferred gain on the sale leaseback transaction of
$965,000 discussed in Note 11; (4) valued the treasury stock at its market
value of $70,000; (5) eliminated the retained deficit of $20,434,000; and
(6) reduced common stock by $17,125,000 and warrants by $3,456,000.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
All amounts are in thousands of dollars, except per share amounts
First Second Third Fourth
------ ------ ------ ------
FISCAL 1997 QUARTERS
- --------------------
Net Revenues $5,152 $5,654 $5,035 $6,204
Gross Profit 1,392 1,728 1,605 1,981
Net Income (Loss) (363) 28 (314) 176
Income (Loss) per Share (0.03) 0.00 (0.02) 0.00
FISCAL 1996 QUARTERS
- --------------------
Net Revenues $5,284 $5,193 $5,739 $6,227
Gross Profit 1,605 1,683 1,779 2,071
Net Income (Loss) 22 (34) (625) 577
Income (Loss) Per Share 0.00 0.00 (0.08) 0.05
42
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. MERGER:
On March 14, 1997, the Company signed an Agreement and Plan of Merger
("Merger Agreement") between VSI; VSI Acquisition Corporation ("Newco"), a
wholly-owned subsidiary of VSI; and the Company, providing for the merger of
Newco with the Company, with the Company surviving the merger as a
wholly-owned subsidiary of VSI. Upon the effective date of the merger, all
of the Company's common stock will be converted into the right to receive
$0.797 per share in cash.
DEALER AGREEMENT. Simultaneous with the execution of the Merger Agreement,
the Company and VSI entered into a Dealer Agreement whereby VSI is authorized
to sell the Company's products for a period of two years. The Company provided
28 of its 29 existing domestic specialty dealers with notices of termination
of their dealer agreements which, as a general matter, allow for termination
on 30 to 90 days notice. The Dealer Agreement may be terminated by the
Company if VSI does not meet certain specified sales quotas after June 30,
1997. Since providing its domestic specialty dealers with notices of
termination, the Company has negotiated new arrangements with five of those
dealers which provide that those dealers may continue to distribute Company
products at reduced margins.
Two of the Company's terminated dealers have commenced lawsuits against the
Company and VSI alleging, among other things, that the termination of its
dealer agreement was unlawful and that VSI is using confidential information
of dealers in the sale of the Company's products. The Company believes that
its position in both of these matters is meritorious, but is unable to
predict the outcome of either lawsuit or whether other lawsuits will be filed
by other dealers as a result of their termination.
PURCHASE OF ABG ASSETS AND COVENANTS NOT TO COMPETE. As part of the
investment made in the Company by Scherer Healthcare in June 1993, Scherer
Healthcare acquired title to the Company's Arterial Blood Gas ("ABG") product
line which the Company leases from Scherer Healthcare. The Company has an
option to repurchase the ABG product line from Scherer Healthcare at a
purchase price equal to $4,500,000 plus $22,500 per month during the period
from June 13, 1993 through the date of repurchase. Pursuant to an Inducement
Agreement between VSI and Scherer Healthcare (the "Scherer Healthcare
Inducement Agreement"), VSI has agreed to purchase the ABG product line from
Scherer Healthcare for a purchase price equal to the purchase price under the
Company's repurchase option. If the merger occurs on July 31, 1997, the
purchase price of the ABG product line would be $5,625,000.
Pursuant to the Scherer Healthcare Inducement Agreement, Scherer Healthcare
is obligated, at the time of the merger, to enter into a covenant not to
compete pursuant to which it agrees it will not engage in the business of
manufacturing or selling ABG products for a period of three years following
the effective date of the merger. In consideration of this covenant not to
compete, VSI has agreed to pay Scherer Healthcare an amount equal to the
difference between $5,860,000 and the purchase price of the ABG product line.
If the merger occurs on July 31, 1997, Scherer Healthcare will be paid
$235,000 for the covenant not to compete.
Robert P. Scherer, Jr., the Company's Chairman of the Board of Directors and
Chief Executive Officer, is the beneficial owner of or has voting authority
over 2,061,856 shares of the Company's common stock. Mr. Scherer also holds
a promissory note of the Company in the principal amount of $700,000 which is
convertible into the Company's common stock at a rate of $0.70 per share.
Mr. Scherer has agreed to convert the note prior to the merger into 1,000,000
shares of the Company's common stock. In addition to his ownership of the
Company's common stock, Mr. Scherer has voting authority over 61.1% of the
outstanding common stock of Scherer Healthcare.
Pursuant to an Inducement Agreement entered into between VSI and Mr. Scherer
(the "RPS Inducement Agreement"), Mr. Scherer has agreed to vote his shares
of Scherer Healthcare common stock in favor of the merger. Mr. Scherer has
also agreed to vote all of his shares of the Company's common stock in favor
of the merger. Pursuant to the RPS Inducement Agreement, Mr. Scherer is
required to enter into a covenant not to compete pursuant to which he agrees
43
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that for a period of three years following the merger he will not engage in
the business of manufacturing or selling ABG products. In consideration of
this covenant, VSI has agreed to pay Mr. Scherer $140,000.
CONDITIONS TO CLOSING. The Merger Agreement contains a number of conditions
to closing which must be satisfied or waived prior to consummation of the
merger. These conditions include, among other conditions, the requirement
that the merger be approved by the shareholders of the Company and Scherer
Healthcare, the requirement that no material litigation is pending against
the Company or its business, and the requirement that no adverse regulatory
action has been taken against the Company. The Company believes that the
conditions to closing can be satisfied and that the closing will take place
in late July 1997.
COVENANTS OF THE MERGER AGREEMENT. Pursuant to the Merger Agreement, the
Company has agreed that, during the period from March 14, 1997 to the
effective time of the merger, except as permitted in writing by VSI, the
Company will not, among other things, (a) amend its Articles of Incorporation
or Bylaws, (b) issue, sell, deliver, grant or declare any stock dividend or
any other distribution with respect to the Company's common stock except that
the Company may issue common stock pursuant to certain options, warrants or a
convertible note exercisable or convertible in accordance with the terms of
the applicable agreements and outstanding as of March 14, 1997, (c) mortgage
or pledge any assets except in the ordinary course of business, (d) borrow or
agree to borrow any funds except in the ordinary course of business and
pursuant to the Company's existing credit facilities up to certain amounts,
(e) incur any obligation or liability, cancel any material debts of third
parties, lease, sell, transfer or grant any preferential rights to lease or
acquire any of its material assets or substantively amend or terminate any
material contract or agreement except in the ordinary course of business, (f)
adopt, materially amend or terminate any employee benefit plan or materially
increase compensation or other benefits payable to the Company's employees,
(g) acquire any other business entity, (h) solicit, encourage or authorize
any competing inquiry, proposal, offer or possible offer from a third party
relating to a change in control or ownership of the Company, (j) enter into
any material licensing or marketing arrangement or other material contract
with any party other than VSI, and (k) settle any pending litigation in a
manner that is materially adverse to the Company or commence any material
litigation.
TERMINATION OF THE MERGER. The Merger Agreement may be terminated and the
merger may be abandoned before the effective time of the merger (a) by mutual
written consent of VSI, Newco and the Company or (b) by VSI or the Company if
(i) the Company's shareholders fail to approve the merger at the special
meeting of shareholders or (ii) the shareholders of Scherer Healthcare fail
to approve the sale of the stock of the Company. In addition, VSI may
terminate the Merger Agreement if (a) there has been a material
misrepresentation or breach by the Company of any of its representations or
warranties in the Merger Agreement, (b) the Company's Special Treatment Sales
(defined below) during the period from December 29, 1996 through the date
seven days prior to the Closing (the "Pre-Closing Date") are less than eighty
percent of the Company's Special Treatment Sales during the period from the
first day of the Company's fiscal quarter commencing in December 1995 through
the date one year prior to the Pre-Closing Date, (c) there has been any
misrepresentation by Scherer Healthcare or Mr. Scherer in any of the
representations or warranties set forth in the Inducement Agreements, or (d)
there has been any material failure by Scherer Healthcare or Mr. Scherer to
comply with their respective obligations under the Inducement Agreements.
Special Treatment Sales are all of the Company's sales other than sales made
through the Company's U.S. (including Puerto Rico) dealers and sales made
through distributors of the Company's medical-surgical products.
Either the Company or VSI, at their discretion, may terminate the Merger
Agreement if the effective date of the merger has not occurred by August 29,
1997, except that a party whose breach of the Merger Agreement has caused
such a delay in the consummation of the merger will not be entitled to
terminate the Merger Agreement. If the Company terminates the Merger
Agreement as a result of a breach of any material covenants by VSI, the
Company will be entitled to $800,000 as damages.
44
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the Merger Agreement is terminated by VSI or the Company because (a) an
offer is made, including a Purchase Event (defined below), (b) a claim is
made that such offer could result in greater value to the Company's
shareholders than the value to be received from VSI, and (c) after such offer
is known to the Company, the Company's shareholders do not approve the
merger, the shareholders of Scherer Healthcare do not approve the sale of the
Company's common stock, or the Company breaches any of its obligations under
the merger agreement, and within 24 months after the termination of the
Merger Agreement, a Purchase Event occurs, the Company will pay to VSI a cash
fee of $1,500,000. A Purchase Event means any of the following events: (a)
without VSI's written consent, the Company announces an intention to enter
into an agreement with a party other than VSI to (i) merge, (ii) dispose of
25% or more of the Company's assets or (iii) issue, sell or dispose of
securities representing 25% or more of the voting power of the Company, or
(b) any person or group other than Scherer Healthcare or VSI or their
affiliates acquires 25% or more of the voting power of the Company.
45
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands of dollars)
<TABLE>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER RECOVERIES AT END OF
OF PERIOD EXPENSES ACCOUNTS (WRITE-OFFS) PERIOD
---------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS - TRADE RECEIVABLES
Year Ended
March 29, 1997 $ 94 $32 $ (3) $ (5) $118
Year Ended
March 30, 1996 $132 $24 $ (8) $(54) $ 94
Year Ended
April 1, 1995 $178 $21 $(48) $(19) $132
</TABLE>
46
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with accountants on any accounting or
financial disclosure matters during the applicable period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS: Information regarding the executive officers of the
Company is set forth under the caption "Executive Officers" in Part I of this
report on Form 10-K.
DIRECTORS: Information regarding the directors of the Company is set forth
below.
CHARLES R. ATKINS III has been a Vice President of the Isolyser Company since
1993. From 1987 until its sale in 1993 to the Isolyser Company, he was
President and a partner in Charles Atkins and Company, Ltd., a business which
produced and distributed surgical procedural trays, drapes, gowns, and other
disposable surgical products. He has been a director of the Company since
August 1994. He is 55.
STEPHEN LUKAS, SR. has been President, Chief Executive Officer, and a
director of Goldcaps, Inc., a subsidiary of IVAX Corporation since 1992. Mr.
Lukas also serves as Vice President of IVAX Corporation, Business Development
and he is Chairman of the Board and a director of Galena A.S. in the Czech
Republic. He was President and a director of Capsule Technology from its
formation in 1981 until his retirement in 1991. Mr. Lukas has been a
director of the Company since February 1995. Mr. Lukas also is a director of
Scherer Healthcare, Inc. He is 71.
JACK W. PAYNE has been Director of Medical Corporate Development for
Pierson/Hawkins, Inc., a strategic planning and creative services company,
since 1996. Mr. Payne was Chairman and Chief Executive Officer of Ferro
Magnetic Therapeutics Corporation, a biotechnology company, from 1993 to
1996, and Executive Vice President and Chief Operating Officer of Sequin
Medical Corporation, a medical device company, from 1990 to the present. Mr.
Payne became a director of the Company in December 1995. He is 67.
KENNETH H. ROBERTSON has been Chairman of Conference-Call USA, Inc. and Vice
President of Business Development of Dial Services LTD. (communications
companies) since 1988. He has also been the Managing Partner of Print
Marketing Concepts, a communications company, since 1984, and the principal
owner and developer of a self-storage warehouse and business incubator
operation since 1977. Mr. Robertson has been a director of the Company since
February 1995. Mr. Robertson also is a director of Scherer Healthcare, Inc.
and served as its President from July 1981 to June 1983. He is 62.
ROBERT P. SCHERER, JR. has been Chairman of the Board and Chief Executive
Officer of the Company since February 1995. He has been the Chairman of the
Board and Chief Executive Officer of Scherer Healthcare, Inc. since February
1995 and director since 1977. Mr. Scherer is also the controlling
stockholder and a director and executive officer of RPS Investment, Inc. and
certain affiliated companies. RPS Investments, Inc. and its affiliates
beneficially own a majority of the common stock of Scherer Healthcare, Inc.
He was Chairman of the Board, Chief Executive Officer and a director of
Scherer-Storz, Inc. from its formation in January 1980 until its sale in June
1986 to American Cyanamid Company. Mr. Scherer was a director of IRT
Corporation which filed a petition under Chapter 11 of the federal bankruptcy
laws in 1993. He is 64.
WILLIAM J. THOMPSON has been the Vice Chairman and Chief Operating Officer of
the Company since April 1994 and President since February 1995. He has also
been President and Chief Operating Officer and a director of Scherer
Healthcare, Inc. since 1984. He has been a Director of the Company since
August 1993. He is 63.
MACK D. TINDAL has been a private investor since his retirement in 1981.
Previously, Mr. Tindal was President of First Texas Pharmeceuticals from 1964
to 1978 until its sale to Scherer Healthcare, Inc. when it was renamed
Scherer
47
<PAGE>
Laboratories. Mr. Tindal served as President of Scherer Laboratories from
1978 to 1979 and President of Aloe Creme Laboratories from 1979 to 1981. Mr.
Tindal has been a director of the Company since December 1995. He is 76.
JACK L. YORK has been President of Shelbourne, Wallace, York, Inc., a
construction company, since 1993. He was President of Angel of Mercy, Inc.,
an ambulance service business from 1974 until 1996. He was President of York
Medical Supply, a wholly-owned subsidiary of the Company until it was sold in
February 1992. Mr. York became a Director of the Company in 1988, resigned
in April 1993 and was reelected in June 1993. He is 52.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934: Section
16(a) of the Securities Exchange Act of 1934, as amended, and regulations of
the Securities and Exchange Commission ("SEC") thereunder, require the
Company's executive officers, directors and persons who own more than ten
percent of the Company's common stock, as well as affiliates of such persons,
to file reports of ownership and changes in ownership of the Company's stock
with the SEC and the National Association of Securities Dealers, Inc.
Executive officers, directors and persons owning more than ten percent of the
Company's stock are required by SEC regulations to furnish the Company with
copies of all Section 16(a) reports that they file.
Based solely upon a review of the copies of such reports, the Company
believes that during the fiscal year ended March 29, 1997, its executive
officers, directors and persons owning more than ten percent of the Company's
stock complied with all applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE: The following table summarizes the compensation
paid or accrued during the three fiscal years ended March 29, 1997, to the
Company's Chief Executive Officer and each of the other executive officers of
the Company whose compensation for fiscal 1997 exceeded $100,000 (the "named
executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
Long-term
Compensation
Awards
Annual Compensation Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary ($) Bonus ($) Compensation($) Options (#) Compensation ($)
<S> <C> <C> <C> <C> <C> <C>
Robert P. Scherer, Jr. (1) 1997 -- -- -- -- --
Chairman of the Board and 1996 -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- --
William J. Thompson (2) 1997 $80,002 -- $5,307 50,000 --
President and Chief 1996 -- -- -- 75,000 --
Operating Officer 1995 -- -- -- -- --
</TABLE>
- -------------------
(1) Mr. Scherer was elected as Chairman of the Board and Chief Executive
Officer in February 1995 and receives no salary or bonus compensation from
the Company. Mr. Scherer also serves as Chairman of the Board and Chief
Executive Officer of Scherer Healthcare. Mr. Scherer devotes a substantial
portion of his professional time to matters other than the Company.
(2) During Fiscal 1996 and 1995, Mr. Thompson received no salary or bonus
compensation from the Company, but was compensated as President, Chief
Operating Officer and a director of Scherer Healthcare. The Company accrued
approximately $77,000, $102,000 and $96,000 during fiscal 1997, 1996 and
1995, respectively, payable to Scherer
48
<PAGE>
Healthcare, for the services of Mr. Thompson. Beginning November, 1996, Mr.
Thompson was compensated by the Company for his services as President and
Chief Operating Officer at an annual salary of $120,000. Mr. Thompson also
received an auto allowance beginning May 1996 at an annual rate of $6,000.
Mr. Thompson devotes substantially all of his professional time to the
Company.
STOCK OPTION PLAN: The Company maintains the Marquest Medical Products, Inc.
Incentive and Non-Qualified Stock Option Plan (the "Plan") to attract and
retain key executive personnel and advisors, and to encourage their continued
employment with and service to the Company.
As a result of the proposed merger discussed in Part I of this Form 10-K and
in accordance with the Plan, the Company will provide notice to the Plan's
option holders that they may exercise their options, whether vested or not,
prior to the effective time of the merger. All such options which are not
exercised prior to the merger will terminate.
The following table sets forth information regarding (i) the number of shares
of the Company's common stock underlying stock options granted during fiscal
1997 to each named executive officer, (ii) the percent the grants represent
to total options granted to all employees during the fiscal year, (iii) the
per share exercise price of the options, (iv) the expiration dates of the
options, and (v) the potential realizable value of each grant of options
assuming the market price of the Company's common stock appreciates from the
date of grant to the end of the term at a 5% and a 10% annualized rate.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
% OF TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED TO EXERCISE OR ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES BASE PRICE PRICE APPRECIATION FOR
OPTIONS IN FISCAL PER EXPIRATION OPTION TERM (1)
NAME GRANTED (#) YEAR SHARE ($/SH) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
William J. Thompson 50,000(2) 52.6% 0.875 8/22/03 $17,811 $41,506
</TABLE>
- -------------------
(1) The potential realizable value was calculated based on the grant-date
valuation method assuming (i) the options were 100% vested on the date of
grant and (ii) that the market price of the Company's common stock
appreciates from the date of grant to the expiration of the options at a 5%
and a 10% annualized rate.
(2) Mr. Thompson vests one-third of the options on August 22, 1996, 1997 and
1998. However, if the proposed merger between the Company and VSI is
consummated, all of the options will vest at the effective time of the merger.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR END VALUES:
During Fiscal 1997, no stock options were exercised. The following table
sets forth information as of March 29, 1997 with respect to (i) the number
of shares covered by options (both exercisable and unexercisable) held by
each named executive officer and (ii) the respective value for "in-the-money"
options which represents the positive spread between the exercise price of
existing options and the fair market value of the Company's common stock at
March 29, 1997.
49
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
# SHARES FISCAL YEAR END (#) AT FISCAL YEAR END ($)(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Thompson (2) -- -- 66,666 83,334 --- ---
</TABLE>
- -------------------
(1) The dollar value is determined by subtracting the option price from the
per share fair market value of the Company's common stock as of March 29,
1997 ($0.59) as reported on the Nasdaq SmallCap Market.
(2) In accordance with the Merger Agreement discussed in Part I of this Form
10-K and in accordance with the Plan, Mr. Thompson will be notified that his
options may be exercised, whether vested or not, prior to the effective time
of the proposed merger. If Mr. Thompson exercised his options and if the
proposed merger is consummated, the value of his in-the-money option will be
$8,213, computed by subtracting the option exercise price from the per share
purchase consideration of $0.797.
DIRECTOR COMPENSATION: Executive officers of the Company who serve on the
Board of Directors of the Company do not receive compensation for Board or
committee participation, but are reimbursed for expenses incurred. Other
directors receive a $5,000 annual retainer, $500 for each Board meeting
attended, $250 for each telephonic meeting and $250 for each committee
meeting attended. Expenses of travel to meetings are reimbursed to the
Company.
On August 22, 1996, the Company's Board authorized the grant of options for
150,000 shares of the Company's common stock to its non executive officer
directors at an exercise price in excess of the price offered by VSI in the
Merger Agreement discussed in Part I of this report on Form 10-K. These
options were never evidenced by option agreements. On March 14, 1997, each
of the directors agreed that these options would be canceled. The Company
has agreed to pay each outside director $10,000 as partial compensation for
their services to the Company and Director Mack D. Tindal will receive an
additional $10,000 in recognition of his service to the Company in
negotiating the Merger Agreement between the Company and VSI.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS: Pursuant to an
employment agreement dated November 1, 1996 between the Company and William
J. Thompson, the Company's President, Chief Operating Officer and Director,
Mr. Thompson is entitled to a lump sum severance benefit equal to his base
salary under the employment agreement from the date of his termination
through February 28, 1999, if his employment is involuntarily terminated for
reasons other than cause following a change of control of the Company. The
merger between the Company and VSI will constitute a change of control within
the meaning of the employment agreement. Mr. Thompson has agreed that his
employment with the Company will terminate on the effective date of the
merger and Scherer Healthcare has agreed to pay the full amount of the
severance benefits to which Mr. Thompson will become entitled. These
severance benefits are estimated to be $190,000 if the effective date of the
merger occurs in July 1997.
Robert P. Scherer, Jr., the Company's Chairman of the Board of Directors and
Chief Executive Officer, is the beneficial owner of or has voting authority
over 2,061,856 shares of the Company's common stock. Mr. Scherer also holds
a promissory note of the Company in the principal amount of $700,000 which is
convertible into the Company's common stock at a rate of $0.70 per share.
Mr. Scherer has agreed to convert the note prior to the merger into 1,000,000
shares of the Company's common stock.
50
<PAGE>
Pursuant to the RPS Inducement Agreement between VSI and Mr. Scherer, Mr.
Scherer has agreed to vote his shares of Scherer Healthcare common stock in
favor of approval of the merger. Mr. Scherer has also agreed to vote all of
his shares of the Company's common stock in favor of the merger. Pursuant
the RPS Inducement Agreement, Mr. Scherer is required to enter into a
covenant not to compete pursuant to which he agrees that for a period of
three years following the merger he will not engage in the business of
manufacturing or selling ABG products. In consideration of this covenant, VSI
has agreed to pay Mr. Scherer $140,000.
COMPENSATION COMMITTEE INTERLOCKS AND COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION: Robert P. Scherer, Jr. is Chairman, Chief Executive
Officer and a Director of both the Company and Scherer Healthcare. Mr.
Scherer receives no direct compensation from either the Company or Scherer
Healthcare. William J. Thompson is the President, Chief Operating Officer
and a Director of both the Company and Scherer Healthcare. Mr. Thompson is
compensated by Scherer Healthcare for his services as President and Chief
Operating Officer of Scherer Healthcare. Mr. Thompson is compensated by the
Company for his services as President and Chief Operating Officer of the
Company beginning in November 1996. Stephen Lukas, Sr., a Director of both
the Company and Scherer Healthcare, services on the Compensation Committee of
both companies.
During the fiscal year ended March 29, 1997, the Compensation Committee met
once. The Compensation Committee is composed of Stephen Lukas, Sr. and Jack
L. York. The Compensation Committee's responsibilities with respect to
executive compensation for all executive officers has been limited to
long-term incentive compensation under the stock option plan. The
Compensation Committee has furnished the following report for Fiscal 1997.
COMPENSATION PHILOSOPHY. The objectives of the Company's executive
compensation program are to provide a level of compensation that will
attract, retain, and motivate executives capable of achieving long-term
success for the Company's stockholders in terms of increasing Company and
shareholder value. Stock options are granted to executive officers and to
other employees on a periodic basis, with vesting typically over several
years. Awards are made at a level which is considered to provide a
meaningful incentive to and to retain the executive officers.
Jack L. York
Stephen Lukas, Sr.
51
<PAGE>
SHAREHOLDER RETURN PERFORMANCE GRAPH: The Company's common stock is listed
for trading on The Nasdaq SmallCap Market under the symbol "MMPI." The price
information reflected for the Company's Common Stock in the following
performance graph and accompanying table is based upon the closing sales
prices of the Common Stock on the dates indicated assuming a $100.00
investment on March 28, 1992. The performance graph compares the Company's
cumulative total stockholder return with the Nasdaq Stock Market Total Return
Index and the Nasdaq Health Services Stock Index. The graph assumes that the
value of the investment in each index was $100 on March 28, 1992. The
stockholder return reflected below for the five year historical period may
not be indicative of future performance.
1992 1993 1994 1995 1996 1997
Marquest Medical............. 100 18 23 4 17 7
Nasdaq Stock Market (US)..... 100 115 124 138 187 208
Nasdaq Health Services....... 100 98 129 149 180 162
COMPARISON OF CUMULATIVE FIVE-YEAR SHAREHOLDER RETURN
[GRAPH]
52
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
SHARES BENEFICIALLY PERCENT OF
BENEFICIAL OWNER ADDRESS OWNED (1) CLASS
<S> <C> <C> <C>
Scherer Healthcare, Inc. 2859 Paces Ferry Road 13,791,192 (2) 66.03%
PRINCIPAL STOCKHOLDER Suite 300
Atlanta, Georgia 30339
Robert P. Scherer, Jr. 2859 Paces Ferry Road 16,853,048 (3) 77.00%
CHAIRMAN OF THE BOARD, Suite 300
CHIEF EXECUTIVE OFFICER Atlanta, Georgia 30339
AND PRINCIPAL STOCKHOLDER
William J. Thompson 11039 East Lansing Circle 225,000 (4) 1.55%
PRESIDENT, CHIEF OPERATING Englewood, CO 80112
OFFICER AND DIRECTOR
Charles R. Atkins III 0 (7)
DIRECTOR
Stephen Lukas, Sr. 0 (7)
DIRECTOR
Jack W. Payne 0 (7)
DIRECTOR
Kenneth H. Robertson 1,000 (7)
DIRECTOR
Mack D. Tindal 2,000 (7)
DIRECTOR
Jack L. York 378,728 (5) 2.64%
DIRECTOR
All current directors and 17,459,776 (6) 78.78%
officers as a group
(8 persons)
</TABLE>
- -------------------
(1) The stock ownership information shown has been furnished to the Company
by the named person and members of the group or obtained from information
filed with the Securities and Exchange Commission. Beneficial ownership as
reported in the table has been determined in accordance with applicable
federal regulations and includes shares of common stock as to which a person
possesses sole or shared voting and/or investment power and shares which may
be acquired within 60 days upon the exercise of outstanding stock options,
warrants and convertible securities. Certain outstanding shares may be
deemed to be beneficially owned by more than one person.
(2) The shares shown include 6,580,000 shares issuable upon exercise of
outstanding common stock purchase warrants.
53
<PAGE>
(3) The shares shown include the shares beneficially owned by Scherer
Healthcare, 1,000,000 shares issuable pursuant to the terms of an outstanding
convertible note, and 515,464 shares held in a voting trust, with respect to
which shares Mr. Scherer has sole voting power but which shares are owned by
Mr. Scherer's adult children. Mr. Scherer is deemed to beneficially own such
shares by virtue of his positions as Chairman of the Board, Chief Executive
Officer and controlling stockholder of Scherer Healthcare.
(4) The shares shown also include 150,000 shares of common stock issuable
upon exercise of outstanding stock options and 75,000 shares issuable upon
exercise of outstanding Company common stock warrants owned by Scherer
Healthcare which Mr. Thompson has an option to purchase.
(5) The shares shown include 25,000 shares of common stock issuable upon
exercise of outstanding stock options and 25,000 shares of restricted common
stock issuable August 1, 1996 pursuant to Restricted Stock Units.
(6) See Notes (2), (3), (4) and (5) above.
(7) Represents less than one percent.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH SCHERER HEALTHCARE, INC.
In April 1993, the Company sold its ABG product line to Scherer Healthcare
for $4.5 million in cash and agreed to a six year leaseback of the product
line for a royalty of 3.25% of net product line sales. The Company has the
option to repurchase the product line for $4.5 million plus $22,500 for each
month elapsed between the sale and repurchase. The option to repurchase,
originally expiring on May 31, 1996, was extended by Scherer Healthcare and
the Company until June 15, 1999. During Fiscal 1997, the royalties on the
net ABG sales totaled $354,000.
During fiscal year 1994, the Company acquired approximately $4,352,000 of 5%
cumulative convertible preferred stock of Scherer Healthcare in exchange for
an 8% note, maturing on March 31, 1999. The note was convertible, in whole
or in part, into Marquest common stock at a rate of $0.75 per share. In May
1994, pursuant to the note agreement, Scherer Healthcare converted $2,500,000
of the principal balance of the 8% note into 3,333,333 shares of the
Company's common stock. In March 1996, Scherer Healthcare converted the
remaining balance of the 8% notes of $1,851,600, $486,571 in related accrued
interest due to Scherer Healthcare and $376,330 owed to Scherer Healthcare
for management fees into 3,877,859 shares of the Company's common stock at a
rate of $0.70 per share. At March 29, 1997, Scherer Healthcare owns 50.5% of
the Company's outstanding common stock.
During Fiscal 1997, the Company reimbursed Scherer Healthcare $77,000 for the
services of Mr. Thompson as President and Chief Operating Officer of the
Company.
TRANSACTIONS WITH SCHERER CAPITAL, LLC/R. P. SCHERER, JR.
In March 1996, Scherer Capital purchased 2,061,856 shares of the Company's
common stock at $0.485 per common share for $1,000,000. During the third
quarter of Fiscal 1996, Scherer Capital provided a net short-term loan to the
Company which was used for working capital purposes. In March 1996, the
Company and Scherer Capital refinanced this advance with long-term
convertible debt. The debt, which bears interest at 1-1/2% over prime, is
secured by inventory and equipment and is convertible into the Company's
common stock at a rate of $0.70 per share.
During Fiscal 1997, Scherer Capital transferred its credit facility to Robert
P. Scherer, Jr., the Company's Chairman of the Board of Directors and Chief
Executive Officer. Mr. Scherer has voting authority over the Company's
common stock purchased by Scherer Capital in March 1996 through beneficial
ownership or as trustee of a voting trust for shares owned by Mr. Scherer's
adult children. These shares represent 14.4% of the Company's outstanding
common stock at March 29, 1997.
During Fiscal 1997, the Company expensed $68,250 of interest related to the
loan provided by Mr. Scherer.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following represents a listing of all financial statement, financial
statement schedules and exhibits filed as part of this report.
(1) Financial Statements: See Table of Contents to the Consolidated
Financial Statements included herein in Item 8.
(2) Financial Statement Schedules: See Table of Contents to the
Consolidated Financial Statements included herein in Item 8.
Schedules I, III, IV and V, for which provision is made in the
applicable regulations of the Securities and Exchange Commission
have been omitted because they are not applicable or the information
is elsewhere disclosed in the notes to the financial statements.
(3) Exhibits: Exhibits identified in parentheses below are on file with
the Securities and Exchange Commission and are incorporated herein by
such references.
2.1 Agreement and Plan of Merger dated March 14, 1997, by and among
Vital Signs, Inc., VSI Acquisition Corporation, and Marquest
Medical Products, Inc. (Exhibit 2.1 to Form 8-K dated March 21,
1997)
2.2 Scherer Healthcare Inducement Agreement dated March 14, 1997,
by and among Scherer Healthcare, Inc., Vital Signs, Inc.,
and Marquest Medical Products, Inc. (Exhibit 2.2 to Form 8-K
dated March 21, 1997)
3.1 Articles of Incorporation of Registrant, as amended through
August 25, 1994 (Exhibit 3(i) of Registration Statement on Form
S-2, Registration No. 33-85564)
3.2 By-laws of Registrant, as amended (Exhibit 2 to Form 8-K dated
April 9, 1993)
4.1 The outside and inside front cover pages and the information
set forth under the heading "Terms of the Bonds" excerpted from
the Prospectus of the Registrant dated February 10, 1985 with
respect to the 25,000,000 Swiss Franc Bonds offered pursuant
thereto (Exhibit 4(b) to Form 10-K dated April 1, 1989)
4.2 Rights Agreement dated as of August 8, 1991 between Marquest
Medical Products, Inc. and Bank of America National Trust &
Savings Association (Exhibit 4.5 to Registration Statement on
Form S-2, Registration Statement No. 33-85564)
4.3 Subscription Agreement for Purchase of Common Stock between
Marquest Medical Products, Inc. and Scherer Capital, LLC dated
March 29, 1996 (Exhibit 4.1 of Form 8-K dated March 28, 1996)
4.4 Conversion Agreement dated March 28, 1996 between Marquest
Medical Products, Inc. and Scherer Healthcare, Inc. (Exhibit
4.2 of Form 8-K dated March 28, 1996)
4.5 Loan and Security Agreement dated March 28, 1996 between
Marquest Medical Products, Inc. and Scherer Capital, LLC
(Exhibit 4.3 of Form 8-K dated March 28, 1996)
4.6 Second Priority Deed of Trust, Security Agreement and
Assignment of Rents and Leases dated March 28, 1996 from
Marquest Medical Products, Inc. to the Public Trustee of
Douglas County, Colorado for the benefit of Scherer Capital,
LLC (Exhibit 4.4 of Form 8-K dated March 28, 1996)
4.7 Convertible Secured Note due April 1, 2001 (Exhibit 4.5 of
Form 8-K dated March 28, 1996)
55
<PAGE>
4.8 Credit and Security Agreement by and between Marquest Medical
Products, Inc. and Norwest Business Credit, Inc. dated November
5, 1996 (Exhibit 4 to Form 10-Q dated December 28, 1996)
10.1 Master Equipment Lease Agreement dated December 8, 1993 between
Marquest Medical Products, Inc. and Financing for Science
International, Inc. (Exhibit 4(c) to Form 10-K dated April 2,
1994)
10.2 Term Loan Agreement dated June 30, 1994 between Marquest
Medical Products, Inc. and Colorado National Bank (Exhibit 4(d)
to Form 10-Q dated July 2, 1994)
10.3 Letter Agreement between Marquest Medical Products, Inc. and
Norman Dreyfuss dated August 1, 1989 (Exhibit 10(a) to Form
10-K dated March 31, 1990)
10.4 Letter Agreement between Marquest Medical Products, Inc. and
Robert J. McKinnon dated August 19, 1991 (Exhibit 10(b) to
Form 10-K dated March 28, 1992)
10.5 Marquest Medical Products, Inc. Incentive and Non-Qualified
Stock Option Plan effective November 14, 1987, as amended
(Exhibit 10(c) to Form 10-K dated April 1, 1989)
10.6 Consent Decree between Marquest Medical Products, Inc. and the
Food and Drug Administration ("FDA") dated October 1, 1992
(Exhibit 10(d) to Form 10-K dated March 28, 1992)
10.7 Letter from FDA approving resumption of manufacturing and
distribution activities of Marquest Medical Products, Inc.
dated January 9, 1992 (Exhibit 10(e) to Form 10-K dated March
28, 1992)
10.8 Management Agreement between Marquest Medical Products, Inc.
and Scherer Healthcare, Inc. dated June 1, 1994 (Exhibit 10(f)
to Form 10-Q dated June 2, 1994)
10.9 Omnibus Agreement between Scherer Healthcare, Inc. and Marquest
Medical Products, Inc. dated April 12, 1993 (Exhibit 3 to
Form 8-K dated April 9, 1993)
10.10 First Amendment to Loan Agreement dated December 18, 1995
between Marquest Medical Products, Inc. and Colorado National
Bank (Exhibit 10(a) to Form 10-Q dated December 30, 1995)
21. Subsidiaries of Registrant
27 Financial Data Schedule (EDGAR version only)
99.1 Robert Scherer Inducement Agreement dated March 14, 1997, by
and between Robert P. Scherer, Jr. and Vital Signs, Inc.
(Exhibit 99.2 to Form 8-K dated March 21, 1997)
(b) Reports on Form 8-K:
Report on Form 8-K dated March 21, 1997 regarding the announcement of
the signing of a merger agreement between the Company and Vital Signs, Inc.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the County of Douglas,
State of Colorado, on June 9, 1997.
MARQUEST MEDICAL PRODUCTS, INC.
By /s/ ROBERT P. SCHERER, JR.
--------------------------------
Robert P. Scherer, Jr., Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
TITLE DATE SIGNATURE
- ----- ---- ---------
Principal Executive Officer:
Robert P. Scherer, Jr.
Chairman, Chief Executive Officer /s/ ROBERT P. SCHERER, JR.
and Director June 9, 1997 -----------------------------
Principal Accounting and
Financial Officer:
Margaret Von der Schmidt
Vice President - Finance and /s/ MARGARET VON DER SCHMIDT
Chief Financial Officer June 6, 1997 -----------------------------
/s/ CHARLES R. ATKINS III
Charles R. Atkins III, Director June 10, 1997 -----------------------------
/s/ STEPHEN LUKAS, SR.
Stephen Lukas, Sr., Director June 10, 1997 ------------------------------
/s/ JACK W. PAYNE
Jack W. Payne, Director June 10, 1997 ------------------------------
/s/ KENNETH H. ROBERTSON
Kenneth H. Robertson, Director June 9, 1997 ------------------------------
/s/ MACK D. TINDAL
Mack D. Tindal, Director June 10, 1997 ------------------------------
/s/ WILLIAM J. THOMPSON
William J. Thompson, Director June 6, 1997 ------------------------------
Jack L. York, Director June __, 1997 ------------------------------
57
<PAGE>
REVOCABLE PROXY
SCHERER HEALTHCARE, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR
THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD JULY 28, 1997
The undersigned hereby appoints Robert P. Scherer, Jr., Amy M. Murphy
and Gary W. Ruffcorn, and each of them, proxies, with full power of
substitution, to act for and in the name of the undersigned to vote all
shares of Common Stock of Scherer Healthcare, Inc. (the "Company") which the
undersigned is entitled to vote at the Special Meeting of Stockholders (the
"Special Meeting"), to be held at the offices of LeBoeuf, Lamb, Greene &
MacRae, LLP, Suite 2000, 633 17th Street, Denver, Colorado 80202, on Monday,
July 28, 1997, at 9:00 a.m., local time, and at any and all adjournments and
postponements thereof, as indicated on the reverse with respect to all
matters set forth in the Proxy Statement dated July 2, 1997, and all
supplements and amendments thereto and, in their discretion upon all matters
incident to the conduct of such Special Meeting and all matters presented at
the Special Meeting but which are not known to the Board of Directors of the
Company at the time of the solicitation of this proxy. The undersigned hereby
revokes any proxy heretofore given by the undersigned to vote at the Special
Meeting or any adjournment or postponement thereof.
If the undersigned elects to withdraw this proxy card on or before the
time of the Special Meeting or any adjournments or postponements thereof and
notifies the Secretary of the Company at or prior to the vote at the Special
Meeting of the decision of the undersigned to withdraw this proxy card, then
the power of said proxies shall be deemed terminated and of no further force
and effect. If the undersigned withdraws this proxy card in the manner
described above and prior to the Special Meeting does not submit a duly
executed and later dated proxy card to the Company, the undersigned may vote
in person at the Special Meeting all shares of Common Stock of the Company
owned by the undersigned as of the record date (June 27, 1997).
PLEASE COMPLETE, DATE AND SIGN ON REVERSE AND MAIL THIS PROXY CARD
IN THE ENCLOSED POSTAGE-PAID ENVELOPE
Please mark, date and sign this proxy card on the reverse exactly as
your name(s) appear(s) hereon. When shares are held jointly, both holders
should sign. When signing as attorney, executor, administrator, trustee,
custodian or guardian, please give your full title. If the holder is a
corporation or partnership, the full corporate or partnership name should be
signed by a duly authorized officer.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ------------------------------------ --------------------------------
- ------------------------------------ --------------------------------
- ------------------------------------ --------------------------------
<PAGE>
/x/ PLEASE MARK VOTES
AS IN THIS EXAMPLE
- -------------------------------------------------------------------------------
SCHERER HEALTHCARE, INC.
- -------------------------------------------------------------------------------
Mark box at right if an address change or comment has been noted / /
on the reverse side of this card.
Mark box at right if you plan attend the Special Meeting. / /
RECORD DATE SHARES:
Please be sure to sign and date this Proxy. Date
------------------
- ------------------------------------ --------------------------------
Stockholder sign here Co-owner sign here
DETACH CARD
The Board of Directors recommends a vote "FOR" Proposals 1 and 2 listed
below.
1. A proposal to grant the Board of Directors authority to vote the
shares of common stock of Marquest Medical Products, Inc. ("MMPI")
owned by the Company FOR approval of the Agreement and Plan of Merger
dated as of March 14, 1997 (the "Merger Agreement"), by and among
Vital Signs, Inc. ("VSI"), VSI Acquisition Corporation and MMPI,
and the transactions contemplated thereby.
FOR / / AGAINST / / ABSTAIN / /
2. A proposal to approve and adopt the Scherer Healthcare Inducement
Agreement dated as of March 14, 1997, among the Company, VSI and
MMPI and the transactions contemplated thereby, including the sale
by the Company to VSI of certain assets of the Company leased or
licensed by the Company to MMPI and used by MMPI in the manufacture
and sale of arterial blood gas products and the execution by the
Company of a covenant not to compete for the benefit of VSI.
FOR / / AGAINST / / ABSTAIN / /
This proxy card will be voted as directed. If no instructions are
specified, this proxy card will be voted "FOR" the Proposals set forth above.
DETACH CARD
