<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A-1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
COMMISSION FILE NO. 0-10552
SCHERER HEALTHCARE, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 59-0688813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2859 PACES FERRY ROAD, SUITE 300, ATLANTA, GEORGIA 30339
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code:
(770) 333-0066
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered (Title of Class) pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 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. [ ]
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates of the Registrant on June 10, 1997 was $3,876,847. There were
4,314,223 Shares of Common Stock outstanding on June 10, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders
are incorporated by reference into Parts I and III of this report.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company, through its subsidiaries and majority owned partnership, operates
in several areas of the healthcare industry. It manufactures and distributes
healthcare products, provides disposal of certain medical waste, and markets
certain over-the-counter and generic drugs. See "Item 1. Business" for a more
detailed description and discussion of each of the Company's segments.
RESULTS OF OPERATIONS
The assets and business of Scherer, Ltd.'s Medical Business were sold in October
1995 and the assets and business of Scherer Ltd.'s Industrial Business were sold
in October 1996. See "Item 1. Business - Scherer Healthcare, Ltd." for a more
detailed description of the two transactions.
NET SALES. The following table sets forth the net sales of each segment of the
Company's business for the last three fiscal years (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
Medical Device and
Surgical/Safety Disposables Segment
Marquest $22,045 60.9% $22,443 53.6% $20,576 48.1%
Scherer, Ltd. 1,069 2.9 7,555 18.0 11,203 26.2
Waste Management Services Segment 11,836 32.7 10,753 25.7 10,039 23.4
Consumer Healthcare Products Segment 1,276 3.5 1,106 2.7 984 2.3
------- ----- ------- ------ ------- ------
Company Totals $36,226 100.0% $41,857 100.0% $42,802 100.0%
------- ----- ------- ------ ------- ------
------- ----- ------- ------ ------- ------
</TABLE>
FISCAL 1997 VS. FISCAL 1996 (NET SALES)
The Company's net sales decreased by 13% to $36,226,000 for fiscal 1997 from
$41,857,000 for fiscal 1996; however, fiscal 1996 includes six months of net
sales, or $5,344,000, for the Medical Business, which was sold in October 1995.
Additionally, fiscal 1996 includes twelve months of net sales of $2,211,000 for
the Industrial Business and fiscal 1997 only includes six full months of net
sales of $1,069,000 for the Industrial Business, which was sold in October 1996.
Marquest's net sales decreased approximately 2% to $22,045,000 for fiscal 1997
from $22,443,000 in fiscal 1996. The decrease in net sales is primarily due to
a decrease in sales of Marquest's medication delivery devices. Sales of these
devices are down approximately $800,000 in fiscal 1997 compared to fiscal 1996,
the majority of the decrease is attributable to one major customer who placed a
large sales order in fiscal 1996 and who did not place a sales order in fiscal
1997. The decrease in sales of the medication delivery devices was partially
offset by an increase in sales of Marquest's ABG products which increased
approximately $270,000 in fiscal 1997 compared to fiscal 1996. The increase in
the ABG sales can be attributable to a long term contract signed with a major
customer in late fiscal 1996 for these products.
Scherer Ltd.'s net sales decreased approximately 86% to $1,069,000 in fiscal
1997 from $7,555,000 in fiscal 1996; however, fiscal 1996 includes six months of
net sales, or $5,344,000, for the Medical Business, which was sold in October
1995. Additionally, fiscal 1996 includes twelve months of net sales of
$2,211,000 for the Industrial Business and fiscal 1997 only includes six full
months of net sales of $1,069,000 for the Industrial Business, which was sold in
October 1996. Prior to the sale of the Industrial Business in October 1996, one
of Scherer Ltd.'s significant distributors had substantially reduced its sales
orders with Scherer Ltd.
Net sales in the Company's Waste Management Services Segment, which operates
through Bio Systems, increased 10% to $11,836,000 in fiscal 1997 from
$10,753,000 in fiscal 1996. In fiscal 1997, Bio Systems increased its net sales
by approximately $810,000 by securing new medical waste disposal contracts with
hospitals. Bio Systems feels that hospitals have been more receptive to
out-sourcing the disposal of their medical waste, and attributes its success in
obtaining new hospital contracts to its reusable containers which are more cost
effective.
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<PAGE>
Net sales for Scherer Labs, which operates in the Company's Consumer Healthcare
Products Segment, increased approximately 15% to $1,276,000 in fiscal 1997 from
$1,106,000 in fiscal 1996. The increase in net sales can be attributed to
securing new customers and retail outlets during fiscal 1997.
FISCAL 1996 VS. FISCAL 1995 (NET SALES)
The Company's net sales decreased by 2% to $41,857,000 for fiscal 1996 from
$42,802,000 for fiscal 1995; however, fiscal 1995 includes twelve months of net
sales for the Medical Business, or $9,865,000, and fiscal 1996 includes only six
months of net sales for the Medical Business, or $5,344,000, which was sold in
October 1995.
Marquest's net sales increased 9% to $22,443,000 in fiscal 1996 from $20,576,000
in fiscal 1995. Marquest's sales for the first quarter of fiscal 1995 were low
due to a decline in sales to hospitals which Marquest believes was due primarily
to the uncertainties relating to proposed healthcare reform. Also, many of
Marquest's distributors purchased high levels of product during the fourth
quarter of fiscal 1994 which depressed Marquest's sales in the first quarter of
fiscal 1995. In fiscal 1996, Marquest implemented a network of independent
manufacturer's representatives which supplements its sales force.
Scherer, Ltd.'s net sales decreased 33% to $7,555,000 in fiscal 1996 from
$11,203,000 in fiscal 1995; however, fiscal 1995 includes twelve months of net
sales for the Medical Business, or $9,865,000, and fiscal 1996 includes only six
months of net sales for the Medical Business, or $5,344,000. Scherer, Ltd.'s
net sales for the Industrial Business increased 65% to $2,211,000 for fiscal
1996 from $1,338,000 in fiscal 1995. This increase in net sales was primarily
due to the introduction of products fabricated from two new fabric lines in late
fiscal 1995.
Net sales for Bio Systems increased approximately 7% to $10,753,000 in fiscal
1996 from $10,039,000 in fiscal 1995. The increase in sales was due to the
continuing acquisition of new medical waste disposal contracts with hospitals.
Net sales for the Consumer Healthcare Products Segment increased 12% to
$1,106,000 for fiscal 1996 from $984,000 for fiscal 1995. This segment achieved
a record level of sales of certain over-the-counter products during the first
quarter of fiscal 1996. The sales growth can be attributed to an increase in
sales to a primary wholesaler to Wal-Mart.
COSTS AND EXPENSES. The following table sets forth the percentage relationship
which the expense line items in the consolidated statement of operations bear to
total revenue:
Percentage of Revenue
Year Ended March 31,
--------------------------------
1997 1996 1995
------ ------ -------
Net Sales 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of good sold 65.3 67.4 73.6
Selling, general, and administrative 31.9 31.3 34.5
Research and development 0.8 0.4 0.3
Nonrecurring charges - - 4.7
------ ------ -------
Operating income (loss) 2.0% 0.9% (13.1)%
------ ------ -------
------ ------ -------
The following table sets forth the Company's operating margins by operating
segment and on a consolidated basis:
Year Ended March 31,
--------------------------------
1997 1996 1995
---- ---- ----
Medical Device and Surgical/Safety
Disposables Segment:
Marquest 1.6% 2.3% (13.1)%
Scherer, Ltd. (30.2) (4.4) (8.1)
Waste Management Services Segment 9.1 8.6 7.9
Consumer Healthcare Products Segment 36.6 33.3 24.8
Consolidated 2.0% 0.9% (13.1)%
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FISCAL 1997 VS. FISCAL 1996 (COSTS AND EXPENSES)
The Company's operating income improved 86% to $732,000 in fiscal 1997 from
$393,000 in fiscal 1996. The Company's cost of goods sold decreased to
approximately 65% of net sales in fiscal 1997 from 67% of net sales in fiscal
1996. Selling, general and administrative expenses increased to 32% of net
sales in fiscal 1997 from approximately 31% of net sales in fiscal 1996.
Marquest's operating income decreased to $363,000 in fiscal 1997 from $510,000
in fiscal 1996. This decrease is primarily the result of the decrease in net
sales combined with an increase in overtime expense in the first quarter of
fiscal 1997 due to the rework of certain products. Product rework is caused by
supplier quality issues, defects in the molded products, and damage to product
during assembly and warehousing. Marquest believes that the supplier quality
and damage to product issues have been corrected; however, the molded product
defects may recur depending on the condition of the molds. In an effort to
reduce molded product defects, Marquest has implemented a preventative
maintenance program, increased inspections, and improved operator training. The
decrease in net sales and the increase in overtime expense was partially offset
by a decrease in the net operating lease expense of its idle warehouse in
Nogales, Arizona of approximately $120,000 due to the sublease of two-thirds of
the warehouse in December 1995 and the sublease of the remaining portion in
September 1996. Additionally, Marquest wrote off approximately $200,000 in
fiscal 1996 for certain expenses associated with unsuccessful financing
transactions with no corresponding expenses incurred in fiscal 1997.
Scherer Ltd.'s operating loss decreased slightly to $323,000 in fiscal 1997 from
$355,000 in fiscal 1996; however, fiscal 1996 includes $164,000 of operating
income from the Medical Business which was sold in October 1995. The Medical
Business reported operating income in fiscal 1996 primarily as a result of an
agreement, effective April 1, 1995, which required Cordis to reimburse Scherer,
Ltd. for monthly losses ($295,000 in total for the period April 1995 through
September 1995) that Scherer, Ltd. was incurring under its surgical tray
contract with Cordis. The Industrial Business of Scherer, Ltd., which was sold
in October 1996, reported an operating loss of $323,000 for fiscal 1997 compared
to an operating loss of $499,000 in fiscal 1996. The operating loss in fiscal
1997 for the Industrial Business can be attributed to the decrease in net sales
due to a substantial reduction in sales orders from one of Scherer, Ltd.'s
significant distributors combined with an inventory write down pursuant to the
physical count taken for the Health-Pak transaction in October 1996.
Bio Systems increased its operating income 16% to $1,073,000 in fiscal 1997 from
$924,000 in fiscal 1996. The improved operating performance can be attributed
to the increase in net sales from the acquisition of new hospital contracts
combined with a significant decrease in Bio Systems' workers' compensation
insurance expense. The decrease in insurance expense is primarily due to the
conversion in October 1995 of Bio Systems' insurance coverage from a
fully-insured workers' compensation program to a partially insured program, to
take advantage of Bio Systems' excellent claims history.
The Company's Consumer Healthcare Products Segment improved its operating income
27% to $467,000 in fiscal 1997 from $368,000 in fiscal 1996. While improving
its net sales by 15%, as discussed above, this Segment was able to maintain, or
improve upon, its prior level of operating costs. Cost of goods sold decreased
slightly to 37% of net sales in fiscal 1997 from approximately 38% of net sales
in fiscal 1996 and selling, general and administrative expenses decreased to 26%
of net sales in fiscal 1997 from 29% in fiscal 1996.
FISCAL 1996 VS. FISCAL 1995 (COSTS AND EXPENSES)
The Company reported operating income of $393,000 in fiscal 1996 compared to an
operating loss of $5,628,000 in fiscal 1995. The fiscal 1995 operating loss
includes a nonrecurring charge of $2,000,000 for the write down of two waste
incinerator investments.
Marquest reported operating income of $510,000 in fiscal 1996 compared to an
operating loss of $2,696,000 in fiscal 1995. This improvement is a result of
the increase in sales discussed above combined with an emphasis on cost
reduction. Marquest reduced manufacturing costs and administrative expenses by
reductions in personnel, improved operational efficiencies and increased
vertical integration of the manufacturing processes. Additionally, the increase
in the manufacturing volume helped improve overhead absorption.
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<PAGE>
Scherer, Ltd.'s operating loss decreased 63% to $335,000 in fiscal 1996 from
$912,000 in fiscal 1995. In fiscal 1995, Scherer, Ltd. experienced substantial
losses (approximately $700,000) under its surgical trays contract with Cordis.
Effective April 1, 1995, Scherer, Ltd. entered into a new agreement with Cordis
which required Cordis, among other things, to reimburse Scherer, Ltd. a monthly
shortfall amount ($52,000 per month for the period April to July 1995 and
$42,500 per month for the months of August and September 1995) to help offset
monthly losses incurred under the contract. The contract was terminated upon
the sale of the Medical Business to Cordis Medical in October 1995. Primarily
as a result of the new contract, the Medical Business reported operating income
of $164,000 in fiscal 1996 compared to an operating loss of $559,000 in fiscal
1995. The Industrial Business of Scherer, Ltd. increased its operating loss 41%
to $499,000 in fiscal 1996 from $353,000 in fiscal 1995. In late fiscal 1996,
Scherer, Ltd., which is currently operating under the name Protective Disposable
Apparel, moved the manufacture of its lab coats to a new workshop where Scherer,
Ltd. was able to negotiate better labor rates.
Bio Systems' operating income increased 17% to $924,000 in fiscal 1996 from
$790,000 in fiscal 1995. The operating improvement was attributable to a
decrease in insurance expense and a one-time sales tax expense in fiscal 1995
pursuant to a three year assessment from a sales tax audit. Prior to fiscal
1996, this segment reported consistent increases in net sales but had struggled
to improve its operating margins because of pricing pressures in both the
hospital and physician markets.
Operating income improved 51% to $368,000 in fiscal 1996 from $244,000 in fiscal
1995 at the Company's Consumer Healthcare Products Segment. This increase was
directly attributed to the increase in sales for this segment discussed above.
OTHER INCOME (EXPENSE). In fiscal 1997, the Company recorded a loss of
approximately $84,000 from the sale of the Industrial Business in October 1996
primarily due to the write-off of the remaining book value of certain intangible
assets. In fiscal 1996, the Company recorded a pretax gain of approximately
$2,781,000 from the sale of the Medical Business in October 1995. Also in
fiscal 1996, Marquest recorded a gain of approximately $200,000 from the sale of
its 10% investment in a medical device company.
In November 1995, the Company used $4,800,000 of the net proceeds from the sale
of the Medical Business to repay a portion of outstanding loans from affiliates.
Primarily as a result of the debt repayment, the Company reduced its interest
expense incurred on the affiliate debt from approximately $518,000 in fiscal
1996 to approximately $175,000 in fiscal 1997 (prior to the assignment of the
affiliate debt to a nonaffiliate in March 1997). Marquest's interest expense
incurred on affiliate debt in fiscal 1997 was $70,000 compared to $21,000 in
fiscal 1996.
In fiscal 1996, Marquest received $488,000 in a one-time royalty related to one
of Marquest's product lines. In fiscal 1997, Marquest incurred approximately
$265,000 in certain expenses associated with the merger between Marquest and
Vital Signs, Inc. (See "Item 1. Business - Recent Developments").
INCOME TAXES. The Company recorded an income tax provision of $6,000 and
$548,000 in fiscal 1997 and 1996, respectively, and had a tax benefit of
$197,000 in fiscal 1995. Marquest recorded a tax provision of $697,000 in
fiscal 1996 as a result of its settlement with the IRS with respect to tax
issues related to previous years. In fiscal 1997, the Company (excluding
Marquest) utilized tax loss carryforwards and reduced its valuation allowance
accordingly. In fiscal 1997 and in prior years, the Company significantly
increased its valuation allowance against its deferred tax assets mainly related
to the tax loss carryforwards.
The Company's ability to generate taxable income from operations is dependent
upon various factors, many of which are beyond management's control.
Accordingly, there can be no assurance that the Company will generate future
taxable income. Therefore, the realization of the deferred tax assets will be
assessed periodically based upon the Company's current and anticipated results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
CASH FLOWS FROM OPERATING ACTIVITIES. The Company's (excluding Marquest which
is described below) cash provided by operating activities from continuing
operations decreased to approximately $1,924,000 in fiscal 1997 from
approximately $2,123,000 in fiscal 1996. This slight decrease in cash provided
from continuing operations can be attributed to the
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<PAGE>
collection in fiscal 1996 of the remaining accounts receivable associated with
the Medical Business of Scherer Ltd. which was sold in October 1995. Pursuant
to the terms of the sale agreement, Scherer, Ltd. retained all accounts
receivable associated with the Medical Business, of which approximately
$1,360,000 was collected at the closing of and subsequent to the transaction.
This was partially offset by improvements, primarily due to timing, in the
collection of accounts receivable at Bio Systems and Scherer Labs of $187,000
and $75,000, respectively, in fiscal 1997 compared to fiscal 1996.
Additionally, due to the timing of payments, the Company's accounts payable and
accrued expenses increased approximately $725,000 in fiscal 1997 compared to
fiscal 1996.
Discontinuing the operations of Biofor has significantly improved the cash flow
of the Company. The net cash used by Biofor's operations was approximately
$170,000 in fiscal 1997 compared to approximately $1,564,000 in fiscal 1996.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES. The Company's (excluding
Marquest which is described below) investing activities provided cash of
approximately $8,279,000 in fiscal 1996 compared to a use of cash from investing
activities of approximately $487,000 in fiscal 1997. In fiscal 1996, the
Company used $2,989,000 of its $3,200,000 in cash investments to pay off the
then remaining balance of $2,989,000 on a line of credit arrangement it had with
Trust Company Bank (now SunTrust Bank) because the Company determined that the
credit line did not provide any net financial leverage. Prior to its
termination, the credit line was fully collateralized by the cash investments.
The Company received approximately $4,922,000 in net proceeds from the sale of
assets associated with the Medical Business of Scherer Ltd. in fiscal 1996. In
fiscal 1997, the Company received $254,000 in net proceeds from the sale of
Scherer Ltd.'s Industrial Business. Additionally, Bio Systems increased its
capital expenditures by approximately $219,000 in fiscal 1997 compared to fiscal
1996 primarily due to the purchase of new trucks used to transport medical
waste.
Cash flows from the Company's financing activities used cash of approximately
$7,340,000 in fiscal 1996 compared to a use of cash of only $108,000 in fiscal
1997. Prior to fiscal 1996, Scherer Scientific, Ltd. and Scherer Capital
Company L.L.C. ("Scherer Cap"), entities controlled by Robert P. Scherer, Jr.
who is the Chairman of the Board, Chief Executive Officer, and majority
shareholder of the Company, made loans (the "Affiliate Loans") to the Company
and its subsidiaries the proceeds of which were used primarily for working
capital and business acquisitions. The Affiliate Loans were payable on demand
and generally bore interest at prime rate plus 1%. In November 1995, the
Company used $4,800,000 of the net proceeds from the sale of the Medical
Business to repay a portion of the Affiliate Loans. In January 1997, the
Company and Scherer Cap restructured the remaining balance of $2,128,000 on the
Affiliate Loans into a five-year promissory note (the "Original Note") which
bore interest at prime rate plus 1%, adjusted quarterly, and was collateralized
by shares of Marquest Common Stock owned by the Company. In connection with the
dissolution of Scherer Cap in March 1997, the Original Note was amended (the
"Amended Note") and subsequently assigned to the four adult children of Robert
P. Scherer, Jr., who are not affiliated with the Company. In exchange for
certain considerations, $50,000 for the principal balance was forgiven and the
interest rate was reduced to prime, adjusted quarterly, in the Amended Note. As
discussed above, the Company terminated its line of credit arrangement during
the first quarter of fiscal 1996 which had borrowings outstanding of $1,944,000
at March 31, 1995.
On March 14, 1997, Marquest and VSI announced the execution of a Merger
Agreement providing for VSI to acquire Marquest. In the transaction, which is
expected to take place in July 1997, Marquest would become a wholly-owned
subsidiary of VSI and VSI would pay Marquest shareholders $0.797 per share in
cash for each outstanding share of Marquest Common Stock. The Company owns
7,211,192 shares of Marquest Common Stock directly and holds warrants to
purchase an additional 6,580,000 shares of Marquest Common Stock at an exercise
price of $0.75 per share. In connection with the Merger Agreement, the Company
and VSI entered into an agreement pursuant to which VSI has agreed, provided the
Merger Agreement is consummated, to purchase certain assets and product rights
previously sold by Marquest to the Company and to enter into a covenant not to
compete for an aggregate purchase price of $5,860,000. The Company expects to
receive approximately $11,900,000, before the payment of transaction costs and
associated income taxes, in total from the above transactions if they are
consummated. The Company plans to use a portion of the proceeds to repay the
Amended Note which had a balance of $1,958,000 as of March 31, 1997. The
Company will evaluate its long-term options with regard to the remaining
proceeds; however, on a short-term basis it plans to invest the proceeds,
principally in U.S. Treasuries.
Management of the Company believes that its current cash on hand of
approximately $3,225,000 as of March 31, 1997 and its current cash flow are
sufficient to maintain its current operations.
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<PAGE>
MARQUEST
With the exception of executive management, Marquest operates independently of
the Company.
CASH FLOWS FROM OPERATING ACTIVITIES. Marquest's cash used from operating
activities increased from $79,000 in fiscal 1996 to $1,178,000 in fiscal 1997
primarily due to a decrease in accounts payable and accrued expenses. The
decrease in accounts payable and accrued expenses is due to the payment in
fiscal 1997 of consulting fees and other costs related to Marquest's financing
transactions (discussed below), and the payment of income taxes and certain
legal settlements.
Simultaneous with the execution of the Merger Agreement with VSI, Marquest and
VSI entered into a Dealer Agreement which authorizes VSI to distribute
Marquest's products for a period of two years. Marquest has given 28 of its 29
hospital specialty dealers notice terminating its agreements with such dealers
at the end of the required notice period, generally 30 to 90 days from the date
of notice. These dealers provided Marquest with approximately $9,687,000 of
revenue in fiscal 1997. It is uncertain whether the sales through the Dealer
Agreement with VSI will reach the level of sales achieved by the terminated
dealers.
Primarily as a result of the termination notices, two of Marquest's dealers have
filed lawsuits against Marquest and VSI (see "Item 3. Legal Proceedings").
These dealers have informed Marquest that they are withholding further payment
of amounts owed to Marquest pending the settlement of the issues raised in their
respective lawsuits. The two dealers combined outstanding accounts receivable
as of May 31, 1997 was approximately $714,000 ($564,000 through sales in April
and May 1997), before certain rebate adjustments. Marquest intends to
vigorously contest the lawsuits and pursue the collection of the outstanding
accounts receivable.
CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES. On June 30, 1994, Marquest
refinanced $1,300,000 of Douglas County Industrial Revenue Bonds (the "Bonds'),
due on December 31, 1993, with a term loan from Colorado National Bank (the
"Bank"), the same bank holding the Bonds. In fiscal 1996, Marquest and the Bank
executed an amendment to the term loan agreement, whereby Marquest made a
principal payment of $160,000 and the term of the loan was shortened from July
31, 2004 to January 31, 2000 and the Bank released Marquest's inventory and
accounts receivable as collateral for the loan. The loan will continue to
amortize over its original term with a balloon payment on January 31, 2000.
In fiscal 1996, Scherer Cap, an entity controlled by Robert P. Scherer, Jr.,
made an investment in Marquest of approximately $1,588,000, net of related
transaction costs. In March 1996, Marquest and Scherer Cap entered into the
Loan Agreement, from which Marquest borrowed $700,000 to repay $700,000 that
Marquest borrowed from Scherer Cap in December 1995 for working capital
purposes. The Loan Agreement contemplated the possibility of additional
borrowings of $800,000. Borrowings under the Loan Agreement, which expires
February 28, 2001, bear interest at prime rate plus 1.5%, are secured by
Marquest's inventory, building, and equipment, and are represented by the
Scherer Cap Notes that are convertible, at the option of Scherer Cap, into
shares of Marquest Common Stock at a conversion price of $0.70 per share.
Additionally, Scherer Cap invested $1,000,000 in Marquest in March 1996 through
the purchase of 2,061,856 shares of Marquest Common Stock. In connection with
its dissolution in March 1997, Scherer Cap assigned the Loan Agreement and the
Scherer Cap Notes, and transferred 1,546,392 shares of the Marquest Common Stock
that it owned to Mr. Scherer, Jr. The remaining 515,464 shares of Marquest
Common Stock owned by Scherer Cap were transferred into a voting trust for the
benefit of Mr. Scherer, Jr.'s adult children. Mr. Scherer, Jr. is entitled to
vote the shares held in the voting trust.
In November 1996, Marquest obtained a revolving line of credit from Norwest
Business Credit, Inc. ("Norwest") which expires February 28, 1999. Any amounts
borrowed against the line of credit will primarily be secured by Marquest's
trade accounts receivable and will bear interest at Norwest's prime rate plus
2.25% (the rate was 10.75% as of March 31, 1997). The maximum amount of the
line of credit is 80% of Marquest's eligible domestic accounts receivable plus
70% of eligible international accounts receivable or $2,000,000, whichever is
less. As of March 31, 1997, Marquest had borrowed $125,000 against an available
borrowing limit on the line of approximately $1,400,000.
As of March 31, 1997, Marquest was not in compliance with a covenant requiring a
specified debt service coverage rate and a covenant that Marquest not incur an
after tax loss greater than a specified amount. Norwest has waived the
requirement of compliance with these covenants as of March 31, 1997, and
Marquest has negotiated new covenants with Norwest providing for a maximum net
loss for the first four months of fiscal 1998 (through July
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<PAGE>
1997) of $1,018,000 and a minimum net worth of $3,364,000 at the end of July
1997 and each subsequent month thereafter.
Marquest's management expects that the pending Merger with VSI will be
consummated by the end of July 1997. However, if the Merger is delayed or does
not occur, Marquest's management anticipates taking the following actions during
fiscal 1998: (i) continue marketing and selling its products through
medical-surgical dealers and through the dealer arrangement with VSI in domestic
markets where VSI has strategic presence; (ii) renegotiate its current line of
credit with Norwest and pursue additional financing opportunities that may be
available; (iii) continue to reduce costs and operating expenses; and (iv)
restrict expenditures for capital assets to maintenance of existing equipment
and facilities until Marquest generates positive operating cash flow.
The viability of Marquest during fiscal 1998 will be dependent on the
consummation of the Merger with VSI, or , if the Merger is delayed or does not
occur, on the successful implementation of some or all of the above actions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are set forth on pages F-3 through F-23
of this report. The reporting of selected quarterly financial data specified by
Item 302 of Regulation S-K is not required for the Company.
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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 on June 26, 1997.
SCHERER HEALTHCARE, INC.
By: /s/Robert P. Scherer, Jr.
-------------------------
Robert P. Scherer, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on June 26, 1997.
Signature Title
- --------- -----
/s/Robert P. Scherer, Jr. Chairman of the Board, Director and
- ------------------------------- Chief Executive Officer
Robert P. Scherer, Jr.
/s/William J. Thompson * President and Director
- ------------------------------
William J. Thompson
/s/Gary W. Ruffcorn Director of Finance and Accounting
- ------------------------------ (Principal Financial and Accounting Gary
Gary W. Ruffcorn Officer)
/s/Stephen Lukas, Sr. * Director
- ------------------------------
Stephen Lukas, Sr.
/s/Kenneth H. Robertson * Director
- ------------------------------
Kenneth H. Robertson
*By:/S/Robert P. Scherer, Jr
--------------------------
Robert P. Scherer, Jr.
as Attorney-in-Fact
-24-
<PAGE>
SCHERER HEALTHCARE, INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and schedules of the Registrant
and its subsidiaries are submitted herewith in response to Item 8:
Report of Independent Public Accountants . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets--March 31, 1997 and 1996 . . . . . . . . . F-3
Consolidated Statements of Operations--Years Ended
March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity--Years
Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows--
Years Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-9
The following financial statement schedules of the Registrant and its
subsidiaries are submitted herewith in response to Item 14(a)(2):
Schedule I--Condensed Financial Information of Registrant. . . . . . . S-1
Schedule II--Valuation and Qualifying Accounts . . . . . . . . . . . . S-4
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of
Scherer Healthcare, Inc.
We have audited the accompanying consolidated balance sheets of SCHERER
HEALTHCARE, INC. (a Delaware corporation) AND SUBSIDIARIES as of March 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended March 31, 1997. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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 Scherer Healthcare, Inc. and
subsidiaries as of March 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements and financial statement schedules are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state, 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
Atlanta, Georgia
June 6, 1997
F-2
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,237,000 $ 3,622,000
Accounts receivable, less allowance for doubtful
accounts of $289,000 in 1997 and $243,000 in 1996 6,087,000 6,092,000
Current maturities of notes receivable 223,000 393,000
Inventories 3,453,000 3,936,000
Prepaid and other 218,000 331,000
------------ -------------
Total current assets 13,218,000 14,374,000
------------ -------------
PROPERTY AND EQUIPMENT 16,792,000 15,749,000
Less accumulated depreciation (6,586,000) (5,146,000)
------------ -------------
Net property and equipment 10,206,000 10,603,000
------------ -------------
OTHER ASSETS
Cost in excess of net assets acquired, net 6,404,000 6,721,000
Other investments, at cost 650,000 651,000
Notes receivable, less current portion 371,000 506,000
Intangibles 309,000 365,000
Deferred income taxes 329,000 329,000
Other 356,000 305,000
Net assets of discontinued operations 351,000 556,000
------------ -------------
Total other assets 8,770,000 9,433,000
------------ -------------
TOTAL ASSETS $32,194,000 $34,410,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
AS OF MARCH 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,808,000 $ 2,150,000
Accrued expenses 4,107,000 5,002,000
Line of credit and current maturities of debt obligations 1,397,000 981,000
Payables to affiliates - 2,286,000
Other 57,000 49,000
------------ -------------
Total current liabilities 7,369,000 10,468,000
------------ -------------
LONG-TERM DEBT
Note payable to affiliate 700,000 700,000
Notes, obligations, and other, net of current maturities 5,946,000 4,591,000
------------ -------------
Total long-term debt 6,646,000 5,291,000
------------ -------------
OTHER LIABILITIES 325,000 347,000
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN SUBSIDIARY AND PARTNERSHIPS 1,891,000 2,130,000
STOCKHOLDERS' EQUITY
Convertible preferred stock - $.01 par value, 2,000,000
shares authorized; 23,541 shares issued and outstanding
in 1997 and 28,885 in 1996 - -
Common stock - $.01 par value, 12,000,000 shares authorized;
4,693,585 issued in 1997 and 4,669,928 in 1996;
4,314,223 shares outstanding in 1997 and 4,290,566 in 1996 47,000 47,000
Capital in excess of par value 22,366,000 22,316,000
Accumulated deficit (3,417,000) (3,156,000)
Less treasury stock, at cost (3,033,000) (3,033,000)
------------ -------------
Total stockholders' equity 15,963,000 16,174,000
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,194,000 $34,410,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $36,226,000 $41,857,000 $42,802,000
----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold 23,660,000 28,194,000 31,514,000
Selling, general, and administrative 11,548,000 13,115,000 14,776,000
Research and development 286,000 155,000 140,000
Nonrecurring charges - - 2,000,000
----------- ----------- -----------
Total costs and expenses 35,494,000 41,464,000 48,430,000
----------- ----------- -----------
OPERATING INCOME (LOSS) 732,000 393,000 (5,628,000)
OTHER (EXPENSE) INCOME
Interest income 178,000 266,000 696,000
Interest expense (900,000) (1,128,000) (1,257,000)
(Loss) gain on sale of assets (84,000) 3,006,000 70,000
Other, net (165,000) 684,000 (642,000)
----------- ----------- -----------
Total other (expense) income (971,000) 2,828,000 (1,133,000)
----------- ----------- -----------
(Loss) income from continuing operations before
minority interest and income taxes (239,000) 3,221,000 (6,761,000)
Minority interest in net loss (income) of
subsidiary and partnerships 359,000 (5,000) 1,927,000
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 120,000 3,216,000 (4,834,000)
(Provision) benefit for income taxes (6,000) (548,000) 197,000
----------- ----------- -----------
Income (loss) from continuing operations 114,000 2,668,000 (4,637,000)
Loss from discontinued operations, net of
income taxes of $0 (375,000) (920,000) (5,534,000)
----------- ----------- -----------
NET (LOSS) INCOME $ (261,000) $ 1,748,000 $(10,171,000)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
For the years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
(LOSS) INCOME PER COMMON SHARE
Income (loss) from continuing operations $ 0.03 $ 0.60 $ (1.09)
Loss from discontinued operations (0.09) (0.20) (1.30)
--------- --------- ---------
NET (LOSS) INCOME PER SHARE $ (0.06) $ 0.40 $ (2.39)
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,418,483 4,418,483 4,254,327
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended March 31, 1997
<TABLE>
<CAPTION>
Retained
Earnings
Preferred Common Capital In (Accu- Treasury
Preferred Stock Common Stock Excess of mulated Treasury Stock
Shares Amount Shares Amount Par Value Deficit) Shares Cost
----------- ----------- ----------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 43,516 $ - 4,605,139 $ 46,000 $22,317,000 $ 5,267,000 376,362 $(2,973,000)
Conversion of preferred
shares to common shares (8,510) - 37,675 - - - - -
Net loss - - - - - (10,171,000) - -
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
Balance at March 31, 1995 35,006 - 4,642,814 46,000 22,317,000 (4,904,000) 376,362 (2,973,000)
Conversion of preferred
shares to common shares (6,121) - 27,114 1,000 (1,000) - - -
Net income - - - - - 1,748,000 - -
Other - - - - - - 3,000 (60,000)
----------- ----------- ----------- ----------- ------------- ------------ ----------- -----------
Balance at March 31, 1996 28,885 - 4,669,928 47,000 22,316,000 (3,156,000) 379,362 (3,033,000)
Conversion of preferred
shares to common shares (5,344) - 23,657 - - - - -
Net loss - - - - - (261,000) - -
Other - - - - 50,000 - - -
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
Balance at March 31, 1997 23,541 $ - 4,693,585 $ 47,000 $22,366,000 $(3,417,000) 379,362 $(3,033,000)
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (261,000) $ 1,748,000 $(10,171,000)
Adjustments to reconcile net (loss)
income to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,777,000 2,228,000 2,658,000
Minority interest (239,000) 46,000 (1,952,000)
Deferred taxes - - 121,000
Loss (gain) on sale of assets 84,000 (3,006,000) (70,000)
Nonrecurring charges - - 2,000,000
Loss from discontinued operations 375,000 920,000 5,534,000
Other noncash charges and credits, net 55,000 34,000 (267,000)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net (382,000) 1,063,000 48,000
Inventories 174,000 (614,000) 816,000
Prepaid and other 112,000 101,000 188,000
Income taxes, net 8,000 14,000 825,000
Accounts payable and accrued expenses (935,000) (464,000) (154,000)
Other liabilities (22,000) (25,000) (221,000)
-------------- ------------- -------------
Net cash provided by (used for) operating activities of
continuing operations 746,000 2,045,000 (645,000)
Net operating activities of discontinued operations (170,000) (1,564,000) (2,105,000)
--------------- ------------- -------------
Net cash provided by (used for) operating activities 576,000 481,000 (2,750,000)
--------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (1,058,00) (670,000) (1,773,000)
Proceeds from sale of assets 254,000 5,147,000 245,000
Decrease (increase) in investments - 3,232,000 (232,000)
Decrease in notes receivable 304,000 467,000 764,000
Other investing activities, net (88,000) 82,000 (45,000)
--------------- -------------- ------------
Net cash (used for) provided by investing activities (588,000) 8,258,000 (1,041,000)
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of borrowings (171,000) (2,657,000) (1,008,000)
(Repayments to) advances from affiliated companies (202,000) (5,321,000) 2,356,000
Proceeds from investment by affiliated company - 1,588,000 -
Other financing activities, net - - 169,000
--------------- ------------- --------------
Net cash (used for) provided by financing activities (373,000) (6,390,000) 1,517,000
--------------- ------------- --------------
CHANGE IN CASH AND CASH EQUIVALENTS (385,000) 2,349,000 (2,274,000)
CASH AND CASH EQUIVALENTS, beginning of year 3,622,000 1,273,000 3,547,000
--------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 3,237,000 $ 3,622,000 $ 1,273,000
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996, AND 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES OF
CONSOLIDATION
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the parent company, Scherer Healthcare, Inc. (the "Company" or "Scherer
Healthcare"), and its subsidiaries (see Note 3). Marquest Medical Products,
Inc. ("Marquest"), a majority owned subsidiary of the Company, has a 52- or
53-week fiscal year ending on the Saturday nearest to March 31. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain 1995 and 1996 amounts have been reclassified to conform with the 1997
presentation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of March 31, 1997 and 1996, the carrying value of financial instruments
such as cash, short-term investments, trade receivables and payables and
short-term debt approximated their fair values based on the short-term
maturities of these instruments. Additionally, the carrying value of both
long-term investments and long-term debt approximated fair values.
INVENTORIES
Inventories are stated at the lower of net realizable value or cost primarily
using the first-in, first-out ("FIFO") method.
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Finished products $ 1,086,000 $ 1,746,000
Work in progress 282,000 233,000
Containers, packaging, and
raw material 2,085,000 1,957,000
------------ -------------
$ 3,453,000 $ 3,936,000
------------ -------------
------------ -------------
</TABLE>
F-9
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, and depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets as follows: furniture, fixtures and equipment--3-10 years and
buildings and leasehold improvements--5-50 years.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Land $ 1,265,000 $ 1,265,000
Building and leasehold improvements 4,870,000 4,836,000
Furniture, fixtures, and equipment 10,657,000 9,648,000
------------- -------------
$16,792,000 $15,749,000
------------- -------------
------------- -------------
</TABLE>
Depreciation expense for fiscal years 1997, 1996, and 1995 was $1,678,000,
$1,924,000, and $2,276,000, respectively.
MINORITY INTEREST
Minority interest primarily represents the equity interest in Marquest of
outside investors. Because of recent losses, there is no significant minority
interest liability related to other subsidiaries not wholly owned by the
Company.
INCOME TAXES
The Company uses the liability method to account for income taxes (see Note 11).
REVENUE RECOGNITION
Sales are recorded by the Company when products are shipped to customers or
independent distributors. Sales for services provided are recorded when the
Company has completed the service.
Geographic net sales were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
United States and Canada $30,138,000 $36,113,000 $38,249,000
Europe, Pacific Rim, Puerto
Rico and Other 6,088,000 5,744,000 4,553,000
-------------- -------------- ---------------
Net Sales $36,226,000 $41,857,000 $42,802,000
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
All of the Company's export sales are through Marquest. The operating
margins on Marquest's export sales have been comparable to those associated
with Marquest's domestic sales.
As of March 31, 1997 and 1996, Marquest had approximately $219,000 and
$131,000, respectively, in finished goods inventory at a warehouse facility
of one of its European distributors. These assets represent all of the
Company's assets located outside the United States.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenditures for the creation and application of new
products and processes are expensed as incurred.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is based upon the weighted average number of
common shares outstanding after giving effect for common stock equivalents
arising from the assumed conversion of the Company's Convertible Preferred
Stock into common stock. The common stock equivalents included in the
calculation of earnings per share are 104,260 and 127,917 for the years ended
March 31, 1997 and 1996, respectively. Because of losses, common stock
equivalents were not included in the calculation of earnings per share for
the year ended March 31, 1995.
F-10
<PAGE>
NEW ACCOUNTING STANDARDS
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and associated intangibles be written down to fair value whenever an
impairment review indicates that the carrying value cannot be recovered on an
undiscounted cash flow basis. SFAS No. 121 also requires that a company no
longer record depreciation expense on assets held for sale. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure.
SFAS No. 123 is only applicable to stock options granted in fiscal years
beginning after December 15, 1994. The Company did not grant any stock
options during fiscal years 1996 and 1997 (see Note 9); therefore, the
accounting disclosures, as required by SFAS No. 123, are not applicable to
the Company's outstanding stock options.
In fiscal 1998, the Company will adopt SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock. This Statement
replaces the presentation of primary EPS with a presentation of basic EPS and
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. This Statement also
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
The Company must adopt the new standard for the quarter ending December 31,
1997; earlier application is not permitted. This Statement requires restatement
of all prior period EPS data presented. The impact of SFAS No. 128 on the
calculations of basic and diluted EPS for these years is not expected to be
material.
NOTE 2. MARQUEST
In fiscal 1994, the Company entered into transactions to acquire Marquest and to
purchase one of Marquest's product lines for $4,500,000 in cash. Marquest is an
international manufacturer and distributor of specialty cardiopulmonary support,
respiratory and anesthesia disposable devices. Since the transactions were
completed, Marquest has been included with the Company in the consolidated
financial statements due to the Company's ability to control Marquest by virtue
of common stock, warrants and convertible debt held by the Company and the
Company's control of the Board of Directors.
As part of the acquisition, Marquest restructured its $12,650,000 of defaulted
Swiss bonds. Approximately 96% of the outstanding amount of bonds was tendered
and accepted in the Swiss bond exchange offers. A combination of approximately
43,516 shares of Scherer Healthcare 5% Convertible Preferred Stock, $2,875,000
of Marquest six-year 8% notes, and Marquest warrants for 1,597,416 Common Shares
were issued to the former bondholders who accepted the exchange offers. In
exchange for its Preferred Stock, the Company received approximately $4,352,000
of Marquest six-year 8% notes convertible into Marquest Common Stock. In
connection with the acquisition of Marquest, the Company purchased Marquest's
arterial blood gas ("ABG") product line, including related equipment, from
Marquest for $4,500,000 in cash. The Company licenses the ABG product line back
to Marquest in exchange for a royalty equal to 3.25% of Marquest's net ABG
product line sales. Marquest had the option to repurchase the ABG product line
from the Company at any time prior to May 31, 1996 for $4,500,000 plus $22,500
for each month lapsed between June 1993 and the date of repurchase. In May
1996, the Company and Marquest agreed to extend the option period through June
15, 1999. The purchase of the ABG product line by the Company resulted in
goodwill of approximately $4,255,000. Primarily as consideration for the
original product line repurchase option, the Company received warrants for
6,580,000 shares of Marquest Common Stock, exercisable at $0.75 per share. At
the Company's option, either cash or Scherer Healthcare Common Stock can be used
in exercising the warrants. On May 23, 1994, the Company converted $2,500,000
of the $4,352,000 Marquest six-year 8% note into 3,333,333 shares of Marquest
Common Stock.
F-11
<PAGE>
On March 28, 1996, the Company converted the remaining balance of $1,852,000 and
the associated accrued interest of $487,000 on the Marquest six-year 8% note
into 3,340,245 shares of Marquest Common Stock. Additionally, the Company
agreed to convert $376, 000 in accrued but unpaid management fees owed to the
Company by Marquest into 537,614 shares of Marquest Common Stock. As of March
31, 1997, the Company owns 51% of Marquest's outstanding Common Stock. Marquest
has outstanding a significant number of warrants, stock options, and convertible
notes that could be converted into Marquest Common Stock. Depending upon the
amount and timing of conversion of any of these securities, the Company's
ownership percentage in Marquest could vary from 42% to 66%.
On March 14, 1997, Marquest and Vital Signs, Inc. ("VSI") announced the
execution of a definitive merger agreement (the "Merger Agreement") providing
for VSI to acquire Marquest. In the transaction, which is expected to take
place in July 1997, Marquest would become a wholly owned subsidiary of VSI and
VSI would pay Marquest shareholders $0.797 per share in cash for each
outstanding share of Marquest Common Stock. As discussed above, the Company
owns 7,211,192 shares of Marquest Common Stock directly and holds warrants to
purchase an additional 6,580,000 shares of Marquest Common Stock at an exercise
price of $0.75 per share. In connection with the Merger Agreement, the Company
and VSI entered into an agreement pursuant to which VSI has agreed, provided the
Merger Agreement is consummated, to purchase the ABG product line from the
Company and the Company has agreed to enter into a covenant not to compete for
an aggregate purchase price of $5,860,000. The Company expects to record a gain
from these transactions, which will be reflected in the Company's consolidated
financial statements at the time the transactions become effective.
Simultaneous with the execution of the Merger Agreement, Marquest and VSI
entered into a Dealer Agreement which authorizes VSI to distribute Marquest's
products in the United States, Canada, Puerto Rico and certain other
international territories for a period of two years. Marquest has given 28 of
its 29 hospital specialty dealers notice terminating its agreements with such
dealers at the end of the required notice period, generally 30 to 90 days from
the date of notice. Primarily as a result of the termination notices, two of
Marquest's dealers have filed lawsuits against Marquest and VSI (See Note 8).
Subsequent to giving the hospital specialty dealers notice of termination,
Marquest entered into new arrangements with some of the dealers pursuant to
which these certain dealers may continue to distribute Marquest's products.
The operations of Marquest are included in the Company's Medical Device and
Surgical/Safety Disposables Segment along with the operations of Scherer
Healthcare, Ltd. ("Scherer, Ltd."). The assets and businesses of Scherer, Ltd.
were sold in two separate transactions in October 1995 and October 1996 (See
Note 5). Upon the consummation of the Merger Agreement, the operations of the
Medical Device and Surgical/Safety Disposable Segment will be accounted for as a
discontinued segment, and accordingly, the operations of Marquest and Scherer,
Ltd. will be segregated and reported as discontinued operations in the Company's
consolidated financial statements. The operations of this Segment are included
in the Company's consolidated continuing operations for the fiscal year ended
March 31, 1997 because the pending transactions with VSI are subject to approval
by the shareholders of Marquest and the Company and to other standard
conditions.
F-12
<PAGE>
NOTE 3. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------
(in thousands)
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net Sales:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 22,045 $ 22,443 $ 20,576
Scherer Healthcare, Ltd. (a) 1,069 7,555 11,203
Waste Management Services Segment 11,836 10,753 10,039
Consumer Healthcare Products Segment 1,276 1,106 984
--------- --------- ---------
Total $ 36,226 $ 41,857 $ 42,802
--------- --------- ---------
--------- --------- ---------
Operating Income (Loss) from Continuing Operations:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 363 $ 510 $ (2,696)
Scherer Healthcare, Ltd. (a) (323) (335) (912)
Waste Management Services Segment 1,073 924 790
Consumer Healthcare Products Segment 467 368 244
Corporate (b) (848) (1,074) (3,054)
--------- --------- ---------
Total $ 732 $ 393 $ (5,628)
--------- --------- ---------
--------- --------- ---------
Identifiable Assets:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 13,424 $ 15,393 $ 13,992
Scherer Healthcare, Ltd. (a) - 909 6,233
Waste Management Services Segment 9,589 9,370 9,524
Consumer Healthcare Products Segment 111 153 139
Corporate (c) 9,070 8,585 10,751
--------- --------- ---------
Total $ 32,194 $ 34,410 $ 40,639
--------- --------- ---------
--------- --------- ---------
Depreciation Expense:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 793 $ 1,046 $ 1,364
Scherer Healthcare, Ltd. (a) 3 74 128
Waste Management Services Segment 816 731 717
Consumer Healthcare Products Segment 1 1 1
Corporate 65 72 66
--------- --------- ---------
Total $ 1,678 $ 1,924 $ 2,276
--------- --------- ---------
--------- --------- ---------
Capital Expenditures:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 207 $ 66 $ 666
Scherer Healthcare, Ltd. (a) - 47 268
Waste Management Services Segment 841 626 715
Consumer Healthcare Products Segment 5 - -
Corporate 5 - 15
--------- --------- ---------
Total $ 1,058 $ 739 $ 1,664
--------- --------- ---------
--------- --------- ---------
</TABLE>
(a) The assets and businesses of Scherer Healthcare, Ltd. were sold in two
separate transactions in October 1995 and October 1996. See Note 5.
(b) Amount includes a nonrecurring charge of $2,000,000 for fiscal year 1995
relating to the write-down of two waste incinerator investments.
(c) Amount includes net assets of discontinued operations of $351,000,
$556,000, and $9,000 for fiscal years 1997, 1996, and 1995, respectively.
See Note 4.
F-13
<PAGE>
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT
MARQUEST MEDICAL PRODUCTS, INC.
See Note 2 for discussion on the acquisition of Marquest.
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 a broad line of Marquest disposable blood gas
syringes. Most revenues in this group are from the sales of
proprietary-designed syringes, which are marketed under the trade names Gas-Lyte
and Quik-ABG.
All of Marquest's operations and assets are located in Englewood, Colorado,
except for a small amount of inventory at a warehouse facility of one of its
European distributors. Marquest markets its products domestically (United
States and Canada) and internationally. The international markets primarily
include Europe, the Pacific Rim, and Puerto Rico. Export sales accounted for
28%, 26%, and 22% of Marquest's sales for fiscal 1997, 1996, and 1995,
respectively. Marquest had one independent distributor who accounted for 18%,
19% and 19% of its sales for fiscal 1997, 1996, and 1995, respectively.
SCHERER HEALTHCARE, LTD
The Company, through a wholly owned subsidiary, was the general partner and 65%
owner of Scherer Healthcare, Ltd. ("Scherer, Ltd."), which had been doing
business as Custom Medical Products until October 1995. On October 3, 1995,
Scherer, Ltd. sold certain of its assets to Cordis Medical Products, Inc.
("Cordis Medical"), a wholly owned subsidiary of Cordis Corporation, for
approximately $6,527,000. The assets sold to Cordis Medical were those used in
connection with Scherer, Ltd.'s business of packing and distributing medical
supplies for surgical procedures and providing nonwoven medical drapes, gowns
and accessory items to hospitals and other healthcare providers. Scherer, Ltd.
continued in the business of providing nonwoven disposable industrial apparel
and related products to the industrial safety and environment-controlled clean
room and scientific markets under the name Protective Disposable Apparel.
On October 29, 1996, Scherer, Ltd. sold substantially all of its remaining
assets to a subsidiary of Health-Pak, Inc. ("Health-Pak") for approximately
$254,000, plus the assumption by Health-Pak of $319,000 in accounts payable.
The assets acquired by Health-Pak include accounts receivable, inventory and
furniture and fixtures. See Note 5 for further discussion on the transactions
with Cordis Medical and Health-Pak.
WASTE MANAGEMENT SERVICES SEGMENT
The Company operates its medical waste management services segment through Bio
Systems Partners and Medical Waste Systems, Inc. (collectively, "Bio Systems").
The Company owns a 60% general partnership interest in Bio Systems Partners, and
Medical Waste Systems, Inc. is wholly owned by the Company. Bio Systems has
developed and implemented a system to manage and to dispose of certain
infectious waste from hospitals and medical facilities--primarily injectables
and other sharp-edged waste. Bio Systems operates in the metropolitan New York
City, Pennsylvania, New Jersey, and New England areas.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
Scherer Laboratories, Inc. ("Scherer Labs"), a 100% owned subsidiary of the
Company, markets brand name and generic over-the-counter ("OTC") drugs. The OTC
products are principally products used for treatment of colds and coughs, eye
and ear irritations and insect bites. In early fiscal 1997, Scherer Labs
discontinued the sale of its one prescription drug due to an impractical
increase in the cost to manufacture. Sales of the prescription drug were
$12,000 and $24,000 in fiscal 1996 and 1995, respectively. The loss of these
sales did not have a material effect on the Company. Scherer Labs had one
customer who accounted for 55%, 45% and 45% of its total sales for fiscal 1997,
1996, and 1995, respectively.
Scherer Labs markets its products primarily to drug and food stores, mass market
retailers, drug wholesalers, and government agencies. The majority of the sales
are through retailers in the southwest region of the United States. Accounting
and customer service functions are provided by the Company at its corporate
headquarters in Atlanta, Georgia, and sales, marketing, purchasing, and
relations with suppliers and contractors are performed in Dallas, Texas.
F-14
<PAGE>
NOTE 4. DISCONTINUED OPERATIONS
Biofor, Inc. ("Biofor"), a majority owned subsidiary of the Company which had
been operating the Company's Pharmaceutical Research and Development Segment,
was engaged in research to identify and develop new drug compounds. Biofor
utilized "artificial intelligence" computer technology (known as "MultiCASE")
which employed a system of rational drug design (known as M-CADD). This
technology was used for new drug compound development and for contracted
research and development.
Biofor focused its drug design efforts on arthritis and osteoarthritis as well
as the treatment for acute pain. Biofor's lead compound, BF-389, is an
anti-inflammatory analgesic which preliminary Phase I clinical trials indicated
was not sufficiently bioavailable when administered orally in humans. Other
delivery methods that would allow oral administration of the compound were
pursued by Biofor without success.
Since October 1990, Biofor and Ono Pharmaceutical Company, Ltd. ("Ono") had
entered into two research and collaboration agreements pursuant to which they
jointly researched compounds. Biofor provided the use of its exclusive M-CADD
software and its scientists experienced in using M-CADD, while Ono provided
funding and clinical testing of any compounds discovered. The first contract
expired in fiscal 1994 and the second expired March 1996. Substantially all of
Biofor's revenues since 1990 were derived from these contracts.
Since its inception on June 29, 1986, Biofor had expended over $20 million in
cash funding from the Company and affiliates of the Company. In July 1995,
after attempts to locate a purchaser for Biofor, Biofor ceased further drug
design efforts and concentrated solely on the Ono research contract. When the
Ono contract expired in March 1996, Biofor discontinued all operations and the
Company abandoned all operations of Biofor.
The abandonment of the operations of Biofor has been accounted for as a
discontinued operation, and accordingly, its net assets have been segregated
from continuing operations in the accompanying consolidated balance sheets.
Biofor's operating results are also segregated and reported as discontinued
operations in the accompanying consolidated statements of operations and cash
flows.
The following results of operations are attributable to the discontinued
operations of Biofor:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ - $ 772,000 $ 800,000
------------ ------------ ------------
Research and development expenditures - 1,381,000 2,717,000
Nonrecurring charges - - 2,874,000
Other costs and expenses 104,000 136,000 743,000
Provision for shutdown costs - 50,000 -
Write-down of assets to net realizable value 271,000 125,000 -
------------ ------------ ------------
375,000 1,692,000 6,334,000
------------ ------------ ------------
Loss from discontinued operations $ (375,000) $ (920,000) $ (5,534,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-15
<PAGE>
The net assets of the discontinued operations of Biofor at March 31, 1997 and
1996 are as follows:
1997 1996
---------- ----------
Assets:
Property and equipment, net of disposal
costs (a) $ 393,000 $ 664,000
---------- ----------
Total assets 393,000 664,000
---------- ----------
Liabilities:
Accounts payable and accrued expenses 17,000 33,000
Other liabilities 25,000 25,000
Estimated shutdown costs - 50,000
---------- ----------
Total liabilities 42,000 108,000
---------- ----------
Net assets $ 351,000 $ 556,000
---------- ----------
---------- ----------
(a) The remaining property and equipment of Biofor consists of land, a 30,000
square foot building owned by Biofor, and computer and laboratory
equipment.
In fiscal 1996, the Company wrote down the assets of Biofor to their
then-estimated net realizable value and recorded a provision of $50,000 for the
estimated shutdown costs. However, the operating costs of Biofor for fiscal
1997 were $104,000 higher than the provision recorded in fiscal 1996 primarily
due to the cost to maintain the patents for BF-389 in various countries and the
cost for property and liability insurance. The Company intends to sell the
remaining assets of Biofor, but it now anticipates that it may take several
years (primarily to sell the building) and accordingly, has recorded an
additional charge of $271,000 for the write-down of Biofor's assets to their net
realizable value. No income taxes or interest expense was allocated to the
discontinued operations of Biofor for the fiscal years 1997, 1996 and 1995.
NOTE 5. SALE OF ASSETS
On October 3, 1995, Scherer, Ltd. sold certain of its assets to Cordis Medical,
a wholly owned subsidiary of Cordis Corporation, for $6,527,000. The assets
sold were those used in connection with Scherer, Ltd.'s business of packing and
distributing medical supplies for surgical procedures and providing nonwoven
medical drapes, gowns and accessory items to hospitals and other healthcare
providers (the "Medical Business"). Additionally, Cordis Medical agreed to
assume all accounts payable related to the Medical Business and certain other
specifically identified liabilities, including the mortgage on Scherer, Ltd.'s
facility located in Asheville, North Carolina. Scherer, Ltd. received net
proceeds, before income taxes, of $4,922,000, and the Company recorded a pretax
gain of $2,781,000 in the third quarter of fiscal 1996. Scherer, Ltd. continued
in the business of providing nonwoven apparel for industrial uses (the
"Industrial Business") under the name Protective Disposable Apparel.
On October 29, 1996, Scherer, Ltd. sold substantially all of its remaining
assets to a subsidiary of Health-Pak, Inc. for approximately $254,000, plus the
assumption by Health-Pak of $319,000 in accounts payable. The assets acquired
by Health-Pak were those used in connection with Scherer, Ltd.'s Industrial
Business and included accounts receivable, inventory and furniture and fixtures.
Additionally, Health-Pak agreed to assume certain accounts payable and
liabilities related to the Industrial Business. The Company recorded a loss
from the transaction of $84,000 in the third quarter of fiscal 1997 primarily
due to the write-off of the remaining book value of certain intangible assets.
NOTE 6. INTANGIBLES AND COSTS IN EXCESS OF NET ASSETS ACQUIRED
Intangibles are being amortized on a straight-line basis over periods ranging
from 5 to 30 years. Amortization expense amounted to $99,000, $124,000, and
$152,000 in fiscal years 1997, 1996, and 1995, respectively. Accumulated
amortization at March 31, 1997 and 1996 was $213,000 and $317,000, respectively.
F-16
<PAGE>
The cost in excess of net assets acquired ("goodwill") is being amortized on a
straight-line basis over a period of 30 years. Amortization expense amounted to
$243,000, $380,000, and $249,000 in fiscal years 1997, 1996, and 1995,
respectively. Accumulated amortization at March 31, 1997 and 1996 was
$1,408,000 and $1,155,000, respectively.
Subsequent to an acquisition, the Company periodically evaluates whether later
events and circumstances indicate that the remaining estimated useful life of
goodwill warrants revision. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of undiscounted
net income over the remaining life of the goodwill in measuring whether the
goodwill is recoverable. As of March 31, 1997, in the opinion of the Company's
management, no revision of goodwill is required.
NOTE 7. BORROWINGS
Debt and obligations at March 31, 1997 and 1996 consisted of the following:
1997 1996
----------- ----------
Swiss debt principal and accrued
interest at 9% $ 347,000 $ 397,000
Note payable to Robert P. Scherer, Jr.,
due fiscal 2002, prime plus
1.50%, 9.75% at March 31, 1997 700,000 700,000
Note payable to bank, due through
fiscal 2000; variable interest rate,
8.375% at March 31, 1997 883,000 975,000
Obligations under line of credit
arrangement, prime plus 2.25% 125,000 -
Note payable (a), due through fiscal 2002,
prime rate, 8.25% at March 31, 1997 1,958,000 -
Obligations under capital leases,
due in varying installments
through fiscal 2002 1,179,000 1,290,000
Swiss notes payable due fiscal 1999 at 8% 2,851,000 2,896,000
Other long-term debt - 14,000
----------- ----------
8,043,000 6,272,000
Less current maturities (1,397,000) (981,000)
----------- ----------
Long-term debt $ 6,646,000 $ 5,291,000
----------- ----------
----------- ----------
(a) The note is payable to the four adult children of Robert P. Scherer,
Jr., who is the Chairman of the Board and Chief Executive Officer of
the Company and Marquest and is the majority stockholder of the
Company (see Note 12).
The following is a summary of the future maturities of the obligations and notes
payable:
Year ended March 31:
1998 $ 1,397,000
1999 3,703,000
2000 1,368,000
2001 562,000
2002 1,013,000
-----------
$ 8,043,000
-----------
-----------
In June 1995, the Company terminated a $3,200,000 line of credit arrangement it
had with a bank which was collateralized by $3,200,000 of investments.
Borrowings under the line of credit were repaid with the investments that
collateralized the line.
In fiscal 1997, Marquest entered into a line of credit arrangement with Norwest
Business Credit, Inc. which is secured by its trade accounts receivable. The
maximum available under the line of credit is $2,000,000, subject to certain
restrictions. At March 31, 1997, Marquest had an available borrowing limit of
approximately $1,400,000 of which $125,000 had been borrowed.
Substantially all of the assets of Marquest (approximately $13,424,000) are
collateral on approximately $5,442,000 of the above noted debt obligations.
F-17
<PAGE>
NOTE 8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Office space, warehouse facilities, transportation equipment, and office
equipment are leased under noncancelable operating leases expiring at various
dates through 2003. Total rental expense, net of sublease income, included in
the consolidated statements of operations was approximately $820,000, $943,000,
and $1,110,000 for the years ended March 31, 1997, 1996, and 1995, respectively.
The following is a summary of future minimum lease payments required under
operating leases having noncancelable lease terms in excess of one year:
Year ended March 31:
1998 $ 919,000
1999 397,000
2000 278,000
2001 196,000
2002 172,000
Thereafter 129,000
-----------
2,091,000
Minimum sublease income (300,000)
-----------
$ 1,791,000
-----------
-----------
LEGAL PROCEEDINGS
A products liability action was filed against Marquest in California in 1990
which was defended and settled during the trial by its insurance company. Under
the insurance policy, Marquest may have been responsible for a $250,000 self
insured retention plus the cost of defense. Marquest claimed that the insurance
company mishandled the lawsuit and declined to pay. Marquest was sued by the
insurance company in District Court, Arapahoe County, Colorado in February 1994
alleging damages of up to $540,000. In May 1996, Marquest entered into a
settlement agreement with the insurance company pursuant to which Marquest paid
the insurance company $170,000.
On April 9, 1997, Tri-Anim Health Services ("THS"), Marquest's largest domestic
dealer, filed a complaint against Marquest and VSI in the Superior Court of the
State of California for the County of Los Angeles alleging that Marquest had
breached a Confidentiality Agreement between THS and Marquest. Marquest filed a
motion to move the California action to federal district court and filed a
motion to compel arbitration of all issues in Colorado. Marquest intends to
vigorously contest THS' suit against Marquest.
On March 24, 1997, Chesapeake Medical, Inc. and Chesapeake Breathing Services,
Inc. (collectively referred to as "Chesapeake"), two of Marquest's distributors,
filed a lawsuit against Marquest and VSI in the United States District Court for
the District of New Jersey, alleging that Marquest terminated the Dealer
Agreement between Marquest and Chesapeake in a commercially unreasonable manner
and that Marquest disclosed confidential information. Marquest is vigorously
contesting this matter.
Marquest believes that its position in the preceding two matters is meritorious,
but Marquest is unable to predict the outcome of either lawsuit or whether other
lawsuits will be filed by other dealers as a result of their termination. (See
Note 2)
Terumo K.K. ("Terumo"), a competitor of Marquest, filed a complaint in September
1996 in the Tokyo District Court against Chiron K.K. ("Chiron"), Marquest's
distributor of arterial blood gas samplers in Japan, alleging that the blood
samplers infringe upon a Japanese patent owned by Terumo. The complaint does
not name Marquest; however, Marquest has agreed to pay the cost of Chiron's
defense and to indemnify Chiron from Terumo's claim. Terumo is requesting an
injunction against Chiron from importing and selling blood samplers as well as
137,000,000 yen (approximately $1,100,000 as of March 31, 1997) for damages with
regard to Chiron's sale of blood samplers from January 1993 through December
1995. Terumo may increase the damages requested from 1996 to the present. Due
to the preliminary nature of this litigation, Marquest cannot predict the
Court's opinion or the impact, if any, on Marquest's market for blood gas
samplers in Japan.
F-18
<PAGE>
The Company, through a subsidiary, owns a 60% partnership interest in Bio
Systems Partners ("BSP") which operates in the Company's Waste Management
Services Segment. Pursuant to summary judgment granted in a civil action filed
in the United States District Court for the Eastern District of New York in
March 1994, the Company's subsidiary is required to purchase the minority
partner's 40% equity interest valued as of November 30, 1993. Pursuant to the
partnership agreement, the Company's subsidiary and the minority partner
performed separate appraisals of the minority interest. The separate appraisals
were not consistent; therefore, a third appraiser, selected by the partners,
has been retained to review each of the valuations and determine the final
valuation and purchase price. Recently, the District Court rejected the
minority partner's request for prejudgement interest on the final valuation.
The Company is subject to other legal proceedings and claims that arise in the
ordinary course of business. Although the outcome of such proceedings and
claims, including the cases above, cannot be determined with certainty,
management is of the opinion that their final outcome will not have a material
adverse effect on the Company's consolidated operations or financial position.
NOTE 9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has three stock option plans and a long-term incentive plan.
Options may be exercised at a rate ranging from 20% to 33% per year and expire
after eight years. At March 31, 1997, the maximum shares available under these
plans for future grants were 1,859,200. The price of options granted to date
has generally been at the fair market value of the shares on date of grant.
A summary of changes in outstanding options is as follows:
Weighted
Shares Average
Subject Price per
to Option Share
---------- -----------
Balance at March 31, 1994 199,800 $ 14.07
Options granted 241,000 10.34
Options exercised -
Options canceled and expired -
--------- ---------
Balance at March 31, 1995 440,800 12.03
Options granted -
Options exercised -
Options canceled and expired (311,000) 10.77
--------- ---------
Balance at March 31, 1996 129,800 15.05
Options granted -
Options exercised -
Options canceled and expired -
--------- ---------
Balance at March 31, 1997 129,800 $ 15.05
--------- ---------
--------- ---------
Options exercisable at March 31, 1997 113,800
---------
---------
Of the 129,800 options outstanding at March 31, 1997, 99,800 have exercise
prices between $12.50 and $14.30, with a weighted average exercise price of
$13.09 and a weighted average remaining contractual life of four years. All of
these options are exercisable as of March 31, 1997. The remaining 30,000
options have exercise prices between $20.50 and $26.88, with a weighted average
exercise price of $21.56 and a weighted average remaining contractual life of
6.7 years. Of these options, 14,000 are exercisable as of March 31, 1997.
F-19
<PAGE>
CONVERTIBLE PREFERRED STOCK
As part of the Marquest acquisition in fiscal 1994, the Company issued 43,516
shares of its 5% Convertible Preferred Stock, $.01 par value (the "Preferred
Stock") to the former holders of Marquest's defaulted Swiss bonds (see Note 2).
The Company has 2,000,000 shares of the Preferred Stock authorized. Each share
of the Preferred Stock is convertible into approximately 4.43 shares of the
Company's Common Stock. At March 31, 1997 and 1996, the Company had 23,541 and
28,885, respectively, shares of the Preferred Stock outstanding which were
convertible into approximately 104,260 and 127,917, respectively, shares of the
Company's Common Stock.
NOTE 10. RETIREMENT PLAN
A contributory 401(k) salary reduction plan (the "Plan") covers all nonunion
employees, and union employees in a few states, who are 21 years of age or older
and have been employed at least one year. Prior to April 1, 1995, an eligible
employee could elect to contribute up to 3% of their compensation and the
Company was required to make a matching contribution equal to 200% of employee
contributions for all Plan participants still employed on the last day of the
Plan year. Effective April 1, 1995, an eligible employee may elect to
contribute from 2% up to 10% of their compensation and the Company may make a
matching contribution, at its discretion, equal to a set percentage of employee
contributions for all Plan participants still employed on the last day of the
Plan year. The amount of employee contributions to which the match percentage
is applied is limited to 6% of an employee's compensation. For fiscal 1997, the
Company made a matching contribution equal to 100% of employee contributions up
to the maximum of 6% of employee compensation. Company contributions were
approximately $120,000, $108,000, and $200,000 for fiscal years 1997, 1996, and
1995, respectively.
NOTE 11. INCOME TAXES
In fiscal 1994, the Company adopted SFAS No. 109, "Accounting for Income Taxes,"
which required the use of the liability method of accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
As of March 31, the Company's net deferred tax assets consisted of the
following:
1997 1996
----------- ------------
Deferred tax assets:
Accrued expenses $ 560,000 $ 829,000
Partnership losses 601,000 577,000
Capital Losses 896,000 971,000
Net operating loss carryforwards 7,058,000 6,912,000
Other 233,000 174,000
---------- ----------
Total deferred tax assets 9,348,000 9,463,000
---------- ----------
Deferred tax liabilities:
Depreciation (512,000) (585,000)
Other - (123,000)
---------- ----------
Total deferred tax liabilities (512,000) (708,000)
---------- ----------
Valuation allowance (8,507,000) (8,426,000)
---------- ----------
Net deferred tax assets $ 329,000 $ 329,000
---------- ----------
---------- ----------
F-20
<PAGE>
A reconciliation of the income tax provision (benefit) from continuing
operations at the federal statutory rates to the actual tax provision (benefit)
from continuing operations follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------ --------------
<S> <C> <C> <C>
Computed statutory amount $ 41,000 $ 1,093,000 $ (1,644,000)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income
tax benefit 9,000 129,000 (193,000)
Minority interest in net income (loss) of
subsidiaries (136,000) 2,000 (732,000)
Amortization of goodwill 90,000 142,000 92,000
IRS settlement - 697,000 -
Net federal and state tax refunds - (150,000) (320,000)
Net change in valuation allowance 81,000 (1,172,000) 2,249,000
Other, net (79,000) (193,000) 351,000
--------- ----------- ------------
Provision (benefit) for income taxes $ 6,000 $ 548,000 $ (197,000)
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
Components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- ------------
<S> <C> <C> <C>
Current taxes:
Federal $ - $ 612,000 $ (126,000)
State 6,000 (64,000) (192,000)
--------- ----------- ------------
6,000 548,000 (318,000)
Deferred taxes - - 121,000
--------- ----------- ------------
Provision (benefit) for income taxes $ 6,000 $ 548,000 $ (197,000)
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
At March 31, 1997, the Company, excluding Marquest, has regular tax loss
carryforwards of approximately $4,670,000 expiring in varying dates through
2011. Marquest, which files a separate consolidated tax return, has tax loss
carryforwards of approximately $14,200,000 which expire at varying dates through
2011 and are limited as to their use. Marquest also has capital loss
carryforwards of approximately $2,400,000 which expire at varying dates through
1998. Due to the transactions discussed in Note 2, the future benefits
associated with the utilization of Marquest's tax loss carryforwards may be
substantially limited. Capital losses can be utilized to the extent Marquest
generates capital gains in the future.
The Company has determined, based upon its recent earnings history, that asset
valuation allowances of $8,507,000 and $8,426,000 should be established against
its deferred tax assets as of March 31, 1997 and 1996.
During fiscal 1994, Marquest received a refund of federal income taxes of
approximately $745,000 due to the carryback to prior years of losses incurred
during the temporary suspension of operations by the FDA. The Internal Revenue
Service ("IRS") completed an audit in July 1994 and determined that the losses
could not be carried back and issued an assessment to Marquest for the taxes
plus interest. In fiscal 1996, Marquest settled additional tax issues related
to audits by the IRS for fiscal years 1982-1988. Marquest recorded $697,000 of
additional taxes and interest. Marquest negotiated a repayment plan whereby
Marquest paid $400,000 in June 1995 and the remaining liability for taxes,
interest and penalties of approximately $970,000 at March 30, 1996 will be
repaid in monthly installments of $40,000. The IRS has placed a lien on
Marquest's facility in Englewood, Colorado to secure payment of the taxes.
F-21
<PAGE>
NOTE 12. RELATED-PARTY TRANSACTIONS
Prior to fiscal 1996, Scherer Capital Company L.L.C. ("Scherer Cap") and Scherer
Scientific, Ltd. ("Scherer Sci"), entities controlled by the majority
stockholder of the Company, made loans (the "Affiliate Loans") to the Company
and its subsidiaries, the proceeds of which were used for working capital and
business and equipment acquisitions. The Affiliate Loans were payable on demand
and bore interest at prime rate plus 1%. The balance of the Affiliate Loans was
approximately $2,286,000 at March 31, 1996.
In January 1997, the Company and Scherer Cap restructured the balance of
$2,128,000 on the Affiliate Loans (the Company had repaid all amounts owed to
Scherer Sci) into a promissory note (the "Original Note") to be repaid in
monthly installments of principal and interest over a five-year term with a
maturity date of December 1, 2001. The Original Note was collateralized by
2,432,251 shares of Marquest Common Stock owned by the Company, had a fixed
monthly payment of $44,437, except for the last payment, and bore interest at
prime rate plus 1%, adjusted quarterly. In connection with the dissolution of
Scherer Cap in March 1997, the Original Note was amended (the "Amended Note")
and subsequently assigned to the four adult children, who are not affiliated
with the Company, of Robert P. Scherer, Jr. who is Chairman of the Board and
Chief Executive Officer of the Company and Marquest and is the majority
stockholder of the Company. In exchange for certain considerations, $50,000 of
the principal balance was forgiven and the interest rate was reduced to prime,
adjusted quarterly, in the Amended Note. The monthly payment in the Amended
Note is fixed at $43,408, except for the last payment which will be for the
amount of the unpaid principal balance plus any unpaid accrued interest as of
December 1, 2001. The term and collateral remained the same in the Amended Note
as in the Original Note. As of March 31, 1997, the balance of the Amended
Note was approximately $1,958,000 and the interest rate was 8.25% The Company
has reported the $50,000 of debt forgiveness as an equity transaction due to the
common control at the time between the respective parties.
In March 1996, Marquest and Scherer Cap entered into a loan and security
agreement (the "Loan Agreement") from which Marquest borrowed $700,000 to repay
$700,000 that it borrowed from Scherer Cap in December 1995 for working capital
purposes. The Loan Agreement contemplated the possibility of additional
borrowings of $800,000. Borrowings under the Loan Agreement are represented by
convertible notes due April 1, 2001 (the "Scherer Cap Notes"), bear interest at
prime rate plus 1.5%, and are secured by Marquest's inventory, building, and
equipment. Pursuant to the Loan Agreement, which expires February 28, 2001, the
Scherer Cap Notes are convertible at the option of Scherer Cap into shares of
Marquest's Common Stock at a conversion price of $.70 per share. As of March
31, 1997, Marquest had borrowed $700,000 under the Loan Agreement and the
Scherer Cap Notes and the interest rate was 9.75%. Additionally, in March 1996
Scherer Cap purchased 2,061,856 shares of Marquest Common Stock for an
aggregate purchase price of $1,000,000. In connection with its dissolution in
March 1997, Scherer Cap assigned the Loan Agreement and the Scherer Cap Notes,
and transferred 1,546,392 shares of the Marquest Common Stock that it owned to
Mr. Scherer, Jr. The remaining 515,464 shares of Marquest Common Stock owned by
Scherer Cap were transferred into a voting trust for the benefit of Mr. Scherer,
Jr.'s adult children. Mr. Scherer, Jr. is entitled to vote the shares held in
the voting trust.
Effective October 1, 1995, Scherer Sci charged the Company an allocated portion
of the salary of a certain executive officer of the Company who was an employee
of Scherer Sci and not the Company. The executive officer provided the Company
with administrative and operations management. In connection with the
dissolution of Scherer Sci in March 1997, the executive officer became an
employee of the Company.
During the first quarter of fiscal 1996 and prior periods, Scherer Sci provided
to the Company and its subsidiaries administrative, accounting, management
oversight and payroll services (collectively, the "Administrative Services").
Effective July 1, 1995, Scherer Sci and the Company terminated the
Administrative Services arrangement and certain employees of Scherer Sci became
employees of the Company. As a result, the Company currently provides its own
administrative, accounting, management and payroll services.
F-22
<PAGE>
The Company was charged the following fees by the above affiliates:
1997 1996 1995
-------- -------- ---------
Management fees $ - $150,000 $ 610,000
Accounting services and
administrative management 70,000 43,000 78,000
Interest expense 245,000 539,000 544,000
-------- -------- ----------
Total $315,000 $732,000 $1,232,000
-------- -------- ----------
-------- -------- ----------
Until March 1995, Scherer Labs utilized the inventory receiving, warehousing and
distribution, customer service, and invoicing services of an entity controlled
by certain former officers of the Company and 25% owned by the majority
shareholder of the Company. The fees charged for these services were $104,000
in fiscal 1995.
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended March 31
-------------------------------------
1997 1996 1995
----------- ----------- ------------
NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Restructure of demand loan from
an affiliate into a promissory
note, net of debt forgiveness $ 2,078,000 $ - $ -
----------- ----------- -----------
----------- ----------- -----------
Conversion of notes from
Marquest to Marquest Common
Stock - $ 2,715,000 $ 2,500,000
----------- ----------- -----------
----------- ----------- -----------
Supplemental information:
Interest paid during the year $ 682,000 $ 1,395,000 $ 935,000
Income taxes paid (refunded) during
the year 451,000 471,000 (1,149,000)
F-23
<PAGE>
SCHEDULE I
SCHERER HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
MARCH 31, 1997 AND 1996
ASSETS
1997 1996
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 3,225,000 $ 1,987,000
Accounts and notes receivable 2,870,000 3,389,000
Receivable from Marquest 25,000 43,000
Inventories 170,000 542,000
Other current assets 66,000 158,000
------------- -------------
Total current assets 6,356,000 6,119,000
------------- -------------
PROPERTY AND EQUIPMENT, net 3,737,000 3,548,000
------------- -------------
INVESTMENT IN MARQUEST 6,491,000 6,882,000
GOODWILL AND OTHER INTANGIBLES, net 2,676,000 2,926,000
OTHER ASSETS 2,057,000 2,347,000
------------- -------------
$ 21,317,000 $ 21,822,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,372,000 $ 2,423,000
Payable to affiliates - 2,280,000
Current maturities of debt obligations 555,000 178,000
Other current liabilities 57,000 49,000
------------- -------------
Total current liabilities 2,984,000 4,930,000
------------- -------------
LONG-TERM DEBT, net of current maturities 2,046,000 -
OTHER LIABILITIES 325,000 718,000
STOCKHOLDERS' EQUITY 15,962,000 16,174,000
------------- -------------
$ 21,317,000 $ 21,822,000
------------- -------------
------------- -------------
The notes to consolidated financial statements are an integral part of these
condensed balance sheets.
This schedule presents Scherer Healthcare, Inc. and subsidiaries consolidated
except for its Marquest subsidiary. Marquest's assets are restricted as to
their distribution to the Company.
S-1
<PAGE>
SCHEDULE I
SCHERER HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
NET SALES $ 14,181,000 $ 19,413,000 $22,226,000
--------------- --------------- -------------
COSTS AND EXPENSES
Costs of goods sold 8,675,000 13,234,000 16,343,000
Selling, general and administrative 5,365,000 6,662,000 7,385,000
Nonrecurring charges - - 2,000,000
--------------- --------------- -------------
Total costs and expenses 14,040,000 19,896,000 25,728,000
OPERATING INCOME (LOSS) 141,000 (483,000) (3,502,000)
OTHER INCOME, net
(Loss) Gain on sale of assets (84,000) 2,781,000 -
Other, net 303,000 265,000 67,000
--------------- --------------- -------------
Total other income, net 219,000 3,046,000 67,000
--------------- --------------- -------------
Income (loss) from continuing operations before net loss from
unconsolidated subsidiary and income taxes 360,000 2,563,000 (3,435,000)
Net loss from unconsolidated subsidiary (240,000) (45,000) (1,399,000)
--------------- --------------- -------------
Income (loss) from continuing operations 120,000 2,518,000 (4,834,000)
(Provision) benefit for income taxes (6,000) 150,000 197,000
--------------- --------------- -------------
Income (loss) from continuing operations 114,000 2,668,000 (4,637,000)
Loss from discontinued operations (375,000) (920,000) (5,534,000)
--------------- --------------- -------------
NET (LOSS) INCOME $ (261,000) $ 1,748,000 $(10,171,000)
--------------- --------------- -------------
--------------- --------------- -------------
</TABLE>
The notes to consolidated financial statements are an integral part of these
condensed statements of operations.
This schedule presents Scherer Healthcare, Inc. and subsidiaries consolidated
except for its Marquest subsidiary. Marquest's assets are restricted as to
their distribution to the Company.
S-2
<PAGE>
SCHEDULE I
SCHERER HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (261,000) $ 1,748,000 $(10,171,000)
Adjustments to reconcile net (loss) income to net cash
provided by (used for) operating activities:
Depreciation and amortization 985,000 1,178,000 1,295,000
Nonrecurring charges - - 2,000,000
Net loss from unconsolidated subsidiary 240,000 45,000 1,399,000
Loss (gain) on sale of assets 84,000 (2,781,000) -
Loss from discontinued operations 375,000 920,000 5,534,000
Other, net 25,000 139,000 (224,000)
Changes in operating assets and liabilities, net 555,000 652,000 611,000
--------------- --------------- -------------
Net cash provided by operating activities of
continuing operations 2,003,000 1,901,000 444,000
Net operating activities of discontinued operations (170,000) (1,564,000) (2,105,000)
--------------- --------------- -------------
Net cash provided by (used for) operating activities 1,833,000 337,000 (1,661,000)
--------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (852,000) (605,000) (1,107,000)
Proceeds from sale of assets 254,000 4,922,000 -
Investment in Marquest - - (6,000)
Decrease in notes receivable 170,000 648,000 389,000
Decrease (increase) in investments - 3,232,000 (232,000)
Other investing activities, net (59,000) 82,000 -
--------------- --------------- -------------
Net cash (used for) provided by investing activities (487,000) 8,279,000 (956,000)
--------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) borrowings 105,000 (2,019,000) (913,000)
(Repayments to) advances from affiliates (213,000) (5,321,000) 2,356,000
--------------- --------------- -------------
Net cash (used for) provided by financing activities (108,000) (7,340,000) 1,443,000
--------------- --------------- -------------
CHANGE IN CASH AND CASH EQUIVALENTS 1,238,000 1,276,000 (1,174,000)
CASH AND CASH EQUIVALENTS, beginning of year 1,987,000 711,000 1,885,000
--------------- --------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 3,225,000 $ 1,987,000 $ 711,000
--------------- --------------- -------------
--------------- --------------- -------------
</TABLE>
The notes to consolidated financial statements are an integral part of these
condensed statements of cash flows.
This schedule presents Scherer Healthcare, Inc. and subsidiaries consolidated
except for its Marquest subsidiary. Marquest's assets are restricted as to
their distributions to the Company.
S-3
<PAGE>
SCHEDULE II
SCHERER HEALTHCARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Additions
----------------------------
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------- ------------ -------------- ------------ -------------- ------------
Balance Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts Deductions of Year
- -------------------------------- ------------ -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts $ 243,000 $ 125,000 - $ 79,000(a) $ 289,000
------------ -------------- ------------ -------------- ------------
------------ -------------- ------------ -------------- ------------
1996:
Allowance for doubtful accounts $ 228,000 $ 112,000 - $ 97,000(a) $ 243,000
------------ -------------- ------------ -------------- ------------
------------ -------------- ------------ -------------- ------------
1995:
Allowance for doubtful accounts $ 216,000 $ 86,000 - $ 74,000 (a) $ 228,000
------------ -------------- ------------ -------------- ------------
------------ -------------- ------------ -------------- ------------
</TABLE>
(a) Accounts written off, net of recoveries.
S-4
