<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission File No. 0-10552
-------------------
SCHERER HEALTHCARE, INC.
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C>
Delaware 59-0688813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2859 Paces Ferry Road, Suite 300, Atlanta, Georgia 30339
(Address of principal executive offices, including Zip Code)
(770) 333-0066
(Registrant's telephone number, including area code)
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 the number of shares of each of the issuer's classes of Common
Stock, as of the latest practicable date:
<TABLE>
<CAPTION>
<S> <C>
CLASS OUTSTANDING AS OF JULY 29, 1997
----------------------------- ------------------------------------
Common Stock, $0.01 par value 4,314,223
</TABLE>
<PAGE>
SCHERER HEALTHCARE, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
- ------ --------
<S> <C> <C>
1 Financial Statements:
Condensed Consolidated Balance
Sheets as of June 30, 1997 and
March 31, 1997................................................ 3
Condensed Consolidated Statements
of Operations for the Three Months
Ended June 30, 1997 and 1996.................................. 5
Condensed Consolidated Statements
of Cash Flows for the Three Months
Ended June 30, 1997 and 1996.................................. 6
Notes to Condensed Consolidated
Financial Statements.......................................... 7
2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................................. 10
PART II. OTHER INFORMATION
6 Exhibits and Reports on Form 8-K.............................. 15
SIGNATURES.................................................... 16
Index to Exhibits............................................. 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(See Note 5)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................... $ 3,483,000 $ 3,237,000
Accounts receivable, less allowance for doubtful
accounts of $380,000 and $289,000, respectively.. 5,970,000 6,087,000
Current maturities of notes receivable............ 257,000 223,000
Inventories....................................... 3,301,000 3,453,000
Prepaid and other................................. 319,000 218,000
------------- ------------
Total current assets............................ 13,330,000 13,218,000
------------- ------------
PROPERTY AND EQUIPMENT............................. 16,752,000 16,792,000
Less accumulated depreciation..................... (6,911,000) (6,586,000)
------------- ------------
Net property and equipment........................ 9,841,000 10,206,000
------------- ------------
OTHER ASSETS
Cost in excess of net assets acquired, net........ 6,339,000 6,404,000
Other investments, at cost........................ 650,000 650,000
Notes receivable, less current portion............ 338,000 371,000
Intangibles....................................... 307,000 309,000
Deferred income taxes............................. 329,000 329,000
Other............................................. 390,000 356,000
Net assets of discontinued operations............. 375,000 351,000
------------- ------------
Total other assets.............................. 8,728,000 8,770,000
------------- ------------
TOTAL ASSETS....................................... $31,899,000 $32,194,000
------------- -------------
------------- -------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(See Note 5)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
-------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable............................. $ 2,092,000 $ 1,808,000
Accrued expenses............................. 3,430,000 4,107,000
Line of credit and current maturities of
debt obligations............................ 1,233,000 1,397,000
Other........................................ 93,000 57,000
----------- -----------
Total current liabilities.................. 6,848,000 7,369,000
----------- -----------
LONG-TERM DEBT
Note payable to affiliate.................... 700,000 700,000
Notes, obligations, and other, net of
current maturities.......................... 5,628,000 5,946,000
----------- -----------
Total long-term debt....................... 6,328,000 6,646,000
----------- -----------
OTHER LIABILITIES............................. 320,000 325,000
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN SUBSIDIARY
AND PARTNERSHIPS.............................. 2,010,000 1,891,000
STOCKHOLDERS' EQUITY
Convertible preferred stock--$.01 par value,
2,000,000 shares authorized;
23,541 shares issued and outstanding........ -- --
Common stock--$.01 par value,
12,000,000 shares authorized;
4,693,585 shares issued;
4,314,223 shares outstanding................ 47,000 47,000
Capital in excess of par value............... 22,366,000 22,366,000
Accumulated deficit.......................... (2,987,000) (3,417,000)
Less treasury stock, at cost................. (3,033,000) (3,033,000)
----------- -----------
Total stockholders' equity................. 16,393,000 15,963,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $31,899,000 $32,194,000
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(See Note 5)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
<S> <C> <C>
1997 1996
------------ ------------
NET SALES................................................................. $ 8,775,000 $ 9,059,000
------------ ------------
COSTS AND EXPENSES
Cost of goods sold...................................................... 5,364,000 6,158,000
Selling, general, and administrative.................................... 2,599,000 2,932,000
Research and development................................................ 63,000 43,000
------------ ------------
Total costs and expenses............................................... 8,026,000 9,133,000
------------ ------------
OPERATING INCOME (LOSS)................................................... 749,000 (74,000)
OTHER INCOME (EXPENSE)
Interest income......................................................... 54,000 65,000
Interest expense........................................................ (222,000) (230,000)
Other, net.............................................................. (125,000) 20,000
------------ ------------
Total other income (expense)........................................... (293,000) (145,000)
------------ ------------
Income (loss) from continuing operations before minority
interest and income taxes............................................... 456,000 (219,000)
Minority interest in net (income) loss of subsidiary and partnerships..... (37,000) 216,000
------------ ------------
Income (loss) from continuing operations before income taxes.............. 419,000 (3,000)
Benefit (provision) for income taxes...................................... 11,000 (11,000)
------------ ------------
Income (loss) from continuing operations.................................. 430,000 (14,000)
------------ ------------
NET INCOME (LOSS)......................................................... $ 430,000 $ (14,000)
------------ ------------
------------ ------------
INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations................................ $ 0.10 $ --
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE........................................ $ 0.10 $ --
------------ ------------
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................................ 4,418,483 4,290,745
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(See Note 5)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------
<S> <C> <C>
1997 1996
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................................... $ 430,000 $(14,000)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization....................................................... 464,000 366,000
Minority interest................................................................... 118,000 (202,000)
Other noncash charges and credits, net.............................................. 100,000 (2,000)
Changes in operating assets and liabilities:
Accounts receivable, net............................................................ 25,000 651,000
Inventories......................................................................... 152,000 (246,000)
Prepaid and other................................................................... (101,000) (10,000)
Accounts payable and accrued expenses............................................... (356,000) (1,027,000)
Other liabilities................................................................... (6,000) (5,000)
------------ -----------
Net cash provided by (used for) operating activities of continuing operations........ 826,000 (489,000)
------------ -----------
Net operating activities of discontinued operations.................................. (24,000) (43,000)
------------ -----------
Net cash provided by (used for) operating activities................................. 802,000 (532,000)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net............................................. (283,000) (247,000)
Proceeds from sale of assets......................................................... 261,000 --
Decrease in notes receivable......................................................... -- 145,000
Other investing activities, net...................................................... (51,000) (89,000)
------------ -----------
Net cash used for investing activities................................................ (73,000) (191,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayment of) proceeds from borrowings.......................................... (483,000) 5,000
Net repayments to affiliated companies............................................... -- (127,000)
------------ -----------
Net cash used for financing activities................................................ (483,000) (122,000)
------------ -----------
CHANGE IN CASH AND CASH EQUIVALENTS................................................... 246,000 (845,000)
CASH AND CASH EQUIVALENTS, beginning of period........................................ 3,237,000 3,622,000
------------ -----------
CASH AND CASH EQUIVALENTS, end of period.............................................. $ 3,483,000 $ 2,777,000
------------ -----------
------------ -----------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
The accompanying condensed consolidated financial statements of Scherer
Healthcare, Inc. and its subsidiaries (the "Company") include all adjustments
that, in the opinion of management, are necessary for a fair presentation of the
results for the period indicated. Quarterly results of operations are not
necessarily indicative of annual results. These statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997.
Certain fiscal 1997 amounts have been reclassified to conform with the
fiscal 1998 presentation.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The
new standard simplifies the computation of earnings per share ("EPS") and
increases comparability to international standards. Under SFAS No. 128, primary
EPS is replaced by "Basic" EPS, which excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. "Diluted" EPS, which is computed
similarly to fully diluted EPS, reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock.
The Company is required to 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. Pro Forma EPS, as if the
Company adopted SFAS No. 128 on April 1 of each period presented, are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
<S> <C> <C>
1997 1996
---------- ---------
Basic EPS............................................. $ 0.10 $ --
Diluted EPS........................................... $ 0.10 $ --
</TABLE>
NOTE 2.
The components of inventory at June 30, 1997 and March 31, 1997 consisted of
the following:
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
------------- --------------
<S> <C> <C>
Finished products.................................. $ 1,015,000 $ 1,086,000
Work in progress................................... 260,000 282,000
Containers, packaging, and raw materials........... 2,026,000 2,085,000
------------- --------------
$ 3,301,000 $ 3,453,000
------------- --------------
------------- --------------
</TABLE>
Inventories are stated at the lower of net realizable value or cost
primarily using the first-in, first-out ("FIFO") method.
7
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3.
Debt and obligations at June 30, 1997 and March 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
------------- --------------
<S> <C> <C>
Swiss debt principal and accrued interest at 9%..................... $ 353,000 $ 347,000
Note payable to Robert P. Scherer, Jr., due fiscal 2002,
prime plus 1.50%, 9.75% at June 30, 1997.......................... 700,000 700,000
Note payable to bank, due through fiscal 2000; variable
interest rate, 8.375% at June 30, 1997............................ 860,000 883,000
Obligations under line of credit arrangement, prime plus 2.25%...... 162,000 125,000
Note payable, due through fiscal 2002, prime rate,
8.25% at June 30, 1997 (a)........................................ 1,867,000 1,958,000
Obligations under capital leases, due in varying
installments through fiscal 2002.................................. 849,000 1,179,000
Swiss notes payable due fiscal 1999 at 8%........................... 2,770,000 2,851,000
------------- --------------
7,561,000 8,043,000
Less current maturities............................................. (1,233,000) (1,397,000)
------------- --------------
Long-term debt...................................................... $ 6,328,000 $ 6,646,000
------------- --------------
------------- --------------
</TABLE>
(a) The note is payable to the four adult children of Robert P. Scherer, Jr.
Mr. Scherer, Jr. is the Chairman of the Board and Chief Executive Officer
of the Company and Marquest Medical Products, Inc. ("Marquest"), a majority
owned subsidiary of the Company, and the majority stockholder of the
Company.
NOTE 4.
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%.
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 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, under the Amended Note. The monthly payment under 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 under the Amended Note as in the
Original Note. As of June 30, 1997, the balance of the Amended Note was
approximately $1,867,000 and the interest rate was 8.25%.
On July 28, 1997, the Company used a portion of the proceeds from the
Marquest transaction (see Note 5) to pay in full the outstanding principal
balance of approximately $1,867,000 and the associated accrued interest of
approximately $12,000 on the Amended Note. Accordingly, the Amended Note was
cancelled and the shares of Marquest Common Stock pledged as collateral under
the Amended Note were released back to the Company.
8
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 up to $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 June 30, 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. On July 23, 1997, Mr. Scherer, Jr. converted the outstanding
balance of $700,000 on the Scherer Cap Notes into 1,000,000 shares of Marquest
Common Stock.
NOTE 5.
Effective on July 28, 1997, the Company and Marquest completed the
previously announced transactions with Vital Signs, Inc. ("VSI"). Pursuant to
the terms of an Agreement and Plan of Merger dated as of March 14, 1997, between
Marquest, VSI, and VSI Acquisition Corporation (the "Merger Agreement"), VSI
acquired Marquest upon the merger (the "Merger") of VSI Acquisition Corporation,
a wholly-owned subsidiary of VSI, with and into Marquest. At the effective time
of the Merger, all of the issued and outstanding shares of Marquest Common Stock
were converted into the right to receive $0.797 in cash per share and Marquest
became a wholly-owned subsidiary of VSI. As a result, the Company received
$5,747,320 in exchange for its 7,211,192 shares of Marquest Common Stock and
$309,260 through the exercise of warrants to purchase Marquest Common Stock.
Additionally, pursuant to the terms of the Scherer Healthcare Inducement
Agreement dated as of March 14, 1997, between the Company, Marquest, and VSI
(the "Inducement Agreement"), VSI purchased from the Company certain assets of
the Company leased or licensed by the Company to Marquest and used by Marquest
in the manufacture and sale of arterial blood gas products and the Company
entered into a covenant not to compete with VSI in the manufacture and sale of
arterial blood gas products for a period of three years. VSI paid the Company an
aggregate of $5,860,000 for the assets and the covenant not to compete. The
Company used a portion of the proceeds from the Merger to pay in full the
outstanding principal balance of approximately $1,867,000 on the Amended Note
(see Note 4).
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."), a limited partnership that was 65% owned by
the Company, whose assets and businesses were sold in two separate transactions
in October 1995 and October 1996. Effective, July 28, 1997, the operations of
the Medical Device and Surgical/Safety Disposables 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 after such date.
The following unaudited pro forma condensed consolidated statements of
continuing operations for three months ended June 30, 1997 and 1996 present the
operating results of the Company as if the Marquest and Scherer, Ltd.
transactions had occurred on April 1, 1996. The statements are based on
previously described financial information of the Company and financial
information described elsewhere herein. The statements include adjustments to
reflect the elimination of the operations of Marquest and Scherer, Ltd., the
amortization and depreciation expense associated with the assets the Company
sold to VSI, and the interest expense associated with the repayment of a
promissory note (see Note 4).
9
<PAGE>
The unaudited pro forma condensed consolidated statements of continuing
operations are presented for illustrative purposes only and are not necessarily
indicative of the operating results that actually would have occurred if the
transactions had been consummated as of such dates, nor are they necessarily
indicative of future operating results.
SCHERER HEALTHCARE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
OF CONTINUING OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
<S> <C> <C>
1997 1996
------------ ------------
NET SALES...................................................... $ 3,506,000 $ 3,351,000
COST AND EXPENSES
Cost of goods sold........................................... 1,960,000 1,995,000
Selling, general, and administrative......................... 1,204,000 1,136,000
------------ ------------
Total costs and expenses.................................... 3,164,000 3,131,000
------------ ------------
OPERATING INCOME............................................... 342,000 220,000
OTHER INCOME, NET.............................................. 46,000 27,000
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.......... 388,000 247,000
BENEFIT (PROVISION) FOR INCOME TAXES........................... 11,000 (11,000)
------------ ------------
INCOME FROM CONTINUING OPERATIONS.............................. $ 399,000 $ 236,000
------------ ------------
------------ ------------
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE............. $ 0.09 $ 0.05
------------ ------------
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..................... 4,418,483 4,418,483
------------ ------------
------------ ------------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information,
forward-looking statements. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and in the Company's 1997 Annual Report on
Form 10-K.
10
<PAGE>
RECENT DEVELOPMENTS
Effective on July 28, 1997, the Company and Marquest, a majority owned
subsidiary of the Company, completed the previously announced transactions with
VSI. Pursuant to the terms of the Merger Agreement dated as of March 14, 1997,
VSI acquired Marquest upon the Merger of VSI Acquisition Corporation, a
wholly-owned subsidiary of VSI, with and into Marquest. At the effective time of
the Merger, all of the issued and outstanding shares of Marquest Common Stock
were converted into the right to receive $0.797 in cash per share and Marquest
became a wholly-owned subsidiary of VSI. As a result, the Company received
$5,747,320 in exchange for its 7,211,192 shares of Marquest Common Stock and
$309,260 through the exercise of warrants to purchase Marquest Common Stock.
Additionally, pursuant to the terms of the Inducement Agreement dated as of
March 14, 1997, VSI purchased from the Company certain assets of the Company
leased or licensed by the Company to Marquest and used by Marquest in the
manufacture and sale of arterial blood gas products and the Company entered into
a covenant not to compete with VSI in the manufacture and sale of arterial blood
gas products for a period of three years. VSI paid the Company an aggregate of
$5,860,000 for the assets and the covenant not to compete. The Company's
shareholders approved these transactions at a Special Meeting of Stockholders
held on July 28, 1997.
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."), a limited partnership that was 65% owned
by the Company, whose assets and businesses were sold in two separate
transactions in October 1995 and October 1996. Effective, July 28, 1997, the
operations of the Medical Device and Surgical/Safety Disposables 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 after such date.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the net sales and
operating income (loss) for each segment of the business of the Company and its
subsidiaries:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
<S> <C> <C>
1997 1996
------------ ------------
NET SALES:
Medical Device and Surgical/Safety
Disposables Segment:
Marquest Medical Products, Inc.................................... $ 5,269,000 $ 5,152,000
Scherer Healthcare, Ltd. (a)...................................... -- 556,000
Waste Management Services Segment................................... 3,079,000 2,954,000
Consumer Healthcare Products Segment................................ 427,000 397,000
------------ ------------
Company Totals.................................................... $ 8,775,000 $ 9,059,000
------------ ------------
------------ ------------
OPERATING INCOME (LOSS):
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc...................................... $ 372,000 $ (239,000)
Scherer Healthcare, Ltd. (a)...................................... -- (101,000)
Waste Management Services Segment................................... 396,000 273,000
Consumer Healthcare Products Segment................................ 205,000 168,000
Corporate........................................................... (224,000) (175,000)
------------ ------------
Company Totals.................................................... $ 749,000 $ (74,000)
------------ ------------
------------ ------------
</TABLE>
(a) In October 1996, Scherer Healthcare, Ltd., a majority owned partnership of
the Company, sold substantially all of its remaining assets used in
connection with its business of providing nonwoven disposable industrial
apparel and related products to the industrial safety, environment-
controlled clean room, and scientific markets.
11
<PAGE>
The Company's net sales decreased by 3% to $8,775,000 for the first
quarter of fiscal 1998 from $9,059,000 for the first quarter of fiscal 1997;
however, the first quarter of fiscal 1997 includes three months of net sales
for Scherer, Ltd., or $556,000, which sold all of its remaining assets and
business in October 1996. The Company reported operating income of $749,000
for the first quarter of fiscal 1998 compared to an operating loss of $74,000
during the same period in fiscal 1997. The Company's cost of sales decreased
from 68% of net sales in the first quarter of fiscal 1997 to 61% in the first
quarter of fiscal 1998. Selling, general, and administrative expenses
decreased from 32% of net sales in the first quarter of fiscal 1997 to 30% in
the first quarter of fiscal 1998. The primary reasons for these changes are
discussed below.
The results of operations of the Company are dependent upon the results of
operations of each of its subsidiaries and majority owned partnerships operating
in the Company's individual business segments. Set forth below is a discussion
of the results of operations of each of these segments.
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT
MARQUEST MEDICAL PRODUCTS, INC. Marquest's net sales increased
approximately 2% to $5,269,000 for the first quarter of fiscal 1998 from
$5,152,000 during the same period in fiscal 1997. The increase in net sales
is attributable to an unusual expansion in the quantity of sales orders from
certain customers which Marquest believes is due to an effort by these
customers to increase their inventory levels upon receiving notice of the
Merger and termination of their dealer agreements with Marquest in March
1997. Simultaneous with the execution of the Merger Agreement, Marquest and
VSI entered into a Dealer Agreement which authorized VSI to distribute
Marquest's products in the United States, Canada, Puerto Rico, and certain
other international territories. Subsequently, Marquest provided 28 of its 29
existing domestic specialty dealers with notices of termination of their
dealer agreements which, as a general matter, allowed for termination on 30
to 90 days' notice.
Marquest reported operating income of $372,000 in the first quarter of
fiscal 1998 compared to an operating loss of $239,000 for the first quarter of
fiscal 1997. Marquest's cost of sales decreased to 65% of net sales for the
first quarter of fiscal 1998 from 73% of net sales during the first quarter of
fiscal 1997 and its selling, general, and administrative expenses decreased to
25% of net sales for the first quarter of fiscal 1998 from 29% during the same
period in fiscal 1997. The operating improvement at Marquest can be attributed
to the increase in net sales discussed above combined with the implementation of
certain manufacturing cost reduction efforts which helped reduce materials
expense and overhead. These cost reduction efforts included (i) the installation
of automated equipment used in the manufacture of nebulizers; (ii) converting
the packaging on certain arterial blood gas products which reduced material
costs and labor; (iii) outsourcing the manufacturing of certain components for
the nebulizer kits; and (iv) realizing a cost reduction in packaging due to
favorable market conditions. As a result of the execution of the Dealer
Agreement, Marquest reduced its sales and marketing personnel and realized a
significant decrease in payroll and travel expense. Additionally, in connection
with the Dealer Agreement, VSI agreed to pay the commissions to Marquest's
independent manufacturer's representatives which resulted in savings to Marquest
of approximately $150,000.
SCHERER HEALTHCARE, LTD. On October 29, 1996, Scherer, Ltd., a majority
owned partnership of the Company which had been operating as Protective
Disposable Apparel, sold substantially all of its remaining assets to a
subsidiary of Health-Pak, Inc. The assets sold were those used in connection
with Scherer, Ltd.'s business of providing nonwoven disposable industrial
apparel and related products to the industrial safety, environment-controlled
clean room, and scientific markets. This transaction combined with the sale
of certain assets and business to a subsidiary of Cordis Corporation in
October 1995 eliminated substantially all of the assets of Scherer, Ltd.;
therefore, Scherer, Ltd. was dissolved on December 2, 1996. Scherer, Ltd.
reported net sales of $556,000 and an operating loss of $101,000 during the
first quarter of fiscal 1997.
WASTE MANAGEMENT SERVICES SEGMENT
Net sales in the Company's Waste Management Services Segment, which
operates through Bio Systems Partners and Medical Waste Systems, Inc.
(collectively, "Bio Systems"), increased approximately 4% to $3,079,000 in
the first quarter of fiscal 1998 from $2,954,000 during the first quarter of
fiscal 1997. The increase in net sales is due to the new medical waste
disposal contracts with hospitals that Bio Systems secured in fiscal 1997.
12
<PAGE>
Bio Systems' operating income increased approximately 45% to $396,000 for
the first quarter of fiscal 1998 from $273,000 during the first quarter of
fiscal 1997. Bio Systems' cost of sales decreased slightly to 59% of net
sales for the first quarter of fiscal 1998 from 60% of net sales during the
same period in fiscal 1997; however, Bio Systems' selling, general, and
administrative expense decreased to 28% of net sales for the first quarter of
fiscal 1998 from 31% of net sales during the first quarter of fiscal 1997.
This operating improvement can be attributed to the increase in net sales
from the new hospital contracts combined with a decrease in liability
insurance expense and legal expenses.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
Net sales for the Consumer Healthcare Products Segment, which operates
through Scherer Laboratories, Inc., increased approximately 8% to $427,000
for the first quarter of fiscal 1998 from $397,000 during the same period in
fiscal 1997. The increase in net sales is a result of securing new customers
and retail outlets in fiscal 1997. Operating income increased approximately
22% to $205,000 for the first quarter of fiscal 1998 from $168,000 during the
first quarter of fiscal 1997. The increase in operating income can be
directly attributed to the increase in net sales discussed above.
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 increased to approximately
$627,000 for the first quarter of fiscal 1998 from approximately $120,000
during the same period in fiscal 1997. As a result of the improvement in the
Company's operating performance, working capital increased from approximately
$3,373,000 in fiscal 1997 to approximately $3,817,000 in fiscal 1998. Bio
Systems' operations provided cash of approximately $375,000 during the first
quarter of fiscal 1998 compared to a use of cash from operating activities of
approximately $7,000 during the same period in fiscal 1997. This increase is
a result of Bio Systems improved operating performance combined with the
timing of its accounts receivable collections and payment of accounts payable.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES.
The Company's (excluding Marquest which is described below) cash used by
investing activities decreased slightly to approximately $150,000 during the
first quarter of fiscal 1998 from approximately $217,000 during the same
period in fiscal 1997. Bio Systems decreased its capital expenditures by
approximately $93,000 during the first quarter of fiscal 1998 compared to the
same period in fiscal 1997 primarily due to a decrease in expenditures for
reusable containers and for new trucks used to transport medical waste.
Cash used by the Company's financing activities increased from approximately
$21,000 during the first quarter of fiscal 1997 to approximately $151,000 during
the same period in fiscal 1998. Bio Systems increased its capital lease debt by
approximately $101,000 in the first quarter of fiscal 1997 to finance the
acquisition of new medical waste transport trucks. In January 1997, the Company
and Scherer Cap, an entity controlled by Robert P. Scherer, Jr. who is Chairman
of the Board, Chief Executive Officer, and majority shareholder of the Company,
restructured the outstanding balance of $2,128,000 from loans that Scherer Cap
had made to the Company previously into a five-year promissory note (the
"Original Note") which bore interest at prime rate plus 1% 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 Mr. Scherer, Jr., who are not affiliated with 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, under
the Amended Note. The Company made installment payments of approximately
$121,000 to Scherer Cap during the first quarter of fiscal 1997 and made
payments of approximately $90,000 on the Amended Note during the first quarter
of fiscal 1998. On July 28, 1997, the Company repaid the outstanding principal
balance of $1,867,000 on the Amended Note by using a portion of the proceeds
from the Marquest transactions, which are discussed below.
13
<PAGE>
Effective on July 28, 1997, the Company and Marquest completed the
previously announced transactions with VSI. Pursuant to the terms of the
Merger Agreement dated as of March 14, 1997, VSI Acquisition Corporation, a
wholly-owned subsidiary of VSI, merged with and into Marquest and as a
result, Marquest became a wholly-owned subsidiary of VSI. At the effective
time of the Merger, all of the issued and outstanding shares of Marquest
Common Stock were converted into the right to receive $0.797 per share in
cash. As a result, the Company received $5,747,320 in exchange for its
7,211,192 shares of Marquest Common Stock and $309,260 through the exercise
of warrants to purchase Marquest Common Stock. Additionally, pursuant to the
terms of the Inducement Agreement dated as of March 14, 1997, VSI purchased
from the Company certain assets of the Company that were licensed by the
Company to Marquest and used by Marquest in the manufacture and sale of
arterial blood gas products and the Company entered into a covenant not to
compete with VSI for a period of three years. VSI paid the Company an
aggregate of $5,860,000 for the assets and the covenant not to compete. As
discussed above, the Company used a portion of the proceeds to repay the
balance of $1,867,000 on the Amended Note. The Company is evaluating its
long-term options with regard to the use of the remaining proceeds from the
transactions; 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 and its
current cash flow are sufficient to maintain its current operations.
MARQUEST
With the exception of executive management, Marquest operated independent of
the Company prior to the Merger.
CASH FLOWS FROM OPERATING ACTIVITIES.
Marquest's operating activities provdied cash of approximately $199,000
during the first quarter of fiscal 1998 as compared to the same period in
fiscal 1997 when Marquest's operating activities used cash of approximately
$609,000. In an effort to improve its customer service, Marquest increased
its inventory by approximately $225,000 during the first quarter of fiscal
1997 as compared to a reduction of its inventory of approximately $157,000
during the same period in fiscal 1998. Additionally, during the first quarter
of fiscal 1997, Marquest made payments for consulting fees and other costs
related to financing transactions and paid $170,000 to settle a lawsuit with
an insurance company.
CASH FLOWS FROM FINANCING AND INVESTING ACTIVITIES.
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 had borrowed from Scherer Cap in December 1995 for
working capital purposes. The Loan Agreement contemplated the possibility of
additional borrowings of up to $800,000. Any amounts borrowed under the Loan
Agreement bear interest at prime rate plus 1.5%, are secured by Marquest's
inventory, building, and equipment, and are represented by convertible notes
(the "Scherer Cap Notes"). The Scherer Cap Notes 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 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. On July
23, 1997, Mr. Scherer, Jr. converted the $700,000 balance on the Scherer Cap
Notes into 1,000,000 shares of Marquest Common Stock.
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 maximum amount of the line of credit is 80% of Marquest's eligible
domestic accounts receivables plus 70% of eligible international accounts
receivable or $2,000,000, whichever is less. As of June 1997, Marquest had
borrowed $162,000 against the line of credit.
As previously discussed, on July 28, 1997, Marquest merged with a
wholly-owned subsidiary of VSI and became a wholly-owned subsidiary of VSI.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule Description
(b) Reports on Form 8-K.
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHERER HEALTHCARE, INC.
(Registrant)
Date: August 19, 1997 /s/ ROBERT P. SCHERER, JR.
------------------------------------------
Robert P. Scherer, Jr.
Chairman
Date: August 19, 1997 /s/ Gary W. Ruffcorn
------------------------------------------
Gary W. Ruffcorn
Principal Accounting Officer
16
<PAGE>
SCHERER HEALTHCARE, INC.
INDEX OF EXHIBITS
The Following exhibit is being filed with this report.
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ------
<S> <C> <C>
27 Financial Data Schedule (included only in EDGAR filing) 18
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT TO STOCKHOLDERS FOR THE QUARTER ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,483
<SECURITIES> 0
<RECEIVABLES> 6,350
<ALLOWANCES> (380)
<INVENTORY> 3,301
<CURRENT-ASSETS> 13,330
<PP&E> 16,752
<DEPRECIATION> (6,911)
<TOTAL-ASSETS> 31,899
<CURRENT-LIABILITIES> 6,848
<BONDS> 6,328
0
0
<COMMON> 47
<OTHER-SE> 16,346
<TOTAL-LIABILITY-AND-EQUITY> 31,899
<SALES> 8,775
<TOTAL-REVENUES> 8,775
<CGS> 5,364
<TOTAL-COSTS> 8,026
<OTHER-EXPENSES> 125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 222
<INCOME-PRETAX> 419
<INCOME-TAX> 11
<INCOME-CONTINUING> 430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 430
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
