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 April 1, 1995 Commission File No. 0-11484
_______________________
MARQUEST MEDICAL PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
COLORADO 84-0785259
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11039 EAST LANSING CIRCLE, ENGLEWOOD, CO 80112
(Address and zip code of principal executive offices)
(303) 790-4835
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Based on the last reported sales price of $.4375 on June 14, 1995, the
aggregate market value of the voting stock held by nonaffiliates of the
registrant was $2,005,854.
The number of shares outstanding of the registrant's common stock was
8,246,880 at June 14, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders are
incorporated by reference into Part III of this report on Form 10-K.
Page 1 of 51, including exhibits.
Exhibits begin on page 47.
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..................................................15
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................43
PART III
10. Directors and Executive Officers of the Registrant........................................................43
11. Executive Compensation....................................................................................43
12. Security Ownership of Certain Beneficial Owners and Management............................................43
13. Certain Relationships and Related Transactions............................................................43
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................................43
Signatures................................................................................................46
2
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 12 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."
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
3
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 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, packing and
storing 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
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 covered all
products manufactured and assembled in facilities of the Company located in
Englewood, Colorado and Parker, Colorado, exempting the former facility in
Nogales, Mexico. 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. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes 3 and 8
of Notes to Consolidated Financial Statements.)
The suspension of operations from September 27, 1991 until January 9, 1992
resulted in a layoff of 350 personnel and a significant decrease in revenues.
The resulting cash flow deficit caused the Company to dispose of its home
healthcare business segment in February 1992 (at a loss in excess of
$2,900,000), divest its common stock ownership of Diversicare, Inc. in
October 1992 (at a loss of $2,494,000), sell its Parker, Colorado facility in
January 1993 (at a loss of $1,113,000) and sell its Nogales, Arizona property
in December, 1992 (at an immaterial gain).
The Company has made substantial efforts to take appropriate corrective
action and implement 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 various submissions made by the Company. Included in those
submissions are the steps taken to prevent future recurrence of the problems
identified by the FDA during its inspections. During Fiscal 1994, the FDA
completed a routine inspection of the Company's compliance with the FDA's
Good Manufacturing Practices. The Company was issued an inspection report
with only two deficiency observations noted, which have been corrected.
During Fiscal 1995, there were no additional FDA compliance inspections.
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
4
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 OEM customers. The Company's international sales
and marketing efforts are managed from the 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 1995, 1994, and 1993, the Company had one distributor, Tri-Anim
Health Services, Inc. of Sylmar, California, who accounted for 19%, 18%, and
16%, 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. During Fiscal 1992, the Company shifted much of its plastic
injection molding to outside custom molders while it examined the validation
and control of its internal molding process. During Fiscal years 1994 and
1995, the Company resumed molding internally some of its high volume plastic
components and plans to continue the movement of molds from outside custom
molders.
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
5
is preserved. The Company had a backlog of orders to ship of approximately
$99,000 and $94,000 at April 1, 1995 and April 2, 1994, respectively.
SEASONALITY: Historically, the Company has experienced approximately 45% of
its net sales in the first and second quarters of its fiscal year and 55% in
the third and fourth quarters. Net sales are influenced generally by overall
patterns in hospital admissions and discharges, which the Company believes
reflect, among other things, a lower incidence of respiratory problems and
postponements of elective surgeries during the summer months.
COMPETITION: The medical device business is highly competitive. The Company
competes with three major competitors in the manufacture and distribution of
its blood collection systems, four major competitors in respiratory and
nebulizer products and two major competitors in its heated humidification
products.
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 1995, 1994
and 1993, the Company expensed royalties and license fees of approximately
$54,000, $15,000 and $4,000, respectively, in connection with products
developed by others. The Company commenced its internal product development
program in Fiscal 1981. It spent approximately $140,000, $126,000 and
$370,000, respectively, on internal product development in Fiscal 1995, 1994
and 1993.
The results achieved in the product development area were greatly impacted by
the FDA-related suspension (see Notes 3 and 8 to the Consolidated Financial
Statements) as the development engineering staff was reassigned to the
resolution of FDA-related issues. The development staff returned to its
normal function in May, 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
are easily circumvented.
EMPLOYEES: At June 1, 1995, the Company had a total of 257 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
6
Board of Directors in June, 1993, and was effective July 3, 1993. See Note
13 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.: During Fiscal 1994, the
Company consummated two related financing transactions to provide the Company
with necessary liquidity and to effect an exchange offer for defaulted Swiss
Bonds, pursuant to the Omnibus Agreement between the Company and Scherer
Healthcare, Inc., dated April 12, 1993.
The Company sold its Arterial Blood Gas product line, including $245,000 of
net book value of property connected with the product line, to Scherer
Healthcare, Inc. ("Scherer") 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 at any
time on or prior to May 31, 1996, for $4.5 million plus $22,500 for each
month elapsed between the sale and repurchase. 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, 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.
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.
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 is convertible, in whole or in part, at Scherer's option, into Marquest
common stock at a value of $.75 per share. 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. 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) unsecurred 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.
7
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. During Fiscal
1995, the Company leased 71,500 square feet of warehouse space in Aurora,
Colorado. Effective May 1995, the Company reduced its leased warehouse space
to approximately 45,000 square feet. The Company believes its owned and
leased facilities are adequate for its operations in the foreseeable future.
See Notes 5 and 10 to the Consolidated Financial Statements regarding
encumbrances on the Company's manufacturing and office facility.
ITEM 3. LEGAL PROCEEDINGS
As of April 1, 1995, the Company was involved in various litigation matters.
See Note 11 to the Consolidated Financial Statements for a description of
current legal proceedings.
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, 1995 are listed below:
NAME AND AGE POSITIONS WITH THE COMPANY
------------ --------------------------
Robert P. Scherer, Jr. (62) 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 (61) 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 and Chief Operating Officer of
Scherer Healthcare, Inc., an affiliate of
the Company, since August, 1984.
Margaret E. Von der Schmidt (43) 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.
8
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. On March 20,
1984, the Company's stock was accepted into the National Market System of
NASDAQ. 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 1995 and 1994. All quotations were
reported to the Company by the National Association of Securities Dealers and
represent actual transactions and not inter-dealer quotations.
YEAR ENDED: APRIL 1, 1995 APRIL 2, 1994
-------------------- -------------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter 2 1/4 1 5/8 3 3/8 1
Second Quarter 1 7/8 1 1/16 4 1/8 2 1/4
Third Quarter 1 1/4 3/8 2 1/2 1 1/8
Fourth Quarter 5/8 1/4 2 1/2 1 3/8
The closing sale price of the Company's Common Stock on June 14, 1995, as
reported on NASDAQ, was $.4375.
As of June 14, 1995, the Company had 482 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.
9
ITEM 6. SELECTED FINANCIAL DATA:
All amounts in thousands of dollars except per share amounts.
FISCAL NINE THREE FISCAL FISCAL FISCAL
YEAR MONTHS MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
APRIL 1, APRIL 2, JULY 3, APRIL 3, MARCH 28, MARCH 30,
1995 1994 1993 1993 1992 1991
---- ---- ---- ---- ---- ----
Net Revenues $20,576 $17,139 $ 5,327 $21,935 $30,294 $47,193
Net Earnings/(Loss) from
Continuing Operations before
Extraordinary Item (3,450) (2,312) (1,042) (18,542) (6,078) 1,102
Net Earnings/(Loss) (3,450) (2,030) (336) (18,338) (10,100) 1,936
EARNINGS/(LOSS) PER
COMMON SHARE:
Continuing Operations before
Extraordinary Item (0.46) (0.51) (0.23) (4.17) (1.41) 0.26
Net Earnings/(Loss) (0.46) (0.45) (0.07) (4.12) (2.34) 0.46
Total Assets 13,992 16,929 18,366 21,007 40,529 54,177
Long-Term Obligations 5,961 7,659 6,745 -0- 1,589 2,041
Cash Dividend Declared Per
Common Share $.00 $.00 $.00 $.00 $.00 $.00
The substantial decline in net revenues and the related operating results for
since Fiscal 1991 is a result of the temporary suspension of the Company's
operations by the FDA in the third quarter of Fiscal 1992 and its continuing
impact on the Company's operations See Notes 3 and 8 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 13 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
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 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.
10
By letter dated October 8, 1991, the District Director of the FDA's Denver
district informed the Company that, pursuant to the Consent Decree of October
1, 1991, the Company's medical device manufacturing operations were not in
substantial compliance with GMP. The FDA informed the Company that it,
therefore, was not in 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 . 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.
The suspension of the Company's domestic operations during late 1991 and
early 1992, as a result of the Consent Decree, resulted in the layoff of 350
personnel from the Company's manufacturing work force and created a
significant decrease in revenue resulting in cash flow deficits. In order to
remain in operation, the Company was forced to sell subsidiaries and other
assets to raise sufficient operating funds to sustain ongoing operations.
During and after the suspension of operations, the Company incurred
substantial expenses and devoted valuable resources to the restart of
operations that previously were devoted to research and development projects.
The Denver District Director has noted that the Company has fully cooperated
with the FDA in all respects and has maintained constant communication
regarding the status of the Company. During the first quarter of Fiscal
1994, the FDA conducted a routine inspection of the Company's Englewood,
Colorado manufacturing facilities. The Company was issued an inspection
report with only two deficiency observations noted, which were corrected.
The results of the inspection also indicated that Marquest had made
significant improvements in its systems and procedures. During Fiscal 1995,
there were no additional FDA compliance inspections.
FINANCIAL CONDITION
TRADE ACCOUNTS RECEIVABLE, NET: The decrease in accounts receivable is due
to the lower level of sales in the fourth quarter of Fiscal 1995 versus
Fiscal 1994. There have been no significant changes in the composition or
aging of receivables or in the sales terms between years.
INVENTORIES, NET: The decrease in inventory from April 2, 1994 reflects
management's continued efforts to reduce inventory levels to reduce costs and
maximize cash flow.
NOTE FROM RELATED PARTY: The note from related party at April 2, 1994
consisted of an 8% note due from Seabrook Medical, Inc., 10% owned by the
Company. This note was paid off during Fiscal 1995.
PROPERTY, PLANT, AND EQUIPMENT: In Fiscal 1995, the Company has included in
construction in progress the down payment on three pieces of automation
equipment in process of being constructed for the Company at April 1, 1995.
The Company sold equipment no longer used in the business with a book value
of $175,000.
NOTE PAYABLE TO BANK: During Fiscal 1995, the Company refinanced its
Industrial Revenue Bonds which were issued to build the Company's
manufacturing facility in Englewood, Colorado. The Bonds were due December
31, 1993, however the bank extended the debt. The Bonds were refinanced by
the same bank who held the Bonds. The Company refinanced $1,300,000 of the
outstanding $1,389,000.
SWISS DEBT PRINCIPAL: During Fiscal 1994, the holders of 96% of the
Company's Swiss Franc denominated bonds exchanged the bonds for cumulative
convertible preferred stock of Scherer Healthcare, Inc.; unsecured, 8% U.S.
dollar denominated notes of the Company; and warrants to purchase the
Company's common stock. The Company has taken no action with respect to the
approximately $636,000 principal balance of Swiss bonds which were not
tendered for exchange. If such bonds are tendered for redemption, the
Company plans to attempt to exchange securities for them in a manner similar
to the previous exchanges.
11
NOTE PAYABLE TO SCHERER: During Fiscal 1995, Scherer Healthcare, Inc.
converted $2,500,000 of debt to common equity of the Company. In accordance
with the note, Scherer received 3,333,333 shares of common stock at a
conversion price of $0.75 per share.
SHAREHOLDERS' EQUITY: During Fiscal 1995, in addition to the debt conversion
by Scherer described above, 263,921 warrants held by the former Swiss
bondholders were converted to equity at $0.75 per share. In accordance with
the warrant agreement, Swiss Notes Payable were used instead of cash.
During the first quarter of Fiscal 1994, the Company completed significant
changes to its operations and, at the end of the first quarter, determined
that it was appropriate to effect a quasi-reorganization. In accordance with
the rules for a quasi-reorganization, the balance sheet amounts were restated
to fair values and the accumulated deficit was eliminated against the
paid-in-capital accounts. See Note 13 to the Consolidated Financial
Statements for a detailed discussion of the entries to effect the
quasi-reorganization.
RESULTS OF OPERATIONS
FISCAL 1995 VERSUS FISCAL 1994
REVENUE, 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 has been 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 produced internally 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 descreases 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.
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.
12
FISCAL 1994 VERSUS FISCAL 1993
At the end of the first quarter of Fiscal 1994, the Company effected a
quasi-reorganization as described above. The Company's Consolidated Statement
of Operations for Fiscal 1994 has been separated between operations pre- and
post-quasi-reorganization. When appropriate for a more complete
understanding, the results of operations discussed below for Fiscal 1994
delineates operations in the first quarter separate from the remainder of the
year.
REVENUE, COST OF SALES AND GROSS PROFIT: In October 1991, the sale of the
Company's products practically ceased due to the actions of the FDA. The
sales volume for the remainder of Fiscal 1992 was substantially reduced and
remained at reduced levels through Fiscal 1993. Sales volumes in Fiscal 1994
increased 2.4% over Fiscal 1993. The Company has completed its validation
process of products and has concentrated its marketing efforts on rebuilding
market share.
The volume of the Company's sales in Fiscal 1993 was marginally sufficient to
fully absorb and cover the amount of overhead related to the Company's
production and the costs of revalidating its products. Validation costs
included additional engineering, inspection and quality control costs to
ensure compliance with FDA regulations. Smaller production runs resulted in
smaller purchasing volumes and lost volume discounts. In addition, the
Company was purchasing components that it once manufactured, resulting in
increased material costs. During Fiscal 1994, the gross margin was 15% for
the first quarter and 22% for the remaining three quarters. The cost of
sales and gross margin for the first quarter were impacted by the closing and
relocation of the Company's Mexico; Nogales, Arizona; and Parker, Colorado,
manufacturing and warehouse facilities to its Englewood, Colorado facility.
The relocation caused downtime in the Englewood facility and it had to be
modified to accommodate the relocated equipment and manufacturing lines.
During Fiscal 1994, the Company began manufacturing a limited number of
molded components which were purchased during Fiscal 1993. This
manufacturing of components, the efficiencies achieved by the consolidation
of manufacturing and warehouse facilities, reductions in personnel and the
Company's continued emphasis to improve operations and reduce costs favorably
impacted cost of sales and gross margin during Fiscal 1994.
SALES AND MARKETING EXPENSES: Sales expense decreased 31% during Fiscal 1994
from Fiscal 1993 due to restructuring of the sales and marketing function.
The reorganization trimmed upper level sales and marketing management to
reflect the lower sales levels and focused on the strengthening of the
Company's existing distributor network.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses in
Fiscal 1993 were high due to the Company's ongoing revalidation and
remarketing efforts, as well as its attempts to obtain refinancing. Such
efforts resulted in additional consulting fees ($953,000), legal fees
($763,000) and investment banking and advisory fees ($942,000). During
Fiscal 1994, general and administrative expenses decreased 54% due to the
Company's completion of its product revalidation and the consummation of its
successful refinancing as described in Note 12 to the Consolidated Financial
Statements.
LOSS ON SALE/DISPOSAL: Fiscal 1993 losses on the sales or disposition of
assets can be summarized as follows:
Diversicare stock $2,494,000
Parker facility 1,058,000
Property held for lease 350,000
Disposal of Nogales machinery, equipment and other 252,000
----------
$4,154,000
----------
----------
During Fiscal 1994, the Company experienced no losses on the sales of assets.
EXTRAORDINARY ITEM: In the first quarter of Fiscal 1994, the Company
exchanged 91% of its Swiss Franc denominated bonds as discussed above, and
recorded a gain of approximately $706,000 on the early extinguishment of
debt. In the fourth quarter of Fiscal 1994, the Company exchanged an
additional 5% of its Swiss bonds and recorded a similar gain on the exchange
of approximately $282,000. See Note 12 to the Consolidated Financial
Statements for a detailed discussion of the Swiss bond exchange.
13
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1995, the Company has incurred continuing losses, and $994,000
of cash was used to fund operations. Liquidity was provided during Fiscal
1995 by cash on hand at the beginning of the fiscal year, obtained primarily
from the sale of the Company's Arterial Blood Gas product line to Scherer
Healthcare, Inc. during Fiscal 1994. Cash was also provided by proceeds of
$245,000 from the sale of assets no longer used in the business and $375,000
of proceeds from the repayment of a note receivable.
At April 1, 1995, the Company had approximately $600,000 of cash on hand.
Subsequent to year end, the following events occurred:
(i) The Company sold its 10% investment in Seabrook Medical Systems, Inc.,
realizing proceeds of $200,000;
(ii) During Fiscal 1994, the Company received an assessment of approximately
$745,000 for additional taxes and interest from the Internal Revenue Service
("IRS"), as discussed in Note 10 to the Consolidated Financial Statements. In
June, 1995, the Company negotiated a repayment plan with the IRS whereby the
Company paid $400,000 in June 1995, with the remaining balance due in equal
monthly installments over a two-year period. The Company must use best efforts
to obtain third-party financing for all or a portion of the remaining balance
by January 2, 1996;
(iii) In May, 1995, the Company settled a lawsuit with the former President
and former Chairman of the Company as discussed in Note 11 to the
Consolidated Financial Statements, whereby the Company agreed to pay a total
of $725,000 plus interest at 9%. A total of $200,000 was paid in May 1995
and the remainder will be paid in monthly installments through September 1998.
The Company has taken several steps in Fiscal 1996 to preserve cash and
increase profitability on sales, including (i) the addition of independent
manufacturer's representatives to supplement the Company's sales force; (ii)
cost reductions in all departments; and (iii) equipment has been ordered
which will increase the automation of the Company's manufacturing process.
The Company's planned capital investment during Fiscal 1996 is approximately
$720,000 for new molds and betterments to existing molds, and for equipment
to automate the Company's manufacturing process. Management believes that
approximately $390,000 of this investment can be funded with internally
generated funds and the Company has a financing commitment for the remaining
$330,000.
Due to the factors discussed above, there remains substantial doubt about the
Company's ability to continue as a going concern. Management of the Company
believes that it can fund its current operating levels and meet its
obligations as they come due for the first half of Fiscal 1996 from existing
cash on hand at April 1, 1995. Thereafter, the viability of the Company will
be dependent on increasing operating income and, if necessary, the successful
completion of external financing arrangements, which the Company is currently
negotiating. However, there can be no assurance that external financing will
be available to meet operating requirements as needed by the Company.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.............................Page 16
Consolidated Balance Sheets..........................................Page 17
Consolidated Statements of Operations................................Page 19
Consolidated Statements of Shareholders' Equity......................Page 21
Consolidated Statements of Cash Flow.................................Page 22
Notes to Consolidated Financial Statements...........................Page 26
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants on Schedule.................Page 41
Schedule II - Valuation and Qualifying Accounts......................Page 42
15
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 April
1, 1995 and April 2, 1994 (post quasi-reorganization), and the related
consolidated statements of operations, stockholders' equity (deficit) and
cash flows for the fiscal year ended April 1, 1995 and the nine months ended
April 2, 1994 (post quasi-reorganization--Note 13), and for the three months
ended July 3, 1993, and the fiscal year ended April 3, 1993 (pre
quasi-reorganization). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements 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 April 1, 1995 and April 2, 1994 (post
quasi-reorganization) and the results of their operations and their cash
flows for the fiscal year ended April 1, 1995 and the nine months ended April 2,
1994 (post quasi-reorganization) and for the three months ended July 3,
1993 and the fiscal year ended April 3, 1993 (pre quasi-reorganization), in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
Consolidated Financial Statements, the Company has incurred continuing losses
during the fiscal year ended April 1, 1995. Operations continue to use cash
and subsequent to year end, the Internal Revenue Service required partial
payment of taxes due (Note 10). During Fiscal 1995, the Company completed
several transactions to improve its cash requirements. First, the Company
refinanced its Industrial Revenue Bonds with a ten-year agreement due in
monthly installments through June 2004 (Note 5). Second, the beneficial
owner of the Company converted $2,500,000 of notes due from the Company into
3,333,333 shares of the Company's common stock (Note 12). The Company has
taken several further steps in Fiscal 1996 to preserve cash and increase
profitability on sales as discussed in Note 3. Nevertheless, there remains
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3
to the Consolidated Financial Statements. The Consolidated Financial
Statements do not include any adjustments that might result from the outcome
of these uncertainties.
ARTHUR ANDERSEN LLP
Denver, Colorado,
June 30, 1995.
16
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
APRIL 1, APRIL 2,
1995 1994
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 562 $ 1,662
Trade accounts receivable, less allowances for
doubtful accounts of $132 and $178, respectively 2,847 3,075
Notes and other receivables -- 74
Current portion of note from related party -- 300
Inventories 2,610 2,955
Prepaid items 260 212
-------- --------
Total current assets 6,279 8,278
NOTE FROM RELATED PARTY -- 75
PROPERTY, PLANT AND EQUIPMENT
Land 1,265 1,265
Buildings 4,976 4,976
Machinery and equipment 8,364 8,920
Other 2,573 2,404
Construction in progress 220 --
-------- --------
17,398 17,565
Less accumulated depreciation (9,727) (9,021)
-------- --------
Net property, plant and equipment 7,671 8,544
OTHER ASSETS 42 32
-------- --------
$ 13,992 $ 16,929
-------- --------
-------- --------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
17
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
APRIL 1, APRIL 2,
1995 1994
-------- --------
CURRENT LIABILITIES
Accounts payable $ 1,220 $ 1,260
Accrued liabilities 3,622 3,355
Payable to related party 683 375
Swiss debt principal and interest 813 599
Notes payable 220 --
Current maturities of long-term debt 93 1,389
Current maturities of capital lease obligation 141 125
-------- --------
Total current liabilities 6,792 7,103
CAPITAL LEASE OBLIGATION 291 432
NOTE PAYABLE TO SCHERER 1,852 4,352
NOTE PAYABLE TO BANK 1,141 --
SWISS NOTES PAYABLE 2,677 2,875
OTHER LONG-TERM LIABILITIES -- 176
-------- --------
Total liabilities 12,753 14,938
-------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 7, 10 and 11)
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 50,000,000 and 20,000,000
shares authorized; 8,102,720 and 4,505,466 shares
issued and outstanding, respectively 6,177 3,459
Warrants 612 632
Retained earnings (deficit) ($20,434 of retained
deficit eliminated at July 3, 1993 relating to the
quasi-reorganization) (5,480) (2,030)
Treasury stock, 20,840 shares (70) (70)
-------- --------
Total shareholders' equity (deficit) 1,239 1,991
-------- --------
$ 13,992 $ 16,929
-------- --------
-------- --------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
18
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL NINE THREE FISCAL
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
APRIL 1, APRIL 2, JULY 3, APRIL 3,
1995 1994 1993 1993
-------- -------- ------- --------
(PRE QUASI-REORGANIZATION)
NET REVENUES $ 20,576 $ 17,139 $ 5,327 $ 21,935
COST OF SALES (15,666) (13,448) (4,513) (21,790)
---------- ---------- --------- -------
GROSS PROFIT 4,910 3,691 814 145
COSTS AND EXPENSES
Sales and marketing (4,323) (2,872) (969) (5,593)
General and administrative (3,193) (2,276) (941) (7,000)
Research and development (140) (87) (39) (370)
Loss on disposition of assets -- -- -- (1,660)
---------- ---------- --------- -------
OPERATING LOSS (2,746) (1,544) (1,135) (14,478)
OTHER INCOME (EXPENSES)
Sale of Diversicare stock -- -- -- (2,494)
Equity in losses of investees -- -- -- (240)
Interest, dividend & other income 113 340 159 171
Interest expense (626) (911) (81) (1,317)
Other expense (27) 5 (5) (103)
Foreign exchange gain (loss) (164) (202) 20 (81)
---------- ---------- --------- -------
LOSS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES (3,450) (2,312) (1,042) (18,542)
INCOME TAXES -- -- -- --
---------- ---------- --------- -------
NET LOSS FROM CONTINUING
OPERATIONS (3,450) (2,312) (1,042) (18,542)
DISCONTINUED OPERATIONS -- -- -- 204
---------- ---------- --------- -------
LOSS BEFORE EXTRAORDINARY
ITEM (3,450) (2,312) (1,042) (18,338)
EXTRAORDINARY ITEM -- 282 706 --
---------- ---------- --------- -------
NET LOSS $ (3,450) $ (2,030) $ (336) $(18,338)
---------- ---------- --------- -------
---------- ---------- --------- -------
19
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued on next page)
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL NINE THREE FISCAL
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
APRIL 1, APRIL 2, JULY 3, APRIL 3,
1995 1994 1993 1993
-------- -------- ------- --------
(PRE QUASI-REORGANIZATION)
(Continued from previous page)
EARNINGS (LOSS) PER
COMMON SHARE:
Continuing operations $ (0.46) $ (0.51) $ (0.23) $ (4.17)
Disposal of discontinued
operations -- -- -- 0.05
---------- ---------- --------- ---------
Before extraordinary item (0.46) (0.51) (0.23) (4.12)
Extraordinary item -- 0.06 0.16 --
---------- ---------- --------- ---------
Net loss $ (0.46) $ (0.45) $ (0.07) $ (4.12)
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Weighted average number of
common shares outstanding
during the period 7,483,612 4,484,626 4,466,907 4,445,734
---------- ---------- --------- ---------
---------- ---------- --------- ---------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
20
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(THOUSANDS OF DOLLARS EXCEPT SHARE AMOUNTS)
Common Stock Retained Treasury Stock
-------------------- Earnings/ -------------------
Shares Amount (Deficit) Shares Amount Warrants
------ -------- --------- ------ -------- --------
BALANCE, March 28, 1992 4,453,194 $19,706 ($1,760) (23,436) ($141) $ --
Net loss -- -- (18,338) -- -- --
Stock issuances--
Options exercised 8,500 54 -- -- -- --
Stock purchase plan 12,838 55 -- -- -- --
Sale of treasury stock -- -- -- 2,596 16 --
--------- ------- ------- ------- ------ -------
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 12) -- -- -- -- -- 3,290
Swiss Bond exchange (Note 12) -- -- -- -- -- 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 13) -- 745 -- -- -- --
Warrants issued -- Swiss Bond
exchange (Note 12) -- -- -- -- -- 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
--------- ------- ------- ------- -------- -------
--------- ------- ------- ------- -------- -------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
21
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
FISCAL NINE THREE FISCAL
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
APRIL 1, APRIL 2, JULY 3, APRIL 3,
1995 1994 1993 1993
-------- -------- ------- --------
(PRE QUASI-REORGANIZATION)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (3,450) $ (2,030) $ (336) $ (18,338)
Adjustments to reconcile net loss to net
cash provided by operating activities-
Depreciation and amortization 1,364 1,236 607 2,847
Equity loss/impairment of investees -- -- -- 240
Provision for losses on accounts receivable 21 (62) 15 (70)
Extraordinary gain from early extinguish-
ment of debt -- (282) (706) --
(Gain)/loss on sale of assets (70) (219) (50) 4,154
(Gain)/loss on foreign currency translation 164 202 (20) 81
Income tax refund -- 745 -- --
Increase (decrease) in operating assets and
liabilities-
Trade accounts receivable 207 (279) (800) 626
Income taxes receivable -- -- -- 1,399
Notes and other receivables 74 145 212 (7)
Inventories and prepaid items 297 392 (276) 952
Other assets (10) 57 (30) 484
Accounts payable, accrued expenses and
payable to related parties 535 (146) (1,571) 85
Other long term liabilities (176) (463) -- --
Accrued interest on Swiss bonds 50 68 6 --
---------- ---------- --------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (994) $ (636) $ (2,949) $(7,547)
---------- ---------- --------- -------
(Continued on next page)
22
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
FISCAL NINE THREE FISCAL
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
APRIL 1, APRIL 2, JULY 3, APRIL 3,
1995 1994 1993 1993
-------- -------- ------- --------
(PRE QUASI-REORGANIZATION)
(Continued from previous page)
CASH FLOW FROM INVESTING ACTIVITIES
Decrease in short-term investments $ -- $ -- $ -- $ 494
Proceeds received on notes from related
party 375 225 -- --
Purchases of equipment (666) (1,192) (458) (1,023)
Proceeds from sale of discontinued
operations -- -- -- 285
Proceeds from disposition of assets 245 224 468 4,127
Proceeds from sale of long-term investments -- -- -- 3,006
---------- ---------- --------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (46) (743) 10 6,889
---------- ---------- --------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from notes payable 220 -- 1,750 --
Payments on note payable -- -- (1,750) (800)
Proceeds from sale of ABG product line -- -- 4,500 --
Principal payments on borrowings (280) (34) (67) (400)
Issuance of common stock -- -- 24 109
Proceeds from capital lease -- 591 -- --
Sale of treasury stock -- -- -- 16
---------- ---------- --------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (60) 557 4,457 (1,075)
---------- ---------- --------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,100) (822) 1,518 (1,733)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,662 2,484 966 2,699
---------- ---------- --------- -------
CASH AND CASH EQUIVALENTS.
END OF PERIOD $ 562 $ 1,662 $ 2,484 $ 966
---------- ---------- --------- -------
---------- ---------- --------- -------
(Continued on next page)
23
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
FISCAL NINE THREE FISCAL
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
APRIL 1, APRIL 2, JULY 3, APRIL 3,
1995 1994 1993 1993
-------- -------- ------- --------
(PRE QUASI-REORGANIZATION)
(Continued from previous page)
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest $ 445 $ 374 $ -- $ 291
---------- ---------- --------- --------
---------- ---------- --------- --------
Income taxes $ -- $ -- $ -- $ 62
---------- ---------- --------- --------
---------- ---------- --------- --------
NONCASH INVESTING AND FINANCING
TRANSACTIONS-
Debt forgiven in exchange for investment $ -- $ -- $ -- $ 185
---------- ---------- --------- --------
---------- ---------- --------- --------
Refinancing of Swiss debt-
Warrants issued $ -- $ 84 $ 714 $ --
Notes issued -- 482 6,745 --
Prospective interest on notes -- -- 3,246 --
---------- ---------- --------- --------
$ -- $ 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 --
---------- ---------- --------- --------
$ -- $ -- $ -- $ --
---------- ---------- --------- --------
---------- ---------- --------- --------
(Continued on next page)
24
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
FISCAL NINE THREE FISCAL
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
APRIL 1, APRIL 2, JULY 3, APRIL 3,
1995 1994 1993 1993
-------- -------- ------- --------
(PRE QUASI-REORGANIZATION)
(Continued from previous page)
Debt conversion-
Note payable converted $ (2,500) $ -- $ -- $ --
Common stock issued 2,500 -- -- --
---------- ---------- --------- --------
$ -- $ -- $ -- $ --
---------- ---------- --------- --------
---------- ---------- --------- --------
Refinancing of Industrial Revenue Bonds-
Bonds retired $ (1,300) $ -- $ -- $ --
Note payable issued to bank 1,300 -- -- --
---------- ---------- --------- --------
$ -- $ -- $ -- $ --
---------- ---------- --------- --------
---------- ---------- --------- --------
Warrants-
Warrants exercised $ (20) $ -- $ -- $ --
Common stock issued 218 -- -- --
Swiss notes retired (198) -- -- --
---------- ---------- --------- --------
$ -- $ -- $ -- $ --
---------- ---------- --------- --------
---------- ---------- --------- --------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
25
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Marquest Medical Products, Inc. (the "Company") was incorporated in Colorado
on March 28, 1979, for the purpose of developing, manufacturing and
distributing medical and related products and services. The Company operates
in the United States and has one line of business - it manufactures and
distributes medical devices and equipment to the healthcare provider sector.
During Fiscal 1995, 1994, and 1993, the Company had one distributor, Tri-Anim
Health Services, Inc. of Sylmar, California, who accounted for 19%, 18%, and
16%, respectively, of the Company's sales. The Company's fiscal year ends on
the Saturday closest to March 31.
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 1995 FY 1994 FY 1993
------- ------- -------
Sales by geographic location:
United States and Canada $16,023 $18,262 $18,522
------- ------- -------
------- ------- -------
Export Sales:
Europe $2,538 $2,251 $1,965
Pacific Rim 1,458 1,647 1,167
Puerto Rico 352 306 205
Other 205 -- 76
------- ------- ------
$4,553 $4,204 $3,413
------- ------- ------
------- ------- ------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
PRINCIPLES OF CONSOLIDATION. 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 RECOGNITION. Revenue is recognized at the time the product is
shipped.
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.
26
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories consist of the following:
($000)
---------------------------------------
APRIL 1, 1995 APRIL 2, 1994
-------------- -------------
Raw materials $1,530 $1,372
Work in process 203 236
Finished goods 877 1,347
------ ------
$2,610 $2,955
------ ------
------ ------
FOREIGN CURRENCY EXCHANGE GAIN/(LOSS). The Company had SFr 720,000, 720,000
and 17,040,000 of Swiss Franc denominated bonds outstanding at April 1,1995,
April 2, 1994 and April 3, 1993, 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. Property, plant and equipment are recorded at
acquisition cost. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets as follows:
Buildings 50 years
Machinery and equipment 3 to 10 years
Other 3 to 8 years
Expenditures for maintenance and repairs are charged to operations as
incurred, whereas expenditures for renewals and betterments are capitalized
and depreciated.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenditures for
the creation and application of new products and processes are expensed as
incurred.
INCOME TAXES. As discussed in Note 10, effective April 4, 1993, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets or
liabilities are computed based on the difference between the financial
reporting and income tax bases of assets and liabilities, as measured by the
statutory tax rates in effect when such differences are expected to reverse.
SFAS 109 requires recognition of deferred tax assets 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 (see Note 10).
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. The Company periodically assesses the realizability of its
recorded goodwill and makes any appropriate adjustments. During Fiscal
1994, as part of the quasi-reorganization discussed in Note 13, the Company
reduced the remaining goodwill at July 3, 1993 of $4,283,000 to zero.
27
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER COMMON SHARE. Earnings 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 1995, 1994 and 1993 and are therefore excluded from
the computation.
CONSOLIDATED STATEMENTS OF CASH FLOWS. For purposes of reporting cash flows,
the Company considers all highly liquid investments with an original maturity
of three months or less to be cash and cash equivalents.
3. BASIS OF PRESENTATION:
The Company's Consolidated Financial Statements have been presented on the
basis that it will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The conditions and uncertainty associated with this
basis of presentation, as well as management's plans concerning these
matters, are described in the following paragraphs.
FDA ACTIONS. The Company is subject to oversight and regulation by the U.S.
Food and Drug Administration ("FDA") for substantially all of its
manufactured products. On August 8, 1991 the Company was named in a civil
complaint filed by the FDA alleging that the Company violated Good
Manufacturing Practices ("GMP") and other FDA regulations. This dispute was
resolved through the execution of a consent decree by the Company on October 1,
1991.
The consent decree provided for a series of inspections on the part of the
FDA in the Company's U.S. manufacturing facilities. Following the first of
these inspections, the Company was directed on October 8, 1991, to suspend
its U. S. manufacturing and distribution operations until certain issues had
been resolved to the satisfaction of the FDA. This suspension lasted until
January 9, 1992 and had a significant impact on the operations of the Company.
During Fiscal 1993, the Company's operations continued to be impacted by
significantly lower sales volumes and higher operating costs as products were
revalidated in accordance with GMP and reintroduced to the market. During
Fiscal 1994, the Company completed the revalidation of its products, and in
July, 1993, the FDA completed a routine inspection of the Company's
compliance with the FDA's GMP. The results of the inspection indicated that
the Company had made significant improvements in its systems and procedures.
The Company was issued an inspection report with only two deficiency
observations noted, which were corrected. During Fiscal 1995, there were no
FDA compliance inspections.
FINANCING. During Fiscal 1995, the Company refinanced its Industrial Revenue
Bonds to a 10-year Term Loan Agreement due in monthly installments through
June 2004 (See Note 5 to the Consolidated Financial Statements). Also during
Fiscal 1995, Scherer Healthcare, Inc. elected to convert $2,500,000 of its
Marquest debt to Marquest common stock.
OPERATIONS. Cash used in operations has decreased from $7,547,000 in Fiscal
1993 and $3,585,000 in Fiscal 1994 to $994,000 in Fiscal 1995. Liquidity was
provided during Fiscal 1995 by cash on hand at the beginning of the fiscal
year, obtained primarily from the sale of the Company's Arterial Blood Gas
product line to Scherer Healthcare, Inc. during Fiscal 1994.
At April l, 1995, the Company had approximately $600,000 of cash on hand.
Subsequent to year end, the following events occurred:
(i) The Company sold its 10% investment in Seabrook Medical Systems, Inc.,
realizing proceeds of $200,000;
28
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ii) During Fiscal 1995, the Company received an assessment of approximately
$745,000 for additional taxes plus interest from the Internal Revenue Service
("IRS"), as discussed in Note 10 to the Consolidated Financial Statements.
In June 1995, the Company negotiated a repayment plan with the IRS whereby
the Company paid $400,000 in June 1995, with the remaining balance due in
equal monthly installments of approximately $20,000 over a two-year period.
The Company must use best efforts to obtain third-party financing for all or a
portion of the remaining balance by January 2, 1996; and
(iii) In May 1995, the Company settled a lawsuit with the former President
and former Chairman of the Company as discussed in Note 11 to the
Consolidated Financial Statements, whereby the Company agreed to pay a total
of $725,000 plus interest at 9%. A total of $200,000 was paid in May 1995
and the remainder will be paid in monthly installments through September 1998.
The Company has taken several steps in Fiscal 1996 to preserve cash and
increase the gross margin on its sales: (i) independent manufacturer's
representatives have been added to supplement the Company's sales force; (ii)
effective in the first quarter of 1996, the Company has increased prices of
its products; (iii) operating expenses in all departments have been reduced;
and (iv) equipment has been ordered which will further automate the Company's
manufacturing process. The Company has a financing commitment to fund
$330,000 for the capital investment in automation equipment.
Management of the Company believes that it can fund its current operating
levels and meet its obligations as they come due for the first half of Fiscal
1996 from improving profitability as discussed above and existing cash on
hand at April 1, 1995. Thereafter, the viability of the Company will be
dependent on increasing profitability and, if necessary, the successful
completion of external financing arrangements, which the Company is currently
negotiating. However, there can be no assurance that external financing will
be available to meet operating requirements as needed by the Company.
Nevertheless, there remains doubt about the Company's ability to continue as
a going concern. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
4. INVESTMENTS:
SEABROOK MEDICAL SYSTEMS, INC. In Fiscal 1991 the Company acquired 10% of
the issued and outstanding Class A and Class B common shares of Seabrook
Medical Systems, Inc. ("Seabrook"). As part of this transaction, the Company
entered into a private label distribution agreement with Seabrook that gave
the Company worldwide distribution rights of certain products for a period of
five years. In exchange for the 10% ownership interest, a private label
distribution agreement and a license agreement to manufacture those same
products, the Company paid approximately $608,000 in cash and agreed to loan
Seabrook an additional $600,000 at an interest rate of 8% per annum. In
Fiscal 1993, the Company determined that these products no longer played a
part in its strategic direction and wrote off its remaining investment of
$368,000. The note was paid off by Seabrook during Fiscal 1995. Subsequent
to year end the Company sold its 10% investment back to Seabrook for $200,000.
INVESTMENT IN SUBSIDIARY. In Fiscal 1993, the Company sold its investment in
a subsidiary in exchange for a $300,000 note receivable. During Fiscal 1994,
$100,000 was received and a reserve was established for the remainder of the
receivable.
DIVERSICARE, INC. The Company acquired 343,750 shares of common stock of
Diversicare, Inc. in February, 1992 as part of the sale of the Company's Home
Healthcare Division. At that time, due to certain restrictions and put and
call provisions, it was the Company's intent to hold the stock until it could
be realized at $16 per share.
During Fiscal 1992, the Company became critically short of cash. Product
validation costs and remarketing costs in excess of those previously
anticipated had resulted in significant liquidity problems. As a result, the
Company's
29
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
management determined that sales of nonoperating assets were required to fund
operations. The nonmarketable nature of the Diversicare, Inc. stock and the
Company's critical need for cash resulted in the Company accepting a
significant discount from the carrying amount of the stock to provide needed
cash for operations. Accordingly, in Fiscal 1993, the Company entered into
an agreement to sell the common stock for approximately $3,000,000 and
recorded a loss of approximately $2,494,000.
PROPERTY HELD FOR LEASE. As a result of a plant consolidation in Fiscal
1989, certain real property owned by the Company had been leased to a third
party. Prior to Fiscal 1994, the Company had recorded $350,000 in writedowns
to this investment. During Fiscal 1994, the Company sold the property and
recorded a $50,000 gain on the sale.
5. DEBT:
($000)
---------------------------------------
APRIL 1, 1995 APRIL 2, 1994
-------------- -------------
Long-term debt consists of the following:
Swiss Bonds, 720,000 Swiss Francs outstanding at April 1, 1995 and
April 2, 1994, interest payable annually on March 11 at a rate of
6%, increased to 9% effective March 12, 1992; due March 11, 1994;
unsecured; including $176,000 and $94,000 accrued interest,
respectively. (See Notes 3 and 12) $ 813 $ 599
Douglas County Industrial Revenue Bonds, payable in quarterly
principal installments of $66,666, plus interest at 75% of the
bank's prime rate but not less than 7.5% (effective rate of 7.5%);
with the remaining principal balance of $1,389,488 due and payable
on December 31, 1993; collateralized by real property, inventory and
accounts receivable. -- 1,389
Note payable to Scherer; 8% interest due semi-annually; due March
31, 1999; unsecured; convertible into 2,468,000 and 5,802,000
shares, respectively, of Marquest common stock. (See Note 12) 1,852 4,352
Swiss notes payable; 8% interest due semi-annually, due March 31,
1999, unsecured; denominated in U.S. dollars. (See Note 12.) 2,677 2,875
Note payable to bank; interest rate floats annually, currently 7.75%;
interest and principal due in monthly installments until June 2004;
secured by property, inventory and accounts receivable 1,234 --
Notes payable; 18% interest payable monthly; due in fiscal 1996;
secured by a letter of credit from a bank 220 --
------ ------
6,796 9,215
Less current maturities 1,126 1,988
------ ------
Long-term debt $5,670 $7,227
------ ------
------ ------
30
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The scheduled maturities of long-term debt for the next five fiscal years are
as follows: 1996 - $1,126,000; 1997 - $103,000; 1998 - $112,000; 1999 -
$4,651,000; 2000 - $132,000; thereafter - $670,000.
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 12). The Swiss bonds outstanding at April
1, 1995, including the accrued interest on these bonds, have been classified
as current maturities of long-term debt.
NOTE PAYABLE TO BANK/INDUSTRIAL REVENUE BONDS. The Industrial Revenue Bonds
(the "Bonds"), which were due on December 31, 1993, were refinanced in Fiscal
1995 with a term loan from the same bank holding the Bonds. The Term Loan
Agreement dated June 30, 1994, between the Company and Colorado National Bank
(the "Bank"), imposes certain conditions and financial covenants on the
Company. At April l, 1995, the Company was not in compliance with covenants
requiring a specified current ratio and ratio of total liabilities to
tangible net worth. The Company was also not in compliance with a covenant
that the Company will pay and discharge all claims which might become a lien
on the Company's property (see Note 10). The Bank has subsequently waived
the requirement of compliance with these covenants.
Also, pursuant to the Term Loan Agreement, the Company cannot, without the
written prior approval of the Bank, (1) make any expenditures for capital
assets in excess of $1 million in any fiscal year subsequent to April l, 1995
and (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. 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 (see
Note 12).The Company has not made its semi-annual interest payment to Scherer
since September 30, 1993, due to the Company's cash flow deficit. Scherer
has waived this event of noncompliance. The total interest accrued on the
note payable is $347,000 at April l, 1995.
NOTES PAYABLE. At April 1, 1995, the Company has three notes payable
outstanding to a leasing company, aggregating $220,000. These notes
represent the down payments funded by the leasing company on three pieces of
equipment which are being constructed for the Company. The notes are
recorded as current liabilities as the notes will be paid by the execution of
long-term capital leases upon delivery and acceptance of the equipment by the
Company during Fiscal 1996. The notes bear interest at 18% which is paid
monthly. The remaining amount of the capital equipment to be funded by the
leasing company will be approximately $330,000.
6. INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN 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 633,400 are available for grant at April 1,
1995. At April 1, 1995, 299,026 options are vested. Options expire seven
years from the date of the grant.
31
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The activity in the stock option plan for the years ended April 1, 1995,
April 2, 1994 and April 3, 1993 is as follows:
EXERCISE
SHARES PRICE RANGE
-------- -------------
Outstanding, March 28, 1992 395,202 $5.50 - $8.87
Granted 186,000 $3.94 - $9.25
Exercised (8,500) $5.75 - $6.63
Canceled (114,168) $5.50 - $8.87
-------
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
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
approved for the 1990 Plan totaled 500,000. During Fiscal 1994, 1993 and
1992, shares in the amount of 934, 12,838 and 12,317, respectively, 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.) 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.) 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.
32
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 April 1, 1995 8,102,720 42.60%
Stock options outstanding at April 1, 1995 pursuant to the
Company's Incentive and Non-Qualified Stock Option Plan 339,327 1.78%
Stock options issued to consultant, exercisable at $0.75
per share until August 26, 2002 50,000 .26%
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 .73%
Warrants issued in connection with a Fiscal 1993 lease
termination, exercisable at $4.00 per share until
September 30, 1997 10,000 .05%
Warrants issued to the Swiss bondholders:
Exercisable at $.75 per share until March 31, 1999 1,168,495
Exercisable at $.25 per share until March 31, 1999 165,000
----------
Total Swiss bondholders 1,333,495 7.01%
Warrants issued to Scherer Healthcare, Inc.:
In connection with providing short-term financing in Fiscal
1994, exercisable at $.75 per share until March 31, 1999 800,000
In connection with sale leaseback of Arterial Blood Gas
product line, exercisable at $.75 per share; 1,530,000 and
4,250,000 exercisable until March 31, 1999 and March 31, 2003,
respectively 5,780,000
Note payable to Scherer Healthcare, convertible into common
stock at $.75 per share until March 31, 1999 2,468,800
----------
Total Scherer Healthcare 9,048,800 47.57%
---------- ------
Total common shares if all options and warrants are exercised 19,023,175 100.00%
---------- ------
---------- ------
33
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LEASES:
OPERATING LEASES. The Company leases warehouse space as well as office and
manufacturing equipment under non-cancelable operating leases. The following
is a schedule of future minimum rental payments required under these leases
that expire after April 1, 1995.
FISCAL ($000)
YEAR ENDING --------------------------------------
----------- EQUIPMENT FACILITIES TOTAL
--------- ---------- -----
1996 $ 78 $ 347 $ 425
1997 5 343 348
1998 2 343 345
1999 1 182 183
2000 -- 168 168
Thereafter -- 461 461
----- ------ ------
$ 86 $1,844 $1,930
----- ------ ------
----- ------ ------
Total rent expense, related to continuing operations, under all operating
leases for Fiscal 1995, 1994, and 1993 was $560,000, $1,088,000 and
$1,472,000, respectively.
During Fiscal 1994, the Company consolidated its warehousing and
administration facility in Nogales, Arizona into its primary facility in
Englewood, Colorado. The facility in Nogales, Arizona, which was sold under
a sale/leaseback arrangement in Fiscal 1993, has a lease commitment until
2002 with monthly lease payments of approximately $14,000. The Company is
currently negotiating with the owner of the building for a settlement of the
obligation, as well as pursuing sublease arrangements with potential
sublessors. At April 1, 1995, the Company has accrued approximately $240,000
for the estimated cost to settle the lease obligation.
CAPITAL LEASE. In December, 1993, the Company refinanced certain production
equipment rentals under a capital lease agreement. The present value of the
future minimum capital lease payments as of April 2, 1994 are (in thousands
of dollars):
FISCAL YEAR ENDING
------------------
1996 $186
1997 186
1998 139
----
Total minimum lease payments 511
Less - amount representing imputed interest (79)
----
Present value of minimum capital lease payments 432
Less - current installments (141)
----
Long-term obligation under capital lease $ 291
----
----
The gross amount of equipment and related accumulated depreciation recorded
under the capital lease was $591,000 and $185,000, respectively, at April 1,
1995.
34
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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.
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.
The Company has made substantial efforts to take appropriate corrective
action and implement 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 various submissions made by the Company. Included in those
submissions also are the steps taken to prevent future recurrence of the
problems identified by the FDA during its inspections. During Fiscal 1994,
the FDA completed a routine inspection of the Company's compliance with the
FDA's Good Manufacturing Practices. The Company was issued an inspection
report with only two deficiency observations noted, which have been
corrected. During Fiscal 1995, there have been no additional FDA compliance
inspections.
9. RELATED PARTY TRANSACTIONS:
At April 3, 1993, the Company had accrued $325,000 of severance expense which
was paid after year end to the former CEO and member of the Board of
Directors.
In Fiscal 1993 the Company paid, through monthly retainers, an amount of
$314,000 to former members of the Board of Directors for additional services
of a consulting nature.
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 1995 and 1994, these royalties totaled $287,000 and $262,000,
respectively. During Fiscal 1995 and
35
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1994, the Company expensed $180,000 and $263,000 of interest related to the
Company's note payable to Scherer (see Note 5), and expensed $304,000 in
Fiscal 1995 related to marketing and financial consulting provided by Scherer.
10. INCOME TAXES:
During Fiscal 1995, the nine months ended April 2, 1994, the three months
ended July 3, 1993 and Fiscal 1993, the Company did not record any
provision/(benefit) for income taxes.
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.
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):
FISCAL NINE THREE FISCAL
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
APRIL 1, APRIL 2, JULY 3, APRIL 3,
1995 1994 1993 1993
------------ ---------- ---------- ----------
Federal statutory rate 34% 34% 34% 34%
"Expected" federal tax benefit $ (1,156) $ (786) $ (354) $ (6,235)
State income taxes, net of Federal benefit (112) (76) (34) (605)
Goodwill amortization for book purposes -- -- 24 66
Nondeductible capital losses -- -- -- 1,009
Other items 24 -- -- --
---------- --------- --------- ---------
(1,244) (862) (364) (5,765)
Increase in valuation allowance 1,244 862 364 5,765
---------- --------- --------- ---------
$ -- $ -- $ -- $ --
---------- --------- --------- ---------
---------- --------- --------- ---------
36
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under SFAS 109, deferred taxes are determined based on estimated future tax
effects on 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
April 1, 1995 and April 2, 1994 are comprised of the following (in thousands
of dollars):
APRIL 1, APRIL 2,
1995 CHANGE 1994
---------- -------- ----------
Deferred tax assets/(liabilities):
Accelerated tax depreciation in excess of book
depreciation $ (187) $ -- $ (187)
Nondeductible accruals 783 (59) 842
Unrealized foreign exchange losses 112 (900) 1,012
Capital loss carryforwards 1,530 520 1,010
Net operating loss carryforwards 7,087 1,119 5,968
--------- --------- ---------
9,325 680 8,645
Valuation allowance (9,325) (680) (8,645)
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
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 April 1, 1995, the Company had tax net operating
loss carryforwards of approximately $19,000,000, and capital loss
carryforwards of approximately $4,100,000. 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 12
and 13, the future benefits associated with the utilization of net operating
loss carryforwards may be substantially limited.
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") has completed an audit, and in July 1994, determined
that the losses could not be carried back and issued an assessment to the
Company for the taxes plus interest. In June 1995, the Company negotiated a
repayment plan with the IRS whereby the Company paid $400,000 in June, 1995
and the remaining balance will be paid in equal monthly installments over a
two-year period. The Company must use best efforts to obtain third-party
financing for all or a portion of the remaining balance by January 2, 1996. The
IRS has placed a lien on the Company's facility in Englewood, Colorado to secure
payment of the taxes. The tax assessment and interest has been accrued as of
April 1, 1995.
11. LITIGATION:
As of April 1, 1995, the Company was involved in various litigation matters.
Certain of the more significant matters are discussed below.
In July, 1993, the Company filed suit in the United States District Court in
Colorado against a former President and a former Chairman of the Board of
Directors of the Company seeking a declaratory judgment that their termination
37
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreements were void and for damages. The Company discontinued making
payments on these termination agreements in April, 1993. The former
President and the former Chairman counterclaimed for payments allegedly due
them under the termination agreements and the former Chairman counterclaimed
for repayment of an alleged loan made by him to a third party for the benefit
of the Company. Subsequent to year end, the Company entered into a
settlement agreement with the counterclaimants to pay them a total of
$725,000 plus interest at 9% in monthly payments through September 1998.
This settlement is included in accrued liabilities in the accompanying
Consolidated Financial Statements.
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 be
responsible for a $250,000 self-insured retention plus the cost of defense.
The Company has claimed that the insurance company mishandled the lawsuit and
has 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.
The Company has provided reserves on these issues. In Management's opinion,
the resolution of the remaining proceeding is not expected to have a
significant effect on the Company's reported financial condition or results
of operations.
12. 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 at any time on or prior to May 31, 1996, for $4.5
million plus $22,500 for each month elapsed between the sale and repurchase.
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.
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 13.
38
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is 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 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 Number 15, the Company also accrued $3,246,000 in
prospective interest on the notes. The prospective interest was eliminated
in the quasi-reorganization described in Note 13.
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.
13. QUASI-REORGANIZATION:
During the first quarter of Fiscal 1994, the Company completed significant
changes to its operations: (l) the reintroduction of substantially all of its
product lines into the market after ceasing operations after an FDA shutdown
in Fiscal 1992, (2) the consolidation of its manufacturing facilities in
Mexico and Parker, Colorado into its primary facility in Englewood, Colorado;
(3) the changes in management of the Company, including a new President and
CEO, Vice President of Sales and Senior Vice President of Regulatory Affairs;
and (4) the successful completion of the first exchange offer to the Swiss
bondholders in which 91% of the bonds were exchanged. Considering these
changes and management's expections of future operating profits, 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 12;
(3) eliminated the deferred gain on the sale leaseback transaction of $965,000
39
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
discussed in Note 12; (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.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
All amounts are in thousands of dollars, except per share amounts
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
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)
FISCAL 1994 QUARTERS
Net Revenues $5,327 $5,181 $5,102 $6,856
Gross Profit 814 666 946 2,079
Loss Before Extraordinary Item (1,042) (1,284) (952) (76)
Loss Per Share Before Extraordinary Item (0.23) (0.29) (0.21) (0.01)
Net Income (Loss) (336) (1,284) (941) 195
Net Income (Loss) Per Share (0.07) (0.29) (0.21) 0.01
Since the Company had net income for the fourth quarter of Fiscal 1994,
earnings per share for that quarter have been calculated using a weighted
average share calculation in accordance with Accounting Principles Board
Opinion No. 15, "Earnings Per Share."
40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Marquest Medical Products, Inc. and Subsidiaries:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Marquest Medical Products, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon
dated June 30, 1995. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole, which included an
explanatory paragraph with respect to going concern issues as discussed in
Note 3 to the consolidated financial statements. The following schedule
listed in the index above is the responsibility of the Company's management
and is presented for the purpose of complying with the Securities and
Exchange Commission's rule and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
June 30, 1995.
41
MARQUEST MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS OF DOLLARS)
ADDITIONS
------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER RECOVERIES AT END OF
OF PERIOD EXPENSES ACCOUNTS (WRITE-OFFS) PERIOD
--------- ---------- ---------- ------------ ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS - TRADE RECEIVABLES
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
Year Ended
April 3, 1993 $313 $(70) $ -- $(43) $200
42
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 24, 1995 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 24, 1995 is
incorporated herein by reference; such incorporation by reference shall not
be deemed to include or incorporated by reference the information referrred
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 24, 1995 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 24, 1995 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.
43
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)
10.1 Master Equipment Lease Agreement dated December 8, 1993
between Marquest Medical Products, Inc. and Financing for
Science International, Inc. (Exhibit 4(c) to Form 10-K dated
April 2, 1994)
10.2 Term Loan Agreement dated June 30, 1994 between Marquest
Medical Products, Inc. and Colorado National Bank (Exhibit
4(d) to Form 10-Q dated July 2, 1994)
10.3 Letter Agreement between Marquest Medical Products, Inc.
and Norman Dreyfuss dated August 1, 1989 (Exhibit 10(a) to
Form 10-K dated March 31, 1990)
10.4 Letter Agreement between Marquest Medical Products, Inc.
and Robert J. McKinnon dated August 19, 1991 (Exhibit 10(b)
to Form 10-K dated March 28, 1992)
10.5 Marquest Medical Products, Inc. Incentive and Non-Qualified
Stock Option Plan effective November 14, 1987, as amended
(Exhibit 10(c) to Form 10-K dated April 1, 1989)
10.6 Consent Decree between Marquest Medical Products, Inc. and
the Food and Drug Administration ("FDA") dated October 1,
1992 (Exhibit 10(d) to Form 10-K dated March 28, 1992)
10.7 Letter from FDA approving resumption of manufacturing and
distribution activities of Marquest Medical Products, Inc.
dated January 9, 1992 (Exhibit 10(e) to Form 10-K dated
March 28, 1992)
10.8 Management Agreement between Marquest Medical Products,
Inc. and Scherer Healthcare, Inc. dated June 1, 1994
(Exhibit 10(f) to Form 10-Q dated June 2, 1994)
10.9 Omnibus Agreement between Scherer Healthcare, Inc. and
Marquest Medical Products, Inc. dated April 12, 1993
(Exhibit 3 to Form 8-K dated April 9, 1993)
10.10 Promissory Note dated January 13, 1995 between Marquest
Medical Products, Inc. and Financing for Science
International, Inc.
44
10.11 Promissory Note dated January 13, 1995 between Marquest
Medical Products, Inc. and Financing for Science
International, Inc.
10.12 Promissory Note dated January 13, 1995 between Marquest
Medical Products, Inc. and Financing for Science
International, Inc.
21. Subsidiaries of Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K:
Report on Form 8-K dated February 24, 1995 regarding change in directors
and officers effective February, 24, 1995.
45
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 July 11, 1995.
MARQUEST MEDICAL PRODUCTS, INC.
/s/ Robert P. Scherer, Jr.
By______________________________________
Robert P. Scherer, Jr., Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
TITLE DATE SIGNATURE
- ----- ---- ----------
Principal Executive Officer:
Robert P. Scherer, Jr.
Chairman, Chief Executive Officer /s/ Robert P. Scherer, Jr.
and Director July 11, 1995 _____________________________
Principal Accounting and Financial Officer:
Margaret Von der Schmidt
Vice President - Finance and Chief Financial /s/ Margaret Von der Schmidt
Officer July 11, 1995 ______________________________
/s/ Charles R. Atkins III
Charles R. Atkins III, Director June 13, 1995 ______________________________
/s/ Arthur Lipper III
Arthur Lipper III, Director June 8, 1995 ______________________________
/s/ Stephen A. Lukas, Sr.
Stephen A. Lukas, Sr., Director June 12, 1995 ______________________________
/s/ Kenneth H. Robertson
Kenneth H. Robertson, Director June 8, 1995 ______________________________
/s/ William J. Thompson
William J. Thompson, Director July 11, 1995 ______________________________
/s/ Jack L. York
Jack L. York, Director June 13, 1995 ______________________________
46