**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Forthe quarterly period ended September 30, 2002**

 

**CommissionFile No. 0-10552**

 

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** **

| **SCHERER  HEALTHCARE, INC.**                                                   |
|---------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its Charter)                          |
|                                                                            |   |   |
| **Delaware**                                                                    |   | **59-0688813** |
| (State or other jurisdiction of  incorporation or organization)                 |   | (I.R.S. Employer  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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

YES  ý               NO  o

 

Indicate the number of outstanding shares of each of the issuer’sclasses of  Common Stock, as of thelatest practicable date:

** **

| **Class**                     |   | **Outstanding  as of  November 4, 2002** |
|-------------------------------|--------|-----------------------------------------------|
| Common Stock, $0.01 par value |   | 4,390,379                                     |

 

 

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**SCHERERHEALTHCARE, INC.**

 

**QuarterlyReport on Form 10-Q**

**Forthe Quarter Ended September 30, 2002**

 

**Tableof Contents**

 
| **Item  Number** |                                                                                                                         | **Page**

**Number** |
|------------------|------------------------------------------------------------------------------------------------------------------------------|----------------------|
|             |                                                                                                                         |                 |   |
|             | **PART I.  FINANCIAL INFORMATION**                                                                                      |                 |   |
|             |                                                                                                                         |                 |   |
| 1                | Financial Statements:                                                                                                        |                 |   |
|             |                                                                                                                         |                 |   |
|             | Condensed Consolidated Balance  Sheets as of September 30, 2002 and  March 31, 2002 (unaudited)                              | 3                    |   |
|             |                                                                                                                         |                 |   |
|             | Condensed Consolidated Statements  of Operations for the Three and Six Months  Ended September 30, 2002 and 2001 (unaudited) | 5                    |   |
|             |                                                                                                                         |                 |   |
|             | Condensed Consolidated Statements  of Cash Flows for the Six Months  Ended September 30, 2002 and 2001 (unaudited)           | 6                    |   |
|             |                                                                                                                         |                 |   |
|             | Notes to Condensed Consolidated  Financial Statements                                                                        | 7                    |   |
|             |                                                                                                                         |                 |   |
| 2                | Management’s Discussion and Analysis  of Financial Condition and Results of Operations                                  | 11                   |   |
|             |                                                                                                                         |                 |   |
| **3**            | **Quantitative  and Qualitative Disclosure About Market Risk**                                                               | 16                   |   |
|             |                                                                                                                         |                 |   |
| **4**            | **Controls and  Procedures**                                                                                                 | 16                   |   |
|             |                                                                                                                         |                 |   |
|             | **PART II.  OTHER INFORMATION**                                                                                         |                 |   |
|             |                                                                                                                         |                 |   |
| 4                | Submission of Matters to a Vote of Security  Holders                                                                         | 17                   |   |
|             |                                                                                                                         |                 |   |
| 6                | Exhibits and Reports on Form 8-K                                                                                             | 17                   |   |
|             |                                                                                                                         |                 |   |
|             | **SIGNATURES**                                                                                                               | 18                   |   |
|             |                                                                                                                         |                 |   |
|             | **CERTIFICATIONS**                                                                                                           | 19                   |   |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

** **

 

**SCHERERHEALTHCARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 

ASSETS

 

 
|                                                                                              |   | **September  30, 2002** |       | **March 31,  2002** |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------------|------------|---------------------|--------|
|                                                                                              |   |                    |       |                |   |
| CURRENT ASSETS                                                                                    |   |                    |       |                |   |
| Cash and cash equivalents                                                                         |   | $                       | 15,757,000 |                | $      | 5,561,000 |   |
| Accounts receivable, less allowance for  doubtful accounts of $281,000 and $299,000, respectively |   | 4,287,000               |       | 4,320,000           |   |
| Interest receivable                                                                               |   | 77,000                  |       | 219,000             |   |
| Inventories                                                                                       |   | 444,000                 |       | 416,000             |   |
| Income taxes receivable                                                                           |   | 130,000                 |       | 130,000             |   |
| Prepaid and other                                                                                 |   | 480,000                 |       | 374,000             |   |
|                                                                                              |   |                    |       |                |   |
| Total current assets                                                                              |   | 21,175,000              |       | 11,020,000          |   |
|                                                                                              |   |                    |       |                |   |
| PROPERTY AND EQUIPMENT                                                                            |   | 10,767,000              |       | 10,010,000          |   |
| Less accumulated depreciation                                                                     |   | (6,089,000              | )          | (5,466,000          | )      |
| Net property and equipment                                                                        |   | 4,678,000               |       | 4,544,000           |   |
|                                                                                              |   |                    |       |                |   |
| OTHER ASSETS                                                                                      |   |                    |       |                |   |
| Intangibles, net                                                                                  |   | 3,282,000               |       | 3,331,000           |   |
| Investments                                                                                       |   | 318,000                 |       | 9,143,000           |   |
| Deferred income taxes                                                                             |   | 420,000                 |       | 590,000             |   |
| Net assets of discontinued operations                                                             |   | 504,000                 |       | 498,000             |   |
|                                                                                              |   |                    |       |                |   |
| Total other assets                                                                                |   | 4,524,000               |       | 13,562,000          |   |
|                                                                                              |   |                    |       |                |   |
| TOTAL ASSETS                                                                                      |   | $                       | 30,377,000 |                | $      | 29,126,000 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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LIABILITIES AND STOCKHOLDERS’ EQUITY

 
|                                                                                                                                                                                                                          |   | **September  30, 2002** |       | **March 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|---------------------|--------|
|                                                                                                                                                                                                                          |   |                    |       |                |   |
| CURRENT LIABILITIES                                                                                                                                                                                                           |   |                    |       |                |   |
| Accounts payable                                                                                                                                                                                                              |   | $                       | 1,100,000  |                | $      | 1,070,000 |   |
| Accrued expenses                                                                                                                                                                                                              |   | 846,000                 |       | 1,011,000           |   |
| Unearned revenues                                                                                                                                                                                                             |   | 554,000                 |       | 492,000             |   |
| Current maturities of capital lease  obligations                                                                                                                                                                              |   | 272,000                 |       | 292,000             |   |
| Income taxes payable                                                                                                                                                                                                          |   | 117,000                 |       | —              |   |
|                                                                                                                                                                                                                          |   |                    |       |                |   |
| Total current liabilities                                                                                                                                                                                                     |   | 2,889,000               |       | 2,865,000           |   |
|                                                                                                                                                                                                                          |   |                    |       |                |   |
| CAPITAL LEASE OBLIGATIONS, net of current  maturities                                                                                                                                                                         |   | 579,000                 |       | 673,000             |   |
|                                                                                                                                                                                                                          |   |                    |       |                |   |
| OTHER LIABILITIES                                                                                                                                                                                                             |   | 80,000                  |       | 56,000              |   |
|                                                                                                                                                                                                                          |   |                    |       |                |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                 |   |                    |       |                |   |
|                                                                                                                                                                                                                          |   |                    |       |                |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                                                     |   |                    |       |                |   |
| Convertible preferred stock - $.01 par  value, 2,000,000 shares authorized; 17,666 shares issued and outstanding at  September 30, 2002 (17,939 at March 31, 2002)                                                            |   | —                  |       | —              |   |
| Common stock - $.01 par value, 12,000,000  shares authorized; 4,781,293 shares issued at September 30, 2002 (4,730,085  at March 31, 2002); 4,390,264 shares outstanding at September 30, 2002  (4,339,056 at March 31, 2002) |   | 48,000                  |       | 47,000              |   |
| Capital in excess of par value                                                                                                                                                                                                |   | 22,478,000              |       | 22,394,000          |   |
| Unrealized loss on marketable securities                                                                                                                                                                                      |   | —                  |       | (330,000            | )      |
| Retained earnings                                                                                                                                                                                                             |   | 7,394,000               |       | 6,512,000           |   |
| Less treasury stock, at cost                                                                                                                                                                                                  |   | (3,091,000              | )          | (3,091,000          | )      |
|                                                                                                                                                                                                                          |   |                    |       |                |   |
| Total stockholders’ equity                                                                                                                                                                                               |   | 26,829,000              |       | 25,532,000          |   |
|                                                                                                                                                                                                                          |   |                    |       |                |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                               |   | $                       | 30,377,000 |                | $      | 29,126,000 |   |

 

See notes to condensed consolidated financialstatements.

 

4

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**SCHERERHEALTHCARE, INC.**

** CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                  |   | **Three  months ended  September 30,** |      | **Six months  ended  September 30,** |   |
|-------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|--------|
|                                                  |   | **2002**                               |      | **2001**                             |   | **2002** |   | **2001** |   |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| NET SALES                                             |   | $                                      | 5,536,000 |                                 | $      | 5,132,000 |   | $ | 10,939,000 |   | $ | 10,166,000 |   |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| COSTS AND EXPENSES                                    |   |                                   |      |                                 |   |   |   |   |   |
| Cost of goods sold                                    |   | 3,764,000                              |      | 3,357,000                            |   | 7,237,000 |   | 6,549,000 |   |
| Selling, general, and administrative                  |   | 1,303,000                              |      | 1,312,000                            |   | 2,683,000 |   | 2,600,000 |   |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| Total costs and expenses                              |   | 5,067,000                              |      | 4,669,000                            |   | 9,920,000 |   | 9,149,000 |   |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| OPERATING INCOME                                      |   | 469,000                                |      | 463,000                              |   | 1,019,000 |   | 1,017,000 |   |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| OTHER INCOME (EXPENSE)                                |   |                                   |      |                                 |   |   |   |   |   |
| Interest income                                       |   | 80,000                                 |      | 114,000                              |   | 194,000 |   | 306,000 |   |
| Equity in net losses of unconsolidated  companies     |   | (1,000                                 | )         | (40,000                              | )      | (13,000 | ) | (1,000 | ) |
| Impairment charges on investments                     |   | —                                 |      | (3,129,000                           | )      | — |   | (3,129,000 | ) |
| Gain (loss) on sale of securities                     |   | 223,000                                |      | (34,000                              | )      | 19,000 |   | (34,000 | ) |
| Other, net                                            |   | 11,000                                 |      | 5,000                                |   | 12,000 |   | 2,000 |   |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| Total other income (expense), net                     |   | 313,000                                |      | (3,084,000                           | )      | 212,000 |   | (2,856,000 | ) |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAXES                     |   | 782,000                                |      | (2,621,000                           | )      | 1,231,000 |   | (1,839,000 | ) |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| PROVISION (BENEFIT) FOR INCOME TAXES                  |   | 188,000                                |      | (1,089,000                           | )      | 349,000 |   | (808,000 | ) |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| NET INCOME (LOSS)                                     |   | $                                      | 594,000   |                                 | $      | (1,532,000 | ) | $ | 882,000 |   | $ | (1,031,000 | ) |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| Basic earnings (loss) per common share                |   | $                                      | 0.14      |                                 | $      | (0.35 | ) | $ | 0.20 |   | $ | (0.24 | ) |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| Diluted earnings (loss) per common share              |   | $                                      | 0.13      |                                 | $      | (0.35 | ) | $ | 0.19 |   | $ | (0.24 | ) |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| Weighted average common shares outstanding  - basic   |   | 4,381,321                              |      | 4,322,874                            |   | 4,381,321 |   | 4,322,874 |   |
|                                                  |   |                                   |      |                                 |   |   |   |   |   |
| Weighted average common shares outstanding  - diluted |   | 4,538,778                              |      | 4,322,874                            |   | 4,538,778 |   | 4,322,874 |   |

 

 

See notes to condensed consolidated financialstatements.

 

5

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**SCHERERHEALTHCARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
|                                                                                      |   | **Six months  ended  September 30,** |       |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                      |   | **2002**                             |       | **2001** |   |
|                                                                                      |   |                                 |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |                                 |       |   |   |
| Net (loss) income                                                                         |   | $                                    | 882,000    |   | $ | (1,031,000 | ) |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities: |   |                                 |       |   |   |
| Depreciation and amortization                                                             |   | 720,000                              |       | 689,000 |   |
| Equity in net loss of unconsolidated  companies                                           |   | 13,000                               |       | 1,000 |   |
| Impairment charges on investments                                                         |   | —                               |       | 3,129,000 |   |
| Deferred taxes                                                                            |   | —                               |       | (1,050,000 | ) |
| Gain on sale of investments, net                                                          |   | (19,000                              | )          | — |   |
| Changes in operating assets and  liabilities:                                             |   |                                 |       |   |   |
| Accounts receivable                                                                       |   | 33,000                               |       | 373,000 |   |
| Interest receivable                                                                       |   | 142,000                              |       | 58,000 |   |
| Inventories                                                                               |   | (28,000                              | )          | (11,000 | ) |
| Prepaid and other current assets                                                          |   | 13,000                               |       | — |   |
| Other                                                                                     |   | —                               |       | (39,000 | ) |
| Income taxes payable                                                                      |   | 117,000                              |       | (36,000 | ) |
| Accounts payable and accrued expenses                                                     |   | (135,000                             | )          | (294,000 | ) |
| Unearned revenue                                                                          |   | 62,000                               |       | 13,000 |   |
| Other liabilities                                                                         |   | 24,000                               |       | (25,000 | ) |
| Net cash provided by operating activities  of continuing operations                       |   | 1,824,000                            |       | 1,777,000 |   |
| Net cash (used for) discontinued operations                                               |   | (6,000                               | )          | — |   |
| Net cash provided by operating activities                                                 |   | 1,818,000                            |       | 1,777,000 |   |
|                                                                                      |   |                                 |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |   |                                 |       |   |   |
| Additions to property and equipment, net                                                  |   | (761,000                             | )          | (507,000 | ) |
| Purchase of marketable securities                                                         |   | (9,311,000                           | )          | (1,001,000 | ) |
| Sale of marketable securities                                                             |   | 18,472,000                           |       | — |   |
| Investments in unconsolidated companies, at  equity                                       |   | —                               |       | (112,000 | ) |
| Change in permit acquisition costs                                                        |   | 7,000                                |       | (76,000 | ) |
| Net cash (used for) provided by investing  activities                                     |   | 8,407,000                            |       | (1,696,000 | ) |
|                                                                                      |   |                                 |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                      |   |                                 |       |   |   |
| Net repayment of borrowings                                                               |   | (114,000                             | )          | (68,000 | ) |
| Exercised options                                                                         |   | 85,000                               |       | — |   |
| Net cash (used for) financing activities                                                  |   | (29,000                              | )          | (68,000 | ) |
|                                                                                      |   |                                 |       |   |   |
| CHANGE IN CASH AND CASH EQUIVALENTS                                                       |   | 10,196,000                           |       | 13,000 |   |
|                                                                                      |   |                                 |       |   |   |
| CASH AND CASH EQUIVALENTS, beginning of  period                                           |   | 5,561,000                            |       | 4,398,000 |   |
|                                                                                      |   |                                 |       |   |   |
| CASH AND CASH EQUIVALENTS, end of period                                                  |   | $                                    | 15,757,000 |   | $ | 4,411,000 |   |
|                                                                                      |   |                                 |       |   |   |
| **SUPPLEMENTAL DISCLOSURE**                                                               |   |                                 |       |   |   |   |   |
| Income taxes paid                                                                         |   | $                                    | 233,000    |   | $ | 311,000 |   |

 

See notes to condensed consolidated financial statements.

 

6

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**SCHERERHEALTHCARE, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE1.**

 

**Basis of Presentation**

 

The accompanying unaudited condensedconsolidated financial statements of Scherer Healthcare, Inc. and itssubsidiaries (the “Company”) include all adjustments (all of which are ofnormal, recurring nature) that, in the opinion of management, are necessary fora fair presentation of the results for the period indicated.  Quarterly results of operations are notnecessarily indicative of annual results. These statements should be read in conjunction with the consolidatedfinancial statements and the notes thereto included in the Company’s AnnualReport on Form 10-K for the fiscal year ended March 31, 2002.

 

**RevenueRecognition**

 

Revenue for services provided is recorded when the Company hascompleted the service.  Product revenueis recorded by the Company when products are received by customers orindependent distributors.  The Company’spayment terms for product sales are the same for all customers, i.e. 1%discount if paid in 10 days, net due in 30 days.  The Company does not offer price protection.  In accordance with Statements of FinancialAccounting Standards (“SFAS”) No. 48, “Revenue Recognition When Right of ReturnExists,” transactions with customers and distributors qualify as sales atdelivery.  The Company’s return andexchange policy is as follows:

 

•                  TheCompany will accept for exchange or credit all merchandise returned in theoriginal and unopened packages within one year after the expiration date;

•                  Merchandisewill not be accepted for exchange or credit if purchased at sacrifice, fire orbankruptcy sale, or sold on a non-returnable basis or if deteriorated fromcauses beyond the Company’s control;

•                  Merchandiseeligible for return may be exchanged for merchandise of equal value, for areturn of the purchase price, or for credit to be applied to future orders;

•                  Exchangemerchandise is required to be shipped prepaid by the customer; and

•                  Thereturn of merchandise constitutes an authorization without recourse to theCompany to destroy without payment any return items deemed unfit for resale.

 

## **Investments**

 

The Company uses the equity method ofaccounting for companies and other investments in which the Company hassignificant influence.  Generally thisrepresents common stock ownership or convertible rights of at least 20%, andnot greater than 50%, of the company in which the Company has the investmentand, for investments in limited liability companies, investments of at least 5%of ownership percentages.

 

The Companyperforms analysis of the operations and financial position of all investmentson a quarterly basis subsequent to its initial investment, including a reviewof quarterly unaudited financial statements. The Company considers any increase/decrease in the Company’s investmentsto be temporary unless other information related to sale or cessation exists.

 

**Goodwill and IntangibleAssets**

 

The Financial Accounting Standards Board(“FASB”) recently issued SFAS No. 141 “Business Combination” and SFAS No. 142“Goodwill and Other Intangible Assets.” SFAS No. 141 eliminates the pooling method of accounting for allbusiness combinations initiated after June 30, 2001.  SFAS No. 142 requires that goodwill no longer be amortizedagainst earnings, but instead be reviewed periodically for impairment, with anyidentified impairment treated as a cumulative effect of change in accountingprinciple.  As of April 1, 2002, nogoodwill impairment was identified.

 

The Company adopted SFAS No. 142, effectiveApril 1, 2002, as a result amortization of goodwill was discontinued.  The following is a proforma presentation ofreported net income and earnings per share, adjusted for the exclusion ofgoodwill amortization net of related income tax effect:

 

7

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|                                  |   | **Proforma Results  for the three months ended September 30,** |    | **Proforma Results  for the six months ended September 30,** |   |
|---------------------------------------|--------|----------------------------------------------------------------|---------|--------------------------------------------------------------|--------|
|                                  |   | **2002**                                                       |    | **2001**                                                     |   | **2002** |   | **2001** |   |
| Reported net income (loss)            |   | $                                                              | 594,000 |                                                         | $      | (1,532,000 | ) | $ | 882,000 |   | $ | (1,031,000 | ) |
| Goodwill  amortization (net of tax)   |   | —                                                         |    | 38,000                                                       |   | — |   | 76,000 |   |
|                                  |   |                                                           |    |                                                         |   |   |   |   |   |
| Adjusted  net income (loss)           |   | $                                                              | 594,000 |                                                         | $      | (1,494,000 | ) | $ | 882,000 |   | $ | (955,000 | ) |
|                                  |   |                                                           |    |                                                         |   |   |   |   |   |
| Basic earnings per share:             |   |                                                           |    |                                                         |   |   |   |   |   |
| Reported earnings per share - basic   |   | $                                                              | 0.14    |                                                         | $      | (0.35 | ) | $ | 0.20 |   | $ | (0.24 | ) |
| Goodwill  amortization (net of tax)   |   | —                                                         |    | 0.01                                                         |   | — |   | 0.02 |   |
|                                  |   |                                                           |    |                                                         |   |   |   |   |   |
| Adjusted  basic earnings per share    |   | $                                                              | 0.14    |                                                         | $      | (0.34 | ) | $ | 0.20 |   | $ | (0.22 | ) |
|                                  |   |                                                           |    |                                                         |   |   |   |   |   |
| Diluted earnings per share:           |   |                                                           |    |                                                         |   |   |   |   |   |
| Reported earnings per share - diluted |   | $                                                              | 0.13    |                                                         | $      | (0.35 | ) | $ | 0.19 |   | $ | (0.24 | ) |
| Goodwill  amortization (net of tax)   |   | —                                                         |    | 0.01                                                         |   | — |   | 0.02 |   |
|                                  |   |                                                           |    |                                                         |   |   |   |   |   |
| Adjusted  diluted earnings per share  |   | $                                                              | 0.13    |                                                         | $      | (0.34 | ) | $ | 0.19 |   | $ | (0.22 | ) |

** **

Intangible assets as of September 30, 2002,and March 31, 2002, were as follows:

 
|                                      |   | **Gross Assets** |      | **Accumulated  Amortization** |   | **Net Assets** |   |
|-------------------------------------------|--------|------------------|-----------|-------------------------------|--------|----------------|--------|
| Permit acquisition and organization cost: |   |             |      |                          |   |           |   |
|                                      |   |             |      |                          |   |           |   |
| September 30, 2002                        |   | $                | 1,780,000 |                          | $      | (477,000       | )      | $ | 1,303,000 |   |
|                                      |   |             |      |                          |   |           |   |
| March 31, 2002                            |   | $                | 1,788,000 |                          | $      | (431,000       | )      | $ | 1,357,000 |   |

 

The net amount of goodwill at September 30,2002, and March 31, 2002, was $2,067,000.  There were no intangible assets reclassified to goodwill uponadoption of SFAS No. 142.

 

Amortization expense related to goodwill andintangible assets was $41,000 and $68,000 for the three months ended September30, 2002 and 2001, respectively, and $81,000 and $136,000 for the six monthsended September 30, 2002, and 2001, respectively.  Estimated aggregate future amortization expense for intangibleassets remaining as of September 30, 2002, are $190,000 for fiscal 2003 and$200,000 for fiscal 2004.

 

**RecentAccounting Pronouncements**

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144 addresses the financialaccounting and reporting for the impairment or disposal of long-lived assets.  SFAS No. 144 supersedes SFAS No. 121 butretains the fundamental provisions of SFAS No. 121 for (i)recognition/measurement of impairment of long-lived assets to be held and used,and (ii) measurement of long-lived assets to be disposed of by sale.  SFAS No. 144 also supersedes the accountingand reporting provisions of Accounting Principles Board’s (“APB”) No. 30,“Reporting the Results of Operations - Reporting the Effects of Disposal of aSegment of a Business and Extraordinary, Unusual and Infrequently OccurringEvents and Transaction,” for segments of business to be disposed of, butretains APB No. 30’s requirement to report discontinued operations separatelyfrom continuing operations and extends that reporting to a component of anentity that either has been disposed of or is classified as held for sale.  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001.  Thecompany adopted the provisions of SFAS No. 144 effective April 1, 2002.  The adoption of this standard did not haveany impact on the Company’s financial statements.

 

In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections,” which provides for the rescission ofseveral previously issued accounting standards, new accounting guidance for theaccounting of certain lease modifications and various technical correctionsthat are not substantive in nature to existing pronouncements.  The Company will adopt SFAS No. 145 on April1, 2003, except for the provisions relating to the amendment of SFAS No. 13,which was adopted for

 

8

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transactions occurring subsequent to May 15,2002.  The Company is currentlyassessing the impact of SFAS No. 145 on its financial position and results ofoperations.

 

In July 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities,” whichrequires companies to recognize costs associated with exit or disposal activitieswhen they are incurred rather than at the date of a commitment to an exit ordisposal plan.  SFAS No. 146 is to beapplied prospectively to exit or disposal activities initiated after December31, 2002.  The Company is currentlyassessing the impact of SFAS No. 146 on its financial position and results ofoperations.

 

**NOTE2.**

 

The components of inventory at September 30,2002, and March 31, 2002, consisted of the following:

 

|                                     |   | **September  30, 2002** |    | **March 31,  2002** |   |
|------------------------------------------|--------|-------------------------|---------|---------------------|--------|
|                                     |   |                    |    |                |   |
| Finished  products                       |   | $                       | 103,000 |                | $      | 53,000 |   |
|                                     |   |                    |    |                |   |
| Containers, packaging, and raw materials |   | 341,000                 |    | 363,000             |   |
|                                     |   |                    |    |                |   |
| Total                                    |   | $                       | 444,000 |                | $      | 416,000 |   |

 

Inventories are stated at the lower of netrealizable value or cost using the first-in, first-out (“FIFO”) method.

 

**NOTE3.**

** **

Obligations under capital leases at September30, 2002, and March 31, 2002, consisted of the following: 

 

|                                                                               |   | **September 30, 2002** |    | **March 31, 2002** |   |
|------------------------------------------------------------------------------------|--------|------------------------|---------|--------------------|--------|
|                                                                               |   |                   |    |               |   |
| Obligations  under capital leases, due in varying installments through fiscal 2007 |   | $                      | 851,000 |               | $      | 965,000 |   |
|                                                                               |   |                   |    |               |   |
| Less current  maturities                                                           |   | 272,000                |    | 292,000            |   |
|                                                                               |   |                   |    |               |   |
| Long-term  debt                                                                    |   | $                      | 579,000 |               | $      | 673,000 |   |

 

**NOTE 4.**

 

The Company had the following investments asof September 30, 2002, and March 31, 2002:

 

|                                                        |   | **September 30, 2002** |    | **March 31, 2002** |   |
|-------------------------------------------------------------|--------|------------------------|---------|--------------------|--------|
|                                                        |   |                   |    |               |   |
| Investments in marketable securities, at  market value      |   | $                      | —  |               | $      | 8,811,000 |   |
|                                                        |   |                   |    |               |   |
| Equity method investments in unconsolidated  companies, net |   | 290,000                |    | 303,000            |   |
|                                                        |   |                   |    |               |   |
| Other investments, at cost                                  |   | 28,000                 |    | 29,000             |   |
|                                                        |   |                   |    |               |   |
| Total                                                       |   | $                      | 318,000 |               | $      | 9,143,000 |   |

 

During the sixmonths ended September 30, 2002, the Company liquidated all investments inmarketable securities.  Previously, theCompany’s investments in marketable securities, at market value, consisted ofinvestments in long-term high-grade marketable securities composed primarily ofgovernment and corporate fixed income bonds. These marketable securities were classified as available-for-sale andwere being carried at market value based on quoted market prices.  There were no unrealized holding gains(losses) on these investments reported as other comprehensive income (loss) forthe six months ended September 30, 2002, due to the liquidation.

 

The amortized cost and fair market value ofthe Company’s marketable securities are as follows:

 

| March 31, 2002  |   |      |       |    |       |      |       |
|-----------------|--------|-----------|------------|---------|------------|-----------|------------|
| Municipal bonds |   | $         | 6,408,000  |    | $          | (243,000  | )          | $ | 6,165,000 |   |
| Corporate bonds |   | 2,733,000 |       | (87,000 | )          | 2,646,000 |       |
|            |   |      | ** ** |    | ** ** |      | ** ** |
| Total           |   | $         | 9,141,000  |    | $          | (330,000  | )          | $ | 8,811,000 |   |

 

9

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The net unrealized gains (losses) of theCompany’s marketable securities at March 31, 2002, are detailed as follows:

 

|            |   | **Gross  Unrealized Gains** |       | **Gross  Unrealized Losses** |       | **Net  Unrealized Losses** |       |
|-----------------|--------|-----------------------------|------------|------------------------------|------------|----------------------------|------------|
| March 31, 2002  |   |                        |       |                         |       |                       |       |
| Municipal bonds |   | $                           | 24,000     |                         | $          | (267,000                   | )          | $ | (243,000 | )  |
| Corporate bonds |   | 3,000                  |       | (90,000                      | )          | (87,000                    | )          |
|            |   |                        | ** ** |                         | ** ** |                       | ** ** |
| Total           |   | $                           | 27,000     |                         | $          | (357,000                   | )          | $ | (330,000 | ) |

 

The Company had one investment in anunconsolidated company, MedicareFacts, LLC, recorded on the equity method ofaccounting, of $290,000 and $303,000 as of September 30, 2002, and March 31,2002, respectively.  The Company’sequity in the net loss of the unconsolidated company was $13,000 for the sixmonths ended September 30, 2002.

 

The equity method of accounting is used forinvestments in companies in which the Company has significant influence.  This represents common stock ownership orconvertible rights of at least 5% for investments in limited liabilitycompanies.

 

MedicareFacts, LLC designs and developsreimbursement guides which provide a single source for all coding and coverageinformation needed to file accurate Medicare claims, thus ensuring optimalreimbursement and compliance with government regulations.  These products are used principally byhospitals and clinical laboratories. The Company’s investment is in the form of a two-year 10% series Bunsecured convertible note in the aggregate principal amount of $400,000 thatmatures in October 2002, and which converts, at the Company’s option, into 17%of the outstanding common stock of MedicareFacts, LLC as of September 30,2002.  At this time, MedicareFacts, LLCis unable to retire the debt or pay accrued interest and is in negotiation torefinance its unsecured convertible notes.

 

**Note5.  Comprehensive Income**

 

The Company follows SFAS No. 130, “ReportingComprehensive Income.”  This statementestablishes standards for reporting and display of comprehensive income and itscomponents in a full set of general purpose financial statements.  The Company has chosen to disclosecomprehensive income, which consists of net income and unrealized gains(losses) on marketable securities, in the consolidated statements ofstockholders’ equity.  During thequarter ended September 30, 2002, the Company eliminated $330,000 of unrealizedloss when it liquidated all of its marketable securities.

 

Accumulated comprehensive income for the sixmonths ended September 30, 2002 and 2001 was $7,394,000 and $6,892,000,respectively.

 

**Note6.  Segment Reporting**

 

**NetSales and Operating Income (Loss)**

The following table sets forth, for theperiods indicated, the net sales and operating income (loss) for each segmentof the business of the Company and its subsidiaries:

 
|                                 |   | **Three months ended  September 30,** |      | **Six months ended  September 30,** |   |
|--------------------------------------|--------|---------------------------------------|-----------|-------------------------------------|--------|
|                                 |   | **2002**                              |      | **2001**                            |   | **2002** |   | **2001** |   |
| NET SALES                            |   |                                  |      |                                |   |   |   |   |   |
| Waste Management Services Segment    |   | $                                     | 5,116,000 |                                | $      | 4,694,000 |   | $ | 10,042,000 |   | $ | 9,265,000 |   |
| Consumer Healthcare Products Segment |   | 420,000                               |      | 438,000                             |   | 897,000 |   | 901,000 |   |
| Company Totals                       |   | $                                     | 5,536,000 |                                | $      | 5,132,000 |   | $ | 10,939,000 |   | $ | 10,166,000 |   |
|                                 |   |                                  |      |                                |   |   |   |   |   |
| OPERATING INCOME (LOSS)              |   |                                  |      |                                |   |   |   |   |   |
| Waste Management Services Segment    |   | $                                     | 402,000   |                                | $      | 524,000 |   | $ | 900,000 |   | $ | 1,122,000 |   |
| Consumer Healthcare Products Segment |   | 211,000                               |      | 176,000                             |   | 444,000 |   | 359,000 |   |
| Corporate                            |   | (144,000                              | )         | (237,000                            | )      | (325,000 | ) | (464,000 | ) |
| Company Totals                       |   | $                                     | 469,000   |                                | $      | 463,000 |   | $ | 1,019,000 |   | $ | 1,017,000 |   |

** **

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**Note 7.**

 

During the six months ended September 30,2002, an officer of the Company exercised options for 50,000 shares at theapproximate purchase price of $85,000.

 

** **

**Note 8.  Subsequent Events**

 

Subsequent to the end of the second quarterof fiscal year 2003, the Company’s Board of Directors approved, and on October9, 2002, the Company entered into an agreement and plan of merger pursuant towhich Stericycle, Inc. will acquire the Company and all of its interests forapproximately $41.5 million in cash. Upon completion of the merger transaction, the Company will become awholly owned subsidiary of Stericycle, Inc. The transaction is subject to the approval of the Company’sstockholders, customary closing conditions and regulatory review.   If the transaction is closed, each issuedand outstanding share of the Company’s common stock will be acquired for $8.57and each share of the Company’s preferred stock will be acquired for $100.00,together with an amount equal to cumulative dividends, if any.  In addition, all outstanding options topurchase the Company’s common stock will be canceled, and each canceled optionwill represent the right to receive upon completion of the merger a cashpayment in an amount equal to the option “spread” (i.e., the product of (i) thenumber of shares of common stock issuable upon exercise of the optionmultiplied by (ii) the excess, if any, of $8.57 per share over the exerciseprice per share payable under the terms of the option.

 

**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

The following discussion contains, inaddition to historical information, “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities and Exchange Act of 1934, as amended, which represent theCompany’s expectations or beliefs.  Whenused in this report, the words “may,” “could,” “should,” “would,” “believe,”“anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressionsare intended to identify forward-looking statements.  These statements by their nature involve substantial risks anduncertainties, 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 Securitiesand Exchange Commission (the “SEC”), as well as general economic conditions,changes in applicable laws and regulations, industry trends, the impact of theproposed merger with Stericycle, including the impact of the announcement ofsuch transaction, a dependence upon and/or loss of key employees, vendors orcustomers, the loss of strategic product shipping relationships, customerdemand, product availability, competition (including pricing and availability),concentrations of credit risks, distribution efficiencies, capacity constraintsand technological difficulties could cause actual results or outcomes to differmaterially from those expressed in any forward-looking statements of theCompany.  Reference is made to thisreport as well as the Company’s most recent Annual Report on Form 10-K andother reports filed with the SEC for other factors that could affect theforward-looking statements.  Anyforward-looking statement speaks only as of the date of this report and theCompany undertakes no obligation to update any forward-looking statement orstatements to reflect events or circumstances after the date on which suchstatements are made or to reflect the occurrence of an unanticipatedevent.  New factors emerge from time totime, and it is not possible for the Company to predict all of suchfactors.  Further, the Company cannotassess the impact of each such factor on its business or the extent to whichany factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

** **

**Application of CriticalAccounting Policies**

 

The methods, estimates and judgments theCompany uses in applying its most critical accounting policies have been asignificant impact on the results the Company reports in its financialstatements.  The SEC has definedcritical accounting policies as policies that involve critical accountingestimates that require (i) management to make assumptions that are highlyuncertain at the time the estimate is made, and (ii) different estimates thatcould have been reasonably used for the current period, or changes in theestimates that are reasonably likely to occur from period to period, whichwould have a material impact on the presentation of the Company’s financialcondition, changes in financial condition or had results of operations.  Based on this definition, the Company’s mostcritical policies include: revenue recognition; accounting for investments,which impacts write-offs of investments; allowances for doubtful accounts,which impact selling, general and administrative; and the assessment ofrecoverability of goodwill and other intangible assets, which impactswrite-offs of goodwill and intangibles. These policies are discussed further below, as well as the estimates andmanagement’s judgments involved.  TheCompany also has other key accounting policies, such as policies for revenuerecognition, including unbilled accounts receivable and deferred revenue, aswell as policies governing the estimate of the useful life of its property andequipment. The Company believes these other key policies either do notgenerally require it to make estimates and judgments that are as difficult orsubjective, or it is less likely that they would have a material impact on theCompany’s reported results of operation for a given period.

 

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Revenue for services provided is recorded when theCompany has completed the service. Product revenue is recorded by the Company when products are received bycustomers or independent distributors. The Company’s payment terms for product sales are the same for allcustomers, i.e. 1% discount if paid in 10 days, net due in 30 days.  The Company does not offer priceprotection.  In accordance with SFAS No.48, “Revenue Recognition When Right of Return Exists,” transactions withcustomers and distributors qualify as sales at delivery.  The Company’s return and exchange policy isas follows:

 

•                  TheCompany will accept for exchange or credit all merchandise returned in theoriginal and unopened packages within one year after the expiration date;

•                  Merchandisewill not be accepted for exchange or credit if purchased at sacrifice, fire orbankruptcy sale, or sold on a non-returnable basis or if deteriorated fromcauses beyond the Company’s control;

•                  Merchandiseeligible for return may be exchanged for merchandise of equal value, for areturn of the purchase price, or for credit to be applied to future orders;

•                  Exchangemerchandise is required to be shipped prepaid by the customer; and

•                  Thereturn of merchandise constitutes an authorization without recourse to theCompany to destroy without payment any return items deemed unfit for resale.

 

The Company uses the equity method ofaccounting for companies and other investments in which the Company hassignificant influence.  Generally thisrepresents common stock ownership or convertible rights of at least 20%, andnot greater than 50%, of the company in which the Company has the investmentand, for investments in limited liability companies, investments of at least 5%of ownership percentages.

 

The Companyperforms analysis of the operations and financial position of all investmentson a quarterly basis subsequent to its initial investment, including a reviewof quarterly unaudited financial statements. The Company considers any increase/decrease in the Company’s investmentsto be temporary unless other information related to sale or cessation exists.

 

The Company maintains allowances for doubtfulaccounts for estimated losses resulting from the failure of its customers tomake required payments.  The Companybases its estimates on the aging of its accounts receivable balances and itshistorical write-off experience, net of recoveries.  If the financial condition of the Company’s customers were todeteriorate, additional allowances may be required.  The Company believes the accounting estimate related to theallowance for doubtful accounts is a “critical accounting estimate” becausechanges in it can significantly affect net income and treatment of theallowance requires the Company to anticipate the economic viability of itscustomers and requires a degree of judgment.

 

The Company adopted SFAS No. 141 and 142 onaccounting for business combinations and goodwill on April 1, 2002.  Accordingly, the Company no longer amortizesgoodwill, but will continue to amortize other acquisition related costs.  The Company expects amortization of permitacquisition costs to be approximately $190,000 in fiscal 2003, down from$261,000 of amortized goodwill and permit acquisition costs in fiscal 2002.  The Company assesses the impairment oflong-lived assets whenever events or changes in circumstances indicate thesecarrying values may not be recoverable.

 

In conjunction with the implementation of thenew accounting rules for goodwill, the Company has completed the initialgoodwill impairment test required by SFAS No. 142.  To accomplish this, the Company identified its reporting unitsand determined the carrying value of each reporting unit by assigning theassets and liabilities, including existing goodwill and intangible assets, tothose reporting units as of the date of adoption and determined the fair valueof each reporting unit and compared it to the reporting unit’s carryingamount.  The Company considers itself tohave two reporting units.  To the extentthe reporting unit’s carrying amount exceeds its fair value, an indicationexists that the reporting unit’s goodwill may be impaired and the Company mustperform the second step of the impairment test.  In the second step, the Company must compare the implied fairvalue of the reporting units goodwill, determined by allocating the reportingunit’s fair value to all of its assets and liabilities in a manner similar to apurchase price allocation in accordance with SFAS No. 141, to its carryingamount, both of which would be measured as of the date of adoption.

 

The Company performed the initial goodwillimpairment test required by SFAS No. 142 during the first quarter of fiscal2003.  The Company considers itself tohave two reporting units.  As of April1, 2002, based on the Company’s comparison of the fair value of the reportingunits to its carrying value inclusive of goodwill, there was no impairment ofgoodwill recorded upon implementation of SFAS No. 142.  The Company will continue to test forimpairment on an annual basis, coinciding with its fiscal year end, or on aninterim basis if circumstances change that would more likely than not reducethe fair value of its reporting unit below its carrying amount.

 

The Company adopted SFAS No. 144 onaccounting for the impairment or disposal of long-lived assets effective April1, 2002.  The adoption of this standarddid not have an impact on the Company’s financial statements.

 

In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections,” which provides for the rescission of

 

12

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several previously issued accountingstandards, new accounting guidance for the accounting of certain leasemodifications and various technical corrections that are not substantive innature to existing pronouncements.  TheCompany will adopt SFAS No. 145 on April 1, 2003, except for the provisionsrelating to the amendment of SFAS No. 13, which was adopted for transactionsoccurring subsequent to May 15, 2002. The Company is currently assessing the impact of SFAS No. 145 on itsfinancial position and results of operations.

 

In July 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities,” whichrequires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan.  SFAS No. 146 isto be applied prospectively to exit or disposal activities initiated afterDecember 31, 2002.  The Company iscurrently assessing the impact of SFAS No. 146 on its financial position andresults of operations.

 

**SubsequentEvents**

 

Subsequent to the end of the second quarterof fiscal year 2003, the Company’s Board of Directors approved a definitiveagreement pursuant to which Stericycle, Inc. will acquire the Company and allof its interests for $41.5 million in cash. Upon completion of the merger transaction, the Company will become awholly owned subsidiary of Stericycle, Inc. The transaction is subject to the approval of the Company’sshareholders, customary closing conditions and regulatory review.   If the transaction is closed, each issuedand outstanding share of the Company’s common stock will be acquired for $8.57and each share of the Company’s preferred stock will be acquired for $100.00,together with an amount equal to cumulative dividends, if any.  In addition, all outstanding options topurchase the Company’s common stock will be canceled, and each canceled optionwill represent the right to receive upon completion of the merger a cashpayment in an amount equal to the option “spread” (i.e., the product of (i) thenumber of shares of common stock issuable upon exercise of the optionmultiplied by (ii) the excess, if any, of $8.57 per share over the exerciseprice per share payable under the option), less any required withholding taxes.

 

The merger agreement specifies that thetransaction is subject to the approval of the Company’s stockholders, customaryclosing conditions and regulatory reviews, including approval of the mergertransaction by the New York City Business Integrity Commission.  The merger agreement is terminable incertain circumstances by the Company, including in connection with adetermination to accept a qualified superior proposal (subject to payment of atermination fee in the amount of $1.5 million).

 

In connection with the merger agreement,Robert P. Scherer, Jr., the Company’s Chairman of the Board of Directors,President and Chief Executive Officer who controls the voting power over amajority of the shares of common stock, is a party to a voting agreementpursuant to which he has agreed to vote all of the shares of common stock overwhich he has voting power in favor of the merger transaction.  Mr. Scherer has sole voting power overshares representing approximately 52.0% of the Company’s outstanding commonstock and shared voting power over shares representing approximately 7.7% ofthe Company’s outstanding common stock. (The party with whom Mr. Scherer shares voting power over these lattershares is not a party to the voting agreement.)  Under the voting agreement, Mr. Scherer has given his proxy tothe Company’s president and CEO and its Chief Financial Officer to vote theshares subject to the voting agreement at the special meeting of the Company’sstockholders to be held for the purpose of voting on the proposed mergertransaction.  The voting agreementterminates automatically upon, among other things, the termination of themerger agreement or the merger agreement becoming terminable pursuant tospecified sections of the merger agreement.

 

Mr. Scherer has entered into a five-yearnoncompetition agreement with Stericycle pursuant to which, in considerationfor his receiving $195,000 per year during the term of the agreement, he willnot provide services for any competing business or solicit for a competingbusiness any customer or employee of the Company.  In addition, Stericycle has agreed to pay Mr. Scherer a one timeconsulting fee of $225,000 on the effective date of the merger transaction inexchange for his entering into a three-year consulting agreement whereby hewill provide consulting services to Stericycle upon its request.  These two agreements do not become effectiveuntil the closing of the merger transaction.

 

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**Resultsof Operations**

 

**NetSales and Operating Income (Loss)**

The following table sets forth, for theperiods indicated, the net sales and operating income for each segment of thebusiness of the Company and its subsidiaries:

 
|                                 |   | **Three months ended  September 30,** |      | **Six months ended  September 30,** |   |
|--------------------------------------|--------|---------------------------------------|-----------|-------------------------------------|--------|
|                                 |   | **2002**                              |      | **2001**                            |   | **2002** |   | **2001** |   |
| NET SALES:                           |   |                                  |      |                                |   |   |   |   |   |
| Waste Management Services Segment    |   | $                                     | 5,116,000 |                                | $      | 4,694,000 |   | $ | 10,042,000 |   | $ | 9,265,000 |   |
| Consumer Healthcare Products Segment |   | 420,000                               |      | 438,000                             |   | 897,000 |   | 901,000 |   |
| Company Totals                       |   | $                                     | 5,536,000 |                                | $      | 5,132,000 |   | $ | 10,939,000 |   | $ | 10,166,000 |   |
|                                 |   |                                  |      |                                |   |   |   |   |   |
| OPERATING INCOME:                    |   |                                  |      |                                |   |   |   |   |   |
| Waste Management Services Segment    |   | $                                     | 402,000   |                                | $      | 524,000 |   | $ | 900,000 |   | $ | 1,122,000 |   |
| Consumer Healthcare Products Segment |   | 211,000                               |      | 176,000                             |   | 444,000 |   | 359,000 |   |
| Corporate                            |   | (144,000                              | )         | (237,000                            | )      | (325,000 | ) | (464,000 | ) |
| Company Totals                       |   | $                                     | 469,000   |                                | $      | 463,000 |   | $ | 1,019,000 |   | $ | 1,017,000 |   |

 

The Company’s net sales increased 8% to$5,536,000 for the second quarter of fiscal 2003 from $5,132,000 for the secondquarter of fiscal 2002.  The Company’soperating income increased 1% to $469,000 for the second quarter of fiscal 2003from $463,000 for the second quarter of fiscal 2002.  The Company’s cost of goods sold of the Waste Management ServicesSegment is made up of direct labor and related costs and benefits to collectand process waste, vehicle and equipment maintenance, repair and depreciation,waste disposal costs and interest on capital leases used to finance vehicleacquisitions.  The cost of goods soldfor the Consumer Healthcare Products Segment is made up of the cost of materialsfor products distributed and the related shipping expenses.  The Company’s cost of goods sold on aconsolidated basis for the quarter ended September 30, 2002, and September 30,2001, was 68% and 65%, respectively, of net sales.  Selling, general and administrative expenses decreased to 24% ofnet sales for the second quarter of fiscal 2003 from 26% of net sales for thesecond quarter of fiscal 2002 on a consolidated basis.  Selling, general and administrative expensesin both of the Company’s business segments is made up of:

 

•                  management,administrative and office compensation, related costs and benefits;

•                  utilities,insurance, property depreciation, bad debt, professional fees, rent,amortization, advertising promotion, travel and miscellaneous other expenses.

 

The Company’s net sales increased 8% to$10,939,000 for the six months ended September 30, 2002, from $10,166,000 forthe six months ended September 30, 2001. The Company’s operating income increased 0.2% to $1,019,000 for thefirst six months of fiscal 2003 from $1,017,000 for the first six months offiscal 2002.  Cost of goods soldincreased to 66% of net sales for the six months ended September 30, 2002, from64% of net sales for the six months ended September 30, 2001.  Selling, general and administrative expensesdecreased to 25% of net sales for the six months ended September 30, 2002, from26% of net sales for the six months ended September 30, 2001.  The primary reasons for these changes are discussedbelow.

 

The results of operations of the Company aredependent upon the results of operations of each of its subsidiaries operatingin the Company’s individual business segments. Set forth below is a discussion of the results of operations of each ofthese segments.

 

***Waste Management ServicesSegment***

 

Net sales in the Company’s Waste ManagementServices Segment, which operates through Bio Waste Systems, Inc. and MedicalWaste Systems, Inc. (collectively, “Bio Systems”), increased 9% to $5,116,000for the second quarter of fiscal 2003 from $4,694,000 for the second quarter offiscal 2002.  Bio Systems’ net salesincreased 8% to $10,042,000 for the six months ended September 30, 2003, from$9,265,000 during the same period in fiscal 2002.  As in the last few years, the sales growth is primarily due tosecuring new hospital contracts for Bio Systems’ core business of providing“sharps” (including sharp-edged medical waste such as scalpels, syringes, andneedles) disposal services which utilize cost effective reusable containers.

 

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Bio Systems’ operating income decreased to$402,000 for the quarter ended September 30, 2002, from $524,000 for thequarter ended September 30, 2001.  BioSystems’ cost of goods sold for the second quarter of fiscal 2003 was 71% ofnet sales compared to 68% for the second quarter of fiscal 2002.  Selling, general and administrative expensesremained at 21% of Bio System’s net sales for the quarter ended September 30,2002, and for the quarter ended September 30, 2001.

 

Bio Systems’ operating income decreased 3% to$900,000 for the six months ended September 30, 2002, from $1,122,000 for thesix months ended September 30, 2001. Primarily due to the reasons discussed below, Bio System’s cost of goodssold for the six months ended September 30, 2002, as a percentage of its netsales was 69% compared to 67% for the six months ended September 30, 2001.   Bio System’s selling, general andadministrative expenses remained at 21% of net sales for the first six monthsof fiscal 2003 and for the first six months of fiscal 2002.

 

Preparing new accounts for service requires,among other things, installation of Bio Systems’ reusable containers andsometimes considerable operational follow-up which causes increases in certaincosts and expenses such as operating payroll and expense for the hardwarerelated to the installation of the reusable containers.  Although Bio Systems continues to increaserevenue through new hospital contracts, the pricing pressures combined withcertain contract restrictions have hampered Bio Systems’ ability to effectivelyabsorb these costs and expenses as compared to prior periods.  Bio Systems’ costs and expenses for wastedisposal have increased slightly due to the outsourcing of the disposal of thelaboratory and surgical fluid waste and red bag waste.  The reusable containers that Bio Systemsuses to collect the laboratory and surgical fluid waste are larger than thesharps collection containers and the waste disposal machinery at Bio Systems’processing facility is not currently equipped to process these largercontainers.  In the future, Bio Systemsintends to process these larger containers at its processing facility byretrofitting its waste disposal system at a cost that is not expected to bematerial to Bio Systems’ results of operations.

 

***Consumer HealthcareProducts Segment***

 

Net sales for the Consumer HealthcareProducts Segment, which operates through Scherer Laboratories, Inc. (“SchererLabs”), decreased 4% to $420,000 for the second quarter of fiscal 2003 from$438,000 during the same period in fiscal 2002.  Scherer Labs’ net sales decreased 0.4% to $897,000 for the sixmonths ended September 30, 2002 from $901,000 for the six months endedSeptember 30, 2001.

 

Scherer Labs’ operating income increased 20%to $211,000 for the second quarter of fiscal 2003 from $176,000 for the secondquarter of fiscal 2002 and increased 24% to $444,000 for the six months endedSeptember 30, 2002, from $359,000 for the six months ended September 30, 2001.  The increase in operating income isprimarily due to the increased gross margin resulting from consolidating itspackaging process in one location.

 

***Corporate***

 

The Company’s operating expenses in theCorporate Segment decreased to $144,000 for the quarter ended September 30,2002, from $237,000 for the quarter ended September 30, 2001.  For the six months ended September 30, 2002,operating expenses in the Corporate Segment decreased to $325,000 from $464,000for the same period in fiscal 2002. Certain administrative, accounting, management oversight and payrollservices are performed by the Company’s corporate office.  The Corporate operating expenses primarilyinclude the salaries and wages of the personnel who perform these functions(including the Company’s executive officers), rent expense, and professionalaccounting and legal fees.  The salariesand wages decreased to $104,000 for the second quarter of fiscal 2003 from$165,000 for the second quarter of fiscal 2002 and to $206,000 for the firstsix months of fiscal 2003 from $264,000 for the first six months of fiscal2002.  Professional, legal, accountingand financial consulting fees decreased to $16,000 for the second quarter offiscal 2003 from $33,000 for the second quarter of fiscal 2002 and decreased to$46,000 for the first six months of fiscal 2003 from $148,000 for the first sixmonths of fiscal 2002.

 

**OtherIncome**

The Company’s interest income decreased to$80,000 for the second quarter of fiscal 2003 from $114,000 for the secondquarter of fiscal 2002 and decreased to $194,000 for the six months endedSeptember 30, 2002, from $306,000 for the six months ended September 30,2001.  The Company recognized equity innet losses of unconsolidated companies of $1,000 and $13,000 for the secondquarter of fiscal 2003 and for the six months ended September 30, 2002,respectively, relating to its equity method investments, and the gain onliquidation of our marketable securities resulted in a gain of $223,000 in thesecond quarter of fiscal 2003 compared to a loss on the sale of marketablesecurities of $34,000 in the second quarter of fiscal 2002.  For the six months ended September 30, 2002,the net gain on marketable security transactions was $19,000 compared to the$34,000 loss on the sale of marketable securities for the six months endedSeptember 30, 2001.

 

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**Provisionfor Income Taxes**

During the first quarter of fiscal 2003, theCompany’s taxable income used the remaining net operating loss carryforwardbalance that existed as of March 31, 2002. The provision for income taxes increased to $349,000 for the first sixmonths of fiscal 2003 from a tax benefit of $808,000 for the first six monthsof fiscal 2002.

 

## **Liquidity and CapitalResources**

The Company’s cash and cash equivalentstotaled $15,757,000 at September 30, 2002, an increase of $10,196,000 fromMarch 31, 2002.  The Company’s workingcapital increased to $18,286,000 at September 30, 2002, from $8,155,000 at March31, 2002.  This increase was primarily forthe reasons described below and the result of investment transactions describedabove.

 

**CashFlow from Operating Activities**

The Company’s cash provided by operatingactivities totaled $1,818,000 for the first six months of fiscal 2003, ascompared to $1,777,000 for the first six months of fiscal 2002.

 

**CashFlows from Investing and Financing Activities**

The Company’s investing activities providedcash of $8,407,000 for the six months ended September 30, 2002, as compared toa use of cash of $1,696,000 for the six months ended September 30, 2001.  This change was primarily from theliquidation of the Company’s positions in all marketable securities.  For the six months ended September 30, 2002,the Company acquired in its Waste Management Services Segment new vehicles,factory machinery and equipment, office equipment and containers amounting to$761,000, versus $507,000 for the six months ended September 30, 2001.

 

Net cash used for financing activities was$29,000 for the six months ended September 30, 2002, after receiving $85,000from exercised options, and $68,000 for the six months ended September 30,2001.

 

Management of the Company believes that itscurrent cash on hand and its current and future cash flow is sufficient tomaintain its current operations.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

The Company has estimated the fair value ofits financial instruments as of September 30, 2002, and March 31, 2002, usingavailable market information or other appropriate valuation methodologies.  Considerable judgment, however, is requiredin interpreting market data to develop the estimates of fair value.  Accordingly, the estimates presented hereinare not necessarily indicative of the amounts that the Company would realize ina current market exchange.

 

**Item 4.  Controls andProcedures**

 

Within the 90-day periodprior to the date of this report, the Company, under the supervision and withthe participation of our management, including our Chief Executive Officer andChief Financial Officer, carried out an evaluation of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures.  Based upon this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosure controlsand procedures are effective in ensuring that material information relating tothe Company, including our consolidated subsidiaries, is made known to them byothers within those entities, particularly during the period in which thisquarterly report was being prepared. There were no significant changes in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation.

 

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**PART II. OTHER INFORMATION**

 

**Item 4.**    **Submission of Matters to a Vote of Security Holders**

 

The Companyheld its Annual Meeting of Stockholders on September 18, 2002, for the purposeof electing Directors.  The followingpersons were elected to the Company’s Board of Directors.  The vote totals are set forth opposite thename of each nominee for director.

 
|                    |   | **For**          |   | **Withheld**  |
|-------------------------|--------|------------------|--------|---------------|
| Stephen  Lukas, Sr.     |   | 3,390,867 shares |   | 21,125 shares |
| Kenneth H.  Robertson   |   | 3,390,867 shares |   | 21,125 shares |
| Robert P.  Scherer, Jr. |   | 3,390,817 shares |   | 21,175 shares |
| Joel M.  Segal          |   | 3,390,867 shares |   | 21,125 shares |
| William J.  Thompson    |   | 3,390,867 shares |   | 21,125 shares |

 

There were nobroker non-votes with respect to the election of directors.

 

**Item 6**.   **Exhibits andReports on Form 8-K**

 

(a)          Exhibits

 

99.1         Certificationof Chief Executive Officer

99.2         Certificationof Chief Financial Officer

 

(b)         Reports on Form 8-K

 

On July 31, 2002, the Company filed a CurrentReport on Form 8-K with respect to its change of auditors.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                                | SCHERER  HEALTHCARE, INC.                        |
|-------------------------------------|--------------------------------------------------|
|                                | (Registrant)                                     |
|                                |                                             |
|                                |                                             |
| Date:  November  14, 2002 | /s/ Robert  P. Scherer, Jr.                      |   |
|                                | Robert P.  Scherer, Jr.                          |
|                                | Chairman,  Chief Executive Officer and President |
|                                |                                             |
|                                |                                             |
| Date:  November  14, 2002 | /s/ Donald  P. Zima                              |   |
|                                | Donald P.  Zima                                  |
|                                | Vice  President and Chief Financial Officer      |

 

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**CERTIFICATION**

 

I, Robert P. Scherer,Jr., the Chairman, Chief Executive Officer and President of Scherer Healthcare,Inc., certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-Q of Scherer Healthcare, Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.            Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

| Date:  November 12, 2002 |                                             |
|-------------------------------|--------------------------------------------------|
|                          |                                             |
|                          | /s/ Robert P. Scherer,  Jr.                      |
|                          | Robert P. Scherer, Jr.                           |
|                          | Chairman, Chief  Executive Officer and President |

 

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**CERTIFICATION**

 

I, Donald P. Zima, theVice President and Chief Financial Officer of Scherer Healthcare, Inc., certifythat:

 

1.             Ihave reviewed this quarterly report on Form 10-Q of Scherer Healthcare, Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterly report;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.            Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  November 12, 2002 |                                        |
|-------------------------------|---------------------------------------------|
|                          |                                        |
|                          | /s/ Donald  P. Zima                         |
|                          | Donald P.  Zima                             |
|                          | Vice  President and Chief Financial Officer |

 

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