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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 29, 1997 Commission File No. 0-11484
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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Based on the last reported sales price of $0.75 on May 30, 1997, the
aggregate market value of the voting stock held by non affiliates of the
registrant was $3,527,215.
The number of shares outstanding of the registrant's common stock, exclusive
of treasury shares, was 14,307,729 on May 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
PART I
Item Page
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1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 10
4. Submission of Matters to a Vote of Shareholders. . . . . . . . . . 10
Executive Officers of the Registrant . . . . . . . . . . . . . . . 11
PART II
5. Market for the Registrant's Common Stock and Related
Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . . 11
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 12
8. Consolidated Financial Statements and Supplementary Data . . . . . 19
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . . 47
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . 47
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 48
12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
13. Certain Relationships and Related Transactions . . . . . . . . . . 54
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 55
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
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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.
On March 14, 1997, the Company entered into a Merger Agreement with Vital
Signs, Inc., a New Jersey corporation ("VSI"), pursuant to which a subsidiary
of VSI will be merged into the Company with the result that the Company will
become a wholly-owned subsidiary of VSI and the Company's shareholders shall
receive $0.797 for each outstanding share of Company common stock. The
consummation of the merger is subject to a number of contingencies, including
obtaining the approval of the Company's shareholders and the approval of the
shareholders of Scherer Healthcare, Inc., which holds approximately 50.5% of
the Company's common stock. Assuming that these contingencies are satisfied,
it is expected that the merger will be consummated in late July 1997. See
"Merger."
Marquest manufactures and distributes four major groups of products for use
in the respiratory care, cardiopulmonary support and anesthesia markets. The
largest of these product groups is the Blood Collection Systems for
Diagnostic Testing. This group includes the broad line of Marquest disposable
blood gas syringes. Most revenues in this group are generated by the
proprietary-designed syringes, which are marketed under the trade names
Gas-Lyte and Quik-ABG. As discussed in Note 11 to the Consolidated Financial
Statements, the Company executed a sale and leaseback of this product line
during Fiscal 1994 with Scherer Healthcare, Inc. ("Scherer Healthcare") as
part of a series of transactions designed to restructure the Company
financially. See "Business Transactions with Scherer Healthcare, Inc. and
Scherer Capital, LLC/R. P. Scherer, Jr."
The Company's disposable blood gas syringes are used to collect blood for
blood gas analysis routinely performed in hospitals on patients suspected of
having metabolic, respiratory or other cardiopulmonary difficulties. The
blood sample collected is processed through a blood gas analyzer which is
manufactured by other companies. In order for the analysis to be meaningful,
the collected sample must remain as free from contamination as possible.
Contamination is principally caused by the diffusion of gases in the sample
resulting from (i) exposure to air and (ii) dilution caused by the
anticoagulant solution used to prevent the sample from clotting. Marquest
syringes are specifically designed to minimize both of these forms of
contamination.
The Company's second largest product line is Aerosolized Medication Delivery
Systems, consisting primarily of disposable nebulizers. Nebulizers atomize
medications for inhalation into the lungs. The Company offers different
nebulizers to accommodate user preferences as well as the requirements for
different types of respiratory treatment. Nebulizers are marketed under the
trade names Acorn II-Registered Trademark- and Whisperjet. The Acorn II
- -Registered Trademark- Nebulizer is used as part of a circuit package sold
under the name, "RespirGard II-Registered Trademark- Nebulizer System".
The RespirGard II-Registered Trademark- Nebulizer System is a device designed
for the administration of aerosolized pentamidine (NebuPent-Registered
Trademark-, a registered trademark of Fujisawa Pharmaceutical Company), a
drug used in the treatment of certain respiratory complications that result
from the AIDS virus (pneumocystis carinii pneumonia). RespirGard
II-Registered Trademark- is the only device specifically recommended by
Fujisawa and is referenced in their labeling and use instructions.
Heated Humidification Systems is the Company's third product group. These
systems consist of three subgroups - humidifiers, heated wire circuits and
humidification chambers. Heated Humidification Systems provide a flow of
moist, warm air to patients who are at risk from loss of body temperature and
drying of the lung linings. There are applications for this product group in
both respiratory care and anesthesia.
The fourth product group is Anesthesia and Respiratory Breathing Systems,
which includes numerous disposable products for use in respiratory care and
anesthesia. These products include standard respiratory and anesthesia
circuits, masks, filters, and hyperinflation systems, as well as other
accessories for use in either respiratory therapy or anesthesia
administration applications.
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The circuits range from a simple hose connecting the patient to the
anesthesia machine in the operating room to more sophisticated circuits that
allow monitoring of gas temperature and flow into and out of the patient.
Disposable masks are designed to eliminate resterilization costs of
conventional reusable masks and represent further steps to remove the
possibility of cross-contamination from the operating room.
The filters are designed to filter particulates and bacteria from any air or
anesthesia line carrying gases to or from a patient. The filter market
continues to be a rapidly expanding one as healthcare providers have
increased the emphasis placed on infection control. They are marketed for use
in respiratory support, principally on ventilators, and anesthesia circuits.
The filters, however, can be used anywhere there is a concern about what
enters or leaves a patient's lungs. These filters are marketed under the
trade names RespirGard, HydroGard, OxyGard, and SpiroGard.
Marquest produces plastic parts for use in its assembly of disposable
respiratory and anesthesia products, and is engaged in the distribution of
medical equipment.
FDA REGULATION AND ADMINISTRATIVE ACTION: The Company and its products are
subject to regulation by the United States Food and Drug Administration
("FDA") and virtually all of the Company's products are subject to validation
as required by the current Good Manufacturing Practices Regulations ("GMP")
of the FDA. As a result, the FDA engages in periodic inspections of the
Company's facilities, its products and its manufacturing processes. In May
1991, the FDA initiated such an inspection, resulting in a report dated May
31, 1991, that contained significant allegations of violations of the GMP
regulations. In the report, the FDA alleged that methods used by Marquest and
the facilities and controls used in connection with manufacturing, packaging
and storage of the medical devices were not in conformity with GMP. The FDA
also alleged that Marquest failed to make appropriate Medical Device Reports
("MDRs"). On August 8, 1991, the Company was named in a civil complaint filed
by the United States Attorney's Office for the District of Colorado seeking
an injunction against the Company and three of its officers and further
alleging that the Company was manufacturing its products in violation of GMP,
that certain devices were misbranded and adulterated and violations of
several other sections of the Food, Drug and Cosmetic Act. On October 1,
1991, the Company and one of the named individual defendants entered into a
five-year Consent Decree; the two other individual defendants named in the
complaint were dismissed as defendants. The Consent Decree provided for
suspension of the Company's United States manufacturing and distribution
operations until the Company demonstrated it had adequate controls in place
to ensure products were consistently produced in substantial compliance with
GMP regulations. The suspension continued until January 9, 1992, at which
time the FDA's Denver District office informed the Company that it was
authorized to renew its operations. See Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 7 of the Notes to
Consolidated Financial Statements.
During Fiscal 1994, the FDA completed a routine inspection of the Company's
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with two observations noted, which were
corrected; there were no inspections during Fiscal 1995.
During Fiscal 1996, the FDA again inspected the Company's operations for
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with three observations noted. The Company
responded to the observations, including providing specific corrective action.
In May, 1996, the FDA concluded an inspection with six deficiency
observations noted. Many of the observations noted refer to the lack of
training regarding assembly, testing and sampling. The Company took
corrective action, including retraining employees, and implementing other
changes in order to respond to the FDA's concerns. These changes and
corrective actions were presented to the FDA in detail in the submissions
made by the Company and the Company continues to work with the FDA to address
the issues raised. The Company was again inspected by the FDA during
September, 1996 and received a Form 483, Inspection Observations, containing
three alleged nonconformances with GMP. The Company responded to these
observations, including providing specific corrective action. Following the
September inspection, the Consent Decree expired October 1, 1996 and is of no
further force and effect.
INDUSTRY SEGMENTS AND FOREIGN SALES: The Company has one industry segment: it
manufactures and distributes medical devices and equipment to the healthcare
provider sector. All of the Company's current operations are located in the
United States. The Company has inventory at a distributor's warehouse in The
Netherlands of approximately
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$219,000 and $131,000 at March 29, 1997 and March 30, 1996 respectively.
Export sales are discussed in Note 1 to the Consolidated Financial Statements.
Most export customers have been purchasing product from the Company for
several years and are sold to on an open credit basis. New customers
generally are sold products on a letter of credit or other secured basis
until an appropriate experience level is reached. The Company does not
perceive, and has not experienced, any unusual risk in its export activity.
Export sales are billed to the Company's customers in U. S. dollars.
MARKETING AND CUSTOMERS: The Company focuses a substantial portion of its
resources on marketing and sales. It emphasizes in-service training for its
clinical customers, distributor training and direct marketing. In-service
training educates customers about the Company's products and is supported by
continuing efforts to introduce product design changes that eliminate
application difficulties, such as converting from liquid heparin to a dried
form to eliminate dilutional errors in blood gas analysis tests. Close
working relationships with medical personnel also have led to the development
of better and safer applications for the Company's products, such as
development of the RespirGard II nebulizer, which is used in the treatment of
AIDS-associated respiratory illnesses.
The Company has identified and pursued opportunities to modify common medical
devices to improve and expand their applications. The Company believes that
innovative product line expansion and clinical marketing have been and will
continue to be essential factors in gaining market acceptance for the Company
and its products.
The Company's sales and marketing program utilizes field sales
representatives, managers and corporate marketing specialists who market the
Company's manufactured products both directly and through distributors. The
representatives assist the Company's distributors by (i) making direct calls
on hospital technicians and physicians to develop sales leads for the
distributors, (ii) providing education and training programs to distributors
and healthcare professionals relating to the need for, and use of, the
Company's products, (iii) furnishing distributors with technical advice on
various aspects of the Company's products, and (iv) working with distributors
to improve joint business relationships. The field sales representatives also
sell directly to the hospitals in those market areas not serviced by
distributors.
The Company distributes most of its manufactured products through a network
of respiratory or anesthesia distributors. Domestically, this network
historically included 29 hospital specialty dealers as well as several
medical-surgical dealers and over one thousand home heathcare dealers who
distribute certain of the Company's products to be used in the home.
VSI distributes its products primarily through its internal sales force. On
March 14, 1997, in conjunction with the execution by the Company of the
Merger Agreement, VSI and the Company entered into a Dealer Agreement with
VSI which authorized VSI to distribute Company products in the United States,
Canada, Puerto Rico and certain foreign countries and provided 28 of its 29
hospital specialty dealers with notice that they were being terminated as
distributors effective as of the end of the termination notice period
specified in their dealer agreements. In addition to providing protection
from the possibility that the Company's hospital specialty dealers would try
to shift customers away from Company products while the Company's acquisition
by VSI was pending, the Company believes that appointing VSI as a national
dealer for its products will be desirable because of VSI's strong sales force
and complementary product mix even if the Company's acquisition by VSI is
never consummated.
Since providing most of its domestic hospital specialty dealers with notices
of termination, the Company has entered into new arrangements with five of
those dealers, which provide that those dealers may continue to distribute
Company products at reduced margins.
The Company's international sales and marketing efforts are managed from its
corporate offices located in Englewood, Colorado. Europe, the Middle East,
Asia and Pacific Rim territories are managed by field sales representatives
and specialty distributors. Mexico, Central America, South America, and South
Africa are managed using specialty distributors. The international
distributors act in much the same way as the domestic distributors to supply
the Company's products. The Company also participates in major international
trade shows annually.
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During Fiscal 1997, 1996, and 1995, the Company had one distributor, Tri-anim
Health Services, Inc. ("Tri-Anim") of Sylmar, California, who accounted for
18%, 19%, and 19%, respectively, of the Company's sales. Tri-Anim was
terminated as a distributor of Company products effective June 13, 1997.
MANUFACTURING SUPPLIES AND BACKLOG: The Company's manufacturing and
assembly operations consist primarily of the injection molding and
extrusion of certain components and the assembly and packaging of
final products from both purchased and internally-manufactured
sources. All of the products manufactured are disposable and are
principally fabricated from molded resins.
Due to economies of scale in production, the Company purchases certain
standardized components, including needles, syringe barrels, and other
supplies from qualified external sources. The Company's material procurement
consists of multiple single source vendors, all of which are subject to
qualification criteria in accordance with the Company's quality procedures
and policies. While the Company endeavors to avoid being dependent on a
single source of supply for any component or raw material by establishing
qualified alternate suppliers, in certain cases it is not economical to use
more than one source. The Company emphasizes vendor certification and quality
programs to ensure uninterrupted supplies of raw materials and components.
Historically, the Company has not had a significant backlog of firm orders
for its products. With the exception of orders for future delivery or for
specially assembled products, most orders have been shipped within one week
of receipt and the Company has maintained predetermined levels of finished
goods inventories to ensure that this ability is preserved. The Company had a
backlog of orders to ship of approximately $249,000 and $158,000 at March 29,
1997 and March 30, 1996, respectively.
SEASONALITY: Historically, the Company has experienced approximately 45% of
its net sales in the first and second quarters of its fiscal year and 55% in
the third and fourth quarters. Net sales are influenced generally by overall
patterns in hospital admissions and discharges, which the Company believes
reflect, among other things, a lower incidence of respiratory problems and
postponements of elective surgeries during the summer months.
COMPETITION: The medical device business is highly competitive. The Company
competes with three major competitors in the manufacture and distribution of
its blood collection systems, four major competitors in respiratory and
nebulizer products and two major competitors in its heated humidification
products. A number of the Company's competitors are larger companies with
greater resources and more diversified lines of medical products and services.
Competition in the area of manufactured products involves quality and
reliability in product performance and price competitiveness. The Company
believes that the expertise of its sales force and the strength of its
distributor network are important factors in its ability to compete in the
submarkets for manufactured products. The Company's marketing approach
emphasizes continuing efforts to educate medical personnel through in-service
training in the area of the Company's specialties and to develop and adapt
products to fit the clinical needs of its customers.
PRODUCT DEVELOPMENT: The Company's product development efforts have been
guided by its marketing and sales personnel. Through their daily contact with
existing and potential customers, marketing and sales personnel are able to
identify needs for new products and improvements for existing products.
The Company's product development program includes its internal efforts as
well as the acquisition of new products from others. In Fiscal 1997, 1996 and
1995, the Company expensed royalties and license fees of approximately
$2,800, $2,000 and $54,000, respectively, in connection with products
developed by others. The Company spent approximately $286,000, $155,000 and
$140,000, respectively, on internal product development in Fiscal 1997, 1996
and 1995.
Many risks exist in new product development and there is no assurance that
any of the products currently under development by the Company can be
successfully developed or, if introduced, will prove to be commercially
successful products.
PATENTS, TRADEMARKS, LICENSES AND FRANCHISES: The Company holds numerous
patents for its manufactured products. It also holds licenses from
individuals to manufacture a number of proprietary products. The Company
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makes renewal filings on patents and trademarks periodically in accordance
with Federal regulations. Patents, trademarks and licenses afford the Company
a measure of protection for its proprietary products, and the Company has
taken a posture of defending to the fullest extent possible the rights
attendant to the patents, trademarks and licenses. However, it has been the
Company's experience that patents offer limited protection because the degree
of specialization in its products is so extensive that the patents on them
can, in some cases, be circumvented.
EMPLOYEES: At May 30, 1997, the Company had a total of 253 employees. None of
the Company's employees are represented by a labor union and the Company
considers its employee relations to be good. The Company has experienced no
significant problems in recruiting qualified personnel.
QUASI-REORGANIZATION: During the first quarter of Fiscal 1994, the Company
completed significant changes to its operations: (i) reintroduction of
substantially all of its product lines into the market after ceasing
operations after the FDA shutdown in Fiscal 1992, (ii) consolidation of its
manufacturing facilities in Mexico and Parker, Colorado into its Englewood,
Colorado facility, (iii) changes in senior management, and (iv) successful
completion of the first exchange offer to the Swiss bondholders in which 91%
of the bonds were exchanged. Considering these changes, the Company
determined that it was appropriate to effect a quasi-reorganization. The
quasi-reorganization was approved by the Board of Directors in June, 1993,
and was effective July 3, 1993. See Note 12 to the Consolidated Financial
Statements for a discussion of the effects of the quasi-reorganization on the
accounts of the Company.
BUSINESS TRANSACTIONS WITH SCHERER HEALTHCARE, INC. AND SCHERER CAPITAL,
LLC/R. P. SCHERER, JR.: During Fiscal 1994, the Company consummated two
related financing transactions to provide the Company with necessary
liquidity and to effect an exchange offer for defaulted Swiss Bonds, pursuant
to the Omnibus Agreement between the Company and Scherer Healthcare, Inc.,
dated April 12, 1993.
The Company sold its Arterial Blood Gas product line, including $245,000 of
net book value of property connected with the product line, to Scherer
Healthcare, Inc. ("Scherer Healthcare") for $4.5 million in cash and agreed
to a six year lease back of the product line for a royalty of 3.25% of net
product line sales. The Company has the option to repurchase the product line
for $4.5 million plus $22,500 for each month elapsed between the sale and
repurchase. The option to repurchase, originally expiring on May 31, 1996,
was extended by Scherer Healthcare and the Company until June 15, 1999. The
Company granted Scherer Healthcare warrants to purchase 5,780,000 shares of
common stock of the Company at $.75 per share as consideration for the
repurchase option. Of these warrants, 1,530,000 and 4,250,000 will expire if
not exercised by March 31, 1999 and March 31, 2003, respectively. The
warrants are exercisable in exchange for cash or, if exercised by Scherer
Healthcare or a Scherer Healthcare affiliate, for common stock of Scherer
Healthcare. Scherer Healthcare may elect to exercise these warrants for no
cash if a corresponding concession is granted to the Company in the product
line repurchase price. Scherer Healthcare may elect to receive the product
line repurchase price in the form of 5,780,000 shares of the Company's common
stock, based on a value of $.75 per share, plus the balance of the purchase
price in cash. If Scherer Healthcare makes this election, the number of
warrants issued in consideration for the Company's repurchase option as
described above will be reduced by a corresponding number.
Prior to the above transaction, Scherer Healthcare had advanced the Company
$1,750,000. In consideration for that advance, the Company granted to Scherer
Healthcare warrants to purchase 800,000 shares of the Company's common stock
at $.75 per share exercisable until March 31, 1999. The advance was repaid
with the proceeds from the sale and leaseback transaction but the warrants
remain outstanding.
During Fiscal 1986, the Company issued 25,000,000 Swiss Francs of bonds due
March 11, 1994. On January 14, 1992, the Company was notified that holders of
the majority of its Swiss bonds had exercised their right to put the bonds
for redemption as of March 11, 1992. The Company was not able to honor this
put, and, accordingly, defaulted on the obligations.
During Fiscal 1994, the Company acquired approximately $4,352,000 of 5%
cumulative convertible preferred stock of Scherer Healthcare (an amount equal
to approximately 35% of the outstanding Swiss bond principal and accrued
interest tendered in the transaction described below). This preferred stock
was acquired in exchange for an 8% note, maturing on March 31, 1999. In May
1994, Scherer Healthcare converted $2,500,000 of the principal balance of the
8% note into 3,333,333 shares of the Company's common stock at $.75 per
common share. In March 1996, Scherer
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Healthcare converted the remaining balance of the 8% note of $1,851,600,
$486,571 in related accrued interest due to Scherer Healthcare and $376,330
owed to Scherer Healthcare for management fees into 3,877,859 shares of the
Company's common stock at $.70 per share. At March 29, 1997, Scherer
Healthcare owns 50.5% of the Company's outstanding common stock. The Scherer
Healthcare preferred stock is convertible into Scherer Healthcare common
stock.
In three exchange offers during Fiscal 1994, the bondholders exchanged
16,320,000 Swiss Francs in bonds, 96% of the total bonds outstanding, for a
combination of Marquest debt, warrants to purchase common stock of the
Company, and the convertible preferred stock of Scherer Healthcare. In the
exchange, the Swiss bondholders received (i) cumulative convertible preferred
stock of Scherer Healthcare for 35% of the principal and accrued interest of
the tendered bonds; (ii) unsecured 8% U.S. dollar denominated notes of the
Company maturing March 31, 1999 with an aggregate principal amount of
$2,875,000, and (iii) warrants to purchase 165,000 and 1,432,416 shares of
Marquest common stock at $.25 and $.75 per share, respectively, exercisable
until March 31, 1999.
As a result of the sale of the Arterial Blood Gas product line and the Swiss
bond refinancing, Scherer Healthcare obtained the right to acquire
approximately 65% of the outstanding common stock of the Company through the
exercise of all warrants and conversion of the note. Also, as a result of the
Omnibus Agreement, Scherer Healthcare acquired the right to name a majority
of the members of the Company's Board of Directors.
In March 1996, Scherer Capital, LLC ("Scherer Capital"), a company controlled
by the largest shareholder of Scherer Healthcare, Inc., purchased 2,061,856
shares of the Company's common stock at $.485 per common share for
$1,000,000. During the third quarter of Fiscal 1996, Scherer Capital advanced
the Company $700,000 which was used for working capital purposes. In March
1996, the Company and Scherer Capital refinanced this advance with long-term
convertible debt. The debt, which bears interest at 1-1/2% over prime, is
secured by inventory and equipment and is convertible at a rate of $.70 per
share. The debt agreement contemplated the possibility of additional
borrowings of $800,000. During Fiscal 1997, Scherer Capital transferred its
credit facility to Robert P. Scherer, Jr., the Company's Chairman of the
Board of Directors and Chief Executive Officer. Mr. Scherer has voting
authority over the Company's common stock purchased by Scherer Capital in
March 1996 either through beneficial ownership or as trustee of a voting
trust for shares owned by Mr. Scherer's adult children. These shares
represent 14.4% of the Company's outstanding common stock. Mr. Scherer is
also the majority shareholder, Chairman of the Board and Chief Executive
Officer of Scherer Healthcare.
MERGER: On March 14, 1997, the Company signed an Agreement and Plan of Merger
("Merger Agreement") between VSI; VSI Acquisition Corporation ("Newco"), a
wholly-owned subsidiary of VSI; and the Company, providing for the merger of
Newco with the Company, with the Company surviving the merger as a
wholly-owned subsidiary of VSI. Upon the effective date of the merger, all of
the Company's common stock will be converted into the right to receive $0.797
per share in cash.
DEALER AGREEMENT. Simultaneous with the execution of the Merger Agreement,
the Company and VSI entered into a Dealer Agreement whereby VSI is authorized
to sell the Company's products for a period of two years. The Company
provided 28 of its 29 existing domestic specialty dealers with notices of
termination of their dealer agreements which, as a general matter, allow for
termination on 30 to 90 days notice. The Dealer Agreement may be terminated
by the Company if VSI does not meet certain specified sales quotas after June
30, 1997. Since providing its domestic specialty dealers with notices of
termination, the Company has negotiated new arrangements with five of those
dealers which provide that those dealers may continue to distribute Company
products at reduced margins.
Two of the Company's terminated dealers have commenced lawsuits against the
Company and VSI alleging, among other things, that the termination of its
dealer agreement was unlawful and that VSI is using confidential information
of dealers in the sale of the Company's products. The Company believes that
its position in both of these matters is meritorious, but is unable to
predict the outcome of either lawsuit or whether other lawsuits will be filed
by other dealers as a result of their termination.
PURCHASE OF ABG ASSETS AND COVENANTS NOT TO COMPETE. As part of the
investment made in the Company by Scherer Healthcare in June 1993, Scherer
Healthcare acquired title to the Company's Arterial Blood Gas ("ABG") product
line which the Company leases from Scherer Healthcare. The Company has an
option to repurchase the ABG product line
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from Scherer Healthcare at a purchase price equal to $4,500,000 plus $22,500
per month during the period from June 13, 1993 through the date of
repurchase. Pursuant to an Inducement Agreement between VSI and Scherer
Healthcare (the "Scherer Healthcare Inducement Agreement"), VSI has agreed to
purchase the ABG product line from Scherer Healthcare for a purchase price
equal to the purchase price under the Company's repurchase option. If the
merger occurs on July 31, 1997, the purchase price of the ABG product line
would be $5,625,000.
Pursuant to the Scherer Healthcare Inducement Agreement, Scherer Healthcare
is obligated, at the time of the merger, to enter into a covenant not to
compete pursuant to which it agrees it will not engage in the business of
manufacturing or selling ABG products for a period of three years following
the effective date of the merger. In consideration of this covenant not to
compete, VSI has agreed to pay Scherer Healthcare an amount equal to the
difference between $5,860,000 and the purchase price of the ABG product line.
If the merger occurs on July 31, 1997, Scherer Healthcare will be paid
$235,000 for the covenant not to compete.
Robert P. Scherer, Jr., the Company's Chairman of the Board of Directors and
Chief Executive Officer, is the beneficial owner of or has voting authority
over 2,061,856 shares of the Company's common stock. Mr. Scherer also holds a
promissory note of the Company in the principal amount of $700,000 which is
convertible into the Company's common stock at a rate of $0.70 per share. Mr.
Scherer has agreed to convert the note prior to the merger into 1,000,000
shares of the Company's common stock. In addition to his ownership of the
Company's common stock, Mr. Scherer has voting authority over 61.1% of the
outstanding common stock of Scherer Healthcare.
Pursuant to an Inducement Agreement entered into between VSI and Mr. Scherer
(the "RPS Inducement Agreement"), Mr. Scherer has agreed to vote his shares
of Scherer Healthcare common stock in favor of the merger. Mr. Scherer has
also agreed to vote all of his shares of the Company's common stock in favor
of the merger. Pursuant to the RPS Inducement Agreement, Mr. Scherer is
required to enter into a covenant not to compete pursuant to which he agrees
that for a period of three years following the merger he will not engage in
the business of manufacturing or selling ABG products. In consideration of
this covenant, VSI has agreed to pay Mr. Scherer $140,000.
CONDITIONS TO CLOSING. The Merger Agreement contains a number of conditions
to closing which must be satisfied or waived prior to consummation of the
merger. These conditions include, among other conditions, the requirement
that the merger be approved by the shareholders of the Company and Scherer
Healthcare, the requirement that no material litigation is pending against
the Company or its business, and the requirement that no adverse regulatory
action has been taken against the Company. The Company believes that the
conditions to closing can be satisfied and that the closing will take place
in late July 1997.
COVENANTS OF THE MERGER AGREEMENT. Pursuant to the Merger Agreement, the
Company has agreed that, during the period from March 14, 1997 to the
effective time of the merger, except as permitted in writing by VSI, the
Company will not, among other things, (a) amend its Articles of Incorporation
or Bylaws, (b) issue, sell, deliver, grant or declare any stock dividend or
any other distribution with respect to the Company's common stock except that
the Company may issue common stock pursuant to certain options, warrants or a
convertible note exercisable or convertible in accordance with the terms of
the applicable agreements and outstanding as of March 14, 1997, (c) mortgage
or pledge any assets except in the ordinary course of business, (d) borrow or
agree to borrow any funds except in the ordinary course of business and
pursuant to the Company's existing credit facilities up to certain amounts,
(e) incur any obligation or liability, cancel any material debts of third
parties, lease, sell, transfer or grant any preferential rights to lease or
acquire any of its material assets or substantively amend or terminate any
material contract or agreement except in the ordinary course of business, (f)
adopt, materially amend or terminate any employee benefit plan or materially
increase compensation or other benefits payable to the Company's employees,
(g) acquire any other business entity, (h) solicit, encourage or authorize
any competing inquiry, proposal, offer or possible offer from a third party
relating to a change in control or ownership of the Company, (j) enter into
any material licensing or marketing arrangement or other material contract
with any party other than VSI, and (k) settle any pending litigation in a
manner that is materially adverse to the Company or commence any material
litigation.
TERMINATION OF THE MERGER. The Merger Agreement may be terminated and the
merger may be abandoned before the effective time of the merger (a) by mutual
written consent of VSI, Newco and the Company or (b) by VSI or the Company if
(i) the Company's shareholders fail to approve the merger at the special
meeting of shareholders or (ii) the shareholders of Scherer Healthcare fail
to approve the sale of the stock of the Company. In addition, VSI may
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<PAGE>
terminate the Merger Agreement if (a) there has been a material
misrepresentation or breach by the Company of any of its representations or
warranties in the Merger Agreement, (b) the Company's Special Treatment Sales
(defined below) during the period from December 29, 1996 through the date
seven days prior to the Closing (the "Pre-Closing Date") are less than eighty
percent of the Company's Special Treatment Sales during the period from the
first day of the Company's fiscal quarter commencing in December 1995 through
the date one year prior to the Pre-Closing Date, (c) there has been any
misrepresentation by Scherer Healthcare or Mr. Scherer in any of the
representations or warranties set forth in the Inducement Agreements, or (d)
there has been any material failure by Scherer Healthcare or Mr. Scherer to
comply with their respective obligations under the Inducement Agreements.
Special Treatment Sales are all of the Company's sales other than sales made
through the Company's U.S. (including Puerto Rico) dealers and sales made
through distributors of the Company's medical-surgical products.
Either the Company or VSI, at their discretion, may terminate the Merger
Agreement if the effective date of the merger has not occurred by August 29,
1997, except that a party whose breach of the Merger Agreement has caused
such a delay in the consummation of the merger will not be entitled to
terminate the Merger Agreement. If the Company terminates the Merger
Agreement as a result of a breach of any material covenants by VSI, the
Company will be entitled to $800,000 as damages.
If the Merger Agreement is terminated by VSI or the Company because (a) an
offer is made, including a Purchase Event (defined below), (b) a claim is
made that such offer could result in greater value to the Company's
shareholders than the value to be received from VSI, and (c) after such offer
is known to the Company, the Company's shareholders do not approve the
merger, the shareholders of Scherer Healthcare do not approve the sale of the
Company's common stock, or the Company breaches any of its obligations under
the Merger Agreement, and within 24 months after the termination of the
Merger Agreement, a Purchase Event occurs, the Company will pay to VSI a cash
fee of $1,500,000. A Purchase Event means any of the following events: (a)
without VSI's written consent, the Company announces an intention to enter
into an agreement with a party other than VSI to (i) merge, (ii) dispose of
25% or more of the Company's assets or (iii) issue, sell or dispose of
securities representing 25% or more of the voting power of the Company, or
(b) any person or group other than Scherer Healthcare or VSI or their
affiliates acquires 25% or more of the voting power of the Company.
ITEM 2. PROPERTIES
The Company's principal office, which is owned by the Company, is located at
11039 E. Lansing Circle, Meridian Office Park, in Douglas County, Colorado.
This facility consists of 88,000 square feet and houses all of the Company's
manufacturing activities. The building also houses certain warehousing
functions and most administrative functions of the Company. The Company
leases approximately 45,000 square feet of warehouse space in Aurora,
Colorado pursuant to a lease that expires in April 1998. The Company believes
its owned and leased facilities are adequate for its operations in the
foreseeable future. See Notes 4 and 9 to the Consolidated Financial
Statements regarding encumbrances on the Company's manufacturing and office
facility.
In December 1992, the Company sold its Nogales, Arizona warehouse to a third
party under a 10-year sale leaseback arrangement. The Company does not
utilize the warehouse in its operations but subleases the space to an
unaffiliated entity. See Note 6 to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
See Note 10 to the Consolidated Financial Statements for a description of
legal proceedings at March 29, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of shareholders during the fourth quarter
of the fiscal year covered by this report.
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EXECUTIVE OFFICERS
The executive officers of the Company as of June 1, 1997 are listed below:
<TABLE>
NAME AND AGE POSITIONS WITH THE COMPANY
------------ --------------------------
<S> <C>
Robert P. Scherer, Jr. (64) Chairman, Chief Executive Officer and Director of the Company
since February 1995. Chairman and Chief Executive of RPS
Investments, Inc. since its formation. Director of Scherer
Healthcare, Inc., an affiliate of the Company, since 1977;
Chairman and Chief Executive Officer of Scherer Healthcare,
Inc. since February, 1995.
William J. Thompson (63) President of the Company since February 1995; Vice Chairman and
Chief Operating Officer of the Company since April 1994; Director
of the Company since August 1993. President, Chief Operating
Officer and Director of Scherer Healthcare, Inc., an affiliate
of the Company, since August, 1984.
Margaret E. Von der Schmidt (45) Vice President - Finance of the Company since February 1994;
Secretary of the Company since February 1995; Director of Finance
of the Company from November 1993 to January 1994. Pursued various
business opportunities and interests from January 1993 to November
1993. Assistant Corporate Controller, U S WEST, Inc. (a
telecommunications company), from December 1985 to December 1992.
</TABLE>
The officers serve until their successors have been elected and qualified.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS:
On July 1, 1983, the Common Stock of the Company commenced trading in the
over-the-counter market and was quoted on the Nasdaq system. From March 20,
1984 to October 14, 1994, the Company's stock was listed for trading on the
Nasdaq National Market System. Effective October 14, 1994, the Company's
Common Stock was included in the Nasdaq SmallCap Market. The Company's
Common Stock is quoted under the symbol MMPI. The table below shows, for the
period indicated, the range of high and low sales prices for Fiscal 1997 and
1996. All quotations were reported to the Company by Nasdaq and represent
actual transactions and not inter-dealer quotations.
1997 1996
---------------- -----------------
High Low High Low
------ ------ ------ ------
First Fiscal Quarter $ 2.06 $ 1.38 $ 0.63 $ 0.38
Second Fiscal Quarter 1.75 0.63 2.31 0.44
Third Fiscal Quarter 1.25 0.63 1.31 0.50
Fourth Fiscal Quarter 1.38 0.56 2.06 0.56
The closing sale price of the Company's Common Stock on May 30, 1997, as
reported on Nasdaq, was $0.75.
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<PAGE>
As of May 30, 1997, the Company had 445 holders of record of its Common
Stock. It is estimated that the total number of holders of the Common Stock
is approximately 3,000.
The Company has not paid dividends on its Common Stock in the last six fiscal
years. Under a Term Loan Agreement dated June 30, 1994, between the Company
and Colorado National Bank and a Credit and Security Agreement dated November 5,
1996 between the Company and Norwest Business Credit, Inc., the Company may
not, without prior written consent of the lenders, pay or declare any
dividends on its Common Stock. The Company does not anticipate payment of
dividends for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA:
All amounts in thousands of dollars except per share amounts.
<TABLE>
Fiscal Fiscal Fiscal Nine Three Fiscal
Year Year Year Months Months Year
Ended Ended Ended Ended Ended Ended
March 29, March 30, April 1, April 2, July 3, April 3,
1997 1996 1995 1994 1993 1993
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $22,045 $22,443 $20,576 $17,139 $ 5,327 $ 21,935
Net loss from continuing
operations before extraordinary
item (473) (60) (3,450) (2,312) (1,042) (18,542)
Net loss (473) (60) (3,450) (2,030) (336) (18,338)
LOSS PER COMMON SHARE:
Continuing operations before
extraordinary item (0.03) (0.01) (0.46) (0.51) (0.23) (4.17)
Net loss (0.03) (0.01) (0.46) (0.45) (0.07) (4.12)
Total Assets 13,424 15,393 13,992 16,929 18,366 21,007
Long-Term Obligations 4,600 4,990 5,961 7,659 6,745 0
Cash Dividend Declared Per
Common Share 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
Effective July 3, 1993, the Company effected a quasi-reorganization as
discussed in Note 12 to the Consolidated Financial Statements. The Company
has segregated its Consolidated Statements of Operations into the three-month
period prior to and the nine-month period subsequent to the
quasi-reorganization.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
MERGER
On March 14, 1997, the Company signed an Agreement and Plan of Merger
("Merger Agreement") between VSI; VSI Acquisition Corporation ("Newco"), a
wholly-owned subsidiary of VSI; and the Company, providing for the merger of
Newco with the Company, with the Company surviving the merger as a
wholly-owned subsidiary of VSI. Upon the effective date of the merger, all
of the Company's common stock will be converted into the right to receive
$0.797 per share in cash.
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<PAGE>
DEALER AGREEMENT. Simultaneous with the execution of the Merger Agreement,
the Company and VSI entered into a Dealer Agreement whereby VSI is authorized
to sell the Company's products for a period of two years. The Company
provided 28 of its 29 existing domestic specialty dealers with notices of
termination of their dealer agreements which, as a general matter, allow for
termination on 30 to 90 days notice. The Dealer Agreement may be terminated
by the Company if VSI does not meet certain specified sales quotas after June
30, 1997. Since providing its domestic specialty dealers with notices of
termination, the Company has negotiated new arrangements with five of those
dealers which provide that those dealers may continue to distribute Company
products at reduced margins.
Two of the Company's terminated dealers have commenced lawsuits against the
Company and VSI alleging, among other things, that the termination of its
dealer agreement was unlawful and that VSI is using confidential information
of dealers in the sale of the Company's products. The Company believes that
its position in both of these matters is meritorious, but is unable to
predict the outcome of either lawsuit or whether other lawsuits will be filed
by other dealers as a result of their termination.
PURCHASE OF ABG ASSETS AND COVENANTS NOT TO COMPETE. As part of the
investment made in the Company by Scherer Healthcare in June 1993, Scherer
Healthcare acquired title to the Company's Arterial Blood Gas ("ABG") product
line which the Company leases from Scherer Healthcare. The Company has an
option to repurchase the ABG product line from Scherer Healthcare at a
purchase price equal to $4,500,000 plus $22,500 per month during the period
from June 13, 1993 through the date of repurchase. Pursuant to an Inducement
Agreement between VSI and Scherer Healthcare (the "Scherer Healthcare
Inducement Agreement"), VSI has agreed to purchase the ABG product line from
Scherer Healthcare for a purchase price equal to the purchase price under the
Company's repurchase option. If the merger occurs on July 31, 1997, the
purchase price of the ABG product line would be $5,625,000.
Pursuant to the Scherer Healthcare Inducement Agreement, Scherer Healthcare
is obligated, at the time of the merger, to enter into a covenant not to
compete pursuant to which it agrees it will not engage in the business of
manufacturing or selling ABG products for a period of three years following
the effective date of the merger. In consideration of this covenant not to
compete, VSI has agreed to pay Scherer Healthcare an amount equal to the
difference between $5,860,000 and the purchase price of the ABG product line.
If the merger occurs on July 31, 1997, Scherer Healthcare will be paid
$235,000 for the covenant not to compete.
Robert P. Scherer, Jr., the Company's Chairman of the Board of Directors and
Chief Executive Officer, is the beneficial owner of or has voting authority
over 2,061,856 shares of the Company's common stock. Mr. Scherer also holds
a promissory note of the Company in the principal amount of $700,000 which is
convertible into the Company's common stock at a rate of $0.70 per share.
Mr. Scherer has agreed to convert the note prior to the merger into 1,000,000
shares of the Company's common stock. In addition to his ownership of the
Company's common stock, Mr. Scherer has voting authority over 61.1% of the
outstanding common stock of Scherer Healthcare.
Pursuant to an Inducement Agreement entered into between VSI and Mr. Scherer
(the "RPS Inducement Agreement"), Mr. Scherer has agreed to vote his shares
of Scherer Healthcare common stock in favor of the merger. Mr. Scherer has
also agreed to vote all of his shares of the Company's common stock in favor
of the merger. Pursuant to the RPS Inducement Agreement, Mr. Scherer is
required to enter into a covenant not to compete pursuant to which he agrees
that for a period of three years following the merger he will not engage in
the business of manufacturing or selling ABG products. In consideration of
this covenant, VSI has agreed to pay Mr. Scherer $140,000.
CONDITIONS TO CLOSING. The Merger Agreement contains a number of conditions
to closing which must be satisfied or waived prior to consummation of the
merger. These conditions include, among other conditions, the requirement
that the merger be approved by the shareholders of the Company and Scherer
Healthcare, the requirement that no material litigation is pending against
the Company or its business, and the requirement that no adverse regulatory
action has been taken against the Company. The Company believes that the
conditions to closing can be satisfied and that the closing will take place
in late July 1997.
COVENANTS OF THE MERGER AGREEMENT. Pursuant to the Merger Agreement, the
Company has agreed that, during the period from March 14, 1997 to the
effective time of the merger, except as permitted in writing by VSI, the
Company will not, among other things, (a) amend its Articles of Incorporation
or Bylaws, (b) issue, sell, deliver, grant or declare any stock dividend or
any other distribution with respect to the Company's common stock except that
the Company
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<PAGE>
may issue common stock pursuant to certain options, warrants or a convertible
note exercisable or convertible in accordance with the terms of the
applicable agreements and outstanding as of March 14, 1997, (c) mortgage or
pledge any assets except in the ordinary course of business, (d) borrow or
agree to borrow any funds except in the ordinary course of business and
pursuant to the Company's existing credit facilities up to certain amounts,
(e) incur any obligation or liability, cancel any material debts of third
parties, lease, sell, transfer or grant any preferential rights to lease or
acquire any of its material assets or substantively amend or terminate any
material contract or agreement except in the ordinary course of business, (f)
adopt, materially amend or terminate any employee benefit plan or materially
increase compensation or other benefits payable to the Company's employees,
(g) acquire any other business entity, (h) solicit, encourage or authorize
any competing inquiry, proposal, offer or possible offer from a third party
relating to a change in control or ownership of the Company, (j) enter into
any material licensing or marketing arrangement or other material contract
with any party other than VSI, and (k) settle any pending litigation in a
manner that is materially adverse to the Company or commence any material
litigation.
TERMINATION OF THE MERGER. The Merger Agreement may be terminated and the
merger may be abandoned before the effective time of the merger (a) by mutual
written consent of VSI, Newco and the Company or (b) by VSI or the Company if
(i) the Company's shareholders fail to approve the merger at the special
meeting of shareholders or (ii) the shareholders of Scherer Healthcare fail
to approve the sale of the stock of the Company. In addition, VSI may
terminate the Merger Agreement if (a) there has been a material
misrepresentation or breach by the Company of any of its representations or
warranties in the Merger Agreement, (b) the Company's Special Treatment Sales
(defined below) during the period from December 29, 1996 through the date
seven days prior to the Closing (the "Pre-Closing Date") are less than eighty
percent of the Company's Special Treatment Sales during the period from the
first day of the Company's fiscal quarter commencing in December 1995 through
the date one year prior to the Pre-Closing Date, (c) there has been any
misrepresentation by Scherer Healthcare or Mr. Scherer in any of the
representations or warranties set forth in the Inducement Agreements, or (d)
there has been any material failure by Scherer Healthcare or Mr. Scherer to
comply with their respective obligations under the Inducement Agreements.
Special Treatment Sales are all of the Company's sales other than sales made
through the Company's U.S. (including Puerto Rico) dealers and sales made
through distributors of the Company's medical-surgical products.
Either the Company or VSI, at their discretion, may terminate the Merger
Agreement if the effective date of the merger has not occurred by August 29,
1997, except that a party whose breach of the Merger Agreement has caused
such a delay in the consummation of the merger will not be entitled to
terminate the Merger Agreement. If the Company terminates the Merger
Agreement as a result of a breach of any material covenants by VSI, the
Company will be entitled to $800,000 as damages.
If the Merger Agreement is terminated by VSI or the Company because (a) an
offer is made, including a Purchase Event (defined below), (b) a claim is
made that such offer could result in greater value to the Company's
shareholders than the value to be received from VSI, and (c) after such offer
is known to the Company, the Company's shareholders do not approve the
merger, the shareholders of Scherer Healthcare do not approve the sale of the
Company's common stock, or the Company breaches any of its obligations under
the merger agreement, and within 24 months after the termination of the
Merger Agreement, a Purchase Event occurs, the Company will pay to VSI a cash
fee of $1,500,000. A Purchase Event means any of the following events: (a)
without VSI's written consent, the Company announces an intention to enter
into an agreement with a party other than VSI to (i) merge, (ii) dispose of
25% or more of the Company's assets or (iii) issue, sell or dispose of
securities representing 25% or more of the voting power of the Company, or
(b) any person or group other than Scherer Healthcare or VSI or their
affiliates acquires 25% or more of the voting power of the Company.
FOOD AND DRUG ADMINISTRATION
The impact of the United States Food and Drug Administration's ("FDA") action
against the Company in August 1991 has had a significant and pervasive effect
on the Company.
On August 8, 1991, the United States Attorney's Office for the District of
Colorado filed a complaint seeking an injunction against the Company and
three of its officers. The complaint alleged that the Company was
manufacturing products in violation of the FDA's Current Good Manufacturing
Practice Regulations ("GMP"). The complaint also alleged that certain of the
Company's products were misbranded and adulterated for violating other
relevant sections of
-14-
<PAGE>
the Federal Food, Drug and Cosmetic Act. On October 1, 1991, the Company and
one of the named individual defendants entered into a five-year Consent
Decree. The two other individuals originally named in the complaint for
injunction were dismissed as defendants.
By letter dated October 8, 1991, the District Director of the FDA's Denver
district informed the Company that, pursuant to the Consent Decree of October 1,
1991, the Company's medical device manufacturing operations were not in
substantial compliance with GMP. The Consent Decree provided for suspension
of the Company's United States manufacturing and distribution operations until
the Company demonstrated it had adequate controls in place to ensure products
were consistently produced in substantial compliance with GMP regulations.
Based upon agreements with the FDA in November and December 1991, the Company
was allowed to recondition inventories of components, sub-assemblies and
finished products which were produced prior to the October 8th shut down.
This was done in close cooperation with the FDA by the use of higher sampling
levels and tightened acceptable quality limits. The Company's facilities
were reinspected by the FDA in December, 1991 and found to have adequate
processes in place to insure devices would be manufactured in compliance with
GMP. As a result of that inspection, on January 9, 1992, the Company was
given authorization to renew its operations, including production and
distribution of all products.
During Fiscal 1994, the FDA completed a routine inspection of the Company's
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with only two deficiency observations noted,
which were corrected; there were no inspections during Fiscal 1995.
During Fiscal 1996, the FDA again inspected the Company's operations for
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with three deficiency observations noted. The
Company responded to the observations, including providing specific
corrective action.
In May, 1996, the FDA concluded an inspection with six deficiency
observations noted. Many of the deficiencies noted refer to the lack of
training regarding assembly, testing and sampling. The Company took
corrective action, including retraining employees, and implementing other
changes in order to respond to the FDA's concerns. These changes and
corrective actions were presented to the FDA in detail in the submissions
made by the Company and the Company continues to work with the FDA to address
the issues raised. The Company was again inspected by the FDA during
September, 1996 and received a Form 483, Inspection Observations, containing
three alleged nonconformances with GMP. The Company responded to these
observations, including providing specific corrective action. Following the
September inspection, the Consent Decree expired October 1, 1996 and is of no
further force and effect.
RESULTS OF OPERATIONS
FISCAL 1997 VERSUS FISCAL 1996
SALES, COST OF SALES AND GROSS PROFIT: The Company's net sales decreased
approximately 2% to $22,045,000 from $22,443,000 in Fiscal 1996. The
decrease in net sales was primarily due to a decrease in sales of the
Company's medication delivery devices. Sales of these devices were down
approximately $800,000 in Fiscal 1997 compared to Fiscal 1996; the majority
of the decrease was attributable to one major customer who placed a large
sales order in Fiscal 1996 and who did not place an order in Fiscal 1997.
The decrease in the sales of medication delivery devices was partially offset
by an increase in sale of the Company's ABG products which increased
approximately $270,000 in Fiscal 1997 due to a contract signed with a major
customer in late Fiscal 1996 for these products.
The gross margin decreased from 32% to 30.4%. This decline in gross margin
was primarily the result of the decrease in net sales combined with the rework
of certain products. Rework is caused by supplier quality issues, defects in
molded products produced due to worn tools, and damage during assembly and
warehousing. The Company believes that the supplier quality and damage
issues have been corrected; however, molded product defects may recur because
of the condition of the molds. The Company has implemented a preventative
maintenance program, and increased inspections and operator training in the
Company's molding operation.
-15-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
declined 19% due to two primary items. The Company leases a warehouse in
Nogales, Arizona which was formerly used by the Company until early Fiscal
1994 when it ceased operations in Mexico. The Company was able to sublease
two-thirds of the warehouse in December 1995 and the remaining portion of the
warehouse in September 1996. (See Note 6 to the Consolidated Financial
Statements.) Net lease expense decreased approximately $120,000. During
Fiscal 1996, the Company wrote off approximately $200,000 of certain expenses
associated with unsuccessful efforts to obtain financing. These expenses
were not incurred in Fiscal 1997.
OTHER INCOME AND EXPENSE: Other income decreased due to nonrecurring income
received in Fiscal 1996. The Company received $488,000 in royalty income in
the fourth quarter of fiscal 1996 related to the Company's ABG product line
patents. The royalty agreement expired during Fiscal 1996. Also in Fiscal
1996, the Company sold a 10% investment in a medical device company for a
gain of $200,000. Other expense has increased in Fiscal 1997 due to $265,000
of expense related to the proposed merger with VSI discussed above. These
expenses were for financial advisors and for investment banking, legal and
accounting services.
FISCAL 1996 VERSUS FISCAL 1995
SALES, COST OF SALES AND GROSS PROFIT: Sales increased 9% from $20,576,000
in Fiscal 1995 to $22,443,000 in Fiscal 1996. Sales in the first quarter of
Fiscal 1995 were low due to a decline in hospital census which the Company
believes was due to the uncertainties of healthcare reform. Also, many of
the Company's distributors purchased high levels of product during the fourth
quarter of Fiscal 1994, which depressed sales in the first quarter of Fiscal
1995. This did not occur in Fiscal 1996, and sales increased to previous
levels. In Fiscal 1996, the Company implemented a network of independent
manufacturer's representatives which supplemented the Company's sales force
and increased sales.
The Company's gross margin increased from 24% in Fiscal 1995 to 32% in Fiscal
1996. The Company has reduced manufacturing costs through reductions in
personnel, improved operational efficiencies and increased its vertical
integration of the manufacturing process. The gross margin improvement was
also due to increased manufacturing volume which improved overhead absorption.
In early Fiscal 1996, the Company began manufacturing a less expensive needle
sheath holder, converted to a less expensive pallet and obtained price
reductions from suppliers for cartons and plastic resins. Average production
labor headcount was reduced 9% in Fiscal 1996 compared to Fiscal 1995.
Layoffs were effective in the first quarter of Fiscal 1996 and the savings
achieved were partially offset by increased overtime.
Expense controls in manufacturing resulted in a reduction in overhead.
Factors influencing this reduction include not immediately replacing several
salaried positions which were vacant due to attrition, and limiting travel
and the use of temporary help. Depreciation expense was reduced
approximately $285,000 during Fiscal 1996 as fixed assets became fully
depreciated. Property taxes were decreased in Fiscal 1996 approximately
$73,000 as a result of a tax appeal with the county.
The absorption of overhead costs by the Company's molding operation was also
favorably impacted by the transfer of molding production from outside vendors
in the second and third quarters of Fiscal 1996 and the increase in
production volume.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
decreased 25% from $3,193,000 in Fiscal 1995 to $2,391,000 in Fiscal 1996 due
to reductions in personnel and a decrease in legal and litigation expenses.
Legal expense decreased approximately $100,000 in Fiscal 1996 primarily due
to the settlement of litigation with former officers and directors in May
1995. Also, an additional $300,000 was accrued during Fiscal 1995 for the
settlement of this litigation; the total settlement amount was $725,000 of
which $425,000 was accrued prior to Fiscal 1995.
OTHER INCOME: Other income increased primarily due to $488,000 in royalty
income received in the fourth quarter of Fiscal 1996 on the Company's patents
related to the ABG product line. The royalty agreement expired during Fiscal
1996. In Fiscal 1996, the Company sold its 10% investment in Seabrook
Medical Systems, Inc. at a gain of $200,000.
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<PAGE>
INCOME TAXES: In Fiscal 1996 the Company settled tax issues related to
audits by the Internal Revenue Service ("IRS") for fiscal years 1982-1988.
The Company recorded $697,000 of taxes and interest related to the settlement
of these tax issues during Fiscal 1996. The Company has negotiated a
repayment plan of monthly installments of $40,000 per month through
approximately September 1998.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES: Cash used in operations increased from $79,000 in
Fiscal 1996 to $1,178,000 in Fiscal 1997, primarily due to a decrease in
payables and accrued expenses. The decrease in payables and accrued expenses
is due to the payment in Fiscal 1997 of consulting and other costs related to
the financing transactions consummated in March 1996 discussed below and
payment of income taxes and legal settlements.
FINANCING AND LIQUIDITY: On June 30, 1994, the Company refinanced $1,300,000
of Douglas County Industrial Revenue Bonds (the "Bonds"), due on December 31,
1993, with a term loan from Colorado National Bank (the "Bank"), the same
bank holding the Bonds. During Fiscal 1996, the Company and the Bank
executed an amendment to the term loan agreement, whereby the Company made a
principal payment of $160,000 and shortened the term of the loan from July
31, 2004 to January 31, 2000 and the Bank released the Company's inventory
and accounts receivable as collateral for the loan. The loan will continue
to be amortized over its original term with a balloon payment on January 31,
2000.
During the third quarter of Fiscal 1996, Scherer Capital, a company
controlled by the largest shareholder of Scherer Healthcare, advanced the
Company $700,000 which was used for working capital purposes. In March 1996,
the Company and Scherer Capital refinanced this advance with long-term
convertible debt. The debt, which bears interest at 1-1/2% over prime, is
secured by inventory and equipment and is convertible at a rate of $.70 per
share. The debt agreement contemplated the possibility of additional
borrowings of $800,000. During Fiscal 1997, Scherer Capital transferred its
credit facility to Robert P. Scherer, Jr., the Company's Chairman of the
Board of Directors and Chief Executive Officer.
In March 1996, Scherer Capital invested $1,000,000 in the Company through the
purchase of 2,061,856 shares of common stock at a rate of $.485 per share.
Robert P. Scherer, Jr. has voting authority over the Company's stock
purchased by Scherer Capital either through beneficial ownership or as
trustee of a voting trust for shares owned by Mr. Scherer's adult children.
Also in March 1996, Scherer Healthcare converted a $1.8 million note of the
Company into common stock at a rate of $.70 per share. In a related
transaction, the Company accepted a proposal to exchange the accrued interest
on the note payable to Scherer Healthcare of $487,000 as well as management
fees owed to Scherer Healthcare of $376,000 for the Company's common stock at
a rate of $.70 per share.
In November 1996, the Company obtained a revolving line of credit from
Norwest Business Credit, Inc., ("Norwest") secured by trade accounts
receivable, inventory and equipment, with an interest rate of 2.25% over
Norwest's prime rate, expiring February 28, 1999. At March 29, 1997, the
interest rate is 10.75%. The maximum line of credit to be extended is 80% of
net eligible domestic accounts receivable plus 70% of eligible international
accounts receivable or $2,000,000, whichever is less. At March 29, 1997, the
Company had an available borrowing limit of approximately $1.4 million of
which $125,000 had been borrowed.
At March 29, 1997, the Company was not in compliance with a covenant
requiring a specified debt service coverage rate and a covenant that the
Company not incur an after tax loss greater than that specified. Norwest has
waived the requirement of compliance with these covenants effective as of
March 29, 1997, and the Company and Norwest have negotiated covenants
providing for a maximum net loss for the first four months of Fiscal 1998
(through July 1997) of $1,018,000 and a minimum net worth of $3,364,000 at
the end of July 1997 and each subsequent month end.
Simultaneous with the execution of the Merger Agreement with VSI, the Company
entered into a Dealer Agreement whereby VSI is authorized to sell the
Company's products for a period of two years. The Company provided 28 of its
29 existing domestic specialty dealers with notices of termination of their
dealer agreements which allow for
-17-
<PAGE>
termination on 30 to 90 days notice. These domestic dealers provided
$9,687,000 of revenue during Fiscal 1997. Five of these dealers have
subsequently entered into new agreements with the Company.
The Company believes that if the merger is not consummated or is delayed, VSI
will, over time, be able to replace the sales which had been made by the
terminated dealers prior to their termination. There can be no assurance,
however, that VSI will be able to generate sufficient sales to replace the
sales by the terminated dealers or that the sales of Company products by VSI
will increase quickly enough to avoid a material adverse impact on the
operations of the Company.
Two of the Company's domestic specialty dealers who were provided with
notices of termination have filed lawsuits alleging, among other claims,
breach of confidentiality and termination of a dealer agreement in a
commercially unreasonable manner. (See Note 10 to the Consolidated Financial
Statements.) The Company intends to contest these lawsuits vigorously.
These dealers, whose accounts receivable with the Company total $714,000 at
the end of May 1997 ($564,000 generated through sales subsequent to March
1997), are withholding payment pending settlement of issues raised in their
respective lawsuits. The Company intends to vigorously pursue collection of
these accounts.
The Company's management expects that the contemplated merger will be
consummated by the end of July 1997. However, if the merger is delayed or
does not occur and the sales of the terminated dealers are not replaced by
VSI in a timely manner, the Company may be unable to continue as a going
concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern. If
the merger is delayed or does not occur and VSI is unable to generate a
sufficient volume of sales of Company products, the Company would then
anticipate taking the following actions during Fiscal 1998.
1. Continue marketing and selling its products through the medical-surgical
dealers and through the distribution arrangement with VSI in the domestic
market and certain international markets where VSI has a strategic
presence.
2. Renegotiate its current line of credit with Norwest and pursue additional
financing opportunities that may be available.
3. Continue to reduce costs and operating expenses.
4. Restrict expenditures related to capital assets to maintenance of existing
equipment and facilities until the Company generates positive operating
cash flow.
5. Reduce employee headcount to support the level of sales volume.
The viability of the Company during Fiscal 1998 will be dependent on the
Company's successful completion of the merger or the successful completion of
some or all of the above activities.
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this report on
Form 10-K that are not statements of historical facts are forward-looking
statements that involve substantial risks and uncertainties. Forward-looking
statements are those relating to the Company or its operations that are
preceded by terms such as "anticipates", "expects", "believes", "intends" and
similar expressions. The Company's actual results, performance or
achievements may differ materially from those expressed or implied by such
forward-looking statements.
-18-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants. . . . . . . . . Page 20
Consolidated Balance Sheets . . . . . . . . . . . . . . . Page 21
Consolidated Statements of Operations . . . . . . . . . . Page 22
Consolidated Statements of Shareholders' Equity . . . . . Page 23
Consolidated Statements of Cash Flows . . . . . . . . . . Page 24
Notes to Consolidated Financial Statements. . . . . . . . Page 26
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts . . . . . Page 46
-19-
<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 29, 1997 and March 30, 1996 and the related
consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended March 29, 1997.
These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Marquest
Medical Products, Inc. and subsidiaries as of March 29, 1997 and
March 30, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended March 29, 1997,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements,
substantial doubt exists about the ability of the Company to continue
as a going concern. A contemplated merger and management's other
plans regarding these matters are described in Note 2. The
accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going
concern.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
June 6, 1997.
-20-
<PAGE>
MARQUEST MEDICAL PR0DUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
March 29, March 30,
1997 1996
--------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 13 $ 1,635
Trade accounts receivable, less allowances for
doubtful accounts of $118 and $94, respectively 3,392 2,915
Notes and other receivables 47 181
Inventories 3,283 3,393
Prepaid expenses 152 173
------- -------
Total current assets 6,887 8,297
PROPERTY, PLANT AND EQUIPMENT, net (Note 3) 6,469 7,055
OTHER ASSETS 68 41
------- -------
$13,424 $15,393
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 831 $ 1,001
Accrued liabilities 2,690 3,728
Payable to related parties 47 48
Short-term debt (Note 4) 842 803
------- -------
Total current liabilities 4,410 5,580
LONG-TERM DEBT (Note 4) 4,600 4,990
------- -------
Total liabilities 9,010 10,570
------- -------
COMMITMENTS AND CONTINGENGIES (Notes 2, 6 and 14)
SHAREHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares
authorized; 14,292,613 and 14,207,435 shares issued,
respectively; 14,271,773 and 14,186,595 shares
outstanding, respectively 9,904 9,834
Warrants 593 599
Retained deficit ($20,434 of retained deficit eliminated
at July 3, 1993 relating to quasi-reorganization) (6,013) (5,540)
Treasury stock, 20,840 shares (70) (70)
------- -------
Total shareholders' equity 4,414 4,823
------- -------
$13,424 $15,393
------- -------
------- -------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
21
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
March 29, March 30, April 1,
1997 1996 1995
---------- --------- ---------
NET REVENUES $ 22,045 $ 22,443 $ 20,576
COST OF SALES (15,339) (15,305) (15,666)
---------- --------- ---------
GROSS PROFIT 6,706 7,138 4,910
COSTS AND EXPENSES
Sales and marketing (4,135) (4,082) (4,323)
General and administrative (1,922) (2,391) (3,193)
Research and development (286) (155) (140)
---------- --------- ---------
OPERATING INCOME (LOSS) 363 510 (2,746)
OTHER INCOME (EXPENSE)
Interest, dividend & other income 70 410 113
Royalty income -- 488 --
Interest expense (675) (685) (626)
Other expense (305) (114) (27)
Foreign exchange gain (loss) 74 28 (164)
---------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (473) 637 (3,450)
INCOME TAXES -- (697) --
---------- --------- ---------
NET LOSS $ (473) $ (60) $ (3,450)
---------- --------- ---------
---------- --------- ---------
Net Loss per Common Share $ (0.03) $ (0.01) $ (0.46)
---------- --------- ---------
---------- --------- ---------
Weighted average number of
common shares outstanding
during the period 14,242,879 8,268,242 7,483,612
---------- --------- ---------
---------- --------- ---------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
22
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
---------------------- Retained ------------------------
Shares Amount Deficit Shares Amount Warrants
--------- --------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, April 2, 1994 4,505,466 $3,459 ($2,030) (20,840) ($70) $632
Net loss -- -- (3,450) -- -- --
Stock issuances --
Conversion of debt 3,333,333 2,500 -- -- -- --
Warrants exercised 263,921 218 -- -- -- (20)
--------- --------- ---------- ---------- ----------- ----------
BALANCE, April 1, 1995 8,102,720 6,177 (5,480) (20,840) (70) 612
Net loss -- -- (60) -- -- --
Stock issuances --
Conversion of debt 3,877,859 2,715 -- -- -- --
Warrants exercised 165,000 54 -- -- -- (13)
Sale of stock to related party 2,061,856 1,000 -- -- -- --
Stock issuance costs -- (112) -- -- -- --
--------- --------- ---------- ---------- ----------- ----------
BALANCE, March 30, 1996 14,207,435 9,834 (5,540) (20,840) (70) 599
Net loss -- -- (473) -- --
Warrants exercised 85,178 70 -- -- -- (6)
--------- --------- ---------- ---------- ----------- ----------
BALANCE, March 29, 1997 14,292,613 $9,904 ($6,013) (20,840) ($70) $593
--------- --------- ---------- ---------- ----------- ----------
--------- --------- ---------- ---------- ----------- ----------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
23
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
Fiscal Year Ended
-------------------------------
March 29, March 30, April 1,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (473) $ (60) $(3,450)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 804 1,050 1,364
Provision for losses on accounts receivable 32 24 21
Gain from extinguishment of debt -- (32) --
Gain on sale of assets -- (225) (70)
Gain)/loss on foreign currency translation (74) (28) 164
Net change in operating assets and liabilities-
Trade accounts receivable (509) (92) 207
Notes and other receivables 134 (181) 74
Inventories and prepaid items 131 (696) 297
Other assets (38) (3) (10)
Accounts payable, accrued expenses and
payable to related parties (1,209) 115 535
Other long-term liabilities -- -- (176)
Accrued interest on Swiss bonds 24 49 50
------- ------- -------
NET CASH USED IN OPERATING ACTIVITIES (1,178) (79) (994)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on notes from related party -- -- 375
Purchases of equipment (207) (66) (666)
Proceeds from disposition of assets -- 225 245
------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (207) 159 (46)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 200 1,100 220
Payments on notes payable (75) (400) --
Principal payments on borrowings and capital leases (381) (596) (280)
Issuance of common stock, net 19 889 --
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (237) 993 (60)
------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,622) 1,073 (1,100)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,635 562 1,662
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 13 $ 1,635 $ 562
------- ------- -------
------- ------- -------
</TABLE>
(Continued on next page)
24
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
Fiscal Year Ended
-------------------------------
March 29, March 30, April 1,
(Continued from previous page) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 469 $ 462 $ 445
------- ------- -------
------- ------- -------
Income taxes 480 630 --
------- ------- -------
------- ------- -------
NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Refinancing of Swiss debt-
Notes issued -- 259 --
------- ------- -------
Bonds and accrued interest retired -- (291) --
------- ------- -------
-- (32) --
------- ------- -------
------- ------- -------
Debt conversion-
Note payable to Scherer Healthcare, Inc. -- (1,852) (2,500)
Payable to related party -- (863) --
Common stock issued -- 2,715 2,500
------- ------- -------
-- -- --
------- ------- -------
------- ------- -------
Refinancing of Industrial Revenue Bonds-
Bonds retired -- -- (1,300)
Note payable to bank -- -- 1,300
------- ------- -------
-- -- --
------- ------- -------
------- ------- -------
Warrants-
Warrants exercised (6) (13) (20)
Common stock issued 51 53 218
Swiss notes retired (45) (40) (198)
------- ------- -------
-- -- --
------- ------- -------
------- ------- -------
Capital lease-
Capital lease obligation -- (364) --
Purchase of equipment -- 364 --
------- ------- -------
-- -- --
------- ------- -------
------- ------- -------
Conversion of short-term note to long-term debt-
Short-term debt to Scherer Capital, LLC -- (700) --
Note payable to Scherer Capital, LLC -- 700 --
------- ------- -------
$ -- $ -- $ --
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
25
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ORGANIZATION. Marquest Medical Products, Inc. ("Marquest" or the
"Company") is a manufacturer and marketer of disposable medical devices,
supplies and equipment for use in the respiratory care, cardiopulmonary
support and anesthesia markets. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
REVENUE. Revenue is recognized at the time the product is shipped. The
Company's export sales for the latest three fiscal years are presented in the
table below. Profits on export sales have been comparable to those
associated with domestic sales.
($000)
-----------------------------
FY 1997 FY 1996 FY 1995
------- ------- -------
Sales by geographic location:
United States and Canada $15,957 $16,699 $16,023
------- ------- -------
------- ------- -------
Export Sales:
Europe $ 3,518 $ 3,069 $ 2,538
Pacific Rim 1,707 1,959 1,458
Puerto Rico 391 407 352
Other 472 309 205
------- ------- -------
$ 6,088 $ 5,744 $ 4,553
------- ------- -------
------- ------- -------
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Work in process and finished goods include
material costs, labor and manufacturing overhead. The Company has expensed
all inventories that cannot be used in the Company's operations. Inventories
consist of the following (in thousands of dollars):
March 29, 1997 March 30, 1996
-------------- --------------
Raw materials $ 1,931 $ 1,782
Work in process 282 233
Finished goods 1,070 1,378
------- -------
$ 3,283 $ 3,393
------- -------
------- -------
The Company has finished goods inventory at a distributor's warehouse in The
Netherlands of approximately $219,000 and $131,000 at March 29, 1997 and
March 30, 1996, respectively.
FOREIGN CURRENCY EXCHANGE GAIN/(LOSS). The Company had SFr 345,000, 345,000
and 720,000 of Swiss Franc denominated bonds outstanding at March 29, 1997,
March 30, 1996 and April 1, 1995, respectively. The foreign currency
gain/(loss) is the result of the difference in the exchange rate between the
Swiss Franc and the U.S. Dollar at the beginning and end of the related
period for Swiss Francs outstanding during the period. The annual interest
payments on the bonds are accrued and recorded as interest expense with the
appropriate adjustments made to reflect the current exchange rate.
PROPERTY, PLANT AND EQUIPMENT. Additions to property, plant and equipment are
recorded at acquisition cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to operations as
incurred, whereas expenditures for renewals and betterments are capitalized
and depreciated.
26
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenditures for
the creation and application of new products and processes are expensed as
incurred.
QUASI-REORGANIZATION. On June 11, 1993, the Company's Board of Directors
approved quasi-reorganization procedures which were effective July 3, 1993,
the end of the Company's first quarter of Fiscal 1994.
INCOME TAXES. The Company provides for income taxes using the asset and
liability method prescribed by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred
income taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of a
change in tax laws or tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are recognized for the
expected future effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance for the amount of any
tax benefits which, more likely than not, based on current circumstances, are
not expected to be realized.
ACCRUED LIABILITIES. Accrued liabilities consist of the following (in
thousands of dollars):
March 29, 1997 March 30, 1996
-------------- --------------
Accrued income taxes, interest and penalties $ 638 $ 997
Accrued payroll and benefits 867 932
Accrued legal settlement 224 383
Other 961 1,416
------- -------
$ 2,690 $ 3,728
------- -------
------- -------
INCOME (LOSS) PER COMMON SHARE. Income (loss) per common share is based on
the weighted average number of common and common stock equivalent shares
outstanding during each period. Common stock equivalent shares were
anti-dilutive in Fiscal 1997, 1996 and 1995 and were therefore excluded from
the computation.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
consist of cash, short-term trade receivables and payables and long-term
debt. The carrying values of these financial instruments approximate fair
value.
SIGNIFICANT CUSTOMERS. During Fiscal 1997, 1996 and 1995, the Company had
one distributor, Tri-anim Health Services, Inc. ("Tri-anim") of Sylmar,
California, which accounted for 18%, 19% and 19%, respectively, of the
Company's sales. At March 29, 1997 and March 30, 1996, respectively,
Tri-anim represented 22% and 13% of total receivables before allowances.
This distributor has been terminated effective June 13, 1997.
INDUSTRY SEGMENTS. The Company operates in the United States and has one
industry segment - it manufactures and distributes medical devices and
equipment to the healthcare provider sector.
27
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NEW ACCOUNTING STANDARDS. In Fiscal 1997, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain
identified intangibles be written down in value whenever an impairment review
indicates that the carrying value may not be recoverable. The adoption of
SFAS No. 121 did not have a material effect on the Company's consolidated
financial position or results of operations.
In Fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting
for stock-based compensation plans either through recognition or disclosure.
The Company has adopted the disclosure provisions of SFAS No. 123 but
continues to account for the stock incentive plan under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 5
to the Consolidated Financial Statements.
In Fiscal 1998, the Company will adopt SFAS No. 128, "Earnings Per Share."
This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128
requires presentation of basic and diluted earnings per share on the face of
the income statement. Adoption of the new standard will not have a material
impact on the Company's earnings per share.
2. LIQUIDITY AND BASIS OF PRESENTATION:
The Company's consolidated financial statements have been presented on the
basis that it will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The conditions and uncertainty associated with this
basis of presentation, as well as management's plans concerning these
matters, are described in the following paragraphs.
As reflected in the accompanying consolidated financial statements, the
Company has experienced cash flow deficits from its operating activities. In
addition, as part of the contemplated merger discussed in Note 14 to the
Consolidated Financial Statements, the Company has given notice of
termination to the existing hospital specialty distributors of its products
and has entered into an agreement with the merger candidate, Vital Signs,
Inc. ("VSI"), to be the distributor of its products. This has resulted in
two distributor lawsuits (see Note 10) and will likely have a negative impact
on the Company's sales revenues in the short term. These distributors, whose
accounts receivable with the Company, total $714,000 at the end of May 1997
($564,000 resulting from sales subsequent to March 29, 1997), are withholding
payment pending settlement of issues raised in their respective lawsuits.
The Company intends to vigorously pursue collection of these accounts.
The Company's management expects that the contemplated merger will be
consummated by the end of July 1997. The Company also believes that if the
merger is not consummated or is delayed, VSI will, over time, be able to
replace the sales which had been made by the terminated dealers prior to
their termination. There can be no assurance, however, that VSI will be able
to generate sufficient sales to replace the sales by the terminated dealers
or that the sales of Company products by VSI will increase quickly enough to
avoid a material adverse impact on the operations of the Company. These
circumstances indicate that the Company may be unable to continue as a going
concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
28
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the merger is delayed or does not occur and the distributor relationship
with VSI does not generate sufficient volume of sales, the Company would then
anticipate taking the following actions during Fiscal 1998.
1. Continue marketing and selling its products through the medical-surgical
dealers and through the distribution arrangement with VSI in the
domestic market and certain international markets where VSI has a
strategic presence.
2. Renegotiate its current line of credit with Norwest and pursue additional
financing opportunities that may be available.
3. Continue to reduce costs and operating expenses.
4. Restrict expenditures related to capital assets to maintenance of
existing equipment and facilities until the Company generates positive
operating cash flow.
5. Reduce employee headcount to support the level of sales volume.
The viability of the Company during Fiscal 1998 will be dependent on the
Company's successful completion of the merger or the successful completion of
some or all of the above activities.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following (in thousands of
dollars):
March 29, March 30,
1997 1996
--------- ---------
Land $ 1,265 $ 1,265
Buildings 4,985 4,985
Machinery and equipment 8,924 8,866
Other 2,555 2,523
Construction in progress 119 2
-------- --------
17,848 17,641
Less - accumulated depreciation (11,379) (10,586)
-------- --------
$ 6,469 $ 7,055
-------- --------
-------- --------
The Company depreciates buildings over 50 years, machinery and equipment
between 3 and 10 years and other fixed assets between 3 and 8 years.
29
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBT:
Short-term debt consists of the following (in thousands of
dollars):
March 29, March 30,
1997 1996
--------- ---------
Swiss Bonds, SFr 345,000 outstanding at March 29,
1997 and March 30, 1996; interest payable annually
on March 11 at a rate of 6%, increased to 9% effective
March 12, 1992; due March 11, 1994; unsecured;
including $110,000 and $107,000 accrued interest,
respectively (See Note 11) $ 347 $ 397
Borrowings on bank line of credit, interest at prime
plus 2.25% payable monthly in arrears, secured by trade
accounts receivable, inventory and equipment 125 -----
Current maturities of long-term debt and
capital lease obligations 370 406
--------- ---------
$ 842 $ 803
--------- ---------
--------- ---------
SWISS BONDS. On January 14, 1992, the Company was notified that the holders
of the majority of its Swiss bonds had exercised their right to put the bonds
for redemption as of March 11, 1992. The Company was not able to honor this
put, and accordingly defaulted on these obligations. The Company did not
make any payments of principal or interest on the Swiss bonds in Fiscal 1993.
During Fiscal 1994, the Company refinanced a significant portion of the
Swiss bonds outstanding (see Note 11). During Fiscal 1996, bonds totaling
375,000 Swiss Francs plus accrued interest were exchanged for $291,000 of
U.S. denominated 8% Swiss notes and $146,000 in cash. No bond exchanges were
made during Fiscal 1997. The remaining Swiss bonds outstanding at March 29,
1997 and March 30, 1996, including the accrued interest on these bonds, have
been classified as short-term debt.
BORROWINGS ON LINE OF CREDIT. The Company has obtained a revolving line of
credit from Norwest Business Credit, Inc. ("Norwest") secured by trade
accounts receivable, inventory and equipment, with an interest rate of 2.25%
over Norwest's prime rate, expiring February 28, 1999. At March 29, 1997,
the interest rate is 10.75%. Under the terms of the line of credit
agreement, the Company is obligated to pay a minimum interest of $15,000 per
quarter beginning November 5, 1996, the date the agreement was signed. In
addition, the Company is obligated to pay an unused line fee at the rate of
one-quarter percent (0.25%) per year on the average daily unused line of
credit. During Fiscal 1997, approximately $24,000 was expensed related to
interest and the unused line fee. Pursuant to the Credit and Security
Agreement, the Company cannot, without the written consent of Norwest,
declare or pay any dividends (other than dividends payable solely in common
stock of the Company) or purchase, redeem or retire any common stock.
The maximum line of credit to be extended is 80% of net eligible domestic
accounts receivable plus 70% of eligible international accounts receivable or
$2,000,000, whichever is less. At March 29, 1997, the Company had an
available borrowing limit of approximately $1.4 million of which $125,000 had
been borrowed.
At March 29, 1997, the Company was not in compliance with a covenant
requiring a specified debt service coverage ratio. The Company was also not
in compliance with a covenant that the Company not incur a year-to-date after
tax loss greater than that specified. Norwest has waived the requirement of
compliance with these covenants effective March 29, 1997 and the Company and
Norwest have negotiated covenants providing for a maximum net loss for the
first four months of Fiscal 1998 (through July 1997) of $1,018,000 and a
minimum net worth of $3,364,000 at the end of July 1997 and each subsequent
month end.
30
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following (in thousands of dollars):
March 29, March 30,
1997 1996
--------- ---------
Swiss notes payable; 8%; interest due semi-annually;
due March 31, 1999, unsecured; denominated in
U.S. dollars $ 2,851 $ 2,896
Note payable to bank; interest rate floats annually,
currently 8.125%; interest and principal due in
monthly installments with balloon payment at January 31,
2000; secured by building 788 858
Note payable to R. P. Scherer, Jr., interest payable
quarterly at 1-1/2% over prime; current interest rate
9.75%; due April 1, 2001; convertible into 1,000,000
shares of Marquest common stock; secured by inventory,
property and equipment 700 700
Capital lease obligations 261 536
--------- ---------
$ 4,600 $ 4,990
--------- ---------
--------- ---------
The scheduled maturities of long-term debt beyond Fiscal 1998 are as
follows:
1999 $ 3,127
2000 794
2001 --
2002 700
Less - imputed interest on capital leases (21)
----------
Total $ 4,600
----------
----------
NOTE PAYABLE TO BANK. During Fiscal 1996, the Company and Colorado
National Bank (the "Bank") executed an amendment to the Term Loan Agreement
dated June 30, 1994, whereby the Company made a principal payment of $160,000
and shortened the term of the Note from July 31, 2004 to January 31, 2000 and
the Bank released the Company's inventory and accounts receivable as
collateral for the Note. The Note will continue to be amortized over the
original term of the Note with a balloon payment on January 31, 2000.
Pursuant to the Term Loan Agreement, the Company cannot, without the written
prior approval of the Bank, (1) make any expenditures for capital assets in
excess of $1 million in any fiscal year subsequent to April l, 1995 or (2)
pay or declare any dividends or purchase, redeem or otherwise acquire any of
its capital stock, or make any other distribution of any property to any of
its shareholders.
NOTE PAYABLE TO SCHERER CAPITAL/LLC/R. P. SCHERER, JR. During the third
quarter of Fiscal 1996, Scherer Capital, LLC ("Scherer Capital"), a company
controlled by the largest shareholder of Scherer Healthcare, advanced the
Company $700,000 which was used for working capital purposes. In March 1996,
the Company and Scherer Capital refinanced this advance with long-term
convertible debt. The debt, which bears interest at 1-1/2% over prime, is
convertible into the Company's common stock at a rate of $0.70 per share.
The debt agreement contemplated the possibility of additional 7borrowings of
$800,000. During Fiscal 1997, Scherer Capital transferred its credit
facility to Robert P. Scherer, Jr., the Company's Chairman of the Board of
Directors and Chief Executive Officer. After April
31
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1, 1997, the Company may, at its option, redeem the note at the following
prices, expressed as a percentage of principal amount: 1998 - 104%, 1999 -
103%, 2000 - 102%, 2001 - 101%.
CAPITAL LEASE. The Company leases certain production equipment under a
capital lease arrangement. The gross amount of equipment and accumulated
depreciation recorded under capital leases was $1,133,000 and $595,000,
respectively, at March 29, 1997.
5. STOCK OPTIONS AND WARRANTS:
STOCK OPTION PLAN. The Company has an Incentive and Non-Qualified Stock
Option Plan (the "Plan") for executives and key employees, which is
administered by the Compensation Committee of the Board of Directors. Shares
approved for the plan total 1,750,000, of which 790,161 are available for
grant at March 29, 1997. Options vest in periods ranging from three to five
years and expire seven years from the date of the grant.
As a result of the proposed merger discussed in Note 14 and in accordance
with the Plan, the Company will provide notice to the Plan's option holders
that they may exercise their options, whether vested or not, prior to the
effective time of the merger. All such options which are not exercised prior
to the merger will terminate.
During Fiscal 1997, Marquest adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," but continues to account for
the plan under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Had compensation cost for the Plan been
determined consistent with the fair value based accounting method under SFAS
No. 123, the pro forma net loss and loss per share would have been the
following:
Fiscal Years Ended
----------------------------------------------
March 29, 1997 March 30, 1996
----------------------------------------------
Loss Loss
Net Loss Per Share Net Loss Per Share
--------- ------------ ----------- -----------
As reported $(473) $(0.03) $(60) $(0.01)
Pro forma $(494) $(0.03) $(69) $(0.01)
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation
cost over the option's vesting period and has not been applied to options
granted prior to Fiscal 1996. Accordingly, the resulting pro forma
compensation cost is not representative of what compensation cost will be in
future years.
32
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are the weighted-average assumptions used in connection with
the Black-Scholes option-pricing model to estimate the fair value of options
granted in Fiscal years 1997 and 1996:
Fiscal Year Ended
--------------------------------
March 29, 1997 March 30, 1996
-------------- --------------
Risk-free interest rate 6.54% 5.56%
Expected dividend yield None None
Expected life 3 years 3 years
Expected volatility 118.70% 154.38%
Data for outstanding options under the Plan are summarized as follows:
<TABLE>
<CAPTION>
March 29, 1997 March 30, 1996
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 555,000 $1.23 339,327 $1.91
Granted 95,000 $0.88 587,500 $0.93
Canceled or forfeited (17,434) $1.10 (371,827) $1.36
---------- --------- ---------- ---------
Outstanding, end of year 632,566 $1.18 555,000 $1.23
Exercisable at end of year 353,227 $1.52 227,096 $1.93
Weighted average fair value of
options granted during year $0.08 $0.10
</TABLE>
The following table summarizes the status of outstanding and exercisable
options under the Plan at March 29, 1997:
<TABLE>
Outstanding Options Exercisable Options
------------------------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Outstanding Life (years) Price Exercisable Price
----------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Range of Exercise Prices
- ------------------------
$0.69-$0.88 392,166 5.47 $0.73 116,827 $0.72
$1.38-$2.00 240,400 3.30 $1.92 236,400 $1.92
------- ---- ----- ------- -----
Total 632,566 4.64 $1.18 353,227 $1.52
</TABLE>
33
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON STOCK PURCHASE RIGHTS. On August 18, 1991, the Board of
Directors of the Company declared a dividend distribution of one
right (a "Right") for each outstanding share of the Company's Common
Stock to shareholders of record at the close of business on August
20, 1991 (the "Record Date"). Each Right entitles the registered
holder to purchase from the Company a unit consisting of one-half of
a share (a "Unit") of Common Stock at a purchase price of $25.00 per
Unit, subject to adjustment.
The Rights are attached to all Common Stock certificates representing
shares outstanding, and no separate Rights Certificates have been
distributed. The Rights will separate from the Common Stock and a
"Distribution Date" will occur so that the Rights become exercisable
no later than ten business days following (1) the public announcement
that a person or group (other than Scherer Healthcare, Inc. or
Scherer Capital, LLC) has acquired, or obtained the right to acquire,
15% or more of the Company's outstanding shares or (2) the
commencement of a tender or exchange offer that would result in a
person or entity (other than Scherer Healthcare, Inc. or Scherer
Capital, LLC) owning 15% or more of the Company's outstanding Common
Stock. In the event that 15% or more of the stock is actually held
by a person or group, each right not owned by such person or group
allows the holder to buy $50.00 worth of the Company's Common Stock,
based on the then-current market price, for $25.00. The Company can
redeem the rights at any time until 10 days following the above
events at a price of $.01 per Right. The Rights are not exercisable
until the Distribution Date and will expire at the close of business
on August 20, 2001.
The Rights Agreement was amended by the Board of Directors on March
14, 1997, that makes the Rights Agreement inapplicable to the
proposed merger between the Company and VSI discussed in Note 14.
SETTLEMENT PAYABLE. In July, 1993, the Company filed suit in the
United States District Court in Colorado against a former President
and Director and a former Chairman of the Board of Directors of the
Company seeking a declaratory judgment that their termination
agreements were void and for damages. The Company discontinued
making payments on these termination agreements in April, 1993. The
former President and the former Chairman counterclaimed for payments
allegedly due them under the termination agreements and the former
Chairman counterclaimed for repayment of an alleged loan made by him
to a third party for the benefit of the Company.
In May, 1995, the Company settled this litigation for $725,000 plus
interest at 9%; $200,000 paid in May, 1995 and the remaining amount
in monthly payments through September, 1998. At March 29, 1997, the
accrued balance outstanding is $224,000. As part of this settlement,
the former President and Chairman may convert amounts owed to them by
Marquest to Marquest common stock at $1.00 per share up to a maximum
of $200,000. The convertible portion of the settlement may not
exceed the balance owed. At March 29, 1997, a maximum of 200,000
common shares are issuable under the settlement agreement.
34
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the total number of the Company's
common shares which may be issued upon exercise of existing stock
options and warrants, or conversion of debt at March 29, 1997.
Fully Diluted
Percentage
Shares Ownership
---------- -------------
Shares outstanding at March 29, 1997 14,271,773 59.70%
Stock options outstanding at March 29, 1997
pursuant to the Company's Incentive and Non-
Qualified Stock Option Plan 632,566 2.64%
Stock options issued to consultant, exercisable
at $0.75 per share until August 26, 2002 50,000 0.21%
Warrants issued in connection with a Fiscal 1993
sale and leaseback of certain real estate;
exercisable at $1.50 per share until December
21, 1997 75,326 0.32%
Warrants issued in connection with a Fiscal 1993
lease termination, exercisable at $4.00 per
share until September 30, 1997 10,000 0.04%
Warrants issued to the Swiss bondholders,
exercisable at $0.75 per share until March 31, 1999 1,087,317 4.55%
Warrants issued to Scherer Healthcare, Inc.:
In connection with providing short-term
financing in Fiscal 1994, exercisable at $0.75
per share until March 31, 1999 800,000 3.34%
In connection with sale leaseback of Arterial
Blood Gas product line, exercisable at $0.75
per share; 1,530,000 and 4,250,000 exercisable
until March 31, 1999 and March 31, 2003,
respectively 5,780,000 24.18%
---------- ------
Total Scherer Healthcare, Inc. 6,580,000 27.52%
---------- ------
Convertible note payable to R. P. Scherer, Jr.,
exercisable at $0.70 per share until April 1, 2001 1,000,000 4.18%
Settlement payable, convertible into common stock
at $1.00 per share 200,000 0.84%
---------- ------
Total common shares if all options and warrants
are exercised 23,906,982 100.00%
---------- ------
---------- ------
35
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LEASING ARRANGEMENTS:
The Company leases warehouse space as well as office and transportation
equipment under non-cancelable operating leases. The following is a schedule
as of March 29, 1997, of minimum future lease payments required under these
leases:
Facilities Equipment Total
---------- --------- -----
1998 $ 347 $ 66 $ 413
1999 187 67 254
2000 172 64 236
2001 172 23 195
2002 172 -- 172
Thereafter 129 -- 129
------ ---- ------
1,179 220 1,399
Minimum sublease rentals (300) -- (300)
------ ---- ------
$879 $220 $1,099
------ ---- ------
------ ---- ------
In December 1992, the Company sold its Nogales, Arizona warehouse to a third
party under a 10-year sale leaseback arrangement with a base monthly rental
of $10,850 plus operating costs. The rent can be adjusted in years three,
five, seven and nine based upon the increase, if any, in the Consumer Price
Index for All Urban Customers ("CPI"). In December 1995, the Company
subleased two-thirds of the warehouse space to an unaffiliated entity and in
September 1996 subleased the remaining space to the same entity. The monthly
sublease income is $15,000 plus operating costs and without any escalation
for changes in the CPI. The sublease expires on November 30, 1998; however,
the sublessee has the option to extend the term of the lease for two
additional terms of two years each.
Total rent expense, net of sublease revenue, under all operating leases for
Fiscal 1997, 1996, and 1995 was $272,000, $452,000 and $560,000, respectively.
7. FOOD AND DRUG ADMINISTRATION:
The Company is subject to regulation by the United States Food and Drug
Administration ("FDA"). The FDA provides regulations governing the
manufacture and sale of the Company's products and regularly inspects the
Company and other manufacturers to determine their compliance with these
regulations.
On August 8, 1991, the United States Attorney's Office for the District of
Colorado filed a complaint for injunction against the Company and certain of
its officers. The complaint alleged that the Company was manufacturing
products in violation of the FDA's Current Good Manufacturing Practice
Regulations ("GMP"). The complaint also alleged that certain of the devices
were misbranded and adulterated for violating other relevant sections of the
Federal Food, Drug and Cosmetic Act. On October 1, 1991, the Company and a
former officer entered into a five-year Consent Decree. The two other
individuals originally named in the complaint for injunction were dismissed
as defendants.
By letter dated October 8, 1991, the District Director of the FDA's Denver
district informed the Company that, pursuant to the consent decree of October
1, 1991, the Company's medical device manufacturing operations were not in
substantial compliance with the terms of the consent decree and ordered the
Company to cease all manufacturing and distribution.
36
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based upon agreements with the FDA in November and December 1991, the Company
was allowed to recondition inventories of components, sub-assemblies and
finished products which were produced prior to the October 8th shut down.
This was done in close cooperation with the FDA by the use of higher sampling
levels and tightened acceptable quality limits. After the FDA reviewed the
Company's records of this reprocess/rework, the FDA allowed the distribution
of these products. The Company was also allowed to manufacture products
following the new, documented procedures.
By letter dated January 9, 1992, the FDA's Denver district office informed
the Company that it was authorized to renew its operations, including
production and distribution of all products.
In May 1996, the FDA concluded an inspection with six deficiency observations
noted. Many of the deficiencies noted referred to the lack of training
regarding assembly, testing and sampling. The Company took corrective
action, including retraining employees, and implemented other changes in
order to respond to the FDA's concerns. These changes and corrective actions
were presented to the FDA in detail in the submissions made by the Company
and the Company continues to work with the FDA to address the issues raised.
The Company was again inspected by the FDA during September 1996, and
received a Form 483, Inspection Observations, containing three alleged
nonconformances with GMP. The Company responded to these observations,
including providing specific corrective action. Following the September
inspection, the Consent Decree expired October 1, 1996 and is of no further
force and effect.
8. RELATED PARTY TRANSACTIONS:
SCHERER HEALTHCARE, INC. During Fiscal 1994, the Company acquired
approximately $4,352,000 of 5% cumulative convertible preferred stock of
Scherer Healthcare to be used in an exchange offer for defaulted Swiss Bonds,
pursuant to the Omnibus Agreement dated April 12, 1993 between the Company
and Scherer Healthcare (See Note 11). This preferred stock was acquired in
exchange for an 8% note, maturing on March 31, 1999. In May, 1994, Scherer
Healthcare converted $2,500,000 of the principal balance of the 8% note into
3,333,333 shares of the Company's common stock at a rate of $0.75 per share.
In March, 1996, Scherer Healthcare converted the remaining balance of the 8%
note of $1,851,600, $486,571 in related accrued interest due to Scherer
Healthcare and $376,330 owed to Scherer Healthcare for management fees into
3,877,859 shares of the Company's common stock at a rate of $0.70 per share.
At March 29, 1997, Scherer Healthcare owns 50.5% of the Company's outstanding
common stock.
As consideration for granting the Company an option to repurchase its
Arterial Blood Gas ("ABG") product line sold to Scherer Healthcare in June,
1993, and for providing a cash advance in early Fiscal 1994 (see Note 11),
Scherer Healthcare acquired 5,780,000 and 800,000 warrants, respectively, to
purchase the Company's common stock at $0.75 per share.
As a result of the Omnibus Agreement, Scherer Healthcare also acquired a
right to name a majority of the members of the Company's Board of Directors.
In connection with the sale of the Company's ABG product line to Scherer
Healthcare, the Company pays a monthly royalty to Scherer Healthcare of 3.25%
of the Company's net sales of ABG products. During Fiscal 1997, 1996 and
1995, these royalties totaled $354,000, $346,000 and $287,000, respectively.
During Fiscal 1996 and 1995, the Company expensed $150,000 and $180,000,
respectively, of interest related to the Company's 8% note payable to Scherer
Healthcare, and expensed $77,000, $164,000 and $304,000 in Fiscal 1997, 1996
and 1995, respectively, related to marketing and financial consulting
provided by Scherer Healthcare.
37
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHERER CAPITAL, LLC/R. P. SCHERER, JR. In March, 1996, Scherer Capital
purchased 2,061,856 shares of the Company's common stock at $0.485 per common
share for $1,000,000. During the third quarter of Fiscal 1996, Scherer
Capital provided a net short-term loan of $700,000 to the Company which was
used for working capital purposes. In March 1996, the Company and Scherer
Capital refinanced this advance with long-term convertible debt. The debt,
which bears interest at 1-1/2% over prime, is secured by inventory and
equipment and is convertible into the Company's common stock at a rate of
$0.70 per share. The debt agreement contemplated the possibility of
additional borrowings of $800,000.
During Fiscal 1997, Scherer Capital transferred its credit facility to Robert
P. Scherer, Jr., the Company's Chairman of the Board of Directors and Chief
Executive Officer. Mr. Scherer has voting authority over the Company's
common stock purchased by Scherer Capital in March 1996 either through
beneficial ownership or as trustee of a voting trust for shares owned by Mr.
Scherer's adult children. These shares represent 14.4% of the Company's
outstanding common stock at March 29, 1997.
During Fiscal 1997 and 1996, the Company expensed $68,250 and $20,831,
respectively, of interest related to the loan provided by Mr. Scherer.
9. INCOME TAXES:
During Fiscal 1996, the Company recorded a current federal tax provision of
$697,000 relating to its settlement with the IRS from pre-quasi reorganization
tax years. No provisions were recorded for the fiscal years ended March 29,
1997 or April 1, 1995.
The differences between the provision/(benefit) for income taxes at the
Federal statutory rate and that shown in the Consolidated Statements of
Operations are as follows (in thousands of dollars):
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
March 29, March 30, April 1,
1997 1996 1995
--------- --------- --------
Federal statutory rate 34% 34% 34%
"Expected" federal tax provision (benefit) $ (161) $ 217 $ (1,156)
Utilization of net operating loss -- (237) --
IRS settlement -- 697 --
State income taxes, net of Federal benefit (15) (2) (112)
Other items 115 10 24
------- ------- --------
(61) 685 (1,244)
Increase in valuation allowance 61 12 1,244
------- ------- --------
Tax provision $ -- $ 697 $ --
------- ------- --------
------- ------- --------
38
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under SFAS 109, deferred taxes are determined based on estimated
future tax effects of differences between the amounts reflected in
the financial statements and the tax basis of assets and liabilities
given the provisions of the enacted tax laws. The net deferred tax
assets and liabilities as of March 29, 1997 and March 30, 1996 are
comprised of the following (in thousands of dollars):
March 29, March 30,
1997 Change 1996
--------- ------ ---------
Deferred tax assets/(liabilities):
Accelerated tax depreciation in excess
of book depreciation $ (190) $ (3) $ (187)
Nondeductible accruals 272 (328) 600
Unrealized foreign exchange losses 74 (38) 112
Capital loss carryforwards 896 (75) 971
Net operating loss carryforwards 5,283 443 4,840
------- ----- -------
6,335 (1) 6,336
Valuation allowance (6,335) 1 (6,336)
------- ----- -------
$ -- $ -- $ --
------- ----- -------
------- ----- -------
During recent fiscal years, the Company has experienced losses for
financial reporting and tax purposes. Because of the uncertainty of
realization of any future tax benefits, the Company has determined
that, on a more likely than not basis, it is appropriate to reflect
a valuation allowance for the entire net deferred tax asset. At March
29, 1997, the Company had tax net operating loss carryforwards of
approximately $14,200,000, and capital loss carryforwards of
approximately $2,400,000. Tax net operating losses expire at varying
dates through 2011, and capital loss carryforwards expire at varying
dates through 1998. Due to the transactions discussed in Notes 11,
12 and 14, the future benefits associated with the utilization of net
operating loss carryforwards may be substantially limited. Capital
loss carryforwards can only be utilized to the extent the Company
generates capital gains in the future.
During Fiscal 1994, the Company received a refund of federal income
taxes of approximately $745,000 due to the carryback to prior years
of losses incurred during the temporary suspension of operations by
the FDA. The Internal Revenue Service ("IRS") completed an audit,
and in July 1994, determined that the losses could not be carried
back and issued an assessment to the Company for the taxes plus
interest. In June 1995, the Company negotiated a repayment plan with
the IRS whereby the Company paid $400,000 in June 1995, and the
remaining balance to be paid in equal monthly installments over a
two-year period.
In Fiscal 1996, the Company settled additional tax issues related to
audits by the IRS for fiscal years 1982-1988. The Company recorded
$697,000 of additional taxes and interest.
The Company negotiated a repayment plan for both tax cases settled
whereby the Company will pay the liability for taxes, interest and
penalties in monthly installments of $40,000. The unpaid balance
outstanding included in accrued liabilities for both tax cases is
$638,000 at March 29, 1997. Interest and penalties will continue to
accrue on the unpaid balance during the repayment period. The IRS
has placed a lien on the Company's facility in Englewood, Colorado to
secure payment of the taxes, interest and penalties.
39
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LITIGATION:
A products liability action was filed against the Company in
California in 1990 which was defended and settled during the trial by
the Company's insurance company. Under the insurance policy, the
Company may have been responsible for a $250,000 self-insured
retention plus the cost of defense. The Company claimed that the
insurance company mishandled the lawsuit and declined to pay. The
Company was sued by the insurance company in District Court, Arapahoe
County, Colorado in February, 1994 alleging damages of either $540,000
or $290,000. In May, 1996, the Company settled with the insurance
company for $170,000.
On March 28, 1997, the Company filed an action in the United States
District Court for the District of Colorado, alleging that Tri-Anim
Health Services, Inc. ("TriAnim"), the Company's largest domestic
distributor, breached a Dealer Agreement between the Company and Tri-
Anim. This action was dismissed without prejudice on May 30, 1997.
Tri-Anim filed a complaint in the Superior Court of the State of
California for the County of Los Angeles against the Company and VSI
on April 9, 1997, alleging that the Company had breached a
Confidentiality Agreement between Tri-Anim and the Company and making
a number of other claims against the Company and VSI. The Company
filed a motion to move the California action to federal district court
and filed a motion to compel arbitration of all issues in Colorado.
The Company is vigorously contesting this matter.
On March 24, 1997, Chesapeake Medical, Inc. and Chesapeake Breathing
Services, Inc. (collectively referred to as "Chesapeake"), two of the
Company's distributors, filed a lawsuit against the Company and VSI
in United States District Court for the District of New Jersey,
alleging that the Company terminated the Dealer Agreement between the
Company and Chesapeake in a commercially unreasonable manner and that
the Company disclosed confidential information. The Company is
vigorously contesting this matter.
The Company believes that its position in the above two matters is
meritorious, but is unable to predict the outcome of either lawsuit
or whether other lawsuits will be filed by other dealers as a result
of their termination.
There is litigation pending before the Tokyo District Court which was
filed by Terumo K.K. ("Terumo"), a competitor of the Company, against
Chiron K.K. ("Chiron"), the Company's distributor of arterial blood
gas samplers in Japan, alleging that the blood samplers infringe upon
a Japanese patent owned by Terumo. The litigation does not name the
Company; however, the Company has agreed to indemnify Chiron from
Terumo's claim and reimburse Chiron for its litigation cost.
Terumo is requesting an injunction against Chiron from importing and
selling blood samplers as well as 137,000,000 yen (approximately
$1,103,000 at March 29, 1997) for damages with regard to Chiron's sale
of blood samplers from January 1993 through 1995. Terumo may increase
the damages requested from 1996 to the present. Due to the
preliminary nature of this litigation, the Company cannot predict the
Court's opinion or the impact, if any, on the Company's market for
blood gas samplers in Japan.
11. REFINANCING TRANSACTIONS:
During Fiscal 1994, the Company consummated two related transactions
to provide the Company with necessary liquidity and to refinance the
Swiss Bonds.
SALE OF ARTERIAL BLOOD GAS PRODUCT LINE. The Company sold its ABG
product line, including $245,000 of net book value of property
connected with the product line, to Scherer Healthcare for $4.5
million in cash and agreed to a six year lease back of the product
line for a royalty of 3.25% of net product line sales. The Company
has the option to repurchase the product line for $4.5 million plus
$22,500 for each month elapsed between the sale and repurchase.
40
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The option to repurchase, originally expiring on May 31, 1996, was extended
by the boards of Scherer Healthcare and the Company until June 15, 1999. The
Company granted Scherer Healthcare 5,780,000 warrants to purchase common
stock of the Company at $.75 per share as consideration for the repurchase
option. These warrants were valued at $0.50 each. Of these, 1,530,000 and
4,250,000 will expire if not exercised by March 31, 1999 and March 31, 2003,
respectively. The warrants are exercisable for cash or, if exercised by
Scherer Healthcare or a Scherer Healthcare affiliate, for common stock of
Scherer Healthcare. Scherer Healthcare may elect to exercise these options
for no cash if a corresponding concession is granted to the Company in the
product line repurchase price. Scherer Healthcare may elect to receive the
product line repurchase price in the form of 5,780,000 shares of the
Company's common stock, based on a value of $.75 per share, plus the balance
of the purchase price in cash. If Scherer Healthcare makes this election,
the number of warrants issued in consideration for the Company's repurchase
option as described above will be reduced by a corresponding number.
Prior to the above transaction, Scherer Healthcare had advanced the Company
$1,750,000. In consideration for this advance, the Company also granted to
Scherer Healthcare warrants to purchase 800,000 shares of the Company's
common stock at $0.75 per share exercisable until March 31, 1999. These
warrants were also valued at $0.50 each. The advance was repaid with the
proceeds from the sale and leaseback transaction.
The Company recorded $3,290,000 related to the value of the warrants issued
to Scherer Healthcare and a deferred gain on the sale leaseback of $965,000,
representing the amount of the sale proceeds, less the value assigned to the
warrants, less the net book value of the property sold. The deferred gain
was eliminated in the quasi-reorganization discussed in Note 12.
SWISS BOND REFINANCING. During Fiscal 1986, the Company issued 25,000,000
Swiss Francs of bonds due March 11, 1994. On January 14, 1992, the Company
was notified that holders of the majority of its Swiss bonds had exercised
their right to put the bonds for redemption as of March 11, 1992. The
Company was not able to honor this put, and, accordingly, defaulted on these
obligations.
During Fiscal 1994, the Company acquired approximately $4,352,000 of 5%
cumulative convertible preferred stock of Scherer Healthcare (an amount equal
to approximately 35% of the outstanding Swiss bond principal and accrued
interest tendered in the transaction described below). This preferred stock
was acquired in exchange for an 8% note, maturing on March 31, 1999. The
note was convertible, in whole or in part, at Scherer Healthcare's option,
into Marquest common stock at a value of $.75 per share. The Scherer
Healthcare preferred stock is convertible into Scherer Healthcare common
stock. In May 1994, Scherer Healthcare converted $2,500,000 of the principal
balance of the 8% note into 3,333,333 shares of the Company's common stock.
In March 1996, Scherer Healthcare converted the remaining principal balance
of the 8% note of $1,851,600 into 2,645,143 shares of Marquest common stock
at a rate of $.70 per share.
In three exchange offers, the bondholders exchanged 16,320,000 Swiss Francs
in bonds, 96% of the total bonds outstanding. The bondholders were offered a
combination of Marquest debt, warrants to purchase common stock of the
Company, and the convertible preferred stock of Scherer Healthcare in
exchange for the outstanding Swiss debt principal and interest. In the
exchanges, the Swiss bondholders received (1) cumulative convertible
preferred stock of Scherer Healthcare for 35% of the principal and accrued
interest of the tendered bonds; (2) unsecured, 8% U.S. dollar denominated
notes of the Company maturing March 31, 1999 with an aggregate principal
amount of $2,875,000, and (3) warrants to purchase 165,000 and 1,432,416
shares of Marquest common stock at $.25 and $.75 per share, respectively,
exercisable until March 31, 1999. These warrants were also valued at $.50
each.
The Company recorded approximately $798,000 for the value assigned to the
warrants given to the Swiss bondholders, a gain of approximately $988,000 on
the extinguishment of the Swiss bonds and, because this transaction was
41
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
considered a troubled debt restructuring under SFAS No. 15, the Company also
accrued $3,226,000 in prospective interest on the notes. The prospective
interest was eliminated in the quasi-reorganization described in Note 12.
As a result of the sale of the Arterial Blood Gas product line and the Swiss
bond refinancing, Scherer Healthcare has the right to acquire approximately
65% of the outstanding common stock of the Company through the exercise of
all warrants and conversion of the note. Also as a result of the agreement
with Scherer Healthcare, Scherer Healthcare acquired the right to name a
majority of the members of the Company's Board of Directors.
12. QUASI-REORGANIZATION:
During the first quarter of Fiscal 1994, the Company completed significant
changes to its operations: (l) the reintroduction of substantially all of its
product lines into the market after ceasing operations after an FDA shutdown
in Fiscal 1992, (2) the consolidation of its manufacturing facilities in
Mexico and Parker, Colorado into its primary facility in Englewood, Colorado;
(3) the changes in management of the Company, including a new President and
CEO, Vice President of Sales and Senior Vice President of Regulatory Affairs;
and (4) the successful completion of the first exchange offer to the Swiss
bondholders in which 91% of the bonds were exchanged. Considering these
changes, the Company determined that it was appropriate to effect a
quasi-reorganization. On June 11, 1993, the Company's Board of Directors
approved quasi-reorganization accounting procedures which were effective July
3, 1993, the end of the Company's first quarter of Fiscal 1994.
Quasi-reorganization rules require that the balance sheet amounts be restated
to fair values and that the accumulated deficit be eliminated against the
paid-in-capital accounts. Therefore, the Company (1) wrote off the remaining
amount of goodwill, totaling $4,283,000 at July 3, 1993; (2) eliminated the
prospective interest on the Swiss bonds of $3,226,000 discussed in Note 11;
(3) eliminated the deferred gain on the sale leaseback transaction of
$965,000 discussed in Note 11; (4) valued the treasury stock at its market
value of $70,000; (5) eliminated the retained deficit of $20,434,000; and
(6) reduced common stock by $17,125,000 and warrants by $3,456,000.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
All amounts are in thousands of dollars, except per share amounts
First Second Third Fourth
------ ------ ------ ------
FISCAL 1997 QUARTERS
- --------------------
Net Revenues $5,152 $5,654 $5,035 $6,204
Gross Profit 1,392 1,728 1,605 1,981
Net Income (Loss) (363) 28 (314) 176
Income (Loss) per Share (0.03) 0.00 (0.02) 0.00
FISCAL 1996 QUARTERS
- --------------------
Net Revenues $5,284 $5,193 $5,739 $6,227
Gross Profit 1,605 1,683 1,779 2,071
Net Income (Loss) 22 (34) (625) 577
Income (Loss) Per Share 0.00 0.00 (0.08) 0.05
42
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. MERGER:
On March 14, 1997, the Company signed an Agreement and Plan of Merger
("Merger Agreement") between VSI; VSI Acquisition Corporation ("Newco"), a
wholly-owned subsidiary of VSI; and the Company, providing for the merger of
Newco with the Company, with the Company surviving the merger as a
wholly-owned subsidiary of VSI. Upon the effective date of the merger, all
of the Company's common stock will be converted into the right to receive
$0.797 per share in cash.
DEALER AGREEMENT. Simultaneous with the execution of the Merger Agreement,
the Company and VSI entered into a Dealer Agreement whereby VSI is authorized
to sell the Company's products for a period of two years. The Company provided
28 of its 29 existing domestic specialty dealers with notices of termination
of their dealer agreements which, as a general matter, allow for termination
on 30 to 90 days notice. The Dealer Agreement may be terminated by the
Company if VSI does not meet certain specified sales quotas after June 30,
1997. Since providing its domestic specialty dealers with notices of
termination, the Company has negotiated new arrangements with five of those
dealers which provide that those dealers may continue to distribute Company
products at reduced margins.
Two of the Company's terminated dealers have commenced lawsuits against the
Company and VSI alleging, among other things, that the termination of its
dealer agreement was unlawful and that VSI is using confidential information
of dealers in the sale of the Company's products. The Company believes that
its position in both of these matters is meritorious, but is unable to
predict the outcome of either lawsuit or whether other lawsuits will be filed
by other dealers as a result of their termination.
PURCHASE OF ABG ASSETS AND COVENANTS NOT TO COMPETE. As part of the
investment made in the Company by Scherer Healthcare in June 1993, Scherer
Healthcare acquired title to the Company's Arterial Blood Gas ("ABG") product
line which the Company leases from Scherer Healthcare. The Company has an
option to repurchase the ABG product line from Scherer Healthcare at a
purchase price equal to $4,500,000 plus $22,500 per month during the period
from June 13, 1993 through the date of repurchase. Pursuant to an Inducement
Agreement between VSI and Scherer Healthcare (the "Scherer Healthcare
Inducement Agreement"), VSI has agreed to purchase the ABG product line from
Scherer Healthcare for a purchase price equal to the purchase price under the
Company's repurchase option. If the merger occurs on July 31, 1997, the
purchase price of the ABG product line would be $5,625,000.
Pursuant to the Scherer Healthcare Inducement Agreement, Scherer Healthcare
is obligated, at the time of the merger, to enter into a covenant not to
compete pursuant to which it agrees it will not engage in the business of
manufacturing or selling ABG products for a period of three years following
the effective date of the merger. In consideration of this covenant not to
compete, VSI has agreed to pay Scherer Healthcare an amount equal to the
difference between $5,860,000 and the purchase price of the ABG product line.
If the merger occurs on July 31, 1997, Scherer Healthcare will be paid
$235,000 for the covenant not to compete.
Robert P. Scherer, Jr., the Company's Chairman of the Board of Directors and
Chief Executive Officer, is the beneficial owner of or has voting authority
over 2,061,856 shares of the Company's common stock. Mr. Scherer also holds
a promissory note of the Company in the principal amount of $700,000 which is
convertible into the Company's common stock at a rate of $0.70 per share.
Mr. Scherer has agreed to convert the note prior to the merger into 1,000,000
shares of the Company's common stock. In addition to his ownership of the
Company's common stock, Mr. Scherer has voting authority over 61.1% of the
outstanding common stock of Scherer Healthcare.
Pursuant to an Inducement Agreement entered into between VSI and Mr. Scherer
(the "RPS Inducement Agreement"), Mr. Scherer has agreed to vote his shares
of Scherer Healthcare common stock in favor of the merger. Mr. Scherer has
also agreed to vote all of his shares of the Company's common stock in favor
of the merger. Pursuant to the RPS Inducement Agreement, Mr. Scherer is
required to enter into a covenant not to compete pursuant to which he agrees
43
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that for a period of three years following the merger he will not engage in
the business of manufacturing or selling ABG products. In consideration of
this covenant, VSI has agreed to pay Mr. Scherer $140,000.
CONDITIONS TO CLOSING. The Merger Agreement contains a number of conditions
to closing which must be satisfied or waived prior to consummation of the
merger. These conditions include, among other conditions, the requirement
that the merger be approved by the shareholders of the Company and Scherer
Healthcare, the requirement that no material litigation is pending against
the Company or its business, and the requirement that no adverse regulatory
action has been taken against the Company. The Company believes that the
conditions to closing can be satisfied and that the closing will take place
in late July 1997.
COVENANTS OF THE MERGER AGREEMENT. Pursuant to the Merger Agreement, the
Company has agreed that, during the period from March 14, 1997 to the
effective time of the merger, except as permitted in writing by VSI, the
Company will not, among other things, (a) amend its Articles of Incorporation
or Bylaws, (b) issue, sell, deliver, grant or declare any stock dividend or
any other distribution with respect to the Company's common stock except that
the Company may issue common stock pursuant to certain options, warrants or a
convertible note exercisable or convertible in accordance with the terms of
the applicable agreements and outstanding as of March 14, 1997, (c) mortgage
or pledge any assets except in the ordinary course of business, (d) borrow or
agree to borrow any funds except in the ordinary course of business and
pursuant to the Company's existing credit facilities up to certain amounts,
(e) incur any obligation or liability, cancel any material debts of third
parties, lease, sell, transfer or grant any preferential rights to lease or
acquire any of its material assets or substantively amend or terminate any
material contract or agreement except in the ordinary course of business, (f)
adopt, materially amend or terminate any employee benefit plan or materially
increase compensation or other benefits payable to the Company's employees,
(g) acquire any other business entity, (h) solicit, encourage or authorize
any competing inquiry, proposal, offer or possible offer from a third party
relating to a change in control or ownership of the Company, (j) enter into
any material licensing or marketing arrangement or other material contract
with any party other than VSI, and (k) settle any pending litigation in a
manner that is materially adverse to the Company or commence any material
litigation.
TERMINATION OF THE MERGER. The Merger Agreement may be terminated and the
merger may be abandoned before the effective time of the merger (a) by mutual
written consent of VSI, Newco and the Company or (b) by VSI or the Company if
(i) the Company's shareholders fail to approve the merger at the special
meeting of shareholders or (ii) the shareholders of Scherer Healthcare fail
to approve the sale of the stock of the Company. In addition, VSI may
terminate the Merger Agreement if (a) there has been a material
misrepresentation or breach by the Company of any of its representations or
warranties in the Merger Agreement, (b) the Company's Special Treatment Sales
(defined below) during the period from December 29, 1996 through the date
seven days prior to the Closing (the "Pre-Closing Date") are less than eighty
percent of the Company's Special Treatment Sales during the period from the
first day of the Company's fiscal quarter commencing in December 1995 through
the date one year prior to the Pre-Closing Date, (c) there has been any
misrepresentation by Scherer Healthcare or Mr. Scherer in any of the
representations or warranties set forth in the Inducement Agreements, or (d)
there has been any material failure by Scherer Healthcare or Mr. Scherer to
comply with their respective obligations under the Inducement Agreements.
Special Treatment Sales are all of the Company's sales other than sales made
through the Company's U.S. (including Puerto Rico) dealers and sales made
through distributors of the Company's medical-surgical products.
Either the Company or VSI, at their discretion, may terminate the Merger
Agreement if the effective date of the merger has not occurred by August 29,
1997, except that a party whose breach of the Merger Agreement has caused
such a delay in the consummation of the merger will not be entitled to
terminate the Merger Agreement. If the Company terminates the Merger
Agreement as a result of a breach of any material covenants by VSI, the
Company will be entitled to $800,000 as damages.
44
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the Merger Agreement is terminated by VSI or the Company because (a) an
offer is made, including a Purchase Event (defined below), (b) a claim is
made that such offer could result in greater value to the Company's
shareholders than the value to be received from VSI, and (c) after such offer
is known to the Company, the Company's shareholders do not approve the
merger, the shareholders of Scherer Healthcare do not approve the sale of the
Company's common stock, or the Company breaches any of its obligations under
the merger agreement, and within 24 months after the termination of the
Merger Agreement, a Purchase Event occurs, the Company will pay to VSI a cash
fee of $1,500,000. A Purchase Event means any of the following events: (a)
without VSI's written consent, the Company announces an intention to enter
into an agreement with a party other than VSI to (i) merge, (ii) dispose of
25% or more of the Company's assets or (iii) issue, sell or dispose of
securities representing 25% or more of the voting power of the Company, or
(b) any person or group other than Scherer Healthcare or VSI or their
affiliates acquires 25% or more of the voting power of the Company.
45
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands of dollars)
<TABLE>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER RECOVERIES AT END OF
OF PERIOD EXPENSES ACCOUNTS (WRITE-OFFS) PERIOD
---------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS - TRADE RECEIVABLES
Year Ended
March 29, 1997 $ 94 $32 $ (3) $ (5) $118
Year Ended
March 30, 1996 $132 $24 $ (8) $(54) $ 94
Year Ended
April 1, 1995 $178 $21 $(48) $(19) $132
</TABLE>
46
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with accountants on any accounting or
financial disclosure matters during the applicable period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS: Information regarding the executive officers of the
Company is set forth under the caption "Executive Officers" in Part I of this
report on Form 10-K.
DIRECTORS: Information regarding the directors of the Company is set forth
below.
CHARLES R. ATKINS III has been a Vice President of the Isolyser Company since
1993. From 1987 until its sale in 1993 to the Isolyser Company, he was
President and a partner in Charles Atkins and Company, Ltd., a business which
produced and distributed surgical procedural trays, drapes, gowns, and other
disposable surgical products. He has been a director of the Company since
August 1994. He is 55.
STEPHEN LUKAS, SR. has been President, Chief Executive Officer, and a
director of Goldcaps, Inc., a subsidiary of IVAX Corporation since 1992. Mr.
Lukas also serves as Vice President of IVAX Corporation, Business Development
and he is Chairman of the Board and a director of Galena A.S. in the Czech
Republic. He was President and a director of Capsule Technology from its
formation in 1981 until his retirement in 1991. Mr. Lukas has been a
director of the Company since February 1995. Mr. Lukas also is a director of
Scherer Healthcare, Inc. He is 71.
JACK W. PAYNE has been Director of Medical Corporate Development for
Pierson/Hawkins, Inc., a strategic planning and creative services company,
since 1996. Mr. Payne was Chairman and Chief Executive Officer of Ferro
Magnetic Therapeutics Corporation, a biotechnology company, from 1993 to
1996, and Executive Vice President and Chief Operating Officer of Sequin
Medical Corporation, a medical device company, from 1990 to the present. Mr.
Payne became a director of the Company in December 1995. He is 67.
KENNETH H. ROBERTSON has been Chairman of Conference-Call USA, Inc. and Vice
President of Business Development of Dial Services LTD. (communications
companies) since 1988. He has also been the Managing Partner of Print
Marketing Concepts, a communications company, since 1984, and the principal
owner and developer of a self-storage warehouse and business incubator
operation since 1977. Mr. Robertson has been a director of the Company since
February 1995. Mr. Robertson also is a director of Scherer Healthcare, Inc.
and served as its President from July 1981 to June 1983. He is 62.
ROBERT P. SCHERER, JR. has been Chairman of the Board and Chief Executive
Officer of the Company since February 1995. He has been the Chairman of the
Board and Chief Executive Officer of Scherer Healthcare, Inc. since February
1995 and director since 1977. Mr. Scherer is also the controlling
stockholder and a director and executive officer of RPS Investment, Inc. and
certain affiliated companies. RPS Investments, Inc. and its affiliates
beneficially own a majority of the common stock of Scherer Healthcare, Inc.
He was Chairman of the Board, Chief Executive Officer and a director of
Scherer-Storz, Inc. from its formation in January 1980 until its sale in June
1986 to American Cyanamid Company. Mr. Scherer was a director of IRT
Corporation which filed a petition under Chapter 11 of the federal bankruptcy
laws in 1993. He is 64.
WILLIAM J. THOMPSON has been the Vice Chairman and Chief Operating Officer of
the Company since April 1994 and President since February 1995. He has also
been President and Chief Operating Officer and a director of Scherer
Healthcare, Inc. since 1984. He has been a Director of the Company since
August 1993. He is 63.
MACK D. TINDAL has been a private investor since his retirement in 1981.
Previously, Mr. Tindal was President of First Texas Pharmeceuticals from 1964
to 1978 until its sale to Scherer Healthcare, Inc. when it was renamed
Scherer
47
<PAGE>
Laboratories. Mr. Tindal served as President of Scherer Laboratories from
1978 to 1979 and President of Aloe Creme Laboratories from 1979 to 1981. Mr.
Tindal has been a director of the Company since December 1995. He is 76.
JACK L. YORK has been President of Shelbourne, Wallace, York, Inc., a
construction company, since 1993. He was President of Angel of Mercy, Inc.,
an ambulance service business from 1974 until 1996. He was President of York
Medical Supply, a wholly-owned subsidiary of the Company until it was sold in
February 1992. Mr. York became a Director of the Company in 1988, resigned
in April 1993 and was reelected in June 1993. He is 52.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934: Section
16(a) of the Securities Exchange Act of 1934, as amended, and regulations of
the Securities and Exchange Commission ("SEC") thereunder, require the
Company's executive officers, directors and persons who own more than ten
percent of the Company's common stock, as well as affiliates of such persons,
to file reports of ownership and changes in ownership of the Company's stock
with the SEC and the National Association of Securities Dealers, Inc.
Executive officers, directors and persons owning more than ten percent of the
Company's stock are required by SEC regulations to furnish the Company with
copies of all Section 16(a) reports that they file.
Based solely upon a review of the copies of such reports, the Company
believes that during the fiscal year ended March 29, 1997, its executive
officers, directors and persons owning more than ten percent of the Company's
stock complied with all applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE: The following table summarizes the compensation
paid or accrued during the three fiscal years ended March 29, 1997, to the
Company's Chief Executive Officer and each of the other executive officers of
the Company whose compensation for fiscal 1997 exceeded $100,000 (the "named
executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
Long-term
Compensation
Awards
Annual Compensation Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary ($) Bonus ($) Compensation($) Options (#) Compensation ($)
<S> <C> <C> <C> <C> <C> <C>
Robert P. Scherer, Jr. (1) 1997 -- -- -- -- --
Chairman of the Board and 1996 -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- --
William J. Thompson (2) 1997 $80,002 -- $5,307 50,000 --
President and Chief 1996 -- -- -- 75,000 --
Operating Officer 1995 -- -- -- -- --
</TABLE>
- -------------------
(1) Mr. Scherer was elected as Chairman of the Board and Chief Executive
Officer in February 1995 and receives no salary or bonus compensation from
the Company. Mr. Scherer also serves as Chairman of the Board and Chief
Executive Officer of Scherer Healthcare. Mr. Scherer devotes a substantial
portion of his professional time to matters other than the Company.
(2) During Fiscal 1996 and 1995, Mr. Thompson received no salary or bonus
compensation from the Company, but was compensated as President, Chief
Operating Officer and a director of Scherer Healthcare. The Company accrued
approximately $77,000, $102,000 and $96,000 during fiscal 1997, 1996 and
1995, respectively, payable to Scherer
48
<PAGE>
Healthcare, for the services of Mr. Thompson. Beginning November, 1996, Mr.
Thompson was compensated by the Company for his services as President and
Chief Operating Officer at an annual salary of $120,000. Mr. Thompson also
received an auto allowance beginning May 1996 at an annual rate of $6,000.
Mr. Thompson devotes substantially all of his professional time to the
Company.
STOCK OPTION PLAN: The Company maintains the Marquest Medical Products, Inc.
Incentive and Non-Qualified Stock Option Plan (the "Plan") to attract and
retain key executive personnel and advisors, and to encourage their continued
employment with and service to the Company.
As a result of the proposed merger discussed in Part I of this Form 10-K and
in accordance with the Plan, the Company will provide notice to the Plan's
option holders that they may exercise their options, whether vested or not,
prior to the effective time of the merger. All such options which are not
exercised prior to the merger will terminate.
The following table sets forth information regarding (i) the number of shares
of the Company's common stock underlying stock options granted during fiscal
1997 to each named executive officer, (ii) the percent the grants represent
to total options granted to all employees during the fiscal year, (iii) the
per share exercise price of the options, (iv) the expiration dates of the
options, and (v) the potential realizable value of each grant of options
assuming the market price of the Company's common stock appreciates from the
date of grant to the end of the term at a 5% and a 10% annualized rate.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
% OF TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED TO EXERCISE OR ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES BASE PRICE PRICE APPRECIATION FOR
OPTIONS IN FISCAL PER EXPIRATION OPTION TERM (1)
NAME GRANTED (#) YEAR SHARE ($/SH) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
William J. Thompson 50,000(2) 52.6% 0.875 8/22/03 $17,811 $41,506
</TABLE>
- -------------------
(1) The potential realizable value was calculated based on the grant-date
valuation method assuming (i) the options were 100% vested on the date of
grant and (ii) that the market price of the Company's common stock
appreciates from the date of grant to the expiration of the options at a 5%
and a 10% annualized rate.
(2) Mr. Thompson vests one-third of the options on August 22, 1996, 1997 and
1998. However, if the proposed merger between the Company and VSI is
consummated, all of the options will vest at the effective time of the merger.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR END VALUES:
During Fiscal 1997, no stock options were exercised. The following table
sets forth information as of March 29, 1997 with respect to (i) the number
of shares covered by options (both exercisable and unexercisable) held by
each named executive officer and (ii) the respective value for "in-the-money"
options which represents the positive spread between the exercise price of
existing options and the fair market value of the Company's common stock at
March 29, 1997.
49
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
# SHARES FISCAL YEAR END (#) AT FISCAL YEAR END ($)(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Thompson (2) -- -- 66,666 83,334 --- ---
</TABLE>
- -------------------
(1) The dollar value is determined by subtracting the option price from the
per share fair market value of the Company's common stock as of March 29,
1997 ($0.59) as reported on the Nasdaq SmallCap Market.
(2) In accordance with the Merger Agreement discussed in Part I of this Form
10-K and in accordance with the Plan, Mr. Thompson will be notified that his
options may be exercised, whether vested or not, prior to the effective time
of the proposed merger. If Mr. Thompson exercised his options and if the
proposed merger is consummated, the value of his in-the-money option will be
$8,213, computed by subtracting the option exercise price from the per share
purchase consideration of $0.797.
DIRECTOR COMPENSATION: Executive officers of the Company who serve on the
Board of Directors of the Company do not receive compensation for Board or
committee participation, but are reimbursed for expenses incurred. Other
directors receive a $5,000 annual retainer, $500 for each Board meeting
attended, $250 for each telephonic meeting and $250 for each committee
meeting attended. Expenses of travel to meetings are reimbursed to the
Company.
On August 22, 1996, the Company's Board authorized the grant of options for
150,000 shares of the Company's common stock to its non executive officer
directors at an exercise price in excess of the price offered by VSI in the
Merger Agreement discussed in Part I of this report on Form 10-K. These
options were never evidenced by option agreements. On March 14, 1997, each
of the directors agreed that these options would be canceled. The Company
has agreed to pay each outside director $10,000 as partial compensation for
their services to the Company and Director Mack D. Tindal will receive an
additional $10,000 in recognition of his service to the Company in
negotiating the Merger Agreement between the Company and VSI.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS: Pursuant to an
employment agreement dated November 1, 1996 between the Company and William
J. Thompson, the Company's President, Chief Operating Officer and Director,
Mr. Thompson is entitled to a lump sum severance benefit equal to his base
salary under the employment agreement from the date of his termination
through February 28, 1999, if his employment is involuntarily terminated for
reasons other than cause following a change of control of the Company. The
merger between the Company and VSI will constitute a change of control within
the meaning of the employment agreement. Mr. Thompson has agreed that his
employment with the Company will terminate on the effective date of the
merger and Scherer Healthcare has agreed to pay the full amount of the
severance benefits to which Mr. Thompson will become entitled. These
severance benefits are estimated to be $190,000 if the effective date of the
merger occurs in July 1997.
Robert P. Scherer, Jr., the Company's Chairman of the Board of Directors and
Chief Executive Officer, is the beneficial owner of or has voting authority
over 2,061,856 shares of the Company's common stock. Mr. Scherer also holds
a promissory note of the Company in the principal amount of $700,000 which is
convertible into the Company's common stock at a rate of $0.70 per share.
Mr. Scherer has agreed to convert the note prior to the merger into 1,000,000
shares of the Company's common stock.
50
<PAGE>
Pursuant to the RPS Inducement Agreement between VSI and Mr. Scherer, Mr.
Scherer has agreed to vote his shares of Scherer Healthcare common stock in
favor of approval of the merger. Mr. Scherer has also agreed to vote all of
his shares of the Company's common stock in favor of the merger. Pursuant
the RPS Inducement Agreement, Mr. Scherer is required to enter into a
covenant not to compete pursuant to which he agrees that for a period of
three years following the merger he will not engage in the business of
manufacturing or selling ABG products. In consideration of this covenant, VSI
has agreed to pay Mr. Scherer $140,000.
COMPENSATION COMMITTEE INTERLOCKS AND COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION: Robert P. Scherer, Jr. is Chairman, Chief Executive
Officer and a Director of both the Company and Scherer Healthcare. Mr.
Scherer receives no direct compensation from either the Company or Scherer
Healthcare. William J. Thompson is the President, Chief Operating Officer
and a Director of both the Company and Scherer Healthcare. Mr. Thompson is
compensated by Scherer Healthcare for his services as President and Chief
Operating Officer of Scherer Healthcare. Mr. Thompson is compensated by the
Company for his services as President and Chief Operating Officer of the
Company beginning in November 1996. Stephen Lukas, Sr., a Director of both
the Company and Scherer Healthcare, services on the Compensation Committee of
both companies.
During the fiscal year ended March 29, 1997, the Compensation Committee met
once. The Compensation Committee is composed of Stephen Lukas, Sr. and Jack
L. York. The Compensation Committee's responsibilities with respect to
executive compensation for all executive officers has been limited to
long-term incentive compensation under the stock option plan. The
Compensation Committee has furnished the following report for Fiscal 1997.
COMPENSATION PHILOSOPHY. The objectives of the Company's executive
compensation program are to provide a level of compensation that will
attract, retain, and motivate executives capable of achieving long-term
success for the Company's stockholders in terms of increasing Company and
shareholder value. Stock options are granted to executive officers and to
other employees on a periodic basis, with vesting typically over several
years. Awards are made at a level which is considered to provide a
meaningful incentive to and to retain the executive officers.
Jack L. York
Stephen Lukas, Sr.
51
<PAGE>
SHAREHOLDER RETURN PERFORMANCE GRAPH: The Company's common stock is listed
for trading on The Nasdaq SmallCap Market under the symbol "MMPI." The price
information reflected for the Company's Common Stock in the following
performance graph and accompanying table is based upon the closing sales
prices of the Common Stock on the dates indicated assuming a $100.00
investment on March 28, 1992. The performance graph compares the Company's
cumulative total stockholder return with the Nasdaq Stock Market Total Return
Index and the Nasdaq Health Services Stock Index. The graph assumes that the
value of the investment in each index was $100 on March 28, 1992. The
stockholder return reflected below for the five year historical period may
not be indicative of future performance.
1992 1993 1994 1995 1996 1997
Marquest Medical............. 100 18 23 4 17 7
Nasdaq Stock Market (US)..... 100 115 124 138 187 208
Nasdaq Health Services....... 100 98 129 149 180 162
COMPARISON OF CUMULATIVE FIVE-YEAR SHAREHOLDER RETURN
[GRAPH]
52
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
SHARES BENEFICIALLY PERCENT OF
BENEFICIAL OWNER ADDRESS OWNED (1) CLASS
<S> <C> <C> <C>
Scherer Healthcare, Inc. 2859 Paces Ferry Road 13,791,192 (2) 66.03%
PRINCIPAL STOCKHOLDER Suite 300
Atlanta, Georgia 30339
Robert P. Scherer, Jr. 2859 Paces Ferry Road 16,853,048 (3) 77.00%
CHAIRMAN OF THE BOARD, Suite 300
CHIEF EXECUTIVE OFFICER Atlanta, Georgia 30339
AND PRINCIPAL STOCKHOLDER
William J. Thompson 11039 East Lansing Circle 225,000 (4) 1.55%
PRESIDENT, CHIEF OPERATING Englewood, CO 80112
OFFICER AND DIRECTOR
Charles R. Atkins III 0 (7)
DIRECTOR
Stephen Lukas, Sr. 0 (7)
DIRECTOR
Jack W. Payne 0 (7)
DIRECTOR
Kenneth H. Robertson 1,000 (7)
DIRECTOR
Mack D. Tindal 2,000 (7)
DIRECTOR
Jack L. York 378,728 (5) 2.64%
DIRECTOR
All current directors and 17,459,776 (6) 78.78%
officers as a group
(8 persons)
</TABLE>
- -------------------
(1) The stock ownership information shown has been furnished to the Company
by the named person and members of the group or obtained from information
filed with the Securities and Exchange Commission. Beneficial ownership as
reported in the table has been determined in accordance with applicable
federal regulations and includes shares of common stock as to which a person
possesses sole or shared voting and/or investment power and shares which may
be acquired within 60 days upon the exercise of outstanding stock options,
warrants and convertible securities. Certain outstanding shares may be
deemed to be beneficially owned by more than one person.
(2) The shares shown include 6,580,000 shares issuable upon exercise of
outstanding common stock purchase warrants.
53
<PAGE>
(3) The shares shown include the shares beneficially owned by Scherer
Healthcare, 1,000,000 shares issuable pursuant to the terms of an outstanding
convertible note, and 515,464 shares held in a voting trust, with respect to
which shares Mr. Scherer has sole voting power but which shares are owned by
Mr. Scherer's adult children. Mr. Scherer is deemed to beneficially own such
shares by virtue of his positions as Chairman of the Board, Chief Executive
Officer and controlling stockholder of Scherer Healthcare.
(4) The shares shown also include 150,000 shares of common stock issuable
upon exercise of outstanding stock options and 75,000 shares issuable upon
exercise of outstanding Company common stock warrants owned by Scherer
Healthcare which Mr. Thompson has an option to purchase.
(5) The shares shown include 25,000 shares of common stock issuable upon
exercise of outstanding stock options and 25,000 shares of restricted common
stock issuable August 1, 1996 pursuant to Restricted Stock Units.
(6) See Notes (2), (3), (4) and (5) above.
(7) Represents less than one percent.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH SCHERER HEALTHCARE, INC.
In April 1993, the Company sold its ABG product line to Scherer Healthcare
for $4.5 million in cash and agreed to a six year leaseback of the product
line for a royalty of 3.25% of net product line sales. The Company has the
option to repurchase the product line for $4.5 million plus $22,500 for each
month elapsed between the sale and repurchase. The option to repurchase,
originally expiring on May 31, 1996, was extended by Scherer Healthcare and
the Company until June 15, 1999. During Fiscal 1997, the royalties on the
net ABG sales totaled $354,000.
During fiscal year 1994, the Company acquired approximately $4,352,000 of 5%
cumulative convertible preferred stock of Scherer Healthcare in exchange for
an 8% note, maturing on March 31, 1999. The note was convertible, in whole
or in part, into Marquest common stock at a rate of $0.75 per share. In May
1994, pursuant to the note agreement, Scherer Healthcare converted $2,500,000
of the principal balance of the 8% note into 3,333,333 shares of the
Company's common stock. In March 1996, Scherer Healthcare converted the
remaining balance of the 8% notes of $1,851,600, $486,571 in related accrued
interest due to Scherer Healthcare and $376,330 owed to Scherer Healthcare
for management fees into 3,877,859 shares of the Company's common stock at a
rate of $0.70 per share. At March 29, 1997, Scherer Healthcare owns 50.5% of
the Company's outstanding common stock.
During Fiscal 1997, the Company reimbursed Scherer Healthcare $77,000 for the
services of Mr. Thompson as President and Chief Operating Officer of the
Company.
TRANSACTIONS WITH SCHERER CAPITAL, LLC/R. P. SCHERER, JR.
In March 1996, Scherer Capital purchased 2,061,856 shares of the Company's
common stock at $0.485 per common share for $1,000,000. During the third
quarter of Fiscal 1996, Scherer Capital provided a net short-term loan to the
Company which was used for working capital purposes. In March 1996, the
Company and Scherer Capital refinanced this advance with long-term
convertible debt. The debt, which bears interest at 1-1/2% over prime, is
secured by inventory and equipment and is convertible into the Company's
common stock at a rate of $0.70 per share.
During Fiscal 1997, Scherer Capital transferred its credit facility to Robert
P. Scherer, Jr., the Company's Chairman of the Board of Directors and Chief
Executive Officer. Mr. Scherer has voting authority over the Company's
common stock purchased by Scherer Capital in March 1996 through beneficial
ownership or as trustee of a voting trust for shares owned by Mr. Scherer's
adult children. These shares represent 14.4% of the Company's outstanding
common stock at March 29, 1997.
During Fiscal 1997, the Company expensed $68,250 of interest related to the
loan provided by Mr. Scherer.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following represents a listing of all financial statement, financial
statement schedules and exhibits filed as part of this report.
(1) Financial Statements: See Table of Contents to the Consolidated
Financial Statements included herein in Item 8.
(2) Financial Statement Schedules: See Table of Contents to the
Consolidated Financial Statements included herein in Item 8.
Schedules I, III, IV and V, for which provision is made in the
applicable regulations of the Securities and Exchange Commission
have been omitted because they are not applicable or the information
is elsewhere disclosed in the notes to the financial statements.
(3) Exhibits: Exhibits identified in parentheses below are on file with
the Securities and Exchange Commission and are incorporated herein by
such references.
2.1 Agreement and Plan of Merger dated March 14, 1997, by and among
Vital Signs, Inc., VSI Acquisition Corporation, and Marquest
Medical Products, Inc. (Exhibit 2.1 to Form 8-K dated March 21,
1997)
2.2 Scherer Healthcare Inducement Agreement dated March 14, 1997,
by and among Scherer Healthcare, Inc., Vital Signs, Inc.,
and Marquest Medical Products, Inc. (Exhibit 2.2 to Form 8-K
dated March 21, 1997)
3.1 Articles of Incorporation of Registrant, as amended through
August 25, 1994 (Exhibit 3(i) of Registration Statement on Form
S-2, Registration No. 33-85564)
3.2 By-laws of Registrant, as amended (Exhibit 2 to Form 8-K dated
April 9, 1993)
4.1 The outside and inside front cover pages and the information
set forth under the heading "Terms of the Bonds" excerpted from
the Prospectus of the Registrant dated February 10, 1985 with
respect to the 25,000,000 Swiss Franc Bonds offered pursuant
thereto (Exhibit 4(b) to Form 10-K dated April 1, 1989)
4.2 Rights Agreement dated as of August 8, 1991 between Marquest
Medical Products, Inc. and Bank of America National Trust &
Savings Association (Exhibit 4.5 to Registration Statement on
Form S-2, Registration Statement No. 33-85564)
4.3 Subscription Agreement for Purchase of Common Stock between
Marquest Medical Products, Inc. and Scherer Capital, LLC dated
March 29, 1996 (Exhibit 4.1 of Form 8-K dated March 28, 1996)
4.4 Conversion Agreement dated March 28, 1996 between Marquest
Medical Products, Inc. and Scherer Healthcare, Inc. (Exhibit
4.2 of Form 8-K dated March 28, 1996)
4.5 Loan and Security Agreement dated March 28, 1996 between
Marquest Medical Products, Inc. and Scherer Capital, LLC
(Exhibit 4.3 of Form 8-K dated March 28, 1996)
4.6 Second Priority Deed of Trust, Security Agreement and
Assignment of Rents and Leases dated March 28, 1996 from
Marquest Medical Products, Inc. to the Public Trustee of
Douglas County, Colorado for the benefit of Scherer Capital,
LLC (Exhibit 4.4 of Form 8-K dated March 28, 1996)
4.7 Convertible Secured Note due April 1, 2001 (Exhibit 4.5 of
Form 8-K dated March 28, 1996)
55
<PAGE>
4.8 Credit and Security Agreement by and between Marquest Medical
Products, Inc. and Norwest Business Credit, Inc. dated November
5, 1996 (Exhibit 4 to Form 10-Q dated December 28, 1996)
10.1 Master Equipment Lease Agreement dated December 8, 1993 between
Marquest Medical Products, Inc. and Financing for Science
International, Inc. (Exhibit 4(c) to Form 10-K dated April 2,
1994)
10.2 Term Loan Agreement dated June 30, 1994 between Marquest
Medical Products, Inc. and Colorado National Bank (Exhibit 4(d)
to Form 10-Q dated July 2, 1994)
10.3 Letter Agreement between Marquest Medical Products, Inc. and
Norman Dreyfuss dated August 1, 1989 (Exhibit 10(a) to Form
10-K dated March 31, 1990)
10.4 Letter Agreement between Marquest Medical Products, Inc. and
Robert J. McKinnon dated August 19, 1991 (Exhibit 10(b) to
Form 10-K dated March 28, 1992)
10.5 Marquest Medical Products, Inc. Incentive and Non-Qualified
Stock Option Plan effective November 14, 1987, as amended
(Exhibit 10(c) to Form 10-K dated April 1, 1989)
10.6 Consent Decree between Marquest Medical Products, Inc. and the
Food and Drug Administration ("FDA") dated October 1, 1992
(Exhibit 10(d) to Form 10-K dated March 28, 1992)
10.7 Letter from FDA approving resumption of manufacturing and
distribution activities of Marquest Medical Products, Inc.
dated January 9, 1992 (Exhibit 10(e) to Form 10-K dated March
28, 1992)
10.8 Management Agreement between Marquest Medical Products, Inc.
and Scherer Healthcare, Inc. dated June 1, 1994 (Exhibit 10(f)
to Form 10-Q dated June 2, 1994)
10.9 Omnibus Agreement between Scherer Healthcare, Inc. and Marquest
Medical Products, Inc. dated April 12, 1993 (Exhibit 3 to
Form 8-K dated April 9, 1993)
10.10 First Amendment to Loan Agreement dated December 18, 1995
between Marquest Medical Products, Inc. and Colorado National
Bank (Exhibit 10(a) to Form 10-Q dated December 30, 1995)
21. Subsidiaries of Registrant
27 Financial Data Schedule (EDGAR version only)
99.1 Robert Scherer Inducement Agreement dated March 14, 1997, by
and between Robert P. Scherer, Jr. and Vital Signs, Inc.
(Exhibit 99.2 to Form 8-K dated March 21, 1997)
(b) Reports on Form 8-K:
Report on Form 8-K dated March 21, 1997 regarding the announcement of
the signing of a merger agreement between the Company and Vital Signs, Inc.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of Douglas,
State of Colorado, on June 9, 1997.
MARQUEST MEDICAL PRODUCTS, INC.
By /s/ ROBERT P. SCHERER, JR.
--------------------------------
Robert P. Scherer, Jr., Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
TITLE DATE SIGNATURE
- ----- ---- ---------
Principal Executive Officer:
Robert P. Scherer, Jr.
Chairman, Chief Executive Officer /s/ ROBERT P. SCHERER, JR.
and Director June 9, 1997 -----------------------------
Principal Accounting and
Financial Officer:
Margaret Von der Schmidt
Vice President - Finance and /s/ MARGARET VON DER SCHMIDT
Chief Financial Officer June 6, 1997 -----------------------------
/s/ CHARLES R. ATKINS III
Charles R. Atkins III, Director June 10, 1997 -----------------------------
/s/ STEPHEN LUKAS, SR.
Stephen Lukas, Sr., Director June 10, 1997 ------------------------------
/s/ JACK W. PAYNE
Jack W. Payne, Director June 10, 1997 ------------------------------
/s/ KENNETH H. ROBERTSON
Kenneth H. Robertson, Director June 9, 1997 ------------------------------
/s/ MACK D. TINDAL
Mack D. Tindal, Director June 10, 1997 ------------------------------
/s/ WILLIAM J. THOMPSON
William J. Thompson, Director June 6, 1997 ------------------------------
Jack L. York, Director June __, 1997 ------------------------------
57
<PAGE>
EXHIBIT 21
Subsidiaries of Registrant
Name of Corporation Jurisdiction
------------------- ------------
Intec Medical, Incorporated Colorado
Diverse Molding Technologies, Inc. Delaware
58
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF MARCH 29, 1997 AND FOR THE YEAR THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-29-1997
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 3,557
<ALLOWANCES> 118
<INVENTORY> 3,283
<CURRENT-ASSETS> 6,887
<PP&E> 17,848
<DEPRECIATION> (11,379)
<TOTAL-ASSETS> 13,424
<CURRENT-LIABILITIES> 4,410
<BONDS> 4,600
0
0
<COMMON> 9,904
<OTHER-SE> (5,490)
<TOTAL-LIABILITY-AND-EQUITY> 13,424
<SALES> 22,045
<TOTAL-REVENUES> 22,045
<CGS> 15,339
<TOTAL-COSTS> 15,339
<OTHER-EXPENSES> 6,343
<LOSS-PROVISION> 32
<INTEREST-EXPENSE> 675
<INCOME-PRETAX> (473)
<INCOME-TAX> 0
<INCOME-CONTINUING> (473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (473)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> 0
</TABLE>