<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 September 30, 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)
(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:
CLASS OUTSTANDING AS OF OCTOBER 31, 1997
- --------------------------------------- ---------------------------------------
Common Stock, $0.01 par value 4,314,223
<PAGE>
SCHERER HEALTHCARE, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1997
TABLE OF CONTENTS
<TABLE>
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
- ------------- ---------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
1 Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1997 and March 31, 1997............. 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
September 30, 1997 and 1996................................................................... 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 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......... 11
PART II. OTHER INFORMATION
1 Legal Proceedings............................................................................. 14
4 Submission of Matters to a Vote of Security Holders........................................... 14
6 Exhibits and Reports on Form 8-K.............................................................. 14
SIGNATURES.................................................................................... 15
Index to Exhibits............................................................................. 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------ --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................................... $ 13,096,000 $ 3,237,000
Accounts receivable, less allowance for doubtful accounts of $174,000 at
September 30, 1997 and $171,000 at March 31, 1997......................... 3,091,000 2,694,000
Current maturities of notes receivable...................................... 155,000 176,000
Inventories................................................................. 183,000 170,000
Prepaid and other........................................................... 78,000 66,000
------------------ --------------
Total current assets...................................................... 16,603,000 6,343,000
------------------ --------------
PROPERTY AND EQUIPMENT........................................................ 8,135,000 7,709,000
Less accumulated depreciation............................................... (4,482,000) (4,060,000)
------------------ --------------
Net property and equipment.................................................. 3,653,000 3,649,000
------------------ --------------
OTHER ASSETS
Cost in excess of net assets acquired, net.................................. 2,381,000 2,435,000
Other investments, at cost.................................................. 650,000 650,000
Notes receivable, less current portion...................................... 304,000 371,000
Intangibles................................................................. 378,000 232,000
Deferred income taxes....................................................... 329,000 329,000
Other....................................................................... 289,000 289,000
Net assets of discontinued operations....................................... 215,000 7,003,000
------------------ --------------
Total other assets........................................................ 4,546,000 11,309,000
------------------ --------------
TOTAL ASSETS.................................................................. $ 24,802,000 $ 21,301,000
------------------ --------------
------------------ --------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------ --------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable............................................................ $ 849,000 $ 977,000
Accrued expenses............................................................ 1,581,000 1,378,000
Current maturities of debt obligations...................................... 203,000 555,000
Income taxes payable........................................................ 90,000 57,000
Other....................................................................... 78,000 --
------------------ --------------
Total current liabilities................................................. 2,801,000 2,967,000
------------------ --------------
LONG-TERM DEBT, net of current maturities..................................... 325,000 2,046,000
------------------ --------------
OTHER LIABILITIES............................................................. 458,000 325,000
------------------ --------------
COMMITMENTS AND CONTINGENCIES
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
Retained earnings (accumulated deficit)..................................... 1,838,000 (3,417,000)
Less treasury stock, at cost................................................ (3,033,000) (3,033,000)
------------------ --------------
Total stockholders' equity................................................ 21,218,000 15,963,000
------------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 24,802,000 $ 21,301,000
------------------ --------------
------------------ --------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES................................................ $ 3,411,000 $ 3,277,000 $ 6,916,000 $ 6,628,000
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of goods sold..................................... 2,012,000 1,879,000 3,971,000 3,785,000
Selling, general, and administrative................... 1,189,000 1,291,000 2,393,000 2,516,000
------------ ------------ ------------ ------------
Total costs and expenses............................. 3,201,000 3,170,000 6,364,000 6,301,000
------------ ------------ ------------ ------------
OPERATING INCOME......................................... 210,000 107,000 552,000 327,000
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income........................................ 126,000 42,000 180,000 75,000
Interest expense....................................... (19,000) (55,000) (67,000) (109,000)
Other, net............................................. 13,000 -- 13,000 --
------------ ------------ ------------ ------------
Total other income (expense)......................... 120,000 (13,000) 126,000 (34,000)
------------ ------------ ------------ ------------
Income from continuing operations before income taxes.... 330,000 94,000 678,000 293,000
Benefit (provision) for income taxes..................... (5,000) (5,000) 5,000 (17,000)
------------ ------------ ------------ ------------
Income from continuing operations........................ 325,000 89,000 683,000 276,000
DISCONTINUED OPERATIONS
Loss from operations of discontinued medical device
and surgical/safety disposables segment, net of
income taxes of $0................................... (392,000) (9,000) (320,000) (211,000)
Gain from disposal of medical device and
surgical/safety disposables segment, net of
income taxes of $137,000............................... 4,892,000 -- 4,892,000 --
------------ ------------ ------------ ------------
NET INCOME............................................... $ 4,825,000 $ 80,000 $ 5,255,000 $ 65,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
INCOME PER COMMON SHARE
Income from continuing operations...................... $ 0.07 $ 0.02 $ 0.15 $ 0.06
Discontinued operations:
Loss from discontinued operations.................... (0.08) (0.00) (0.07) (0.05)
Gain from disposal of segment........................ 1.04 0.00 1.07 0.00
------------ ------------ ------------ ------------
NET INCOME PER COMMON SHARE.............................. $ 1.03 $ 0.02 $ 1.15 $ 0.01
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............... 4,698,483 4,418,483 4,588,319 4,418,483
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 5,255,000 $ 65,000
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization.................................................... 485,000 312,000
Gain from disposal of segment.................................................... (4,892,000) --
Loss from discontinued operations................................................ 320,000 211,000
Other noncash charges and credits, net........................................... 2,000 16,000
Changes in operating assets and liabilities:
Accounts receivable, net......................................................... (399,000) (28,000)
Inventories...................................................................... (13,000) (71,000)
Prepaid and other................................................................ (12,000) 8,000
Accounts payable and accrued expenses............................................ 108,000 (106,000)
Other liabilities................................................................ 211,000 (11,000)
------------- -----------
Net cash provided by operating activities of continuing operations................. 1,065,000 396,000
------------- -----------
Net operating activities of discontinued operations................................ 1,131,000 (867,000)
------------- -----------
Net cash provided by (used for) operating activities............................... 2,196,000 (471,000)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net........................................... (426,000) (575,000)
Net proceeds from disposal of segment, net of transaction costs.................... 10,273,000 --
Decrease in notes receivable....................................................... 89,000 63,000
Other investing activities, net.................................................... (156,000) (93,000)
Net investing activities of discontinued operations................................ 52,000 (7,000)
------------- -----------
Net cash provided by (used for) investing activities................................. 9,832,000 (612,000)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayment of) proceeds from borrowings........................................ (2,073,000) 297,000
Net repayments to affiliated companies............................................. -- (138,000)
Net financing activities of discontinued operations................................ (96,000) (207,000)
------------- -----------
Net cash used for financing activities............................................... (2,169,000) (48,000)
------------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS.................................................. 9,859,000 (1,131,000)
CASH AND CASH EQUIVALENTS, beginning of period....................................... 3,237,000 3,622,000
------------- -----------
CASH AND CASH EQUIVALENTS, end of period............................................. $ 13,096,000 $ 2,491,000
------------- -----------
------------- -----------
</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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic EPS....................................................................... $ 1.12 $ 0.02 $ 1.22 $ 0.02
Diluted EPS..................................................................... $ 1.03 $ 0.02 $ 1.15 $ 0.01
</TABLE>
NOTE 2.
The components of inventory at September 30, 1997 and March 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------ --------------
<S> <C> <C>
Finished products............................................. $ 10,000 $ 29,000
Containers, packaging, and raw materials...................... 173,000 141,000
------------ -----------
$ 183,000 $ 170,000
------------ -----------
------------ -----------
</TABLE>
Inventories are stated at the lower of net realizable value or cost
primarily using the first-in, first-out ("FIFO") method.
7
<PAGE>
NOTE 3.
Debt and obligations under capital leases at September 30, 1997 and
March 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------ --------------
<S> <C> <C>
Obligations under capital leases, due in varying installments through
fiscal 2002................................................................. $ 528,000 $ 643,000
Note payable, due through fiscal 2002, prime rate (a)......................... -- 1,958,000
------------ ------------
528,000 2,601,000
Less current maturities....................................................... (203,000) (555,000)
------------ ------------
Long-term debt................................................................ $ 325,000 $ 2,046,000
------------ ------------
------------ ------------
</TABLE>
(a) The note was 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.
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 that were 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, Chief
Executive Officer, 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 rate, adjusted quarterly.
The monthly payment under the Amended Note was fixed at $43,408, except for the
last payment which would have been 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.
On July 28, 1997, the Company used a portion of the proceeds from the
Marquest Transactions (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
canceled and the shares of Marquest Common Stock pledged as collateral under the
Amended Note were released back to the Company.
8
<PAGE>
NOTE 5.
Effective July 28, 1997, the Company and Marquest Medical Products, Inc.
("Marquest"), which was a majority owned subsidiary of the Company, 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 (the "Merger Agreement"), between Marquest, VSI, and VSI Acquisition
Corporation, a wholly-owned subsidiary of VSI, VSI acquired Marquest upon the
merger (the "Merger") of VSI Acquisition Corporation 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 approximately $5,747,000 in cash in exchange for
its 7,211,192 shares of Marquest Common Stock and approximately $309,000 in
cash through the exercise of warrants to purchase Marquest Common Stock and
the conversion of these shares into cash pursuant to the Merger.
Additionally, pursuant to the terms of the Scherer Healthcare Inducement
Agreement dated as of March 14, 1997 (the "Inducement Agreement"), between
the Company, Marquest, and VSI, 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 (the "ABG
Assets") 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 in cash for the ABG
Assets and the covenant not to compete. The Company recorded gains, net of
income taxes and transaction costs, of approximately $3,552,000 and
$1,340,000 from the Merger and the sale of the ABG Assets, respectively. The
aggregate net gain of $4,892,000 from the Merger and the sale of the ABG
Assets has been reported as "Gain from disposal of medical device and
surgical/safety disposables segment" under discontinued operations (see Note
6) in the accompanying Condensed Consolidated Statements of Operations. The
Merger, the sale of the ABG Assets by the Company to VSI, and the execution
of the covenant not to compete are hereinafter collectively referred to as
the "Marquest Transactions".
NOTE 6.
Marquest, which is a manufacturer and international distributor of
specialty cardiopulmonary support, respiratory and anesthesia disposable
devices, has been included in the Company's consolidated financial statements
since the first quarter of fiscal 1994 when the Company entered into
transactions to acquire a majority interest in Marquest and to purchase from
Marquest the ABG Assets. Marquest's operations were 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 and whose assets and businesses
were sold in two separate transactions in October 1995 and October 1996.
Effective with the Marquest Transactions (see Note 5), the operations of the
Medical Device and Surgical/Safety Disposables Segment have been accounted
for as a discontinued segment, and accordingly, the operations of Marquest
and Scherer Ltd. have been segregated and reported as discontinued operations
in the accompanying consolidated financial statements.
The following results of operations are attributable to the discontinued
operations of the Medical Device and Surgical/Safety Disposables Segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net Sales....................................... $ 1,353,000 $ 6,142,000 $ 6,623,000 $ 11,849,000
------------ ------------ ------------ -------------
Cost of goods sold.............................. 1,115,000 4,371,000 4,519,000 8,623,000
Selling, general, and administrative............ 712,000 1,592,000 2,106,000 3,299,000
Research and development expenditures........... 26,000 54,000 90,000 98,000
Other costs and expenses, net................... 268,000 153,000 567,000 275,000
------------ ------------ ------------ -------------
Total costs and expenses.................... 2,121,000 6,170,000 7,282,000 12,295,000
------------ ------------ ------------ -------------
Loss before minority interest................... (768,000) (28,000) (659,000) (446,000)
Minority interest in net loss of subsidiary
and partnership............................... 376,000 19,000 339,000 235,000
------------ ------------ ------------ -------------
Loss from discontinued operations............... $ (392,000) $ (9,000) $ (320,000) $ (211,000)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
9
<PAGE>
The net assets (liabilities) of the discontinued operations of the Medical
Device and Surgical/Safety Disposables Segment at September 30, 1997 and
March 31, 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------ --------------
<S> <C> <C>
ASSETS:
Accounts receivable, net.............................................................. $ -- $ 3,393,000
Inventory............................................................................. -- 3,282,000
Prepaid and other..................................................................... -- 152,000
Notes receivable...................................................................... -- 47,000
Property and equipment, net........................................................... -- 6,558,000
Cost in excess of net assets acquired, net............................................ -- 3,969,000
Other assets.......................................................................... -- 144,000
------------------ --------------
Total assets........................................................................ -- 17,545,000
------------------ --------------
LIABILITIES:
Accounts payable and accrued expenses................................................. 25,000 3,560,000
Income taxes payable.................................................................. 162,000 --
Current maturities of debt obligations................................................ -- 842,000
Long-term debt, net of current maturities............................................. -- 4,600,000
Minority shareholder interest......................................................... -- 1,891,000
------------------ --------------
Total liabilities................................................................... 187,000 10,893,000
------------------ --------------
Net assets (liabilities) of the Medical Device and Surgical/Safety
Disposables Segment................................................................... (187,000) 6,652,000
Net assets of Biofor, Inc. (a).......................................................... 402,000 351,000
------------------ --------------
Net assets of discontinued operations................................................... $ 215,000 $ 7,003,000
------------------ --------------
------------------ --------------
</TABLE>
(a) Represents the net assets of Biofor, Inc. ("Biofor"), a majority owned
subsidiary of the Company which operated the Company's Pharmaceutical
Research and Development Segment and whose operations were discontinued
in fiscal 1996. The property and equipment included in Biofor's net
assets of discontinued operations consists of land, a 30,000 square foot
building owned by Biofor, and computer and laboratory equipment.
10
<PAGE>
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" within the meaning of Section 27A of the
Securities Act of 1933, as amended, which represent the Company's
expectations or beliefs, including, but not limited to, statements concerning
sales of the Company's products or services and operating income. The Company
cautions that various factors, including, without limitation, the factors
discussed below and in the Company's 1997 Annual Report on Form 10-K as well
as general economic conditions and industry trends, a dependence upon and/or
loss of key vendors or customers, the loss of strategic product shipping
relationships, customer demand, product availability, competition (including
pricing and availability), concentrations of credit risks, distribution
efficiencies, capacity constraints and technological difficulties could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements. New factors emerge from time to time, and it is
not possible for management to predict all of such factors.
RESULTS OF OPERATIONS
Net Sales and Operating Income (Loss).
- --------------------------------------
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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES:
Waste Management Services Segment...................... $ 3,083,000 $ 2,924,000 $ 6,162,000 $ 5,878,000
Consumer Healthcare Products Segment................... 328,000 353,000 754,000 750,000
------------ ------------ ------------ ------------
Company Totals....................................... $ 3,411,000 $ 3,277,000 $ 6,916,000 $ 6,628,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS):
Waste Management Services Segment...................... $ 412,000 $ 291,000 $ 808,000 $ 564,000
Consumer Healthcare Products Segment................... 133,000 140,000 338,000 308,000
Corporate.............................................. (335,000) (324,000) (594,000) (545,000)
------------ ------------ ------------ ------------
Company Totals....................................... $ 210,000 $ 107,000 $ 552,000 $ 327,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The Company's net sales increased by 4% to $3,411,000 for the second
quarter of fiscal 1998 from $3,277,000 for the second quarter of fiscal 1997.
The Company reported operating income of $210,000 for the second quarter of
fiscal 1998 compared to operating income of $107,000 during the same period
in fiscal 1997, an increase of 96%. The Company's cost of goods sold
increased to 59% of net sales in the second quarter of fiscal 1998 from 57%
in the second quarter of fiscal 1997. Selling, general, and administrative
expenses decreased to 35% of net sales in the second quarter of fiscal 1998
from 39% in the second quarter of fiscal 1997.
For the first six months of fiscal 1998, the Company's net sales
increased by 4% to $6,916,000 from $6,628,000 during the first six months of
fiscal 1997. The Company's operating income increased to $552,000 for the six
months ended September 30, 1997 from $327,000 for the six months ended
September 30, 1996, an increase of 69%. The Company's cost of goods sold were
flat at 57% of net sales for the six months ended September 30, 1997 and
1996. Selling, general and administrative expenses decreased to 35% of net
sales for the six months ended September 30, 1997 from 38% for the six months
ended September 30, 1996. 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 operating in the individual
business segments. Set forth below is a discussion of the results of
operations of each of these segments.
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 5% to $3,083,000 in the second quarter of
fiscal 1998 from $2,924,000 during the second quarter of fiscal 1997. Bio
Systems' net sales also increased 5% to $6,162,000 for the six months ended
September 30, 1997 from $5,878,000 during the same period in fiscal 1997. The
sales growth is primarily due to securing new hospital contracts for Bio
Systems' core business of providing "sharps" (including sharp-edged waste
such as scalpels, syringes, and needles) disposal services which utilize
cost effective reusable containers. Due to cost pressures, hospitals have become
more receptive to outsourcing certain services such as sharps management.
Additionally, the recent industry trend toward the formation of
11
<PAGE>
hospital newtworks has enhanced Bio Systems sales and market share growth.
Market forces and competitive pricing pressures have affected Bio Systems'
ability to increase prices with existing hospital and physician customers.
These factors also impact the prices Bio Systems is able to charge new and
potential customers.
Primarily as a result of the increase in net sales under the new hospital
contracts, Bio Systems reported an increase in operating income of
approximately 42% to $412,000 for the second quarter of fiscal 1998 from
$291,000 for the second quarter of fiscal 1997. Bio Systems' operating income
increased 43% to $808,000 for the six months ended September 30, 1997 from
$564,000 during the same period in fiscal 1997.
For the second quarter of fiscal 1998, Bio Systems' cost of goods sold
increased to 62% of net sales from 60% of net sales during the second quarter
of fiscal 1997. This increase was partially due to expenses associated with
an increased level of new hospital account activity. Preparing new accounts
for service requires, among other things, installation of reusable containers
and substantial operational follow-up which causes a temporary but sometimes
significant increase in labor and supply costs. Cost of goods sold were 60%
of net sales for the six months ended September 30, 1997, which was unchanged
compared to the same period in fiscal 1997.
Selling, general, and administrative expenses decreased to 25% of net
sales for the second quarter of fiscal 1998 from 30% of net sales for the
second quarter of fiscal 1997, and decreased to approximately 27% of net
sales for the six-month period ended September 30, 1997 from approximately
30% of net sales for the same period in fiscal 1997. The decrease is due to
Bio Systems' success in controlling its administrative costs and expenses,
such as business liability insurance, combined with a decrease in expenses
associated with the purchase of the minority partner's 40% partnership
interest in Bio Systems Partners in October 1997 (see Part II, Item 1). Bio
Systems capitalized certain cost associated with the purchase of the minority
partnership interest in fiscal 1998, while the costs incurred in fiscal 1997,
primarily legal fees, were expensed.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
Net sales for Scherer Laboratories, Inc. ("Scherer Labs"), which operates
the Company's Consumer Healthcare Products Segment, decreased 7% to $328,000
during the second quarter of fiscal 1998 from $353,000 during the second
quarter of fiscal 1997. The decrease in net sales is attributable to the
timing of sales orders for a single product that typically has its highest
sales volume during the first fiscal quarter because consumers generally
purchase the product in the summer months. Net sales increased slightly to
$754,000 for the six months ended September 30, 1997 from $750,000 for the
same period in fiscal 1997.
As a result of the decrease in net sales, Scherer Labs' operating income
decreased 5% to $133,000 for the second quarter of fiscal 1998 compared to
$140,000 for the second quarter of fiscal 1997. Operating income increased by
approximately 10% to $338,000 for the six-month period ended September 30,
1997 from $308,000 for the six months ended September 30, 1996. The
improvement in operating income for the six months ended September 30, 1997
compared to the same period in fiscal 1997, can be attributed to a decrease
in management consulting fees, expenses associated with Scherer Labs'
contracted warehouse and distribution facility, and certain administrative
costs.
Other Income (Expense).
- -----------------------
Interest income increased to $126,000 for the second quarter of fiscal
1998 from $42,000 for the second quarter of fiscal 1997, and increased to
$180,000 for the six months ended September 30, 1997 from $75,000 for the six
months ended September 30, 1996. The increase is a result of the investment,
principally in government securities, of the net proceeds received from the
Marquest Transactions.
Interest expense decreased to $19,000 for the second quarter of fiscal
1998 from $55,000 for the second quarter of fiscal 1997, and decreased to
$67,000 for the first six months of fiscal 1998 from $109,000 for the same
period in fiscal 1997. The decrease is primarily due to the repayment of the
outstanding principal balance on the Amended Note (see Note 4) in July 1997.
The Company used a portion of the proceeds from the Marquest Transactions to
repay in full the Amended Note.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $13,096,000 at September 30,
1997, an increase of $9,859,000 from March 31, 1997. Working capital increased
to $13,802,000 at September 30, 1997, compared to $3,376,000 at March 31, 1997.
Long-term debt decreased to $325,000 at September 30, 1997 from $2,046,000 at
March 31, 1997. The primary reasons for these changes are discussed below.
Cash Flows from Operating Activities.
- -------------------------------------
The Company's cash provided by operating activities from continuing
operations totaled $1,065,000 for the six months ended September 30, 1997, up
from $396,000 during the same period in fiscal 1997. Bio Systems' operations
provided cash of $696,000 for the six months ended September 30, 1997,
compared to $138,000 for the six months ended September 30, 1996. Scherer
Lab's cash provided by operations improved slightly to $274,000 for the six
months ended September 30, 1997 from $246,000 during the same period in
fiscal 1997. These increases are a result of Bio Systems' and Scherer Labs'
improved operating performance combined with the timing of working capital
items.
Cash Flows from Investing and Financing Activities.
- ---------------------------------------------------
Cash provided by the Company's investing activities for the six months ended
September 30, 1997 was $9,832,000, as compared to cash used of $612,000 for
the same period in fiscal 1997. This increase is a result of the Marquest
Transactions (see Note 5) completed in July 1997. 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 $5,747,000 in cash in exchange for its 7,211,192 shares of Marquest
Common Stock and $309,000 in cash through the exercise of warrants to
purchase Marquest Common Stock and the conversion of these shares into cash
pursuant to the Merger. Additionally, the Company received $5,625,000 in cash
from the sale of the ABG Assets to VSI and $235,000 in cash for the covenant
not to compete with VSI in the manufacture and sale of arterial blood gas
products for a period of three years. The aggregate proceeds that the Company
received from the Merger and the sale of the ABG Assets, net of transaction
costs, were $11,296,000 and the cash held by Marquest at the time of the
Merger was $1,023,000.
The Company's cash used from financing activities increased to $2,169,000
for the first six months of fiscal 1998, from $48,000 during the same period
in fiscal 1997. This decrease is a result of the repayment in July 1997 of
the outstanding principal balance of $1,867,000 on the Amended Note (see Note
4). The Amended Note was due December 1, 2001, had a fixed monthly payment of
$43,408, bore interest at prime rate, and was collateralized by 2,432,251
shares of Marquest Common Stock that the Company owned. The Company used a
portion of the proceeds from the Marquest Transactions (see Note 5) to pay in
full the outstanding principal balance of $1,867,000 on the Amended Note. The
Company made installment payments of approximately $91,000 against the
Amended Note prior to the repayment.
The Company, through a wholly-owned subsidiary, owned a 60% partnership
interest in Bio Systems Partners ("BSP") which operates in the Company's
Waste Management Services Segment. Pursuant to a summary judgment described
in Part II, Item 1 below, the Company's subsidiary was required to purchase
the minority partner's 40% partnership interest in BSP valued as of November
30, 1993. After separate appraisals performed by the partners were not
consistent, a third independent appraiser was retained by the partners to
review each of the previous valuations and to determine the purchase price
for the minority interest.
In early October 1997, the independent appraiser informed the Company and
the minority partner of its determination that the fair market value of the 40%
minority interest in BSP was $1,100,000 as of November 30, 1993. Effective
October 28, 1997, the Company's subsidiary purchased, using cash on hand, the
minority partner's 40% partnership interest in BSP for a purchase price of
$1,100,000. As a result, the Company, through its subsidiary, now owns 100% of
BSP.
Management of the Company believes that its current cash on hand and its
current cash flow is sufficient to maintain its current operations. The Company
is evaluating its long-term options with regard to the use of its remaining cash
on hand.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, through a wholly-owned subsidiary, owned a 60% partnership
interest in 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 was required to purchase the minority
partner's 40% partnership interest in BSP valued as of November 30, 1993.
Pursuant to the Partnership Agreement of BSP, the Company and the minority
partner retained separate independent appraisers to perform appraisals of the
minority interest in BSP. The separate appraisals were not consistent;
therefore, the Company and the minority partner selected and retained a third
independent appraiser to review each of the previous valuations and determine
the purchase price for the minority interest.
In early October 1997, the independent appraiser informed the Company and
the minority partner of its' determination that the fair market value of the
40% minority interest in BSP was $1,100,000 as of November 30, 1993. Effective
October 28, 1997, the Company's subsidiary purchased from the minority partner
all of the minority partner's interest in BSP for a purchase price of
$1,100,000. As a result, the Company, through its subsidiary, now owns 100% of
BSP.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Special Meeting: At a Special Meeting of Stockholders of the Company held
on July 28, 1997, the stockholders voted on (1) a proposal to grant the Board
of Directors authority to vote the shares of common stock of Marquest owned
by the Company to approve the Merger Agreement and the transactions
contemplated thereby ("Proposal 1"), and (2) a proposal to approve and adopt
the Inducement Agreement and the transactions contemplated thereby ("Proposal
2").
The stockholders approved each of the proposals with the following vote
totals:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------------------ -------------- --------------
<S> <C> <C> <C>
Proposal 1.................................................... 3,194,362 shares 8,235 shares 2,904 shares
Proposal 2.................................................... 3,194,333 shares 8,302 shares 2,866 shares
</TABLE>
There were no broker non-votes on either of the proposals.
As of the record date for the Special Meeting (June 27, 1997), there were
4,314,223 shares of Common Stock of the Company issued and outstanding and
eligible to vote at the Special Meeting. Accordingly, the holders of 74.0% of
the total outstanding shares of Common Stock eligible to vote at the Special
Meeting approved each of the proposals.
Annual Meeting: The Company's Annual Meeting of Stockholders was held
September 10, 1997 for the purposes of electing Directors. The following
persons were elected to the Board of Directors:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- ------------
<S> <C> <C>
Stephen Lukas, Sr................................ 2,790,249 shares 9,594 shares
Kenneth H. Robertson............................. 2,790,799 shares 9,044 shares
Robert P. Scherer, Jr............................ 2,790,744 shares 9,099 shares
William J. Thompson.............................. 2,790,789 shares 9,054 shares
</TABLE>
There were no broker non-votes with respect to the election of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated August 11, 1997
with respect to the consummation of the Marquest Transactions.
14
<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: November 14, 1997 /s/ Robert P. Scherer, Jr.
----------------- -------------------------------
Robert P. Scherer, Jr.
Chairman
Date: November 14, 1997 /s/ Gary W. Ruffcorn
----------------- -------------------------------
Gary W. Ruffcorn
Chief Financial Officer
15
<PAGE>
SCHERER HEALTHCARE, INC.
INDEX OF EXHIBITS
The following exhibit is being filed with this report.
Exhibit Page
Number Description Number
------- ---------------------------------------------------- ------
27 Financial Data Schedule 17
(included only in EDGAR filing)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Company's Quarterly Report to Stockholders for the Quarter Ended September
30, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,096
<SECURITIES> 0
<RECEIVABLES> 3,420
<ALLOWANCES> (174)
<INVENTORY> 183
<CURRENT-ASSETS> 16,603
<PP&E> 8,135
<DEPRECIATION> (4,482)
<TOTAL-ASSETS> 24,802
<CURRENT-LIABILITIES> 2,801
<BONDS> 325
0
0
<COMMON> 47
<OTHER-SE> 21,171
<TOTAL-LIABILITY-AND-EQUITY> 24,802
<SALES> 6,916
<TOTAL-REVENUES> 6,916
<CGS> 3,971
<TOTAL-COSTS> 6,364
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 678
<INCOME-TAX> (5)
<INCOME-CONTINUING> 683
<DISCONTINUED> 4,572
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,255
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
</TABLE>
