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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 30, 1996 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 5-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. ___
Based on the last reported sales price of $1.8125 on June 18, 1996, the
aggregate market value of the voting stock held by non affiliates of the
registrant was $8,377,502.
The number of shares outstanding of the registrant's common stock, exclusive
of treasury shares, was 14,206,006 on June 18, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders are
incorporated by reference into Part III of this report on Form 10-K.
Page 1 of 43
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TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business.................................................................3
2. Properties...............................................................8
3. Legal Proceedings........................................................8
4. Submission of Matters to a Vote of Shareholders..........................8
Executive Officers of the Registrant.....................................8
PART II
5. Market for the Registrant's Common Stock and Related Shareholder
Matters................................................................9
6. Selected Financial Data.................................................10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................10
8. Consolidated Financial Statements and Supplementary Data................14
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................39
PART III
10. Directors and Executive Officers of the Registrant......................39
11. Executive Compensation..................................................39
12. Security Ownership of Certain Beneficial Owners and Management..........39
13. Certain Relationships and Related Transactions..........................39
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........39
Signatures..............................................................42
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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. Marquest is a
manufacturer and marketer of disposable medical devices, supplies and
equipment for use in the respiratory care, cardiopulmonary support and
anesthesia markets.
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") as part of a
series of transactions designed to restructure the Company financially. See
"Business Transactions with Scherer Healthcare, Inc. and Scherer Capital,
LLC."
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
- -Registered Trademark- II is the only device specifically recommended by
Fujisawa and 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.
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
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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 continues
to be subject to a five-year Consent Decree with the FDA in connection
with the Company's compliance with GMP regulations, which Consent Decree
expires in October 1996. 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, subsequent to year end, 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
is taking corrective action, including retraining employees, and implementing
other changes in order to respond to the FDA's concerns. These changes and
corrective actions have been 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. Due to the observations noted and the pending
expiration of the Consent Decree in October 1996, the FDA has conducted more
frequent inspections of the Company's operations. The FDA will verify the
Company's implementation of corrective action at another inspection which
will occur prior to mid-August, 1996. The Company cannot predict the outcome
of the FDA's inspection or whether or not the FDA will take any additional
action with respect to this matter.
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 and
assets are located in the United States. 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
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development of better and safer applications for the Company's products, such
as development of the RespirGard II -Registered Trademark- circuit, 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. This network includes hospital
supply distributors as well as over a thousand home healthcare dealers who
historically have distributed certain of the Company's products to users in
the home. There are some direct sales to certain large hospitals or to
hospitals in areas where the Company has no dealer support, to certain
government agencies and to original equipment manufacturer ("OEM") customers.
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.
The Company has invested significant time and financial resources in the
development of its distributor network and views this network as a valuable
asset. However, the Company does not believe that the loss of any single
distributor would have a material impact on the Company's sales as it
believes that any distributor can be replaced within a reasonable period of
time, and that in the interim the Company can sell its products directly to
most of the hospitals serviced by such a distributor.
During Fiscal 1996, 1995, and 1994, the Company had one distributor, Tri-anim
Health Services, Inc. of Sylmar, California, who accounted for 19%, 19%, and
18%, respectively, of the Company's sales.
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 $158,000 and $99,000 at March 30,
1996 and April 1, 1995, respectively.
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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 1996, 1995
and 1994, the Company expensed royalties and license fees of approximately
$2,000, $54,000 and $15,000, respectively, in connection with products
developed by others. The Company spent approximately $155,000, $140,000 and
$126,000, respectively, on internal product development in Fiscal 1996, 1995
and 1994.
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
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 June 1, 1996, the Company had a total of 291 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.: During Fiscal 1994, the Company consummated two related financing
transactions to provide the Company with necessary liquidity and to
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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") 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 and the Company until June 15, 1999. The Company
granted Scherer 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 or a Scherer affiliate, for
common stock of Scherer. Scherer 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 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 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 had advanced the Company $1,750,000.
In consideration for that advance, the Company granted to Scherer 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 (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 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 converted the remaining balance of the 8% note of
$1,851,600, $486,571 in related accrued interest due to Scherer and $376,330
owed to Scherer for management fees into 3,877,859 shares of the Company's
common stock at $.70 per share. At March 30, 1996, Scherer owns 50.8% of the
Company's outstanding common stock. The Scherer preferred stock is
convertible into Scherer 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. In the exchange,
the Swiss bondholders received (i) cumulative convertible preferred stock of
Scherer 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 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 acquired the right to, and has elected 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. Also in March 1996, Scherer Capital agreed to loan the Company a
maximum of $1,500,000, of which
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$700,000 has been borrowed at March 30, 1996. See Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note 4 to
the Consolidated Financial Statements. Scherer Capital owns 14.5% of the
Company's outstanding common stock.
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.
ITEM 3. LEGAL PROCEEDINGS
See Note 10 to the Consolidated Financial Statements for a description of
legal proceedings at March 30, 1996.
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.
EXECUTIVE OFFICERS
The executive officers of the Company as of June 1, 1996 are listed below:
Name and Age Positions with the Company
------------ --------------------------
Robert P. Scherer, Jr. (63) Chairman, Chief Executive Officer and Director
of the Company since February 1995. Chairman
and Chief Executive of Scherer Scientific, Ltd.
since 1986. 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 (62) 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 (44) 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.
The officers serve until their successors have been elected and qualified.
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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 1996 and 1995.
All quotations were reported to the Company by Nasdaq and represent actual
transactions and not inter-dealer quotations.
1996 1995
------------------ -----------------
High Low High Low
--------- ------- ------- --------
First Quarter $ 5/8 $ 3/8 $ 2 1/4 $ 1 5/8
Second Quarter 2 5/16 7/16 1 7/8 1 1/16
Third Quarter 1 5/16 1/2 1 1/4 3/8
Fourth Quarter 2 1/16 9/16 5/8 1/4
The closing sale price of the Company's Common Stock on June 18, 1996, as
reported on Nasdaq, was $1.8125.
As of June 11, 1996, the Company had 461 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 two most recent
fiscal years. Under a Term Loan Agreement dated June 30, 1994, between the
Company and Colorado National Bank (the "Bank"), the Company may not, without
the prior written consent of the Bank, pay or declare any dividends on its
Common Stock. The Company does not anticipate payment of dividends for the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA:
All amounts in thousands of dollars except per share amounts.
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three Fiscal Fiscal
Year Year Months Months Year Year
Ended Ended Ended Ended Ended Ended
March 30, April 1, April 2, July 3, April 3, March 28,
1996 1995 1994 1993 1993 1992
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<S> <C> <C> <C> <C> <C> <C>
Net revenues $22,443 $20,576 $17,139 $5,327 $21,935 $30,294
Net loss from continuing
operations before extraordinary
item (60) (3,450) (2,312) (1,042) (18,542) (6,078)
Net loss (60) (3,450) (2,030) (336) (18,338) (10,100)
LOSS PER COMMON SHARE:
Continuing operations before
extraordinary item (0.01) (0.46) (0.51) (0.23) (4.17) (1.41)
Net loss (0.01) (0.46) (0.45) (0.07) (4.12) (2.34)
Total Assets 15,393 13,992 16,929 18,366 21,007 40,529
Long-Term Obligations 4,990 5,961 7,659 6,745 0 1,589
Cash Dividend Declared Per
Common Share 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
During the third quarter of Fiscal 1992, the Company's operations were
temporarily suspended by the FDA. See Note 7 to the Company's Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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:
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 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
10
<PAGE>
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 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 continues
to be subject to a five-year Consent Decree with the FDA in connection
with the Company's compliance with GMP regulations, which Consent Decree
expires in October 1996. 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, subsequent to year end, 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
is taking corrective action, including retraining employees, and implementing
other changes in order to respond to the FDA's concerns. These changes and
corrective actions have been 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. Due to the observations noted and the pending
expiration of the Consent Decree in October 1996, the FDA has conducted more
frequent inspections of the Company's operations. The FDA will verify the
Company's implementation of corrective action at another inspection which
will occur prior to mid-August, 1996. The Company cannot predict the outcome
of the FDA's inspection or whether or not the FDA will take any additional
action with respect to this matter.
FINANCIAL CONDITION
INVENTORIES, NET: The Company's net inventory increased to $3,393,000 at
March 30, 1996 from $2,610,000 at April 1, 1995. The increase in inventory is
due to the Company stocking inventory in Europe and management's commitment
to stocking more inventory domestically to provide improved customer service.
DEBT AND SHAREHOLDER'S EQUITY: During Fiscal 1996, Scherer Healthcare, Inc.
converted the remaining principal of $1,852,000 of the Company's 8% note
payable into common stock of Marquest at $.70 per share. Scherer Healthcare,
Inc. also converted the accrued interest on the 8% note of $487,000 and
$376,000 in accrued management fees to common stock of the Company at $.70
per share.
In Fiscal 1996, Scherer Capital, LLC. ("Scherer Capital"), a Company
controlled by the largest shareholder of Scherer Healthcare, Inc., provided
the Company with a short-term loan of $700,000 which was refinanced with
Scherer Capital on a long-term basis. The Company can borrow an additional
$800,000 under this loan agreement. Scherer Capital invested $1,000,000 in
the Company, purchasing 2,061,856 shares of common stock at $.485 per share.
As a result of these transactions, the Company's shareholders' equity
increased by approximately $3.7 million.
Before exercise of any warrants, Scherer Healthcare, Inc. and Scherer
Capital own 50.8% and 14.5%, respectively, of the Company's common stock at
March 30, 1996.
RESULTS OF OPERATIONS
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.
11
<PAGE>
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.
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.
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.
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.
FISCAL 1995 VERSUS FISCAL 1994
SALES, COST OF SALES AND GROSS PROFIT: Sales decreased 8.4% from Fiscal 1994
to Fiscal 1995. The Company entered the first quarter of Fiscal 1994 with a
backorder due to the closing of the Company's manufacturing plant in Nogales,
Mexico and its distribution center in Nogales, Arizona. 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 purchasing pattern by distributors did not occur in the fourth
quarter of Fiscal 1995. During Fiscal 1995, the Company implemented a
territorial reorganization of its distributors. This reorganization expanded
certain distributors' sales territories and dropped other distributors from
the Company's network, resulting in a decrease in sales as not all business
to customers of the dropped distributors was retained by the Company. Sales
also decreased in Fiscal 1995 due to a decline in hospital census which the
Company's believes is due to the uncertainties surrounding healthcare reform.
The gross margin continued to increase to 24% in Fiscal 1995 from 20% in
Fiscal 1994. During Fiscal 1994, the cost of sales and gross margin were
negatively impacted by the closing and relocation of the Company's
manufacturing and distribution facilities in Mexico, Arizona and Colorado to
its principal location in Englewood, Colorado. During Fiscal 1995, the
Company reduced manufacturing costs through reductions in personnel, improved
operational efficiencies and increased vertical integration of the
manufacturing process. During Fiscal 1995, the Company internally produced a
larger portion of the molded components used in the Company's products than
was done in Fiscal 1994. Internally manufactured components are less
expensive than the same components purchased from outside vendors.
SALES AND MARKETING EXPENSES: Selling expenses increased 12.5% during 1995.
In Fiscal 1994, the Company reduced its sales and marketing management to
preserve cash. During Fiscal 1995, the Company strategically hired
additional sales and marketing personnel to support the Company's distributor
network and refocus its marketing efforts. During Fiscal 1995, the Company
increased its spending for trade advertising, sales training, sales tools and
attendance at trade shows.
INTEREST INCOME: Interest and other income for Fiscal 1995 declined 77% from
Fiscal 1994 primarily due to a $200,000 decrease in the gain on the sale of
assets no longer used in the business plus decreases in interest income on
the Company's money market account due to lower cash balances and the pay off
during Fiscal 1995 of a note receivable on which the Company was earning 8%
interest.
12
<PAGE>
INTEREST EXPENSE: Interest expense decreased 37% during Fiscal 1995 due to
the conversion by Scherer Healthcare, Inc. of $2,500,000 of debt to equity in
the Company in May 1994.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES: Cash used in operations decreased from $994,000 in
Fiscal 1995 to $79,000 in Fiscal 1996. Improvements in the results of
operations as discussed above were responsible for the improvement in
operating cash flow in Fiscal 1996.
FINANCING ACTIVITIES: During the third quarter of Fiscal 1996, Scherer
Capital, LLC. ("Scherer Capital"), a company controlled by the largest
shareholder of Scherer Healthcare, Inc., 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 provides for additional borrowing availability of $800,000 which
can be borrowed through February 2001.
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.
Also in March 1996, Scherer Healthcare, Inc. ("Scherer") converted a $1.8
million note of the Company into common stock at a rate of $.70 per share.
The original terms of the note provided for a conversion rate of $.75 per
share and was convertible at the option of the holder. In a related
transaction, the Company accepted a proposal to exchange the accrued interest
on the note payable to Scherer of $487,000 as well as management fees owed to
Scherer of $376,000 for the Company's common stock at a rate of $.70 per
share.
The above financing transactions were consummated to provide the Company with
needed liquidity for working capital and capital investment, and to decrease
the Company's level of debt. Management believes these financing
arrangements reflect more favorable terms than could be obtained from other
sources. Because the financing came from an affiliate of the Company, the
financing was approved by an independent committee of the Board of Directors
who obtained a fairness opinion from an investment banking firm.
The Company is currently negotiating with a bank for a line of credit secured
by accounts receivable. The line of credit would be available for working
capital and other general corporate purposes. Negotiations are expected to
be completed during the second quarter of Fiscal 1997, however, there can be
no assurance that the line of credit financing will be made available to the
Company.
The Company's planned capital investment for Fiscal 1997 is approximately
$1,000,000 to replace equipment and acquire new equipment in the Company's
ongoing effort to automate its manufacturing process. These capital
investments will be funded through internally generated funds and the
available borrowings of $800,000 through Scherer Capital.
Management of the Company believes that it can fund its current operating
levels and meet its obligations during Fiscal 1997 from cash on hand at March
30, 1996, from internally generated funds and from available borrowings. To
the extent that Fiscal 1997 operations are not sufficient to support
anticipated capital expenditures, the Company's planned investment in capital
expenditures will be reduced.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants . . . . . . . . .Page 15
Consolidated Balance Sheets. . . . . . . . . . . . . . . .Page 16
Consolidated Statements of Operations. . . . . . . . . . .Page 17
Consolidated Statements of Shareholders' Equity. . . . . .Page 19
Consolidated Statements of Cash Flows. . . . . . . . . . .Page 20
Notes to Consolidated Financial Statements . . . . . . . .Page 24
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts . . . . .Page 38
14
<PAGE>
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
30, 1996 and April 1, 1995, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the fiscal
years ended March 30, 1996, April 1, 1995 and the nine months ended April 2,
1994 (post quasi-reorganization--Note 12), and for the three months ended
July 3, 1993. 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 30, 1996 and April 1, 1995 and the results
of their operations and their cash flows for the fiscal years ended March 30,
1996, April 1, 1995 and the nine months ended April 2, 1994 (post
quasi-reorganization) and for the three months ended July 3, 1993, in
conformity with generally accepted accounting principles.
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,
May 6, 1996.
15
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ASSETS
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,635 $ 562
Trade accounts receivable, less allowances for
doubtful accounts of $94 and $132, respectively 2,915 2,847
Notes and other receivables 181 --
Inventories 3,393 2,610
Prepaid expenses 173 260
--------- --------
Total current assets 8,297 6,279
PROPERTY, PLANT AND EQUIPMENT, net (Note 3) 7,055 7,671
OTHER ASSETS 41 42
--------- --------
$ 15,393 $ 13,992
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,001 $ 1,220
Accrued liabilities 3,728 3,622
Payable to related parties 48 683
Short-term debt 803 1,267
--------- --------
Total current liabilities 5,580 6,792
LONG-TERM DEBT 4,990 5,961
--------- --------
Total liabilities 10,570 12,753
--------- --------
COMMITMENTS AND CONTINGENGIES (Notes 2 and 6)
SHAREHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares authorized;
14,207,435 and 8,102,720 shares issued and outstanding,
respectively 9,834 6,177
Warrants 599 612
Retained earnings (deficit) ($20,434 of retained deficit
eliminated at July 3, 1993 relating to quasi-reorganization) (5,540) (5,480)
Treasury stock, 20,840 shares (70) (70)
--------- --------
Total shareholders' equity 4,823 1,239
--------- --------
$ 15,393 $ 13,992
--------- --------
--------- --------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
16
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Nine Months Three Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
------------ ----------- ----------- ------------
(Pre quasi-
reorganization)
<S> <C> <C> <C> <C>
NET REVENUES $ 22,443 $ 20,576 $ 17,139 $ 5,327
COST OF SALES (15,305) (15,666) (13,448) (4,513)
---------- ---------- ---------- ---------
GROSS PROFIT 7,138 4,910 3,691 814
COSTS AND EXPENSES
Sales and marketing (4,082) (4,323) (2,872) (969)
General and administrative (2,391) (3,193) (2,276) (941)
Research and development (155) (140) (87) (39)
---------- ---------- ---------- ---------
OPERATING INCOME (LOSS) 510 (2,746) (1,544) (1,135)
OTHER INCOME (EXPENSES)
Interest, dividend & other
income 410 113 340 159
Royalty income 488 -- -- --
Interest expense (685) (626) (911) (81)
Other expense (114) (27) 5 (5)
Foreign exchange gain (loss) 28 (164) (202) 20
---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES 637 (3,450) (2,312) (1,042)
INCOME TAXES (697) -- -- --
---------- ---------- ---------- ---------
NET LOSS BEFORE EXTRAORDINARY
ITEM (60) (3,450) (2,312) (1,042)
EXTRAORDINARY ITEM -- -- 282 706
---------- ---------- ---------- ---------
NET LOSS $ (60) $ (3,450) $ (2,030) $ (336)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
(Continued on next page)
17
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Nine Months Three Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
------------ ----------- ----------- ------------
(Pre quasi-
reorganization)
<S> <C> <C> <C> <C>
(Continued from previous page)
EARNINGS (LOSS) PER COMMON
SHARE:
Continuing operations and before
extraordinary item $ (0.01) $ (0.46) $ (0.51) $ (0.23)
Extraordinary item -- -- 0.06 0.16
---------- ---------- ---------- ---------
Net loss $ (0.01) $ (0.46) $ (0.45) $ (0.07)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Weighted average number of
common shares outstanding
during the period 8,268,242 7,483,612 4,484,626 4,466,907
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
18
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Thousands of Dollars Except Share Amount)
<TABLE>
<CAPTION>
Common Stock Retained Treasury Stock
---------------------- Earnings/ ---------------------
Shares Amount (Deficit) Shares Amount Warrants
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, April 3, 1993 4,474,532 $19,815 ($20,098) (20,840) ($125) --
Net loss, 3 months ended 7/3/93 -- -- (336) -- -- --
Stock issuances--
Options exercised 30,000 23 -- -- -- --
Stock purchase plan 934 1 -- -- -- --
Warrants issued--
Scherer Healthcare (Note 11) -- -- -- -- -- 3,290
Swiss Bond exchange (Note 11) -- -- -- -- -- 714
Quasi-reorganization (effective
7/3/93) -- (17,125) 20,434 -- 55 (3,456)
---------- --------- --------- --------- --------- ---------
Post quasi-reorganization
balances 4,505,466 2,714 -- (20,840) (70) 548
Net loss, 9 months ended 4/2/94 -- -- (2,030) -- -- --
Refund of income taxes related
to periods prior to quasi-
reorganization (Note 12) -- 745 -- -- -- --
Warrants issued -- Swiss Bond
exchange (Note 11) -- -- -- -- -- 84
---------- --------- --------- --------- --------- ---------
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
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
19
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
---------- ----------- ---------- --------------
(Pre quasi-
reorganization)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (60) $ (3,450) $ (2,030) $ (336)
Adjustments to reconcile net loss to net
cash provided by operating activities-
Depreciation and amortization 1,050 1,364 1,236 607
Provision for losses on accounts receivable 24 21 (62) 15
Gain from extinguishment of debt (32) -- (282) (706)
Gain on sale of assets (225) (70) (219) (50)
(Gain)/loss on foreign currency translation (28) 164 202 (20)
Income tax refund -- -- 745 --
Net change in operating assets and
liabilities-
Trade accounts receivable (92) 207 (279) (800)
Notes and other receivables (181) 74 145 212
Inventories and prepaid items (696) 297 392 (276)
Other assets (3) (10) 57 (30)
Accounts payable, accrued expenses and
payable to related parties 115 535 (146) (1,571)
Other long term liabilities -- (176) (463) --
Accrued interest on Swiss bonds 49 50 68 6
-------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (79) $ (994) $ (636) $ (2,949)
-------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds received on notes from related
party -- 375 225 --
Purchases of equipment (66) (666) (1,192) (458)
Proceeds from disposition of assets 225 245 224 468
-------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 159 (46) (743) 10
-------- --------- -------- ---------
</TABLE>
(Continued on next page)
20
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
---------- ----------- ---------- --------------
(Pre quasi-
(Continued from previous page) reorganization)
<S> <C> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from notes payable 1,100 220 -- 1,750
Payments on note payable (400) -- -- (1,750)
Proceeds from sale of ABG product line -- -- -- 4,500
Principal payments on borrowings and capital leases (596) (280) (34) (67)
Issuance of common stock, net 889 -- -- 24
Proceeds from capital lease -- -- 591 --
-------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 993 (60) 557 4,457
-------- --------- -------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,073 (1,100) (822) 1,518
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 562 1,662 2,484 966
-------- --------- -------- ---------
CASH AND CASH EQUIVALENTS.
END OF PERIOD $ 1,635 $ 562 $ 1,662 $ 2,484
-------- --------- -------- ---------
-------- --------- -------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest $ 462 $ 445 $ 374 $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
Income taxes $ 630 $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
(Continued on next page)
21
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
---------- ----------- ---------- --------------
(Pre quasi-
(Continued from previous page) reorganization)
<S> <C> <C> <C> <C>
NONCASH INVESTING AND FINANCING
TRANSACTIONS-
Refinancing of Swiss debt-
Warrants issued $ -- $ -- $ 84 $ 714
Notes issued 259 -- 482 6,745
Bonds and accrued interest retired (291) -- -- --
Prospective interest on notes -- -- -- 3,246
-------- --------- -------- ---------
$ (32) $ -- $ 566 $ 10,705
-------- --------- -------- ---------
-------- --------- -------- ---------
Sale leaseback of ABG product line-
Warrants issued $ -- $ -- $ -- $ 3,290
Net book value of ABG assets -- -- -- 245
Deferred gain -- -- -- 965
-------- --------- -------- ---------
$ -- $ -- $ -- $ 4,500
-------- --------- -------- ---------
-------- --------- -------- ---------
Quasi-reorganization-
Prospective interest on notes $ -- $ -- $ -- $ (3,226)
Deferred gain -- -- -- (965)
Goodwill -- -- -- 4,283
Retained deficit -- -- -- 20,434
Common stock -- -- -- (17,125)
Warrants -- -- -- (3,456)
Treasury stock -- -- -- 55
-------- --------- -------- ---------
$ -- $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
Debt conversion-
Note payable to Scherer Healthcare, Inc. $ (1,852) $ (2,500) $ -- $ --
Payable to related parties (863) -- -- --
Common stock issued 2,715 2,500 -- --
-------- --------- -------- ---------
$ -- $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
(Continued on next page)
22
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
---------- ----------- ---------- --------------
(Pre quasi-
(Continued from previous page) reorganization)
<S> <C> <C> <C> <C>
Refinancing of Industrial Revenue Bonds-
Bonds retired $ -- $ (1,300) $ -- $ --
Note payable issued to bank -- 1,300 -- --
-------- --------- -------- ---------
$ -- $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
Warrants-
Warrants exercised $ (13) $ (20) $ -- $ --
Common stock issued 53 218 -- --
Swiss notes retired (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.
23
<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.
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 1996 FY 1995 FY 1994
--------- --------- ---------
Sales by geographic location:
United States and Canada $16,699 $16,023 $18,262
--------- --------- ---------
--------- --------- ---------
Export Sales:
Europe $3,069 $2,538 $2,251
Pacific Rim 1,959 1,458 1,647
Puerto Rico 407 352 306
Other 309 205 --
--------- --------- ---------
$5,744 $4,553 $4,204
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:
($000)
-----------------------------------
March 30, 1996 April 1, 1995
---------------- ---------------
Raw materials $1,782 $1,530
Work in process 233 203
Finished goods 1,378 877
------ ------
$3,393 $2,610
------ ------
------ ------
FOREIGN CURRENCY EXCHANGE GAIN/(LOSS). The Company had SFr 345,000, 720,000
and 720,000 of Swiss Franc denominated bonds outstanding at March 30, 1996,
April 1, 1995 and April 2, 1994, 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.
24
<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. The Company has
segregated its Consolidated Statements of Operations and Cash Flows for
Fiscal 1994 into the three-month period prior to and the nine-month period
subsequent to the quasi-reorganization.
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.
GOODWILL. The difference between direct costs of acquisitions accounted for
by the purchase method and the estimated fair value of the net assets of
acquired companies is recorded as goodwill and amortized over the remaining
useful life. During Fiscal 1994, as part of the quasi-reorganization
discussed in Note 12, the Company reduced the remaining goodwill at July 3,
1993 of $4,283,000 to zero.
ACCRUED LIABILITIES. Accrued liabilities consist of the following (in
thousands of dollars):
March 30, 1996 April 1, 1995
-------------- -------------
Accrued income taxes, interest and penalties $ 997 $ 858
Accrued payroll and benefits 932 606
Accrued legal settlement 383 725
Other 1,416 1,433
------ ------
$3,728 $3,622
------ ------
------ ------
EARNINGS (LOSS) PER COMMON SHARE. Earnings (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 1996, 1995 and 1994 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 1996, 1995 and 1994, the Company had
one distributor, Tri-anim Health Services, Inc. of Sylmar, California, which
accounted for 19%, 19% and 18%, respectively, of the Company's sales.
25
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 will adopt 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
associated intangibles be written down in value whenever an impairment review
indicates that the carrying value cannot be recovered on an undiscounted cash
flow basis. The Company expects that the adoption of SFAS No. 121 will not
have a material effect on its financial position or results of operations.
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 associated with this basis of
presentation are described in the following paragraphs.
At April 1, 1995, there was significant uncertainty as to the Company's
ability to continue as a going concern due to uncertainties concerning the
Company's ability to improve its profitability from operations and the
successful completion of external financing arrangements. During Fiscal
1996, the following events occurred:
The gross margin on the Company's sales improved from 24% in Fiscal 1995
to 32% in Fiscal 1996 due to improved operational efficiencies which
included reductions in manufacturing personnel, increased vertical
integration of the manufacturing process and increased sales volumes.
In March 1996, Scherer Healthcare, Inc. ("Scherer") converted debt and
other payables of approximately $2.7 million into common stock of the
Company. Also in March 1996, Scherer Capital, LLC. ("Scherer Capital")
provided the Company with a $1.5 million long-term convertible note
facility, of which $700,000 is outstanding at March 30, 1996.
Concurrently, Scherer Capital purchased 2,061,856 shares of the
Company's common stock for proceeds to the Company of $1.0 million
($0.485 per share) (See Note 8).
Management of the Company believes that it can fund its current operating
levels and meet its obligations as they come due during Fiscal 1997 through
existing cash on hand at March 30, 1996 of $1.6 million, available borrowings
with Scherer Capital of $800,000, and continued improvement in operating
profitability. Additionally, the Company is currently negotiating additional
financing to be used for working capital. To the extent that projected
operating results and cash flows are not met during Fiscal 1997, planned
capital purchases would be delayed to allow the Company to pay its existing
obligations.
The Company is subject to oversight by the United States Food and Drug
Administration ("FDA"). See Note 7 for a discussion of FDA matters.
26
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following (in thousands of
dollars):
March 30, April 1,
1996 1995
--------- ---------
Land $ 1,265 $ 1,265
Buildings 4,985 4,976
Machinery and equipment 8,866 8,364
Other 2,523 2,573
Construction in progress 2 220
--------- ---------
17,641 17,398
Less - accumulated depreciation (10,586) (9,727)
--------- ---------
$ 7,055 $ 7,671
--------- ---------
--------- ---------
The Company depreciates buildings over 50 years, machinery and equipment
between 3 and 10 years and other fixed assets between 3 and 8 years.
4. DEBT:
Short-term debt consists of the following (in thousands of dollars):
March 30, April 1,
1996 1995
--------- ---------
Swiss Bonds, SFr 345,000 and 720,000 outstanding at
March 30, 1996 and April 1, 1995, respectively;
interest payable annually on March 11 at a rate of
6%, increased to 9% effective March 12, 1992; due
March 11, 1994; unsecured; including $107,000 and
$176,000 accrued interest, respectively (See Note 11) $397 $ 813
Notes payable; 18% interest payable monthly; paid in
Fiscal 1996 through execution of capital leases -- 220
Current maturities of long-term debt and capital
lease obligations 406 234
--------- ---------
$803 $1,267
--------- ---------
--------- ---------
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 totalling
375,000 Swiss Francs plus accrued interest were exchanged for $291,000 of
U.S. denominated 8% Swiss notes and $146,000 in cash. The remaining Swiss
bonds outstanding at March 30, 1996, including the accrued interest on these
bonds, have been classified as short-term debt.
27
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following (in thousands of dollars):
March 30, April 1,
1996 1995
--------- --------
Swiss notes payable; 8%; interest due semi-annually;
due March 31, 1999, unsecured; denominated in U.S.
dollars $2,896 $2,677
Note payable to bank; interest rate floats annually,
currently 8.375%; interest and principal due in
monthly installments with balloon payment at January
31, 2000; secured by building 858 1,141
Note payable to Scherer Capital, LLC.; 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 --
Note payable to Scherer Healthcare, Inc.; 8%
interest due semi-annually; due March 31, 1999;
unsecured; convertible into 2,468,000 shares of
Marquest common stock (See Note 11) -- 1,852
Capital lease obligations 536 291
------ ------
$4,990 $5,961
------ ------
------ ------
The scheduled maturities of long-term debt beyond Fiscal 1997 are as follows:
1998 $ 440
1999 3,209
2000 700
2001 --
Thereafter 700
Less - imputed interest on capital leases (59)
------
Total $4,990
------
------
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 1, 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 HEALTHCARE, INC. The note payable to Scherer was
issued during Fiscal 1994 to purchase Scherer's preferred stock which was
used in connection with exchange offers for the Company's defaulted Swiss Bonds
28
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(see Note 11). During Fiscal 1996, Scherer Healthcare, Inc. converted the
note and related accrued interest of $487,000 into 3,340,244 shares of
Marquest common stock.
NOTE PAYABLE TO SCHERER CAPITAL, LLC. In December, 1995 Scherer Capital,
LLC. provided the Company with a short-term loan of $700,000. In March, 1996
the Company refinanced the loan with Scherer Capital on a long-term basis.
After April 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%. Pursuant to the Loan and Security
Agreement (the "Agreement"), dated March 28, 1996, the Company can borrow up
to an additional $800,000 under the same terms and conditions as the current
borrowings under the Agreement.
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 $1,175,000 and $364,000,
respectively, at March 30, 1996.
5. STOCK OPTIONS AND WARRANTS:
STOCK OPTION PLAN. The Company has an Incentive and Non-Qualified Stock
Option Plan for executives and key employees, which is administered by the
Compensation Committee of the Board of Directors. Shares approved for the
plan total 1,250,000, of which 367,727 are available for grant at March 30,
1996. At March 30, 1996, 227,098 options are vested. Options expire seven
years from the date of the grant.
The activity in the stock option plan for the years ended March 30, 1996,
April 1, 1995 and April 2, 1994 is as follows:
Exercise
Shares Price Range
------ -----------
Outstanding, April 3, 1993 458,534 $3.94 - $9.25
Granted 548,500 $0.75 - $2.00
Exercised (30,000) $0.75
Canceled (497,534) $2.00 - $9.25
--------
Outstanding, April 2, 1994 479,500 $1.38 - $2.00
Granted 32,000 $1.625
Exercised --
Canceled (172,173) $1.38 - $2.00
--------
Outstanding, April 1,1995 339,327 $1.38 - $2.00
Granted 587,500 $0.69 - $1.19
Exercised --
Canceled (371,827) $1.19 - $2.00
--------
Outstanding, March 30, 1996 555,000 $0.69 - $2.00
STOCK PURCHASE PLAN. During Fiscal 1990, shareholders approved the adoption
of an Employee Stock Purchase Plan to benefit all full-time, permanent
employees of the Company with more than one year of service. The shares
29
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approved for the 1990 Plan totaled 500,000. During Fiscal 1994, 934 shares
were issued under this plan. During Fiscal 1994, the Board of Directors
terminated the Employee Stock Purchase Plan.
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.
SETTLEMENT PAYABLE. In Fiscal 1996, the Company settled litigation with
former officers and directors of the Company. As part of this settlement,
the officers and directors 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 30, 1996, a maximum of 200,000 common shares are issuable under the
settlement agreement.
30
<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.
Fully Diluted
Percentage
Shares Ownership
------ -------------
Shares outstanding at March 30, 1996 14,207,435 59.42%
Stock options outstanding at March 30, 1996
pursuant to the Company's Incentive and
Non-Qualified Stock Option Plan 555,000 2.32%
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 138,833 0.58%
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 1,168,495 4.89%
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 24.17%
---------- -------
Total Scherer Healthcare, Inc. 6,580,000 27.51%
---------- -------
Convertible note payable to Scherer Capital, LLC.,
exercisable at $0.70 per share until April 1, 2001 1,000,000 4.19%
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 23,909,763 100.00%
---------- -------
---------- -------
31
<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 30, 1996, of minimum future lease payments required under these
leases:
Facilities Equipment Total
---------- --------- ---------
1997 $ 347 $ 70 $ 417
1998 347 63 410
1999 188 63 251
2000 173 61 234
2001 173 24 197
Thereafter 303 -- 303
---------- --------- ---------
1,531 281 1,812
Minimum sublease rentals (331) -- (331)
---------- --------- ---------
$1,200 $281 $1,481
---------- --------- ---------
---------- --------- ---------
The Company subleases warehouse space to an unaffiliated entity at
approximately $10,000 per month. This sublease expires in November 1998.
Total rent expense, net of sublease revenue, under all operating leases for
Fiscal 1996, 1995, and 1994 was $452,000, $560,000 and $1,088,000,
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
l, 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.
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.
32
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 continues
to be subject to a five-year Consent Decree with the FDA in connection
with the Company's compliance with GMP regulations, which Consent Decree
expires in October 1996. 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, subsequent to year end, 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
is taking corrective action, including retraining employees, and implementing
other changes in order to respond to the FDA's concerns. These changes and
corrective actions have been 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. Due to the observations noted and the pending
expiration of the Consent Decree in October 1996, the FDA has conducted more
frequent inspections of the Company's operations. The FDA will verify the
Company's implementation of corrective action at another inspection which
will occur prior to mid-August, 1996. The Company cannot predict the outcome
of the FDA's inspection or whether or not the FDA will take any additional
action with respect to this matter.
8. RELATED PARTY TRANSACTIONS:
In connection with a sale of the Company's Arterial Blood Gas ("ABG") product
line to Scherer Healthcare, Inc. ("Scherer"), the Company pays a monthly
royalty to Scherer of 3.25% of the Company's net sales of ABG products.
During Fiscal 1996, 1995 and 1994, these royalties totaled $346,000, $287,000
and $262,000, respectively. During Fiscal 1996, 1995 and 1994, the Company
expensed $150,000, $180,000 and $263,000 of interest related to the Company's
note payable to Scherer (see Note 4), and expensed $164,000 and $304,000 in
Fiscal 1996 and 1995, respectively, related to marketing and financial
consulting provided by Scherer.
In Fiscal 1996, Scherer Capital, LLC. ("Scherer Capital") provided a net
short-term loan of $700,000 to the Company which was converted into long-term
debt to Scherer Capital in March 1996. In Fiscal 1996, Scherer converted
debt and other payables of approximately $2.7 million into common stock of
the Company.
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 year
ended April 1, 1995, the nine months ended April 2, 1994 or the three months
ended July 3, 1993.
Effective April 4, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
The adoption of SFAS 109 did not have a material effect on the Company's
financial position or results of operations.
33
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The differences between the provision/(benefit) for income taxes at the
Federal statutory rate and that shown in the Consolidated Statements of
Operation are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Federal statutory rate 34% 34% 34% 34%
"Expected" federal tax provision (benefit) $ 217 $(1,156) $(786) $(354)
Utilization of net operating loss (237) -- -- --
IRS settlement 697 -- -- --
State income taxes, net of Federal benefit (2) (112) (76) (34)
Goodwill amortization for book purposes -- -- -- 24
Other items 10 24 -- --
--------- --------- --------- ---------
685 (1,244) (862) (364)
Increase in valuation allowance 12 1,244 862 364
--------- --------- --------- ---------
Tax provision $ 697 $ -- $-- $--
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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 30, 1996 and April 1, 1995 are comprised of the following (in thousands
of dollars):
March 30, April 1,
1996 Change 1995
--------- --------- ---------
Deferred tax assets/(liabilities):
Accelerated tax depreciation in excess
of book depreciation $ (187) $ -- $ (187)
Nondeductible accruals 600 (183) 783
Unrealized foreign exchange losses 112 -- 112
Capital loss carryforwards 971 (559) 1,530
Net operating loss carryforwards 4,840 (2,247) 7,087
--------- --------- ---------
6,336 (2,989) 9,325
Valuation allowance (6,336) 2,989 (9,325)
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
34
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 30, 1996, the Company had tax net operating
loss carryforwards of approximately $13,000,000, and capital loss
carryforwards of approximately $2,600,000. Tax net operating losses expire
at varying dates through 2010, and capital loss carryforwards expire at
varying dates through 1998. Due to the transactions discussed in Notes 11 and
12, 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 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 whereby the Company paid $400,000 in June 1995
and the remaining liability for taxes, interest and penalties of
approximately $997,000 at March 30, 1996, plus interest and penalties to be
accrued during the repayment period, will be repaid in monthly installments
of $40,000. The IRS has placed a lien on the Company's facility in
Englewood, Colorado to secure payment of the taxes.
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. Subsequent to March 30, 1996, the Company entered into
a settlement agreement with the insurance company whereby the Company would
pay $170,000. The settlement was accrued at March 30, 1996.
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 Arterial Blood
Gas product line, including $245,000 of net book value of property connected
with the product line, to Scherer Healthcare, Inc. ("Scherer") 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 $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 the boards of Scherer and the
Company until June 15, 1999. The Company granted Scherer 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 or a Scherer affiliate, for common stock of Scherer.
Scherer 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 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 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.
35
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the above transaction, Scherer had advanced the Company $1,750,000.
In consideration for this advance, the Company also granted to Scherer
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 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 (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's option, into Marquest
common stock at a value of $.75 per share. The Scherer preferred stock is
convertible into Scherer common stock. In May 1994, Scherer 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 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 in exchange for the
outstanding Swiss debt principal and interest. In the exchanges, the Swiss
bondholders received (1) cumulative convertible preferred stock of Scherer
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
considered a troubled debt restructuring under Statement of Financial
Accounting Standards 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 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,
Scherer acquired the right to, and has elected to, name a majority of the
members of the Company's Board of Directors.
12. QUASI-REORGANIZATION:
36
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company has presented its Consolidated Statements of Operations and Cash
Flows for the three-month period prior to and the nine-month period
subsequent to the accounting for the quasi-reorganization.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
All amounts are in thousands of dollars, except per share amounts
First Second Third Fourth
------ ------ ------ ------
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) 465
Income (Loss) per Share 0.00 0.00 (0.08) 0.05
FISCAL 1995 QUARTERS
Net Revenues $4,899 $4,597 $5,234 $5,846
Gross Profit 1,181 1,020 1,249 1,460
Net Loss (1,070) (961) (646) (773)
Loss Per Share (0.18) (0.12) (0.08) (0.10)
37
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
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 30, 1996 $132 $ 24 $ (8) $(54) $ 94
Year Ended
April 1, 1995 $178 $ 21 $(48) $(19) $132
Nine Months Ended
April 2, 1994 $200 $ (62) $ -- $ 40 $178
Three Months Ended
July 3, 1993 $200 $ 15 $ -- $(15) $200
</TABLE>
38
<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
In accordance with General Instruction G(3) of Form 10-K, the information
relating to nominees for Directors of the Company set forth under the caption
"Election of Directors" and the information relating to compliance with
Section 16(a) set forth under the caption "Committees and Meetings of the
Board of Directors" in the Company's definitive proxy statement in connection
with the Annual Meeting of Stockholders to be held on August 22, 1996 is
incorporated herein by reference. Information regarding the executive
officers of the Company required by Item 401(b) of Regulation S-K is set
forth under the caption "Executive Officers" in Part I of this report.
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 Company's definitive proxy statement in
connection with the Annual Meeting to be held on August 22, 1996 is
incorporated herein by reference; such incorporation by reference shall not
be deemed to include or incorporated by reference the information referred to
in Item 402(a)(8) of Regulation S-K.
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" in the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on August 22, 1996 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 Company's definitive proxy
statement in connection with the Annual Meeting of Stockholders to be held on
August 22, 1996 is hereby incorporated herein by reference.
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.
39
<PAGE>
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.
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)
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)
40
<PAGE>
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)
(b) Reports on Form 8-K:
Report on Form 8-K dated March 28, 1996 regarding completion of several
transactions effecting the Company's indebtedness and capital.
41
<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 20, 1996.
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 and Director June 20, 1996 /s/ Robert P. Scherer, Jr.
----------------------------
Principal Accounting and
Financial Officer:
Margaret Von der Schmidt
Vice President -- Finance and
Chief Financial Officer June 24, 1996 /s/ Margaret Von der Schmidt
----------------------------
Charles R. Atkins III, Director June 22, 1996 /s/ Charles R. Atkins III
----------------------------
Stephen A. Lukas, Sr., Director June ___, 1996
----------------------------
Jack W. Payne, Director June 24, 1996 /s/ Jack W. Payne
----------------------------
Kenneth H. Robertson, Director June 21, 1996 /s/ Kenneth H. Robertson
----------------------------
Mack D. Tindal, Director June 20, 1996 /s/ Mack D. Tindal
----------------------------
William J. Thompson, Director June 20, 1996 /s/ William J. Thompson
----------------------------
Jack L. York, Director June 20, 1996 /s/ Jack L. York
----------------------------
42
<PAGE>
EXHIBIT 21
Subsidiaries of Registrant
Name of Corporation Jurisdiction
------------------- ------------
Intec Medical, Incorporated Colorado
Diverse Molding Technologies, Inc. Delaware
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF MARCH 30, 1996 AND FOR THE YEAR THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-START> APR-02-1995
<PERIOD-END> MAR-30-1996
<CASH> 1,635
<SECURITIES> 0
<RECEIVABLES> 3,190
<ALLOWANCES> (94)
<INVENTORY> 3,393
<CURRENT-ASSETS> 8,297
<PP&E> 17,641
<DEPRECIATION> (10,586)
<TOTAL-ASSETS> 15,393
<CURRENT-LIABILITIES> 5,580
<BONDS> 4,990
0
0
<COMMON> 9,834
<OTHER-SE> (5,011)
<TOTAL-LIABILITY-AND-EQUITY> 15,393
<SALES> 22,443
<TOTAL-REVENUES> 22,443
<CGS> 15,305
<TOTAL-COSTS> 15,305
<OTHER-EXPENSES> 6,628
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 685
<INCOME-PRETAX> 637
<INCOME-TAX> (697)
<INCOME-CONTINUING> (60)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> 0
</TABLE>
