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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-30999
R.P. SCHERER CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3523163
(State of Incorporation) (I.R.S. Employer Identification Number)
2075 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (810) 649-0900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [x] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES [x] NO _
The aggregate market value of all shares of common stock held by non-affiliates
of the registrant as of June 23, 1994 was approximately $539,326,000 (based
on purchases at $33.50 per share as of June 23, 1994).
Number of shares outstanding of each class of the registrant's common stock as
of June 23, 1994: 23,287,043 shares of common stock, par value $.01.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
ITEM 1 BUSINESS
GENERAL
R.P. Scherer Corporation (the "Company"), an international developer and
manufacturer of oral drug delivery systems, is the world's largest producer of
softgels. The Company has also developed and is commercializing advanced drug
delivery systems, including the Scherersol(TM), Zydis(R) and Pulsincap(R)
technologies. The Company's proprietary drug delivery systems improve the
efficacy of drugs by regulating their dosage, rate of absorption and place of
release.
The Company produces over 4,000 products in softgel form, which accounted for
approximately 90% of the Company's fiscal 1994 sales. Softgels are used for a
wide range of drug, vitamin, cosmetic and recreational products.
The Company has a broad domestic and international customer base consisting of
manufacturers and wholesalers of pharmaceutical, health and nutritional,
cosmetic and recreational products, with more than half of its total sales made
to the pharmaceutical industry. To meet the needs of its multinational
customers and to serve new markets, the Company operates softgel manufacturing
facilities in eleven countries throughout the world and manufactures hardshell
capsules in three of these countries. Approximately 73% of the Company s
fiscal 1994 sales and 79% of the Company s fiscal 1994 operating income were
derived from operations outside the United States.
The Company works closely with its customers in the development of new softgel
products. Using its expertise in softgel technology, the Company has developed
its Scherersol(TM) systems to broaden the range of pharmaceutical products
which may be encapsulated in softgel form. Scherersol(TM) systems, most of
which are patented, often enable pharmaceutical companies to combine the
advantages of drugs in liquid solution with the convenience and dosage accuracy
of softgels. Additionally, Scherersol(TM) technologies, by providing a unique,
patented dosage delivery system, can protect a pharmaceutical compound against
competition from generic drugs throughout the life of the Scherersol(TM)
patents.
In 1991, the Company formed a separate division, Scherer DDS, to focus on the
development of advanced drug delivery systems, including the Zydis(R) and
Pulsincap(R) technologies. Zydis(R) is an oral dosage form which dissolves
instantaneously on the tongue and does not require water to aid swallowing.
Pulsincap(R) is an oral drug delivery device which is designed to release a
drug at either a predetermined time following ingestion or a predetermined site
in the gastrointestinal tract. Through Scherer DDS, the Company is engaged in
the search for other advanced drug delivery systems which would complement the
Company s existing technologies. In January 1994, the Company acquired the
rights to a novel ophthalmic drug delivery system from Zeneca Limited. The
system, which is in the early stages of development, is intended to enable
accurate, sensation-free application of drugs to the eye. In March 1994, the
Company entered into an agreement with a United Kingdom-based drug research
concern to fund feasibility studies for a unique patent-pending dry powder
inhaler device and a patented controlled-release tablet product.
In September 1993, the Company formed its Advanced Therapeutic Products Group
("ATP"), based in the United Kingdom. ATP was formed to manage the development
and registration of pharmaceutical products using off-patent compounds and the
Company s drug delivery technologies. The Company expects that ATP will help
it service the growing global demand for therapeutically improved,
cost-effective pharmaceutical products.
The Company, a Delaware corporation, was organized in 1989 at the direction of
Shearson Lehman Brothers Holdings Inc. ("Lehman") to effect the acquisition in
June 1989 of R.P. Scherer International Corporation ("Scherer International"
and formerly R.P. Scherer Corporation). Scherer International,
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which had been a public company before its acquisition, was incorporated in
Michigan in 1944 and reincorporated in Delaware in 1969. Scherer International
is the Company s only subsidiary. The Company essentially has no other
operations.
SOFTGEL PRODUCTS AND MARKETS
There are three solid oral dosage delivery systems: tablets, hardshell gelatin
capsules, and softgel capsules. Softgel products accounted for 90% of the
Company s fiscal 1994 sales, and empty two-piece hardshell capsules represented
7% of sales.
The various softgel markets around the world were developed primarily by the
Company working in conjunction with its customers. The technical and
commercial staff of the Company work in close collaboration with the technical
and marketing staff of its customers to identify requirements and develop
commercial products.
Softgel capsules are used in the following three markets: (i) pharmaceutical
(both prescription and over-the-counter products); (ii) health and nutritional;
and (iii) other (cosmetics and recreational).
Pharmaceutical. The pharmaceutical markets in each country are relatively
similar due to the high degree of manufacturing regulation worldwide, together
with the globalization of the pharmaceutical industry. The Company performs
especially well in a highly regulated environment where the customers' main
focus is on quality and service as opposed to price. In fiscal 1994, 46% of
the Company's softgel sales were derived from the sale of pharmaceutical
products.
The Company assists pharmaceutical companies in the formulation of liquids and
solids in suspension to be used in softgels. The Company's development of its
Scherersol(R) systems broadens the range of pharmaceutical products which may
be encapsulated in softgel form. Scherersol(R) softgel systems are liquid
formulation technologies which are designed to improve bioavailability of
pharmaceutical compounds that are inconsistently, incompletely or too slowly
absorbed from traditional oral dosage forms. Scherersol(R) systems, most of
which are patented, often enable pharmaceutical companies to extend patent
protection and combine the advantages of active molecules in a solution with
the convenience and dosage accuracy of softgels.
To date, the most significant product which has been reformulated using the
Scherersol(R) systems is Sandimmun(R), a product developed and marketed by
Sandoz Pharma AG. Sandimmun(R) (cyclosporin A) is an immuno-suppressant which
typically is administered daily to organ transplant patients throughout their
lives in order to prevent post-operative organ rejection. Additionally, it has
recently received approval in Europe for treatment of psoriasis, and
applications are pending in the U.S. for both psoriasis and rheumatoid
arthritis. By reformulating the drug into softgel form, the Company was able
to mask Sandimmun's(R) unpleasant taste and regulate the dosage size. Sandoz
Pharma AG's annual worldwide sales of Sandimmun(R) are currently estimated at
$700 million. To date, the Company believes that a substantial portion of
Sandimmun(R) sales continue to be in non-softgel forms. Sandimmun(R)
represents approximately 2% of the Company's softgel sales.
Health and Nutritional. Health and nutritional products consist primarily of
vitamins, minerals, supplements, and plant and fish oils. Some of the
Company's products involve relatively simple encapsulation of oils, such as
vitamin E and cod liver oil, while others are specifically formulated to the
requirements of customers and are mutually developed Some health and
nutritional products can only be formulated in softgel form, and other products
are formulated in softgel form for convenience and quality product line image.
Health and nutritional products represented approximately 43% of the Company's
fiscal 1994 softgel sales.
Other-Cosmetics and Recreational. Other products represented approximately 11%
of the Company's softgel sales in fiscal 1994, with approximately 6%
attributable to cosmetics and 5% to recreational products.
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The Company's products for the cosmetics market consist principally of: (i)
specially shaped softgels containing various topical oils and creams; and (ii)
bath pearls or bath capsules containing various oils and fragrances. The
Company's largest cosmetics customer, Elizabeth Arden Co., introduced Ceramide
facial and eye cream products using special twist-off softgel capsules to
provide unit dosaging and prevent oxidation of the products before use. The
Company continues to develop and market new products for the growing cosmetics
market. An example is its fragrance softgel, which represents an economical,
biodegradable twist-off sampler for perfumes and similar products.
The Company manufactures paintball softgels for use in recreational "paintball
games." Various colors of water-washable paint are encapsulated in softgels and
sold by the Company to qualified distributors. Originally established in the
United States, this sport is now also growing in popularity internationally.
SCHERER DDS
In 1991, the Company formed a separate division, Scherer DDS, to focus on the
development of advanced drug delivery systems. This represents a broadening of
the Company's existing business within its existing infrastructure, and
reflects the Company's commitment to this rapidly growing market segment. The
Company believes that demand for advanced drug delivery systems has grown
because the pharmaceutical industry is recognizing limitations to improving
drug efficacy and tolerance with conventional dosage form technologies. In
addition, novel and patentable formulation technologies can often extend the
product life cycle of major drugs for many years, thus maximizing income
streams from the customers' significant research and development investments.
Scherer DDS, largely based in the United Kingdom, is responsible for the
development, manufacture and marketing of the Company's new advanced drug
delivery systems, including the Zydis(R) and Pulsincap(R) technologies.
Additionally, Scherer DDS is engaged in the search for other advanced drug
delivery systems which might complement the Company's existing technologies.
In January 1994, the Company acquired the rights to a novel ophthalmic drug
delivery system from Zeneca Limited. The system, which is in the early stages
of development, is intended to enable accurate, sensation-free application of
drugs to the eye. In March 1994, the Company entered into an agreement with a
United Kingdom-based drug research concern to fund feasibility studies for a
unique patent-pending dry powder inhaler device and a patented
controlled-release tablet product.
Zydis(R). Zydis(R) is a freeze-dried, porous wafer containing a drug substance
which dissolves instantaneously on the tongue and does not require water to aid
swallowing. This feature of Zydis(R) is expected to improve patient
compliance, particularly among children and the elderly who frequently
experience difficulties in swallowing conventional dosage forms. The Zydis(R)
system has been patented in major markets extending through the year 2002, with
such patent protection extending to the active ingredients being delivered
using Zydis(R). Products incorporating Zydis(R) technology have received
approvals for use in eighteen countries.
The Company currently produces Zydis(R) products containing the lorazepam and
oxazepam tranquilizers for Wyeth-Ayerst International, as well as Pfizer's
Feldene Melt anti-arthritic product. At present, such products are only sold
in Europe. There are currently eleven major products encompassing Zydis(R)
technology in different stages of development and regulatory approval. Because
patents covering active compounds in these products have expired or will expire
within the next few years, the manufacturers of such products have been seeking
alternative patent- protected dosage forms. Conventional dosage forms of the
active compounds in these products are marketed by large multinational
pharmaceutical companies, and these products had aggregate annual sales
exceeding $5.0 billion in calendar 1992. In general, agreements with customers
call for customers to pay option fees to the Company as well as to pay certain
of the costs for development, clinical testing, obtaining regulatory approvals
and commercialization of the products. The Company will receive royalties, as
well as manufacturing revenues, assuming such
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products are successfully commercialized. The Company recognized revenues of
approximately $8.0 million in fiscal 1994 related to Zydis(R) products.
Pulsincap(R). Pulsincap(R) is an oral drug delivery device which is designed
to release the drug in a pulsed fashion at a predetermined time in the
gastrointestinal tract or at a predetermined site in the body. This dosage
form consists of a capsule composed of a water insoluble body and a water
soluble cap. The drug formulation is contained within the capsule body and is
sealed in by a hydrogel plug. At a specified time after ingestion, the drug is
released into the small intestine or colon for absorption into the blood
stream.
The Company anticipates that the Pulsincap(R) system will have a broad range of
applications. Two major areas targeted are nocturnal (time-controlled)
delivery and colonic (site-specific) delivery.
The Pulsincap(R) technology is covered by patents in Europe, and has patents
pending in all other major markets. The Company has completed toxicology
studies on the hydrogel plug, and anticipates that several customer-funded
feasibility studies will be initiated in the next several months. The Company
further expects that several years of continued development and testing will be
required before any material commercial sales of Pulsincap(R) products are
realized.
Optidyne. Optidyne is a novel pocket-sized design which would enable the
transfer of atomized droplets of solutions of pharmaceutical compounds to the
corneal surface of the eye. The device will deliver a small (3 to 5
microlitres) and precise volume of a liquid in fine droplet size to the eye,
thus avoiding blinking, flooding, spillage and waste and ensuring a longer
contact time on the corneal surface. Side effects, which can arise with
standard drops from the effects of excess formulation draining into the nose
and being swallowed, would be avoided. The device is designed to be used in a
vertical or a horizontal position with no requirement for bending back the head
and thus has the potential for increasing therapeutic efficacy with minimal
side effects.
ADVANCED THERAPEUTIC PRODUCTS GROUP
In September 1993, the Company formed the Advanced Therapeutic Products Group,
based in the United Kingdom. This division was formed to manage the
development and registration of pharmaceutical products using the Company s
proprietary drug delivery technologies and incorporating off- patent compounds.
The Group s objective is to reformulate existing compounds using the Company s
proprietary drug delivery technologies to create new products with demonstrably
improved therapeutic and cost benefits over existing treatments. The Company
does not intend, however, to engage in any research aimed at the development of
new chemical entities.
INTERNATIONAL OPERATIONS
To serve new markets and to meet the needs of its multinational customers, the
Company operates softgel manufacturing facilities in eleven countries
throughout the world and manufactures hardshell capsules in three of these
countries. In addition, the Company has the flexibility to transfer some of
its production from one plant to another within its worldwide network. (For
information concerning the Company's geographic segments, see Note 15 to the
consolidated financial statements.)
Currently, the Company is not subject to any significant government
restrictions as to the availability of any material cash flows from its foreign
subsidiaries, however, transfer of profits from foreign subsidiaries could be
subject to foreign exchange controls and to regulations of foreign governments
which may be in effect from time to time. In addition, the consolidated
results of the Company's operations are affected by foreign currency
fluctuations. Laws or regulations have been proposed or enacted in various
foreign countries which, among other things, specify the number of national
directors and restrict borrowing by foreign-owned companies.
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The Company is also subject to certain restrictions pursuant to which R.P.
Scherer GmbH, the Company's 51% owned German subsidiary, has the exclusive
right to sell or manufacture softgels and hardshell capsules in eastern Europe
and certain countries in western Europe and Asia. These restrictions do not
apply to the Company's advanced drug delivery systems marketed by Scherer DDS.
COMPETITION
The greatest competition to the Company's softgel dosage form for
pharmaceuticals, its major softgel market, historically has come from the
manufacturers of tablets and hardshell capsules in instances where
technological barriers to their usage did not exist. The Company believes that
the most significant disadvantages of softgel capsules compared to tablets or
hardshell capsules for pharmaceutical and health and nutritional product
manufacturers have been the relatively higher cost of softgels and the lack of
control by such manufacturers over the softgel manufacturing process. Because
a relatively high unit volume is necessary to manufacture softgels
economically, no significant pharmaceutical manufacturer and only one
significant health and nutritional product manufacturer produces its own
softgels.
In recent years, a large number of pharmaceutical companies have become
increasingly interested in the development and commercialization of both
existing and newly developed pharmaceutical products incorporating advanced
drug delivery systems. A number of companies have been formed to develop new
drug formulations, products, and drug delivery systems.
The Company is the world's largest manufacturer of softgels. The Company
believes it has a competitive advantage in the softgel business due to its
greater experience in the manufacture of softgels, its advanced technology, its
extensive participation in customer product development, its strong acceptance
by customers and its geographic breadth. The Company's principal softgel
competitors are several manufacturers with substantially smaller softgel
operations. Although the Company faces varying degrees of competition in each
of its geographic markets, it believes it has a leading market share in each of
its major markets.
The largest producers of hardshell capsules are two multinational
pharmaceutical manufacturers which have substantially greater assets and sales
than the Company. In addition, the Company competes in various countries with
smaller hardshell manufacturers.
PRODUCT INFORMATION
The Company's business is not dependent upon a single product or a few
products. Softgels containing both natural and synthetic Vitamin E represent
approximately 11% of the Company s fiscal 1994 sales; no other product
represents 10% or more of the Company's sales.
CUSTOMERS
No material part of the Company's business is considered to be dependent upon a
single customer or a few customers, and no single customer represents 10% or
more of the Company's sales.
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SOURCES OF MATERIALS
The principal raw material used in the manufacture of softgels and hardshell
capsules is gelatin. Gelatin is obtained primarily regionally and in most
instances is available from multiple sources (and is generally purchased based
on a coordinated worldwide basis by the Company to obtain favorable terms).
The Company has never experienced any significant shortage of gelatin or other
significant raw materials.
PATENTS
The Company has a number of active patents on its specialized machinery,
processes, products and drug delivery systems. In addition, a number of
patent applications are pending and numerous trademarks are held. In the
opinion of management, the Company's businesses are not dependent upon any one
patent or trademark.
SEASONAL BUSINESS
No material portion of the Company's business is seasonal. However, second
quarter operating results are generally below the results of other quarters due
to the regularly scheduled vacation and annual summer maintenance shutdown of
substantially all northern hemisphere softgel facilities.
BACKLOG
The backlog of unfilled orders was approximately $136.3 million at March 31,
1994, as compared to approximately $110.2 million at March 31, 1993. The
Company believes that such backlog of orders at March 31, 1994 is firm and will
be filled within the next 12 months.
GOVERNMENT REGULATION
The Company's products and manufacturing processes and services are subject to
the applicable Good Manufacturing Practice standards for the pharmaceutical
industry and to other regulations by governmental agencies or departments in
each of the countries in which it operates. In the United States, the
Company's encapsulation products and manufacturing and packaging services are
subject to the Federal Food, Drug and Cosmetic Act, the Comprehensive Drug
Abuse Prevention and Control Act of 1970 and various rules and regulations of
the Bureau of Alcohol, Tobacco and Firearms of the United States Department of
Treasury, the Bureau of Narcotics of the United States Department of Justice
and state narcotic regulatory agencies. In other countries, the Company's
products and services are subject to analogous regulation.
The Company is regularly subjected to testing and inspection of its products
and facilities by representatives of various Federal agencies and in addition,
the Company comes under the regulation of various state, municipal and foreign
health agencies.
The Company is also generally required to obtain United States Food and Drug
Administration approval for sales in the United States, as well as approval of
the appropriate agencies in other jurisdictions, prior to commencing the sale
of many of the proprietary products under development.
The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. Compliance with Federal, state
and local provisions relating to the protection of the environment has had no
material effect upon the capital expenditures, earnings or competitive position
of the Company and its subsidiaries. The Company was informed in August 1992
that soil at a manufacturing facility in North Carolina owned and operated by
the Company from 1975 to 1985 contained levels of certain substances which
exceeded environmental standards. The Company voluntarily initiated a remedial
investigation, and initial remedial and removal actions have been completed by
the Company and the current owner of the facility for the known soil
contamination at such site. The Company continues to perform additional
studies and remediation
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in the area, including testing and removal of groundwater, which have indicated
the necessity for additional remedial and removal actions. On the basis of the
results of investigations performed to date, the Company does not believe that
potential future costs associated with either the investigation or any future
remedial or removal action will ultimately have an materially adverse impact on
the Company s business or financial condition. Based on current information,
no other significant expenditures for environmental compliance are contemplated
in the foreseeable future.
RESEARCH AND DEVELOPMENT
Costs incurred in connection with the development of new products and
manufacturing methods, including both Company and customer-sponsored
expenditures, amounted to $16.0 million in fiscal 1994, $12.4 million in fiscal
1993, and $11.6 million in fiscal 1992.
EMPLOYEES
At March 31, 1994, the Company employed approximately 3,100 full-time
employees. The Company considers its relations with its employees to be good.
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EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The name, age and employment history, including all positions held concurrently
or successively in the past five years, of each of the Company's executive
officers and directors are as follows:
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
------------------------------------------
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
---- --- ------------------------------------
<S> <C> <C>
John P. Cashman 53 Chairman of the Company since August 1991 and Director of the Company
since June 1990. Chairman of Scherer International since June 1989.
Director of Scherer International since December 1989. Chairman and
President of Cashman Group Inc. since 1986. Chairman of Pharmaphil Group,
Inc. from January 1987 to June 1989. President of Manville International
and Mining Group and Senior Vice President and Officer of Manville
Corporation from 1984 to 1986.
Aleksandar Erdeljan 44 President of the Company since August 1991 and Director of the Company
since June 1990. President of Scherer International since June 1989.
Director of Scherer International since December 1989. President of
Pharmaphil Group, Inc. from January 1987 to June 1989. Director of
Corporate Development of the Company from June 1985 to January 1987.
Nicole S. Williams 49 Executive Vice President, Finance, Chief Financial Officer and Secretary
of the Company and Scherer International since January 1992. Treasurer of
the Company and Scherer International since June 1993. Executive Vice
President - Worldwide Operations, SPSS, Inc. from December 1990 to January
1992. Senior Vice President, Finance and Administration and Corporate
Secretary, SPSS, Inc. from July 1987 to December 1990. Vice President and
Treasurer, CECO Industries, November 1985 to July 1987.
Thomas J. Stuart 33 Vice President and Controller of the Company and Scherer International
effective June 1994. Controller of the Company since August 1991, and of
Scherer International since May 1990. Manager, Detroit office of Arthur
Andersen & Co. from June 1987 to May 1990.
Dennis R. McGregor 41 Assistant Treasurer and Director of Tax Operations of the Company and
Scherer International since August 1993. Manager of Tax Audit and
Planning, Allied-Lyons North America from December 1991 to August 1993.
International Tax Manager for Great Lakes Chemical from September 1990 to
November 1991. Manager of Tax Planning and Research for Brown Forman
Corporation from September 1983 to September 1990.
Lori G. Koffman 35 Director of the Company and Scherer International since September 1989.
Assistant Secretary of the Company since December 1989. Senior Vice
President, Lehman from 1990 to present. Vice President, Lehman from 1987
to 1990. Also a director of Shearson/SDI, Inc., the general partner of
Sun Distributors, L.P.
Frederick Frank 62 Director of the Company since June 1990. Director of Scherer
International since August 1988. Senior Managing Director of Lehman.
Also a director of Applied Bioscience International, Inc. and Physicians
Computer Network.
James A. Stern 43 Director of the Company and Scherer International since June 1990.
Chairman of The Cypress Group, a private merchant bank, since April 1994.
Managing Director of Lehman and head of its Merchant Banking Group from
1984 to 1994. Also a director of Noel Group, Inc., K & F Industries Inc.,
Loral Aerospace Holdings, Inc., Lear Seating Corporation, American
Marketing Industries Holdings Inc. and Infinity Broadcasting Corporation.
</TABLE>
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<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
------------------------------------------
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
---- --- ------------------------------------
<S> <C> <C>
Gilbert H. Lamphere 42 Director of the Company since August 1991. Director of Scherer
International since June 1992. Co-Chairman and Chief Executive Officer
of Noel Group, Inc. since November 1991. Chairman of the Board and Chief
Executive Officer of The Prospect Group, Inc. since January 1990.
Chairman of the Executive Committee of The Prospect Group from 1985 to
1989, and President from 1989 to 1991. Director and Chairman of the
Board of Illinois Central Corporation, Recognition International
Incorporated, and Belding Heminway Company. Also a director of The
Prospect Group, Inc., Children's Discovery Centers of America, Inc.,
Illinois Central Railroad Company, Global Natural Resources Inc., Sylvan
Foods Holdings, Inc., Noel Group, Inc., Lincoln Snacks Company, Simmons
Outdoor Corporation and Cleveland-Cliffs Inc. President of the Board of
Trustees of The Nightingale-Bamford School and trustee of the City Parks
Foundation.
Louis Lasagna, M.D. 71 Director of the Company since September 1991. Director of Scherer
International since June 1992. Dean, Sackler School of Graduate
Biomedical Sciences, Tufts University; Academic Dean, Tufts University
School of Medicine; Professor of Psychiatry and Professor of
Pharmacology, Tufts University, in each case since 1984. Independent
consultant since 1965. Director of Tufts University Center for the Study
of Drug Development since 1975. Director of the United States branch of
Astra Pharmaceutical Products, Inc. Member of the Board of Trustees of
International Life Sciences Institute/Nutrition Foundation since 1980 and
Chairman since 1991. Director of the Foundation for Nutritional
Advancement since 1980. Chairman of the Drug Science Foundation from
1987-1988.
Robert H. Rock 44 Director of the Company since September 1991. Director of Scherer
International since June 1992. Chairman of IDD Enterprises, L.P. since
September 1991. Chairman of Metroweek Corporation since December 1988.
President of MLR Enterprises since October 1987. Chairman and Chief
Executive Officer of the Hay Group from October 1986 to October 1987.
Also a director of Hunt Manufacturing Company, Opinion Research
Corporation and the Wistar Institute.
</TABLE>
(1) Where no starting date is given for a principal occupation or
employment, such occupation or employment commenced prior to
1989.
All directors of the Company serve terms of one year and until the election of
their respective successors. Officers serve at the pleasure of the Board of
Directors.
There are three committees of the Board of Directors of the Company: the
Executive Committee, the Compensation Committee and the Audit Committee.
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ITEM 2 PROPERTIES
The Company develops and manufactures its products at nineteen principal
worldwide locations with an aggregate floor space of approximately 1,440,000
square feet. Fifteen of these facilities are owned in fee by the Company, and
four facilities, with an aggregate floor space of 548,000 square feet, are
leased. The U.S. softgel manufacturing facilities total two, of which one, of
25,000 square feet, is leased. The seventeen foreign manufacturing facilities
include fourteen owned facilities with an aggregate floor space of 732,000
square feet, and three leased facilities with 523,000 square feet aggregate
floor space. Approximately 80% of the foreign facilities primarily manufacture
softgels and related items, while 20% of the foreign facilities produce
hardshell capsules. The foreign facilities are located in Argentina,
Australia, Brazil, Canada (two facilities), France (two facilities), Germany
(three facilities), Italy (two facilities), Japan, South Korea, and the United
Kingdom (two facilities). Portions of these facilities are also used for
related research and development, administration, and warehousing activities.
The Company's primary leased facility, a German manufacturing facility of
approximately 377,000 square feet in size, has a lease term (including renewal
options) extending through December 2008. The Company also leases a production
facility in France of approximately 120,000 square feet, with a lease term
extending through March 2008. Additionally the Company leases its executive
offices in Troy, Michigan, and sales offices, research facilities and
warehouses at a variety of locations in the U.S. and abroad. All leases
generally provide for payment of taxes, utilities, insurance and maintenance by
the Company, and have terms extending for periods from one to fifteen years,
including renewal options.
In the opinion of the Company, its principal properties, whether owned or
leased, are well-maintained and in satisfactory condition, are adequately
insured, and are suitable and have capacities adequate for the purposes for
which they are used.
ITEM 3 LEGAL PROCEEDINGS
The Company's former subsidiary Paco Pharmaceutical Services, Inc. ("Paco"),
certain of Paco's subsidiaries, the Company and other defendants are parties to
a group of actions commenced, beginning in April 1990, in Federal and state
courts in New Jersey and in Federal courts in New York and Massachusetts by
limited partners of Paco Development Partners II ("PDP II"), a research and
development partnership in which a subsidiary of Paco serves as the general
partner. The defendants were granted summary judgment for dismissal with
respect to the New York actions on March 29, 1993, and the time to appeal this
decision has expired. In the New Jersey state court action (Nelson v. Dean
Witter Reynolds, Inc., MRS-L-5014-90), a class consisting of the 14 investors
who reside in New Jersey has been certified. On October 23, 1992, the Company,
Paco and its affiliates moved for summary judgment as to three counts of the
complaint. This motion was denied on January 6, 1993. A second action
commenced in New Jersey Federal court (Nelson v. Ian Ferrier, Civil Action
91-5334(JWB)), has been stayed pending resolution of the New Jersey state court
action. No class has been certified in this federal action.
Plaintiffs in each of these actions seek damages of an unspecified amount for,
among other things, alleged violations of state securities law, fraud,
misrepresentation, breach of contract, conversion and negligence in connection
with the $25 million private placement sale of PDP II limited partnership
interests and warrants in 1986. Plaintiffs in the state court action also seek
damages, derivatively, on behalf of PDP II, for alleged breaches of fiduciary
duty and breach of contract in connection with the management of PDP II. On
October 19, 1993, the plaintiffs in the New York federal court action described
above (in which the defendants were granted summary judgment) filed a new
complaint in state court in New Jersey. This complaint alleges state law
causes of action for fraud, negligent misrepresentation, breach of fiduciary
duty and breach of contract.
Subsequent to year end, the Company reached an agreement in principle with the
plaintiffs in the PDP II litigation, and is in the process of formalizing that
agreement and seeking all necessary approvals. The
10
<PAGE> 12
Company recognized during the fourth quarter of fiscal 1994 a special charge of
approximately $3.2 million representing the anticipated amount of all
settlement-related costs in excess of previously provided reserves.
On March 30, 1992, OCAP Acquisition Corp. ("OCAP") commenced an action in the
Supreme Court of the State of New York, County of New York, against Paco,
certain of its subsidiaries, the Company and Scherer International
(collectively, the "defendants"), arising out of the termination of an Asset
Purchase Agreement dated February 21, 1992 (the "Purchase Agreement") between
OCAP and the defendants providing for the purchase of substantially all the
assets of Paco. On May 15, 1992, OCAP served an amended verified complaint (the
"Amended Complaint"), asserting causes of action for breach of contract and
breach of the implied covenant of good faith and fair dealing, arising out of
defendants' March 25, 1992 termination of the Purchase Agreement, as well as
two additional causes of action that were subsequently dismissed by order of
the court. The Amended Complaint seeks $75 million in actual damages, $100
million in punitive damages, as well as OCAP's attorney fees and other
litigation expenses, costs and disbursements incurred in bringing this action.
Discovery with respect to the action has commenced; however, discovery was
temporarily stayed by OCAP's filing of a motion for partial summary judgment,
and the Company s subsequent cross-motion for dismissal. The Court recently
denied both motions and the Company anticipates that discovery will resume or
the Court s decision will be appealed. Based upon the investigation conducted
by the Company to date, the Company believes that this action lacks merit and
intends to defend against it vigorously. In the opinion of management, the
ultimate outcome of this litigation will not have a material adverse effect on
the Company's business or financial condition.
The Company was informed in August 1992 that soil at a manufacturing facility
in North Carolina owned and operated by the Company from 1975 to 1985 contained
levels of tetrachlorethene and other substances which exceeded environmental
standards. The Company voluntarily initiated a remedial investigation, and
initial remedial and removal actions have been completed by the Company and the
current owner of the facility for the known soil contamination at such site.
The Company continues to perform additional studies and remediation of the
area, including testing and removal of groundwater, which have indicated the
necessity for additional remedial and removal actions. On the basis of the
results of investigations performed to date, the Company does not believe that
potential future costs associated with either the investigation or any
potential remedial or removal action will ultimately have a materially adverse
impact on the Company's business or financial condition.
The Company is a party to various other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the last quarter of its fiscal year ended March 31, 1994.
11
<PAGE> 13
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The principal market for the Company's common shares is the New York Stock
Exchange. The following table indicates the high and low sales prices of the
Company's common stock as reported on the composite tape of the New York Stock
Exchange.
<TABLE>
<CAPTION>
MARKET PRICE
---------------------
HIGH LOW
---- ---
<S> <C> <C>
Year ended March 31, 1994:
First Quarter $31.25 $25.00
Second Quarter $33.50 $26.13
Third Quarter $37.75 $31.38
Fourth Quarter $40.50 $35.50
Year ended March 31, 1993:
First Quarter $29.38 $22.13
Second Quarter $34.13 $23.75
Third Quarter $38.50 $28.88
Fourth Quarter $38.88 $23.88
</TABLE>
The Company had 125 common shareholders of record at June 23, 1994.
The Company did not declare any dividends in the year ended March 31, 1994.
Restrictions contained in certain of the Company's long-term debt agreements
limit the payment of dividends. The Company does not currently have any plans
to declare or pay cash dividends.
12
<PAGE> 14
ITEM 6 SELECTED FINANCIAL DATA
The financial data of the Company and the Predecessor are not comparable in all
respects (see Note 8).
<TABLE>
<CAPTION>
COMPANY PREDECESSOR (8)
------------------------------------------------------ ----------------------------
THREE
NINE MONTHS MONTHS YEAR
ENDED ENDED ENDED
YEAR ENDED MARCH 31, MARCH 31, JUNE 30, MARCH 31,
----------------------------------------- ----------- ----------- ---------------
1994 1993 1992 1991 1990 1990 1989
---------- ------- -------- ---------- ----------- ----------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA (1):
Net sales ....... $449,297 $398,011 $337,786 $298,638 $191,451 $62,991 $236,944
Cost of sales ... 287,389 242,108 201,991 183,438 123,725 39,811 151,698
Selling,
administrative
and other
expense ........ 74,517 67,806 58,758 52,216 33,041 18,313 50,979
Litigation
settlement and
other (2) ...... 4,478 - - - - - -
Stock and other
compensation
expense (3) .... - - 13,060 - - - -
Operating income
(2, 3, 4) ........ 82,913 88,097 63,977 62,984 34,685 4,867 34,267
Interest expense. 22,480 25,436 35,348 45,045 35,352 765 2,986
Net income (loss)
from continuing
operations (5).. 30,914 28,960 (1,224) (6,425) (12,126) (9,270) 8,401
Net income (loss)
from continuing
operations
attributable to
common shares
(5, 6) ......... 30,914 28,960 (7,596) (12,154) (13,972) (9,275) 6,217
Net income (loss)
attributable to
common shares
(5, 6, 7) ...... 15,094 20,895 (31,118) (12,471) (16,204) (8,706) (7,865)
Depreciation and
amortization
(10) ........... 25,314 22,678 19,940 19,774 17,922 3,686 11,910
Capital
additions ...... 39,503 33,192 20,947 11,993 9,038 1,998 13,014
PER COMMON SHARE:
Net income (loss)
from continuing
operations
(5, 6) ......... $1.27 $1.20 $(0.50) $(1.37) $(1.57) $(0.92) $0.68
Net income (loss)
(5,6,7) ........ 0.62 0.86 (2.05) (1.40) (1.82) (0.86) 0.86
Dividends
declared ....... - - - - - 0.10 0.39
BALANCE SHEET DATA (1)
(AT END OF PERIOD):
Working capital
(9) ............ $ 89,681 $ 82,874 $ 79,248 $47,624 $ 61,226 $79,569 $87,252
Total assets ..... 613,414 532,184 525,977 501,859 493,189 293,729 281,864
Long-term debt,
including current
portion ......... 189,277 142,508 178,639 298,746 313,916 57,161 56,076
Redeemable
preferred stock . - - - 31,560 25,831 - -
Minority
interests ....... 35,354 32,369 28,357 24,609 20,249 19,068 18,068
Shareholders'
equity .......... 214,710 203,001 191,634 35,582 45,981 136,876 149,165
</TABLE>
(See the notes to this table on the following page)
13
<PAGE> 15
NOTES TO SELECTED FINANCIAL DATA
1. Excludes the discontinued operations of Southern Optical Company, The
Lorvic Corporation, Franz Pohl GmbH, Scientific Associates, Inc., and Paco
Pharmaceutical Services, Inc. ("Paco").
2. Includes $4,478,000 special charge in the year ended March 31, 1994, for
the accrual of a proposed settlement of Paco Development Partners (PDP II)
litigation, which has been outstanding since 1990, and the write-down of
buildings and property related to the relocation of operations in
Australia.
3. Includes a one-time $12,345,000 non-cash charge for stock and other
compensation expense relating to the Company's common stock sale in October
1991 for the year ended March 31, 1992.
4. Includes provision for restructuring of operations of $5,376,000 for the
period ended June 30, 1989.
5. Includes $8,437,000 and $9,020,000 in non-operating expenses for the
periods ended June 30, 1989 and March 31, 1989, respectively, associated
with a proxy contest, negotiated severance agreements and the sale of the
Predecessor.
6. After allowing for preferred stock dividends and accretion between the fair
value at the date of issuance and the stated value of preferred stock.
During calendar year 1992, the Securities and Exchange Commission staff
implemented a policy which would have required the difference between the
redemption price and carrying value of R.P. Scherer Corporation's
Exchangeable Preferred Stock, amounting to $29.8 million, to be reflected
as an increase to net loss attributable to common shares. If such policy
had been applied in connection with R.P. Scherer Corporation's November
1991 redemption of its Exchangeable Preferred Stock, net loss attributable
to common shares for the year ended March 31, 1992 would have increased to
$(60.9) million, or $(4.01) per common share, from the reported $(31.1)
million, or $(2.05) per common share.
7. Includes extraordinary loss of $15,800,000 from debt extinguishments for
the year ended March 31, 1994; extraordinary loss of $8,392,000 from early
retirement of debt, a $647,000 loss from the sale of Paco, and $974,000
gain from cumulative effect of accounting change for year ended March 31,
1993; an estimated loss of $16,657,000 from disposal of Paco, an
extraordinary loss of $2,067,000 on the early retirement of debt, and a
$4,917,000 charge for an accounting change for postretirement benefits for
the year ended March 31,1992; and an extraordinary credit of $932,000 for
the year ended March 31, 1989.
8. In June 1989, R.P. Scherer Corporation acquired the common stock of Scherer
International pursuant to a tender offer. For financial reporting
purposes, the acquisition was deemed effective as of July 1, 1989. The
acquisition and the related application of purchase accounting resulted in
significant changes to the capital structure of the Company and the
historical bases of various assets and liabilities. The effect of such
changes significantly impairs comparability of the selected financial data
before and after the acquisition. Accordingly, the data prior to July 1,
1989, are entitled "Predecessor."
9. Includes notes payable but does not include current portion of long-term
debt.
10. Includes amortization of deferred financing costs and debt discount of
$1,330,000, $1,823,000, $2,007,000, $3,273,000, and $6,375,000 for the
years ended March 31, 1994, 1993, 1992, and 1991, and the nine months ended
March 31, 1990, respectively.
14
<PAGE> 16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis of financial results and condition covers
the fiscal years ended March 31, 1994, 1993, and 1992. The discussion and
analysis also addresses the effects of the application of proceeds that the
Company's October 1991 sale of 11.5 million shares of its common stock had on
the Company's results of operations and financial condition in the 1992 fiscal
year (see Note 4 to the consolidated financial statements).
In August 1991, the Company adopted a plan to sell its wholly-owned subsidiary
Paco, a provider of design, engineering and contract packaging and
manufacturing services to U.S. pharmaceutical and consumer products companies.
In August 1992, Paco was disposed of through a public offering of Paco's common
stock. The assets, liabilities, and results of operations of Paco have been
reported as a discontinued operation in the consolidated financial statements
for all periods presented. The following discussion and analysis refers only
to continuing operations.
A majority of the Company s sales, income and cash flows is derived from its
international operations. With the exception of operations in highly
inflationary economies, which are measured in U.S. dollars, the financial
position and the results of operations of the Company's foreign operations are
measured using the local currencies of the countries in which they operate, and
are translated into U.S. dollars. Although the effects of foreign currency
fluctuations are mitigated by the fact that expenses of foreign subsidiaries
are generally incurred in the same currencies in which sales are generated, the
reported results of operations of the Company's foreign subsidiaries will be
higher or lower depending upon a weakening or strengthening of the U.S. dollar.
In addition, a substantial portion of the Company s net assets are based in its
foreign operations, and are translated into U.S. dollars at foreign currency
exchange rates in effect as of the end of each period. Accordingly, the
Company s consolidated shareholders equity will fluctuate depending upon the
strengthening or weakening of the U.S. dollar.
RESULTS OF OPERATIONS
Fiscal Years Ended March 31, 1994 and 1993
Sales for fiscal 1994 reached a record high $449.3 million, representing a 13%
increase from the $398.0 million achieved in fiscal 1993. Pharmagel
operations, which were acquired July 1, 1993 (see Note 3 to the consolidated
financial statements) contributed $15.5 million to the fiscal 1994 sales gain.
A significantly stronger U.S. dollar in fiscal 1994 compared to fiscal 1993 had
the effect of depressing the reported growth in sales by approximately $25
million. On a constant exchange rate basis, the sales increase would have been
19% in fiscal 1994 versus fiscal 1993.
The Company s United States operations achieved sales of $120.7 million in
fiscal 1994, or a 39% gain from sales of $86.7 million in fiscal 1993. A
substantial majority of the fiscal 1994 improvement resulted from a 60%
increase in sales of nutritional softgels, primarily Vitamin E and other
anti-oxidants, in large part due to publicized recognition in the medical
community of the potential health benefits of these products. While the growth
in sales of nutritional softgels slowed somewhat during the fiscal 1994 fourth
quarter, management anticipates that nutritional softgels will be a continued
source of additional sales in the foreseeable future. A 75% rise in sales of
over-the-counter ("OTC") pharmaceutical softgels also contributed to the United
States sales improvement. Demand for the Company s cough/cold products, such
as A.H. Robins Robitussin and Burroughs-Wellcome s Sudafed line of softgels
remained strong in fiscal 1994. Launches of additional cough/cold and other
OTC branded softgels are scheduled for fiscal 1995.
15
<PAGE> 17
Sales in Europe increased by 1.6%, from $229.9 million in fiscal 1993 to $233.7
million in fiscal 1994. Without the $15.5 million in additional sales provided
by Pharmagel in fiscal 1994, European sales declined 5%. Such decline is
primarily attributable to the stronger U.S. dollar in fiscal 1994. On a
constant exchange rate basis, sales would have increased by 6% in fiscal 1994,
excluding the impact of Pharmagel. Sales growth in fiscal 1994 was also
adversely affected as a result of government healthcare reforms implemented in
Germany during calendar year 1993. These reforms, among other changes, reduced
or eliminated government reimbursement for a wide range of pharmaceutical
products. The effects of these reforms impacted mainly the last quarter of
fiscal 1993 and the first half of fiscal 1994 and, by the fourth quarter of
fiscal 1994, deutschemark sales in Germany had increased by 20% as compared to
last year's fourth quarter. Sales growth was strong elsewhere in Europe, most
notably in the United Kingdom, which generated increased sales of specialty
nutritional softgels.
The Company's Other International geographic segment posted a 17% sales gain,
with sales of $94.9 million in fiscal 1994 compared to $81.4 million in fiscal
1993. Significant sales gains of nutritional and pharmaceutical softgels were
achieved by the Company's subsidiaries in Australia and Japan. Both of these
subsidiaries set new record sales levels in fiscal 1994.
The Company's 12-month sales order backlog was $136.3 million at March 31,
1994, an increase of 24% from the same time last year. The backlog increase
reflects primarily an improvement in the pharmaceutical industry and economic
climate in Germany, and continuing strong demand for the Company's nutritional
softgel products in the United States. Through the acquisition of Pharmagel
and manufacturing capacity expansions now underway, the Company will be in a
position to more effectively service this demand in the coming months.
Gross margin increased by $6.0 million to $161.9 million in fiscal 1994,
compared to $155.9 million in fiscal 1993. Gross margin as a percentage of
sales, however, declined in fiscal 1994 to 36.0% from 39.2% in fiscal 1993.
This decline reflects a significant shift in the Company's product mix towards
nutritional softgels during fiscal 1994. Nutritional softgels generally have a
higher material cost content relative to their sales value compared to other
types of softgels. In addition, particularly in the United States, certain of
the Company's nutritional softgel products are subject to greater competition,
which restricts margin potential. The economic and pharmaceutical industry
situation in Germany also had a further negative impact on gross margin rates
in fiscal 1994.
The Company recorded a combined $4.5 million charge against operating income in
fiscal 1994 to account for the proposed settlement of litigation relating to
Paco Development Partners II and to write-down the Company's existing
production facility in Australia to net realizable value prior to its
replacement (see Note 2 and 14 to the consolidated financial statements).
Excluding this special charge, operating income was $87.4 million for fiscal
1994, essentially unchanged from fiscal 1993's operating income of $88.1
million. On a constant currency basis, however, operating income increased 3%
in fiscal 1994 as compared to fiscal 1993. Selling and administrative expenses
rose $5.0 million to $61.4 million, or an increase of 9% compared to fiscal
1993. Almost one-half of this increase is due to the addition of Pharmagel
during 1994. Before the inclusion of Pharmagel, selling and administrative
expenses declined to 13.1% of sales in fiscal 1994 from 14.2 % of sales in
fiscal 1993, reflecting the Company's emphasis on containing overhead costs.
The Company continued to increase its investment in research and development,
with spending of $13.1 million in fiscal 1994, representing a 15% increase from
the $11.4 million expensed in the prior fiscal year. These increased
expenditures reflect increased pharmaceutical softgel development work, as well
as research and development activities related to the Company's Advanced
Therapeutic Products group and Pulsincap(R) drug delivery device.
16
<PAGE> 18
Income from continuing operations reached a record $30.9 million, or $1.27 per
share, in fiscal 1994, despite the $4.5 million special charge described above.
Before the effects of the special charge, income from continuing operations for
fiscal 1994 was $1.40 per share, representing a 17% improvement from the $1.20
per share reported in fiscal 1993. The earnings improvement stems in part from
a $1.2 million reduction in net interest expense resulting from the debt
refinancing described below, offset by interest expense on bank debt used to
fund the Pharmagel acquisition. A significant reduction in the Company s
effective income tax rate accounted for a majority of the income improvement
for fiscal 1994. The income tax provision was $18.7 million (30.1% of pretax
income) in fiscal 1994, compared to $24.1 million (36.3% of pretax income) in
fiscal 1993. The lower effective income tax rate in fiscal 1994 resulted from
a shift in pretax income towards lower tax rate countries (primarily the U.S.)
and reduced statutory corporate income tax rates in Germany and Australia.
Minority interests in income declined to $12.7 million in fiscal 1994, a
reduction of $0.6 million from the $13.3 million in fiscal 1993. Such decline
resulted primarily from reduced income of the Company s 51% owned German
subsidiary.
In January 1994, the Company successfully refinanced, through defeasance, the
outstanding 14% Senior Subordinated Debentures of R.P. Scherer International
Corporation. The Company recorded an extraordinary loss of $15.5 million
($0.64 per share) related to the defeasance transaction, as well as a $0.3
million extraordinary loss ($0.01 per share) related to the replacement of its
former bank credit facility. See "Liquidity and Financial Condition" below for
further discussion.
Fiscal Years Ended March 31, 1993 and 1992
Sales for fiscal 1993 were $398.0 million, exceeding by 18% the sales of $337.8
million recognized in fiscal 1992. Strong sales growth was experienced in all
of the Company's major operations, favorably impacted by a strengthening of
certain foreign currency exchange rates relative to the U.S. dollar. Sales
growth as measured on a constant currency basis would have been 16% for fiscal
1993 compared to fiscal 1992.
Sales of the Company's United States operations in fiscal 1993 increased to
$86.7 million, or 30%, as compared to sales of $66.8 million recorded in fiscal
1992. The United States results reflect significant increases in sales of
pharmaceutical softgels, particularly generic nifedipine and OTC cough/cold
medications. Additionally, the favorable studies and media reports confirming
the health benefits of anti- oxidant vitamins, and a stronger marketing focus
by the Company, resulted in substantial increases in sales of certain
nutritional softgels, especially Vitamin E. Sales in Europe rose by 16% to
$229.9 million in fiscal 1993, as compared to $198.4 million in fiscal 1992.
All European subsidiaries reported sales gains in fiscal 1993, with volume
growth in both pharmaceutical and nutritional softgel product sales. Sales
growth of the Company's largest subsidiary, located in Germany, slowed during
the latter half of fiscal 1993 as a result of difficult economic conditions and
recently introduced health care reforms which, among other things, restrict
government reimbursements for certain pharmaceutical products. Other
International operations recognized sales of $81.4 million in fiscal 1993,
representing a 12% increase over fiscal 1992 sales of $72.5 million. A
majority of such sales increase was achieved by the Company's subsidiaries in
Japan, with continued growth in sales of pharmaceutical softgels, and Canada,
primarily as a result of the increased demand for anti-oxidant softgels.
The Company's 12-month sales order backlog was $110.2 million as of March 31,
1993, comparable to the previous year, as measured both in U.S. dollars and in
local currencies.
The Company's gross margin increased by $20.1 million to $155.9 million in
fiscal 1993, compared to $135.8 million in fiscal 1992. Gross margin expressed
as a percentage of sales declined to 39.2% in fiscal 1993 from 40.2% in fiscal
1992. Such decrease in the margin rate reflects an increase in the current
year's sales mix toward nutritional softgels, which generally have a higher
material cost content relative to their sales value, and increases in costs of
raw materials (primarily vitamins) not yet fully offset by price increases for
the Company's products. The economic and regulatory situation in Germany also
had an unfavorable effect on the fiscal 1993 gross margin rate.
17
<PAGE> 19
Operating income reached $88.1 million for fiscal 1993, representing a 16%
increase from $76.3 million recorded for fiscal 1992, before a $12.3 million
non-recurring charge for stock compensation (see Note 4 to the financial
statements). On a constant foreign currency exchange rate basis, the increase
would have amounted to 14%. The operating income improvement stems primarily
from the increases in sales described above, offset in part by a $6.1 million,
or 12%, increase in selling and administrative expenses and a $2.9 million, or
35%, increase in net research and development expenses. Selling and
administrative expenses for fiscal 1993, which declined as a percentage of
sales, reflect additional investments in marketing staffs and activities,
increased incentive compensation related to the income improvements, general
inflationary factors and the higher foreign currency exchange rates. A
majority of the increase in research and development expenses is attributable
to pharmaceutical softgel product development activities in the U.S. and the
United Kingdom, and continued development of the Company's Pulsincap(R) drug
delivery device.
Income from continuing operations was $29.0 million, or $1.20 per share, for
fiscal 1993, an increase of $30.2 million from a loss of $1.2 million, or $0.50
per share, in fiscal 1992. In addition to the higher operating income in
fiscal 1993, a $9.9 million reduction in interest expense contributed to such
improvement. The lower interest expense resulted primarily from a full year's
interest savings in fiscal 1993 due to the approximate $124.0 million reduction
in bank debt through the application of proceeds from the October 1991 common
stock sale, and, to a lesser extent, the Company's repurchase of approximately
$42.5 million face value of its 14% Senior Subordinated Debentures during the
third quarter of fiscal 1993 (see Notes 4 and 9 to the financial statements).
In addition, the prior year results included the $12.3 million charge for stock
compensation expense. On a pro-forma basis, assuming the October 1991 common
stock sale and related transactions had occurred as of April 1, 1991, income
from continuing operations would have been $22.0 million, or $0.92 per share,
for fiscal 1992 (see Note 4 to the financial statements).
The Company's income tax provisions were $24.1 million (36.3% of pre-tax
income) in fiscal 1993 and $22.3 million (69.5% of pre-tax income) in fiscal
1992. The reduction in the consolidated tax rate to a more normal level in
fiscal 1993 reflects improved U.S. operating results and income, including the
reduction in interest expense and the $12.3 million stock compensation expense
recorded in the prior year. A significant portion of expenses in the prior
year could not be tax benefited as the realization of such benefit could not be
assured. A significantly lower tax provision rate is associated with such
incremental income due to the Company's U.S. tax position and the utilization
of available foreign tax credits. Minority interests in net income of
subsidiaries increased by 21% to $13.3 million in fiscal 1993 from $11.0
million in fiscal 1992 due primarily to increased earnings of the Company's
partially-owned subsidiaries in Germany, France and Japan.
The Company earned net income of $20.9 million, or $0.86 per share, in fiscal
1993 after reflecting an $8.4 million net extraordinary loss from the
repurchase of the senior subordinated debentures described above, a $0.6
million loss from the disposal of the company's discontinued operation (Paco)
and $1.0 million of income from the cumulative effect of a change in accounting
for income taxes in accordance with SFAS 109 (see Note 6 to the consolidated
financial statements). The Company reported a net loss attributable to common
shares of $31.1 million, or $2.05 per share, in fiscal 1992, which included a
$16.5 million estimated loss on disposal of Paco, a $4.9 million charge related
to a change in accounting for postretirement medical and other benefits in
accordance with SFAS 106 (see Note 11 to the financial statements) and a $2.1
million extraordinary loss from the early retirement of bank debt described
above.
CASH FLOWS
Cash and cash equivalents decreased by $13.8 million for fiscal 1994, as
compared with a decrease of $14.4 million for the same period in 1993 and an
increase of $15.3 million in 1992. Operating activities provided net cash of
$47.7 million, $46.0 million, and $36.5 million during fiscal years 1994, 1993,
and 1992, respectively. In 1994, cash generated from continuing growth in the
Company s after-tax earnings was offset by a $22.5 million increase in net
working capital. This working capital increase reflected increases in
inventories and receivables associated with the 13% sales growth, as well as by
the previously
18
<PAGE> 20
discussed shift in sales mix to nutritional products customers who are
generally provided longer payment terms. The working capital increase further
reflects the approximate $6 million decrease in accrued interest payable
resulting from the Company s refinancing activities as discussed in the
"Liquidity and Financial Condition" section below. In 1993, increased cash
from the Company's after-tax earnings was offset by an $20.6 million increase
in net working capital. Such working capital increase included an aggregate
17% increase in inventories and receivables associated with the sales gains
previously discussed. For fiscal 1992, the cash from operating earnings was
partially offset by a $8.7 million increase in working capital, primarily
related to increases in accounts receivable, as well as net value added taxes
receivable at the Company's German subsidiary.
Net cash used by investing activities was $74.7 million, $3.7 million and $20.3
million for the 1994, 1993 and 1992 fiscal years, respectively. Fiscal 1994
reflects the $33.8 million use of cash for the acquisitions of the capital
stock of Pharmagel and certain softgel assets of Gayoso Wellcome (as discussed
in Note 3 to the consolidated financial statements), as well as cash used for
capital expenditures of $39.5 million. Such capital expenditures consisted
primarily of expenditures in the United Kingdom related to the new Zydis(R)
production facility and in Australia for the construction of a replacement
manufacturing facility, as well as general facility and equipment additions and
improvements. Capital expenditures of $33.2 million and $20.9 million were
incurred in fiscal years 1993 and 1992, respectively, consisting primarily of
facility and equipment upgrades in the Company's German subsidiary, expansion
in the United Kingdom related primarily to Zydis(R) production and Pulsincap(R)
development facilities, and softgel manufacturing equipment and other facility
upgrades and improvements worldwide. Fiscal 1993 also reflects the disposal of
Paco, which provided $28.0 million of cash.
Financing activities for fiscal 1994 reflect the Defeasance (as defined
hereafter) of the 14% Senior Subordinated Debentures of R.P. Scherer
International Corporation, which used cash of $141.5 million. Such Defeasance
was funded primarily through the issuance of 6 3/4% Senior Notes, which
provided cash of $99.3 million, as well as through borrowings under the Company
s bank credit facility (see discussion in the "Liquidity and Financial
Condition" section below). Other significant financing sources include $99.7
million of proceeds from the Company s bank credit facility (primarily to fund
the Defeasance and the acquisition of Pharmagel), $7.0 million for the
refinancing of an existing capitalized lease obligation, and $2.4 million of
proceeds from industrial revenue bonds to finance a facility upgrade and
expansion. Other significant financing uses include $35.9 million repayments
on the bank credit facility and the retirement of the aforementioned capital
lease obligation. Financing activities for fiscal 1993 reflect primarily the
third quarter repurchase of $42.5 million principal amount of 14% Senior
Subordinated Debentures for approximately $49.3 million, funded primarily by
cash on hand and borrowings under the Company's bank credit facility. Other
financing sources include $2.2 million of proceeds from industrial revenue
bonds and $4.8 million of other borrowings. Other significant financing uses
include $29.6 million of repayments on the bank credit facility. In the 1992
fiscal year, financing activities include the $195.5 million of proceeds from
the Company's October 1991 sale of common stock, net of cash used for related
purchases of exchangeable preferred stock and repayments of long-term bank debt
(see Note 4 to the consolidated financial statements).
LIQUIDITY AND FINANCIAL CONDITION
In January 1994, Scherer International completed the refinancing of a
significant portion of its outstanding debt through the issuance of $100.0
million face value 6 3/4% Senior Notes and the Defeasance of $125.1 million
face value of its 14% Senior Subordinated Debentures (see Note 9 to the
consolidated financial statements). The 6 3/4% Senior Notes are due February
1, 2004 and are noncallable and unsecured, ranking pari passu with all other
unsecured and senior indebtedness of Scherer International. Interest on the
Senior Notes is payable February 1 and August 1, commencing August 1, 1994.
The proceeds of the offering to the Company (prior to deducting underwriting
fees and certain other expenses related to the offering) were $99.3 million.
19
<PAGE> 21
Using the net proceeds from the offering and additional proceeds from
borrowings under the Company s bank credit facility, the Company defeased its
Subordinated Debentures. The Company deposited into an irrevocable trust
account for the benefit of the holders of the Subordinated Debentures an amount
of United States government obligations sufficient to pay, with respect to the
Subordinated Debentures, all interest thereon through the first call date, the
call premium thereon and the outstanding principal thereof when due upon
redemption. The Company remains obligated to pay interest and principal on the
Subordinated Debentures when due but, subject to certain exceptions, is no
longer subject to the terms, agreements and covenants contained in the
indenture under which the Subordinated Debentures were issued ("Defeasance").
As a result of the Defeasance, the Company recognized an extraordinary loss for
accounting purposes of $15.5 million ($0.64 per share) in the quarter ended
December 31, 1993, reflecting the estimated after-tax difference between the
recorded value of the Subordinated Debentures and their face value, the call
premium, the prepayment of net interest through the Call Date, and the
write-off of unamortized deferred financing costs related to the Subordinated
Debentures. These actions will result in interest savings of approximately $9
million annually related to these debt securities.
During the next several years, a significant portion of the Company's cash flow
will be used to reduce and service indebtedness and fund capital expenditures.
The Company believes that its future cash flows from operations, together with
cash and short-term investments aggregating $22.6 million at March 31, 1994,
and amounts available under bank credit facilities will be adequate to meet
anticipated debt service, capital investment and operating cash requirements.
The Company actively reviews drug delivery systems businesses and technologies
for potential acquisition, consistent with its strategic objectives. An
example is the Company s acquisition of an ophthalmic drug delivery technology
from Zeneca Limited, and agreement to fund feasibility studies for a dry-powder
inhaler device and a controlled-release tablet product with another UK-based
drug research concern. Management presently anticipates that any acquisition
requiring significant funding would be financed largely through the issuance of
common stock, depending upon market conditions, so as not to increase the
Company's debt to equity relationship.
At March 31, 1994, the Company's outstanding long-term indebtedness consisted
of approximately $99.3 million of 6 3/4% Senior Notes (net of a $0.7 million
discount), $65.8 million of borrowings under the Company s bank credit
facility, $10.9 million of industrial development revenue bonds, and
approximately $13.3 million of other indebtedness. The Senior Notes bear
interest at 6 3/4% of face value, payable semi-annually, and mature in full in
February 2004. Annual interest expense on the Senior Notes outstanding is
approximately $6.8 million (excluding amortization of the original issue
discount and deferred financing fees). The Senior Notes have been listed on
the New York Stock Exchange.
In March 1994, the Company entered into a new bank credit facility as a
replacement for the Company's previous bank credit agreement. The new credit
facility allows for revolving credit borrowings up to an aggregate of $175.0
million in various currencies, and expires April 1, 1999. Interest is payable
quarterly at LIBOR plus .675% currently, with further reductions possible based
on certain financial performance criteria, or at the bank's prime rate. Unused
borrowing availability is subject to annual commitment fees of 1/4%.
Borrowings under this agreement are unsecured, and rank pari passu with all
other unsecured and senior indebtedness of Scherer International.
Pursuant to other revolving credit arrangements, the Company and certain of its
subsidiaries may borrow up to $15.5 million, subject to limitations imposed by
the bank credit facility discussed above. As of March 31, 1994, the Company
had outstanding approximately $2.6 million under these revolving credit
arrangements.
Capital expenditures in fiscal 1995 are expected to approximate $50 million and
will include facilities expansions or replacement in Australia, Europe, and
North America, continuing expenditures for the expansion of manufacturing
capacity for Zydis(R) fast dissolving dosage products, and general facility and
20
<PAGE> 22
equipment upgrade and replacement costs worldwide. As of March 31, 1994, the
Company has approximately $5.9 million of commitments for future capital
expenditures. The Company expects to fund such capital expenditures primarily
from operating cash flows and, to the extent necessary, from its bank credit
facility.
The bank credit facility requires the Company to satisfy various annual and
quarterly financial tests, including maintenance on a consolidated basis of a
specified minimum or maximum current level of tangible net worth and cash flow
coverage, leverage, and fixed charge ratios. The agreement also restricts the
Company's ability to incur additional indebtedness or liens, make investments
and loans, dispose of assets, or consummate a business combination, and limits
the ability of the Company to pay dividends. The indenture under which the
Senior Notes were issued also restricts the Company s ability to incur
additional liens, enter into sale-leaseback transactions, engage in certain
transactions with affiliates, and engage in certain business combinations. As
of March 31, 1994, the Company does not currently have plans to declare or pay
any cash dividends.
Inflation and Accounting Policies
In the view of management, the effects of inflation and changing prices on the
Company's net results of operations and financial condition were not
significant.
In November 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, Employer's Accounting for
Postemployment Benefits, which must be adopted for the Company's 1995 fiscal
year. This statement requires the use of the accrual method to recognize
liabilities for postemployment benefits. The Company has determined that the
adoption of this statement will not significantly affect the Company's future
financial results or position.
21
<PAGE> 23
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the years ended March 31,
--------------------------------------------------
1994 1993 1992
------------ ----------- -----------
<S> <C> <C> <C>
Net sales $449,297 $398,011 $337,786
Cost of sales 287,389 242,108 201,991
Selling and administrative expenses 61,427 56,413 50,305
Litigation settlement and other (Notes 2, 14) 4,478 - -
Stock and other compensation expense (Note 4) - - 13,060
Research and development expenses, net 13,090 11,393 8,453
------------ ----------- -----------
Operating income 82,913 88,097 63,977
Interest expense 22,480 25,436 35,348
Interest earned and other (1,911) (3,630) (3,390)
------------ ----------- -----------
Income from continuing operations before income
taxes, minority interests, and extraordinary loss 62,344 66,291 32,019
Income taxes 18,737 24,056 22,269
Minority interests 12,693 13,275 10,974
------------ ----------- -----------
Income (loss) from continuing operations before
extraordinary loss and accounting change 30,914 28,960 (1,224)
Loss from discontinued operation, net of
income taxes (Note 5) - (647) (16,538)
------------ ----------- -----------
Income (loss) before extraordinary loss
and accounting change 30,914 28,313 (17,762)
Extraordinary loss from debt extinguishments (Note 9) (15,820) (8,392) (2,067)
Cumulative effect of accounting change (Notes 6, 11) - 974 (4,917)
------------ ----------- -----------
Net income (loss) 15,094 20,895 (24,746)
Preferred stock dividends - - 6,372
------------ ----------- -----------
Net income (loss) attributable to common
shares (Note 4) $15,094 $20,895 $(31,118)
============ =========== ===========
Per Common Share Data:
Income (loss) from continuing operations $1.27 $1.20 $(0.50)
Loss from discontinued operations - (0.03) (1.09)
Extraordinary loss (0.65) (0.35) (0.14)
Accounting change - 0.04 (0.32)
------------ ----------- -----------
Net income (loss) per common share (Note 4) $0.62 $0.86 $(2.05)
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
22
<PAGE> 24
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In thousands)
As of March 31,
---------------------------
1994 1993
--------- ---------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 16,576 $ 30,389
Short-term investments 6,041 3,476
Receivables, less reserves of: 1994 - $2,900,000;
1993 - $2,300,000 98,775 80,537
Inventories 56,492 48,310
Other current assets 5,260 4,573
--------- ---------
183,144 167,285
--------- ---------
PROPERTY:
Property, plant and equipment, at cost 284,992 243,538
Accumulated depreciation (63,277) (48,987)
--------- ---------
221,715 194,551
--------- ---------
OTHER ASSETS:
Intangibles, net of amortization 188,396 155,595
Deferred financing fees, net of amortization 1,658 4,407
Other assets 18,501 10,346
--------- ---------
208,555 170,348
--------- ---------
$613,414 $532,184
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 3,936 $ 2,465
Accounts payable 52,086 41,557
Accrued liabilities 36,802 34,410
Accrued income taxes 1,967 7,336
--------- ---------
94,791 85,768
--------- ---------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 187,949 141,151
Other long-term liabilities 49,865 38,812
Deferred income taxes 30,745 31,083
Minority interests in subsidiaries 35,354 32,369
--------- ---------
303,913 243,415
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY (Note 4):
Preferred stock, 500,000 shares authorized, none
issued (Note 2) - -
Common stock, $.01 par value, 50,000,000 shares authorized,
shares issued: 1994 - 23,287,043; 1993 - 23,261,436 233 233
Additional paid-in capital 234,157 233,511
Retained deficit (9,857) (24,951)
Currency translation adjustment (9,823) (5,792)
--------- ---------
214,710 203,001
--------- ---------
$613,414 $532,184
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
23
<PAGE> 25
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
For the years ended March 31,
------------------------------------------
1994 1993 1992
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $15,094 $20,895 $(24,746)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 17,121 16,530 13,629
Amortization of intangible assets 5,519 4,325 4,304
Amortization of deferred financing costs and debt discount 1,330 1,823 2,007
Minority interests in net income 12,693 13,275 10,974
Deferred tax provision and other 2,631 1,682 2,359
Extraordinary loss from debt extinguishments (Note 9) 15,820 8,392 2,067
Loss from discontinued operation (Note 5) - 647 16,657
Stock option and other compensation expense (Note 4) - - 13,060
Cumulative effect of accounting change - (974) 4,917
Increase in receivables (12,458) (16,160) (14,187)
Increase in inventories and other current assets (8,056) (6,161) (5,881)
Increase (decrease) in accounts payable and accrued expenses (1,972) 1,699 11,374
------- ------- --------
Net cash provided by operating activities 47,722 45,973 36,534
------- ------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (39,503) (33,192) (20,947)
Acquisition of businesses, net of cash acquired (Note 3) (33,761) - -
Proceeds from sales of plant and equipment 1,859 187 564
Proceeds from disposition of subsidiary - 28,047 -
Other (3,279) 1,221 85
------- ------- --------
Net cash used by investing activities (74,684) (3,737) (20,298)
------- ------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock - - 195,471
Purchases of exchangeable preferred stock - - (58,686)
Proceeds from issuance of 6 3/4% Senior Notes (Note 9) 99,268 - -
Defeasance of 14% Senior Subordinated Debentures (Note 9) (141,546) - -
Proceeds from other long-term borrowings 109,788 34,609 9,082
Other long-term debt retirements and payments (47,608) (80,177) (127,167)
Short-term borrowings, net 642 (726) (11,897)
Cash dividends paid to minority shareholders of subsidiaries (7,022) (9,979) (8,022)
------- ------- --------
Net cash provided (used) by financing activities 13,522 (56,273) (1,219)
------- ------- --------
Effect of currency translation on cash and cash equivalents (373) (335) 317
------- ------- --------
Net increase (decrease) in cash and cash equivalents (13,813) (14,372) 15,334
------- ------- --------
Cash and cash equivalents, beginning of period 30,389 44,761 29,427
------- ------- --------
Cash and cash equivalents, end of period $16,576 $30,389 $44,761
======= ======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
24
<PAGE> 26
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
For the years ended March 31,
-------------------------------------------------
1994 1993 1992
--------- ----------- ----------
<S> <C> <C> <C>
COMMON STOCK (Note 4):
Balance at beginning of period $233 $232 $20
Stock split - - 69
Issuance of common stock, including stock options exercised - 1 115
Conversions of preferred stock - - 28
---------- ---------- ----------
Balance at end of period $233 $233 $232
========== ========== ==========
SERIES B PREFERRED STOCK (Note 4):
Balance at beginning of period - - $40,858
Conversions to common stock - - (40,858)
---------- ---------- ----------
Balance at end of period - - -
========== ========== ==========
ADDITIONAL PAID-IN CAPITAL (Note 4):
Balance at beginning of period $233,511 $232,935 $ 12,834
Stock options exercised, net of related tax effects 140 576 -
Issuance of common stock, net of expenses - - 194,123
Stock split - - (69)
Conversions of preferred stock - - 49,830
Compensation related to stock options 506 - 12,343
17% Senior cumulative exchangeable preferred stock:
Stock redeemed - - (29,754)
Stock dividends - - (5,336)
Accretion - - (1,036)
---------- ---------- ----------
Balance at end of period $234,157 $233,511 $232,935
========== ========== ==========
RETAINED DEFICIT:
Balance at beginning of period $(24,951) $(45,846) $(21,100)
Net income (loss) 15,094 20,895 (24,746)
---------- ---------- ----------
Balance at end of period $(9,857) $(24,951) $(45,846)
========== ========== ==========
CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period $(5,792) $4,313 $2,970
Adjustment for the period (4,031) (10,105) 1,343
---------- ---------- ----------
Balance at end of period $(9,823) $(5,792) $4,313
========== ========== ==========
TOTAL SHAREHOLDERS' EQUITY $214,710 $203,001 $191,634
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE> 27
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated statement of financial position as of March 31, 1994 and 1993,
and the consolidated statements of operations, shareholders' equity and cash
flows for the years ended March 31, 1994, 1993, and 1992 include the accounts
of R.P. Scherer Corporation (the "Company" and formerly RPS Corporation), a
Delaware corporation, and its wholly-owned subsidiary, R.P. Scherer
International Corporation ("Scherer International" and formerly R.P. Scherer
Corporation). The Company's only operating asset is the common stock of
Scherer International.
2. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Company in preparing the consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all of its direct and indirect domestic and foreign subsidiaries, some of which
are less than wholly-owned. All intercompany accounts and transactions have
been eliminated.
Revenue Recognition and Concentration of Credit Risk
Revenues from sales of the Company s products to its customers are recognized
primarily upon shipment of such products. The majority of the Company's
customers are concentrated in the pharmaceutical, health and nutritional, and
cosmetic markets.
Translation of Foreign Currencies
With the exception of operations in highly inflationary economies, which are
measured in U.S. dollars, the financial position and the results of operations
of the Company's foreign operations are measured using the local currencies of
the countries in which they operate and are translated into U.S. dollars in
conformity with Statement of Financial Accounting Standards No. 52, Foreign
Currency Translation. Accordingly, the reported sales and net income of the
Company's foreign subsidiaries are affected by changes in foreign currency
exchange rates, and as compared to prior periods are reported at higher or
lower amounts depending upon a weakening or strengthening of the U.S. dollar.
Aggregate sales of operations in highly inflationary economies represented less
than 5% of consolidated sales for each period presented in the consolidated
statement of operations.
Borrowings under any long-term foreign currency loans are used to hedge against
declines in the value of net investments in certain foreign subsidiaries. The
Company also periodically enters into foreign exchange contracts to hedge
certain exposures related to foreign currency transactions, and does not engage
in speculation. Gains and losses on the forward contracts are recognized
concurrently with the gains or losses from the underlying transactions. At
March 31, 1994, the Company was party to foreign currency forward exchange
sales contracts of approximately $10.9 million (notional amount) denominated in
European currencies. The contracts generally mature in less than one year and
are intended to hedge various foreign currency commitments due from foreign
subsidiaries. The Company is exposed to credit loss in the event of
nonperformance by the counterparties of these agreements, but does not
anticipate any such nonperformance.
26
<PAGE> 28
Foreign currency exchange and translation adjustments (reflecting primarily the
translation of net assets at historical exchange rates for operations in highly
inflationary economies) included in net income resulted in net decreases in
income of $7.1 million, $3.5 million, and $1.4 million for the years ended
March 31, 1994, 1993 and 1992, respectively.
Litigation Settlement and Other
In the fourth quarter of fiscal year 1994, the Company recognized a pretax
charge in the amount of $4.5 million as a result of the accrual of a potential
settlement for pending Paco Development Partners II ("PDP II") litigation (see
Note 14 for discussion) and a decision made by the Company to relocate its
Australian production operations. The Company has purchased a new facility in
Australia, and recognized a charge to operations of approximately $1.3 million
representing the anticipated costs of disposal related to the existing facility
and land.
Cash and Cash Equivalents and Short-Term Investments
The carrying value of cash and cash equivalents and short-term investments
approximates fair value due to the short maturities of these instruments. For
purposes of reporting cash flows, all highly liquid investments which are
readily convertible to known amounts of cash and have an original maturity of
three months or less when purchased are considered cash equivalents.
Inventories
Inventories are stated at the lower of cost or market with cost determined on a
first-in, first-out basis for substantially all inventories. Market is the
lower of replacement cost or estimated net realizable value. Finished goods
and work-in-process inventories include material, labor and manufacturing
overhead costs. The components of inventories are as follows:
<TABLE>
<CAPTION>
(In thousands) 1994 1993
------- -------
<S> <C> <C>
Raw materials and supplies $26,760 $23,881
Work in process 10,289 7,365
Finished goods 19,443 17,064
------- -------
$56,492 $48,310
======= =======
</TABLE>
Property, Plant & Equipment
Property, plant and equipment is recorded at cost and is depreciated over
related estimated useful lives primarily using the straight-line method for
financial reporting and accelerated methods for tax reporting. Maintenance and
repair costs are expensed as incurred. Upon sale or retirement, property cost
and related depreciation is eliminated, and resulting gains or losses are
reflected in income. Interest cost capitalized as part of the construction
cost of capital assets amounted to $0.9 million in fiscal 1994, and was not
significant in fiscal 1993 and 1992. A summary of property follows:
<TABLE>
<CAPTION>
(In thousands) 1994 1993
--------- --------
<S> <C> <C>
Land and improvements $16,844 $16,932
Building and equipment 68,767 61,302
Machinery and equipment 174,203 151,828
Construction in progress 25,178 13,476
--------- --------
$284,992 $243,538
========= ========
</TABLE>
27
<PAGE> 29
Intangibles and Deferred Financing Fees
Intangibles include principally goodwill (consisting of purchase price and
related acquisition costs in excess of the fair value of identifiable net
assets of businesses acquired, primarily related to the acquisition of the
Company in June 1989 and the acquisition of Pharmagel on July 1, 1993) as well
as other intangible assets. Intangibles are being amortized on a straight-line
basis over their estimated useful lives, ranging from 5 to 40 years. The
accumulated amortization of intangibles is $21.5 million and $15.9 million as
of March 31, 1994 and 1993, respectively. Deferred financing fees are
amortized over the life of the related obligations using the effective interest
method. The accumulated amortization of deferred financing fees is $0.1
million and $9.7 million as of March 31, 1994 and 1993, respectively.
Research and Development Costs
Costs incurred in connection with the development of new products and
manufacturing methods are charged to income as incurred. Customer
reimbursements in the amount of $2.9 million, $1.1 million and $3.1 million
were received for the fiscal years ended March 31, 1994, 1993, and 1992,
respectively. The amounts reflected in the consolidated statement of
operations are net of such reimbursements.
Income Taxes
Deferred U.S. and foreign income taxes are provided on earnings of subsidiary
companies which are intended to be remitted to the parent company in the
future, based on enacted tax laws and rates. Unremitted earnings on which
deferred taxes have not been provided would, if remitted, be taxed at
substantially reduced effective rates due to the utilization of available
foreign tax credits.
Earnings Per Share
The computation of earnings per share is based on net income or loss less
preferred stock dividends and accretion between the fair value at the date of
issuance and the stated value of preferred stock (Note 4) divided by the
weighted average number of shares of common stock and dilutive common stock
equivalents (consisting solely of stock options) outstanding of 24,387,791,
24,223,059 and 15,202,793 for the years ended March 31, 1994, 1993, and 1992.
For fiscal year 1992, such amounts are restated to give effect to a 4.35:1
stock split in October 1991 (Note 4). In addition, common stock equivalents
were anti-dilutive for the 1992 fiscal year, and were therefore excluded from
the computation.
Preferred Stock
The Company is authorized to issue 500,000 shares of preferred stock in one or
more series, and to fix as to any series the dividend rate, redemption prices,
preferences in liquidation or dissolution, sinking fund terms, if any,
conversion rights, voting rights and any other preference or special rights and
qualifications. The issuance of preferred stock in certain circumstances may
have the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Company's common stock at a premium over
the market price of the common stock, and may adversely affect the market price
of and other rights of the holders of common stock. The Company has no present
plans to issue any shares of preferred stock.
Reclassifications
Certain items in the prior years' financial statements and notes thereto have
been reclassified to conform with the current year presentation.
28
<PAGE> 30
3. ACQUISITIONS
On July 1, 1993, the Company acquired all outstanding capital stock of
Pharmagel S.p.A. (Italy) and Pharmagel S.A. (France) (jointly "Pharmagel"), a
manufacturer of softgels which had been privately held. The Company accounted
for the acquisition as a purchase for financial reporting purposes, and has
included the net assets and results of operations of Pharmagel in the Company's
consolidated financial statements beginning July 1, 1993. The aggregate
purchase price, which approximated $30 million, was allocated to assets and
liabilities based on estimates of their fair values as of the date of
acquisition, as well as to a $3.0 million non-compete agreement with the former
owners of Pharmagel. The purchase was funded primarily by borrowings under the
Company's bank credit facility, plus an additional amount payable to the
sellers during the next six years not to exceed $4.5 million plus interest.
Approximately $28.2 million of estimated tangible assets were acquired, and
approximately $24.4 million of estimated liabilities were assumed. The
purchase price exceeded the preliminary estimated fair value of the net assets
acquired by approximately $26.2 million, which is classified as goodwill in the
accompanying statement of financial position and is being amortized on a
straight-line basis over forty years. A final allocation of the purchase price
will be determined during fiscal 1995 when appraisals and other studies are
completed.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company and Pharmagel as if the acquisition had occurred at
the beginning of the periods presented after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense on
acquisition borrowings, and related income tax effects. The pro forma
information is not necessarily indicative of what would have occurred had the
acquisition been made as of those dates, and is not intended to be a projection
of future results or trends.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) For the year ended
March 31,
-------------------------
1994 1993
-------- --------
<S> <C> <C>
Net sales $456,434 $426,498
Income from continuing operations 30,767 27,972
Net income 14,947 19,907
Earnings per share from continuing operations 1.26 1.16
Net income per share 0.61 0.82
</TABLE>
As of September 1, 1993, the Company also acquired certain tangible and
intangible assets of Gayoso Wellcome S.A., a softgel manufacturer in Spain, for
a purchase price of approximately $9.5 million. Gayoso Wellcome's operations
are not material in relation to the Company's consolidated financial
statements, and pro forma information for this acquisition is therefore not
presented.
4. SALE OF COMMON STOCK AND RELATED TRANSACTIONS
October 1992 Offering
In October 1992, the Company completed a secondary offering of 3.5 million
shares of its common stock. The shares were sold by Shearson Lehman Brothers
Holdings Inc. and certain affiliated merchant banking partnerships
(collectively "Lehman"). The offering did not result in any additional shares
outstanding of the Company's common stock, and the Company did not receive any
proceeds from the sale. Subsequent to completion of the offering, Lehman's
beneficial ownership amounted to approximately 30% of common shares outstanding
(see Note 13).
29
<PAGE> 31
October 1991 Offering
In October 1991, the Company completed a public sale of 11.5 million shares of
its common stock, representing approximately 47% of the Company's common equity
on a fully diluted basis. Net proceeds realized were approximately $195.5
million, of which approximately $124.0 million was used in October 1991 to
repurchase long-term debt under the Company's former senior bank credit
agreement and $58.7 million was used in November 1991 to redeem all outstanding
shares of the Company's 17% Exchangeable Preferred Stock. Remaining funds were
used for general corporate purposes. In connection with and upon consummation
of the common stock sale, all shares of the Company's Series B and Series C
preferred stocks were converted into common stock at the ratio of five (5)
common shares for nine (9) preferred shares (based upon the ratio of the
liquidation value of preferred shares to the initial public offering price) and
previously existing common shares were converted at the ratio of 4.35:1.
The Exchangeable Preferred Stock was reflected in the consolidated statement of
shareholders equity at fair value as of the date of issuance plus stock
dividends and accretions computed using the effective interest rate method.
The difference between the carrying value of the Exchangeable Preferred Stock
and its redemption costs was reflected as a charge to additional paid-in
capital. During calendar year 1992, the Securities and Exchange Commission
staff implemented a policy which would have required the difference between the
redemption price and carrying value of the Exchangeable Preferred Stock,
amounting to $29.8 million, to be reflected as an increase to net loss
attributable to common shares. If such policy had been applied in connection
with the November 1991 redemption of Exchangeable Preferred Stock, net loss
attributable to common shares for the year ended March 31, 1992 would have
increased to $(60.9) million, or $(4.01) per common share, from the reported
$(31.1) million, or $(2.05) per common share.
Also in connection with the common stock sale, the vesting periods for certain
management stock options were accelerated. Additionally, notes receivable
aggregating $400,000 from certain officers were canceled upon completion of the
common stock sale (Note 13). The year ended March 31, 1992 reflects a one-time
$12.3 million non-cash charge for compensation expense relating to these items.
The Company also recorded an extraordinary loss in the amount of $2.1 million
for the year ended March 31, 1992 relating to the early retirement of the
long-term debt, representing a write-off of unamortized deferred financing
costs associated with the debt.
5. DISCONTINUED OPERATION
In August 1991, the Company's Board of Directors reached a decision to dispose
of Paco Pharmaceutical Services, Inc. ("Paco"), through an active program to
sell the stock or substantially all assets of Paco. Accordingly, the operating
results of Paco have been classified as discontinued operations in the
accompanying consolidated financial statements and notes thereto for all years
presented. During the fiscal year ended March 31, 1992, an estimated loss from
disposal of $16.7 million, which represented a write-down of Paco's goodwill,
was recorded by the Company. No income tax benefit was recorded during fiscal
1992, as its realization could not be assured.
On August 26, 1992, Paco completed an initial public offering of its common
stock as a result of which the Company's ownership of Paco's common stock was
reduced to less than 1% of the outstanding stock. In the offering, Paco sold
4,000,000 shares of its common stock for aggregate net proceeds of
approximately $36.5 million. With the proceeds of such offering, Paco paid
$28.0 million to the Company in connection with the satisfaction of an
intercompany promissory note. In connection with the offering, the Company
agreed to indemnify Paco for any liabilities and costs incurred subsequent to
March 31, 1992, related to the litigation involving Paco specifically described
in Note 14. In addition, the Company has indemnified Paco for any additional
U. S. Federal and state income tax liabilities arising from the date of the
Company's acquisition of Paco through the date of completion of the offering.
The Company recorded an additional $0.6 million loss in connection with the
final accounting for the disposition of Paco, representing the after-tax
difference between net proceeds received and the Company's carrying value of
Paco as of August 26, 1992.
30
<PAGE> 32
For the fiscal year beginning April 1, 1992 through August 26, 1992 (the "date
of disposal"), Paco recognized net sales of $30.2 million, interest expense
(allocated portion of consolidated interest expense based on debt attributable
to Paco) of $1.1 million, income tax expense of $1.0 million, and no net
income. For the fiscal year ended March 31, 1992, Paco recognized net sales of
$69.9 million, interest expense (as derived above) of $4.0 million, income
taxes of $0.5 million, and net income of $0.1 million.
Net current assets of $3.2 million and net non-current assets of $25.5 million
were disposed of through the sale of Paco. The consolidated statement of cash
flows excludes Paco's net cash provided (used) of ($0.6) million and $0.8
million for the fiscal years ended March 31, 1993 and 1992, respectively.
6. INCOME TAXES
Effective April 1, 1992, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
SFAS 109 requires that deferred income taxes reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities and
the financial reporting amounts. Prior to fiscal year 1992, provisions were
made for deferred income taxes where differences existed between the time that
transactions affected taxable income and the time that these transactions
entered into the determination of income for financial reporting purposes. As
of April 1, 1992, the Company recorded income of approximately $1.0 million, or
$0.04 per share, which represented the net decrease in deferred tax liabilities
resulting from the adoption of SFAS 109. Such amount was reflected in the
consolidated statement of operations as the cumulative effect of an accounting
change. Prior years' financial statements have not been restated to apply the
provisions of SFAS 109.
A summary of income (loss) from continuing operations before income taxes,
minority interests and extraordinary items is as follows:
<TABLE>
<CAPTION>
(In thousands) For the years ended March 31,
----------------------------------------------
1994 1993 1992
------- ------- --------
<S> <C> <C> <C>
Income (loss) from continuing operations
before income taxes, minority interest
and extraordinary items:
United States $1,505 $ 3,194 $(26,408)
Foreign 60,839 63,097 58,427
------- ------- --------
$62,344 $66,291 $32,019
======= ======= ========
</TABLE>
Such income is exclusive of various intercorporate income/expense items, such
as royalties, interest, dividends and similar items, which are
taxable/deductible in the respective locations. Therefore, the relationship of
domestic and foreign taxes to reported domestic and foreign income is not
representative of actual tax rates.
<TABLE>
<CAPTION>
(In thousands) For the years ended March 31,
-----------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Provision (credit) for currently payable
income taxes:
United States $ 1,120 $ 1,570 $ (127)
Foreign 17,453 21,442 20,924
-------- -------- --------
18,573 23,012 20,797
-------- -------- --------
Provision (credit) for deferred
income taxes:
United States (21) (125) -
Foreign 185 1,169 1,472
-------- -------- --------
164 1,044 1,472
-------- -------- --------
Total taxes $18,737 $24,056 $22,269
======== ======== ========
</TABLE>
31
<PAGE> 33
The deferred tax provision for fiscal year 1994 includes a credit of $1.7
million from net reductions in enacted statutory tax rates in certain
countries, as well as a $0.8 million charge resulting from an increase in
deferred tax valuation allowances during the period. The deferred tax
provision for fiscal year 1993 includes a charge of $4.5 million resulting from
increases in deferred tax valuation allowances during the period. In fiscal
year 1992, the primary sources and tax effects of the deferred tax timing
differences were depreciation and property retirements ($1.2 million) and
interest ($0.3 million).
The components of deferred taxes as of March 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1994 1993
-------------------------------- --------------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Property, plant and equipment $ 852 $35,974 $ - $35,611
Foreign tax credit carryforwards 9,050 - 10,542 -
Capital loss carryforwards 6,379 - 5,953 -
Pensions and other postretirement
benefits 5,782 1,299 5,501 1,500
Stock options 3,665 - 3,679 -
Defeasance of debt (Note 9) 4,758 - - -
Miscellaneous other 8,678 790 6,168 702
------------- ------------ ------------ ------------
Subtotal 39,164 38,063 31,843 37,813
Valuation allowances (25,390) - (23,777) -
------------- ------------ ------------ ------------
Total deferred taxes $13,774 $38,063 $ 8,066 $37,813
============= ============ ============ ============
</TABLE>
At March 31, 1994, net current future tax benefits of $1.8 million were
included in other current assets, while $0.1 million of net current deferred
tax liabilities were included in accrued liabilities in the accompanying
consolidated statement of financial position. In addition, $4.8 million of net
long-term future tax benefits were included in other assets, and $30.7 million
of net long-term deferred tax liabilities are reflected in that statement. At
March 31, 1993, net current future tax benefits of $1.5 million were included
in other current assets, while $0.1 million of net current deferred tax
liabilities were included in accrued liabilities in the accompanying
consolidated statement of financial position. In addition, $31.1 million of
net long-term deferred tax liabilities are included in deferred income taxes in
that statement.
The difference between consolidated income taxes as computed at the United
States statutory rate and as reported in the consolidated statement of
operations is summarized as follows:
<TABLE>
<CAPTION>
For the years ended March 31,
----------------------------------------------
(In thousands) 1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
United States statutory tax $21,820 $22,539 $10,886
Increases (reductions) in taxes due to:
Difference in effective foreign tax rates (2,467) 1,590 4,840
Foreign tax credit carryforwards
(utilized) generated (1,803) 2,388 -
Stock option compensation 115 124 4,290
Domestic losses - - 799
Goodwill amortization 1,490 1,252 1,291
Translation losses (595) (1,752) 407
Changes in valuation allowances
and other items, net 177 (2,085) (244)
------- ------- -------
Consolidated income taxes $18,737 $24,056 $22,269
======= ======= =======
</TABLE>
The capital loss carryforwards noted above expire in 1998. The foreign tax
credit carryforwards noted above expire through 1998. At March 31, 1994,
foreign earnings of approximately $69.7 million have been retained indefinitely
by subsidiaries for reinvestment, and accordingly no provision is made for
income taxes that would be payable upon the distribution of such earnings. It
is not practicable to determine the amount of the related unrecognized deferred
income tax liability, if any.
32
<PAGE> 34
The Company's U.S., Australian, and certain German income tax returns are
undergoing routine reviews encompassing several fiscal years. Various open
issues involving the U.S. tax returns are awaiting final resolution with the
Internal Revenue Service, however, the Company believes that the impact of the
resolution of such issues will not be material to its financial position.
While the Company has not received any formal notification from either the
Australian or German tax authorities, preliminary communications indicate the
Company's positions on deductibility of certain expenses may be challenged.
Based upon review of these issues by management and legal and tax advisors, the
Company does not believe the ultimate outcome of these matters will have a
material adverse impact on its business or financial position.
Income tax payments, net of refunds, were $18.9 million, $22.5 million and
$12.3 million for the years ended March 31, 1994, 1993 and 1992.
7. ACCRUED AND OTHER LONG-TERM LIABILITIES
Accrued and other long-term liabilities consist of the following as of March
31, 1994 and 1993:
<TABLE>
<CAPTION>
(In thousands) 1994 1993
-------- -------
<S> <C> <C>
Accrued Liabilities:
Salaries, wages and bonuses $11,606 $ 8,994
Interest 1,695 7,780
Other 23,501 17,636
-------- -------
$36,802 $34,410
======== =======
Other Long-Term Liabilities:
Pension and welfare benefits
(Note 11) $28,808 $27,836
Postretirement benefits (Note 11) 5,968 5,534
Other 15,089 5,442
-------- -------
$49,865 $38,812
======== =======
</TABLE>
8. SHORT-TERM BORROWINGS AND LINES OF CREDIT
The Company has short-term line of credit arrangements with foreign banking
institutions whereunder, at March 31, 1994, the Company and its subsidiaries
may borrow up to approximately $15.5 million subject to limitations imposed by
the bank credit facility (Note 9). There are no compensating balance
requirements related to these lines of credit. The total indebtedness
outstanding under such arrangements was $2.6 million and $1.1 million at March
31, 1994 and 1993, respectively.
Short-term borrowings, based on the amounts outstanding at the end of each
month, were as follows:
<TABLE>
<CAPTION>
(In thousands) As of March 31,
----------------------------------------------
1994 1993 1992
------- ------- --------
<S> <C> <C> <C>
Maximum amount outstanding $2,607 $1,551 $10,374
Average amount outstanding 2,052 1,163 5,212
Weighted average interest rate
during the year 9.0% 7.9% 10.3%
Weighted average interest rate at
March 31 8.5% 7.5% 9.3%
</TABLE>
33
<PAGE> 35
9. LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1994 and 1993:
<TABLE>
<CAPTION>
(In thousands) 1994 1993
-------- --------
<S> <C> <C>
Senior notes (net of discount of $723 in 1994) $99,277 $ -
Borrowings under bank credit agreement 65,842 2,270
Senior subordinated debentures (net of
discount of $5,482 in 1993) - 119,656
Capitalized lease obligations (Note 10) 1,398 10,485
Industrial development revenue bonds 10,922 8,561
Other 11,838 1,536
-------- --------
189,277 142,508
Less - current portion (1,328) (1,357)
-------- --------
$187,949 $141,151
======== ========
</TABLE>
In January 1994, Scherer International completed a public offering of $100
million aggregate principal amount of its 6 3/4% Senior Notes ("Senior Notes")
due February 1, 2004 ("Offering"). The Senior Notes are noncallable and are
unsecured obligations, ranking pari passu with all other unsecured and senior
indebtedness of Scherer International. Interest on the Senior Notes is payable
February 1 and August 1, commencing August 1, 1994. The indenture under which
the Senior Notes were issued contains certain covenants which, among other
things, limit the ability of the Company and its subsidiaries to incur liens,
to enter into sale and lease-back transactions, to engage in certain
transactions with affiliates, and to merge or consolidate with, or transfer all
or substantially all, of its assets to another person. The proceeds of the
Offering to the Company were $99.3 million.
On January 28, 1994, with the net proceeds from the Offering and additional
proceeds from borrowings under the Company's bank credit facility, the Company
defeased its 14% Senior Subordinated Debentures ("Subordinated Debentures"),
which have an outstanding principal amount of $125.1 million. The Company
deposited into an irrevocable trust account for the benefit of the holders of
the Subordinated Debentures an amount of United States government obligations
sufficient to pay, with respect to the Subordinated Debentures, all interest
thereon through the November 1, 1994 call date ("Call Date"), the call premium
thereon and the outstanding principal thereof when due upon redemption
("Defeasance"). The Company remains obligated to pay interest and principal on
the Subordinated Debentures when due but, subject to certain exceptions, is no
longer subject to the terms, agreements and covenants related to the
Subordinated Debentures.
As a result of the Defeasance, the Company recognized an extraordinary loss of
$15.5 million ($0.64 per share) in the quarter ended December 31, 1993,
reflecting the estimated after-tax difference between the recorded value of the
Subordinated Debentures and their face value, the call premium, the prepayment
of net interest through the Call Date, and the write-off of unamortized
deferred financing costs related to the Subordinated Debentures. The Company
also recognized future tax benefits of approximately $4.8 million related to
the Defeasance.
In March 1994, the Company entered into a new bank credit facility as a
replacement for the Company's previous bank credit agreement. The new credit
facility allows for revolving credit borrowings up to an aggregate of $175.0
million, in various currencies, and expires April 1, 1999. Interest is payable
quarterly at LIBOR plus .675% currently, with further reductions possible based
on certain financial performance criteria, or at the bank's prime rate. Unused
borrowing availability is subject to annual commitment fees of 1/4%.
Borrowings under this agreement are unsecured, and rank pari passu with all
other unsecured and senior indebtedness of Scherer International. In
connection with the new credit facility, the Company recognized a $0.3 million
extraordinary loss, reflecting the write-off of unamortized deferred financing
costs related to the former credit agreement, net of $0.1 million tax effects.
34
<PAGE> 36
The bank credit facility requires the Company to satisfy various annual and
quarterly financial tests, including maintenance on a consolidated basis of a
specified minimum or maximum current level of tangible net worth and cash flow
coverage, leverage, and fixed charge ratios. The agreement also restricts the
Company's ability to incur additional indebtedness or liens, make investments
and loans, dispose of assets, or engage in certain business combinations, and
limits the ability of the Company to pay dividends. The indenture under which
the Senior Notes were issued also restricts the Company's ability to incur
additional liens, enter into sale-leaseback transactions, engage in certain
transactions with affiliates, and engage in certain business combinations. As
of March 31, 1994, the Company does not currently have plans to declare or pay
any cash dividends.
The Company has variable interest rate industrial development revenue bonds
aggregating $10.9 million due through fiscal years ending in 2015. The
interest rates in effect at March 31, 1994, ranged from 4.6% to 4.8%.
The annual maturities of long-term debt, excluding amounts payable under
capitalized lease obligations, for the five succeeding fiscal years are: 1995
- - - - $1.3 million; 1996 - $1.3 million; 1997 - $2.1 million; 1998 - $0.8 million;
and 1999 - $0.6 million. Interest paid was $28.1 million, $23.7 million, and
$45.0 million for the years ended March 31, 1994, 1993, and 1992, respectively.
The fair value of the Senior Notes, estimated based on quoted market prices as
of March 31, 1994, was approximately $88.5 million. Fair values of other
long-term debt, determined based on interest rates that are currently available
to the Company for similar types of borrowings, approximate carrying value.
10. LEASES
Total rental expense under operating leases was $7.1 million, $7.6 million, and
$7.5 million for the years ended March 31, 1994, 1993, and 1992, respectively.
The present value of capitalized lease obligations is classified as long-term
debt and the related assets are classified as land, buildings and equipment.
As of March 31, 1994, the minimum rental commitments under long-term operating
and capitalized leases are as follows:
<TABLE>
<CAPTION>
(In thousands) Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1995 $ 229 $ 6,019
1996 174 5,913
1997 174 5,606
1998 174 5,109
1999 174 4,890
2000 and thereafter 1,529 36,145
------- ---------
2,454 $63,682
Less - amount representing interest (1,056) =========
-------
Present value of net minimum lease payments $1,398
=======
</TABLE>
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pensions
The Company has several pension plans covering substantially all salaried and
hourly employees. In general, the Company's domestic plans provide defined
pension benefits based on years of service and the level of compensation.
Foreign subsidiaries provide for pension benefits in accordance with local
customs or law. The
35
<PAGE> 37
Company funds its pension plans at amounts required by the applicable
regulations. Pension expense included the following:
<TABLE>
<CAPTION>
(In thousands) For the years ended March 31,
------------------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Service cost of benefits earned during year $3,255 $2,474 $1,965
Interest cost on projected benefit obligation 4,191 3,665 3,217
Actual return on plan assets (3,602) (2,633) (2,475)
Net amortization and deferral 774 705 338
--------- --------- ---------
$4,618 $4,211 $3,045
========= ========= =========
</TABLE>
The following table shows the status of the various plans and amounts included
in the Company's consolidated statement of financial position as of March 31,
1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---------------------------------- ---------------------------------
(In thousands) Plans whose Plans whose Plans whose Plans whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $4,723 $41,507 $4,479 $31,865
Non-vested benefit obligation 293 4,331 122 4,509
---------- ---------- ---------- -----------
Accumulated benefit 5,016 45,838 4,601 36,374
obligation
Effects of anticipated future
compensation increases 987 8,228 1,168 7,350
---------- ---------- ---------- -----------
Projected benefit 6,003 54,066 5,769 43,724
obligation
Plan assets at fair value 9,504 18,576 8,660 12,773
---------- ---------- ---------- -----------
Projected benefit
obligation in (3,501) 35,490 (2,891) 30,951
excess of (less than)
plan assets
Unamortized net gain (loss) 44 (5,794) (858) (2,576)
Unrecognized prior service cost (152) (386) (180) (430)
---------- ---------- ---------- -----------
Accrued pension (asset)
liability recorded in the
consolidated statement
of financial position $(3,609) $29,310 $(3,929) $27,945
========== ========== ========== ===========
</TABLE>
Plan assets consist primarily of annuities, marketable securities and mortgage
notes receivable.
The average of the assumptions used as of March 31, 1994, 1993 and 1992 in
determining the pension expense and benefit obligation information shown above
were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------- ------
<S> <C> <C> <C> <C> <C>
Discount rate 7.4% 8.0% 8.4%
Rate of compensation increase 5.0 5.0 5.0
Long-term rate of return on plan assets 9.9 9.9 10.5
</TABLE>
Postretirement and Other Benefits
In fiscal year 1992, the Company adopted Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS 106") effective as of April 1, 1991. SFAS 106 requires that
the expected cost of postretirement benefits be charged to expense during the
years that eligible employees render service. Upon adoption of SFAS 106, the
Company charged the cumulative effect of the unfunded obligation of $4.9
million against earnings during 1992.
36
<PAGE> 38
The following table reconciles the status of the accrued postretirement
liability as of March 31 (based on January 1 measurement dates):
<TABLE>
<CAPTION>
(In thousands) 1994 1993
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,940 $4,408
Active employees 1,171 910
------- -------
Accumulated postretirement benefit obligation
in excess of plan assets 4,111 5,318
Unrecognized net gain (loss) 2,057 416
-------- --------
Accrued postretirement benefit liability
(including $200 in current $6,168 $5,734
liabilities) ======== ========
<CAPTION>
Net postretirement benefits cost for the years ended March 31, 1994, 1993 and
1992 included:
(In thousands) 1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Service cost $173 $129 $96
Interest cost on accumulated
postretirement benefit obligation 441 468 447
---------- ---------- ----------
Net postretirement benefit cost $614 $597 $543
========== ========== ==========
</TABLE>
For measurement purposes, an 11% annual rate of increase in the per capita
costs of covered health care claims was assumed for 1994, and 12% for 1993 and
1992. The rate was assumed to decrease by 1% in fiscal 1995 and each year
thereafter to a rate of 6% beyond 1999. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as
of the measurement date of January 1, 1994, by $514,500 and the aggregate of
the service and interest cost components of net postretirement cost for fiscal
1994 by $87,000. The discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% for fiscal 1994 and 8.25% for fiscal
1993.
In November 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits, which must be adopted for the Company's 1995 fiscal
year. This statement requires the use of the accrual method to recognize
liabilities for postemployment benefits. The Company has determined that the
adoption of this statement will not significantly affect the Company's future
financial results or position.
12. STOCK COMPENSATION PLANS
1992 Stock Option Plan
In February 1992, the Board of Directors approved a new management stock option
plan designed to provide key management personnel stock options for maximizing
shareholder value through improved Company financial performance. Under such
plan, management participants are required to purchase options for common stock
at a cost equal to 10% of an average market value per share at the beginning of
the fiscal year. The exercise price of such options is set at the average
beginning of the year common stock market value per share, net of the purchase
cost, increased by a 10% annual rate compounded over five years. The number of
stock options a participant is required to purchase is based upon a financial
performance formula established by the Compensation Committee of the Board of
Directors.
37
<PAGE> 39
As an added incentive to increase shareholder value, participants are provided
one standard stock option for each purchased stock option. Each standard stock
option is exercisable at an average market value per share at the beginning of
the fiscal year, and may only be exercised when the purchased option is
exercised. Both types of options vest after three years from the date of
grant, and expire four years after the date of vesting.
A total of 334,877 stock options were granted for fiscal 1994. For such
grants, the purchased options, costing $2.77 each, will be exercisable at
$40.07 per share, and the standard options will be exercisable at $27.65 per
share. Compensation expense of $0.3 million was recorded for fiscal 1994 in
connection with the 1992 Stock Option Plan.
A total of 325,981 stock options were granted for fiscal 1993. For fiscal 1993
grants, the purchased options, costing $2.74 each, will be exercisable at
$39.67 per share, and the standard options will be exercisable at $27.38 per
share. No compensation expense was recorded for fiscal 1993 in connection with
this plan.
A total of 381,452 stock options were granted for fiscal 1992. For fiscal 1992
grants, the purchased options, costing $1.80 each, will be exercisable at
$26.09 per share, and the standard options will be exercisable at $18.00 per
share. Compensation expense of $0.7 million was recorded for fiscal 1992 in
connection with this plan.
During 1994, none of the 1992 Plan options were exercised. As of March 31,
1994, a total of 157,690 options for common shares remain available for grant
for up to the next two fiscal years.
Director Stock Options
In fiscal 1992, a total of 36,000 options were granted to the Company's three
outside directors. These options are exercisable at $18.00 per share, vest
after three years from the date of grant, and expire seven years after the date
of vesting. None of these options were exercised in 1993 or 1994.
1990 Stock Option Plans
In November 1990 the Company implemented three stock option plans under which a
total of an adjusted 1,239,612 options for shares of the Company's common stock
were authorized for issuance to key management personnel. As a result of the
Company's sale of common stock in October 1991, all options granted under such
plans became fully vested (Note 4). Information on the number of shares under
option for the 1990 Plan, exercisable at $5.49 per share, is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
Number of shares under stock options - 1990 Plan:
Outstanding at beginning of year 1,099,272 1,204,225 1,159,111
Granted during year - - 45,114
Exercised (25,607) (104,953) -
----------- ----------- -----------
Outstanding at end of year 1,073,665 1,099,272 1,204,225
=========== =========== ===========
</TABLE>
The amounts set forth above are adjusted to reflect the 4.35:1 common stock
split and conversion of Series B Preferred Stock described in Note 4.
38
<PAGE> 40
13. RELATED PARTY TRANSACTIONS
Certain foreign subsidiaries purchase gelatin materials and Scherer
International's German subsidiary leases plant facilities, purchases other
services and receives loans from time-to-time from a German company which is
also the minority shareholder of the Company's German and certain other
European subsidiaries.
Gelatin purchases, at prices comparable to estimated market prices, amounted to
$18.7 million, $19.6 million, and $17.7 million for the years ended March 31,
1994, 1993, and 1992, respectively. Rental payments amounted to $4.7 million,
$4.7 million, and $4.4 million and purchased services amounted to $4.6 million,
$5.4 million, and $5.5 million for each of the respective years.
Lehman and certain of its affiliates have received fees for services in
connection with public offerings of the Company s securities and other matters.
During the year ended March 31, 1994, the Company paid $0.7 million for
underwriting fees to Lehman in connection with the January 1994 Senior Notes
offering (Note 9). During the year ended March 31, 1992, the Company paid $3.5
million for underwriting fees in connection with the October 1991 initial
public offering (Note 4). No fees were paid by the Company to Lehman or its
affiliates during the year ended March 31, 1993.
On October 30, 1990, the Company loaned to Messrs. Cashman and Erdeljan
$400,000, which loan was to mature October 26, 1992 and did not bear interest.
In connection with the October 1991 stock offering, the Company forgave the
loan and paid the related income taxes (Note 4).
14. COMMITMENTS AND CONTINGENCIES
The Company's former subsidiary Paco Pharmaceutical Services, Inc. ("Paco"),
certain of Paco's subsidiaries, the Company and other defendants are parties to
a group of actions commenced, beginning in April 1990, in Federal and state
courts in New Jersey and in Federal courts in New York and Massachusetts by
limited partners of Paco Development Partners II ("PDP II"), a research and
development partnership in which a subsidiary of Paco serves as the general
partner. The defendants were granted summary judgment for dismissal with
respect to the New York actions on March 29, 1993, and the time to appeal this
decision has expired. In the New Jersey state court action (Nelson v. Dean
Witter Reynolds, Inc., MRS-L-5014-90), a class consisting of the 14 investors
who reside in New Jersey has been certified. On October 23, 1992, the Company,
Paco and its affiliates moved for summary judgment as to three counts of the
complaint. This motion was denied on January 6, 1993. A second action
commenced in New Jersey Federal court (Nelson v. Ian Ferrier, Civil Action
91-5334(JWB)), has been stayed pending resolution of the New Jersey state court
action. No class has been certified in this federal action.
Plaintiffs in each of these actions seek damages of an unspecified amount for,
among other things, alleged violations of state securities law, fraud,
misrepresentation, breach of contract, conversion and negligence in connection
with the $25 million private placement sale of PDP II limited partnership
interests and warrants in 1986. Plaintiffs in the state court action also seek
damages, derivatively, on behalf of PDP II, for alleged breaches of fiduciary
duty and breach of contract in connection with the management of PDP II. On
October 19, 1993, the plaintiffs in the New York federal court action described
above (in which the defendants were granted summary judgment) filed a new
complaint in state court in New Jersey. This complaint alleges state law
causes of action for fraud, negligent misrepresentation, breach of fiduciary
duty and breach of contract.
Subsequent to year end, the Company reached an agreement in principle with the
plaintiffs in the PDP II litigation, and is in the process of formalizing that
agreement and seeking all necessary approvals. The Company recognized during
the fourth quarter of fiscal 1994 a special charge of approximately $3.2
million representing the anticipated amount of all settlement-related costs in
excess of previously provided reserves.
39
<PAGE> 41
On March 30, 1992, OCAP Acquisition Corp. ("OCAP") commenced an action in the
Supreme Court of the State of New York, County of New York, against Paco,
certain of its subsidiaries, the Company and Scherer International
(collectively, the "defendants"), arising out of the termination of an Asset
Purchase Agreement dated February 21, 1992 (the "Purchase Agreement") between
OCAP and the defendants providing for the purchase of substantially all the
assets of Paco. On May 15, 1992, OCAP served an amended verified complaint (the
"Amended Complaint"), asserting causes of action for breach of contract and
breach of the implied covenant of good faith and fair dealing, arising out of
defendants' March 25, 1992 termination of the Purchase Agreement, as well as
two additional causes of action that were subsequently dismissed by order of
the court. The Amended Complaint seeks $75 million in actual damages, $100
million in punitive damages, as well as OCAP's attorney fees and other
litigation expenses, costs and disbursements incurred in bringing this action.
Discovery with respect to the action has commenced; however, discovery was
temporarily stayed by OCAP's filing of a motion for partial summary judgment,
and the Company s subsequent cross-motion for dismissal. The Court recently
denied both motions and the Company anticipates that discovery will resume or
the Court s decision will be appealed. Based upon the investigation conducted
by the Company to date, the Company believes that this action lacks merit and
intends to defend against it vigorously. In the opinion of management, the
ultimate outcome of this litigation will not have a material adverse effect on
the Company's business or financial condition.
The Company was informed in August 1992 that soil at a manufacturing facility
in North Carolina owned and operated by the Company from 1975 to 1985 contained
levels of tetrachlorethene and other substances which exceeded environmental
standards. The Company voluntarily initiated a remedial investigation, and
initial remedial and removal actions have been completed by the Company and the
current owner of the facility for the known soil contamination at such site.
The Company continues to perform additional studies and remediation of the
area, including testing and removal of groundwater, which have indicated the
necessity for additional remedial and removal actions. On the basis of the
results of investigations performed to date, the Company does not believe that
potential future costs associated with either the investigation or any
potential remedial or removal action will ultimately have a materially adverse
impact on the Company's business or financial condition.
The Company is a party to various other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources.
As of March 31, 1994, the Company has capital expenditure commitments related
primarily to plant expansions amounting to approximately $5.9 million.
40
<PAGE> 42
15. SEGMENT DATA
The Company is engaged principally in the production of softgels, hardshells
and other drug delivery systems for the pharmaceutical, health and nutritional
and cosmetic products industries. The Company's operations are divided into
three geographical areas: United States, Europe and Other International.
Europe represents operations in the United Kingdom, France, Italy and Germany.
Other International consists of operations in Canada, the Pacific and Latin
America.
<TABLE>
<CAPTION>
For the years ended March 31,
------------------------------------------------
(In thousands) 1994 1993 1992
---------- ----------- ----------
<S> <C> <C> <C>
Sales:
United States $120,687 $ 86,687 $66,802
Europe 233,716 229,937 198,445
Other international 94,894 81,387 72,539
-------- -------- --------
Net sales (1) $449,297 $398,011 $337,786
======== ======== ========
Operating Income:
United States $28,241 $23,327 $18,147
Europe 46,249 53,941 48,896
Other International 19,238 13,450 13,070
Unallocated (2) (10,815) (2,621) (16,136)
-------- -------- --------
Operating income $82,913 $88,097 $63,977
======== ======== ========
Identifiable assets:
United States $86,410 $ 74,886 $ 64,997
Europe 316,623 263,099 255,345
Other International 121,318 106,372 105,474
Unallocated (3) 89,063 87,827 100,161
-------- -------- --------
Total assets $613,414 $532,184 $525,977
======== ======== ========
Capital expenditures:
Drug Delivery Systems $39,294 $33,132 $20,780
Unallocated (4) 209 60 167
-------- -------- --------
Total capital expenditures $39,503 $33,192 $20,947
======== ======== ========
Depreciation and amortization:
Drug Delivery Systems $21,008 $19,589 $16,771
Unallocated (4) 2,962 3,089 3,169
-------- -------- --------
Total depreciation and
amortization $23,970 $22,678 $19,940
======== ======== ========
</TABLE>
(1) No single customer or product represents 10% or more of sales, and
intersegment sales are not significant.
(2) Unallocated operating income includes principally general corporate
expenses, including in 1992 the stock compensation expense related to
the Company's October 1991 sale of common stock (Note 4), and in 1994
$4.5 million related to the special charges for the litigation
settlement and plant revaluation (Note 2).
(3) Unallocated identifiable assets are principally cash, cash
equivalents, short-term investments, other assets and net assets of
discontinued operations.
(4) Unallocated capital expenditures and depreciation and amortization
represent primarily corporate amounts.
The net assets of foreign subsidiaries were $216.5 million at March 31, 1994,
$216.6 million at March 31, 1993, and $190.7 million at March 31, 1992. The
Company's share of foreign net income was $34.6 million for the year ended
March 31, 1994, $27.9 million for the year ended March 31, 1993, and $26.4
million for the year ended March 31, 1992, after deducting minority interests,
income taxes on unremitted earnings and various charges billed by the parent
company.
41
<PAGE> 43
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------------- -------------------- ----------------------- ---------------------
1994 1993(1) 1994 1993(2) 1994(4) 1993(3) 1994(4) 1993
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $108,454 $103,353 $105,179 $97,671 $114,820 $97,966 $120,844 $99,021
Gross profit 40,708 43,080 35,464 37,387 39,972 37,426 45,764 38,010
Income from continuing
operations before
extraordinary 8,596 8,388 6,557 6,059 8,904 7,103 6,857 7,410
loss and accounting change
Net income (loss) $8,596 $9,362 $6,557 $5,412 $(6,596) $(1,289) $6,537 $7,410
===================== ==================== ======================= =====================
Income from continuing
operations before
extraordinary
loss and accounting change
per common share $0.36 $0.35 $0.27 $0.25 $0.37 $0.29 $0.28 $0.31
===================== ==================== ======================= =====================
Net income (loss) per
common share
$0.36 $0.39 $0.27 $0.22 $(0.27) $(0.05) $0.27 $0.31
===================== ==================== ======================= =====================
</TABLE>
(1) Net income includes the $974,000 ($0.04 per share) cumulative effect of
accounting change for income taxes, SFAS 109.
(2) Net income includes loss on disposal of discontinued operation of
$647,000 ($0.03 per share).
(3) Net income includes extraordinary loss of $8,392,000 ($0.35 per share)
related to the early retirement of debt (see Note 9).
(4) Net income includes extraordinary loss of $15,500,000 ($0.64 per
share) and $320,000 ($0.01 per share) related to debt extinguishment
in the third and fourth quarters of fiscal 1994, respectively.
42
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To R.P. Scherer Corporation:
We have audited the accompanying consolidated statement of financial position
of R.P. SCHERER CORPORATION (a Delaware Corporation), and subsidiary as of
March 31, 1994 and 1993, and the related consolidated statements of operations,
cash flows and shareholders' equity for the years ended March 31, 1994, 1993
and 1992. These financial statements and the schedules referred to below are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of March 31,
1994 and 1993, and the results of its operations and cash flows for the years
ended March 31, 1994, 1993 and 1992, in conformity with generally accepted
accounting principles.
As explained in Note 6 to the consolidated financial statements, effective
April 1, 1992, the Company changed its method of accounting for income taxes.
As explained in Note 11 to the consolidated financial statements, effective
April 1, 1991, the Company changed its method of accounting for postretirement
benefits other than pensions.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules listed in the index to financial
schedules are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Detroit, Michigan,
April 26, 1994.
ARTHUR ANDERSEN & CO.
43
<PAGE> 45
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable for this report.
44
<PAGE> 46
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The name, age and employment history, including all positions held concurrently
or successively in the past five years, of each of the Company's executive
officers and directors is reflected in item 1 on pages 9 and 10 of this Annual
Report on Form 10-K.
The Board of Directors met four times during the Company's fiscal year ended
March 31, 1994. No member of the Board attended fewer than 75% of the
aggregate number of meetings of the Board and the committees on which he or she
served during the period.
The Board of Directors has three standing committees: an Audit Committee, a
Compensation Committee, and an Executive Committee. The Audit Committee
consists of Messrs. Lamphere (Chairman), Lasagna and Rock. The Compensation
Committee consists of Messrs. Frank, Rock (Chairman) and Stern. The Executive
Committee consists of Messrs. Cashman, Erdeljan, Lamphere and Stern (Chairman).
The Audit, Compensation, and Executive Committees met four, two and one times,
respectively, during the 1994 fiscal year.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 31, 1994 all Section
16(a) filing requirements applicable to its officers, directors and greater
than ten-percent beneficial owners were complied with.
45
<PAGE> 47
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash compensation
paid by the Company for services rendered in all capacities during the three
most recent fiscal years ended March 31, to each of its five most highly
compensated corporate executive officers.
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1994
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS (#) PAYOUTS
-------------- -----------
NAME AND FISCAL RESTRICTED ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OTHER STOCK OPTIONS LTIP COMPENSATION
- - - ------------------------- -------- -------- ------- ------- ----------- ---------- ------ --------------
(3) (1) (1) (1) (1, 2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John P. Cashman 1994 $582,584 - 82,458
Chairman and Co-Chief 1993 505,625 - 71,162 11,723
Executive Officer 1992 341,667 - 76,666 10,847
Aleksandar Erdeljan 1994 582,584 - 82,458 -
President and Co-Chief 1993 505,625 - 71,162 -
Executive Officer 1992 341,667 - 76,666 *
Nicole S. Williams (4) 1994 205,667 109,397 21,390 -
Executive Vice President, 1993 195,833 94,250 18,066 -
Finance, Chief Financial 1992 35,897 N/A 29,306 *
Officer, Secretary,
Treasurer
Thomas J. Stuart 1994 113,125 60,174 11,766 -
Controller 1993 108,333 51,840 9,936 -
1992 97,500 40,000 16,243 *
Dennis R. McGregor(5) 1994 64,423 35,267 6,896 -
Assistant Treasurer and 1993 N/A N/A N/A N/A
Director of Tax 1992 N/A N/A N/A N/A
Operations
</TABLE>
(1) The Company does not have restricted stock award plans, long term
incentive plans ("LTIPs") or stock appreciation rights ("SARs").
Other annual compensation is below the level where disclosure would be
required.
(2) Represents contributions on behalf of Mr. Cashman to a defined
contribution retirement plan. See "Employment Agreements". Such
contributions are in lieu of Mr. Cashman's participation in the
Company's defined benefit pension plan.
(3) Messrs. Cashman and Erdeljan are not participants in the Company's
bonus program.
(4) Ms. Williams began employment with the Company in January, 1992.
(5) Mr. McGregor began employment with the Company in August, 1993.
* No disclosure required under the Securities and Exchange Commission's
transition rules.
46
<PAGE> 48
OPTION GRANTS FOR FISCAL YEAR 1994
The following table provides information on option grants for the Company's
common stock in fiscal year 1994 to the named executive officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATE
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------------- --------------------------
% OF TOTAL EXERCISE
OPTION OR BASE
OPTIONS GRANTS FOR PRICE EXPIRATION
NAME GRANTED (#) THE YEAR ($/SHARE) DATE 5% ($) 10% ($)
------------------------ ----------- -------- --------- ----------- ----------- --------
(1) (2) (2)
<S> <C> <C> <C> <C> <C> <C>
John P. Cashman:
Purchased Portion 41,229 12.31% $40.07 June 16, 2001 $421,773 $1,220,378
Granted Portion 41,229 12.31% 27.65 June 16, 2001 933,837 1,732,443
Aleksandar Erdeljan:
Purchased Portion 41,229 12.31% 40.07 June 16, 2001 421,773 1,220,378
Granted Portion 41,229 12.31% 27.65 June 16, 2001 933,837 1,732,443
Nicole S. Williams:
Purchased Portion 10,695 3.19% 40.07 June 16, 2001 109,410 316,572
Granted Portion 10,695 3.19% 27.65 June 16, 2001 242,242 449,404
Thomas J. Stuart:
Purchased Portion 5,883 1.76% 40.07 June 16, 2001 60,183 174,137
Granted Portion 5,883 1.76% 27.65 June 16, 2001 133,250 247,204
Dennis R. McGregor (3):
Purchased Portion 3,448 1.03% 40.07 June 16, 2001 35,273 102,061
Granted Portion 3,448 1.03% 27.65 June 16, 2001 78,097 144,885
</TABLE>
(1) The purchased option cost is set at 10% of an average market price per
share at the beginning of the year. The purchased option exercise
price is set at such beginning average stock price, net of the
purchase cost, increased by a 10% annual rate compounded over five
years.
The granted option exercise price is set at the beginning average
market price per share. See "Stock Option Plans".
Purchased and granted options both vest three years from the date of
grant. Options may only be exercised for an equal number of purchased
portion shares and granted portion shares.
(2) Based upon market value of $35.75 per share at date of grant.
(3) Mr. McGregor began employment with the Company in August, 1993.
47
<PAGE> 49
OPTION EXERCISES IN FISCAL YEAR 1994 AND
FISCAL YEAR END OPTION VALUE
The following table provides information on option exercises in fiscal year
1994 by the named executive officers and the value of such officers' options at
March 31, 1994.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END
-------------------------------- ----------------------------------
SHARES ACQUIRED VALUE NOT NOT
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE (#) EXERCISABLE (#) EXERCISABLE (#) EXERCISABLE (#)
- - - ------------------- ------------ -------- --------------- --------------- --------------- ---------------
(1) (2) (2)
<S> <C> <C> <C> <C> <C> <C>
John P. Cashman N/A N/A 495,843 230,286 $15,440,551 $1,566,801
Aleksandar Erdeljan N/A N/A 495,843 230,286 15,440,551 1,566,801
Nicole S. Williams N/A N/A 3,333 65,429 103,790 521,547
Thomas J. Stuart 832 $27,464 1,500 32,813 46,710 190,094
Dennis R. McGregor(3) N/A N/A - 6,896 - 19,102
</TABLE>
(1) Options now exercisable for Messrs. Cashman and Erdeljan were granted
in connection with their interests in the leveraged buy-out of the
Company in June, 1989.
(2) Based upon market value of $36.63 per share at March 31, 1994.
Options under the 1990 Stock Option Plan are generally exercisable.
Options under the 1992 Stock Option Plan are not yet exercisable.
(3) Mr. McGregor began employment with the Company in August, 1993.
EXECUTIVE COMPENSATION PURSUANT TO PLANS
The Company maintains certain compensation plans, programs and arrangements for
the Company's executive officers and key employees. Set forth below is a brief
description of each such plan, program or arrangement under which compensation
or other benefits were paid to named executive officers during fiscal 1994
(and, with respect to the 1990 Stock Option Plans, fiscal 1993 and fiscal 1992)
or are proposed to be paid in the future. In addition, set forth below is a
brief description of termination of employment and change of control
arrangements.
Employment Agreements
Effective June 1, 1994, the Company entered into revised employment agreements
with Mr. Cashman and Mr. Erdeljan, and entered into an employment agreement
with Ms. Williams. The agreements each provide for an initial term of
employment of one year, automatically renewable thereafter for successive one
year periods, unless terminated by either party to the agreement. The initial
salary for both Mr. Cashman and Mr. Erdeljan under the agreements is $632,286,
and the base salary of Ms. Williams is $213,625. The Compensation Committee
may adjust the salary of Mr. Cashman, Mr. Erdeljan or Ms. Williams for
subsequent years.
Mr. Cashman, Mr. Erdeljan, and Ms. Williams are entitled to participate in
stock option plans which have been adopted by the Company (as described below)
and in retirement and welfare benefit plans that are in effect or which may be
adopted by the Company. In addition, Ms. Williams is eligible to participate
in the incentive compensation plan described below. Mr. Cashman made an
election to waive irrevocably his
48
<PAGE> 50
participation in the R.P. Scherer Corporation Employees' Retirement Income Plan
(the "Retirement Income Plan" described below). In lieu of participation in
the Retirement Income Plan, the Company contributes an amount, currently
approximately $12,000 annually, in a Defined Contribution Retirement Plan on
behalf of Mr. Cashman.
Pursuant to each of these employment agreements, if the Company terminates the
employment of Mr. Cashman, Mr. Erdeljan or Ms. Williams without cause or if Mr.
Cashman, Mr. Erdeljan or Ms. Williams terminate for good reason (as set forth
in each employment agreement) or if the Company properly notifies Mr. Cashman,
Mr. Erdeljan or Ms. Williams of its intention to terminate their employment
agreement on the termination date of the term of employment then in effect, the
Company must pay the employee a monthly amount for twenty-four consecutive
months after termination equal to one-twelfth of the employee's annual average
salary for the prior twenty-four months, and also provide welfare plan benefits
for twenty-four months in accordance with plan terms. The agreements further
provide that in the event of physical or mental disability of Mr. Cashman, Mr.
Erdeljan or Ms. Williams (as set forth in each employment agreement), the
Company may terminate their employment and shall be obligated for similar
benefits; however, such amount will be reduced by any amount received by Mr.
Cashman, Mr. Erdeljan, or Ms. Williams, as the case may be, in respect of his
or her disability from any employee benefit or disability plans maintained by
the Company.
Pursuant to their respective contracts, Mr. Cashman, Mr. Erdeljan and Ms.
Williams have agreed to keep confidential all proprietary information relating
to the Company's business obtained in the course of employment, and have agreed
not to compete with the Company for a period of two years after termination of
their respective employment.
Qualified Pension Plan
The Retirement Income Plan, which is noncontributory, provides for a defined
benefit based on years of service and the employee's highest consecutive
five-year average annual compensation. The Retirement Income Plan covers all
employees of the Company not represented by a collective bargaining agent for
which a pension plan has been the subject of good faith bargaining and who meet
certain eligibility requirements.
Contributions to the Retirement Income Plan are made by the Company based upon
the Participants' annual salaries, plus all other forms of cash compensation
(including overtime, bonuses and commissions), and certain actuarial
assumptions with regard to funding. During fiscal 1993, the Company accrued
aggregate contributions for the Retirement Income Plan in an amount
approximating 3.8% of such total compensation.
The following table shows annual pension benefits payable on a straight life
annuity basis, in various remuneration and years of service classifications, to
employees under the Retirement Income Plan, assuming retirement at age 65 in
calendar 1994. Benefit amounts are not subject to reduction for Social Security
or other offset amounts.
<TABLE>
<CAPTION>
ANNUAL BENEFIT FOR YEARS OF SERVICE INDICATED
HIGHEST CONSECUTIVE ---------------------------------------------
FIVE YEAR AVERAGE ANNUAL TEN TWENTY THIRTY FORTY
COMPENSATION YEARS YEARS YEARS YEARS
------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
$100,000 $13,800 $27,600 $41,400 $53,300
150,000 21,300 42,600 63,900 82,050
200,000 28,880 57,600 86,400 110,800
250,000 (1) 30,184 60,367 90,551 116,104 (2)
300,000 (1) 30,184 60,367 90,551 116,104 (2)
350,000 (1) 30,184 60,367 90,551 116,104 (2)
</TABLE>
49
<PAGE> 51
(1) The Company has amended its Retirement Income Plan, as required by the
Tax Reform Act of 1986, to limit compensation that may be taken into
account by the plan to $200,000 annually, as may be adjusted for
cost-of-living increases. Consequently, after a period of years,
final average compensation will also be limited to $200,000 (subject
to annual cost-of-living adjustments). The maximum compensation taken
into account by the plan during 1994 is $150,000.
(2) Benefits payable under the Retirement Income Plan are subject to the
applicable guidelines or maximum prescribed in the Internal Revenue
Code of 1986, as amended. The maximum pension benefit allowable
during 1994 under current law is $116,104 (subject to annual
cost-of-living adjustments).
Credited service in the Retirement Income Plan for those individuals listed in
the Summary Compensation Table for Fiscal 1994 who are active participants is
as follows: Mr. Erdeljan, 12.7 Years (including years credited for service from
1978 to 1987 and from 1989 to the present); Ms. Williams, 1.9 Years; and Mr.
Stuart, 3.7 Years. Mr. Cashman has elected not to participate in the
Retirement Income Plan. For purposes of the Retirement Income Plan, the final
average compensation of such individuals as of January 1, 1994 was
approximately as follows: Mr. Erdeljan, $219,224; Ms. Williams, $235,840; and
Mr. Stuart, $137,172. Under the terms of this Plan, Mr. McGregor will be
eligible to participate beginning January 1, 1995.
Incentive Compensation Plan
The purpose of the Incentive Compensation Plan is to provide certain key
employees of the Company an incentive to promote the maximization of
shareholder value over the long term.
The Incentive Compensation Plan is administered by the Compensation Committee
("Committee") in conjunction with the full Board of Directors. Under the
Incentive Compensation Plan incentive compensation is directly linked to return
generated through the employment of capital. This return, which is defined as
"Economic Value Added" ("EVA"), is measured individually for each of the
Company's major business divisions (each a "Unit") and equals the operating
profit generated by each Unit less taxes and the cost of capital employed to
generate such profit. The Incentive Compensation Plan rewards designated
management employees in each Unit for increases in EVA and penalizes such
employees for any decreases in EVA by deducting amounts from an employee's
Bonus Bank, as described below.
Management employees who are designated as participants ("Participants") by the
Chairman and President of the Company and approved by the Committee are
eligible to participate in the Incentive Compensation Plan. Currently
approximately 11 employees are Participants in the Incentive Compensation Plan.
The Participant(s) of each Unit are eligible to receive an EVA-based award (the
"EVA Award") based on the performance of their Unit. The Eva Award each year
for a Unit is comprised of two elements: The "Base Award" and the "Improvement
Award." The Base Award is equal to a pre-determined percentage of the aggregate
annual salary of a Unit's Participants and is earned for an applicable year if
the prior year's EVA level for the Unit is achieved. The Improvement Award is
based on a percentages of the increase or decrease in EVA from the prior year's
EVA. Improvement Awards which exceed a pre-determined percentage of a
Participant's base salary are deferred and credited to the Participant's
account ("Bonus Bank"). These amounts are subject to loss if subsequent
performance deteriorates. One-third of the balance in a Participant's Bonus
Bank (if it is positive) is paid out each succeeding year in which a
Participant earns a new bonus under the Incentive Compensation Plan. The
relationship between EVA achievement and percentages of salary awarded as EVA
Award is determined by the Committee.
The Incentive Compensation Plan provides that 25% (or such other percentage set
by the Compensation Committee) of the EVA Award for each current year, subject
to certain limits, is used to purchase stock options under the Company's 1992
Stock Option Plan (as described below). Once options have been purchased from
such portion of a year's EVA Award, and to the extent that options remain
available for
50
<PAGE> 52
purchase under the Stock Option Plan, then up to 25% of additional
amounts distributed from the Bonus Bank, if any, will be used to purchase such
options.
In addition to the EVA Award, the Committee may, at the recommendation of the
Chairman and President, grant to Participants a discretionary award, generally
up to 10% of salary, which is a function of their performance against a
pre-determined set of primarily qualitative objectives. The discretionary award
is paid in cash following the year in which it is earned.
The Board of Directors may amend, suspend or terminate the incentive
Compensation Plan upon the recommendation of the Committee and, as required,
with stockholder approval, provided that no such change in the Incentive
Compensation Plan will be effective to eliminate or diminish the distribution
of any award that has been allocated to a Participant's Bonus Bank prior to the
date of such change.
Stock Option Plans
1992 Stock Option Plan
The purpose of the 1992 Stock Option Plan is to aid the Company in retaining
and attracting capable management employees and to provide an inducement to
such employees to promote the best interests of the Company by enabling and
encouraging them to acquire stock ownership in the Company.
The 1992 Stock Option Plan is administered by the Committee which has the
authority to grant options and set the terms and conditions of each grant. The
1992 Stock Option Plan authorizes a total of 1,200,000 shares of Common Stock
to be issued upon exercise of options granted thereunder. Under the terms of
the 1992 Stock Option Plan any management employee of the Company who is
eligible to receive a bonus under the Company's Incentive Compensation Plan (as
described above) or such other management employee designated by the Committee
is eligible to receive options under the 1992 Stock Option Plan. Currently,
there are 14 participants in the 1992 Stock Option Plan ("Optionee"). The
Committee also has the authority to ensure that the 1992 Stock Option Plan
complies with foreign law and practices.
Each option grant under the 1992 Stock Option Plan represents the right to
purchase a number of shares of Common Stock of the Company and consists of two
portions: a purchased portion and a granted portion. The purchased portion
for a participating management employee is determined by applying 25% (or such
other percentage set by the Committee) of such employee's bonus under the
Company's Incentive Compensation Plan (or such other compensation designated by
the Committee to be applied to purchase options), to purchase stock options at
a cost equal to 10% of a designated stock price. The designated stock price
equals the average market value per share of the Common Stock over a two month
period which include the first month of the fiscal year in which the option is
granted and the last month of the preceding fiscal year (the "Average Stock
Price"). The exercise price for the purchased portion is fixed on the grant
date and equals the Average Stock Price, net of the purchase costs, increased
at 10% annual rate compounded over five years. The granted portion represents
the right to purchase an additional number of shares equal to the number of
shares which make up the purchased portion and is exercisable at the Average
Stock Price. Options may be exercised in whole or in part, but may only be
exercised for an equal number of purchased portion shares and granted portion
shares.
Options become exercisable on the third anniversary of the date of their grant,
provided that the Committee may accelerate the time at which any option may be
exercised. Each option granted under the 1992 Stock Option Plan will expire on
the day following the fifth anniversary of the date when granted, unless such
option shall have expired earlier under the provisions of the Plan or the
Committee shall have extended the time in which such options may be
exercisable, provided that, no option will expire later than the seventh
anniversary of the date when granted.
51
<PAGE> 53
The Board of Directors may amend or terminate the 1992 Stock Option Plan, but
may not (i) without the consent of the Optionees, alter or impair any rights or
obligations under any option theretofore granted, or (ii) make any alternation
in the 1992 Stock Option Plan that would cause the 1992 Stock Option Plan to
fail to comply with any requirement of applicable law or regulation, if such
revision or amendment were not approved by the stockholder of the Company,
unless and until stockholder approval of such revision or amendment is
obtained.
Options to purchase a total of 334,877 shares were granted under the 1992 Stock
Option Plan for fiscal 1994. For fiscal 1994 grants, the purchased portion,
costing $2.77 each, will be exercisable at $40.07 per share and the granted
portion will be exercisable at $27.65 per share. For persons named in the
Summary Compensation Table and all executive officers as a group, the following
options were granted under the Plan, all for fiscal 1994: John P. Cashman,
82,458 shares; Aleksandar Erdeljan, 82,458 shares; Nicole S. Williams, 21,390
shares; Thomas J. Stuart, 11,766 shares; and Dennis R. McGregor, 6,896 shares.
A total of 157,690 options for common stock remain available for future grant
under the 1992 Stock Option Plan.
As of June 23, 1994, the last sale price of the Common Stock on the New York
Stock Exchange was $33.50 per share.
1990 Stock Option Plans
The Company implemented three stock option plans in November 1990: the 1990
Nonqualified Plan, the 1990 Nonqualified Performance Stock Option Plan A and
the 1990 Nonqualified Performance Stock Option Plan B (collectively, the "1990
Stock Option Plans"). The 1990 Stock Option Plans are administered by the
Committee. A total of 1,239,612 options for shares of the Company's Common
Stock were authorized for issuance to key management personnel under the 1990
Stock Option Plans.
In November 1990, options for an aggregate of 1,159,111 shares of Common Stock
under the 1990 Stock Option Plans were granted to an aggregate of 17 employees
of the Company. During fiscal 1992, the Company granted additional options for
an aggregate of 45,114 shares of Common Stock, primarily to these same
employees. During fiscal 1994, 25,607 options were exercised, leaving
1,073,665 outstanding at year end. All options granted under the 1990 Stock
Option Plans have an exercise price of $5.49 per share. No commitments exist
to exercise any options granted under the 1990 Stock Option Plans. The Company
does not anticipate granting the remaining options authorized for the 1990
Stock Option Plans.
Compensation expense of approximately $0.3 million was recorded by the Company
in connection with the 1992 Stock Option Plan for fiscal 1994; no compensation
expense was recorded for the 1990 Stock Option Plan for fiscal 1994.
Federal Income Tax Consequences of the 1992 and 1990 Stock Option Plans
The 1992 and 1990 Stock Option Plans authorize the grant of only nonqualified
options to option holders ("Optionee"). The grant of nonqualified options has
no immediate tax consequences to the Optionee or to the Company.
In general, upon the exercise of options by the payment of cash, the Optionee
will recognize ordinary income (and the Company will be entitled to a deduction
if certain withholding requirements are met) in an amount equal to the excess
of the fair market value of the shares of Common Stock on the date of exercise
over (i) the purchased portion exercise price and (ii) the granted portion
exercise price, and the Optionee's basis in the shares received upon exercise
will equal the fair market value of the shares on the date of exercise.
Proposed legislation, if enacted into law, may under certain circumstances
operate to disallow a portion of the deduction the Company would otherwise be
entitled to take.
Pursuant to the terms of the 1992 and 1990 Stock Option Plans, the time at
which options may be exercised due to a merger, consolidation or other
reorganization of the Company with or into another
52
<PAGE> 54
entity will be accelerated. Under certain circumstances, such acceleration may
result in an excess parachute payment and the imposition of an excise tax
payable by the Optionee and the loss of a deduction to the Company under
Section 280(G) of the Internal Revenue Code with respect to any amounts which
are excess parachute payments.
The foregoing discussion is a brief summary of the federal income tax rules
generally applicable to nonqualified options in the circumstances described
above. In this regard, there are special rules for other situations which may
apply. For example, the tax treatment applicable where an Optionee is not
subject to U.S. tax law or delivers shares of the Common Stock in payment of
the option exercise price may be different from that described above.
COMPENSATION OF OUTSIDE DIRECTORS
Directors who are not officers or employees of Lehman Brothers Inc., the
Company or any of its subsidiaries ("Outside Directors") are currently paid an
annual retainer of $18,000 and $1,000 for each Board meeting attended, and an
additional annual retainer of $3,000 for serving as chairman of any committee
of the Board of Directors. In fiscal 1992, each Outside Director was also
granted options to purchase 12,000 shares of Common Stock at $18 per share,
which options become exercisable in September 1994.
53
<PAGE> 55
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of March 31, 1994, regarding the
beneficial ownership of Common Stock of the Company by principal holders, by
each director of the Company beneficially owning Common Stock and by all
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF COMMON
NAME AND ADDRESS SHARES (1) PERCENT
---------------- ---------------- -------
<S> <C> <C>
Lehman Brothers Merchant Banking Portfolio
Partnership, L.P.
American Express Tower
World Financial Center
New York, NY 10285 2,547,334 10.9%
Lehman Brothers Offshore Investment
Partnership - Japan L.P.
Clarendon House
Church Street
Hamilton HMCX Bermuda 2,061,555 8.9%
Lehman Brothers Capital
Partners II L.P.
American Express Tower
World Financial Center
New York, NY 10285 1,730,169 7.4%
Lehman Brothers Offshore Investment
Partnership, L.P.
Clarendon House
Church Street
Hamilton HMCX Bermuda 685,315 2.9%
Janus Capital Corporation
100 Fillmore Street, Suite 300
Denver, Colorado 80206 2,067,678 8.9%
The Equitable Companies (2)
787 Seventh Avenue
New York, NY 10019 1,246,612 5.4%
John P. Cashman
R.P. Scherer Corporation
2075 West Big Beaver Road
Troy, Michigan 48084 541,984 2.3%
Aleksandar Erdeljan
R.P. Scherer Corporation
2075 West Big Beaver Road
Troy, Michigan 48084 612,985 2.5%
All officers and directors as a group 1,161,570 4.8%
</TABLE>
(1) Number of common shares includes shares issuable within sixty days
upon the exercise of outstanding options. The directors of the
Company include officers of Lehman Brothers Inc. and
certain affiliated merchant banking partnerships (collectively,
"Lehman"). The figures set forth herein do not include shares which
may be deemed to be beneficially owned by such directors as limited
partners of Lehman Brothers Capital Partners II, L.P.
(2) These shares are owned jointly on behalf of AXA Assurances I.A.R.D.
Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances I.A.R.D.
Mutuelle, Alpha Assurances Vie Mutuelle, and Uni Europe Assurance
Mutuelle, as a group, as well as AXA, The Equitable Companies
Incorporated, Alliance Capital Management L.P., and Donaldson, Lufkin
& Jenrette Securities Corporation.
54
<PAGE> 56
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships appears in Items 1, 8 and 10
of this Annual Report on Form 10-K. There were no reportable transactions
involving the Company in regard to this item during the fiscal year ended March
31, 1994.
55
<PAGE> 57
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS - the consolidated financial statements
of R.P. Scherer Corporation and Subsidiary and the related
report of independent public accountants are included in Item
8 of this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES - the financial statement
schedules for R.P. Scherer Corporation are listed in the
accompanying index to financial statement schedules (see page
59).
3. EXHIBITS - the following exhibits are filed as part of this
Annual Report on Form 10-K or, where indicated, were
heretofore filed and are hereby incorporated by reference:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company dated May 15, 1990.
Incorporated by reference to Exhibit 3.1 filed with the Company's
Registration Statement on Form S-4, NO. 33-30999.
3.2 Certificate of Amendment of Restated Certificate of Incorporation of the
Company dated August 21, 1991. Incorporated by Reference to Exhibit 3.4
filed with the Company's Registration Statement on Form S-1, No. 33-42392.
3.3 Certificate of Amendment of Restated Certificate of Incorporation of the
Company dated October 11, 1991. Incorporated by reference to Exhibit 3.5
filed with the Company's Registration Statement on Form S-1, No. 33-42392.
3.4 Certificate of Correction of Restated Certificate of Incorporation of the
Company dated November 25, 1991. Incorporated by reference to Exhibit 3.3
filed with the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1991.
3.5 By-Laws of the Company. Incorporated by reference to Exhibit 3.2 filed with
the Company's Registration Statement on Form S-4, No. 33-30999.
4.1 Form of Senior Subordinated Debenture Indenture, dated as of November 1,
1989, between R.P. Scherer International Corporation and the First National
Bank of Boston, as Trustee (including form of Senior Subordinated Debenture).
Incorporated by reference to Exhibit 4.1 filed with Scherer International's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.
4.2 Indenture dated as of January 1, 1994, between the Registrant and Comerica
Bank, Trustee. Incorporated by reference to Exhibit 2.1 filed with Scherer
International's Registration Statement on Form 8-A, dated May 2, 1994.
</TABLE>
56
<PAGE> 58
<TABLE>
<S> <C>
10.1 Amended and Restated $175,000,000 Credit Agreement, dated as of March 30,
1994, among R.P. Scherer International Corporation, certain of its
subsidiaries, Comerica Bank, NBD Bank, N.A., Societe Generale, The Bank of
Nova Scotia, and ABN AMRO Bank N.V.. Incorporate by reference to Exhibit
10.1 filed with R.P. Scherer International Corporation's Annual Report on
Form 10-K for the year ended March 31, 1994.
10.2 R.P. Scherer Corporation Management Incentive Compensation Plan, Amended and
Restated July, 1993. Incorporated by reference to Exhibit A.2 filed with the
Company's Proxy Statement dated August 24, 1993.
10.3 Stock Option Plan of R.P. Scherer Corporation and Subsidiaries, Amended and
Restated July, 1993. Incorporated by reference to Exhibit B.2 filed with
the Company's Proxy Statement dated August 24, 1993.
10.4 Executive Supplemental Benefit Plan for senior executives of R.P. Scherer
International Corporation, dated as of April 1, 1981. Incorporated by
reference to Exhibit 10.15 filed with the Company's Annual Report on Form 10-
K for the year ended March 31, 1988.
10.5 Extended Severance Plan of R.P. Scherer International Corporation dated
November 10, 1988. Incorporated by reference to Exhibit 19A filed with
Scherer International's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1988.
10.6 R.P. Scherer International Corporation Employees' Retirement Income Plan
effective August 6, 1986. Incorporated by reference to Exhibit 10.33 of the
Company's Registration Statement on Form S-1, No. 33-30362.
10.7 Employment Agreement, dated June 1, 1994, between the Company and John P.
Cashman. Incorporated by reference to Exhibit 10.7 of Scherer
International's Annual Report on Form 10-K as of March 31, 1994.
10.8 Employment Agreement, dated June 1, 1994, between the Company and Aleksandar
Erdeljan. Incorporated by reference to Exhibit 10.8 of Scherer
International's Annual Report on Form 10-K as of March 31, 1994.
10.9 Employment Agreement, Dated June 1, 1994, between the Company and Nicole S.
Williams. Incorporated by reference to Exhibit 10.9 of Scherer
International's Annual Report on Form 10-K as of March 31, 1994.
21 Subsidiaries of the registrant. filed herewith.
23 Consent of Arthur Andersen & Co. Filed herewith.
</TABLE>
(b) No reports on Form 8-K were filed with the Securities
and Exchange Commission during the period for which this report is
filed.
57
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, R.P. Scherer Corporation has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
June 24, 1994.
R.P. SCHERER CORPORATION
By: /s/ John P. Cashman
John P. Cashman
Chairman and Co-Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this
Report has been signed below by the following persons on behalf of R.P. Scherer
Corporation in the capacities indicated on June 24, 1994.:
<TABLE>
<CAPTION>
SIGNATURES TITLE
<S> <C>
/S/ John P. Cashman Chairman and Co-Chief
--------------------
John P. Cashman Executive Officer
/s/ Aleksandar Erdeljan President and Co-Chief
------------------------
Aleksandar Erdeljan Executive Officer
/s/ Nicole S. Williams Executive Vice President, Finance,
---------------------- Chief Financial Officer, Treasurer
Nicole S. Williams and Secretary
/s/ Thomas J. Stuart Vice President and Controller
-------------------- (Principal Accounting Officer)
Thomas J. Stuart
/s/ Frederick Frank Director
-------------------
Frederick Frank
/s/ Lori G. Koffman Director
-------------------
Lori G. Koffman
/s/ Gilbert H. Lamphere Director
-----------------------
Gilbert H. Lamphere
/s/ Louis Lasagna Director
-----------------
Louis Lasagna
/s/ Robert H. Rock Director
------------------
Robert H. Rock
/s/ James A. Stern Director
------------------
James A. Stern
</TABLE>
58
<PAGE> 60
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Financial Schedules Page
- - - ------------------- ----
<S> <C> <C>
II. Amounts Receivable from Employees 61
V. Property, Plant and Equipment 62
VI. Accumulated Depreciation of Property, Plant and Equipment 63
VIII. Valuation Accounts 64
X. Supplementary Income Statement Information 65
</TABLE>
All other schedules are omitted as data is contained in the consolidated
financial statements or are not applicable or not required.
59
<PAGE> 61
R.P. SCHERER CORPORATION AND SUBSIDIARY
SCHEDULE II - AMOUNTS RECEIVABLE FROM EMPLOYEES
<TABLE>
<CAPTION>
(In Thousands) Balance at Balance at
Beginning Amounts End of
Name of Debtor of Period Additions Collected Period
-------------- --------- --------- --------- ------
<S> <C> <C> <C> <C>
For the year ended March 31, 1994: $ 0 $ - $ - $ 0
--------- --------- ---------- ---------
For the year ended March 31, 1993: $ 0 $ - $ - $ 0
--------- --------- ---------- ---------
For the year ended March 31, 1992:
J. Cashman, Chairman and
A. Erdeljan, President . . . . . . . $ 400 $ - $ (400) (a) $ 0
--------- --------- ---------- ---------
</TABLE>
(a) The above note was forgiven in entirety as agreed to due to a
successful stock offering in October 1991.
60
<PAGE> 62
R.P. SCHERER CORPORATION AND SUBSIDIARY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In thousands) Balance at Balance at
Beginning of Additions Other End
Description Period to Cost Retirements Changes (b) of Period
----------- ------------ --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1994:
-------------------------
Land and improvements $16,932 $32 $0 ($120) $16,844
Buildings and equipment 55,480 5,628 0 (1,030) 60,078
Machinery and equipment 141,200 27,433 (1,028) (6,131) 161,474
Furniture and fixtures 9,483 1,096 (349) 701 10,931
Transportation equipment 1,145 697 (99) 56 1,799
Leasehold improvements 5,822 222 (24) 2,669 8,689
Construction in progress 13,476 4,395 (a) (1,236) 8,542 25,177
-------- ------- ------- ------ --------
$243,538 $39,503 ($2,736) $4,687 $284,992
======== ======= ======= ====== ========
Year ended March 31, 1993:
-------------------------
Land and improvements $17,881 $279 ($2) ($1,226) $16,932
Buildings and equipment 46,844 4,746 (61) 3,951 55,480
Machinery and equipment 105,718 18,623 (3,976) 20,835 141,200
Furniture and fixtures 6,792 3,458 (910) 143 9,483
Transportation equipment 478 839 (311) 139 1,145
Leasehold improvements 6,119 24 (522) 201 5,822
Construction in progress 7,125 5,223 (a) (8) 1,136 13,476
-------- ------- ------- ------ --------
$190,957 $33,192 ($5,790) $25,179 $243,538
======== ======= ======= ====== ========
Year ended March 31, 1992:
-------------------------
Land and improvements $17,520 $381 ($42) $22 $17,881
Buildings and equipment 43,039 3,370 (1) 436 46,844
Machinery and equipment 92,899 11,764 (2,563) 3,618 105,718
Furniture and fixtures 4,613 2,256 (349) 272 6,792
Transportation equipment 331 298 (169) 18 478
Leasehold improvements 5,853 251 (167) 182 6,119
Construction in progress 2,312 2,627 (a) (125) 2,311 7,125
-------- ------- ------- ------ --------
$166,567 $20,947 ($3,416) $6,859 $190,957
======== ======= ======= ====== ========
</TABLE>
(a) Net of transfers to various property, plant and equipment categories.
(b) Includes changes due to fluctuations in foreign currency exchange rates,
purchase accounting adjustments, and disposals of certain discontinued
businesses. Also included in fiscal year 1993 are changes due to adoption
of SFAS 109.
61
<PAGE> 63
R.P. SCHERER CORPORATION AND SUBSIDIARY
SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In Thousands) Balance at Additions Charged Balance at
Beginning to Costs and Other End
Description of Period Expenses (b) Retirements Changes (a) of Period
----------- ---------- ----------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1994:
Land and improvements $83 $23 -- ($3) $103
Buildings and equipment 6,375 2,157 -- (1,535) 6,997
Machinery and equipment 37,722 12,227 ($794) (651) 48,504
Furniture and fixtures 3,701 1,915 (325) (419) 4,872
Transportation equipment 297 393 (68) 55 677
Leasehold improvements 809 406 (24) 933 2,124
------- ------- ------- ------- -------
$48,987 $17,121 ($1,211) ($1,620) $63,277
======= ======= ======= ======= =======
Year ended March 31, 1993:
Land and improvements $12 $32 -- $39 $83
Buildings and equipment 3,940 1,832 (26) 629 6,375
Machinery and equipment 25,398 12,137 (4,064) 4,251 37,722
Furniture and fixtures 2,524 1,848 (883) 212 3,701
Transportation equipment (26) 334 (198) 187 297
Leasehold improvements 1,480 347 (515) (503) 809
------- ------- ------- ------- -------
$33,328 $16,530 ($5,686) $4,815 $48,987
======= ======= ======= ======= =======
Year ended March 31, 1992:
Land and improvements $8 $4 -- -- $12
Buildings and equipment 1,710 1,855 (2) 377 3,940
Machinery and equipment 14,980 9,710 (2,364) 3,072 25,398
Furniture and fixtures 1,179 1,454 (312) 203 2,524
Transportation equipment (76) 152 (120) 18 (26)
Leasehold improvements 1,122 454 (124) 28 1,480
------- ------- ------- ------- -------
$18,923 $13,629 ($2,922) $3,698 $33,328
======= ======= ======= ======= =======
</TABLE>
(a) Includes changes due to fluctuations in foreign currency exchange
rates, purchase accounting adjustments, and disposals of certain
discontinued businesses. Also included in fiscal year 1993 are
changes due to adoption of SFAS 109.
(b) The Company provided for depreciation at the following annual rates:
Buildings and improvements - 2% to 5%
Machinery, equipment, furniture and fixtures, etc. - 5% to 33 1/3%.
62
<PAGE> 64
R.P. SCHERER CORPORATION AND SUBSIDIARY
SCHEDULE VIII - VALUATION ACCOUNTS
<TABLE>
<CAPTION>
(in thousands) Balance at Charged to Other Balance at
Beginning Costs and Changes Add End of
Description of Period Expenses (Deduct) (A) Deductions Period
- - - ----------- --------- --------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED MARCH 31, 1994:
Valuation accounts deducted
from related assets -
Reserve for doubtful accounts $ 2,260 $1,123 $ (53) $ (427) $ 2,903
Reserve for unmerchantable
inventories 2,188 828 (44) (1,271) 1,701
Reserve for future tax
benefits 23,777 1,613 0 0 25,390
--------- --------- ------------ ---------- ------
FOR THE YEAR ENDED MARCH 31, 1993:
Valuation accounts deducted
from related assets -
Reserve for doubtful
accounts $2,064 $ 638 $ (35) $ (407) $2,260
Reserve for unmerchantable
inventories 1,900 706 (43) (375) 2,188
Reserve for future tax
benefits 0 4,460 19,317 (b) 0 23,777
--------- --------- ------------ ---------- ------
FOR THE YEAR ENDED MARCH 31, 1992:
Valuation accounts deducted
from related assets -
Reserve for doubtful
accounts $1,416 $ 873 $ 22 $ (247) $2,064
Reserve for unmerchantable
inventories 1,920 289 26 (335) 1,900
--------- --------- ------------ ---------- ------
</TABLE>
(a) Includes changes due to fluctuations in foreign
currency exchange rates.
(b) Resulting from initial adoption of SFAS 109, included
in net cumulative effect of accounting change.
63
<PAGE> 65
R.P. SCHERER CORPORATION AND SUBSIDIARY
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
(In thousands) Twelve Months
Ended March 31,
--------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Charged to Costs and Expenses -
Maintenance and repairs $10,463 $11,197 $ 9,121
Amortization of intangible and other assets 6,849 6,148 7,850
Taxes, other than payroll and income taxes 2,586 2,231 2,987
-------- ------- -------
</TABLE>
Amounts charged to costs and expenses for (1) royalties and (2) advertising
costs have been omitted since each is less than 1% of net sales.
64
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Page
- - - ------------------- ----
<S> <C>
Exhibit 21 - Subsidiaries 66
Exhibit 23 - Consent of Arthur Andersen & Co. 68
</TABLE>
65
<PAGE> 1
EXHIBIT 21
66
<PAGE> 2
EXHIBIT 21
R. P. SCHERER CORPORATION AND SUBSIDIARY
The following is a list of all of the directly and indirectly owned
subsidiaries of R.P. Scherer Corporation, their jurisdiction of incorporation
and the percentage of their outstanding capital stock owned by R.P. Scherer
Corporation or another subsidiary of R.P. Scherer Corporation.
<TABLE>
<CAPTION>
EFFECTIVE PERCENTAGE
JURISDICTION OF OWNERSHIP BY
NAME OF SUBSIDIARY INCORPORATION R. P. SCHERER CORPORATION
------------------------------------------ --------------- -------------------------
<S> <C> <C>
R.P. Scherer International Corporation Delaware 100%
R. P. Scherer Hardcapsule, Inc.* New Jersey 100%
R. P. Scherer Hardcapsule (West)* Utah 100%
Gelatin Products International Delaware 100%
Science Labs Inc.* Delaware 100%
The LVC Corporation* Missouri 100%
R. P. SCherer Argentina S.A.I.C. Argentina 99%
Vivax Interamericana S.A. Argentina 99% (1)
R. P. Scherer do Brasil Encapsulacoes, Ltda. Brazil 100%
R. P. Scherer Canada Inc. Ontario, Canada 100%
F&F Holding GmbH Germany 100%
R. P. Scherer GmbH Germany 51% (2)
Allcaps Weichgelatinekapseln GmbH Germany 51% (3)
R. P. Scherer S.A. France 70% (4)
Pharmagel France S.A. France 95% (5)
R. P. Scherer S.p.A. Italy 95% (6)
R. P. Scherer Holdings Pty. Ltd. Australia 100%
R. P. Scherer Pty. Limited Australia 100% (7)
R. P. Scherer Holdings Ltd. England 100%
R. P. Scherer Limited England 100% (8)
Scherer DDS Limited England 100% (8)
R. P. Scherer (Hong Kong) Limited Hong Kong 100%
R. P. Scherer K.K. Japan 60%
R. P. Scherer Korea Limited Korea 50%
R. P. Scherer Egypt Egypt 10%
</TABLE>
(1) The Company owns 1.875% directly and R. P. Scherer Argentina S.A.I.C.
(of which the Company owns 99%) owns an additional 98.125%.
(2) The 51% interest in R. P. Scherer GmbH is owned directly by F&F
Holding GmbH.
(3) This corporation is 100% owned directly by R. P. Scherer GmbH (of
which F&F Holding GmbH owns 51%).
(4) The Company owns 50.01% directly and R. P. Scherer GmbH (of which F&F
Holding GmbH owns 51%) owns an additional 39.975%.
(5) This Corporation is 100% owned by R. P. Scherer S.p.A.
(6) The Company owns 90% directly and R. P. Scherer GmbH (of which F&F
Holding GmbH owns 51%) owns an additional 10%.
(7) This Corporation is 100% owned by R. P. Scherer Holdings Pty. Ltd.
(8) This Corporation is 100% owned by R. P. Scherer Holdings Ltd.
* Inactive
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EXHIBIT 23
68
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EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statements, File Numbers 33-47056 and 33-51920.
ARTHUR ANDERSEN & CO.
Detroit, Michigan,
June 24, 1994.
69
