<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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)
(770) 933-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
----- -----
Indicate the number of shares of each of the issuer's classes of Common Stock,
as of the latest practicable date:
CLASS OUTSTANDING AS OF NOVEMBER 2, 1999
- ---------------------------------------- ----------------------------------
Common Stock, $0.01 par value 4,336,291
<PAGE>
SCHERER HEALTHCARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER PART I. FINANCIAL INFORMATION NUMBER
- ------ ------
<S> <C> <C>
1 Financial Statements:
Condensed Consolidated Balance
Sheets as of September 30, 1999 and
March 31, 1999............................................. 3
Condensed Consolidated Statements
of Operations for the Three and Six Months
Ended September 30, 1999 and 1998.......................... 5
Condensed Consolidated Statements
of Cash Flows for the Six Months
Ended September 30, 1999 and 1998.......................... 6
Notes to Condensed Consolidated
Financial Statements....................................... 7
2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................................. 9
PART II. OTHER INFORMATION
1 Legal Proceedings.......................................... 13
4 Submission of Matters to a Vote of Security Holders........ 14
6 Exhibits and Reports on Form 8-K........................... 14
SIGNATURES................................................. 15
Index to Exhibits.......................................... 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,082,000 $ 5,433,000
Accounts receivable, less allowance for doubtful
accounts of $264,000 and $293,000, respectively 4,481,000 3,721,000
Current maturities of notes receivable 71,000 174,000
Inventories 250,000 200,000
Prepaid and other 125,000 215,000
--------------- -------------
Total current assets 7,009,000 9,743,000
--------------- -------------
PROPERTY AND EQUIPMENT 8,192,000 7,786,000
Less accumulated depreciation (4,149,000) (3,674,000)
--------------- -------------
Net property and equipment 4,043,000 4,112,000
--------------- -------------
OTHER ASSETS
Intangibles, net 1,450,000 1,484,000
Cost in excess of net assets acquired, net 2,168,000 2,222,000
Investments, at market value 9,966,000 8,914,000
Other investments, at cost 650,000 650,000
Restricted cash for investment (Note 5) 2,000,000 -
Deferred income taxes 329,000 329,000
Other 197,000 197,000
Net assets of discontinued operations 358,000 326,000
--------------- -------------
Total other assets 17,118,000 14,122,000
--------------- -------------
TOTAL ASSETS $28,170,000 $27,977,000
=============== =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
---------------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 851,000 $ 1,083,000
Accrued expenses 1,938,000 1,499,000
Current maturities of debt obligations 229,000 235,000
Income taxes payable 99,000 85,000
Other 65,000 78,000
--------------- -------------
Total current liabilities 3,182,000 2,980,000
--------------- -------------
LONG-TERM DEBT, net of current maturities 287,000 351,000
--------------- -------------
OTHER LIABILITIES 228,000 378,000
--------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock - $.01 par value,
2,000,000 shares authorized;
22,162 shares issued and outstanding at September 30, 1999 - -
(22,775 at March 31, 1999)
Common stock - $.01 par value,
12,000,000 shares authorized;
4,715,596 shares issued at September 30, 1999
(4,713,641 at March 31, 1999);
4,336,234 shares outstanding at September 30, 1999
(4,334,279 at March 31, 1999) 47,000 47,000
Capital in excess of par value 21,487,000 22,349,000
Retained earnings 5,972,000 4,905,000
Less treasury stock, at cost (3,033,000) (3,033,000)
--------------- -------------
Total stockholders' equity 24,473,000 24,268,000
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,170,000 $27,977,000
=============== =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 4,019,000 $ 3,702,000 $ 8,089,000 $7,431,000
COSTS AND EXPENSES
Cost of goods sold 2,418,000 2,104,000 4,758,000 4,206,000
Selling, general, and administrative 1,151,000 1,043,000 2,307,000 2,189,000
Litigation expense (Note 6) 245,000 - 298,000 -
------------- ------------- ------------- ----------
Total costs and expenses 3,814,000 3,147,000 7,363,000 6,395,000
------------- ------------- ------------- ----------
OPERATING INCOME 205,000 555,000 726,000 1,036,000
OTHER INCOME
Interest income 156,000 177,000 344,000 350,000
Other, net 19,000 28,000 39,000 47,000
------------- ------------- ------------- ----------
Total other income 175,000 205,000 383,000 397,000
------------- ------------- ------------- ----------
INCOME BEFORE INCOME TAXES 380,000 760,000 1,109,000 1,433,000
PROVISION FOR INCOME TAXES 20,000 28,000 42,000 39,000
------------- ------------- ------------- ----------
NET INCOME $ 360,000 $ 732,000 $ 1,067,000 $1,394,000
============= ============= ============= ==========
Basic earnings per common share $ 0.08 $ 0.17 $ 0.25 $ 0.32
============= ============= ============= ==========
Diluted earnings per common share $ 0.08 $ 0.16 $ 0.23 $ 0.31
============= ============= ============= ==========
Weighted average common shares
outstanding - basic 4,336,234 4,332,487 4,335,935 4,325,534
============= ============= ============= ==========
Weighted average common shares
outstanding - diluted 4,555,644 4,547,768 4,551,224 4,564,291
============= ============= ============= ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
September 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,066,000 $ 1,394,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 653,000 623,000
Other noncash charges and credits, net 16,000 8,000
Changes in operating assets and liabilities:
Accounts receivable (778,000) (540,000)
Inventories (50,000) (47,000)
Prepaid and other 90,000 120,000
Income taxes, net 14,000 (31,000)
Accounts payable and accrued expenses 207,000 48,000
Other liabilities (163,000) (64,000)
------------ ------------
Net cash provided by operating activities of continuing operations 1,055,000 1,511,000
Net operating activities of discontinued operations (32,000) (89,000)
------------ ------------
Net cash provided by operating activities 1,023,000 1,422,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (458,000) (555,000)
Purchase of long-term investments (1,919,000) -
Cash restricted for investment (2,000,000) -
Decrease in notes receivable 103,000 94,000
Other investing activities, net (30,000) (66,000)
------------ ------------
Net cash used for investing activities (4,304,000) (527,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayment of borrowings (70,000) (94,000)
Exercise of stock options - 28,000
------------ ------------
Net cash used for financing activities (70,000) (66,000)
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS (3,351,000) 829,000
CASH AND CASH EQUIVALENTS, beginning of period 5,433,000 6,868,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,082,000 $ 7,697,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
The accompanying unaudited condensed consolidated financial statements of
Scherer Healthcare, Inc. and its subsidiaries (the "Company") include all
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results for the period indicated. Quarterly results of
operations are not necessarily indicative of annual results. These statements
should be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1999.
Certain fiscal 1999 amounts have been reclassified to conform with the fiscal
2000 presentation.
NOTE 2.
The components of inventory at September 30, 1999 and March 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------ ---------------
<S> <C> <C>
Finished products $ 67,000 $ 43,000
Containers, packaging, and raw materials 231,000 205,000
LIFO reserve (48,000) (48,000)
------------- -------------
Total $ 250,000 $ 200,000
============= =============
</TABLE>
Inventories are stated at the lower of net realizable value or cost using the
last-in, first-out ("LIFO") method.
NOTE 3.
Obligations under capital leases at September 30, 1999 and March 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------ ---------------
<S> <C> <C>
Obligations under capital leases, due in varying
installments through fiscal 2003 $ 516,000 $ 586,000
Less current maturities (229,000) (235,000)
------------- -------------
Long-term debt $ 287,000 $ 351,000
============ =============
</TABLE>
NOTE 4.
The Company has investments in long-term high-grade marketable securities
composed primarily of government and corporate fixed income bonds. These
marketable securities are classified as available-for-sale and are being
carried at fair market value based on quoted market prices. The net
unrealized holding gains or losses on these investments are reported under
capital in excess of par value.
The amortized cost and fair market value of the Company's marketable
securities are as follows:
<TABLE>
<CAPTION>
Net
Amortized unrealized Fair market
Cost loss value
------------ ------------ ------------
<S> <C> <C> <C>
SEPTEMBER 30, 1999
------------------
Municipal bonds $ 9,358,000 $ (745,000) $ 8,613,000
Corporate bonds 1,217,000 (101,000) 1,116,000
Preferred stocks 298,000 (61,000) 237,000
------------ ------------ ------------
Total $ 10,873,000 $ (907,000) $ 9,966,000
============ ============ ============
MARCH 31, 1999
------------------
Municipal bonds $ 7,444,000 $ (2,000) $ 7,442,000
Corporate bonds 1,217,000 (10,000) 1,207,000
Preferred stocks 298,000 (33,000) 265,000
------------ ------------ ------------
Total $ 8,959,000 $ (45,000) $ 8,914,000
============ ============ ============
</TABLE>
The municipal bonds mature ranging from 2 years to 29 years and the corporate
bonds mature ranging from 10 years to 25 years.
7
<PAGE>
NOTE 5.
On October 5, 1999, the Company made a cash investment of $2,000,000 in
Econometrics, Inc., a database marketing company based in Chicago, Illinois
that manages its own national consumer database of 180 million consumers and
links marketers to its national database through the Internet. The Company's
investment is in the form of a five-year convertible debenture, dated as of
September 30, 1999 (the "Debenture"), in the principal sum of $2,000,000, to
be repaid by Econometrics to the last registered holder of the Debenture on
September 1, 2004. Interest accrues on the unpaid principal balance of the
Debenture from September 30, 1999 at a rate of 8% per annum. Econometrics is
not required to make an interest payment until September 1, 2000, at which
time all accrued interest from September 30, 1999 through September 1, 2000
shall be paid. Commencing on December 1, 2000, interest shall be paid
quarterly until the principal amount has been paid in full or the Debenture
has been converted in full into Econometrics' common stock. Until the
Debenture is paid in full, the Company has the right to convert up to the
entire outstanding principal balance of the Debenture, plus accrued interest
thereon, into shares of Econometrics' common stock at a conversion price of
$.4315 per share, subject to adjustment. The conversion price was determined
to provide the Company with 20% of the outstanding common stock of
Econometrics as of September 30, 1999, on a fully diluted basis.
Additionally, as a result of the transaction, the Company has the right to
designate two persons to serve on the seven member Econometrics Board of
Directors. As of September 30, 1999, the Company recorded $2,000,000 of cash
on hand as restricted for the investment in Econometrics.
NOTE 6.
In a January 1989 merger transaction, a wholly-owned subsidiary of the
Company acquired Med X Services of Pennsylvania, Inc. ("Med X") whose
President and majority stockholder was Harry Kovar. Mr. Kovar continued to be
employed by Med X after the merger although a written employment agreement
between Mr. Kovar and Med X had not been executed by both parties. In July
1989, Mr. Kovar was terminated from his employment with Med X. On December
18, 1989, Mr. Kovar and his wife filed a complaint against the Company, Med
X, and other affiliated entities and persons in the Court of Common Pleas of
Bucks County, Pennsylvania ("Kovar Complaint"). The Kovar Complaint, as
amended four times by Mr. Kovar, alleged, among other charges, breach of an
oral agreement by the Company to cause Med X to employ Mr. Kovar on a
long-term basis and breach by Med X of an alleged employment contract between
Mr. Kovar and Med X. On March 13, 1992, the Company answered Mr. Kovar's
Fourth Amended Complaint and filed a counterclaim against Mr. Kovar for
breach of warranties and representations, fraud, and violations of
Pennsylvania's Securities Act of 1972 in connection with the merger of the
Company's subsidiary and Med X. On September 26, 1992, the Company filed a
complaint against Mr. Kovar, his wife, and other persons in the Court of
Common Pleas of Bucks County, Pennsylvania ("Scherer Complaint"). On November
15, 1993, the Court consolidated the Kovar Complaint and the Scherer
Complaint. On June 9, 1997, all defendants in the Kovar Complaint filed
motions for summary judgment. On January 23, 1998, the Court denied the
motion for summary judgment filed by the Company and Med X, but granted the
motion filed by the individual defendants in the Kovar Complaint. Between the
date the Kovar Complaint was filed and the date of the orders on summary
judgment, the consolidated action progressed slowly, and at times was
essentially dormant. Subsequent to the ruling on the motions for summary
judgment, settlement discussions began. On October 26, 1999, counsel for the
parties attended a mediation with a Senior Judge in the Court of Common Pleas
of Bucks County, Pennsylvania to attempt to settle the case. After
negotiation and discussion, an agreement in principle to settle the case was
reached whereby the Company agreed to pay Mr. Kovar $325,000 in a lump sum.
Discussions regarding the final language of the settlement are ongoing. In
the quarter ended September 30, 1999, the Company recorded $210,000, related
to this agreement in principle to settle, under litigation expense in the
accompanying condensed consolidated financial statements. The balance of the
expense related to the proposed amount of the settlement was accrued by the
Company in prior periods.
On August 28, 1998, Amy M. Murphy, the former President of the Company, filed
a sex discrimination and retaliation charge against the Company alleging a
violation of Title VII of the Civil Rights Act of 1964, as amended. Ms.
Murphy filed the charge with the Atlanta, Georgia office of the Equal
Employment Opportunity Commission ("EEOC"). On September 23, 1998, Ms. Murphy
amended this charge to identify the Company and Robert P. Scherer, Jr.,
Chairman, President and Chief Executive Officer of the Company, as her
employers. The Company conducted an internal investigation of Ms. Murphy's
charge and concluded that there has been no Title VII violation. On December
22, 1998, the EEOC notified the Company it had terminated its investigation
of Ms. Murphy's charge. On March 17, 1999, Ms. Murphy filed a complaint in
United States District Court, Northern District of Georgia, Atlanta Division,
against the Company and Mr. Scherer alleging gender discrimination, sexual
harassment, and intentional infliction of emotional distress. The Company and
Mr. Scherer filed an answer denying Ms. Murphy's allegations on April 23,
1999. On October 4, 1999, the Company, without admitting any wrongdoing,
settled the dispute with Ms. Murphy for a cash payment of $140,000. The
Company recorded $35,000 and $88,000 in expense related to the settlement,
including associated legal fees, for the quarter and six months ended
September 30, 1999, respectively, under litigation expense in the
accompanying condensed consolidated financial statements. The balance of the
expenses related to this settlement were accrued for in prior periods. The
Company also agreed to repurchase all of Ms. Murphy's 16,667 shares of Common
Stock of the Company for $3.50 per share. Ms. Murphy dismissed the lawsuit
and retracted her allegations against the Company and Mr. Scherer.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information,
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, which represent the Company's expectations
or beliefs. When used in this report, the words "may," "could," "should,"
"would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and
similar expressions are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
certain of which are beyond the Company's control. The Company cautions that
various factors, including the factors described in the Company's filings
with the Securities and Exchange Commission, as well as general economic
conditions, changes in applicable laws and regulations, 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 of the Company. Reference is made to this report as well as the
Company's most recent Annual Report on Form 10-K and other reports filed with
the Securities and Exchange Commission for other factors that could affect
the forward-looking statements. Any forward-looking statement speaks only as
of the date of this report and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or
circumstances after the date on which such statements is made or to reflect
the occurrence of an unanticipated event. New factors emerge from time to
time, and it is not possible for the Company to predict all of such factors.
Further, the Company cannot assess the impact of each such factor on its
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.
RESULTS OF OPERATIONS
NET SALES AND OPERATING INCOME (LOSS).
The following table sets forth, for the periods indicated, the net sales and
operating income (loss) for each segment of the business of the Company and
its subsidiaries:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES:
Waste Management Services Segment $ 3,723,000 $ 3,498,000 $ 7,401,000 $ 6,912,000
Consumer Healthcare Products Segment 296,000 204,000 688,000 519,000
----------- ----------- ----------- -----------
Company Totals $ 4,019,000 $ 3,702,000 $ 8,089,000 $ 7,431,000
=========== =========== =========== ===========
OPERATING INCOME (LOSS):
Waste Management Services Segment $ 303,000 $ 626,000 $ 858,000 $ 1,139,000
Consumer Healthcare Products Segment 96,000 43,000 260,000 156,000
Corporate (194,000) (114,000) (392,000) (259,000)
----------- ----------- ----------- -----------
Company Totals $ 205,000 $ 555,000 $ 726,000 $ 1,036,000
=========== =========== =========== ===========
</TABLE>
The Company's net sales increased 9% to $4,019,000 for the second quarter of
fiscal 2000 from $3,702,000 for the second quarter of fiscal 1999. The
Company's operating income decreased to $205,000 for the second quarter of
fiscal 2000 from $555,000 for the second quarter of fiscal 1999; however, the
operating income for the quarter ended September 30, 1999 includes $245,000
in expense associated with the settlement of one lawsuit against the Company
and an agreement in principle to settle a second lawsuit against the Company
(see Note 6 of Notes to Condensed Consolidated Financial Statements included
elsewhere herein). The Company's cost of goods sold increased to 60% of net
sales for the quarter ended September 30, 1999 from 57% of net sales for the
quarter ended September 30, 1998. Selling, general and administrative
expenses increased slightly to 29% of net sales for the second quarter of
fiscal 2000 from 28% for the second quarter of fiscal 1999.
9
<PAGE>
The Company's net sales increased 9% to $8,089,000 for the six months ended
September 30, 1999 from $7,431,000 for the six months ended September 30,
1998. The Company's operating income decreased to $726,000 for the first six
months of fiscal 2000 from $1,036,000 for the first six months of fiscal
1999; however, the operating income for the six months ended September 30,
1999 includes $298,000 in expense associated with the settlement of one
lawsuit against the Company and an agreement in principle to settle a second
lawsuit against the Company (see Note 6 of Notes to Condensed Consolidated
Financial Statements included elsewhere herein). Cost of goods sold increased
to 59% of net sales for the six months ended September 30, 1999 from 57% of
net sales for the six months ended September 30, 1998. Selling, general and
administrative expenses decreased to 29% of net sales for the six months
ended September 30, 1999 from 30% of net sales for the six months ended
September 30, 1998. The primary reasons for these changes are discussed below.
The results of operations of the Company are dependent upon the results of
operations of each of its subsidiaries operating in the Company's individual
business segments. Set forth below is a discussion of the results of
operations of each of these segments.
WASTE MANAGEMENT SERVICES SEGMENT
Net sales in the Company's Waste Management Services Segment, which operates
through Bio Systems Partners, Bio Waste Systems, Inc., and Medical Waste
Systems, Inc. (collectively, "Bio Systems"), increased 6% to $3,723,000 for
the second quarter of fiscal 2000 from $3,498,000 for the second quarter of
fiscal 1999. Bio Systems' net sales increased 7% to $7,401,000 for the six
months ended September 30, 1999 from $6,912,000 during the same period in
fiscal 1999. 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. Market forces and
competitive pricing pressures have affected Bio Systems' ability to increase
prices for its sharps disposal services with existing hospital and physician
customers. These factors also impact the prices Bio Systems is able to charge
new and potential customers. In fiscal 1999, Bio Systems expanded its
disposal services to include certain laboratory waste and surgical fluid
waste. Net sales for laboratory and surgical fluid waste increased $57,000 to
$108,000 in the second quarter of fiscal 2000, as compared to $51,000 in the
second quarter of fiscal 1999. For the six months ended September 30, 1999,
net sales for laboratory and surgical fluid waste increased 99% to $198,000
from $100,000 for the six months ended September 30, 1998. Bio Systems
intends to continue to actively pursue the laboratory and surgical fluid
waste disposal market although the market is relatively small compared to Bio
Systems' core business of sharps disposal.
Bio Systems' operating income decreased to $303,000 for the quarter ended
September 30, 1999 from $626,000 for the quarter ended September 30, 1998;
however, the quarter ended September 30, 1999 includes $210,000 in expense
associated with an agreement in principle to settle a lawsuit (see Note 6 of
Notes to Condensed Consolidated Financial Statements included elsewhere
herein). Bio Systems' cost of goods sold increased to 62% of its net sales
for the second quarter of fiscal 2000 from 58% of its net sales for the
second quarter of fiscal 1999. Selling, general and administrative expenses
were 24% of net sales for the quarter ended September 30, 1999, which was
unchanged compared to the quarter ended September 30, 1998. Starting in early
fiscal 1998 and continuing through the current period, Bio Systems has had
substantial new hospital activity. Preparing new accounts for service
requires, among other things, installation of Bio Systems' reusable
containers and sometimes considerable operational follow-up which causes
increases in certain costs and expenses such as operating payroll and expense
for the hardware related to the installation of the reusable containers.
Although Bio Systems continues to increase revenue through new hospital
contracts, the pricing pressures discussed above combined with certain
contract restrictions have hampered Bio Systems' ability to effectively
absorb these costs and expenses as compared to prior periods. Bio Systems'
operating payroll has also increased primarily due to the addition of
personnel needed to service the new hospital accounts subsequent to
installation. Additionally, Bio Systems' costs and expenses for waste
disposal have increased slightly due to the outsourcing of the disposal of
the laboratory and surgical fluid waste discussed above. The reusable
containers that Bio Systems uses to collect the laboratory and surgical fluid
waste are larger than the sharps collection containers and the waste disposal
machinery at Bio Systems' processing facility is not currently equipped to
process these larger containers. In future periods, Bio Systems intends to
process these larger containers at its processing facility by retrofitting
its waste disposal system at a cost that's not expected to be material to Bio
Systems' results of operations.
Bio Systems' operating income decreased to $858,000 for the six months ended
September 30, 1999 from $1,139,000 for the six months ended September 30,
1998; however, the six months ended September 30, 1999 includes $210,000 in
expense associated with an agreement in principle to settle a lawsuit.
Primarily due to the reasons discussed above, cost of goods sold increased to
61% of net sales for the six months ended September 30, 1999 from 58% for the
same period in fiscal 1999. Selling, general and administrative expenses were
25% of net sales for the first six months of fiscal 2000, which was unchanged
compared to the first six months of fiscal 1999.
10
<PAGE>
CONSUMER HEALTHCARE PRODUCTS SEGMENT
Net sales for the Consumer Healthcare Products Segment, which operates
through Scherer Laboratories, Inc. ("Scherer Labs"), increased 45% to
$296,000 for the second quarter of fiscal 2000 from $204,000 during the same
period in fiscal 1999. Scherer Labs' net sales increased 33% to $688,000 for
the six months ended September 30, 1999 from $519,000 for the six months
ended September 30, 1998. In the first quarter of fiscal 1999, Scherer Labs'
largest customer reduced its sales orders for Scherer Labs' two core products
which severely impacted Scherer Labs' operating results. In early fiscal
2000, Scherer Labs regained a significant portion of its lost sales volume
with this customer. As a result, Scherer Labs' had a 60% increase in sales
orders for its topical analgesic product that provides relief from insect
bites.
As a result of the increase in net sales, Scherer Labs' operating income
increased to $96,000 for the second quarter of fiscal 2000 from $43,000 for
the second quarter of fiscal 1999 and increased to $260,000 for the six
months ended September 30, 1999 from $156,000 for the six months ended
September 30, 1998.
CORPORATE
The Company's operating expenses in the Corporate Segment increased to
$194,000 for the quarter ended September 30, 1999 from $114,000 for the
quarter ended September 30, 1998. For the six months ended September 30,
1999, operating expenses in the Corporate Segment increased to $392,000 from
$259,000 for the same period in fiscal 1999. 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. The increase in the Corporate operating expenses is primarily
due to the settlement of a lawsuit against the Company (see Note 6 of Notes
to Condensed Consolidated Financial Statements included elsewhere herein).
The Company recorded $35,000 and $88,000 in expense related to the
settlement, including associated legal fees, for the quarter and six months
ended September 30, 1999, respectively. Additionally, beginning April 1,
1999, the Company began paying a salary to Robert P. Scherer, Jr., the
Company's Chairman of the Board, President and Chief Executive Officer. Prior
to April 1999, the Company did not provide salary compensation for Mr.
Scherer's services. The Company does not allocate any revenues to the
Corporate level.
OTHER INCOME.
The Company's interest income decreased to $156,000 for the second quarter of
fiscal 2000 from $177,000 for the second quarter of fiscal 1999 and decreased
to $344,000 for the six months ended September 30, 1999 from $350,000 for the
six months ended September 30, 1998. In the second quarter of fiscal 2000,
the Company made an adjustment to interest income related to timing of
interest received on an investment in marketable securities in the first
quarter of fiscal 2000. The balance of the decrease is primarily the result
of a reduction in interest income related to a note receivable due to the
repayment of principal on the note.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $2,082,000 at September 30,
1999, a decrease of $3,351,000 from March 31, 1999. However, in April 1999,
the Company invested, using cash on hand, $1,919,000 in long-term high-grade
marketable securities resulting in a reduction in cash and cash equivalents.
Additionally, as of September 30, 1999, the Company recorded $2,000,000 of
cash on hand as restricted for the investment in Econometrics (see Note 5 of
Notes to Condensed Consolidated Financial Statements included elsewhere
herein). With the investment in marketable securities in April 1999, the
balance, at fair market value, of the Company's long-term investments was
$9,966,000 at September 30, 1999, as compared to $8,914,000 at March 31,
1999. As a result of the investment in marketable securities in April 1999
and the reclass of the restricted cash for the investment in Econometrics,
the Company's working capital decreased to $3,827,000 at September 30, 1999
from $6,763,000 at March 31, 1999. The Company's long-term debt decreased
slightly to $287,000 at September 30, 1999 from $351,000 at March 31, 1999.
The primary reasons for these changes are discussed below.
CASH FLOW FROM OPERATING ACTIVITIES.
The Company's cash provided by operating activities from continuing
operations totaled $1,055,000 for the first six months of fiscal 2000, as
compared to $1,511,000 for the first six months of fiscal 1999. Primarily due
to timing of working capital items, Bio Systems' cash provided from operating
activities decreased to $527,000 for the first six months of fiscal 2000 from
$733,000 for the first six months of fiscal 1999. As a result of the increase
in its net sales, Scherer Labs' cash provided from operating activities
increased to $163,000 for the six months ended September 30, 1999 from
$115,000 for the six months ended September 30, 1998. The cash provided by
operations at the corporate level decreased to $365,000 for the six months
ended September 30, 1999 from $663,000 for the same period in fiscal 1999.
The decrease is primarily due to timing of payroll funding and interest
received on the Company's long-term investments.
11
<PAGE>
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES.
The Company's investing activities used cash of $4,304,000 for the six months
ended September 30, 1999, as compared to a use of cash of $527,000 for the
six months ended September 30, 1998. In April 1999, the Company increased its
investment in marketable securities by $1,919,000 when it made an additional
investment in fixed income government bonds. The Company's marketable
securities are composed of municipal bonds, corporate bonds and preferred
stocks and mature over periods ranging from 2 years to 29 years (see Note 4
of the Notes to Condensed Consolidated Financial Statements included
elsewhere herein). On October 5, 1999, the Company made a cash investment of
$2,000,000 in Econometrics Inc. in the form of a five-year convertible
debenture. As of September 30, 1999, the Company recorded $2,000,000 of cash
on hand as restricted for the investment in Econometrics. (see Note 5 of
Notes to Condensed Consolidated Financial Statements included elsewhere
herein).
Cash used for financing activities decreased slightly to $70,000 for the six
months ended September 30, 1999 from $66,000 for the six months ended
September 30, 1998.
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 continues to evaluate its long-term options with regard to the use of
its remaining cash on hand.
YEAR 2000 ISSUES.
Like many other companies, the year 2000 computer issue creates risks for the
Company. If internal systems do not correctly recognize and process date
information beyond the year 1999, there could be an adverse impact on the
Company's operations. The Company has developed a plan to modify its
information technology for the year 2000 and during fiscal 1999 began
replacing critical data processing systems at its corporate headquarters as
well as at Bio Systems. The Company completed its conversion to the new
equipment and software at its corporate headquarters in fiscal 1999 and Bio
Systems completed its conversion in the second quarter of fiscal 2000. The
third party vendors that supplied the new hardware and software have informed
the Company that the new systems and software are year 2000 compliant. As of
September 30, 1999, the Company incurred approximately $75,000 in replacing
and converting the Company's data processing systems.
The Company believes that its most reasonably likely worst case year 2000
scenarios would relate to problems with the systems of third parties rather
than with the Company's internal systems or its products. It is clear that
the Company has the least ability to assess and remediate the year 2000
problems of third parties and the Company believes the risks are greatest
with infrastructure (e.g. electricity supply, water and sewer service),
telecommunications, transportation supply chains and suppliers of materials.
Similarly, the failure of the Company's hospital and other healthcare
provider customers to be year 2000 compliant could have an adverse impact on
the Company. While the Company is taking steps that it believes to be
reasonable and prudent to assess the year 2000 readiness of third parties
with whom the Company does business, the failure of any of these third
parties to correct a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Due to the general uncertainty inherent in the year 2000 problem,
resulting in part from the uncertainty of the year 2000 readiness of third
party suppliers and customers, the Company is unable to determine at this
time whether the consequences of year 2000 failures will have a material
impact on the Company's results of operations, liquidity, or financial
condition. Readers are cautioned that forward-looking statements contained in
this year 2000 update should be read in conjunction with the Company's
disclosures regarding forward looking statements.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In a January 1989 merger transaction, a wholly-owned subsidiary of the
Company acquired Med X Services of Pennsylvania, Inc. ("Med X") whose
President and majority stockholder was Harry Kovar. Mr. Kovar continued
to be employed by Med X after the merger although a written employment
agreement between Mr. Kovar and Med X had not been executed by both
parties. In July 1989, Mr. Kovar was terminated from his employment
with Med X. On December 18, 1989, Mr. Kovar and his wife filed a
complaint against the Company, Med X, and other affiliated entities and
persons in the Court of Common Pleas of Bucks County, Pennsylvania
("Kovar Complaint"). The Kovar Complaint, as amended four times by Mr.
Kovar, alleged, among other charges, breach of an oral agreement by the
Company to cause Med X to employ Mr. Kovar on a long-term basis and
breach by Med X of an alleged employment contract between Mr. Kovar and
Med X. On March 13, 1992, the Company answered Mr. Kovar's fourth
amended complaint and filed a counterclaim against Mr. Kovar for breach
of warranties and representations, fraud, and violations of
Pennsylvania's Securities Act of 1972 in connection with the merger of
the Company's subsidiary and Med X. On September 26, 1992, the Company
filed a complaint against Mr. Kovar, his wife, and other persons in the
Court of Common Pleas of Bucks County, Pennsylvania ("Scherer
Complaint"). On November 15, 1993, the Court consolidated the Kovar
Complaint and the Scherer Complaint. On June 9, 1997, all defendants in
the Kovar Complaint filed motions for summary judgment. On January 23,
1998, the Court denied the motion for summary judgment filed by the
Company and Med X, but granted the motion filed by the individual
defendants in the Kovar Complaint. Between the date the Kovar Complaint
was filed and the date of the orders on summary judgment, the
consolidated action progressed slowly, and at times was essentially
dormant. Subsequent to the ruling on the motions for summary judgment,
settlement discussions began. On October 26, 1999, counsel for the
parties attended a mediation with a Senior Judge in the Court of Common
Pleas of Bucks County, Pennsylvania to attempt to settle the case.
After negotiation and discussion, an agreement in principle to settle
the case was reached whereby the Company agreed to pay Mr. Kovar
$325,000 in a lump sum. Discussions regarding the final language of the
settlement are ongoing.
On August 28, 1998, Amy M. Murphy, the former President of the Company,
filed a sex discrimination and retaliation charge against the Company
alleging a violation of Title VII of the Civil Rights Act of 1964, as
amended. Ms. Murphy filed the charge with the Atlanta, Georgia office
of the Equal Employment Opportunity Commission ("EEOC"). On September
23, 1998, Ms. Murphy amended this charge to identify the Company and
Robert P. Scherer, Jr., Chairman, President and Chief Executive Officer
of the Company, as her employers. The Company conducted an internal
investigation of Ms. Murphy's charge and concluded that there has been
no Title VII violation. On December 22, 1998, the EEOC notified the
Company it had terminated its investigation of Ms. Murphy's charge. On
March 17, 1999, Ms. Murphy filed a complaint in United States District
Court, Northern District of Georgia, Atlanta Division, against the
Company and Mr. Scherer alleging gender discrimination, sexual
harassment, and intentional infliction of emotional distress. The
Company and Mr. Scherer filed an answer denying Ms. Murphy's
allegations on April 23, 1999. On October 4, 1999, the Company, without
admitting any wrongdoing, settled the dispute with Ms. Murphy for a
cash payment of $140,000. The Company recorded $35,000 and $88,000 in
expense related to the settlement, including associated legal fees, for
the quarter and six months ended September 30, 1999, respectively,
under litigation expense in the accompanying condensed consolidated
financial statements. The balance of the expenses related to this
settlement were accrued for in prior periods. The Company also agreed
to repurchase all of Ms. Murphy's 16,667 shares of Common Stock of the
Company for $3.50 per share. Ms. Murphy dismissed the lawsuit and
retracted her allegations against the Company and Mr. Scherer.
13
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on September 15,
1999 for the purpose of electing Directors. The following persons were
elected to the Company's Board of Directors. The vote totals are
set forth opposite the name of each nominee for director.
<TABLE>
<CAPTION>
For Withheld
------------------ ------------------
<S> <C> <C>
Stephen Lukas, Sr. 3,444,716 shares 49,253 shares
Kenneth H. Robertson 3,445,220 shares 48,749 shares
Robert P. Scherer, Jr. 3,481,986 shares 11,983 shares
William J. Thompson 3,482,041 shares 11,928 shares
</TABLE>
There were no broker non-votes with respect to the election of
directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHERER HEALTHCARE, INC.
(Registrant)
Date: November 15, 1999 /s/ Robert P. Scherer, Jr.
--------------------------
Robert P. Scherer, Jr.
Chairman, Chief Executive Officer and President
Date: November 15, 1999 /s/ Gary W. Ruffcorn
--------------------
Gary W. Ruffcorn
Vice President and Chief Financial Officer
15
<PAGE>
SCHERER HEALTHCARE, INC.
INDEX OF EXHIBITS
The following exhibit is being filed with this report.
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<S> <C> <C>
27 Financial Data Schedule
(included only in EDGAR filing) 17
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,082
<SECURITIES> 0
<RECEIVABLES> 4,745
<ALLOWANCES> (264)
<INVENTORY> 250
<CURRENT-ASSETS> 7,009
<PP&E> 8,192
<DEPRECIATION> (4,149)
<TOTAL-ASSETS> 28,170
<CURRENT-LIABILITIES> 3,182
<BONDS> 287
0
0
<COMMON> 47
<OTHER-SE> 24,426
<TOTAL-LIABILITY-AND-EQUITY> 28,170
<SALES> 8,089
<TOTAL-REVENUES> 8,089
<CGS> 4,578
<TOTAL-COSTS> 7,363
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,109
<INCOME-TAX> 42
<INCOME-CONTINUING> 1,067
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,067
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.23
</TABLE>
