<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 FEBRUARY 2, 2000
- -------------------------------- -----------------------------------
Common Stock, $0.01 par value 4,337,163
<PAGE>
SCHERER HEALTHCARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
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 December 31, 1999 and
March 31, 1999......................................................................... 3
Condensed Consolidated Statements
of Operations for the Three and Nine Months
Ended December 31, 1999 and 1998....................................................... 5
Condensed Consolidated Statements
of Cash Flows for the Nine Months
Ended December 31, 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
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>
December 31, 1999 March 31, 1999
----------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,892,000 $ 5,433,000
Accounts receivable, less allowance for doubtful
accounts of $273,000 and $293,000, respectively 4,464,000 3,721,000
Current maturities of notes receivable 18,000 174,000
Inventories 226,000 200,000
Prepaid and other 240,000 215,000
------------- -------------
Total current assets 6,840,000 9,743,000
------------- -------------
PROPERTY AND EQUIPMENT 8,538,000 7,786,000
Less accumulated depreciation (4,391,000) (3,674,000)
------------- -------------
Net property and equipment 4,147,000 4,112,000
------------- -------------
OTHER ASSETS
Intangibles, net 1,551,000 1,484,000
Cost in excess of net assets acquired, net 2,142,000 2,222,000
Investments, at market value (Note 4) 9,660,000 8,914,000
Other investments, at cost (Note 5) 2,650,000 650,000
Deferred income taxes 329,000 329,000
Other 265,000 197,000
Net assets of discontinued operations 381,000 326,000
------------- -------------
Total other assets 16,978,000 14,122,000
------------- -------------
TOTAL ASSETS $ 27,965,000 $ 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>
December 31, 1999 March 31, 1999
----------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 906,000 $ 1,083,000
Accrued expenses 1,486,000 1,499,000
Current maturities of debt obligations 236,000 235,000
Income taxes payable 108,000 85,000
Other 46,000 78,000
------------- -------------
Total current liabilities 2,782,000 2,980,000
LONG-TERM DEBT, net of current maturities 241,000 351,000
------------- -------------
OTHER LIABILITIES 215,000 378,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock - $.01 par value,
2,000,000 shares authorized;
22,123 shares issued and outstanding at December 31, 1999 - -
(22,775 at March 31, 1999)
Common stock - $.01 par value,
12,000,000 shares authorized;
4,716,525 shares issued at December 31, 1999
(4,713,641 at March 31, 1999);
4,337,163 shares outstanding at December 31, 1999
(4,334,279 at March 31, 1999) 47,000 47,000
Capital in excess of par value 21,187,000 22,349,000
Retained earnings 6,526,000 4,905,000
Less treasury stock, at cost (3,033,000) (3,033,000)
------------- -------------
Total stockholders' equity 24,727,000 24,268,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,965,000 $ 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 Nine months ended
December 31, December 31,
------------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 4,220,000 $ 3,719,000 $12,309,000 $11,150,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold 2,634,000 2,233,000 7,392,000 6,439,000
Selling, general, and administrative 1,232,000 1,150,000 3,539,000 3,339,000
Litigation expense (Note 6) - - 298,000 -
----------- ----------- ----------- -----------
Total costs and expenses 3,866,000 3,383,000 11,229,000 9,778,000
----------- ----------- ----------- -----------
OPERATING INCOME 354,000 336,000 1,080,000 1,372,000
OTHER INCOME
Interest income 199,000 174,000 543,000 524,000
Other, net 20,000 18,000 59,000 65,000
----------- ----------- ----------- -----------
Total other income 219,000 192,000 602,000 589,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 573,000 528,000 1,682,000 1,961,000
PROVISION FOR INCOME TAXES 19,000 23,000 61,000 62,000
----------- ----------- ----------- -----------
NET INCOME $ 554,000 $ 505,000 $ 1,621,000 $ 1,899,000
=========== =========== =========== ===========
Basic earnings per common share $ 0.13 $ 0.12 $ 0.37 $ 0.44
=========== =========== =========== ===========
Diluted earnings per common share $ 0.12 $ 0.11 $ 0.36 $ 0.42
=========== =========== =========== ===========
Weighted average common shares
outstanding - basic 4,336,414 4,333,117 4,336,095 4,328,071
=========== =========== =========== ===========
Weighted average common shares
outstanding - diluted 4,541,492 4,564,252 4,548,138 4,565,707
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SCHERER HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
December 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,621,000 $ 1,899,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,008,000 950,000
Other noncash charges and credits, net 28,000 16,000
Changes in operating assets and liabilities:
Accounts receivable (773,000) (697,000)
Inventories (26,000) (84,000)
Prepaid and other (25,000) 9,000
Income taxes, net 23,000 (28,000)
Accounts payable and accrued expenses (190,000) 86,000
Other liabilities (195,000) (97,000)
----------- -----------
Net cash provided by operating activities of continuing operations 1,471,000 2,054,000
Net operating activities of discontinued operations (55,000) (110,000)
----------- -----------
Net cash provided by operating activities 1,416,000 1,944,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (846,000) (791,000)
Purchase of investments (3,919,000) -
Decrease in notes receivable 156,000 142,000
Other investing activities, net (239,000) (166,000)
----------- -----------
Net cash used for investing activities (4,848,000) (815,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayment of borrowings (109,000) (164,000)
Exercise of stock options - 28,000
----------- -----------
Net cash used for financing activities (109,000) (136,000)
----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS (3,541,000) 993,000
CASH AND CASH EQUIVALENTS, beginning of period 5,433,000 6,868,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,892,000 $ 7,861,000
=========== ===========
</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 December 31, 1999 and March 31, 1999 consisted of
the following:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
----------------- --------------
<S> <C> <C>
Finished products $ 53,000 $ 43,000
Containers, packaging, and raw materials 221,000 205,000
LIFO reserve (48,000) (48,000)
------------ ------------
Total $ 226,000 $ 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 December 31, 1999 and March 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
----------------- --------------
<S> <C> <C>
Obligations under capital leases, due in varying
installments through fiscal 2003 $ 477,000 $ 586,000
Less current maturities (236,000) (235,000)
------------ ------------
Long-term debt $ 241,000 $ 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>
December 31, 1999
- -----------------
Municipal bonds $ 9,353,000 $ (970,000) $ 8,383,000
Corporate bonds 1,216,000 (134,000) 1,082,000
Preferred stocks 298,000 (103,000) 195,000
------------- ------------- -------------
Total $ 10,867,000 $ (1,207,000) $ 9,660,000
============= ============= =============
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 two
persons serving on the seven member Econometrics Board of Directors.
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 cash payment. In December 1999, the Company, without admitting any
wrongdoing, finalized the terms of the settlement with Mr. Kovar and the lawsuit
was dismissed. The Company recorded $210,000 related to this settlement under
litigation expense in the accompanying condensed consolidated financial
statements. The balance of the expense related to the 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 $88,000 in expense related to the settlement,
including associated legal fees, 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 Nine months ended
December 31, December 31,
-------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
NET SALES:
Waste Management Services Segment $ 3,923,000 $ 3,556,000 $11,324,000 $10,468,000
Consumer Healthcare Products Segment 297,000 163,000 985,000 682,000
----------- ----------- ----------- -----------
Company Totals $ 4,220,000 $ 3,719,000 $12,309,000 $11,150,000
=========== =========== =========== ===========
OPERATING INCOME (LOSS):
Waste Management Services Segment $ 478,000 $ 453,000 $ 1,336,000 $ 1,592,000
Consumer Healthcare Products Segment 86,000 21,000 346,000 177,000
Corporate (210,000) (138,000) (602,000) (397,000)
----------- ----------- ----------- -----------
Company Totals $ 354,000 $ 336,000 $ 1,080,000 $ 1,372,000
=========== =========== =========== ===========
</TABLE>
The Company's net sales increased 13% to $4,220,000 for the third quarter of
fiscal 2000 from $3,719,000 for the third quarter of fiscal 1999. The Company's
operating income increased to $354,000 for the third quarter of fiscal 2000 from
$336,000 for the third quarter of fiscal 1999. The Company's cost of goods sold
increased to 62% of net sales for the quarter ended December 31, 1999 from 60%
of net sales for the quarter ended December 31, 1998. Selling, general and
administrative expenses decreased to 29% of net sales for the third quarter of
fiscal 2000 from 31% for the third quarter of fiscal 1999.
9
<PAGE>
The Company's net sales increased 10% to $12,309,000 for the nine months ended
December 31, 1999 from $11,150,000 for the nine months ended December 31, 1998.
The Company's operating income decreased to $1,080,000 for the first nine months
of fiscal 2000 from $1,372,000 for the first nine months of fiscal 1999;
however, the operating income for the nine months ended December 31, 1999
includes $298,000 in expense associated with the settlement of two lawsuits
against the Company (see Note 6 of Notes to Condensed Consolidated Financial
Statements included elsewhere herein). Cost of goods sold increased to 60% of
net sales for the nine months ended December 31, 1999 from 58% of net sales for
the nine months ended December 31, 1998. Selling, general and administrative
expenses decreased to 29% of net sales for the nine months ended December 31,
1999 from 30% of net sales for the nine months ended December 31, 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 10% to $3,923,000 for the
third quarter of fiscal 2000 from $3,556,000 for the third quarter of fiscal
1999. Bio Systems' net sales increased 8% to $11,324,000 for the nine months
ended December 31, 1999 from $10,468,000 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. Bio Systems added nine new hospital
contracts in the third quarter of fiscal 2000, and added a total of 21 new
hospital contracts in the first nine months of fiscal 2000. It is expected that
these 21 new hospital contracts, which have a term of at least one year, will
contribute an aggregate of more than one million dollars in revenue during
fiscal 2001. 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 $63,000 to $133,000 in the third quarter of fiscal 2000, as compared
to $70,000 in the third quarter of fiscal 1999. For the nine months ended
December 31, 1999, net sales for laboratory and surgical fluid waste increased
95% to $331,000 from $170,000 for the nine months ended December 31, 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 increased to $478,000 for the quarter ended
December 31, 1999 from $453,000 for the quarter ended December 31, 1998. Bio
Systems' cost of goods sold increased to 64% of its net sales for the third
quarter of fiscal 2000 from 61% of its net sales for the third quarter of fiscal
1999. 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. Primarily as a result of the
increase in net sales, selling, general and administrative expenses decreased to
24% of net sales for the quarter ended December 31, 1999, from 26% for the
quarter ended December 31, 1998.
10
<PAGE>
Bio Systems' operating income decreased to $1,336,000 for the nine months ended
December 31, 1999 from $1,592,000 for the nine months ended December 31, 1998;
however, the nine months ended December 31, 1999 includes $210,000 in expense
associated with the settlement of a lawsuit (see Note 6 of Notes to Consolidated
Financial Statements included elsewhere herein). Primarily due to the reasons
discussed above, cost of goods sold increased to 62% of net sales for the nine
months ended December 31, 1999 from 59% for the same period in fiscal 1999.
Selling, general and administrative expenses decreased to 25% of net sales for
the first nine months of fiscal 2000 from 26% for the first nine months of
fiscal 1999.
CONSUMER HEALTHCARE PRODUCTS SEGMENT
Net sales for the Consumer Healthcare Products Segment, which operates through
Scherer Laboratories, Inc. ("Scherer Labs"), increased 82% to $297,000 for the
third quarter of fiscal 2000 from $163,000 during the same period in fiscal
1999. Scherer Labs' net sales increased 44% to $985,000 for the nine months
ended December 31, 1999 from $682,000 for the nine months ended December 31,
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 55% increase in sales orders for its topical
analgesic product that provides relief from insect bites and a 36% increase in
sales orders for its earwax removal products for the nine months ended December
31, 1999, as compared to the nine months ended December 31, 1998.
As a result of the increase in net sales, Scherer Labs' operating income
increased to $86,000 for the third quarter of fiscal 2000 from $21,000 for the
third quarter of fiscal 1999 and increased 95% to $346,000 for the nine months
ended December 31, 1999 from $177,000 for the nine months ended December 31,
1998.
CORPORATE
The Company's operating expenses in the Corporate Segment increased to $210,000
for the quarter ended December 31, 1999 from $138,000 for the quarter ended
December 31, 1998. For the nine months ended December 31, 1999, operating
expenses in the Corporate Segment increased to $602,000 from $397,000 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. Effective 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. Additionally, for the nine months ended December 31, 1999, the Company
recorded $88,000 in expense, including associated legal fees, related to the
settlement of a lawsuit against the Company (see Note 6 of Notes to Condensed
Consolidated Financial Statements included elsewhere herein). The Company does
not allocate any revenues to the Corporate level.
OTHER INCOME.
- -------------
Primarily as a result of the interest income associated with the investment in
Econometrics, Inc., the Company's interest income increased to $199,000 for the
third quarter of fiscal 2000 from $174,000 for the third quarter of fiscal 1999
and increased to $543,000 for the nine months ended December 31, 1999 from
$524,000 for the nine months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $1,892,000 at December 31, 1999,
a decrease of $3,541,000 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, in October 1999, the Company invested $2,000,000 using cash on
hand in Econometrics, Inc. (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 $9,660,000 at December 31, 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 investment in Econometrics in October 1999, the
Company's working capital decreased to $4,058,000 at December 31, 1999 from
$6,763,000 at March 31, 1999. The Company's long-term debt decreased to $241,000
at December 31, 1999 from $351,000 at March 31, 1999. The primary reasons for
these changes are discussed below.
11
<PAGE>
CASH FLOW FROM OPERATING ACTIVITIES.
- ------------------------------------
The Company's cash provided by operating activities from continuing operations
totaled $1,471,000 for the first nine months of fiscal 2000, as compared to
$2,054,000 for the first nine months of fiscal 1999. Primarily due to the cash
payment of $325,000 for the settlement of a lawsuit, Bio Systems' cash provided
from operating activities decreased to $861,000 for the first nine months of
fiscal 2000 from $1,186,000 for the first nine months of fiscal 1999. As a
result of the increase in its net sales, Scherer Labs' cash provided from
operating activities increased to $269,000 for the nine months ended December
31, 1999 from $151,000 for the nine months ended December 31, 1998. The cash
provided by operations at the corporate level decreased to $341,000 for the nine
months ended December 31, 1999 from $717,000 for the same period in fiscal 1999.
The decrease is primarily due to timing of working capital items combined with
the $140,000 cash payment for the settlement of a lawsuit against the Company.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES.
- ---------------------------------------------------
The Company's investing activities used cash of $4,848,000 for the nine months
ended December 31, 1999, as compared to a use of cash of $815,000 for the nine
months ended December 31, 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 (see Note 5
of Notes to Condensed Consolidated Financial Statements included elsewhere
herein).
Cash used for financing activities decreased slightly to $109,000 for the nine
months ended December 31, 1999 from $136,000 for the nine months ended December
31, 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 including possible investment and acquisition
opportunities.
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 December 31, 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 has taken 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.
To date, the Company has not experienced any material adverse effects as a
result of year 2000 issues.
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 cash payment. In December 1999, the Company,
without admitting any wrongdoing, finalized the terms of the settlement
with Mr. Kovar and the lawsuit was dismissed.
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 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 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
On October 15, 1999, the Company filed a Current Report on
Form 8-K with respect to an investment in Econometrics, Inc.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
SCHERER HEALTHCARE, INC.
(Registrant)
Date: February 14, 2000 /s/ Robert P. Scherer, Jr.
--------------------------
Robert P. Scherer, Jr.
Chairman, Chief Executive Officer and President
Date: February 14, 2000 /s/ Gary W. Ruffcorn
--------------------
Gary W. Ruffcorn
Vice President and Chief Financial Officer
</TABLE>
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 17
(included only in EDGAR filing)
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<CAPTION>
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 1,892
<SECURITIES> 0
<RECEIVABLES> 4,737
<ALLOWANCES> (273)
<INVENTORY> 226
<CURRENT-ASSETS> 6,840
<PP&E> 8,538
<DEPRECIATION> (4,391)
<TOTAL-ASSETS> 27,965
<CURRENT-LIABILITIES> 2,782
<BONDS> 241
0
0
<COMMON> 47
<OTHER-SE> 24,680
<TOTAL-LIABILITY-AND-EQUITY> 27,965
<SALES> 12,309
<TOTAL-REVENUES> 12,309
<CGS> 7,392
<TOTAL-COSTS> 11,229
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,682
<INCOME-TAX> 61
<INCOME-CONTINUING> 1,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,621
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.36
</TABLE>
