ITEM 1. BUSINESS
Overview
Scherer Healthcare, Inc. (the "Company") was incorporated under the laws of the State of Delaware on December 18, 1981 as the successor to Aloe Creme Laboratories, Inc., incorporated on February 7, 1953. The Company's Common Stock is listed on The Nasdaq National Market under the symbol "SCHR".
The Company's strategy has focused on the manufacture, distribution, and sale of specialized healthcare and industrial safety room products and services. At March 31, 1998, the Company, through its subsidiaries operated in the following business segments:
Waste Management Services Segment:
(a) Bio Systems Partners, a Georgia partnership, is 100% owned by the Company.
(b) BioWaste Systems, Inc., a Georgia corporation, is 100% owned by the Company
(c) Medical Waste Systems, Inc., a Delaware corporation, is 100% owned by the Company.
Consumer Healthcare Products Segment: Scherer Laboratories Inc., a Texas corporation, is 100% owned by the Company.
As used herein, the term "Company" includes Scherer Healthcare, Inc. and, where appropriate, its subsidiaries and majority owned partnerships.
Sale of Marquest Medical Products, Inc.
Pursuant to the terms of an Agreement and Plan of Merger dated as of March 14, 1997 (the "Merger Agreement"), between Marquest Medical Products, Inc. ("Marquest"), then a 51% owned subsidiary of the Company, Vital Signs, Inc. ("VSI"), and VSI Acquisition Corporation, a wholly-owned subsidiary of VSI, effective July 28, 1997, VSI acquired Marquest upon the merger (the "Merger") of VSI Acquisition Corporation with and into Marquest. At the effective time of the Merger, all of the issued and outstanding shares of Marquest Common Stock were converted into the right to receive $0.797 in cash per share and Marquest became a wholly-owned subsidiary of VSI. As a result, the Company received approximately $5,747,000 in cash in exchange for its 7,211,192 shares of Marquest Common Stock and approximately $309,000 in cash through the exercise of warrants to purchase Marquest Common Stock and the conversion of these shares into cash pursuant to the Merger. Additionally, pursuant to the terms of the Scherer Healthcare Inducement Agreement dated as of March 14, 1997 (the "Inducement Agreement"), between the Company, Marquest, and VSI, VSI purchased certain assets from the Company that were leased or licensed by the Company to Marquest and used by Marquest in the manufacture and sale of arterial blood gas products (the "ABG Assets") and the Company entered into a covenant not to compete with VSI in the manufacture and sale of arterial blood gas products for a period of three years. VSI paid the Company an aggregate of $5,860,000 in cash for the ABG Assets and the covenant not to compete. The transactions contemplated by the Merger Agreement and the Inducement Agreement, including the Merger and the sale of the ABG Assets, are referred to as the "Marquest Transactions". See "Discontinued Medical Device and Surgical/Safety Disposables Segment - Marquest" for further discussion.
Acquisition of Minority Partnership Interest
The Company, through a wholly-owned subsidiary, owned a 60% partnership interest in Bio Systems Partners ("BSP") which operates in the Company's Waste Management Services Segment. Pursuant to a summary judgment, the Company's subsidiary was required to purchase the minority partner's 40% partnership interest in BSP valued as of November 30, 1993. After separate appraisals performed by the partners were not consistent, a third independent appraiser was retained by the partners to review each of the previous valuations and to determine the purchase price for the minority interest. In early October 1997, the independent appraiser informed the Company and the minority partner of its determination that the fair market value of the 40% minority interest in BSP was $1,100,000 as of November 30, 1993. Effective October 28, 1997, the Company's subsidiary purchased, using cash on hand, the minority partner's 40% partnership interest in BSP for a purchase price of $1,100,000 and incurred associated transaction costs of $114,000. As a result, the Company, through its subsidiary, now owns 100% of BSP.
Financial Information Relating to Segment Operations
Set forth below is certain financial information with respect to each of the Company's operating segments.
(a) Amount includes net assets of discontinued operations of $188,000, $7,003,000, and $6,360,000 for fiscal years 1998, 1997, and 1996, respectively.
The Company recorded interest income of $521,000, $160,000, and $258,000 for fiscal years 1998, 1997, and 1996, respectively. Additionally, the Company recorded interest expense of $52,000, $195,000, and $559,000 for fiscal years 1998, 1997, and 1996, respectively. The Company records interest income and interest expense at the Corporate level.
Waste Management Services Segment
Overview. The Company operates its Waste Management Services Segment through BSP, BioWaste Systems, Inc., and Medical Waste Systems, Inc. (collectively, "Bio Systems"). Prior to fiscal 1998, the Company owned a 60% general partnership interest in BSP, a Georgia partnership. In October 1997, the Company, through BioWaste Systems, Inc., a wholly-owned Georgia corporation, purchased the minority partner's 40% partnership interest in BSP for $1,100,000. Medical Waste Systems, Inc. is a Delaware corporation and is wholly-owned by the Company.
Services. Bio Systems assists hospitals, clinics, doctors, and other health care facilities with the control and disposal of infectious medical waste, principally sharp-edged medical waste, or "sharps", which includes needles, scalpels, and syringes. Bio Systems provides its services in ten Northeastern and Mid-Atlantic states plus the District of Columbia.
Because of the AIDS crisis and public perception regarding the transmission of a number of diseases, safe packaging, transportation and disposal of medical waste has for many years been mandated by federal, state and local governmental regulatory agencies. Sharps medical waste poses a threat to health care workers and the public because of its potential to transmit disease. Consequently, health care facilities have worked to improve the safety of their sharps waste management systems, however, many have found that an in-house system may not be the most cost effective method for their sharps disposal.
Bio Systems' sharps management programs are designed to reduce a medical facility's costs and risks associated with sharps disposal. Bio Systems incorporates reusable containers of various sizes and designs in its systems, which are installed by Bio Systems' personnel at the locations within a medical facility where sharps are discarded. These reusable containers provide a medical facility with a cost effective and environmentally friendly alternative to traditional disposable plastic containers. Bio Systems' personnel collect and replace the containers at the point of use and then transport the full containers to Bio Systems' processing facility where they are emptied and decontaminated for reuse.
Bio Systems maintains a fleet of licensed trucks and trailers to transport medical waste to its processing facility, where the waste is sterilized, pulverized and made available for recycling or disposal via landfill or incineration. During fiscal 1996, Bio Systems consolidated its operations by transferring the medical waste processing operations at its facility located near Philadelphia, Pennsylvania to its processing facility in Farmingdale, New York. Bio Systems uses the Pennsylvania facility to assemble, manage and store its reusable medical waste containers.
Bio Systems also provides medical waste management services designed for medical clinics, physicians and other facilities that generate relatively small quantities of regulated medical waste (small quantity generators). Bio Systems provides these customers with both a reusable container for sharps and a specially designed corrugated box for non-sharp regulated medical waste. This service for small quantity generators includes pick-up, removal and disposal of the medical waste.
Sales and Marketing. Bio Systems markets its services, which are not seasonal and are not subject to backlog, via a direct sales force and through advertising in hospital publications and direct mailings. Bio Systems operates 365 days a year.
Bio Systems' management believes that the recent trend toward consolidation of hospitals, medical clinics and physicians into managed health care networks provides companies with existing medical facility contracts, such as Bio Systems, an advantage in securing contracts with newly affiliated network members.
Customers. Bio Systems' customers include hospitals, nursing homes, medical clinics, physicians and laboratories. Services to hospitals are typically provided under contracts of at least one year. As of March 31, 1998, Bio Systems had contracts with over 200 hospitals including agreements with the Greater New York Hospital Association, New Jersey Hospital Association, and seven of the largest hospital networks in the northeast. Additionally, Bio Systems provides medical services to over 3,500 small quantity generators including medical clinics, laboratories, and physicians offices.
No single customer accounts for over 10% of Bio Systems' sales revenues.
Competition. Bio Systems' principal competition comes from in-house management of sharps wherein the hospital purchases disposable containers from one of several manufacturers, uses hospital personnel to collect and replace containers when full, and disposes of the containers and waste with on-site equipment or through a third party medical waste hauler. Additionally, Bio Systems has two direct competitors which offer similar full-service programs.
With regard to its small quantity generator services, Bio Systems competes with several national and local medical waste service providers.
Though Bio Systems faces significant competition in its market areas, it believes it has a strong competitive position because of its reusable sharps containers, specialized service infrastructure and strategically located transfer and processing facilities.
Regulation. The medical waste industry is subject to a variety of federal, state and local regulations regarding its collection, transport, processing, and disposal. Bio Systems has obtained licenses or authorizations from the appropriate governmental regulatory agencies to operate its processing and transfer facilities in Farmingdale, New York, Warminster, Pennsylvania, and Haverhill, Massachusetts.
New regulations are frequently promulgated, compliance with which could have a material adverse effect on Bio Systems' business. Management is not aware of any pending regulations that would have such a material adverse effect.
Employees. Bio Systems has approximately 120 employees. Drivers, technicians and processing personnel in New York and drivers and warehouse personnel in Pennsylvania are covered by collective bargaining agreements representing approximately 66% of Bio Systems' employees. Bio Systems entered into a three- year collective bargaining agreement in June 1996 with the union for its New York employees and a three-year agreement in October 1996 with the union for its Pennsylvania employees. Management considers its employee relations to be good.
Consumer Healthcare Products Segment
Overview. In 1981, the Company acquired Scherer Laboratories, Inc., ("Scherer Labs"), a Texas corporation originally incorporated in 1903. Scherer Labs markets brand name and generic over-the-counter drugs. These products are primarily used for treatment of colds and coughs, eye and ear irritations and insect bites. In early fiscal 1997, Scherer Labs discontinued the sale of its one remaining prescription drug for which sales were $12,000 in fiscal 1996. The loss of these sales did not have a material effect on the Company. Scherer Labs' products are manufactured by third party contractors using Scherer Labs' formulas. Scherer Labs carries an inventory sufficient to cover planned sales requirements. Scherer Labs' return policy is consistent with the drug industry, with annual returns during the last three years of less than 1.5% of total annual sales.
Scherer Labs employs one individual in Dallas, Texas as the division's Vice President - General Manager who administers all sales, marketing, and purchasing and handles relations with customers, suppliers and contractors. Warehousing and distribution services are performed on a contract basis with a public warehouse. Two employees at the Company's corporate headquarters in Atlanta, Georgia perform all accounting and customer service functions including order processing, accounts receivable, accounts payable and inventory control.
In the second quarter of fiscal 1999, the Company intends to begin performing all inventory and shipping functions internally by utilizing warehouse space currently leased in one of the Company's Atlanta, Georgia facilities.
Seasonality. The sales of most of Scherer Labs' products are evenly distributed throughout the year. However, the majority of three of Scherer Labs' products are purchased by consumers during the summer months. As a result of this seasonal activity, approximately 33% of Scherer Labs' sales occur during the first fiscal quarter (April through June) of each fiscal year.
Customers. Scherer Labs markets its products primarily to drug and food stores, mass market retailers, drug wholesalers, and government agencies. The majority of the sales are through retailers located in the Southwest region of the United States with approximately 35% of sales to retail outlets located in other areas of the country. Sales to Wal-Mart Stores, Inc. represented approximately 53%, 55% and 45% of total sales for fiscal 1998, 1997 and 1996, respectively. These sales were through McKesson Drug Co., Wal-Mart's primary wholesaler, and account for over 80% of McKesson's total purchases from Scherer Labs. The loss of Wal-Mart's business would have a material adverse effect on Scherer Labs' ability to continue to operate profitably.
Competition. Scherer Labs' products are subject to competition from national, regional, and store brands of similar or identical formulations. Emphasis is placed on Scherer Labs' long history, product quality and pricing at or near the pricing levels of generic products. Marketing activities focus on in-store price specials and other promotional allowances.
Regulation. Scherer Labs' products are regulated by the FDA. Also, licensing and product registration is required by certain states where product sales occur and are renewed annually. There have been no government inspections of Scherer Labs in the last three years and there are no pending matters between Scherer Labs and any federal, state or local governmental regulatory agency.
Discontinued Medical Device and Surgical/Safety Disposables Segment
The operations of Marquest and Scherer Healthcare, Ltd. ("Scherer Ltd.") were included in the Company's Medical Device and Surgical/Safety Disposables Segment. The assets and businesses of Scherer Ltd., a limited partnership that was 65% owned by the Company, were sold in two separate transactions in October 1995 and October 1996. In July 1997, the Company and Marquest, which was a majority owned subsidiary of the Company, completed certain transactions whereby VSI acquired Marquest. Effective with the sale of Marquest to VSI, the operations of the Medical Device and Surgical/Safety Segment have been accounted as a discontinued segment. Set forth below is information regarding Marquest and Scherer Ltd. and the transactions discussed above.
Marquest
In fiscal 1994, the Company and Marquest completed a series of transactions whereby the Company obtained a controlling interest in Marquest. Marquest is a manufacturer and international distributor of specialty cardiopulmonary support, respiratory and anesthesia disposable devices. Marquest utilized an internal sales force and independent distributors to market its four major product groups: blood collection systems for diagnostic testing, aerosolized medication delivery systems, heated humidification systems, and anesthesia and respiratory breathing systems.
As part of the transactions completed in fiscal 1994, Marquest sold to the Company the ABG Assets for $4,500,000 in cash and the Company then leased the ABG Assets to Marquest in exchange for a royalty equal to 3.25% of the net arterial blood gas product line sales. Marquest had the option to repurchase the ABG Assets from the Company for $4,500,000 plus $22,500 for each month lapsed between June 1993 and the date of repurchase. Primarily as consideration for the repurchase option on the ABG Assets, Marquest granted to the Company warrants for the purchase of 6,580,000 shares of Marquest Common Stock, exercisable at $0.75 per share.
In fiscal 1994, the Company also participated in Marquest's exchange offer of approximately $12,650,000 of defaulted Marquest Swiss Bonds. In connection with the exchange offer, the Company issued 43,516 shares of the Company's 5% Convertible Preferred Stock to the former holders of the Marquest Swiss Bonds. In exchange for its Preferred Stock, the Company received $4,352,000 of Marquest six-year 8% notes (the "Marquest Notes") convertible into Marquest Common Stock. In May 1994, the Company converted $2,500,000 of the Marquest Notes into 3,333,333 shares of Marquest Common Stock. In March 1996, the Company converted the remaining balance of $1,852,000 on the Marquest Notes plus the associated accrued interest and accrued but unpaid management fees owed to the Company by Marquest into 3,877,859 shares of Marquest Common Stock.
Effective July 28, 1997, VSI acquired Marquest upon the Merger of VSI Acquisition Corporation with and into Marquest. At the effective time of the Merger, all of the issued and outstanding shares of Marquest Common Stock were converted into the right to receive $0.797 in cash per share and Marquest became a wholly-owned subsidiary of VSI. As a result, the Company received approximately $5,747,000 in cash in exchange for its 7,211,192 shares of Marquest Common Stock and approximately $309,000 in cash through the exercise of warrants to purchase Marquest Common Stock and the conversion of these shares into cash pursuant to the Merger. Additionally, pursuant to the terms of the Inducement Agreement, VSI purchased the ABG Assets from the Company and the Company entered into a covenant not to compete with VSI in the manufacture and sale of arterial blood gas products for a period of three years. VSI paid the Company an aggregate of $5,860,000 in cash for the ABG Assets and the covenant not to compete.
Scherer Ltd.
The Company, through a wholly-owned subsidiary, owned a 65% interest in Scherer Ltd. and was its sole general partner. Scherer Ltd., which was formed in 1987, was engaged in the manufacture and distribution of three disposable product lines: surgical drapes and gowns, surgical trays, and industrial/clean room specialty apparel.
In October 1995, Scherer, Ltd. sold certain of its assets to Cordis Medical, a wholly owned subsidiary of Cordis Corporation for $6,527,000. The assets sold were those used in connection with Scherer, Ltd.'s business of packing and distributing medical supplies for surgical procedures and providing nonwoven medical drapes, gowns and accessory items to hospitals and other health care providers (the "Medical Business"). Additionally, Cordis Medical agreed to assume all accounts payable related to the Medical Business and certain other specifically identified liabilities, including the mortgage on Scherer, Ltd.'s facility located in Asheville, North Carolina. Scherer, Ltd. received net proceeds, before income taxes, of $4,922,000. Scherer, Ltd. continued in the business of providing nonwoven apparel for industrial uses (the "Industrial Business") after the sale of the Medical Business.
In October 1996, Scherer, Ltd. sold substantially all of its remaining assets to a subsidiary of Health-Pak, Inc. for approximately $254,000, plus the assumption by Health-Pak of $319,000 in accounts payable. The assets acquired by Health-Pak were those used in connection with Scherer, Ltd.'s Industrial Business and included accounts receivable, inventory and furniture and fixtures. Additionally, Health-Pak agreed to assume certain accounts payable and liabilities related to the Industrial Business.
The two transactions discussed above eliminated substantially all of the assets of Scherer Ltd.; therefore, Scherer Ltd. was dissolved on December 2, 1996.
Discontinued Pharmaceutical Research and Development Segment
Biofor, Inc. ("Biofor"), a majority owned subsidiary of the Company which had been operating the Company's Pharmaceutical Research and Development Segment, was engaged in research to identify and develop new drug compounds. In July 1995, after attempts to locate a purchaser for Biofor, Biofor ceased further drug design efforts and concentrated solely on the Ono research contract discussed below. When the Ono contract expired in March 1996, Biofor discontinued all operations and the Company abandoned all operations of Biofor.
Prior to the discontinuance of its operations, Biofor focused its drug design efforts on arthritis and osteoarthritis as well as the treatment for acute pain. Biofor's lead compound, BF-389, is an anti-inflammatory analgesic which preliminary Phase I clinical trials indicated was not sufficiently bioavailable when administered orally in humans. Other delivery methods that would allow oral administration of the compound were pursued by Biofor without success.
Beginning in October 1990, Biofor and Ono Pharmaceutical Company, Ltd. ("Ono") entered into two research and collaboration agreements pursuant to which they jointly researched compounds. Biofor utilized its exclusive M-CADD "artificial intelligence" software and its scientists experienced in using M-CADD while Ono provided funding and clinical testing of any compounds discovered. The first contract expired in fiscal 1994 and the second expired March 1996. Substantially all of Biofor's revenues from 1990 forward were derived from these contracts.
The remaining property and equipment of Biofor primarily consists of land, a 30,000 square foot building owned by Biofor, and computer and laboratory equipment. The Company intends to sell the remaining assets of Biofor, which have been written down to their estimated net realistic value, but it anticipates that it may take several years to sell all of the assets.
ITEM 2.
ITEM 2. PROPERTIES
The Company's major facilities follow:
Waste Management Services Segment: Bio Systems Partners Farmingdale, New York - 17,000 square foot facility leased by Bio Systems Partners which includes 3,000 square feet of administrative office space and 14,000 square feet of space housing Bio Systems' medical waste processing operations. Medical Waste Systems, Inc. Warminster, Pennsylvania - 11,900 square foot facility leased by Medical Waste Systems, Inc. which includes 1,900 square feet of administrative office space and 10,000 square feet of warehouse and storage space. Haverhill, Massachusetts - 4,000 square foot transfer station leased by Medical Waste Systems, Inc.
Consumer Healthcare Products Segment: Scherer Laboratories, Inc. Plano, Texas - 300 square foot facility leased by Scherer Labs and used as a sales office.
Corporate Segment: Scherer Healthcare, Inc. Atlanta, Georgia - 2,100 square feet of leased office space. Atlanta, Georgia - 5,300 square feet of leased office and warehouse space (the warehouse space will be used by Scherer Laboratories, Inc. beginning in July 1998) Biofor, Inc. Waverly, Pennsylvania - 30,000 square foot building owned by Biofor.
The Company believes the facilities in all locations are adequate for the current and anticipated future level of activities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company does not have any material pending legal actions but is a party to certain other legal proceedings, however, it does not anticipate that any of such proceedings will have any material adverse affect on its financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders for vote during the quarter ended March 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The names, ages at June 1, 1998, and current positions with the Company of the executive officers, including all positions and offices with the Company held by such persons, are listed below. Unless otherwise stated, each executive officer has held their position for at least the last five years. All officers are elected for one year terms or until their respective successors are chosen. There are no family relationships among the executive officers nor is there any agreement or understanding between any officer and any other person pursuant to which the officer was elected.
Amy M. Murphy resigned as President and Chief Operating Officer of the Company in May 1998. Robert P. Scherer, Jr. assumed Ms. Murphy's responsibilities.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock At March 31, 1998, there were approximately 2,003 shareholders of record of the Company's Common Stock. The Company's Common Stock is traded on The Nasdaq National Market under the symbol "SCHR". The following table sets forth the high and low closing sale prices per share as reported by Nasdaq for the periods indicated:
On June 17, 1998, the closing price of the Common Stock was $3.75.
While there are no restrictions to prevent the payment of dividends, the Company has not paid a cash dividend in its history. The current policy of the Company's Board of Directors is to retain any available earnings for use in the operations and expansion of the Company's business. Therefore, the Company has no current intention to pay cash dividends on its Common Stock. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will depend upon the Company's earnings, capital requirements, financial condition, the ability of the Company's subsidiaries to pay cash dividends to the Company and any factors deemed relevant by the Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data concerning the Company for and as of the end of each of the years in the five year period ended March 31, 1998 are derived from the audited consolidated financial statements of the Company. The selected financial data is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, included elsewhere in this report. The audited consolidated financial statements of the Company as of March 31, 1998 and 1997 and for each of the years in the three year period ended March 31, 1998, and the report of Arthur Andersen LLP thereon, are included elsewhere in this report.
SELECTED FINANCIAL DATA (In Thousands Except Per Share Data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, which represent the Company's expectations or beliefs, including, but not limited to, statements concerning sales of the Company's products or services and operating income. The Company cautions that various factors, including, without limitation, the factors discussed below as well as general economic conditions and industry trends, a dependence upon and/or loss of key employees, vendors or customers, the loss of strategic product shipping relationships, customer demand, product availability, competition (including pricing and availability), concentrations of credit risks, distribution efficiencies, capacity constraints and technological difficulties could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements. New factors emerge from time to time, and it is not possible for management to predict all of such factors.
Results of Operations
Net Sales and Operating Income (Loss). The following table sets forth the net sales and operating income (loss) for each segment of the Company's business for the last three fiscal years:
Fiscal 1998 vs. Fiscal 1997
The Company's net sales increased by approximately 6% to $13,853,000 for fiscal 1998 from $13,112,000 for fiscal 1997. The Company's operating income increased to $1,034,000 for fiscal 1998 from $518,000 in fiscal 1997, an increase of approximately 100%. The Company's cost of goods sold were 58% of net sales in fiscal 1998, which was unchanged as compared to fiscal 1997. Selling, general, and administrative expenses decreased to 35% of net sales in fiscal 1998 from 38% in fiscal 1997.
The results of operations of the Company are dependent upon the results of operations of each of its subsidiaries operating in the individual business segments. Set forth below is a discussion of the results of operations of each of these segments.
Waste Management Services Segment
Net sales in the Company's Waste Management Services Segment, which operates through Bio Systems, increased 6% to $12,567,000 in fiscal 1998 from $11,836,000 in fiscal 1997. The sales growth is primarily due to securing new hospital contracts for Bio Systems' core business of providing "sharps" (including sharp- edged medical waste such as scalpels, syringes, and needles) disposal services which utilize cost effective reusable containers. Due to cost pressures, hospitals have become more receptive to out-sourcing certain services such as sharps management. Additionally, the recent industry trend toward the formation of hospital networks has enhanced Bio Systems' sales and market share growth. Market forces and competitive pricing pressures have affected Bio Systems' ability to increase prices with existing hospital and physician customers. These factors also impact the prices Bio Systems is able to charge new and potential customers.
Bio Systems reported an increase in operating income of 49% to $1,603,000 for fiscal 1998 from $1,073,000 for fiscal 1997. For fiscal 1998, Bio Systems' cost of goods sold were 60% of its net sales, which was unchanged compared to fiscal 1997. Selling, general, and administrative expenses decreased to 27% of net sales for fiscal 1998 from 30% of net sales for fiscal 1997. The decrease in selling, general, and administrative expenses is due to Bio Systems' success in controlling its administrative costs and expenses, such as business liability insurance, combined with a decrease in expenses associated with the purchase of the minority partner's 40% partnership interest in BSP in October 1997. See "Item 1. Business - Acquisition of Minority Partnership Interest." Bio Systems capitalized certain costs, primarily legal fees, associated with the purchase of the minority partnership interest in fiscal 1998, while the costs incurred in fiscal 1997 associated with the transaction were charged to expense. Additionally, Bio Systems reduced its bad debt expense in fiscal 1998, even though its net sales increased, primarily due to the implementation of an aggressive collection effort of its accounts receivable.
Consumer Healthcare Products Segment
Net sales for Scherer Labs, which operates in the Company's Consumer Healthcare Products Segment, increased 1% to $1,286,000 for fiscal 1998 from $1,276,000 for fiscal 1997. This slight increase is attributable to a price increase on some of Scherer Labs' products in early fiscal 1998. Recent consolidation within the industry has negatively impacted the sales of Scherer Labs' products. As a result of the industry consolidation, some of Scherer Labs' customers have either significantly decreased or discontinued their sales orders for Scherer Labs' products.
Scherer Labs' operating income improved 16% to $543,000 for fiscal 1998 from $467,000 for fiscal 1997. For fiscal 1998, Scherer Labs' cost of goods sold decreased to 33% of net sales from 37% of net sales for fiscal 1997. This improvement can be attributed to a decrease in cost of materials because Scherer Labs' shipped fewer product units in fiscal 1998, primarily as a result of the industry consolidation discussed above, combined with a favorable inventory reserve adjustment. Selling, general, and administrative expenses decreased slightly to 25% of net sales in fiscal 1998 from 26% of net sales in fiscal 1997. This improvement is due to a decrease in certain management consulting fees and expenses associated with Scherer Labs' contracted warehouse and distribution facility. The Company intends to begin performing all inventory and shipping functions internally in the second quarter of fiscal 1999 by utilizing warehouse space currently leased in one of the Company's Atlanta, Georgia facilities.
Corporate
The Company recorded operating expenses at the corporate level of $1,112,000 and $1,022,000 for fiscal years 1998 and 1997, respectively. Certain administrative, accounting, management oversight and payroll services are performed by the Company's Corporate office. The Corporate operating expenses include the salaries and wages of the personnel who perform these functions, including the Company's executive officers, rent expense, and professional accounting and legal fees. In fiscal 1998, the Company recorded approximately $120,000 in legal fees associated with litigation that was settled during the year. The Company does not allocate any revenues to the Corporate level.
In February 1998, the Company relocated its corporate headquarters to another location in Atlanta, Georgia and will recognize cost savings through reduced rent expense.
Fiscal 1997 vs. Fiscal 1996
The Company's net sales increased approximately 11% to $13,112,000 for fiscal 1997 from $11,858,000 for fiscal 1996. The Company's operating income increased approximately 119% to $518,000 for fiscal 1997 from $236,000 for fiscal 1996. For fiscal 1997, the Company's cost of goods sold increased to 58% of net sales from 57% of net sales for fiscal 1996. Selling, general, and administrative expenses decreased to 38% of net sales in fiscal 1997 from 41% of net sales in fiscal 1996.
Set forth below is a discussion of the results of operations of each of the Company's business segments for fiscal 1997 compared to fiscal 1996.
Waste Management Services Segment
Net sales for Bio Systems increased 10% to $11,836,000 in fiscal 1997 from $10,752,000 in fiscal 1996. In fiscal 1997, Bio Systems increased its net sales by approximately $810,000 by securing new medical waste disposal contracts with hospitals.
Bio Systems increased its operating income 16% to $1,073,000 in fiscal 1997 from $924,000 in fiscal 1996. Bio Systems' cost of goods sold increased to 60% of net sales in fiscal 1997 from 59% of net sales in fiscal 1996. Selling, general, and administrative expenses decreased to 30% of net sales in fiscal 1997 from 33% in fiscal 1996. The improved operating performance can be attributed to the increase in net sales from the acquisition of new hospital contracts combined with a significant decrease in Bio Systems' workers' compensation insurance expense. The decrease in insurance expense is primarily due to the conversion in October 1995 of Bio Systems' insurance coverage from a fully-insured workers' compensation program to a partially insured program, to take advantage of Bio Systems' excellent claims history.
Consumer Healthcare Products Segment
Scherer Labs' net sales increased approximately 15% to $1,276,000 in fiscal 1997 from $1,106,000 in fiscal 1996. The increase in net sales can be attributed to securing new customers and retail outlets during fiscal 1997.
Scherer Labs improved its operating income 27% to $467,000 in fiscal 1997 from $368,000 in fiscal 1996. While improving its net sales by 15%, as discussed above, Scherer Labs was able to maintain, or improve upon, its prior level of operating costs. Cost of goods sold decreased slightly to 37% of net sales in fiscal 1997 from approximately 38% of net sales in fiscal 1996 and selling, general and administrative expenses decreased to 26% of net sales in fiscal 1997 from 29% in fiscal 1996.
Corporate
The Company's Corporate operating expenses were consistent for fiscal 1997 and 1996 at $1,022,000 and $1,056,000, respectively. Corporate operating expenses include certain administrative, accounting, management oversight and payroll services.
Other Income (Expense). The Company recorded interest income of $521,000, $160,000, and $258,000 in fiscal 1998, 1997, and 1996, respectively. The increase in interest income in fiscal 1998 is a result of the investment, principally in marketable securities (see Note 4 of Notes to Consolidated Financial Statements included elsewhere herein), of the net proceeds received from the Marquest Transactions. In early fiscal 1996, the Company used the investments that were collateralizing a line of credit to repay the borrowings it made against the line of credit. Prior to the termination of the line of credit, the Company recorded $47,000 of interest income from the investments. Additionally, in fiscal 1996, the Company was paid in full the outstanding principal amount owed on a certain note receivable that was scheduled to be repaid in monthly installments over several years. Prior to the repayment, the Company recorded $33,000 in interest income on the note receivable.
The Company recorded interest expense of $52,000, $195,000 and $559,000 in fiscal 1998, 1997, and 1996, respectively. The decrease in interest expense in fiscal 1998 is a result of the repayment of the outstanding principal balance on a note payable to the adult children of an affiliate of the Company in July 1997. See Note 12 of Notes to Consolidated Financial Statements included elsewhere herein. The Company used a portion of the proceeds from the Marquest Transactions to repay in full the note payable. In fiscal 1996, the Company used $4,800,000 of the net proceeds from the sale of the Medical Business to repay a portion of the outstanding loans from affiliates. See "Item 1. Business - - Sale of Marquest Medical Products, Inc." and "- Discontinued Medical Device and Surgical/Safety Disposables Segment."
Income Taxes. The Company recorded an income tax provision of $21,000 and $4,000 in fiscal 1998 and 1997, respectively, and had a tax benefit of $178,000 in fiscal 1996. In fiscal 1998 and 1997, the Company utilized tax loss carryforwards and reduced its valuation allowance accordingly. In fiscal 1998 and in prior years, the Company significantly increased its valuation allowance against its deferred tax assets mainly related to the tax loss carryforwards.
The Company's ability to generate taxable income from operations is dependent upon various factors, many of which are beyond management's control. Accordingly, there can be no assurance that the Company will generate future taxable income. Therefore, the realization of the deferred tax assets will be assessed periodically based upon the Company's current and anticipated results of operations.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $6,868,000 at March 31, 1998, an increase of $3,631,000 from March 31, 1997. Working capital increased to $7,376,000 at March 31, 1998, compared to $3,376,000 at March 31, 1997. The Company's long-term debt decreased to $504,000 at March 31, 1998 from $2,046,000 at March 31, 1997. The primary reasons for these changes are discussed below.
Cash Flows from Operating Activities.
The Company's cash provided by operating activities from continuing operations totaled $2,752,000 for fiscal 1998, up from $2,019,000 for fiscal 1997. Bio Systems' operations provided cash of $2,051,000 for fiscal 1998, compared to $1,281,000 in fiscal 1997. The increase can be attributed to Bio Systems' improved operating performance combined with the timing of working capital items, specifically the timing of collections of its accounts receivable. In fiscal 1998, Bio Systems implemented an aggressive effort for collection of its trade accounts receivable. Primarily as a result of this collection effort, Bio Systems improved collection of its accounts receivable by over $800,000 for fiscal 1998 compared to fiscal 1997. Scherer Labs' operations provided cash of $447,000 in fiscal 1998, up slightly from $415,000 in fiscal 1997.
Cash Flows from Investing and Financing Activities. Cash provided by the Company's investing activities for fiscal year 1998 was $1,721,000, as compared to cash used of $872,000 for fiscal 1997. This increase is a result of the Marquest Transactions completed in July 1997. As a result of the Marquest Transactions, the Company received $5,747,000 in cash in exchange for its 7,211,192 shares of Marquest Common Stock and $309,000 in cash through the exercise of warrants to purchase Marquest Common Stock and the conversion of these shares into cash pursuant to the Merger. Additionally, the Company received $5,625,000 in cash from the sale of the ABG Assets to VSI and $235,000 in cash for the covenant not to compete with VSI in the manufacture and sale of arterial blood gas products for a period of three years. The aggregate proceeds that the Company received from the Merger and the sale of the ABG Assets, net of transaction costs, were $11,296,000 and the cash held by Marquest at the time of the Merger was $1,023,000.
During the third quarter of fiscal 1998, the Company invested approximately $6,300,000 of the proceeds received from the Marquest Transactions in long-term high-grade marketable securities. These marketable securities, which consist of municipal bonds, corporate bonds, and preferred stocks, mature over periods ranging from 3 to 27 years.
The Company, through a wholly-owned subsidiary, owned a 60% partnership interest in BSP which operates in the Company's Waste Management Services Segment. Pursuant to a summary judgment, the Company's subsidiary was required to purchase the minority partner's 40% partnership interest in BSP valued as of November 30, 1993. After separate appraisals performed by the partners were not consistent, a third independent appraiser was retained by the partners to review each of the previous valuations and to determine the purchase price for the minority interest. In early October 1997, the independent appraiser informed the Company and the minority partner of its determination that the fair market value of the 40% minority interest in BSP was $1,100,000 as of November 30, 1993. Effective October 28, 1997, the Company's subsidiary purchased, using cash on hand, the minority partner's 40% partnership interest in BSP for a purchase price of $1,100,000 and incurred associated transaction costs of $114,000. As a result, the Company, through its subsidiary, now owns 100% of BSP.
The Company's cash used from financing activities increased to $1,924,000 for fiscal 1998, from $373,000 in fiscal 1997. This decrease is a result of the repayment in July 1997 of the outstanding principal balance of $1,867,000 on a note payable to the adult children of an affiliate of the Company. The note payable was due December 1, 2001, had a fixed monthly payment of $43,408, bore interest at prime rate, and was collateralized by 2,432,251 shares of Marquest Common Stock that the Company owned. The Company used a portion of the proceeds from the Marquest Transactions to pay in full the outstanding principal balance of $1,867,000 on the note payable. The Company made installment payments of approximately $91,000 against the note payable prior to the repayment.
Management of the Company believes that its current cash on hand and its current cash flow is sufficient to maintain its current operations. The Company is evaluating its long-term options with regard to the use of its remaining cash on hand.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are set forth on pages through of this report. The reporting of selected quarterly financial data specified by Item 302 of Regulation S-K is not required for the Company.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this report but is incorporated herein by reference to the Company's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders (the "Proxy Statement"). Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after March 31, 1998.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
In accordance with General Instruction G(3) of the Form 10-K, the information relating to the directors of the Company, including directors who are executive officers of the Company, is set forth under the caption "Election of Directors" in the Proxy Statement and is incorporated herein by reference. Pursuant to Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K, information relating to the executive officers of the Company is set forth under the caption "Executive Officers of the Company" in Part I, Item 4A of this report. Compliance with Section 16(a) of the Securities Exchange Act of 1934: Section 16(a) of the Securities Exchange of 1934, as amended, and regulations of the Securities and Exchange Commission thereunder require the Company's directors and executive officers and any persons who own more than 10% of the Company's Common Stock, as well as certain affiliates of such persons, to file reports with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. with respect to their ownership of the Company's Common Stock. Directors, executive officers and persons owning more than 10% of the Company's Common Stock are required by Securities and Exchange Commission regulations to furnish the Company with copies of all Section 16(a) reports they file. Based solely on its review of the copies of such reports received by it and written representations that no other reports were required of those persons, the Company believes that during fiscal 1998, all filing requirements applicable to its directors and executive officers were complied within a timely manner, except that Amy M. Murphy and Gary W. Ruffcorn have filed their Form 3s late. The Company is not aware of any other persons other than directors and executive officers and their affiliates who own more than 10% of the Company's Common Stock.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with General Instruction G(3) of Form 10-K, the information relating to executive compensation set forth under the caption "Compensation of Executive Officers" in the Proxy Statement is incorporated herein by reference; provided, such incorporation by reference shall not be deemed to include or incorporate by reference the information referred to in Item 402 (a)(8) of Regulation S-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3) of Form 10-K, the information relating to security ownership by certain persons set forth under the captions "Principal Stockholders" and "Election of Directors" in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3) of Form 10-K, the information relating to certain relationships and related transactions set forth under the caption "Related Party Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
(1) Financial Statements.
The financial statements of the Company and the related report of independent accountants thereon are set forth immediately following the Index to Financial Statements and Financial Statement Schedule which appears on page of this report.
(2) Financial Statement Schedule.
The financial statement schedule is on page S-1 of this report. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions or are not applicable or because the information required is included in the consolidated financial statements or notes thereto.
(3) Exhibits.
The following exhibits are filed with or incorporated by reference in this report. Where filing is made by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified in parenthesis. The Company will furnish any exhibit upon request to Jeanne M. Fernandez, Secretary, Scherer Healthcare, Inc., 120 Interstate North Parkway, S.E., Suite 305, Atlanta, Georgia 30339. There is a charge of $.50 per page to cover expenses for copying and mailing.
3.1 Articles of Incorporation of the Company, as amended (Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
3.2 By-Laws of the Company (Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
4 Certificate of Designation, Preferences and Rights of Preferred Stock by Resolution of the Board of Directors Providing for an Issue of 7,000 Shares of Preferred Stock Designated "Series A" Cumulative Convertible Preferred Stock (Exhibit 4 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
10.1 Property Lease between Bio Systems Partners and Flushing Operating Corp. for 210 Sherwood Avenue, Farmingdale, New York, and Addendum (Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
10.2 Property Lease between Med X Services of PA, Inc. and successors and Mark Hankin and Hamnar Associates XVII for 380 Constance Drive, Warminster, Pennsylvania, and Addendum (Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
10.3 Conversion Agreement dated March 28, 1996 by and between Marquest Medical Products, Inc. and Scherer Healthcare, Inc. (Exhibit 10 to the Company's Current Report on Form 8-K dated April 17, 1996)
10.4 Amended and Restated Non-Negotiable Note dated January 17, 1997 by Scherer Healthcare, Inc. to Scherer Capital Company L.L.C. (Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997)
10.5 Agreement and Plan of Merger dated March 14, 1997 by and among Vital Signs, Inc., VSI Acquisition Corporation, and Marquest Medical Products, Inc. (Exhibit 2.1 to the Company's Current Report on Form 8-K dated March 21, 1997)
10.6 Scherer Healthcare Inducement Agreement dated March 14, 1997 by and between Scherer Healthcare, Inc., Vital Signs, Inc. and Marquest Medical Products, Inc. (Exhibit 2.2 to the Company's Current Report on Form 8-K dated March 21, 1997)
21 Subsidiaries of Registrant - filed herewith.
25 Powers of Attorney - filed herewith.
27 Financial Data Schedule (included only in EDGAR filing)
99.1 Robert Scherer Inducement Agreement dated March 14, 1997 by Robert P. Scherer, Jr. to Vital Signs, Inc. (Exhibit 99.2 to the Company's Current Report on Form 8-K dated March 21, 1997)
(b) Reports on Form 8-K. The following Current Reports on form 8-K were filed by the Company during the quarter ended March 31, 1998:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on June 25, 1998.
SCHERER HEALTHCARE, INC.
By: /s/Robert P. Scherer, Jr. ------------------------- Robert P. Scherer, Jr. Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on June 25, 1998.
Signature Title - --------- -----
/s/Robert P. Scherer, Jr. Chairman of the Board, Director, - ------------------------ Robert P. Scherer, Jr. Chief Executive Officer, and President
/s/Gary W. Ruffcorn Vice President and Chief Financial Officer - ----------------------- Gary W. Ruffcorn
/s/Stephen Lukas, Sr. * Director - ------------------------- Stephen Lukas, Sr.
/s/Kenneth H. Robertson * Director - -------------------------- Kenneth H. Robertson
/s/William J. Thompson * Director - -------------------------- William J. Thompson
*By:/s/Robert P. Scherer, Jr. ------------------------- Robert P. Scherer, Jr. as Attorney-in-Fact
SCHERER HEALTHCARE, INC.
Index of Exhibits
The following exhibits are filed with or incorporated by reference in this report. Where such filing is made by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified in parentheses.
SCHERER HEALTHCARE, INC.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and schedule of the Registrant and its subsidiaries are submitted herewith in response to Item 8:
Report of Independent Public Accountants.....................................F-2
Consolidated Balance Sheets--March 31, 1998 and 1997.........................F-3
Consolidated Statements of Operations--Years Ended March 31, 1998, 1997 and 1996............................................F-5
Consolidated Statements of Stockholders' Equity--Years Ended March 31, 1998, 1997 and 1996......................................F-7
Consolidated Statements of Cash Flows-- Years Ended March 31, 1998, 1997 and 1996................................F-8
Notes to Consolidated Financial Statements...................................F-9
The following financial statement schedule of the Registrant and its subsidiaries is submitted herewith in response to Item 14(a)(2):
Schedule II--Valuation and Qualifying Accounts...............................S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Scherer Healthcare, Inc.
We have audited the accompanying consolidated balance sheets of SCHERER HEALTHCARE, INC. (a Delaware corporation) AND SUBSIDIARIES as of March 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Scherer Healthcare, Inc. and subsidiaries as of March 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements and financial statement schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, Georgia June 3, 1998
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and 1997
SCHERER HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
As of March 31, 1998 and 1997
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 31,
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) For the years ended March 31,
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended March 31, 1998
SCHERER HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31,
SCHERER HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES OF CONSOLIDATION
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the parent company, Scherer Healthcare, Inc. (the "Company" or "Scherer Healthcare"), and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain 1996 and 1997 amounts have been reclassified to conform with the 1998 presentation.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
As of March 31, 1998 and 1997, the carrying value of financial instruments such as cash, short-term investments, trade receivables and payables and short-term debt approximated their fair values based on the short-term maturities of these instruments. Additionally, the carrying value of both long-term investments and long-term debt approximated fair values.
Inventories
Inventories are stated at the lower of net realizable value or cost using the last-in, first-out ("LIFO") method.
Property and Equipment
Property and equipment is stated at cost, and depreciation is computed principally using the straight-line method over the estimated useful lives of the assets as follows: automobiles and trucks--5 years, leasehold improvements--3-31 years, and furniture, fixtures and equipment--3-10 years.
Depreciation expense for fiscal years 1998, 1997, and 1996 was $916,000, $842,000, and $761,000, respectively.
Marketable Securities
The Company determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. At March 31, 1998, the Company's marketable securities were categorized as available-for-sale securities, as defined by Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and were carried at fair market value, with unrealized holding gains and losses reported as a separate component of shareholders' equity (see Note 4).
Income Taxes
The Company uses the liability method to account for income taxes (see Note 11).
Revenue Recognition
Sales are recorded by the Company when products are shipped to customers or independent distributors. Sales for services provided are recorded when the Company has completed the service.
Income (Loss) Per Common Share
In fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share." Under SFAS No. 128, Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
The following is a reconciliation of the Company's basic weighted average common shares outstanding to diluted weighted average common shares outstanding for fiscal years 1998, 1997, and 1996.
NOTE 2. DISCONTINUED OPERATIONS
Medical Device and Surgical/Safety Disposables Segment
The operations of Marquest Medical Products, Inc. ("Marquest"), a manufacturer and international distributor of specialty cardiopulmonary support, respiratory and anethesia disposable devices, and Scherer Healthcare, Ltd. ("Scherer Ltd."), whose primary business was to manufacture and distribute nonwoven medical drapes, gowns and accessory items to hospitals and other health care providers, were included in the Company's Medical Device and Surgical/Safety Disposables Segment. The assets and businesses of Scherer Ltd., a limited partnership that was 65% owned by the Company, were sold in two separate transactions in October 1995 and October 1996. In July 1997, the Company and Marquest, which was a majority owned subsidiary of the Company, completed certain transactions with Vital Signs, Inc. ("VSI") whereby Marquest became a wholly-owned subsidiary of VSI. Effective with the sale of Marquest to VSI, the operations of the Medical Device and Surgical/Safety Disposables Segment have been accounted for as a discontinued segment, and accordingly, the operations of Marquest and Scherer Ltd. have been segregated and reported as discontinued operations in the accompanying consolidated financial statements. Set forth below is information regarding Marquest and Scherer Ltd. and the transactions discussed above.
Marquest
In fiscal 1994, the Company entered into transactions to acquire Marquest and to purchase one of Marquest's product lines for $4,500,000 in cash. Since the transactions were completed, Marquest had been included with the Company in the consolidated financial statements due to the Company's ability to control Marquest by virtue of common stock, warrants and convertible debt held by the Company and the Company's control of the Board of Directors.
As part of the acquisition, Marquest restructured its $12,650,000 of defaulted Swiss bonds. Approximately 96% of the outstanding amount of bonds was tendered and accepted in the Swiss bond exchange offers. A combination of 43,516 shares of Scherer Healthcare 5% Convertible Preferred Stock, $2,875,000 of Marquest six-year 8% notes, and Marquest warrants for 1,597,416 shares of Marquest Common Stock were issued to the former bondholders who accepted the exchange offers. In exchange for its Preferred Stock, the Company received approximately $4,352,000 of Marquest six-year 8% notes convertible into Marquest Common Stock. In connection with the acquisition of Marquest, the Company purchased certain assets from Marquest which are used by Marquest in the manufacture and sale of arterial blood gas products (the "ABG Assets") for $4,500,000 in cash. The Company licensed the ABG Assets back to Marquest in exchange for a royalty equal to 3.25% of Marquest's net arterial blood gas product line sales. Marquest had the option to repurchase the ABG Assets from the Company for $4,500,000 plus $22,500 for each month lapsed between June 1993 and the date of repurchase. The purchase of the ABG Assets by the Company resulted in goodwill of approximately $4,255,000. Primarily as consideration for the ABG Assets repurchase option, the Company received warrants for 6,580,000 shares of Marquest Common Stock, exercisable at $0.75 per share. In May 1994, the Company converted $2,500,000 of the $4,352,000 Marquest six-year 8% note into 3,333,333 shares of Marquest Common Stock.
In March 1996, the Company converted the remaining balance of $1,852,000 and the associated accrued interest of $487,000 on the Marquest six-year 8% note into 3,340,245 shares of Marquest Common Stock. Additionally, the Company agreed to convert $376, 000 in accrued but unpaid management fees owed to the Company by Marquest into 537,614 shares of Marquest Common Stock.
Pursuant to the terms of an Agreement and Plan of Merger dated as of March 14, 1997 (the "Merger Agreement"), between Marquest, VSI, and VSI Acquisition Corporation, a wholly-owned subsidiary of VSI, effective July 28, 1997, VSI acquired Marquest upon the merger (the "Merger") of VSI Acquisition Corporation with and into Marquest. At the effective time of the Merger, all of the issued and outstanding shares of Marquest Common Stock were converted into the right to receive $0.797 in cash per share and Marquest became a wholly-owned subsidiary of VSI. As a result, the Company received approximately $5,747,000 in cash in exchange for its 7,211,192 shares of Marquest Common Stock and approximately $309,000 in cash through the exercise of warrants to purchase Marquest Common Stock and the conversion of these shares into cash pursuant to the Merger. Additionally, pursuant to the terms of the Scherer Healthcare Inducement Agreement dated as of March 14, 1997 (the "Inducement Agreement"), between the Company, Marquest, and VSI, VSI purchased the ABG Assets from the Company and the Company entered into a covenant not to compete with VSI in the manufacture and sale of arterial blood gas products for a period of three years. VSI paid the Company an aggregate of $5,860,000 in cash for the ABG Assets and the covenant not to compete. The Company recorded gains, net of income taxes and transaction costs, of approximately $3,552,000 and $1,340,000 from the Merger and the sale of the ABG Assets, respectively. The aggregate net gain of $4,892,000 from the Merger and the sale of the ABG Assets has been reported as "Gain (loss) from disposal of discontinued operations" in the accompanying Consolidated Statements of Operations. The Merger, the sale of the ABG Assets by the Company to VSI, and the execution of the covenant not to compete are collectively referred to as the "Marquest Transactions".
Scherer Ltd.
The Company, through a wholly-owned subsidiary, owned a 65% interest in Scherer Ltd. and was its sole general partner. Scherer Ltd., which was formed in 1987, was engaged in the manufacture and distribution of three disposable product lines: surgical drapes and gowns, surgical trays, and industrial/clean room specialty apparel.
In October 1995, Scherer, Ltd. sold certain of its assets to Cordis Medical, a wholly owned subsidiary of Cordis Corporation for $6,527,000. The assets sold were those used in connection with Scherer, Ltd.'s business of packing and distributing medical supplies for surgical procedures and providing nonwoven medical drapes, gowns and accessory items to hospitals and other healthcare providers (the "Medical Business"). Additionally, Cordis Medical agreed to assume all accounts payable related to the Medical Business and certain other specifically identified liabilities, including the mortgage on Scherer, Ltd.'s facility located in Asheville, North Carolina. Scherer, Ltd. received net proceeds, before income taxes, of $4,922,000, and the Company recorded an after tax gain of $2,758,000 in fiscal 1996. Scherer, Ltd. continued in the business of providing nonwoven apparel for industrial uses (the "Industrial Business") after the sale of the Medical Business.
In October 1996, Scherer, Ltd. sold substantially all of its remaining assets to a subsidiary of Health-Pak, Inc. for approximately $254,000, plus the assumption by Health-Pak of $319,000 in accounts payable. The assets acquired by Health-Pak were those used in connection with Scherer, Ltd.'s Industrial Business and included accounts receivable, inventory and furniture and fixtures. Additionally, Health-Pak agreed to assume certain accounts payable and liabilities related to the Industrial Business. The Company recorded a loss from the transaction of $84,000 in fiscal 1997 primarily due to the write-off of the remaining book value of certain intangible assets.
The net gain of $2,758,000 from the sale of the Medical Business and the net loss of $84,000 from the sale of the Industrial Business have been reported as "Gain (loss) from disposal of discontinued operations" in the accompanying Consolidated Statements of Operations.
The following results of operations are attributable to the discontinued operations of the Medical Device and Surgical/Safety Disposables Segment:
The net assets (liabilities) of the discontinued operations of the Medical Device and Surgical/Safety Disposables Segment at March 31, 1998 and March 31, 1997 are as follows:
Pharmaceutical Research and Development Segment
Biofor, Inc. ("Biofor"), a majority owned subsidiary of the Company which had been operating the Company's Pharmaceutical Research and Development Segment, was engaged in research to identify and develop new drug compounds. Biofor utilized "artificial intelligence" computer technology (known as "MultiCASE") which employed a system of rational drug design (known as M-CADD). This technology was used for new drug compound development and for contracted research and development.
Biofor focused its drug design efforts on arthritis and osteoarthritis as well as the treatment for acute pain. Biofor's lead compound, BF-389, is an anti-inflammatory analgesic which preliminary Phase I clinical trials indicated was not sufficiently bioavailable when administered orally in humans. Other delivery methods that would allow oral administration of the compound were pursued by Biofor without success.
Since October 1990, Biofor and Ono Pharmaceutical Company, Ltd. ("Ono") had entered into two research and collaboration agreements pursuant to which they jointly researched compounds. Biofor provided the use of its exclusive M-CADD software and its scientists experienced in using M-CADD, while Ono provided funding and clinical testing of any compounds discovered. The first contract expired in fiscal 1994 and the second expired March 1996. Substantially all of Biofor's revenues since 1990 were derived from these contracts.
In July 1995, after attempts to locate a purchaser for Biofor, Biofor ceased further drug design efforts and concentrated solely on the Ono research contract. When the Ono contract expired in March 1996, Biofor discontinued all operations and the Company abandoned all operations of Biofor.
The abandonment of the operations of Biofor has been accounted for as a discontinued segment, and accordingly, the operations of Biofor have been segregated and reported as discontinued operations in the accompanying consolidated financial statements.
The following results of operations are attributable to the discontinued operations of Biofor:
The net assets of the discontinued operations of Biofor at March 31, 1998 and 1997 are as follows:
(a) The remaining property and equipment of Biofor consists of land, a 30,000 square foot building owned by Biofor, and computer and laboratory equipment.
In fiscal 1996, the Company wrote down the assets of Biofor to their then-estimated net realizable value and recorded a provision of $50,000 for the estimated shutdown costs. However, the operating costs of Biofor for fiscal 1997 were $104,000 higher than the provision recorded in fiscal 1996 primarily due to the cost to maintain the patents for BF-389 in various countries and the cost for property and liability insurance. The Company intends to sell the remaining assets of Biofor, but it now anticipates that it may take several years (primarily to sell the building) and accordingly, has recorded additional charges of $75,000 and $271,000 in fiscal 1998 and 1997, respectively, for the write-down of Biofor's assets to their estimated net realizable value. No income taxes or interest expense was allocated to the discontinued operations of Biofor for the fiscal years 1998, 1997 and 1996.
The following is a summary of the Company's consolidated loss from discontinued operations:
The following is a summary of the Company's consolidated net assets of discontinued operations at March 31, 1998 and March 31, 1997:
NOTE 3. SEGMENT INFORMATION
In fiscal 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not have a material effect on the Company's financial position or its results of operations.
(a) Amount includes net assets of discontinued operations of $188,000, $7,003,000, and $6,360,000 for fiscal years 1998, 1997, and 1996, respectively. See Note 2.
The Company recorded interest income of $521,000, $160,000, and $258,000 for fiscal years 1998, 1997, and 1996, respectively. Additionally, the Company recorded interest expense of $52,000, $195,000, and $559,000 for fiscal years 1998, 1997, and 1996, respectively. The Company records interest income and interest expense at the Corporate level.
Waste Management Services Segment
The Company operates its medical waste management services segment through its wholly-owned subsidiaries, Bio Systems Partners ("BSP"), BioWaste Systems, Inc., and Medical Waste Systems, Inc. (collectively, "Bio Systems"). Prior to fiscal 1998, the Company owned a 60% general partnership interest in BSP. In October 1997, the Company purchased the remaining 40% partnership interest in BSP from the minority partner for $1,100,000 (see Note 5). Bio Systems has developed and implemented a system to manage and to dispose of certain infectious waste from hospitals and medical facilities--primarily injectables and other sharp-edged waste. Bio Systems operates in the New York City, Pennsylvania, New Jersey, and New England areas.
Consumer Healthcare Products Segment
Scherer Laboratories, Inc. ("Scherer Labs"), a 100% owned subsidiary of the Company, markets brand name and generic over-the-counter ("OTC") drugs. The OTC products are principally products used for treatment of colds and coughs, eye and ear irritations and insect bites. In early fiscal 1997, Scherer Labs discontinued the sale of its one prescription drug due to an impractical increase in the cost to manufacture. The loss of these sales did not have a material effect on the Company. Scherer Labs had one customer who accounted for 60%, 55% and 45% of its total sales for fiscal 1998, 1997, and 1996, respectively.
Scherer Labs markets its products primarily to drug and food stores, mass market retailers, drug wholesalers, and government agencies. The majority of the sales are through retailers in the southwest region of the United States. Accounting and customer service functions are provided by the Company at its corporate headquarters in Atlanta, Georgia, and sales, marketing, purchasing, and relations with suppliers and contractors are performed in Dallas, Texas.
NOTE 4. MARKETABLE SECURITIES
During the third quarter of fiscal 1998, the Company invested a portion of the proceeds from the Marquest Transactions in high-grade marketable securities. The Company has classified its marketable securities, which consist of municipal bonds, corporate bonds, and preferred stocks, as available-for-sale securities as defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These marketable securities are being carried at fair market value and unrealized holding gains and losses have been reported as a separate component of shareholders' equity.
The amortized cost and fair market value of the Company's marketable securities at March 31, 1998 are as follows:
The municipal bonds mature ranging from 3 years to 27 years and the corporate bonds mature ranging from 11 years to 27 years.
NOTE 5. ACQUISITION OF MINORITY PARTNERSHIP INTEREST
The Company, through a wholly-owned subsidiary, owned a 60% partnership interest in BSP which operates in the Company's Waste Management Services Segment. Pursuant to a summary judgment, the Company's subsidiary was required to purchase the minority partner's 40% partnership interest in BSP valued as of November 30, 1993. After separate appraisals performed by the partners were not consistent, a third independent appraiser was retained by the partners to review each of the previous valuations and to determine the purchase price for the minority interest. In early October 1997, the independent appraiser informed the Company and the minority partner of its determination that the fair market value of the 40% minority interest in BSP was $1,100,000 as of November 30, 1993. Effective October 28, 1997, the Company's subsidiary purchased the minority partner's 40% partnership interest in BSP for a purchase price of $1,100,000. As a result, the Company, through its subsidiary, now owns 100% of BSP.
The purchase price of $1,100,000 for the 40% partnership interest in BSP and the associated transaction costs of $114,000 have been reported as intangibles and are being amortized over 30 years.
NOTE 6. INTANGIBLES AND COSTS IN EXCESS OF NET ASSETS ACQUIRED
Intangibles are being amortized on a straight-line basis over periods ranging from 5 to 30 years. Amortization expense amounted to $90,000, $93,000, and $111,000 in fiscal years 1998, 1997, and 1996, respectively. Accumulated amortization at March 31, 1998 and 1997 was $199,000 and $207,000, respectively.
The cost in excess of net assets acquired ("goodwill") is being amortized on a straight-line basis over a period of 30 years. Amortization expense amounted to $107,000, $106,000, and $106,000 in fiscal years 1998, 1997, and 1996, respectively. Accumulated amortization at March 31, 1998 and 1997 was $971,000 and $864,000, respectively.
Subsequent to an acquisition, the Company periodically evaluates whether later events and circumstances indicate that the remaining estimated useful life of goodwill warrants revision. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of undiscounted net income over the remaining life of the goodwill in measuring whether the goodwill is recoverable. As of March 31, 1998, in the opinion of the Company's management, no revision of goodwill is required.
NOTE 7. BORROWINGS
Debt and obligations under capital leases at March 31, 1998 and 1997 consisted of the following:
(a) The note was payable to the four adult children of Robert P. Scherer, Jr. who is the Chairman of the Board and Chief Executive Officer of the Company.
The following is a summary of the future maturities of the obligations:
NOTE 8. COMMITMENTS AND CONTINGENCIES
Operating Leases
Office space, warehouse facilities, transportation equipment, and office equipment are leased under noncancelable operating leases expiring at various dates through 2003. Total rental expense included in the consolidated statements of operations was approximately $557,000, $580,000, and $533,000 for the years ended March 31, 1998, 1997, and 1996, respectively.
The following is a summary of future minimum lease payments required under operating leases having noncancelable lease terms in excess of one year:
Year ended March 31: 1999 $327,000 2000 182,000 2001 108,000 2002 8,000 2003 3,000 -------- Total $628,000 -------- --------
Legal Proceedings
The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Although the outcome of such proceedings and claims cannot be determined with certainty, management is of the opinion that their final outcome will not have a material adverse effect on the Company's consolidated operations or financial position.
NOTE 9. STOCKHOLDERS' EQUITY
Stock Options
The Company has three stock option plans and a long-term incentive plan. Options may be exercised at a rate ranging from 20% to 33% per year and expire ten years from the date of grant. At March 31, 1998, the maximum shares available under these plans for future grants were 1,579,200. The price of options granted to date has generally been at the fair market value of the shares on date of grant.
The Company accounts for its stock based compensation plans under APB opinion No. 25, under which no compensation cost is recognized for options granted with an exercise price equal to the fair market value of the Company's common stock at the grant date. The Company has computed, for pro forma disclosure purposes, the value of options granted in fiscal 1998 to employees using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 0%, expected volatility of 50%, risk-free rate of return of 6.87%, and expected option life of 5.92 years. The weighted-average fair value of options granted during the year is $0.91.
If the Company had accounted for these plans in accordance with SFAS No. 123 "Accounting for Stock-Based Compensation" the Company's net income would have been $5,922,000 and earnings per share would have been $1.37 (basic) and $1.31 (diluted) for the year ended March 31, 1998.
A summary of changes in outstanding options is as follows:
Of the 409,800 options outstanding at March 31, 1998, 99,800 have exercise prices ranging from $12.50 to $14.30, with a weighted average exercise price of $13.09 and a weighted average remaining contractual life of three years. All of these options are exercisable as of March 31, 1998. Additionally, 30,000 options have exercise prices ranging from $20.50 to $26.88, with a weighted average exercise price of $21.56 and a weighted average remaining contractual life of 5.7 years. Of these options, 20,000 are exercisable as of March 31, 1998. The remaining 280,000 options have an exercise price of $1.69 and a weighted average remaining contractual life of 8.4 years. Of these options, 93,336 are exercisable as of March 31, 1998.
Convertible Preferred Stock
As part of the Marquest acquisition in fiscal 1994, the Company issued 43,516 shares of its 5% Convertible Preferred Stock, $.01 par value (the "Preferred Stock") to the former holders of Marquest's defaulted Swiss bonds (see Note 2). The Company has 2,000,000 shares of the Preferred Stock authorized. Each share of the Preferred Stock is convertible into approximately 4.43 shares of the Company's Common Stock. At March 31, 1998 and 1997, the Company had 23,193 and 23,541, respectively, shares of the Preferred Stock outstanding which were convertible into approximately 102,724 and 104,260 respectively, shares of the Company's Common Stock.
NOTE 10. RETIREMENT PLAN
A contributory 401(k) salary reduction plan (the "Plan") covers all nonunion employees, and union employees in a few states, who are 21 years of age or older and have been employed at least one year. Prior to April 1, 1995, an eligible employee could elect to contribute up to 3% of their compensation and the Company was required to make a matching contribution equal to 200% of employee contributions for all Plan participants still employed on the last day of the Plan year. Effective April 1, 1995, an eligible employee may elect to contribute from 2% up to 10% of their compensation and the Company may make a matching contribution, at its discretion, equal to a set percentage of employee contributions for all Plan participants still employed on the last day of the Plan year. The amount of employee contributions to which the match percentage is applied is limited to 6% of an employee's compensation. For fiscal 1998, the Company made a matching contribution equal to 100% of employee contributions up to the maximum of 6% of employee compensation. Company contributions were approximately $132,000, $120,000, and $93,000 for fiscal years 1998, 1997, and 1996, respectively.
NOTE 11. INCOME TAXES
As of March 31, the Company's net deferred tax assets consisted of the following:
A reconciliation of the income tax provision (benefit) from continuing operations at the federal statutory rates to the actual tax provision (benefit) from continuing operations follows:
Components of the provision (benefit) for income taxes are as follows:
At March 31, 1998, the Company has regular tax loss carryforwards of approximately $1,774,000 expiring in varying dates through 2011. The Company has determined, based upon its recent earnings history, that asset valuation allowances of $1,016,000 and $2,172,000 should be established against its deferred tax assets as of March 31, 1998 and 1997, respectively.
NOTE 12. RELATED-PARTY TRANSACTIONS
Prior to fiscal 1996, Scherer Capital Company L.L.C. ("Scherer Cap") and Scherer Scientific, Ltd. ("Scherer Sci"), entities controlled by the majority stockholder of the Company, made loans (the "Affiliate Loans") to the Company and its subsidiaries, the proceeds of which were used for working capital and business and equipment acquisitions. The Affiliate Loans were payable on demand and bore interest at prime rate plus 1%.
In January 1997, the Company and Scherer Cap restructured the balance of $2,128,000 on the Affiliate Loans (the Company had repaid all amounts owed to Scherer Sci) into a promissory note (the "Original Note") to be repaid in monthly installments of principal and interest over a five-year term with a maturity date of December 1, 2001. The Original Note was collateralized by 2,432,251 shares of Marquest Common Stock owned by the Company, had a fixed monthly payment of $44,437, except for the last payment, and bore interest at prime rate plus 1%, adjusted quarterly. In connection with the dissolution of Scherer Cap in March 1997, the Original Note was amended (the "Amended Note") and subsequently assigned to the four adult children, who are not affiliated with the Company, of Robert P. Scherer, Jr. who is Chairman of the Board and Chief Executive Officer of the Company and Marquest and is the majority stockholder of the Company. In exchange for certain considerations, $50,000 of the principal balance was forgiven and the interest rate was reduced to prime, adjusted quarterly, in the Amended Note. The monthly payment in the Amended Note was fixed at $43,408, except for the last payment which will be for the amount of the unpaid principal balance plus any unpaid accrued interest as of December 1, 2001. The term and collateral remained the same in the Amended Note as in the Original Note. The Company has reported the $50,000 of debt forgiveness as an equity transaction due to the common control at the time between the respective parties.
On July 28, 1997, the Company used a portion of the proceeds from the Marquest Transactions (see Note 2) to pay in full the outstanding principal balance of approximately $1,867,000 and the associated accrued interest of approximately $12,000 on the Amended Note. Accordingly, the Amended Note was canceled and the shares of Marquest Common Stock pledged as collateral under the Amended Note were released back to the Company.
In March 1996, Marquest and Scherer Cap entered into a loan and security agreement (the "Loan Agreement") from which Marquest borrowed $700,000 to repay $700,000 that it borrowed from Scherer Cap in December 1995 for working capital purposes. Borrowings under the Loan Agreement were represented by convertible notes due April 1, 2001 (the "Scherer Cap Notes"), bore interest at prime rate plus 1.5%, and were secured by Marquest's inventory, building, and equipment. Pursuant to the Loan Agreement, the Scherer Cap Notes were convertible at the option of Scherer Cap into shares of Marquest's Common Stock at a conversion price of $.70 per share. Additionally, in March 1996 Scherer Cap purchased 2,061,856 shares of Marquest Common Stock for an aggregate purchase price of $1,000,000. In connection with its dissolution in March 1997, Scherer Cap assigned the Loan Agreement and the Scherer Cap Notes, and transferred 1,546,392 shares of the Marquest Common Stock that it owned to Mr. Scherer, Jr. The remaining 515,464 shares of Marquest Common Stock owned by Scherer Cap were transferred into a voting trust for the benefit of Mr. Scherer, Jr.'s adult children. Mr. Scherer, Jr. was entitled to vote the shares held in the voting trust. In July 1997, Mr. Scherer, Jr. converted the outstanding principal amount of $700,000 under the Loan Agreement and Scherer Cap Notes into 1,000,000 shares of Marquest Common Stock and accordingly, the Scherer Cap Notes were canceled.
In connection with the Marquest Transactions in July 1997, the 2,546,392 shares of Marquest Common Stock that Mr. Scherer, Jr. owned and the 515,464 shares of Marquest Common Stock held in the voting trust for the benefit of his adult children were converted into cash pursuant to the terms of the Merger.
Effective October 1, 1995, Scherer Sci charged the Company an allocated portion of the salary of a certain executive officer of the Company who was an employee of Scherer Sci and not the Company. The executive officer provided the Company with administrative and operations management. In connection with the dissolution of Scherer Sci in March 1997, the executive officer became an employee of the Company.
During the first quarter of fiscal 1996 and prior periods, Scherer Sci provided to the Company and its subsidiaries administrative, accounting, management oversight and payroll services (collectively, the "Administrative Services"). Effective July 1, 1995, Scherer Sci and the Company terminated the Administrative Services arrangement and certain employees of Scherer Sci became employees of the Company. As a result, the Company currently provides its own administrative, accounting, management and payroll services.
The Company was charged the following fees by the above affiliates:
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Schedule II
SCHERER HEALTHCARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended March 31, 1998
(a) Accounts written off, net of recoveries.
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