<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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)
(770) 333-0066
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares of each of the issuer's classes of Common
Stock, as of the latest practicable date:
Class Outstanding as of February 3, 1998
---------------------------------- --------------------------------------
Common Stock, $0.01 par value 4,314,277
<PAGE>
SCHERER HEALTHCARE, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended December 31, 1997
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
- ------ --------------------------------- -------------
<C> <S> <C>
1 Financial Statements:
Condensed Consolidated Balance
Sheets as of December 31, 1997
and March 31, 1997............................. 3
Condensed Consolidated Statements
of Operations for the Three and Nine Months
Ended December 31, 1997 and 1996............... 5
Condensed Consolidated Statements
of Cash Flows for the Nine Months
Ended December 31, 1997 and 1996............... 6
Notes to Condensed Consolidated
Financial Statements........................... 7
2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................. 11
PART II. OTHER INFORMATION
1 Legal Proceedings.............................. 14
6 Exhibits and Reports on Form 8-K............... 14
SIGNATURES..................................... 15
Index to Exhibits.............................. 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................................... $ 5,475,000 $ 3,237,000
Accounts receivable, less allowance for doubtful
accounts of $181,000 at December 31, 1997 and
$171,000 at March 31, 1997................................. 3,288,000 2,694,000
Current maturities of notes receivable....................... 142,000 176,000
Inventories.................................................. 175,000 170,000
Prepaid and other............................................ 81,000 66,000
----------------- --------------
Total current assets...................................... 9,161,000 6,343,000
----------------- --------------
PROPERTY AND EQUIPMENT......................................... 8,536,000 7,709,000
Less accumulated depreciation................................ (4,497,000) (4,060,000)
----------------- --------------
Net property and equipment................................... 4,039,000 3,649,000
----------------- --------------
OTHER ASSETS
Cost in excess of net assets acquired, net................... 2,355,000 2,435,000
Investments, at market value................................. 6,248,000 --
Other investments, at cost................................... 650,000 650,000
Notes receivable, less current portion....................... 271,000 371,000
Intangibles.................................................. 1,418,000 232,000
Deferred income taxes........................................ 329,000 329,000
Other........................................................ 285,000 289,000
Net assets of discontinued operations........................ 240,000 7,003,000
----------------- --------------
Total other assets........................................ 11,796,000 11,309,000
----------------- --------------
TOTAL ASSETS................................................... $ 24,996,000 $ 21,301,000
----------------- --------------
----------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable............................ $ 706,000 $ 977,000
Accrued expenses............................ 1,295,000 1,378,000
Current maturities of debt obligations...... 265,000 555,000
Income taxes payable........................ 90,000 57,000
Other....................................... 78,000 --
----------- ------------
Total current liabilities.................. 2,434,000 2,967,000
----------- ------------
LONG-TERM DEBT, net of current maturities.... 530,000 2,046,000
----------- ------------
OTHER LIABILITIES............................ 433,000 325,000
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock--$.01 par value,
2,000,000 shares authorized; 23,541 shares
issued and outstanding -- --
Common stock--$.01 par value, 12,000,000
shares authorized; 4,693,585 shares issued;
4,314,223 shares outstanding.............. 47,000 47,000
Capital in excess of par value.............. 22,366,000 22,366,000
Unrealized loss on investments.............. (53,000) --
Retained earnings (accumulated deficit)..... 2,272,000 (3,417,000)
Less treasury stock, at cost................ (3,033,000) (3,033,000)
----------- ------------
Total stockholders' equity................. 21,599,000 15,963,000
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY.... $24,996,000 $21,301,000
----------- ------------
----------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------ ------------ ------------- ------------
NET SALES............................................... $ 3,398,000 $ 3,190,000 $ 10,314,000 $ 9,818,000
COSTS AND EXPENSES
Cost of goods sold.................................... 2,010,000 1,885,000 5,981,000 5,670,000
Selling, general, and administrative.................. 1,140,000 1,087,000 3,533,000 3,603,000
------------ ------------ ------------- ------------
Total costs and expenses............................ 3,150,000 2,972,000 9,514,000 9,273,000
------------ ------------ ------------- ------------
OPERATING INCOME........................................ 248,000 218,000 800,000 545,000
------------ ------------ ------------- ------------
OTHER INCOME (EXPENSE)
Interest income....................................... 174,000 42,000 354,000 117,000
Interest expense...................................... (7,000) (69,000) (74,000) (178,000)
Other, net............................................ 20,000 -- 33,000 --
------------ ------------ ------------- ------------
Total other income (expense)........................ 187,000 (27,000) 313,000 (61,000)
------------ ------------ ------------- ------------
Income from continuing operations before income taxes... 435,000 191,000 1,113,000 484,000
Benefit (provision) for income taxes.................... (1,000) 11,000 4,000 (6,000)
------------ ------------ ------------- ------------
Income from continuing operations....................... 434,000 202,000 1,117,000 478,000
DISCONTINUED OPERATIONS
Loss from operations of discontinued medical device
and surgical/safety disposables segment, net of
income taxes of $0................................... -- (345,000) (320,000) (556,000)
Gain from disposal of medical device and surgical/
safety disposables segment, net of income taxes of
$137,000............................................. -- -- 4,892,000 --
------------ ------------ ------------- ------------
NET INCOME (LOSS)....................................... $ 434,000 $ (143,000) $ 5,689,000 $ (78,000)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Basic income (loss) per common share
Income from continuing operations..................... $ 0.10 $ 0.05 $ 0.26 $ 0.11
Discontinued operations:
Loss from discontinued operations................... -- (0.08) (0.07) (0.13)
Gain from disposal of segment....................... -- -- 1.13 --
------------ ------------ ------------- ------------
Net income (loss)..................................... $ 0.10 $ (0.03) $ 1.32 $ (0.02)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Weighted average common shares outstanding.............. 4,314,223 4,311,206 4,314,223 4,298,139
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Diluted income (loss) per common share
Income from continuing operations..................... $ 0.09 $ 0.05 $ 0.24 $ 0.11
Discontinued operations:
Loss from discontinued operations................... -- (0.08) (0.07) (0.13)
Gain from disposal of segment....................... -- -- 1.06 --
------------ ------------ ------------- ------------
Net income (loss)..................................... $ 0.09 $ (0.03) $ 1.23 $ (0.02)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Weighted average common shares outstanding.............. 4,698,483 4,418,483 4,625,174 4,418,483
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................... $ 5,689,000 $ (78,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization..................................................... 539,000 549,000
Gain from disposal of segment..................................................... (4,892,000) --
Loss from discontinued operations................................................. 320,000 556,000
Other noncash charges and credits, net............................................ 10,000 23,000
Changes in operating assets and liabilities:
Accounts receivable, net.......................................................... (603,000) (46,000)
Inventories....................................................................... (5,000) (68,000)
Prepaid and other................................................................. (15,000) 16,000
Accounts payable and accrued expenses............................................. (320,000) (258,000)
Other liabilities................................................................. 186,000 (17,000)
------------ ------------
Net cash provided by operating activities of continuing operations.................. 909,000 677,000
------------ ------------
Net operating activities of discontinued operations................................. 1,104,000 (800,000)
------------ ------------
Net cash provided by (used for) operating activities................................ 2,013,000 (123,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net............................................ (827,000) (768,000)
Net proceeds from disposal of segment, net of transaction costs..................... 10,273,000 --
Purchases of long-term investments.................................................. (6,303,000) --
Decrease in notes receivable........................................................ 135,000 126,000
Purchase of minority partnership interest........................................... (1,214,000) --
Other investing activities, net..................................................... 11,000 (16,000)
Net investing activities of discontinued operations................................. 52,000 187,000
------------ ------------
Net cash provided by (used for) investing activities.................................. 2,127,000 (471,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayment of) proceeds from borrowings......................................... (1,806,000) 239,000
Net repayments to affiliated companies.............................................. -- (136,000)
Net financing activities of discontinued operations................................. (96,000) (283,000)
------------ ------------
Net cash used for financing activities................................................ (1,902,000) (180,000)
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS................................................... 2,238,000 (774,000)
CASH AND CASH EQUIVALENTS, beginning of period........................................ 3,237,000 3,622,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period.............................................. $ 5,475,000 $ 2,848,000
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
The accompanying condensed consolidated financial statements of Scherer
Healthcare, Inc. and its subsidiaries (the "Company") include all adjustments
that, in the opinion of management, are necessary for a fair presentation of
the results for the period indicated. Quarterly results of operations are not
necessarily indicative of annual results. These statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997.
Certain fiscal 1997 amounts have been reclassified to conform with the fiscal
1998 presentation.
For the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 simplifies the computation of earnings per share ("EPS") and
increases comparability to international standards. Under SFAS No. 128,
primary EPS is replaced by "Basic" EPS, which excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
"Diluted" EPS, which is computed similarly to fully diluted EPS, reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
The Company determines the appropriate classification of its marketable
securities at the time of purchase and reevaluates such designation at each
balance sheet date. At December 31, 1997, the Company's marketable securities
were categorized as available-for-sale securities, as defined by SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
were carried at fair market value, with unrealized holding gains and losses
reported as a separate component of shareholders' equity (see Note 7).
NOTE 2.
The components of inventory at December 31, 1997 and March 31, 1997 consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
Finished products.................................. $ 16,000 $ 29,000
Containers, packaging, and raw materials........... 159,000 141,000
----------------- --------------
$ 175,000 $ 170,000
----------------- --------------
----------------- --------------
</TABLE>
Inventories are stated at the lower of net realizable value or cost primarily
using the first-in, first-out ("FIFO") method.
NOTE 3.
Debt and obligations under capital leases at December 31, 1997 and March 31,
1997 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
Obligations under capital leases, due in varying
installments through fiscal 2002................. $ 795,000 $ 643,000
Note payable, due through fiscal 2002, prime
rate (a)......................................... -- 1,958,000
----------------- --------------
795,000 2,601,000
Less current maturities............................ (265,000) (555,000)
----------------- --------------
Long-term debt..................................... $ 530,000 $ 2,046,000
----------------- --------------
----------------- --------------
</TABLE>
(a) The note was payable to the four adult children of Robert P. Scherer, Jr.
who is the Chairman of the Board and Chief Executive Officer of the Company.
7
<PAGE>
NOTE 4.
Prior to fiscal 1996, Scherer Capital Company L.L.C. ("Scherer Cap") and
Scherer Scientific, Ltd. ("Scherer Sci"), entities controlled by the majority
stockholder of the Company, made loans (the "Affiliate Loans") to the Company
and its subsidiaries, the proceeds of which were used for working capital and
business and equipment acquisitions. The Affiliate Loans were payable on
demand and bore interest at prime rate plus 1%.
In January 1997, the Company and Scherer Cap restructured the balance of
$2,128,000 on the Affiliate Loans (the Company had repaid all amounts owed to
Scherer Sci) into a promissory note (the "Original Note") to be repaid in
monthly installments of principal and interest over a five-year term with a
maturity date of December 1, 2001. The Original Note was collateralized by
2,432,251 shares of Marquest Common Stock that were owned by the Company, had
a fixed monthly payment of $44,437, except for the last payment, and bore
interest at prime rate plus 1%, adjusted quarterly. In connection with the
dissolution of Scherer Cap in March 1997, the Original Note was amended (the
"Amended Note") and subsequently assigned to the four adult children, who are
not affiliated with the Company, of Robert P. Scherer, Jr. who is Chairman of
the Board, Chief Executive Officer, and the majority stockholder of the
Company. In exchange for certain considerations, $50,000 of the principal
balance was forgiven and the interest rate was reduced to prime rate,
adjusted quarterly. The monthly payment under the Amended Note was fixed at
$43,408, except for the last payment which would have been for the amount of
the unpaid principal balance plus any unpaid accrued interest as of December
1, 2001. The term and collateral remained the same under the Amended Note as
in the Original Note.
On July 28, 1997, the Company used a portion of the proceeds from the
Marquest Transactions (see Note 5) to pay in full the outstanding principal
balance of approximately $1,867,000 and the associated accrued interest of
approximately $12,000 on the Amended Note. Accordingly, the Amended Note was
canceled and the shares of Marquest Common Stock pledged as collateral under
the Amended Note were released back to the Company.
NOTE 5.
Effective July 28, 1997, the Company and Marquest Medical Products, Inc.
("Marquest"), which was a majority owned subsidiary of the Company, completed
the previously announced transactions with Vital Signs, Inc. ("VSI").
Pursuant to the terms of an Agreement and Plan of Merger dated as of March
14, 1997 (the "Merger Agreement"), between Marquest, VSI, and VSI Acquisition
Corporation, a wholly-owned subsidiary of VSI, VSI acquired Marquest upon the
merger (the "Merger") of VSI Acquisition Corporation with and into Marquest.
At the effective time of the Merger, all of the issued and outstanding shares
of Marquest Common Stock were converted into the right to receive $0.797 in
cash per share and Marquest became a wholly-owned subsidiary of VSI. As a
result, the Company received approximately $5,747,000 in cash in exchange for
its 7,211,192 shares of Marquest Common Stock and approximately $309,000 in
cash through the exercise of warrants to purchase Marquest Common Stock and
the conversion of these shares into cash pursuant to the Merger.
Additionally, pursuant to the terms of the Scherer Healthcare Inducement
Agreement dated as of March 14, 1997 (the "Inducement Agreement"), between
the Company, Marquest, and VSI, VSI purchased from the Company certain assets
of the Company leased or licensed by the Company to Marquest and used by
Marquest in the manufacture and sale of arterial blood gas products (the "ABG
Assets") and the Company entered into a covenant not to compete with VSI in
the manufacture and sale of arterial blood gas products for a period of three
years. VSI paid the Company an aggregate of $5,860,000 in cash for the ABG
Assets and the covenant not to compete. The Company recorded gains, net of
income taxes and transaction costs, of approximately $3,552,000 and
$1,340,000 from the Merger and the sale of the ABG Assets, respectively. The
aggregate net gain of $4,892,000 from the Merger and the sale of the ABG
Assets has been reported as "Gain from disposal of medical device and
surgical/safety disposables segment" under discontinued operations (see Note
6) in the accompanying Condensed Consolidated Statements of Operations. The
Merger, the sale of the ABG Assets by the Company to VSI, and the execution
of the covenant not to compete are collectively referred to as the "Marquest
Transactions".
NOTE 6.
Marquest, which is a manufacturer and international distributor of specialty
cardiopulmonary support, respiratory and anesthesia disposable devices, has
been included in the Company's consolidated financial statements since the
first quarter of fiscal 1994 when the Company entered into transactions to
acquire a majority interest in Marquest and to purchase from Marquest the ABG
Assets. Marquest's operations were included in the Company's Medical Device
and Surgical/Safety Disposables Segment along with the operations of Scherer
Healthcare, Ltd. ("Scherer Ltd."), a limited partnership that was 65% owned
by the Company and whose assets and businesses were sold in two separate
transactions in October 1995 and October 1996. Effective with the Marquest
Transactions (see Note 5), the operations of the Medical Device and
Surgical/Safety Disposables Segment have been accounted for as a discontinued
segment, and accordingly, the operations of Marquest and Scherer Ltd. have
been segregated and reported as discontinued operations in the accompanying
consolidated financial statements.
8
<PAGE>
The following results of operations are attributable to the discontinued
operations of the Medical Device and Surgical/Safety Disposables Segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- ---------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
----- ------------ ------------ -------------
Net Sales...................................................... $ -- $ 5,060,000 $ 6,623,000 $ 16,909,000
----- ------------ ------------ -------------
Cost of goods sold............................................. -- 3,282,000 4,519,000 11,905,000
Selling, general, and administrative........................... -- 1,837,000 2,106,000 5,136,000
Research and development expenditures.......................... -- 97,000 90,000 195,000
Other costs and expenses, net.................................. -- 344,000 567,000 619,000
----- ------------ ------------ -------------
Total costs and expenses..................................... -- 5,560,000 7,282,000 17,855,000
----- ------------ ------------ -------------
Loss before minority interest.................................. -- (500,000) (659,000) (946,000)
Minority interest in net loss of subsidiary and partnership.... -- 155,000 339,000 390,000
----- ------------ ------------ -------------
Loss from discontinued operations.............................. $ -- $ (345,000) $ (320,000) $ (556,000)
----- ------------ ------------ -------------
----- ------------ ------------ -------------
</TABLE>
The net assets (liabilities) of the discontinued operations of the
Medical Device and Surgical/Safety Disposables Segment at December 31, 1997
and March 31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
ASSETS:
Accounts receivable, net.................................................... $ -- $ 3,393,000
Inventory................................................................... -- 3,282,000
Prepaid and other........................................................... -- 152,000
Notes receivable............................................................ -- 47,000
Property and equipment, net................................................. -- 6,558,000
Cost in excess of net assets acquired, net.................................. -- 3,969,000
Other assets................................................................ -- 144,000
-------- --------------
Total assets.............................................................. -- 17,545,000
-------- --------------
LIABILITIES:
Accounts payable and accrued expenses....................................... 47,000 3,560,000
Income taxes payable........................................................ 137,000 --
Current maturities of debt obligations...................................... -- 842,000
Long-term debt, net of current maturities................................... -- 4,600,000
Minority shareholder interest............................................... -- 1,891,000
-------- --------------
Total liabilities......................................................... 184,000 10,893,000
-------- --------------
Net assets (liabilities) of the Medical Device and Surgical/Safety Disposables
Segment..................................................................... (184,000) 6,652,000
Net assets of Biofor, Inc. (a)................................................ 424,000 351,000
-------- --------------
Net assets of discontinued operations......................................... $ 240,000 $ 7,003,000
-------- --------------
-------- --------------
</TABLE>
(a) Represents the net assets of Biofor, Inc. ("Biofor"), a majority owned
subsidiary of the Company which operated the Company's Pharmaceutical
Research and Development Segment and whose operations were discontinued in
fiscal 1996. The property and equipment included in Biofor's net assets of
discontinued operations consists of land, a 30,000 square foot building
owned by Biofor, and computer and laboratory equipment.
9
<PAGE>
NOTE 7.
During the third quarter of fiscal 1998, the Company invested a portion of
the proceeds from the Marquest Transactions in high-grade marketable
securities. The Company has classified its marketable securities, which
consist of municipal bonds, corporate bonds, and preferred stocks, as
available-for-sale securities as defined by SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." These marketable
securities are being carried at fair market value and unrealized holding
gains and losses have been reported as a separate component of shareholders'
equity.
The amortized cost and fair market value of the Company's marketable
securities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NET UNREALIZED FAIR MARKET
AMORTIZED COST LOSS VALUE
-------------- ----------------- ----------------
<S> <C> <C> <C>
Municipal bonds............................................. $ 4,784,000 $ (14,000) $ 4,770,000
Corporate bonds............................................. 1,219,000 (27,000) 1,192,000
Preferred stocks............................................ 298,000 (12,000) 286,000
-------------- -------- ----------------
Total..................................................... $ 6,301,000 $ (53,000) $ 6,248,000
-------------- -------- ----------------
-------------- -------- ----------------
</TABLE>
The municipal bonds mature after three years through thirty years and the
corporate bonds mature after eleven years through twenty-seven years.
NOTE 8.
The Company, through a wholly-owned subsidiary, owned a 60% partnership
interest in Bio Systems Partners ("BSP") which operates in the Company's
Waste Management Services Segment. Pursuant to a summary judgment described
in Part II, Item 1 below, the Company's subsidiary was required to purchase
the minority partner's 40% partnership interest in BSP valued as of November
30, 1993. After separate appraisals performed by the partners were not
consistent, a third independent appraiser was retained by the partners to
review each of the previous valuations and to determine the purchase price
for the minority interest. In early October 1997, the independent appraiser
informed the Company and the minority partner of its determination that the
fair market value of the 40% minority interest in BSP was $1,100,000 as of
November 30, 1993. Effective October 28, 1997, the Company's subsidiary
purchased the minority partner's 40% partnership interest in BSP for a
purchase price of $1,100,000. As a result, the Company, through its
subsidiary, now owns 100% of BSP.
At December 31, 1997, the purchase price of $1,100,000 for the 40%
partnership interest in BSP and the associated transaction costs of $114,000
have been reported as intangibles and are being amortized over 30 years.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information,
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, which represent the Company's expectations or beliefs,
including, but not limited to, statements concerning sales of the Company'
products or services and operating income. The Company cautions that various
factors, including, without limitation, the factors discussed below and in the
Company's 1997 Annual Report on Form 10-K as well as general economic conditions
and industry trends, a dependence upon and/or loss of key vendors or customers,
the loss of strategic product shipping relationships, customer demand, product
availability, competition (including pricing and availability), concentrations
of credit risks, distribution efficiencies, capacity constraints and
technological difficulties could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements. New factors
emerge from time to time, and it is not possible for management to predict all
of such factors.
RESULTS OF OPERATIONS
Net Sales and Operating Income (Loss).
- --------------------------------------
The following table sets forth, for the periods indicated, the net sales and
operating income (loss) for each segment of the business of the Company and its
subsidiaries:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
NET SALES:
Waste Management Services Segment..................... $ 3,139,000 $ 2,954,000 $ 9,300,000 $ 8,832,000
Consumer Healthcare Products Segment.................. 259,000 236,000 1,014,000 986,000
------------ ------------ ------------- ------------
Company Totals...................................... $ 3,398,000 $ 3,190,000 $ 10,314,000 $ 9,818,000
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
OPERATING INCOME (LOSS):
Waste Management Services Segment..................... $ 371,000 $ 304,000 $ 1,179,000 $ 868,000
Consumer Healthcare Products Segment.................. 87,000 61,000 425,000 369,000
Corporate............................................. (210,000) (147,000) (804,000) (692,000)
------------ ------------ ------------- ------------
Company Totals...................................... $ 248,000 $ 218,000 $ 800,000 $ 545,000
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</TABLE>
The Company's net sales increased by approximately 7% to $3,398,000 for the
third quarter of fiscal 1998 from $3,190,000 for the third quarter of fiscal
1997. The Company reported operating income of $248,000 for the third quarter of
fiscal 1998 compared to operating income of $218,000 during the same period in
fiscal 1997, an increase of 14%. The Company's cost of goods sold were 59% of
net sales in the third quarter of fiscal 1998, which was unchanged compared to
the third quarter of fiscal 1997. Additionally, selling, general, and
administrative expenses remained flat at 34% of net sales in both the third
quarter of fiscal 1998 and the third quarter of fiscal 1997.
For the first nine months of fiscal 1998, the Company's net sales increased
by 5% to $10,314,000 from $9,818,000 during the first nine months of fiscal
1997. The Company's operating income increased to $800,000 for the nine months
ended December 31, 1997 from $545,000 for the nine months ended December 31,
1996, an increase of 47%. The Company's cost of goods sold were flat at 58% of
net sales for the nine months ended December 31, 1997 and 1996. Selling, general
and administrative expenses decreased to 34% of net sales for the nine months
ended December 31, 1997 from 37% for the nine months ended December 31, 1996.
The primary reasons for these changes are discussed below.
The results of operations of the Company are dependent upon the results of
operations of each of its subsidiaries operating in the individual business
segments. Set forth below is a discussion of the results of operations of each
of these segments.
11
<PAGE>
WASTE MANAGEMENT SERVICES SEGMENT
Net sales in the Company's Waste Management Services Segment, which operates
through Bio Systems Partners and Medical Waste Systems, Inc. (collectively "Bio
Systems"), increased approximately 6% to $3,139,000 in the third quarter of
fiscal 1998 from $2,954,000 during the third quarter of fiscal 1997. Bio
Systems' net sales increased 5% to $9,300,000 for the nine months ended December
31, 1997 from $8,832,000 during the same period in fiscal 1997. The sales growth
is primarily due to securing new hospital contracts for Bio Systems' core
business of providing "sharps" (including sharp-edged waste such as scalpels,
syringes, and needles) disposal services which utilize cost effective reusable
containers. Due to cost pressures, hospitals have become more receptive to
outsourcing certain services such as sharps management. Additionally, the recent
industry trend toward the formation of hospital networks has enhanced Bio
Systems sales and market share growth. Market forces and competitive pricing
pressures have affected Bio Systems' ability to increase prices with existing
hospital and physician customers. These factors also impact the prices Bio
Systems is able to charge new and potential customers.
Bio Systems reported an increase in operating income of approximately 22% to
$371,000 for the third quarter of fiscal 1998 from $304,000 for the third
quarter of fiscal 1997. Bio Systems' operating income increased 36% to
$1,179,000 for the nine months ended December 31, 1997 from $868,000 during the
same period in fiscal 1997. The operating improvement is primarily the result of
Bio Systems reducing its administrative costs and expenses, which is discussed
below.
For the third quarter of fiscal 1998, Bio Systems' cost of goods sold were
61% of net sales, which was unchanged compared to the third quarter of fiscal
1997. Bio Systems' cost of goods sold increased slightly to 61% of net sales for
the nine months ended December 31, 1997, as compared to 60% of net sales for the
same period in fiscal 1997. The increase was primarily due to expenses
associated with an increased level of new hospital account activity which causes
a temporary increase in labor and supply costs.
Selling, general, and administrative expenses decreased to 27% of net sales
for the third quarter of fiscal 1998 from 29% of net sales for the third quarter
of fiscal 1997, and decreased to approximately 27% of net sales for the
nine-month period ended December 31, 1997 from approximately 30% of net sales
for the same period in fiscal 1997. The decrease is due to Bio Systems' success
in controlling its administrative costs and expenses, such as business liability
insurance, combined with a decrease in expenses associated with the purchase of
the minority partner's 40% partnership interest in Bio Systems Partners in
October 1997 (see Part II, Item 1). Bio Systems capitalized certain cost
associated with the purchase of the minority partnership interest in fiscal
1998, while the costs incurred in fiscal 1997, primarily legal fees, were
expensed.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
Net sales for Scherer Laboratories, Inc. ("Scherer Labs"), which operates
the Company's Consumer Healthcare Products Segment, increased 10% to $259,000
during the third quarter of fiscal 1998 from $236,000 during the third quarter
of fiscal 1997. The increase in net sales for the third quarter is attributable
to the timing of sales orders of some of Scherer Labs' higher volume products.
Net sales increased 3% to $1,014,000 for the nine months ended December 31, 1997
from $986,000 for the same period in fiscal 1997.
Scherer Labs' operating income increased approximately 43% to $87,000 for
the third quarter of fiscal 1998 compared to $61,000 for the third quarter of
fiscal 1997. Operating income increased by approximately 15% to $425,000 for the
nine-month period ended December 31, 1997 from $369,000 for the nine months
ended December 31, 1996. The improvement in operating income can be attributed
to the increase in net sales described above combined with a decrease in
management consulting fees, expenses associated with Scherer Labs' contracted
warehouse and distribution facility, and certain administrative costs.
Other Income (Expense).
- -----------------------
Interest income increased to $174,000 for the third quarter of fiscal 1998
from $42,000 for the third quarter of fiscal 1997, and increased to $354,000 for
the nine months ended December 31, 1997 from $117,000 for the nine months ended
December 31, 1996. The increase is a result of the investment, principally in
marketable securities (see Note 7), of the net proceeds received from the
Marquest Transactions.
Interest expense decreased to $7,000 for the third quarter of fiscal 1998
from $69,000 for the third quarter of fiscal 1997, and decreased to $74,000
for the first nine months of fiscal 1998 from $178,000 for the same period in
fiscal 1997. The decrease is primarily due to the repayment of the
outstanding principal balance on the Amended Note (see Note 4) in July 1997.
The Company used a portion of the proceeds from the Marquest Transactions to
repay in full the Amended Note.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $5,475,000 at December 31,
1997, an increase of $2,238,000 from March 31, 1997. Working capital increased
to $6,727,000 at December 31, 1997, compared to $3,376,000 at March 31, 1997.
Long-term debt decreased to $530,000 at December 31, 1997 from $2,046,000 at
March 31, 1997. The primary reasons for these changes are discussed below.
Cash Flows from Operating Activities.
- -------------------------------------
The Company's cash provided by operating activities from continuing
operations totaled $909,000 for the nine months ended December 31, 1997, up from
$677,000 during the same period in fiscal 1997. Bio Systems' operations provided
cash of $697,000 for the nine months ended December 31, 1997, compared to
$412,000 for the nine months ended December 31, 1996. Scherer Lab's cash
provided by operations improved slightly to $334,000 for the nine months ended
December 31, 1997 from $307,000 during the same period in fiscal 1997. These
increases are a result of Bio Systems' and Scherer Labs' improved operating
performance combined with the timing of working capital items.
Cash Flows from Investing and Financing Activities.
- ---------------------------------------------------
Cash provided by the Company's investing activities for the nine months
ended December 31, 1997 was $2,127,000, as compared to cash used of $471,000 for
the same period in fiscal 1997. This increase is a result of the Marquest
Transactions (see Note 5) completed in July 1997. At the effective time of the
Merger, all of the issued and outstanding shares of Marquest Common Stock were
converted into the right to receive $0.797 in cash per share and Marquest became
a wholly-owned subsidiary of VSI. As a result, the Company received $5,747,000
in cash in exchange for its 7,211,192 shares of Marquest Common Stock and
$309,000 in cash through the exercise of warrants to purchase Marquest Common
Stock and the conversion of these shares into cash pursuant to the Merger.
Additionally, the Company received $5,625,000 in cash from the sale of the ABG
Assets to VSI and $235,000 in cash for the covenant not to compete with VSI in
the manufacture and sale of arterial blood gas products for a period of three
years. The aggregate proceeds that the Company received from the Merger and the
sale of the ABG Assets, net of transaction costs, were $11,296,000 and the cash
held by Marquest at the time of the Merger was $1,023,000.
During the third quarter of fiscal 1998, the Company invested approximately
$6,300,000 of the proceeds received from the Marquest Transactions in long-term
high-grade marketable securities. These marketable securities, which consist of
municipal bonds, corporate bonds, and preferred stocks, mature over periods
ranging from 3 to 30 years (see Note 7).
The Company, through a wholly-owned subsidiary, owned a 60% partnership
interest in Bio Systems Partners ("BSP") which operates in the Company's Waste
Management Services Segment. Pursuant to a summary judgment described in Part
II, Item 1 below, the Company's subsidiary was required to purchase the minority
partner's 40% partnership interest in BSP valued as of November 30, 1993. After
separate appraisals performed by the partners were not consistent, a third
independent appraiser was retained by the partners to review each of the
previous valuations and to determine the purchase price for the minority
interest. In early October 1997, the independent appraiser informed the Company
and the minority partner of its determination that the fair market value of the
40% minority interest in BSP was $1,100,000 as of November 30, 1993. Effective
October 28, 1997, the Company's subsidiary purchased, using cash on hand, the
minority partner's 40% partnership interest in BSP for a purchase price of
$1,100,000. As a result, the Company, through its subsidiary, now owns 100% of
BSP.
The Company's cash used from financing activities increased to $1,902,000
for the first nine months of fiscal 1998, from $180,000 during the same period
in fiscal 1997. This decrease is a result of the repayment in July 1997 of the
outstanding principal balance of $1,867,000 on the Amended Note (see Note 4).
The Amended Note was due December 1, 2001, had a fixed monthly payment of
$43,408, bore interest at prime rate, and was collateralized by 2,432,251 shares
of Marquest Common Stock that the Company owned. The Company used a portion of
the proceeds from the Marquest Transactions (see Note 5) to pay in full the
outstanding principal balance of $1,867,000 on the Amended Note. The Company
made installment payments of approximately $91,000 against the Amended Note
prior to the repayment.
In February 1998, the Company will relocate its corporate headquarters to
another location in Atlanta, Georgia and anticipates it will achieve cost
savings through reduced rent expense.
Management of the Company believes that its current cash on hand and its
current cash flow is sufficient to maintain its current operations. The Company
is evaluating its long-term options with regard to the use of its remaining cash
on hand.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company, through a wholly-owned subsidiary, owned a 60% partnership
interest in BSP which operates in the Company's Waste Management
Services Segment. Pursuant to summary judgment granted in a civil action
filed in the United States District Court for the Eastern District of
New York in March 1994, the Company's subsidiary was required to
purchase the minority partner's 40% partnership interest in BSP valued
as of November 30, 1993. Pursuant to the Partnership Agreement of BSP,
the Company and the minority partner retained separate independent
appraisers to perform appraisals of the minority interest in BSP. The
separate appraisals were not consistent; therefore, the Company and the
minority partner selected and retained a third independent appraiser to
review each of the previous valuations and determine the purchase price
for the minority interest.
In early October 1997, the independent appraiser informed the Company
and the minority partner of its' determination that the fair market
value of the 40% minority interest in BSP was $1,100,000 as of November
30, 1993. Effective October 28, 1997, the Company's subsidiary purchased
from the minority partner all of the minority partner's interest in BSP
for a purchase price of $1,100,000. As a result, the Company, through
its subsidiary, now owns 100% of BSP.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
SCHERER HEALTHCARE, INC.
(Registrant)
Date: February 6, 1998 /s/ Robert P. Scherer, Jr.
---------------- --------------------------------
Robert P. Scherer, Jr.
Chairman
Date: February 6, 1998 /s/ Gary W. Ruffcorn
---------------- --------------------------------
Gary W. Ruffcorn
Chief Financial Officer
</TABLE>
15
<PAGE>
SCHERER HEALTHCARE, INC.
INDEX OF EXHIBITS
The following exhibit is being filed with this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------------- ---------------------------------- -----------
<C> <S> <C>
27 Financial Data Schedule 17
(included only in EDGAR filing)
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT TO STOCKHOLDERS FOR THE QUARTER ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,475
<SECURITIES> 0
<RECEIVABLES> 3,611
<ALLOWANCES> 181
<INVENTORY> 175
<CURRENT-ASSETS> 9,161
<PP&E> 8,536
<DEPRECIATION> (4,497)
<TOTAL-ASSETS> 24,996
<CURRENT-LIABILITIES> 2,434
<BONDS> 530
0
0
<COMMON> 47
<OTHER-SE> 21,552
<TOTAL-LIABILITY-AND-EQUITY> 24,996
<SALES> 10,314
<TOTAL-REVENUES> 10,314
<CGS> 5,981
<TOTAL-COSTS> 9,514
<OTHER-EXPENSES> 33
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74
<INCOME-PRETAX> 1,113
<INCOME-TAX> (4)
<INCOME-CONTINUING> 1,117
<DISCONTINUED> (320)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,689
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.23
</TABLE>
