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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. 2)
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
(X) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
( ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MARQUEST MEDICAL PRODUCTS, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
( ) No fee required.
(X) Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: COMMON
STOCK, NO PAR VALUE, OF MARQUEST MEDICAL PRODUCTS, INC.
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(2) Aggregate number of securities to which transaction applies: 15,788,008
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined): $0.797 PER SHARE
(4) Proposed maximum aggregate value of transaction: $12,583,031
(5) Total fee paid: $2,516.61
(X) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:_________________________________________.
(2) Form, Schedule or Registration Statement No.:________________________.
(3) Filing Party:__________.
(4) Date Filed:___________.
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[Letterhead of Marquest Medical Products, Inc.]
Dear Shareholder:
You are cordially invited to attend a Special Meeting of shareholders of
Marquest Medical Products, Inc. (the "Company") which will be held on July 28,
1997, at the offices of LeBoeuf, Lamb, Greene & MacRae, LLP, Suite 2000, 633
17th Street, Denver, Colorado 80202. The meeting will start at 10:00 a.m.,
local time.
At this important meeting, the holders of the Company's common stock (the
"Company Common Stock") will be asked to approve an agreement and plan of merger
(the "Merger Agreement") pursuant to which the holders of Company Common Stock
will receive $0.797 in cash per share of Company Common Stock and the Company
will become a wholly-owned subsidiary of Vital Signs, Inc. (the "Merger").
Following the Merger, holders of Company Common Stock will have no further
interest in the Company.
The accompanying Proxy Statement and the Annexes thereto contain a summary
description of the Merger (beginning on page [__]) followed by a more detailed
discussion of the Merger, including the reasons for, and the benefits of, the
Merger. Because a summary is not, by its nature, complete, shareholders are
urged to read the Proxy Statement and Annexes in their entirety.
The Board of Directors believes that this merger is advisable, is in the
best interests of the Company and its shareholders and offers the Company's
shareholders a greater return than would be available if the Company were to
remain a stand-alone entity.
The Board of Directors has received the opinion of its financial advisor,
Hanifen, Imhoff, Inc., that as of the date hereof and based on the factors and
assumptions described in such opinion, the Merger is fair, from a financial
point of view, to the holders of Company Common Stock. A copy of this opinion
is set forth in Annex II of the Proxy Statement and shareholders should read it
in its entirety.
Approval of the Merger Agreement by two thirds of the Company's
shareholders entitled to vote thereon is a condition to the consummation of the
Merger. It is presently anticipated that the Merger will be consummated in mid-
1997.
Scherer Healthcare, Inc. owns beneficially 50.44% of the outstanding common
stock of the Company. Robert P. Scherer, Jr., who is the majority shareholder
of Scherer Healthcare, Inc. and the Chief Executive Officer of Scherer
Healthcare, Inc. and the Company, owns beneficially 10.82% and has voting
control over another 3.60% of the common stock of the Company. Together,
Scherer Healthcare and Mr. Scherer have voting control over approximately 97% of
the shares of common stock of the Company necessary to approve the Merger.
Scherer Healthcare, Inc., subject to obtaining the approval of a majority of its
stockholders at a special meeting called for that purpose and Mr. Scherer have
informed the Company that they intend to vote their shares of Company Common
Stock in favor of the Merger. In addition to the consideration to be received
by Scherer Healthcare, Inc. and Mr. Scherer in the merger through their
ownership of Company Common Stock, Scherer Healthcare, Inc. will receive
$5,860,000 from Vital Signs
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from the sale of certain assets to Vital Signs, Inc. and for a covenant not to
compete with Vital Signs and Mr. Scherer will receive $140,000 from Vital Signs,
Inc. for a covenant not to compete with Vital Signs, Inc.
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE MERGER AGREEMENT, BELIEVES THAT THEY ARE IN THE BEST INTERESTS
OF THE COMPANY AND ITS SHAREHOLDERS, HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
Even if you plan to attend the meeting, we urge you to mark, sign and date
the enclosed proxy and return it promptly. You have the option to revoke it at
any time or to vote your shares personally on request if you attend the meeting.
IF YOU DO NOT RETURN THE PROXY CARD AND DO NOT VOTE AT THE MEETING, IT WILL
HAVE THE SAME EFFECT AS IF YOU VOTED AGAINST THE MERGER AGREEMENT.
Holders of record of Company Common Stock at the close of business on June
27, 1997 will be entitled to one vote for each share of Company Common Stock
they hold. For the transaction to be approved, the proposal must be approved by
the holders of at least two-thirds of the outstanding shares of Company Common
Stock entitled to vote. Your vote is important no matter how many shares you
hold.
Holders of Company Common Stock have the right to dissent from consummation
of the Merger and, upon compliance with the procedural requirements of the
Colorado Business Corporation Act, to receive the "fair value" of their shares
if the Company's Merger is effected. Reference is made to the detailed
information regarding dissenters' rights contained in the accompanying Proxy
Statement.
Promptly after the Merger, a letter of transmittal will be mailed to each
holder of record of shares of Company Common Stock. PLEASE DO NOT SEND YOUR
COMPANY COMMON STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD AT THIS TIME.
LATER, YOU WILL RECEIVE THE LETTER OF TRANSMITTAL WHICH WILL INCLUDE
INSTRUCTIONS AS TO THE PROCEDURE TO BE USED IN EXCHANGING YOUR COMPANY COMMON
STOCK CERTIFICATES FOR $0.797 IN CASH PER SHARE OF COMPANY COMMON STOCK.
Sincerely,
Robert P. Scherer, Jr.
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
June __, 1997
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MARQUEST MEDICAL PRODUCTS, INC.
11039 EAST LANSING CIRCLE
ENGLEWOOD, COLORADO 80112
(303) 790-4835
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 28, 1997
TO THE SHAREHOLDERS OF MARQUEST MEDICAL PRODUCTS, INC.:
A Special Meeting of shareholders (the "Special Meeting") of Marquest
Medical Products, Inc., a Colorado corporation (the "Company"), will be held on
July 28, 1997, at the offices of LeBoeuf, Lamb, Greene & MacRae, LLP, Suite
2000, 633 17th Street, Denver, Colorado 80202., for the following purposes:
1. To consider and vote upon the approval of an Agreement and Plan of
Merger, dated as of March 14, 1997, as amended (the "Merger
Agreement"), by and among Vital Signs, Inc., a New Jersey corporation
("VSI"), VSI Acquisition Corporation ("Newco"), a Colorado corporation
and a wholly-owned subsidiary of VSI, and the Company, providing for
the merger of Newco with and into the Company (the "Merger"), with the
Company surviving the Merger as a wholly-owned subsidiary of VSI, and,
whereby, with certain limitations, upon effectiveness of the Merger,
all then-outstanding Company common stock, no par value (the "Company
Common Stock") (other than any Company Comon Stock held by VSI, Newco
or any of their subsidiaries, or in the treasury of the Company, all
of which will be cancelled, and Company Common Stock held by
shareholders who perfect their appraisal rights under Article 113 of
the Colorado Business Corporation Act), will be converted into the
right to receive $0.797 per share of Company Common Stock in cash,
without interest; and
2. To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
Shareholders of record at the close of business on June 27, 1997 will be
entitled to notice of and to vote at the Special Meeting or at any
adjournment(s) thereof. EVEN IF YOU NOW EXPECT TO ATTEND THE SPECIAL MEETING,
YOU ARE REQUESTED TO MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN THE
ENCLOSED ADDRESSED, POSTAGE-PAID ENVELOPE. If you do attend the Special
Meeting, you may vote in person, whether or not you have sent in your proxy. If
you do not vote at the meeting and do not send in your proxy, it will have the
same effect as if you voted against the proposed Merger.
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When the proxies are executed and returned, Company Common Stock
represented thereby will be voted in accordance with the indicated instructions
either "for" or "against." IF NO INSTRUCTIONS HAVE BEEN SPECIFIED ON A RETURNED
SIGNED PROXY, COMPANY COMMON STOCK REPRESENTED THEREBY WILL BE COUNTED FOR
DETERMINING WHETHER A QUORUM IS PRESENT AND WILL BE VOTED "FOR" THE APPROVAL OF
THE MERGER AGREEMENT. Broker non-votes and abstentions will have the effect of
a vote against the adoption of the Merger Agreement.
Holders of Company Common Stock have the right to dissent from consummation
of the Merger and, upon compliance with the procedural requirements of the
Colorado Business Corporation Act, to receive "fair value" of their shares if
the Merger is effected. See "The Merger-Dissenters' Rights" in the Proxy
Statement.
By Order of the Board of
Directors,
Margaret Von der Schmidt
Secretary
Englewood, Colorado
June __, 1997
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MARQUEST MEDICAL PRODUCTS, INC.
PROXY STATEMENT
June __, 1997
This Proxy Statement is being furnished by the Board of Directors of
Marquest Medical Products, Inc., a Colorado corporation (the "Company"), in
connection with a special meeting of holders of the Company's Common Stock (the
"Shareholders") to be held on July 28, 1997 at 10:00 a.m., local time, at the
offices of LeBoeuf, Lamb, Greene & MacRae, LLP, Suite 2000, 633 17th Street,
Denver Colorado, 80202, and any and all adjournments or postponements thereof
(the "Special Meeting").
At the Special Meeting, Shareholders will be asked to consider and vote
upon the approval of the Agreement and Plan of Merger, dated as of March 14,
1997, as amended (the "Merger Agreement"), by and among Vital Signs, Inc., a New
Jersey corporation ("VSI"), Vital Signs Acquisition Corporation, a Colorado
corporation and a wholly-owned subsidiary of VSI ("Newco"), and the Company, and
any other matters as may properly come before the Special Meeting and any
postponements or adjournments thereof. The Merger Agreement provides for the
merger (the "Merger") of Newco with and into the Company, with the Company
surviving the Merger as a wholly-owned subsidiary of VSI. Pursuant to the
Merger Agreement, all shares of the Company's Common Stock, no par value (the
"Company Common Stock"), outstanding at the effective time of the Merger (other
than Company Common Stock held by VSI, Newco or any of their subsidiaries, or in
the treasury of the Company, all of which will be cancelled, and Company Common
Stock held by Shareholders who perfect their dissenters' rights under Article
113 of the Colorado Business Corporation Act ("BCA")) will be converted into the
right to receive $0.797 per share of Company Common Stock in cash, without
interest.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE BY SHAREHOLDERS FOR APPROVAL OF
THE MERGER AGREEMENT.
This Proxy Statement and the accompanying form of proxy are being mailed to
all holders of Company Common Stock of record as of June 27, 1997 (the "Record
Date") and are first being sent to such shareholders on or about the date
hereof. ONLY SHAREHOLDERS OF RECORD ON THE RECORD DATE ARE ENTITLED TO VOTE AT
THE SPECIAL MEETING.
The affirmative vote of two-thirds of outstanding shares of Company Common
Stock is required to approve the Merger. Scherer Healthcare, Inc. ("Scherer
Healthcare"), which beneficially owned 7,211,192 shares of Company Common Stock
as of the Record Date, representing approximately 50.44% of the outstanding
Company Common Stock, has advised the Company that it has agreed with VSI to
vote its Company Common Stock for approval of the Merger if authorized to do so
by the shareholders of Scherer Healthcare at a special meeting (the "Scherer
Special Meeting"), scheduled to be held prior to the Company's Special Meeting,
on July 28, 1997. In addition, Robert P. Scherer, Jr., Chairman of the Board
and Chief Executive
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Officer of the Company and of Scherer Healthcare and the majority shareholder of
Scherer Healthcare, who, in addition to Company Common Stock held by Scherer
Healthcare that he may be deemed to beneficially own, beneficially owned
1,546,392 shares of Company Common Stock on the Record Date and had voting
authority over an additional 515,464 shares of Company Common Stock,
representing approximately 14.42% of the outstanding shares of Company Common
Stock in the aggregate, has advised the Company that he intends to vote such
Company Common Stock for approval of the Merger Agreement. Accordingly, Mr.
Scherer will have the ability to vote or direct the voting of approximately
64.86% of the outstanding shares of Company Common Stock, or approximately 97%
of the shares necessary to approve the Merger.
The Company's principal executive offices are located at 11039 East Lansing
Circle, Englewood, Colorado 80112, and its telephone number is (303) 790-4835.
The cost of solicitation of proxies will be borne by the Company.
The date of this Proxy Statement is June __, 1997.
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TABLE OF CONTENTS
SUMMARY........................................................................1
The Special Meeting.......................................................1
Date, Time and Place.................................................1
Purpose of the Special Meeting.......................................1
Quorum...............................................................1
Record Date; Shareholders Entitled to Vote...........................2
Voting Requirements..................................................2
The Merger................................................................3
Principal Effects of the Merger......................................3
Effective Time.......................................................3
Related Transactions.................................................3
Background of the Merger..................................................4
Reasons for the Merger....................................................4
Recommendations of the Company's Board of Directors;
Reasons for the Merger..........................................5
Opinion of the Financial Advisor.....................................5
Certain Federal Income Tax Consequences..............................6
Dissenters' Rights...................................................6
Sources and Amount of Funds..........................................6
Termination; Payments Upon Termination...............................6
Business of the Company...................................................7
Business of VSI and Newco.................................................7
Price Range of Company Common Stock and Dividends.........................8
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY............................9
THE MERGER....................................................................11
Effective Time...........................................................11
Principal Effects of the Merger .........................................11
Related Transactions.....................................................11
Dealer Agreement....................................................11
Purchase of ABG Assets and Covenants Not to Compete......................12
Payment of the Merger Consideration......................................13
Background of the Merger ................................................15
Reasons for the Merger...................................................18
Recommendations of the Company's Board of Directors......................19
Opinion of the Financial Advisor.........................................21
Analysis of Selected Publicly Traded Comparable Companies...........22
Analysis of Selected Comparable Transactions........................23
Discounted Cash Flow Analysis.......................................24
Source and Amount of Funds...............................................25
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Certain Federal Income Tax Consequences..................................25
Accounting Treatment.....................................................27
Interests of Certain Persons in the Merger...............................27
Severance Benefits..................................................28
Early Vesting of Stock Options......................................28
Director Compensation...............................................29
Scherer Healthcare..................................................29
Robert P. Scherer...................................................30
Regulatory Matters.......................................................31
Antitrust Matters...................................................31
Other Governmental Approvals........................................31
Certain Terms of the Merger Agreement....................................31
General.............................................................31
Representations and Warranties of the Company.......................32
Representations and Warranties of VSI...............................32
Certain Covenants of the Company....................................32
Certain Covenants of VSI............................................34
Certain Other Agreements............................................34
Conditions to Obligations of VSI and Newco..........................34
Conditions to Obligations of the Company............................35
Termination.........................................................36
Dissenters' Rights.......................................................39
BENEFICIAL OWNERSHIP OF SECURITIES............................................41
Business of the Company..................................................43
Information Concerning VSI and Newco.....................................43
INDEPENDENT ACCOUNTANTS.......................................................43
AVAILABLE INFORMATION.........................................................43
ANNEX
Annex I: Agreement and Plan of Merger, dated as of March 14, 1997, by and among
Marquest Medical Products, Inc., Vital Signs, Inc., and Vital Signs Acquisition
Corporation
Annex II: Amendment to Agreement Plan of Merger dated as of June 4, 1997
Annex III. Fairness Opinion of Hanifen, Imhoff, Inc.
Annex IV. Sections 7-113-101 through 7-113-302 of the Colorado Business
Corporation Act
Annex V. The Company's Annual Report on Form 10-K for the fiscal year ended
March 29, 1997
ii
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT AND DOES NOT PURPORT TO BE COMPLETE. ALL STATEMENTS IN THE
FOLLOWING SUMMARY ARE QUALIFIED BY AND ARE MADE SUBJECT TO THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT AND THE ANNEXES HERETO.
THE ANNEXES ATTACHED TO THIS PROXY STATEMENT CONSTITUTE A PART OF THIS PROXY
STATEMENT AND SHOULD BE CONSIDERED AS SUCH. SHAREHOLDERS ARE URGED TO READ THIS
PROXY STATEMENT, INCLUDING THE ANNEXES, IN ITS ENTIRETY. THE FULL TEXT OF THE
MERGER AGREEMENT IS ATTACHED HERETO AS ANNEX I AND SHOULD BE READ IN ITS
ENTIRETY.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting of the Shareholders of the Company, will be held on
July 28, 1997, at 10:00 a.m., local time, at the offices of LeBoeuf, Lamb,
Greene & MacRae, LLP, Suite 2000, 633 17th Street, Denver, Colorado 80202.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, Shareholders will be asked to consider and vote
upon the approval of the Merger and the other transactions contemplated by the
Merger Agreement and any other matters as may properly come before the Special
Meeting and any postponement or adjournment thereof. The Merger Agreement
provides for the merger of Newco with and into the Company, with the Company
being the surviving corporation following the Merger. Effective as of the
consummation of the Merger, all then-outstanding shares of Company Common Stock
(other than Company Common Stock held by VSI, Newco or any of their
subsidiaries, or in the treasury of the Company, all of which will be cancelled,
and Company Common Stock held by Shareholders who perfect their dissenters'
rights under Article 113 of the BCA) will be converted into the right to receive
$0.797 per share of Company Common Stock in cash, without interest (the "Merger
Consideration"). As a result of the Merger, the Company will become a
wholly-owned subsidiary of VSI.
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QUORUM
A majority of shares of Company Common Stock entitled to vote, represented
in person or by proxy, will constitute a quorum at the Special Meeting.
Abstentions, broker non-votes and proxies returned without instructions will be
counted for purposes of determining whether a quorum is present at the Special
Meeting.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE
The Company Common Stock is the only class of voting securities of the
Company. Holders of record of Company Common Stock on the books of the Company
on June 27, 1997 are entitled to notice of and to vote at the Special Meeting.
On the Record Date, there were [__________] shares of Company Common Stock
outstanding, which were held of record by approximately [____] persons.
VOTING REQUIREMENTS
Approval of the Merger and the other transactions contemplated by the
Merger Agreement requires the affirmative vote of the holders of two-thirds of
the outstanding shares of Company Common Stock. Each holder of record of
Company Common Stock will be entitled to one vote per share of Company Common
Stock at the Special Meeting or any and all adjournments or postponements
thereof. A SIGNED PROXY RETURNED WITHOUT INSTRUCTIONS WILL BE VOTED FOR
APPROVAL OF THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT. Abstentions and broker non-votes will have the effect of a vote
against approval of the Merger and the other transactions contemplated by the
Merger Agreement. Any proxy given may be revoked either by a written notice
duly signed and delivered to the Secretary of the Company prior to the exercise
of the proxy, by execution of a subsequent proxy or by voting in person at the
Special Meeting.
Scherer Healthcare, which beneficially owned 7,211,192 shares of Company
Common Stock on the Record Date, representing approximately 50.44% of
outstanding shares of Company Common Stock, has advised the Company that it has
agreed with VSI to vote its Company Common Stock for approval of the Merger and
the other transactions contemplated by the Merger Agreement if authorized to do
so by the shareholders of Scherer Healthcare at the Scherer Special Meeting
scheduled to be held prior to the Company's Special Meeting on July 28, 1997.
In addition, Robert P. Scherer, Jr., Chairman of the Board and Chief Executive
Officer of the Company and of Scherer Healthcare and the majority shareholder of
Scherer Healthcare, who, in addition to the Company Common Stock held by Scherer
Healthcare, which he may be deemed to beneficially own, beneficially owned
1,546.392 shares of Company Common Stock on the Record Date and had voting
control over an additional 515,464 shares of Company Common Stock, representing
approximately 14.42% of outstanding Company Common Stock, has advised the
Company that he intends to vote such Company Common Stock for approval of the
Merger and
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the other transactions contemplated by the Merger Agreement. Accordingly,
Mr. Scherer will have the ability to vote or direct the voting of approximately
64.86% of Company Common Stock, or approximately 97% of the shares necessary to
approve the Merger.
THE MERGER
PRINCIPAL EFFECTS OF THE MERGER
As a result of the Merger, each outstanding share of Company Common Stock
(other than shares of Company Common Stock held by VSI, Newco or any of their
subsidiaries, or in the treasury of the Company, all of which will be cancelled,
and shares of Company Common Stock held by Shareholders who perfect their
dissenters' rights under Article 113 of the BCA) will be converted into the
right to receive $0.797 per share, and the Company will become a wholly-owned
subsidiary of VSI. See "The Merger--Principal Effects of the Merger." The
$0.797 price per share to be received by shareholders of the Company was
approximately 29% less than the closing price of Company Common Stock on March
14, 1997, the day the Merger was announced, but was 11% higher than the average
closing price of Company Common Stock in the three calendar months proceeding
the month in which the Merger was announced, 14.3% higher than the average
closing price of Company Common Stock in the month preceding the month in which
the Merger was announced and more than twice the per share book value of Company
Common Stock as of December 28, 1996, the date of the Company's most recent
quarterly financial statements preceeding the Merger announcement.
EFFECTIVE TIME
The Merger will become effective (the "Effective Time of the Merger") upon
the filing of the certificate of merger with the Secretary of State of the State
of Colorado. It is anticipated that, subject to the satisfaction or waiver, if
permissible, of the conditions set forth in the Merger Agreement, such filing
will be made promptly after the Merger has been approved by the Shareholders.
See "The Merger."
RELATED TRANSACTIONS
As part of the transactions contemplated by the Merger Agreement, (i) VSI
and the Company have entered into a Dealer Agreement dated March 14, 1997, which
was amended on March 31, 1997, pursuant to which VSI is entitled to distribute
Company products in the United States, Canada and Puerto Rico, as well as
certain international territories (the "Dealer Agreement"), (ii) VSI and Scherer
Healthcare have entered into an Inducement Agreement (the "SH Inducement
Agreement") pursuant to which VSI has agreed to purchase from Scherer Healthcare
at the Effective Time of the Merger certain assets owned by Scherer Healthcare
(the "ABG Assets") and used by the Company in the manufacture and sale of its
arterial blood gas line of products (the "ABG Products") and a covenant not to
compete for aggregate consideration of
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$5,860,000, and (iii) VSI and Robert P. Scherer, Jr. have entered into an
Inducement Agreement (the "RPS Inducement Agreement") pursuant to which, among
other things, VSI has agreed to purchase a covenant not to compete from
Mr. Scherer for $140,000.
The Company's agreements with most of its dealers may be terminated by
either party on 30 to 90 days' notice. The Company has given 28 of its 29
domestic hospital specialty dealers notice terminating its agreements with such
dealers at the end of the required notice period, which in each case expired by
June 12, 1997. Subsequent to terminating those dealers, the Company entered
into new arrangements with five of the dealers which provided the Company with
improved margins.
Following the termination of the dealers, one dealer has commenced a
lawsuit against the Company and VSI alleging, among other things, that the
termination was unlawful and the Company has commenced a lawsuit against another
dealer seeking to enjoin that dealer from violating its agreement during the
period prior to termination of the agreement by soliciting customers to purchase
products of other manufacturers. The Company's motion for a temporary
restraining order restraining this dealer from violating the terms of its dealer
agreement with the Company has been denied, and the dealer commenced a separate
action against the Company and VSI, alleging among other claims, that VSI is
using confidential information of that dealer in the sale of Company products.
The Company's motion to compel arbitration in Colorado of all issues presented
in this dealer's action has been granted. 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.
BACKGROUND OF THE MERGER
For a description of the Background of the Merger, see "The Merger-
Background of the Merger."
REASONS FOR THE MERGER
The method by which medical devices are distributed in the United States is
in the process of a significant structural change. This structural change has
had a significant negative impact on smaller medical device manufacturers such
as the Company that have limited or non-proprietary product lines and cost
structures which make it difficult to compete on a basis where price is the
primary purchasing factor. In recognition of the structural changes in the
medical device market and the Company's own limited ability to meet the
challenges posed by those changes because of its limited financial resources,
the Company's Board of Directors (with Mr. Scherer abstaining) concluded that
the Merger would provide a greater return to the Shareholders than any of the
other alternatives available to the Company. In reaching this conclusion, the
Company's Board considered the fact that the per share price offered by VSI was
approximately 29% less than the market price of Company Common Stock at the time
the Merger was announced, but concluded that the price on the date the merger
was announced was not necessarily indicative of the fair
4
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value of the Company Common Stock because of the volatility of the stock's
market price. The Board compared the price offered by VSI to the average market
price of Company Common Stock during the three calendar months and the calendar
month preceding the announcement and to the Company's book value per share of
Common Stock and found that the price offered by VSI was approximately 11%
higher than the average price of Company Common Stock during the three calendar
months preceding the month in which the Merger was announced, was approximately
14.3% higher than the average price of Company Common Stock during the calendar
month preceding the month in which the Merger was announced, and was more than
twice the per share book value of the Common Stock of the Company as at December
28, 1996, the date of the Company's most recent quarterly financial statements
preceding the date on which the Merger was announced. See "The Merger-Reasons
for the Merger" and "Price Range of Company Common Stock and Dividends.".
RECOMMENDATIONS OF THE COMPANY'S BOARD OF DIRECTORS; REASONS FOR THE MERGER
The Board of Directors has adopted the Merger Agreement (with Mr. Scherer
abstaining) and recommends that the Shareholders vote for the approval of the
Merger and the other transactions contemplated by the Merger Agreement.
The Company's Board provided its approval and recommendation after
consideration of a number of factors, which are described under the heading "The
Merger-Recommendations of the Board." In considering the recommendations of the
Company's Board, the Shareholders should be aware that certain members of the
Company's management and Board have certain interests in the Merger that are in
addition to the interests of the Shareholders. The Company's Board was aware of
these interests and considered them, among other matters, in adopting the Merger
Agreement and approving the Merger and the other transactions contemplated by
the Merger Agreement. See "-Related Transactions," "The Merger--Related
Transactions" and "Interests of Certain Persons in the Merger."
OPINION OF THE FINANCIAL ADVISOR
The Company engaged Hanifen, Imhoff, Inc. ("Hanifen") to act as its
financial advisor in connection with the Merger and related matters. On
March 14, 1997, Hanifen delivered to the Company's Board its written opinion
(the "Hanifen Opinion") that the Merger Consideration to be received by
Shareholders pursuant to the Merger is fair to such holders from a financial
point of view.
The full text of the Hanifen Opinion, which sets forth the procedures
followed, matters considered and assumptions made in connection with rendering
such opinion, as well as certain interests and relationships of Hanifen with the
Company, is attached as Annex II to this Proxy Statement. The Hanifen Opinion
will not be updated and is limited to the facts and circumstances
5
<PAGE>
in existence on March 14, 1997, the date on which the opinion was delivered to
the Company's Board. See "The Merger--Opinion of the Financial Advisor."
SHAREHOLDERS ARE URGED TO READ THE HANIFEN OPINION IN ITS ENTIRETY.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Shareholders' receipt of cash for Company Common Stock pursuant to the
Merger will be a taxable transaction for federal income tax purposes and may
also be a taxable transaction under applicable state, local and other tax laws.
See "The Merger--Certain Federal Income Tax Consequences."
DISSENTERS' RIGHTS
Shareholders may demand an appraisal by the appropriate Colorado state
court of the "fair value" of their Company Common Stock under Article 113 of the
BCA, in lieu of accepting the Merger Consideration. A Shareholder electing to
demand an appraisal must deliver to the Company, before the taking of the vote
on the Merger, a written demand for appraisal of such Shareholder's Company
Common Stock. A proxy or vote against the Merger or an abstention or broker
non-vote will not constitute such a demand. A vote in favor of the Merger by a
Shareholder will have the effect of waiving such Shareholder's dissenters'
rights. See "The Merger--Dissenters' Rights."
SOURCES AND AMOUNT OF FUNDS
The total amount of funds required by VSI for the payment of the Merger
Consideration, to repay certain indebtedness owed by the Company, to purchase
the ABG Assets and the covenants not to compete from Scherer Healthcare and
Robert P. Scherer, Jr. and to pay related fees and expenses, is expected to be
approximately $23 million. VSI has advised the Company that it will pay for
such obligations primarily from cash on hand.
TERMINATION; PAYMENTS UPON TERMINATION
The Merger Agreement may be terminated by the mutual consent of the parties
or upon the happening of certain events, including the failure of the
representations or warranties of either party to be true, the failure of either
party to comply with its obligations under the Merger Agreement or the failure
of the Shareholders to approve the Merger.
If, at the time of the termination of the Merger Agreement, there is
outstanding an offer by a third party to acquire (i) more than 25% of Company
Common Stock or (ii) the Company or more than 25% of its assets, and, within two
years following the termination of the Merger, such a transaction involving the
Company is closed with a party other than, in certain circumstances, Scherer
Healthcare, the Company is obligated to pay VSI a termination fee of $1,500,000.
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<PAGE>
If the Merger Agreement is terminated because of a material default by VSI
of its obligations under the Merger Agreement, VSI is obligated to pay the
Company liquidated damages of $800,000. See "The Merger--Certain Terms of the
Merger Agreement--Termination."
BUSINESS OF THE COMPANY
The business of the Company principally consists of manufacturing and
marketing disposable medical devices, supplies and equipment for use in the
respiratory care, cardiopulmonary support and anesthesia markets. The Company
manufactures and distributes four major groups of products for these markets:
blood collection systems for diagnostic testing, including ABG Products;
aerosolized medication delivery systems, consisting primarily of disposable
nebulizers; heated humidification systems; and anesthesia and respiratory
breathing systems. See "Business of the Company."
BUSINESS OF VSI AND NEWCO
VSI and its subsidiaries design, manufacture and market single-use medical
products for anesthesia, respiratory and critical care. Newco is a newly-formed
Colorado corporation that has not conducted any business except in connection
with the transactions related to the Merger. See "Information Concerning VSI
and Newco."
7
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PRICE RANGE OF COMPANY COMMON STOCK AND DIVIDENDS
The Company Common Stock is traded on the Nasdaq SmallCap Market under the
ticker symbol MMPI. As of the Record Date, the number of record holders of
Company Common Stock was approximately [____] persons. The table below shows
the quarterly high and low closing sales prices for the Company's fiscal periods
indicated. All quotations were reported to the Company by Nasdaq and represent
actual transactions and not inter-dealer quotations.
QUARTERLY HIGH AND LOW SALES PRICES*
HIGH LOW
FISCAL 1995 (APRIL 3, 1994
THROUGH APRIL 1, 1995)
First Quarter $2-1/4 $1-5/8
Second Quarter 1-7/8 1-1/16
Third Quarter 1-1/2 3/8
Fourth Quarter 1-5/8 1/4
FISCAL 1996 (APRIL 2, 1995
THROUGH MARCH 30, 1996)
First Quarter 5/8 3/8
Second Quarter 2-5/16 7/16
Third Quarter 1-5/16 1/2
Fourth Quarter 2-1/16 9/16
FISCAL 1997 (MARCH 31, 1996
THROUGH MARCH 29, 1997)
First Quarter 1-1/16 1-3/8
Second Quarter 1-3/4 5/8
Third Quarter 1-1/4 5/8
Fourth Quarter 1-3/16 9/32
FISCAL 1998 (MARCH 30, 1997
THROUGH MARCH 28, 1998)
First Quarter (through June 11, 25/32 19/32
1997)
- --------------------------------------------------------------------------------
* The information is provided for fiscal quarters.
On March 14, 1997, the last full trading day prior to the announcement of
the Merger Agreement, the reported last transaction price per share of Company
Common Stock reported to the Company by Nasdaq was $1 1/8. On [___________ __],
1997, the last full trading day prior
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<PAGE>
to the date of this Proxy Statement, the last transaction sales price of Company
Common Stock reported to the Company by Nasdaq was $[______] per share of
Company Common Stock. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR COMPANY COMMON STOCK.
The Company has not paid any cash dividends during its last six fiscal
years, and does not anticipate that dividends will be paid in the foreseeable
future. Under a Colorado Deed of Trust and Security Agreement dated June 30,
1994 by the Company in favor of Colorado National Bank and a Credit and Security
Agreement dated as of November 5, 1996 between the Company and Norwest Business
Credit, Inc., the Company may not, without the prior written consent of each
lender, pay or declare dividends on Company Common Stock. The Company has
agreed in the Merger Agreement not to, and does not intend to, pay cash
dividends with respect to Company Common Stock prior to the Effective Time of
the Merger.
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following table sets forth selected financial data of the Company as of
and for each of the years in the five fiscal year period ended March 29, 1997.
Such selected information is qualified by, and should be read in conjunction
with, the detailed information and the financial statements and the notes
related thereto appearing in the Company's Form 10-K for the fiscal year ended
March 29, 1997 attached hereto as Annex IV.
9
<PAGE>
SELECTED FINANCIAL DATA
(Thousands of Dollars, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL NINE THREE FISCAL
YEAR YEAR YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MAR. 29, MAR. 30, APR. 1, APR. 2, JULY 3, APR. 3,
1997 1996 1995 1994 1993 1993
--------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net Revenues $22,045__ $22,443 $20,576 $17,139 $5,327 $21,935
Net Earnings
(Loss) from
Continuing
Operations before
Extraordinary Item (473) (60) (3,450) (2,312) (1,042) (18,542)
Net Earnings
(Loss) (473) (60) (3,450) (2,030) (336) (18,338)
Earnings (Loss) per
Common Share:
Continuing
Operations before
Extraordinary Item (0.03) (0.01) (0.46) (0.51) (0.23) (4.17)
Net Earnings
(Loss) (0.03) (0.01) (0.46) (0.45) (0.07) (4.12)
BALANCE SHEET
DATA:
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 0.0 0.00 0.00 0.00 0.00 0.00
Book Value per
Common Share 0.31 .034 0.15 0.44 0.71 (0.09)
Effective July 3, 1993, the Company effected a quasi-reorganization.
</TABLE>
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<PAGE>
THE MERGER
The information contained in this Proxy Statement with respect to the
Merger is qualified in its entirety by reference to the complete text of the
Merger Agreement, which is attached to this Proxy Statement as and incorporated
by reference herein. SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT IN ITS
ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE MERGER AGREEMENT.
EFFECTIVE TIME
The Effective Time of the Merger will occur upon the filing of a
certificate of merger with the Secretary of the State of Colorado. It is
anticipated that, subject to the satisfaction or waiver, if permissible, of the
conditions set forth in the Merger Agreement, such filing will be made promptly
after the Merger has been approved by the holders of two-thirds of the
outstanding Company Common Stock.
PRINCIPAL EFFECTS OF THE MERGER
Upon consummation of the Merger, Newco will be merged with and into the
Company, with the Company being the surviving corporation (as such, the
"Surviving Corporation"). If the Merger is consummated, the Company will become
a wholly-owned subsidiary of VSI, and current Shareholders will no longer have
an equity interest in the Company and will not share in its future earnings or
growth, if any. Instead, each such Shareholder (other than those who perfect
dissenters' rights under Article 113 of the BCA) will have the right to receive
$0.797 in payment for each share of Company Common Stock held by such
Shareholder immediately prior to the Merger.
RELATED TRANSACTIONS
DEALER AGREEMENT
Simultaneous with the execution of the Merger Agreement, the Company and
VSI entered into the Dealer Agreement pursuant to which VSI is authorized to
sell Company products for a period of two years and the Company provided 28 of
its 29 existing domestic hospital 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 Company has since negotiated new agreements with
five of the terminated dealers which provide the Company with better margins).
The Company negotiated the Dealer Agreement to protect itself from the product
revenue loss that the Company anticipates would otherwise occur as its existing
dealers de-emphasized the sale of Company products in anticipation of being
terminated by VSI as dealers following the Effective Time of the Merger. If the
Merger does not occur for any reason, the Company believes that using VSI as its
principal domestic dealer will enhance its sales as a result of VSI's strong
sales force, however, the Company has no assurance that VSI will be able to
replace the sales of the terminated dealers
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<PAGE>
in their entirety or that VSI's sales of Company products will increase quickly
enough to avoid a material adverse impact on the operations of the Company.
The Dealer Agreement may be terminated by the Company if VSI does not meet
certain specified sales quotas after June 30, 1997. The Dealer Agreement
otherwise provides for what the Company believes to be market terms.
One of the Company's dealers has commenced a lawsuit against the Company
and VSI alleging, among other things, that the termination of its dealer
agreement was unlawful. The Company has commenced a lawsuit against another
dealer seeking to enjoin this dealer from violating its dealer agreement by
soliciting customers of Company products to purchase competing products
manufactured by other manufacturers. The Company's motion for a temporary
restraining order restraining this dealer from violating the terms of its dealer
agreement with the Company has been denied and the dealer has commenced a
separate action against the Company and VSI, alleging, among other claims, that
VSI is using confidential information of that dealer in the sale of Company
products. THIS DEALER'S REQUEST FOR A PRELIMINARY INJUNCTION HAS BEEN DENIED
AND THE COMPANY'S MOTION TO COMPEL ARBITRATION IN COLORADO OF ALL OF THE ISSUES
PRESENTED IN THIS DEALER'S ACTION HAS BEEN GRANTED. 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 ABG Assets which it leases and
licenses back to the Company. The Company has an option to repurchase the ABG
Assets 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 the SH Inducement Agreement, VSI has agreed to purchase
the ABG Assets from Scherer Healthcare for a purchase price equal to the
purchase price under the Company's repurchase option. If the Effective Time of
the Merger occurred on July 31, 1997, the purchase price for the ABG Assets
would be $5,625,000.
Pursuant to the SH Inducement Agreement, Scherer Healthcare is obligated at
the Effective Time of the Merger to enter into a covenant not to compete
pursuant to which it agrees that for a period of three years following the
Effective Time of the Merger, it will not engage in the business of
manufacturing or selling ABG Products. In consideration of this covenant not to
compete, VSI has agreed to pay Scherer Healthcare an amount equal to the
difference between $5,860,000 and the purchase price of the ABG Assets. If the
Effective Time of the Merger occurs on July 31, 1997, it is expected that
Scherer Healthcare will receive $235,000 for the covenant not to compete.
Pursuant to the RPS Inducement Agreement, Robert P. Scherer, Jr., is
required to enter into a covenant not to compete pursuant to which he agrees
that for a period of three years
12
<PAGE>
following the Effective Time of the Merger, he will not engage in the business
of manufacturing or selling ABG Products. In consideration of this covenant not
to compete, VSI has agreed to pay Mr. Scherer $140,000.
PAYMENT OF THE MERGER CONSIDERATION
At or prior to the Effective Time of the Merger, VSI will designate a third
party to act as exchange agent with respect to the Merger (the "Exchange Agent")
and will make available to the Exchange Agent sufficient funds to make all
payments for shares of Company Common Stock pursuant to the Merger Agreement.
Pending payment of such funds to the Shareholders, such funds shall be held and
invested by the Exchange Agent as VSI directs. Any net profit resulting from,
or interest or income produced by, such investments will be payable to VSI. VSI
will promptly replace any monies lost through any investment made pursuant to
its direction.
Each holder (other than VSI, Newco or any of their subsidiaries, the
Company and Shareholders who perfect their dissenters' rights under Article 113
of the BCA) of a certificate or certificates which prior to the Effective Time
of the Merger represented Company Common Stock (a "Stock Certificate") will be
entitled to receive, upon surrender to the Exchange Agent of any Stock
Certificates for cancellation and subject to any required withholding of taxes,
the aggregate Merger Consideration into which the shares of Company Common Stock
previously represented by such Stock Certificates were converted in the Merger,
with such aggregate consideration to be rounded up to the nearest whole penny.
Until surrendered to the Exchange Agent, each Stock Certificate (other than
Company Common Stock owned by VSI, Newco, or any of their subsidiaries, or in
the treasury of the Company and Shareholders who perfect their dissenters'
rights under Article 113 of the BCA) will be deemed for all purposes to evidence
only the right to receive upon such surrender the aggregate Merger Consideration
into which the shares of Company Common Stock represented thereby will have
been converted, subject to any required withholding taxes. No interest will be
paid on the cash payable upon the surrender of any Stock Certificate.
Instructions with regard to the surrender of Stock Certificates, together
with a letter of transmittal (a "Transmittal Letter") to be used for this
purpose, will be forwarded to Shareholders as promptly as practicable following
the Effective Time of the Merger. Shareholders should surrender their Stock
Certificates only after receiving a Transmittal Letter. SHAREHOLDERS SHOULD NOT
SEND ANY STOCK CERTIFICATES AT THIS TIME.
Any cash delivered or made available to the Exchange Agent and not
exchanged for Company Common Stock within nine months after the Effective Time
of the Merger will be returned by the Exchange Agent to VSI which thereafter
will act as exchange agent, and any former Shareholders who have not theretofore
complied with the instructions for exchanging their Stock Certificates will
thereafter look only to VSI for payment of the Merger Consideration set forth in
the Merger Agreement, without any interest thereon, but will have no greater
rights against VSI than may be accorded to general creditors thereof under
applicable law.
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<PAGE>
Notwithstanding the foregoing, none of the Exchange Agent, VSI, Newco or the
Surviving Corporation will be liable to a Shareholder for any cash or interest
thereon delivered to a public official pursuant to applicable abandoned
property, escheat and similar laws.
Promptly after the Effective Time of the Merger, the Exchange Agent will
mail to each record holder of Stock Certificates a form of Transmittal Letter
and instructions for use thereof in surrendering such Stock Certificates which
will specify that delivery will be effected and risk of loss and title to the
Stock Certificates will pass to the Exchange Agent only upon proper delivery of
the Stock Certificates to the Exchange Agent in accordance with the terms of
delivery specified in the Transmittal Letter and instructions for use thereof in
surrendering such Stock Certificates and receiving the Merger Consideration for
each share of Company Common Stock previously represented by such Stock
Certificates.
From and after the Effective Time of the Merger, holders of Stock
Certificates immediately prior to the Effective Time of the Merger will have no
right to vote or to receive any dividends or other distributions with respect to
any shares of Company Common Stock which were theretofore represented by such
Stock Certificates, other than any dividends or other distributions payable to
holders of record of Company Common Stock as of a date prior to the Effective
Time of the Merger, and will have no other rights other than as provided in the
Merger Agreement or by law or as described herein.
After the Effective Time of the Merger, there will be no transfers on the
books of the Surviving Corporation of Company Common Stock which was outstanding
immediately prior to the Effective Time of the Merger. If, after the Effective
Time of the Merger, Stock Certificates are presented (with proper endorsements)
to the Surviving Corporation, such Stock Certificates will be cancelled, retired
and exchanged for the Merger Consideration as provided for in the Merger
Agreement.
At the Effective Time of the Merger, each share of common stock of Newco
issued and outstanding immediately prior to the Effective Time of the Merger
will, by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and become one share of common stock of the Surviving
Corporation.
OPTIONS, WARRANTS AND OTHER RIGHTS
At least thirty-five days prior to the Effective Time of the Merger, the
Company will give notice to each holder of employee stock options and each other
option having similar terms advising each such holder of the terms of the Merger
and describing the consequences of the Merger to holders of such options. By
virtue of such notice, all such options will become exercisable in full and all
such options which are not exercised prior to the Effective Time of the Merger
will terminate as of the Effective Time of the Merger.
14
<PAGE>
The Company will provide certain other required or appropriate notices to
holders of other options, warrants and other rights to acquire Company Common
Stock regarding the Merger such that, prior to or upon the Effective Time of the
Merger, such options, warrants and other rights will, in accordance with their
respective terms and the BCA, be cancelled or become exercisable for, upon
payment of the applicable exercise price, the right to receive only the per
share Merger Consideration that would have been obtainable upon such exercise
immediately prior to the Effective Time of the Merger.
BACKGROUND OF THE MERGER
On October 1, 1991, the United States Food and Drug Administration issued a
cease and desist order which had the immediate effect of stopping the
manufacture and sale of the Company's products for approximately three months
and had a long term negative impact on the Company's business. As a result of
the financial and business distress caused by this shutdown, the Company sought
investments from third parties, and in June 1993, approved an initial investment
by Scherer Healthcare designed to provide the Company with the capital resources
necessary to recover from the cease and desist order and to continue as a stand-
alone entity. The Scherer Healthcare offer was accepted by the Company over a
competing offer by VSI for the purchase of all of the outstanding Company Common
Stock.
Although the Scherer Healthcare investment provided the Company with the
financial resources to survive, the Company has been unable to return its
operations to profitability in an increasingly competitive industry. Because of
the Company's ongoing financial problems and the changing and increasingly
competitive medical device market, the Company's management undertook a rigorous
review of the strategic alternatives available to the Company in the second and
third quarters of 1995. The strategic alternatives investigated included
seeking protection under the United States Bankruptcy Code, the sale of all or
part of the Company's assets, the acquisition or divestiture of product lines,
funding a new three year strategic plan through the raising of additional
capital and a strategic combination of the Company with another medical device
manufacturer or distributor. As part of this review, in August 1995, the
Company retained Triad Partners, Inc., a private merchant banking firm, to
assist it in devising a long range strategy. The Company's management concluded
that the Company should try to implement a three year plan to reduce expenses,
mechanize production and diversify product lines, all of which would require the
Company to reduce its leverage and attract additional capital. In addition, the
Company's management also concluded that the Company should consider proposals
from third parties desiring to acquire the Company as an alternative to the
three year plan.
While the Company's management was evaluating its strategic alternatives,
the Company and Scherer Healthcare received a number of inquiries from strategic
or financial parties expressing varying degrees of interest in effecting a
transaction with the Company or with Scherer Healthcare for its equity position
in the Company. The Company's management evaluated each proposal and determined
that none of the proposals provided adequate consideration for the Shareholders
and proceeded to implement the Company's "stand-alone" plan.
15
<PAGE>
Toward the end of fiscal year 1996, the Company received an inquiry by a
SMALL MANUFACTURER OF PLASTIC PRODUCTS which after several meetings and
discussions led to a formal expression of interest to acquire the Company for
APPROXIMATELY $0.78 PER SHARE OF COMPANY COMMON STOCK. The expression of
interest was reviewed by the Company's Board which indicated that it was not
willing to entertain a sale of the Company for the consideration under
discussion AT THIS TIME. In the meantime, as the result of the continuing
difficulties in returning the Company to profitability and the acceleration in
the ongoing changes in the medical device market, the Company's Board directed
the Company's management to review the companies which had previously expressed
interest in acquiring the Company and any other additional companies to
determine whether a transactions that would be in the best interest of the
Shareholders could be consummated with any one of them. VSI was one of these
companies.
During a meeting on August 20, 1996 with Terry Wall, President and Chief
Executive Officer of VSI, Anthony Dimun, Executive Vice President and Chief
Financial Officer of VSI, Robert P. Scherer, Jr., Chairman of the Board and
Chief Executive Officer of the Company, Amy Murphy, Vice President of Scherer
Healthcare, and Richard Trenkmann, President of Triad Partners, VSI expressed
interest in acquiring the Company. On September 16, 1996, VSI sent a letter to
the Company outlining the general terms of VSI's interest in acquiring the
Company. The parties continued these discussions on September 26, 1996.
At a meeting on October 2, 1996, Mr. Dimun, Jay Sturm, General Counsel of
VSI, Ms. Murphy, Mr. Trenkmann and representatives of Lowenstein Sandler Kohl
Fisher & Boylan, counsel to VSI, and LeBoeuf, Lamb, Greene & MacRae, L.L.P.,
counsel to the Company, met to discuss the details of a potential acquisition of
the Company by VSI. A preliminary consensus was reached at this meeting that
any potential acquisition of the Company by VSI would be structured as a tax-
free transaction with the holders of Company Common Stock receiving shares of
VSI common stock in exchange for their shares of Company Common Stock. This
"preliminary consensus" was subject to agreement as to price and to a number of
material contingencies, including due diligence, agreement as to the definitive
terms of the transaction and approval by the VSI and Marquest Boards.
From October 8 through October 10, 1996, representatives of VSI met with
the Company's senior management personnel and representatives of LeBoeuf, Lamb,
Greene & MacRae, L.L.P. in Denver, Colorado to commence due diligence by VSI of
the Company. Due diligence efforts continued through October and November 1996,
as did the negotiation of definitive merger documents.
On October 21, 1996, the Company engaged Hanifen to render an opinion as to
the fairness of the proposed transaction.
In October 1996, William Thompson, the President and Chief Operating
Officer of the Company, and Robert Fenwick, Senior Vice President of Sales and
Marketing of the Company, met with Terry Wall, Barry Wicker, Executive Vice
President of Sales and Marketing of VSI and
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<PAGE>
other senior members of VSI's sales and marketing staff to discuss how to market
the Company's products during this interim period.
On November 19, 1996, Mr. Dimun met with Mr. Scherer, Ms. Murphy and
Mr. Trenkmann in Chicago, Illinois. At this meeting, VSI informed the Company
that it was not prepared to go forward with the transaction on the same economic
basis as previously discussed. At that point, discussions between the Company
and VSI were suspended to allow both parties to re-evaluate their positions.
In early January 1997, Triad Partners re-established contact with VSI and
suggested a meeting to consider whether any basis existed on which the parties
would be willing to go forward. On January 15, 1997, Mr. Trenkmann and
Ms. Murphy met with Messrs. Wall, Dimun and Sturm at VSI's offices to discuss
whether a transaction could be structured which would be acceptable to both VSI
and the Company. At that meeting, representatives of VSI stated that VSI might
be willing to go forward with a transaction which provided that each share of
Company Common Stock would be converted into $0.75, payable in cash in a taxable
transaction, subject to certain adjustments.
At a telephonic meeting of the Company's Board of Directors held on
February 11, 1997, the revised terms of the VSI proposal were discussed and the
Company's management was authorized to continue negotiating with VSI. While the
Company's Board believed there appeared to be a basis for further negotiations,
the Board expressed concern over the damage to the Company that would result if
discussions continued for an extended period of time. Triad Partners was
instructed to conclude the discussions as expeditiously as possible. The Board
also considered the risk of the loss of product revenues that the Company would
face during the period between the date on which a transaction with VSI was
announced and the closing and whether those risks could be minimized by
appointing VSI as a Company dealer.
From February 12, 1997 through early March 1997, representatives of the
Company, VSI, Scherer Healthcare, Triad Partners and their respective counsel
negotiated the terms of the Merger Agreement, the Dealer Agreement, the SH
Inducement Agreement and the RPS Inducement Agreement. Those negotiations
resulted in the cash purchase price being increased to $0.797 per share, VSI
agreeing to pay the Company liquidated damages of $800,000 if it refused to
close the transaction without cause, and the parties agreeing to the terms of an
agreement whereby VSI would distribute Company products pending closing.
On March 12, 1997, VSI's Board approved the Merger Agreement.
On March 13, 1997, a meeting of the Boards of Directors of the Company was
held in Denver, Colorado (with several directors participating by telephone) to
consider, on a preliminary basis, the offer made by VSI. During the meeting of
the Company's Board, the Board heard oral presentations from the Company's
management which discussed certain operational aspects of the transaction, from
Triad Partners which outlined the principal terms of the transaction, and from
17
<PAGE>
LeBoeuf, Lamb, Greene & MacRae, L.L.P. which discussed certain legal
implications of the terms and conditions of the transaction. In addition, the
Company's Board heard a preliminary presentation from Hanifen on the fairness of
the transaction from a financial point of view to the Shareholders in which
Hanifen summarized the analyses described under "Opinion of the Financial
Advisor."
The Company's Board re-convened by telephone on March 14, 1997, and
unanimously approved the Merger subject to receipt of a fairness opinion from
Hanifen. Hanifen delivered its written opinion to the Company on March 14,
1997. The Merger was publicly announced at 4:30 p.m. Mountain Standard Time on
March 14, 1997.
REASONS FOR THE MERGER
The method by which medical devices are distributed in the United States is
in the process of a significant structural change. Historically, the decision
as to which medical device to purchase has been made by individual hospitals or
other health care providers which purchased from vendors with specialized
product lines. However, the purchasing decision is rapidly moving away from
individual hospitals or other health care providers to large buying groups which
purchase only from a limited number of vendors that are able to provide complete
product lines on a "just in time" basis where price is the primary purchasing
criterion.
This structural change has had a significant negative impact on smaller
medical device manufacturers such as the Company that have limited or non-
proprietary product lines and cost structures which make it difficult to compete
on a basis where price is the primary purchasing factor. In recognition of the
structural changes in the medical device market and the Company's own limited
ability to meet the challenges posed by those changes because of its limited
financial resources, the Company's Board of Directors concluded that the Merger
would provide a greater return to the Shareholders than any of the other
alternatives considered by the Board. These alternatives included continuing as
a stand-alone entity and restructuring the Company's business through the sale
or other disposition of product lines so that the Company would become primarily
involved in the manufacture and sale of ABG Products. In both cases, the
Company's Board determined that because of efficiencies which could be achieved
through the integration of the Company's business with that of VSI, VSI was
prepared to pay a higher price per share of Company Common Stock than the
Shareholders could reasonably expect to receive in the market if the Company
continued as a stand-alone entity. In addition, although the Company had no
other outstanding offers for the acquisition of the Company by, or proposals for
a strategic merger with, another medical device manufacturer or distributor, the
Company's Board considered the possibility of whether such offers could be
obtained or such proposals could be developed and the likely ranges of value
that such offers or proposals would provide to the Shareholders.
Finally, the Company's Board considered the fact that the per share price
offered by VSI was approximately 29% less than the market price of Company
Common Stock at the time the
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Merger was announced but concluded that the market price of the Company Common
Stock on the date was not necessarily indicative of the fair value of the stock
because of the volatility of the stock's market price. The Board compared the
price per share offered by VSI to the average market price of Company Common
Stock during the three calendar months and the calender month preceding the date
on which the Merger was announced and to the per share book value of Company
Common Stock and found that the price offered by VSI was approximately 11%
higher than the average price of Company Common Stock during the three calendar
months preceding the month in which the Merger was announced, was approximately
14.3% higher than the average price of Company Common Stock during the calendar
month preceding the month in which the Merger was announced, and was more than
twice the per share book value of the Common Stock of the Company on December
29, 1996, the date of the Company's most recent quarterly financial statements
preceding the date on which the Merger was announced. See "Price Range of
Company Common Stock and Dividends."
RECOMMENDATIONS OF THE COMPANY'S BOARD OF DIRECTORS
The Company's Board of Directors believes that the Merger advisable, is in
the best interest of the Company and its Shareholders and offers the
Shareholders a greater return than would be available if the Company were to
remain a stand- alone entity.
In its deliberations with respect to the Merger, the Company's Board
considered the following factors: (i) the Company's current businesses,
operations and prospects and the possibility that the Company's sales and
operating results could decline in the future; (ii) the significant structural
change in the manner in which medical devices are marketed and the negative
effect that the change has had, and will continue to have, on the Company's
business and business prospects given the Company's limited capital resources;
(iii) the opinion of the Company's financial advisor that the Merger
Consideration to be received by the Shareholders in the Merger is fair to
Shareholders from a financial point of view; (iv) the ability successfully to
consummate the Merger in light of the terms of the Merger Agreement and the high
likelihood that the Company would be able to satisfy the conditions precedent to
consummating the Merger; (v) the negative effect that the announcement of the
Merger would likely have on the Company's existing distribution channels and the
willingness of VSI to enter into the Dealer Agreement to minimize the impact
that the announcement would have on the Company; (vi) the fact that the Merger
would be taxable to Shareholders thereby reducing the value of the merger
consideration to Shareholders who would be required to pay tax as a result of
the Merger; (vii) a comparison of the benefits of the Merger to Shareholders
with the likely return from remaining a stand-alone medical device manufacturer,
entering into marketing alliances with third parties, or entering into a
business transaction with other possible purchasers or strategic merger
partners; and (viii) a comparison of the consideration to be received by
Shareholders with the market price of Company Common Stock at the time the
Merger was approved and the average market price during the preceding three
calendar months. See "Background of the Merger" and "Reasons for the Merger."
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In reaching its determination that the Merger is in the best interests of
the Company and its Shareholders, the Company's Board of Directors determined
that it would be unlikely that the Company would be able to develop sufficient
capital resources to compete effectively as a stand alone entity in light of the
structural changes in the manner in which medical products are being marketed.
Without the necessary capital resources, the Board concluded that if the Company
was not acquired by a third party, the Company would not be able to maintain its
current sales levels and operating results which would have an increasingly
negative impact on its stock price and the returns to its shareholders. Based
on its analysis of the market for the Company, the Board determined that it was
unlikely that another bidder for the Company would offer to acquire the Company
on terms more favorable than the terms of the Merger.
In its deliberations concerning the Merger, the Board of Directors of the
Company considered the fact that the Merger Consideration of $0.797 per share
was approximately 29% less than the $1.125 closing price for the Company's
Common Stock on March 14, 1997, the last trading day prior to the announcement
of the Merger. However, the Board concluded that it would be unlikely that the
Company's Common Stock price could be maintained at that level, which was
considerably higher than the stock's recent average price. THE COMPANY'S BOARD
DID NOT CONSIDER THE POSSIBILITY THAT THE MARKET PRICE OF THE COMPANY'S COMMON
STOCK MAY HAVE BEEN DEPRESSED BY THE SUBSTANTIAL OWNERSHIP POSITION OF THE
SCHERER INTERESTS.
The foregoing discussion of the information and factors considered by the
Company's Board of Directors is not intended to be exhaustive, but includes the
material factors considered by the Company's Board. In voting to approve the
Merger and to recommend the approval of the Merger by the Shareholders, the
members of the Company's Board did not indicate the relative or specific weights
they assigned to the foregoing factors, and individual directors may have given
different weights to different factors. Throughout its deliberations, the
Company's Board received the advice of counsel.
THE COMPANY'S BOARD HAS APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT (WITH MR. SCHERER ABSTAINING), BELIEVES
THAT THE MERGER AND THE TERMS OF THE MERGER ARE IN THE BEST INTERESTS OF THE
SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS VOTE TO APPROVE THE MERGER.
In considering the recommendations of the Company's Board with respect to
the Merger Agreement, Shareholders should be aware that the Company's management
and certain members of the Company's Board had certain interests in the Merger
which are in addition to the interest of Shareholders generally. The Company's
Board was aware of these interests and considered them, among other matters, in
approving the Merger and the transactions contemplated by the Merger Agreement.
See "Related Transactions" and "Interests of Certain Persons in the Merger."
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OPINION OF THE FINANCIAL ADVISOR
The Company retained Hanifen to render an opinion to the Company's Board of
Directors in connection with the Merger. On March 14, 1997, Hanifen delivered
its written opinion (the "Hanifen Opinion") to the Company's Board of Directors
that, as of the date of such opinion and subject to certain considerations and
assumptions set forth therein, the Merger Consideration to be received by
Shareholders from VSI pursuant to the Merger was fair to current Shareholders
from a financial point of view.
In arriving at its opinion, Hanifen: (i) reviewed the Agreement and the
specific terms of the Merger, (ii) held discussions with certain senior officers
and Directors of Marquest concerning the businesses, operations, assets,
financial condition and prospects of Marquest; (iii) examined certain publicly
available business and financial information relating to Marquest; (iv)
reviewed the financial terms of the Merger as set forth in the Agreement and
considered them in relation to, among other things, certain estimates of the
value of a share of Marquest Common Stock; (v) examined the financial terms of
certain other recent merger transactions that Hanifen deemed relevant; (vi)
analyzed the trading history of Company Common Stock over the past two years and
a comparison of that trading history with the trading history of other companies
that it deemed relevant; (vii) analyzed certain financial, market and other
publicly available information relating to the businesses of other companies,
whose operations Hanifen deemed comparable to those of the Company; and (viii)
reviewed and relied upon certain financial forecasts and other information
reflecting the current estimates and judgements of management as to the future
performance of the Company. In addition to the foregoing, Hanifen conducted
such other analyses and examinations and considered such other financial,
economic and market criteria as it deemed necessary to arrive at its opinion.
The full text of the Hanifen Opinion, dated March 14, 1997, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex II to this Proxy Statement. The Shareholders
are urged to read this opinion carefully in its entirety. The Hanifen Opinion
was directed only to the fairness, from a financial point of view, to the
current Shareholders of the Merger Consideration to be paid by VSI and was
provided for the use of the Company's Board of Directors in its evaluation of
the proposed offer by VSI to acquire the Company, does not address any other
aspect of the Merger and does not constitute a recommendation to any of the
Shareholders as to how such Shareholder should vote at the Special Meeting. In
addition, the Hanifen Opinion was rendered as of March 14, 1997 and does not
consider subsequent events that may change the Hanifen Opinion.
In Hanifen's review and analysis and in rendering its opinion, Hanifen
relied upon, and did not independently verify, the accuracy, completeness and
fair presentation of all financial and other information (including financial
projections and estimates) that were provided to or otherwise discussed with it,
or which were publicly available, and the Hanifen Opinion is conditioned upon
such information (whether written or oral) being complete, accurate and fair in
all material respects. With respect to the projected financial information and
estimates provided to or discussed with it, Hanifen assumed without independent
verification that such information
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was reasonably prepared on bases reasonably reflecting management's best,
currently available estimates and good faith judgement as to the future
performance of the Company and that the Company will perform in accordance with
such projections for all periods specified therein. Hanifen also assumed that
all consents, authorizations and agreements of other parties necessary to
consummate the Merger had been, or will be, obtained without material expense.
Hanifen did not make an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Company or conduct a physical
inspection of any of the assets of the Company, nor was Hanifen furnished with
any such appraisals. The Hanifen Opinion is necessarily based on economic,
monetary, political, market, and other conditions that existed and could be
evaluated as of the date of the opinion and on information available to Hanifen
as of that date. Such conditions are subject to rapid and unpredictable change.
In arriving at its opinion, Hanifen employed several analytical
methodologies, no one of which was regarded as critical to its overall
conclusion. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial and
comparative analysis and the application of those methods to the particular
circumstances, and therefore such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at its opinion, Hanifen did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgements as to the significance and relevance of each
analysis and factor. The conclusions it reached were based on all the analyses
and factors considered as a whole and also on application of its own experience
and judgement. Such conclusions involved significant elements of subjective
judgment and qualitative analysis. Among the analytical methodologies employed
was comparison of certain financial information, ratios and public market
multiples of the Company with similar data of selected publicly traded companies
considered by Hanifen to be comparable to those of the Company and a review of
implied multiples paid in certain other recent business combinations deemed by
Hanifen to be relevant. Also among the methodologies employed was an estimation
of the present value of future cash flows that the Company may generate based on
management's projections.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES
Using publicly available information, Hanifen reviewed and compared certain
financial information, ratios, and public market multiples of the Company with
similar data of selected publicly traded companies considered by Hanifen to be
comparable to those of the Company, including Respironics, Inc., Healthdyne,
Inc., ICU Medical, Inc., Allied Healthcare Products, Inc., Criticare Systems,
Inc., Medical Action Industries, Inc., and Gish Biomedical, Inc.
The range and mean for market capitalization as a multiple of each of the
indicated statistics for the comparable companies were as follows: (i) latest
twelve months' net income--- 16.7x to 53.1x, with a mean of 28.1x; (ii)
estimated calendar 1997 earnings based upon estimates from industry sources---
13.6x to 32.8x, with a mean of 20.2x; (iii) book value--- 1.0x to 4.1x, with a
mean of 2.3x. The net market capitalization (defined as the market equity
value plus total debt and preferred stock less cash and cash equivalents) as a
multiple of each of the indicated statistics for the comparable companies were
as follows: (i) latest twelve months' revenues--- 0.7x
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to 2.8x. with a mean 1.5x; and (ii) latest twelve months' earnings before
interest and taxes ---7.0x to 60.2x, with a mean of 25.9x.
The Company's multiples based upon the consideration to be offered in
connection with the Merger, which at the time date of Hanifen's rendering of its
opinion had a value of $0.797 per share were as follows: (I) book value--- 2.6x;
and (ii) latest twelve months' revenues--- 0.9x. The following multiples were
deemed not to be meaningful due to lack of positive historical and projected
earnings by the Company: latest twelve months' net income; estimated calendar
year 1997 net income and latest twelve months' earnings before interest and
taxes. Hanifen believes that the calculated multiples supported Hanifen's view
that the consideration to be received by the Company's stockholders is fair,
from a financial point of view, to such stockholders, because taken as a whole,
the ratios described above were within the range of selected public comparable
multiples.
Because of the inherent differences between the capital structure,
financial information and public market multiples of the Company and those
comparable companies, Hanifen believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of this analysis, and
accordingly made qualitative judgements concerning the differences between the
financial and operating characteristics of the Company and those selected
comparable companies that would affect the public trading values of the Company
and such comparable companies. The qualitative considerations included the
Company's relatively weak competitive position with limited or non-proprietary
product lines in an increasingly competitive medical device industry and the
Company's limited ability to meet its competitive challenges due to its limited
financial resources and the lack of viable alternatives to obtain additional
financing.
ANALYSIS OF SELECTED COMPARABLE TRANSACTIONS
Using publicly available information, Hanifen compared selected financial
data for the Company with similar data for selected recent business combinations
deemed by Hanifen to be relevant. The merger and acquisition transactions
reviewed by Hanifen included: (i) the acquisition of Infrasonics, Inc. by
Nellcor Puritan-Bennet; (ii) the acquisition of MDT Corporation by Getinge
Industrier; (iii) the acquisition of Customedix Corporation by CUS Acquisitions
Inc.; (iv) the acquisition of Aequitron Medical, Inc. by Nellcor Puritan-Bennet;
(v) the acquisition of MediVators, Inc. by Cantel Industries Inc.; and (vi) the
acquisition of EP Technologies, Inc. by Boston Scientific Corporation.
The range and mean for the purchase price of equity as a multiple of each
of the indicated statistics for the above transactions were as follows: (i)
latest twelve months' net income --- 18.9x to 43.1x, with a mean of 27.7x; and
(ii) book value--- 0.7x to 6.9x, with a mean of 2.5x. The range and mean for
the transaction value (defined as purchase price of equity plus the book value
of debt less cash and cash equivalents) as a multiple of each of the indicated
statistics for the group of comparable acquisitions were as follows: (i) latest
twelve months' revenues ---0.3x to 6.8x, with a mean of 2.5x; (ii) latest twelve
months' earnings before interest and taxes --- 10.6x to 31.9x, with a mean of
18.7x.
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The Company's multiples based upon the consideration to be received by the
Company's stockholders in connection with the Merger, which at the date of
Hanifen's rendering of its opinion had a value of $0.797 per share, were as
follows: (i) book value---2.6x: and (ii) latest twelve months' revenues--- 0.9x.
The following multiples were deemed not to be meaningful due to the lack of
positive historical and projected earnings: net income for the last twelve
months; and latest twelve months' earnings before interest and taxes. Hanifen
believes that the calculated multiples supported Hanifen's view that the
consideration to be received by the Company's stockholders is fair, from a
financial point of view, to such stockholders, because taken as a whole, the
ratios described above were within the range of selected multiples.
Because the reasons for and the circumstances surrounding each of the
comparable recent business combinations analyzed were specific to each
transaction and because of the inherent differences between the capital
structure, financial condition and prospects of the Company and those of the
selected acquired companies, Hanifen believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of this analysis, and
accordingly made qualitative judgements concerning the differences between the
financial and operating characteristics of the Company and those selected
comparable companies that would affect the public trading values of the Company
and such comparable companies. The qualitative considerations included the
Company's relatively weak competitive position with limited or non-proprietary
product lines in an increasingly competitive medical devise industry and the
Company's limited ability to meet its competitive challenges due to its limited
financial resources and the lack of viable alternatives to obtain additional
financing.
DISCOUNTED CASH FLOW ANALYSIS
Under this analysis, Hanifen calculated an estimation of the present value
of future cash flows that the Company may generate based on management's
projections. The Company's projected after-tax cash flows were calculated as
the after-tax operating earnings plus depreciation and amortization less capital
expenditures and net changes in working capital. Hanifen calculated terminal
values for the Company by applying to after-tax cash flow a range of multiples
based on the analysis of the trading multiples of the comparable companies and
the acquisition multiples of the comparable merger transactions, as well as
Hanifen's general experience in mergers and acquisitions. The cash flow streams
and the terminal values were then discounted to present values using a range of
discount rates from 15% to 35%, which were chosen based on several assumptions
regarding the cost of capital of the Company's business. The resulting
estimates of the value of the Company's equity ranged from $2.4 million to $3.1
million; the corresponding per share range was $0.16 to $0.21. Hanifen believes
that the discounted cash flow analysis supported Hanifen's opinion that the
consideration to be received by the Company's stockholders is fair, from a
financial point of view, because the consideration valued at the time of
Hanifen's opinion was greater than the range of present values of the Company's
projected future cash flows.
By letter dated October 21, 1996, the Company formally retained Hanifen to
render the Hanifen Opinion. The Company has paid Hanifen a fee of $50,000 in
connection with the
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rendering of the Hanifen Opinion and has agreed to pay Hanifen an additional fee
of $25,000 upon closing of the Merger. The Company also agreed to reimburse
Hanifen for its out-of-pocket expenses incurred in performing its services,
including reasonable attorneys' fees and expenses, and to indemnify Hanifen and
related persons against certain liabilities, including liabilities under federal
securities laws, arising out of Hanifen's engagement.
Hanifen has advised the Company that, in the ordinary course of business,
it may actively trade the securities of the Company for its own account or for
the account of its customers and, accordingly, may at any time hold a long or
short position in such securities.
Hanifen, as part of its investment banking services, regularly performs
valuations of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, financial
restructurings and other financial services. In addition, Hanifen is regularly
engaged in the evaluation of capital structures and the rendering of advice in
financial restructurings and recapitalizations.
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required by VSI for the payment of the Merger
Consideration, to repay certain indebtedness owed by the Company, to purchase
the ABG Assets and to pay related fees and expenses, is expected to be
approximately $23 million. VSI has advised the Company that it will pay for
such obligations primarily from cash on hand. VSI has informed the Company that
on the date of this Proxy Statement, the Company had cash resources in excess of
$40,000,000.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences of the Merger to holders whose shares of Company Common Stock are
converted to cash in the Merger. This discussion is for general information
only and does not purport to consider all aspects of federal income taxation
that may be relevant to holders of Company Common Stock. The discussion is
based on current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing, proposed and temporary regulations promulgated
thereunder and administrative and judicial interpretations thereof, all of which
are subject to change. No assurance can be given that future legislation,
regulations, administrative interpretations and court decisions will not
significantly change these authorities, possibly with a retroactive effect.
This discussion applies only to holders of Company Common Stock in whose hands
shares of Company Common Stock are capital assets within the meaning of Section
1221 of the Code, and may not apply to Company Common Stock received pursuant to
the exercise of employee stock options or otherwise as compensation, or to
holders of Company Common Stock subject to special tax provisions (including,
but not limited to, insurance companies, banks, regulated investment companies,
tax-exempt organizations and broker-dealers) who may be subject to special rules
under the Code. This discussion does not discuss the federal income tax
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consequences to a holder of Company Common Stock who, for United States federal
income tax purposes, is a non-resident alien individual, a foreign corporation,
a foreign partnership or a foreign estate or trust, nor does it consider the
effect of any foreign, state or local tax laws.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH SHAREHOLDER SHOULD
CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE
RULES DISCUSSED BELOW TO SUCH SHAREHOLDER AND THE PARTICULAR TAX EFFECTS TO SUCH
SHAREHOLDER OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL
AND OTHER INCOME TAX LAWS.
The receipt of cash for Company Common Stock pursuant to the Merger will be
a taxable transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local or foreign tax laws. The tax
consequences of such receipt pursuant to the Merger may vary depending upon,
among other things, the particular circumstances of the Shareholder. In
general, for federal income tax purposes, a Shareholder will recognize gain or
loss equal to the difference between the Shareholder's adjusted tax basis in
Company Common Stock and the amount of cash received in exchange for such
Company Common Stock. Gain or loss must be determined separately for each block
of Company Common Stock (i.e., Company Common Stock acquired at the same cost in
a single transaction) converted into cash in the Merger. For non-corporate
Shareholders who hold Company Common Stock as a capital asset, gain or loss
recognized as a result of the Merger will be treated as a capital gain or loss,
provided that the Company is not treated for federal income purposes as a
"collapsible corporation." In the opinion of the Company's management, the
Company is not a collapsible corporation for federal income tax purposes. Such
gain or loss will be a long-term capital gain or loss if the Shareholder held
Company Common Stock for more than one year on the date of the Effective Time of
the Merger. Long-term capital gain of individuals currently is taxed at a
maximum rate of 28%, in contrast to items taxable as ordinary income which are
subject to rates up to 39.6%.
In the case of a corporate Shareholder, capital losses are allowed only to
the extent of capital gains. In the case of a non-corporate Shareholder,
capital losses are allowed only to the extent of capital gains plus the lesser
of (i) $3,000 ($1,500 in the case of a married individual filing a separate
return) or (ii) the excess of losses over such gains. Generally, a corporation
may carry its excess capital loss back three years or forward five years,
subject to certain provisions of the Code. Generally, in the case of a non-
corporate taxpayer, excess capital losses may be carried forward indefinitely
and used each year, subject to the $3,000 limitation ($1,500 in the case of a
married individual filing a separate return), until the loss is exhausted.
Holders of employee stock options or options or warrants otherwise received
as compensation who surrender their options or warrants in exchange for a cash
payment equal to the difference between the per share Merger Consideration and
the exercise price per share for the underlying Company Common Stock will
recognize gain for federal income tax purposes equal to
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the amount of such cash payment. Such gain will be taxable as ordinary income
and subject to any required withholding taxes.
Holders of options or warrants which are not employee stock options or
options or warrants otherwise received as compensation who surrender their
options or warrants in exchange for a cash payment equal to the difference
between the per share Merger Consideration and the exercise price per share for
the underlying Company Common Stock will recognize gain for federal income tax
purposes equal to the amount of such cash payment. Such gain or loss will be a
long-term capital gain or loss if the Shareholder held such options or warrants
for more than one year on the date of the Effective Time of the Merger. As
discussed above, long-term capital gain of individuals currently is taxed at a
maximum rate of 28%, in contrast to items taxable as ordinary income which are
subject to rates up to 39.6%.
Payments to a Shareholder in connection with the Merger may be subject to
"backup withholding" at a rate of 31%, unless the Shareholder (a) is a
corporation or comes within certain exempt categories and, when required,
demonstrates this fact or (b) provides a correct tax identification number
("TIN") to the payor, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A Shareholder who does not provide a correct TIN may be
subject to penalties imposed by the Internal Revenue Service. Any amount paid
as backup withholding does not constitute an additional tax and will be
creditable against the holder's federal income tax liability. Each Shareholder
should consult with his or her own tax advisor as to his or her qualification
for exemption from backup withholding and the procedure for obtaining such
exemption. Shareholders whose Company Common Stock is converted into cash in
the Merger may prevent backup withholding by completing a Substitute Form W-9
or, in the case of foreign Shareholders, a Form W-8 and submitting it to the
Exchange Agent.
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting.
As a result, VSI's consolidated financial statements will include the Company's
operations only for periods after the Effective Time of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain officers and directors of the Company have interests in the Merger
that are in addition to their interests as Shareholders and have participated in
the negotiations of the terms of the Merger Agreement and the transactions
contemplated thereby. The Company's Board was aware of theses interests and
considered them along with the other matters described above. See
"Recommendation of the Board of Directors."
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SEVERANCE BENEFITS
Mr. Thompson currently serves as President and Chief Operating Officer of
the Company. He also serves as a director of the Company and as a director of
Scherer Healthcare. Pursuant to an employment agreement, dated November 1, 1996
between Mr. Thompson and the Company, 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 will constitute a change of control within
the meaning of Mr. Thompson's employment agreement. As required by the Merger
Agreement, Mr. Thompson has agreed that his employment with the Company will
terminate at the Effective Time of the Merger and Scherer Healthcare has agreed
that it will pay the full amount of the severance benefits to which Mr. Thompson
will become entitled. These severance benefits are estimated to be $190,000, if
the Effective Time of the Merger occurs in July 1997.
Margaret Von der Schmidt, currently Chief Financial Officer and Secretary
of the Company, and five non-executive officers of the Company have entered into
employment agreements which provide that upon involuntary termination of
employment for reasons other than cause within three months from the occurrence
of a change of control of the Company, the employee is entitled to a
continuation of salary and certain benefits for six months following termination
of employment and to a pro-rata bonus under any existing bonus plan of the
Company for the portion of the fiscal year of the Company prior to the date of
the change of control. In addition, four other non-executive officers of the
Company have entered into similar employment agreements which provide for three
months continuation of benefits and salary if the employment of any such
employee is terminated involuntarily for reason other than cause within three
months of the change of control. The Merger will constitute a change of control
under each of these agreements.
EARLY VESTING OF STOCK OPTIONS
Mr. Thompson and Ms. Von der Schmidt hold options covering shares of
Company Common Stock under the Company's Incentive and Non-Qualified Stock
Option Plan (the "Option Plan") which, pursuant to the terms of the Option Plan,
vest upon the occurrence of a change of control. Mr. Thompson holds options for
150,000 shares of Company Common Stock, of which 75,000 are exercisable at
$0.6875 per share and the remaining 75,000 are exercisable at a price in excess
of the per share Merger Consideration. Ms. Von der Schmidt holds options for
50,000 shares of Company Common Stock, of which 30,000 are exercisable at
$0.6875 and the remaining 20,000 shares are exercisable at a price in excess of
the per share Merger Consideration. In addition, forty-one non-executive
officers and employees of the Company hold options to purchase 408,166 shares of
Company Common Stock which will vest at the Effective Time of the Merger, of
which 192,166 shares are exercisable at exercise prices less than the per share
Merger Consideration and 216,000 are exercisable at exercise prices in excess of
the per share Merger Consideration.
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Pursuant to the Option Plan, the Company intends to provide the holders of
the above options with notice that the options must either be exercised prior to
the Effective Time of the Merger or the options will expire at the Effective
Time of the Merger. As an accommodation to its employees, the Company intends
to offer holders of options with an exercise price below the Merger
Consideration the opportunity to exercise their options on a "cashless" basis
with the result that the Company will pay the employee, at the Effective Time of
the Merger, the difference between the per share Merger Consideration and the
exercise price of the option.
DIRECTOR COMPENSATION
On August 22, 1996, the Company's Board authorized the grant of options for
150,000 shares of Company Common Stock to its directors at an exercise price in
excess of the Merger Consideration. These options were never evidenced by
option agreements. On March 14, 1997, each of the directors of the Company
agreed that these options would be cancelled. As a result, neither the Company
nor VSI has any obligation with respect to these options.
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 exceptional service to the
Company in assisting in the negotiation of the Merger Agreement.
SCHERER HEALTHCARE
The Board of Directors of Scherer Healthcare consists of four directors,
all of whom are also directors of the Company. Mr. Scherer is Chairman and
Chief Executive Officer of both Scherer Healthcare and the Company and
Mr. Thompson is President of both Scherer Healthcare and the Company.
Scherer Healthcare owned directly 7,211,192 shares of Company Common Stock
and warrants for the purchase of an additional 6,580,000 shares of Company
Common Stock at an exercise price of $0.75 per share. Scherer Healthcare's
stock ownership in the Company represented approximately 50.44% of the issued
and outstanding shares of Company Common Stock on June 27, 1997. Upon
consummation of the Merger, Scherer Healthcare will receive $6,056,580.02 for
its Company Common Stock and warrants. See "Security Ownership of Certain
Beneficial Owners and Management."
In connection with the execution of the Merger Agreement, Scherer
Healthcare entered into the SH Inducement Agreement which provides that if the
Merger is consummated, VSI will purchase all of Scherer Healthcare's right,
title and interest in the ABG Assets from Scherer Healthcare for a purchase
price equal to the exercise price under the option. Assuming that the Merger
closes in July 1997, the purchase price will be $5,625,000. In addition, the SH
Inducement Agreement provides that Scherer Healthcare will execute a covenant
not to compete
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at the Effective Time of the Merger for additional consideration equal to the
difference between $5,860,000 and the amount paid for the ABG Assets. See
"Related Transactions."
Pursuant to the SH Inducement Agreement, Scherer Healthcare also agreed,
subject to exercise of its fiduciary obligations as a controlling shareholder of
the Company and the approval of the transactions contemplated by the Merger
Agreement and the SH Inducement Agreement by the vote of a majority of the
shares of common stock of Scherer Healthcare, to vote its shares of Company
Common Stock to approve the Merger. Mr. Scherer has beneficial ownership of and
voting control over a majority of the issued and outstanding shares of Scherer
Healthcare and has agreed, subject to his fiduciary obligations as a controlling
shareholder of Scherer Healthcare, to vote his Scherer Healthcare shares in
favor of approving the transactions contemplated by the Merger Agreement and the
SH Inducement Agreement.
ROBERT P. SCHERER
Robert P. Scherer, Jr., is beneficial owner of 1,546,392 shares of Company
Common Stock for which he will receive $1,232,474.42 upon the consummation of
the Merger. Mr. Scherer also has voting authority over an additional 515,464
shares of Company Common Stock as trustee of a voting trust for shares of
Company Common Stock which are beneficially owned by Mr. Scherer's adult
children. In addition, Mr. Scherer holds a convertible promissory note of the
Company in the principal amount of $700,000 which he has agreed to convert
immediately prior to the Effective Time of the Merger into a total of 1,000,000
shares of Company Common Stock for which he will receive $797,000 at the
Effective Time of the Merger.
In addition to his ownership of Company Common Stock, Mr. Scherer has
voting authority over 2,591,180 shares or 61.1% of the issued and outstanding
shares of common stock of Scherer Healthcare.
As part of the transactions contemplated by the Merger Agreement,
Mr. Scherer entered into the RPS Inducement Agreement pursuant to which
Mr. Scherer has agreed that, subject to his fiduciary obligations as a director
and controlling shareholder of Scherer Healthcare, he will vote his shares of
Scherer Healthcare common stock in favor of approval of the Merger at the
Scherer Special Meeting. Mr. Scherer has agreed to vote all of his shares of
Company Common Stock, including the shares over which he has voting authority
pursuant to the voting trust for the benefit of his adult children, in favor of
the Merger. Pursuant to the RPS Inducement Agreement, Mr. Scherer will execute
a covenant not to compete at the Effective Time of the Merger in exchange for a
payment by VSI of $140,000. See "Related Transactions."
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REGULATORY MATTERS
ANTITRUST MATTERS
Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), provides that certain acquisition transactions may not
be consummated until certain information has been furnished to the Antitrust
Division of the Department of Justice (the "Antitrust Division") and the Federal
Trade Commission (the "FTC") and the waiting period under the HSR Act has
terminated. The Company and VSI filed information and material with the
Antitrust Division and the FTC with respect to the Merger on March 18, 1997. On
March 31, 1997, the FTC provided VSI with telephonic notification that it had
granted early termination of the waiting period under the HSR Act with respect
to the Merger.
Transactions such as the Merger may be investigated by the Antitrust
Division or the FTC notwithstanding the termination of the waiting period
applicable to the Merger under the HSR Act. Before or after the consummation of
such transaction, the Antitrust Division or the FTC could take such action under
the antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the transaction or seeking divestiture of all
Company Common Stock or the ABG Assets so acquired or divestiture of substantial
assets of VSI and/or the Company. Private parties may also bring legal action
under antitrust laws under certain circumstances.
OTHER GOVERNMENTAL APPROVALS
Other than the issuance of a certificate of merger by the Secretary of
State of Colorado, the Company is aware of no other federal or state regulatory
requirements that must be complied with or approvals that must be obtained prior
to the consummation of the Merger.
CERTAIN TERMS OF THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, which is attached as Annex I and is incorporated herein by reference.
See also "Payment of the Merger Consideration," and "-Options, Warrants and
Other Rights" for summaries of certain other provisions of the Merger Agreement.
All such summaries are qualified in their entirety by reference to the Merger
Agreement.
GENERAL
At the Effective Time of the Merger, pursuant to the Merger Agreement,
Newco will merge with and into the Company. The Company will be the surviving
corporation and will become a wholly-owned subsidiary of VSI. At the Effective
Time of the Merger, the separate existence and corporate organization of Newco
will cease. The Company, as the surviving
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corporation, will succeed, insofar as permitted by law, to all of the rights,
assets, liabilities and obligations of Newco in accordance with the BCA.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Merger Agreement contains representations and warranties by the Company
relating to, among other things: (a) its organization and qualification, its
subsidiaries' organization and qualification and similar corporate matters; (b)
its capital structure; (c) its ABG Products and related business; (d) its
filings with the Securities and Exchange Commission ("SEC") and the accuracy of
the information contained therein; (e) its owned and leased real and personal
property, including intangible personal property; (f) its accounts receivable
and inventory; (g) its material contracts; (h) its customers and suppliers; (i)
transactions with directors, officers, employees and affiliates; (j) litigation;
(k) insurance; (l) licenses and permits; (m) authorization, execution, delivery,
performance and enforceability of the Merger Agreement and related matters,
including regulatory and statutory approvals; (n) compliance with applicable
laws and environmental matters; (o) ERISA and employment matters; (p) reports
and financial statements; (q) certain tax matters; (r) business changes; (s)
brokers and finders fees; (t) industrial revenue bonds; (u) the SH Inducement
Agreement and the RPS Inducement Agreement; (v) accuracy of information; (w)
certain agreements with Scherer Healthcare relating to the ABG Products and the
Company's related business; and (x) FDA matters.
REPRESENTATIONS AND WARRANTIES OF VSI
The Merger Agreement contains representations and warranties by VSI
relating to, among other things: (a) its organization and qualification; (b)
authorization, execution, delivery, performance and enforceability of the Merger
Agreement and related matters; and (c) brokers and finders fees.
CERTAIN COVENANTS OF THE COMPANY
Pursuant to the Merger Agreement, the Company has agreed that, during the
period from the date of the Merger Agreement until the Effective Time of the
Merger, except as permitted under the Merger Agreement or any other agreement
executed by VSI or as otherwise consented to in writing by VSI, the Company
will, among other things, carry on its business diligently and in the ordinary
course and use reasonable efforts to preserve its present business organization
intact and preserve its present relationship with persons having business
dealings with it. In addition, the Company has agreed that, prior to the
Effective Time of the Merger, it will not do any of the following, among other
things, without VSI's written consent: (a) amend its Articles of Incorporation
or Bylaws; (b) issue, sell, deliver, grant or declare any stock dividend or
stock split or other distributions in respect of, any of the Company Common
Stock or any securities convertible or exchangeable into or exercisable for any
such stock or any options or warrants to purchase Company Common Stock, except
the issuance of shares of Company Common Stock pursuant to certain options,
warrants or a convertible note exercisable or convertible by their
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terms and outstanding on the date the Merger Agreement was executed; (c) except
in the ordinary course of business or as required upon exercise of directors'
fiduciary duties, mortgage or pledge any of its assets; (d) except in the
ordinary course of business, borrow or agree to borrow any funds (other than
pursuant to the Company's existing credit facilities up to certain amounts); (e)
except in the ordinary course of business, voluntarily incur any obligation or
liability, cancel any material debts of third parties or claims against third
parties, lease, sell, transfer or grant any preferential rights to lease or
acquire any of its material assets, property or rights or substantively amend or
terminate any material contract, agreement, license or other right of which the
Company is a party; (f) adopt, materially amend or terminate any employee
benefit plan or materially increase compensation or other benefits payable to
any of the Company's employees; (g) acquire control of, or an ownership interest
in, any other business entity or a substantial portion of the assets thereof;
(h) solicit, encourage or authorize any inquiry, proposal, offer or possible
offer from a third party relating to a change in control or ownership or other
transaction that would constitute a "Takeover Proposal" as defined in the Merger
Agreement or, subject to the fiduciary obligations of the Company's Board of
Directors, provide to any person information or assistance or negotiate with any
person in furtherance of a Takeover Proposal; (i) except in the ordinary course
of business and consistent with practices customary for the Company and except
for the buy-out of certain equipment leases, incur or discharge any material
obligation or liability; (j) enter into any material licensing or marketing
arrangement or other material contract with any party other than VSI; (k) settle
any pending litigation in a manner that is materially adverse to the Company or
commence any material litigation; and (l) take certain other actions, all as
more fully described in the Merger Agreement.
In addition, the Merger Agreement contains certain covenants of the Company
prior to the Effective Time of the Merger regarding, among other things, (a) no
breaches, violations or defaults with respect to material contracts or
applicable laws; (b) maintaining its insurance policies; (c) filing tax returns
and other reports and returns required to be filed with applicable governmental
authorities and paying tax liabilities; (d) advising VSI of certain material
adverse changes; (e) advising VSI of any Takeover Proposal or related inquiry;
(f) obtaining necessary approvals, authorizations, and consents of governmental
and regulatory authorities and completing required filings; (g) allowing VSI to
review and investigate the business and financial condition of the Company; (h)
fulfilling and satisfying certain conditions to the Closing; (i) performing
certain matters required to be performed by the Company at or prior to the
Closing; (j) the accuracy of the Company's warranties and representations in the
Merger Agreement; (k) maintenance of its property and assets; (l) furnishing VSI
with information required to prepare a Current Report on Form 8-K; (m) calling
the Special Meeting; (n) not triggering anti-dilution provisions of securities
exercisable for or convertible into shares of Company Common Stock or changing
the applicable exercise price; (o) amending the Company's Rights Agreement; (p)
filing with the SEC all required reports and statements under the 1934 Act; (q)
advising VSI of any notice of intent to demand dissenters' rights and giving VSI
the opportunity to direct any negotiations and proceedings with respect thereto;
(r) establishing a separate account for funds received upon the exercise of any
option or warrant prior to the Effective Time of the Merger; and (s) not
exercising the repurchase option relating to the ABG Assets.
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CERTAIN COVENANTS OF VSI
The Merger Agreement contains certain covenants of VSI prior to the
Effective Time of the Merger regarding, among other things: (a) fulfilling and
satisfying certain conditions to the Closing; (b) performing certain matters
required to be performed by VSI at or prior to the Closing; (c) the accuracy of
VSI's warranties and representations in the Merger Agreement; and (d) obtaining
necessary approvals, authorizations, and consents of governmental and regulatory
authorities and completing required filings.
CERTAIN OTHER AGREEMENTS
Pursuant to the Merger Agreement, VSI and the Company have agreed to make
required filings promptly pursuant to the Hart Scott Rodino Act and to use their
best efforts and cooperate to effect compliance with the Hart Scott Rodino Act.
The Company has further agreed to provide to VSI a consolidated balance sheet
prior to Closing and a sales statement with respect to certain "Special
Treatment Sales" (generally defined as foreign sales and domestic OEM,
government and home health care sales) each together with a certificate from the
Company's Chief Financial Officer as to compliance with certain preparation
parameters. In addition, the Company has represented and covenanted with VSI as
to (a) the compliance of this Proxy Statement with the 1934 Act and the rules
and regulations promulgated thereunder; (b) the accuracy and completeness of the
information contained in this Proxy Statement (other than with respect to
information regarding VSI); and (c) compliance in this Proxy Statement with
notifications regarding dissenters' rights as are required by the BCA.
CONDITIONS TO OBLIGATIONS OF VSI AND NEWCO
The Merger Agreement provides that the respective obligations of VSI and
Newco to consummate the Merger are subject to satisfaction of the following
conditions, among others: (a) the accuracy in all material respects of the
representations and warranties of the Company contained in the Merger Agreement;
(b) the Company's performance and compliance in all material respects with all
covenants, agreements and conditions required by the Merger Agreement to be
performed or complied with by the Company prior to or on the Closing Date;
(c)(i) no order of any court or administrative agency being in effect which
restrains or prohibits any transaction contemplated by the Merger Agreement or
the Inducement Agreements or which would limit or affect VSI's ownership of the
Company or of the ABG Assets; (ii) no suit, action (other than the exercise of
dissenters' rights), investigation, inquiry or proceeding pending or threatened
against VSI, Newco, any subsidiary of VSI or the Company, challenging the
validity or legality, or seeking to restrain or limit the consummation, of the
transactions contemplated by the Merger Agreement or the Inducement Agreements;
and (iii) no written advice having been received by VSI, Newco or the Company
from any governmental body and remaining in effect threatening to commence an
action or proceeding seeking to invalidate, restrain or limit the Merger or the
Inducement Agreements or the transactions contemplated thereby or otherwise
affect VSI's ownership of the Company or the ABG Assets; (d)(i) obtaining
approval of the
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Merger by the Shareholders, and by the holders of Scherer Healthcare common
stock at the Scherer Special Meeting and all other necessary or specified
governmental and non-governmental consents and approvals, including the
expiration or termination of all applicable waiting periods under the Hart Scott
Rodino Act; (ii) no such consent or approval having imposed a condition to such
consent or approval, and no condition having been imposed in connection with any
filings made under the Hart Scott Rodino Act or under any other law, which
condition in the opinion of VSI is unduly burdensome to the consolidated
financial condition or operations of VSI or to the business of the Company and
its subsidiaries taken as a whole; and (iii) all conditions required to be
satisfied prior to the Effective Time of the Merger pursuant to such consents
and approvals having been satisfied; (e) VSI and Newco having received an
acceptable opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the
Company as to the corporate existence and good standing of the Company, the
authority of the Company to enter into the Merger Agreement, the valid issuance
of the Company Common Stock, the absence of material litigation, and the absence
of conflicts with other agreements and similar matters; (f) as of the Closing
Date, the Company not being indebted for borrowed money in an aggregate amount
in excess of $6.4 million (subject to certain exceptions); (g)(i) the Company
having furnished VSI with satisfactory closing certificates of the Company,
signed by its President or an Executive Vice President, regarding the accuracy
in all material respects of the representations and warranties of the Company in
the Merger Agreement and the Company's compliance in all material respects with
all terms, covenants and provisions of the Merger Agreement with which it is
required to comply prior to or on the Closing Date and (ii) Scherer Healthcare
having furnished VSI with satisfactory certificates of Scherer Healthcare,
signed by its President or Executive Vice President, to the same effect with
respect to the SH Inducement Agreement; (h) the Company, William J. Thompson and
Scherer Healthcare having entered into an agreement pursuant to which
Mr. Thompson's existing employment agreement with the Company will terminate as
of the Effective Time of the Merger; (i) the Company having amended the Rights
Agreement in such a manner that the execution of the Merger Agreement and the
consummation of the Merger will not cause any of the Rights to become
exercisable and, prior to the consummation of the Closing, no Rights thereunder
having been exercised; (j)(i) the accuracy in all material respects of Scherer
Healthcare's and Robert P. Scherer, Jr.'s respective representations and
warranties contained in the Inducement Agreements; (ii) their performance and
compliance in all material respects with the applicable covenants, agreements
and conditions as required by the Inducement Agreements; and (iii) Scherer
Healthcare, Mr. Scherer and VSI having agreed upon the form and substance of all
documents to be executed and delivered at the closings contemplated by the
Inducement Agreements; (k) VSI having received such additional documentation at
the Closing as VSI and its counsel may reasonably require to evidence compliance
by the Company with all of its obligations under the Merger Agreement and to
evidence compliance by Scherer Healthcare and Mr. Scherer with all of their
obligations under the Inducement Agreements.
CONDITIONS TO OBLIGATIONS OF THE COMPANY
The Merger Agreement provides that obligations of the Company to consummate
the Merger are subject to satisfaction of the following conditions, among
others: (a) the accuracy in
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all material respect of the representations and warranties of VSI contained in
the Merger Agreement; (b) VSI's and Newco's respective performance and
compliance in all material respects with each covenant, agreement and condition
required by this Agreement to be performed or complied with by it prior to or on
the Closing Date; (c)(i) no order of any court or administrative agency being in
effect which restrains or prohibits any transaction contemplated by the Merger
Agreement; (ii) no suit, action (other than the exercise of dissenters' rights),
investigation, inquiry or proceeding pending or threatened against VSI, Newco or
the Company challenging the validity or legality of, or seeking to restrain, the
consummation of the transactions contemplated by, the Merger Agreement; and
(iii) no written advice having been received by VSI, Newco or the Company or
their respective counsel from any governmental body, and remaining in effect,
threatening to commence an action or proceeding seeking to invalidate or
restrain the Merger; (d) obtaining the approval of the Shareholders of the
Merger, the Scherer Shareholder Approval and all necessary or specified
governmental and non-governmental consents and approvals, including the
expiration or termination of all applicable waiting periods under the Hart Scott
Rodino Act; (e) the Company having received a satisfactory opinion of
Lowenstein, Sandler, Kohl, Fisher & Boylan, P.C., counsel to VSI, dated the
Closing Date and addressed to the Company as to the corporate existence and good
standing of VSI, the authority of VSI to enter into the Merger Agreement, the
absence of material litigation, and the absence of conflicts with other
agreements and similar matters; (f) VSI and Newco both having furnished the
Company with satisfactory closing certificates, signed by their respective
Presidents or Executive Vice Presidents, regarding the accuracy in all material
respects of the representations and warranties of such corporations contained in
the Merger Agreement and such corporations' compliance in all material respects
with all terms, covenants and provisions of the Merger Agreement with which they
are required to comply prior to or on the Closing Date; and (g) the Company
having received such additional documentation at the Closing as the Company and
its counsel may reasonably require to evidence compliance by VSI and Newco with
all of their respective obligations under the Merger Agreement.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
before the Effective Time of the Merger, notwithstanding approval of the Merger
by the shareholders of the Company or Newco (a) by mutual written consent of
VSI, Newco and the Company; (b) by VSI or the Company if (i) the Shareholders
fail to approve the Merger at the Special Meeting, (ii) the shareholders of
Scherer Healthcare fail to give the Scherer Shareholder Approval, (iii) the
Board of Directors of the Company fails to recommend, withdraws or conditions
its recommendation that the Shareholders approve the Merger Agreement and the
Merger or resolves to do so, or (iv) the Board of Directors of Scherer
Healthcare fails to recommend, withdraws or conditions its recommendation that
the shareholders of Scherer Healthcare give the Scherer Shareholder Approval or
resolves to do so. 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 or any material
failure by the Company to comply with its obligations under the Merger
Agreement; (b) the Company's Special Treatment Sales for the
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period from December 29, 1996 through the date seven days prior to the Closing
(the "Pre-Closing Date") are less than eighty percent (80%) of the Company's
Special Treatment Sales during the period from the first day of the Company's
fiscal quarter commencing in December 1995 through the date one year prior to
the Pre-Closing Date; (c) there has been a material misrepresentation or breach
by Scherer Healthcare or Mr. Scherer (together, the "Scherer Parties") in any of
the representations or warranties of any of the Scherer Parties set forth in the
Inducement Agreements; (d) there has been any material failure by either of the
Scherer Parties to comply with its or his respective obligations under the
Inducement Agreements; (e) there has been a failure to satisfy any of the
conditions to VSI's obligation to consummate the Merger or to VSI's obligation
to consummate the transactions contemplated by the Inducement Agreements as of
the Closing Date. The Company may terminate the Merger Agreement if there has
been (a) a material misrepresentation or breach by VSI or Newco of any of the
respective representations or warranties of VSI and Newco set forth in the
Merger Agreement, (b) any material failure by VSI or Newco to comply with their
respective obligations under the Merger Agreement, or (c) a failure to satisfy
any of the conditions to the Company's obligation to consummate the Merger as of
the Closing Date. Either the Company or VSI, at their discretion, may terminate
the Merger Agreement if the Effective Time of the Merger has not occurred by
August 29, 1997, except that a party whose breach of the Merger Agreement has
caused such a delay in the consummation of the Merger will not be entitled to
terminate the Merger Agreement. If the Merger Agreement is terminated, the
Merger will be abandoned without further action by the Company.
If the Merger Agreement is terminated and the Merger is abandoned, no party
to the Merger Agreement will have any liability or further obligation to any
other party to the Merger Agreement except as follows: (a) a party will be
liable for damages incurred by the other parties to the Merger Agreement if (and
only if) (i) such breach is a material breach of a material covenant and (ii)
the party asserting such breach gives the breaching party notice of such breach
and such breach is not cured within twenty days (or a longer reasonable period
not to extend beyond August 29, 1997). If VSI terminates the Merger Agreement
as a result of any such material breach of a covenant and is entitled to damages
under the Merger Agreement, the Company will be liable to VSI only to the extent
that such damages are proximately caused by such breach. If the Company
terminates the Merger Agreement as a result of a breach of any material
covenants by VSI or Newco and is entitled to damages under the Merger Agreement,
the Company will be entitled to $800,000 as liquidated damages.
In addition, if the Merger Agreement is terminated by VSI or the Company
pursuant to specified provisions of the Merger Agreement, and prior to the date
on which the Merger Agreement is terminated (a) an offer is made contemplating
certain events, including a Purchase Event (as defined below) or Takeover
Proposal, (b) a claim is made that such offer could result in greater value to
the Shareholders than the value to be received by them upon consummation of the
Merger, and (c) after such offer is known to the Company or any of its officers
or directors, the Shareholders do not approve the Merger, the shareholders of
Scherer Healthcare fail to grant the Scherer Shareholder Approval, the Company
breaches any of its obligations under the Merger Agreement or the conditions
precedent to the Merger Agreement are not satisfied, and within
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twenty-four months after the termination of the Merger Agreement, a Purchase
Event occurs, the Company will pay to VSI, no later than the date on which such
Purchase Event occurs, a cash fee equal to $1,500,000. The term "Purchase
Event" means any of the following events: (a) without VSI's prior written
consent, the Company or any of its officers or directors have recommended,
proposed or announced an intention to authorize, recommend or propose, or
entered into an agreement with any person (other than VSI or any subsidiary of
VSI) to effect (i) a merger, consolidation or similar transaction involving the
Company or any "Significant Subsidiary" as defined in Rule 405 of the Securities
Act of 1933, as amended; (ii) the disposition of the Company or of 25% or more
of the consolidated assets of the Company; or (iii) the issuance, sale or other
disposition by the Company of securities representing 25% or more of the voting
power of the Company or any of its Significant Subsidiaries, other than, in the
case of (i), (ii) or (iii), any merger, consolidation or similar transaction in
which the voting securities of the Company outstanding immediately prior thereto
continue to represent at least 75% of the combined voting power of the voting
securities of the Company or the surviving entity outstanding immediately after
the consummation of such transaction; or (b) any person or group (other than
Scherer Healthcare, affiliates of Scherer Healthcare, VSI or any subsidiary of
VSI or a group consisting solely thereof) acquires beneficial ownership of, or
the right to acquire beneficial ownership of, 25% or more of the voting power of
the Company or any of its Significant Subsidiaries. Notwithstanding the
foregoing, the Company is not obligated to pay the $1,500,000 fee in the event
that each of the following circumstances occurs in the following order: (a) the
Merger Agreement is terminated after a public announcement is made that a
specific third-party other than Scherer Healthcare (the "Potential Acquirer")
has proposed a transaction which, if consummated, would constitute a Purchase
Event; (b) after termination of the Merger Agreement, a public announcement is
made that the Potential Acquirer no longer intends to pursue such a transaction
and, in fact, does not; (c) the Company offers VSI the opportunity to enter into
an agreement and plan of merger substantially identical to the Merger Agreement
and Scherer Healthcare and Mr. Scherer offer to VSI the opportunity to enter
into agreements which are substantially identical to the Inducement Agreements;
and (d) VSI either declines in writing to pursue such offers or fails to respond
to the Company, Scherer Healthcare and Mr. Scherer within twenty days after
receipt of such offers. In addition, the Company will not be obligated to pay
the $1,500,000 fee if, after the events described in clauses (a), (b) and (c) of
the preceding sentence occur in that order, each of the following occurs in the
following order: (a) the Company and VSI enter into an agreement and plan of
merger substantially identical to the Merger Agreement (the "New Agreement") and
VSI enters into inducement agreements substantially identical to the Inducement
Agreements; (b) after the execution of the New Agreement, the New Agreement is
terminated for reasons that would not give rise to the payment of any sum by the
Company and at a time when Scherer Healthcare has made no public announcement of
any intention to acquire the Company; and (c) after such termination, Scherer
Healthcare determines to pursue the merger of the Company with Scherer
Healthcare or a wholly-owned subsidiary of Scherer Healthcare and such
transaction is consummated.
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DISSENTERS' RIGHTS
Shareholders may demand an appraisal by the appropriate Colorado state
court of the "fair value" of their Company Common Stock under Article 113 of the
BCA, in lieu of accepting the Merger Consideration. Sections 7-113-101 through
7-113-302 of the Business Corporation Act (the "BCA") provide that Shareholders
have the right to dissent from consummation of the Merger and obtain the "fair
value" of their Company Common Stock if the Merger is effectuated. The
following is a brief summary of these sections, copies of which are set out in
Annex III. The following summary is qualified in its entirety by reference to
such sections of the BCA.
To preserve the right to exercise dissenters' rights, a Shareholder must:
(i) deliver to Margaret E. Von der Schmidt, Secretary of the Company, 11039 East
Lansing Circle, Englewood, Colorado 80112, prior to the vote of the Shareholders
to approve the Merger Agreement, written notice that the Shareholder intends to
demand payment for his or her Company Common Stock if the Merger is consummated,
and (ii) not vote his or her Company Common Stock in favor of approval of the
Merger Agreement. The failure by a Shareholder to vote his or her Company
Common Stock at the Special Meeting or to return a proxy in respect of the
Special Meeting will not be deemed to be a vote in favor of the Merger
Agreement. However, return of a blank proxy or proxy directing a vote in favor
of the Merger will be deemed to be a vote in favor of the Merger Agreement and
will constitute a waiver of the Shareholder's right to dissent from the Merger,
unless such proxy is revoked either prior to or at the Special Meeting
After the Merger Agreement is approved by the Shareholders but in no event
later than ten days after the Effective Time of the Merger, the Company will
deliver a written notice (a "Dissenters' Notice") to all of its Shareholders who
both notified the Company of their intention to dissent and did not vote in
favor of the Merger, (i) stating that the Merger was authorized and the
Effective Time of the Merger (or if the Merger is not yet effective, the
proposed Effective Time); (ii) providing the address to which payment demands
must be sent and the address at which the certificates representing Company
Common Stock with respect to which dissenters' rights are being exercised must
be deposited; (iii) stating that if a record Shareholder is exercising
dissenter's rights for a beneficial owner, that any demand for payment in
respect of such Company Common Stock must be accompanied by a certificate from
the beneficial owner certifying that dissenters' rights have been or will be
timely asserted with respect to all Company Common Stock owned beneficially by
such beneficial Shareholder and as to which there is no limitation on such
Shareholder's ability to exercise dissenters' rights, and (iv) stating the date
by which the Company must receive the payment demand and the certificates
representing Company Common Stock for which dissenters' rights are being
exercised, which date shall not be less than thirty days after the Dissenters'
Notice is given. The Dissenters' Notice shall be accompanied by a form which
may be used to demand payment and by a copy of the provisions of the BCA
governing dissenters' rights.
A Shareholder who wishes to assert dissenters' rights after receiving a
Dissenter's Notice (the "Dissenting Shareholder") must, by the date stated in
the Dissenters' Notice, (i) make a
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written demand for payment for such Dissenting Shareholder's Company Common
Stock as directed in the Dissenters' Notice and (ii) deposit such Dissenting
Shareholder's certificate for certificated shares of Company Common Stock with
[the Company] in accordance with the instructions contained in the Dissenters'
Notice. A Dissenting Shareholder retains all rights of a Shareholder, except
the right to transfer his or her Company Common Stock, until the Effective Time
of the Merger. After the Effective Time of the Merger, the Dissenting
Shareholder has only the right to receive payment for such Company Common Stock.
A Shareholder who does not demand payment and deposit his or her Company Common
Stock by the date stated in the Dissenters' Notice is no longer entitled to
dissenters' rights.
Under the BCA, the Company may require that Dissenting Shareholder's
certify in writing the date(s) on which they purchased their shares of Company
Common Stock. If a Dissenting Shareholder fails to certify such date(s) or
certifies that such date(s) was after March 14, 1997, the date of the first
announcement to news media of the Merger, in lieu of making the "fair value"
payment discussed above, the Company may offer to make such payment in full
satisfaction of the demand, if such Dissenting Shareholder agrees to accept the
payment as such.
Upon the later of the Effective Time of the Merger or the date of receipt
of demand for payment from a Dissenting Shareholder, the Company shall pay to
each Dissenting Shareholder who has complied with the dissenters' rights
provisions of the BCA the amount that the Company estimates to be the "fair
value" of such Dissenting Shareholder's Company Common Stock, plus accrued
interest from the Effective Time of the Merger at the rate currently paid by the
Company on its principal bank loans, if any, or if none, at an annual rate equal
to eight percent. Payment will be made to the address stated in the Dissenting
Shareholder's payment demand or, if none, at the address shown in the Company's
current record of shareholders. The payment will be accompanied by (i) the
Company's financial statements for its most recent fiscal year for which
financial statements have been prepared; (ii) a statement of the Company's
estimate of the "fair value" of the Dissenting Shareholder's Company Common
Stock; (iii) an explanation of how the amount of interest included in the
payment was calculated; (iv) a statement of the Dissenting Shareholder's rights
if the Dissenting Shareholder is dissatisfied with the payment, and (v) a copy
of the provisions of the BCA governing dissenter's rights.
If a Dissenting Shareholder believes that the amount paid by the Company as
the "fair value" of his or her Company Common Stock is inadequate or that the
interest due to the Dissenting Shareholder has been incorrectly calculated, the
Dissenting Shareholder may notify the Company in writing within thirty days of
receipt of payment by the Company of the Dissenting Shareholder's own estimate
of the "fair value" of his or her Company Common Stock and/or the amount of
interest that the Dissenting Shareholder believes to be due and may demand
payment of such amount less any payments already received by the Dissenting
Shareholder. If a Dissenting Shareholder makes such a payment demand within the
thirty-day period, the Company is obligated to pay the amount demanded unless,
within sixty days of receipt of such demand, the Company and the Dissenting
Shareholder agree on the amount payable by the Company to the Dissenting
Shareholder or the Company commences a proceeding in Colorado District Court for
the County
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of Douglas petitioning the court to determine the "fair value" of such
Dissenting Shareholder's Company Common Stock and/or the amount of interest due
to the Dissenting Shareholder.
The costs of any court proceeding to determine the amount due to a
Dissenting Shareholder, including reasonable compensation and expenses of
appraisers appointed by the court, will generally be assessed against the
Company. The court may, however, assess such costs against the Dissenting
Shareholder if the court finds that the Dissenting Shareholder acted
arbitrarily, vexatiously or not in good faith. The court may also assess fees
and expenses of counsel and experts against the Company if the Company did not
substantially comply with the dissenters' rights provisions of the BCA or
against any party who the court finds acted arbitrarily, vexatiously or not in
good faith.
Once a Dissenting Shareholder demands payment for his or her Company Common
Stock, the demand is irrevocable unless the Merger is not consummated within
sixty days after the date stated in the Dissenters' Notice by which a Dissenting
Shareholder must provide the Company with a demand for payment and must deposit
his or her Company Common Stock with the Company. If the Merger is not
consummated by the end of the sixty-day period, the Company must return any
deposited Company Common Stock to the Dissenting Shareholder and deliver a new
Dissenters' Notice to the Dissenting Shareholder, if the Merger is still
contemplated at that time.
If Shareholders elect to exercise these dissenters' rights, the receipt of
cash for Company Common Stock will be a taxable transaction to the Shareholders
receiving such cash, as described above under "The Merger--Certain Federal
Income Tax Consequences."
SHAREHOLDERS CONSIDERING EXERCISING STATUTORY DISSENTERS' RIGHTS SHOULD
CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE TAX CONSEQUENCES OF SUCH
ACTIONS.
To the extent there are any inconsistencies between the foregoing summary
and the BCA, the BCA shall control.
BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth information as of March 31, 1997, regarding
the ownership of Company Common Stock by each person known to the Company to be
the beneficial owner of more than 5% of the outstanding Company Common Stock,
each executive officer and each director of the Company, and all directors and
officers of the Company as a group. The Company believes that each person named
has sole investment and voting power with regard to the shares of Company Common
Stock shown except as otherwise noted.
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BENEFICIAL OWNER SHARES BENEFICIALLY PERCENT OF CLASS
OWNED(1)
Scherer Healthcare, Inc.
2859 Paces Ferry Road
Suite 300
Atlanta, Georgia 30339 13,791,192(2) 66.06%
Robert P. Scherer, Jr.* **
2859 Paces Ferry Road
Suite 300
Atlanta, Georgia 30339 16,853,048(3) 77.04%
William J. Thompson* ** 225,000(4) 1.55%
Charles R. Atkins, III* 0 (6)
Stephen A. Lukas, Sr.* 0 (6)
Jack W. Payne* 0 (6)
Kenneth H. Robertson* 1,000 (6)
Mack D. Tindal* 2,000 (6)
Jack L. York* 378,728 2.65%
All current
directors and
officers as a
group (8 persons) 17,389,776(5) 78.93%
* Director
** Executive Officer
1 Beneficial ownership as reported in the table has been determined in
accordance with applicable federal regulations and includes shares of Company
Common Stock as to which a person possesses sole or shared voting and/or
investment power and shares of Company Common Stock which may be acquired within
sixty 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 of Company Common Stock shown include 6,580,000 shares issuable
upon exercise of outstanding Company Common Stock purchase warrants.
3 The shares of Company Common Stock shown include shares beneficially owned
by Scherer Healthcare (See Note (2) above). The shares shown also include
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.
4 The shares of Company Common Stock shown include 150,000 shares of Company
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, Inc. which Mr. Thompson has an option to purchase.
5 The shares of Company Common Stock shown include 6,580,000 shares issuable
upon exercise of outstanding Company Common Stock warrants, 1,000,000 shares
issuable upon conversion of an outstanding convertible note and 150,000 shares
issuable upon exercise of outstanding stock options. See Notes (2), (3), (4)
and (5) above.
6 Represents less than one percent (1%).
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BUSINESS OF THE COMPANY
The business of the Company principally consists of manufacturing and
marketing disposable medical devices, supplies and equipment for use in the
respiratory care, cardiopulmonary support and anesthesia markets. The Company
manufactures and distributes four major groups of products for these markets:
ABG Products; aerosolized medication delivery systems, consisting primarily of
disposable nebulizers; heated humidification systems; and anesthesia and
respiratory breathing systems.
Additional information regarding the business and properties of the Company
is contained in the Company's Form 10-K for the fiscal year ended March 29, 1997
which is attached as Annex IV to this Proxy Statement. See "Annexes."
INFORMATION CONCERNING VSI AND NEWCO
The following information has been provided by VSI.
The principal executive office for each of VSI and Newco is 20 Campus Road,
Totowa, New Jersey 07512, and the telephone number is (201) 790-1330. VSI,
together with its respiratory subsidiaries, design, manufacture and market
single-use medical products for anesthesia, and critical care applications.
Newco is a newly-formed Colorado corporation that has not conducted any business
except in connection with the transactions related to the Merger. See
"Information Concerning VSI and Newco." VSI's common stock is quoted on the
Nasdaq National Market under the symbol "VITL."
VSI is subject to the informational filing requirements of the Exchange Act
and is required to file reports and other information with the Securities
Exchange Commission (the "Commission") under the Exchange Act relating to its
business, financial condition and other matters. Reports and other information
relating to VSI may be inspected and copies may be obtained from the office of
the Commission. See "Available Information."
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, the Company's independent accountants for the year
ended March 30, 1996, will have a representative at the Special Meeting.
AVAILABLE INFORMATION
Each of the Company and VSI is subject to the informational filing or
submission requirements of the Exchange Act, and in accordance therewith are
required to file or submit periodic reports and other information with the
Commission under the Exchange Act relating to their business, financial
condition and other matters. Such reports, proxy statements and other
information may be inspected, without charge, and copies may be obtained at
prescribed rates, at
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the Commission's public reference facility at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located
in Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and Seven World Trade Center, 13th Floor, New York, New York 10048 and
can also be reviewed through the Commission's Electronic Data Gathering,
Analysis and Retrieval System which is publicly available through the
Commission's Web site (http://www.sec.gov).
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ANNEX INDEX
NUMBER DESCRIPTION
I. Agreement and Plan of Merger, dated as of March 14, 1997, by and among
Marquest Medical Products, Inc., Vital Signs, Inc., and Vital Signs
Acquisition Corporation
II. Amendment to Agreement and Plan of Merger dated as of June 4, 1997.
III. Fairness Opinion of Hanifen, Imhoff, Inc.
IV. Sections 7-113-101 through 7-113-302 of the Colorado Business
Corporation Act
V. The Company's Annual Report on Form 10-K for the fiscal year ended
March 29, 1997
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ANNEX I
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of March 14,
1997, by and among VITAL SIGNS, INC., a New Jersey corporation having its
principal place of business at 20 Campus Road, Totowa, New Jersey ("VSI"), VSI
ACQUISITION CORPORATION, a Colorado corporation and a wholly-owned subsidiary of
VSI, having its principal place of business at 20 Campus Road, Totowa, New
Jersey ("Newco"), and MARQUEST MEDICAL PRODUCTS, INC., a Colorado corporation
having its principal place of business at 11039 East Lansing Circle, Englewood,
Colorado (the "Company"),
WITNESSETH THAT:
WHEREAS, the Boards of Directors of VSI, Newco and the Company, deeming it
advisable for the mutual benefit of VSI, Newco and the Company and their
respective shareholders, that VSI acquire the Company by the merger of the
Company and Newco under the terms and conditions hereinafter set forth (the
"Merger"), have approved this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto hereby agree
that the Company and Newco shall be merged in accordance with the terms of this
Agreement and that the terms and conditions of the Merger and the mode of
carrying the same into effect shall be as follows:
ARTICLE I
PLAN OF MERGER
SECTION 1.1 STRUCTURE. Upon performance of all of the covenants and
obligations of the parties contained herein and upon fulfillment (or waiver) of
all of the conditions to the obligations of the parties contained herein, at the
Effective Time of the Merger (as hereinafter defined) and pursuant to the
Business Corporation Act of the State of Colorado (the "BCA"), the following
shall occur:
1.1.1 Newco shall be merged with and into the Company. The
Company shall be the surviving corporation (the "Surviving Corporation") and
upon consummation of the Merger shall become a wholly-owned subsidiary of VSI.
The separate existence and corporate organization of Newco shall cease at the
Effective Time of the Merger, and thereupon the Company and Newco shall be a
single corporation, the name of which shall be Marquest Medical Products, Inc.
The Company, as the Surviving Corporation, shall succeed, insofar as permitted
by law, to all of the rights, assets, liabilities and obligations of Newco in
accordance with the BCA.
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1.1.2 The Articles of Incorporation of the Company shall be
amended to contain such provisions as VSI shall determine prior to the Effective
Time of the Merger and as such shall be the Articles of Incorporation of the
Surviving Corporation until amended as provided by law.
1.1.3 The By-Laws of the Company shall be amended to contain such
provisions as VSI shall determine prior to the Effective Time of the Merger and
as such shall be the by-laws of the Surviving Corporation until amended as
provided by law.
1.1.4 Until changed in accordance with the articles of
incorporation and by-laws of the Surviving Corporation, the directors of Newco
immediately prior to the Effective Time of the Merger shall be the directors of
the Surviving Corporation.
1.1.5 Until changed in accordance with the articles of
incorporation and by-laws of the Surviving Corporation, the officers of Newco
immediately prior to the Effective Time of the Merger shall be the officers of
the Surviving Corporation.
1.1.6 As soon as practicable after the terms and conditions of
this Agreement have been satisfied, and upon consummation of the closing
referred to in Article IX hereof (the "Closing"), articles of merger consistent
with this Agreement, in the form prescribed by, and properly executed in
accordance with, the BCA and in form and substance satisfactory to the parties
hereto (the "Articles of Merger"), shall be filed with the Secretary of State of
the State of Colorado. The Merger shall become effective when the Articles of
Merger are so filed. The date and time when the Merger shall become effective
is referred to in this Agreement as the "Effective Time of the Merger".
SECTION 1.2 COMMON STOCK OF SURVIVING CORPORATION. Upon consummation of
the Merger, each of the issued and outstanding shares of common stock of Newco
shall be automatically converted into such number of shares of the common stock
of the Surviving Corporation as shall equal the "Outstanding Number". Each such
share shall be held by VSI and shall be fully paid and non-assessable. For
purposes of this Agreement, the term "Outstanding Number" shall mean the
aggregate number of shares of Company Common Stock (as hereinafter defined)
outstanding immediately prior to the Effective Time of the Merger divided by the
number of shares of common stock of Newco outstanding immediately prior to the
Effective Time of the Merger.
SECTION 1.3 CANCELLATION OR CONVERSION OF COMPANY COMMON STOCK. As of the
Effective Time of the Merger, by virtue of the Merger and without any action on
the part of any shareholder:
1.3.1 Any shares of the Company's common stock, no par value
("Company Common Stock"), held in the treasury of the Company, and any shares of
Company Common Stock issued and outstanding immediately prior to the Effective
Time of the Merger which are
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owned by VSI or Newco, shall be canceled and retired. No cash, securities or
other consideration shall be paid or delivered in exchange for such Company
Common Stock under this Agreement.
1.3.2 Except as provided herein with respect to Dissenting Shares
(as hereinafter defined), the following provisions shall apply with respect to
all shares of Company Common Stock outstanding immediately prior to the
Effective Time of the Merger other than the shares canceled pursuant to Section
1.3.1 hereof:
1.3.2.1 Subject to Section 1.3.2.4 hereof, at the Effective Time of
the Merger, each such share of Company Common Stock outstanding shall be
converted, without any action by the holder thereof, into the right to receive
from VSI $0.797 in cash, without interest (the "Purchase Price").
1.3.2.2 At the Effective Time of the Merger, (i) VSI shall deliver to
American Stock Transfer and Trust Company or such other institution as shall be
designated by VSI as exchange agent (the "Exchange Agent") $12,497,360 in
immediately available funds and (ii) the Company shall deliver to the Exchange
Agent immediately available funds equal to the amount of consideration received
by the Company after the date hereof and prior to the Effective Time of the
Merger from the exercise of options and warrants, such amounts to be held by the
Exchange Agent, to effect conversions of outstanding Company Common Stock into
cash pursuant to Section 1.3.2.1 hereof and to effect exercises of options and
warrants that remain exercisable for cash after the Effective Time of the Merger
(as described in Section 1.4 hereof), in accordance with the terms of an
exchange agency agreement between VSI and the Exchange Agent.
1.3.2.3 At the Effective Time of the Merger and subject to Section
1.3.2.4 hereof, each holder of an outstanding certificate or certificates
representing Company Common Stock ("Company Stock Certificates") shall, upon
surrender thereof to the Exchange Agent together with a letter of transmittal in
the form of the letter of transmittal furnished by VSI pursuant to Section 1.3.3
hereof, be entitled to receive a cash amount equal to the Purchase Price,
without interest, in exchange for each share of Company Common Stock
surrendered. Until so surrendered, each outstanding Company Stock Certificate
shall be deemed for all purposes to represent the right to receive the Purchase
Price in cash without interest. Whether or not a Company Stock Certificate is
surrendered, from and after the Effective Time of the Merger such certificate
shall under no circumstances evidence, represent or otherwise constitute any
stock or other interest whatsoever in the Company, the Surviving Corporation,
VSI or any other person, firm or corporation.
1.3.2.4 VSI and the Exchange Agent shall not be required to pay a
fraction of a penny to any former shareholder of the Company. In lieu of paying
any such fraction, VSI and the Exchange Agent shall determine the aggregate
consideration payable to each shareholder with respect to all of such
shareholder's shares of Company Common Stock and upon tender of all such shares
in accordance with the provisions of this Agreement, shall round such
consideration up to the nearest whole penny.
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1.3.3 Promptly after the Effective Time of the Merger, VSI shall
deliver to holders of Company Stock Certificates letters of transmittal pursuant
to which such certificates may be submitted to the Exchange Agent.
SECTION 1.4 OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES. The Company
covenants, warrants and represents as follows:
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1.4.1 OPTION PLAN. As of the date hereof, options covering 633,166
shares of Company Common Stock are outstanding under the Company's Incentive and
Non-Qualified Stock Option Plan (the "Stock Option Plan"). Of these "Employee
Options" (as defined in Section 2.2 hereof), options covering 297,168 shares of
Company Common Stock have per share exercise prices that are less than the
Purchase Price. At least 35 days prior to the Effective Time of the Merger, the
Company shall provide to each holder of an Employee Option a notice, in
accordance with Section 4.2 of the Stock Option Plan, advising each such holder
of the terms of the Merger and describing the consequences of the Merger to
holders of Employee Options. By virtue of such notice, all outstanding Employee
Options shall become exercisable in full and all Employee Options which are not
exercised prior to the Effective Time of the Merger shall terminate as of the
Effective Time of the Merger. As a result of such termination, neither the
Company nor VSI shall have any obligation under the Employee Options at or after
the Effective Time of the Merger.
1.4.2 DIRECTOR OPTIONS. Options covering 150,000 shares of Company
Common Stock granted to directors of the Company pursuant to Non-Qualified
Director Stock Option Agreements were canceled on March 14, 1997. As a result
of such cancellations, neither the Company nor VSI shall have any obligation
under any such agreements at or after the Effective Time of the Merger.
1.4.3 CONVERTIBLE SECURITIES. Pursuant to the terms of the "Robert
Scherer Inducement Agreement" (as defined in Section 2.27 hereof), Robert P.
Scherer, Jr. has agreed to convert all principal payable under the "Convertible
Note" (as defined in Section 2.2 hereof) into a total of 1,000,000 shares of
Company Common Stock prior to the Effective Time of the Merger. By virtue of
such conversion, there will be no obligation to pay any interest under the
Convertible Note to Robert P. Scherer, Jr. after the effective date of such
conversion. There are no other debt or equity instruments outstanding which are
convertible into the Company's Common Stock.
1.4.4 SCHERER HEALTHCARE WARRANTS. Pursuant to the terms of the
"Scherer Healthcare Inducement Agreement" (as defined in Section 2.27 hereof),
Scherer Healthcare, Inc. ("Scherer") has agreed that as of the Effective Time of
the Merger, it will exchange the "First ABG Warrants" and "Second ABG Warrants"
(as defined in Section 2.2 hereof) and the "Current Warrants" (as defined in
Section 2.2 hereof) for a payment equal to $309,260 (representing the number of
shares of Company Common Stock covered by the First ABG Warrants, the Second ABG
Warrants and the Current Warrants (6,580,000) multiplied by the amount by which
the
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Purchase Price exceeds $0.75, the per share exercise price of the First ABG
Warrants, the Second ABG Warrants and the Current Warrants).
1.4.5 SWISS WARRANTS. As of the date hereof, "Swiss Warrants" (as
defined in Section 2.2 hereof) covering 1,083,317 shares of Company Common Stock
are outstanding. Pursuant to the Swiss Warrant Agreement (as defined in Section
2.2 hereof), the Company and VSI are not required to provide the holders of the
Swiss Warrants or any other person or entity any notice describing the
consequences of the Merger to holders of Swiss Warrants. By virtue of the
provisions of the Swiss Warrant Agreement, upon consummation of the Merger, each
outstanding Swiss Warrant shall be converted, without any action by the holder
thereof, into the right to receive, upon exercise thereof pursuant to the terms
of the Swiss Warrant and the Swiss Warrant Agreement, an amount of cash equal to
the Purchase Price in lieu of each share of Company Common Stock deliverable
upon such exercise.
1.4.6 SETTLEMENT OPTIONS. Pursuant to promissory notes (the
"Settlement Notes") issued in accordance with the "Settlement Agreement" (as
defined in Section 2.2 hereof), two individuals each have an option to acquire
100,000 shares of Company Common Stock by reducing the principal amount of the
Settlement Notes. The Company shall pay the holders of the Settlements Notes
all amounts outstanding under the Settlement Notes prior to the Effective Time
of the Merger. As a result, no obligation to issue capital stock or otherwise
will exist after the Effective Time of the Merger pursuant to the Settlement
Notes.
1.4.7 CONSULTANT'S OPTIONS. As of the date hereof, the Company is
obligated to issue 50,000 shares of Company Common Stock pursuant to the
Consultant's Options (as defined in Section 2.2 hereof) at an exercise price of
$0.75 per share. At least 35 days prior to the Effective Time of the Merger,
the Company shall provide to the holder of the Consultant's Option a notice, in
accordance with Section 5(b) of the agreement setting forth the terms of the
Consultant's Options, advising such holder of the terms of the Merger and
describing the consequences of the Merger to holders of Employee Options. By
virtue of such notice, all of the Consultant's Options which are not exercised
prior to the Effective Time of the Merger shall terminate as of the Effective
Time of the Merger. As a result of such termination, neither the Company nor
VSI shall have any obligation under the Consultant's Options at or after the
Effective Time of the Merger.
1.4.8 RUSSELL WARRANTS. As of the date hereof, the Company is
obligated to issue 75,326 shares of Company Common Stock pursuant to the Russell
Warrants (as defined in Section 2.2 hereof) at an exercise price of $1.50 per
share. At least 15 days prior to the Effective Time of the Merger, the Company
shall provide to the holder of the Russell Warrants the notice required pursuant
to Section "e" of the Russell Warrant Agreement (as defined in Section 2.2
hereof). By virtue of the provisions of the Russell Warrant Agreement, upon
consummation of the Merger, each outstanding Russell Warrant shall be converted,
without any action by the holder thereof, into the right to receive, upon
exercise thereof pursuant to the terms of the Russell
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Warrant and the Russell Warrant Agreement, an amount of cash equal to the
Purchase Price in lieu of each share of Company Common Stock deliverable upon
such exercise.
1.4.9 ITT WARRANTS. As of the date hereof, the Company is obligated
to issue 10,000 shares of Company Common Stock pursuant to the ITT Warrants (as
defined in Section 2.2 hereof) at an exercise price of $4.00 per share. At least
25 days prior to the Effective Time of the Merger, the Company shall provide to
the holder of the ITT Warrants the notice required pursuant to Section 4(f) of
the ITT Warrant Agreement (as defined in Section 2.2 hereof). By virtue of the
provisions of the ITT Warrant Agreement, upon consummation of the Merger, each
outstanding ITT Warrant shall be converted, without any action by the holder
thereof, into the right to receive, upon exercise thereof pursuant to the terms
of the ITT Warrant and the ITT Warrant Agreement, an amount of cash equal to the
Purchase Price in lieu of each share of Company Common Stock deliverable upon
such exercise.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
References herein to the "Disclosure Letter" shall mean the letter from the
Company to VSI, dated the date hereof, pursuant to which the Company has made
certain representations and described certain exceptions to the representations
set forth in this Article II by means of express cross-references to the
Sections hereof requiring that exceptions be made. Except as set forth in the
Disclosure Letter, the Company hereby represents, warrants, and agrees as
follows:
SECTION 2.1 ORGANIZATION. The Company is a corporation, duly organized,
validly existing, and in good standing under the laws of the State of Colorado,
and has all requisite corporate power and authority to own its property and
conduct the business in which it is engaged. The Disclosure Letter contains an
accurate and complete list of the dates of filing of the Company's articles of
incorporation and all amendments thereto with the Colorado Secretary of State
and the date of the Company's current by-laws.
SECTION 2.2 CAPITALIZATION. The Company is solely authorized to issue
50,000,000 shares of Company Common Stock. As of the date hereof, there were
14,296,773 shares of Company Common Stock issued and outstanding (the
"Outstanding Common Shares"). The Outstanding Common Shares include 25,000
shares of Company Common Stock which were initially issued to Jack L. York as
restricted shares, all of which restrictions have lapsed. The Outstanding Common
Shares do not include any restricted shares issued to any other director of the
Company. If the Effective Time of the Merger occurs prior to August 31, 1997,
any restricted shares outstanding on the date hereof, other than the restricted
shares owned by Jack L. York, will, by their terms, be forfeited and deemed not
to be outstanding as of the Effective Time of the Merger. All of the Outstanding
Common Shares have been fully paid, have been validly issued, and are
nonassessable. No shares of Company Common Stock have been issued in
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violation of the preemptive rights of any person or entity and the holders of
Outstanding Common Shares do not possess preemptive rights. Except with respect
to (i) options covering not more than 633,166 shares of Company Common Stock
granted pursuant to the Company's Incentive and Non-Qualified Stock Option Plan
(the "Stock Option Plan"), (ii) warrants covering up to 1,083,317 shares of
Company Common Stock which were granted to former holders of Swiss bonds at an
exercise price of $.75 per share pursuant to a warrant agreement (the "Swiss
Warrant Agreement"), dated June 15, 1993, between the Company and Chemical Trust
Company of California, as warrant agent (the "Swiss Warrants"), (iii) warrants
to purchase through March 31, 1999 up to 1,530,000 shares of Company Common
Stock at an exercise price of $.75 per share (the "First ABG Warrants"), which
First ABG Warrants were granted to Scherer pursuant to an omnibus agreement,
dated April 12, 1993, between the Company and Scherer (the "Omnibus Agreement"),
(iv) warrants to purchase through March 31, 2003 up to 4,250,000 shares of
Company Common Stock at an exercise price of $.75 per share (the "Second ABG
Warrants"), which Second ABG Warrants were granted to Scherer pursuant to the
Omnibus Agreement, (v) warrants to purchase through March 31, 1999 up to 800,000
shares of Company Common Stock at an exercise price of $.75 per share (the
"Current Warrants"), which Current Warrants were granted to Scherer pursuant to
a warrant agreement dated April 12, 1993, (vi) a convertible secured promissory
note in the principal amount of $700,000 entitling the holder thereof to acquire
up to 1,000,000 shares of Company Common Stock upon conversion thereof (the
"Convertible Note"), which Convertible Note was issued to Scherer Capital, LLC
on March 28, 1996 and which currently is owned by Robert P. Scherer, Jr., (vii)
stock options covering up to 50,000 shares of Company Common Stock granted by
the Company to David Hagelstein at an exercise price of $.75 per share (the
"Consultant Options"), the terms of which Consultant Options are reflected in an
option agreement, dated August 26, 1993, (viii) options granted pursuant to a
settlement agreement dated April 30, 1995 (the "Settlement Agreement"), which
options (the "Settlement Options") entitle the holders thereof to purchase up to
200,000 shares of Company Common Stock at an exercise price of $1.00 per share,
which price is payable by reducing amounts otherwise payable by the Company,
(ix) Warrants to purchase through September 30, 1997 up to 10,000 shares of
Company Common Stock at an exercise price of $4.00 per share (the "ITT
Warrants"), which ITT Warrants were granted to ITT Commercial Finance
Corporation pursuant to a warrant agreement dated October 1, 1992 (the "ITT
Warrant Agreement"), (x) warrants to purchase through December 20, 1997 up to
75,326 shares of Company Common Stock at an exercise price of $1.50 per share
(the "Russell Warrants"), which Russell Warrants were granted to Robert A.
Russell pursuant to a warrant agreement dated November 18, 1992 (the "Russell
Warrant Agreement"), and (xi) certain rights (the "Rights") granted pursuant to
the Company's Rights Agreement, dated as of August 8, 1991, between the Company
and Bank of America National Trust & Savings Association, as amended (the
"Rights Agreement"), the Company does not have outstanding any options or
warrants to purchase, or contracts to issue, or contracts or any other rights
entitling anyone to acquire, shares of its capital stock of any class or kind,
or securities convertible into or exchangeable for such shares. In light of
commitments made by Robert P. Scherer, Jr. and Scherer to VSI in the Inducement
Agreements with respect to the Convertible Note, the First ABG Warrants, the
Second ABG Warrants and the Current Warrants, immediately prior to the Effective
Time of the Merger the
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outstanding shares of Company Common Stock shall not exceed the above-mentioned
14,296,773 Outstanding Common Shares plus (a) up to 633,166 shares of Company
Common Stock which may be issued between the date hereof and the Closing Date
upon the exercise of options previously granted pursuant to the Option Plan, (b)
up to 1,083,317 shares of Company Common Stock which may be issued between the
date hereof and the Closing Date upon exercise of the Swiss Warrants, (c) up to
800,000 shares of Company Common Stock which may be issued by the Company upon
the exercise of the Current Warrants, (d) the 1,000,000 shares of Company Common
Stock to be issued upon conversion of the Convertible Note, (e) up to 50,000
shares of Company Common Stock which may be issued upon the exercise of the
Consultant's Options, (f) up to 200,000 shares of Company Common Stock which may
be issued upon the exercise of the Settlement Options, (g) up to 10,000 shares
of Company Common Stock which may be issued upon exercise of the ITT Warrants
and (h) up to 75,326 shares of Company Common Stock which may be issued upon
exercise of the Russell Warrants. The Disclosure Letter contains a complete and
accurate schedule setting forth the names of each holder of the options
currently outstanding under the Option Plan ("Plan Options" or "Employee
Options"), the First ABG Warrants, the Second ABG Warrants, the Current
Warrants, the Convertible Note, the Consultant's Options, the Settlement
Options, the ITT Warrants and the Russell Warrants, the number of shares of
Company Common Stock currently issuable to each such holder pursuant to such
options, warrants and Convertible Note (after giving effect to the anti-dilution
provisions applicable thereto), the current exercise price of each of such
options, warrants and Convertible Note (after giving effect to the anti-dilution
provisions applicable thereto), the dates on which each such option or warrant
granted to such holder becomes exercisable (or if such option becomes
exercisable in installments, the dates and percentages applicable to such
installments) and the date on which each such option or warrant terminates. The
Company has amended its Rights Agreement in such a manner that the execution of
this Agreement and the consummation of the Merger will not cause any of the
Rights to become exercisable with or without the passage of time.
SECTION 2.3 SUBSIDIARIES. The Company's subsidiaries (collectively, the
"Subsidiaries" and each such entity individually, a "Subsidiary") are
corporations duly organized, validly existing and in good standing under the
laws of their respective jurisdictions of incorporation, and each Subsidiary has
all requisite corporate power and authority to own its respective property and
conduct the respective business in which it is engaged. The Disclosure Letter
contains an accurate and complete list of (i) all of the Subsidiaries and (ii)
the dates of filing of each Subsidiary's articles of incorporation and all
amendments thereto with the Secretary of State of the applicable jurisdiction of
organization and the dates of the current by-laws of each such Subsidiary. The
Company has no equity interest in any corporation, partnership, limited
liability Company or other entity other than its interests in the Subsidiaries.
All of the Subsidiaries are inactive.
SECTION 2.3A ABG. As set forth in the Omnibus Agreement, Scherer leases
to the Company certain equipment pursuant to the "Equipment Lease" (as such
phrase is defined in the Omnibus Agreement) and licenses to the Company certain
intellectual property pursuant to the
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"License of Intellectual Property" (as such phrase is defined in the Omnibus
Agreement). The assets leased and licensed by Scherer to the Company pursuant to
the Equipment Lease and the License of Intellectual Property, together with any
"Improvements" (as such term is defined in the License of Intellectual
Property), are all included within the definition of Scheduled Assets in the
Scherer Healthcare Inducement Agreement and comprise the only assets of the
blood gas collection product line marketed and sold by the Company (such assets
and Improvements being hereinafter referred to as the "ABG Assets", such product
line being hereinafter referred to as the "ABG Product Line" and the business
presently operated by the Company with respect to the ABG Product Line being
hereinafter referred to as the "ABG Business") that are owned by any entity
other than the Company. All of the equipment leased by Scherer pursuant to the
Equipment Lease is located in the Company's premises in Englewood, Colorado.
With the exception of the Terumo litigation referred to herein, the Company is
not aware of any basis or claim for material indemnification by Scherer against
the Company under the Equipment Lease or the License of Intellectual Property.
SECTION 2.4 QUALIFICATIONS. The Disclosure Letter contains an accurate
and complete list of all States in which the Company and each Subsidiary are
qualified to do business. The Company and each Subsidiary are qualified to do
business in each State and in each foreign country in which their failure to so
qualify would have a material adverse effect on the financial condition, assets,
business or operations of the Company and its Subsidiaries, taken as a whole.
SECTION 2.5 SEC FILINGS. Since March 30, 1994, the Company has filed with
the Securities and Exchange Commission (the "SEC") all reports and statements
(consisting solely of those reports described in the Disclosure Letter) which it
was required to file with the SEC pursuant to the Securities Exchange Act of
1934 (the "1934 Act"). None of the reports and statements filed by the Company
with the SEC pursuant to the 1934 Act from March 30, 1994 through the date
hereof (collectively, the "Reports") contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
SECTION 2.6 OWNED REAL ESTATE. The only real estate owned by the Company
or any of its Subsidiaries is the real estate on which the Company's principal
office is located at 11039 East Lansing Circle, Englewood, Colorado. None of
the ABG Assets constitute real estate. All buildings located on such owned real
estate (the "Owned Buildings") comply in all material respects with all
municipal, state and federal statutes, ordinances, rules and regulations
applicable to the construction of such buildings and their actual use.
SECTION 2.7 LEASED REAL ESTATE. The Company and its Subsidiaries do not
lease any real estate other than pursuant to two real estate leases (the
"Leases"). The Business is conducted solely from either the Owned Buildings or
from real estate subject to the Leases. The Disclosure Letter contains an
accurate and complete list of the dates of the Leases and any amendments
thereto. The Company and the Subsidiaries are not in material default under the
Leases and the
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Company is not aware of any facts which, with notice and/or the passage of time,
would constitute such a default. Consent is required under both of the Leases
in connection with the Merger.
SECTION 2.8 LEASED TANGIBLE PERSONAL PROPERTY. The Company and its
Subsidiaries do not lease any personal property other than pursuant to (i)
leases which expire on not more than 90 days notice by the Company or a
Subsidiary, (ii) leases which require annual rentals of not more than $25,000,
(iii) the "Equipment Lease" (as defined in the Omnibus Agreement) and (iv)
leases ("Personalty Leases") listed in the Disclosure Letter. Scherer is not a
lessee of any of the ABG Assets. The Company and the Subsidiaries are not in
material default under any of the Personalty Leases or the Equipment Lease and
the Company is not aware of any fact which, with notice and/or passage of time,
would constitute such a default. No consent is required under the Personalty
Leases or the Equipment Lease in connection with the Merger.
SECTION 2.9 Intentionally Omitted.
SECTION 2.10 INTANGIBLE PERSONAL PROPERTY. The Disclosure Letter contains
an accurate and complete list of all distributorship, franchise and license
agreements (whether the Company or any of its Subsidiaries is the grantor or
grantee of such distributorship, franchise or license), and all patents, patent
applications, trademarks, trademark applications and trade names (whether the
Company or any of its Subsidiaries owns such items or is licensed to use them)
currently owned or used by the Company or, with respect to the ABG Assets,
Scherer (the "Intellectual Property"). The Company or a wholly-owned Subsidiary
of the Company, or, with respect to the ABG Assets, Scherer, is the sole and
exclusive owner of, or (in the case of the Company or any of its Subsidiaries)
is a valid licensee or lessee of, or has the right to use in the manner
currently used, each of said items of Intellectual Property and has the right to
use in the manner currently used all other items of intangible personal property
(including, without limitation, copyrights) owned or used by the Company or any
of its Subsidiaries in any of their businesses or used by Scherer, the Company
or any of its Subsidiaries with respect to the ABG Assets or the ABG Business
(together with the Intellectual Property, the "Intangible Property"); said items
of Intangible Property represent the only intangible personal property required
by the Company and its Subsidiaries in order to operate the ABG Business and the
businesses presently conducted by the Company and its Subsidiaries; there are no
claims or demands against Scherer, the Company or any of its Subsidiaries with
respect to any of such items of Intangible Property, and no proceedings have
been instituted, are pending, or to the knowledge of the Company have been
threatened to terminate or cancel any such agreements or which challenge the
right of Scherer, the Company or any of its Subsidiaries with respect to any of
said items of Intangible Property; and there are no facts known to the Company
which make it likely that any such agreements will not be renewed at their next
expiration date or which might reasonably serve as the basis, in whole or in
part, of any claim that any part of the business carried on by the Company or
any of its Subsidiaries infringes the patent, trademark, trade name, copyright,
or other rights of any other person. With respect to the Terumo litigation
referenced in the Disclosure Letter, the Company makes no representation as to
the likelihood of any ultimate determination, whether positive or
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negative. Subject to the interests of the Company's distributors in information
generated by such distributors, the Company and its Subsidiaries have the
unrestricted right to use, free from any rights or claims of others, all trade
secrets and customer lists which the Company or any of its Subsidiaries has used
or which the Company or any of its Subsidiaries is now using in connection with
the sale of any and all products or services which have been or are being sold
by the Company or any of its Subsidiaries, including assets included within the
ABG Business.
SECTION 2.11 ACCOUNTS RECEIVABLE AND INVENTORY.
2.11.1 All accounts receivable of the Company and its Subsidiaries
have originated in the ordinary course of business, are valid and are not
subject, to any material extent, to any defense, counterclaim or setoff.
2.11.2 All inventory in the possession of the Company or any of its
Subsidiaries is owned by the Company or one or more of its Subsidiaries and
recorded on such entities' books and records in accordance with generally
accepted accounting principles consistently applied. All such inventory has
been valued at the lower of cost, calculated on a FIFO method, or market. No
inventory in the possession of the Company or any of its Subsidiaries has been
consigned. The Company believes that the reserves for inventory obsolescence
contained in the Company's December 31, 1995 and September 29, 1996 consolidated
financial statements are adequate. No inventory relating to the ABG Business is
owned by Scherer.
SECTION 2.12 TITLE TO ASSETS.
2.12.1 The Company and its Subsidiaries have good and marketable
title in and to all of their property reflected in the December 28, 1996
consolidated balance sheet referred to in Section 2.22.1 hereof (the "Balance
Sheet") plus all assets purchased by the Company and its Subsidiaries since
December 28, 1996, less all assets which the Company or its Subsidiaries have
disposed of in the ordinary course since such date, which property presently
owned by the Company or any of its Subsidiaries is free and clear of all
security interests, consignments, liens, judgments, encumbrances, restrictions,
or claims of any kind except (a) those items that secure liabilities that are
reflected on the Balance Sheet or that are described in the notes thereto, (b)
with respect to owned real property, title imperfections accurately and
completely noted in the title reports listed in the Disclosure Letter, and minor
title imperfections which do not, in the aggregate, adversely affect the
Company's ability to use such property as it is currently being used, and (c)
liens for current taxes or assessments not yet due or delinquent.
2.12.2 To the best of the Company's knowledge, Scherer has good and
marketable title in and to all of the ABG Assets to the extent described in the
Disclosure Letter, which property presently owned by Scherer is free and clear
of all security interests, consignments, liens, judgments, encumbrances,
restrictions, or claims of any kind except (a) Scherer's obligations under the
Equipment Lease and the License of Intellectual Property and (b) liens for
current taxes or assessments not yet due or delinquent.
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SECTION 2.13 MATERIAL CONTRACTS.
2.13.1 The Disclosure Letter accurately identifies all of the
following contracts or other obligations (and any amendments thereto) to which
the Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound: (a) any written contracts with or loans to any of
the Company's, or any of the Subsidiaries', shareholders (including, without
limitation, Scherer and its affiliates), officers, directors, employees,
consultants, salespersons, distributors or sales representatives; (b) any
employee benefit plan made available by the Company or any of its Subsidiaries
to any of their employees, including without limitation any medical benefits
payable to retired employees of the Company or its Subsidiaries; (c) any
collective bargaining agreement; (d) any outstanding option plans, options,
warrants, warrant agreements and rights agreements; (e) any contracts with
customers and suppliers other than purchase orders delivered in the ordinary
course of business; (f) any deeds of trust, mortgages, conditional sales
contracts, security agreements, pledge agreements, trust receipts, or any other
agreements or arrangements whereby any material amount of the assets of the
Company or any Subsidiary are subject to a lien, encumbrance, charge or other
restriction; (g) any loan agreements, letters of credit or lines of credit,
including without limitation any documents pertaining to the Company's Swiss
bonds and Swiss notes; (h) any contracts restricting the Company or any
Subsidiary from doing business in any areas or in any way limiting competition;
(i) any contracts calling for aggregate payments by the Company or any
Subsidiary in excess of $25,000 and which are not terminable without cost or
liability on notice of 90 days or less; (j) any joint venture, partnership or
limited partnership agreement or limited liability Company operating agreement
involving the Company or any Subsidiary; (k) any guarantees by the Company or
any Subsidiary of the obligations of any other party except those resulting from
the endorsement of checks deposited by the Company or any Subsidiary for
collection; (l) any engagement letter relating to the Merger; (m) any other
contracts which could have a material impact on the Company's consolidated
results of operations or consolidated financial condition; and (n) any
commitments to enter into any of the types of contracts and obligations referred
to in this Section 2.13.1. The Company and its Subsidiaries are not in material
default under any of such contracts, obligations or commitments and the Company
is not aware of any facts which, with notice and/or the passage of time, would
constitute such a default and are not aware of any default by any party thereto
which would have a materially adverse effect upon the results of operations or
financial condition of the Company and its Subsidiaries taken as a whole. No
consent is required under any of the contracts, obligations and commitments
referred to in this Section 2.13.1 in connection with the Merger.
2.13.2 No purchase commitment of the Company or any of its
Subsidiaries is substantially in excess of the normal, ordinary, and usual
requirements of the business of the Company and its Subsidiaries.
2.13.3 The Company and its Subsidiaries are not a party to or
otherwise bound by any contract, agreement, plan, lease, license, commitment, or
undertaking which is materially adverse, materially onerous, or materially
harmful to any aspect of the businesses of the Company
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and its Subsidiaries; provided, however, that no representation is made in this
Section 2.13.3 with respect to any agreement that has been identified in any
section of the Disclosure Letter.
2.13.4 To the best of the Company's knowledge, Scherer is not under
any material contractual obligation with respect to the ABG Product Line other
than as set forth in the Omnibus Agreement, the Equipment Lease and the License
of Intangible Property.
SECTION 2.14 CUSTOMERS AND SUPPLIERS. The Disclosure Letter contains a
complete and accurate list setting forth, for the ten months ended January 25,
1997, all customers who purchased more than $100,000 in goods from the Company
and its Subsidiaries and all suppliers from whom the Company and its
Subsidiaries purchased more than $100,000 in products, the total value of
business transacted by the Company and its Subsidiaries with such customers or
suppliers during such period, and, if applicable, the reasons that any such
contracts were terminated. Except as set forth in the Disclosure Letter and
subject to arrangements agreed upon by the Company and VSI with respect to the
distribution of the Company's products subsequent to the date hereof, the
Company has not been notified that any of such customers or suppliers intends to
terminate or change significantly its relationship with the Company and its
Subsidiaries on or after the Effective Time of the Merger. None of the
Company's presently outstanding proposals to customers which are subject to
competitive bidding would, if accepted, materially adversely affect the
Company's profit margins. For the twelve months ended December 28, 1996,
approximately 40% of the Company's business was subject to competitive bidding.
For the twelve months ending December 28, 1997, the Company does not reasonably
expect that more than approximately 40% of its business will be subject to
competitive bidding.
SECTION 2.15 TRANSACTIONS WITH DIRECTORS, OFFICERS, EMPLOYEES AND
AFFILIATES. Except as disclosed in reports filed by the Company with the SEC,
there have been no transactions since July 1, 1993 between the Company and any
director, officer, employee or affiliate (as defined in Rule 405 promulgated by
the SEC, it being agreed by the parties that Scherer and its officers, directors
and 10% shareholders shall be deemed "affiliates" of the Company for purposes of
this Agreement) of the Company, except on an arm's length basis in accordance
with normal business practices. Since July 1, 1993, none of the officers,
directors or affiliates of the Company, or any member of the immediate family of
any such persons, has been a director or officer of, or has had a material
interest in, any firm, corporation, association or business enterprise which
during such period has been a material supplier, customer or sales agent of the
Company or any of its Subsidiaries or has competed to a material extent with the
Company or any of its Subsidiaries.
SECTION 2.16 LITIGATION.
2.16.1 Except as disclosed in the Reports: (i) there are no legal,
administrative, arbitration or other proceedings or claims pending or to the
knowledge of the Company threatened against the Company or any of its
Subsidiaries (other than proceedings or claims which are reasonably likely not
to have a material adverse effect upon the Company's financial condition or
results of operations); (ii) the Company and its Subsidiaries are not subject to
any existing
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judgment; (iii) the Company and its Subsidiaries have not received any inquiry
from any agency of the federal or of any state or local government about the
transactions contemplated hereby, or about any violation or possible violation
of any law, regulation or ordinance affecting its business, its assets, the ABG
Business, the ABG Assets or the ABG Product Line; and (iv) the Company and its
Subsidiaries have not been subject to any products liability claims during the
three years ended on the date of this Agreement. During the three year period
ending on the date of this Agreement, no claim has been made, and to the best of
the knowledge of the Company, no basis exists for any claim, by any current or
former director, officer, employee or other agent of the Company or any of its
Subsidiaries seeking indemnification, whether pursuant to statute, court rule,
contract, by-law, a provision in an article of association or otherwise, based
on such person's involvement in the business of the Company or any of its
Subsidiaries.
2.16.2 To the best of the Company's knowledge, (i) there are no
legal, administrative, arbitration or other proceedings or claims pending or
threatened against Scherer with respect to the ABG Product Line or the ABG
Assets (other than proceedings or claims which, if made against the Company,
would not be reasonably likely to have a material adverse effect upon the
Company's financial condition or results of operations); (ii) Scherer is not
subject to any existing judgment which would adversely affect Scherer's
obligations to convey the ABG Assets upon exercise of the Repurchase Option (as
hereinafter defined); and (iii) Scherer has not received any inquiry from any
agency of the federal or of any state or local government about the transactions
contemplated hereby, about any exercise of the Repurchase Option or about any
violation or possible violation of any law, regulation or ordinance affecting
the ABG Assets, the ABG Business or the ABG Product Line.
SECTION 2.17 INSURANCE. The Disclosure Letter contains an accurate and
complete list of all insurance coverage maintained by the Company and its
Subsidiaries on the date hereof. Except as otherwise indicated in the Disclosure
Letter, such coverage applies to the Company's interests in the ABG Product
Line. The Company and its Subsidiaries have not received any notice of
cancellation with respect to any insurance policy relating to such coverage.
All premiums due under any such insurance policy have been paid in full.
SECTION 2.18 LICENSES AND PERMITS. The Company and its Subsidiaries and
the employees and agents of the Company and its Subsidiaries have all material
licenses, permits, orders, approvals and authorizations required for the conduct
of their respective businesses as presently conducted, including without
limitation the ABG Business. In all material respects, the Company and its
Subsidiaries are acting within the terms of such licenses, permits, orders,
approvals and authorizations, and, to the best knowledge of the Company, no
suspension or cancellation thereof has been threatened.
SECTION 2.19 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEABILITY. The
execution, delivery and performance of this Agreement by the Company (A) are
within the legal capacity and power of the Company; (B) have been duly
authorized by all requisite corporate action on the part of the Company, other
than shareholder approval; (C) require the approval or consent of, or filing
with,
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no persons, entities or agencies, other than such approvals as shall be required
under the 1934 Act and state securities laws and such filings as shall be
required pursuant to the Hart Scott Rodino Antitrust Improvements Act (the "Hart
Scott Rodino Act"); and neither violate nor constitute a default under, nor
create a lien or breach under, the terms of the articles of incorporation and
by-laws of the Company or any Subsidiary or of any material agreement, document
or instrument binding upon the Company or any Subsidiary. This Agreement is a
legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except insofar as the enforcement thereof
may be limited by bankruptcy, insolvency, moratorium or similar laws affecting
the enforcement of creditors' rights generally and subject to equitable
principles limiting the availability of equitable remedies. At the Special
Meeting (as hereinafter defined), approval of the Merger by holders of two-
thirds of the shares of Company Common Stock outstanding on the applicable
record date will be sufficient to constitute shareholder approval of the Merger
under Colorado law and under the Company's articles of incorporation and by-
laws.
SECTION 2.20 COMPLIANCE WITH APPLICABLE LAWS; ENVIRONMENTAL MATTERS.
2.20.1 The Company and its Subsidiaries and all real property now
owned by the Company and its Subsidiaries ("Company Owned Real Property") are in
compliance in all material respects with all federal, state, county, and
municipal laws, ordinances, regulations, rules, reporting requirements,
judgments, orders, decrees and requirements of common law applicable to the
conduct of the Company and its Subsidiaries and to the assets owned, used or
occupied by the Company and its Subsidiaries (collectively referred to
hereinafter as the "General Laws"), including without limitation all applicable
federal, state, county and municipal laws, ordinances, regulations, rules,
reporting requirements, judgments, orders, decrees and requirements of common
law concerning or relating to the protection of health and the environment
(collectively referred to hereinafter as the "Environmental Laws"). To the best
of the Company's knowledge, all real property owned, operated, used or leased
by, to or for the Company and its Subsidiaries, with respect to any aspect of
their businesses including, without limitation, the ABG Business, at any time
since 1990 other than the Company Owned Real Property (the "Company
Leased/Previously Owned Property"), was and is in compliance in all material
respects with the General Laws and the Environmental Laws. The Company and its
Subsidiaries have not received any notification of violation, citation,
complaint, request for information, order, directive, compliance schedule or
other similar enforcement order, or any other notice from any administrative or
governmental agency or entity, indicating that any business or operation of or
any real property owned, operated, used or leased by, to or for the Company or
any Subsidiary, was not or currently is not in compliance in all material
respects with all Environmental Laws and General Laws. To the best of the
Company's knowledge, Scherer has not received any notification of violation,
citation, complaint, request for information, order, directive, compliance
schedule or other similar enforcement order, or any other notice from any
administrative or governmental agency or entity, indicating that any aspect of
the ABG Business was not or currently is not in compliance in all material
respects with all Environmental Laws and General Laws.
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2.20.2 All businesses and operations of the Company and its
Subsidiaries (including without limitation the ABG Business), the Company Owned
Real Property and, to the best of the Company's knowledge, the Company
Leased/Previously Owned Property, are in compliance in all material respects
with all: (i) judgments, orders, directives, decrees or awards of any court,
arbitrator or administrative or governmental agency or entity concerning
compliance with the Environmental Laws; and (ii) consent decrees, administrative
orders, settlement agreements or other settlement documents entered into with
any administrative or governmental agency or entity concerning compliance with
the Environmental Laws.
2.20.3 All assets owned, leased, licensed or otherwise used by the
Company or any of its Subsidiaries, including, without limitation, the Company
Owned Real Property, and, to the best of the Company's knowledge, the Company
Leased/Previously Owned Property, are free of all materials designated as
hazardous substances, wastes, hazardous materials, pollutants or contaminants
under any Environmental Law (collectively, "Hazardous Materials") and physical
conditions which violate any Environmental Laws; all storage tanks and
associated pipes, pumps and structures (whether above or below ground) located
in or on the Company Owned Real Property and, to the best of the Company's
knowledge, the Company Leased/Previously Owned Property, have been identified in
the Disclosure Letter, are in sound condition, free of corrosion, meet all
design and performance standards required by all Environmental Laws, and do not
now, and did not at any time in the past, evidence impaired integrity or
leakage. No Hazardous Materials used or generated by the Company or any of its
Subsidiaries or generated at the Company Owned Real Property or, to the best of
the Company's knowledge, generated at the Company Leased/Previously Owned
Property, have been treated, stored, transported or disposed of in violation of
any Environmental Laws; and all Hazardous Materials which have been utilized in
the business or operation of the Company or any of its Subsidiaries (including
without limitation the ABG Business) or which have been removed, released,
discharged or emitted from the Company Owned Real Property or, to the best of
the Company's knowledge, from the Company Leased/Previously Owned Property, were
and are documented, transported and disposed of in compliance in all material
respects with all Environmental Laws.
2.20.4 The Disclosure Letter lists all permits, licenses and other
authorizations issued by administrative or governmental agencies or entities
under the General Laws and the Environmental Laws which are held by the Company
or any of its Subsidiaries or which are held by Scherer with respect to the ABG
Business (the "General and Environmental Permits"). The General and
Environmental Permits include all such permits which are necessary to the
business and operations of the Company and its Subsidiaries (including without
limitation the ABG Business) and the Company, the Subsidiaries and, to the best
of the Company's knowledge, Scherer are and have been in compliance in all
material respects with the terms and conditions of the General and Environmental
Permits. Under the General Laws, the Environmental Laws and the General and
Environmental Permits, the consummation of the transactions contemplated by this
Agreement and any exercise of the Repurchase Option do not and will not: (i)
affect the validity of the General and Environmental Permits; or (ii) require
the consent of any governmental authority or third party.
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SECTION 2.21 ERISA AND EMPLOYMENT MATTERS.
2.21.1 The Disclosure Letter contains an accurate and complete list
of all funded or unfunded, written or oral, employee benefit plans, contracts,
agreements, incentives and salary, wage or other compensation plans or
arrangements, including but not limited to all pension and profit sharing plans,
savings plans, bonus plans, deferred compensation plans, incentive compensation
plans, stock purchase plans, supplemental retirement plans, severance or
termination pay plans, stock option plans, hospitalization plans, medical plans,
life insurance plans, dental plans, disability plans, cafeteria plans, dependent
care plans, tuition reimbursement plans, educational assistance plans, salary
continuation plans, vacation plans, supplemental unemployment benefit plans,
collective bargaining agreements, employment contracts, consulting agreements,
retiree benefits and agreements, severance agreements and each other employee
benefit program, plan, policy or arrangement (each a "Benefit Plan") maintained,
contributed to, or required to be contributed to by the Company or any
Subsidiary with respect to any current or former employees, directors, officers,
agents or consultants of the Company or any Subsidiary, or for which the Company
or any Subsidiary may be responsible or with respect to which it may have any
liability, whether or not subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). The Disclosure Letter indicates whether each
Benefit Plan is funded or unfunded, and insured or uninsured.
2.21.2 The Disclosure Letter contains an accurate and complete list
of all documents embodying or relating to the Benefit Plans and of all employee
handbooks and policy manuals utilized by the Company or any of the Subsidiaries
within the past five years. Each of the Benefit Plans listed in the Disclosure
Letter is and has at all times been in compliance in all material respects with
all applicable provisions of ERISA, the Code, the Age Discrimination in
Employment Act of 1967, the Americans with Disabilities Act of 1990, the Family
Medical Leave Act of 1993 and all other laws applicable to the Benefit Plans.
2.21.3 Each Company "employee pension benefit plan" as defined in
Section 3(2) of ERISA (each a "Pension Plan") which is intended to meet the
requirements of Section 401(a) of the Code now meets, and since its inception
has met, the requirements for qualification under Section 401(a) of the Code and
nothing has occurred which would adversely affect the qualified status of any
such Pension Plan. The Internal Revenue Service has issued a favorable
determination letter with respect to the qualification under the Code (including
without limitation the Tax Reform Act of 1986) of each Pension Plan, the
Disclosure Letter contains an accurate and complete list of the dates of such
letters and the Internal Revenue Service has not taken any action to revoke any
such letter.
2.21.4 Each fiduciary and every plan official of each Benefit Plan is
bonded to the extent required by Section 412 of ERISA. The Company and the
Subsidiaries have not maintained, contributed to or been required to contribute
to (i) any Pension Plan under which more than one employer makes contributions
(as contemplated by Section 4064(a) of ERISA) or (ii) a "multiemployer plan" as
defined in Section 3(37)(A) and (D) of ERISA, nor have they
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withdrawn from any Pension Plan as a "substantial employer" as defined in
Section 4001(a)(2) of ERISA so as to become subject to the provisions of Section
4063 of ERISA, or ceased operations at any facility so as to become subject to
the provisions of Section 4062 of ERISA. The Disclosure Letter sets forth an
accurate and complete list of all annual reports filed during the last three
years with the Internal Revenue Service, the Department of Labor or the Pension
Benefit Guaranty Corporation by or on behalf of every Benefit Plan.
2.21.5 The execution and performance of the transactions contemplated
by this Agreement will not, alone or together with any other event, constitute
an event under any Benefit Plan or individual agreement that will result in any
payment (whether of severance pay or otherwise), or acceleration, vesting or
increase in benefits, with respect to any current or former employee, officer,
consultant, agent or director of the Company or any Subsidiary.
2.21.6 Long-term disability benefits for any employee of the Company
and each Subsidiary who has become disabled (including without limitation any
individual who is disabled but has not satisfied any applicable waiting period)
and death benefits for any employee of the Company and each Subsidiary who has
died are described in the Disclosure Letter and are insured in amounts and with
insurance companies described in the Disclosure Letter.
2.21.7 Each group health plan (within the meaning of Section
5000(b)(1) of the Code) maintained by the Company or any Subsidiary has been
administered in substantial compliance with the coverage continuation
requirements contained in the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") and as provided under Section 4980B of the Code and any
regulations promulgated or proposed under the Code. No current or former
employee, officer, consultant, agent or director of the Company and the
Subsidiaries, and/or their spouses or dependents, is presently entitled or may
be entitled in the future to any post-termination employment, health, dental,
disability or life insurance benefits, except to the minimum extent required by
COBRA.
2.21.8 The Company and the Subsidiaries have made all contributions
required to be made to each Benefit Plan under the terms of the plan and
applicable law, and are not in default under any Benefit Plan. No prohibited
transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) has
occurred with respect to any Benefit Plan which could subject any Benefit Plan
or any related trust, the Company, any Subsidiary, the Surviving Corporation or
any director or employee of any of them to any tax or penalty imposed under
Section 4975 of the Code or Section 502(i) or 502(1) of ERISA, either directly
or indirectly, and whether by way of indemnity or otherwise. No event or set of
circumstances has occurred under which the Company, any of its Subsidiaries, any
Benefit Plan, or any fiduciary thereof, could directly or indirectly be subject
to any other liability (other than benefits payable in accordance with the terms
of such Benefit Plan and related expenses) under ERISA (including, but not
limited to, Sections 409, 510, 4062, 4064 or 4069 thereof), the Code (including,
but not limited to, Sections 4971, 4972, 4976 or 4980B thereof), the Family
Medical Leave Act of 1993 or any other applicable law.
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2.21.9 The Company or the plan "administrator" (as defined in Section
3(16) of ERISA) of each Benefit Plan has timely filed all ERISA and Code
required reporting and disclosure forms, including, but not limited to, the Form
5500 series, with the appropriate government agencies, with respect to every
Benefit Plan required to file such forms.
2.21.10 There are and there have been no inquiries, proceedings,
claims, audits or suits pending or, to the best knowledge of any Company Party,
threatened by any governmental agency or authority or by any participant or
beneficiary against the Company, any of its Subsidiaries, any of their
respective directors, officers or employees, any Benefit Plan of the Company or
any of its Subsidiaries, or any fiduciary of a Benefit Plan, with respect to the
operation of any Benefit Plan.
2.21.11 Neither the Company nor any of its Subsidiaries have any
obligation to pay medical benefits to retired employees.
2.21.12 The Disclosure Letter contains a list, as of the date hereof,
showing the names of all employees of the Company and the Subsidiaries, their
original dates of employment, their job titles and their hourly rates.
2.21.13 All employees of the Company and the Subsidiaries are
employees at will who may be terminated by the Company at any time with no
obligation to make any payment except wages to the date of termination and such
other amounts as may be required by law.
2.21.14 The Company and the Subsidiaries are in compliance in all
material respects with all federal and state laws respecting employment, wages
and hours. Such entities have not engaged in any discriminatory hiring or
employment practices or any unfair labor practices nor have any employment
discrimination or unfair labor practice complaints against such entities been
filed, or, to the knowledge of the Company, been threatened to be filed, with
any federal or state agency having jurisdiction over the labor matters of the
Company and the Subsidiaries. There are no outstanding threats by any former
employee of the Company or its Subsidiaries of any suit alleging wrongful
termination. The Company has no knowledge of facts which might form a basis for
any complaint or suit of a type described in this Section 2.21.14. The Company
and the Subsidiaries have no actual knowledge that they employ any alien who
does not have a valid permit to work in the United States of America.
2.21.15 To the best of the knowledge of the Company's executive
officers, no current employee of the Company or any of the Subsidiaries is bound
by any previous non-competition agreement (other than agreements given to the
Company) and no employee, in his or her capacity as an agent of the Company, has
violated a confidentiality agreement or non-compete agreement with an unrelated
entity.
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2.21.16 With respect to each facility in which the Company or any of
its Subsidiaries does business, the Company and its Subsidiaries and each such
facility are in compliance in all material respects with the Americans With
Disabilities Act.
2.21.17 During the three years ended December 28, 1996, there has not
been any labor dispute (including a strike, slowdown or work stoppage) or threat
of a labor dispute involving the Company or any of its Subsidiaries or any
attempt or threat of an attempt by a labor union to organize any employees of
the Company or any of its Subsidiaries. No employee of the Company or any of
its Subsidiaries is a member of or represented by any labor union.
2.21.18 Intentionally omitted.
SECTION 2.22 FINANCIAL STATEMENTS.
2.22.1 Prior to the date hereof, the Company has delivered to VSI
its consolidated Balance Sheet dated December 28, 1996, its consolidated income
statement for the three months then ended and its consolidated statement of cash
flows for the three months then ended (such financial statements are referred to
herein as the "December Financial Statements"). The December Financial
Statements and the consolidated financial statements of the Company included
within the Reports filed with the SEC since January 1, 1996 fairly present the
consolidated financial position of the Company and the consolidated results of
operations of the Company as at the dates and for the periods to which they
apply; such statements have been prepared in conformity with generally accepted
accounting principles, applied on a consistent basis throughout the periods
involved, and such financial statements comply with all applicable provisions of
Regulation S-X of the SEC. The December Financial Statements and the interim
financial statements presented in such Reports include all adjustments (subject
only to normal recurring year-end adjustments) necessary for a fair presentation
of the Company's consolidated financial position and consolidated results of
operations as of the dates and for the periods presented therein.
2.22.2 On March 30, 1996 and December 28, 1996, the Company and its
Subsidiaries had no material liabilities (whether absolute, accrued, contingent
or otherwise) which were required to be reflected in and disclosed on the
Company's March 30, 1996 audited consolidated balance sheet or the Balance Sheet
(as to December 28, 1996) or in the notes thereto pursuant to Regulation S-X of
the SEC or in accordance with generally accepted accounting principles,
consistently applied, but were not so reflected and disclosed. Since December
28, 1996, the Company and its Subsidiaries have incurred no liabilities (whether
absolute, accrued, contingent or otherwise) in addition to those reflected in or
disclosed on the Balance Sheet or the related notes, except liabilities incurred
in the ordinary course of business and the execution by the Company of this
Agreement.
2.22.3 The books, records and system of internal accounting
controls of the Company and its Subsidiaries comply in all material respects
with Section 13(b) of the 1934 Act.
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2.22.4 The Disclosure Letter contains an accurate and complete list
of the most recent management letters received by the Company or any of its
Subsidiaries.
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SECTION 2.23 TAXES.
2.23.1 All tax and information returns required to have been filed
by the Company and its Subsidiaries have been filed with the appropriate
authority; and all federal, state and local taxes (including without limitation
income, franchise, property, sales, use, value-added, withholding, excise,
capital or other tax liabilities), charges, assessments, penalties and interest
of the Company and its Subsidiaries ("Tax Liabilities") required to be paid on
or before December 28, 1996 were paid on or before that date or accrued on the
books of the Company and its Subsidiaries as of that date. Such returns were
correct in all material respects as filed. No assessments or additional Tax
Liabilities have been proposed or threatened against the Company or any of its
Subsidiaries or any of their assets, and neither the Company nor any of its
Subsidiaries have executed any waiver of the statute of limitations on the
assessment or collection of any Tax Liabilities. The Balance Sheet includes
adequate provision for Tax Liabilities incurred or accrued as of December 28,
1996. The Disclosure Letter contains an accurate and complete list of the dates
of filing of the Company's and each Subsidiary's most recent federal, state and
local tax returns.
2.23.2 The federal tax returns of the Company and its Subsidiaries
have been audited or examined by the Internal Revenue Service through the dates
specified in the Disclosure Letter. Adjustments, if any, to all such returns
have been agreed upon and paid by the Company or its Subsidiaries or are being
contested as indicated in the Disclosure Letter. There are no pending
investigations of the Company or any of its Subsidiaries or their tax returns by
any federal, state or local taxing authority and there are no federal, state or
local tax liens upon any of the assets of the Company or any of its
Subsidiaries. The Disclosure Letter contains an accurate and complete
description of the Company's transfer pricing policy and such transfer pricing
policy is in accordance with the specific pricing methods described in
regulations promulgated by the Internal Revenue Service under Section 482 of the
Code. To the best of the Company's knowledge, as of March 30, 1996, the Company
had net operating loss carryforwards totaling $23,084,830, of which $7,329,242
were encumbered by the restrictions under Section 382 of the Code (the
"restricted NOLs"). The "section 382 annual limitation" (within the meaning of
Section 382 of the Code) with respect to the restricted NOLs is $486,900. The
Disclosure Letter contains an accurate and complete list of (i) the years in
which the Company's net operating loss carryforwards expire, (ii) the amount of
net operating loss carryforwards which will expire in each of those years
(separately broken out to indicate the restricted NOLs and the nonrestricted
NOLs) and (iii) the extent of any "owner shift" or "equity structure shift"
(within the meaning of Section 382 of the Code) as of the date of this
Agreement.
SECTION 2.24 BUSINESS CHANGES. Except for the transactions contemplated
by this Agreement, since March 30, 1996 there has not been:
2.24.1 any reduction through December 28, 1996 in the Company's
"Special Treatment Sales" (as defined herein), as compared with Special
Treatment Sales during the comparable period in the immediately preceding fiscal
year (it being understood that the term
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"Special Treatment Sales" shall mean all of the Company's sales other than sales
made through the Company's United States (including Puerto Rico) dealers and
sales made through distributors of the Company's medical-surgical products);
2.24.2 any damage, destruction or loss (whether or not covered by
insurance) materially and adversely affecting the business of the Company and
its Subsidiaries taken as a whole (including without limitation the ABG
Business) or any material deterioration in (x) the condition of the Owned
Buildings or the personal property owned by the Company or any of its
Subsidiaries or leased, licensed or otherwise used by the Company or any of its
Subsidiaries in their respective businesses (including without limitation the
ABG Business) or (y) the condition or operation of the heating, air
conditioning, plumbing and electrical systems of the Owned Buildings, excluding
ordinary wear and tear;
2.24.3 any disposition, mortgage, pledge, or subjection to any
lien, claim, charge, option, or encumbrance of any property or asset of the
Company or any of its Subsidiaries or, to the best of the Company's knowledge,
of any of the assets included within the ABG Product Line, or any cancellation
or compromise of any debt or claim of the Company or any of its Subsidiaries
otherwise than in the ordinary course of business;
2.24.4 any acquisition by the Company or any of its Subsidiaries of
the assets or capital stock of another business entity;
2.24.5 any distribution or disposition of the assets of the Company
or any of its Subsidiaries other than in the ordinary course of business or any
distribution by Scherer of any of the ABG Assets;
2.24.6 any action taken by the United States Food and Drug
Administration (the "FDA"), including without limitation the delivery of a
report on Form 483, which could have a material adverse effect upon the
Company's consolidated financial condition or consolidated results of
operations;
2.24.7 any statute, order, judgment, writ, injunction, decree,
permit, rule or regulation of any court or any governmental or regulatory body
adopted or entered or proposed to be adopted or entered which may materially and
adversely affect the property or business of the Company or any of its
Subsidiaries (including without limitation the ABG Business), other than those
statutes, orders, judgments, writs, injunctions, decrees, permits, rules or
regulations which are applicable to the business of health care generally or the
business of manufacturing and selling medical products generally and which do
not and will not have a disproportionate effect on the business of the Company
or any of its Subsidiaries (including without limitation the ABG Business)
relative to the effect on other entities in the business of manufacturing and
selling similar medical products; or
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2.24.8 any dividend or distribution declared, set aside or paid in
respect of the Company Common Stock or any repurchase by the Company of shares
of Company Common Stock.
SECTION 2.25 BROKERAGE. Except as described in the Disclosure Letter,
neither the Company nor any of its Subsidiaries has engaged any broker or finder
to render services in connection with this Agreement or in connection with any
fairness opinions to be delivered in connection with this Agreement.
SECTION 2.26 INDUSTRIAL REVENUE BONDS. The Company and its Subsidiaries
are not indebted under any industrial revenue bonds.
SECTION 2.27 INDUCEMENT AGREEMENTS. Concurrent with the execution of this
Agreement, Scherer has delivered to VSI an inducement agreement, a copy of which
has been furnished to the Company (the "Scherer Healthcare Inducement
Agreement"), and Robert Scherer has delivered to VSI an inducement agreement, a
copy of which has been furnished to the Company (the "Robert Scherer Inducement
Agreement" and, collectively with the Scherer Healthcare Inducement Agreement,
the "Inducement Agreements"). The Company understands that the receipt of the
Inducement Agreements by VSI represents a material inducement to VSI to enter
into this Agreement and that VSI has relied upon the Inducement Agreements in
entering into this Agreement.
SECTION 2.28 INFORMATION. Any information in written or electronic format
provided or to be provided by or on behalf of the Company, Scherer or their
representatives to VSI or its representatives in connection with this Agreement
or the Merger (the "Information") has been, and will be, accurate in all
material respects. The Company has disclosed to VSI all information regarding
the Company and its Subsidiaries (including without limitation the ABG Business)
which is material to VSI's determination to execute this Agreement.
SECTION 2.29 REORGANIZATION. The Company has not taken any action other
than relating to the consummation of the Merger, and is not aware of any actions
which have been taken or may be taken by any person, which would further limit
the Company's ability to utilize its net operating loss carryforwards under
Section 382 of the Code from the amounts described in Section 2.23.2 hereof.
SECTION 2.30 ABG PRODUCT LINE. Scherer has agreed to extend the repurchase
option described in Section 2.03 of the Omnibus Agreement (the "Repurchase
Option") until June 15, 1999. The aggregate purchase price required for the
Company to exercise the Repurchase Option currently is $5,535,000, which amount
increases by $22,500 per month as of the first day of each calendar month. The
Company has delivered to VSI's counsel copies of each bill of sale, assignment
and other instrument of transfer and conveyance pursuant to which Scherer
acquired the Purchased Assets from the Company pursuant to the Omnibus
Agreement. The Disclosure Letter sets forth the calculation of all amounts paid
by the Company to Scherer by calendar year
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pursuant to the Equipment Lease and the License of Intellectual Property. The
Company has paid to Scherer all amounts due to Scherer under the Equipment Lease
and the License of Intellectual Property through January 25, 1997 and the
Company will have no obligation to pay any amounts to Scherer with respect to
the period from such date until the Effective Time of the Merger other than to
pay to Scherer an amount equal to 3.25% of the Company's net sales of the ABG
Product Line during such period.
SECTION 2.31 FDA MATTERS. The Company and its Subsidiaries are in
compliance in all material respects with the United States Food, Drug and
Cosmetics Act, with all rules and regulations of the FDA applicable to the
Company or any of its Subsidiaries (including without limitation all Good
Manufacturing Practices regulations) and with all comparable state laws, rules
and regulations applicable to the Company or any of its Subsidiaries
(collectively, the "Device Laws"). The Disclosure Letter contains an accurate
and complete list of all dates of inspections of the Company or any of its
Subsidiaries made by the FDA or any similar state agencies during the six years
ended on the date of this Agreement, the dates of all correspondence between the
Company or any Subsidiary and the FDA or any such state agency with respect to
any such inspections and the dates of all reports delivered during such six year
period by any third-parties to the Company or any of its Subsidiaries with
respect to the compliance by the Company or any of its Subsidiaries with the
Device Laws. The Disclosure Letter contains an accurate and complete list of
the dates of all notices received by the Company or any of its Subsidiaries
within such six year period from the FDA or any other agency that enforces any
of the Device Laws. The Company has made available to representatives of VSI
all complaint files maintained by the Company and its Subsidiaries and all other
files maintained by the Company and its Subsidiaries with respect to compliance
with any aspect of the Device Laws. During the three years ended February 28,
1997, neither the FDA nor any comparable state agency has taken any action which
has had a material adverse effect upon the Company's consolidated financial
condition, results of operations, business or prospects.
SECTION 2.32 FULL DISCLOSURE. No representation or warranty made by the
Company in this Agreement or the Disclosure Letter, no certification furnished
or to be furnished by the Company to VSI pursuant to this Agreement, and no
document or electronic transmission delivered by the Company to VSI or its
counsel hereunder, including without limitation the Information, contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements contained herein or
therein not misleading. All documents delivered or to be delivered by the
Company to VSI and/or its counsel in connection with the negotiation, execution
and performance of this Agreement and the matters ancillary hereto are and will
be accurate and complete, and will contain all amendments through the date of
such delivery.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VSI
VSI hereby represents, warrants and agrees as follows:
SECTION 3.1 ORGANIZATION. VSI is a corporation, duly organized, validly
existing, and in good standing under the laws of the State of New Jersey, and
has all requisite corporate power and authority to own its property and conduct
the business in which it is engaged.
SECTION 3.2 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEABILITY. The
execution, delivery and performance of this Agreement are (A) within the legal
capacity and power of VSI and Newco; (B) have been duly authorized by all
requisite corporate action on the part of VSI and Newco; (C) require the
approval or consent of, or filing with, no persons, entities or agencies, other
than the approval of one or more institutions that have extended credit to VSI
and the New Jersey Economic Development Authority and filings to be made
pursuant to the Hart Scott Rodino Act; and (D) neither violate, nor constitute a
default under, nor create a lien or breach under the terms of, the certificate
of incorporation and by-laws of VSI or Newco or any other subsidiary of VSI or
of any material agreement, document or instrument binding upon VSI or Newco or
any other subsidiary of VSI (other than loan agreements as to which appropriate
consents or waivers shall avoid any defaults). This Agreement is a legal, valid
and binding obligation of VSI and Newco enforceable against VSI and Newco in
accordance with its terms, except insofar as the enforcement thereof may be
limited by bankruptcy, insolvency, moratorium or similar laws affecting the
enforcement of creditors' rights generally and subject to equitable principles
limiting the availability of equitable remedies.
SECTION 3.3 BROKERAGE. VSI has not engaged any broker or finder to render
services in connection with this Agreement.
SECTION 3.4 FULL DISCLOSURE. No representation or warranty made by VSI in
this Agreement, no certification furnished or to be furnished by VSI to the
Company pursuant to this Agreement, and no document or electronic transmission
delivered by VSI to the Company or its counsel hereunder, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
ARTICLE IV
COVENANTS OF THE COMPANY
SECTION 4.1 REGULAR COURSE OF BUSINESS. Except as otherwise consented to
in writing by VSI prior to the Effective Time of the Merger or as contemplated
by this Agreement or any other
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agreement executed by VSI, the Company will (and will cause each of its
Subsidiaries to) carry on its business (including without limitation the ABG
Business) diligently and in the ordinary course and use reasonable efforts to
preserve its present business (including without limitation the ABG
Business) organization intact, keep available the services of its present
executive officers and preserve its present relationships with persons having
business dealings with it.
SECTION 4.2 RESTRICTED ACTIVITIES AND TRANSACTIONS. Except as otherwise
consented to in writing by VSI, prior to the Effective Time of the Merger the
Company will not and the Company will cause each of its Subsidiaries not to:
4.2.1 amend its articles of incorporation or by-laws;
4.2.2 issue, sell or deliver, or agree to issue, sell or deliver,
or grant, or declare any stock divided or stock split with respect to, any
shares of any class of capital stock of the Company or any securities
convertible or exchangeable into any such shares or convertible or exchangeable
into securities in turn so convertible or exchangeable, or any options, warrants
or other rights calling for the issuance, sale or delivery of any such shares or
any such convertible or exchangeable securities, except that the Company may
issue shares of Company Common Stock pursuant to the Employee Options, the
Director Options, the Swiss Warrants, the Consultant's Options, the Russell
Warrants, the ITT Warrants, the Convertible Note or the Settlement Agreement,
provided that such options, warrants or Note are exercisable by their terms on
the date of such issuance and are outstanding on the date hereof and provided
that the applicable provisions of the Convertible Note and the Settlement
Agreement remain in full force and effect on the date of such issuance;
4.2.3 except in the ordinary course of business or as required
upon exercise of directors' fiduciary duties, mortgage or pledge any of its
assets, tangible or intangible;
4.2.4 (i) borrow, or agree to borrow, any funds, other than in the
ordinary course of business pursuant to the Company's existing credit facilities
in amounts that will not preclude the Company from satisfying the condition set
forth in Section 7.6 hereof, or (ii) except in the ordinary course of business
(and consistent with past practice), voluntarily incur, assume or become subject
to, whether directly or by way of guarantee or otherwise, any obligation or
liability (absolute or contingent), (iii) except in the ordinary course of
business (and consistent with past practice), cancel or agree to cancel any
material debts of third-parties or claims against third-parties, (iv) except in
the ordinary course of business (and consistent with past practice), lease, sell
or transfer, or grant or agree to grant any preferential rights to lease or
acquire, any of its material assets, property or rights, or (v) except in the
ordinary course of business (and consistent with past practice), make or permit
any substantive amendment or termination of any material contract, agreement,
license or other right of which it is a party;
4.2.5 adopt, materially amend or terminate any employee benefit
plan or materially increase the compensation or other benefits payable to any of
its employees; provided, however, that the Company may pay fiscal year-end
bonuses to its employees in an aggregate amount up to the
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amount disclosed to VSI's Chief Financial Officer immediately prior to the
execution of this Agreement;
4.2.6 acquire control of, or an ownership interest in, any other
corporation, association, joint venture, partnership, business trust, limited
liability company or other business entity, or acquire control or ownership of
all or a substantial portion of the assets of any of the foregoing, or enter
into any agreement providing for any of the foregoing;
4.2.7 directly or indirectly solicit, encourage or authorize any
individual, corporation or entity (including without limitation its directors,
officers, employees, attorneys, accountants and investment bankers) to directly
or indirectly solicit or encourage any inquiry, proposal, offer or possible
offer from a third party relating to (i) the purchase of shares of any class of
capital stock of the Company or any securities convertible or exchangeable into
any such shares or convertible or exchangeable into securities in turn so
convertible or exchangeable, or the acquisition of any option, warrant or other
right to purchase or otherwise acquire any such shares or
convertible/exchangeable securities, (ii) a tender or exchange offer for any
shares of Company Common Stock, (iii) a purchase, lease or other acquisition of
the shares of Company Common Stock owned by Scherer or all or a substantial
portion of the assets of the Company or any product line or line of business of
the Company or any of its Subsidiaries, or any other material asset of the
Company or any of its Subsidiaries, or (iv) a merger, consolidation or other
combination involving the Company (any such inquiry, proposal, offer or possible
offer being hereinafter referred to as a "Takeover Proposal"); or, subject to
the fiduciary obligations of the Company's Board of Directors, provide any
individual, corporation or other entity with information or assistance or
negotiate with any individual, corporation or entity in furtherance of any
Takeover Proposal;
4.2.8 enter into any agreement with any third-party with respect
to any of the types of transactions referred to in Section 4.2.7 hereof, other
than pursuant to the exercise by the Company's Board of Directors of its
fiduciary duties;
4.2.9 except in the ordinary course of business and consistent
with practices customary for the Company during the current fiscal year and
except for the buy-out of certain leases entered into with Finova for which the
Company has received comparable sums from Nexstar, enter into or agree to enter
into any transaction, or incur or discharge any obligation or liability,
material to the business of the Company and its Subsidiaries taken as a whole;
4.2.10 except with respect to dividend or distribution payments
made to the Company or any Subsidiary wholly-owned by the Company, declare or
pay any dividend on its capital stock in cash, stock or property, or redeem,
purchase or otherwise acquire any shares of capital stock or any options or
warrants to purchase any shares of its capital stock;
4.2.11 enter into any material licensing or marketing arrangement
or other material contract with any party other than VSI or the Premier
purchasing group;
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4.2.12 settle any pending litigation in a manner that is materially
adverse to the Company or commence any material litigation; or
4.2.13 take any action, or omit to take any action, the results of
which will prevent any of the warranties and representations set forth in
Article II hereof from being true in all material respects (or, in the case of a
representation or warranty that is, by its terms, qualified as to materiality,
from being true and accurate in all respects) as of the Effective Time of the
Merger.
SECTION 4.3 NO DEFAULT OR VIOLATION. Except as otherwise consented to in
writing by VSI, prior to the Effective Time of the Merger the Company will (and
will cause each of its Subsidiaries to) use its best efforts not to (i) violate,
or commit a breach of or a default under, any material contract, obligation or
commitment to which it is a party or to which any of its assets may be subject
or (ii) violate any applicable federal, state or municipal statutes, regulations
or ordinances or any injunctions, orders or judgments binding upon the Company
or its Subsidiaries, the effect of which in any such case would be materially
adverse to the business of the Company and its Subsidiaries taken as a whole.
SECTION 4.4 INSURANCE. Except as otherwise consented to in writing by
VSI, prior to the Effective Time of the Merger, the Company will (and will cause
its Subsidiaries to) maintain in full force and effect all policies of insurance
in substantially the same amounts and types of coverage as are presently in
effect on the date of this Agreement or in such greater amounts or with such
expanded coverage as the Company shall determine in good faith to be
appropriate.
SECTION 4.5 REPORTS; TAXES; ETC. Except as otherwise consented to in
writing by VSI, prior to the Effective Time of the Merger:
4.5.1 the Company will (and will cause each of its Subsidiaries
to) duly and timely (by the due date or any duly granted extension thereof) file
all reports and returns required to be filed with all applicable federal, state
and local authorities; and
4.5.2 unless it is contesting the same in good faith and, if
appropriate, has established reasonable reserves therefor, the Company will (and
will cause each of its Subsidiaries to) (i) promptly pay all Tax Liabilities
indicated by such returns or otherwise lawfully levied or assessed upon it or
any of its properties and (ii) withhold or collect and pay to the proper
governmental authorities or hold in separate bank accounts for such payment all
taxes and other assessments which it believes in good faith to be required by
law to be so withheld or collected; provided, however, that this Section 4.5.2
shall not affect the Company's plans to pay out approximately $640,000 over time
in order to discharge certain tax liens, as described in the Disclosure Letter.
SECTION 4.6 ADVICE OF CHANGES. The Company will promptly advise VSI
orally and in writing of (i) any event occurring subsequent to the date of this
Agreement which would render any representation or warranty of the Company
contained in this Agreement, if made on or as of the date of such event or the
Closing Date, untrue, inaccurate or incomplete in any material respect (or, in
the
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case of a representation or warranty that is, by its terms, qualified as to
materiality, untrue, inaccurate or incomplete in any respect) and (ii) any
material adverse change in the consolidated working capital, financial
condition, assets, liabilities (whether absolute, accrued contingent or
otherwise), operating profits, business or prospects of the Company and its
Subsidiaries taken as a whole.
SECTION 4.7 NOTIFICATION OF TAKEOVER PROPOSAL AND OTHER MATTERS. The
Company shall promptly advise VSI orally and in writing of any Takeover Proposal
or of any inquiry or proposal which the Company has reason to believe may lead
to a Takeover Proposal. The Company shall promptly advise VSI orally and in
writing of the receipt by the Company of any notification submitted to the
Company pursuant to any law of any purchase or proposed purchase of any
securities of the Company by any person
SECTION 4.8 CONSENTS, APPROVALS AND FILINGS. The Company will (and will
cause each of its Subsidiaries to) use its best efforts to obtain as promptly as
possible all necessary approvals, authorizations, consents, licenses, clearances
or orders of governmental and regulatory authorities and to complete all filings
required in order for the Company to perform all of its obligations hereunder.
SECTION 4.9 ACCESS TO RECORDS AND PROPERTIES. VSI may, prior to the
Effective Time of the Merger, through its employees, agents and representatives,
make or cause to be made a detailed review of the business (including without
limitation the ABG Business) and financial condition of the Company and its
Subsidiaries and make or cause to be made such investigation as it deems
necessary or advisable of the properties, assets, businesses (including without
limitation the ABG Business), books and records of the Company and its
Subsidiaries. The Company agrees (and will cause its Subsidiaries to agree) to
assist VSI in conducting such review and investigation and will provide, and
will cause its Subsidiaries and its independent public accountants to provide,
VSI and its employees, agents and representatives full access to, and complete
information concerning, all aspects of the businesses of the Company and its
Subsidiaries, including their books, records (including tax returns filed or in
preparation), personnel and premises, the audit work papers and other records of
their independent public accountants and any documents (including any documents
filed on a confidential basis) included in any report filed with the SEC.
Neither any investigation by VSI nor the receipt by VSI of any data or
information from the Company shall impair the right of VSI to terminate this
Agreement as provided in Article X hereof.
SECTION 4.10 BEST EFFORTS. The Company shall use its best efforts (a) to
cause to be fulfilled and satisfied all of the conditions to the Closing to be
fulfilled and satisfied by the Company and (b) to cause to be performed all of
the matters required of the Company at or prior to the Closing. The Company
shall use its best efforts to make all of its warranties and representations
contained in this Agreement (except those representations and warranties
regarding the number of shares of Company Common Stock issued and outstanding on
the date hereof set forth in Section 2.2 hereof) true and correct in all
material respects as at the Closing, with the same effect as if the same had
been made and this Agreement had been dated as at the Closing.
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SECTION 4.11 MAINTENANCE OF ASSETS. The Company shall (and shall cause
its Subsidiaries to) keep the property and assets used in its businesses
(including without limitation the ABG Business) in good order, repair and
operating condition.
SECTION 4.12 8-K. At least 10 days prior to the Effective Time of the
Merger, the Company shall furnish VSI with all such information and financial
statements as VSI may reasonably require in order for VSI to prepare a Current
Report on Form 8-K (describing the Merger pursuant to Items 2 and 7 of such
Form) for filing with the SEC promptly after the Effective Time of the Merger.
Immediately prior to the Closing, the Company shall cause its independent
accountants to provide any report of such accountants which VSI determines must
be included in such filing on Form 8-K and a consent (in form and substance
satisfactory to VSI) to the filing of any report of such accountants which VSI
determines must be included or incorporated by reference in such filing on Form
8-K.
SECTION 4.13 SHAREHOLDERS' MEETING. The Company shall call a special
meeting of its shareholders (the "Special Meeting"), to be held as soon as
practicable after the Proxy Statement (as hereinafter defined) is mailed to the
Company's shareholders, for the purpose of voting upon the Merger and this
Agreement. Notwithstanding the foregoing, the Special Meeting shall not be held
until after Scherer shall have conducted a meeting of its shareholders for the
purpose of seeking approval from the shareholders of Scherer for Scherer to vote
its shares of Company Common Stock in favor of the Merger and to consummate the
transactions contemplated by the Scherer Healthcare Inducement Agreement (the
"Scherer Shareholder Approval"). In connection with the Company's meeting, the
members of the Company's Board of Directors shall recommend that the Company's
shareholders approve the Merger and this Agreement and use their best efforts to
obtain such shareholder approval, subject to the exercise by the members of such
Board of Directors of their fiduciary duties.
SECTION 4.14 ANTI-DILUTION. The Company shall not permit any event to
occur that will trigger the anti-dilution provisions of any option, warrant,
Convertible Note or other security (collectively, the "Subscription Securities")
in a manner that would change in any respect the number of shares of Company
Common Stock issuable pursuant to any such Subscription Securities from the
number of shares set forth with respect to such Subscription Securities in
Section 2.2 hereof and Exhibit 2.2 to the Disclosure Letter or that would change
in any respect the exercise price applicable to any such Subscription Securities
from the exercise price set forth with respect to such Subscription Securities
in Exhibit 2.2 to the Disclosure Letter.
SECTION 4.15 RIGHTS PLAN. The Company shall amend the Rights Agreement in
such a manner that the execution of this Agreement and the consummation of the
Merger will not cause any of the Rights to become exercisable with or without
the passage of time.
SECTION 4.16 SEC REPORTS. Between the date hereof and the Closing Date,
the Company shall timely file with the SEC (and, contemporaneously with such
filings, shall deliver to VSI a copy of) all reports and statements required to
be filed by the Company under the 1934 Act. None of such
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reports or statements shall contain an untrue statement of a material fact or
shall omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under which
they were made, not misleading.
SECTION 4.17 NOTIFICATION REGARDING DISSENTERS' SHARES. The Company shall
give VSI (i) prompt notice of any notice of intent to demand fair value for any
shares of Company Common Stock, any withdrawals of such notices, and any other
instruments served pursuant to the Appraisal Laws and received by the Company
and (ii) the opportunity to direct any negotiations and proceedings with respect
to demands for fair value for shares of Company Common Stock under the Appraisal
Laws. The Company shall not, without the prior written consent of VSI,
voluntarily make payment with respect to any demands for fair value of shares of
Company Common Stock or offer to settle or settle any such demands.
SECTION 4.18 SEPARATE FUNDS. The Company shall establish and maintain a
separate account in which it shall deposit all funds it receives between the
date hereof and the Closing Date upon the exercise of any option or warrant.
Such funds shall be held in such account until such time as they are to be
delivered to the Exchange Agent pursuant to Section 1.3.2.2 hereof.
SECTION 4.19 Intentionally Omitted.
SECTION 4.20 REPURCHASE OPTION. The Company shall not exercise the
Repurchase Option under the Omnibus Agreement at any time prior to the earlier
of the Effective Time of the Merger or the date on which this Agreement is
terminated.
ARTICLE V
COVENANTS OF VSI
SECTION 5.1 BEST EFFORTS. VSI shall use its best efforts (a) to cause to
be fulfilled and satisfied all of the conditions to the Closing to be fulfilled
and satisfied by it, and (b) to cause to be performed all of the matters
required of it at or prior to the Closing. VSI shall use its best efforts to
make all of its warranties and representations contained in this Agreement true
and correct in all material respects as at the Closing, with the same effect as
if the same had been made and this Agreement had been dated as at the Closing.
SECTION 5.2 CONSENTS, APPROVALS AND FILINGS. VSI will use its best
efforts to obtain as promptly as possible all necessary approvals,
authorizations, consents, licenses, clearances or orders of governmental and
regulatory authorities and to complete all filings required in order for VSI to
perform its obligations hereunder.
SECTION 5.3 ADVICE OF CHANGES. VSI will promptly advise the Company
orally and in writing of (i) any event occurring subsequent to the date of this
Agreement which would render any representation or warranty of VSI contained in
this Agreement, if made on or as of the date of such
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event or the Closing Date, untrue, inaccurate or incomplete in any material
respect (or, in the case of a representation or warranty that is, by its terms,
qualified as to materiality, untrue, inaccurate or incomplete in any respect).
ARTICLE VI
HART SCOTT RODINO, INTERIM BALANCE SHEET
AND PROXY STATEMENT MATTERS
SECTION 6.1 HART SCOTT RODINO FILINGS. VSI and the Company agree to make
any required filings promptly pursuant to the Hart Scott Rodino Act, and to use
their best efforts, and to cooperate with each other in their efforts, to effect
compliance with the Hart Scott Rodino Act. If the parties should receive a
second request for information from either the Federal Trade Commission or the
United States Department of Justice, VSI and the Company shall use their best
efforts to comply promptly with such request and to persuade the agency seeking
such information to permit the parties to consummate the Merger.
Notwithstanding any provision herein to the contrary, VSI shall not be required
to enter into any consent decree or to make any divestitures, before or after
Closing, of its assets or of the assets to be acquired from the Company pursuant
to this Agreement.
SECTION 6.2 INTERIM BALANCE SHEET; STATEMENT OF SPECIAL TREATMENT SALES
At least ten days prior to the Closing Date, the Company shall deliver to VSI a
consolidated balance sheet of the Company as of the last day of the calendar
month immediately prior to the calendar month in which the Closing will be held,
or if the Closing is to be held within the first twenty days of a calendar
month, as of the last day of the calendar month which is two calendar months
prior to the calendar month in which the Closing will be held (the "Interim
Balance Sheet"). The Interim Balance Sheet shall be prepared in accordance with
generally accepted accounting principles, in a manner consistent with the
preparation of the Balance Sheet. Contemporaneous with the delivery of the
Interim Balance Sheet, the Company shall deliver to VSI a certificate of the
chief financial officer of the Company certifying that the Interim Balance Sheet
has been prepared in accordance with this Section 6.2 and shall provide VSI's
representatives with access to such documentation as they shall require in order
to review and evaluate the Interim Balance Sheet delivered by the Company. At
least two days prior to the Closing Date, the Company shall deliver to VSI a
statement (the "Sales Statement"), prepared in accordance with generally
accepted accounting principles consistently applied, setting forth the Company's
Special Treatment Sales (as defined in Section 2.24.1 hereof) for the period
from the date hereof through the seventh day prior to the Closing Date and for
the comparable period in 1996. Contemporaneous with the delivery of the Sales
Statement, the Company shall deliver to VSI a certificate of the chief financial
officer of the Company certifying that the Sales Statement has been prepared in
accordance with this Section 6.2 and shall provide VSI's representatives with
access to such documentation as they shall require in order to review and
evaluate the Sales Statement delivered by the Company.
SECTION 6.3. PROXY STATEMENT. Promptly after this Agreement is executed,
VSI and the Company shall cooperate in preparing a proxy statement (describing
the Merger) for filing with the
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SEC and ultimately for mailing to the Company's shareholders (the "Proxy
Statement"). The Company shall not file the Proxy Statement preliminarily or in
final form unless and until VSI consents to such filings. VSI shall not
unreasonably withhold or delay any such consent. The Proxy Statement shall
contain such notifications regarding dissenters' rights as are required by the
BCA. The Company represents and warrants to, and covenants with, VSI that the
Proxy Statement will comply in all material respects with the 1934 Act and the
rules and regulations promulgated thereunder, that the Proxy Statement will not
contain any untrue statements of material fact and will not omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that such representation, warranty
and covenant shall not apply with respect to any information regarding VSI. The
Company will promptly advise VSI in writing if at any time prior to the
Effective Time of the Merger it shall obtain knowledge of any facts that might
make it necessary or appropriate to amend or supplement the Proxy Statement in
order to make the statements contained or incorporated by reference therein not
misleading or to comply with applicable law. At VSI's request, the mailing of
the Proxy Statement shall be delayed until VSI or the Company shall have
received, from such accountants as VSI shall specify, letters of the type
contemplated by Statement on Auditing Standards No. 72 and based upon procedures
carried out to such date as VSI shall reasonably specify. After VSI consents to
the mailing of the Proxy Statement and all necessary SEC filing requirements
have been satisfied, the Company shall mail the Proxy Statement to its
shareholders in accordance with all applicable federal and state securities laws
and shall use its best efforts to solicit proxies in favor of the Merger.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF
VSI AND NEWCO
The obligations of VSI and Newco under this Agreement to consummate the
Merger shall be subject to the satisfaction, or to the waiver by them in the
manner contemplated by Section 11.2 hereof, on or before the Closing Date, of
the following conditions:
SECTION 7.1 COMPANY REPRESENTATIONS AND WARRANTIES TRUE. The
representations and warranties of the Company contained in this Agreement shall
be true and accurate in all material respects (or, in the case of a
representation or warranty that is, by its terms, qualified as to materiality,
shall be true and accurate in all respects) as of the date when made, and,
except as to representations and warranties (consisting solely of
representations and warranties regarding the number of shares of Company Common
Stock issued and outstanding on the date hereof set forth in Section 2.2 hereof)
which are expressly limited to a state of facts existing at a time prior to the
Closing Date, shall be true and accurate in all material respects (or, in the
case of a representation or warranty that is, by its terms, qualified as to
materiality, shall be true and accurate in all respects) at and as of the
Closing Date as if made on the Closing Date, without giving effect to any funds
received by the Company after December 28, 1996 upon the exercise of any option
or warrant or to the reduction
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of indebtedness resulting from the conversion of any promissory note or other
instrument convertible into shares of the Company's capital stock.
SECTION 7.2 PERFORMANCE OF COVENANTS. The Company shall have performed
and complied in all material respects with each and every covenant, agreement
and condition required by this Agreement to be performed or complied with by the
Company prior to or on the Closing Date.
SECTION 7.3 NO GOVERNMENTAL OR OTHER PROCEEDING OR LITIGATION. No order
of any court or administrative agency shall be in effect which restrains or
prohibits any transaction contemplated hereby or transactions contemplated by
the Inducement Agreements or which would limit or affect VSI's ownership of the
Company or any of its Subsidiaries or of the ABG Assets; no suit, action (other
than the exercise of dissenters' rights), investigation, inquiry or proceeding
by any governmental body or other person or entity shall be pending or
threatened against VSI, Newco or any subsidiary of VSI or the Company, which
challenges the validity or legality, or seeks to restrain the consummation, of
the transactions contemplated hereby or by the Inducement Agreements or which
seeks to limit or otherwise affect VSI's ownership of the Company or any of its
Subsidiaries or of the ABG Assets; and no written advice shall have been
received by VSI, Newco or the Company, or their respective counsel from any
governmental body, and remain in effect, stating that an action or proceeding
will, if the Merger is consummated or sought to be consummated, be filed seeking
to invalidate or restrain the Merger or the transactions contemplated by the
Inducement Agreements or limit or otherwise affect VSI's ownership of the
Company or any of its Subsidiaries or of the ABG Assets.
SECTION 7.4 APPROVALS AND CONSENTS. The approval of the shareholders of
the Company referred to in Section 8.4 hereof, the Scherer Shareholder Approval,
and all approvals of applications to public authorities, Federal, state, or
local, if any, the expiration of all waiting periods under the Hart Scott Rodino
Act and any other applicable law and all consents or approvals of any non-
governmental persons, the granting or expiration of which is necessary for the
consummation of the Merger and the consummation of the transactions contemplated
by this Agreement and the Scherer Inducement Agreements or for preventing the
termination or breach of any material real property lease, right, privilege,
license or agreement of VSI or its subsidiaries or of the Company or its
Subsidiaries or pertaining to the ABG Assets, or which is necessary for
preventing any material loss or disadvantage to VSI and its subsidiaries taken
as a whole or the Company and its Subsidiaries taken as a whole, by reason of
the Merger and the consummation of the transactions contemplated hereby and by
the Inducement Agreements, shall have been obtained; and no such consent or
approval shall have imposed a condition to such consent or approval, and no
condition shall have been imposed in connection with any filings made under the
Hart Scott Rodino Act or under any other law, which condition in the opinion of
VSI is unduly burdensome to the consolidated financial condition or operations
of VSI or to the business of the Company and its subsidiaries taken as a whole.
All conditions required to be satisfied prior to the Effective Time of the
Merger by the terms of such approvals and consents shall have been satisfied;
and all statutory waiting periods applicable to the parties hereto and the
parties to the Inducement Agreements (including without limitation all
applicable waiting periods under the Hart Scott Rodino Act) shall have expired.
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SECTION 7.5 OPINION OF COUNSEL. VSI and Newco shall have received an
opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the Company, dated
the Closing Date and addressed to VSI and Newco, in form and substance and
covering such matters as are reasonably agreed to by the parties. LeBoeuf,
Lamb, Greene & MacRae, L.L.P. may rely upon certificates with respect to factual
matters.
SECTION 7.6 INDEBTEDNESS. As of the Closing Date, the Company and its
Subsidiaries shall not be indebted with respect to "Debt" (as defined herein) in
an aggregate amount in excess of $6.4 million. For purposes of this Agreement,
the term "Debt" shall mean all amounts owed by the Company and its Subsidiaries
(i) to financial institutions, Scherer and affiliates of Scherer, (ii) on
capital leases, (iii) to the Internal Revenue Service and (iv) to holders of the
Company's 8.0% Notes due March 31, 1999 issued pursuant to Section 3.03 of the
Omnibus Agreement. At the Closing, the Company's chief financial officer shall
have delivered a certificate to VSI specifying the amount of such Debt as of the
Closing Date.
SECTION 7.7 CERTIFICATES. The Company shall have furnished VSI with
certificates of the Company, in form and substance satisfactory to VSI, signed
by its president or executive vice president, to the effect that the
representations and warranties of the Company contained in this Agreement are
true and correct in all material respects (or, in the case of representations or
warranties that are, by their terms, qualified as to materiality, are true and
accurate in all respects) on and as of the Closing Date as though such
representations and warranties were made at such time (except as contemplated in
Section 7.1 hereof) and that the Company has complied in all material respects
with all terms, covenants and provisions of this Agreement required to be
complied with by it prior to or on the Closing Date. Scherer shall have
furnished VSI with a certificates of Scherer, in form and substance satisfactory
to VSI, signed by its president or executive vice president, to the effect that
the representations and warranties of Scherer contained in the Scherer
Inducement Agreement are true and correct in all material respects (or, in the
case of representations or warranties that are, by their terms, qualified as to
materiality, are true and accurate in all respects) on and as of the Closing
Date as though such representations and warranties were made at such time and
that Scherer has complied in all material respects with all terms, covenants and
provisions of the Scherer Healthcare Inducement Agreement required to be
complied with by it prior to or on the date of the closings referenced to
therein.
SECTION 7.8 EXCHANGE AGENCY AGREEMENT. VSI shall have entered into an
agreement, in form and substance satisfactory to VSI, with American Stock
Transfer and Trust Company or another institution satisfactory to VSI, pursuant
to which such institution shall serve as exchange agent for the Merger in
accordance with the terms of this Agreement.
SECTION 7.9 EMPLOYMENT AGREEMENT. The Company, William Thompson
("Thompson") and Scherer shall have entered into an agreement pursuant to which
Thompson's existing employment agreement with the Company (the "Employment
Agreement") shall terminate as of the Effective Time of the Merger and the
Company thereafter shall have no liabilities under the Employment Agreement.
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SECTION 7.10 RIGHTS AGREEMENT. The Company shall have amended the Rights
Agreement in such a manner that the execution of this Agreement and the
consummation of the Merger will not cause any of the Rights to become
exercisable with or without the passage of time. Prior to the consummation of
the Closing, no Rights shall have been exercised under the Rights Agreement.
SECTION 7.11 SCHERER MATTERS.
7.11.1 The representations and warranties of Scherer and Robert
Scherer contained in the Inducement Agreements shall be true and accurate in all
material respects (or, in the case of a representation or warranty that is, by
its terms, qualified as to materiality, shall be true and accurate in all
respects) as of the date when made, and shall be true and accurate in all
material respects (or, in the case of a representation or warranty that is, by
its terms, qualified as to materiality, shall be true and accurate in all
respects) at and as of the Closing Date as if made on the Closing Date.
7.11.2 Scherer and Robert Scherer shall have performed and complied
in all material respects with each and every covenant, agreement and condition
required by the Inducement Agreements to be performed or complied with by such
entity or person prior to or on the Closing Date and on the dates of the
closings referred to therein.
7.11.3 Scherer, Robert Scherer and VSI shall have agreed upon the
form and substance of all documents to be executed and delivered at the
closings contemplated by the Inducement Agreements.
SECTION 7.12 CLOSING DOCUMENTATION. VSI shall have received such
additional documentation at the Closing as VSI and its counsel may reasonably
require to evidence compliance by the Company with all of their obligations
hereunder and to evidence compliance by Scherer and Robert Scherer with all of
their obligations under the Inducement Agreements.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement to consummate the
Merger shall be subject to the satisfaction, or to the waiver by it in the
manner contemplated by Section 11.2 hereof, on or before the Closing Date of the
following conditions:
SECTION 8.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of VSI contained in this Agreement shall be true and accurate in all
material respects (or, in the case of a representation or warranty that is, by
its terms, qualified as to materiality, shall be true and accurate in all
respects) as of the date when made, and shall be true and accurate in all
material respects (or, in the case of a representation or warranty that is, by
its terms, qualified as to materiality, shall be true and accurate in all
respects) at and as of the Closing Date as if made on the Closing Date.
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SECTION 8.2 PERFORMANCE OF COVENANTS. VSI and Newco shall have performed
and complied in all material respects with each and every covenant, agreement
and condition required by this Agreement to be performed or complied with by it
prior to or on the Closing Date.
SECTION 8.3 NO GOVERNMENTAL OR OTHER PROCEEDINGS OR LITIGATION. No order
of any court or administrative agency shall be in effect which restrains or
prohibits any transaction contemplated hereby; no suit, action (other than the
exercise of dissenters' rights), investigation, inquiry or proceeding by any
governmental body or other person or entity shall be pending or threatened
against VSI, Newco or the Company, which challenges the validity or legality, or
seeks to restrain the consummation, of the transactions contemplated hereby; and
no written advice shall have been received by VSI, Newco or the Company or their
respective counsel from any governmental body, and remain in effect, stating
that an action or proceeding will, if the Merger is consummated or sought to be
consummated, be filed seeking to invalidate or restrain the Merger.
SECTION 8.4 APPROVALS. The Company's shareholders shall have approved the
Merger by the requisite vote under the BCA and the Company's articles of
incorporation, the Scherer Shareholder Approval shall have been obtained, and
all approvals of applications to public authorities, Federal, state or local,
the granting of which is necessary for the consummation of the Merger, shall
have been obtained. All conditions required to be satisfied prior to the
Effective Time of the Merger by the terms of such approvals shall have been
satisfied; and all applicable statutory waiting periods under the Hart Scott
Rodino Act and under all other laws shall have expired.
SECTION 8.5 OPINION OF COUNSEL. The Company shall have received an
opinion of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.C., counsel to VSI,
dated the Closing Date and addressed to the Company, in form and substance and
covering such matters as are reasonably agreed to by the parties. Lowenstein,
Sandler, Kohl, Fisher & Boylan, P.C. may rely upon the written opinion of Krys,
Boyle, Freedman, Scott & Sawyer with respect to matters of Colorado law and upon
certificates with respect to factual matters.
SECTION 8.6 CERTIFICATES. VSI and Newco shall have furnished the Company
with certificates of VSI and Newco, respectively, in form and substance
satisfactory to the Company, signed by their respective presidents or executive
vice presidents, to the effect that the representations and warranties of such
corporations contained in this Agreement are true and correct in all material
respects (or, in the case of representations or warranties that are, by their
terms, qualified as to materiality, are true and accurate in all respects) on
and as of the Closing Date as though such representations and warranties were
made at such time and that such corporations have complied in all material
respects with all terms, covenants and provisions of this Agreement required to
be complied with by them prior to or on the Closing Date.
SECTION 8.7 CLOSING DOCUMENTATION. The Company shall have received such
additional documentation at the Closing as the Company and its counsel may
reasonably require to evidence compliance by VSI and Newco with all of their
obligations under this Agreement.
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ARTICLE IX
CLOSING; CLOSING DATE
Unless this Agreement shall have been terminated and the Merger herein
contemplated shall have been abandoned pursuant to a provision of Article X
hereof, a closing (the "Closing") will be held on a date mutually acceptable to
VSI and the Company as soon as practicable after the latest to occur of (i) the
Special Meeting referred to in Section 4.13 hereof, (ii) the receipt of all
consents and approvals referred to in Sections 7.4 and 8.4 hereof or the waiver
thereof by VSI in the case of consents by private parties, and (iii) the
expiration of all waiting periods referred to in Sections 7.4 and 8.4 hereof, at
the offices of VSI's special Colorado counsel, Krys, Boyle, Freedman, Scott &
Sawyer, at Dominion Plaza, Suite 2700, South Tower, Denver, Colorado, commencing
at 10:00 A.M. At such time, date (the "Closing Date") and place, the documents
referred to in Articles VII and VIII hereof will be exchanged by the parties
and, promptly thereafter, the Articles of Merger will be filed by Newco and the
Company with the Secretary of State of the State of Colorado; provided, however,
that if any of the conditions provided for in Articles VII and VIII hereof shall
not have been met or waived by the date on which the Closing is otherwise
scheduled, then, subject to Section 10.1.4 hereof, the party to this Agreement
which is unable to meet such condition or conditions shall be entitled to
postpone the Closing for a reasonable period of time by notice to the other
parties until such condition or conditions shall have been met (which such
notifying party will seek to cause to happen at the earliest practicable date)
or waived.
ARTICLE X
TERMINATION
SECTION 10.1 TERMINATION AND ABANDONMENT. This Agreement may be
terminated and the Merger may be abandoned before the Effective Time of the
Merger, notwithstanding any approval and adoption of this Agreement by the
shareholders of the Company or Newco:
10.1.1 by the mutual written consent of VSI, Newco and the Company;
or
10.1.2 by VSI or the Company, if (w) the shareholders of the
Company fail to approve the Merger at the Special Meeting, (x) the shareholders
of Scherer fail to give the Scherer Shareholder Approval at a meeting of
Scherer's shareholders convened to vote upon the Scherer Shareholder Approval,
(y) the Board of Directors of the Company shall fail to recommend or shall
withdraw or condition its recommendation that the shareholders of the Company
approve this Agreement and the Merger or shall have resolved to do so or (z) the
Board of Directors of Scherer shall fail to recommend or shall withdraw or
condition its recommendation that the shareholders of Scherer give the Scherer
Shareholder Approval or shall have resolved to do so; or
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10.1.3 by VSI if there has been a misrepresentation or breach on
the part of the Company in any of the representations or warranties of the
Company set forth herein that are, by their terms, qualified as to materiality,
or if there has been a material misrepresentation or breach on the part of the
Company in any of the representations or warranties of the Company set forth
herein that are not so qualified, or if there has been any material failure on
the part of the Company to comply with its obligations hereunder, or if the
Company's Special Treatment Sales (as defined in Section 2.24.1 hereof) for the
period from December 29, 1996 through the date seven days prior to the Closing
(the "Pre-Closing Date") are less than eighty percent (80%) of the Company's
Special Treatment Sales during the period from the first day of the Company's
fiscal quarter commencing in December 1995 through the date one year prior to
the Pre-Closing Date, or if there has been a misrepresentation or breach on the
part of Scherer or Robert Scherer (collectively, the "Scherer Parties") in any
of the representations or warranties of any of the Scherer Parties set forth in
the Inducement Agreements that are, by their terms, qualified as to
materiality, or if there has been a material misrepresentation or breach on the
part of any of the Scherer Parties in any of the representations or warranties
of the Scherer Parties set forth in the Inducement Agreements that are not so
qualified, or if there has been any material failure on the part of any of the
Scherer Parties to comply with such entity's or such person's obligations under
the Inducement Agreements, or if any of the conditions to VSI's obligation to
consummate the Merger set forth in Article VII or to VSI's obligation to
consummate the transactions contemplated by the Inducement Agreements has not
been satisfied as of the Closing Date, or by the Company if there has been a
misrepresentation or breach on the part of VSI or Newco in any of the
representations or warranties of VSI or Newco set forth herein that are, by
their terms, qualified as to materiality, or if there has been a material
misrepresentation or breach on the part of VSI in any of the representations or
warranties of VSI set forth herein that are not so qualified, or if there has
been any material failure on the part of VSI or Newco to comply with their
respective obligations hereunder, or if any of the conditions to the Company's
obligation to consummate the Merger set forth in Article VIII hereof has not
been satisfied as of the Closing Date; or
10.1.4 by either the Company or VSI, at its discretion, if the
Merger is not effective by July 31, 1997, except that a party whose breach of
this Agreement has caused a delay in the consummation of the Merger shall not be
entitled to terminate this Agreement pursuant to this Section 10.1.4.
SECTION 10.2 TERMINATION PROCEDURES. The power of termination provided
for by this Article X will be effective only after written notice thereof,
signed on behalf of the party for which it is given by its President or other
duly authorized officer, shall have been given to the other parties hereto. If
this Agreement is terminated in accordance with this Article X, then the Merger
shall be abandoned without further action by the Company, VSI and Newco, and
their officers shall not file the Articles of Merger with the Secretary of State
of the State of Colorado.
SECTION 10.3 LIABILITY UPON TERMINATION. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article X, no
party hereto shall have any liability or further obligation to any other party
hereto except as follows:
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10.3.1 A party that is in breach of its representations or
warranties hereunder shall not be liable for damages incurred by the other
parties hereto as a result of such breach. A party that is in breach of its
covenants hereunder shall be liable for damages incurred by the other parties
hereto only if (i) such breach is a material breach of a material covenant and
(ii) the party asserting such breach gives the breaching party notice of such
breach and such breach is not cured within twenty days thereafter (provided,
however, that if such breach is not reasonably curable within such twenty day
period but is curable prior to the date set forth in Section 10.1.4 hereof, no
party shall be entitled to damages pursuant to this Section 10.3. if the
breaching party diligently seeks to effect such cure and does in fact effect
such cure prior to the date set forth in Section 10.1.4 hereof). If VSI
terminates this Agreement as a result of any such material breach of a covenant
and is entitled to damages pursuant to this Section 10.3.1, the Company shall be
liable to VSI only to the extent that such damages are proximately caused by
such breach. The parties acknowledge that it is not possible to calculate the
damages that the Company would suffer in the event that VSI were to materially
breach any of its material covenants hereunder. Accordingly, if the Company
terminates this Agreement as a result of one or more material breaches of
material covenants by VSI or Newco and is entitled to damages pursuant to this
Section 10.3, the parties hereby agree that the Company shall be entitled to the
sum of $800,000 (and no more) as liquidated damages with respect to such
breaches.
10.3.2 In the event that (x) this Agreement is terminated by any
party pursuant to Section 10.1.2, by VSI pursuant to Section 10.1.3 or by VSI
pursuant to Section 10.1.4, (y) prior to the date on which this Agreement is
terminated (i) an offer is made in any manner contemplating a merger with the
Company, an acquisition of the Company or its assets, a tender or exchange offer
with respect to the Company, a consolidation with the Company, a liquidation of
the Company, a recapitalization of the Company or any other Purchase Event (as
defined below) or Takeover Proposal (as defined in Section 4.2.7 hereof), (ii) a
claim is made that such offer could result in greater value to the Company's
shareholders than the value to be received by them upon consummation of the
Merger and (iii) after such offer is known to the Company or any of its officers
or directors, the shareholders of the Company do not approve the Merger, the
shareholders of Scherer fail to grant the Scherer Shareholder Approval, the
Company breaches any of its obligations hereunder or all of the conditions
precedent described in Article VII hereof are not satisfied, and (z) within
twenty-four months after the termination of this Agreement, a Purchase Event
occurs, the Company shall pay to VSI, no later than the date on which such
Purchase Event occurs, a cash fee equal to $1,500,000. For purposes of this
Agreement, the term "Purchase Event" means any of the following events:
10.3.2.1 Without VSI's prior written consent, the Company or any of
its officers or directors shall have recommended, publicly proposed or publicly
announced an intention to authorize, recommend or propose, or entered into an
agreement with any person (other than VSI or any subsidiary of VSI) to effect
(A) a merger, consolidation or similar transaction involving the Company or any
Subsidiary which would constitute a "significant subsidiary" within the meaning
of Rule 405 of the SEC (a "Significant Subsidiary") (other than transactions
solely between the Company's Subsidiaries that are not violative of this
Agreement), (B) the disposition, by sale, lease, exchange or
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otherwise, of the Company or of assets of the Company or any of its Subsidiaries
representing 25% or more of the consolidated assets of the Company and its
Subsidiaries or (C) the issuance, sale or other disposition by the Company of
(including by way of merger, consolidation, share exchange or any similar
transaction) securities representing 25% or more of the voting power of the
Company or any of its Significant Subsidiaries, other than, in the case of (A),
(B) or (C), any merger, consolidation or similar transaction involving the
Company or any of its Subsidiaries in which the voting securities of the Company
outstanding immediately prior thereto continue to represent (by either remaining
outstanding or being converted into the voting securities of the surviving
entity of any such transaction) at least 75% of the combined voting power of the
voting securities of the Company or the surviving entity outstanding immediately
after the consummation of such merger, consolidation, or similar transaction
(provided any such transaction is not violative of this Agreement); or
10.3.2.2 any person (other than Scherer, affiliates of Scherer, VSI
or any subsidiary of VSI) shall have acquired beneficial ownership (as such term
is defined in Rule 13d-3 promulgated under the 1934 Act) of or the right to
acquire beneficial ownership of, or any "group" (as such term is defined in
Section 13(d)(3) of the 1934 Act), other than a group of which Scherer,
subsidiaries of Scherer, VSI or a subsidiary of VSI are the sole members, shall
have been formed which beneficially owns, or has the right to acquire beneficial
ownership of, 25% or more of the voting power of the Company or any of its
Significant Subsidiaries.
10.3.3 Notwithstanding the foregoing, the Company shall not be
obligated to pay the $1,500,000 amount set forth in Section 10.3.2 hereof in the
event that each of the following circumstances occur in the following order:
10.3.3.1 this Agreement is terminated after a public announcement is
made that a specific third-party other than Scherer (such third-party being
hereinafter referred to as the "Potential Acquirer") is proposing one or more
transactions which, if consummated, would constitute a Purchase Event;
10.3.3.2 subsequent to the termination of this Agreement, a public
announcement is made that the Potential Acquirer no longer intends to pursue any
transactions which would constitute a Purchase Event and, in fact, the potential
purchaser does not pursue a Purchase Event;
10.3.3.3 the Company offers in writing to VSI the opportunity to
enter into an agreement and plan of merger which is, in all substantial respects
(including, without limitation, the nature and amount of the consideration
payable by VSI thereunder), identical to this Agreement and Scherer and Robert
Scherer offer in writing to VSI the opportunity to enter into agreements which
are, in all substantial respects (including, without limitation, the amounts
payable by VSI thereunder), identical to the Inducement Agreements; and
10.3.3.4 VSI either declines in writing to pursue such offers or
fails to respond to the Company, Robert Scherer and Scherer within 20 days after
receipt of notice given in accordance with Section 11.7 hereof.
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10.3.4 In addition, the Company shall not be obligated to pay the
$1,500,000 amount set forth in Section 10.3.2 hereof in the event that each of
the following circumstances occur in the following order:
10.3.4.1 this Agreement is terminated after a public announcement is
made that a Potential Acquirer other than Scherer is proposing one or more
transactions which, if consummated, would constitute a Purchase Event;
10.3.4.2 subsequent to the termination of this Agreement, a public
announcement is made that the Potential Acquirer no longer intends to pursue any
transactions which would constitute a Purchase Event and, in fact, the potential
purchaser does not pursue a Purchase Event;
10.3.4.3 the Company offers in writing to VSI the opportunity to
enter into an agreement and plan of merger which is, in all substantial respects
(including, without limitation, the nature and amount of the consideration
payable by VSI thereunder), identical to this Agreement and Scherer and Robert
Scherer offer in writing to VSI the opportunity to enter into agreements which
are, in all substantial respects (including, without limitation, the amounts
payable by VSI thereunder), identical to the Inducement Agreements;
10.3.4.4 the Company and VSI enter into such an agreement and plan of
merger (the "New Agreement") and VSI enters into such inducement agreements;
10.3.4.5 subsequent to the execution of the New Agreement, the New
Agreement is terminated for reasons that would not give rise to the payment of
any sum by the Company pursuant to the section of the New Agreement that is
analogous to Section 10.3.2 hereof and at a time when Scherer has made no public
announcement of any intention to acquire the Company; and
10.3.4.6 subsequent to such termination of the New Agreement, Scherer
determines to pursue the merger of the Company with Scherer or a wholly-owned
subsidiary of Scherer and such transaction is consummated.
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ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.1 AMENDMENT AND MODIFICATION. To the fullest extent permitted
by applicable law, this Agreement may be amended, modified and supplemented with
respect to any of the terms contained herein by mutual consent of the Company,
VSI and Newco by an appropriate written instrument executed by each of such
parties at any time prior to the Effective Time of the Merger; provided,
however, that following an affirmative vote at the Special Meeting, this
Agreement may not be amended to reduce the consideration payable in the Merger
in respect of shares of Company Common Stock without obtaining the approval of
the Company's shareholders in the manner required by law.
SECTION 11.2 WAIVER OF COMPLIANCE. To the fullest extent permitted by
law, each of VSI, Newco and the Company may, by an instrument in writing, extend
the time for or waive the performance of any of the obligations of the other
parties hereto or waive compliance by the other parties hereto with any of the
covenants, or waive any of the conditions of its obligations, contained herein;
provided, however, that the obtaining of the approval of the Company's
shareholders referred to in Sections 7.4 and 8.4 hereof and the expiration of
all applicable waiting periods under the Hart Scott Rodino Act shall not be
waivable. No such extension of time or waiver shall operate as a waiver of, or
estoppel with respect to, any subsequent or other failure.
SECTION 11.3 SURVIVAL. The respective representations and warranties of
each party hereto contained herein shall not be deemed to be waived or otherwise
affected by any investigation made by the other parties hereto. None of the
representations or warranties of the parties hereto set forth in Articles II and
III hereof, or in any document furnished pursuant hereto, shall survive the
Merger. The terms and conditions set forth in Sections 10.3, 11.4, 11.5 and
11.6 hereof, as well as this Section 11.3, shall survive any termination of this
Agreement.
SECTION 11.4 NO THIRD PARTY RIGHTS. Except as otherwise expressly
provided in this Agreement, nothing herein expressed or implied is intended, nor
shall be construed, to confer upon or give any person, firm or corporation,
other than VSI, Newco and the Company and their respective security holders, any
rights or remedies under or by reason of this Agreement.
SECTION 11.5 CONFIDENTIALITY. VSI and the Company shall honor the
confidentiality agreements previously delivered by each such party to the other
with respect to matters pertaining to the Merger.
SECTION 11.6 EXPENSES. Each party hereto will bear all expenses incurred
by it in connection with this Agreement and the transactions contemplated
hereby.
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SECTION 11.7 NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand or when mailed by
registered or certified mail, postage prepaid, or when given by telex or
facsimile transmission (promptly confirmed in writing), as follows:
(a) If to the Company:
Marquest Medical Products, Inc.
11039 East Lansing Circle
Englewood, Colorado 80112
Attn: William Thompson
Telephone: 800-525-1882, ext. 404
Telecopy: 303-792-5028
with a copy to:
Thomas Moore, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
633 Seventeenth Street
Suite 2800
Denver, Colorado 80202
Telephone: 303-291-2644
Telecopy: 303-297-0422
or to such other person as the Company shall designate in writing, such writing
to be delivered to VSI in the manner provided in this Section 11.7;
(b) If to VSI or Newco:
Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Attn: Mr. Anthony J. Dimun
Telephone: 201-790-1330, ext. 371
Telecopy: 201-790-3842
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with a copy to:
Jay Sturm, Esq.
General Counsel
Vital Signs, Inc.
20 Campus Road
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Totowa, New Jersey 07512
Telephone: 201-790-1330, ext. 372
Telecopy: 201-790-3842
and with a copy to:
Peter H. Ehrenberg, Esq.
Lowenstein, Sandler, Kohl,
Fisher & Boylan, P.C.
65 Livingston Avenue
Roseland, New Jersey 07068
Telephone: 201-992-8003
Telecopy: 201-992-5820
or to such other person as VSI shall designate in writing, such writing to be
delivered to the Company in the manner provided in this Section 11.7.
SECTION 11.8 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties
hereto; provided, however, that Newco may assign this Agreement and its rights,
interests and obligations hereunder to another directly or indirectly wholly-
owned subsidiary of VSI without the consent of the Company.
SECTION 11.9 GOVERNING LAW. This Agreement and the legal relations
between the parties hereto shall be governed by and construed in accordance with
the laws of the State of New Jersey.
SECTION 11.10 COUNTERPARTS. This Agreement may be executed simultaneously
in two or more counterparts and by the different parties hereto on separate
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 11.11 HEADINGS AND REFERENCES. The headings of the Sections and
Articles of this Agreement are inserted for convenience of reference only and
shall not constitute a part hereof. All references herein to Sections and
Articles are to sections and articles of this Agreement, unless otherwise
indicated.
SECTION 11.12 ENTIRE AGREEMENT. This Agreement (including the Disclosure
Letter and the documents and agreements referred to herein, all of which form a
part hereof), any other document executed by the parties hereto concurrently
herewith, the confidentiality agreements delivered by VSI and the Company to
each other and any other document signed by the parties
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hereto referencing this Section 11.12 contain the entire understanding of the
parties hereto in respect of the subject matter contained herein and supersede
all prior agreements and understandings between the parties with respect to such
subject matter.
SECTION 11.13 PUBLICITY. Except as otherwise required by law or the rules
of the Nasdaq Stock Market, so long as this Agreement is in effect, neither VSI
nor the Company shall issue or cause the publication of any press release with
respect to the transactions contemplated by this Agreement without the consent
of the other parties hereto, which consent shall not be unreasonably withheld or
delayed.
SECTION 11.14 GENERAL INTERPRETIVE PRINCIPLES. For purposes of this
Agreement, except as otherwise expressly provided or unless the context
otherwise requires:
11.14.1 the terms defined in this Agreement have the meanings
assigned to them in this Agreement and include the plural as well as the
singular, and the use of any gender herein shall be deemed to include the
other genders;
11.14.2 accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles;
11.14.3 a reference to a Section or Article without further reference
to Subsections within such Section or without further reference to
Subsections or Sections within such Article shall constitute a reference to
all Subsections within such Section or all Sections and Subsections within
such Article unless the context otherwise expressly indicates;
11.14.4 the words "herein", "hereof", "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
provision;
11.14.5 the term "include" or "including" shall mean without
limitation by reason of enumeration; and
11.14.6 the parties hereto do not intend for this Agreement or any
other document prepared in connection with the Merger to be construed
against the party that drafted this Agreement or such other document merely
by virtue of the fact that such party drafted this Agreement or such other
document.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first written above.
VITAL SIGNS, INC.
By:
-----------------------------
Anthony J. Dimun,
Executive Vice President
VSI ACQUISITION CORPORATION
By:
-----------------------------
Anthony J. Dimun,
Executive Vice President
MARQUEST MEDICAL PRODUCTS, INC.
By:
-----------------------------
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ANNEX II
AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO THAT CERTAIN AGREEMENT AND PLAN OF MERGER DATED AS OF
JUNE 4, 1997 AND BY AND AMONG VITAL SIGNS, INC., VSI ACQUISITION CORPORATION AND
MARQUEST MEDICAL PRODUCTS, INC., DATED AS OF MARCH 14, 1997.
IN CONSIDERATION OF GOOD AND VALUABLE CONSIDERATION DULY ACKNOWLEDGED, THE
PARTIES AGREE AS FOLLOWS:
PARAGRAPH 10.1.4 IS HEREBY AMENDED TO CHANGE THE DATE THEREIN STATED
OF JULY 31, 1997 TO AUGUST 29, 1997.
IN WITNESS WHEREOF THE PARTIES HAVE CAUSED THIS AMENDMENT TO BE DULY EXECUTED AS
OF THE DATE AND YEAR FIRST WRITTEN ABOVE.
VITAL SIGNS, INC.
BY: /S/ ANTHONY J. DIMUN
---------------------------------------
ANTHONY J. DIMUN
EXECUTIVE VICE PRESIDENT
VSI ACQUISITION CORPORATION
BY: /S/ ANTHONY J. DIMUN
---------------------------------------
ANTHONY J. DIMUN
EXECUTIVE VICE PRESIDENT
MARQUEST MEDICAL PRODUCTS, INC.
BY: /S/ WILLIAM J. THOMPSON
-------------------------------------
WILLIAM J. THOMPSON
PRESIDENT
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ANNEX III
March 14, 1997
Board of Directors
Marquest Medical Products, Inc.
11039 East Lansing Circle
Englewood, CO 80112
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Marquest Medical Products, Inc.
("Marquest") of the consideration to be received by such stockholders pursuant
to the terms and subject to the conditions set forth in the Agreement and Plan
of Merger dated March 14, 1997 (the "Agreement"), by and among Vital Signs, Inc.
("Vital Signs"), Vital Signs Acquisition Corporation ("Merger Sub") a wholly
owned subsidiary of Vital Signs and Marquest. As more fully described in the
Agreement: (i) Marquest will be merged with and into Merger Sub (the "Merger");
and (ii) each outstanding share of the common stock, no par value, of Marquest
(the "Marquest Common Stock") will be exchanged for consideration of $.797 per
share in cash.
In arriving at our opinion: (i) we reviewed the Agreement and the specific
terms of the Merger, (ii) we held discussions with certain senior officers and
Directors of Marquest concerning the businesses, operations, assets, financial
condition and prospects of Marquest; (iii) we examined certain publicly
available business and financial information relating to Marquest; (iv) we
reviewed the financial terms of the Merger as set forth in the Agreement and
considered them in relation to, among other things, certain estimates of the
value of a share of Marquest Common Stock; (v) we examined the financial terms
of certain other recent merger transactions that we deemed relevant; (vi) we
analyzed the trading history of Marquest's Common Stock over the past two years
and a comparison of that trading history with the trading history of other
companies that we deemed relevant; (vii) we analyzed certain financial, market
and other publicly available information relating to the businesses of other
companies, whose operations we deemed comparable to those of Marquest; and
(viii) we have reviewed and relied upon certain financial forecasts and other
information reflecting the current estimates and judgements of management as to
the future performance of the Company. In addition to the foregoing, we
conducted such other analyses and examinations and considered such other
financial, economic and market criteria as we deemed necessary to arrive at our
opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to, or otherwise reviewed by or
discussed with, us. With respect to financial forecasts relating to Marquest,
we have assumed that such forecasts and other information were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management as to the future financial performance of Marquest.
Nevertheless, financial forecasts are subject to risks and uncertainties which
could cause actual results to differ materially from those forecasted. We have
not made, or been provided with, an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Marquest. We were not
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of Marquest, and we were not asked to consider, and
our opinion does not address, the relative merits of the Merger as compared to
any alternative business strategies that might exist for Marquest, or the effect
of any other transaction in which Marquest might engage. Our opinion is
necessarily based upon information available to us, and
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financial, stock market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
Hanifen, Imhoff Inc. ("Hanifen"), as part of its investment banking services, is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. In the ordinary course of our business, we may actively trade the
securities of Marquest for our own account or for the accounts of our customers
and, accordingly, may at any time hold long or short positions in such
securities. For our services in rendering this opinion, Marquest will pay us a
fee and indemnify us against certain liabilities; a portion of the fee is
contingent upon consummation of the Merger.
The opinion expressed herein is provided for the use of the Board of Directors
of Marquest in its evaluation of the proposed Merger and whether to submit the
Merger as proposed to the shareholders, and our opinion is not intended to be
and does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed Merger. Our opinion may neither be
published or otherwise used or referred to, nor shall any public reference to
Hanifen be made, without our prior written consent, except that it may appear in
the Proxy Statement pursuant to which Marquest seeks shareholder approval of the
Merger.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the consideration to be received in the
Merger is fair, from a financial point of view, to the holders of Marquest
Common Stock.
Very truly yours,
HANIFEN, IMHOFF INC.
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<PAGE>
ANNEX IV
COLORADO BUSINESS CORPORATION ACT - DISSENTERS' RIGHTS PROVISIONS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
SECTION 7-113-101. DEFINITIONS
For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares held in
a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring domestic or foreign
corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 7-113-102 and who exercises that right at the
time and in the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action except to the extent that exclusion would
be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at the legal rate as
specified in section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
that are registered in the name of a nominee to the extent such owner is
recognized by the corporation as the shareholder as provided in section
7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
SECTION 7-113-102. RIGHT TO DISSENT
(1) A shareholder, whether or not entitled to vote, is entitled to dissent
and obtain payment of the fair value of the shareholder's shares in the event of
any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
if:
(I) Approval by the shareholders of that corporation is required for the
merger by section 7-111-103 or 7-111-104 or by the articles of incorporation; or
(II) The corporation is a subsidiary that is merged with its parent
corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired;
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(c) Consummation of a sale, lease, exchange, or other disposition of all,
or substantially all, of the property of the corporation for which a shareholder
vote is required under section 7-112-102(l); and
(d) Consummation of a sale, lease, exchange, or other disposition of all,
or substantially all, of the property of an entity controlled by the corporation
if the shareholders of the corporation were entitled to vote upon the consent of
the corporation to the disposition pursuant to section 7-112-102(2).
(1.3) A shareholder is not entitled to dissent and obtain payment, under
subsection (1) of this section, of the fair value of the shares of any class or
series of shares which either were listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934", as amended,(1)
or on the national market system of the national association of securities
dealers automated quotation system, or were held of record by more than two
thousand shareholders, at the time of:
(a) The record date fixed under section 7-107-107 to determine the
shareholders entitled to receive notice of the shareholders' meeting at which
the corporate action is submitted to a vote;
(b) The record date fixed under section 7-107-104 to determine
shareholders entitled to sign writings consenting to the corporate action; or
(c) The effective date of the corporate action if the corporate action is
authorized other than by a vote of shareholders.
(1.8) The limitation set forth in subsection (1.3) of this section shall
not apply if the shareholder will receive for the shareholder's shares, pursuant
to the corporate action, anything except:
(a) Shares of the corporation surviving the consummation of the plan of
merger or share exchanges;
(b) Shares of any other corporation which at the effective date of the
plan of merger or share exchange either will be listed on a national securities
exchange registered under the federal "Securities Exchange Act of 1934", as
amended, or on the national market system of the national association of
securities dealers automated quotation system, or will be held of record by more
than two thousand shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares or cash in lieu of
fractional shares.
(2) Deleted by Laws 1996, H.B.96-1285, Section 30, eff. June 1, 1996.
(2.5) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's shares in the
event of a reverse split that reduces the number of shares owned by the
shareholder to a fraction of a share or to scrip if the fractional share or
scrip so created is to be acquired for cash or the scrip is to be voided under
section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.
- --------------------------------
(1)15 U.S.C.A. Section 78a et seq.
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<PAGE>
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
SECTION 7-113-103. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and causes the corporation to receive written notice which states such
dissent and the name, address, and federal taxpayer identification number, if
any, of each person on whose behalf the record shareholder asserts dissenters'
rights. The rights of a record shareholder under this subsection (1) are
determined as if the shares as to which the record shareholder dissents and the
other shares of the record shareholder were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the
shares held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to receive the
record shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares
beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents
with respect to the shares held by any one or more beneficial shareholders, each
such beneficial shareholder must certify to the corporation that the beneficial
shareholder and the record shareholder or record shareholders of all shares
owned beneficially by the beneficial shareholder have asserted, or will timely
assert, dissenters' rights as to all such shares as to which there is no
limitation on the ability to exercise dissenters' rights. Any such requirement
shall be stated in the dissenters' notice given pursuant to section 7-113-203.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
SECTION 7-113-201. NOTICE OF DISSENTERS' RIGHTS
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting, the notice
of the meeting shall be given to all shareholders, whether or not entitled to
vote. The notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and shall be accompanied by a copy of this
article and the materials, if any, that, under articles 101 to 117 of this
title, are required to be given to shareholders entitled to vote on the proposed
action at the meeting. Failure to give notice as provided by this subsection
(1) shall not affect any action taken at the shareholders' meeting for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's share under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202(1).
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104, any written or oral solicitation of a shareholder to execute
a writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection
(2) shall not affect any
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action taken pursuant to section 7-107-104 for which the notice was to have been
given, but any shareholder who was entitled to dissent but who was not given
such notice shall not be precluded from demanding payment for the shareholder's
shares under this article by reason of the shareholder's failure to comply with
the provisions of section 7-113-202(2).
SECTION 7-113-202. NOTICE OF INTENT TO DEMAND PAYMENT
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting and if
notice of dissenters' rights has been given to such shareholder in connection
with the action pursuant to section 7-113-201(1), a shareholder who wishes to
assert dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is taken, written
notice of the shareholder's intention to demand payment for the shareholder's
shares if the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed corporate action.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104 and if notice of dissenters' rights has been given to such
shareholder in connection with the action pursuant to section 7-113-201(2) a
shareholder who wishes to assert dissenters' rights shall not execute a writing
consenting to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection (1)
or (2) of this section is not entitled to demand payment for the shareholder's
shares under this article.
SECTION 7-113-203. DISSENTERS' NOTICE
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized, the corporation shall give a written
dissenters' notice to all shareholders who are entitled to demand payment for
their shares under this article.
(2) The dissenters' notice required by subsection (1) of this section
shall be given no later than ten days after the effective date of the corporate
action creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state the effective
date or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive payment demands
and the address of a place where certificates for certificated shares must be
deposited;
(c) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request a
dissenter to state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the payment demand
and certificates for certificated shares, which date shall not be less than
thirty days after the date the notice required by subsection (1) of this section
is given;
(f) State the requirement contemplated in section 7-113-103(3), if such
requirement is imposed; and
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<PAGE>
(g) Be accompanied by a copy of this article.
SECTION 7-113-204. PROCEDURE TO DEMAND PAYMENT
(1) A shareholder who is given a dissenters' notice pursuant to section
7-113-203 and who wishes to assert dissenters' rights shall, in accordance with
the terms of the dissenters' notice:
(a) Cause the corporation to receive a payment demand, which may be the
payment demand form contemplated in section 7-113-203(2)(d), duly completed, or
may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated shares.
(2) A shareholder who demands payment in accordance with
subsection (1) of this section retains all rights of a shareholder, except the
right to transfer the shares, until the effective date of the proposed corporate
action giving rise to the shareholder's exercise of dissenters' rights and has
only the right to receive payment for the shares after the effective date of
such corporate action.
(3) Except as provided in section 7-113-207 or 7-113-209(1)(b), the demand
for payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the
shareholder's share certificates as required by the date or dates set in the
dissenters' notice is not entitled to payment for the shares under this article.
SECTION 7-113-205. UNCERTIFICATED SHARES
(1) Upon receipt of a demand for payment under section 7-113-204 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
SECTION 7-113-206. PAYMENT
(1) Except as provided in section 7-113-208, upon the effective date of
the corporate action creating dissenters' rights under section 7-113-102 or upon
receipt of a payment demand pursuant to section 7-113-204, whichever is later,
the corporation shall pay each dissenter who complied with section 7-113-204, at
the address stated in the payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, the
amount the corporation estimates to be the fair value of the dissenter's shares,
plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall be
accompanied by:
(a) The corporation's balance sheet as of the end of its most recent
fiscal year or, if that is not available, the corporation's balance sheet as of
the end of a fiscal year ending not more than sixteen months before the date of
payment, an income statement for that year, and, if the corporation customarily
provides such statements to shareholders, a statement of changes in
shareholders' equity for that year and a statement of cash flow for that year,
which balance sheet and statements shall have been audited if the corporation
customarily provides audited financial statements to shareholders, as well as
the latest available financial statements, if any, for the interim or full-year
period, which financial statements need not be audited;
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<PAGE>
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under section
7-113-209; and
(e) A copy of this article.
SECTION 7-113-207. FAILURE TO TAKE ACTION
(1) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 does not occur within sixty days after the date
set by the corporation by which the corporation must receive the payment demand
as provided in section 7-113-203, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 occurs more than sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, then the corporation shall send a new dissenters'
notice, as provided in section 7-113-203, and the provisions of sections 7-113-
204 to 7-113-209 shall again be applicable.
SECTION 7-113-208. SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER
ANNOUNCEMENT OF PROPOSED CORPORATE ACTION
(1) The corporation may, in or with the dissenters' notice given pursuant
to section 7-113-203, state the date of the first announcement to news media or
to shareholders of the terms of the proposed corporate action creating
dissenters' rights under section 7-113-102 and state that the dissenter shall
certify in writing, in or with the dissenter's payment demand under section
7-113-204, whether or not the dissenter (or the person on whose behalf
dissenters' rights are asserted) acquired beneficial ownership of the shares
before that date. With respect to any dissenter who does not so certify in
writing, in or with the payment demand, that the dissenter or the person on
whose behalf the dissenter asserts dissenters' rights acquired beneficial
ownership of the shares before such date, the corporation may, in lieu of making
the payment provided in section 7-113-206, offer to make such payment if the
dissenter agrees to accept it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206(2).
SECTION 7-113-209. PROCEDURE IF DISSENTER IS DISSATISFIED WITH PAYMENT OR OFFER
(1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under section 7-113-206 or
offered under section 7-113-208 is less than the fair value of the shares or
that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206 within
sixty days after the date set by the corporation by which the corporation must
receive the payment demand; or
(c) The corporation does not return the deposited certificates or release
the transfer restrictions imposed on uncertificated shares as required by
section 7-113-207(l).
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<PAGE>
(2) A dissenter waives the right to demand payment under this section
unless the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
PART 3. JUDICIAL APPRAISAL OF SHARES
SECTION 7-113-301. COURT ACTION
(1) If a demand for payment under section 7-113-209 remains unresolved,
the corporation may, within sixty days after receiving the payment demand,
commence a proceeding and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the
proceeding within the sixty-day period, it shall pay to each dissenter whose
demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in subsection
(1) of this section in the district court of the county in this state where the
corporation's principal office is located or, if the corporation has no
principal office in this state, in the district court of the county in which its
registered office is located. If the corporation is a foreign corporation
without a registered office, it shall commence the proceeding in the county
where the registered office of the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unresolved parties to the proceeding commenced
under subsection (2) of this section as in an action against their shares, and
all parties shall be served with a copy of the petition. Service on each
dissenter shall be by registered or certified mail, to the address stated in
such dissenter's payment demand, or if no such address is stated in the payment
demand, at the address shown on the corporation's current record of shareholders
for the record shareholder holding the dissenter's shares, or as provided by
law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to such order. The
parties to the proceeding are entitled to the same discovery rights as parties
in other civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
subsection (2) of this section is entitled to judgment for the amount, if any,
by which the court finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by the corporation, or for the fair value,
plus interest, of the dissenter's shares for which the corporation elected to
withhold payment under section 7-113-208.
SECTION 7-113-302. COURT COSTS AND COUNSEL FEES
(1) The court in an appraisal proceeding commenced under section 7-113-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation; except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if the court
finds the corporation did not substantially comply with the requirements of part
2 of this article; or
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(b) Against either the corporation or one or more dissenters, in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to said counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefitted.
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ANNEX V
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED MARCH 29, 1997
V-1
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 29, 1997 Commission File No. 0-11484
-----------------------
MARQUEST MEDICAL PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
Colorado 84-0785259
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11039 EAST LANSING CIRCLE, ENGLEWOOD, CO 80112
(Address and zip code of principal executive offices)
(303) 790-4835
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
Based on the last reported sales price of $0.75 on May 30, 1997, the
aggregate market value of the voting stock held by non affiliates of the
registrant was $3,527,215.
The number of shares outstanding of the registrant's common stock, exclusive
of treasury shares, was 14,307,729 on May 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
Page 1 of 58
<PAGE>
TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 10
4. Submission of Matters to a Vote of Shareholders. . . . . . . . . . 10
Executive Officers of the Registrant . . . . . . . . . . . . . . . 11
PART II
5. Market for the Registrant's Common Stock and Related
Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . . 11
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 12
8. Consolidated Financial Statements and Supplementary Data . . . . . 19
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . . 47
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . 47
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 48
12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
13. Certain Relationships and Related Transactions . . . . . . . . . . 54
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 55
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
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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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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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<PAGE>
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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As of May 30, 1997, the Company had 445 holders of record of its Common
Stock. It is estimated that the total number of holders of the Common Stock
is approximately 3,000.
The Company has not paid dividends on its Common Stock in the last six fiscal
years. Under a Term Loan Agreement dated June 30, 1994, between the Company
and Colorado National Bank and a Credit and Security Agreement dated November 5,
1996 between the Company and Norwest Business Credit, Inc., the Company may
not, without prior written consent of the lenders, pay or declare any
dividends on its Common Stock. The Company does not anticipate payment of
dividends for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA:
All amounts in thousands of dollars except per share amounts.
<TABLE>
Fiscal Fiscal Fiscal Nine Three Fiscal
Year Year Year Months Months Year
Ended Ended Ended Ended Ended Ended
March 29, March 30, April 1, April 2, July 3, April 3,
1997 1996 1995 1994 1993 1993
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $22,045 $22,443 $20,576 $17,139 $ 5,327 $ 21,935
Net loss from continuing
operations before extraordinary
item (473) (60) (3,450) (2,312) (1,042) (18,542)
Net loss (473) (60) (3,450) (2,030) (336) (18,338)
LOSS PER COMMON SHARE:
Continuing operations before
extraordinary item (0.03) (0.01) (0.46) (0.51) (0.23) (4.17)
Net loss (0.03) (0.01) (0.46) (0.45) (0.07) (4.12)
Total Assets 13,424 15,393 13,992 16,929 18,366 21,007
Long-Term Obligations 4,600 4,990 5,961 7,659 6,745 0
Cash Dividend Declared Per
Common Share 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
Effective July 3, 1993, the Company effected a quasi-reorganization as
discussed in Note 12 to the Consolidated Financial Statements. The Company
has segregated its Consolidated Statements of Operations into the three-month
period prior to and the nine-month period subsequent to the
quasi-reorganization.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
MERGER
On March 14, 1997, the Company signed an Agreement and Plan of Merger
("Merger Agreement") between VSI; VSI Acquisition Corporation ("Newco"), a
wholly-owned subsidiary of VSI; and the Company, providing for the merger of
Newco with the Company, with the Company surviving the merger as a
wholly-owned subsidiary of VSI. Upon the effective date of the merger, all
of the Company's common stock will be converted into the right to receive
$0.797 per share in cash.
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<PAGE>
DEALER AGREEMENT. Simultaneous with the execution of the Merger Agreement,
the Company and VSI entered into a Dealer Agreement whereby VSI is authorized
to sell the Company's products for a period of two years. The Company
provided 28 of its 29 existing domestic specialty dealers with notices of
termination of their dealer agreements which, as a general matter, allow for
termination on 30 to 90 days notice. The Dealer Agreement may be terminated
by the Company if VSI does not meet certain specified sales quotas after June
30, 1997. Since providing its domestic specialty dealers with notices of
termination, the Company has negotiated new arrangements with five of those
dealers which provide that those dealers may continue to distribute Company
products at reduced margins.
Two of the Company's terminated dealers have commenced lawsuits against the
Company and VSI alleging, among other things, that the termination of its
dealer agreement was unlawful and that VSI is using confidential information
of dealers in the sale of the Company's products. The Company believes that
its position in both of these matters is meritorious, but is unable to
predict the outcome of either lawsuit or whether other lawsuits will be filed
by other dealers as a result of their termination.
PURCHASE OF ABG ASSETS AND COVENANTS NOT TO COMPETE. As part of the
investment made in the Company by Scherer Healthcare in June 1993, Scherer
Healthcare acquired title to the Company's Arterial Blood Gas ("ABG") product
line which the Company leases from Scherer Healthcare. The Company has an
option to repurchase the ABG product line from Scherer Healthcare at a
purchase price equal to $4,500,000 plus $22,500 per month during the period
from June 13, 1993 through the date of repurchase. Pursuant to an Inducement
Agreement between VSI and Scherer Healthcare (the "Scherer Healthcare
Inducement Agreement"), VSI has agreed to purchase the ABG product line from
Scherer Healthcare for a purchase price equal to the purchase price under the
Company's repurchase option. If the merger occurs on July 31, 1997, the
purchase price of the ABG product line would be $5,625,000.
Pursuant to the Scherer Healthcare Inducement Agreement, Scherer Healthcare
is obligated, at the time of the merger, to enter into a covenant not to
compete pursuant to which it agrees it will not engage in the business of
manufacturing or selling ABG products for a period of three years following
the effective date of the merger. In consideration of this covenant not to
compete, VSI has agreed to pay Scherer Healthcare an amount equal to the
difference between $5,860,000 and the purchase price of the ABG product line.
If the merger occurs on July 31, 1997, Scherer Healthcare will be paid
$235,000 for the covenant not to compete.
Robert P. Scherer, Jr., the Company's Chairman of the Board of Directors and
Chief Executive Officer, is the beneficial owner of or has voting authority
over 2,061,856 shares of the Company's common stock. Mr. Scherer also holds
a promissory note of the Company in the principal amount of $700,000 which is
convertible into the Company's common stock at a rate of $0.70 per share.
Mr. Scherer has agreed to convert the note prior to the merger into 1,000,000
shares of the Company's common stock. In addition to his ownership of the
Company's common stock, Mr. Scherer has voting authority over 61.1% of the
outstanding common stock of Scherer Healthcare.
Pursuant to an Inducement Agreement entered into between VSI and Mr. Scherer
(the "RPS Inducement Agreement"), Mr. Scherer has agreed to vote his shares
of Scherer Healthcare common stock in favor of the merger. Mr. Scherer has
also agreed to vote all of his shares of the Company's common stock in favor
of the merger. Pursuant to the RPS Inducement Agreement, Mr. Scherer is
required to enter into a covenant not to compete pursuant to which he agrees
that for a period of three years following the merger he will not engage in
the business of manufacturing or selling ABG products. In consideration of
this covenant, VSI has agreed to pay Mr. Scherer $140,000.
CONDITIONS TO CLOSING. The Merger Agreement contains a number of conditions
to closing which must be satisfied or waived prior to consummation of the
merger. These conditions include, among other conditions, the requirement
that the merger be approved by the shareholders of the Company and Scherer
Healthcare, the requirement that no material litigation is pending against
the Company or its business, and the requirement that no adverse regulatory
action has been taken against the Company. The Company believes that the
conditions to closing can be satisfied and that the closing will take place
in late July 1997.
COVENANTS OF THE MERGER AGREEMENT. Pursuant to the Merger Agreement, the
Company has agreed that, during the period from March 14, 1997 to the
effective time of the merger, except as permitted in writing by VSI, the
Company will not, among other things, (a) amend its Articles of Incorporation
or Bylaws, (b) issue, sell, deliver, grant or declare any stock dividend or
any other distribution with respect to the Company's common stock except that
the Company
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<PAGE>
may issue common stock pursuant to certain options, warrants or a convertible
note exercisable or convertible in accordance with the terms of the
applicable agreements and outstanding as of March 14, 1997, (c) mortgage or
pledge any assets except in the ordinary course of business, (d) borrow or
agree to borrow any funds except in the ordinary course of business and
pursuant to the Company's existing credit facilities up to certain amounts,
(e) incur any obligation or liability, cancel any material debts of third
parties, lease, sell, transfer or grant any preferential rights to lease or
acquire any of its material assets or substantively amend or terminate any
material contract or agreement except in the ordinary course of business, (f)
adopt, materially amend or terminate any employee benefit plan or materially
increase compensation or other benefits payable to the Company's employees,
(g) acquire any other business entity, (h) solicit, encourage or authorize
any competing inquiry, proposal, offer or possible offer from a third party
relating to a change in control or ownership of the Company, (j) enter into
any material licensing or marketing arrangement or other material contract
with any party other than VSI, and (k) settle any pending litigation in a
manner that is materially adverse to the Company or commence any material
litigation.
TERMINATION OF THE MERGER. The Merger Agreement may be terminated and the
merger may be abandoned before the effective time of the merger (a) by mutual
written consent of VSI, Newco and the Company or (b) by VSI or the Company if
(i) the Company's shareholders fail to approve the merger at the special
meeting of shareholders or (ii) the shareholders of Scherer Healthcare fail
to approve the sale of the stock of the Company. In addition, VSI may
terminate the Merger Agreement if (a) there has been a material
misrepresentation or breach by the Company of any of its representations or
warranties in the Merger Agreement, (b) the Company's Special Treatment Sales
(defined below) during the period from December 29, 1996 through the date
seven days prior to the Closing (the "Pre-Closing Date") are less than eighty
percent of the Company's Special Treatment Sales during the period from the
first day of the Company's fiscal quarter commencing in December 1995 through
the date one year prior to the Pre-Closing Date, (c) there has been any
misrepresentation by Scherer Healthcare or Mr. Scherer in any of the
representations or warranties set forth in the Inducement Agreements, or (d)
there has been any material failure by Scherer Healthcare or Mr. Scherer to
comply with their respective obligations under the Inducement Agreements.
Special Treatment Sales are all of the Company's sales other than sales made
through the Company's U.S. (including Puerto Rico) dealers and sales made
through distributors of the Company's medical-surgical products.
Either the Company or VSI, at their discretion, may terminate the Merger
Agreement if the effective date of the merger has not occurred by August 29,
1997, except that a party whose breach of the Merger Agreement has caused
such a delay in the consummation of the merger will not be entitled to
terminate the Merger Agreement. If the Company terminates the Merger
Agreement as a result of a breach of any material covenants by VSI, the
Company will be entitled to $800,000 as damages.
If the Merger Agreement is terminated by VSI or the Company because (a) an
offer is made, including a Purchase Event (defined below), (b) a claim is
made that such offer could result in greater value to the Company's
shareholders than the value to be received from VSI, and (c) after such offer
is known to the Company, the Company's shareholders do not approve the
merger, the shareholders of Scherer Healthcare do not approve the sale of the
Company's common stock, or the Company breaches any of its obligations under
the merger agreement, and within 24 months after the termination of the
Merger Agreement, a Purchase Event occurs, the Company will pay to VSI a cash
fee of $1,500,000. A Purchase Event means any of the following events: (a)
without VSI's written consent, the Company announces an intention to enter
into an agreement with a party other than VSI to (i) merge, (ii) dispose of
25% or more of the Company's assets or (iii) issue, sell or dispose of
securities representing 25% or more of the voting power of the Company, or
(b) any person or group other than Scherer Healthcare or VSI or their
affiliates acquires 25% or more of the voting power of the Company.
FOOD AND DRUG ADMINISTRATION
The impact of the United States Food and Drug Administration's ("FDA") action
against the Company in August 1991 has had a significant and pervasive effect
on the Company.
On August 8, 1991, the United States Attorney's Office for the District of
Colorado filed a complaint seeking an injunction against the Company and
three of its officers. The complaint alleged that the Company was
manufacturing products in violation of the FDA's Current Good Manufacturing
Practice Regulations ("GMP"). The complaint also alleged that certain of the
Company's products were misbranded and adulterated for violating other
relevant sections of
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<PAGE>
the Federal Food, Drug and Cosmetic Act. On October 1, 1991, the Company and
one of the named individual defendants entered into a five-year Consent
Decree. The two other individuals originally named in the complaint for
injunction were dismissed as defendants.
By letter dated October 8, 1991, the District Director of the FDA's Denver
district informed the Company that, pursuant to the Consent Decree of October 1,
1991, the Company's medical device manufacturing operations were not in
substantial compliance with GMP. The Consent Decree provided for suspension
of the Company's United States manufacturing and distribution operations until
the Company demonstrated it had adequate controls in place to ensure products
were consistently produced in substantial compliance with GMP regulations.
Based upon agreements with the FDA in November and December 1991, the Company
was allowed to recondition inventories of components, sub-assemblies and
finished products which were produced prior to the October 8th shut down.
This was done in close cooperation with the FDA by the use of higher sampling
levels and tightened acceptable quality limits. The Company's facilities
were reinspected by the FDA in December, 1991 and found to have adequate
processes in place to insure devices would be manufactured in compliance with
GMP. As a result of that inspection, on January 9, 1992, the Company was
given authorization to renew its operations, including production and
distribution of all products.
During Fiscal 1994, the FDA completed a routine inspection of the Company's
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with only two deficiency observations noted,
which were corrected; there were no inspections during Fiscal 1995.
During Fiscal 1996, the FDA again inspected the Company's operations for
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with three deficiency observations noted. The
Company responded to the observations, including providing specific
corrective action.
In May, 1996, the FDA concluded an inspection with six deficiency
observations noted. Many of the deficiencies noted refer to the lack of
training regarding assembly, testing and sampling. The Company took
corrective action, including retraining employees, and implementing other
changes in order to respond to the FDA's concerns. These changes and
corrective actions were presented to the FDA in detail in the submissions
made by the Company and the Company continues to work with the FDA to address
the issues raised. The Company was again inspected by the FDA during
September, 1996 and received a Form 483, Inspection Observations, containing
three alleged nonconformances with GMP. The Company responded to these
observations, including providing specific corrective action. Following the
September inspection, the Consent Decree expired October 1, 1996 and is of no
further force and effect.
RESULTS OF OPERATIONS
FISCAL 1997 VERSUS FISCAL 1996
SALES, COST OF SALES AND GROSS PROFIT: The Company's net sales decreased
approximately 2% to $22,045,000 from $22,443,000 in Fiscal 1996. The
decrease in net sales was primarily due to a decrease in sales of the
Company's medication delivery devices. Sales of these devices were down
approximately $800,000 in Fiscal 1997 compared to Fiscal 1996; the majority
of the decrease was attributable to one major customer who placed a large
sales order in Fiscal 1996 and who did not place an order in Fiscal 1997.
The decrease in the sales of medication delivery devices was partially offset
by an increase in sale of the Company's ABG products which increased
approximately $270,000 in Fiscal 1997 due to a contract signed with a major
customer in late Fiscal 1996 for these products.
The gross margin decreased from 32% to 30.4%. This decline in gross margin
was primarily the result of the decrease in net sales combined with the rework
of certain products. Rework is caused by supplier quality issues, defects in
molded products produced due to worn tools, and damage during assembly and
warehousing. The Company believes that the supplier quality and damage
issues have been corrected; however, molded product defects may recur because
of the condition of the molds. The Company has implemented a preventative
maintenance program, and increased inspections and operator training in the
Company's molding operation.
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<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
declined 19% due to two primary items. The Company leases a warehouse in
Nogales, Arizona which was formerly used by the Company until early Fiscal
1994 when it ceased operations in Mexico. The Company was able to sublease
two-thirds of the warehouse in December 1995 and the remaining portion of the
warehouse in September 1996. (See Note 6 to the Consolidated Financial
Statements.) Net lease expense decreased approximately $120,000. During
Fiscal 1996, the Company wrote off approximately $200,000 of certain expenses
associated with unsuccessful efforts to obtain financing. These expenses
were not incurred in Fiscal 1997.
OTHER INCOME AND EXPENSE: Other income decreased due to nonrecurring income
received in Fiscal 1996. The Company received $488,000 in royalty income in
the fourth quarter of fiscal 1996 related to the Company's ABG product line
patents. The royalty agreement expired during Fiscal 1996. Also in Fiscal
1996, the Company sold a 10% investment in a medical device company for a
gain of $200,000. Other expense has increased in Fiscal 1997 due to $265,000
of expense related to the proposed merger with VSI discussed above. These
expenses were for financial advisors and for investment banking, legal and
accounting services.
FISCAL 1996 VERSUS FISCAL 1995
SALES, COST OF SALES AND GROSS PROFIT: Sales increased 9% from $20,576,000
in Fiscal 1995 to $22,443,000 in Fiscal 1996. Sales in the first quarter of
Fiscal 1995 were low due to a decline in hospital census which the Company
believes was due to the uncertainties of healthcare reform. Also, many of
the Company's distributors purchased high levels of product during the fourth
quarter of Fiscal 1994, which depressed sales in the first quarter of Fiscal
1995. This did not occur in Fiscal 1996, and sales increased to previous
levels. In Fiscal 1996, the Company implemented a network of independent
manufacturer's representatives which supplemented the Company's sales force
and increased sales.
The Company's gross margin increased from 24% in Fiscal 1995 to 32% in Fiscal
1996. The Company has reduced manufacturing costs through reductions in
personnel, improved operational efficiencies and increased its vertical
integration of the manufacturing process. The gross margin improvement was
also due to increased manufacturing volume which improved overhead absorption.
In early Fiscal 1996, the Company began manufacturing a less expensive needle
sheath holder, converted to a less expensive pallet and obtained price
reductions from suppliers for cartons and plastic resins. Average production
labor headcount was reduced 9% in Fiscal 1996 compared to Fiscal 1995.
Layoffs were effective in the first quarter of Fiscal 1996 and the savings
achieved were partially offset by increased overtime.
Expense controls in manufacturing resulted in a reduction in overhead.
Factors influencing this reduction include not immediately replacing several
salaried positions which were vacant due to attrition, and limiting travel
and the use of temporary help. Depreciation expense was reduced
approximately $285,000 during Fiscal 1996 as fixed assets became fully
depreciated. Property taxes were decreased in Fiscal 1996 approximately
$73,000 as a result of a tax appeal with the county.
The absorption of overhead costs by the Company's molding operation was also
favorably impacted by the transfer of molding production from outside vendors
in the second and third quarters of Fiscal 1996 and the increase in
production volume.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
decreased 25% from $3,193,000 in Fiscal 1995 to $2,391,000 in Fiscal 1996 due
to reductions in personnel and a decrease in legal and litigation expenses.
Legal expense decreased approximately $100,000 in Fiscal 1996 primarily due
to the settlement of litigation with former officers and directors in May
1995. Also, an additional $300,000 was accrued during Fiscal 1995 for the
settlement of this litigation; the total settlement amount was $725,000 of
which $425,000 was accrued prior to Fiscal 1995.
OTHER INCOME: Other income increased primarily due to $488,000 in royalty
income received in the fourth quarter of Fiscal 1996 on the Company's patents
related to the ABG product line. The royalty agreement expired during Fiscal
1996. In Fiscal 1996, the Company sold its 10% investment in Seabrook
Medical Systems, Inc. at a gain of $200,000.
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<PAGE>
INCOME TAXES: In Fiscal 1996 the Company settled tax issues related to
audits by the Internal Revenue Service ("IRS") for fiscal years 1982-1988.
The Company recorded $697,000 of taxes and interest related to the settlement
of these tax issues during Fiscal 1996. The Company has negotiated a
repayment plan of monthly installments of $40,000 per month through
approximately September 1998.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES: Cash used in operations increased from $79,000 in
Fiscal 1996 to $1,178,000 in Fiscal 1997, primarily due to a decrease in
payables and accrued expenses. The decrease in payables and accrued expenses
is due to the payment in Fiscal 1997 of consulting and other costs related to
the financing transactions consummated in March 1996 discussed below and
payment of income taxes and legal settlements.
FINANCING AND LIQUIDITY: On June 30, 1994, the Company refinanced $1,300,000
of Douglas County Industrial Revenue Bonds (the "Bonds"), due on December 31,
1993, with a term loan from Colorado National Bank (the "Bank"), the same
bank holding the Bonds. During Fiscal 1996, the Company and the Bank
executed an amendment to the term loan agreement, whereby the Company made a
principal payment of $160,000 and shortened the term of the loan from July
31, 2004 to January 31, 2000 and the Bank released the Company's inventory
and accounts receivable as collateral for the loan. The loan will continue
to be amortized over its original term with a balloon payment on January 31,
2000.
During the third quarter of Fiscal 1996, Scherer Capital, a company
controlled by the largest shareholder of Scherer Healthcare, advanced the
Company $700,000 which was used for working capital purposes. In March 1996,
the Company and Scherer Capital refinanced this advance with long-term
convertible debt. The debt, which bears interest at 1-1/2% over prime, is
secured by inventory and equipment and is convertible at a rate of $.70 per
share. The debt agreement contemplated the possibility of additional
borrowings of $800,000. During Fiscal 1997, Scherer Capital transferred its
credit facility to Robert P. Scherer, Jr., the Company's Chairman of the
Board of Directors and Chief Executive Officer.
In March 1996, Scherer Capital invested $1,000,000 in the Company through the
purchase of 2,061,856 shares of common stock at a rate of $.485 per share.
Robert P. Scherer, Jr. has voting authority over the Company's stock
purchased by Scherer Capital either through beneficial ownership or as
trustee of a voting trust for shares owned by Mr. Scherer's adult children.
Also in March 1996, Scherer Healthcare converted a $1.8 million note of the
Company into common stock at a rate of $.70 per share. In a related
transaction, the Company accepted a proposal to exchange the accrued interest
on the note payable to Scherer Healthcare of $487,000 as well as management
fees owed to Scherer Healthcare of $376,000 for the Company's common stock at
a rate of $.70 per share.
In November 1996, the Company obtained a revolving line of credit from
Norwest Business Credit, Inc., ("Norwest") secured by trade accounts
receivable, inventory and equipment, with an interest rate of 2.25% over
Norwest's prime rate, expiring February 28, 1999. At March 29, 1997, the
interest rate is 10.75%. The maximum line of credit to be extended is 80% of
net eligible domestic accounts receivable plus 70% of eligible international
accounts receivable or $2,000,000, whichever is less. At March 29, 1997, the
Company had an available borrowing limit of approximately $1.4 million of
which $125,000 had been borrowed.
At March 29, 1997, the Company was not in compliance with a covenant
requiring a specified debt service coverage rate and a covenant that the
Company not incur an after tax loss greater than that specified. Norwest has
waived the requirement of compliance with these covenants effective as of
March 29, 1997, and the Company and Norwest have negotiated covenants
providing for a maximum net loss for the first four months of Fiscal 1998
(through July 1997) of $1,018,000 and a minimum net worth of $3,364,000 at
the end of July 1997 and each subsequent month end.
Simultaneous with the execution of the Merger Agreement with VSI, the Company
entered into a Dealer Agreement whereby VSI is authorized to sell the
Company's products for a period of two years. The Company provided 28 of its
29 existing domestic specialty dealers with notices of termination of their
dealer agreements which allow for
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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>
MARQUEST MEDICAL PRODUCTS, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 28, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF MARQUEST MEDICAL PRODUCTS, INC.
The undersigned shareholder of Marquest Medical Products, Inc., hereby appoints
Robert P. Scherer, Jr., and William J. Thompson, and each of them, as proxy or
proxies for the undersigned (the "Proxies"), each with full power of
substitution, to represent the undersigned and to vote all the shares of commons
stock, no par value, of Marquest Medical Products, Inc., a corporation
organized under the laws of the State of Colorado (the "Company"), which the
undersigned is entitled in any capacity to vote if personally present at the
special meeting (the "Special Meeting") of shareholders of the Company to be
held at the offices of LeBoeuf, Lamb, Greene & MacRae, LLP, Suite 2000, 633 17th
Street, Denver, Colorado 80202, at 10:00 a.m local time, on July 28, 1997, and
at any and all adjournments or postponements thereof, with respect to all
matters set forth in the Proxy Statement dated June __, 1997, and all
supplements and amendments thereto and, in their discretion, upon all matters
incident to the conduct of such Special Meeting and all matters presented at the
Special Meeting but which are not known to the Board of Directors of the Company
at the time of the solicitation of this proxy. The undersigned hereby revokes
any proxy or proxies heretofore given by the undersigned to vote at the Special
Meeting or any adjournment or postponement thereof.
THE BOARD RECOMMENDS A VOTE FOR PROPOSAL 1.
1. Proposal to approve the Agreement and Plan of Merger, dated as of March 14,
1997 (the "Merger Agreement"), by and among the Company, Vital Signs, Inc.,
a corporation organized under the laws of the State of New Jersey ("Vital
Signs"), and VSI Acquisition Corporation, a corporation organized under the
laws of the State of Colorado and a wholly-owned subsidiary of Vital Signs.
[ ] FOR [ ] ABSTAIN [ ] AGAINST
(continued, and to be signed and dated, on the other side)
<PAGE>
If properly executed, this proxy will be voted in accordance with instructions
appearing hereon and, at the discretion of the Proxies, as to any other matter
that may properly come before the Special Meeting. IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE APPROVAL OF THE MERGER AGREEMENT.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders and Proxy Statement (with all enclosures and attachments) dated
June __, 1997, relating to the Special Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE AS SOON AS POSSIBLE, EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING.
Date: , 1997
-------------------------------------
- ------------------------------------------------
- ------------------------------------------------
(Signature(s) of Holder(s))
(By:)
-------------------------------------------
(Please Print)
(Title:)
----------------------------------------
Please sign this proxy exactly as your name(s)
appears on this card. Joint owners should each
sign personally. An attorney, administrator,
trustee, executor, guardian or other person
signing in a representative capacity should
indicate such capacity. An authorized officer
signing on behalf of a corporation should
indicate the name of the corporation and such
officer's capacity. An authorized signatory for
a partnership should sign in partnership name and
indicate the authorized person's name and title.
I PLAN TO ATTEND THE SPECIAL MEETING: [ ] YES [ ] NO
