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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
COMMISSION FILE NO. 0-10552
SCHERER HEALTHCARE, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 59-0688813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2859 PACES FERRY ROAD, SUITE 300, ATLANTA, GEORGIA 30339
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code:
(770) 333-0066
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered (Title of Class) pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates of the Registrant on June 10, 1997 was $3,876,847. There were
4,314,223 Shares of Common Stock outstanding on June 10, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders
are incorporated by reference into Parts I and III of this report.
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SCHERER HEALTHCARE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
TABLE OF CONTENTS
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Item Page
Number Number
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PART I
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1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . 13
4a. Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters. . . 14
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . 14
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . 21
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . 21
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 21
12. Security Ownership of Certain Beneficial Owners and Management . . . . . . 22
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . 22
SIGNATURES. . . . . . . . . . . . . 24
INDEX OF EXHIBITS . . . . . . . . . 25
</TABLE>
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SCHERER HEALTHCARE, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
OVERVIEW
Scherer Healthcare, Inc. (the "Company") was incorporated under the laws of the
State of Delaware on December 18, 1981 as the successor to Aloe Creme
Laboratories, Inc., incorporated on February 7, 1953. The Company's Common
Stock is listed on The Nasdaq National Market under the symbol "SCHR".
The Company's strategy has focused on the manufacture, distribution, and sale of
specialized healthcare and industrial safety room products and services. At
March 31, 1997, the Company, through its subsidiaries and majority owned
partnership, operated in the following business segments:
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT:
Marquest Medical Products, Inc., a Colorado corporation, is 51% owned by
the Company.
WASTE MANAGEMENT SERVICES SEGMENT:
(a) Bio Systems Partners, a Georgia partnership, is 60% owned by the
Company.
(b) Medical Waste Systems, Inc., a Delaware corporation, is 100% owned by
the Company.
CONSUMER HEALTHCARE PRODUCTS SEGMENT:
Scherer Laboratories Inc., a Texas corporation, is 100% owned by the
Company.
As used herein, the term "Company" includes Scherer Healthcare, Inc. and, where
appropriate, its subsidiaries and majority owned partnerships.
RECENT DEVELOPMENTS
SALE OF SCHERER HEALTHCARE, LTD. INDUSTRIAL BUSINESS ASSETS. On October 29,
1996, Scherer Healthcare, Ltd. ("Scherer, Ltd."), which was a majority owned
partnership of the Company doing business as Protective Disposable Apparel, sold
substantially all of its assets to a subsidiary of Health-Pak, Inc. for
approximately $254,000, plus the assumption by Health-Pak of $319,000 in
accounts payable. The assets 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. In October 1995, Scherer, Ltd. sold its assets used in the
Medical Business (as hereinafter defined) to a subsidiary of Cordis
Corporation. See "Medical Device and Surgical/Safety Disposables Segment -
Scherer Healthcare, Ltd.".
EXECUTION OF DEFINITIVE MERGER AGREEMENT BETWEEN MARQUEST MEDICAL PRODUCTS, INC.
AND VITAL SIGNS, INC.
On March 14, 1997, Marquest Medical Products, Inc. ("Marquest") and Vital Signs,
Inc. ("VSI") announced the execution of a definitive Agreement and Plan of
Merger dated such date (the "Merger Agreement") providing for VSI to acquire
Marquest. In the transaction, which the Company and Marquest expect to
consummate in late July 1997, Marquest would become a wholly owned subsidiary of
VSI and VSI would pay Marquest shareholders $0.797 per share in cash for each
outstanding share of Marquest Common Stock. The Company owns 7,211,192 shares
of Marquest Common Stock directly and holds warrants to purchase an additional
6,580,000 shares of Marquest Common Stock at an exercise price of $0.75 per
share. In connection with the Merger Agreement, the Company and VSI entered
into an agreement pursuant to which VSI has agreed, provided the Merger
Agreement is consummated, to purchase from the Company certain assets and
product rights previously sold by Marquest to the Company and the Company has
agreed to enter into a covenant not to compete for an aggregate purchase price
of $5,860,000.
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The Company has agreed, subject to approval by the Company's shareholders and to
certain other conditions, to vote its shares of Marquest Common Stock in favor
of the Merger. The Company also will agree not to compete with VSI in the sale
or manufacture of arterial blood gas products. The Merger Agreement and the
transactions contemplated thereby are subject to a number of conditions,
including approval by the shareholders of Marquest and the Company. See
"Medical Device and Surgical/Safety Disposables Segment - Marquest" for further
discussion.
FINANCIAL INFORMATION RELATING TO SEGMENT OPERATIONS. Set forth below is
certain financial information with respect to each of the Company's operating
segments.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
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1997 1996 1995
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(in thousands)
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Net Sales:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 22,045 $ 22,443 $ 20,576
Scherer Healthcare, Ltd. (a) 1,067 7,555 11,203
Waste Management Services Segment 11,836 10,753 10,039
Consumer Healthcare Products Segment 1,276 1,106 984
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Total $ 36,226 $ 41,857 $ 42,802
----------- ----------- -----------
----------- ----------- -----------
Operating Income (Loss) from Continuing Operations:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 363 $ 510 $ (2,696)
Scherer Healthcare, Ltd. (a) (323) (335) (912)
Waste Management Services Segment 1,073 924 790
Consumer Healthcare Products Segment 467 368 244
Corporate (b) (848) (1,074) (3,054)
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Total $ 732 $ 393 $ (5,628)
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Identifiable Assets:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 13,424 $ 15,393 $ 13,992
Scherer Healthcare, Ltd. (a) - 909 6,233
Waste Management Services Segment 9,589 9,370 9,524
Consumer Healthcare Products Segment 111 153 139
Corporate (c) 9,070 8,585 10,751
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Total $ 32,194 $ 34,410 $ 46,639
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Depreciation Expense:
Medical Device and Surgical/Safety Disposables Segment
Marquest Medical Products, Inc. $ 793 $ 1,046 $ 1,364
Scherer Healthcare, Ltd. (a) 3 74 128
Waste Management Services Segment 816 731 717
Consumer Healthcare Products Segment 1 1 1
Corporate 65 72 66
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Total $ 1,678 $ 1,924 $ 2,276
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Capital Expenditures:
Medical Device and Surgical/Safety Disposables Segment
Marquest Medical Products, Inc. $ 207 $ 66 $ 666
Scherer Healthcare, Ltd. (a) - 47 268
Waste Management Services Segment 1,106 626 715
Consumer Healthcare Products Segment 6 - -
Corporate 5 - 15
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Total $ 1,324 $ 739 $ 1,664
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(a) The assets and businesses of Scherer Healthcare, Ltd. were sold in two
separate transactions in October 1995 and October 1996. See Note 5 to
Notes to Consolidated Financial Statements inlcuded elsewhere herein.
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(b) Amount includes a nonrecurring charge of $2,000,000 for fiscal year 1995
relating to the write down of two waste incinerator investments.
(c) Amount includes net assets of discontinued operations of $351,000,
$556,000, and $9,000 for fiscal years 1997, 1996, and 1995, respectively.
See Note 4 to Notes to Consolidated Financial Statements included elsewhere
herein.
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT
Set forth below is information regarding the two companies that comprised this
segment during fiscal 1997.
MARQUEST MEDICAL PRODUCTS, INC.
OVERVIEW. Marquest was incorporated in 1979 under the laws of the State of
Colorado. During the first half of calendar year 1993, the Company and Marquest
structured several transactions whereby the Company obtained a controlling
interest in Marquest. Marquest has been included in the Company's consolidated
financial statements beginning with the fiscal year ending March 31, 1994.
Marquest's common stock is listed for trading on The Nasdaq Small Cap Market
under the symbol "MMPI".
MERGER AGREEMENT. On March 14, 1997, Marquest and VSI entered into a Merger
Agreement pursuant to which, and subject to the satisfaction of certain
conditions precedent, a subsidiary of VSI will be merged (the "Merger") into
Marquest with the result that Marquest will become a wholly owned subsidiary of
VSI and VSI would pay Marquest shareholders $0.797 per share in cash for each
outstanding share of Marquest Common Stock. As of March 31, 1997, the Company
owned 7,211,192 shares of Marquest Common Stock directly and held warrants to
purchase an additional 6,580,000 shares of Marquest Common Stock at an exercise
price of $0.75 per share.
In connection with the Merger Agreement, the Company and VSI entered into an
agreement pursuant to which VSI has agreed, provided the Merger is consummated,
to purchase certain assets owned by the Company and licensed back to Marquest
and the Company has agreed to enter into a covenant not to compete for an
aggregate purchase price of $5,860,000. The assets to be acquired by VSI are
those assets owned by the Company but used by Marquest in the manufacture and
sale of its arterial blood gas ("ABG") product line. In connection with its
investment in Marquest, the Company purchased the ABG product line for
$4,5000,000 in cash and it licenses the product line back to Marquest in
exchange for 3.25% of Marquest's net ABG product sales. Marquest has the option
to repurchase the ABG product line from the Company (the "Repurchase Option")
for $4,500,000 plus $22,500 for each month lapsed between June 1993 and the date
of repurchase. VSI has agreed to purchase the ABG product line from the Company
for a purchase price equal to the purchase price under the Repurchase Option.
Additionally, the Company is obligated to enter into a covenant not to compete
at the time of the Merger pursuant to which it will not engage in the business
of manufacturing or selling ABG products for a period of three years from the
effective date of the Merger. The consideration for the covenant not to compete
will be the difference between $5,860,000 and the amount paid by VSI for the ABG
product line.
See "Transactions with the Company" for further discussion of the Company's
investment in Marquest and its purchase of the ABG product line.
These pending transactions are subject to approval by the shareholders of
Marquest and the Company, and to other standard conditions. The Company
anticipates that the closing will take place in late July 1997.
PRODUCTS. Marquest manufactures and distributes four major groups of products
for use in the respiratory care, cardiopulmonary support and anesthesia
markets. The largest of these product groups is the Blood Collection Systems
for Diagnostic Testing group. This group includes a broad line of Marquest
disposable blood gas syringes. Most revenues in this group are from the sales
of proprietary-designed syringes, which are marketed under the trade names
Gas-Lyte and Quik-ABG.
Marquest's disposable blood gas syringes are used to collect blood for blood gas
analysis routinely performed in hospitals on patients suspected of having
metabolic, respiratory or other cardiopulmonary difficulties. The blood sample
collected is processed through a blood gas analyzer which is manufactured by
other companies. In order for the analysis to be meaningful, the collected
sample must remain as free from contamination as possible. Marquest syringes are
specifically designed to minimize contamination.
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Marquest's second largest product group is the Aerosolized Medication Delivery
Systems group, consisting primarily of disposable nebulizers. Nebulizers
atomize medications for inhalation into the lungs. Marquest offers different
nebulizers to accommodate user preferences as well as the requirements for
different types of respiratory treatment. Nebulizers are marketed under the
trade names Acorn II-Registered Trademark- and Whisperjet. The Acorn
II-Registered Trademark- nebulizer is used as part of a circuit package sold
under the name "RespirGard II-Registered Trademark- Nebulizer System".
The RespirGard II-Registered Trademark- Nebulizer System is a device designed
for the administration of aerosolized pentamidine (NebuPent-Registered
Trademark-, a registered trademark of Fujisawa Pharmaceutical Company), a drug
used in the treatment of certain respiratory complications that result from the
AIDS virus (pneumocystis carinii pneumonia). RespirGard -Registered
Trademark-II is the only nebulizer system specifically recommended by Fujisawa
and referenced in their labeling and use instructions.
Heated Humidification Systems products comprise Marquest's third product group.
These systems consist of three subgroups - humidifiers, heated wire circuits and
humidification chambers. Heated Humidification Systems provide a flow of moist,
warm air to patients who are at risk from loss of body temperature and drying of
the lung linings. There are applications for this product group in both
respiratory care and anesthesia.
The fourth product group is the Anesthesia and Respiratory Breathing Systems
group, which includes numerous disposable products for use in respiratory care
and anesthesia. These products include standard respiratory and anesthesia
circuits, masks, filters, and hyperinflation systems, as well as other
accessories for use in either respiratory therapy or anesthesia administration
applications.
The circuits range from a simple hose connecting the patient to the anesthesia
machine in the operating room to more sophisticated circuits that allow
monitoring of gas temperature and flow into and out of the patient. Marquest's
disposable masks are designed to eliminate resterilization costs of conventional
reusable masks and represent further steps to reduce the possibility of
cross-contamination in operating rooms.
Marquest's filters are designed to filter particulates and bacteria from any air
or anesthesia line carrying gases to or from a patient. The filter market
continues to rapidly expand as healthcare providers have increased the emphasis
placed on infection control. Marquest's filters are marketed for use in
respiratory support, principally on ventilators, and anesthesia circuits.
These filters are marketed under the trade names RespirGard, HydroGard, OxyGard,
and SpiroGard.
MARKETING AND DISTRIBUTION. During fiscal 1997, Marquest marketed its products
domestically and internationally through company sales personnel and independent
distributors. As of March 31, 1997 and 1996, all of Marquest's operations and
assets were located in the United States with the exception of approximately
$219,000 and $131,000, respectively, of inventory at a warehouse facility of one
of its European distributors. The domestic (United States and Canada) and
export sales for the last three fiscal years are presented in the table below.
FY 1997 FY 1996 FY 1995
------- ------------ -------
(In Thousands)
Net Sales:
United States and Canada $15,957 $16,699 $16,023
Export Sales $ 6,088 $ 5,744 $ 4,553
Marquest focuses substantial resources on marketing and sales. It emphasizes
in-service training for its clinical customers, distributor training and direct
marketing. In-service training educates customers about Marquest's products and
is supported by continuing efforts to introduce product design changes that
eliminate application difficulties, such as converting from liquid heparin to a
dried form to eliminate dilutional errors in blood gas analysis tests. Close
working relationships with medical personnel also have led to the development of
better and safer applications for Marquest's products, such as development of
the RespirGard II -Registered Trademark- nebulizer system circuit, which is used
in the treatment of AIDS-associated respiratory illnesses.
Marquest has identified and pursued opportunities to modify common medical
devices to improve and expand their applications. Marquest believes that
innovative product line expansion and clinical marketing have been and will
continue to be essential factors in gaining market acceptance for Marquest's
products.
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During fiscal 1997, Marquest distributed most of its manufactured products
through a network of respiratory or anesthesia distributors. Historically, this
network included 29 hospital specialty dealers as well as several
medical-surgical dealers and over one thousand home healthcare dealers who
distribute certain Marquest of products for use in the home.
On March 14, 1997, in conjunction with the execution of the Merger Agreement,
VSI and Marquest entered into a Dealer Agreement which authorizes VSI to
distribute Marquest's products in the United States, Canada, Puerto Rico and
certain other international territories for a period of two years. Marquest has
given 28 of its 29 hospital specialty dealers notice terminating its dealer
agreements with such dealers at the end of the required notice period, generally
30 to 90 days from the date of notice. Marquest entered into the Dealer
Agreement with VSI, who distributes its products through an internal sales
force, primarily to provide protection from the possibility that Marquest's
hospital specialty dealers would try to shift customers away from Marquest's
products while the Merger is pending. The Dealer Agreement may be terminated by
Marquest if VSI does not meet certain specified sales quotas after June 30,
1997.
Subsequent to giving the hospital specialty dealers notice of termination,
Marquest entered into new arrangements with some of the dealers pursuant to
which these certain dealers may continue to distribute Marquest's products.
Marquest's international sales and marketing efforts are managed from the
corporate offices in Englewood, Colorado. The European, Middle Eastern, Asian
and Pacific Rim territories are managed by independent field sales
representatives and specialty distributors. Mexican, Central American, South
American, and South African territories are managed using independent specialty
distributors. Marquest also participates in major international trade shows
annually.
During Fiscal 1997, 1996 and 1995, Marquest had one distributor, Tri-Anim Health
Services, Inc. ("THS") of Sylmar, California, that accounted for 18%, 19% and
19%, respectively, of Marquest's sales. THS was terminated as a distributor of
Marquest's products effective June 15, 1997.
PRODUCTION AND RAW MATERIALS. Marquest's manufacturing and assembly operations
consist primarily of the injection molding and extrusion of certain components
and the assembly and packaging of final products from both purchased and
internally-manufactured sources. All of Marquest's manufactured products are
disposable and are principally fabricated from molded resins.
Due to economies of scale in production, Marquest purchases certain standardized
components, including needles, syringe barrels, and other supplies from
qualified external sources. Marquest's material procurement consists of
multiple single source vendors, all of which are subject to qualification
criteria in accordance with Marquest's quality control procedures and policies.
While Marquest endeavors to avoid being dependent on a single source of supply
for any component or raw material by establishing qualified alternate suppliers,
in certain cases it is not economical to use more than one source. Marquest
emphasizes vendor certification and quality programs to ensure uninterrupted
supplies of raw materials and components.
Historically, Marquest has not had a significant backlog of firm orders for its
products. With the exception of orders for future delivery or for specially
assembled products, most orders are shipped within one week of receipt and
Marquest maintains predetermined levels of finished goods inventories to ensure
timely delivery. Marquest had a backlog of orders to ship its products of
approximately $249,000 and $158,000 at March 31, 1997 and 1996, respectively.
SEASONALITY. Historically, Marquest has experienced approximately 45% of its
net sales in the first and second quarters of its fiscal year and 55% in the
third and fourth quarters. Net sales are influenced by patterns in hospital
admissions and discharges.
COMPETITION. The method by which medical devices are distributed in the United
States has undergone, and continues to undergo, significant structural changes.
These structural changes have had a significant negative impact on smaller
medical device manufacturers such as Marquest that have limited on
non-proprietary product lines and cost structures which make it difficult to
compete on a basis where price is the primary purchasing factor.
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The markets for Marquest's products are highly competitive. There are three
major competitors in blood gas collection systems, four major competitors in
anesthesia, respiratory and nebulizer products, and two major competitors in
heated humidification products.
PRODUCT DEVELOPMENT. Marquest's product development is guided by its marketing
and sales personnel. Through their daily contact with existing and potential
customers, marketing and sales personnel attempt to identify needs for new
products and improvements for existing products.
Many risks exist in new product development and there is no assurance that any
of the products currently under development by Marquest can be successfully
developed or, if introduced, will prove to be commercially successful products.
PATENTS, TRADEMARKS, LICENSES AND FRANCHISES. Marquest holds numerous patents
for its manufactured products. It also holds licenses from individuals to
manufacture a number of proprietary products. Marquest makes renewal filings on
patents and trademarks periodically in accordance with Federal regulations.
Patents, trademarks and licenses afford Marquest a measure of protection for its
proprietary products, and Marquest has taken a posture of defending to the
fullest extent possible the rights attendant to the patents, trademarks and
licenses. However, it has been Marquest's experience that patents offer limited
protection because the degree of specialization in its products is so extensive
that the patents on them can, in some cases, be circumvented.
REGULATION. Marquest and its products are subject to regulation by the Food and
Drug Administration ("FDA") and virtually all of Marquest's products are subject
to validation as required by Good Manufacturing Practices ("GMP") of the FDA.
The FDA engages in periodic inspections of Marquest's facilities, its products,
and its manufacturing processes. A May 1991 FDA inspection of Marquest noted
significant deviations from GMP. This report and a subsequent civil complaint
filed by the FDA culminated in a suspension of Marquest's United States
operations pursuant to a five-year Consent Decree effective October 1, 1991.
The suspension was lifted by the FDA on January 9, 1992 after Marquest
demonstrated substantial compliance with GMP and the Consent Decree expired on
October 1, 1996 and is of no further force and effect.
During fiscal 1994, the FDA completed a routine inspection of Marquest for
compliance with GMP. The FDA's inspection report noted two deficiencies which
were addressed and corrected by Marquest. There were no FDA inspections of
Marquest in fiscal 1995.
The FDA conducted another inspection of Marquest's compliance with GMP in fiscal
1996. Marquest was issued an inspection report from the FDA with three
observations noted. In May 1996, the FDA inspected Marquest's operations and
issued a report with six observations noted. Many of the deficiencies noted in
the FDA's reports refer to the lack of training regarding assembly, testing and
sampling. Marquest has taken corrective action in response to the FDA's
concerns and has submitted written documentation to the FDA describing the
employee retraining and other changes it has implemented. Marquest was again
inspected by the FDA in September 1996, and was issued a Form 483, Inspection
Observations, containing three alleged nonconformances with GMP. Marquest
continues to work with the FDA to address the issues raised from these
inspections.
TRANSACTIONS WITH THE COMPANY. During fiscal 1994, the Company and Marquest
completed a series of transactions designed to improve Marquest's liquidity and
cash flows. As part of these transactions, Marquest sold to the Company its
arterial blood gas ("ABG") product line, including related equipment, for
$4,500,000 in cash. The Company then leased the ABG line to Marquest in
exchange for a royalty equal to 3.25% of net ABG product line sales. Marquest
had the option to repurchase the ABG product line at any time on or prior to May
31, 1996 for $4,500,000 plus $22,500 for each month lapsed between the sale and
the repurchase. In May 1996, the Company and Marquest agreed to extend the
option period through June 15, 1999. In 1994, Marquest granted to the Company
warrants to purchase up to 6,580,000 shares of Marquest Common Stock at $.75 per
share as consideration for the original product line repurchase option.
The Company also participated in Marquest's exchange offer for approximately
$12,650,000 of defaulted Marquest Swiss Bonds. In connection with the exchange
offer, the Company issued 43,516 shares of the Company's 5% Convertible
Preferred Stock to the former holders of the Marquest Swiss Bonds. As
consideration for the Company's issuance of its Preferred Stock, Marquest issued
to the Company $4,352,000 aggregate principal amount of its 8% Convertible
Promissory Notes due March 1999. The 8% Notes were convertible into shares of
Marquest Common
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Stock. During fiscal 1995, the Company converted $2,500,000 of the Marquest 8%
Notes into 3,333,333 shares of Marquest Common Stock at a conversion price of
$.70 per share..
On March 28, 1996, the Company and Marquest entered into an agreement pursuant
to which the Company converted the remaining balance of $1,852,000 and the
associated accrued interest of $487,000 on the Marquest six-year 8% Notes into
3,340,245 shares of Marquest Common Stock at a conversion price of $.70 per
share. Additionally, the Company agreed to convert $376,000 in accrued but
unpaid management fees owed to the Company by Marquest into 537,614 shares of
Marquest Common Stock. As of March 31, 1997, the Company owned approximately
51% of Marquest's Common Stock. Marquest has a significant number of warrants,
stock options, and convertible notes that could be converted into Marquest
Common Stock. Depending upon the amount and timing of conversion of any of
these securities, the Company's ownership percentage in Marquest could vary from
42% to 66%. Additionally, the Company has the right to appoint a majority of
the members of Marquest's Board of Directors.
RELATED PARTY TRANSACTIONS. In March 1996, Scherer Capital Company, L.L.C.
("Scherer Cap"), an entity controlled by Robert P. Scherer, Jr. who is the
Chairman of the Board and Chief Executive Officer of the Company and Marquest
and is the majority stockholder of the Company, and Marquest signed a loan and
security agreement (the "Loan Agreement") from which Marquest borrowed $700,000
to repay $700,000 that Marquest borrowed from Scherer Cap in December 1995 for
working capital purposes. The Loan Agreement contemplated the possibility of
additional borrowings of $800,000. Borrowings under the Loan Agreement are
represented by convertible notes due April 1, 2001 (the "Scherer Cap Notes"),
are secured by Marquest's inventory, building, and equipment, and bear interest
at prime rate plus 1.5%, adjusted quarterly. Pursuant to the Loan Agreement,
which expires February 28, 2001, the Scherer Cap Notes are convertible at the
option of Scherer Cap into shares of Marquest's Common Stock at a conversion
price of $.70 per share. As of March 31, 1997, Marquest had borrowed $700,000
under the Loan Agreement and the Scherer Cap Notes and the interest rate was
9.75%. Additionally, on March 29, 1996 Scherer Cap purchased 2,061,856 shares of
Marquest Common Stock, representing approximately 14% of the shares outstanding,
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.
INTERNAL REVENUE SERVICE AUDITS. During fiscal 1994, Marquest received a
federal income tax refund of approximately $745,000 due to the carryback to
prior years of losses incurred during a temporary suspension of its operations.
Subsequently, the Internal Revenue Service ("IRS") conducted an audit of
Marquest and, in July 1994, determined that Marquest could not carryback the
losses and issued an assessment against Marquest for the return of the full
amount of the refund plus interest. In June 1995, Marquest negotiated a
repayment plan with the IRS whereby Marquest paid the IRS $400,000 in June 1995
and the remaining balance will be paid in equal monthly installments over a
two-year period. The IRS has placed a lien on Marquest's manufacturing facility
in Englewood, Colorado to secure payment of these taxes.
EMPLOYEES. At May 30, 1997, Marquest had a total of 253 employees. Marquest's
employees are not represented by a labor union, and Marquest considers its
employee relations to be good.
SCHERER HEALTHCARE, LTD.
The Company owned a 65% interest in Scherer, Ltd., and, through a wholly owned
subsidiary, was the sole general partner. Scherer, Ltd. was formed in 1987 and
had been doing business as Custom Medical Products until October 1995. On
October 3, 1995, Scherer, Ltd. sold certain of its assets to Cordis Medical
Products, Inc., ("Cordis Medical"), a wholly owned subsidiary of Cordis
Corporation ("Cordis") for approximately $6,527,000. The assets sold to Cordis
Medical were those used in connection with Scherer, Ltd.'s business of packing
and distributing medical supplies for surgical procedures and providing nonwoven
medical drapes, gowns and accessory items to hospitals and other healthcare
providers (the "Medical Business"). The assets acquired by Cordis Medical
consisted primarily of Scherer, Ltd.'s plant and land located in Asheville,
North Carolina, furniture and fixtures, machinery and equipment, inventory, and
other intangible property related to the Medical Business. Cordis Medical also
agreed to assume all accounts payable related to the Medical Business and
certain other specifically identified liabilities, including the mortgage on
Scherer, Ltd.'s Asheville facility. Scherer, Ltd. continued in the business of
providing nonwoven disposable industrial apparel and related products to the
industrial safety, environment-controlled clean room and scientific markets (the
"Industrial Business") under the name Protective Disposable Apparel. Its line
of disposable industrial apparel included protective coveralls, frocks, boot
covers, and headware.
-9-
<PAGE>
On October 29, 1996, Scherer, Ltd. sold substantially all of its remaining
assets to a subsidiary of Health-Pak, Inc. for approximately $254,000, plus the
assumption by Health-Pak of $319,000 in accounts payable. The assets acquired
by Health-Pak were those used in connection with Scherer, Ltd.'s Industrial
Business and included accounts receivable, inventory and furniture and
fixtures. Additionally, Health-Pak agreed to assume certain accounts payable
and liabilities related to the Industrial Business.
The two transactions discussed above eliminated substantially all of the assets
of Scherer, Ltd.; therefore, Scherer, Ltd. was dissolved on December 2, 1996.
WASTE MANAGEMENT SERVICES SEGMENT
OVERVIEW. The Company operates its Medical Waste Management Services Segment
through Bio Systems Partners and Medical Waste Systems, Inc. (collectively, "Bio
Systems"). The Company owns a 60% general partner interest in Biosystems
Partners, a Georgia partnership. Medical Waste Systems, Inc. is a Delaware
corporation and is wholly owned by the Company. Bio Systems assists hospitals,
clinics, doctors and other healthcare facilities with the control and disposal
of infectious medical waste, including sharp-edged waste such as scalpels,
syringes and needles.
Bio Systems provides services throughout the Northeastern and Mid-Atlantic
states.
Bio Systems' sharp-edged medical waste management programs are designed to
reduce a medical facility's costs and risks associated with disposal of used
scalpels, needles, syringes, and other sharp-edged waste. Bio Systems
incorporates reusable containers in its systems, providing the medical facility
with a more environmentally friendly alternative to traditional disposable
plastic containers.
Bio Systems maintains a fleet of licensed trucks and trailers to transport
medical waste to its processing facility, where it is sterilized, pulverized and
made available for recycling or disposal via landfill or incineration. During
fiscal 1996, Bio Systems consolidated its operations by transferring the medical
waste processing operations at its facility located near Philadelphia,
Pennsylvania to its processing facility in Long Island, New York. The
Pennsylvania facility is used to assemble, manage and store its reusable medical
waste containers..
MARKETING. Bio Systems markets its services through advertising in hospital
industry publications, direct mail and direct contact by Bio Systems' sales
personnel. Customers include hospitals, clinics, and physician offices.
Services to hospitals are typically provided under contracts of at least one
year. No single customer accounts for over 10% of Bio Systems' sales revenues.
Bio Systems operates 365 days a year. Its services are not seasonal or subject
to backlog.
COMPETITION. Bio Systems has three major competitors. Even though Bio Systems
faces significant competition in each of its market areas it believes it has a
strong competitive position because of its reusable sharps containers and
personalized services.
REGULATION. The waste management business is subject to a variety of federal,
state and local regulations concerning the collection, transportation,
processing, and disposal of medical and infectious waste. New regulations are
frequently promulgated, compliance with which could have a material adverse
effect on Bio Systems' business. Management is not aware of any pending
regulations that would have such a material adverse effect.
EMPLOYEES. Bio Systems has approximately 119 employees. Drivers, technicians
and processing personnel in New York and drivers and warehouse personnel in
Pennsylvania are covered by collective bargaining agreements representing
approximately 66% of Bio Systems employees. Bio Systems entered into a
three-year collective bargaining contract in June 1996 with the union for its
New York employees and a three-year contract in October 1996 with the union for
its Pennsylvania employees. Management considers its employee relations to be
good.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
OVERVIEW. In 1981, the Company acquired Scherer Laboratories, Inc., ("Scherer
Labs"), a Texas corporation originally incorporated in 1903. Scherer Labs
markets brand name and generic over-the-counter drugs. These products are
primarily used for treatment of colds and coughs, eye and ear irritations and
insect bites. In early fiscal 1997, Scherer Labs discontinued the sale of its
one remaining prescription drug for which sales were $12,000 and $24,000 in
fiscal 1996 and 1995, respectively. The loss of these sales did not have a
material effect on the Company. Scherer Labs' products are manufactured by
third party contractors using Scherer Labs' formulas. Scherer Labs carries an
inventory sufficient to cover planned sales requirements. Scherer Labs' return
policy is
-10-
<PAGE>
consistent with the drug industry, with annual returns during the last three
years of less than 1.5% of total annual sales.
Scherer Labs employs one individual in Dallas, Texas as the division's Vice
President - General Manager who administers all sales, marketing, and purchasing
and handles relations with customers, suppliers and contractors. Warehousing
and distribution services are performed on a contract basis with a public
warehouse. Two employees at the Company's corporate headquarters in Atlanta,
Georgia perform all accounting and customer service functions including order
processing, accounts receivable, accounts payable and inventory control.
SEASONALITY. The sales of most of Scherer Labs' products are evenly distributed
throughout the year. However, the majority of three of Scherer Labs products
are purchased by consumers during the summer months. As a result of this
seasonal activity, approximately 33% of Scherer Labs' sales occur during the
first fiscal quarter (April through June) of each fiscal year.
CUSTOMERS. Scherer Labs markets its products primarily to drug and food stores,
mass market retailers, drug wholesalers, and government agencies. The majority
of the sales are through retailers located in the Southwest region of the United
States with approximately 35% of sales to retail outlets located in other areas
of the country. Sales to Wal-Mart Stores, Inc. represented approximately 55%,
45% and 45% of total sales for fiscal 1997, 1996 and 1995, respectively. These
sales were through McKesson Drug Co., Wal-Mart's primary wholesaler, and
account for over 80% of McKesson's total purchases from Scherer Labs. The loss
of Wal-Mart's business would have a material adverse effect on Scherer Labs'
ability to continue to operate profitably.
COMPETITION. Scherer Labs' products are subject to competition from national,
regional, and store brands of similar or identical formulations. Emphasis is
placed on Scherer Labs' long history, product quality and pricing at or near the
pricing levels of generic products. Marketing activities focus on in-store
price specials and other promotional allowances.
REGULATION. Scherer Labs' products are regulated by the FDA. Also, licensing
and product registration is required by certain states where product sales occur
and are renewed annually. There have been no government inspections of Scherer
Labs in the last three years and there are no pending matters between Scherer
Labs and any federal, state or local governmental regulatory agency.
DISCONTINUED PHARMACEUTICAL RESEARCH AND DEVELOPMENT SEGMENT
Biofor, Inc. ("Biofor"), a majority owned subsidiary of the Company which had
been operating the Company's Pharmaceutical Research and Development Segment,
was engaged in research to identify and develop new drug compounds. From its
inception on June 29, 1986 until its closure in March 1996, Biofor had expended
over $20 million in cash funding from the Company and affiliates of the
Company. In July 1995, after attempts to locate a purchaser for Biofor, Biofor
ceased further drug design efforts and concentrated solely on the Ono research
contract discussed below. When the Ono contract expired in March 1996, Biofor
discontinued all operations and the Company abandoned all operations of Biofor.
Prior to the discontinuance of its operations, Biofor focused its drug design
efforts on arthritis and osteoarthritis as well as the treatment for acute pain.
Biofor's lead compound, BF-389, is an anti-inflammatory analgesic which
preliminary Phase I clinical trials indicated was not sufficiently bioavailable
when administered orally in humans. Other delivery methods that would allow
oral administration of the compound were pursued by Biofor without success.
Beginning in October 1990, Biofor and Ono Pharmaceutical Company, Ltd. ("Ono")
entered into two research and collaboration agreements pursuant to which they
jointly researched compounds. Biofor utilized its exclusive
M-CADD "artificial intelligence" software and its scientists experienced in
using M-CADD while Ono provided funding and clinical testing of any compounds
discovered. The first contract expired in fiscal 1994 and the second expired
March 1996. Substantially all of Biofor's revenues from 1990 forward were
derived from these contracts.
The remaining property and equipment of Biofor primarily consists of land, a
30,000 square foot building owned by Biofor, and computer and laboratory
equipment. The Company intends to sell the remaining assets of Biofor, which
have been written down to their estimated net realistic value, but it
anticipates that it may take several years to sell all of the assets.
-11-
<PAGE>
ITEM 2. PROPERTIES
The Company's major facilities follow:
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT:
Marquest Medical Products, Inc.
Englewood, Colorado - 88,000 square foot facility owned by
Marquest which includes 58,000 square feet of manufacturing
and warehouse space and 30,000 square feet of
administrative offices.
Aurora, Colorado - 45,000 square foot leased warehouse.
WASTE MANAGEMENT SERVICES SEGMENT:
Bio Systems Partners
Farmingdale, New York - 17,000 square foot facility leased by Bio
Systems Partners which includes 3,000 square feet of
administrative office space and 14,000 square feet of space
housing Bio Systems' medical waste processing operations.
Medical Waste Systems, Inc.
Warminster, Pennsylvania - 11,900 square foot facility leased by
Medical Waste Systems, Inc. which includes 1,900 square feet
of administrative office space and 10,000 square feet of
warehouse and storage space.
Haverhill, Massachusetts - 4,000 square foot transfer station
leased by Medical Waste Systems, Inc.
CONSUMER HEALTHCARE PRODUCTS SEGMENT:
Scherer Laboratories, Inc.
Plano, Texas - 300 square foot facility leased by Scherer Labs
and used as a sales office.
CORPORATE SEGMENT:
Scherer Healthcare, Inc.
Atlanta, Georgia - 10,100 square feet of leased office space
shared with RPS Investments, Inc. See "Item 13. Certain
Relationships and Related Transactions."
Biofor, Inc.
Waverly, Pennsylvania - 30,000 square foot building owned by
Biofor.
The Company believes the facilities in all locations are adequate for the
current and anticipated future level of activities.
ITEM 3. LEGAL PROCEEDINGS
A products liability action was filed against Marquest in California in 1990
which was defended and settled during the trial by its insurance company,
Hartford Specialty Company ("Hartford"). Under the insurance policy, Marquest
may have been responsible for a $250,000 self insured retention plus the cost of
defense. Marquest claimed that Hartford mishandled the lawsuit and declined to
pay. Marquest was sued by Hartford in District Court, Arapahoe County, Colorado
in February 1994 alleging damages of up to $540,000. In May 1996, Marquest
entered into a settlement agreement with Hartford pursuant to which Marquest
paid Hartford $170,000.
On April 9, 1997, Tri-Anim Health Services ("THS"), Marquest's largest domestic
distributor, filed a complaint against Marquest and VSI in the Superior Court of
the State of California for the County of Los Angeles alleging that Marquest had
breached a Confidentiality Agreement between THS and Marquest. Marquest filed a
motion to move the California action to federal district court and filed a
motion to compel arbitration of all issues in Colorado. Marquest intends to
vigorously contest THS' suit against Marquest.
On March 24, 1997, Chesapeake Medical, Inc. and Chesapeake Breathing Services,
Inc. (collectively referred to as "Chesapeake"), two of Marquest's distributors,
filed a lawsuit against Marquest and VSI in the United States District Court
for the District of New Jersey, alleging that Marquest terminated the Dealer
Agreement between Marquest and Chesapeake in a commercially unreasonable manner
and that Marquest disclosed confidential information. Marquest is vigorously
contesting this matter.
Marquest believes that its position in the preceding two matters is meritorious,
but Marquest is unable to predict the outcome of either lawsuit or whether other
lawsuits will be filed by other dealers as a result of their termination. (See
"Medical Device and Surgical/Safety Disposables Segment - Marquest").
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<PAGE>
Terumo K.K. ("Terumo"), a competitor of Marquest, filed a complaint in September
1996 in the Tokyo District Court against Chiron K.K. ("Chiron"), Marquest's
distributor of arterial blood gas samplers in Japan, alleging that the blood
samplers infringe upon a Japanese patent owned by Terumo. The complaint does
not name Marquest; however, Marquest has agreed to pay the cost of Chiron's
defense and indemnify Chiron from Terumo's claim. Terumo is requesting an
injunction against Chiron from importing and selling blood samplers as well as
137,000,000 yen (approximately $1,100,000 as of March 31, 1997) for damages with
regard to Chiron's sale of blood samplers from January 1993 through December
1995. Terumo may increase the damages requested from 1996 to the present. Due
to the preliminary nature of this litigation, Marquest cannot predict the
Court's opinion or the impact, if any, on Marquest's market for blood gas
samplers in Japan.
The Company, through a subsidiary, owns a 60% partnership interest in Bio
Systems Partners ("BSP") which operates in the Company's Waste Management
Services Segment. Pursuant to summary judgment granted in a civil action filed
in the United States District Court for the Eastern District of New York in
March 1994, the Company's subsidiary is required to purchase the minority
partner's 40% equity interest valued as of November 30, 1993. Pursuant to the
partnership agreement, the Company and the minority partner performed separate
appraisals of the minority interest. The separate appraisals were not
consistent; therefore, a third appraiser, selected by the partners, has been
retained to review each of the valuations and determine the final valuation and
purchase price. Recently, the District Court rejected the minority partner's
request for prejudgement interest on the final valuation.
The Company is a party to certain other legal proceedings, however, it does not
anticipate that any of such proceedings will have any material adverse affect on
its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders for vote during the quarter
ended March 31, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The names, ages at June 1, 1997, and positions with the Company of the executive
officers, including all positions and offices with the Company held by such
persons, are listed below. Unless otherwise stated, each executive officer has
held their position for at least the last five years. All officers are elected
for one year terms or until their respective successors are chosen. There are
no family relationships among the executive officers nor is there any agreement
or understanding between any officer and any other person pursuant to which the
officer was elected.
NAME AND AGE POSITIONS WITH THE COMPANY
Robert P. Scherer, Jr., 64 Director of the Company since 1977; Chairman
of the Board of Directors and Chief Executive
Officer of the Company since February 1995.
Chairman of the Board, Director and Chief
Executive Officer of Marquest since February
1995. A Director, executive officer and
controlling stockholder of RPS Investments,
Inc. since its formation.
William J. Thompson, 63 President, Chief Operating Officer and
Director of the Company since August 1984.
President and Chief Operating Officer of
Marquest since February 1995 and Director
since 1993.
Amy M. Murphy, 30 Vice President of Corporate Operations and
Secretary of the Company since February 1995;
Executive Vice President and Secretary of RPS
Investments, Inc. since February 1995.
Executive Assistant to the President for
CompuPharm, Inc. from November 1994 to
February 1995; various positions with RPS
Investments, Inc. and affiliates from May
1992 to November 1994 and Assistant to the
Provost, University of Maine from 1987 to
1992.
Gary W. Ruffcorn, 35 Director of Finance and Accounting of the
Company since April 1995; Principal Financial
and Accounting Officer of the Company since
August 1995. Prior to joining the Company,
Mr. Ruffcorn held various accounting
positions with Ogden Projects, Inc.,
including Assistant Controller/Director of
Accounting, from March 1988 to March 1995.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK
At March 31, 1997, there were approximately 2,058 shareholders of record of the
Company's Common Stock. The Company's Common Stock is traded on The Nasdaq
National Market under the symbol "SCHR". The following table sets forth the
high and low closing sale prices per share as reported by Nasdaq for the periods
indicated:
Fiscal Fiscal
1997 1996
-------------------- ------------------
High Low High Low
---- --- ---- ---
First Quarter $5-1/2 $3-7/8 $7 $5
Second Quarter 4-5/8 2-1/4 5-1/2 2
Third Quarter 3-3/4 2 5 2-1/2
Fourth Quarter 2-5/8 2 5 2-1/4
On June 10, 1997, the closing price of the Common Stock was $2-1/4.
While there are no restrictions to prevent the payment of dividends, the Company
has not paid a cash dividend in its history and does not anticipate paying a
cash dividend in the near future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data concerning the Company for and as of the
end of each of the years in the five year period ended March 31, 1997 are
derived from the financial statements of the Company. The selected financial
data is qualified in its entirety by the more detailed information and financial
statements, including the notes thereto, included elsewhere in this report. The
financial statements of the Company as of March 31, 1997 and 1996 and for each
of the years in the three year period ended March 31, 1997, and the report of
Arthur Andersen LLP thereon, are included elsewhere in this report.
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $36,226 $41,857 $42,802 $41,229 $20,323
Cost of goods sold. . . . . . . . . . . . . . . . . . $23,660 $28,194 $31,514 $30,641 $14,303
Selling, general and administrative expenses. . . . . $11,548 $13,115 $14,776 $13,533 $6,102
Research and development expenses . . . . . . . . . . $286 $155 $140 $126 -
Nonrecurring charges. . . . . . . . . . . . . . . . . - - $2,000 - -
Other (expense) income. . . . . . . . . . . . . . . . $(971) $2,828 $(1,133) $218 $1,518
Minority interest in net loss (income). . . . . . . . $359 $(5) $1,927 $1,992 $(17)
Income (loss) from continuing operations. . . . . . . $114 $2,668 $(4,637) $157 $1,135
Income (loss) from continuing operations per share. . $0.03 $0.60 $ (1.09) $ 0.04 $0.29
Loss from discontinued operations . . . . . . . . . . $(375) $(920) $(5,534) $(4,795) $(2,606)
Net (loss) income . . . . . . . . . . . . . . . . . . $(261) $1,748 $(10,171) $(3,963) $(1,471)
Net (loss) income per share . . . . . . . . . . . . . $(0.06) $0.40 $(2.39) $(1.00) $(0.38)
Average shares outstanding . . . . . . . . . . . . . 4,418 4,418 4,254 3,954 3,919
Total assets. . . . . . . . . . . . . . . . . . . . . $32,194 $34,410 $40,639 $51,424 $28,975
Total long-term liabilities . . . . . . . . . . . . . $6,971 $5,638 $5,316 $ 4,617 $511
Stockholders' equity. . . . . . . . . . . . . . . . . $15,963 $16,174 $14,486 $24,657 $20,708
Cash dividends. . . . . . . . . . . . . . . . . . . . - - - - -
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company, through its subsidiaries and majority owned partnership, operates
in several areas of the healthcare industry. It manufactures and distributes
healthcare products, provides disposal of certain medical waste, and markets
certain over-the-counter and generic drugs. See "Item 1. Business" for a more
detailed description and discussion of each of the Company's segments.
RESULTS OF OPERATIONS
The assets and business of Scherer, Ltd.'s Medical Business were sold in October
1995 and the assets and business of Scherer Ltd.'s Industrial Business were sold
in October 1996. See "Item 1. Business - Scherer Healthcare, Ltd." for a more
detailed description of the two transactions.
NET SALES. The following table sets forth the net sales of each segment of the
Company's business for the last three fiscal years (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
Medical Device and
Surgical/Safety Disposables Segment
Marquest $22,045 60.9% $22,443 53.6% $20,576 48.1%
Scherer, Ltd. 1,069 2.9 7,555 18.0 11,203 26.2
Waste Management Services Segment 11,836 32.7 10,753 25.7 10,039 23.4
Consumer Healthcare Products Segment 1,276 3.5 1,106 2.7 984 2.3
------- ----- ------- ------ ------- ------
Company Totals $36,226 100.0% $41,857 100.0% $42,802 100.0%
------- ----- ------- ------ ------- ------
------- ----- ------- ------ ------- ------
</TABLE>
FISCAL 1997 VS. FISCAL 1996 (NET SALES)
The Company's net sales decreased by 13% to $36,226,000 for fiscal 1997 from
$41,857,000 for fiscal 1996; however, fiscal 1996 includes six months of net
sales, or $5,344,000, for the Medical Business, which was sold in October 1995.
Additionally, fiscal 1996 includes twelve months of net sales of $2,211,000 for
the Industrial Business and fiscal 1997 only includes six full months of net
sales of $1,069,000 for the Industrial Business, which was sold in October 1996.
Marquest's net sales decreased approximately 2% to $22,045,000 for fiscal 1997
from $22,443,000 in fiscal 1996. The decrease in net sales is primarily due to
a decrease in sales of Marquest's medication delivery devices. Sales of these
devices are down approximately $800,000 in fiscal 1997 compared to fiscal 1996,
the majority of the decrease is attributable to one major customer who placed a
large sales order in fiscal 1996 and who did not place a sales order in fiscal
1997. The decrease in sales of the medication delivery devices was partially
offset by an increase in sales of Marquest's ABG products which increased
approximately $270,000 in fiscal 1997 compared to fiscal 1996. The increase in
the ABG sales can be attributable to a long term contract signed with a major
customer in late fiscal 1996 for these products.
Scherer Ltd.'s net sales decreased approximately 86% to $1,069,000 in fiscal
1997 from $7,555,000 in fiscal 1996; however, fiscal 1996 includes six months of
net sales, or $5,344,000, for the Medical Business, which was sold in October
1995. Additionally, fiscal 1996 includes twelve months of net sales of
$2,211,000 for the Industrial Business and fiscal 1997 only includes six full
months of net sales of $1,069,000 for the Industrial Business, which was sold in
October 1996. Prior to the sale of the Industrial Business in October 1996, one
of Scherer Ltd.'s significant distributors had substantially reduced its sales
orders with Scherer Ltd.
Net sales in the Company's Waste Management Services Segment, which operates
through Bio Systems, increased 10% to $11,836,000 in fiscal 1997 from
$10,753,000 in fiscal 1996. In fiscal 1997, Bio Systems increased its net sales
by approximately $810,000 by securing new medical waste disposal contracts with
hospitals. Bio Systems feels that hospitals have been more receptive to
out-sourcing the disposal of their medical waste, and attributes its success in
obtaining new hospital contracts to its reusable containers which are more cost
effective.
-15-
<PAGE>
Net sales for Scherer Labs, which operates in the Company's Consumer Healthcare
Products Segment, increased approximately 15% to $1,276,000 in fiscal 1997 from
$1,106,000 in fiscal 1996. The increase in net sales can be attributed to
securing new customers and retail outlets during fiscal 1997.
FISCAL 1996 VS. FISCAL 1995 (NET SALES)
The Company's net sales decreased by 2% to $41,857,000 for fiscal 1996 from
$42,802,000 for fiscal 1995; however, fiscal 1995 includes twelve months of net
sales for the Medical Business, or $9,865,000, and fiscal 1996 includes only six
months of net sales for the Medical Business, or $5,344,000, which was sold in
October 1995.
Marquest's net sales increased 9% to $22,443,000 in fiscal 1996 from $20,576,000
in fiscal 1995. Marquest's sales for the first quarter of fiscal 1995 were low
due to a decline in sales to hospitals which Marquest believes was due primarily
to the uncertainties relating to proposed healthcare reform. Also, many of
Marquest's distributors purchased high levels of product during the fourth
quarter of fiscal 1994 which depressed Marquest's sales in the first quarter of
fiscal 1995. In fiscal 1996, Marquest implemented a network of independent
manufacturer's representatives which supplements its sales force.
Scherer, Ltd.'s net sales decreased 33% to $7,555,000 in fiscal 1996 from
$11,203,000 in fiscal 1995; however, fiscal 1995 includes twelve months of net
sales for the Medical Business, or $9,865,000, and fiscal 1996 includes only six
months of net sales for the Medical Business, or $5,344,000. Scherer, Ltd.'s
net sales for the Industrial Business increased 65% to $2,211,000 for fiscal
1996 from $1,338,000 in fiscal 1995. This increase in net sales was primarily
due to the introduction of products fabricated from two new fabric lines in late
fiscal 1995.
Net sales for Bio Systems increased approximately 7% to $10,753,000 in fiscal
1996 from $10,039,000 in fiscal 1995. The increase in sales was due to the
continuing acquisition of new medical waste disposal contracts with hospitals.
Net sales for the Consumer Healthcare Products Segment increased 12% to
$1,106,000 for fiscal 1996 from $984,000 for fiscal 1995. This segment achieved
a record level of sales of certain over-the-counter products during the first
quarter of fiscal 1996. The sales growth can be attributed to an increase in
sales to a primary wholesaler to Wal-Mart.
COSTS AND EXPENSES. The following table sets forth the percentage relationship
which the expense line items in the consolidated statement of operations bear to
total revenue:
Percentage of Revenue
Year Ended March 31,
--------------------------------
1997 1996 1995
------ ------ -------
Net Sales 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of good sold 65.3 67.4 73.6
Selling, general, and administrative 31.9 31.3 34.5
Research and development 0.8 0.4 0.3
Nonrecurring charges - - 4.7
------ ------ -------
Operating income (loss) 2.0% 0.9% (13.1)%
------ ------ -------
------ ------ -------
The following table sets forth the Company's operating margins by operating
segment and on a consolidated basis:
Year Ended March 31,
--------------------------------
1997 1996 1995
---- ---- ----
Medical Device and Surgical/Safety
Disposables Segment:
Marquest 1.6% 2.3% (13.1)%
Scherer, Ltd. (30.2) (4.4) (8.1)
Waste Management Services Segment 9.1 8.6 7.9
Consumer Healthcare Products Segment 36.6 33.3 24.8
Consolidated 2.0% 0.9% (13.1)%
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<PAGE>
FISCAL 1997 VS. FISCAL 1996 (COSTS AND EXPENSES)
The Company's operating income improved 86% to $732,000 in fiscal 1997 from
$393,000 in fiscal 1996. The Company's cost of goods sold decreased to
approximately 65% of net sales in fiscal 1997 from 67% of net sales in fiscal
1996. Selling, general and administrative expenses increased to 32% of net
sales in fiscal 1997 from approximately 31% of net sales in fiscal 1996.
Marquest's operating income decreased to $363,000 in fiscal 1997 from $510,000
in fiscal 1996. This decrease is primarily the result of the decrease in net
sales combined with an increase in overtime expense in the first quarter of
fiscal 1997 due to the rework of certain products. Product rework is caused by
supplier quality issues, defects in the molded products, and damage to product
during assembly and warehousing. Marquest believes that the supplier quality
and damage to product issues have been corrected; however, the molded product
defects may recur depending on the condition of the molds. In an effort to
reduce molded product defects, Marquest has implemented a preventative
maintenance program, increased inspections, and improved operator training. The
decrease in net sales and the increase in overtime expense was partially offset
by a decrease in the net operating lease expense of its idle warehouse in
Nogales, Arizona of approximately $120,000 due to the sublease of two-thirds of
the warehouse in December 1995 and the sublease of the remaining portion in
September 1996. Additionally, Marquest wrote off approximately $200,000 in
fiscal 1996 for certain expenses associated with unsuccessful financing
transactions with no corresponding expenses incurred in fiscal 1997.
Scherer Ltd.'s operating loss decreased slightly to $323,000 in fiscal 1997 from
$355,000 in fiscal 1996; however, fiscal 1996 includes $164,000 of operating
income from the Medical Business which was sold in October 1995. The Medical
Business reported operating income in fiscal 1996 primarily as a result of an
agreement, effective April 1, 1995, which required Cordis to reimburse Scherer,
Ltd. for monthly losses ($295,000 in total for the period April 1995 through
September 1995) that Scherer, Ltd. was incurring under its surgical tray
contract with Cordis. The Industrial Business of Scherer, Ltd., which was sold
in October 1996, reported an operating loss of $323,000 for fiscal 1997 compared
to an operating loss of $499,000 in fiscal 1996. The operating loss in fiscal
1997 for the Industrial Business can be attributed to the decrease in net sales
due to a substantial reduction in sales orders from one of Scherer, Ltd.'s
significant distributors combined with an inventory write down pursuant to the
physical count taken for the Health-Pak transaction in October 1996.
Bio Systems increased its operating income 16% to $1,073,000 in fiscal 1997 from
$924,000 in fiscal 1996. The improved operating performance can be attributed
to the increase in net sales from the acquisition of new hospital contracts
combined with a significant decrease in Bio Systems' workers' compensation
insurance expense. The decrease in insurance expense is primarily due to the
conversion in October 1995 of Bio Systems' insurance coverage from a
fully-insured workers' compensation program to a partially insured program, to
take advantage of Bio Systems' excellent claims history.
The Company's Consumer Healthcare Products Segment improved its operating income
27% to $467,000 in fiscal 1997 from $368,000 in fiscal 1996. While improving
its net sales by 15%, as discussed above, this Segment was able to maintain, or
improve upon, its prior level of operating costs. Cost of goods sold decreased
slightly to 37% of net sales in fiscal 1997 from approximately 38% of net sales
in fiscal 1996 and selling, general and administrative expenses decreased to 26%
of net sales in fiscal 1997 from 29% in fiscal 1996.
FISCAL 1996 VS. FISCAL 1995 (COSTS AND EXPENSES)
The Company reported operating income of $393,000 in fiscal 1996 compared to an
operating loss of $5,628,000 in fiscal 1995. The fiscal 1995 operating loss
includes a nonrecurring charge of $2,000,000 for the write down of two waste
incinerator investments.
Marquest reported operating income of $510,000 in fiscal 1996 compared to an
operating loss of $2,696,000 in fiscal 1995. This improvement is a result of
the increase in sales discussed above combined with an emphasis on cost
reduction. Marquest reduced manufacturing costs and administrative expenses by
reductions in personnel, improved operational efficiencies and increased
vertical integration of the manufacturing processes. Additionally, the increase
in the manufacturing volume helped improve overhead absorption.
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Scherer, Ltd.'s operating loss decreased 63% to $335,000 in fiscal 1996 from
$912,000 in fiscal 1995. In fiscal 1995, Scherer, Ltd. experienced substantial
losses (approximately $700,000) under its surgical trays contract with Cordis.
Effective April 1, 1995, Scherer, Ltd. entered into a new agreement with Cordis
which required Cordis, among other things, to reimburse Scherer, Ltd. a monthly
shortfall amount ($52,000 per month for the period April to July 1995 and
$42,500 per month for the months of August and September 1995) to help offset
monthly losses incurred under the contract. The contract was terminated upon
the sale of the Medical Business to Cordis Medical in October 1995. Primarily
as a result of the new contract, the Medical Business reported operating income
of $164,000 in fiscal 1996 compared to an operating loss of $559,000 in fiscal
1995. The Industrial Business of Scherer, Ltd. increased its operating loss 41%
to $499,000 in fiscal 1996 from $353,000 in fiscal 1995. In late fiscal 1996,
Scherer, Ltd., which is currently operating under the name Protective Disposable
Apparel, moved the manufacture of its lab coats to a new workshop where Scherer,
Ltd. was able to negotiate better labor rates.
Bio Systems' operating income increased 17% to $924,000 in fiscal 1996 from
$790,000 in fiscal 1995. The operating improvement was attributable to a
decrease in insurance expense and a one-time sales tax expense in fiscal 1995
pursuant to a three year assessment from a sales tax audit. Prior to fiscal
1996, this segment reported consistent increases in net sales but had struggled
to improve its operating margins because of pricing pressures in both the
hospital and physician markets.
Operating income improved 51% to $368,000 in fiscal 1996 from $244,000 in fiscal
1995 at the Company's Consumer Healthcare Products Segment. This increase was
directly attributed to the increase in sales for this segment discussed above.
OTHER INCOME (EXPENSE). In fiscal 1997, the Company recorded a loss of
approximately $84,000 from the sale of the Industrial Business in October 1996
primarily due to the write-off of the remaining book value of certain intangible
assets. In fiscal 1996, the Company recorded a pretax gain of approximately
$2,781,000 from the sale of the Medical Business in October 1995. Also in
fiscal 1996, Marquest recorded a gain of approximately $200,000 from the sale of
its 10% investment in a medical device company.
In November 1995, the Company used $4,800,000 of the net proceeds from the sale
of the Medical Business to repay a portion of outstanding loans from affiliates.
Primarily as a result of the debt repayment, the Company reduced its interest
expense incurred on the affiliate debt from approximately $518,000 in fiscal
1996 to approximately $175,000 in fiscal 1997 (prior to the assignment of the
affiliate debt to a nonaffiliate in March 1997). Marquest's interest expense
incurred on affiliate debt in fiscal 1997 was $70,000 compared to $21,000 in
fiscal 1996.
In fiscal 1996, Marquest received $488,000 in a one-time royalty related to one
of Marquest's product lines. In fiscal 1997, Marquest incurred approximately
$265,000 in certain expenses associated with the merger between Marquest and
Vital Signs, Inc. (See "Item 1. Business - Recent Developments").
INCOME TAXES. The Company recorded an income tax provision of $6,000 and
$548,000 in fiscal 1997 and 1996, respectively, and had a tax benefit of
$197,000 in fiscal 1995. Marquest recorded a tax provision of $697,000 in
fiscal 1996 as a result of its settlement with the IRS with respect to tax
issues related to previous years. In fiscal 1997, the Company (excluding
Marquest) utilized tax loss carryforwards and reduced its valuation allowance
accordingly. In fiscal 1997 and in prior years, the Company significantly
increased its valuation allowance against its deferred tax assets mainly related
to the tax loss carryforwards.
The Company's ability to generate taxable income from operations is dependent
upon various factors, many of which are beyond management's control.
Accordingly, there can be no assurance that the Company will generate future
taxable income. Therefore, the realization of the deferred tax assets will be
assessed periodically based upon the Company's current and anticipated results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
CASH FLOWS FROM OPERATING ACTIVITIES. The Company's (excluding Marquest) cash
provided by operating activities from continuing operations decreased to
approximately $1,924,000 in fiscal 1997 from approximately $2,123,000 in fiscal
1996. This slight decrease in cash provided from continuing operations can be
attributed to the
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collection in fiscal 1996 of the remaining accounts receivable associated with
the Medical Business of Scherer Ltd. which was sold in October 1995. Pursuant
to the terms of the sale agreement, Scherer, Ltd. retained all accounts
receivable associated with the Medical Business, of which approximately
$1,360,000 was collected at the closing of and subsequent to the transaction.
This was partially offset by improvements, primarily due to timing, in the
collection of accounts receivable at Bio Systems and Scherer Labs of $187,000
and $75,000, respectively, in fiscal 1997 compared to fiscal 1996.
Additionally, due to the timing of payments, the Company's accounts payable and
accrued expenses increased approximately $725,000 in fiscal 1997 compared to
fiscal 1996.
Discontinuing the operations of Biofor has significantly improved the cash flow
of the Company. The net cash used by Biofor's operations was approximately
$170,000 in fiscal 1997 compared to approximately $1,564,000 in fiscal 1996.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES. The Company's (excluding
Marquest) investing activities provided cash of approximately $8,279,000 in
fiscal 1996 compared to a use of cash from investing activities of approximately
$487,000 in fiscal 1997. In fiscal 1996, the Company terminated its $3,200,000
line of credit arrangement with Trust Company Bank (now SunTrust Bank) which was
fully collateralized by $3,200,000 in cash investments. The Company determined
that the line provided no net financial leverage and converted the collateral
previously used to secure the line of credit into operating cash. The Company
received approximately $4,922,000 in net proceeds from the sale of assets
associated with the Medical Business of Scherer Ltd. in fiscal 1996. In fiscal
1997, the Company received $254,000 in net proceeds from the sale of Scherer
Ltd.'s Industrial Business. Additionally, Bio Systems increased its capital
expenditures by approximately $219,000 in fiscal 1997 compared to fiscal 1996
primarily due to the purchase of new trucks used to transport medical waste.
Cash flows from the Company's financing activities used cash of approximately
$7,340,000 in fiscal 1996 compared to a use of cash of only $108,000 in fiscal
1997. Prior to fiscal 1996, Scherer Scientific, Ltd. and Scherer Capital
Company L.L.C. ("Scherer Cap"), entities controlled by Robert P. Scherer, Jr.
who is the Chairman of the Board, Chief Executive Officer, and majority
shareholder of the Company, made loans (the "Affiliate Loans") to the Company
and its subsidiaries the proceeds of which were used primarily for working
capital and business acquisitions. The Affiliate Loans were payable on demand
and generally bore interest at prime rate plus 1%. In November 1995, the
Company used $4,800,000 of the net proceeds from the sale of the Medical
Business to repay a portion of the Affiliate Loans. In January 1997, the
Company and Scherer Cap restructured the remaining balance of $2,128,000 on the
Affiliate Loans into a five-year promissory note (the "Original Note") which
bore interest at prime rate plus 1%, adjusted quarterly, and was collateralized
by shares of Marquest Common Stock owned by the Company. In connection with the
dissolution of Scherer Cap in March 1997, the Original Note was amended (the
"Amended Note") and subsequently assigned to the four adult children of Robert
P. Scherer, Jr., who are not affiliated with the Company. In exchange for
certain considerations, $50,000 for the principal balance was forgiven and the
interest rate was reduced to prime, adjusted quarterly, in the Amended Note. As
discussed above, the Company terminated its line of credit arrangement during
the first quarter of fiscal 1996 which had borrowings outstanding of $1,944,000
at March 31, 1995.
On March 14, 1997, Marquest and VSI announced the execution of a Merger
Agreement providing for VSI to acquire Marquest. In the transaction, which is
expected to take place in July 1997, Marquest would become a wholly-owned
subsidiary of VSI and VSI would pay Marquest shareholders $0.797 per share in
cash for each outstanding share of Marquest Common Stock. The Company owns
7,211,192 shares of Marquest Common Stock directly and holds warrants to
purchase an additional 6,580,000 shares of Marquest Common Stock at an exercise
price of $0.75 per share. In connection with the Merger Agreement, the Company
and VSI entered into an agreement pursuant to which VSI has agreed, provided the
Merger Agreement is consummated, to purchase certain assets and product rights
previously sold by Marquest to the Company and to enter into a covenant not to
compete for an aggregate purchase price of $5,860,000. The Company expects to
receive approximately $11,900,000, before the payment of transaction costs and
associated income taxes, in total from the above transactions if they are
consummated. The Company plans to use a portion of the proceeds to repay the
Amended Note which had a balance of $1,958,000 as of March 31, 1997. The
Company will evaluate its long-term options with regard to the remaining
proceeds; however, on a short-term basis it plans to invest the proceeds,
principally in U.S. Treasuries.
Management of the Company believes that its current cash on hand of
approximately $3,225,000 as of March 31, 1997 and its current cash flow are
sufficient to maintain its current operations.
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<PAGE>
MARQUEST
With the exception of executive management, Marquest operates independently of
the Company.
CASH FLOWS FROM OPERATING ACTIVITIES. Marquest's cash used from operating
activities increased from $79,000 in fiscal 1996 to $1,178,000 in fiscal 1997
primarily due to a decrease in accounts payable and accrued expenses. The
decrease in accounts payable and accrued expenses is due to the payment in
fiscal 1997 of consulting fees and other costs related to Marquest's financing
transactions (discussed below), and the payment of income taxes and certain
legal settlements.
Simultaneous with the execution of the Merger Agreement with VSI, Marquest and
VSI entered into a Dealer Agreement which authorizes VSI to distribute
Marquest's products for a period of two years. Marquest has given 28 of its 29
hospital specialty dealers notice terminating its agreements with such dealers
at the end of the required notice period, generally 30 to 90 days from the date
of notice. These dealers provided Marquest with approximately $9,687,000 of
revenue in fiscal 1997. It is uncertain whether the sales through the Dealer
Agreement with VSI will reach the level of sales achieved by the terminated
dealers.
Primarily as a result of the termination notices, two of Marquest's dealers have
filed lawsuits against Marquest and VSI (see "Item 3. Legal Proceedings").
These dealers have informed Marquest that they are withholding further payment
of amounts owed to Marquest pending the settlement of the issues raised in their
respective lawsuits. The two dealers combined outstanding accounts receivable
as of May 31, 1997 was approximately $714,000 ($564,000 through sales in April
and May 1997), before certain rebate adjustments. Marquest intends to
vigorously contest the lawsuits and pursue the collection of the outstanding
accounts receivable.
CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES. On June 30, 1994, Marquest
refinanced $1,300,000 of Douglas County Industrial Revenue Bonds (the "Bonds'),
due on December 31, 1993, with a term loan from Colorado National Bank (the
"Bank"), the same bank holding the Bonds. In fiscal 1996, Marquest and the Bank
executed an amendment to the term loan agreement, whereby Marquest made a
principal payment of $160,000 and the term of the loan was shortened from July
31, 2004 to January 31, 2000 and the Bank released Marquest's inventory and
accounts receivable as collateral for the loan. The loan will continue to
amortize over its original term with a balloon payment on January 31, 2000.
In fiscal 1996, Scherer Cap, an entity controlled by Robert P. Scherer, Jr.,
made an investment in Marquest of approximately $1,588,000, net of related
transaction costs. In March 1996, Marquest and Scherer Cap entered into the
Loan Agreement, from which Marquest borrowed $700,000 to repay $700,000 that
Marquest borrowed from Scherer Cap in December 1995 for working capital
purposes. The Loan Agreement contemplated the possibility of additional
borrowings of $800,000. Borrowings under the Loan Agreement, which expires
February 28, 2001, bear interest at prime rate plus 1.5%, are secured by
Marquest's inventory, building, and equipment, and are represented by the
Scherer Cap Notes that are convertible, at the option of Scherer Cap, into
shares of Marquest Common Stock at a conversion price of $0.70 per share.
Additionally, Scherer Cap invested $1,000,000 in Marquest in March 1996 through
the purchase of 2,061,856 shares of Marquest Common Stock. In connection with
its dissolution in March 1997, Scherer Cap assigned the Loan Agreement and the
Scherer Cap Notes, and transferred 1,546,392 shares of the Marquest Common Stock
that it owned to Mr. Scherer, Jr. The remaining 515,464 shares of Marquest
Common Stock owned by Scherer Cap were transferred into a voting trust for the
benefit of Mr. Scherer, Jr.'s adult children. Mr. Scherer, Jr. is entitled to
vote the shares held in the voting trust.
In November 1996, Marquest obtained a revolving line of credit from Norwest
Business Credit, Inc. ("Norwest") which expires February 28, 1999. Any amounts
borrowed against the line of credit will primarily be secured by Marquest's
trade accounts receivable and will bear interest at Norwest's prime rate plus
2.25% (the rate was 10.75% as of March 31, 1997). The maximum amount of the
line of credit is 80% of Marquest's eligible domestic accounts receivable plus
70% of eligible international accounts receivable or $2,000,000, whichever is
less. As of March 31, 1997, Marquest had borrowed $125,000 against an available
borrowing limit on the line of approximately $1,400,000.
As of March 31, 1997, Marquest was not in compliance with a covenant requiring a
specified debt service coverage rate and a covenant that Marquest not incur an
after tax loss greater than a specified amount. Norwest has waived the
requirement of compliance with these covenants as of March 31, 1997, and
Marquest has negotiated new covenants with Norwest providing for a maximum net
loss for the first four months of fiscal 1998 (through July
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1997) of $1,018,000 and a minimum net worth of $3,364,000 at the end of July
1997 and each subsequent month thereafter.
Marquest's management expects that the pending Merger with VSI will be
consummated by the end of July 1997. However, if the Merger is delayed or does
not occur, Marquest's management anticipates taking the following actions during
fiscal 1998: (i) continue marketing and selling its products through
medical-surgical dealers and through the dealer arrangement with VSI in domestic
markets where VSI has strategic presence; (ii) renegotiate its current line of
credit with Norwest and pursue additional financing opportunities that may be
available; (iii) continue to reduce costs and operating expenses; and (iv)
restrict expenditures for capital assets to maintenance of existing equipment
and facilities until Marquest generates positive operating cash flow.
The viability of Marquest during fiscal 1998 will be dependent on the
consummation of the Merger with VSI, or , if the Merger is delayed or does not
occur, on the successful implementation of some or all of the above actions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are set forth on pages F-3 through F-23
of this report. The reporting of selected quarterly financial data specified by
Item 302 of Regulation S-K is not required for the Company.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this report but is
incorporated herein by reference to the Company's definitive Proxy Statement for
the 1997 Annual Meeting of Shareholders (the "Proxy Statement"). Such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after March 31, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
In accordance with General Instruction G(3) of the Form 10-K, the information
relating to the directors of the Company, including directors who are executive
officers of the Company, is set forth under the caption "Election of Directors"
in the Proxy Statement and is incorporated herein by reference. Pursuant to
Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of
Form 10-K, information relating to the executive officers of the Company is set
forth under the caption "Executive Officers of the Company" in Part I, Item 4A
of this report. Compliance with Section 16(a) of the Securities Exchange Act of
1934: Section 16(a) of the Securities Exchange of 1934, as amended, and
regulations of the Securities and Exchange Commission thereunder require the
Company's directors and executive officers and any persons who own more than 10%
of the Company's Common Stock, as well as certain affiliates of such persons, to
file reports with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. with respect to their ownership of the
Company's Common Stock. Directors, executive officers and persons owning more
than 10% of the Company's Common Stock are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
reports they file. Based solely on its review of the copies of such reports
received by it and written representations that no other reports were required
of those persons, the Company believes that during fiscal 1997, all filing
requirements applicable to its directors and executive officers were complied
within a timely manner, except that Amy M. Murphy and Gary W. Ruffcorn have
filed their Form 3s late. The Company is not aware of any other persons other
than directors and executive officers and their affiliates who own more than 10%
of the Company's Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with General Instruction G(3) of Form 10-K, the information
relating to executive compensation set forth under the caption "Compensation of
Executive Officers" in the Proxy Statement is incorporated herein by reference;
provided, such incorporation by reference shall not be deemed to include or
incorporate by reference the information referred to in Item 402 (a)(8) of
Regulation S-K.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3) of Form 10-K, the information
relating to security ownership by certain persons set forth under the captions
"Principal Stockholders" and "Election of Directors" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3) of Form 10-K, the information
relating to certain relationships and related transactions set forth under the
caption "Related Party Transactions" in the Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements.
The financial statements of the Company and the related report of
independent accountants thereon are set forth immediately following the
Index to Financial Statements and Financial Statement Schedules which
appears on page F-1 of this report.
(2) Financial Statement Schedules.
Financial statement schedules begin on page S-1 of this report. All other
schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted
because such schedules are not required under the related instructions or
are not applicable or because the information required is included in the
consolidated financial statements or notes thereto.
(3) Exhibits.
The following exhibits are filed with or incorporated by reference in this
report. Where filing is made by incorporation by reference to a previously
filed registration statement or report, such registration statement or
report is identified in parenthesis. The Company will furnish any exhibit
upon request to Amy M. Murphy, Secretary, Scherer Healthcare, Inc., 2859
Paces Ferry Road, Suite 300, Atlanta, Georgia 30339. There is a charge of
$.50 per page to cover expenses for copying and mailing.
3.1 Articles of Incorporation of the Company, as amended
(Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994).
3.2 By-Laws of the Company (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1994).
4 Certificate of Designation, Preferences and Rights of
Preferred Stock by Resolution of the Board of Directors
Providing for an Issue of 7,000 Shares of Preferred Stock
Designated "Series A" Cumulative Convertible Preferred Stock
(Exhibit 4 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994).
10.1 Property Lease between Bio Systems Partners and Flushing
Operating Corp. for 210 Sherwood Avenue, Farmingdale, New
York, and Addendum (Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1994).
10.2 Property Lease between Med X Services of PA, Inc. and
successors and Mark Hankin and Hamnar Associates XVII for
380 Constance Drive, Warminster, Pennsylvania, and Addendum
(Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994).
10.3 Asset Purchase Agreement dated October 3, 1995 among Cordis
Medical Products, Inc., Scherer Healthcare, Ltd. d/b/a
Custom Medical Products, ASH Enterprises, Inc., Out-Patient
Products Company, Inc., Scherer Healthcare, Inc. and Cordis
Corporation (Exhibit 2 to the Company's Current Report on
Form 8-K dated October 19, 1995).
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10.4 Conversion Agreement dated March 28, 1996 by and between
Marquest Medical Products, Inc. and Scherer Healthcare, Inc.
(Exhibit 10 to the Company's Current Report on Form 8-K
dated April 17, 1996)
10.5 Amended and Restated Non-Negotiable Note dated January 17,
1997 by Scherer Healthcare, Inc. to Scherer Capital Company
L.L.C.-filed herewith.
10.6 Agreement and Plan of Merger dated March 14, 1997 by and
among Vital Signs, Inc., VSI Acquisition Corporation, and
Marquest Medical Products, Inc. (Exhibit 2.1 to the
Company's Current Report on Form 8-K dated March 21, 1997)
10.7 Scherer Healthcare Inducement Agreement dated March 14, 1997
by and between Scherer Healthcare, Inc., Vital Signs, Inc.
and Marquest Medical Products, Inc. (Exhibit 2.2 to the
Company's Current Report on Form 8-K dated March 21, 1997)
21 Subsidiaries of Registrant - filed herewith.
25 Powers of Attorney - filed herewith.
27 Financial Data Schedule (included only in EDGAR filing)
99.1 Robert Scherer Inducement Agreement dated March 14, 1997 by
Robert P. Scherer, Jr. to Vital Signs, Inc. (Exhibit 99.2 to
the Company's Current Report on Form 8-K dated March 21,
1997)
(b) REPORTS ON FORM 8-K.
The following Current Reports on form 8-K were filed by the Company during
the quarter ended March 31, 1997:
March 21, 1997 - announcing that Marquest entered into a definitive
merger agreement with Vital Signs, Inc. providing for Vital Signs to
acquire Marquest.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on June 12, 1997.
SCHERER HEALTHCARE, INC.
By: /s/Robert P. Scherer, Jr.
-------------------------
Robert P. Scherer, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on June 12, 1997.
Signature Title
- --------- -----
/s/Robert P. Scherer, Jr. Chairman of the Board, Director and
- ------------------------------- Chief Executive Officer
Robert P. Scherer, Jr.
/s/William J. Thompson * President and Director
- ------------------------------
William J. Thompson
/s/Gary W. Ruffcorn Director of Finance and Accounting
- ------------------------------ (Principal Financial and Accounting Gary
Gary W. Ruffcorn Officer)
/s/Stephen Lukas, Sr. * Director
- ------------------------------
Stephen Lukas, Sr.
/s/Kenneth H. Robertson * Director
- ------------------------------
Kenneth H. Robertson
*By:/S/Robert P. Scherer, Jr
--------------------------
Robert P. Scherer, Jr.
as Attorney-in-Fact
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<PAGE>
SCHERER HEALTHCARE, INC.
INDEX OF EXHIBITS
The following exhibits are filed with or incorporated by reference in this
report. Where such filing is made by incorporation by reference to a previously
filed registration statement or report, such registration statement or report is
identified in parentheses.
Exhibit Page
Number Description Number
- ------ ----------- ------
3.1 Articles of Incorporation of the Company, as amended
(Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994).
3.2 By-Laws of the Company (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1994).
4 Certificate of Designation, Preferences and Rights of
Preferred Stock by Resolution of the Board of Directors
Providing for an Issue of 7,000 Shares of Preferred Stock
Designated "Series A" Cumulative Convertible Preferred Stock
(Exhibit 4 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994).
10.1 Property Lease between Bio Systems Partners and Flushing
Operating Corp. for 210 Sherwood Avenue, Farmingdale, New
York, and Addendum (Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1994).
10.2 Property Lease between Med X Services of PA, Inc. and
successors and Mark Hankin and Hamnar Associates XVII for
380 Constance Drive, Warminster, Pennsylvania, and Addendum
(Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994).
10.3 Asset Purchase Agreement dated October 3, 1995 among Cordis
Medical Products, Inc., Scherer Healthcare, Ltd. d/b/a
Custom Medical Products, ASH Enterprises, Inc., Out-Patient
Products Company, Inc. Scherer Healthcare, Inc. and Cordis
Corporation (Exhibit 2 to the Company's Current Report on
Form 8-K dated October 19, 1995).
10.4 Conversion Agreement dated March 28, 1996 by and between
Marquest Medical Products, Inc. and Scherer Healthcare, Inc.
(Exhibit 10 to the Company's Current Report on Form 8-K
dated April 17, 1996)
10.5 Amended and Restated Non-Negotiable Note dated January 17,
1997 by Scherer Healthcare, Inc. to Scherer Capital Company
L.L.C. - filed herewith. 26
10.6 Areement and Plan of Merger dated March 14, 1997 by and
among Vital Signs, Inc., VSI Acquisition Corporation, and
Marquest Medical Products, Inc. Exhibit 2.1 to the Company's
Current Report on Form 8-K dated March 21, 1997)
10.7 Scherer Healthcare Inducement Agreement dated March 14, 1997
by and between Scherer Healthcare, Inc., Vital Signs, Inc.
and Marquest Medical Products, Inc. (Exhibit 2.2 to the
Company's Current Report on Form 8-K dated March 21, 1997)
21 Subsidiaries of Registrant - filed herewith. 30
25 Powers of Attorney - filed herewith. 32
27 Financial Data Schedule (included only in EDGAR filing)
99.1 Robert Scherer Inducement Agreement dated March 14, 1997 by
Robert P. Scherer, Jr. to Vital Signs, Inc. (Exhibit 99.2 to
the Company's Current Report on Form 8-K dated March 21,
1997)
-25-
<PAGE>
SCHERER HEALTHCARE, INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and schedules of the Registrant
and its subsidiaries are submitted herewith in response to Item 8:
Report of Independent Public Accountants . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets--March 31, 1997 and 1996 . . . . . . . . . F-3
Consolidated Statements of Operations--Years Ended
March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity--Years
Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows--
Years Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-9
The following financial statement schedules of the Registrant and its
subsidiaries are submitted herewith in response to Item 14(a)(2):
Schedule I--Condensed Financial Information of Registrant. . . . . . . S-1
Schedule II--Valuation and Qualifying Accounts . . . . . . . . . . . . S-4
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of
Scherer Healthcare, Inc.
We have audited the accompanying consolidated balance sheets of SCHERER
HEALTHCARE, INC. (a Delaware corporation) AND SUBSIDIARIES as of March 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended March 31, 1997. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Scherer Healthcare, Inc. and
subsidiaries as of March 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements and financial statement schedules are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state, in all material
respects, the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, Georgia
June 6, 1997
F-2
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,237,000 $ 3,622,000
Accounts receivable, less allowance for doubtful
accounts of $289,000 in 1997 and $243,000 in 1996 6,087,000 6,092,000
Current maturities of notes receivable 223,000 393,000
Inventories 3,453,000 3,936,000
Prepaid and other 218,000 331,000
------------ -------------
Total current assets 13,218,000 14,374,000
------------ -------------
PROPERTY AND EQUIPMENT 16,792,000 15,749,000
Less accumulated depreciation (6,586,000) (5,146,000)
------------ -------------
Net property and equipment 10,206,000 10,603,000
------------ -------------
OTHER ASSETS
Cost in excess of net assets acquired, net 6,404,000 6,721,000
Other investments, at cost 650,000 651,000
Notes receivable, less current portion 371,000 506,000
Intangibles 309,000 365,000
Deferred income taxes 329,000 329,000
Other 356,000 305,000
Net assets of discontinued operations 351,000 556,000
------------ -------------
Total other assets 8,770,000 9,433,000
------------ -------------
TOTAL ASSETS $32,194,000 $34,410,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
AS OF MARCH 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,808,000 $ 2,150,000
Accrued expenses 4,107,000 5,002,000
Line of credit and current maturities of debt obligations 1,397,000 981,000
Payables to affiliates - 2,286,000
Other 57,000 49,000
------------ -------------
Total current liabilities 7,369,000 10,468,000
------------ -------------
LONG-TERM DEBT
Note payable to affiliate 700,000 700,000
Notes, obligations, and other, net of current maturities 5,946,000 4,591,000
------------ -------------
Total long-term debt 6,646,000 5,291,000
------------ -------------
OTHER LIABILITIES 325,000 347,000
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN SUBSIDIARY AND PARTNERSHIPS 1,891,000 2,130,000
STOCKHOLDERS' EQUITY
Convertible preferred stock - $.01 par value, 2,000,000
shares authorized; 23,541 shares issued and outstanding
in 1997 and 28,885 in 1996 - -
Common stock - $.01 par value, 12,000,000 shares authorized;
4,693,585 issued in 1997 and 4,669,928 in 1996;
4,314,223 shares outstanding in 1997 and 4,290,566 in 1996 47,000 47,000
Capital in excess of par value 22,366,000 22,316,000
Accumulated deficit (3,417,000) (3,156,000)
Less treasury stock, at cost (3,033,000) (3,033,000)
------------ -------------
Total stockholders' equity 15,963,000 16,174,000
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,194,000 $34,410,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $36,226,000 $41,857,000 $42,802,000
----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold 23,660,000 28,194,000 31,514,000
Selling, general, and administrative 11,548,000 13,115,000 14,776,000
Research and development 286,000 155,000 140,000
Nonrecurring charges - - 2,000,000
----------- ----------- -----------
Total costs and expenses 35,494,000 41,464,000 48,430,000
----------- ----------- -----------
OPERATING INCOME (LOSS) 732,000 393,000 (5,628,000)
OTHER (EXPENSE) INCOME
Interest income 178,000 266,000 696,000
Interest expense (900,000) (1,128,000) (1,257,000)
(Loss) gain on sale of assets (84,000) 3,006,000 70,000
Other, net (165,000) 684,000 (642,000)
----------- ----------- -----------
Total other (expense) income (971,000) 2,828,000 (1,133,000)
----------- ----------- -----------
(Loss) income from continuing operations before
minority interest and income taxes (239,000) 3,221,000 (6,761,000)
Minority interest in net loss (income) of
subsidiary and partnerships 359,000 (5,000) 1,927,000
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 120,000 3,216,000 (4,834,000)
(Provision) benefit for income taxes (6,000) (548,000) 197,000
----------- ----------- -----------
Income (loss) from continuing operations 114,000 2,668,000 (4,637,000)
Loss from discontinued operations, net of
income taxes of $0 (375,000) (920,000) (5,534,000)
----------- ----------- -----------
NET (LOSS) INCOME $ (261,000) $ 1,748,000 $(10,171,000)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
For the years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
(LOSS) INCOME PER COMMON SHARE
Income (loss) from continuing operations $ 0.03 $ 0.60 $ (1.09)
Loss from discontinued operations (0.09) (0.20) (1.30)
--------- --------- ---------
NET (LOSS) INCOME PER SHARE $ (0.06) $ 0.40 $ (2.39)
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,418,483 4,418,483 4,254,327
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended March 31, 1997
<TABLE>
<CAPTION>
Retained
Earnings
Preferred Common Capital In (Accu- Treasury
Preferred Stock Common Stock Excess of mulated Treasury Stock
Shares Amount Shares Amount Par Value Deficit) Shares Cost
----------- ----------- ----------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 43,516 $ - 4,605,139 $ 46,000 $22,317,000 $ 5,267,000 376,362 $(2,973,000)
Conversion of preferred
shares to common shares (8,510) - 37,675 - - - - -
Net loss - - - - - (10,171,000) - -
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
Balance at March 31, 1995 35,006 - 4,642,814 46,000 22,317,000 (4,904,000) 376,362 (2,973,000)
Conversion of preferred
shares to common shares (6,121) - 27,114 1,000 (1,000) - - -
Net income - - - - - 1,748,000 - -
Other - - - - - - 3,000 (60,000)
----------- ----------- ----------- ----------- ------------- ------------ ----------- -----------
Balance at March 31, 1996 28,885 - 4,669,928 47,000 22,316,000 (3,156,000) 379,362 (3,033,000)
Conversion of preferred
shares to common shares (5,344) - 23,657 - - - - -
Net loss - - - - - (261,000) - -
Other - - - - 50,000 - - -
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
Balance at March 31, 1997 23,541 $ - 4,693,585 $ 47,000 $22,366,000 $(3,417,000) 379,362 $(3,033,000)
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
----------- ----------- ----------- ----------- ------------ ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31,
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (261,000) $ 1,748,000 $(10,171,000)
Adjustments to reconcile net (loss)
income to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,777,000 2,228,000 2,658,000
Minority interest (239,000) 46,000 (1,952,000)
Deferred taxes - - 121,000
Loss (gain) on sale of assets 84,000 (3,006,000) (70,000)
Nonrecurring charges - - 2,000,000
Loss from discontinued operations 375,000 920,000 5,534,000
Other noncash charges and credits, net 55,000 34,000 (267,000)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net (382,000) 1,063,000 48,000
Inventories 174,000 (614,000) 816,000
Prepaid and other 112,000 101,000 188,000
Income taxes, net 8,000 14,000 825,000
Accounts payable and accrued expenses (935,000) (464,000) (154,000)
Other liabilities (22,000) (25,000) (221,000)
-------------- ------------- -------------
Net cash provided by (used for) operating activities of
continuing operations 746,000 2,045,000 (645,000)
Net operating activities of discontinued operations (170,000) (1,564,000) (2,105,000)
--------------- ------------- -------------
Net cash provided by (used for) operating activities 576,000 481,000 (2,750,000)
--------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (1,058,00) (670,000) (1,773,000)
Proceeds from sale of assets 254,000 5,147,000 245,000
Decrease (increase) in investments - 3,232,000 (232,000)
Decrease in notes receivable 304,000 467,000 764,000
Other investing activities, net (88,000) 82,000 (45,000)
--------------- -------------- ------------
Net cash (used for) provided by investing activities (588,000) 8,258,000 (1,041,000)
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of borrowings (171,000) (2,657,000) (1,008,000)
(Repayments to) advances from affiliated companies (202,000) (5,321,000) 2,356,000
Proceeds from investment by affiliated company - 1,588,000 -
Other financing activities, net - - 169,000
--------------- ------------- --------------
Net cash (used for) provided by financing activities (373,000) (6,390,000) 1,517,000
--------------- ------------- --------------
CHANGE IN CASH AND CASH EQUIVALENTS (385,000) 2,349,000 (2,274,000)
CASH AND CASH EQUIVALENTS, beginning of year 3,622,000 1,273,000 3,547,000
--------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 3,237,000 $ 3,622,000 $ 1,273,000
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996, AND 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES OF
CONSOLIDATION
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the parent company, Scherer Healthcare, Inc. (the "Company" or "Scherer
Healthcare"), and its subsidiaries (see Note 3). Marquest Medical Products,
Inc. ("Marquest"), a majority owned subsidiary of the Company, has a 52- or
53-week fiscal year ending on the Saturday nearest to March 31. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain 1995 and 1996 amounts have been reclassified to conform with the 1997
presentation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of March 31, 1997 and 1996, the carrying value of financial instruments
such as cash, short-term investments, trade receivables and payables and
short-term debt approximated their fair values based on the short-term
maturities of these instruments. Additionally, the carrying value of both
long-term investments and long-term debt approximated fair values.
INVENTORIES
Inventories are stated at the lower of net realizable value or cost primarily
using the first-in, first-out ("FIFO") method.
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Finished products $ 1,086,000 $ 1,746,000
Work in progress 282,000 233,000
Containers, packaging, and
raw material 2,085,000 1,957,000
------------ -------------
$ 3,453,000 $ 3,936,000
------------ -------------
------------ -------------
</TABLE>
F-9
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, and depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets as follows: furniture, fixtures and equipment--3-10 years and
buildings and leasehold improvements--5-50 years.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Land $ 1,265,000 $ 1,265,000
Building and leasehold improvements 4,870,000 4,836,000
Furniture, fixtures, and equipment 10,657,000 9,648,000
------------- -------------
$16,792,000 $15,749,000
------------- -------------
------------- -------------
</TABLE>
Depreciation expense for fiscal years 1997, 1996, and 1995 was $1,678,000,
$1,924,000, and $2,276,000, respectively.
MINORITY INTEREST
Minority interest primarily represents the equity interest in Marquest of
outside investors. Because of recent losses, there is no significant minority
interest liability related to other subsidiaries not wholly owned by the
Company.
INCOME TAXES
The Company uses the liability method to account for income taxes (see Note 11).
REVENUE RECOGNITION
Sales are recorded by the Company when products are shipped to customers or
independent distributors. Sales for services provided are recorded when the
Company has completed the service.
Geographic net sales were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
United States and Canada $30,138,000 $36,113,000 $38,249,000
Europe, Pacific Rim, Puerto
Rico and Other 6,088,000 5,744,000 4,553,000
-------------- -------------- ---------------
Net Sales $36,226,000 $41,857,000 $42,802,000
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
All of the Company's export sales are through Marquest. The operating
margins on Marquest's export sales have been comparable to those associated
with Marquest's domestic sales.
As of March 31, 1997 and 1996, Marquest had approximately $219,000 and
$131,000, respectively, in finished goods inventory at a warehouse facility
of one of its European distributors. These assets represent all of the
Company's assets located outside the United States.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenditures for the creation and application of new
products and processes are expensed as incurred.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is based upon the weighted average number of
common shares outstanding after giving effect for common stock equivalents
arising from the assumed conversion of the Company's Convertible Preferred
Stock into common stock. The common stock equivalents included in the
calculation of earnings per share are 104,260 and 127,917 for the years ended
March 31, 1997 and 1996, respectively. Because of losses, common stock
equivalents were not included in the calculation of earnings per share for
the year ended March 31, 1995.
F-10
<PAGE>
NEW ACCOUNTING STANDARDS
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and associated intangibles be written down to fair value whenever an
impairment review indicates that the carrying value cannot be recovered on an
undiscounted cash flow basis. SFAS No. 121 also requires that a company no
longer record depreciation expense on assets held for sale. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. As of
March 31, 1997, the price of the Company's Common Stock was 2 3/8, which was
significantly less than the exercise prices of the Company's outstanding stock
options (see Note 9); therefore, the pro forma impact on net income (loss) of
fair value accounting for options granted, as required by SFAS No. 123, is not
significant to the financial statements.
In fiscal 1998, the Company will adopt SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock. This Statement
replaces the presentation of primary EPS with a presentation of basic EPS and
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. This Statement also
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
The Company must adopt the new standard for the quarter ending December 31,
1997; earlier application is not permitted. This Statement requires restatement
of all prior period EPS data presented. The impact of SFAS No. 128 on the
calculations of basic and diluted EPS for these years is not expected to be
material.
NOTE 2. MARQUEST
In fiscal 1994, the Company entered into transactions to acquire Marquest and to
purchase one of Marquest's product lines for $4,500,000 in cash. Marquest is an
international manufacturer and distributor of specialty cardiopulmonary support,
respiratory and anesthesia disposable devices. Since the transactions were
completed, Marquest has been included with the Company in the consolidated
financial statements due to the Company's ability to control Marquest by virtue
of common stock, warrants and convertible debt held by the Company and the
Company's control of the Board of Directors.
As part of the acquisition, Marquest restructured its $12,650,000 of defaulted
Swiss bonds. Approximately 96% of the outstanding amount of bonds was tendered
and accepted in the Swiss bond exchange offers. A combination of approximately
43,516 shares of Scherer Healthcare 5% Convertible Preferred Stock, $2,875,000
of Marquest six-year 8% notes, and Marquest warrants for 1,597,416 Common Shares
were issued to the former bondholders who accepted the exchange offers. In
exchange for its Preferred Stock, the Company received approximately $4,352,000
of Marquest six-year 8% notes convertible into Marquest Common Stock. In
connection with the acquisition of Marquest, the Company purchased Marquest's
arterial blood gas ("ABG") product line, including related equipment, from
Marquest for $4,500,000 in cash. The Company licenses the ABG product line back
to Marquest in exchange for a royalty equal to 3.25% of Marquest's net ABG
product line sales. Marquest had the option to repurchase the ABG product line
from the Company at any time prior to May 31, 1996 for $4,500,000 plus $22,500
for each month lapsed between June 1993 and the date of repurchase. In May
1996, the Company and Marquest agreed to extend the option period through June
15, 1999. The purchase of the ABG product line by the Company resulted in
goodwill of approximately $4,255,000. Primarily as consideration for the
original product line repurchase option, the Company received warrants for
6,580,000 shares of Marquest Common Stock, exercisable at $0.75 per share. At
the Company's option, either cash or Scherer Healthcare Common Stock can be used
in exercising the warrants. On May 23, 1994, the Company converted $2,500,000
of the $4,352,000 Marquest six-year 8% note into 3,333,333 shares of Marquest
Common Stock.
F-11
<PAGE>
On March 28, 1996, the Company converted the remaining balance of $1,852,000 and
the associated accrued interest of $487,000 on the Marquest six-year 8% note
into 3,340,245 shares of Marquest Common Stock. Additionally, the Company
agreed to convert $376, 000 in accrued but unpaid management fees owed to the
Company by Marquest into 537,614 shares of Marquest Common Stock. As of March
31, 1997, the Company owns 51% of Marquest's outstanding Common Stock. Marquest
has outstanding a significant number of warrants, stock options, and convertible
notes that could be converted into Marquest Common Stock. Depending upon the
amount and timing of conversion of any of these securities, the Company's
ownership percentage in Marquest could vary from 42% to 66%.
On March 14, 1997, Marquest and Vital Signs, Inc. ("VSI") announced the
execution of a definitive merger agreement (the "Merger Agreement") providing
for VSI to acquire Marquest. In the transaction, which is expected to take
place in July 1997, Marquest would become a wholly owned subsidiary of VSI and
VSI would pay Marquest shareholders $0.797 per share in cash for each
outstanding share of Marquest Common Stock. As discussed above, the Company
owns 7,211,192 shares of Marquest Common Stock directly and holds warrants to
purchase an additional 6,580,000 shares of Marquest Common Stock at an exercise
price of $0.75 per share. In connection with the Merger Agreement, the Company
and VSI entered into an agreement pursuant to which VSI has agreed, provided the
Merger Agreement is consummated, to purchase the ABG product line from the
Company and the Company has agreed to enter into a covenant not to compete for
an aggregate purchase price of $5,860,000. The Company expects to record a gain
from these transactions, which will be reflected in the Company's consolidated
financial statements at the time the transactions become effective.
Simultaneous with the execution of the Merger Agreement, Marquest and VSI
entered into a Dealer Agreement which authorizes VSI to distribute Marquest's
products in the United States, Canada, Puerto Rico and certain other
international territories for a period of two years. Marquest has given 28 of
its 29 hospital specialty dealers notice terminating its agreements with such
dealers at the end of the required notice period, generally 30 to 90 days from
the date of notice. Primarily as a result of the termination notices, two of
Marquest's dealers have filed lawsuits against Marquest and VSI (See Note 8).
Subsequent to giving the hospital specialty dealers notice of termination,
Marquest entered into new arrangements with some of the dealers pursuant to
which these certain dealers may continue to distribute Marquest's products.
The operations of Marquest are included in the Company's Medical Device and
Surgical/Safety Disposables Segment along with the operations of Scherer
Healthcare, Ltd. ("Scherer, Ltd."). The assets and businesses of Scherer, Ltd.
were sold in two separate transactions in October 1995 and October 1996 (See
Note 5). Upon the consummation of the Merger Agreement, the operations of the
Medical Device and Surgical/Safety Disposable Segment will be accounted for as a
discontinued segment, and accordingly, the operations of Marquest and Scherer,
Ltd. will be segregated and reported as discontinued operations in the Company's
consolidated financial statements. The operations of this Segment are included
in the Company's consolidated continuing operations for the fiscal year ended
March 31, 1997 because the pending transactions with VSI are subject to approval
by the shareholders of Marquest and the Company and to other standard
conditions.
F-12
<PAGE>
NOTE 3. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------
(in thousands)
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net Sales:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 22,045 $ 22,443 $ 20,576
Scherer Healthcare, Ltd. (a) 1,069 7,555 11,203
Waste Management Services Segment 11,836 10,753 10,039
Consumer Healthcare Products Segment 1,276 1,106 984
--------- --------- ---------
Total $ 36,226 $ 41,857 $ 42,802
--------- --------- ---------
--------- --------- ---------
Operating Income (Loss) from Continuing Operations:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 363 $ 510 $ (2,696)
Scherer Healthcare, Ltd. (a) (323) (335) (912)
Waste Management Services Segment 1,073 924 790
Consumer Healthcare Products Segment 467 368 244
Corporate (b) (848) (1,074) (3,054)
--------- --------- ---------
Total $ 732 $ 393 $ (5,628)
--------- --------- ---------
--------- --------- ---------
Identifiable Assets:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 13,424 $ 15,393 $ 13,992
Scherer Healthcare, Ltd. (a) - 909 6,233
Waste Management Services Segment 9,589 9,370 9,524
Consumer Healthcare Products Segment 111 153 139
Corporate (c) 9,070 8,585 10,751
--------- --------- ---------
Total $ 32,194 $ 34,410 $ 40,639
--------- --------- ---------
--------- --------- ---------
Depreciation Expense:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 793 $ 1,046 $ 1,364
Scherer Healthcare, Ltd. (a) 3 74 128
Waste Management Services Segment 816 731 717
Consumer Healthcare Products Segment 1 1 1
Corporate 65 72 66
--------- --------- ---------
Total $ 1,678 $ 1,924 $ 2,276
--------- --------- ---------
--------- --------- ---------
Capital Expenditures:
Medical Device and Surgical/Safety Disposables Segment:
Marquest Medical Products, Inc. $ 207 $ 66 $ 666
Scherer Healthcare, Ltd. (a) - 47 268
Waste Management Services Segment 841 626 715
Consumer Healthcare Products Segment 5 - -
Corporate 5 - 15
--------- --------- ---------
Total $ 1,058 $ 739 $ 1,664
--------- --------- ---------
--------- --------- ---------
</TABLE>
(a) The assets and businesses of Scherer Healthcare, Ltd. were sold in two
separate transactions in October 1995 and October 1996. See Note 5.
(b) Amount includes a nonrecurring charge of $2,000,000 for fiscal year 1995
relating to the write-down of two waste incinerator investments.
(c) Amount includes net assets of discontinued operations of $351,000,
$556,000, and $9,000 for fiscal years 1997, 1996, and 1995, respectively.
See Note 4.
F-13
<PAGE>
MEDICAL DEVICE AND SURGICAL/SAFETY DISPOSABLES SEGMENT
MARQUEST MEDICAL PRODUCTS, INC.
See Note 2 for discussion on the acquisition of Marquest.
Marquest manufactures and distributes four major groups of products for use in
the respiratory care, cardiopulmonary support and anesthesia markets. The
largest of these product groups is the Blood Collection Systems for Diagnostic
Testing. This group includes a broad line of Marquest disposable blood gas
syringes. Most revenues in this group are from the sales of
proprietary-designed syringes, which are marketed under the trade names Gas-Lyte
and Quik-ABG.
All of Marquest's operations and assets are located in Englewood, Colorado,
except for a small amount of inventory at a warehouse facility of one of its
European distributors. Marquest markets its products domestically (United
States and Canada) and internationally. The international markets primarily
include Europe, the Pacific Rim, and Puerto Rico. Export sales accounted for
28%, 26%, and 22% of Marquest's sales for fiscal 1997, 1996, and 1995,
respectively. Marquest had one independent distributor who accounted for 18%,
19% and 19% of its sales for fiscal 1997, 1996, and 1995, respectively.
SCHERER HEALTHCARE, LTD
The Company, through a wholly owned subsidiary, was the general partner and 65%
owner of Scherer Healthcare, Ltd. ("Scherer, Ltd."), which had been doing
business as Custom Medical Products until October 1995. On October 3, 1995,
Scherer, Ltd. sold certain of its assets to Cordis Medical Products, Inc.
("Cordis Medical"), a wholly owned subsidiary of Cordis Corporation, for
approximately $6,527,000. The assets sold to Cordis Medical were those used in
connection with Scherer, Ltd.'s business of packing and distributing medical
supplies for surgical procedures and providing nonwoven medical drapes, gowns
and accessory items to hospitals and other healthcare providers. Scherer, Ltd.
continued in the business of providing nonwoven disposable industrial apparel
and related products to the industrial safety and environment-controlled clean
room and scientific markets under the name Protective Disposable Apparel.
On October 29, 1996, Scherer, Ltd. sold substantially all of its remaining
assets to a subsidiary of Health-Pak, Inc. ("Health-Pak") for approximately
$254,000, plus the assumption by Health-Pak of $319,000 in accounts payable.
The assets acquired by Health-Pak include accounts receivable, inventory and
furniture and fixtures. See Note 5 for further discussion on the transactions
with Cordis Medical and Health-Pak.
WASTE MANAGEMENT SERVICES SEGMENT
The Company operates its medical waste management services segment through Bio
Systems Partners and Medical Waste Systems, Inc. (collectively, "Bio Systems").
The Company owns a 60% general partnership interest in Bio Systems Partners, and
Medical Waste Systems, Inc. is wholly owned by the Company. Bio Systems has
developed and implemented a system to manage and to dispose of certain
infectious waste from hospitals and medical facilities--primarily injectables
and other sharp-edged waste. Bio Systems operates in the metropolitan New York
City, Pennsylvania, New Jersey, and New England areas.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
Scherer Laboratories, Inc. ("Scherer Labs"), a 100% owned subsidiary of the
Company, markets brand name and generic over-the-counter ("OTC") drugs. The OTC
products are principally products used for treatment of colds and coughs, eye
and ear irritations and insect bites. In early fiscal 1997, Scherer Labs
discontinued the sale of its one prescription drug due to an impractical
increase in the cost to manufacture. Sales of the prescription drug were
$12,000 and $24,000 in fiscal 1996 and 1995, respectively. The loss of these
sales did not have a material effect on the Company. Scherer Labs had one
customer who accounted for 55%, 45% and 45% of its total sales for fiscal 1997,
1996, and 1995, respectively.
Scherer Labs markets its products primarily to drug and food stores, mass market
retailers, drug wholesalers, and government agencies. The majority of the sales
are through retailers in the southwest region of the United States. Accounting
and customer service functions are provided by the Company at its corporate
headquarters in Atlanta, Georgia, and sales, marketing, purchasing, and
relations with suppliers and contractors are performed in Dallas, Texas.
F-14
<PAGE>
NOTE 4. DISCONTINUED OPERATIONS
Biofor, Inc. ("Biofor"), a majority owned subsidiary of the Company which had
been operating the Company's Pharmaceutical Research and Development Segment,
was engaged in research to identify and develop new drug compounds. Biofor
utilized "artificial intelligence" computer technology (known as "MultiCASE")
which employed a system of rational drug design (known as M-CADD). This
technology was used for new drug compound development and for contracted
research and development.
Biofor focused its drug design efforts on arthritis and osteoarthritis as well
as the treatment for acute pain. Biofor's lead compound, BF-389, is an
anti-inflammatory analgesic which preliminary Phase I clinical trials indicated
was not sufficiently bioavailable when administered orally in humans. Other
delivery methods that would allow oral administration of the compound were
pursued by Biofor without success.
Since October 1990, Biofor and Ono Pharmaceutical Company, Ltd. ("Ono") had
entered into two research and collaboration agreements pursuant to which they
jointly researched compounds. Biofor provided the use of its exclusive M-CADD
software and its scientists experienced in using M-CADD, while Ono provided
funding and clinical testing of any compounds discovered. The first contract
expired in fiscal 1994 and the second expired March 1996. Substantially all of
Biofor's revenues since 1990 were derived from these contracts.
Since its inception on June 29, 1986, Biofor had expended over $20 million in
cash funding from the Company and affiliates of the Company. In July 1995,
after attempts to locate a purchaser for Biofor, Biofor ceased further drug
design efforts and concentrated solely on the Ono research contract. When the
Ono contract expired in March 1996, Biofor discontinued all operations and the
Company abandoned all operations of Biofor.
The abandonment of the operations of Biofor has been accounted for as a
discontinued operation, and accordingly, its net assets have been segregated
from continuing operations in the accompanying consolidated balance sheets.
Biofor's operating results are also segregated and reported as discontinued
operations in the accompanying consolidated statements of operations and cash
flows.
The following results of operations are attributable to the discontinued
operations of Biofor:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ - $ 772,000 $ 800,000
------------ ------------ ------------
Research and development expenditures - 1,381,000 2,717,000
Nonrecurring charges - - 2,874,000
Other costs and expenses 104,000 136,000 743,000
Provision for shutdown costs - 50,000 -
Write-down of assets to net realizable value 271,000 125,000 -
------------ ------------ ------------
375,000 1,692,000 6,334,000
------------ ------------ ------------
Loss from discontinued operations $ (375,000) $ (920,000) $ (5,534,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-15
<PAGE>
The net assets of the discontinued operations of Biofor at March 31, 1997 and
1996 are as follows:
1997 1996
---------- ----------
Assets:
Property and equipment, net of disposal
costs (a) $ 393,000 $ 664,000
---------- ----------
Total assets 393,000 664,000
---------- ----------
Liabilities:
Accounts payable and accrued expenses 17,000 33,000
Other liabilities 25,000 25,000
Estimated shutdown costs - 50,000
---------- ----------
Total liabilities 42,000 108,000
---------- ----------
Net assets $ 351,000 $ 556,000
---------- ----------
---------- ----------
(a) The remaining property and equipment of Biofor consists of land, a 30,000
square foot building owned by Biofor, and computer and laboratory
equipment.
In fiscal 1996, the Company wrote down the assets of Biofor to their
then-estimated net realizable value and recorded a provision of $50,000 for the
estimated shutdown costs. However, the operating costs of Biofor for fiscal
1997 were $104,000 higher than the provision recorded in fiscal 1996 primarily
due to the cost to maintain the patents for BF-389 in various countries and the
cost for property and liability insurance. The Company intends to sell the
remaining assets of Biofor, but it now anticipates that it may take several
years (primarily to sell the building) and accordingly, has recorded an
additional charge of $271,000 for the write-down of Biofor's assets to their net
realizable value. No income taxes or interest expense was allocated to the
discontinued operations of Biofor for the fiscal years 1997, 1996 and 1995.
NOTE 5. SALE OF ASSETS
On October 3, 1995, Scherer, Ltd. sold certain of its assets to Cordis Medical,
a wholly owned subsidiary of Cordis Corporation, for $6,527,000. The assets
sold were those used in connection with Scherer, Ltd.'s business of packing and
distributing medical supplies for surgical procedures and providing nonwoven
medical drapes, gowns and accessory items to hospitals and other healthcare
providers (the "Medical Business"). Additionally, Cordis Medical agreed to
assume all accounts payable related to the Medical Business and certain other
specifically identified liabilities, including the mortgage on Scherer, Ltd.'s
facility located in Asheville, North Carolina. Scherer, Ltd. received net
proceeds, before income taxes, of $4,922,000, and the Company recorded a pretax
gain of $2,781,000 in the third quarter of fiscal 1996. Scherer, Ltd. continued
in the business of providing nonwoven apparel for industrial uses (the
"Industrial Business") under the name Protective Disposable Apparel.
On October 29, 1996, Scherer, Ltd. sold substantially all of its remaining
assets to a subsidiary of Health-Pak, Inc. for approximately $254,000, plus the
assumption by Health-Pak of $319,000 in accounts payable. The assets acquired
by Health-Pak were those used in connection with Scherer, Ltd.'s Industrial
Business and included accounts receivable, inventory and furniture and fixtures.
Additionally, Health-Pak agreed to assume certain accounts payable and
liabilities related to the Industrial Business. The Company recorded a loss
from the transaction of $84,000 in the third quarter of fiscal 1997 primarily
due to the write-off of the remaining book value of certain intangible assets.
NOTE 6. INTANGIBLES AND COSTS IN EXCESS OF NET ASSETS ACQUIRED
Intangibles are being amortized on a straight-line basis over periods ranging
from 5 to 30 years. Amortization expense amounted to $99,000, $124,000, and
$152,000 in fiscal years 1997, 1996, and 1995, respectively. Accumulated
amortization at March 31, 1997 and 1996 was $213,000 and $317,000, respectively.
F-16
<PAGE>
The cost in excess of net assets acquired ("goodwill") is being amortized on a
straight-line basis over a period of 30 years. Amortization expense amounted to
$243,000, $380,000, and $249,000 in fiscal years 1997, 1996, and 1995,
respectively. Accumulated amortization at March 31, 1997 and 1996 was
$1,408,000 and $1,155,000, respectively.
Subsequent to an acquisition, the Company periodically evaluates whether later
events and circumstances indicate that the remaining estimated useful life of
goodwill warrants revision. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of undiscounted
net income over the remaining life of the goodwill in measuring whether the
goodwill is recoverable. As of March 31, 1997, in the opinion of the Company's
management, no revision of goodwill is required.
NOTE 7. BORROWINGS
Debt and obligations at March 31, 1997 and 1996 consisted of the following:
1997 1996
----------- ----------
Swiss debt principal and accrued
interest at 9% $ 347,000 $ 397,000
Note payable to Robert P. Scherer, Jr.,
due fiscal 2002, prime plus
1.50%, 9.75% at March 31, 1997 700,000 700,000
Note payable to bank, due through
fiscal 2000; variable interest rate,
8.375% at March 31, 1997 883,000 975,000
Obligations under line of credit
arrangement, prime plus 2.25% 125,000 -
Note payable, due through fiscal 2002,
prime rate, 8.25% at March 31, 1997 1,958,000 -
Obligations under capital leases,
due in varying installments
through fiscal 2002 1,179,000 1,290,000
Swiss notes payable due fiscal 1999 at 8% 2,851,000 2,896,000
Other long-term debt - 14,000
----------- ----------
8,043,000 6,272,000
Less current maturities (1,397,000) (981,000)
----------- ----------
Long-term debt $ 6,646,000 $ 5,291,000
----------- ----------
----------- ----------
The following is a summary of the future maturities of the obligations and notes
payable:
Year ended March 31:
1998 $ 1,397,000
1999 3,703,000
2000 1,368,000
2001 562,000
2002 1,013,000
-----------
$ 8,043,000
-----------
-----------
In June 1995, the Company terminated a $3,200,000 line of credit arrangement it
had with a bank which was collateralized by $3,200,000 of investments.
Borrowings under the line of credit were repaid with the investments that
collateralized the line.
In fiscal 1997, Marquest entered into a line of credit arrangement with Norwest
Business Credit, Inc. which is secured by its trade accounts receivable. The
maximum available under the line of credit is $2,000,000, subject to certain
restrictions. At March 31, 1997, Marquest had an available borrowing limit of
approximately $1,400,000 of which $125,000 had been borrowed.
Substantially all of the assets of Marquest (approximately $13,424,000) are
collateral on approximately $5,442,000 of the above noted debt obligations.
F-17
<PAGE>
NOTE 8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Office space, warehouse facilities, transportation equipment, and office
equipment are leased under noncancelable operating leases expiring at various
dates through 2003. Total rental expense, net of sublease income, included in
the consolidated statements of operations was approximately $820,000, $943,000,
and $1,110,000 for the years ended March 31, 1997, 1996, and 1995, respectively.
The following is a summary of future minimum lease payments required under
operating leases having noncancelable lease terms in excess of one year:
Year ended March 31:
1998 $ 919,000
1999 397,000
2000 278,000
2001 196,000
2002 172,000
Thereafter 129,000
-----------
2,091,000
Minimum sublease income (300,000)
-----------
$ 1,791,000
-----------
-----------
LEGAL PROCEEDINGS
A products liability action was filed against Marquest in California in 1990
which was defended and settled during the trial by its insurance company. Under
the insurance policy, Marquest may have been responsible for a $250,000 self
insured retention plus the cost of defense. Marquest claimed that the insurance
company mishandled the lawsuit and declined to pay. Marquest was sued by the
insurance company in District Court, Arapahoe County, Colorado in February 1994
alleging damages of up to $540,000. In May 1996, Marquest entered into a
settlement agreement with the insurance company pursuant to which Marquest paid
the insurance company $170,000.
On April 9, 1997, Tri-Anim Health Services ("THS"), Marquest's largest domestic
dealer, filed a complaint against Marquest and VSI in the Superior Court of the
State of California for the County of Los Angeles alleging that Marquest had
breached a Confidentiality Agreement between THS and Marquest. Marquest filed a
motion to move the California action to federal district court and filed a
motion to compel arbitration of all issues in Colorado. Marquest intends to
vigorously contest THS' suit against Marquest.
On March 24, 1997, Chesapeake Medical, Inc. and Chesapeake Breathing Services,
Inc. (collectively referred to as "Chesapeake"), two of Marquest's distributors,
filed a lawsuit against Marquest and VSI in the United States District Court for
the District of New Jersey, alleging that Marquest terminated the Dealer
Agreement between Marquest and Chesapeake in a commercially unreasonable manner
and that Marquest disclosed confidential information. Marquest is vigorously
contesting this matter.
Marquest believes that its position in the preceding two matters is meritorious,
but Marquest is unable to predict the outcome of either lawsuit or whether other
lawsuits will be filed by other dealers as a result of their termination. (See
Note 2)
Terumo K.K. ("Terumo"), a competitor of Marquest, filed a complaint in September
1996 in the Tokyo District Court against Chiron K.K. ("Chiron"), Marquest's
distributor of arterial blood gas samplers in Japan, alleging that the blood
samplers infringe upon a Japanese patent owned by Terumo. The complaint does
not name Marquest; however, Marquest has agreed to pay the cost of Chiron's
defense and to indemnify Chiron from Terumo's claim. Terumo is requesting an
injunction against Chiron from importing and selling blood samplers as well as
137,000,000 yen (approximately $1,100,000 as of March 31, 1997) for damages with
regard to Chiron's sale of blood samplers from January 1993 through December
1995. Terumo may increase the damages requested from 1996 to the present. Due
to the preliminary nature of this litigation, Marquest cannot predict the
Court's opinion or the impact, if any, on Marquest's market for blood gas
samplers in Japan.
F-18
<PAGE>
The Company, through a subsidiary, owns a 60% partnership interest in Bio
Systems Partners ("BSP") which operates in the Company's Waste Management
Services Segment. Pursuant to summary judgment granted in a civil action filed
in the United States District Court for the Eastern District of New York in
March 1994, the Company's subsidiary is required to purchase the minority
partner's 40% equity interest valued as of November 30, 1993. Pursuant to the
partnership agreement, the Company's subsidiary and the minority partner
performed separate appraisals of the minority interest. The separate appraisals
were not consistent; therefore, a third appraiser, selected by the partners,
has been retained to review each of the valuations and determine the final
valuation and purchase price. Recently, the District Court rejected the
minority partner's request for prejudgement interest on the final valuation.
The Company is subject to other legal proceedings and claims that arise in the
ordinary course of business. Although the outcome of such proceedings and
claims, including the cases above, cannot be determined with certainty,
management is of the opinion that their final outcome will not have a material
adverse effect on the Company's consolidated operations or financial position.
NOTE 9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has three stock option plans and a long-term incentive plan.
Options may be exercised at a rate ranging from 20% to 33% per year and expire
after eight years. At March 31, 1997, the maximum shares available under these
plans for future grants were 1,859,200. The price of options granted to date
has generally been at the fair market value of the shares on date of grant.
A summary of changes in outstanding options is as follows:
Weighted
Shares Average
Subject Price per
to Option Share
---------- -----------
Balance at March 31, 1994 199,800 $ 14.07
Options granted 241,000 10.34
Options exercised -
Options canceled and expired -
--------- ---------
Balance at March 31, 1995 440,800 12.03
Options granted -
Options exercised -
Options canceled and expired (311,000) 10.77
--------- ---------
Balance at March 31, 1996 129,800 15.05
Options granted -
Options exercised -
Options canceled and expired -
--------- ---------
Balance at March 31, 1997 129,800 $ 15.05
--------- ---------
--------- ---------
Options exercisable at March 31, 1997 113,800
---------
---------
Of the 129,800 options outstanding at March 31, 1997, 99,800 have exercise
prices between $12.50 and $14.30, with a weighted average exercise price of
$13.09 and a weighted average remaining contractual life of four years. All of
these options are exercisable as of March 31, 1997. The remaining 30,000
options have exercise prices between $20.50 and $26.88, with a weighted average
exercise price of $21.56 and a weighted average remaining contractual life of
6.7 years. Of these options, 14,000 are exercisable as of March 31, 1997.
F-19
<PAGE>
CONVERTIBLE PREFERRED STOCK
As part of the Marquest acquisition in fiscal 1994, the Company issued 43,516
shares of its 5% Convertible Preferred Stock, $.01 par value (the "Preferred
Stock") to the former holders of Marquest's defaulted Swiss bonds (see Note 2).
The Company has 2,000,000 shares of the Preferred Stock authorized. Each share
of the Preferred Stock is convertible into approximately 4.43 shares of the
Company's Common Stock. At March 31, 1997 and 1996, the Company had 23,541 and
28,885, respectively, shares of the Preferred Stock outstanding which were
convertible into approximately 104,260 and 127,917, respectively, shares of the
Company's Common Stock.
NOTE 10. RETIREMENT PLAN
A contributory 401(k) salary reduction plan (the "Plan") covers all nonunion
employees, and union employees in a few states, who are 21 years of age or older
and have been employed at least one year. Prior to April 1, 1995, an eligible
employee could elect to contribute up to 3% of their compensation and the
Company was required to make a matching contribution equal to 200% of employee
contributions for all Plan participants still employed on the last day of the
Plan year. Effective April 1, 1995, an eligible employee may elect to
contribute from 2% up to 10% of their compensation and the Company may make a
matching contribution, at its discretion, equal to a set percentage of employee
contributions for all Plan participants still employed on the last day of the
Plan year. The amount of employee contributions to which the match percentage
is applied is limited to 6% of an employee's compensation. For fiscal 1997, the
Company made a matching contribution equal to 100% of employee contributions up
to the maximum of 6% of employee compensation. Company contributions were
approximately $120,000, $108,000, and $200,000 for fiscal years 1997, 1996, and
1995, respectively.
NOTE 11. INCOME TAXES
In fiscal 1994, the Company adopted SFAS No. 109, "Accounting for Income Taxes,"
which required the use of the liability method of accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
As of March 31, the Company's net deferred tax assets consisted of the
following:
1997 1996
----------- ------------
Deferred tax assets:
Accrued expenses $ 560,000 $ 829,000
Partnership losses 601,000 577,000
Capital Losses 896,000 971,000
Net operating loss carryforwards 7,058,000 6,912,000
Other 233,000 174,000
---------- ----------
Total deferred tax assets 9,348,000 9,463,000
---------- ----------
Deferred tax liabilities:
Depreciation (512,000) (585,000)
Other - (123,000)
---------- ----------
Total deferred tax liabilities (512,000) (708,000)
---------- ----------
Valuation allowance (8,507,000) (8,426,000)
---------- ----------
Net deferred tax assets $ 329,000 $ 329,000
---------- ----------
---------- ----------
F-20
<PAGE>
A reconciliation of the income tax provision (benefit) from continuing
operations at the federal statutory rates to the actual tax provision (benefit)
from continuing operations follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------ --------------
<S> <C> <C> <C>
Computed statutory amount $ 41,000 $ 1,093,000 $ (1,644,000)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income
tax benefit 9,000 129,000 (193,000)
Minority interest in net income (loss) of
subsidiaries (136,000) 2,000 (732,000)
Amortization of goodwill 90,000 142,000 92,000
IRS settlement - 697,000 -
Net federal and state tax refunds - (150,000) (320,000)
Net change in valuation allowance 81,000 (1,172,000) 2,249,000
Other, net (79,000) (193,000) 351,000
--------- ----------- ------------
Provision (benefit) for income taxes $ 6,000 $ 548,000 $ (197,000)
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
Components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- ------------
<S> <C> <C> <C>
Current taxes:
Federal $ - $ 612,000 $ (126,000)
State 6,000 (64,000) (192,000)
--------- ----------- ------------
6,000 548,000 (318,000)
Deferred taxes - - 121,000
--------- ----------- ------------
Provision (benefit) for income taxes $ 6,000 $ 548,000 $ (197,000)
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
At March 31, 1997, the Company, excluding Marquest, has regular tax loss
carryforwards of approximately $4,670,000 expiring in varying dates through
2011. Marquest, which files a separate consolidated tax return, has tax loss
carryforwards of approximately $14,200,000 which expire at varying dates through
2011 and are limited as to their use. Marquest also has capital loss
carryforwards of approximately $2,400,000 which expire at varying dates through
1998. Due to the transactions discussed in Note 2, the future benefits
associated with the utilization of Marquest's tax loss carryforwards may be
substantially limited. Capital losses can be utilized to the extent Marquest
generates capital gains in the future.
The Company has determined, based upon its recent earnings history, that asset
valuation allowances of $8,507,000 and $8,426,000 should be established against
its deferred tax assets as of March 31, 1997 and 1996.
During fiscal 1994, Marquest received a refund of federal income taxes of
approximately $745,000 due to the carryback to prior years of losses incurred
during the temporary suspension of operations by the FDA. The Internal Revenue
Service ("IRS") completed an audit in July 1994 and determined that the losses
could not be carried back and issued an assessment to Marquest for the taxes
plus interest. In fiscal 1996, Marquest settled additional tax issues related
to audits by the IRS for fiscal years 1982-1988. Marquest recorded $697,000 of
additional taxes and interest. Marquest negotiated a repayment plan whereby
Marquest paid $400,000 in June 1995 and the remaining liability for taxes,
interest and penalties of approximately $970,000 at March 30, 1996 will be
repaid in monthly installments of $40,000. The IRS has placed a lien on
Marquest's facility in Englewood, Colorado to secure payment of the taxes.
F-21
<PAGE>
NOTE 12. RELATED-PARTY TRANSACTIONS
Prior to fiscal 1996, Scherer Capital Company L.L.C. ("Scherer Cap") and Scherer
Scientific, Ltd. ("Scherer Sci"), entities controlled by the majority
stockholder of the Company, made loans (the "Affiliate Loans") to the Company
and its subsidiaries, the proceeds of which were used for working capital and
business and equipment acquisitions. The Affiliate Loans were payable on demand
and bore interest at prime rate plus 1%. The balance of the Affiliate Loans was
approximately $2,286,000 at March 31, 1996.
In January 1997, the Company and Scherer Cap restructured the balance of
$2,128,000 on the Affiliate Loans (the Company had repaid all amounts owed to
Scherer Sci) into a promissory note (the "Original Note") to be repaid in
monthly installments of principal and interest over a five-year term with a
maturity date of December 1, 2001. The Original Note was collateralized by
2,432,251 shares of Marquest Common Stock owned by the Company, had a fixed
monthly payment of $44,437, except for the last payment, and bore interest at
prime rate plus 1%, adjusted quarterly. In connection with the dissolution of
Scherer Cap in March 1997, the Original Note was amended (the "Amended Note")
and subsequently assigned to the four adult children, who are not affiliated
with the Company, of Robert P. Scherer, Jr. who is Chairman of the Board and
Chief Executive Officer of the Company and Marquest and is the majority
stockholder of the Company. In exchange for certain considerations, $50,000 of
the principal balance was forgiven and the interest rate was reduced to prime,
adjusted quarterly, in the Amended Note. The monthly payment in the Amended
Note is fixed at $43,408, except for the last payment which will be for the
amount of the unpaid principal balance plus any unpaid accrued interest as of
December 1, 2001. The term and collateral remained the same in the Amended Note
as in the Original Note. The Company has reported the $50,000 of debt
forgiveness as an equity transaction due to the common control at the time
between the respective parties.
In March 1996, Marquest and Scherer Cap entered into a loan and security
agreement (the "Loan Agreement") from which Marquest borrowed $700,000 to repay
$700,000 that it borrowed from Scherer Cap in December 1995 for working capital
purposes. The Loan Agreement contemplated the possibility of additional
borrowings of $800,000. Borrowings under the Loan Agreement are represented by
convertible notes due April 1, 2001 (the "Scherer Cap Notes"), bear interest at
prime rate plus 1.5%, and are secured by Marquest's inventory, building, and
equipment. Pursuant to the Loan Agreement, which expires February 28, 2001, the
Scherer Cap Notes are convertible at the option of Scherer Cap into shares of
Marquest's Common Stock at a conversion price of $.70 per share. As of March
31, 1997, Marquest had borrowed $700,000 under the Loan Agreement and the
Scherer Cap Notes and the interest rate was 9.75%. Additionally, in March 1996
Scherer Cap purchased 2,061,856 shares of Marquest Common Stock for an
aggregate purchase price of $1,000,000. In connection with its dissolution in
March 1997, Scherer Cap assigned the Loan Agreement and the Scherer Cap Notes,
and transferred 1,546,392 shares of the Marquest Common Stock that it owned to
Mr. Scherer, Jr. The remaining 515,464 shares of Marquest Common Stock owned by
Scherer Cap were transferred into a voting trust for the benefit of Mr. Scherer,
Jr.'s adult children. Mr. Scherer, Jr. is entitled to vote the shares held in
the voting trust.
Effective October 1, 1995, Scherer Sci charged the Company an allocated portion
of the salary of a certain executive officer of the Company who was an employee
of Scherer Sci and not the Company. The executive officer provided the Company
with administrative and operations management. In connection with the
dissolution of Scherer Sci in March 1997, the executive officer became an
employee of the Company.
During the first quarter of fiscal 1996 and prior periods, Scherer Sci provided
to the Company and its subsidiaries administrative, accounting, management
oversight and payroll services (collectively, the "Administrative Services").
Effective July 1, 1995, Scherer Sci and the Company terminated the
Administrative Services arrangement and certain employees of Scherer Sci became
employees of the Company. As a result, the Company currently provides its own
administrative, accounting, management and payroll services.
F-22
<PAGE>
The Company was charged the following fees by the above affiliates:
1997 1996 1995
-------- -------- ---------
Management fees $ - $150,000 $ 610,000
Accounting services and
administrative management 70,000 43,000 78,000
Interest expense 245,000 539,000 544,000
-------- -------- ----------
Total $315,000 $732,000 $1,232,000
-------- -------- ----------
-------- -------- ----------
Until March 1995, Scherer Labs utilized the inventory receiving, warehousing and
distribution, customer service, and invoicing services of an entity controlled
by certain former officers of the Company and 25% owned by the majority
shareholder of the Company. The fees charged for these services were $104,000
in fiscal 1995.
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended March 31
-------------------------------------
1997 1996 1995
----------- ----------- ------------
NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Restructure of demand loan from
an affiliate into a promissory
note, net of debt forgiveness $ 2,078,000 $ - $ -
----------- ----------- -----------
----------- ----------- -----------
Conversion of notes from
Marquest to Marquest Common
Stock - $ 2,715,000 $ 2,500,000
----------- ----------- -----------
----------- ----------- -----------
Supplemental information:
Interest paid during the year $ 682,000 $ 1,395,000 $ 935,000
Income taxes paid (refunded) during
the year 451,000 471,000 (1,149,000)
F-23
<PAGE>
SCHEDULE I
SCHERER HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
MARCH 31, 1997 AND 1996
ASSETS
1997 1996
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 3,225,000 $ 1,987,000
Accounts and notes receivable 2,870,000 3,389,000
Receivable from Marquest 25,000 43,000
Inventories 170,000 542,000
Other current assets 66,000 158,000
------------- -------------
Total current assets 6,356,000 6,119,000
------------- -------------
PROPERTY AND EQUIPMENT, net 3,737,000 3,548,000
------------- -------------
INVESTMENT IN MARQUEST 6,491,000 6,882,000
GOODWILL AND OTHER INTANGIBLES, net 2,676,000 2,926,000
OTHER ASSETS 2,057,000 2,347,000
------------- -------------
$ 21,317,000 $ 21,822,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,372,000 $ 2,423,000
Payable to affiliates - 2,280,000
Current maturities of debt obligations 555,000 178,000
Other current liabilities 57,000 49,000
------------- -------------
Total current liabilities 2,984,000 4,930,000
------------- -------------
LONG-TERM DEBT, net of current maturities 2,046,000 -
OTHER LIABILITIES 325,000 718,000
STOCKHOLDERS' EQUITY 15,962,000 16,174,000
------------- -------------
$ 21,317,000 $ 21,822,000
------------- -------------
------------- -------------
The notes to consolidated financial statements are an integral part of these
condensed balance sheets.
This schedule presents Scherer Healthcare, Inc. and subsidiaries consolidated
except for its Marquest subsidiary. Marquest's assets are restricted as to
their distribution to the Company.
S-1
<PAGE>
SCHEDULE I
SCHERER HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
NET SALES $ 14,181,000 $ 19,413,000 $22,226,000
--------------- --------------- -------------
COSTS AND EXPENSES
Costs of goods sold 8,675,000 13,234,000 16,343,000
Selling, general and administrative 5,365,000 6,662,000 7,385,000
Nonrecurring charges - - 2,000,000
--------------- --------------- -------------
Total costs and expenses 14,040,000 19,896,000 25,728,000
OPERATING INCOME (LOSS) 141,000 (483,000) (3,502,000)
OTHER INCOME, net
(Loss) Gain on sale of assets (84,000) 2,781,000 -
Other, net 303,000 265,000 67,000
--------------- --------------- -------------
Total other income, net 219,000 3,046,000 67,000
--------------- --------------- -------------
Income (loss) from continuing operations before net loss from
unconsolidated subsidiary and income taxes 360,000 2,563,000 (3,435,000)
Net loss from unconsolidated subsidiary (240,000) (45,000) (1,399,000)
--------------- --------------- -------------
Income (loss) from continuing operations 120,000 2,518,000 (4,834,000)
(Provision) benefit for income taxes (6,000) 150,000 197,000
--------------- --------------- -------------
Income (loss) from continuing operations 114,000 2,668,000 (4,637,000)
Loss from discontinued operations (375,000) (920,000) (5,534,000)
--------------- --------------- -------------
NET (LOSS) INCOME $ (261,000) $ 1,748,000 $(10,171,000)
--------------- --------------- -------------
--------------- --------------- -------------
</TABLE>
The notes to consolidated financial statements are an integral part of these
condensed statements of operations.
This schedule presents Scherer Healthcare, Inc. and subsidiaries consolidated
except for its Marquest subsidiary. Marquest's assets are restricted as to
their distribution to the Company.
S-2
<PAGE>
SCHEDULE I
SCHERER HEALTHCARE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (261,000) $ 1,748,000 $(10,171,000)
Adjustments to reconcile net (loss) income to net cash
provided by (used for) operating activities:
Depreciation and amortization 985,000 1,178,000 1,295,000
Nonrecurring charges - - 2,000,000
Net loss from unconsolidated subsidiary 240,000 45,000 1,399,000
Loss (gain) on sale of assets 84,000 (2,781,000) -
Loss from discontinued operations 375,000 920,000 5,534,000
Other, net 25,000 139,000 (224,000)
Changes in operating assets and liabilities, net 555,000 652,000 611,000
--------------- --------------- -------------
Net cash provided by operating activities of
continuing operations 2,003,000 1,901,000 444,000
Net operating activities of discontinued operations (170,000) (1,564,000) (2,105,000)
--------------- --------------- -------------
Net cash provided by (used for) operating activities 1,833,000 337,000 (1,661,000)
--------------- --------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (852,000) (605,000) (1,107,000)
Proceeds from sale of assets 254,000 4,922,000 -
Investment in Marquest - - (6,000)
Decrease in notes receivable 170,000 648,000 389,000
Decrease (increase) in investments - 3,232,000 (232,000)
Other investing activities, net (59,000) 82,000 -
--------------- --------------- -------------
Net cash (used for) provided by investing activities (487,000) 8,279,000 (956,000)
--------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) borrowings 105,000 (2,019,000) (913,000)
(Repayments to) advances from affiliates (213,000) (5,321,000) 2,356,000
--------------- --------------- -------------
Net cash (used for) provided by financing activities (108,000) (7,340,000) 1,443,000
--------------- --------------- -------------
CHANGE IN CASH AND CASH EQUIVALENTS 1,238,000 1,276,000 (1,174,000)
CASH AND CASH EQUIVALENTS, beginning of year 1,987,000 711,000 1,885,000
--------------- --------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 3,225,000 $ 1,987,000 $ 711,000
--------------- --------------- -------------
--------------- --------------- -------------
</TABLE>
The notes to consolidated financial statements are an integral part of these
condensed statements of cash flows.
This schedule presents Scherer Healthcare, Inc. and subsidiaries consolidated
except for its Marquest subsidiary. Marquest's assets are restricted as to
their distributions to the Company.
S-3
<PAGE>
SCHEDULE II
SCHERER HEALTHCARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Additions
----------------------------
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------- ------------ -------------- ------------ -------------- ------------
Balance Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts Deductions of Year
- -------------------------------- ------------ -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts $ 243,000 $ 125,000 - $ 79,000(a) $ 289,000
------------ -------------- ------------ -------------- ------------
------------ -------------- ------------ -------------- ------------
1996:
Allowance for doubtful accounts $ 228,000 $ 112,000 - $ 97,000(a) $ 243,000
------------ -------------- ------------ -------------- ------------
------------ -------------- ------------ -------------- ------------
1995:
Allowance for doubtful accounts $ 216,000 $ 86,000 - $ 74,000 (a) $ 228,000
------------ -------------- ------------ -------------- ------------
------------ -------------- ------------ -------------- ------------
</TABLE>
(a) Accounts written off, net of recoveries.
S-4
<PAGE>
EXHIBIT 10.5
<PAGE>
AMENDED AND RESTATED
NON-NEGOTIABLE
NOTE
$2,078,220.00
As of January 17, 1997
Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned, SCHERER HEALTHCARE, INC., a Delaware
corporation (the "Maker"), promises to pay to the order of SCHERER CAPITAL
COMPANY L.L.C., a Delaware limited liability company ("Holder"), the principal
sum of TWO MILLION SEVENTY EIGHT THOUSAND TWO HUNDRED AND TWENTY DOLLARS
($2,078,220.00) and all interest accrued thereon, in lawful money of the United
States of America in immediately available funds on December 1, 2001 (the
"MATURITY DATE") and such other earlier dates provided in this note (the
"NOTE").
The Note is an amendment and restatement of an existing promissory note of
Maker to Holder dated as of January 17, 1997 in original principal amount of
$2,128,220.00. This Note is issued on the following terms, to which Holder
agrees, and Maker, for itself and its successors, covenants and agrees as
follows:
1. OPTIONAL AND MANDATORY PAYMENTS. This Note may be prepaid in whole or
in part at any time without premium or penalty. Maker shall make a payment to
Holder of principal and interest in the amount of Forty Five Thousand Thirty
Dollars ($45,030.00) on January 1, 1997 and Forty-Four Thousand Four Hundred
Thirty-Seven Dollars ($44,437.00) on February 1, 1997, and thereafter shall make
payments to Holder in fifty-six (56) equal consecutive monthly installments,
each in the amount of Forty-Three Thousand Four Hundred Eight Dollars
($43,408.00) each payable on the 1st day of the calendar month (each such date
being hereinafter referred to as an "INSTALLMENT DATE"), commencing February 1,
1997. The entire remaining outstanding principal balance hereunder, together
with all accrued and unpaid interest thereon, shall be due and payable in full
on the Maturity Date. Except as otherwise provided herein, each payment when
paid shall be applied first to the payment of interest accrued on the unpaid
principal and the residue thereof shall be credited on the principal.
2. INTEREST PAYABLE ON THE NOTE. The entire unpaid principal of the Note
shall bear interest from and after the date of the Note until payment or
prepayment in full of the unpaid principal amount thereof at the floating rate
of prime as published by SunTrust Bank of Atlanta. Such floating rate shall be
adjusted quarterly on the first (1st) day of the calendar quarter, commencing
April of 1997, using the prime rate in effect on the twenty-fifth (25th) day of
the preceding calendar month. The initial interest rate shall be 8.25%.
Interest on all amounts that are not paid within fifteen (15) days of the due
date (whether by acceleration, prepayment, passage of time, or otherwise) shall
bear interest for each day that such amounts are overdue at a rate of fourteen
percent (14%) per annum (the "Default Rate).
3. CHOICE OF LAW; COMPUTATIONS; BUSINESS DAYS. This Note has been
executed and delivered in Atlanta, Georgia and shall be construed in accordance
with and governed by the internal laws of the State of Georgia without
references to principles of conflict of laws. Whenever any payment is to occur
under this Note on a date which is not a Business Day, such payment shall be
required to occur on the next succeeding Business Day and such extension shall
be included in the computation of interest in connection with any such payment.
For purposes of this Section, "BUSINESS DAY" shall mean any day other than a
Saturday, Sunday, or other day on which commercial banks in Atlanta, Georgia,
are authorized or required by law to close.
4. DEFENSES. The right to plead any and all statutes of limitations as a
defense to demand hereunder is hereby waived to the extent permitted by law.
The Maker, for itself and its successors and assigns, waives presentment,
demand, protest and notice thereof or of dishonor, and waives the right to be
released by reason of any extension of time or change in the terms of payment.
5. EVENTS OF DEFAULT. If any one of the following events occurs and is
continuing:
(a) Maker fails to make any payment of principal and interest on this
Note when due, which failure shall continue without cure for thirty (30)
days after written notice of such failure has been delivered to Maker; or
<PAGE>
(b) in the event of any sale of substantially all of Maker's assets,
the person or other entity acquiring substantially all of the assets of
Maker fails to either (i) deliver to Holder, prior to the consummation of
such asset purchase a certificate, signed by its Chief Executive Officer,
agreeing to assume, upon the effectiveness of such consummation, the
obligations of Maker under this Note; or (ii) pay to Holder the entire
amount of the unpaid principal and interest due and owing under the Note;
or
(c) Maker, pursuant to or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case, (ii) consents to the entry of an order for
relief against it in an involuntary case, (iii) consents to the appointment
of a Custodian of it or for all or substantially all of its property (iv)
makes a general assignment for the benefit of its creditors, or (v)
generally is unable to pay its debts as the same become due; or
(d) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that: (i) is for relief against the Maker in an
involuntary case, (ii) appoints a Custodian of the Maker for all or
substantially all of its property, or (iii) orders the liquidation of the
Maker, and the order or decree referred to in clauses (i) through (iii)
hereof remains undismissed or unstayed for a period of sixty (60) days; or
(e) An Event of Default shall occur under the Amended and Restated
Stock Pledge Agreement, of even date herewith (the "Stock Pledge
Agreement"), as provided in Section 4 of such Agreement;
then, and in any such event, the unpaid principal amount of this Note, together
with accrued but unpaid interest thereon, shall become immediately due and
payable, without presentment, diligence, demand, protest or other notice of any
kind. The term "BANKRUPTCY LAW" means Title 11, United States Code or any
similar federal or state law for the relief of debtors. The term "CUSTODIAN"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law. The term "sale of substantially all of Maker's assets" shall
mean the sale of assets from which Maker derives 90 percent or more of its total
revenues.
Nothing contained herein shall prevent Maker from participating in any
merger, consolidation or other business combination (whether or not Maker is the
surviving entity) so long as the surviving entity in such merger, consolidation
or business combination either (i) expressly assumes all of the obligations of
Maker contained hereunder, including, without limitation, the obligation to
deliver the certificate referred to in clause (b) of the preceding paragraph; or
(ii) pays to Holder the entire amount of the unpaid principal and interest due
and owing under the Note.
6. SUBORDINATION.
(a) Certain defined terms. For purposes hereof:
(i) "Senior Indebtedness" means (1) all future and
past indebtedness, liabilities and obligations of Maker (A) for
money borrowed, including, without limitation, all principal,
interest (including, without limitation, any interest accruing
after the commencement of any case, proceeding or other action
relating to the bankruptcy, insolvency or reorganization of
Maker), premium upon prepayment and related fees and expenses,
and (B) in respect of any guarantees of the indebtedness,
liabilities and obligations described in the preceding clause
(A); and (2) all future and past deferrals, renewals, extensions
and refundings of, or amendments, modifications or supplements
to, any of the foregoing; PROVIDED, HOWEVER, that the term
"Senior Indebtedness" shall not include any indebtedness,
liabilities or obligations of Maker which are owed to any Related
Party. For purposes hereof, the term "Related Party" means any
trade creditor or wholly-owned subsidiary of Maker, or any
corporation, partnership or other person or entity controlling,
or under common control with Maker or any officer or director of
Maker.
(ii) "Subordinated Indebtedness" means, following the
occurrence of an Event of Default and foreclosure on the
collateral pledged pursuant to the Stock Pledge Agreement, (1)
the outstanding balance of any deficiency on the indebtedness,
liabilities and obligations of Maker arising under, or evidenced
by, this Note and the Stock
<PAGE>
Pledge Agreement, whether for the payment of principal, interest,
premium or otherwise, and including, without limitation, all
obligations of Maker (A) to pay interest accruing on the Note
after the commencement of any case, proceeding or other action
relating to the bankruptcy, insolvency or reorganization of maker
or (B) to make any prepayments under the Note or to make any
payments on account of any repurchase or other acquisition of the
Note; and (ii) all deferrals, renewals, extensions and refundings
of, or amendments, modification or supplements to, any of the
foregoing.
(b) Subordination. Following the occurrence of an Event of
Default and foreclosure of the collateral pledged pursuant to the
Stock Pledge Agreement, the Subordinated Indebtedness shall at all
times be wholly subordinate and junior to the Senior Indebtedness.
7. STOCK PLEDGE AGREEMENT. The indebtedness evidenced by this Note and
the obligations created herein are secured by the Stock Pledge Agreement, the
terms and conditions of which are hereby incorporated herein by this reference.
8. ATTORNEYS FEES; REMEDIES. If this Note is placed in the hands of an
attorney for collection, or if collected by suit or through probate, bankruptcy,
or other court proceedings, the undersigned agrees to pay Holder reasonable
costs of such collection, including reasonable attorney's fees. No delay or
failure by Holder in the exercise of any right or remedy shall constitute a
waiver thereof, and no single or partial exercise by the holder hereof of any
right or remedy shall preclude other or future exercise thereof or the exercise
or any other right or remedy.
9. USURY LIMITATION. Notwithstanding anything herein to the contrary, in
no event shall any interest be payable under this Note which exceeds the maximum
amount permitted by applicable law.
10. EFFECTIVE DATE. The effective date of this Note shall be December 1,
1996.
11. ASSIGNABILITY. This Note shall not be assigned, pledged or otherwise
transferred by the Holder hereof except (i) to Robert P. Scherer, III, Mark C.
Scherer, Stephen M. Scherer, Leslie Scherer Reeves or to any Holder's father,
mother, sisters, brothers, spouse or children or (ii) with the prior written
consent of Maker.
12. NEGOTIABILITY. This Note does not constitute a negotiable instrument
governed by O.C.G.A. Section 11-3-101 ET. SEQ.
[13. TIME. Time is of the essence of this Note.
14. INTENT OF PARTIES. Except as expressly modified and amended as herein
provided, the Note and the Pledge Agreement are and shall remain in full force
and effect. This Agreement is not intended to be nor shall it constitute a
novation of the Pledge Agreement or the indebtedness secured thereby. Maker
hereby ratifies, confirms and approves the Note and the Pledge Agreement as
modified herein, and agrees that the same constitute valid and binding
agreements of Maker, enforceable by Holder in accordance with their terms.
IN WITNESS WHEREOF, this Note has been duly executed and the Maker has
affixed its seal hereto, all of the day and year first set forth above.
"Maker"
SCHERER HEALTHCARE, INC.
By: /S/ROBERT P. SCHERER, JR.
---------------------------
Name: Robert P. Scherer, Jr.
Title: Chairman and CEO
[(Corporate Seal)]
<PAGE>
EXHIBIT 21
<PAGE>
Exhibit 21. SUBSIDIARIES OF SCHERER HEALTHCARE, INC.
1. Medical Waste Systems, Inc. Subsidiary
DBA Bio Systems I.D.#22-2853378
380 Constance Drive
Warminster, Pennsylvania 18974
(215) 672-8888
2. ASH Enterprises, Inc. Subsidiary
2859 Paces Ferry Road, Suite 300 I.D.# 58-1728029
Atlanta, Georgia 30339
(770) 333-0066
3. Bio Systems Partners Majority Owned Partnership
DBA Bio Systems I.D.# 58-1822608
210 Sherwood Avenue
Farmingdale, New York 11735
(516) 756-9433
4. Biofor, Inc. Subsidiary
P.O. Box 629 I.D.# 58-2105818
Waverly, Pennsylvania 18471
(717) 586-1333
5. BioWaste Management Corp. Subsidiary
2859 Paces Ferry Road, Suite 300 I.D.# 11-2872389
I.D.# 11-2872389
Atlanta, Georgia 30339
(770) 333-0066
6. BioWaste Systems, Inc. Subsidiary
2859 Paces Ferry Road, Suite 300 I.D.# 58-1803613
Atlanta, Georgia 30339
(770) 333-0066
7. Scherer Laboratories, Inc. Subsidiary
2859 Paces Ferry Road, Suite 300 I.D.# 75-0270890
Atlanta, Georgia 30339
(770) 333-0066
8. Marquest Medical Products, Inc. Majority Owned Subsidiary
11039 E. Lansing Circle I.D. # 84-0785259
Englewood, Colorado 80112
(303) 790-4835
<PAGE>
EXHIBIT 25
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Robert P. Scherer, Jr. and Amy M. Murphy, and each of them, his true
and lawful attorneys-in-fact and agents, with full power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K of Scherer Healthcare, Inc. for the fiscal year ended
March 31, 1997, and any and all amendments thereto, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc., granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
This 11th day of June, 1997.
/s/ William J. Thompson
--------------------------
William J. Thompson
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Robert P. Scherer, Jr. and Amy M. Murphy, and each of them, his true
and lawful attorneys-in-fact and agents, with full power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K of Scherer Healthcare, Inc. for the fiscal year ended
March 31, 1997, and any and all amendments thereto, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc., granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
This 11th day of June, 1997.
/s/ Stephen Lukas, Sr.
-----------------------
Stephen Lukas, Sr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Robert P. Scherer, Jr. and Amy M. Murphy, and each of them, his true
and lawful attorneys-in-fact and agents, with full power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K of Scherer Healthcare, Inc. for the fiscal year ended
March 31, 1997, and any and all amendments thereto, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc., granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
This 11th day of June, 1997.
/s/ Kenneth H. Robertson
-------------------------
Kenneth H. Robertson.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 3,237
<SECURITIES> 0
<RECEIVABLES> 6,599
<ALLOWANCES> (289)
<INVENTORY> 3,453
<CURRENT-ASSETS> 13,218
<PP&E> 16,792
<DEPRECIATION> (6,586)
<TOTAL-ASSETS> 32,194
<CURRENT-LIABILITIES> 7,369
<BONDS> 6,646
0
0
<COMMON> 47
<OTHER-SE> 15,916
<TOTAL-LIABILITY-AND-EQUITY> 32,194
<SALES> 36,226
<TOTAL-REVENUES> 36,226
<CGS> 23,660
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<DISCONTINUED> (375)
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<CHANGES> 0
<NET-INCOME> (261)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
