<PAGE>
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, 1998
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.)
120 Interstate North Parkway, S.E., Suite 305, Atlanta, Georgia 30339
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code:
(770) 933-1800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered (Title of Class) pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO .
------ ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates of the Registrant on June 17, 1998 was $6,467,171. There were
4,315,759 Shares of Common Stock outstanding on June 17, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference into Parts I and III of this report.
<PAGE>
SCHERER HEALTHCARE, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended March 31, 1998
Table of Contents
-----------------
Item Page
Number Number
- ------ ------
PART I
1. Business ................................................................3
2. Properties ..............................................................9
3. Legal Proceedings .......................................................9
4. Submission of Matters to a Vote of Security Holders .....................9
4a. Executive Officers of the Registrant ...................................10
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters ................................................................10
6. Selected Financial Data. ...............................................11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................11
8. Financial Statements and Supplementary Data ............................15
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ...................................................15
PART III
10. Directors and Executive Officers of the Registrant .....................16
11. Executive Compensation .................................................16
12. Security Ownership of Certain Beneficial Owners and Management .........16
13. Certain Relationships and Related Transactions .........................16
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......17
SIGNATURES................................19
INDEX OF EXHIBITS ...........................20
<PAGE>
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, 1998, the Company, through its subsidiaries operated in the following
business segments:
Waste Management Services Segment:
(a) Bio Systems Partners, a Georgia partnership, is 100% owned by the
Company.
(b) BioWaste Systems, Inc., a Georgia corporation, is 100% owned by the
Company
(c) 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.
Sale of Marquest Medical Products, Inc.
Pursuant to the terms of an Agreement and Plan of Merger dated as of March
14, 1997 (the "Merger Agreement"), between Marquest Medical Products, Inc.
("Marquest"), then a 51% owned subsidiary of the Company, Vital Signs, Inc.
("VSI"), and VSI Acquisition Corporation, a wholly-owned subsidiary of VSI,
effective July 28, 1997, 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 certain assets from the Company that were 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 transactions contemplated by the Merger
Agreement and the Inducement Agreement, including the Merger and the sale of
the ABG Assets, are referred to as the "Marquest Transactions". See
"Discontinued Medical Device and Surgical/Safety Disposables Segment -
Marquest" for further discussion.
3
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Acquisition of Minority Partnership Interest
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, 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 and incurred associated transaction
costs of $114,000. As a result, the Company, through its subsidiary, now owns
100% of BSP.
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,
(In Thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales:
Waste Management Services Segment $ 12,567 $ 11,836 $ 10,752
Consumer Healthcare Products Segment 1,286 1,276 1,106
-------- -------- --------
Total $ 13,853 $ 13,112 $ 11,858
-------- -------- --------
-------- -------- --------
Operating Income (Loss) from
Continuing Operations:
Waste Management Services Segment $ 1,603 $ 1,073 $ 924
Consumer Healthcare Products Segment 543 467 368
Corporate (1,112) (1,022) (1,056)
-------- -------- --------
Total $ 1,034 $ 518 $ 236
-------- -------- --------
-------- -------- --------
Identifiable Assets:
Waste Management Services Segment $ 10,945 $ 9,589 $ 9,370
Consumer Healthcare Products Segment 157 111 153
Corporate (a) 14,690 11,670 11,775
-------- -------- --------
Total $ 25,792 $ 21,370 $ 21,298
-------- -------- --------
-------- -------- --------
Depreciation Expense:
Waste Management Services Segment $ 886 $ 816 $ 731
Consumer Healthcare Products Segment 1 1 1
Corporate 29 25 29
-------- -------- --------
Total $ 916 $ 842 $ 761
-------- -------- --------
-------- -------- --------
Capital Expenditures:
Waste Management Services Segment $ 1,228 $ 1,107 $ 765
Consumer Healthcare Products Segment -- 6 --
Corporate 113 5 --
-------- -------- --------
Total $ 1,341 $ 1,118 $ 765
-------- -------- --------
-------- -------- --------
</TABLE>
(a) Amount includes net assets of discontinued operations of $188,000,
$7,003,000, and $6,360,000 for fiscal years 1998, 1997, and 1996,
respectively.
The Company recorded interest income of $521,000, $160,000, and $258,000 for
fiscal years 1998, 1997, and 1996, respectively. Additionally, the Company
recorded interest expense of $52,000, $195,000, and $559,000 for fiscal years
1998, 1997, and 1996, respectively. The Company records interest income and
interest expense at the Corporate level.
4
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Waste Management Services Segment
Overview. The Company operates its Waste Management Services Segment through
BSP, BioWaste Systems, Inc., and Medical Waste Systems, Inc. (collectively, "Bio
Systems"). Prior to fiscal 1998, the Company owned a 60% general partnership
interest in BSP, a Georgia partnership. In October 1997, the Company, through
BioWaste Systems, Inc., a wholly-owned Georgia corporation, purchased the
minority partner's 40% partnership interest in BSP for $1,100,000. Medical
Waste Systems, Inc. is a Delaware corporation and is wholly-owned by the
Company.
Services. Bio Systems assists hospitals, clinics, doctors, and other health
care facilities with the control and disposal of infectious medical waste,
principally sharp-edged medical waste, or "sharps", which includes needles,
scalpels, and syringes. Bio Systems provides its services in ten Northeastern
and Mid-Atlantic states plus the District of Columbia.
Because of the AIDS crisis and public perception regarding the transmission of a
number of diseases, safe packaging, transportation and disposal of medical waste
has for many years been mandated by federal, state and local governmental
regulatory agencies. Sharps medical waste poses a threat to health care workers
and the public because of its potential to transmit disease. Consequently,
health care facilities have worked to improve the safety of their sharps waste
management systems, however, many have found that an in-house system may not be
the most cost effective method for their sharps disposal.
Bio Systems' sharps management programs are designed to reduce a medical
facility's costs and risks associated with sharps disposal. Bio Systems
incorporates reusable containers of various sizes and designs in its systems,
which are installed by Bio Systems' personnel at the locations within a medical
facility where sharps are discarded. These reusable containers provide a
medical facility with a cost effective and environmentally friendly alternative
to traditional disposable plastic containers. Bio Systems' personnel collect
and replace the containers at the point of use and then transport the full
containers to Bio Systems' processing facility where they are emptied and
decontaminated for reuse.
Bio Systems maintains a fleet of licensed trucks and trailers to transport
medical waste to its processing facility, where the waste 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 Farmingdale, New
York. Bio Systems uses the Pennsylvania facility to assemble, manage and store
its reusable medical waste containers.
Bio Systems also provides medical waste management services designed for medical
clinics, physicians and other facilities that generate relatively small
quantities of regulated medical waste (small quantity generators). Bio Systems
provides these customers with both a reusable container for sharps and a
specially designed corrugated box for non-sharp regulated medical waste. This
service for small quantity generators includes pick-up, removal and disposal of
the medical waste.
Sales and Marketing. Bio Systems markets its services, which are not seasonal
and are not subject to backlog, via a direct sales force and through advertising
in hospital publications and direct mailings. Bio Systems operates 365 days a
year.
Bio Systems' management believes that the recent trend toward consolidation of
hospitals, medical clinics and physicians into managed health care networks
provides companies with existing medical facility contracts, such as Bio
Systems, an advantage in securing contracts with newly affiliated network
members.
Customers. Bio Systems' customers include hospitals, nursing homes, medical
clinics, physicians and laboratories. Services to hospitals are typically
provided under contracts of at least one year. As of March 31, 1998, Bio
Systems had contracts with over 200 hospitals including agreements with the
Greater New York Hospital Association, New Jersey Hospital Association, and
seven of the largest hospital networks in the northeast. Additionally, Bio
Systems provides medical services to over 3,500 small quantity generators
including medical clinics, laboratories, and physicians offices.
No single customer accounts for over 10% of Bio Systems' sales revenues.
5
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Competition. Bio Systems' principal competition comes from in-house management
of sharps wherein the hospital purchases disposable containers from one of
several manufacturers, uses hospital personnel to collect and replace containers
when full, and disposes of the containers and waste with on-site equipment or
through a third party medical waste hauler. Additionally, Bio Systems has two
direct competitors which offer similar full-service programs.
With regard to its small quantity generator services, Bio Systems competes with
several national and local medical waste service providers.
Though Bio Systems faces significant competition in its market areas, it
believes it has a strong competitive position because of its reusable sharps
containers, specialized service infrastructure and strategically located
transfer and processing facilities.
Regulation. The medical waste industry is subject to a variety of federal,
state and local regulations regarding its collection, transport, processing, and
disposal. Bio Systems has obtained licenses or authorizations from the
appropriate governmental regulatory agencies to operate its processing and
transfer facilities in Farmingdale, New York, Warminster, Pennsylvania, and
Haverhill, Massachusetts.
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 120 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 agreement in June 1996 with the union for its New
York employees and a three-year agreement 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 in fiscal 1996.
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 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.
In the second quarter of fiscal 1999, the Company intends to begin performing
all inventory and shipping functions internally by utilizing warehouse space
currently leased in one of the Company's Atlanta, Georgia facilities.
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.
6
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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 53%,
55% and 45% of total sales for fiscal 1998, 1997 and 1996, 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 Medical Device and Surgical/Safety Disposables Segment
The operations of Marquest and Scherer Healthcare, Ltd. ("Scherer Ltd.") were
included in the Company's Medical Device and Surgical/Safety Disposables
Segment. The assets and businesses of Scherer Ltd., a limited partnership that
was 65% owned by the Company, were sold in two separate transactions in October
1995 and October 1996. In July 1997, the Company and Marquest, which was a
majority owned subsidiary of the Company, completed certain transactions whereby
VSI acquired Marquest. Effective with the sale of Marquest to VSI, the
operations of the Medical Device and Surgical/Safety Segment have been accounted
as a discontinued segment. Set forth below is information regarding Marquest
and Scherer Ltd. and the transactions discussed above.
Marquest
In fiscal 1994, the Company and Marquest completed a series of transactions
whereby the Company obtained a controlling interest in Marquest. Marquest is a
manufacturer and international distributor of specialty cardiopulmonary support,
respiratory and anesthesia disposable devices. Marquest utilized an internal
sales force and independent distributors to market its four major product
groups: blood collection systems for diagnostic testing, aerosolized medication
delivery systems, heated humidification systems, and anesthesia and respiratory
breathing systems.
As part of the transactions completed in fiscal 1994, Marquest sold to the
Company the ABG Assets for $4,500,000 in cash and the Company then leased the
ABG Assets to Marquest in exchange for a royalty equal to 3.25% of the net
arterial blood gas product line sales. Marquest had the option to repurchase
the ABG Assets from the Company for $4,500,000 plus $22,500 for each month
lapsed between June 1993 and the date of repurchase. Primarily as consideration
for the repurchase option on the ABG Assets, Marquest granted to the Company
warrants for the purchase of 6,580,000 shares of Marquest Common Stock,
exercisable at $0.75 per share.
In fiscal 1994, the Company also participated in Marquest's exchange offer of
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.
In exchange for its Preferred Stock, the Company received $4,352,000 of Marquest
six-year 8% notes (the "Marquest Notes") convertible into Marquest Common Stock.
In May 1994, the Company converted $2,500,000 of the Marquest Notes into
3,333,333 shares of Marquest Common Stock. In March 1996, the Company converted
the remaining balance of $1,852,000 on the Marquest Notes plus the associated
accrued interest and accrued but unpaid management fees owed to the Company by
Marquest into 3,877,859 shares of Marquest Common Stock.
7
<PAGE>
Effective July 28, 1997, VSI acquired Marquest upon 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
Inducement Agreement, VSI purchased the ABG Assets from the Company 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.
Scherer Ltd.
The Company, through a wholly-owned subsidiary, owned a 65% interest in Scherer
Ltd. and was its sole general partner. Scherer Ltd., which was formed in 1987,
was engaged in the manufacture and distribution of three disposable product
lines: surgical drapes and gowns, surgical trays, and industrial/clean room
specialty apparel.
In October 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 health care
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. Scherer, Ltd. continued in the
business of providing nonwoven apparel for industrial uses (the "Industrial
Business") after the sale of the Medical Business.
In October 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.
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. 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.
8
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ITEM 2. PROPERTIES
The Company's major facilities follow:
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 - 2,100 square feet of leased office space.
Atlanta, Georgia - 5,300 square feet of leased office and
warehouse space (the warehouse space will be used by Scherer
Laboratories, Inc. beginning in July 1998)
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
The Company does not have any material pending legal actions but 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, 1998.
9
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ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The names, ages at June 1, 1998, and current 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.
<TABLE>
<CAPTION>
Name and Age Positions with the Company
------------ --------------------------
<S> <C>
Robert P. Scherer, Jr., 65 Director of the Company since 1977; Chairman
of the Board of Directors and Chief
Executive Officer of the Company since
February 1995; President of the Company
since May 1998. A Director, executive
officer and controlling stockholder of RPS
Investments, Inc. since its formation.
Gary W. Ruffcorn, 36 Vice President, Chief Financial Officer, and
Assistant Secretary of the Company since
September 1997. Director of Finance and
Accounting of the Company from April 1995 to
September 1997; Principal Financial and
Accounting Officer of the Company from
August 1995 to September 1997. 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.
</TABLE>
Amy M. Murphy resigned as President and Chief Operating Officer of the
Company in May 1998. Robert P. Scherer, Jr. assumed Ms. Murphy's
responsibilities.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Common Stock
At March 31, 1998, there were approximately 2,003 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:
<TABLE>
<CAPTION>
Fiscal Fiscal
1998 1997
------- ------
High Low High Low
------ ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter $ 2.250 $ 1.500 $ 5.500 $ 3.875
Second Quarter 3.625 2.125 4.625 2.250
Third Quarter 4.125 3.000 3.750 2.000
Fourth Quarter 4.250 3.375 2.625 2.000
</TABLE>
On June 17, 1998, the closing price of the Common Stock was $3.75.
While there are no restrictions to prevent the payment of dividends, the Company
has not paid a cash dividend in its history. The current policy of the
Company's Board of Directors is to retain any available earnings for use in the
operations and expansion of the Company's business. Therefore, the Company has
no current intention to pay cash dividends on its Common Stock. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will depend upon the Company's earnings, capital requirements,
financial condition, the ability of the Company's subsidiaries to pay cash
dividends to the Company and any factors deemed relevant by the Board of
Directors.
10
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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, 1998 are
derived from the audited consolidated 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 audited consolidated financial statements of the
Company as of March 31, 1998 and 1997 and for each of the years in the three
year period ended March 31, 1998, 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,
--------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ................................................ $ 13,853 $ 13,112 $ 11,858 $ 11,023 $ 10,672
Cost of goods sold ....................................... $ 8,008 $ 7,633 $ 6,716 $ 6,062 $ 5,915
Selling, general and administrative expenses ............. $ 4,811 $ 4,961 $ 4,906 $ 5,745 $ 4,850
Nonrecurring charges ..................................... -- -- -- $ 2,000 --
Other income (expense), net .............................. $ 491 $ (68) $ (200) $ (573) $ 742
Minority interest in net income .......................... -- -- -- $ (74) --
Income (loss) from continuing operations ................. $ 1,504 $ 446 $ 214 $ (2,793) $ 1,763
Income (loss) from continuing operations per share basic . $ 0.35 $ 0.10 $ 0.05 $ (0.66) $ 0.45
Income (loss) from continuing operations per share diluted $ 0.33 $ 0.10 $ 0.05 $ (0.66) $ 0.43
Loss from discontinued operations ........................ $ (395) $ (623) $ (1,224) $ (7,378) $ (5,980)
Gain (loss) from disposal of discontinued operations ..... $ 4,892 $ (84) $ 2,758 -- --
Net income (loss) ........................................ $ 6,001 $ (261) $ 1,748 $(10,171) $ (3,963)
Net income (loss) per share - basic ..................... $ 1.39 $ (0.06) $ 0.41 $ (2.39) $ (1.00)
Net income (loss) per share - diluted ................... $ 1.33 $ (0.06) $ 0.40 $ (2.30) $ (0.97)
Average shares outstanding - basic ....................... 4,314 4,302 4,277 4,254 3,954
Average shares outstanding - diluted ..................... 4,521 4,418 4,418 4,421 4,073
Total assets ............................................. $ 25,792 $ 21,370 $ 21,298 $ 27,123 $ 34,725
Total long-term liabilities .............................. $ 1,011 $ 2,371 $ 648 $ 726 $ 591
Stockholders' equity ..................................... $ 21,916 $ 15,963 $ 16,174 $ 14,486 $ 24,657
Cash dividends ........................................... -- -- -- -- --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains, in addition to historical information,
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, which represent the Company's expectations or beliefs,
including, but not limited to, statements concerning sales of the Company's
products or services and operating income. The Company cautions that various
factors, including, without limitation, the factors discussed below as well as
general economic conditions and industry trends, a dependence upon and/or loss
of key employees, 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.
11
<PAGE>
Results of Operations
Net Sales and Operating Income (Loss). The following table sets forth the net
sales and operating income (loss) for each segment of the Company's business for
the last three fiscal years:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
NET SALES:
Waste Management Services Segment $12,567 $11,836 $10,752
Consumer Healthcare Products Segment 1,286 1,276 1,106
------- ------- -------
Company Totals $13,853 $13,112 $11,858
------- ------- -------
------- ------- -------
OPERATING INCOME (LOSS):
Waste Management Services Segment $ 1,603 $ 1,073 $ 924
Consumer Healthcare Products Segment 543 467 368
Corporate (1,112) (1,022) (1,056)
------- ------- -------
Company Totals $ 1,034 $ 518 $ 236
------- ------- -------
------- ------- -------
</TABLE>
Fiscal 1998 vs. Fiscal 1997
The Company's net sales increased by approximately 6% to $13,853,000 for fiscal
1998 from $13,112,000 for fiscal 1997. The Company's operating income increased
to $1,034,000 for fiscal 1998 from $518,000 in fiscal 1997, an increase of
approximately 100%. The Company's cost of goods sold were 58% of net sales in
fiscal 1998, which was unchanged as compared to fiscal 1997. Selling, general,
and administrative expenses decreased to 35% of net sales in fiscal 1998 from
38% in fiscal 1997.
The results of operations of the Company are dependent upon the results of
operations of each of its subsidiaries operating in the individual business
segments. Set forth below is a discussion of the results of operations of each
of these segments.
Waste Management Services Segment
Net sales in the Company's Waste Management Services Segment, which operates
through Bio Systems, increased 6% to $12,567,000 in fiscal 1998 from $11,836,000
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 medical 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 out-sourcing 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 49% to $1,603,000 for
fiscal 1998 from $1,073,000 for fiscal 1997. For fiscal 1998, Bio Systems' cost
of goods sold were 60% of its net sales, which was unchanged compared to fiscal
1997. Selling, general, and administrative expenses decreased to 27% of net
sales for fiscal 1998 from 30% of net sales for fiscal 1997. The decrease in
selling, general, and administrative expenses 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 BSP in October 1997. See
"Item 1. Business - Acquisition of Minority Partnership Interest." Bio Systems
capitalized certain costs, primarily legal fees, associated with the purchase of
the minority partnership interest in fiscal 1998, while the costs incurred in
fiscal 1997 associated with the transaction were charged to expense.
Additionally, Bio Systems reduced its bad debt expense in fiscal 1998, even
though its net sales increased, primarily due to the implementation of an
aggressive collection effort of its accounts receivable.
12
<PAGE>
Consumer Healthcare Products Segment
Net sales for Scherer Labs, which operates in the Company's Consumer Healthcare
Products Segment, increased 1% to $1,286,000 for fiscal 1998 from $1,276,000 for
fiscal 1997. This slight increase is attributable to a price increase on some
of Scherer Labs' products in early fiscal 1998. Recent consolidation within the
industry has negatively impacted the sales of Scherer Labs' products. As a
result of the industry consolidation, some of Scherer Labs' customers have
either significantly decreased or discontinued their sales orders for Scherer
Labs' products.
Scherer Labs' operating income improved 16% to $543,000 for fiscal 1998 from
$467,000 for fiscal 1997. For fiscal 1998, Scherer Labs' cost of goods sold
decreased to 33% of net sales from 37% of net sales for fiscal 1997. This
improvement can be attributed to a decrease in cost of materials because Scherer
Labs' shipped fewer product units in fiscal 1998, primarily as a result of the
industry consolidation discussed above, combined with a favorable inventory
reserve adjustment. Selling, general, and administrative expenses decreased
slightly to 25% of net sales in fiscal 1998 from 26% of net sales in fiscal
1997. This improvement is due to a decrease in certain management consulting
fees and expenses associated with Scherer Labs' contracted warehouse and
distribution facility. The Company intends to begin performing all inventory
and shipping functions internally in the second quarter of fiscal 1999 by
utilizing warehouse space currently leased in one of the Company's Atlanta,
Georgia facilities.
Corporate
The Company recorded operating expenses at the corporate level of $1,112,000 and
$1,022,000 for fiscal years 1998 and 1997, respectively. Certain
administrative, accounting, management oversight and payroll services are
performed by the Company's Corporate office. The Corporate operating expenses
include the salaries and wages of the personnel who perform these functions,
including the Company's executive officers, rent expense, and professional
accounting and legal fees. In fiscal 1998, the Company recorded approximately
$120,000 in legal fees associated with litigation that was settled during the
year. The Company does not allocate any revenues to the Corporate level.
In February 1998, the Company relocated its corporate headquarters to another
location in Atlanta, Georgia and will recognize cost savings through reduced
rent expense.
Fiscal 1997 vs. Fiscal 1996
The Company's net sales increased approximately 11% to $13,112,000 for fiscal
1997 from $11,858,000 for fiscal 1996. The Company's operating income increased
approximately 119% to $518,000 for fiscal 1997 from $236,000 for fiscal 1996.
For fiscal 1997, the Company's cost of goods sold increased to 58% of net sales
from 57% of net sales for fiscal 1996. Selling, general, and administrative
expenses decreased to 38% of net sales in fiscal 1997 from 41% of net sales in
fiscal 1996.
Set forth below is a discussion of the results of operations of each of the
Company's business segments for fiscal 1997 compared to fiscal 1996.
Waste Management Services Segment
Net sales for Bio Systems increased 10% to $11,836,000 in fiscal 1997 from
$10,752,000 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 increased its operating income 16% to $1,073,000 in fiscal 1997 from
$924,000 in fiscal 1996. Bio Systems' cost of goods sold increased to 60% of
net sales in fiscal 1997 from 59% of net sales in fiscal 1996. Selling,
general, and administrative expenses decreased to 30% of net sales in fiscal
1997 from 33% 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.
13
<PAGE>
Consumer Healthcare Products Segment
Scherer Labs' net sales 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.
Scherer Labs 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, Scherer Labs 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.
Corporate
The Company's Corporate operating expenses were consistent for fiscal 1997 and
1996 at $1,022,000 and $1,056,000, respectively. Corporate operating expenses
include certain administrative, accounting, management oversight and payroll
services.
Other Income (Expense). The Company recorded interest income of $521,000,
$160,000, and $258,000 in fiscal 1998, 1997, and 1996, respectively. The
increase in interest income in fiscal 1998 is a result of the investment,
principally in marketable securities (see Note 4 of Notes to Consolidated
Financial Statements included elsewhere herein), of the net proceeds received
from the Marquest Transactions. In early fiscal 1996, the Company used the
investments that were collateralizing a line of credit to repay the borrowings
it made against the line of credit. Prior to the termination of the line of
credit, the Company recorded $47,000 of interest income from the investments.
Additionally, in fiscal 1996, the Company was paid in full the outstanding
principal amount owed on a certain note receivable that was scheduled to be
repaid in monthly installments over several years. Prior to the repayment, the
Company recorded $33,000 in interest income on the note receivable.
The Company recorded interest expense of $52,000, $195,000 and $559,000 in
fiscal 1998, 1997, and 1996, respectively. The decrease in interest expense in
fiscal 1998 is a result of the repayment of the outstanding principal balance on
a note payable to the adult children of an affiliate of the Company in July
1997. See Note 12 of Notes to Consolidated Financial Statements included
elsewhere herein. The Company used a portion of the proceeds from the Marquest
Transactions to repay in full the note payable. In fiscal 1996, the Company
used $4,800,000 of the net proceeds from the sale of the Medical Business to
repay a portion of the outstanding loans from affiliates. See "Item 1. Business
- - Sale of Marquest Medical Products, Inc." and "- Discontinued Medical Device
and Surgical/Safety Disposables Segment."
Income Taxes. The Company recorded an income tax provision of $21,000 and
$4,000 in fiscal 1998 and 1997, respectively, and had a tax benefit of $178,000
in fiscal 1996. In fiscal 1998 and 1997, the Company utilized tax loss
carryforwards and reduced its valuation allowance accordingly. In fiscal 1998
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's cash and cash equivalents totaled $6,868,000 at March 31, 1998, an
increase of $3,631,000 from March 31, 1997. Working capital increased to
$7,376,000 at March 31, 1998, compared to $3,376,000 at March 31, 1997. The
Company's long-term debt decreased to $504,000 at March 31, 1998 from $2,046,000
at March 31, 1997. The primary reasons for these changes are discussed below.
14
<PAGE>
Cash Flows from Operating Activities.
The Company's cash provided by operating activities from continuing operations
totaled $2,752,000 for fiscal 1998, up from $2,019,000 for fiscal 1997. Bio
Systems' operations provided cash of $2,051,000 for fiscal 1998, compared to
$1,281,000 in fiscal 1997. The increase can be attributed to Bio Systems'
improved operating performance combined with the timing of working capital
items, specifically the timing of collections of its accounts receivable. In
fiscal 1998, Bio Systems implemented an aggressive effort for collection of its
trade accounts receivable. Primarily as a result of this collection effort, Bio
Systems improved collection of its accounts receivable by over $800,000 for
fiscal 1998 compared to fiscal 1997. Scherer Labs' operations provided cash of
$447,000 in fiscal 1998, up slightly from $415,000 in fiscal 1997.
Cash Flows from Investing and Financing Activities.
Cash provided by the Company's investing activities for fiscal year 1998 was
$1,721,000, as compared to cash used of $872,000 for fiscal 1997. This increase
is a result of the Marquest Transactions completed in July 1997. As a result of
the Marquest Transactions, 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 27 years.
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 a summary judgment, 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 and incurred associated transaction costs of
$114,000. As a result, the Company, through its subsidiary, now owns 100% of
BSP.
The Company's cash used from financing activities increased to $1,924,000 for
fiscal 1998, from $373,000 in fiscal 1997. This decrease is a result of the
repayment in July 1997 of the outstanding principal balance of $1,867,000 on a
note payable to the adult children of an affiliate of the Company. The note
payable 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 to pay in full the outstanding principal balance
of $1,867,000 on the note payable. The Company made installment payments of
approximately $91,000 against the note payable prior to the repayment.
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.
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.
15
<PAGE>
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 1998 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, 1998.
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 1998, 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.
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.
16
<PAGE>
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 Schedule which appears on page F-1 of this
report.
(2) Financial Statement Schedule.
The financial statement schedule is 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
Jeanne M. Fernandez, Secretary, Scherer Healthcare, Inc., 120 Interstate North
Parkway, S.E., Suite 305, 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 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)
17
<PAGE>
10.4 Amended and Restated Non-Negotiable Note dated January 17, 1997
by Scherer Healthcare, Inc. to Scherer Capital Company L.L.C.
(Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997)
10.5 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)
10.6 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, 1998:
None
18
<PAGE>
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 25, 1998.
SCHERER HEALTHCARE, INC.
By: /s/Robert P. Scherer, Jr.
-------------------------
Robert P. Scherer, Jr.
Chairman, Chief Executive Officer and President
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 25, 1998.
Signature Title
- --------- -----
/s/Robert P. Scherer, Jr. Chairman of the Board, Director,
- ------------------------
Robert P. Scherer, Jr. Chief Executive Officer, and President
/s/Gary W. Ruffcorn Vice President and Chief Financial Officer
- -----------------------
Gary W. Ruffcorn
/s/Stephen Lukas, Sr. * Director
- -------------------------
Stephen Lukas, Sr.
/s/Kenneth H. Robertson * Director
- --------------------------
Kenneth H. Robertson
/s/William J. Thompson * Director
- --------------------------
William J. Thompson
*By:/s/Robert P. Scherer, Jr.
-------------------------
Robert P. Scherer, Jr.
as Attorney-in-Fact
19
<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.
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C>
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 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)
10.4 Amended and Restated Non-Negotiable Note dated January 17, 1997 by Scherer
Healthcare, Inc. to Scherer Capital Company L.L.C. (Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1997)
10.5 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)
10.6 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. 21
25 Powers of Attorney - filed herewith. 23
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)
</TABLE>
20
<PAGE>
SCHERER HEALTHCARE, INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and schedule 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, 1998 and 1997.........................F-3
Consolidated Statements of Operations--Years Ended
March 31, 1998, 1997 and 1996............................................F-5
Consolidated Statements of Stockholders' Equity--Years
Ended March 31, 1998, 1997 and 1996......................................F-7
Consolidated Statements of Cash Flows--
Years Ended March 31, 1998, 1997 and 1996................................F-8
Notes to Consolidated Financial Statements...................................F-9
The following financial statement schedule of the Registrant and its
subsidiaries is submitted herewith in response to Item 14(a)(2):
Schedule II--Valuation and Qualifying Accounts...............................S-1
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,
1998 and 1997 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended March 31, 1998. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998 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 schedule listed in the index of
financial statements and financial statement schedule is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, 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 3, 1998
F-2
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,868,000 $ 3,237,000
Accounts receivable, less allowance for doubtful accounts of
$189,000 in 1998 and $171,000 in 1997 2,796,000 2,694,000
Current maturities of notes receivable 191,000 176,000
Inventories 174,000 170,000
Prepaid and other 212,000 135,000
------------ ------------
Total current assets 10,241,000 6,412,000
------------ ------------
PROPERTY AND EQUIPMENT 7,157,000 7,709,000
Less accumulated depreciation (3,099,000) (4,060,000)
------------ ------------
Net property and equipment 4,058,000 3,649,000
------------ ------------
OTHER ASSETS
Cost in excess of net assets acquired, net 2,328,000 2,435,000
Investments, at market value 6,251,000 --
Other investments, at cost 650,000 650,000
Notes receivable, less current portion 174,000 371,000
Intangibles 1,410,000 232,000
Deferred income taxes 329,000 329,000
Other 163,000 289,000
Net assets of discontinued operations 188,000 7,003,000
------------ ------------
Total other assets 11,493,000 11,309,000
------------ ------------
TOTAL ASSETS $ 25,792,000 $ 21,370,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
As of March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 809,000 $ 977,000
Accrued expenses 1,594,000 1,432,000
Current maturities of debt obligations 269,000 555,000
Income taxes payable 115,000 72,000
Other 78,000 --
--------- ---------
Total current liabilities 2,865,000 3,036,000
--------- ---------
LONG-TERM DEBT, net of current maturities 504,000 2,046,000
OTHER LIABILITIES 507,000 325,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock - $.01 par value, 2,000,000 shares authorized;
23,193 shares issued and outstanding in 1998 and
23,541 in 1997 -- --
Common stock - $.01 par value, 12,000,000 shares authorized; 4,695,121
issued in 1998 and 4,693,585 in 1997;
4,315,759 shares outstanding in 1998 and 4,314,223 in 1997 47,000 47,000
Capital in excess of par value 22,366,000 22,366,000
Unrealized loss on investments (48,000) --
Retained earnings (accumulated deficit) 2,584,000 (3,417,000)
Less treasury stock, at cost (3,033,000) (3,033,000)
------------ ------------
Total stockholders' equity 21,916,000 15,963,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,792,000 $ 21,370,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 13,853,000 $ 13,112,000 $ 11,858,000
---------- ---------- ----------
COSTS AND EXPENSES
Cost of goods sold 8,008,000 7,633,000 6,716,000
Selling, general, and administrative 4,811,000 4,961,000 4,906,000
---------- ---------- ----------
Total costs and expenses 12,819,000 12,594,000 11,622,000
---------- ---------- ----------
OPERATING INCOME 1,034,000 518,000 236,000
OTHER INCOME (EXPENSE)
Interest income 521,000 160,000 258,000
Interest expense (52,000) (195,000) (559,000)
Other, net 22,000 (33,000) 101,000
---------- ---------- ----------
Total other income (expense) 491,000 (68,000) (200,000)
---------- ---------- ----------
Income from continuing operations before income taxes 1,525,000 450,000 36,000
Provision (benefit) for income taxes 21,000 4,000 (178,000)
---------- ---------- ----------
Income from continuing operations 1,504,000 446,000 214,000
Loss from discontinued operations, net of income taxes of $0,
$2,000, and $702,000 in 1998, 1997, and 1996, respectively (395,000) (623,000) (1,224,000)
Gain (loss) from disposal of discontinued operations, net of
income taxes of $137,000, $0, and $23,000 in 1998, 1997, and
1996, respectively 4,892,000 (84,000) 2,758,000
---------- ---------- ----------
NET INCOME (LOSS) $ 6,001,000 $ (261,000) $ 1,748,000
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
For the years ended March 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
BASIC INCOME (LOSS) PER COMMON SHARE
Income from continuing operations $ 0.35 $ 0.10 $ 0.05
Discontinued operations:
Loss from discontinued operations (0.09) (0.14) (0.28)
Gain (loss) from disposal of discontinued operations 1.13 (0.02) 0.64
------------- ------------- -------------
NET INCOME (LOSS) $ 1.39 $ (0.06) $ 0.41
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING--BASIC 4,314,257 4,302,016 4,277,252
------------- ------------- -------------
------------- ------------- -------------
DILUTED INCOME (LOSS) PER COMMON SHARE
Income from continuing operations $ 0.33 $ 0.10 $ 0.05
Discontinued operations:
Loss from discontinued operations (0.08) (0.14) (0.27)
Gain (loss) from disposal of discontinued operations 1.08 (0.02) 0.62
------------- ------------- -------------
NET INCOME (LOSS) $ 1.33 $ (0.06) $ 0.40
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING--DILUTED 4,521,110 4,418,483 4,418,483
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended March 31, 1998
<TABLE>
<CAPTION>
Retained
Preferred Common Capital In Unrealized Earnings Treasury Total
Stock Stock Excess of Loss on (Accumulated Stock Stockholders'
Amount Amount Par Value Investments Deficit) Cost Equity
------ -------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 $ -- $ 46,000 $ 22,317,000 $ -- $ (4,904,000) $ (2,973,000) $ 14,486,000
Conversion of preferred
shares to common shares -- 1,000 (1,000) -- -- -- --
Net Income -- -- -- -- 1,748,000 -- 1,748,000
Other -- -- -- -- -- (60,000) (60,000)
------ -------- ------------ --------- ------------ ------------ ------------
Balance at March 31, 1996 -- 47,000 22,316,000 -- (3,156,000) (3,033,000) 16,174,000
Net loss -- -- -- -- (261,000) -- (261,000)
Other -- -- 50,000 -- -- -- 50,000
------ -------- ------------ --------- ------------ ------------ ------------
Balance at March 31, 1997 -- 47,000 22,366,000 -- (3,417,000) (3,033,000) 15,963,000
Net Income -- -- -- -- 6,001,000 -- 6,001,000
Unrealized loss on marketable
securities -- -- -- (48,000) -- -- (48,000)
------ -------- ------------ --------- ------------ ------------ ------------
Balance at March 31, 1998 $ -- $ 47,000 $ 22,366,000 $ (48,000) $ 2,584,000 $ (3,033,000) $ 21,916,000
------ -------- ------------ --------- ------------ ------------ ------------
------ -------- ------------ --------- ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-7
<PAGE>
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,001,000 $ (261,000) $ 1,748,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,113,000 1,040,000 978,000
(Gain) loss from disposal of discontinued
operations (4,892,000) 84,000 (2,758,000)
Loss from discontinued operations 395,000 623,000 1,224,000
Other noncash charges and credits, net 30,000 134,000 53,000
Changes in operating assets and liabilities:
Accounts receivable (112,000) (8,000) (294,000)
Inventories (4,000) (37,000) (1,000)
Prepaid and other (77,000) 17,000 (21,000)
Income taxes, net 43,000 21,000 (43,000)
Accounts payable and accrued expenses (6,000) 428,000 (145,000)
Other liabilities 261,000 (22,000) (22,000)
------------ ------------ ------------
Net cash provided by operating activities of continuing
operations 2,752,000 2,019,000 719,000
Net operating activities of discontinued operations 1,082,000 (1,159,000) (15,000)
------------ ------------ ------------
Net cash provided by operating activities 3,834,000 860,000 704,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,341,000) (1,118,000) (765,000)
Net proceeds from disposal of segment, net of
transaction costs 10,273,000 -- --
Purchase of long-term investments (6,303,000) -- --
Purchase of minority partnership interest (1,214,000) -- --
Decrease in investments -- -- 3,232,000
Decrease in notes receivable 182,000 170,000 609,000
Other investing activities, net 72,000 (78,000) (35,000)
Net investing activities of discontinued operations 52,000 154,000 4,994,000
------------ ------------ ------------
Net cash provided by (used for) investing
activities 1,721,000 (872,000) 8,035,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) proceeds from borrowings (1,828,000) 119,000 (1,982,000)
Repayments to affiliated companies -- (213,000) (5,321,000)
Net financing activities of discontinued operations (96,000) (279,000) 913,000
------------ ------------ ------------
Net cash used for financing activities (1,924,000) (373,000) (6,390,000)
------------ ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS 3,631,000 (385,000) 2,349,000
CASH AND CASH EQUIVALENTS, beginning of year 3,237,000 3,622,000 1,273,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 6,868,000 $ 3,237,000 $ 3,622,000
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-8
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
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. 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 1996 and 1997 amounts have been reclassified to conform with the 1998
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, 1998 and 1997, 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 using the
last-in, first-out ("LIFO") method.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Finished products $ 41,000 $ 75,000
Containers, packaging, and raw material 179,000 155,000
LIFO reserve (46,000) (60,000)
--------- ---------
Total $ 174,000 $ 170,000
--------- ---------
--------- ---------
</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: automobiles and trucks--5 years, leasehold
improvements--3-31 years, and furniture, fixtures and equipment--3-10 years.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Automobiles and trucks $ 1,506,000 $ 1,400,000
Leasehold improvements 929,000 830,000
Furniture, fixtures, and equipment 4,722,000 5,479,000
----------- -----------
$ 7,157,000 $ 7,709,000
----------- -----------
----------- -----------
</TABLE>
Depreciation expense for fiscal years 1998, 1997, and 1996 was $916,000,
$842,000, and $761,000, respectively.
Marketable Securities
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 March 31, 1998, the Company's marketable securities
were categorized as available-for-sale securities, as defined by Statement of
Financial Accounting Standards ("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 4).
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.
Income (Loss) Per Common Share
In fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share." Under
SFAS No. 128, Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. 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 following is a reconciliation of the Company's basic weighted average common
shares outstanding to diluted weighted average common shares outstanding for
fiscal years 1998, 1997, and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares
outstanding - basic 4,314,257 4,302,016 4,277,252
Dilutive potential common shares, weighted:
Conversion of preferred stock to
common stock 104,226 116,467 141,231
Dilutive stock options, net 102,627 -- --
Weighted average common shares --------- --------- ---------
outstanding - diluted 4,521,110 4,418,483 4,418,483
--------- --------- ---------
--------- --------- ---------
Anti-dilutive options not included 129,800 129,800 129,800
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-10
<PAGE>
NOTE 2. DISCONTINUED OPERATIONS
Medical Device and Surgical/Safety Disposables Segment
The operations of Marquest Medical Products, Inc. ("Marquest"), a manufacturer
and international distributor of specialty cardiopulmonary support, respiratory
and anethesia disposable devices, and Scherer Healthcare, Ltd. ("Scherer Ltd."),
whose primary business was to manufacture and distribute nonwoven medical
drapes, gowns and accessory items to hospitals and other health care providers,
were included in the Company's Medical Device and Surgical/Safety Disposables
Segment. The assets and businesses of Scherer Ltd., a limited partnership that
was 65% owned by the Company, were sold in two separate transactions in October
1995 and October 1996. In July 1997, the Company and Marquest, which was a
majority owned subsidiary of the Company, completed certain transactions with
Vital Signs, Inc. ("VSI") whereby Marquest became a wholly-owned subsidiary of
VSI. Effective with the sale of Marquest to VSI, 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. Set forth below is information
regarding Marquest and Scherer Ltd. and the transactions discussed above.
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. Since the
transactions were completed, Marquest had 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
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
shares of Marquest Common Stock 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 certain assets from Marquest which are used
by Marquest in the manufacture and sale of arterial blood gas products (the
"ABG Assets") for $4,500,000 in cash. The Company licensed the ABG Assets
back to Marquest in exchange for a royalty equal to 3.25% of Marquest's net
arterial blood gas product line sales. Marquest had the option to repurchase
the ABG Assets from the Company for $4,500,000 plus $22,500 for each month
lapsed between June 1993 and the date of repurchase. The purchase of the ABG
Assets by the Company resulted in goodwill of approximately $4,255,000.
Primarily as consideration for the ABG Assets repurchase option, the Company
received warrants for 6,580,000 shares of Marquest Common Stock, exercisable
at $0.75 per share. In May 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.
In March 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.
F-11
<PAGE>
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, effective July 28, 1997, 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 the ABG Assets from the Company 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
(loss) from disposal of discontinued operations" in the accompanying
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".
Scherer Ltd.
The Company, through a wholly-owned subsidiary, owned a 65% interest in Scherer
Ltd. and was its sole general partner. Scherer Ltd., which was formed in 1987,
was engaged in the manufacture and distribution of three disposable product
lines: surgical drapes and gowns, surgical trays, and industrial/clean room
specialty apparel.
In October 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 an after
tax gain of $2,758,000 in fiscal 1996. Scherer, Ltd. continued in the business
of providing nonwoven apparel for industrial uses (the "Industrial Business")
after the sale of the Medical Business.
In October 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 fiscal 1997 primarily due to the write-off of the
remaining book value of certain intangible assets.
The net gain of $2,758,000 from the sale of the Medical Business and the net
loss of $84,000 from the sale of the Industrial Business have been reported as
"Gain (loss) from disposal of discontinued operations" in the accompanying
Consolidated Statements of Operations.
F-12
<PAGE>
The following results of operations are attributable to the discontinued
operations of the Medical Device and Surgical/Safety Disposables Segment:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales $ 6,623,000 $ 23,114,000 $ 29,999,000
------------ ------------ ------------
Cost of goods sold 4,519,000 16,027,000 21,823,000
Selling, general, and administrative 2,106,000 6,587,000 7,863,000
Research and development expenditures 90,000 286,000 155,000
------------ ------------ ------------
Total costs and expenses 6,715,000 22,900,000 29,841,000
------------ ------------ ------------
Operating (loss) income (92,000) 214,000 158,000
Other (expense) income, net (567,000) (819,000) 245,000
------------ ------------ ------------
(Loss) income before minority interest and
income taxes (659,000) (605,000) 403,000
Minority interest in net loss (income) of
subsidiary and partnership 339,000 359,000 (5,000)
------------ ------------ ------------
(Loss) income before income taxes (320,000) (246,000) 398,000
Provision for income taxes -- (2,000) (702,000)
------------ ------------ ------------
Loss from discontinued operations $ (320,000) $ (248,000) $ (304,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The net assets (liabilities) of the discontinued operations of the Medical
Device and Surgical/Safety Disposables Segment at March 31, 1998 and March 31,
1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1998 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 42,000 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 179,000 10,893,000
------------ ------------
Net assets (liabilities) of the Medical Device and
Surgical/Safety Disposables Segment $ (179,000) $ 6,652,000
------------ ------------
------------ ------------
</TABLE>
F-13
<PAGE>
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. 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.
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 segment, and accordingly, the operations of Biofor have been
segregated and reported as discontinued operations in the accompanying
consolidated financial statements.
The following results of operations are attributable to the discontinued
operations of Biofor:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -----------
<S> <C> <C> <C>
Net sales $ -- $ -- $ 772,000
--------- --------- -----------
Research and development expenditures -- -- 1,381,000
Other costs and expenses -- 104,000 136,000
Provision for shutdown costs -- 50,000
Write-down of assets to net realizable value 75,000 271,000 125,000
--------- --------- -----------
75,000 375,000 1,692,000
--------- --------- -----------
Loss from discontinued operations $ (75,000) $(375,000) $ (920,000)
--------- --------- -----------
--------- --------- -----------
</TABLE>
The net assets of the discontinued operations of Biofor at March 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Assets:
Property and equipment, net of disposal
costs(a) $437,000 $393,000
-------- --------
Total assets 437,000 393,000
-------- --------
Liabilities:
Accounts payable and accrued expenses 45,000 17,000
Other liabilities 25,000 25,000
-------- --------
Total liabilities 70,000 42,000
-------- --------
Net assets of Biofor $367,000 $351,000
-------- --------
-------- --------
</TABLE>
(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.
F-14
<PAGE>
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 additional
charges of $75,000 and $271,000 in fiscal 1998 and 1997, respectively, for the
write-down of Biofor's assets to their estimated net realizable value. No income
taxes or interest expense was allocated to the discontinued operations of Biofor
for the fiscal years 1998, 1997 and 1996.
The following is a summary of the Company's consolidated loss from discontinued
operations:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Loss from discontinued operations of the
Medical Device and Surgical/Safety
Disposables Segment $ (320,000) $ (248,000) $ (304,000)
Loss from discontinued operations of Biofor (75,000) (375,000) (920,000)
----------- ----------- -----------
Loss from discontinued operations $ (395,000) $ (623,000) $(1,224,000)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The following is a summary of the Company's consolidated net assets of
discontinued operations at March 31, 1998 and March 31, 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net assets (liabilities) of the Medical Device
and Surgical/Safety Disposables Segment $ (179,000) $6,652,000
Net assets of Biofor 367,000 351,000
---------- ----------
Net assets of discontinued operations $ 188,000 $7,003,000
---------- ----------
---------- ----------
</TABLE>
F-15
<PAGE>
NOTE 3. SEGMENT INFORMATION
In fiscal 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS No. 131 did not have a material effect on the
Company's financial position or its results of operations.
<TABLE>
<CAPTION>
Years Ended March 31,
(in thousands)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
Waste Management Services Segment $ 12,567 $ 11,836 $ 10,752
Consumer Healthcare Products Segment 1,286 1,276 1,106
-------- -------- --------
Total $ 13,853 $ 13,112 $ 11,858
-------- -------- --------
-------- -------- --------
Operating Income (Loss) from Continuing Operations:
Waste Management Services Segment $ 1,603 $ 1,073 $ 924
Consumer Healthcare Products Segment 543 467 368
Corporate (1,112) (1,022) (1,056)
-------- -------- --------
Total $ 1,034 $ 518 $ 236
-------- -------- --------
-------- -------- --------
Identifiable Assets:
Waste Management Services Segment $ 10,945 $ 9,589 $ 9,370
Consumer Healthcare Products Segment 157 111 153
Corporate (a) 14,690 11,670 11,775
-------- -------- --------
Total $ 25,792 $ 21,370 $ 21,298
-------- -------- --------
-------- -------- --------
Depreciation Expense:
Waste Management Services Segment $ 886 $ 816 $ 731
Consumer Healthcare Products Segment 1 1 1
Corporate 29 25 29
-------- -------- --------
Total $ 916 $ 842 $ 761
-------- -------- --------
-------- -------- --------
Capital Expenditures:
Waste Management Services Segment $ 1,228 $ 1,107 $ 765
Consumer Healthcare Products Segment -- 6 --
Corporate 113 5 --
-------- -------- --------
Total $ 1,341 $ 1,118 $ 765
-------- -------- --------
-------- -------- --------
</TABLE>
(a) Amount includes net assets of discontinued operations of $188,000,
$7,003,000, and $6,360,000 for fiscal years 1998, 1997, and 1996,
respectively. See Note 2.
The Company recorded interest income of $521,000, $160,000, and $258,000 for
fiscal years 1998, 1997, and 1996, respectively. Additionally, the Company
recorded interest expense of $52,000, $195,000, and $559,000 for fiscal years
1998, 1997, and 1996, respectively. The Company records interest income and
interest expense at the Corporate level.
Waste Management Services Segment
The Company operates its medical waste management services segment through its
wholly-owned subsidiaries, Bio Systems Partners ("BSP"), BioWaste Systems, Inc.,
and Medical Waste Systems, Inc. (collectively, "Bio Systems"). Prior to fiscal
1998, the Company owned a 60% general partnership interest in BSP. In October
1997, the Company purchased the remaining 40% partnership interest in BSP from
the minority partner for $1,100,000 (see Note 5). 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 New York City, Pennsylvania, New Jersey, and
New England areas.
F-16
<PAGE>
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. The loss of these sales did not have a
material effect on the Company. Scherer Labs had one customer who accounted for
60%, 55% and 45% of its total sales for fiscal 1998, 1997, and 1996,
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.
NOTE 4. MARKETABLE SECURITIES
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 March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Net
Amortized unrealized Fair market
cost loss value
---------- ---------- ----------
<S> <C> <C> <C>
Municipal bonds $4,782,000 $ (20,000) $4,762,000
Corporate bonds 1,219,000 (22,000) 1,197,000
Preferred stocks 298,000 (6,000) 292,000
---------- ---------- ----------
Total $6,299,000 $ (48,000) $6,251,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The municipal bonds mature ranging from 3 years to 27 years and the corporate
bonds mature ranging from 11 years to 27 years.
NOTE 5. ACQUISITION OF MINORITY PARTNERSHIP INTEREST
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 a summary judgment, 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.
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.
F-17
<PAGE>
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 $90,000, $93,000, and
$111,000 in fiscal years 1998, 1997, and 1996, respectively. Accumulated
amortization at March 31, 1998 and 1997 was $199,000 and $207,000, respectively.
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
$107,000, $106,000, and $106,000 in fiscal years 1998, 1997, and 1996,
respectively. Accumulated amortization at March 31, 1998 and 1997 was $971,000
and $864,000, 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, 1998, in the opinion of the Company's
management, no revision of goodwill is required.
NOTE 7. BORROWINGS
Debt and obligations under capital leases at March 31, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Note payable, due through fiscal 2002, prime rate (a) $ -- $ 1,958,000
Obligations under capital leases, due in varying installments
through fiscal 2003 773,000 643,000
----------- -----------
773,000 2,601,000
Less current maturities (269,000) (555,000)
----------- -----------
Long-term debt $ 504,000 $ 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.
The following is a summary of the future maturities of the obligations:
<TABLE>
<S> <C>
Year ended March 31:
1999 $ 269,000
2000 212,000
2001 162,000
2002 86,000
2003 44,000
------------
Total $ 773,000
------------
------------
</TABLE>
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 included in the consolidated statements
of operations was approximately $557,000, $580,000, and $533,000 for the years
ended March 31, 1998, 1997, and 1996, respectively.
F-18
<PAGE>
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:
1999 $327,000
2000 182,000
2001 108,000
2002 8,000
2003 3,000
--------
Total $628,000
--------
--------
Legal Proceedings
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Although the outcome of such proceedings and claims
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 ten years
from the date of grant. At March 31, 1998, the maximum shares available under
these plans for future grants were 1,579,200. The price of options granted to
date has generally been at the fair market value of the shares on date of grant.
The Company accounts for its stock based compensation plans under APB opinion
No. 25, under which no compensation cost is recognized for options granted with
an exercise price equal to the fair market value of the Company's common stock
at the grant date. The Company has computed, for pro forma disclosure purposes,
the value of options granted in fiscal 1998 to employees using the Black-Scholes
option pricing model with the following weighted average assumptions: dividend
yield of 0%, expected volatility of 50%, risk-free rate of return of 6.87%, and
expected option life of 5.92 years. The weighted-average fair value of options
granted during the year is $0.91.
If the Company had accounted for these plans in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation" the Company's net income would have
been $5,922,000 and earnings per share would have been $1.37 (basic) and $1.31
(diluted) for the year ended March 31, 1998.
F-19
<PAGE>
A summary of changes in outstanding options is as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
Subject Price per
to Option Share
--------- ----------
<S> <C> <C>
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 granted 280,000 1.69
Options exercised --
Options canceled and expired --
------- ----------
Balance at March 31, 1998 409,800 $ 5.92
------- ----------
------- ----------
Options exercisable at March 31, 1998 213,136
-------
-------
</TABLE>
Of the 409,800 options outstanding at March 31, 1998, 99,800 have exercise
prices ranging from $12.50 to $14.30, with a weighted average exercise price of
$13.09 and a weighted average remaining contractual life of three years. All of
these options are exercisable as of March 31, 1998. Additionally, 30,000 options
have exercise prices ranging from $20.50 to $26.88, with a weighted average
exercise price of $21.56 and a weighted average remaining contractual life of
5.7 years. Of these options, 20,000 are exercisable as of March 31, 1998. The
remaining 280,000 options have an exercise price of $1.69 and a weighted average
remaining contractual life of 8.4 years. Of these options, 93,336 are
exercisable as of March 31, 1998.
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, 1998 and 1997, the Company had 23,193 and
23,541, respectively, shares of the Preferred Stock outstanding which were
convertible into approximately 102,724 and 104,260 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 1998, 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 $132,000, $120,000, and $93,000 for fiscal years 1998, 1997, and
1996, respectively.
F-20
<PAGE>
NOTE 11. INCOME TAXES
As of March 31, the Company's net deferred tax assets consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 230,000 $ 288,000
Partnership losses 575,000 601,000
Net operating loss carryforwards 674,000 1,775,000
Other 150,000 159,000
--------- ---------
Total deferred tax assets 1,629,000 2,823,000
--------- ---------
Deferred tax liabilities:
Depreciation (284,000) (322,000)
--------- ---------
Total deferred tax liabilities (284,000) (322,000)
--------- ---------
Valuation allowance (1,016,000) (2,172,000)
--------- ---------
Net deferred tax assets $ 329,000 $ 329,000
--------- ---------
--------- ---------
</TABLE>
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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed statutory amount $ 519,000 $ 222,000 $ 180,000
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income
tax benefit 61,000 26,000 21,000
Amortization of goodwill (133,000) 38,000 79,000
Net federal and state tax refunds -- -- (150,000)
Net change in valuation allowance (1,156,000) 81,000 (892,000)
Other, net 730,000 (363,000) 584,000
----------- ----------- -----------
Provision (benefit) for income taxes $ 21,000 $ 4,000 $ (178,000)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current taxes:
Federal $ 5,000 $ -- $ (85,000)
State 16,000 4,000 (93,000)
--------- --------- ---------
Provision (benefit) for income taxes $ 21,000 $ 4,000 $(178,000)
--------- --------- ---------
--------- --------- ---------
</TABLE>
At March 31, 1998, the Company has regular tax loss carryforwards of
approximately $1,774,000 expiring in varying dates through 2011. The Company has
determined, based upon its recent earnings history, that asset valuation
allowances of $1,016,000 and $2,172,000 should be established against its
deferred tax assets as of March 31, 1998 and 1997, respectively.
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%.
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
was 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.
On July 28, 1997, the Company used a portion of the proceeds from the Marquest
Transactions (see Note 2) 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.
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. Borrowings under the Loan Agreement were represented by convertible
notes due April 1, 2001 (the "Scherer Cap Notes"), bore interest at prime rate
plus 1.5%, and were secured by Marquest's inventory, building, and equipment.
Pursuant to the Loan Agreement, the Scherer Cap Notes were convertible at the
option of Scherer Cap into shares of Marquest's Common Stock at a conversion
price of $.70 per share. 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. was entitled to vote the shares held in the voting
trust. In July 1997, Mr. Scherer, Jr. converted the outstanding principal amount
of $700,000 under the Loan Agreement and Scherer Cap Notes into 1,000,000 shares
of Marquest Common Stock and accordingly, the Scherer Cap Notes were canceled.
In connection with the Marquest Transactions in July 1997, the 2,546,392 shares
of Marquest Common Stock that Mr. Scherer, Jr. owned and the 515,464 shares of
Marquest Common Stock held in the voting trust for the benefit of his adult
children were converted into cash pursuant to the terms of the Merger.
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:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Management fees $ -- $ -- $150,000
Accounting services and administrative
management -- 70,000 43,000
Interest expense -- 175,000 539,000
-------- -------- --------
Total $ -- $245,000 $732,000
-------- -------- --------
-------- -------- --------
</TABLE>
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended March 31
1998 1997 1996
---------- ----------- ---------
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Restructure of demand loan from an affiliate into a
promissory note, net of debt forgiveness $ -- $ 2,078,000 $ --
---------- ----------- ----------
---------- ----------- ----------
Supplemental information:
Interest paid during the year $ 52,000 $ 212,000 $ 908,000
Income taxes paid (refunded) during the year 33,000 (30,000) (129,000)
</TABLE>
F-23
<PAGE>
Schedule II
SCHERER HEALTHCARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended March 31, 1998
<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>
1998:
Allowance for doubtful accounts $ 171,000 $ 69,000 $ -- $ 51,000(a) $ 189,000
---------- ---------- ------- ------------ ----------
---------- ---------- ------- ------------ ----------
1997:
Allowance for doubtful accounts $ 80,000 $ 93,000 $ -- $ 2,000(a) $ 171,000
---------- ---------- ------- ------------ ----------
---------- ---------- ------- ------------ ----------
1996:
Allowance for doubtful accounts $ 65,000 $ 19,000 $ -- $ 4,000(a) $ 80,000
---------- ---------- ------- ------------ ----------
---------- ---------- ------- ------------ ----------
</TABLE>
(a) Accounts written off, net of recoveries.
S-1
<PAGE>
EXHIBIT 21
21
<PAGE>
Exhibit 21. SUBSIDIARIES OF SCHERER HEALTHCARE, INC.
<TABLE>
<CAPTION>
<S> <C> <C>
1. Medical Waste Systems, Inc. Subsidiary
DBA Bio Systems I.D.#22-2853378
380 Constance Drive
Warminster, Pennsylvania 18974
(770) 933-1800
2. ASH Enterprises, Inc. Subsidiary
120 Interstate North Parkway, S.E., Suite 305 I.D.# 58-1728029
Atlanta, Georgia 30339
(770) 933-1800
3. Bio Systems Partners Majority Owned Partnership
DBA Bio Systems I.D.# 58-1822608
210 Sherwood Avenue
Farmingdale, New York 11735
(770) 933-1800
4. Biofor, Inc. Subsidiary
P.O. Box 629 I.D.# 58-2105818
Waverly, Pennsylvania 18471
(770) 933-1800
5. BioWaste Management Corp. Subsidiary
120 Interstate North Parkway, S.E., Suite 305 I.D.# 11-2872389
Atlanta, Georgia 30339
(770) 933-1800
6. BioWaste Systems, Inc. Subsidiary
120 Interstate North Parkway, S.E., Suite 305 I.D.# 58-1803613
Atlanta, Georgia 30339
(770) 933-1800
7. Scherer Laboratories, Inc. Subsidiary
120 Interstate North Parkway, S.E., Suite 305 I.D.# 75-0270890
Atlanta, Georgia 30339
(770) 933-1800
</TABLE>
22
<PAGE>
EXHIBIT 25
23
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Robert P. Scherer, Jr. and Gary W. Ruffcorn, 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, 1998, 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 23rd day of June, 1998.
/s/ William J. Thompson
-----------------------
William J. Thompson
24
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Robert P. Scherer, Jr. and Gary W. Ruffcorn, 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, 1998, 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 24th day of June, 1998.
/s/ Stephen Lukas, Sr.
----------------------
Stephen Lukas, Sr.
25
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Robert P. Scherer, Jr. and Gary W. Ruffcorn, 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, 1998, 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 23rd day of June, 1998.
/s/ Kenneth H. Robertson
------------------------
Kenneth H. Robertson.
26
<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, 1998
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-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 6,868
<SECURITIES> 0
<RECEIVABLES> 3,176
<ALLOWANCES> (189)
<INVENTORY> 174
<CURRENT-ASSETS> 10,241
<PP&E> 7,157
<DEPRECIATION> (3,099)
<TOTAL-ASSETS> 25,792
<CURRENT-LIABILITIES> 2,865
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> 21,869
<TOTAL-LIABILITY-AND-EQUITY> 25,792
<SALES> 13,853
<TOTAL-REVENUES> 13,853
<CGS> 8,008
<TOTAL-COSTS> 12,819
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> 1,525
<INCOME-TAX> 21
<INCOME-CONTINUING> 1,504
<DISCONTINUED> 4,497
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,001
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.33
</TABLE>
