<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<TABLE>
<S> <C>
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1993
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
</TABLE>
Commission file number 33-30999
R.P. SCHERER CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3523163
(State of Incorporation) (I.R.S. Employer Identification Number)
</TABLE>
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
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of the registrant's common stock as of February
10, 1994: 23,287,043 shares of common stock, par value $.01.
<PAGE> 2
PART I
ITEM 1 FINANCIAL STATEMENTS
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data)
-------------------------------------------------------------
For the three months ended For the nine months ended
December 31, December 31,
-------------------------- -------------------------
1993 1992 1993 1992
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $114,820 $97,966 $328,453 $298,990
Cost of sales 74,848 60,540 212,309 181,097
Selling and administrative expenses 15,769 13,683 44,503 41,235
Research and development expenses, net 3,287 2,850 9,499 8,524
--------- --------- --------- ---------
Operating income 20,916 20,893 62,142 68,134
Interest expense 6,069 5,600 17,796 19,704
Interest earned and other (587) (402) (1,541) (2,643)
--------- --------- --------- ---------
Income from continuing operations before income
taxes, minority interests and accounting change 15,434 15,695 45,887 51,073
Income taxes 4,404 5,491 14,454 19,313
Minority interests 2,126 3,101 7,376 10,210
--------- --------- --------- ---------
Income from continuing operations before
accounting change 8,904 7,103 24,057 21,550
Loss from discontinued operation (Note 2) - - - (647)
Extraordinary loss from debt extinguishments (Notes 7,8) (15,500) (8,392) (15,500) (8,392)
Cumulative effect of accounting change (Note 3) - - - 974
--------- --------- --------- ---------
Net income (loss) $(6,596) $(1,289) $8,557 $13,485
--------- --------- --------- ---------
--------- --------- --------- ---------
Per Common Share:
Income before other items $0.37 $0.29 $0.99 $0.89
Loss from discontinued operation (Note 2) - - - (0.03)
Extraordinary loss from debt extinguishments (Notes 7,8) (0.64) (0.35) (0.64) (0.35)
Cumulative effect of accounting change (Note 3) - - - 0.04
--------- --------- --------- ---------
Net income (loss) per common share $(0.27) $(0.06) $0.35 $0.55
--------- --------- --------- ---------
--------- --------- --------- ---------
Average number of common and common
equivalent shares 24,355 24,277 24,242 24,197
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE> 3
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In thousands)
December 31, March 31,
1993 1993
------------------ -------------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,150 $ 30,389
Short-term investments 4,337 3,476
Receivables, less reserves of:
December 31, 1993 - $2.1 million;
March 31, 1993 - $2.3 million 90,470 80,537
Inventories 51,010 48,310
Other current assets 5,675 4,573
------------------ -------------------
168,642 167,285
------------------ -------------------
PROPERTY:
Property, plant and equipment, at cost 270,636 243,538
Accumulated depreciation (60,657) (48,987)
------------------ -------------------
209,979 194,551
------------------ -------------------
OTHER ASSETS:
Intangibles, net of amortization 182940 155,595
Deferred financing fees, net of amortization 695 4,407
Other assets 17,263 10,346
------------------ -------------------
200,898 170,348
------------------ -------------------
$579,519 $532,184
------------------ -------------------
------------------ -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 2,859 $ 2,465
Accounts payable 36,458 41,557
Accrued liabilities 31,745 34,410
Accrued income taxes 3,325 7,336
------------------ -------------------
74,387 85,768
------------------ -------------------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 198,455 141,151
Other long-term liabilities 45,151 38,812
Deferred income taxes 27,221 31,083
Minority interests in subsidiaries 29,575 32,369
------------------ -------------------
300,402 243,415
------------------ -------------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, shares issued: December 31, 1993 -
23,286,211; March 31, 1993 - 23,261,436 233 233
Additional paid-in capital 233,912 233,511
Retained deficit (16,394) (24,951)
Currency translation adjustment (13,021) (5,792)
------------------ -------------------
204,730 203,001
------------------ -------------------
$579,001 $532,184
------------------ -------------------
------------------ -------------------
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 4
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
For the nine months ended
December 31,
-----------------------------------------
1993 1992
------------------ -------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $8,557 $13,485
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 13,131 12,526
Amortization of intangible assets 3,808 3,270
Amortization of deferred financing costs and debt
discount 1,110 1,455
Minority interests in net income 7,376 10,210
Deferred tax provision and other (180) (2,444)
Loss from discontinued operation - 647
Extraordinary loss on debt extinguishments (Notes 7,8) 15,500 8,392
Cumulative effect of accounting change - (974)
Increase in receivables (9,771) (3,238)
Increase in inventories and other current assets (2,179) (3,815)
Decrease in accounts payable and accrued expenses (13,555) (12,592)
------------------ -------------------
Net cash provided by operating activities 23,797 26,922
------------------ -------------------
INVESTING ACTIVITIES:
Purchases of plant and equipment (27,789) (20,463)
Acquisition of businesses, net of cash acquired (Note 6) (33,761) -
Proceeds from sales of plant and equipment 865 128
Proceeds from disposition of subsidiary - 28,047
Other (3,768) (259)
------------------ -------------------
Net cash provided (used) by investing activities (64,454) 7,453
------------------ -------------------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 61,751 21,006
Long-term debt retirements and payments (26,375) (57,983)
Short-term borrowings, net (395) (929)
Cash dividends paid to minority shareholders of
subsidiaries (7,014) (626)
------------------ -------------------
Net cash provided (used) by financing activities 27,967 (38,532)
------------------ -------------------
Effect of currency translation on cash and cash equivalents (549) (507)
------------------ -------------------
Net decrease in cash and cash equivalents (13,239) (4,664)
Cash and cash equivalents, beginning of period 30,389 44,761
------------------ -------------------
Cash and cash equivalents, end of period $17,150 $40,097
------------------ -------------------
------------------ -------------------
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 5
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of R.P. Scherer Corporation (the "Company"), a Delaware
corporation, and its wholly-owned subsidiary, R.P. Scherer
International Corporation ("Scherer International"). The Company's
only operating asset is the common stock of Scherer International. In
the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of
normal recurring items) necessary for the fair presentation of
financial position and results of operations. These consolidated
financial statements and related notes have been prepared pursuant to
the Rules and Regulations set forth by the Securities and Exchange
Commission and should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form
10-K for the year ended March 31, 1993, as filed with the Securities
and Exchange Commission.
2. DISCONTINUED OPERATION
In fiscal 1992, the Company reached a decision to dispose of its
former subsidiary, Paco Pharmaceutical Services, Inc. ("Paco").
Accordingly, the net operating results of Paco and the loss from
Paco's disposal are reported as a discontinued operation in the
consolidated statement of operations. In August 1992, the Company
disposed of Paco through an initial public offering of Paco's common
stock, and realized net proceeds of $28.0 million. 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 5. In
addition, the Company has indemnified Paco for any additional U.S.
federal and certain state tax liabilities arising from the date of the
Company's acquisition of Paco through the date of completion of the
offering.
For the nine month period ended December 31, 1992 (through the August
26, 1992 date of disposal), Paco had net sales of $30.2 million,
interest expense of $1.1 million (including an allocation of
consolidated interest expense for debt attributable to Paco), income
taxes of $1.0 million, and no net income. The consolidated statement
of cash flows excludes Paco's net cash used of $0.1 million for the
nine month period ended December 31, 1992.
3. INCOME TAXES
The Company records income tax expense for interim periods
based on an estimated consolidated effective income tax rate
for the fiscal year. The effective income tax rate in 1993 is lower
than the U.S. Federal income tax rate primarily due to the recognition
of foreign income tax credits generated in the current fiscal year for
U.S. tax purposes, offset by goodwill amortization not deductible for
income tax purposes. In 1992, the effective tax rate was higher than
the U.S. Federal income tax rate primarily due to higher foreign
income tax rates, goodwill amortization not deductible for income tax
purposes, and restrictions as to the recognition of foreign income tax
credits for U.S. tax purposes.
Effective April 1, 1992, the Company adopted the provisions of the
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). As a result, 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 as of that date. Such amount has been reflected
in the consolidated statement of operations as the cumulative effect
of an accounting change for the nine months ended December 31, 1992.
5
<PAGE> 6
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, March 31,
1993 1993
------------------ -------------------
<S> <C> <C>
Raw materials and supplies $26,469 $23,881
Work in process 6,654 7,365
Finished goods 17,887 17,064
------------------ -------------------
$51,010 $48,310
------------------ -------------------
------------------ -------------------
</TABLE>
5. CONTINGENCIES
The Company's former subsidiary 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 for dismissal
judgment 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, has been stayed pending resolution of the
New Jersey state court action (Nelson v. Ian Ferrier, Civil Action
91-5334(JWB)). 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.
The Company believes that it has meritorious defenses to these actions
and intends to defend against them 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.
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
6
<PAGE> 7
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 has been temporarily stayed by OCAP's
filing of a motion for partial summary judgment. The Company has
filed a cross-motion for dismissal based on discovery to date and is
awaiting the decision of the Court. 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 may also
indicate 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.
6. BUSINESS ACQUISITION
On July 1, 1993, the Company acquired all outstanding capital stock of
Pharmagel S.p.A. (Italy) and Pharmagel S.A. (France) (jointly
"Pharmagel"), and has accounted for such acquisition as a purchase for
financial reporting purposes. Pharmagel is a manufacturer of
softgels, and had been privately held. The net assets and results of
operations of Pharmagel are included in the Company's consolidated
financial statements beginning July 1, 1993. The aggregate purchase
price, which approximates $30 million, was allocated to assets and
liabilities based on preliminary estimates of their fair values as of
the date of acquisition. The purchase was funded primarily by
borrowings under the Company's bank credit facility, plus an
additional amount not to exceed $4.5 million payable to the sellers
during the next six years. The purchase price exceeds the fair value
of the net assets acquired by a currently estimated $22.4 million,
which is classified as goodwill in the statement of financial position
and is being amortized on a straight-line basis over forty years.
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
7
<PAGE> 8
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 quarter
ended For the nine months ended
December 31, December 31,
---------------- -------------------------
1992 1993 1992
------------- ------------ ------------
<S> <C> <C> <C>
Net sales $104,847 $335,590 $321,373
Income from continuing
operations $6,787 $23,910 $21,037
Net income $(1,605) $8,410 $12,972
Earnings per share from
continuing operations $0.28 $0.99 $0.87
Net income per share $(0.07) $0.35 $0.54
</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 $9.4 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.
7. FISCAL YEAR 1993 REPURCHASE OF SUBORDINATED DEBENTURES
During the quarter ended December 31, 1992, the Company repurchased
approximately $42.5 million principal amount of the Subordinated
Debentures for an aggregate purchase price of approximately $49.3
million, plus accrued interest. As a result of these repurchases, the
Company recognized an extraordinary charge of $10.3 million, less
related income tax benefits of $1.9 million, including the write-off
of unamortized bond discount and deferred financing costs. Annual
interest expense on the Subordinated Debentures repurchased was
approximately $6.4 million. Sources of funds for the repurchases
consisted primarily of cash on hand and, to a lesser extent,
borrowings under the Company's bank credit facility.
8. SUBSEQUENT EVENTS - FINANCING ACTIVITIES
In January 1994, Scherer International successfully 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. Prior to the issuance of this debt, the Company
executed an amendment to the Company's bank credit facility which
removed all collateral requirements. 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 (prior to deducting certain expenses related to the Offering)
were $98.1 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 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. As of
December 31, 1993, the Company recognized future tax benefits of
approximately $4.8 million resulting from the Defeasance, which are
8
<PAGE> 9
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
included in Other Long-Term Assets in the accompanying Consolidated
Statement of Financial Position. The Company also recorded a $17.0
million liability as a component of long-term debt for its
commitments related to the Defeasance.
In January 1994, the Company executed an amendment to the Company's
bank credit facility which removed all collateral requirements.
9
<PAGE> 10
ITEM 2 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 three and nine month periods ended December 31, 1993 and 1992.
A majority of the Company's sales, income and cash flows is derived from
its international operations. With the exception of Brazil, the financial
position and the results of operations of the Company's foreign subsidiaries
are measured using the local currency 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 income of foreign subsidiaries will be higher or lower depending upon
a weakening or strengthening of the U.S. dollar. In addition, a substantial
amount of the Company's net assets are based in its foreign operations, and are
translated into U.S. dollars primarily 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
Quarters Ended December 31 1993 and 1992
Sales for the third fiscal quarter ended December 31, 1993 were a record $114.8
million, amounting to a 17% increase from the $98.0 million reported for last
year's third quarter. A significantly stronger U.S. dollar in the current year
quarter had the effect of depressing the reported sales gain. On a constant
exchange rate basis, the sales increase would have been 22% for the quarter
ended December 31, 1993. Sales for this year's third quarter included $5.5
million from Pharmagel operations, which were acquired July 1, 1993 (see Note 6
to the Consolidated Financial Statements).
The Company's 12-month sales backlog was $123.4 million at December 31, 1993, a
24% increase from the same time a year ago. Sales backlog increased 28% as
measured using constant foreign exchange rates. This increase primarily
reflects significant additional order activity in the Company's United States
and German operations as compared to the prior year. The increase in Germany's
for the first time within the past several quarters and amounts to an 18%
improvement from the prior year and a 23% gain from September 30, 1993.
Operating income was $20.9 million for the quarter ended December 31, 1993,
unchanged from the same quarter last year. Operating income grew by 4% on a
constant exchange rate basis. The Company continued to experience a decline in
operating margin, falling to 18.2% for the quarter ended December 31, 1993 as
compared to 21.3% in the same quarter last year. As described further below,
this decline results primarily from a sales mix shift towards lower margin
health and nutritional products. Selling and administrative expenses increased
15% to $25.8 million in the December 31, 1993 quarter, primarily as a result of
the Pharmagel acquisition. Before the increase related to Pharmagel, selling
and administrative expenses fell to 12.7% of sales in the quarter ended
December 31, 1993 as compared to 14.0% of sales for last year's third quarter.
Research and development expenses also increased by 15%, amounting to nearly
$3.3 million for the three months ended December 31, 1993. This increase
reflects continued spending for development of the Company's Scherersol(TM) and
Pulsincap(R) products and costs associated with the newly formed Advanced
Therapeutic Products group in the United Kingdom.
Income from continuing operations reached a record $8.9 million, or $0.37 per
share, for the quarter ended December 31, 1993, compared to $7.1 million, or
$0.29 per share, for the same quarter last year, primarily as a result of lower
non-operating expenses in the current year quarter. Net interest expense rose
$0.3 million to $5.5 million in the quarter ended December 31, 1993, largely as
a result of interest expense on debt used to fund the Pharmagel acquisition and
transaction losses related to monetary inflation experienced by the Company's
Brazilian subsidiary. Income tax provisions were $4.4 million (28.5% of pretax
income) for the quarter ended December 31, 1993 and $5.5 million (35.0% pretax
income) for the quarter ended December 31, 1992. The lower tax provision in
the 1993 quarter resulted from a shift in income toward lower tax rate
countries, reduced Corporate income tax rates in Germany and Australia and a
$.5 million benefit from a revision in the estimated annual consolidated tax
rate from that used for the first half of the fiscal year. Minority interests
in income fell nearly $1.0 million in the quarter ended December 31, 1993
compared to the same quarter last fiscal year as a result of reduced income
from the Company's 51% owned Germany subsidiary.
In January, 1994, the Company successfully refinanced, through defeasance, the
outstanding 14% Senior Subordinated Debentures of R.P. Scherer International
Corporation. For financial reporting purposes, the extraordinary loss of $15.5
million ($0.64 per share) related to the defeasance was recorded as of December
31, 1993, resulting in a $6.6 million, or $0.27 per share, net loss for the
quarter. See "Liquidity and Financial Condition" below for further discussion.
The following sets forth operating results for each of the Company's
geographic segments for the quarters ended December 31, 1993 and 1992:
<TABLE>
<CAPTION>
(In thousands) Sales Operating Income Operating Margin
-------------------------- ------------------------- -------------------------
1993 1992 1993 1992 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States $ 31,623 $21,952 $ 7,766 $ 6,508 24.6% 29.6%
Europe 57,763 55,672 9,068 12,784 15.7 23.0
Other International 25,434 20,342 5,172 3,774 20.3 18.6
Unallocated - - (1,090) (2,173) - -
---------- ---------- ---------- ---------- ---------- ----------
$114,820 $97,966 $20,916 $20,893 18.2% 21.3%
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The Company's U.S. operations generated a 44% sales gain for the quarter ended
December 31, 1993. Sales of the Company's anti-oxidant softgels (primarily
Vitamin E) more than doubled, resulting in part from the increased popularity
of these products due to favorable medical studies and media reports. Sales
for the quarter also benefited from record demand for over-the-counter ("OTC")
pharmaceutical softgels, including several new branded cough/cold products.
Operating income increased 19% for the 1993 quarter compared to the same
quarter a year earlier, while operating margin declined from 29.6% in last
year's third quarter to 24.6% in the current year quarter. This decline in
margin rate is due to the higher proportion of low margin nutritional softgel
sales in the 1993 quarter.
Sales in Europe increased 4% for the quarter ended December 31, 1993, despite a
stronger U.S. dollar as compared to the same quarter last year. On a constant
exchange rate basis, sales would have increased _____%. The sales increase is
attributable to the addition of Pharmagel in the current fiscal year and strong
sales of specialty nutritional softgels in the United Kingdom. Operating
income declined 29% due in part to significantly lower sales of higher margin
pharmaceutical softgels in Germany and elsewhere. Although the market
situation is improving in Germany, the Company continues to be adversely
affected by government healthcare reforms implemented at the beginning of
calendar year 1993 and recessionary economic conditions. In addition,
Pharmagel operated at a break-even level in the December 31, 1993 quarter,
reducing the Company's margin rate in Europe. The Company expects Pharmagel to
provide a positive income contribution next fiscal year when it is integrated
with Scherer's other European operations.
The Company's Other International segment achieved a 25% sales increase for the
current year quarter as a result of strong demand for both nutritional and
pharmaceutical softgels, particularly in Australia Canada and Japan. Profits
from these additional sales led to a 37% improvement in operating income for
the current year quarter.
Nine Months Ended December 31, 1993 and 1992
Sales for the nine months ended December 31, 1993 were $328.5 million,
representing a 10% increase over sales of $299.0 million for the same period
last year. Strong sales results were achieved in the United States and Other
International segments, offset by the effects of a stronger U.S. dollar
relative to most foreign currencies and the aforementioned weakness of the
German pharmaceutical market. The sales increase between the two periods was
16% as measured using constant exchange rates.
Operating income amounted to $62.1 million for the nine months ended December
31, 1993, a decrease of $6.0 million, or 9%, from the $68.1 million recorded
for the same period a year earlier. The decline would have been 5% if measured
using constant exchange rates. A significant part of the decline in operating
income is attributable to the Company's German operations. The Company
contained selling and administrative expenses to $44.5 million in the current
year nine months (an 8% increase), despite a $3.1 million addition due to the
acquisition of Pharmagel. Before the sales and expenses attributable to
Pharmagel, selling and administrative expenses declined to 13.0% of sales in
the 1993 nine months from 13.8% last year. The Company increased net research
and development spending by $1.0 million, or 11% (18% at constant exchange
rates) in the nine months ended December 31, 1993, primarily for pharmaceutical
softgel development activities and continued investments in the Company's
Pulsincap(R) drug delivery device.
The Company reported income from continuing operations of $24.1 million, or
$0.99 per share, for the nine months ended December 31, 1993, a 12% improvement
versus the $21.6 million, or $0.89 per share, for the same period a year ago.
Reductions in income taxes and minority interests in income of subsidiaries for
the same reasons mentioned under the quarterly discussion above provided a
combined $7.7 million earnings increase. A reduction in interest expense of
$1.9 million due primarily to the Company's October 1992 repurchase of $42.5
million for value of its 14% Senior Subordinated Debentures also contributed to
this improvement.
The following table shows the operating results of the Company's
geographic segments for the nine months ended December 31, 1993 and
1992:
<TABLE>
<CAPTION>
(In thousands) Sales Operating Income Operating Margin
-------------------------- ------------------------- -------------------------
1993 1992 1993 1992 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States $ 87,426 $ 63,167 $22,133 $18,908 25.3% 29.9%
Europe 169,239 176,027 28,674 41,772 16.9 23.7
Other International 71,788 59,796 15,101 11,240 21.0 18.8
Unallocated - - (3,766) (3,736) - -
---------- ---------- ---------- ---------- ---------- ----------
$328,453 $298,990 $62,142 $68,134 18.9% 22.8%
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
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<PAGE> 11
Sales of U.S. operations increased 38% for the nine months ended December 31,
1993, reflecting strong demand for Vitamin E and other anti-oxidant vitamin
softgels, as well as significant growth of OTC softgel medications. Operating
income in the U.S. increased 17% in the December 31, 1993 nine months due to
the additional sales volumes. Operating margins, however, declined
significantly as a majority of the sales gain was from nutritional softgels
which, in the U.S., generally have a high material cost content relative to
their sales value when compared to other softgel types.
The Company experienced a 5% decline in sales of its European operations for
the nine months ended December 31, 1993. Sales in Germany declined $13.8
million due to the difficult industry and economic factors discussed previously
and the effects of a comparatively stronger U.S. dollar. The Company's other
European operations registered local currency sales gains over the prior year
period, including $10.4 million of sales contributed by Pharmagel. Operating
income in Europe decreased by 31% due primarily to the weaker foreign currency
exchange rates and lower prescription pharmaceutical sales in Germany. The
shift in product mix in Germany and elsewhere away from prescription
pharmaceutical softgels, break-even results from Pharmagel and higher research
and development costs all contributed to a 6.8 point decrease in European
operating margins.
In Other International operations, sales increased by 20% for the nine months
ended December 31, 1993 compared to the same period last year. Significant
sales gains of nutritional softgels were achieved in Australia, Japan and
Canada. The sales volume growth led to a 34% increase in operating income. As
a result of efficiencies of scale related to the growth in sales of nutritional
softgels (which are characterized by strong gross margin rates in both
Australia and Japan), operating margin improved from 18.8% in the prior year
period to 21.0% for the 1993 nine months.
CASH FLOWS
Cash and cash equivalents decreased by $13.2 million for the
nine month period ended December 31, 1993, as compared with a decrease
of $4.7 million in the same period in 1992. Operating activities
provided cash of $23.8 million and $26.9 million for the current and
prior year periods, respectively. For the period ended December 31,
1993, cash generated from continued strong earnings was offset by a
$25.5 million increase in net working capital. Such increase resulted
primarily from an increase in accounts receivable due to increased
sales and shifts in sales mix towards nutritional products customers
which are generally provided longer payment terms. Working capital
was further impacted by a decrease in current liabilities relating
primarily to the timing of value added tax payments for certain of the
Company's European subsidiaries as well as the timing of interest
payments. For the prior year period, cash generated from operating
earnings was offset by a $19.6 million increase in net working
capital. Increases in receivables and inventory levels due to
increased sales and decreases in current liabilities primarily related
to the timing of value added tax payments contributed to the prior
year net working capital decrease.
Capital expenditures for the current year nine months amounted to
$27.8 million, compared to the prior year period's capital
expenditures of $20.5 million. Current quarter capital spending
consisted primarily of expenditures in the United Kingdom related to
the new Zydis(R) production facility and in Australia related to the
construction of a new production facility, as well as general facility
and equipment additions and improvements worldwide. In the prior
year, capital expenditures were related primarily to facility upgrades
of the Company's German softgel operation, expansion in the United
Kingdom related to the Zydis(R) production and PulsincapTM development
facilities, and general facility and equipment additions and
improvements. For the nine months ended December 31, 1993, $33.8
million was used for the acquisitions of the capital stock of
Pharmagel and certain softgel assets of Gayoso Wellcome (as discussed
in Note 6 to the consolidated financial statements). For the same
period last year, cash of $28.0 million was provided resulting from
the disposition of Paco (as discussed in Note 2 to the consolidated
financial statements).
Financing activities for the nine months ended December 31, 1993,
reflect primarily $24.5 million of borrowings under the Company's bank
credit facility to fund the acquisition of Pharmagel, as well as a net
$10.9 million of other borrowings (primarily under the bank credit
facility) to fund previoulsy mentioned capital expenditure needs. In
the prior year period, financing activities primarily reflect the
repurchase of $42.5 million principal amount of the Company's 14%
Senior Subordinated Debentures for approximately $49.3 million, funded
primarily by cash on hand and, to a lesser extent, borrowings under
the Company's bank credit facility.
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 8 to the Consolidated Financial Statements).
These actions will result in interest savings of approximately $9
million annually.
The 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 certain
expenses related to the Offering) were $98.1 million.
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<PAGE> 12
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 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.
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. The Company
also recorded a $17.0 million liability as a component of long-term
debt for its commitments related to the Defeasance.
During the next several years, a significant portion of the Company's
cash flow will be used to service indebtedness and fund capital
expenditures. The Company believes that its future cash flows from
operations, together with cash and short-term investments aggregating
$21.5 million at December 31, 1993, 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. Management anticipates that most such acquisitions would
not involve material initial cost. An example is the Company's
recently announced acquisition of an opthalmic drug technology from
Zeneca Limited. Management intends that any acquisition requiring
significant funding would be financed largely through the issuance of
common stock, depending upon market conditions, so as not to adversely
impact the Company's capital structure.
At December 31, 1993, the Company's outstanding long-term indebtedness
consisted of approximately $120.0 million of Subordinated Debentures
(net of a $5.1 million discount) which were subsequently defeased as
discussed above; approximately $37.3 million under the Company's bank
credit facility; $17.0 million relating to commitments under the
Defeasance as discussed above which was funded subsequent to quarter
end with funds from the Company's bank credit facility; $10.1 million
of industrial revenue bonds; and $14.1 million of other instruments.
The Company's bank credit facility provides that the Company may
borrow up to an aggregate of $120.0 million in various currencies, and
expires March 31, 1995. In January 1994, the bank credit facility was
amended to remove all collateral requirements; the facility had
previously been collateralized by a first lien on a significant
portion of the Company's and certain subsidiaries present and future
assets. Borrowings under the facility remain guaranteed by
cross-guarantees among the Company and such subsidiaries.
Pursuant to other local credit arrangements, the Company and certain
of its subsidiaries may borrow up to $12.0 million, subject to certain
limitations imposed by the Company's bank credit facility.
Approximately $0.7 million was outstanding under these arrangements as
of December 31, 1993.
Capital expenditures in fiscal 1994 are expected to approximate $40
million and will include facilities expansions or replacement in
Europe, Latin America and Australia, continuing facility and equipment
expenditures for the manufacture of Zydis(R) fast dissolving dosage
products, and general facility and equipment upgrade and replacement
costs. As of December 31, 1993, the Company has
12
<PAGE> 13
approximately $7.1 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 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 Company's
bank credit facility contains covenants which limit the Company's
ability to incur additional indebtedness or contingent obligations,
make investments and loans, dispose of assets, consummate a business
combination and declare or pay cash dividends. The bank credit
facility allows increasing levels of cash dividends based upon future
income. The Company does not currently have any plans to declare or
pay dividends.
ACCOUNTING POLICIES
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 would require accounting
for other postemployment benefits similar to that currently required
for postretirement benefits. Upon adoption, the standard requires the
recognition of a cumulative adjustment to the results of operations.
The determination of the impact from adoption of this statement on the
Company's financial statements has not yet been completed, however,
the Company believes that it will not significantly affect the
Company's future financial results or position.
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<PAGE> 14
PART II
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - None.
(b) No reports on Form 8-K were filed with the Securities and
Exchange Commission during the period for which this
report is filed.
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<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
R.P. SCHERER CORPORATION
Date: February 14, 1994 By: /s/Nicole S. Williams
----------------- ---------------------
Nicole S. Williams
Executive Vice President, Finance
and Chief Financial Officer,
Treasurer, and Secretary
15
