<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 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)
<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, 1995: 23,311,417 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,
----------------------------- --------------------------
1994 1993 1994 1993
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $132,215 $114,820 $386,465 $328,453
Cost of sales 83,743 74,848 244,612 212,309
Selling and administrative expenses 17,432 15,769 51,775 44,503
Research and development expenses, net 5,236 3,287 14,218 9,499
-------- -------- -------- --------
Operating income 25,804 20,916 75,860 62,142
Interest expense 3,410 6,069 10,630 17,796
Interest earned and other (555) (587) (1,257) (1,541)
-------- -------- -------- --------
Income from continuing operations before
income taxes and minority interests 22,949 15,434 66,487 45,887
Income taxes 7,840 4,404 23,270 14,454
Minority interests 3,502 2,126 11,041 7,376
-------- -------- -------- --------
Income from continuing operations 11,607 8,904 32,176 24,057
-------- -------- -------- --------
Extraordinary loss from debt
extinguishment, net of tax effects
(Note 6) - (15,500) - (15,500)
-------- -------- -------- --------
Net income (loss) $11,607 ($6,596) $32,176 $8,557
======== ======= ======== ========
Per Common and Common Equivalent
Share:
Income before other items $0.47 $0.37 $1.31 $0.99
Extraordinary loss from debt
extinguishment, net of tax
(Note 6) - (0.64) - (0.64)
-------- -------- -------- --------
Net income (loss) $0.47 ($0.27) $1.31 $0.35
======== ======== ========= ========
Average number of common and common
equivalent shares 24,573 24,355 24,476 24,242
</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,
1994 1994
------------- ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 23,142 $ 16,576
Short-term investments 4,426 6,041
Receivables, less reserves of:
December 31, 1994 - $3.6 million;
March 31, 1994 - $2.9 million 100,336 98,775
Inventories 64,438 56,492
Other current assets 7,552 5,260
-------- --------
199,894 183,144
PROPERTY: -------- --------
Property, plant and equipment, at cost 331,378 284,992
Accumulated depreciation (81,392) (63,277)
-------- --------
249,986 221,715
-------- --------
OTHER ASSETS:
Intangibles, net of amortization 187,247 188,396
Deferred financing fees, net of amortization 1,647 1,658
Other assets 16,951 18,501
-------- --------
205,845 208,555
-------- --------
$655,725 $613,414
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 5,286 $ 3,936
Accounts payable 36,524 52,086
Accrued liabilities 43,489 36,802
Accrued income taxes 6,911 1,967
-------- --------
92,210 94,791
-------- --------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 191,451 187,949
Other long-term liabilities 51,000 49,865
Deferred income taxes 32,157 30,745
Minority interests in subsidiaries 34,537 35,354
-------- --------
309,145 303,913
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY:
Preferred stock, 500,000 shares authorized, none - -
issued
Common stock, $.01 par value, 50,000,000 shares
authorized, shares issued: December 31, 1994 -
23,299,417; March 31, 1994 - 23,287,043 233 233
Additional paid-in capital 234,409 234,157
Retained earnings (deficit) 22,319 (9,857)
Currency translation adjustment (2,591) (9,823)
-------- --------
254,370 214,710
-------- --------
$655,725 $613,414
======== ========
</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,
----------------------------
1994 1993
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 32,176 $ 8,557
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 16,094 13,131
Amortization of intangible assets 4,376 3,808
Amortization of deferred financing costs and debt
discount 443 1,110
Minority interests in net income 11,041 7,376
Deferred tax provision and other 898 (180)
Extraordinary loss on debt extinguishment (Note 6) - 15,500
(Increase) decrease in receivables 5,655 (9,771)
Increase in inventories and other current assets (5,889) (2,179)
Decrease in accounts payable and accrued expenses (12,443) (13,555)
-------- ---------
Net cash provided by operating activities 52,351 23,797
-------- ---------
INVESTING ACTIVITIES:
Purchases of plant and equipment (33,842) (27,789)
Acquisitions of businesses, net of cash acquired (Note 5) - (33,761)
Proceeds from sales of plant and equipment 484 864
Other (4,468) (3,768)
-------- ---------
Net cash used by investing activities (37,826) (64,454)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 68,940 61,751
Long-term debt retirements and payments (67,097) (26,375)
Short-term borrowings, net 885 (395)
Cash dividends paid to minority shareholders of subsidiaries (11,539) (7,014)
-------- ---------
Net cash provided (used) by financing activities (8,811) 27,967
-------- ---------
Effect of currency translation on cash and cash equivalents 852 (549)
-------- ---------
Net increase (decrease) in cash and cash equivalents 6,566 (13,239)
Cash and cash equivalents, beginning of period 16,576 30,389
-------- ---------
Cash and cash equivalents, end of period $23,142 $ 17,150
======== =========
</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 and the term "Company" as used herein refers to
either or both of the Company and 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, 1994, as filed with the Securities and Exchange Commission. Certain
items in the prior years' financial statements have been reclassified to
conform with the current year presentation.
2. 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 the 1994 period approximates the U.S. Federal
income tax rate as higher foreign income tax rates and goodwill amortization
not deductible for income tax purposes were offset by the recognition of
foreign income tax credits utilized in the current year. For the 1993 period,
the effective rate is lower than the U.S. Federal income tax rate primarily due
to the recognition of foreign income tax credits generated in the current year
for U.S. tax purposes, offset by goodwill amortization not deductible for
income tax purposes.
3. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, March 31,
1994 1994
-------------- -------------
<S> <C> <C>
Raw materials and supplies $32,440 $26,760
Work in process 8,467 10,289
Finished goods 23,531 19,443
--------- -------
$64,438 $56,492
========= =======
</TABLE>
4. CONTINGENCIES
Three separate actions, which sought damages for, among other things, alleged
violations of state securities laws, fraud, misrepresentation, breach of
contract, conversion and negligence in connection with the 1986 private
placement sale of limited partnership interests and warrants of Paco
Development Partners II, a research and development partnership of which a
former subsidiary of the Company serves as general partner, have been settled
in a class action settlement. These actions include two New Jersey State court
actions which were consolidated (Nelson v. Dean Witter Reynolds, Inc., and
Barrios et al. v. Paco Pharmaceutical Services, Inc., et al.) and a New Jersey
federal court action (Nelson v. Ian Ferrier). The Company recognized during
the fourth quarter of fiscal 1994 a special charge of approximately $3.2
5
<PAGE> 6
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
million representing the anticipated amount of all settlement-related costs in
excess of previously provided reserves. Such payments were made subsequent to
December 31, 1994.
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.
Pre-trial discovery with respect to the action is presently under way. 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.
5. 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"), 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 their fair values as of the date of acquisition, as well
as to a five year, $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 in
installments through June 30, 1999, not to exceed $4.5 million plus interest.
6
<PAGE> 7
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The allocation of the purchase price to the assets and liabilities of Pharmagel
was based upon various valuations and studies. The adjustments to the
historical net assets of Pharmagel are summarized as follows (amounts in
thousands):
<TABLE>
<S> <C>
Historical net assets of Pharmagel at July 1, 1993 $ 5,242
Adjustments of assets and liabilities:
Current assets (675)
Plant and equipment 1,321
Covenant not to compete 3,000
Goodwill 27,200
Current liabilities (3,764)
Long-term liabilities (2,324)
--------
$30,000
========
</TABLE>
The cost of the covenant not to compete is being amortized over the life of the
agreement. Goodwill 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 period 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 that date, and is not intended to be a projection
of future results or trends.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) For the nine months ended
December 31, 1993
-------------------------
<S> <C>
Net sales $335,590
Net income $8,410
Net income per share $0.35
</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
were not material in relation to the Company's consolidated financial
statements, and pro forma information for this acquisition is therefore not
presented.
6. EXTINGUISHMENT OF DEBT
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 proceeds of the Offering (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 Scherer International's 14% Senior Subordinated Debentures
("Subordinated Debentures"), which had 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
7
<PAGE> 8
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
call premium thereon and the outstanding principal thereof when due upon
redemption ("Defeasance"). The Subordinated Debentures were retired at
the Call Date.
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. Approximately $4.8 million of future tax benefits resulting from
the Defeasance were also recognized in the December 31, 1993 quarter.
7. SECONDARY OFFERING OF COMMON STOCK
In December 1994, the Company completed a secondary offering of 7.0 million
shares of its common stock. The shares were sold by certain merchant banking
partnerships affiliated with Lehman Brothers, Inc. (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
offering. As a result of the offering, Lehman no longer has any beneficial
ownership of the Company.
8. ANTICIPATED MERGER OF SCHERER INTERNATIONAL INTO R.P. SCHERER
CORPORATION
For administrative purposes, the Company intends to merge Scherer International
into R.P. Scherer Corporation, through which the assets and liabilities of
Scherer International will be assumed by R.P. Scherer Corporation. Such
merger, which may be completed prior to the end of the current fiscal year,
will have essentially no impact on the Company's financial results or position.
8
<PAGE> 9
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, 1994 and 1993. 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
Quarters Ended December 31, 1994 and 1993
The Company reported consolidated sales of $132.2 million for its third fiscal
quarter ended December 31, 1994, a 15% increase as compared to $114.8 million
of sales for the same quarter last year. A substantial majority of the sales
improvement was provided by the Company's operations in Europe, where a
continued strengthening of the over-the-counter ("OTC") pharmaceutical market
and significant increases in Sandimmune/Neoral(R) sales in Germany contributed
to 26% European sales growth. A further strengthening of most foreign
currencies relative to the U.S. dollar also favorably impacted sales
performance in the current fiscal year quarter. On a constant foreign currency
exchange rate basis, the consolidated sales increase would have been 10% for
the quarter ended December 31, 1994 versus the same quarter of the prior year.
The Company's twelve month sales order backlog was $148.9 million at December
31, 1994, a 21% increase from the $123.4 million backlog at the same date last
year. Sales backlogs increased 20% when measured using constant exchange
rates. The backlog gain represents continuing strong demand for the Company's
products, especially for pharmaceutical softgels in Germany and elsewhere,
and nutritional softgels in the United Kingdom.
Operating income was $25.8 million for the third quarter of fiscal year 1995,
representing a 23% increase from the $20.9 million of operating income
generated in last year's third fiscal quarter. On a constant exchange rate
basis, operating income grew 17% between the two quarters. Operating margin
rose to 19.5% of sales for the quarter ended December 31, 1994 from 18.2% of
sales for the same quarter of the prior year. This margin expansion resulted
from both efficiencies related to the higher sales volumes and a shift in sales
mix towards higher margin pharmaceutical products. Pharmaceutical sales grew
35% comparing these two quarters, whereas lower margin nutritional product
sales were flat primarily as a result of the continued reduced demand for
Vitamin E experienced since the beginning of calendar year 1994. The operating
income improvement was somewhat offset by increases of $1.7 million, or 11%, in
selling and administrative expenses and $1.9 million, or 59%, in research and
development expenses. The increase in selling and administrative expenses,
which was only 6% on a constant exchange rate basis, resulted primarily from
additions to marketing staffs, advertising and promotion costs and commissions
to sales agents related to the higher sales levels.
Research and development expenses were $5.2 million for the third quarter of
fiscal 1995 as compared to $3.3 million for the third quarter of fiscal 1994.
Approximately $1.4 million of the increase in research
9
<PAGE> 10
and development expenses represents the Company's planned investment in ATP,
as discussed further below. Excluding research and development expenses,
income increased 28% between the quarters ended December 31, 1994 and 1993.
Operating margins before research and development expenses were 23.5% and
21.1% for the respective third fiscal quarters of 1995 and 1994.
Income from continuing operations was $11.6 million, or $0.47 per share, for
the quarter ended December 31, 1994, representing a new third fiscal quarter
earnings record and a 30% improvement over the $8.9 million, or $0.37 per
share, recognized in the same quarter last year. Income of the current fiscal
year third quarter includes a $2.7 million decline in interest expense
associated with the January 1994 refinancing of Scherer International's 14%
senior subordinated debentures, as described below. The Company's income tax
provision rose to 34.1% of pretax income in the fiscal 1995 third quarter,
compared to 28.5% for the third quarter last year. The higher income tax rate
is attributable to changes in the geographic mix of pretax income towards
higher tax rate countries, and increases in statutory income tax rates in
certain countries.
The Company incurred a net loss of $6.6 million, or ($0.27) per share, in the
prior year quarter ended December 31, 1993, as the result of an extraordinary
$15.5 million, or $0.64 per share, charge related to the January 1994
refinancing described below.
Nine Months Ended December 31, 1994 and 1993
Consolidated sales for the nine month period ended December 31, 1994 were
$386.5 million, amounting to an 18% increase from sales of $328.5 million in
the same period last year. Sales gains were achieved in all of the Company's
geographic segments, most notably Europe. The effects of a weaker U.S. dollar
relative to most foreign currencies increased reported sales during the current
year period. On a constant exchange rate basis, the sales increase would have
been 15% for the nine months ended December 31, 1994, as compared to the same
period of the prior year.
The Company earned operating income of $75.9 million for the nine months ended
December 31, 1994, a 22% gain from the $62.1 million earned in the same period
of the prior year. On a constant exchange rate basis, operating income rose
19% between these two periods. Operating margin improved to 19.6% of sales for
the December 31, 1994 period from 18.9% for the same period last year. Such
improvement includes significant profit gains in Germany (discussed below), as
well as a sales mix shift toward higher margin pharmaceutical softgels. Sales
of pharmaceutical softgels rose 27%, while health and nutritional softgel sales
increased only 6% between the nine month periods ended December 31, 1994 and
1993. The slow growth rate for nutritional softgels is due to the reduced
demand for comparatively low margin Vitamin E products as a result of recent
published studies questioning the health benefits of Vitamin E and other
anti-oxidants. By contrast, sales of other nutritional softgels increased by
15% in the current fiscal year period. The improvement in operating income was
achieved in spite of a 16% increase in selling and administrative expenses
attributable in large part to additional investments in marketing staffs and
related costs, particularly in Germany and the United States, and sales
commissions in Germany and Argentina.
Planned spending for research and development further reduced reported
operating income and margin growth for the nine months ended December 31, 1994.
Excluding research and development expenses, operating margin grew to 23.3% of
sales for the December 31, 1994 period, compared to 21.8% for the same period
of the prior year. Research and development costs were $14.2 million for the
nine months ended December 31, 1994, representing a 50% increase from the $9.5
million incurred during last fiscal year's first nine months. Approximately
$3.4 million of this increase relates to the Advanced Therapeutic Products
group ("ATP"), which was formed late fiscal 1994 to engage in the development
of off-patent or soon to become off-patent drug compounds reformulated
utilizing the Company's advanced drug delivery systems. The Company expects
that spending for ATP activities will continue to increase at a significant
rate for the foreseeable future.
10
<PAGE> 11
Income from continuing operations and net income for the first nine months of
fiscal 1995 reached $32.2 million, or $1.31 per share, compared to income from
continuing operations of $24.1 million, or $0.99 per share, for the same period
last fiscal year. In addition to the operating income improvement discussed
above, the Company realized the benefit of a $6.9 million reduction in interest
expense, primarily associated with the January, 1994 refinancing through
defeasance of $125 million of 14% subordinated debentures with a combination of
$100 million 6 3/4% senior notes and bank debt. After the $15.5 million, or
$0.64 per share, extraordinary charge related to this refinancing, net income
for the nine months ended December 31, 1993 was $8.6 million, or $0.35 per
share. The Company's effective income tax rate rose to 35.0% for the December
31, 1994 nine months compared to 31.5% for the same period last year. The
higher effective income tax rate is the result of changes in the geographic mix
of pretax income and increases in income tax rates in certain countries.
Minority interests in income of subsidiaries for the nine months ended December
31, 1994 increased $3.7 million as a result of the substantial improvement in
earnings of the Company's 51%-owned German operation.
Overview of Interim Results by Geographic Segment
The following sets forth operating results for each of the Company's geographic
segments for the nine months ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
(In thousands) Sales Operating Income Operating Margin
--------------------- --------------------- -------------------
1994 1993 1994 1993 1994 1993
------ ------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
United States $ 91,462 $ 87,426 $ 21,502 $22,133 23.5% 25.3%
Europe 215,209 169,239 46,609 28,674 21.7 16.9
Other International 79,794 71,788 16,689 15,101 20.9 21.0
Unallocated (1) - - (8,940) (3,766) - -
-------- -------- -------- --------- ---- ----
$386,465 $328,453 $75,860 $62,142 19.6% 18.9%
======== ======== ========= ========= ==== ====
</TABLE>
(1) Includes general Corporate expenses and, in the December 31, 1994
period, expenses associated with ATP.
The Company's United States operations achieved a 5% sales gain for the nine
months ended December 31, 1994. Sales of OTC pharmaceutical softgels were
particularly strong, as planned customer launches of several cough/cold and
other OTC softgels led to a 28% sales gain in this product line. Major branded
products launched during the first nine months of fiscal 1995 include
Alka-Seltzer Plus from Miles Laboratories, Drixoral from Schering-Plough and
Excedrin PM from Bristol-Myers. Sales of nutritional softgels slowed during
the first nine months of fiscal 1995, dropping nearly 8% from sales of the same
period last fiscal year. All of this decline is attributable to reductions in
sales of Vitamin E, resulting from the general decline in demand previously
mentioned. The decrease in nutritional softgel sales had a minimal effect on
operating income as a result of the relatively low margins related to Vitamin E
products due to their high material cost content and commodity nature.
Operating income declined by 3% to $21.5 million for the nine months ended
December 31, 1994, as the incremental profits from sales of pharmaceutical and
other softgels were mostly offset by the costs of increased marketing staffs,
promotional expenses and development resources to meet the increasing demand
for the Company's softgel products.
Sales in Europe increased 27% for the nine months ended December 31, 1994, as
compared to the same period last year. The most significant sales increase was
achieved in Germany, as the Company continued to rebound from the effects of
government healthcare reforms instituted in January 1993. Sales elsewhere in
Europe also increased at double digit rates, aided in large part by the
acquisition of Pharmagel on July 1, 1993. Primarily as a result of the recent
strength in the German pharmaceutical market, operating income grew 63% to
$46.6 million for the nine months ended December 31, 1994, with a related
improvement in operating margin for the period. The business situation in
Europe began to improve noticeably in the latter part of fiscal 1994. As a
result, the Company expects that the rate of growth in sales and operating
income
11
<PAGE> 12
will slow somewhat in future periods as compared with that experienced
in the first nine months of fiscal 1995.
The Company's Other International segment contributed a $8.0 million, or 11%,
increase in sales for the nine months ended December 31, 1994 due to the
continued strength of softgel operations in Japan, Canada and South America, as
well as gains achieved by the Company's Pharmaphil hardshell capsule division
in Canada. Operating income also grew 11% between the two nine month periods,
and a less favorable product sales mix in Australia resulted in constant
operating margins in this segment.
CASH FLOWS
Cash and cash equivalents increased by $6.6 million for the nine month period
ended December 31, 1994, as compared with a decrease of $13.2 million in the
same period in 1993. Operating activities provided cash of $52.4 million and
$23.8 million for the current and prior year periods, respectively. For the
period ended December 31, 1994, cash generated from continued strong earnings
was partially offset by a $12.7 million increase in net working capital. Such
increase is related to a decrease in current liabilities resulting from the
timing of payments for significant capital expenditures and inventory
purchases, as well as by increases in inventory related to higher sales levels
and changes in sales mix. The increase in working capital was partially offset
by reductions in receivables largely due to the timing of sales to and
collections from certain major nutritional customers. For the prior year
period, cash generated from operating earnings was offset by a $25.5 million
increase in net working capital. Increases in accounts receivable due to
increased sales and shifts in sales mix towards nutritional products customers
(who are generally provided longer payment terms) were accompanied by a
decrease in current liabilities relating primarily to the timing of value added
tax payments for certain of the Company's European subsidiaries and the timing
of interest payments.
Capital expenditures for the current year nine months amounted to $33.8
million, compared to the prior year period's capital expenditures of $27.8
million. Current period capital spending consisted primarily of expenditures
in North America related to the completion of a satellite softgel production
facility for nutritional products, in the United Kingdom related to the
continuing expansion of the 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. In the prior year, capital
expenditures were related primarily to the construction in the United Kingdom
of the Zydis(R) production facility and in Australia for the construction of
the replacement facility in Australia, and other general facility and equipment
additions and improvements. For the nine months ended December 31, 1994, $33.8
million was used for the acquisition of the capital stock of Pharmagel and of
certain softgel assets of Gayoso Wellcome (as discussed in Note 5 to the
consolidated financial statements).
Financing activities for the nine months ended December 31, 1994, reflects the
early retirement of $7.1 million of industrial revenue bonds, offset by $7.8
million of net borrowings under the Company's bank credit facility primarily to
fund such retirement. The current year also reflects $11.5 million of
dividends paid to minority shareholders of subsidiaries. In the prior year
period, financing activities reflect primarily $24.5 million of net 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 previously mentioned capital expenditures, and $7.0
million of dividends paid to minority shareholders of subsidiaries.
LIQUIDITY AND FINANCIAL CONDITION
During the next several years, a significant portion of the Company's cash flow
will be used to fund capital expenditures, increased investments in research
and development, and to service and reduce indebtedness. Capital expenditures
are estimated at $50 million for fiscal year 1995 and $50-60 million for fiscal
1996, and are expected to decline to a lower level per year thereafter. Such
expenditures will be used to continue the expansion of softgel production
capacity to meet anticipated customer demand, as well as to ensure continuing
compliance with pharmaceutical Good Manufacturing Practices (GMP) standards for
the Company's facilities.
12
<PAGE> 13
In addition, such expenditures include the expansion of production facilities
for Zydis(R) and the construction of equipment and facilities for the
Company's other advanced drug delivery systems. As of December 31, 1994,
the Company had approximately $19.0 million of commitments for future
capital expenditures.
The Company will also continue to invest a significant portion of its cash flow
in research and development activities for its advanced drug delivery systems,
including the Scherersol(TM), Zydis(R) and Pulsincap(R) technologies, as well
as to develop new drug delivery technologies and to fund the Company's ATP
initiative. The Company believes that changes currently affecting worldwide
pharmaceutical markets will enhance the commercial value of products which can
demonstrate therapeutic and cost benefits over existing therapies, and through
ATP intends to capitalize upon these trends by creating new products which
reformulate existing compounds utilizing the Company's proprietary drug
delivery technologies. The Company expects that expenses associated with ATP
will approximate $30-40 million in aggregate over the next three to four years.
Revenues from ATP product sales and royalties are expected to begin no earlier
than fiscal 1997, assuming the development and commercialization of such
products is successful.
The Company actively reviews drug delivery systems businesses and technologies
for potential investment, consistent with its strategic objectives. Examples
are the Company's fiscal 1994 acquisition of an ophthalmic drug delivery
technology from Zeneca Limited, and an agreement to fund feasibility studies
for a dry powder inhaler device and a controlled-release tablet product with a
UK-based drug research concern. Generally, such investments are not expected
to involve significant initial funding or funding commitments on the part of
the Company. Management intends that any acquisition which would require
significant funding would be financed largely through the issuance of common
stock, depending upon market conditions, so as not to materially increase the
Company's debt to equity ratio.
At December 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), $75.3 million of borrowings under the Company's bank credit
facility, $6.3 million of industrial development revenue bonds, and
approximately $12.3 million of other indebtedness.
In January 1994, Scherer International completed the refinancing of a
significant portion of its outstanding debt. Using the net proceeds from the
offering of the senior notes and additional proceeds from borrowing under the
Company's bank credit facility, the Company defeased its 14% senior
subordinated debentures. The senior notes bear interest at 6 3/4% of face
value, payable semi-annually, and mature in full in February 2004. The 6 3/4%
senior notes are noncallable and unsecured, ranking pari passu with all other
unsecured and senior indebtedness of Scherer International. Annual interest
expense on the senior notes outstanding is approximately $6.8 million
(excluding amortization of the original issue discount and deferred financing
fees), payable semi-annually. The indenture under which the senior notes were
issued 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.
In March 1994, the Company entered into a new bank credit facility as a
replacement for the Company's previous bank credit agreement. This 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 .575%, with a further reduction anticipated later
during the term of the facility 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.
The bank credit facility requires the Company to satisfy various annual and
quarterly financial tests, including maintenance on a consolidated basis of
specified levels 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.
13
<PAGE> 14
Pursuant to other revolving credit arrangements, the Company and certain of its
subsidiaries may borrow up to approximately $13 million. As of December 31,
1994, the Company had outstanding approximately $3.5 million under these
revolving credit arrangements.
The Company believes that its future cash flows from operations, together with
cash and short-term investments aggregating $27.6 million at December 31, 1994
and amounts available under bank credit facilities will be adequate to meet
anticipated capital investment, operating, and debt service requirements.
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.
In October 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments, which also must be adopted
for the Company's 1995 fiscal year. This statement requires expanded
disclosures about the amount, nature, purpose, and terms of derivative
financial instruments.
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<PAGE> 15
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) REPORTS ON FORM 8-K: No reports on Form 8-K were filed with the
Securities and Exchange Commission during the period for which this
report is filed.
15
<PAGE> 16
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
<TABLE>
<S> <C> <C>
Date: February 13, 1995 By: /s/ Nicole S. Williams
------------------- -----------------------
Nicole S. Williams
Executive Vice President, Finance
and Chief Financial Officer,
Treasurer, and Secretary
</TABLE>
16
<PAGE> 17
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> DEC-31-1994
<CASH> 23,142
<SECURITIES> 4,426
<RECEIVABLES> 103,936
<ALLOWANCES> 3,600
<INVENTORY> 64,438
<CURRENT-ASSETS> 199,894
<PP&E> 331,378
<DEPRECIATION> 81,392
<TOTAL-ASSETS> 655,725
<CURRENT-LIABILITIES> 92,210
<BONDS> 191,451
<COMMON> 233
0
0
<OTHER-SE> 254,137
<TOTAL-LIABILITY-AND-EQUITY> 655,725
<SALES> 386,465
<TOTAL-REVENUES> 386,465
<CGS> 244,612
<TOTAL-COSTS> 310,605
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,373
<INCOME-PRETAX> 66,487
<INCOME-TAX> 23,270
<INCOME-CONTINUING> 32,176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,176
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.31
</TABLE>
