<PAGE>
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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, 2000
COMMISSION FILE NO. 0-10552
------------------------
SCHERER HEALTHCARE, INC.
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 59-0688813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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:
<TABLE>
<S> <C>
CLASS OUTSTANDING AS OF NOVEMBER 3, 2000
----------------------------------------- -----------------------------------------
Common Stock, $0.01 par value 4,321,165
</TABLE>
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--------------------------------------------------------------------------------
<PAGE>
SCHERER HEALTHCARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
--------------------- --------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
1 Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
2000 and March 31, 2000..................................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended September 30, 2000 and 1999...... 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2000 and 1999.................... 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
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31,
September 30, 2000 2000
------------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................. $ 3,300,000 $ 1,689,000
Accounts receivable, less allowance for doubtful
accounts of $300,000 and $257,000, respectively..... 4,374,000 4,442,000
Interest receivable................................... 229,000 248,000
Inventories........................................... 263,000 374,000
Prepaid and other..................................... 182,000 215,000
----------- -----------
Total current assets................................ 8,348,000 6,968,000
----------- -----------
PROPERTY AND EQUIPMENT.................................. 9,394,000 8,670,000
Less accumulated depreciation......................... (4,933,000) (4,328,000)
----------- -----------
Net property and equipment............................ 4,461,000 4,342,000
----------- -----------
OTHER ASSETS
Intangibles, net...................................... 1,576,000 1,544,000
Cost in excess of net assets acquired, net............ 2,056,000 2,116,000
Investments, at market value.......................... 8,633,000 9,927,000
Investments in unconsolidated companies, at equity.... 1,028,000 350,000
Other investments, at cost............................ 2,750,000 2,650,000
Deferred income taxes................................. 90,000 119,000
Other................................................. 264,000 265,000
Net assets of discontinued operations................. 457,000 399,000
----------- -----------
Total other assets.................................. 16,854,000 17,370,000
----------- -----------
TOTAL ASSETS............................................ $29,663,000 $28,680,000
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable.......................................... $ 937,000 $ 1,017,000
Accrued expenses.......................................... 1,202,000 1,571,000
Current maturities of debt obligations.................... 273,000 263,000
Income taxes payable...................................... 39,000 1,000
Other..................................................... 31,000 27,000
----------- -----------
Total current liabilities............................... 2,482,000 2,879,000
----------- -----------
LONG-TERM DEBT, net of current maturities................... 480,000 288,000
----------- -----------
OTHER LIABILITIES........................................... 125,000 150,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock--$.01 par value, 2,000,000
shares authorized; 21,979 shares issued and outstanding
at September 30, 2000 (21,992 at March 31, 2000)........ -- --
Common stock--$.01 par value, 12,000,000 shares
authorized; 4,712,194 shares issued at September 30,
2000 (4,712,115 at March 31, 2000); 4,321,165 shares
outstanding at September 30, 2000 (4,337,163 at
March 31, 2000)......................................... 47,000 47,000
Capital in excess of par value............................ 21,537,000 21,456,000
Retained earnings......................................... 8,083,000 6,951,000
Less treasury stock, at cost.............................. (3,091,000) (3,091,000)
----------- -----------
Total stockholders' equity.............................. 26,576,000 25,363,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $29,663,000 $28,680,000
=========== ===========
</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,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES..................................... $4,611,000 $4,019,000 $9,237,000 $8,089,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of goods sold.......................... 2,928,000 2,418,000 5,687,000 4,758,000
Selling, general, and administrative........ 1,218,000 1,151,000 2,498,000 2,307,000
Litigation expense.......................... 0 245,000 28,000 298,000
---------- ---------- ---------- ----------
Total costs and expenses.................. 4,146,000 3,814,000 8,213,000 7,363,000
---------- ---------- ---------- ----------
OPERATING INCOME.............................. 465,000 205,000 1,024,000 726,000
OTHER INCOME (EXPENSE)
Interest income............................. 210,000 156,000 452,000 344,000
Equity in net losses of unconsolidated
companies................................. (197,000) 0 (197,000) 0
Other, net.................................. 5,000 19,000 (50,000) 39,000
---------- ---------- ---------- ----------
Total other income, net................... 18,000 175,000 205,000 383,000
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.................... 483,000 380,000 1,229,000 1,109,000
PROVISION FOR INCOME TAXES.................... 39,000 20,000 68,000 42,000
---------- ---------- ---------- ----------
NET INCOME.................................... $ 444,000 $ 360,000 $1,161,000 $1,067,000
========== ========== ========== ==========
Basic earnings per common share............... $ 0.10 $ 0.08 $ 0.27 $ 0.25
========== ========== ========== ==========
Diluted earnings per common share............. $ 0.10 $ 0.08 $ 0.26 $ 0.23
========== ========== ========== ==========
Weighted average common shares outstanding--
basic....................................... 4,321,105 4,336,234 4,321,096 4,335,935
========== ========== ========== ==========
Weighted average common shares outstanding--
diluted..................................... 4,552,452 4,555,644 4,552,443 4,551,224
========== ========== ========== ==========
</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,
------------------------
2000 1999
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $1,161,000 $ 1,067,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 665,000 653,000
Equity in net losses of unconsolidated companies........ 197,000 0
Other noncash charges and credits, net.................. (29,000) 15,000
Changes in operating assets and liabilities:
Accounts receivable..................................... 68,000 (778,000)
Inventories............................................. 111,000 (50,000)
Other................................................... 51,000 90,000
Income taxes payable.................................... 38,000 14,000
Accounts payable and accrued expenses................... (449,000) 207,000
Other liabilities....................................... (25,000) (163,000)
---------- -----------
Net cash provided by operating activities of continuing
operations.............................................. 1,788,000 1,055,000
Net operating activities of discontinued operations....... (54,000) (32,000)
---------- -----------
Net cash provided by operating activities................. 1,734,000 1,023,000
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net.................. (724,000) (458,000)
Sale (purchase) of investments, at market value........... 1,374,000 (1,919,000)
Cash restricted for investment............................ 0 (2,000,000)
Investments in unconsolidated companies, at equity........ (875,000) 0
Other investments, at cost................................ (100,000) 0
Decrease in notes receivable.............................. 0 103,000
Other investing activities, net........................... 0 (30,000)
---------- -----------
Net cash used for investing activities...................... (325,000) (4,304,000)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayment of borrowings............................... 202,000 (70,000)
---------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS......................... 1,611,000 (3,351,000)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,689,000 5,433,000
---------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $3,300,000 $ 2,082,000
========== ===========
</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, 2000.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
NOTE 2.
The components of inventory at September 30, 2000 and March 31, 2000
consisted of the following:
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
-------------- ---------
<S> <C> <C>
Finished products.................................... $ 46,000 $ 68,000
Containers, packaging, and raw materials............. 266,000 355,000
LIFO reserve......................................... (49,000) (49,000)
-------- --------
Total.............................................. $263,000 $374,000
======== ========
</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, 2000 and March 31, 2000
consisted of the following:
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
-------------- ---------
<S> <C> <C>
Obligations under capital leases, due in varying
installments through fiscal 2005.................. $ 753,000 $ 551,000
Less current maturities............................. (273,000) (263,000)
--------- ---------
Long-term debt...................................... $ 480,000 $ 288,000
========= =========
</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.
7
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. (CONTINUED)
The amortized cost and fair market value of the Company's marketable
securities are as follows:
<TABLE>
<CAPTION>
Net
unrealized Fair market
Cost loss value
----------- ---------- -----------
<S> <C> <C> <C>
September 30, 2000
Municipal bonds........................ $ 7,929,000 $(601,000) $7,328,000
Corporate bonds........................ 1,216,000 (147,000) 1,069,000
Preferred stocks....................... 298,000 (62,000) 236,000
----------- --------- ----------
Total................................ $ 9,443,000 $(810,000) $8,633,000
=========== ========= ==========
March 31, 2000
Municipal bonds........................ $ 9,351,000 $(735,000) $8,616,000
Corporate bonds........................ 1,216,000 (129,000) 1,087,000
Preferred stocks....................... 298,000 (74,000) 224,000
----------- --------- ----------
Total................................ $10,865,000 $(938,000) $9,927,000
=========== ========= ==========
</TABLE>
The municipal bonds mature ranging from 2 years to 29 years and the corporate
bonds mature ranging from 10 years to 25 years.
NOTE 5.
The Company has investments in unconsolidated companies, recorded on the
equity method of accounting, of $1,028,000 as of September 30, 2000. The
Company's equity in net losses of unconsolidated companies was $197,000 for the
three and six months ended September 30, 2000.
The equity method of accounting is used for companies and other investments
in which the Company has significant influence, generally this represents common
stock ownership, partnership equity or convertible rights of at least 20% and
not greater than 50%, and includes investments in Compliance1, Inc. and Protocol
Point of Care Laboratory Management, LLC ("Protocol"). Compliance1, Inc. manages
the Health and Safety Information Service, a one-of-its-kind joint venture with
the U.S. Department of Commerce, which facilitates agri-chemical and crop
protection product compliance in cooperation with the U.S. EPA and state
departments of agriculture. Its internet-based solution consolidates the
official up-to-date information needed by online market places to comply with
federal, state, and local regulations. The Company's investment is in the form
of three-year 10% convertible debentures for $925,000, which mature on various
dates during 2003. Protocol provides a complete laboratory services solution to
group physician practices and other healthcare providers. The Company's
investment is in the form of a three-year 10% convertible debenture for $300,000
that matures during February 2003.
The Company also has investments in Econometrics, Inc. and Renaissance
Pharmaceuticals, Inc., which are recorded at historical cost under the cost
method of accounting. Econometrics is a database marketing company 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 8% convertible debenture of $2,000,000 that matures
during October 2004 and a
8
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. (CONTINUED)
three-year 10% convertible debenture for $100,000, plus warrants, that matures
during June 2003. Renaissance Pharmaceuticals Inc. is a development stage drug
delivery company. The Company has a direct investment of $650,000 in Renaissance
Pharmaceuticals, Inc.
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 to settle the case was reached whereby the Company paid
Mr. Kovar $325,000 in a lump sum. 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
9
<PAGE>
SCHERER HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. (CONTINUED)
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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains, in addition to historical information,
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, 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.
RECENT DEVELOPMENTS
On September 19, 2000, the Company announced that it had invested $925,000
in Compliance1, Inc., a Delaware corporation. The Company's investment is in the
form of three-year 10% convertible notes (the "Notes"), in the principal
aggregate amount of $925,000, which each mature on various dates in 2003.
Compliance1 agreed to pay interest on the unpaid principal amount of the Notes
at a rate of ten percent (10%) per annum. Compliance1 has the right to prepay,
in whole or in part, the outstanding principal balance of each of the Notes
after the first anniversary of each Note, provided, however, that the Company
may, within a thirty (30) day period, as well as any other time on demand,
convert the Notes into common stock of Compliance1. As of the date of the
initial investments, the conversion of the Notes would result in the Company
receiving 31% of the 11,818,030 shares of Compliance1 common stock outstanding,
on a fully diluted basis.
11
<PAGE>
RESULTS OF OPERATIONS
NET SALES AND OPERATING INCOME. The following table sets forth, for the
periods indicated, the net sales and operating income for each segment of the
business of the Company and its subsidiaries:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES:
Waste Management Services Segment........... $4,265,000 $3,723,000 $8,469,000 $7,401,000
Consumer Healthcare Products Segment........ 346,000 296,000 768,000 688,000
---------- ---------- ---------- ----------
Company Totals............................ $4,611,000 $4,019,000 $9,237,000 $8,089,000
========== ========== ========== ==========
OPERATING INCOME:
Waste Management Services Segment........... $ 483,000 $ 303,000 $1,069,000 $ 858,000
Consumer Healthcare Products Segment........ 119,000 96,000 285,000 260,000
Corporate................................... (137,000) (194,000) (330,000) (392,000)
---------- ---------- ---------- ----------
Company Totals............................ $ 465,000 $ 205,000 $1,024,000 $ 726,000
========== ========== ========== ==========
</TABLE>
The Company's net sales increased 15% to $4,611,000 for the second quarter
of fiscal 2001 from $4,019,000 for the second quarter of fiscal 2000. The
Company's operating income increased to $465,000 for the second quarter of
fiscal 2001 from $205,000 for the second quarter of fiscal 2000. The operating
income for the quarter ended September 30, 1999 included $245,000 of 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 64% of net
sales for the quarter ended September 30, 2000 from 60% of net sales for the
quarter ended September 30, 1999. Selling, general and administrative expenses
decreased slightly to 26% of net sales for the second quarter of fiscal 2001
from 29% for the second quarter of fiscal 2000. The primary reasons for these
changes are discussed below.
The Company's net sales increased 14% to $9,237,000 for the six months ended
September 30, 2000 from $8,089,000 for the six months ended September 30, 1999.
The Company's operating income increased to $1,024,000 for the first six months
of fiscal 2001 from $726,000 for the first six months of fiscal 2000. The
operating income for the six months ended September 30, 1999 included $298,000
of 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 62% of net sales for the six
months ended September 30, 2000 from 59% of net sales for the six months ended
September 30, 1999. Selling, general and administrative expenses decreased to
27% of net sales for the six months ended September 30, 2000 from 29% of net
sales for the six months ended September 30, 1999. 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 15% to $4,265,000 for the
second quarter of fiscal 2001 from $3,723,000 for the second quarter of fiscal
2000. Bio Systems' net sales increased 14% to $8,469,000 for the six months
12
<PAGE>
ended September 30, 2000 from $7,401,000 during the same period in fiscal 2000.
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 2000, Bio Systems expanded its disposal services to include
certain laboratory waste and surgical fluid waste. Net sales for laboratory and
surgical fluid waste increased $87,000 to $195,000 in the second quarter of
fiscal 2001, as compared to $108,000 in the second quarter of fiscal 2000. For
the six months ended September 30, 2000, net sales for laboratory and surgical
fluid waste increased 76% to $349,000 from $198,000 for the six months ended
September 30, 1999. 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 increased to $483,000 for the quarter ended
September 30, 2000 from $303,000 for the quarter ended September 30, 1999. The
quarter ended September 30, 1999 included $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 65% of its net sales for the second quarter of fiscal
2001 from 62% of its net sales for the second quarter of fiscal 2000. Selling,
general and administrative expenses were 23% of net sales for the quarter ended
September 30, 2000, compared to 24% for the quarter ended September 30, 1999.
Starting in early fiscal 1998 and continuing through the current period, Bio
Systems continues to have 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 and yield the same profit margin of 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. Bio Systems could process these larger containers at its processing
facility by retrofitting its waste disposal system. The investment decision to
retrofit the waste disposal system will be based on projected sales and the
return on the invested cost.
Bio Systems' operating income increased to $1,069,000 for the six months
ended September 30, 2000 from $858,000 for the six months ended September 30,
1999. The six months ended September 30, 1999 included $210,000 of expense
associated with an agreement in principle to settle a lawsuit. Primarily due to
the reasons discussed above, cost of goods sold increased to 64% of net sales
for the six months ended September 30, 2000 from 61% for the same period in
fiscal 2000. Selling, general and administrative expenses were 24% of net sales
for the first six months of fiscal 2001, which was 1% lower than the first six
months of fiscal 2000.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
Net sales for the Consumer Healthcare Products Segment, which operates
through Scherer Laboratories, Inc. ("Scherer Labs"), increased 17% to $346,000
for the second quarter of fiscal 2001 from
13
<PAGE>
$296,000 during the same period in fiscal 2000. Scherer Labs' net sales
increased 12% to $768,000 for the six months ended September 30, 2000 from
$688,000 for the six months ended September 30, 1999.
As a result of the increase in net sales, Scherer Labs' operating income
increased to $119,000 for the second quarter of fiscal 2001 from $96,000 for the
second quarter of fiscal 2000 and increased to $285,000 for the six months ended
September 30, 2000 from $260,000 for the six months ended September 30, 1999.
CORPORATE
The Company's operating expenses in the Corporate Segment decreased to
$137,000 for the quarter ended September 30, 2000 from $194,000 for the quarter
ended September 30, 1999. For the six months ended September 30, 2000, operating
expenses in the Corporate Segment decreased to $330,000 from $392,000 for the
same period in fiscal 2000. 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 decrease of Corporate
operating expenses is primarily due to the cost of the settlement of the lawsuit
against the Company which was recorded during the six months ended
September 30, 1999 (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 increased to $210,000 for the
second quarter of fiscal 2001 from $156,000 for the second quarter of fiscal
2000 and increased to $452,000 for the six months ended September 30, 2000 from
$344,000 for the six months ended September 30, 1999. The increase is primarily
the result of an interest income related to interest bearing debt instruments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $3,300,000 at September 30,
2000, an increase of $1,611,000 from March 31, 2000. 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). In October 1999 the investment in
Econometrics' 8% 5 year convertible debentures was transacted. The investment in
marketable securities, at fair market value, was $8,633,000 at September 30,
2000, as compared to $9,927,000 at March 31, 2000. The decrease is the result of
$1,374,000 of marketable securities being redeemed and the net increase of the
market value of the remainder of the portfolios. During the quarter ended
September 30, 2000, the Company invested an additional $975,000 in investments.
As a result of the decrease in investment in marketable securities of $1,294,000
and the increase in investments, the Company's working capital increased to
$5,866,000 at September 30, 2000 from $4,089,000 at March 31, 2000. The
Company's long-term debt increased to $480,000 at September 30, 2000 from
$287,000 at March 31, 2000. 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 $1,788,000 for the first
six months of fiscal 2001, as compared to $1,055,000 for the first six months of
fiscal 2000. The increase is primarily due to increased sales of $1,148,000 at
Bio Systems and Scherer Labs for the six months ended September 30, 2000, and
the
14
<PAGE>
results at the corporate level of $107,000 more interest income and the
reduction of administrative cost of $95,000 during the same six month period.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES. The Company's investing
activities used cash of $325,000 for the six months ended September 30, 2000, as
compared to a use of cash of $4,304,000 for the six months ended September 30,
1999. 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).
During the six months ended September 30, 2000, $1,374,000 of investments in
marketable securities were redeemed and the Company invested $875,000 in
investments carried on the equity method of accounting and $100,000 in other
investments, at cost.
Cash used for financing activities increased $202,000 for the six months
ended September 30, 2000 verses a decrease of $70,000 for the six months ended
September 30, 1999.
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.
EFFECTS OF ACCOUNTING STANDARDS Statement of Financial Accounting Standard,
or "SFAS," No. 133, "Accounting of Derivative Instruments and for Hedging
Activities," establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 133 was originally effective for fiscal years beginning
after June 15, 1999. SFAS No. 133 may not be applied retroactively. SFAS
No. 133 must be applied to derivative instruments and certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1997. In June 1999, the Financial
Accounting Standards Board, or "FASB," issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." and in June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivatives and Certain Hedging Activities--an Amendment
of FASB No. 133." SFAS No. 137 amends SFAS No. 133 to be effective for all
fiscal years beginning after June 15, 2000 or April 1, 2001 for the Company. We
expect to implement SFAS Nos. 133, 137 and 138 for the fiscal year beginning
April 1, 2001, and do not expect that the adoption of SFAS Nos. 133, 137 and 138
will have a material effect on our consolidated financial statements.
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
15
<PAGE>
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 to settle the
case was reached whereby the Company paid Mr. Kovar $325,000 in a lump sum.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on September 15, 2000
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............................ 3,339,249 shares 17,953 shares
Kenneth H. Robertson......................... 3,339,249 shares 17,953 shares
Robert P. Scherer, Jr........................ 3,319,725 shares 37,477 shares
William J. Thompson.......................... 3,339,199 shares 18,003 shares
</TABLE>
16
<PAGE>
There were no broker non-votes with respect to the election of directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
--------------------- -----------
<S> <C>
10.1 10% Convertible Promissory Note dated , by and
between Compliance1, Inc., a Delaware corporation, and
Scherer Healthcare, Inc., a Delaware corporation
10.2 Subscription Agreement dated April 5, 2000, by and between
Compliance1, Inc., a Delaware corporation, and Scherer
Healthcare, Inc., a Delaware corporation.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
SCHERER HEALTHCARE, INC.
(Registrant)
Date: November 14, 2000 /s/ ROBERT P. SCHERER, JR.
-------------------------------------------
Robert P. Scherer, Jr.
Chairman, Chief Executive Officer and
President
Date: November 14, 2000 /s/ DONALD P. ZIMA
-------------------------------------------
Donald P. Zima
Vice President and Chief Financial Officer
</TABLE>
18
<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>
10.1 10% Convertible Promissory Note dated , by and between
Compliance1, Inc., a Delaware corporation, and Scherer
Healthcare, Inc., a Delaware corporation 17
10.2 Subscription Agreement dated April 5, 2000, by and between
Compliance1, Inc., a Delaware corporation, and Scherer
Healthcare, Inc., a Delaware corporation. 18
27 Financial Data Schedule (included only in EDGAR filing) 19
</TABLE>
19
