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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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 Section 240.14a-11(c) or Section
240.14a-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.
------------------------------------------------------------------------
(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
------------------------------------------------------------------------
/ / 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
[___________ ___], 1997, at [location]. The meeting will start at [_______]
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").
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 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.
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.
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Holders of record of Company Common Stock at the close of business on
[_________], 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
[_________], 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 [__________ __], 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
[________, __________ __], 1997, at 10:00 a.m., local time, at [LOCATION], 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 [_______ __], 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
[______________ __], 1997
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MARQUEST MEDICAL PRODUCTS, INC.
PROXY STATEMENT
[______________], 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 [_________ __], 1997 at 10:00 a.m., local time,
at [location] , Colorado, 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 (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 [_____________ __], 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 [______ __], 1997. In addition, Robert P. Scherer, Jr., Chairman of the
Board and Chief
<PAGE>
Executive 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.
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 [____________ ___], 1997.
2
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TABLE OF CONTENTS
SUMMARY ................................................................... 1
The Special Meeting .................................................. 1
Date, Time and Place ............................................ 1
Purpose of the Special Meeting .................................. 1
Quorum .......................................................... 1
Record Date; 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 ................................................ 4
Opinion of the Financial Advisor ................................ 5
Certain Federal Income Tax Consequences ......................... 5
Dissenters' Rights .............................................. 5
Sources and Amount of Funds ..................................... 5
Business of the Company .............................................. 6
Business of VSI and Newco ............................................ 6
Price Range of Company Common Stock and Dividends ............... 7
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY ....................... 8
THE MERGER ................................................................ 9
Related Transactions ................................................. 10
Distribution Agreement .......................................... 10
Payment of the Merger Consideration .................................. 11
Background of the Merger ............................................. 13
Reasons for the Merger ............................................... 16
Recommendations of the Company's Board of Directors .................. 17
Opinion of the Financial Advisor ..................................... 18
Analysis of Selected Publicly Traded Comparable Companies ....... 20
Analysis of Selected Comparable Transactions .................... 21
Discounted Cash Flow Analysis ................................... 21
Source and Amount of Funds ........................................... 22
Certain Federal Income Tax Consequences .............................. 22
Interests of Certain Persons in the Merger ........................... 24
Severance Benefits .............................................. 24
Early Vesting of Stock Options .................................. 25
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Director Compensation ........................................... 26
Scherer Healthcare .............................................. 26
Robert P. Scherer ............................................... 27
Regulatory Matters ................................................... 28
Antitrust Matters ............................................... 28
Other Governmental Approvals .................................... 28
Certain Terms of the Merger Agreement ................................ 28
General ......................................................... 29
Representations and Warranties of the Company ................... 29
Representations and Warranties of VSI ........................... 29
Certain Covenants of the Company ................................ 29
Certain Covenants of VSI ........................................ 31
Certain Other Agreements ........................................ 31
Conditions to Obligations of VSI and Newco ...................... 31
Conditions to Obligations of the Company ........................ 33
Termination ..................................................... 33
Dissenters' Rights ................................................... 36
BENEFICIAL OWNERSHIP OF SECURITIES ........................................ 39
Business of the Company .............................................. 40
Information Concerning VSI and Newco ................................. 40
INDEPENDENT ACCOUNTANTS ................................................... 41
AVAILABLE INFORMATION ..................................................... 41
ANNEXES
Annex I: Agreement and Plan of Merger, dated as of March 14, 1997, by and
among Marquest Medical Products, Inc., Vital Signs, Inc., and Vital Signs
Acquisition Corporation
Annex II: Fairness Opinion of Hanifen, Imhoff, Inc.
Annex III: Sections 7-113-101 through 7-113-302 of the Colorado Business
Corporation Act
Annex IV: The Company's Annual Report on Form 10-K for the fiscal year ended
March 30, 1996
ii
<PAGE>
Annex V: The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 28, 1996
iii
<PAGE>
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
[____________ ____], 1997, at 10:00 a.m., local time, at [location], Colorado.
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.
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
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[_______________ __], 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 [______ __],
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 has 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 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.
2
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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 the Merger Consideration, and the Company will become a
wholly-owned subsidiary of VSI. See "The Merger--Principal Effects of the
Merger."
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 distribution agreement, which was amended
on April [__], 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 "Distribution 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 $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 specialty dealers notice terminating its agreements with such dealers
at the end of the required notice period. 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 such dealer from violating the terms of its
dealer agreement with the Company has been denied. The Company believes that
its
3
<PAGE>
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 concluded that the Merger would provide a
greater return to the Shareholders than any of the other alternatives available
to the Company. Finally, the Company's Board considered the fact that,
although the per share price offered by VSI was below the market price of
Company Common Stock at the time the Merger was announced, the price 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
and 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. 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."
4
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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 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 $25 million. VSI has advised the Company that it will pay for
such obligations primarily from cash on hand.
5
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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.
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, together with 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."
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.
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QUARTERLY HIGH AND LOW SALES PRICES
HIGH LOW
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
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
1997
First Quarter 1-15/16 1-3/8
Second Quarter 1-3/4 11/16
Third Quarter 1-1/4 5/8
Fourth Quarter 1-5/16 19/32
- ------------------------------------------------------------------------------
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 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 never paid any cash dividends, 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
7
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The following table sets forth selected financial data of the Company as
of and for the nine months ended December 28, 1996 and December 30, 1995, and
as of and for each of the years in the five fiscal year period ended March 30,
1996. 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 30, 1996 attached hereto as Annex IV and the Company's Form 10-Q
for the fiscal quarters ended June 29, 1996, September 28, 1996, and
December 28, 1996 attached hereto as Annexes V, VI and VII, respectively. The
selected financial data for the nine months ended December 28, 1996 and
December 30, 1995 are unaudited but, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) necessary for the fair
presentation of the financial and operating data for such periods.
SELECTED FINANCIAL DATA
(Thousands of Dollars, Except Share and Per Share Amounts)
<TABLE>
NINE NINE FISCAL FISCAL NINE THREE FISCAL FISCAL
MONTHS MONTHS YEAR YEAR MONTHS MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 28, DEC. 30, MAR. 30, APR. 1, APR. 2, JULY 3, APR. 3, MAR. 28,
1996 1995 1996 1995 1994 1993 1993 1992
-------- -------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net Revenues $15,840 $16,216 $22,443 $20,576 $17,139 $ 5,327 $ 21,935 $ 30,294
Net Earnings (Loss) from
Continuing Operations before
Extraordinary Item (649) (637) (60) (3,450) (2,312) (1,042) (18,542) (6,078)
Net Earnings (Loss) (649) (637) (60) (3,450) (2,030) (336) (18,338) (10,100)
Earnings (Loss) per Common Share:
Continuing Operations
before Extraordinary Item (0.05) (0.08) (0.01) (0.46) (0.51) (0.23) (4.17) (1.41)
Net Earnings (Loss) (0.05) (0.08) (0.01) (0.46) (0.45) (0.07) (4.12) (2.34)
8
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BALANCE SHEET DATA:
Total Assets 13,743 14,153 15,393 13,992 16,929 18,366 21,007 40,529
Long-Term Obligations 4,662 6,242 4,990 5,961 7,659 6,745 -0- 1,589
Cash Dividend Declared
Per Common Share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
Effective July 3, 1993, the Company effected a quasi-reorganization.
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 the Merger Consideration in payment for each share of Company
Common Stock held by such Shareholder immediately prior to the Merger.
RELATED TRANSACTIONS
DISTRIBUTION AGREEMENT
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<PAGE>
Simultaneous with the execution of the Merger Agreement, the Company and
VSI entered into the Distribution 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 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 negotiated the Distribution 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.
The Distribution Agreement may be terminated by the Company if VSI does
not meet certain specified sales quotas after June 30, 1997. The Distribution
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 the dealer for 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 such dealer from violating the terms of its
dealer agreement with the Company has been denied. 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
$22,000 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 June 30, 1997, the purchase price for the ABG
Assets would be $5,602,000.
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
10
<PAGE>
occurs on June 30, 1997, it is expected that Scherer Healthcare will receive
$358,000 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 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
11
<PAGE>
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. 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
12
<PAGE>
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.
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 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 was 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.
13
<PAGE>
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.
Toward the end of fiscal year 1996, the Company received an inquiry by a
company outside the health care industry, which after several meetings and
discussions led to a formal expression of interest to acquire the Company. The
expression of interest was reviewed by the Company's Board and rejected as not
providing sufficient consideration to the Shareholders. 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 with respect to the proposed
structure of the transaction was reached at this meeting.
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,
14
<PAGE>
met with Terry Wall, Barry Wicker, Executive Vice President of Sales and
Marketing of VSI and 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, a preliminary understanding was reached with
respect to the terms of such a transaction.
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. 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 Distribution Agreement, the
SH Inducement Agreement and the RPS Inducement Agreement.
On March 12, 1997, VSI's Board approved the Merger Agreement.
On March 13, 1997, separate meetings of the Boards of Directors of the
Company and Scherer Healthcare were 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 on certain operational aspects
of the transaction, from Triad Partners on the financial terms of the
transaction, and from LeBoeuf, Lamb, Greene & MacRae, L.L.P. on 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. During
the meeting of the Scherer Healthcare Board, the Board heard a presentation by
a representative of Long Aldridge Norman LLP, counsel to Scherer Healthcare,
15
<PAGE>
as to certain legal aspects of the Merger and a presentation by Summit
Investment Corporation, the financial advisor to Scherer Healthcare, on the
fairness of the Scherer Healthcare transactions from a financial point of
view to the holders of Scherer Healthcare common stock.
Both the Company's Board and Scherer Healthcare's Board re-convened by
telephone on March 14, 1997, and unanimously approved the Merger subject to
receipt of fairness opinions from their respective financial advisors. Hanifen
delivered its written opinion to the Company on March 14, 1997, and Summit
Investment Corporation issued its oral fairness opinion to Scherer Healthcare
on March 14, 1997, and followed up with a written fairness opinion on March 17,
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.
16
<PAGE>
Finally, the Company's Board considered the fact that, although the per
share price offered by VSI was below the market price of Company Common Stock
at the time the Merger was announced, the price 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 and 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. 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, (ii) the significant structural change in the manner
in which medical devices are marketed and the effect that the change has had,
and will continue to have, on the Company's business and business prospects;
(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; (v) the 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 Distribution Agreement to minimize the impact that the
announcement would have on the Company; (vi) the fact that the Merger would be
taxable to Shareholders; (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
months. See "Background of the Merger" and "Reasons for the Merger."
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 reaching its
determination to approve the Merger and to recommend the approval of the Merger
by the Shareholders, the Company's Board did not assign any relative or
specific weights 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
17
<PAGE>
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."
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.
THE FULL TEXT OF THE HANIFEN OPINION, WHICH SETS FORTH ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED, LIMITATIONS ON, AND THE SCOPE OF THE
REVIEW BY, HANIFEN IN RENDERING THE HANIFEN OPINION, IS ATTACHED TO THIS PROXY
STATEMENT AS ANNEX II AND IS INCORPORATED BY REFERENCE HEREIN. THE HANIFEN
OPINION IS DIRECTED TO THE COMPANY'S BOARD OF DIRECTORS AND TO THE FAIRNESS OF
THE MERGER CONSIDERATION TO BE RECEIVED BY SHAREHOLDERS PURSUANT TO THE MERGER
FROM A FINANCIAL POINT OF VIEW, AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE
MERGER, NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW TO
VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE HANIFEN OPINION SET FORTH IN
THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE HANIFEN OPINION. SHAREHOLDERS ARE ENCOURAGED TO READ THE HANIFEN
OPINION IN ITS ENTIRETY.
In conducting its analysis and arriving at its opinion, Hanifen considered
such financial and other factors as it deemed appropriate under the
circumstances, including among others: (i) the terms and financial aspects of
the Merger; (ii) the historical and current markets for Company Common Stock
and for securities of certain companies believed by Hanifen to be comparable to
the Company; (iii) certain of the Company's operating and financial
information, including projections, analyses and estimates provided by
management relating to the Company's business and prospects; (iv) publicly
available financial data and stock market performance data of other public
companies which Hanifen deemed generally comparable to the Company; (v) the
financial terms of certain other recent merger transactions Hanifen deemed
relevant; (vi) the Merger
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Agreement and related exhibits and schedules thereto, all in substantially
final form; and (vii) the Company's Annual Reports on Form 10-K for the fiscal
years ended April 2, 1994, April 1, 1995 and March 30, 1996, and the Company's
Quarterly Reports on Form 10-Q for the fiscal quarters ended June 29, 1996,
September 28, 1996, and December 28, 1996. Hanifen also discussed with certain
senior officers and directors of the Company, the business and prospects of
the Company and undertook other reviews, analyses and inquiries relating to
the Company.
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
fairly presented 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 was reasonably
prepared on bases reasonably reflecting management's best, currently available
estimates and good faith judgment 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 judgments 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 judgment. Such conclusions involved significant elements of subjective
judgment and qualitative analysis. Among the analytical methodologies
employed was a review of premiums and implied multiples paid in certain other
recent business combinations deemed by Hanifen to be relevant and a review and
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. 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.
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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. Hanifen calculated, among other things, the following multiples for each
of the referenced companies based on public market prices as of March 11, 1997:
(i) the market equity value to the latest twelve months' net income and to 1997
estimated net income; (ii) the market equity value to the latest twelve months'
earnings before interest and taxes ("EBIT"); (iii) the market equity value to
the latest twelve months' revenues; (iv) the market equity value to book value;
(v) the net market capitalization (i.e. market value of equity plus total debt
and preferred stock less cash and cash equivalents) (the "Net Market
Capitalization") to latest twelve months' EBIT and (vi) the Net Market
Capitalization to the latest twelve months revenue. The results of these
calculations were used to impute a range of values for the Company's common
stock. The resulting estimates of the value of the Company's equity ranged
from $6.3 million to $22.6 million; the corresponding per share range was $0.43
to $1.53.
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 judgments 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.
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. Using the same methodology as
in the analysis of comparable companies, the multiples derived from this
analysis were used to impute a range of values for the Company's common stock.
The resulting estimates of the value of the Company's equity ranged from $7.8
million to $36.3 million; the corresponding per share range was $0.53 to $2.46.
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 judgments 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.
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DISCOUNTED CASH FLOW 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 discounted to present values using
discount rates 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.
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 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 $25 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.
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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 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
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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 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.
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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."
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 $200,000, if the Effective Time of the Merger occurs in June 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
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$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.
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 V. Tindal will
receive an additional $10,000 in recognition of his exceptional service to the
Company in negotiating 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 March 14, 1997, the date of
approval of the Merger Agreement by the Company's Board. Upon consummation of
the Merger, Scherer Healthcare will receive $6,056,580.02 for its
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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 June 1997, the purchase price will be $5,602,000. In addition, the
SH Inducement Agreement provides that Scherer Healthcare will execute a
covenant not to compete 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 pf
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.
Scherer Healthcare received the opinion of its financial advisor, Summit
Investment Corporation, dated March 14, 1997, to the effect that the
transactions contemplated by the Merger Agreement and the SH Inducement
Agreement are fair, from a financial point of view, to the holders of Scherer
Healthcare common stock. The agreement of Scherer Healthcare to vote the
shares of Company Common Stock owned by it to approve the Merger is subject to
Summit Investment Corporation's reaffirming its opinion immediately prior to
the Scherer Special Meeting.
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.
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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."
Agreement to Pay Certain Expenses of Scherer Healthcare
The Company has agreed to reimburse Scherer Healthcare for expenses of Scherer
Healthcare incurred in connection with the Merger and the Scherer Special
Meeting in an amount not to exceed 25,000.
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
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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 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
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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 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
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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.
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
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<PAGE>
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 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; (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;
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<PAGE>
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 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; (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
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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 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 July 31, 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 July 31, 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.
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<PAGE>
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 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)
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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.
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
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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 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
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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 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
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more than 5% of the outstanding Company Common Stock, each executive officer
and each director of the Company, and all directors and officers of the
Company as a group. The Company believes that each person named has sole
investment and voting power with regard to the shares of Company Common Stock
shown except as otherwise noted.
SHARES BENEFICIALLY
BENEFICIAL OWNER OWNED(1) PERCENT OF CLASS
- ---------------- ------------------- ----------------
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 250,000(4) 1.72%
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
officers as a group (8 persons) 17,409,776(5) 78.86%
(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.
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(4) The shares of Company Common Stock shown include 175,000 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 200,000
shares issuable upon exercise of outstanding stock options. See Notes (2),
(3), (4) and (5) above.
(6) Represents less than one percent (1%).
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 30, 1996 and Forms 10-Q for the fiscal quarters ended June 29, 1996,
September 28, 1996 and December 28, 1996, which are attached as Annexes IV, V,
VI and VII, respectively, 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.
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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 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 Fairness Opinion of Hanifen, Imhoff, Inc.
III Sections 7-113-101 through 7-113-302 of the Colorado Business
Corporation Act
IV The Company's Annual Report on Form 10-K for the fiscal year ended
March 30, 1996
V The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 28, 1996
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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 Purchase Price exceeds $0.75, the per share exercise price
of the First ABG Warrants, the Second ABG Warrants and the Current Warrants).
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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 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.
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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
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
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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
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
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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 "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
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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 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.
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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 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
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with the sale of any and all products or services which have been or are
being sold by the Company or any of its Subsidiaries, including assets
included within the ABG Business.
SECTION 2.11 ACCOUNTS RECEIVABLE AND INVENTORY.
2.11.1 All accounts receivable of the Company and its Subsidiaries
have originated in the ordinary course of business, are valid and are not
subject, to any material extent, to any defense, counterclaim or setoff.
2.11.2 All inventory in the possession of the Company or any of its
Subsidiaries is owned by the Company or one or more of its Subsidiaries and
recorded on such entities' books and records in accordance with generally
accepted accounting principles consistently applied. All such inventory has
been valued at the lower of cost, calculated on a FIFO method, or market. No
inventory in the possession of the Company or any of its Subsidiaries has been
consigned. The Company believes that the reserves for inventory obsolescence
contained in the Company's December 31, 1995 and September 29, 1996
consolidated financial statements are adequate. No inventory relating to the
ABG Business is owned by Scherer.
SECTION 2.12 TITLE TO ASSETS.
2.12.1 The Company and its Subsidiaries have good and marketable
title in and to all of their property reflected in the December 28, 1996
consolidated balance sheet referred to in Section 2.22.1 hereof (the "Balance
Sheet") plus all assets purchased by the Company and its Subsidiaries since
December 28, 1996, less all assets which the Company or its Subsidiaries have
disposed of in the ordinary course since such date, which property presently
owned by the Company or any of its Subsidiaries is free and clear of all
security interests, consignments, liens, judgments, encumbrances, restrictions,
or claims of any kind except (a) those items that secure liabilities that are
reflected on the Balance Sheet or that are described in the notes thereto, (b)
with respect to owned real property, title imperfections accurately and
completely noted in the title reports listed in the Disclosure Letter, and
minor title imperfections which do not, in the aggregate, adversely affect the
Company's ability to use such property as it is currently being used, and (c)
liens for current taxes or assessments not yet due or delinquent.
2.12.2 To the best of the Company's knowledge, Scherer has good and
marketable title in and to all of the ABG Assets to the extent described in the
Disclosure Letter, which property presently owned by Scherer is free and clear
of all security interests, consignments, liens, judgments, encumbrances,
restrictions, or claims of any kind except (a) Scherer's obligations under the
Equipment Lease and the License of Intellectual Property and (b) liens for
current taxes or assessments not yet due or delinquent.
SECTION 2.13 MATERIAL CONTRACTS.
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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 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.
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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 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,
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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, 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
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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.
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
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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.
SECTION 2.21 ERISA AND EMPLOYMENT MATTERS.
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2.21.1 The Disclosure Letter contains an accurate and complete list
of all funded or unfunded, written or oral, employee benefit plans, contracts,
agreements, incentives and salary, wage or other compensation plans or
arrangements, including but not limited to all pension and profit sharing
plans, savings plans, bonus plans, deferred compensation plans, incentive
compensation plans, stock purchase plans, supplemental retirement plans,
severance or termination pay plans, stock option plans, hospitalization plans,
medical plans, life insurance plans, dental plans, disability plans, cafeteria
plans, dependent care plans, tuition reimbursement plans, educational
assistance plans, salary continuation plans, vacation plans, supplemental
unemployment benefit plans, collective bargaining agreements, employment
contracts, consulting agreements, retiree benefits and agreements, severance
agreements and each other employee benefit program, plan, policy or arrangement
(each a "Benefit Plan") maintained, contributed to, or required to be
contributed to by the Company or any Subsidiary with respect to any current or
former employees, directors, officers, agents or consultants of the Company or
any Subsidiary, or for which the Company or any Subsidiary may be responsible
or with respect to which it may have any liability, whether or not subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The
Disclosure Letter indicates whether each Benefit Plan is funded or unfunded,
and insured or uninsured.
2.21.2 The Disclosure Letter contains an accurate and complete list
of all documents embodying or relating to the Benefit Plans and of all employee
handbooks and policy manuals utilized by the Company or any of the Subsidiaries
within the past five years. Each of the Benefit Plans listed in the Disclosure
Letter is and has at all times been in compliance in all material respects with
all applicable provisions of ERISA, the Code, the Age Discrimination in
Employment Act of 1967, the Americans with Disabilities Act of 1990, the Family
Medical Leave Act of 1993 and all other laws applicable to the Benefit Plans.
2.21.3 Each Company "employee pension benefit plan" as defined in
Section 3(2) of ERISA (each a "Pension Plan") which is intended to meet the
requirements of Section 401(a) of the Code now meets, and since its inception
has met, the requirements for qualification under Section 401(a) of the Code
and nothing has occurred which would adversely affect the qualified status of
any such Pension Plan. The Internal Revenue Service has issued a favorable
determination letter with respect to the qualification under the Code
(including without limitation the Tax Reform Act of 1986) of each Pension Plan,
the Disclosure Letter contains an accurate and complete list of the dates of
such letters and the Internal Revenue Service has not taken any action to
revoke any such letter.
2.21.4 Each fiduciary and every plan official of each Benefit Plan
is bonded to the extent required by Section 412 of ERISA. The Company and the
Subsidiaries have not maintained, contributed to or been required to contribute
to (i) any Pension Plan under which more than one employer makes contributions
(as contemplated by Section 4064(a) of ERISA) or (ii) a "multiemployer plan" as
defined in Section 3(37)(A) and (D) of ERISA, nor have they withdrawn from any
Pension Plan as a "substantial employer" as defined in Section 4001(a)(2) of
ERISA so as to become subject to the provisions of Section 4063 of ERISA, or
ceased operations
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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.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VSI
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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 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
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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 amount disclosed to
VSI's Chief Financial Officer immediately prior to the execution of this
Agreement;
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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;
4.2.12 settle any pending litigation in a manner that is
materially adverse to the Company or commence any material litigation; or
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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 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,
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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 communi
cations 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
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
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
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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 solely 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. 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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ANNEX III
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(1); 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.
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(1) 15 U.S.C.A. Section 78a et. seq.
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(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
(g) Be accompanied by a copy of this article.
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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;
(b) A statement of the corporation's estimate of the fair value of the
shares;
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(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(1).
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(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 IV
[ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED MARCH 30, 1996]
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<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 30, 1996 Commission File No. 0-11484
_______________________
MARQUEST MEDICAL PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
COLORADO 84-0785259
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11039 EAST LANSING CIRCLE, ENGLEWOOD, CO 80112
(Address and zip code of principal executive offices)
(303) 790-4835
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation 5-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
Based on the last reported sales price of $1.8125 on June 18, 1996, the
aggregate market value of the voting stock held by non affiliates of the
registrant was $8,377,502.
The number of shares outstanding of the registrant's common stock, exclusive
of treasury shares, was 14,206,006 on June 18, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders are
incorporated by reference into Part III of this report on Form 10-K.
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TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business.................................................................3
2. Properties...............................................................8
3. Legal Proceedings........................................................8
4. Submission of Matters to a Vote of Shareholders..........................8
Executive Officers of the Registrant.....................................8
PART II
5. Market for the Registrant's Common Stock and Related Shareholder
Matters................................................................9
6. Selected Financial Data.................................................10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................10
8. Consolidated Financial Statements and Supplementary Data................14
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................39
PART III
10. Directors and Executive Officers of the Registrant......................39
11. Executive Compensation..................................................39
12. Security Ownership of Certain Beneficial Owners and Management..........39
13. Certain Relationships and Related Transactions..........................39
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........39
Signatures..............................................................42
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PART I
ITEM I. BUSINESS
GENERAL: Marquest Medical Products, Inc. ("Marquest" or the "Company") was
incorporated in 1979 under the laws of the State of Colorado. Marquest is a
manufacturer and marketer of disposable medical devices, supplies and
equipment for use in the respiratory care, cardiopulmonary support and
anesthesia markets.
Marquest manufactures and distributes four major groups of products for use
in the respiratory care, cardiopulmonary support and anesthesia markets. The
largest of these product groups is the Blood Collection Systems for
Diagnostic Testing. This group includes the broad line of Marquest
disposable blood gas syringes. Most revenues in this group are generated by
the proprietary-designed syringes, which are marketed under the trade names
Gas-Lyte and Quik-ABG. As discussed in Note 11 to the Consolidated Financial
Statements, the Company executed a sale and leaseback of this product line
during Fiscal 1994 with Scherer Healthcare, Inc. ("Scherer") as part of a
series of transactions designed to restructure the Company financially. See
"Business Transactions with Scherer Healthcare, Inc. and Scherer Capital,
LLC."
The Company's disposable blood gas syringes are used to collect blood for
blood gas analysis routinely performed in hospitals on patients suspected of
having metabolic, respiratory or other cardiopulmonary difficulties. The
blood sample collected is processed through a blood gas analyzer which is
manufactured by other companies. In order for the analysis to be meaningful,
the collected sample must remain as free from contamination as possible.
Contamination is principally caused by the diffusion of gases in the sample
resulting from (i) exposure to air and (ii) dilution caused by the
anticoagulant solution used to prevent the sample from clotting. Marquest
syringes are specifically designed to minimize both of these forms of
contamination.
The Company's second largest product line is Aerosolized Medication Delivery
Systems, consisting primarily of disposable nebulizers. Nebulizers atomize
medications for inhalation into the lungs. The Company offers different
nebulizers to accommodate user preferences as well as the requirements for
different types of respiratory treatment. Nebulizers are marketed under the
trade names Acorn II -Registered Trademark- and Whisperjet. The Acorn II
- -Registered Trademark- Nebulizer is used as part of a circuit package sold
under the name, "RespirGard II -Registered Trademark- Nebulizer System".
The RespirGard II -Registered Trademark- Nebulizer System is a device
designed for the administration of aerosolized pentamidine (NebuPent
- -Registered Trademark-, a registered trademark of Fujisawa Pharmaceutical
Company), a drug used in the treatment of certain respiratory complications
that result from the AIDS virus (pneumocystis carinii pneumonia). RespirGard
- -Registered Trademark- II is the only device specifically recommended by
Fujisawa and referenced in their labeling and use instructions.
Heated Humidification Systems is the Company's third product group. These
systems consist of three subgroups -- humidifiers, heated wire circuits and
humidification chambers. Heated Humidification Systems provide a flow of
moist, warm air to patients who are at risk from loss of body temperature and
drying of the lung linings. There are applications for this product group in
both respiratory care and anesthesia.
The fourth product group is Anesthesia and Respiratory Breathing Systems,
which includes numerous disposable products for use in respiratory care and
anesthesia. These products include standard respiratory and anesthesia
circuits, masks, filters, and hyperinflation systems, as well as other
accessories for use in either respiratory therapy or anesthesia
administration applications.
The circuits range from a simple hose connecting the patient to the
anesthesia machine in the operating room to more sophisticated circuits that
allow monitoring of gas temperature and flow into and out of the patient.
Disposable masks are designed to eliminate resterilization costs of
conventional reusable masks and represent further steps to remove the
possibility of cross-contamination from the operating room.
The filters are designed to filter particulates and bacteria from any air or
anesthesia line carrying gases to or from a patient. The filter market
continues to be a rapidly expanding one as healthcare providers have
increased the emphasis placed on infection control. They are marketed for
use in respiratory support, principally on ventilators, and
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anesthesia circuits. The filters, however, can be used anywhere there is a
concern about what enters or leaves a patient's lungs. These filters are
marketed under the trade names RespirGard, HydroGard, OxyGard, and SpiroGard.
Marquest produces plastic parts for use in its assembly of disposable
respiratory and anesthesia products, and is engaged in the distribution of
medical equipment.
FDA REGULATION AND ADMINISTRATIVE ACTION: The Company and its products are
subject to regulation by the United States Food and Drug Administration
("FDA") and virtually all of the Company's products are subject to validation
as required by the current Good Manufacturing Practices Regulations ("GMP")
of the FDA. As a result, the FDA engages in periodic inspections of the
Company's facilities, its products and its manufacturing processes. In May
1991, the FDA initiated such an inspection, resulting in a report dated May 31,
1991, that contained significant allegations of violations of the GMP
regulations. In the report, the FDA alleged that methods used by Marquest
and the facilities and controls used in connection with manufacturing,
packaging and storage of the medical devices were not in conformity with GMP.
The FDA also alleged that Marquest failed to make appropriate Medical Device
Reports ("MDRs"). On August 8, 1991, the Company was named in a civil
complaint filed by the United States Attorney's Office for the District of
Colorado seeking an injunction against the Company and three of its officers
and further alleging that the Company was manufacturing its products in
violation of GMP, that certain devices were misbranded and adulterated and
violations of several other sections of the Food, Drug and Cosmetic Act. On
October 1, 1991, the Company and one of the named individual defendants
entered into a five-year Consent Decree; the two other individual defendants
named in the complaint were dismissed as defendants. The Consent Decree
provided for suspension of the Company's United States manufacturing and
distribution operations until the Company demonstrated it had adequate
controls in place to ensure products were consistently produced in
substantial compliance with GMP regulations. The suspension continued until
January 9, 1992, at which time the FDA's Denver District office informed the
Company that it was authorized to renew its operations. See Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 7 of the Notes to Consolidated Financial Statements.
During Fiscal 1994, the FDA completed a routine inspection of the Company's
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with two observations noted, which were corrected;
there were no inspections during Fiscal 1995.
During Fiscal 1996, the FDA again inspected the Company's operations for
compliance with the FDA's Good Manufacturing Practices. The Company continues
to be subject to a five-year Consent Decree with the FDA in connection
with the Company's compliance with GMP regulations, which Consent Decree
expires in October 1996. The Company was issued an inspection report with
three observations noted. The Company responded to the observations,
including providing specific corrective action.
In May, 1996, subsequent to year end, the FDA concluded an inspection with
six deficiency observations noted. Many of the observations noted refer to
the lack of training regarding assembly, testing and sampling. The Company
is taking corrective action, including retraining employees, and implementing
other changes in order to respond to the FDA's concerns. These changes and
corrective actions have been presented to the FDA in detail in the submissions
made by the Company and the Company continues to work with the FDA to
address the issues raised. Due to the observations noted and the pending
expiration of the Consent Decree in October 1996, the FDA has conducted more
frequent inspections of the Company's operations. The FDA will verify the
Company's implementation of corrective action at another inspection which
will occur prior to mid-August, 1996. The Company cannot predict the outcome
of the FDA's inspection or whether or not the FDA will take any additional
action with respect to this matter.
INDUSTRY SEGMENTS AND FOREIGN SALES: The Company has one industry segment:
it manufactures and distributes medical devices and equipment to the
healthcare provider sector. All of the Company's current operations and
assets are located in the United States. Export sales are discussed in Note
1 to the Consolidated Financial Statements.
Most export customers have been purchasing product from the Company for
several years and are sold to on an open credit basis. New customers
generally are sold products on a letter of credit or other secured basis
until an appropriate experience level is reached. The Company does not
perceive, and has not experienced, any unusual risk in its export activity.
Export sales are billed to the Company's customers in U.S. dollars.
MARKETING AND CUSTOMERS: The Company focuses a substantial portion of its
resources on marketing and sales. It emphasizes in-service training for its
clinical customers, distributor training and direct marketing. In-service
training educates customers about the Company's products and is supported by
continuing efforts to introduce product design changes that eliminate
application difficulties, such as converting from liquid heparin to a dried
form to eliminate dilutional errors in blood gas analysis tests. Close
working relationships with medical personnel also have led to the
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development of better and safer applications for the Company's products, such
as development of the RespirGard II -Registered Trademark- circuit, which is
used in the treatment of AIDS-associated respiratory illnesses.
The Company has identified and pursued opportunities to modify common medical
devices to improve and expand their applications. The Company believes that
innovative product line expansion and clinical marketing have been and will
continue to be essential factors in gaining market acceptance for the Company
and its products.
The Company's sales and marketing program utilizes field sales
representatives, managers and corporate marketing specialists who market the
Company's manufactured products both directly and through distributors. The
representatives assist the Company's distributors by (i) making direct calls
on hospital technicians and physicians to develop sales leads for the
distributors, (ii) providing education and training programs to distributors
and healthcare professionals relating to the need for, and use of, the
Company's products, (iii) furnishing distributors with technical advice on
various aspects of the Company's products, and (iv) working with distributors
to improve joint business relationships. The field sales representatives
also sell directly to the hospitals in those market areas not serviced by
distributors.
The Company distributes most of its manufactured products through a network
of respiratory or anesthesia distributors. This network includes hospital
supply distributors as well as over a thousand home healthcare dealers who
historically have distributed certain of the Company's products to users in
the home. There are some direct sales to certain large hospitals or to
hospitals in areas where the Company has no dealer support, to certain
government agencies and to original equipment manufacturer ("OEM") customers.
The Company's international sales and marketing efforts are managed from its
corporate offices located in Englewood, Colorado. Europe, the Middle East,
Asia and Pacific Rim territories are managed by field sales representatives
and specialty distributors. Mexico, Central America, South America, and
South Africa are managed using specialty distributors. The international
distributors act in much the same way as the domestic distributors to supply
the Company's products. The Company also participates in major international
trade shows annually.
The Company has invested significant time and financial resources in the
development of its distributor network and views this network as a valuable
asset. However, the Company does not believe that the loss of any single
distributor would have a material impact on the Company's sales as it
believes that any distributor can be replaced within a reasonable period of
time, and that in the interim the Company can sell its products directly to
most of the hospitals serviced by such a distributor.
During Fiscal 1996, 1995, and 1994, the Company had one distributor, Tri-anim
Health Services, Inc. of Sylmar, California, who accounted for 19%, 19%, and
18%, respectively, of the Company's sales.
MANUFACTURING SUPPLIES AND BACKLOG: The Company's manufacturing and assembly
operations consist primarily of the injection molding and extrusion of
certain components and the assembly and packaging of final products from both
purchased and internally-manufactured sources. All of the products
manufactured are disposable and are principally fabricated from molded resins.
Due to economies of scale in production, the Company purchases certain
standardized components, including needles, syringe barrels, and other
supplies from qualified external sources. The Company's material procurement
consists of multiple single source vendors, all of which are subject to
qualification criteria in accordance with the Company's quality procedures
and policies. While the Company endeavors to avoid being dependent on a
single source of supply for any component or raw material by establishing
qualified alternate suppliers, in certain cases it is not economical to use
more than one source. The Company emphasizes vendor certification and
quality programs to ensure uninterrupted supplies of raw materials and
components.
Historically, the Company has not had a significant backlog of firm orders
for its products. With the exception of orders for future delivery or for
specially assembled products, most orders have been shipped within one week
of receipt and the Company has maintained predetermined levels of finished
goods inventories to ensure that this ability is preserved. The Company had
a backlog of orders to ship of approximately $158,000 and $99,000 at March 30,
1996 and April 1, 1995, respectively.
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SEASONALITY: Historically, the Company has experienced approximately 45% of
its net sales in the first and second quarters of its fiscal year and 55% in
the third and fourth quarters. Net sales are influenced generally by overall
patterns in hospital admissions and discharges, which the Company believes
reflect, among other things, a lower incidence of respiratory problems and
postponements of elective surgeries during the summer months.
COMPETITION: The medical device business is highly competitive. The Company
competes with three major competitors in the manufacture and distribution of
its blood collection systems, four major competitors in respiratory and
nebulizer products and two major competitors in its heated humidification
products. A number of the Company's competitors are larger companies with
greater resources and more diversified lines of medical products and services.
Competition in the area of manufactured products involves quality and
reliability in product performance and price competitiveness. The Company
believes that the expertise of its sales force and the strength of its
distributor network are important factors in its ability to compete in the
submarkets for manufactured products. The Company's marketing approach
emphasizes continuing efforts to educate medical personnel through in-service
training in the area of the Company's specialties and to develop and adapt
products to fit the clinical needs of its customers.
PRODUCT DEVELOPMENT: The Company's product development efforts have been
guided by its marketing and sales personnel. Through their daily contact with
existing and potential customers, marketing and sales personnel are able to
identify needs for new products and improvements for existing products.
The Company's product development program includes its internal efforts as
well as the acquisition of new products from others. In Fiscal 1996, 1995
and 1994, the Company expensed royalties and license fees of approximately
$2,000, $54,000 and $15,000, respectively, in connection with products
developed by others. The Company spent approximately $155,000, $140,000 and
$126,000, respectively, on internal product development in Fiscal 1996, 1995
and 1994.
Many risks exist in new product development and there is no assurance that
any of the products currently under development by the Company can be
successfully developed or, if introduced, will prove to be commercially
successful products.
PATENTS, TRADEMARKS, LICENSES AND FRANCHISES: The Company holds numerous
patents for its manufactured products. It also holds licenses from
individuals to manufacture a number of proprietary products. The Company
makes renewal filings on patents and trademarks periodically in accordance
with Federal regulations. Patents, trademarks and licenses afford the
Company a measure of protection for its proprietary products, and the Company
has taken a posture of defending to the fullest extent possible the rights
attendant to the patents, trademarks and licenses. However, it has been the
Company's experience that patents offer limited protection because the degree
of specialization in its products is so extensive that the patents on them
can, in some cases, be circumvented.
EMPLOYEES: At June 1, 1996, the Company had a total of 291 employees. None
of the Company's employees are represented by a labor union and the Company
considers its employee relations to be good. The Company has experienced no
significant problems in recruiting qualified personnel.
QUASI-REORGANIZATION: During the first quarter of Fiscal 1994, the Company
completed significant changes to its operations: (i) reintroduction of
substantially all of its product lines into the market after ceasing
operations after the FDA shutdown in Fiscal 1992, (ii) consolidation of its
manufacturing facilities in Mexico and Parker, Colorado into its Englewood,
Colorado facility, (iii) changes in senior management, and (iv) successful
completion of the first exchange offer to the Swiss bondholders in which 91%
of the bonds were exchanged. Considering these changes, the Company
determined that it was appropriate to effect a quasi-reorganization. The
quasi-reorganization was approved by the Board of Directors in June, 1993,
and was effective July 3, 1993. See Note 12 to the Consolidated Financial
Statements for a discussion of the effects of the quasi-reorganization on the
accounts of the Company.
BUSINESS TRANSACTIONS WITH SCHERER HEALTHCARE, INC. AND SCHERER CAPITAL,
LLC.: During Fiscal 1994, the Company consummated two related financing
transactions to provide the Company with necessary liquidity and to
IV-7
<PAGE>
effect an exchange offer for defaulted Swiss Bonds, pursuant to the Omnibus
Agreement between the Company and Scherer Healthcare, Inc., dated April 12,
1993.
The Company sold its Arterial Blood Gas product line, including $245,000 of
net book value of property connected with the product line, to Scherer
Healthcare, Inc. ("Scherer") for $4.5 million in cash and agreed to a six
year lease back of the product line for a royalty of 3.25% of net product
line sales. The Company has the option to repurchase the product line for
$4.5 million plus $22,500 for each month elapsed between the sale and
repurchase. The option to repurchase, originally expiring on May 31, 1996,
was extended by Scherer and the Company until June 15, 1999. The Company
granted Scherer warrants to purchase 5,780,000 shares of common stock of the
Company at $.75 per share as consideration for the repurchase option. Of
these warrants, 1,530,000 and 4,250,000 will expire if not exercised by March
31, 1999 and March 31, 2003, respectively. The warrants are exercisable in
exchange for cash or, if exercised by Scherer or a Scherer affiliate, for
common stock of Scherer. Scherer may elect to exercise these warrants for no
cash if a corresponding concession is granted to the Company in the product
line repurchase price. Scherer may elect to receive the product line
repurchase price in the form of 5,780,000 shares of the Company's common
stock, based on a value of $.75 per share, plus the balance of the purchase
price in cash. If Scherer makes this election, the number of warrants issued
in consideration for the Company's repurchase option as described above will
be reduced by a corresponding number.
Prior to the above transaction, Scherer had advanced the Company $1,750,000.
In consideration for that advance, the Company granted to Scherer warrants to
purchase 800,000 shares of the Company's common stock at $.75 per share
exercisable until March 31, 1999. The advance was repaid with the proceeds
from the sale and leaseback transaction but the warrants remain outstanding.
During Fiscal 1986, the Company issued 25,000,000 Swiss Francs of bonds due
March 11, 1994. On January 14, 1992, the Company was notified that holders
of the majority of its Swiss bonds had exercised their right to put the bonds
for redemption as of March 11, 1992. The Company was not able to honor this
put, and, accordingly, defaulted on the obligations.
During Fiscal 1994, the Company acquired approximately $4,352,000 of 5%
cumulative convertible preferred stock of Scherer (an amount equal to
approximately 35% of the outstanding Swiss bond principal and accrued
interest tendered in the transaction described below). This preferred stock
was acquired in exchange for an 8% note, maturing on March 31, 1999. In May
1994, Scherer converted $2,500,000 of the principal balance of the 8% note
into 3,333,333 shares of the Company's common stock at $.75 per common share.
In March 1996, Scherer converted the remaining balance of the 8% note of
$1,851,600, $486,571 in related accrued interest due to Scherer and $376,330
owed to Scherer for management fees into 3,877,859 shares of the Company's
common stock at $.70 per share. At March 30, 1996, Scherer owns 50.8% of the
Company's outstanding common stock. The Scherer preferred stock is
convertible into Scherer common stock.
In three exchange offers during Fiscal 1994, the bondholders exchanged
16,320,000 Swiss Francs in bonds, 96% of the total bonds outstanding, for a
combination of Marquest debt, warrants to purchase common stock of the
Company, and the convertible preferred stock of Scherer. In the exchange,
the Swiss bondholders received (i) cumulative convertible preferred stock of
Scherer for 35% of the principal and accrued interest of the tendered bonds;
(ii) unsecured 8% U.S. dollar denominated notes of the Company maturing March
31, 1999 with an aggregate principal amount of $2,875,000, and (iii) warrants
to purchase 165,000 and 1,432,416 shares of Marquest common stock at $.25 and
$.75 per share, respectively, exercisable until March 31, 1999.
As a result of the sale of the Arterial Blood Gas product line and the Swiss
bond refinancing, Scherer obtained the right to acquire approximately 65% of
the outstanding common stock of the Company through the exercise of all
warrants and conversion of the note. Also, as a result of the Omnibus
Agreement, Scherer acquired the right to, and has elected to, name a majority
of the members of the Company's Board of Directors.
In March 1996, Scherer Capital, LLC. ("Scherer Capital"), a company
controlled by the largest shareholder of Scherer Healthcare, Inc., purchased
2,061,856 shares of the Company's common stock at $.485 per common share for
$1,000,000. Also in March 1996, Scherer Capital agreed to loan the Company a
maximum of $1,500,000, of which
IV-8
<PAGE>
$700,000 has been borrowed at March 30, 1996. See Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note 4 to
the Consolidated Financial Statements. Scherer Capital owns 14.5% of the
Company's outstanding common stock.
ITEM 2. PROPERTIES
The Company's principal office, which is owned by the Company, is located at
11039 E. Lansing Circle, Meridian Office Park, in Douglas County, Colorado.
This facility consists of 88,000 square feet and houses all of the Company's
manufacturing activities. The building also houses certain warehousing
functions and most administrative functions of the Company. The Company
leases approximately 45,000 square feet of warehouse space in Aurora,
Colorado pursuant to a lease that expires in April 1998. The Company
believes its owned and leased facilities are adequate for its operations in
the foreseeable future. See Notes 4 and 9 to the Consolidated Financial
Statements regarding encumbrances on the Company's manufacturing and office
facility.
ITEM 3. LEGAL PROCEEDINGS
See Note 10 to the Consolidated Financial Statements for a description of
legal proceedings at March 30, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of shareholders during the fourth quarter
of the fiscal year covered by this report.
EXECUTIVE OFFICERS
The executive officers of the Company as of June 1, 1996 are listed below:
Name and Age Positions with the Company
------------ --------------------------
Robert P. Scherer, Jr. (63) Chairman, Chief Executive Officer and Director
of the Company since February 1995. Chairman
and Chief Executive of Scherer Scientific, Ltd.
since 1986. Director of Scherer Healthcare,
Inc., an affiliate of the Company, since 1977;
Chairman and Chief Executive Officer of Scherer
Healthcare, Inc. since February, 1995.
William J. Thompson (62) President of the Company since February 1995;
Vice Chairman and Chief Operating Officer of
the Company since April 1994; Director of the
Company since August 1993. President, Chief
Operating Officer and Director of Scherer
Healthcare, Inc., an affiliate of the Company,
since August, 1984.
Margaret E. Von der Schmidt (44) Vice President - Finance of the Company since
February 1994; Secretary of the Company since
February 1995; Director of Finance of the
Company from November 1993 to January 1994.
Pursued various business opportunities and
interests from January 1993 to November 1993.
Assistant Corporate Controller, U S WEST, Inc.
(a telecommunications company), from December
1985 to December 1992.
The officers serve until their successors have been elected and qualified.
IV-9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS:
On July 1, 1983, the Common Stock of the Company commenced trading in the
over-the-counter market and was quoted on the Nasdaq system. From March 20,
1984 to October 14, 1994, the Company's stock was listed for trading on the
Nasdaq National Market System. Effective October 14, 1994, the Company's
Common Stock was included in the Nasdaq SmallCap Market. The Company's Common
Stock is quoted under the symbol MMPI. The table below shows, for the period
indicated, the range of high and low sales prices for Fiscal 1996 and 1995.
All quotations were reported to the Company by Nasdaq and represent actual
transactions and not inter-dealer quotations.
1996 1995
------------------ -----------------
High Low High Low
--------- ------- ------- --------
First Quarter $ 5/8 $ 3/8 $ 2 1/4 $ 1 5/8
Second Quarter 2 5/16 7/16 1 7/8 1 1/16
Third Quarter 1 5/16 1/2 1 1/4 3/8
Fourth Quarter 2 1/16 9/16 5/8 1/4
The closing sale price of the Company's Common Stock on June 18, 1996, as
reported on Nasdaq, was $1.8125.
As of June 11, 1996, the Company had 461 holders of record of its Common
Stock. It is estimated that the total number of holders of the Common Stock
is approximately 3,000.
The Company has not paid dividends on its Common Stock in the two most recent
fiscal years. Under a Term Loan Agreement dated June 30, 1994, between the
Company and Colorado National Bank (the "Bank"), the Company may not, without
the prior written consent of the Bank, pay or declare any dividends on its
Common Stock. The Company does not anticipate payment of dividends for the
foreseeable future.
IV-10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA:
All amounts in thousands of dollars except per share amounts.
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three Fiscal Fiscal
Year Year Months Months Year Year
Ended Ended Ended Ended Ended Ended
March 30, April 1, April 2, July 3, April 3, March 28,
1996 1995 1994 1993 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $22,443 $20,576 $17,139 $5,327 $21,935 $30,294
Net loss from continuing
operations before extraordinary
item (60) (3,450) (2,312) (1,042) (18,542) (6,078)
Net loss (60) (3,450) (2,030) (336) (18,338) (10,100)
LOSS PER COMMON SHARE:
Continuing operations before
extraordinary item (0.01) (0.46) (0.51) (0.23) (4.17) (1.41)
Net loss (0.01) (0.46) (0.45) (0.07) (4.12) (2.34)
Total Assets 15,393 13,992 16,929 18,366 21,007 40,529
Long-Term Obligations 4,990 5,961 7,659 6,745 0 1,589
Cash Dividend Declared Per
Common Share 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
During the third quarter of Fiscal 1992, the Company's operations were
temporarily suspended by the FDA. See Note 7 to the Company's Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Effective July 3, 1993, the Company effected a quasi-reorganization as
discussed in Note 12 to the Consolidated Financial Statements. The Company
has segregated its Consolidated Statements of Operations into the three-month
period prior to and the nine-month period subsequent to the
quasi-reorganization.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
FOOD AND DRUG ADMINISTRATION
The impact of the United States Food and Drug Administration's ("FDA") action
against the Company in August 1991 has had a significant and pervasive effect
on the Company.
On August 8, 1991, the United States Attorney's Office for the District of
Colorado filed a complaint seeking an injunction against the Company and
three of its officers. The complaint alleged that the Company was
manufacturing products in violation of the FDA's Current Good Manufacturing
Practice Regulations ("GMP"). The complaint also alleged that certain of the
Company's products were misbranded and adulterated for violating other
relevant sections of the Federal Food, Drug and Cosmetic Act. On October 1,
1991, the Company and one of the named individual defendants entered into a
five-year Consent Decree. The two other individuals originally named in the
complaint for injunction were dismissed as defendants.
By letter dated October 8, 1991, the District Director of the FDA's Denver
district informed the Company that, pursuant to the Consent Decree of October 1,
1991, the Company's medical device manufacturing operations were not
IV-11
<PAGE>
in substantial compliance with GMP. The Consent Decree provided for
suspension of the Company's United States manufacturing and distribution
operations until the Company demonstrated it had adequate controls in place
to ensure products were consistently produced in substantial compliance with
GMP regulations.
Based upon agreements with the FDA in November and December 1991, the Company
was allowed to recondition inventories of components, sub-assemblies and
finished products which were produced prior to the October 8th shut down.
This was done in close cooperation with the FDA by the use of higher sampling
levels and tightened acceptable quality limits . The Company's facilities
were reinspected by the FDA in December, 1991 and found to have adequate
processes in place to insure devices would be manufactured in compliance with
GMP. As a result of that inspection, on January 9, 1992, the Company was
given authorization to renew its operations, including production and
distribution of all products.
During Fiscal 1994, the FDA completed a routine inspection of the Company's
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with two observations noted, which were
corrected; there were no inspections during Fiscal 1995.
During Fiscal 1996, the FDA again inspected the Company's operations for
compliance with the FDA's Good Manufacturing Practices. The Company continues
to be subject to a five-year Consent Decree with the FDA in connection
with the Company's compliance with GMP regulations, which Consent Decree
expires in October 1996. The Company was issued an inspection report with
three observations noted. The Company responded to the observations,
including providing specific corrective action.
In May, 1996, subsequent to year end, the FDA concluded an inspection with
six deficiency observations noted. Many of the observations noted refer to
the lack of training regarding assembly, testing and sampling. The Company
is taking corrective action, including retraining employees, and implementing
other changes in order to respond to the FDA's concerns. These changes and
corrective actions have been presented to the FDA in detail in the submissions
made by the Company and the Company continues to work with the FDA to
address the issues raised. Due to the observations noted and the pending
expiration of the Consent Decree in October 1996, the FDA has conducted more
frequent inspections of the Company's operations. The FDA will verify the
Company's implementation of corrective action at another inspection which
will occur prior to mid-August, 1996. The Company cannot predict the outcome
of the FDA's inspection or whether or not the FDA will take any additional
action with respect to this matter.
FINANCIAL CONDITION
INVENTORIES, NET: The Company's net inventory increased to $3,393,000 at
March 30, 1996 from $2,610,000 at April 1, 1995. The increase in inventory is
due to the Company stocking inventory in Europe and management's commitment
to stocking more inventory domestically to provide improved customer service.
DEBT AND SHAREHOLDER'S EQUITY: During Fiscal 1996, Scherer Healthcare, Inc.
converted the remaining principal of $1,852,000 of the Company's 8% note
payable into common stock of Marquest at $.70 per share. Scherer Healthcare,
Inc. also converted the accrued interest on the 8% note of $487,000 and
$376,000 in accrued management fees to common stock of the Company at $.70
per share.
In Fiscal 1996, Scherer Capital, LLC. ("Scherer Capital"), a Company
controlled by the largest shareholder of Scherer Healthcare, Inc., provided
the Company with a short-term loan of $700,000 which was refinanced with
Scherer Capital on a long-term basis. The Company can borrow an additional
$800,000 under this loan agreement. Scherer Capital invested $1,000,000 in
the Company, purchasing 2,061,856 shares of common stock at $.485 per share.
As a result of these transactions, the Company's shareholders' equity
increased by approximately $3.7 million.
Before exercise of any warrants, Scherer Healthcare, Inc. and Scherer
Capital own 50.8% and 14.5%, respectively, of the Company's common stock at
March 30, 1996.
RESULTS OF OPERATIONS
FISCAL 1996 VERSUS FISCAL 1995
SALES, COST OF SALES AND GROSS PROFIT: Sales increased 9% from $20,576,000
in Fiscal 1995 to $22,443,000 in Fiscal 1996. Sales in the first quarter of
Fiscal 1995 were low due to a decline in hospital census which the Company
believes was due to the uncertainties of healthcare reform. Also, many of
the Company's distributors purchased high levels of product during the fourth
quarter of Fiscal 1994, which depressed sales in the first quarter of Fiscal
1995.
IV-12
<PAGE>
This did not occur in Fiscal 1996, and sales increased to previous levels.
In Fiscal 1996, the Company implemented a network of independent
manufacturer's representatives which supplemented the Company's sales force
and increased sales.
The Company's gross margin increased from 24% in Fiscal 1995 to 32% in Fiscal
1996. The Company has reduced manufacturing costs through reductions in
personnel, improved operational efficiencies and increased its vertical
integration of the manufacturing process. The gross margin improvement was
also due to increased manufacturing volume which improved overhead absorption.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
decreased 25% from $3,193,000 in Fiscal 1995 to $2,391,000 in Fiscal 1996 due
to reductions in personnel and a decrease in legal and litigation expenses.
OTHER INCOME: Other income increased primarily due to $488,000 in royalty
income received in the fourth quarter of Fiscal 1996 on the Company's patents
related to the ABG product line. The royalty agreement expired during Fiscal
1996. In Fiscal 1996, the Company sold its 10% investment in Seabrook
Medical Systems, Inc. at a gain of $200,000.
INCOME TAXES: In Fiscal 1996 the Company settled tax issues related to
audits by the Internal Revenue Service ("IRS") for fiscal years 1982-1988.
The Company recorded $697,000 of taxes and interest related to the settlement
of these tax issues during Fiscal 1996. The Company has negotiated a
repayment plan of monthly installments of $40,000 per month through
approximately September 1998.
FISCAL 1995 VERSUS FISCAL 1994
SALES, COST OF SALES AND GROSS PROFIT: Sales decreased 8.4% from Fiscal 1994
to Fiscal 1995. The Company entered the first quarter of Fiscal 1994 with a
backorder due to the closing of the Company's manufacturing plant in Nogales,
Mexico and its distribution center in Nogales, Arizona. Many of the
Company's distributors purchased high levels of product during the fourth
quarter of Fiscal 1994, which depressed sales in the first quarter of Fiscal
1995. This purchasing pattern by distributors did not occur in the fourth
quarter of Fiscal 1995. During Fiscal 1995, the Company implemented a
territorial reorganization of its distributors. This reorganization expanded
certain distributors' sales territories and dropped other distributors from
the Company's network, resulting in a decrease in sales as not all business
to customers of the dropped distributors was retained by the Company. Sales
also decreased in Fiscal 1995 due to a decline in hospital census which the
Company's believes is due to the uncertainties surrounding healthcare reform.
The gross margin continued to increase to 24% in Fiscal 1995 from 20% in
Fiscal 1994. During Fiscal 1994, the cost of sales and gross margin were
negatively impacted by the closing and relocation of the Company's
manufacturing and distribution facilities in Mexico, Arizona and Colorado to
its principal location in Englewood, Colorado. During Fiscal 1995, the
Company reduced manufacturing costs through reductions in personnel, improved
operational efficiencies and increased vertical integration of the
manufacturing process. During Fiscal 1995, the Company internally produced a
larger portion of the molded components used in the Company's products than
was done in Fiscal 1994. Internally manufactured components are less
expensive than the same components purchased from outside vendors.
SALES AND MARKETING EXPENSES: Selling expenses increased 12.5% during 1995.
In Fiscal 1994, the Company reduced its sales and marketing management to
preserve cash. During Fiscal 1995, the Company strategically hired
additional sales and marketing personnel to support the Company's distributor
network and refocus its marketing efforts. During Fiscal 1995, the Company
increased its spending for trade advertising, sales training, sales tools and
attendance at trade shows.
INTEREST INCOME: Interest and other income for Fiscal 1995 declined 77% from
Fiscal 1994 primarily due to a $200,000 decrease in the gain on the sale of
assets no longer used in the business plus decreases in interest income on
the Company's money market account due to lower cash balances and the pay off
during Fiscal 1995 of a note receivable on which the Company was earning 8%
interest.
IV-13
<PAGE>
INTEREST EXPENSE: Interest expense decreased 37% during Fiscal 1995 due to
the conversion by Scherer Healthcare, Inc. of $2,500,000 of debt to equity in
the Company in May 1994.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES: Cash used in operations decreased from $994,000 in
Fiscal 1995 to $79,000 in Fiscal 1996. Improvements in the results of
operations as discussed above were responsible for the improvement in
operating cash flow in Fiscal 1996.
FINANCING ACTIVITIES: During the third quarter of Fiscal 1996, Scherer
Capital, LLC. ("Scherer Capital"), a company controlled by the largest
shareholder of Scherer Healthcare, Inc., advanced the Company $700,000 which
was used for working capital purposes. In March 1996, the Company and
Scherer Capital refinanced this advance with long-term convertible debt.
The debt, which bears interest at 1-1/2% over prime, is secured by inventory
and equipment and is convertible at a rate of $.70 per share. The debt
agreement provides for additional borrowing availability of $800,000 which
can be borrowed through February 2001.
In March 1996, Scherer Capital invested $1,000,000 in the Company through the
purchase of 2,061,856 shares of common stock at a rate of $.485 per share.
Also in March 1996, Scherer Healthcare, Inc. ("Scherer") converted a $1.8
million note of the Company into common stock at a rate of $.70 per share.
The original terms of the note provided for a conversion rate of $.75 per
share and was convertible at the option of the holder. In a related
transaction, the Company accepted a proposal to exchange the accrued interest
on the note payable to Scherer of $487,000 as well as management fees owed to
Scherer of $376,000 for the Company's common stock at a rate of $.70 per
share.
The above financing transactions were consummated to provide the Company with
needed liquidity for working capital and capital investment, and to decrease
the Company's level of debt. Management believes these financing
arrangements reflect more favorable terms than could be obtained from other
sources. Because the financing came from an affiliate of the Company, the
financing was approved by an independent committee of the Board of Directors
who obtained a fairness opinion from an investment banking firm.
The Company is currently negotiating with a bank for a line of credit secured
by accounts receivable. The line of credit would be available for working
capital and other general corporate purposes. Negotiations are expected to
be completed during the second quarter of Fiscal 1997, however, there can be
no assurance that the line of credit financing will be made available to the
Company.
The Company's planned capital investment for Fiscal 1997 is approximately
$1,000,000 to replace equipment and acquire new equipment in the Company's
ongoing effort to automate its manufacturing process. These capital
investments will be funded through internally generated funds and the
available borrowings of $800,000 through Scherer Capital.
Management of the Company believes that it can fund its current operating
levels and meet its obligations during Fiscal 1997 from cash on hand at March
30, 1996, from internally generated funds and from available borrowings. To
the extent that Fiscal 1997 operations are not sufficient to support
anticipated capital expenditures, the Company's planned investment in capital
expenditures will be reduced.
IV-14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants . . . . . . . . .Page 15
Consolidated Balance Sheets. . . . . . . . . . . . . . . .Page 16
Consolidated Statements of Operations. . . . . . . . . . .Page 17
Consolidated Statements of Shareholders' Equity. . . . . .Page 19
Consolidated Statements of Cash Flows. . . . . . . . . . .Page 20
Notes to Consolidated Financial Statements . . . . . . . .Page 24
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts . . . . .Page 38
IV-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Marquest Medical Products, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MARQUEST
MEDICAL PRODUCTS, INC. (a Colorado corporation) and subsidiaries as of March
30, 1996 and April 1, 1995, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the fiscal
years ended March 30, 1996, April 1, 1995 and the nine months ended April 2,
1994 (post quasi-reorganization--Note 12), and for the three months ended
July 3, 1993. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Marquest Medical Products,
Inc. and subsidiaries as of March 30, 1996 and April 1, 1995 and the results
of their operations and their cash flows for the fiscal years ended March 30,
1996, April 1, 1995 and the nine months ended April 2, 1994 (post
quasi-reorganization) and for the three months ended July 3, 1993, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
May 6, 1996.
IV-16
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ASSETS
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,635 $ 562
Trade accounts receivable, less allowances for
doubtful accounts of $94 and $132, respectively 2,915 2,847
Notes and other receivables 181 --
Inventories 3,393 2,610
Prepaid expenses 173 260
--------- --------
Total current assets 8,297 6,279
PROPERTY, PLANT AND EQUIPMENT, net (Note 3) 7,055 7,671
OTHER ASSETS 41 42
--------- --------
$ 15,393 $ 13,992
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,001 $ 1,220
Accrued liabilities 3,728 3,622
Payable to related parties 48 683
Short-term debt 803 1,267
--------- --------
Total current liabilities 5,580 6,792
LONG-TERM DEBT 4,990 5,961
--------- --------
Total liabilities 10,570 12,753
--------- --------
COMMITMENTS AND CONTINGENGIES (Notes 2 and 6)
SHAREHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares authorized;
14,207,435 and 8,102,720 shares issued and outstanding,
respectively 9,834 6,177
Warrants 599 612
Retained earnings (deficit) ($20,434 of retained deficit
eliminated at July 3, 1993 relating to quasi-reorganization) (5,540) (5,480)
Treasury stock, 20,840 shares (70) (70)
--------- --------
Total shareholders' equity 4,823 1,239
--------- --------
$ 15,393 $ 13,992
--------- --------
--------- --------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
IV-17
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Nine Months Three Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
------------ ----------- ----------- ------------
(Pre quasi-
reorganization)
<S> <C> <C> <C> <C>
NET REVENUES $ 22,443 $ 20,576 $ 17,139 $ 5,327
COST OF SALES (15,305) (15,666) (13,448) (4,513)
---------- ---------- ---------- ---------
GROSS PROFIT 7,138 4,910 3,691 814
COSTS AND EXPENSES
Sales and marketing (4,082) (4,323) (2,872) (969)
General and administrative (2,391) (3,193) (2,276) (941)
Research and development (155) (140) (87) (39)
---------- ---------- ---------- ---------
OPERATING INCOME (LOSS) 510 (2,746) (1,544) (1,135)
OTHER INCOME (EXPENSES)
Interest, dividend & other
income 410 113 340 159
Royalty income 488 -- -- --
Interest expense (685) (626) (911) (81)
Other expense (114) (27) 5 (5)
Foreign exchange gain (loss) 28 (164) (202) 20
---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES 637 (3,450) (2,312) (1,042)
INCOME TAXES (697) -- -- --
---------- ---------- ---------- ---------
NET LOSS BEFORE EXTRAORDINARY
ITEM (60) (3,450) (2,312) (1,042)
EXTRAORDINARY ITEM -- -- 282 706
---------- ---------- ---------- ---------
NET LOSS $ (60) $ (3,450) $ (2,030) $ (336)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
(Continued on next page)
IV-18
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Nine Months Three Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
------------ ----------- ----------- ------------
(Pre quasi-
reorganization)
<S> <C> <C> <C> <C>
(Continued from previous page)
EARNINGS (LOSS) PER COMMON
SHARE:
Continuing operations and before
extraordinary item $ (0.01) $ (0.46) $ (0.51) $ (0.23)
Extraordinary item -- -- 0.06 0.16
---------- ---------- ---------- ---------
Net loss $ (0.01) $ (0.46) $ (0.45) $ (0.07)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Weighted average number of
common shares outstanding
during the period 8,268,242 7,483,612 4,484,626 4,466,907
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
IV-19
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Thousands of Dollars Except Share Amount)
<TABLE>
<CAPTION>
Common Stock Retained Treasury Stock
---------------------- Earnings/ ---------------------
Shares Amount (Deficit) Shares Amount Warrants
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, April 3, 1993 4,474,532 $19,815 ($20,098) (20,840) ($125) --
Net loss, 3 months ended 7/3/93 -- -- (336) -- -- --
Stock issuances--
Options exercised 30,000 23 -- -- -- --
Stock purchase plan 934 1 -- -- -- --
Warrants issued--
Scherer Healthcare (Note 11) -- -- -- -- -- 3,290
Swiss Bond exchange (Note 11) -- -- -- -- -- 714
Quasi-reorganization (effective
7/3/93) -- (17,125) 20,434 -- 55 (3,456)
---------- --------- --------- --------- --------- ---------
Post quasi-reorganization
balances 4,505,466 2,714 -- (20,840) (70) 548
Net loss, 9 months ended 4/2/94 -- -- (2,030) -- -- --
Refund of income taxes related
to periods prior to quasi-
reorganization (Note 12) -- 745 -- -- -- --
Warrants issued -- Swiss Bond
exchange (Note 11) -- -- -- -- -- 84
---------- --------- --------- --------- --------- ---------
BALANCE, April 2, 1994 4,505,466 3,459 (2,030) (20,840) (70) 632
Net loss -- -- (3,450) -- -- --
Stock issuances --
Conversion of debt 3,333,333 2,500 -- -- -- --
Warrants exercised 263,921 218 -- -- -- (20)
---------- --------- --------- --------- --------- ---------
BALANCE, April 1, 1995 8,102,720 6,177 (5,480) (20,840) (70) 612
Net loss -- -- (60) -- -- --
Stock issuances --
Conversion of debt 3,877,859 2,715 -- -- -- --
Warrants exercised 165,000 54 -- -- -- (13)
Sale of stock to related party 2,061,856 1,000 -- -- -- --
Stock issuance costs -- (112) -- -- -- --
---------- --------- --------- --------- --------- ---------
BALANCE, March 30, 1996 14,207,435 $9,834 ($5,540) (20,840) ($70) $599
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
IV-20
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
---------- ----------- ---------- --------------
(Pre quasi-
reorganization)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (60) $ (3,450) $ (2,030) $ (336)
Adjustments to reconcile net loss to net
cash provided by operating activities-
Depreciation and amortization 1,050 1,364 1,236 607
Provision for losses on accounts receivable 24 21 (62) 15
Gain from extinguishment of debt (32) -- (282) (706)
Gain on sale of assets (225) (70) (219) (50)
(Gain)/loss on foreign currency translation (28) 164 202 (20)
Income tax refund -- -- 745 --
Net change in operating assets and
liabilities-
Trade accounts receivable (92) 207 (279) (800)
Notes and other receivables (181) 74 145 212
Inventories and prepaid items (696) 297 392 (276)
Other assets (3) (10) 57 (30)
Accounts payable, accrued expenses and
payable to related parties 115 535 (146) (1,571)
Other long term liabilities -- (176) (463) --
Accrued interest on Swiss bonds 49 50 68 6
-------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (79) $ (994) $ (636) $ (2,949)
-------- --------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds received on notes from related
party -- 375 225 --
Purchases of equipment (66) (666) (1,192) (458)
Proceeds from disposition of assets 225 245 224 468
-------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 159 (46) (743) 10
-------- --------- -------- ---------
</TABLE>
(Continued on next page)
IV-21
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
---------- ----------- ---------- --------------
(Pre quasi-
(Continued from previous page) reorganization)
<S> <C> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from notes payable 1,100 220 -- 1,750
Payments on note payable (400) -- -- (1,750)
Proceeds from sale of ABG product line -- -- -- 4,500
Principal payments on borrowings and capital leases (596) (280) (34) (67)
Issuance of common stock, net 889 -- -- 24
Proceeds from capital lease -- -- 591 --
-------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 993 (60) 557 4,457
-------- --------- -------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,073 (1,100) (822) 1,518
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 562 1,662 2,484 966
-------- --------- -------- ---------
CASH AND CASH EQUIVALENTS.
END OF PERIOD $ 1,635 $ 562 $ 1,662 $ 2,484
-------- --------- -------- ---------
-------- --------- -------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest $ 462 $ 445 $ 374 $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
Income taxes $ 630 $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
(Continued on next page)
IV-22
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
---------- ----------- ---------- --------------
(Pre quasi-
(Continued from previous page) reorganization)
<S> <C> <C> <C> <C>
NONCASH INVESTING AND FINANCING
TRANSACTIONS-
Refinancing of Swiss debt-
Warrants issued $ -- $ -- $ 84 $ 714
Notes issued 259 -- 482 6,745
Bonds and accrued interest retired (291) -- -- --
Prospective interest on notes -- -- -- 3,246
-------- --------- -------- ---------
$ (32) $ -- $ 566 $ 10,705
-------- --------- -------- ---------
-------- --------- -------- ---------
Sale leaseback of ABG product line-
Warrants issued $ -- $ -- $ -- $ 3,290
Net book value of ABG assets -- -- -- 245
Deferred gain -- -- -- 965
-------- --------- -------- ---------
$ -- $ -- $ -- $ 4,500
-------- --------- -------- ---------
-------- --------- -------- ---------
Quasi-reorganization-
Prospective interest on notes $ -- $ -- $ -- $ (3,226)
Deferred gain -- -- -- (965)
Goodwill -- -- -- 4,283
Retained deficit -- -- -- 20,434
Common stock -- -- -- (17,125)
Warrants -- -- -- (3,456)
Treasury stock -- -- -- 55
-------- --------- -------- ---------
$ -- $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
Debt conversion-
Note payable to Scherer Healthcare, Inc. $ (1,852) $ (2,500) $ -- $ --
Payable to related parties (863) -- -- --
Common stock issued 2,715 2,500 -- --
-------- --------- -------- ---------
$ -- $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
(Continued on next page)
IV-23
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
---------- ----------- ---------- --------------
(Pre quasi-
(Continued from previous page) reorganization)
<S> <C> <C> <C> <C>
Refinancing of Industrial Revenue Bonds-
Bonds retired $ -- $ (1,300) $ -- $ --
Note payable issued to bank -- 1,300 -- --
-------- --------- -------- ---------
$ -- $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
Warrants-
Warrants exercised $ (13) $ (20) $ -- $ --
Common stock issued 53 218 -- --
Swiss notes retired (40) (198) -- --
-------- --------- -------- ---------
$ -- $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
Capital lease-
Capital lease obligation (364) -- -- --
Purchase of equipment 364 -- -- --
-------- --------- -------- ---------
$ -- $ -- $ -- $ --
-------- --------- -------- ---------
-------- --------- -------- ---------
Conversion of short-term note to long-term
debt- --
Short-term debt to Scherer Capital, LLC. (700) -- -- --
Note payable to Scherer Capital, LLC. 700 -- -- --
-------- --------- -------- ---------
-- -- -- --
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
IV-24
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ORGANIZATION. Marquest Medical Products, Inc. ("Marquest" or the
"Company") is a manufacturer and marketer of disposable medical devices,
supplies and equipment for use in the respiratory care, cardiopulmonary
support and anesthesia markets. The Consolidated Financial Statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
REVENUE. Revenue is recognized at the time the product is shipped. The
Company's export sales for the latest three fiscal years are presented in the
table below. Profits on export sales have been comparable to those
associated with domestic sales.
($000)
-----------------------------------
FY 1996 FY 1995 FY 1994
--------- --------- ---------
Sales by geographic location:
United States and Canada $16,699 $16,023 $18,262
--------- --------- ---------
--------- --------- ---------
Export Sales:
Europe $3,069 $2,538 $2,251
Pacific Rim 1,959 1,458 1,647
Puerto Rico 407 352 306
Other 309 205 --
--------- --------- ---------
$5,744 $4,553 $4,204
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Work in process and finished goods include
material costs, labor and manufacturing overhead. The Company has expensed
all inventories that cannot be used in the Company's operations. Inventories
consist of the following:
($000)
-----------------------------------
March 30, 1996 April 1, 1995
---------------- ---------------
Raw materials $1,782 $1,530
Work in process 233 203
Finished goods 1,378 877
------ ------
$3,393 $2,610
------ ------
------ ------
FOREIGN CURRENCY EXCHANGE GAIN/(LOSS). The Company had SFr 345,000, 720,000
and 720,000 of Swiss Franc denominated bonds outstanding at March 30, 1996,
April 1, 1995 and April 2, 1994, respectively. The foreign currency
gain/(loss) is the result of the difference in the exchange rate between the
Swiss Franc and the U.S. Dollar at the beginning and end of the related
period for Swiss Francs outstanding during the period. The annual interest
payments on the bonds are accrued and recorded as interest expense with the
appropriate adjustments made to reflect the current exchange rate.
PROPERTY, PLANT AND EQUIPMENT. Additions to property, plant and equipment are
recorded at acquisition cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to operations as
incurred, whereas expenditures for renewals and betterments are capitalized
and depreciated.
IV-25
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenditures for
the creation and application of new products and processes are expensed as
incurred.
QUASI-REORGANIZATION. On June 11, 1993, the Company's Board of Directors
approved quasi-reorganization procedures which were effective July 3, 1993,
the end of the Company's first quarter of Fiscal 1994. The Company has
segregated its Consolidated Statements of Operations and Cash Flows for
Fiscal 1994 into the three-month period prior to and the nine-month period
subsequent to the quasi-reorganization.
INCOME TAXES. The Company provides for income taxes using the asset and
liability method prescribed by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method deferred
income taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of a
change in tax laws or tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are recognized for the
expected future effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance for the amount of any
tax benefits which, more likely than not, based on current circumstances, are
not expected to be realized.
GOODWILL. The difference between direct costs of acquisitions accounted for
by the purchase method and the estimated fair value of the net assets of
acquired companies is recorded as goodwill and amortized over the remaining
useful life. During Fiscal 1994, as part of the quasi-reorganization
discussed in Note 12, the Company reduced the remaining goodwill at July 3,
1993 of $4,283,000 to zero.
ACCRUED LIABILITIES. Accrued liabilities consist of the following (in
thousands of dollars):
March 30, 1996 April 1, 1995
-------------- -------------
Accrued income taxes, interest and penalties $ 997 $ 858
Accrued payroll and benefits 932 606
Accrued legal settlement 383 725
Other 1,416 1,433
------ ------
$3,728 $3,622
------ ------
------ ------
EARNINGS (LOSS) PER COMMON SHARE. Earnings (loss) per common share is based
on the weighted average number of common and common stock equivalent shares
outstanding during each period. Common stock equivalent shares were
anti-dilutive in Fiscal 1996, 1995 and 1994 and were therefore excluded from
the computation.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
consist of cash, short-term trade receivables and payables and long-term
debt. The carrying values of these financial instruments approximate fair
value.
SIGNIFICANT CUSTOMERS. During Fiscal 1996, 1995 and 1994, the Company had
one distributor, Tri-anim Health Services, Inc. of Sylmar, California, which
accounted for 19%, 19% and 18%, respectively, of the Company's sales.
IV-26
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDUSTRY SEGMENTS. The Company operates in the United States and has one
industry segment - it manufactures and distributes medical devices and
equipment to the healthcare provider sector.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NEW ACCOUNTING STANDARDS. In Fiscal 1997, the Company will adopt SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
associated intangibles be written down in value whenever an impairment review
indicates that the carrying value cannot be recovered on an undiscounted cash
flow basis. The Company expects that the adoption of SFAS No. 121 will not
have a material effect on its financial position or results of operations.
2. LIQUIDITY AND BASIS OF PRESENTATION:
The Company's Consolidated Financial Statements have been presented on the
basis that it will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The conditions associated with this basis of
presentation are described in the following paragraphs.
At April 1, 1995, there was significant uncertainty as to the Company's
ability to continue as a going concern due to uncertainties concerning the
Company's ability to improve its profitability from operations and the
successful completion of external financing arrangements. During Fiscal
1996, the following events occurred:
The gross margin on the Company's sales improved from 24% in Fiscal 1995
to 32% in Fiscal 1996 due to improved operational efficiencies which
included reductions in manufacturing personnel, increased vertical
integration of the manufacturing process and increased sales volumes.
In March 1996, Scherer Healthcare, Inc. ("Scherer") converted debt and
other payables of approximately $2.7 million into common stock of the
Company. Also in March 1996, Scherer Capital, LLC. ("Scherer Capital")
provided the Company with a $1.5 million long-term convertible note
facility, of which $700,000 is outstanding at March 30, 1996.
Concurrently, Scherer Capital purchased 2,061,856 shares of the
Company's common stock for proceeds to the Company of $1.0 million
($0.485 per share) (See Note 8).
Management of the Company believes that it can fund its current operating
levels and meet its obligations as they come due during Fiscal 1997 through
existing cash on hand at March 30, 1996 of $1.6 million, available borrowings
with Scherer Capital of $800,000, and continued improvement in operating
profitability. Additionally, the Company is currently negotiating additional
financing to be used for working capital. To the extent that projected
operating results and cash flows are not met during Fiscal 1997, planned
capital purchases would be delayed to allow the Company to pay its existing
obligations.
The Company is subject to oversight by the United States Food and Drug
Administration ("FDA"). See Note 7 for a discussion of FDA matters.
IV-27
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following (in thousands of
dollars):
March 30, April 1,
1996 1995
--------- ---------
Land $ 1,265 $ 1,265
Buildings 4,985 4,976
Machinery and equipment 8,866 8,364
Other 2,523 2,573
Construction in progress 2 220
--------- ---------
17,641 17,398
Less - accumulated depreciation (10,586) (9,727)
--------- ---------
$ 7,055 $ 7,671
--------- ---------
--------- ---------
The Company depreciates buildings over 50 years, machinery and equipment
between 3 and 10 years and other fixed assets between 3 and 8 years.
4. DEBT:
Short-term debt consists of the following (in thousands of dollars):
March 30, April 1,
1996 1995
--------- ---------
Swiss Bonds, SFr 345,000 and 720,000 outstanding at
March 30, 1996 and April 1, 1995, respectively;
interest payable annually on March 11 at a rate of
6%, increased to 9% effective March 12, 1992; due
March 11, 1994; unsecured; including $107,000 and
$176,000 accrued interest, respectively (See Note 11) $397 $ 813
Notes payable; 18% interest payable monthly; paid in
Fiscal 1996 through execution of capital leases -- 220
Current maturities of long-term debt and capital
lease obligations 406 234
--------- ---------
$803 $1,267
--------- ---------
--------- ---------
SWISS BONDS. On January 14, 1992, the Company was notified that the holders
of the majority of its Swiss bonds had exercised their right to put the bonds
for redemption as of March 11, 1992. The Company was not able to honor this
put, and accordingly defaulted on these obligations. The Company did not
make any payments of principal or interest on the Swiss bonds in Fiscal 1993.
During Fiscal 1994, the Company refinanced a significant portion of the
Swiss bonds outstanding (see Note 11). During Fiscal 1996, bonds totalling
375,000 Swiss Francs plus accrued interest were exchanged for $291,000 of
U.S. denominated 8% Swiss notes and $146,000 in cash. The remaining Swiss
bonds outstanding at March 30, 1996, including the accrued interest on these
bonds, have been classified as short-term debt.
IV-28
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following (in thousands of dollars):
March 30, April 1,
1996 1995
--------- --------
Swiss notes payable; 8%; interest due semi-annually;
due March 31, 1999, unsecured; denominated in U.S.
dollars $2,896 $2,677
Note payable to bank; interest rate floats annually,
currently 8.375%; interest and principal due in
monthly installments with balloon payment at January
31, 2000; secured by building 858 1,141
Note payable to Scherer Capital, LLC.; interest
payable quarterly at 1-1/2% over prime; current
interest rate 9.75%; due April 1, 2001; convertible
into 1,000,000 shares of Marquest common stock;
secured by inventory, property and equipment 700 --
Note payable to Scherer Healthcare, Inc.; 8%
interest due semi-annually; due March 31, 1999;
unsecured; convertible into 2,468,000 shares of
Marquest common stock (See Note 11) -- 1,852
Capital lease obligations 536 291
------ ------
$4,990 $5,961
------ ------
------ ------
The scheduled maturities of long-term debt beyond Fiscal 1997 are as follows:
1998 $ 440
1999 3,209
2000 700
2001 --
Thereafter 700
Less - imputed interest on capital leases (59)
------
Total $4,990
------
------
NOTE PAYABLE TO BANK. During Fiscal 1996, the Company and Colorado National
Bank (the "Bank") executed an amendment to the Term Loan Agreement dated
June 30, 1994, whereby the Company made a principal payment of $160,000 and
shortened the term of the Note from July 31, 2004 to January 31, 2000 and the
Bank released the Company's inventory and accounts receivable as collateral
for the Note. The Note will continue to be amortized over the original term
of the Note with a balloon payment on January 31, 2000.
Pursuant to the Term Loan Agreement, the Company cannot, without the written
prior approval of the Bank, (1) make any expenditures for capital assets in
excess of $1 million in any fiscal year subsequent to April 1, 1995 or (2)
pay or declare any dividends or purchase, redeem or otherwise acquire any of
its capital stock, or make any other distribution of any property to any of
its shareholders.
NOTE PAYABLE TO SCHERER HEALTHCARE, INC. The note payable to Scherer was
issued during Fiscal 1994 to purchase Scherer's preferred stock which was
used in connection with exchange offers for the Company's defaulted Swiss Bonds
IV-29
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(see Note 11). During Fiscal 1996, Scherer Healthcare, Inc. converted the
note and related accrued interest of $487,000 into 3,340,244 shares of
Marquest common stock.
NOTE PAYABLE TO SCHERER CAPITAL, LLC. In December, 1995 Scherer Capital,
LLC. provided the Company with a short-term loan of $700,000. In March, 1996
the Company refinanced the loan with Scherer Capital on a long-term basis.
After April 1, 1997, the Company may, at its option, redeem the note at the
following prices, expressed as a percentage of principal amount: 1998 - 104%,
1999 - 103%, 2000 - 102%, 2001 - 101%. Pursuant to the Loan and Security
Agreement (the "Agreement"), dated March 28, 1996, the Company can borrow up
to an additional $800,000 under the same terms and conditions as the current
borrowings under the Agreement.
CAPITAL LEASE. The Company leases certain production equipment under a
capital lease arrangement. The gross amount of equipment and accumulated
depreciation recorded under capital leases was $1,175,000 and $364,000,
respectively, at March 30, 1996.
5. STOCK OPTIONS AND WARRANTS:
STOCK OPTION PLAN. The Company has an Incentive and Non-Qualified Stock
Option Plan for executives and key employees, which is administered by the
Compensation Committee of the Board of Directors. Shares approved for the
plan total 1,250,000, of which 367,727 are available for grant at March 30,
1996. At March 30, 1996, 227,098 options are vested. Options expire seven
years from the date of the grant.
The activity in the stock option plan for the years ended March 30, 1996,
April 1, 1995 and April 2, 1994 is as follows:
Exercise
Shares Price Range
------ -----------
Outstanding, April 3, 1993 458,534 $3.94 - $9.25
Granted 548,500 $0.75 - $2.00
Exercised (30,000) $0.75
Canceled (497,534) $2.00 - $9.25
--------
Outstanding, April 2, 1994 479,500 $1.38 - $2.00
Granted 32,000 $1.625
Exercised --
Canceled (172,173) $1.38 - $2.00
--------
Outstanding, April 1,1995 339,327 $1.38 - $2.00
Granted 587,500 $0.69 - $1.19
Exercised --
Canceled (371,827) $1.19 - $2.00
--------
Outstanding, March 30, 1996 555,000 $0.69 - $2.00
STOCK PURCHASE PLAN. During Fiscal 1990, shareholders approved the adoption
of an Employee Stock Purchase Plan to benefit all full-time, permanent
employees of the Company with more than one year of service. The shares
IV-30
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approved for the 1990 Plan totaled 500,000. During Fiscal 1994, 934 shares
were issued under this plan. During Fiscal 1994, the Board of Directors
terminated the Employee Stock Purchase Plan.
COMMON STOCK PURCHASE RIGHTS. On August 18, 1991, the Board of Directors of
the Company declared a dividend distribution of one right (a "Right") for
each outstanding share of the Company's Common Stock to shareholders of
record at the close of business on August 20, 1991 (the "Record Date"). Each
Right entitles the registered holder to purchase from the Company a unit
consisting of one-half of a share (a "Unit") of Common Stock at a purchase
price of $25.00 per Unit, subject to adjustment.
The Rights are attached to all Common Stock certificates representing shares
outstanding, and no separate Rights Certificates have been distributed. The
Rights will separate from the Common Stock and a "Distribution Date" will
occur so that the Rights become exercisable no later than ten business days
following (1) the public announcement that a person or group (other than
Scherer Healthcare, Inc. or Scherer Capital, LLC.) has acquired, or obtained
the right to acquire, 15% or more of the Company's outstanding shares or (2)
the commencement of a tender or exchange offer that would result in a person
or entity (other than Scherer Healthcare, Inc. or Scherer Capital, LLC.)
owning 15% or more of the Company's outstanding Common Stock. In the event
that 15% or more of the stock is actually held by a person or group, each
right not owned by such person or group allows the holder to buy $50.00 worth
of the Company's Common Stock, based on the then-current market price, for
$25.00. The Company can redeem the rights at any time until 10 days
following the above events at a price of $.01 per Right. The Rights are not
exercisable until the Distribution Date and will expire at the close of
business on August 20, 2001.
SETTLEMENT PAYABLE. In Fiscal 1996, the Company settled litigation with
former officers and directors of the Company. As part of this settlement,
the officers and directors may convert amounts owed to them by Marquest to
Marquest common stock at $1.00 per share up to a maximum of $200,000. The
convertible portion of the settlement may not exceed the balance owed. At
March 30, 1996, a maximum of 200,000 common shares are issuable under the
settlement agreement.
IV-31
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the total number of the Company's common
shares which may be issued upon exercise of existing stock options and
warrants, or conversion of debt.
Fully Diluted
Percentage
Shares Ownership
------ -------------
Shares outstanding at March 30, 1996 14,207,435 59.42%
Stock options outstanding at March 30, 1996
pursuant to the Company's Incentive and
Non-Qualified Stock Option Plan 555,000 2.32%
Stock options issued to consultant, exercisable
at $0.75 per share until August 26, 2002 50,000 0.21%
Warrants issued in connection with a Fiscal 1993
sale and leaseback of certain real estate;
exercisable at $1.50 per share until
December 21, 1997 138,833 0.58%
Warrants issued in connection with a Fiscal 1993
lease termination, exercisable at $4.00 per share
until September 30, 1997 10,000 0.04%
Warrants issued to the Swiss bondholders,
exercisable at $0.75 per share until
March 31, 1999 1,168,495 4.89%
Warrants issued to Scherer Healthcare, Inc.:
In connection with providing short-term
financing in Fiscal 1994, exercisable at
$0.75 per share until March 31, 1999 800,000 3.34%
In connection with sale leaseback of Arterial
Blood Gas product line, exercisable at $0.75
per share; 1,530,000 and 4,250,000 exercisable
until March 31, 1999 and March 31, 2003,
respectively 5,780,000 24.17%
---------- -------
Total Scherer Healthcare, Inc. 6,580,000 27.51%
---------- -------
Convertible note payable to Scherer Capital, LLC.,
exercisable at $0.70 per share until April 1, 2001 1,000,000 4.19%
Settlement payable, convertible into common stock
at $1.00 per share 200,000 0.84%
---------- -------
Total common shares if all options and warrants
are exercised 23,909,763 100.00%
---------- -------
---------- -------
IV-32
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LEASING ARRANGEMENTS:
The Company leases warehouse space as well as office and transportation
equipment under non-cancelable operating leases. The following is a schedule
as of March 30, 1996, of minimum future lease payments required under these
leases:
Facilities Equipment Total
---------- --------- ---------
1997 $ 347 $ 70 $ 417
1998 347 63 410
1999 188 63 251
2000 173 61 234
2001 173 24 197
Thereafter 303 -- 303
---------- --------- ---------
1,531 281 1,812
Minimum sublease rentals (331) -- (331)
---------- --------- ---------
$1,200 $281 $1,481
---------- --------- ---------
---------- --------- ---------
The Company subleases warehouse space to an unaffiliated entity at
approximately $10,000 per month. This sublease expires in November 1998.
Total rent expense, net of sublease revenue, under all operating leases for
Fiscal 1996, 1995, and 1994 was $452,000, $560,000 and $1,088,000,
respectively.
7. FOOD AND DRUG ADMINISTRATION:
The Company is subject to regulation by the United States Food and Drug
Administration ("FDA"). The FDA provides regulations governing the
manufacture and sale of the Company's products and regularly inspects the
Company and other manufacturers to determine their compliance with these
regulations.
On August 8, 1991, the United States Attorney's Office for the District of
Colorado filed a complaint for injunction against the Company and certain of
its officers. The complaint alleged that the Company was manufacturing
products in violation of the FDA's Current Good Manufacturing Practice
Regulations ("GMP"). The complaint also alleged that certain of the devices
were misbranded and adulterated for violating other relevant sections of the
Federal Food, Drug and Cosmetic Act. On October 1, 1991, the Company and a
former officer entered into a five-year Consent Decree. The two other
individuals originally named in the complaint for injunction were dismissed
as defendants.
By letter dated October 8, 1991, the District Director of the FDA's Denver
district informed the Company that, pursuant to the consent decree of October
l, 1991, the Company's medical device manufacturing operations were not in
substantial compliance with the terms of the consent decree and ordered the
Company to cease all manufacturing and distribution.
Based upon agreements with the FDA in November and December 1991, the Company
was allowed to recondition inventories of components, sub-assemblies and
finished products which were produced prior to the October 8th shut down.
This was done in close cooperation with the FDA by the use of higher sampling
levels and tightened acceptable quality limits. After the FDA reviewed the
Company's records of this reprocess/rework, the FDA allowed the distribution
of these products. The Company was also allowed to manufacture products
following the new, documented procedures.
IV-33
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
By letter dated January 9, 1992, the FDA's Denver district office informed
the Company that it was authorized to renew its operations, including
production and distribution of all products.
During Fiscal 1994, the FDA completed a routine inspection of the Company's
compliance with the FDA's Good Manufacturing Practices. The Company was
issued an inspection report with two observations noted, which were
corrected; there were no inspections during Fiscal 1995.
During Fiscal 1996, the FDA again inspected the Company's operations for
compliance with the FDA's Good Manufacturing Practices. The Company continues
to be subject to a five-year Consent Decree with the FDA in connection
with the Company's compliance with GMP regulations, which Consent Decree
expires in October 1996. The Company was issued an inspection report with
three observations noted. The Company responded to the observations,
including providing specific corrective action.
In May, 1996, subsequent to year end, the FDA concluded an inspection with
six deficiency observations noted. Many of the observations noted refer to
the lack of training regarding assembly, testing and sampling. The Company
is taking corrective action, including retraining employees, and implementing
other changes in order to respond to the FDA's concerns. These changes and
corrective actions have been presented to the FDA in detail in the submissions
made by the Company and the Company continues to work with the FDA to
address the issues raised. Due to the observations noted and the pending
expiration of the Consent Decree in October 1996, the FDA has conducted more
frequent inspections of the Company's operations. The FDA will verify the
Company's implementation of corrective action at another inspection which
will occur prior to mid-August, 1996. The Company cannot predict the outcome
of the FDA's inspection or whether or not the FDA will take any additional
action with respect to this matter.
8. RELATED PARTY TRANSACTIONS:
In connection with a sale of the Company's Arterial Blood Gas ("ABG") product
line to Scherer Healthcare, Inc. ("Scherer"), the Company pays a monthly
royalty to Scherer of 3.25% of the Company's net sales of ABG products.
During Fiscal 1996, 1995 and 1994, these royalties totaled $346,000, $287,000
and $262,000, respectively. During Fiscal 1996, 1995 and 1994, the Company
expensed $150,000, $180,000 and $263,000 of interest related to the Company's
note payable to Scherer (see Note 4), and expensed $164,000 and $304,000 in
Fiscal 1996 and 1995, respectively, related to marketing and financial
consulting provided by Scherer.
In Fiscal 1996, Scherer Capital, LLC. ("Scherer Capital") provided a net
short-term loan of $700,000 to the Company which was converted into long-term
debt to Scherer Capital in March 1996. In Fiscal 1996, Scherer converted
debt and other payables of approximately $2.7 million into common stock of
the Company.
9. INCOME TAXES:
During Fiscal 1996, the Company recorded a current federal tax provision of
$697,000 relating to its settlement with the IRS from pre-quasi
reorganization tax years. No provisions were recorded for the Fiscal year
ended April 1, 1995, the nine months ended April 2, 1994 or the three months
ended July 3, 1993.
Effective April 4, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
The adoption of SFAS 109 did not have a material effect on the Company's
financial position or results of operations.
IV-34
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The differences between the provision/(benefit) for income taxes at the
Federal statutory rate and that shown in the Consolidated Statements of
Operation are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Fiscal Fiscal Nine Three
Year Year Months Months
Ended Ended Ended Ended
March 30, April 1, April 2, July 3,
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Federal statutory rate 34% 34% 34% 34%
"Expected" federal tax provision (benefit) $ 217 $(1,156) $(786) $(354)
Utilization of net operating loss (237) -- -- --
IRS settlement 697 -- -- --
State income taxes, net of Federal benefit (2) (112) (76) (34)
Goodwill amortization for book purposes -- -- -- 24
Other items 10 24 -- --
--------- --------- --------- ---------
685 (1,244) (862) (364)
Increase in valuation allowance 12 1,244 862 364
--------- --------- --------- ---------
Tax provision $ 697 $ -- $-- $--
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Under SFAS 109, deferred taxes are determined based on estimated future tax
effects of differences between the amounts reflected in the financial
statements and the tax basis of assets and liabilities given the provisions
of the enacted tax laws. The net deferred tax assets and liabilities as of
March 30, 1996 and April 1, 1995 are comprised of the following (in thousands
of dollars):
March 30, April 1,
1996 Change 1995
--------- --------- ---------
Deferred tax assets/(liabilities):
Accelerated tax depreciation in excess
of book depreciation $ (187) $ -- $ (187)
Nondeductible accruals 600 (183) 783
Unrealized foreign exchange losses 112 -- 112
Capital loss carryforwards 971 (559) 1,530
Net operating loss carryforwards 4,840 (2,247) 7,087
--------- --------- ---------
6,336 (2,989) 9,325
Valuation allowance (6,336) 2,989 (9,325)
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
IV-35
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During recent fiscal years, the Company has experienced losses for financial
reporting and tax purposes. Because of the uncertainty of realization of any
future tax benefits, the Company has determined that, on a more likely than
not basis, it is appropriate to reflect a valuation allowance for the entire
net deferred tax asset. At March 30, 1996, the Company had tax net operating
loss carryforwards of approximately $13,000,000, and capital loss
carryforwards of approximately $2,600,000. Tax net operating losses expire
at varying dates through 2010, and capital loss carryforwards expire at
varying dates through 1998. Due to the transactions discussed in Notes 11 and
12, the future benefits associated with the utilization of net operating loss
carryforwards may be substantially limited. Capital loss carryforwards can
only be utilized to the extent the Company generates capital gains in the
future.
During Fiscal 1994, the Company received a refund of federal income taxes of
approximately $745,000 due to the carryback to prior years of losses incurred
during the temporary suspension of operations by the FDA. The Internal
Revenue Service ("IRS") completed an audit, and in July 1994, determined that
the losses could not be carried back and issued an assessment to the Company
for the taxes plus interest. In Fiscal 1996, the Company settled additional
tax issues related to audits by the IRS for fiscal years 1982-1988. The
Company recorded $697,000 of additional taxes and interest. The Company
negotiated a repayment plan whereby the Company paid $400,000 in June 1995
and the remaining liability for taxes, interest and penalties of
approximately $997,000 at March 30, 1996, plus interest and penalties to be
accrued during the repayment period, will be repaid in monthly installments
of $40,000. The IRS has placed a lien on the Company's facility in
Englewood, Colorado to secure payment of the taxes.
10. LITIGATION:
A products liability action was filed against the Company in California in
1990 which was defended and settled during the trial by the Company's
insurance company. Under the insurance policy, the Company may have been
responsible for a $250,000 self-insured retention plus the cost of defense.
The Company claimed that the insurance company mishandled the lawsuit and
declined to pay. The Company was sued by the insurance company in District
Court, Arapahoe County, Colorado in February, 1994 alleging damages of either
$540,000 or $290,000. Subsequent to March 30, 1996, the Company entered into
a settlement agreement with the insurance company whereby the Company would
pay $170,000. The settlement was accrued at March 30, 1996.
11. REFINANCING TRANSACTIONS:
During Fiscal 1994, the Company consummated two related transactions to
provide the Company with necessary liquidity and to refinance the Swiss Bonds.
SALE OF ARTERIAL BLOOD GAS PRODUCT LINE. The Company sold its Arterial Blood
Gas product line, including $245,000 of net book value of property connected
with the product line, to Scherer Healthcare, Inc. ("Scherer") for $4.5
million in cash and agreed to a six year lease back of the product line for a
royalty of 3.25% of net product line sales. The Company has the option to
repurchase the product line $4.5 million plus $22,500 for each month elapsed
between the sale and repurchase. The option to repurchase, originally
expiring on May 31, 1996, was extended by the boards of Scherer and the
Company until June 15, 1999. The Company granted Scherer 5,780,000 warrants
to purchase common stock of the Company at $.75 per share as consideration
for the repurchase option. These warrants were valued at $0.50 each. Of
these, 1,530,000 and 4,250,000 will expire if not exercised by March 31, 1999
and March 31, 2003, respectively. The warrants are exercisable for cash or,
if exercised by Scherer or a Scherer affiliate, for common stock of Scherer.
Scherer may elect to exercise these options for no cash if a corresponding
concession is granted to the Company in the product line repurchase price.
Scherer may elect to receive the product line repurchase price in the form of
5,780,000 shares of the Company's common stock, based on a value of $.75 per
share, plus the balance of the purchase price in cash. If Scherer makes this
election, the number of warrants issued in consideration for the Company's
repurchase option as described above will be reduced by a corresponding
number.
IV-36
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the above transaction, Scherer had advanced the Company $1,750,000.
In consideration for this advance, the Company also granted to Scherer
warrants to purchase 800,000 shares of the Company's common stock at $0.75
per share exercisable until March 31, 1999. These warrants were also valued
at $0.50 each. The advance was repaid with the proceeds from the sale and
leaseback transaction.
The Company recorded $3,290,000 related to the value of the warrants issued
to Scherer and a deferred gain on the sale leaseback of $965,000,
representing the amount of the sale proceeds, less the value assigned to the
warrants, less the net book value of the property sold. The deferred gain
was eliminated in the quasi-reorganization discussed in Note 12.
SWISS BOND REFINANCING. During Fiscal 1986, the Company issued 25,000,000
Swiss Francs of bonds due March 11, 1994. On January 14, 1992, the Company
was notified that holders of the majority of its Swiss bonds had exercised
their right to put the bonds for redemption as of March 11, 1992. The
Company was not able to honor this put, and, accordingly, defaulted on these
obligations.
During Fiscal 1994, the Company acquired approximately $4,352,000 of 5%
cumulative convertible preferred stock of Scherer (an amount equal to
approximately 35% of the outstanding Swiss bond principal and accrued
interest tendered in the transaction described below). This preferred stock
was acquired in exchange for an 8% note, maturing on March 31, 1999. The
note was convertible, in whole or in part, at Scherer's option, into Marquest
common stock at a value of $.75 per share. The Scherer preferred stock is
convertible into Scherer common stock. In May 1994, Scherer converted
$2,500,000 of the principal balance of the 8% note into 3,333,333 shares of
the Company's common stock. In March 1996, Scherer converted the remaining
principal balance of the 8% note of $1,851,600 into 2,645,143 shares of
Marquest common stock at a rate of $.70 per share.
In three exchange offers, the bondholders exchanged 16,320,000 Swiss Francs
in bonds, 96% of the total bonds outstanding. The bondholders were offered a
combination of Marquest debt, warrants to purchase common stock of the
Company, and the convertible preferred stock of Scherer in exchange for the
outstanding Swiss debt principal and interest. In the exchanges, the Swiss
bondholders received (1) cumulative convertible preferred stock of Scherer
for 35% of the principal and accrued interest of the tendered bonds; (2)
unsecured, 8% U.S. dollar denominated notes of the Company maturing March 31,
1999 with an aggregate principal amount of $2,875,000, and (3) warrants to
purchase 165,000 and 1,432,416 shares of Marquest common stock at $.25 and
$.75 per share, respectively, exercisable until March 31, 1999. These
warrants were also valued at $.50 each.
The Company recorded approximately $798,000 for the value assigned to the
warrants given to the Swiss bondholders, a gain of approximately $988,000 on
the extinguishment of the Swiss bonds and, because this transaction was
considered a troubled debt restructuring under Statement of Financial
Accounting Standards No. 15, the Company also accrued $3,226,000 in
prospective interest on the notes. The prospective interest was eliminated
in the quasi-reorganization described in Note 12.
As a result of the sale of the Arterial Blood Gas product line and the Swiss
bond refinancing, Scherer has the right to acquire approximately 65% of the
outstanding common stock of the Company through the exercise of all warrants
and conversion of the note. Also as a result of the agreement with Scherer,
Scherer acquired the right to, and has elected to, name a majority of the
members of the Company's Board of Directors.
12. QUASI-REORGANIZATION:
IV-37
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the first quarter of Fiscal 1994, the Company completed significant
changes to its operations: (l) the reintroduction of substantially all of its
product lines into the market after ceasing operations after an FDA shutdown
in Fiscal 1992, (2) the consolidation of its manufacturing facilities in
Mexico and Parker, Colorado into its primary facility in Englewood, Colorado;
(3) the changes in management of the Company, including a new President and
CEO, Vice President of Sales and Senior Vice President of Regulatory Affairs;
and (4) the successful completion of the first exchange offer to the Swiss
bondholders in which 91% of the bonds were exchanged. Considering these
changes, the Company determined that it was appropriate to effect a
quasi-reorganization. On June 11, 1993, the Company's Board of Directors
approved quasi-reorganization accounting procedures which were effective
July 3, 1993, the end of the Company's first quarter of Fiscal 1994.
Quasi-reorganization rules require that the balance sheet amounts be restated
to fair values and that the accumulated deficit be eliminated against the
paid-in-capital accounts. Therefore, the Company (1) wrote off the remaining
amount of goodwill, totaling $4,283,000 at July 3, 1993; (2) eliminated the
prospective interest on the Swiss bonds of $3,226,000 discussed in Note 11;
(3) eliminated the deferred gain on the sale leaseback transaction of
$965,000 discussed in Note 11; (4) valued the treasury stock at its market
value of $70,000; (5) eliminated the retained deficit of $20,434,000; and
(6) reduced common stock by $17,125,000 and warrants by $3,456,000.
The Company has presented its Consolidated Statements of Operations and Cash
Flows for the three-month period prior to and the nine-month period
subsequent to the accounting for the quasi-reorganization.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
All amounts are in thousands of dollars, except per share amounts
First Second Third Fourth
------ ------ ------ ------
FISCAL 1996 QUARTERS
Net Revenues $5,284 $5,193 $5,739 $6,227
Gross Profit 1,605 1,683 1,779 2,071
Net Income (Loss) 22 (34) (625) 465
Income (Loss) per Share 0.00 0.00 (0.08) 0.05
FISCAL 1995 QUARTERS
Net Revenues $4,899 $4,597 $5,234 $5,846
Gross Profit 1,181 1,020 1,249 1,460
Net Loss (1,070) (961) (646) (773)
Loss Per Share (0.18) (0.12) (0.08) (0.10)
IV-38
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other Recoveries at End of
of Period Expenses Accounts (Write-offs) Period
---------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts -- Trade Receivables
- ----------------------------------------------------
Year Ended
March 30, 1996 $132 $ 24 $ (8) $(54) $ 94
Year Ended
April 1, 1995 $178 $ 21 $(48) $(19) $132
Nine Months Ended
April 2, 1994 $200 $ (62) $ -- $ 40 $178
Three Months Ended
July 3, 1993 $200 $ 15 $ -- $(15) $200
</TABLE>
IV-39
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with accountants on any accounting or
financial disclosure matters during the applicable period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3) of Form 10-K, the information
relating to nominees for Directors of the Company set forth under the caption
"Election of Directors" and the information relating to compliance with
Section 16(a) set forth under the caption "Committees and Meetings of the
Board of Directors" in the Company's definitive proxy statement in connection
with the Annual Meeting of Stockholders to be held on August 22, 1996 is
incorporated herein by reference. Information regarding the executive
officers of the Company required by Item 401(b) of Regulation S-K is set
forth under the caption "Executive Officers" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with General Instruction G(3) of Form 10-K, the information
relating to executive compensation set forth under the caption "Compensation
of Executive Officers" in the Company's definitive proxy statement in
connection with the Annual Meeting to be held on August 22, 1996 is
incorporated herein by reference; such incorporation by reference shall not
be deemed to include or incorporated by reference the information referred to
in Item 402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3) of Form 10-K, the information
relating to security ownership by certain persons set forth under the
captions "Principal Stockholders" in the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on August 22, 1996 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3) of Form 10-K, the information
relating to certain relationships and related transactions set forth under
the caption "Related Party Transactions" in the Company's definitive proxy
statement in connection with the Annual Meeting of Stockholders to be held on
August 22, 1996 is hereby incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following represents a listing of all financial statement, financial
statement schedules and exhibits filed as part of this report.
(1) Financial Statements: See Table of Contents to the Consolidated
Financial Statements included herein in Item 8.
(2) Financial Statement Schedules: See Table of Contents to the
Consolidated Financial Statements included herein in Item 8.
IV-40
<PAGE>
Schedules I, III, IV and V, for which provision is made in the
applicable regulations of the Securities and Exchange Commission have
been omitted because they are not applicable or the information is
elsewhere disclosed in the notes to the financial statements.
(3) Exhibits: Exhibits identified in parentheses below are on file with
the Securities and Exchange Commission and are incorporated herein
by such references.
3.1 Articles of Incorporation of Registrant, as amended through
August 25, 1994 (Exhibit 3(i) of Registration Statement on
Form S-2, Registration No. 33-85564)
3.2 By-laws of Registrant, as amended (Exhibit 2 to Form 8-K dated
April 9, 1993)
4.1 The outside and inside front cover pages and the information set
forth under the heading "Terms of the Bonds" excerpted from the
Prospectus of the Registrant dated February 10, 1985 with
respect to the 25,000,000 Swiss Franc Bonds offered pursuant
thereto (Exhibit 4(b) to Form 10-K dated April 1, 1989)
4.2 Rights Agreement dated as of August 8, 1991 between Marquest
Medical Products, Inc. and Bank of America National Trust &
Savings Association (Exhibit 4.5 to Registration Statement on
Form S-2, Registration Statement No. 33-85564)
4.3 Subscription Agreement for Purchase of Common Stock between
Marquest Medical Products, Inc. and Scherer Capital, LLC dated
March 29, 1996 (Exhibit 4.1 of Form 8-K dated March 28, 1996)
4.4 Conversion Agreement dated March 28, 1996 between Marquest
Medical Products, Inc. and Scherer Healthcare, Inc. (Exhibit 4.2
of Form 8-K dated March 28, 1996)
4.5 Loan and Security Agreement dated March 28, 1996 between
Marquest Medical Products, Inc. and Scherer Capital, LLC
(Exhibit 4.3 of Form 8-K dated March 28, 1996)
4.6 Second Priority Deed of Trust, Security Agreement and Assignment
of Rents and Leases dated March 28, 1996 from Marquest Medical
Products, Inc. to the Public Trustee of Douglas County, Colorado
for the benefit of Scherer Capital, LLC (Exhibit 4.4 of Form 8-K
dated March 28, 1996)
4.7 Convertible Secured Note due April 1, 2001 (Exhibit 4.5 of
Form 8-K dated March 28, 1996)
10.1 Master Equipment Lease Agreement dated December 8, 1993 between
Marquest Medical Products, Inc. and Financing for Science
International, Inc. (Exhibit 4(c) to Form 10-K dated
April 2, 1994)
10.2 Term Loan Agreement dated June 30, 1994 between Marquest Medical
Products, Inc. and Colorado National Bank (Exhibit 4(d) to
Form 10-Q dated July 2, 1994)
10.3 Letter Agreement between Marquest Medical Products, Inc. and
Norman Dreyfuss dated August 1, 1989 (Exhibit 10(a) to Form 10-K
dated March 31, 1990)
10.4 Letter Agreement between Marquest Medical Products, Inc. and
Robert J. McKinnon dated August 19, 1991 (Exhibit 10(b) to
Form 10-K dated March 28, 1992)
IV-41
<PAGE>
10.5 Marquest Medical Products, Inc. Incentive and Non-Qualified Stock
Option Plan effective November 14, 1987, as amended (Exhibit 10(c)
to Form 10-K dated April 1, 1989)
10.6 Consent Decree between Marquest Medical Products, Inc. and the
Food and Drug Administration ("FDA") dated October 1, 1992
(Exhibit 10(d) to Form 10-K dated March 28, 1992)
10.7 Letter from FDA approving resumption of manufacturing and
distribution activities of Marquest Medical Products, Inc. dated
January 9, 1992 (Exhibit 10(e) to Form 10-K dated March 28, 1992)
10.8 Management Agreement between Marquest Medical Products, Inc. and
Scherer Healthcare, Inc. dated June 1, 1994 (Exhibit 10(f) to
Form 10-Q dated June 2, 1994)
10.9 Omnibus Agreement between Scherer Healthcare, Inc. and Marquest
Medical Products, Inc. dated April 12, 1993 (Exhibit 3 to
Form 8-K dated April 9, 1993)
10.10 First Amendment to Loan Agreement dated December 18, 1995
between Marquest Medical Products, Inc. and Colorado National
Bank (Exhibit 10(a) to Form 10-Q dated December 30, 1995)
21. Subsidiaries of Registrant
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K:
Report on Form 8-K dated March 28, 1996 regarding completion of several
transactions effecting the Company's indebtedness and capital.
IV-42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the County of
Douglas, State of Colorado, on June 20, 1996.
MARQUEST MEDICAL PRODUCTS, INC.
By /s/ Robert P. Scherer, Jr.
--------------------------------------
Robert P. Scherer, Jr., Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Title Date Signature
- ----- ---- ---------
Principal Executive Officer:
Robert P. Scherer, Jr.
Chairman, Chief Executive
Officer and Director June 20, 1996 /s/ Robert P. Scherer, Jr.
----------------------------
Principal Accounting and
Financial Officer:
Margaret Von der Schmidt
Vice President -- Finance and
Chief Financial Officer June 24, 1996 /s/ Margaret Von der Schmidt
----------------------------
Charles R. Atkins III, Director June 22, 1996 /s/ Charles R. Atkins III
----------------------------
Stephen A. Lukas, Sr., Director June ___, 1996
----------------------------
Jack W. Payne, Director June 24, 1996 /s/ Jack W. Payne
----------------------------
Kenneth H. Robertson, Director June 21, 1996 /s/ Kenneth H. Robertson
----------------------------
Mack D. Tindal, Director June 20, 1996 /s/ Mack D. Tindal
----------------------------
William J. Thompson, Director June 20, 1996 /s/ William J. Thompson
----------------------------
Jack L. York, Director June 20, 1996 /s/ Jack L. York
----------------------------
IV-43
<PAGE>
ANNEX V
[QUARTERLY REPORT ON FORM 10-Q
FISCAL QUARTER ENDED DECEMBER 28, 1996]
V-1
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended December 28, 1996 Commission File No. 0-11484
________________________
MARQUEST MEDICAL PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
COLORADO 84-0785259
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11039 EAST LANSING CIRCLE, ENGLEWOOD, COLORADO 80112
(Address of principal executive offices, including zip code)
(303) 790-4835
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changes since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceeding 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
----- -----
Number of shares of common stock, no par value, of Registrant outstanding at
January 16, 1997.
14,267,473
V-2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATMENTS
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
December 28 March 30,
1996 1996
----------- ----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 513 $ 1,635
Trade accounts receivable, less allowances for
doubtful accounts of $124 and $94, respectively 2,712 2,915
Notes and other receivables 70 181
Inventories 3,605 3,393
Prepaid items 176 173
----------- ----------
Total current assets 7,076 8,297
PROPERTY, PLANT AND EQUIPMENT
Land 1,265 1,265
Buildings 4,985 4,985
Machinery and equipment 8,942 8,866
Other 2,552 2,523
Construction in progress 47 2
----------- ----------
17,791 17,641
Less accumulated depreciation (11,193) (10,586)
----------- ----------
Net property, plant and equipment 6,598 7,055
OTHER ASSETS 69 41
----------- ----------
----------- ----------
$ 13,743 $ 15,393
----------- ----------
----------- ----------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
V-3
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 28, March 30,
1996 1996
----------- ----------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 1,195 $ 1,001
Accrued liabilities 2,838 3,728
Payable to related party 40 48
Swiss debt principal and interest 368 397
Current maturities of long-term debt 93 117
Current maturities of capital lease obligation 313 289
------------ ----------
Total current liabilities 4,847 5,580
CAPITAL LEASE OBLIGATION 298 536
NOTE PAYABLE TO BANK 813 858
SWISS NOTES PAYABLE 2,851 2,896
NOTE PAYABLE TO SCHERER CAPITAL, LLC. 700 700
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 50,000,000
shares authorized; 14,288,313 and 14,207,435 shares
issued and outstanding, respectively 9,900 9,834
Warrants 593 599
Retained earnings(deficit) ($20,434 of retained
deficit eliminated at July 3, 1993 relating to the
quasi-reorganization) (6,189) (5,540)
Treasury stock, 20,840 shares (70) (70)
------------ ----------
Total shareholders' equity (deficit) 4,234 4,823
------------ ----------
$ 13,743 $ 15,393
------------ ----------
------------ ----------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
V-4
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
----------------------------
December 28, December 30,
1996 1995
------------ -------------
NET REVENUES $ 5,035 $ 5,739
COST OF SALES (3,430) (3,960)
------------ -------------
GROSS PROFIT 1,605 1,779
COSTS AND EXPENSES
Selling and marketing expenses (1,054) (979)
General and administrative expenses (511) (620)
Research and development expenses (97) (36)
------------ -------------
OPERATING INCOME (LOSS) (57) 144
OTHER INCOME (EXPENSE)
Other income (expense) (112) 91
Interest expense (172) (169)
Foreign exchange gain (loss) 27 (2)
Gain on sale of assets -- 8
------------ -------------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (314) 72
Provision for income taxes -- (697)
------------ -------------
NET INCOME (LOSS) $ (314) $ (625)
------------ -------------
------------ -------------
Earnings (loss) per common share $ (0.02) $ (0.08)
------------ -------------
------------ -------------
Weighted average number of common shares
outstanding during the period 14,265,848 8,246,880
------------ -------------
------------ -------------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
V-5
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended
-----------------------------
December 28, December 30,
1996 1995
------------ ------------
NET REVENUES $ 15,840 $ 16,216
COST OF SALES (11,115) (11,149)
------------ ------------
GROSS PROFIT 4,725 5,067
COSTS AND EXPENSES
Selling and marketing expenses (3,066) (2,950)
General and administrative expenses (1,581) (1,757)
Research and development expenses (195) (112)
------------ ------------
OPERATING INCOME (LOSS) (117) 248
OTHER INCOME (EXPENSE)
Other income (expense) (73) 78
Interest expense (507) (506)
Foreign exchange gain (loss) 48 15
Gain on sale of assets -- 225
------------ ------------
LOSS FROM OPERATIONS BEFORE INCOME TAXES (649) 60
Provision for income taxes -- (697)
------------ ------------
NET INCOME (LOSS) $ (649) $ (637)
------------ ------------
------------ ------------
Earnings (loss) per common share $ (0.05) $ (0.08)
------------ ------------
------------ ------------
Weighted average number of common shares
outstanding during the period 14,234,363 8,231,715
------------ ------------
------------ ------------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
V-6
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (649) $ (637)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation and amortization 614 819
Provision for losses on accounts receivable 16 17
Foreign exchange (gain) loss (48) (15)
Gain on sale of assets -- (225)
Gain on extinguishment of debt -- (32)
Increase (decrease) in operating assets and
liabilities:
Accounts receivable 186 258
Notes and other receivables 111 (24)
Inventories and prepaid items (215) (439)
Accounts payable, accrued liabilities and
payable to related party (704) (158)
Accrued interest on Swiss bonds 19 42
Other (35) --
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (705) (394)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (150) (39)
Proceeds from sale of assets -- 225
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (150) 186
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Swiss bond principal and interest -- (146)
Proceeds from note payable to Scherer Capital -- 1,100
Issuance of common stock 16 1
Principal payments on borrowings (283) (360)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (267) 595
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,122) 387
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,635 562
------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 513 $ 949
------------ ------------
------------ ------------
</TABLE>
(Continued)
V-7
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Nine Months Ended
--------------------------------
December 28, December 30,
1996 1995
------------ ------------
NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Warrants exercised:
Warrants $ (6) $ (13)
Swiss notes (45) (40)
Common stock 51 53
------------ ------------
$ -- $ --
------------ ------------
------------ ------------
Capital lease:
Repayment of notes payable $ -- $ (220)
Purchases of property and equipment -- (364)
Capital lease addition -- 584
------------ ------------
$ -- $ --
------------ ------------
------------ ------------
Swiss Bond exchange:
Issuance of Swiss notes payable $ -- $ 259
Repayment of Swiss Bond principal -- (291)
Gain on exchange -- 32
------------ ------------
$ -- $ --
------------ ------------
------------ ------------
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
V-8
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. REPORT OF MANAGEMENT:
The management of Marquest Medical Products, Inc. (the "Company") is responsible
for the integrity of the financial information presented. The financial
statements have been prepared in accordance with generally accepted accounting
principles and they include amounts that are based on management's estimates and
judgment. These unaudited interim financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results of the interim periods presented.
Management relies upon the Company's system of internal controls in meeting its
responsibilities for maintaining reliable financial records. This system is
designed to provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with management's
intentions. Judgments are required to assess and balance the relative cost and
expected benefits of such controls.
2. INVENTORIES:
Inventories consist of the following (in thousands of dollars):
December 28, 1996 March 30, 1996
----------------- --------------
Raw materials $2,254 $1,782
Work in process 338 233
Finished goods 1,013 1,378
______ ______
$3,605 $3,393
===== =====
3. QUASI-REORGANIZATION:
In June 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.
4. WARRANTS:
In June, August and December, 1996, 19,411, 59,618 and 1,849, respectively, of
the Company's warrants to purchase common stock at $0.75 per share were
exercised. These warrants had been issued to Swiss bondholders in exchange
transactions during fiscal 1994.
5. LINE OF CREDIT
The Company has obtained a revolving line of credit from Norwest Business
Credit, Inc. ("Norwest") secured by receivables with an interest rate of 2.25%
over Norwest's prime rate, expiring February 28, 1999. The maximum line of
credit to be extended is 80% of eligible accounts receivable or $2,000,000,
whichever is less. There have been no borrowings on the line of credit.
V-9
<PAGE>
6. FOOD AND DRUG ADMINISTRATION
The Company is subject to regulation by the Food and Drug Administration ("FDA")
regarding the manufacture and sale of the Company's products. On October 1,
1991, the Company entered into a five-year Consent Decree with the FDA in which
the Company agreed to comply with the FDA's Current Good Manufacturing Practices
("cGMP"). As of October 1, 1996, the Consent Decree expired.
7. JAPANESE PATENT
In a Complaint filed in September 1996, the Company's distributor of arterial
blood gas products in Japan is alleged to infringe the patent of Terumo K.K.,
resulting in a request for an injunction against the distributor from further
marketing and sale of arterial blood gas samplers manufactured by the Company
and distributed in Japan. The Complaint does not currently name the Company.
The Company is paying the cost to defend its distributor in the litigation and
has engaged Japanese counsel. Due to the preliminary nature of this litigation,
there can be no assessment as to the potential impact on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales for the third quarter of fiscal 1997 were $5,035,000, a decrease of
$704,000 or 12.3% compared to sales of $5,739,000 for the third quarter of the
previous year. Year-to-date sales of $15,840,000 declined by $376,000 or 2.3%
compared to sales for the nine-month period of the prior fiscal year. A portion
of the overall decrease is due to sales to one OEM manufacturer in fiscal 1996,
who did not order in fiscal 1997. Also, as a result of the Company's expanded
European warehouse facility, some foreign customers are changing buying
patterns, placing more frequent smaller orders in contrast to large orders.
This practice caused a delay in expected purchases during the third quarter.
The gross margin increased from 31% in the third quarter of fiscal 1996 to 31.9%
in the third quarter of fiscal 1997, and decreased from 31.2% to 29.8% for the
first nine months of fiscal 1996 and 1997, respectively. The year-to-date
decrease is due to (i) overtime incurred for rework of certain products, (ii)
the Company's commitment to improved quality systems to meet international
standards and (iii) an increase in the level of heated humidification units
provided to customers. Heated humidification units are provided to hospitals at
no charge in exchange for agreements to purchase specified levels of disposable
products. In fiscal 1997, more new units are being provided to hospitals.
Operating expenses have remained steady for the third quarter and for the first
nine months compared to the prior year. During the first quarter of fiscal
1996, the Company sold its 10% investment in Seabrook Medical Systems, Inc. for
a $200,000 gain.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES: Cash used in operations was $705,000 for the first nine
months of fiscal 1997 compared to $394,000 for the comparable period in fiscal
1996. This decrease was due to a reduction in payables and accrued liabilities
due resulting from payment of various legal settlements and monthly payments to
the Internal Revenue Service.
FINANCING ACTIVITIES: During fiscal 1996, the Company and Scherer Capital, LLC.
signed a loan agreement under which the Company may borrow up to $1,500,000 at
1-1/2% over prime, secured by inventory and equipment. At December 28, 1996,
there is $800,000 of borrowing capacity available to the Company under that
facility and
V-10
<PAGE>
$2,000,000 under a revolving credit facility. On March 29, 1996, Scherer
Capital purchased $1,000,000 of common stock of the Company for $0.485 per
share.
The Company has obtained a revolving line of credit from Norwest Business
Credit., Inc. ("Norwest") secured by receivables with an interest rate of 2.25%
over Norwest's prime rate, expiring February 28, 1999. The maximum line of
credit to be extended is 80% of eligible accounts receivable or $2,000,000,
whichever is less. All of the line is available for borrowing at December 28,
1996. The covenants for the line of credit provide that the company must
maintain a debt service coverage ratio of 1:1 at the end of fiscal 1997 and the
maximum net loss cannot exceed $50,000 for fiscal 1997.
Management of the Company believes that it can fund its current operating levels
and capital expenditures from the funds from the sale of common stock in March
1996 and from available borrowings under the loan agreement with Scherer Capital
and the line of credit. To the extent that fiscal 1997 operations and
borrowings are not sufficient to support anticipated capital expenditures, the
Company's planned investment in capital projects will be reduced.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In a Complaint filed in September 1996, the Company's distributor of arterial
blood gas products in Japan is alleged to infringe the patent of Terumo K.K.,
resulting in a request for an injunction against the distributor from further
marketing and sale of arterial blood gas samplers manufactured by the Company
and distributed in Japan. The Complaint does not currently name the Company.
The Company is paying the cost to defend its distributor in the litigation and
has engaged Japanese counsel. Due to the preliminary nature of this litigation,
there can be no assessment as to the potential impact on the Company.
ITEM 5. OTHER INFORMATION.
The Company is subject to regulation by the Food and Drug Administration ("FDA")
regarding the manufacture and sale of the Company's products. On October 1,
1991, the Company entered into a five-year Consent Decree with the FDA in which
the Company agreed to comply with the FDA's Current Good Manufacturing Practices
("cGMP"). As of October 1, 1996, the Consent Decree expired.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description Page
----------- ----------- ----
4. Credit and Security Agreement by and between
Marquest Medical Products, Inc. and Norwest Business
Credit, Inc. dated November 5, 1996 12
27. Financial Data Schedule (EDGAR version only) 65
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter for which
this report on Form 10-Q is being filed.
V-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 5, 1997 MARQUEST MEDICAL PRODUCTS, INC.
/s/ William J. Thompson
-------------------------------------
William J. Thompson
President
/s/ Margaret Von der Schmidt
-------------------------------------
Margaret Von der Schmidt
Vice President - Finance and Chief Financial
Officer
V-12
<PAGE>
MARQUEST MEDICAL PRODUCTS, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _____________________________, 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 common 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
[___________________________________________________________________], at
[___________] local time, on [______________________________], 1997, and at
any and all adjournments or postponements thereof, with respect to all
matters set forth in the Proxy Statement dated [________________________],
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 [___________________________], 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
