SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended December 30, 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 (IRS Employer
incorporation or organization) Identification No.)
11039 EAST LANSING CIRCLE, ENGLEWOOD, COLORADO 80112
(Address of principal executive offices, including zip code)
(303) 790-4835
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changes since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceeding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares of common stock, no par value, of Registrant outstanding at
February 12, 1996.
8,246,880
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
December 30, April 1,
1995 1995
------------ ----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 949 $ 562
Trade accounts receivable, less allowances for
doubtful accounts of $144 and $132, respectively 2,574 2,847
Notes and other receivables 24 --
Inventories 3,056 2,610
Prepaid items 253 260
--------- ---------
Total current assets 6,856 6,279
PROPERTY, PLANT AND EQUIPMENT
Land 1,265 1,265
Buildings 4,985 4,976
Machinery and equipment 8,825 8,364
Other 2,526 2,573
Construction in progress 17 220
--------- ---------
17,618 17,398
Less accumulated depreciation (10,363) (9,727)
--------- ---------
Net property, plant and equipment 7,255 7,671
OTHER ASSETS 42 42
--------- ---------
$ 14,153 $ 13,992
--------- ---------
--------- ---------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
2
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 30, April 1,
1995 1995
------------ -----------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 929 $ 1,220
Accrued liabilities 3,538 3,622
Note payable to Scherer Capital 1,100 --
Payable to related party 901 683
Swiss debt principal and interest 403 813
Notes payable -- 220
Current maturities of long-term debt 115 93
Current maturities of capital lease obligation 282 141
--------- ---------
Total current liabilities 7,268 6,792
CAPITAL LEASE OBLIGATION 606 291
NOTE PAYABLE TO SCHERER HEALTHCARE, INC. 1,852 1,852
NOTE PAYABLE TO BANK 888 1,141
SWISS NOTES PAYABLE 2,896 2,677
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 50,000,000
shares authorized; 8,267,720 and 8,102,720 shares
issued and outstanding, respectively 6,231 6,177
Warrants 599 612
Retained earnings (deficit) ($20,434 of retained
deficit eliminated at July 3, 1993 relating to the
quasi-reorganization) (6,117) (5,480)
Treasury stock, 20,840 shares (70) (70)
--------- ---------
Total shareholders' equity (deficit) 643 1,239
--------- ---------
$ 14,153 $ 13,992
--------- ---------
--------- ---------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
3
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
---------------------------
December 30, December 31,
1995 1994
------------ ------------
NET REVENUES $ 5,739 $ 5,234
COST OF SALES (3,960) (3,985)
---------- ----------
GROSS PROFIT 1,779 1,249
COSTS AND EXPENSES
Selling and marketing expenses (979) (1,015)
General and administrative expenses (620) (733)
Research and development expenses (36) (24)
---------- ----------
OPERATING INCOME (LOSS) 144 (523)
OTHER INCOME (EXPENSE)
Interest and other income 100 11
Interest expense (169) (145)
Foreign exchange gain (loss) (2) 11
Gain on sale of assets 8 7
Other expense (9) (7)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 72 (646)
Provision for income taxes (697) --
---------- ----------
NET INCOME (LOSS) $ (625) $ (646)
---------- ----------
---------- ----------
Earnings (loss) per common share $ (0.08) $ (0.08)
---------- ----------
---------- ----------
Weighted average number of common shares
outstanding during the period 8,246,880 8,081,880
---------- ----------
---------- ----------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
4
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended
----------------------------
December 30, December 31,
1995 1994
------------ -------------
NET REVENUES $ 16,216 $ 14,730
COST OF SALES (11,149) (11,280)
---------- ----------
GROSS PROFIT 5,067 3,450
COSTS AND EXPENSES
Selling and marketing expenses (2,950) (3,287)
General and administrative expenses (1,757) (2,264)
Research and development expenses (112) (116)
---------- ----------
OPERATING INCOME (LOSS) 248 (2,217)
OTHER INCOME (EXPENSE)
Interest and other income 112 37
Interest expense (506) (476)
Foreign exchange gain (loss) 15 (55)
Gain on sale of assets 225 53
Other expense (34) (19)
---------- ----------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 60 (2,677)
Provision for income taxes (697) --
---------- ----------
NET INCOME (LOSS) $ (637) $ (2,677)
---------- ----------
---------- ----------
Earnings (loss) per common share $ (0.08) $ (0.37)
---------- ----------
---------- ----------
Weighted average number of common shares
outstanding during the period 8,231,715 7,284,189
---------- ----------
---------- ----------
The accompanying notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
5
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Nine Months Ended
---------------------------
December 30, December 31,
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (637) $ (2,677)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation and amortization 819 1,047
Provision for losses on accounts receivable 17 15
Foreign exchange (gain) loss (15) 55
Gain on sale of assets (225) (53)
Gain on extinguishment of debt (32)
Increase(decrease) in operating assets and liabilities:
Accounts receivable 258 565
Notes and other receivables (24) 36
Inventories and prepaid items (439) 289
Accounts payable, accrued liabilities and
payable to related party (158) 55
Accrued interest on Swiss bonds 42 36
Other -- (11)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (394) (643)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from note from related party -- 150
Purchases of equipment (39) (400)
Proceeds from sale of assets 225 225
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 186 (25)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Swiss bond principal and interest (146) --
Proceeds from note payable to Scherer Capital 1,100 --
Issuance of common stock 1 --
Principal payments on borrowings (360) (225)
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 595 (225)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 387 (893)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 562 1,662
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 949 769
---------- ----------
---------- ----------
(Continued)
6
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
December 30, December 31,
1995 1994
------------ ------------
NONCASH INVESTING AND FINANCING
TRANSACTIONS:
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 exercised:
Warrants $ (13) $ (20)
Swiss notes retired (40) (198)
Common stock 53 218
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
Capital lease:
Repayment of notes payable $ (220) $ --
Purchases of property and equipment (364) --
Capital lease addition 584 --
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
Swiss Bond exchange:
Issuance of Swiss notes payable $ 259 $ --
Repayment of Swiss Bond principal and interest (291) --
Gain on exchange 32 --
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
7
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INVENTORIES:
Inventories consist of the following (in thousands of dollars):
December 30, 1995 April 1, 1995
----------------- -------------
Raw materials $1,879 $1,530
Work in process 203 203
Finished goods 974 877
------ ------
$3,056 $2,610
------ ------
------ ------
2. REPORT OF MANAGEMENT:
The management of Marquest Medical Products, Inc. (the "Company") is responsible
for the integrity of the financial information presented. The financial
statements have been prepared in accordance with generally accepted accounting
principles and they include amounts that are based on management's best
estimates and judgment. These unaudited interim financial statements reflect
all adjustments which are, in the opinion of management, necessary to a fair
statement of the results of the interim periods presented.
Management relies upon the Company's system of internal accounting controls in
meeting its responsibilities for maintaining reliable financial records. This
system is designed to provide reasonable assurance that assets are safeguarded
and that transactions are properly recorded and executed in accordance with
management's intentions. Judgments are required to assess and balance the
relative cost and expected benefits of such internal accounting controls.
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.
During the nine months of Fiscal 1996, the Company has taken several steps to
preserve cash and increase profitability on sales. The Company believes that it
can fund its current operations and meet its obligations as they come due
through the fourth quarter of Fiscal 1996, however the viability of the Company
thereafter will depend on increasing operating income, extending the term of the
promissory note discussed in Note 6, and the successful completion of external
financing arrangements. There can be no assurance that external financing will
be available and there remains substantial 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. QUASI-REORGANIZATION:
In June 1993, the Company's Board of Directors approved quasi-reorganization
procedures which were effective July 3, 1993, the end of the Company's first
quarter of Fiscal 1994.
8
MARQUEST MEDICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. WARRANTS:
In April, 1995, 165,000 of the Company's warrants to purchase common stock at
$0.25 per share were exercised. These warrants had been issued to the Swiss
bondholders in an exchange in Fiscal 1994, and, in accordance with the warrant
agreement, $40,000 of the Company's 8% Swiss notes payable were used in lieu of
cash to exercise the warrants.
6. FINANCING TRANSACTIONS:
SWISS BONDS - In December, 1995, the Company exchanged Sfr 375,000 of defaulted
Swiss Bonds for $259,000 U. S. denominated 8% notes and $145,000 in cash. A
gain of $32,000 was recorded on the transaction.
SCHERER CAPITAL - In December, 1995, Scherer Capital, a company controlled by
the largest shareholder, Scherer Healthcare, Inc., loaned the Company
$1,100,000 at 9.25% annual interest to meet its cash obligations. The loan
is due February 15, 1996 and is collateralized by the Company's accounts
receivable and inventory. The Company is currently in discussions with
Scherer Capital to extend the term of the loan.
NOTE PAYABLE TO BANK - In December, 1995, Colorado National Bank (the "Bank")
released the Company's accounts receivable and inventory as collateral for the
Term Loan Agreement so that the collateral could be used to obtain additional
financing as described above from Scherer Capital. In consideration for the
release, the Company made a principal payment to the Bank of $160,000 and agreed
to shorten the term of the loan from June 2004 to January 2000. The
amortization of the loan will remain the same, however a balloon payment will be
made in January 2000.
7. INCOME TAXES:
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 United States Food and Drug
Administration. The Internal Revenue Service ("IRS") completed an audit during
Fiscal 1995 and 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 reached agreement on a repayment plan with the IRS whereby the Company
paid $400,000 in June 1995 and the remaining balance plus interest will be paid
in equal monthly installments over a two-year period.
Subsequent to the end of the second quarter, the Company settled additional tax
issues related to audits by the IRS for fiscal years 1982-1988. The Company
recorded $697,000 of additional taxes and interest in the third quarter and is
currently negotiating a repayment plan with the IRS.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Revenues for the third quarter increased 9.6% over the same period in Fiscal
1995, and increased 10% for the nine months ended December 30, 1995 over the
first nine months of the prior year. Sales in the first quarter of Fiscal 1995
were low due to a decline in hospital census which the Company believes was due
to the uncertainties of healthcare reform. Also, many of the Company's
distributors had purchased high levels of product during the fourth quarter of
Fiscal 1994 which depressed sales in the first quarter of Fiscal 1995. During
the first nine months of Fiscal 1996, the Company implemented a network of
independent manufacturer's representatives which supplements the Company's sales
force.
The gross margin increased from 23.9% in the third quarter of Fiscal 1995 to 31%
in the third quarter of Fiscal 1996. Similar improvements have been achieved in
the gross margin for the first nine months: 23.4% in Fiscal 1995 compared to
31.2% in Fiscal 1996. The Company has reduced manufacturing costs through
reductions in personnel, improved operational efficiencies and increased its
vertical integration of the manufacturing process.
Selling and marketing expenses decreased 3.5% and 10.2% for the third quarter
and the first nine months of Fiscal 1996, respectively, compared to comparable
periods of Fiscal 1995 primarily due to reductions in personnel which occurred
during the second quarter of Fiscal 1995 and the second quarter of Fiscal 1996.
Advertising and promotion programs costing approximately $85,000 for the first
two quarters of Fiscal 1995 were not continued into Fiscal 1996. General and
administrative expenses decreased approximately 22% during the first three
quarters of Fiscal 1996 compared to the same periods in Fiscal 1995 due to
reductions in personnel during the second quarter of Fiscal 1995.
Interest expense increased 16.5% in the third quarter of Fiscal 1996 compared to
the same quarter in the prior fiscal year due to interest on monthly
installments paid to settle litigation as well as interest on the Company's
obligation to the Internal Revenue Service as discussed in Note 7.
LIQUIDITY AND CAPITAL RESOURCES
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, (ii) cost reductions in all departments, and (iii) ordering of
equipment to increase the automation of the Company's manufacturing process. In
December, 1995, the Company signed a promissory note with Scherer Capital, a
company controlled by the largest shareholder, Scherer Healthcare, Inc., for
maximum borrowings of $1,800,000, of which $1,100,000 had been borrowed at
December 30, 1995. The note is secured by the Company's inventory and accounts
receivable and is due February 15, 1996. In January, 1996, $400,000 was repaid.
The Company is currently in discussions with Scherer Capital to extend the term
of the promissory note.
Management of the Company believes that it can fund its current operating levels
and meet its obligations as they come due through the fourth quarter of Fiscal
1996 from existing operations and from advances from Scherer Capital.
Thereafter, the viability of the Company will be dependent on increasing
operating income, the extension of the promissory note discussed above and the
successful completion of external financing arrangements, which the Company is
currently negotiating. There can be no assurance that the foregoing will occur
and there remains substantial doubt about the Company's ability to continue as a
going concern.
10
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 3. DEFAULTS UPON SECURITIES.
On January 14, 1992, the Company was notified that the holders of the majority
of its Swiss bonds have 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 during 1993. During Fiscal 1994, the
Company refinanced 96% of the Swiss bonds outstanding with 8% notes, warrants to
purchase Marquest common stock and cumulative convertible preferred stock of
Scherer Healthcare, Inc. In December, 1995, the Company exchanged an additional
Sfr 375,000 of Swiss bonds for $259,000 of 8% notes and $145,000 in cash. The
Swiss bonds outstanding at December 30, 1995 and April 1, 1995, including the
accrued interest on these bonds of $104,000 and $176,000, respectively, have
been classified as current liabilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description Page
----------- ----------- ----
10 Promissory Note and Security Agreement dated
December 15, 1995, between Marquest Medical
Products, Inc. and Scherer Capital, LLC 13
10(a) First Amendment to Loan Agreement dated
December 18, 1995, between Marquest Medical
Products, Inc. and Colorado National Bank 24
27. Financial Data Schedule (EDGAR version only) 26
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter for which
this report on Form 10-Q is being filed.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 16, 1996 MARQUEST MEDICAL PRODUCTS, INC.
/s/ William J. Thompson
-----------------------------------
William J. Thompson
President
/s/ Margaret Von der Schmidt
-----------------------------------
Margaret Von der Schmidt
Vice President - Finance and Chief
Financial Officer
12