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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-30999
R.P. SCHERER CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3523163
(State of Incorporation) (I.R.S. Employer Identification Number)
2075 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (810) 649-0900
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Title of each class Name of each exchange on which registered
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
6-3/4% SENIOR NOTES DUE 2004 NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /x/ NO / /
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES /x/ NO / /
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The aggregate market value of all shares of common stock held by non-affiliates
of the registrant as of June 23, 1995 was approximately $1,050,733,000
(based on closing price of $44.75 per share as of June 23, 1995).
Number of shares outstanding of each class of the registrant's common stock as
of June 23, 1995: 23,316,674 shares of common stock, par value $.01.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's proxy statement relating to the 1995 annual
meeting of shareholders to be held on September 12, 1995, are incorporated by
reference in Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1 BUSINESS
GENERAL
R.P. Scherer Corporation (the "Company"), an international developer and
manufacturer of oral drug delivery systems, is the world's largest producer of
softgels. The Company has also developed and is commercializing advanced drug
delivery systems, including the RP Scherersol(R), Zydis(R) and Pulsincap(R)
technologies. The Company's proprietary drug delivery systems improve the
efficacy of drugs by regulating their dosage, rate of absorption and place of
release.
The Company produces over 4,000 products in softgel form, which accounted for
approximately 90% of the Company's fiscal 1995 sales. Softgels are used for a
wide range of drug, vitamin, cosmetic and recreational products.
The Company has a broad domestic and international customer base consisting of
manufacturers and wholesalers of pharmaceutical, health and nutritional,
cosmetic and recreational products, with more than half of its total sales made
to the pharmaceutical industry. To meet the needs of its multinational
customers and to serve new markets, the Company operates softgel manufacturing
facilities in twelve countries throughout the world and manufactures hardshell
capsules in three of these countries. Approximately three-quarters of the
Company's fiscal 1995 sales and operating income were derived from operations
outside the United States.
The Company works closely with its customers in the development of new softgel
products. Using its expertise in softgel formulation technology, the Company
has developed its RP Scherersol(R) systems to broaden the range of
pharmaceutical products which may be encapsulated in softgel form. RP
Scherersol(R) systems, most of which are patented, often enable pharmaceutical
companies to combine the advantages of drugs in liquid solution with the
convenience and dosage accuracy of softgels. Additionally, RP Scherersol(R)
technologies, by providing a unique, patented dosage delivery system, can
protect a pharmaceutical compound against competition from generic drugs
throughout the life of the RP Scherersol(R) patents.
In 1991, the Company formed a separate division, Scherer DDS, to focus on the
development of advanced drug delivery systems, including the Zydis(R) and
Pulsincap(R) technologies. Zydis(R) is an oral dosage form which dissolves
instantaneously on the tongue and does not require water to aid swallowing.
Pulsincap(R) is an oral drug delivery device which is designed to release a
drug at either a predetermined time following ingestion or a predetermined site
in the gastrointestinal tract. The Company is engaged in the search for other
advanced drug delivery systems which would complement the Company's existing
technologies. In January 1994, the Company acquired the rights to a novel
ophthalmic drug delivery system from Zeneca Limited. The system, which is in
the early stages of development, is intended to enable accurate, sensation-free
application of drugs to the eye. In March 1994, the Company entered into an
agreement with a United Kingdom-based drug research concern to fund feasibility
studies for a unique patent-pending dry powder inhaler device and a patented
controlled-release tablet.
In September 1993, the Company formed its Advanced Therapeutic Products Group
("ATP"), based in the United Kingdom. ATP was formed to manage the development
and registration of pharmaceutical products using off-patent compounds and the
Company's drug delivery technologies. The Company expects that ATP will help
it service the growing global demand for therapeutically improved, cost-
effective pharmaceutical products.
The Company, a Delaware corporation, was organized in 1989 at the direction of
Shearson Lehman Brothers Holdings Inc. to effect the acquisition in June 1989
of R.P. Scherer International Corporation
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("Scherer International"). For administrative reasons, on February 28, 1995
Scherer International was merged into the Company, through which the assets and
liabilities of Scherer International were assumed by the Company. Prior to
February 28, 1995, Scherer International directly owned all operations of the
Company, and the Company's only asset was its investment in Scherer
International.
SOFTGEL PRODUCTS AND MARKETS
There are three solid oral dosage delivery systems: tablets, hardshell gelatin
capsules, and softgel capsules. Softgel products accounted for approximately
90% of the Company's fiscal 1995 sales, and empty two-piece hardshell capsules
represented 7% of sales.
The various softgel markets around the world were developed primarily by the
Company working in conjunction with its customers. The technical and
commercial staff of the Company work in close collaboration with the technical
and marketing staff of its customers to identify requirements and develop
commercial products.
Softgel capsules are used in the following three markets: (i) pharmaceutical
(both prescription and over-the-counter products); (ii) health and nutritional;
and (iii) other (cosmetics and recreational).
Pharmaceutical. The pharmaceutical markets in each country are relatively
similar due to the high degree of manufacturing regulation worldwide, together
with the globalization of the pharmaceutical industry. The Company performs
especially well in a highly regulated environment where the customers' main
focus is on quality and service as opposed to price. In fiscal 1995,
approximately 50% of the Company's softgel sales were derived from the sale of
pharmaceutical products.
The Company assists pharmaceutical companies in the formulation of liquids and
solids in suspension to be used in softgels. The Company's development of its
RP Scherersol(R) systems broadens the range of pharmaceutical products which
may be encapsulated in softgel form. RP Scherersol(R) softgel systems are
liquid formulation technologies which are designed to improve bioavailability
of pharmaceutical compounds that are inconsistently, incompletely or too slowly
absorbed from traditional oral dosage forms. RP Scherersol(R) systems, most of
which are patented, often enable pharmaceutical companies to extend patent
protection and combine the advantages of active molecules in a solution with
the convenience and dosage accuracy of softgels.
To date, the most significant product which has been reformulated using the RP
Scherersol(R) systems is Sandimmun(R), a product developed and marketed by
Sandoz Pharma A.G. Sandimmun(R) (cyclosporin A) is an immuno-suppressant which
is administered daily to organ transplant patients throughout their lives in
order to prevent post-operative organ rejection. By reformulating the drug
into softgel form, the Company was able to mask Sandimmun's(R) unpleasant taste
and regulate the dosage size.
In addition, Neoral(R), a new formulation of cyclosporin A, has been recently
developed and patented by the Company and Sandoz Pharma A.G. Neoral(R) provides
a significant improvement in bioavailability of cyclosporin A and is intended
to be used for additional indications. Neoral(R) has received approval in
Europe for the treatment of psoriasis, and applications are pending in the U.S.
for both psoriasis and rheumatoid arthritis. Sandoz Pharma AG's annual
worldwide sales of Sandimmun(R) and Neoral(R) are currently estimated to
approximate $1 billion. The Company believes that a majority of Sandimmun(R)
and Neoral(R) sales are in softgel form. Sandimmun(R) and Neoral(R) represent
approximately 3% of the Company's fiscal 1995 softgel sales.
During fiscal 1995, Abbott Laboratories' popular Hytrin(R) (terazosin HCI)
prescription drug used for the treatment of hypertension and benign prostate
enlargement, was launched in softgel form.
The Company continues to develop new products for the OTC market. The market's
favorable response to softgel formulations of A.H. Robins' Dimetapp(R) and
Robitussin(R) and Burroughs Wellcome's
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Sudafed(R) has resulted in similar product line extension strategies for
Schering-Plough's Drixoral(R) and Miles Laboratories' Alka-Seltzer Plus(R) and
Pfizer's Unisom SleepGels(R).
Health and Nutritional. Health and nutritional products consist primarily of
vitamins, minerals, herbal supplements, and plant and fish oils. Some of the
Company's products involve relatively simple encapsulation of oils, such as
vitamin E and cod liver oil, while others are specifically formulated to the
requirements of customers. Some health and nutritional products can only be
formulated in softgel form, and other products are formulated in softgel form
for convenience and quality product line image. Health and nutritional
products represented approximately 38% of the Company's fiscal 1995 softgel
sales.
Other-Cosmetics and Recreational. Other products represented approximately 12%
of the Company's softgel sales in fiscal 1995, with approximately 6%
attributable to cosmetics and 6% to recreational products.
The Company's products for the cosmetics market consist principally of: (i)
specially shaped softgels containing various topical oils and creams; and (ii)
bath pearls or bath capsules containing various oils and fragrances. The
Company's largest cosmetics customer, Elizabeth Arden Co., introduced Ceramide
facial and eye cream products using special twist-off softgel capsules to
provide unit dosing and prevent oxidation of the products before use. More
recently, Chesebrough-Ponds introduced its Dramatic Results Skin Smoothing
Capsules product, which also utilizes the Company's unit dose softgel
formulation technology. The Company continues to develop and market new
products for the growing cosmetic market. An example is its fragrance softgel
Truscent(R), which represents an economical, biodegradable twist-off sampler
providing a unit dose of the actual perfume.
The Company manufactures paintball softgels for use in recreational "paintball
games." Various colors of water-soluble paint are encapsulated in softgels and
sold by the Company to qualified distributors. Originally established in the
United States, this sport is now also growing in popularity internationally.
SCHERER DDS
In 1991, the Company formed a separate division, Scherer DDS, to focus on the
development of advanced drug delivery systems. This represents a broadening of
the Company's existing business within its infrastructure, and reflects the
Company's commitment to this rapidly growing market segment. The Company
believes that demand for advanced drug delivery systems will continue to grow
because the pharmaceutical industry is recognizing limitations to improving
drug efficacy and tolerance with conventional dosage forms. In addition, novel
and patentable formulation technologies can often extend the product life cycle
of major drugs for many years, thus maximizing income streams from the
customers' significant research and development investments.
Scherer DDS, based in the United Kingdom, is responsible for the development,
manufacture and marketing of the Company's new advanced drug delivery systems,
including the Zydis(R) and Pulsincap(R) technologies. Additionally, Scherer DDS
is engaged in the search for other advanced drug delivery systems which might
complement the Company's existing technologies. In January 1994, the Company
acquired the rights to a novel ophthalmic drug delivery system from Zeneca
Limited. The system, which is in the early stages of development, is intended
to enable accurate, sensation-free application of drugs to the eye. In March
1994, the Company entered into an agreement with a United Kingdom-based drug
research concern to fund feasibility studies for a unique patent-pending dry
powder inhaler device and a patented controlled-release tablet.
Zydis(R). Zydis(R) is a freeze-dried, porous wafer containing a drug substance
which dissolves instantaneously on the tongue and does not require water to aid
swallowing. This feature of Zydis(R) is expected to improve patient compliance,
particularly among children and the elderly who frequently experience
difficulties in swallowing conventional dosage forms. The Zydis(R) system has
been patented in major markets extending through the year 2002, with such patent
protection extending to the active
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ingredients being delivered using Zydis(R). Products incorporating Zydis(R)
technology have received approvals for use in eighteen countries.
The Company currently produces five Zydis(R) products: Pfizer's Feldene
Melt(R) and Feldene Fast(R) (piroxicam), Merck's Pepcidin Rapitab(R)
(famotidine), Janssen's Imodium Lingual(R) (loperamide), and two tranquilizer
products containing lorazepam and oxazepam for Wyeth-Ayerst International. At
present, such products are only sold in Europe and Latin America. There are
currently ten major products encompassing Zydis(R) technology in different
stages of development and regulatory approval, including Glaxo's Zofran(R)
(ondansetron), and an additional ten products are in feasibility studies for
customers. Because patents covering active compounds in these products have
expired or will expire within the next few years, the manufacturers of such
products in many cases have been seeking alternative patent-protected dosage
forms. Conventional dosage forms of the active compounds in these products are
marketed by large multinational pharmaceutical companies, and these products
had aggregate annual sales exceeding $5.0 billion in calendar 1994. In
general, agreements with customers call for customers to pay option fees to the
Company for product class and/or other forms of exclusivity as well as to pay
certain of the costs for development, clinical testing, obtaining regulatory
approvals and commercialization of the products. The Company will receive
royalties, as well as manufacturing revenues, assuming such products are
successfully commercialized. The Company recognized revenues of approximately
$11.6 million in fiscal 1995 related to Zydis(R) products.
Pulsincap(R). Pulsincap(R) is an oral drug delivery device which is designed
to release the drug in a pulsed fashion at a predetermined time in the
gastrointestinal tract or at a predetermined site in the body. This dosage
form consists of a capsule composed of a water insoluble body and a water
soluble cap, or an enteric coated capsule for colonic delivery. The drug
formulation is contained within the capsule body and is sealed in by a hydrogel
plug. At a specified time after ingestion, the drug is released into the small
intestine or colon for absorption into the blood stream. The Company
anticipates that the Pulsincap(R) system will have a broad range of
applications. Two major areas targeted are nocturnal (time-controlled)
delivery and colonic (site-specific) delivery.
The Pulsincap(R) technology is covered by patents in U.S. and European markets
extending through at least 2010. The Company has completed toxicology studies
on the hydrogel plug, and several customer-funded feasibility studies have been
recently initiated. The Company expects that several years of continued
development and testing will be required before any material commercial sales
of Pulsincap(R) products could be realized, assuming such development and
commercialization activities are successful.
ADVANCED THERAPEUTIC PRODUCTS GROUP
The Company believes that changes currently affecting worldwide pharmaceutical
markets will enhance the commercial value of pharmaceutical products which can
demonstrate therapeutic and cost benefits over existing therapies. To
capitalize on these market trends, in September 1993, the Company formed ATP to
manage the development and registration of new pharmaceutical products which
are based on the reformulation of off-patent compounds and which utilize the
Company's proprietary drug delivery technologies.
Unlike the development work it currently performs on behalf of its customers,
the Company intends to plan and execute the clinical development of ATP
products and take these products through the regulatory process in the various
markets for its own account. The Company believes that engaging in the
development of products using its technologies is a logical extension of the
Company's expertise in the drug delivery business, and is complementary to its
ongoing customer-sponsored drug delivery activities. The Company has hired key
executive and technical personnel with extensive expertise in pharmaceutical
development, clinical testing and regulatory affairs to manage the activities
of ATP. The Company does not intend to build a sales and marketing
infrastructure for ATP products, but rather will license marketing rights to
pharmaceutical companies with well-developed distribution capabilities. The
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Company believes that license fees, royalties and/or profit sharing resulting
from development of ATP products will be significantly greater than those that
can be obtained on customer-directed work.
The Company expects that expenses associated with the ATP initiative will
aggregate $30-40 million 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.
However, the Company may receive licensing fees as early as fiscal 1996.
ATP products involve the reformulation of existing compounds whose patent
protection has expired or is near expiration. Seven generic products are
currently under development or planned for development by ATP using RP
Scherersol(R), Zydis(R), and Pulsincap(R) drug delivery systems. The Company
anticipates that the development, clinical testing and regulatory approval
process for ATP products will involve a shorter time period than that normally
associated with a new chemical entity, as the drugs used in the ATP formulation
will already have established records for safety, toxicity and tolerability.
INTERNATIONAL OPERATIONS
To serve new markets and to meet the needs of its multinational customers, the
Company operates softgel manufacturing facilities in twelve countries
throughout the world and manufactures hardshell capsules in three of these
countries. In addition, the Company has the flexibility to transfer some of
its production from one plant to another within its worldwide network. (For
information concerning the Company's geographic segments, see Note 15 to the
consolidated financial statements.)
Currently, the Company is not subject to any significant government
restrictions as to the availability of any material cash flows from its foreign
subsidiaries, however, transfer of profits from foreign subsidiaries could be
subject to foreign exchange controls and to regulations of foreign governments
which may be in effect from time to time. In addition, the consolidated
results of the Company's operations are affected by foreign currency
fluctuations. Laws or regulations have been proposed or enacted in various
foreign countries which, among other things, specify the number of national
directors and restrict borrowing by foreign-owned companies.
The Company is also subject to certain restrictions pursuant to which R.P.
Scherer GmbH, the Company's 51% owned German subsidiary, has the exclusive
right to sell or manufacture softgels and hardshell capsules in eastern Europe
and certain countries in western Europe and Asia. These restrictions do not
apply to the Company's advanced drug delivery systems marketed by Scherer DDS.
COMPETITION
The greatest competition to the Company's softgel dosage form for
pharmaceuticals, its major softgel market, historically has come from the
manufacturers of tablets and hardshell capsules in instances where technological
barriers to their usage did not exist. The Company believes that the most
significant disadvantages of softgel capsules compared to tablets or hardshell
capsules for pharmaceutical and health and nutritional product manufacturers
have been the relatively higher cost of softgels and the lack of control by such
manufacturers over the softgel manufacturing process. Because a relatively high
unit volume is necessary to manufacture softgels economically, no significant
pharmaceutical manufacturer and only one significant health and nutritional
product manufacturer produces its own softgels.
In recent years, a large number of pharmaceutical companies have become
increasingly interested in the development and commercialization of both
existing and newly developed pharmaceutical products incorporating advanced
drug delivery systems, as evidenced by the substantial increase in softgel
development projects. A number of companies have been formed to develop new
drug formulations, products, and drug delivery systems.
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The Company is the world's largest manufacturer of softgels. The Company
believes it has a competitive advantage in the softgel business due to its
greater experience in the manufacture of softgels, its advanced formulation
technologies, its extensive participation in customer product development, its
strong acceptance by customers and its geographic breadth. The Company's
principal softgel competitors are several manufacturers with substantially
smaller softgel operations. Although the Company faces varying degrees of
competition in each of its geographic markets, it believes it has a leading
market position in each of its major markets.
The largest producers of hardshell capsules are two multinational
pharmaceutical manufacturers which have substantially greater assets and sales
than the Company. In addition, the Company competes in various countries with
smaller hardshell manufacturers.
PRODUCT INFORMATION
The Company's business is not dependent upon a single product or a few
products. No product represents 10% or more of the Company's sales.
CUSTOMERS
No material part of the Company's business is considered to be dependent upon a
single customer or a few customers, and no single customer represents 10% or
more of the Company's sales.
SOURCES OF MATERIALS
The principal raw material used in the manufacture of softgels and hardshell
capsules is gelatin. Gelatin is obtained primarily regionally and in most
instances is available from multiple sources (and is generally purchased on a
coordinated worldwide basis by the Company to obtain favorable terms as to
pricing and quantities). The Company has never experienced any significant
shortage of gelatin or other significant raw materials.
PATENTS
The Company has a number of active patents on its specialized machinery,
processes, products and drug delivery systems. In addition, a number of
patent applications are pending and numerous trademarks are held. In the
opinion of management, the Company's businesses are not dependent upon any one
patent or trademark.
SEASONAL BUSINESS
No material portion of the Company's business is seasonal. However, second
quarter operating results are generally below the results of other quarters due
to the regularly scheduled vacation and annual summer maintenance shutdown of
substantially all northern hemisphere softgel facilities.
BACKLOG
The backlog of unfilled orders was approximately $161.1 million at March 31,
1995, as compared to approximately $136.3 million at March 31, 1994. The
Company believes that such backlog of orders at March 31, 1995 is firm and will
be filled within the next 12 months.
GOVERNMENT REGULATION
The Company's products and manufacturing processes and services are subject to
the applicable Good Manufacturing Practice standards for the pharmaceutical
industry and to other regulations by governmental agencies or departments in
each of the countries in which it operates. In the United States, the
Company's encapsulation products and manufacturing and packaging services are
subject to the
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Federal Food, Drug and Cosmetic Act, the Comprehensive Drug Abuse Prevention
and Control Act of 1970 and various rules and regulations of the Bureau of
Alcohol, Tobacco and Firearms of the United States Department of Treasury, the
Bureau of Narcotics of the United States Department of Justice and state
narcotic regulatory agencies. In other countries, the Company's products and
services are subject to analogous regulation.
The Company is regularly subjected to testing and inspection of its products
and facilities by representatives of various Federal agencies and in addition,
the Company comes under the regulation of various state, municipal and foreign
health agencies.
The Company is also generally required to obtain United States Food and Drug
Administration approval for sales in the United States, as well as approval of
the appropriate agencies in other jurisdictions, prior to commencing the sale
of many of the proprietary products under development.
The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. Compliance with Federal, state
and local provisions relating to the protection of the environment has had no
material effect upon the capital expenditures, earnings or competitive position
of the Company and its subsidiaries. The Company was informed in August 1992
that soil at a manufacturing facility in North Carolina owned and operated by
the Company from 1975 to 1985 contained levels of 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. Based on current information, no other significant
expenditures for environmental compliance are contemplated in the foreseeable
future.
RESEARCH AND DEVELOPMENT
Costs incurred in connection with the development of new products and
manufacturing methods, including both Company and customer-sponsored
expenditures, amounted to $24.4 million, $16.0 million, and $12.4 million in
fiscal 1995, 1994 and 1993, respectively.
EMPLOYEES
At March 31, 1995, the Company employed approximately 3,300 full-time
employees. The Company considers its relations with its employees to be good.
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EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The name, age and employment history, including all positions held concurrently
or successively in the past five years, of each of the Company's executive
officers and directors are as follows:
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PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
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NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
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John P. Cashman 54 Chairman of the Company since August 1991 and Director of the Company
since June 1990. Chairman and Director of R.P. Scherer International
Corporation from 1989 to February 1995. Chairman and President of Cashman
Group Inc. since 1986. Chairman of Pharmaphil Group, Inc. from January
1987 to June 1989. President of Manville International and Mining Group
and Senior Vice President and Officer of Manville Corporation from 1984 to
1986.
Aleksandar Erdeljan 45 President of the Company since August 1991 and Director of the Company
since June 1990. President and Director of R.P. Scherer International
Corporation from 1989 to February 1995. President of Pharmaphil Group,
Inc. from January 1987 to June 1989. Director of Corporate Development of
the Company from June 1985 to January 1987.
Nicole S. Williams 50 Executive Vice President, Finance, Chief Financial Officer and Secretary
of the Company since January 1992, and for R.P. Scherer International
Corporation from January 1992 through February 1995. Treasurer of the
Company since June 1993, and of R.P. Scherer International Corporation
from June 1993 through February 1995. Executive Vice President -
Worldwide Operations, SPSS, Inc. from December 1990 to January 1992.
Senior Vice President, Finance and Administration, Corporate Secretary and
Corporate Officer, SPSS, Inc. from July 1987 to December 1990.
Thomas J. Stuart 34 Vice President and Controller of the Company since June 1994, and of R.P.
Scherer International Corporation from June 1994 to February 1995.
Controller of the Company from August 1991 to June 1994, and of R.P.
Scherer International Corporation from May 1990 through February 1995.
Manager, Detroit office of Arthur Andersen & Co. from June 1987 to May
1990.
Dennis R. McGregor 42 Assistant Treasurer and Director of Tax Operations of the Company since
August 1993, and of R.P. Scherer International Corporation from August
1993 through February 1995. Manager of Tax Audit and Planning, Allied-
Lyons North America from December 1991 to August 1993. International Tax
Manager for Great Lakes Chemical from September 1990 to November 1991.
Manager of Tax Planning and Research for Brown Forman Corporation from
September 1983 to September 1990.
Lori G. Koffman 36 Director of the Company since September 1989, and of R.P. Scherer
International from September 1989 through February 1995. Assistant
Secretary of the Company since December 1989. Director, CIBC Wood Gundy
Capital since April 1995. Senior Vice President, Lehman from 1990 to
December 1994. Vice President, Lehman from 1987 to 1990.
Frederick Frank 63 Director of the Company since June 1990, and of R.P. Scherer International
Corporation from August 1988 through February 1995. Senior Managing
Director of Lehman. Also a director of Applied Bioscience International,
Inc. and Physicians Computer Network.
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<TABLE>
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PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
------------------------------------------
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
- ---- --- ------------------------------------
<S> <C> <C>
James A. Stern 44 Director of the Company since June 1990, and of R.P. Scherer
International Corporation from June 1990 through February 1995. Chairman
of The Cypress Group, a private merchant bank, since April 1994.
Managing Director of Lehman and head of its Merchant Banking Group from
1989 to 1994. Also a director of Noel Group, Inc., K & F Industries
Inc., Lear Seating Corporation, American Marketing Industries Holdings
Inc. and Infinity Broadcasting Corporation.
Louis Lasagna, M.D 71 Director of the Company since September 1991, and of R.P. Scherer
International Corporation from June 1992 through February 1995. Dean for
Scientific Affairs, Tufts University School of Medicine, since 1995.
Dean, Sackler School of Graduate Biomedical Sciences, Tufts University;
Professor of Psychiatry and Professor of Pharmacology, Tufts University,
in each case since 1984. Independent consultant since 1965. Director of
Tufts University Center for the Study of Drug Development since 1975.
Chairman of the Board of the United States branch of Astra Pharmaceutical
Products, Inc. Member of the Board of Trustees of International Life
Sciences Institute/Nutrition Foundation since 1980 and Chairman since
1991. Director of the Foundation for Nutritional Advancement since 1980.
Robert H. Rock 44 Director of the Company since September 1991, and of R.P. Scherer
International Corporation from June 1992 through February 1995. Chairman
of Metroweek Corporation since December 1988. President of MLR
Enterprises since October 1987. Chairman and Chief Executive Officer of
the Hay Group from October 1986 to October 1987. Also a director of Hunt
Manufacturing Company and the Wistar Institute.
John E. Avery 66 Director of the Company since January 1995. Chairman of the Americas
Society and Council of the Americas since 1993, and Director since 1991.
Assistant to the Chairman of Johnson & Johnson from 1992 to 1993.
Company Group Chairman, Johnson & Johnson, from 1979 to 1992. Also a
director of the Argentine-American Chamber of Commerce. Member of the
Dean's Council at the Yale University School of Medicine, the Advisory
Board of the Yale School of Organization and Management, the Board of
Governors of the Foreign Policy Association, and the Council on Foreign
Relations.
</TABLE>
(1) Where no starting date is given for a principal occupation or
employment, such occupation or employment commenced prior to
1990.
All directors of the Company serve terms of one year and remain in office until
the election of their respective successors. Officers serve at the pleasure of
the Board of Directors.
There are three committees of the Board of Directors of the Company: the
Executive Committee, the Compensation Committee and the Audit Committee.
ITEM 2 PROPERTIES
The Company develops and manufactures its products at twenty principal
worldwide locations with an aggregate floor space of approximately 1.6 million
square feet. Fifteen of these facilities are owned in fee by the Company, and
five facilities, with an aggregate floor space of 600,000 square feet, are
leased. The U.S. softgel manufacturing facilities total three, of which two,
of 100,000 square feet, are leased. The seventeen foreign manufacturing
facilities include fourteen owned facilities with an aggregate floor space of
900,000 square feet, and three leased facilities with 500,000 square feet
aggregate floor space. Approximately 80% of the foreign facilities primarily
manufacture softgels and related items, while 20% of the foreign facilities
produce hardshell capsules. The foreign facilities are located in Argentina,
Australia, Brazil, Canada (two facilities), France (two
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<PAGE> 11
facilities), Germany (three facilities), Italy (two facilities), Japan, South
Korea, and the United Kingdom (three facilities). Portions of these facilities
are also used for related research and development, administration, and
warehousing activities.
The Company's primary leased facility, a German manufacturing facility of
approximately 300,000 square feet in size, has a lease term (including renewal
options) extending through December 2008. The Company also leases a production
facility in France of approximately 100,000 square feet, with a lease term
extending through March 2008, and a production facility in Italy of
approximately 100,000 square feet, with a lease term extending through May
2000. Additionally the Company leases its executive offices in Troy, Michigan,
and sales offices, research facilities and warehouses at a variety of locations
in the U.S. and abroad. All leases generally provide for payment of taxes,
utilities, insurance and maintenance by the Company, and have terms extending
for periods from one to fifteen years, including renewal options.
In the opinion of the Company, its principal properties, whether owned or
leased, are well-maintained and in satisfactory condition, are adequately
insured, and are suitable and have capacities adequate for the purposes for
which they are used.
ITEM 3 LEGAL PROCEEDINGS
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 ("Settlement Agreement"). These actions included
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 in fiscal 1994 a special charge of approximately $3.2
million representing the amount of all settlement-related costs in excess of
previously provided reserves. The Settlement Agreement entered into by the
parties to the three lawsuits was approved as fair, adequate and reasonable by
order of a judge of the district court of New Jersey dated July 19, 1994, and
all three actions were dismissed with prejudice. All distributions to class
members and class counsel were paid during fiscal 1995.
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
Pharmaceutical Services, Inc. ("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 and
its counsel to date, the Company believes that this action lacks merit and
intends to defend against it vigorously. The Company intends to file a
counterclaim seeking damages as a result of the termination of the Purchase
Agreement. 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
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<PAGE> 12
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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the last quarter of its fiscal year ended March 31, 1995.
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PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The principal market for the Company's common shares is the New York Stock
Exchange. The following table indicates the high and low sales prices of the
Company's common stock as reported on the composite tape of the New York Stock
Exchange.
<TABLE>
<CAPTION>
MARKET PRICE
-------------------------
HIGH LOW
---- ---
<S> <C> <C>
Year ended March 31, 1995:
First Quarter $37.75 $31.75
Second Quarter $41.75 $32.25
Third Quarter $45.50 $39.75
Fourth Quarter $50.25 $42.38
Year ended March 31, 1994:
First Quarter $31.25 $25.00
Second Quarter $33.50 $26.13
Third Quarter $37.75 $31.38
Fourth Quarter $40.50 $35.50
</TABLE>
The Company had 112 common shareholders of record at June 23, 1995.
The Company did not declare any dividends in the two year period ended
March 31, 1995. Restrictions contained in certain of the Company's long-term
debt agreements limit the payment of dividends. The Company does not
currently have any plans to declare or pay cash dividends.
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<PAGE> 14
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA (1):
Net sales ...................................................... $536,682 $449,297 $398,011 $337,786 $298,638
Cost of sales .................................................. 339,923 287,389 242,108 201,991 183,438
Selling, administrative and other expense ...................... 92,937 74,517 67,806 58,758 52,216
Litigation settlement and other (2) ............................ - 4,478 - - -
Stock and other compensation expense (3) ....................... - - - 13,060 -
Operating income (2,3) ......................................... 103,822 82,913 88,097 63,977 62,984
Interest expense ............................................... 13,758 22,480 25,436 35,348 45,045
Net income (loss) from continuing
operations ................................................... 44,859 30,914 28,960 (1,224) (6,425)
Net income (loss) from continuing
operations attributable to common
shares (4) ................................................... 44,859 30,914 28,960 (7,596) (12,154)
Net income (loss) attributable to common
shares (4, 5) ................................................ 44,859 15,094 20,895 (31,118) (12,471)
Depreciation and amortization (7) .............................. 27,449 25,314 22,678 19,940 19,774
Capital additions .............................................. 54,076 39,503 33,192 20,947 11,993
PER COMMON SHARE:
Net income (loss) from continuing
operations (4) ............................................... $ 1.83 $ 1.27 $ 1.20 $(0.50) $ (1.37)
Net income (loss) (4,5) ........................................ 1.83 0.62 0.86 (2.05) (1.40)
BALANCE SHEET DATA (1)
(at end of period):
Working capital (6) ............................................ $113,656 $ 89,681 $ 82,874 $ 79,248 $ 47,624
Total assets ................................................... 704,373 613,414 532,184 525,977 501,859
Long-term debt, including current portion ...................... 185,410 189,277 142,508 178,639 298,746
Redeemable preferred stock ..................................... - - - - 31,560
Minority interests ............................................. 42,706 35,354 32,369 28,357 24,609
Shareholders' equity ........................................... 273,646 214,710 203,001 191,634 35,582
</TABLE>
NOTES TO SELECTED FINANCIAL DATA
1. Excludes the discontinued operations of Southern Optical Company, The
Lorvic Corporation, Franz Pohl GmbH, Scientific Associates, Inc., and Paco
Pharmaceutical Services, Inc. ("Paco").
2. Includes special charges totaling $4.5 million in the year ended March 31,
1994, for the accrual of a proposed settlement of Paco Development
Partners (PDP II) litigation, which has been outstanding since 1990, and
the write-down of buildings and property related to the relocation of
operations in Australia.
3. Includes a one-time $12.3 million non-cash charge for stock and other
compensation expense relating to the Company's common stock sale in
October 1991 for the year ended March 31, 1992.
4. After allowing for preferred stock dividends and accretion between the
fair value at the date of issuance and the stated value of preferred
stock. During calendar year 1992, the Securities and Exchange Commission
staff implemented a policy which would have required the difference
between the redemption price and carrying value of R.P. Scherer
Corporation's Exchangeable Preferred Stock, amounting to $29.8 million, to
be reflected as an increase to net loss attributable to common shares. If
such policy had been applied in connection with R.P. Scherer Corporation's
November 1991 redemption of its Exchangeable Preferred Stock, net loss
attributable to common shares for the year ended March 31, 1992 would have
increased to $(60.9) million, or $(4.01) per common share, from the
reported $(31.1) million, or $(2.05) per common share.
5. Includes extraordinary loss of $15.8 million from debt extinguishments for
the year ended March 31, 1994; extraordinary loss of $8.4 million from
early retirement of debt, a $0.7 million loss from the sale of Paco, and a
$1.0 million gain from cumulative effect of accounting change for year
ended March 31, 1993; an estimated loss of $16.7 million from disposal of
Paco, an extraordinary loss of $2.1 million on the early retirement of
debt, and a $4.9 million charge for an accounting change for
postretirement benefits for the year ended March 31,1992.
6. Includes notes payable but does not include current portion of long-term
debt.
7. Includes amortization of deferred financing costs and debt discount of
$0.5 million, $1.3 million, $1.8 million, $2.0 million, and $3.3 million
for the years ended March 31, 1995, 1994, 1993, 1992, and 1991,
respectively.
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<PAGE> 15
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis of financial results and condition covers
the fiscal years ended March 31, 1995, 1994, and 1993. The discussion and
analysis refers only to results of continuing operations (see Note 5 to the
consolidated financial statements for further discussion).
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 are
affected by changes in foreign currency exchange rates, and as compared to
prior periods 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.
A summary of the Company's sales, operating income and identifiable assets by
geographic segment is included in Note 15 to the consolidated financial
statements. The relationships between operating results and assets of the
segments are not comparable due to a variety of factors. These factors
include: differing product sales mix, operating and capital costs associated
with local regulatory requirements, the age of the Company's manufacturing
facilities, whether capital assets are owned or leased, working capital needs,
fluctuations in exchange rates, and other reasons specific to each country in
which the Company operates.
RESULTS OF OPERATIONS
Fiscal Years Ended March 31, 1995 and 1994
Sales for the fiscal year ended March 31, 1995 reached an all-time record
$536.7 million, exceeding by 19% sales of $449.3 million in fiscal 1994. A
majority of the sales gain in fiscal 1995 was generated by the Company's
European operations, resulting primarily from increased demand for
pharmaceutical softgel products. The effects of the weakening of the U.S.
dollar relative to most foreign currencies also had the effect of increasing
reported sales in fiscal 1995. On a constant exchange rate basis, the sales
improvement for fiscal 1995 was 15% as compared to the prior fiscal year.
The Company's United States operations achieved sales of $128.9 million in
fiscal 1995, representing a 7% increase from sales of $120.7 million recorded in
fiscal 1994. Sales of pharmaceutical softgel products were especially strong,
as customer launches of several cough/cold and other over-the-counter ("OTC")
softgels contributed to a 28% sales gain in this product category. Major branded
products launched during fiscal 1995 include Alka-Seltzer Plus from Miles
Laboratories, Drixoral from Schering-Plough and Excedrin PM from Bristol-Myers
Squibb. Pharmaceutical sales in the United States also benefited from the
introduction of Abbott Laboratories' popular Hytrin (terazosin HCI) prescription
drug used for the treatment of hypertension and benign prostate enlargement,
which was launched in softgel form during the latter part of fiscal 1995. Sales
of nutritional softgels, which represent a majority of the Company's sales in
the United States, declined nearly 7% in fiscal 1995. All of this decline is
attributable to a reduction in sales of Vitamin E, stemming from reduced demand
as a result of media attention to recent studies questioning the purported
health benefits of Vitamin E and other anti-oxidant products.
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<PAGE> 16
The decrease in nutritional softgel sales had minimal effect on the Company's
income as Vitamin E softgels carry relatively low margins due to their high
material cost content and commodity nature.
Sales in Europe increased to $302.2 million for fiscal 1995, amounting to a 29%
improvement from sales of $233.7 million last fiscal year. The most
significant sales increase was achieved in Germany, as the Company continued to
benefit from the recovery of the pharmaceutical industry during the year,
enhanced by a rapidly expanding OTC market. The German pharmaceutical industry
had been depressed during most of fiscal 1994 following government healthcare
reforms instituted in January 1993. Sales in Germany also reflect significant
additional sales to Sandoz of Sandimmune and Neoral cyclosporin A softgels,
which continue to perform well in the growing market for immuno-suppressant
drugs. Sales elsewhere in Europe also increased at double-digit rates, aided
in part by customers and capacity acquired as a result of the purchase of
Pharmagel in July 1993 (See Note 3 to the consolidated financial statements).
The effects of the weaker U.S. dollar also provided a substantial part of the
reported sales increase in Europe. On a constant exchange rate basis, the
sales increase was approximately 21% for fiscal 1995 compared to fiscal 1994.
The factors which gave rise to the extraordinary sales results in Europe during
fiscal 1995 are not anticipated to recur to the same extent in the next fiscal
year. As a result, the Company expects that the rate of sales and income
growth will slow somewhat in future periods as compared with that experienced
in fiscal 1995.
The Company's Other International segment generated sales of $105.6 million in
fiscal 1995, representing an 11% improvement from sales of $94.9 million in
fiscal 1994. Softgel operations in Japan, Canada, and South America
contributed to the sales growth, as did the Company's Pharmaphil hardshell
capsule division, located in Canada. Most of the sales gain resulted from
incremental sales volumes of pharmaceutical products, and, to a lesser extent,
the strengthening of the Japanese Yen. Revenue growth in this geographic
segment was diluted somewhat by the results of the Company's Australian
operations, where competitive pressures and a down-turn in the nutritionals
market resulted in nearly flat sales levels.
The Company's twelve-month sales order backlog rose to $161.1 million at March
31, 1995, an 18% increase when compared to the $136.3 million at the same date
last year, or a 7% increase as measured using constant exchange rates. A
majority of the backlog increase was generated by the Company's operation in
Germany. The Company has expanded, and will continue to increase, its
manufacturing capacity to reduce order lead times and better serve its
customers.
Gross margin rose $34.9 million to $196.8 million in fiscal 1995, a 22%
increase from fiscal 1994. As a percentage of sales, gross margin was 36.7% in
fiscal 1995, compared to 36.0% last fiscal year. Such improvement reflects the
shift in sales mix toward pharmaceutical products by essentially all of the
Company's operations. Pharmaceutical products often incorporate the Company's
patented or proprietary technologies, and require more value-added formulation
and manufacturing expertise than other types of products, thus generally
commanding higher margin levels. Sales of pharmaceutical products (principally
softgels) represented approximately 52% of total sales in fiscal 1995, compared
to 48% of total sales in fiscal 1994. Part of the improvement in gross margin
rate also stems from efficiencies associated with the higher overall volume
levels in fiscal 1995.
The Company earned operating income of $103.8 million in fiscal 1995, a 25%
increase (20% at constant exchange rates) compared to operating income of $82.9
million recognized in the prior fiscal year. The increase in operating income
was 19% excluding special charges in fiscal 1994 totaling $4.5 million for
litigation settlement costs and expenses related to the Company's decision to
relocate its Australian plant operations. The improvement in operating income
was achieved in spite of a 17% increase in selling and administrative expenses,
attributable in large part to additional investments in marketing staffs and
promotional costs, sales commissions, incentive compensation associated with
improved financial performance, and the translation effects of the weaker U.S.
dollar.
15
<PAGE> 17
Planned expenditures for research and development further reduced reported
operating income growth during fiscal 1995. Excluding research and development
expense and the special charges recorded in fiscal 1994, operating income grew
24% in fiscal 1995 compared to last fiscal year. Research and development
costs were $21.3 million in fiscal 1995, representing a 63% increase from the
$13.1 million incurred during the prior fiscal year. Approximately $6.0
million of the fiscal 1995 spending relates to the Advanced Therapeutic
Products group ("ATP"), which was formed late in fiscal year 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, including
Zydis(R), Pulsincap(R) and RP Scherersol(R). As discussed further below, the
Company expects that spending for ATP activities will continue to increase
significantly for the foreseeable future.
Income from continuing operations rose to $44.9 million, or $1.83 per common
share, in fiscal 1995, compared to $30.9 million, or $1.27 per common share, in
fiscal 1994. Before the $4.5 million of special charges described earlier,
income from continuing operations in fiscal 1994 was $34.0 million, or $1.40
per share. In addition to the operating income improvements discussed above,
the Company realized the benefit of an $8.7 million reduction in interest
expense for fiscal 1995, 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 a $15.8
million extraordinary charge related to refinancings in fiscal 1994, net income
was $15.1 million, or $0.62 per share.
The Company's effective income tax rate rose to 33.1% of pretax income in
fiscal 1995, compared to only 30.1% of pretax income in the prior year. The
higher 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 fiscal 1995 increased $3.7 million, or
29%, to $16.4 million, primarily as a consequence of the substantial
improvement in earnings of the Company's 51%-owned German subsidiary.
The favorable effects of the weaker U.S. dollar added an estimated $0.07 to the
Company's increase in reported earnings per share for fiscal 1995.
Fiscal Years Ended March 31, 1994 and 1993
Sales for fiscal 1994 reached $449.3 million, representing a 13% increase from
sales of $398.0 million achieved in fiscal 1993. Pharmagel operations, which
were acquired July 1, 1993 (see Note 3 to the consolidated financial statements)
contributed $15.5 million to the fiscal 1994 sales gain. A significantly
stronger U.S. dollar in fiscal 1994 compared to fiscal 1993 had the effect of
depressing the reported growth in sales. On a constant exchange rate basis, the
sales increase would have been 19% in fiscal 1994 versus fiscal 1993.
The Company's United States operations achieved sales of $120.7 million in
fiscal 1994, or a 39% gain from sales of $86.7 million in fiscal 1993. A
substantial majority of the fiscal 1994 improvement resulted from a 60%
increase in sales of nutritional softgels, primarily Vitamin E and other
anti-oxidants, in large part due to publicized recognition in the medical
community of the potential health benefits of these products. A 75% rise in
sales of over-the-counter ("OTC") pharmaceutical softgels also contributed to
the United States sales improvement.
Sales in Europe increased by 1.6%, from $229.9 million in fiscal 1993 to $233.7
million in fiscal 1994. Without the $15.5 million in additional sales provided
by Pharmagel in fiscal 1994, European sales declined 5%. Such decline is
primarily attributable to the stronger U.S. dollar in fiscal 1994. On a
constant exchange rate basis, sales would have increased by 6% in fiscal 1994,
excluding the impact of Pharmagel. Sales growth in fiscal 1994 was also
adversely affected as a result of government healthcare reforms implemented in
Germany during calendar year 1993. These reforms, among other changes, reduced
or eliminated government reimbursement for a wide range of pharmaceutical
products. The effects of these reforms impacted mainly the last quarter of
fiscal 1993 and the first half of fiscal 1994
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<PAGE> 18
and, by the fourth quarter of fiscal 1994, deutschemark sales in Germany had
increased by 20% as compared to last year's fourth quarter. Sales growth was
strong elsewhere in Europe, most notably in the United Kingdom, which generated
increased sales of specialty nutritional softgels.
The Company's Other International geographic segment posted a 17% sales gain,
with sales of $94.9 million in fiscal 1994 compared to $81.4 million in fiscal
1993. Significant sales gains of nutritional and pharmaceutical softgels were
achieved by the Company's subsidiaries in Australia and Japan.
The Company's twelve-month sales order backlog was $136.3 million at March 31,
1994, an increase of 24% from the same time last year. The backlog increase
reflected primarily an improvement in the pharmaceutical industry and economic
climate in Germany, and continuing strong demand for the Company's nutritional
softgel products in the United States.
Gross margin increased by $6.0 million to $161.9 million in fiscal 1994,
compared to $155.9 million in fiscal 1993. Gross margin as a percentage of
sales, however, declined in fiscal 1994 to 36.0% from 39.2% in fiscal 1993.
This decline reflects a significant shift in the Company's product mix towards
nutritional softgels during fiscal 1994. Nutritional softgels generally have a
higher material cost content relative to their sales value compared to other
types of softgels. In addition, particularly in the United States, certain of
the Company's nutritional softgel products are subject to greater competition,
which restricts margin potential. The economic and pharmaceutical industry
situation in Germany also had a further negative impact on gross margin rates
in fiscal 1994.
The Company recorded a combined $4.5 million charge against operating income in
fiscal 1994 to account for the proposed settlement of litigation relating to
Paco Development Partners II and to write-down the Company's existing production
facility in Australia to net realizable value prior to its replacement (see
Notes 2 and 14 to the consolidated financial statements). Excluding this special
charge, operating income was $87.4 million for fiscal 1994, essentially
unchanged from fiscal 1993's operating income of $88.1 million. On a constant
currency basis, however, operating income increased 3% in fiscal 1994 as
compared to fiscal 1993. Selling and administrative expenses rose $5.0 million
to $61.4 million, or an increase of 9% compared to fiscal 1993. Almost one-half
of this increase is due to the addition of Pharmagel during 1994. Before the
inclusion of Pharmagel, selling and administrative expenses declined to 13.1% of
sales in fiscal 1994 from 14.2 % of sales in fiscal 1993.
The Company continued to increase its investment in research and development,
with spending of $13.1 million in fiscal 1994, representing a 15% increase from
the $11.4 million expensed in the prior fiscal year. These increased
expenditures reflect pharmaceutical softgel development work, as well as
research and development activities related to the Company's Advanced
Therapeutic Products group and Pulsincap(R) drug delivery device.
Income from continuing operations reached a record $30.9 million, or $1.27 per
share, in fiscal 1994, despite the $4.5 million special charge described above.
Before the effects of the special charge, income from continuing operations for
fiscal 1994 was $1.40 per share, representing a 17% improvement from the $1.20
per share reported in fiscal 1993. The earnings improvement stems in part from
a $1.2 million reduction in net interest expense resulting from the debt
refinancing described below, offset by interest expense on bank debt used to
fund the Pharmagel acquisition. A significant reduction in the Company's
effective income tax rate accounted for a majority of the income improvement for
fiscal 1994. The income tax provision was $18.7 million (30.1% of pretax
income) in fiscal 1994, compared to $24.1 million (36.3% of pretax income) in
fiscal 1993. The lower effective income tax rate in fiscal 1994 resulted from a
shift in pretax income towards lower tax rate countries (primarily the U.S.) and
reduced statutory corporate income tax rates in Germany and Australia. Minority
interests in income declined to $12.7 million in fiscal 1994, a reduction of
$0.6 million from the $13.3 million in fiscal 1993. Such decline resulted
primarily from reduced income of the Company's 51% owned German subsidiary.
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<PAGE> 19
In January 1994, the Company successfully refinanced, through defeasance, the
outstanding 14% Senior Subordinated Debentures of R.P. Scherer International
Corporation ("Scherer International"). The Company recorded an extraordinary
loss of $15.5 million, or $0.64 per share, related to the defeasance
transaction, as well as a $0.3 million extraordinary loss, or $0.01 per share,
related to the replacement of its former bank credit facility. See "Liquidity
and Financial Condition" below for further discussion.
CASH FLOWS
Cash and cash equivalents increased by $17.1 million for fiscal 1995, as
compared with decreases of $13.8 million in fiscal 1994 and $14.4 million in
fiscal 1993. Operating activities provided net cash of $89.2 million, $47.7
million, and $46.0 million during fiscal years 1995, 1994 and 1993,
respectively. In fiscal 1995, cash was generated from continued growth in the
Company's after-tax earnings, enhanced by a significant reduction in the rate
of growth of working capital when compared with the previous two fiscal years.
Receivables increased at a rate much slower than sales, due in particular to
the previously discussed shift in sales mix to pharmaceutical products
customers, who generally have shorter payment terms than nutritional products
customers. Inventories also increased at a substantially slower rate than
sales primarily due to the same shift in sales mix away from nutritional
products, which have a higher raw material cost content. In fiscal 1994,
growth in cash from the Company's after-tax earnings was offset by a $22.5
million increase in net working capital, which reflected increases in
inventories and receivables associated with the fiscal 1994 13% sales growth,
as well as by the shift in fiscal 1994 sales mix towards nutritional products
customers who are generally provided longer payment terms. The working capital
increase further reflects the approximate $6 million decrease in accrued
interest payable resulting from the Company's refinancing activities during
fiscal 1994. In fiscal 1993, increased cash from the Company's after-tax
earnings was offset by a $20.6 million increase in net working capital,
primarily related to an aggregate 17% increase in inventories and receivables
associated with sales gains.
Net cash used by investing activities was $54.8 million, $74.7 million, and $3.7
million for the 1995, 1994 and 1993 fiscal years, respectively. Fiscal 1995
activities primarily reflect cash used for capital expenditures of $54.1
million, comprised 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, in France for the expansion and upgrade of softgel
production facilities, and in Australia for the construction of a replacement
manufacturing facility, as well as general facility and equipment additions and
improvements. Fiscal 1994 includes a $33.8 million use of cash for the
acquisitions of the capital stock of Pharmagel and certain softgel assets of
Gayoso Wellcome (as discussed in Note 3 to the consolidated financial
statements), as well as cash used for capital expenditures of $39.5 million.
Such capital expenditures consisted primarily of expenditures in the United
Kingdom related to the new Zydis(R) production facility and in Australia for
the construction of a replacement manufacturing facility, as well as general
facility and equipment additions and improvements. Capital expenditures of
$33.2 million were incurred in fiscal 1993, consisting primarily of facility and
equipment upgrades in the Company's German subsidiary, expansion in the United
Kingdom related primarily to Zydis(R) production and Pulsincap(R) development
facilities, and softgel manufacturing equipment and other facility upgrades and
improvements worldwide. Fiscal 1993 also reflects the disposal of Paco
Pharmaceutical Services, Inc. ("Paco"), which provided $28.0 million of cash.
Net cash used by financing activities was $20.4 million in fiscal 1995, as
compared with cash provided of $13.5 million in fiscal 1994 and cash used of
$56.3 million in fiscal 1993. Financing activities for fiscal 1995 reflects
primarily the $4.6 million retirement of industrial revenue bonds, as well as
$2.8 million of net repayments on the Company's bank credit facility. Other
significant fiscal 1995 financing uses include dividends paid to holders of
minority interests in subsidiaries of $11.5 million. Fiscal 1994 reflects the
defeasance of the 14% senior subordinated debentures of Scherer International,
which used cash of $141.5 million. Such defeasance was funded primarily through
the issuance of 6-3/4% senior notes, which provided cash of $99.3 million, as
well as through borrowings under the Company's bank credit facility. Other
significant fiscal 1994 financing activities include a net $63.8 million of
proceeds from the Company's bank credit facility (primarily to fund the
defeasance and the acquisition of Pharmagel) and $2.4 million of proceeds
18
<PAGE> 20
from industrial revenue bonds to finance a facility upgrade and expansion.
Financing activities for fiscal 1993 reflect primarily the third quarter
repurchase of $42.5 million principal amount of 14% senior subordinated
debentures for approximately $49.3 million, funded primarily by cash on hand
and borrowings under the Company's bank credit facility. Other financing
sources include $2.2 million of proceeds from industrial revenue bonds and $4.8
million of other borrowings. Other significant financing uses include $29.6
million of repayments on the bank credit facility.
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 anticipated to approximate $70-$80 million for fiscal year 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. In addition, such expenditures will include further major
expansions of production facilities for Zydis(R) and the construction of
equipment and facilities for the Company's other advanced drug delivery
systems. As of March 31, 1995, the Company had approximately $11.5 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 RP Scherersol(R), 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. 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 March 31, 1995, the Company's outstanding long-term indebtedness consisted of
approximately $99.3 million of 6-3/4% senior notes (net of a $0.7 million
discount), $65.6 million of borrowings under the Company's bank credit facility,
$6.4 million of industrial development revenue bonds, and approximately $14.1
million of other indebtedness.
In January 1994, the Company 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 borrowings 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 the Company. Annual interest expense on the senior notes 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 consummate certain business combinations.
19
<PAGE> 21
In March 1994, the Company entered into a bank credit facility which 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 in the interest rate spread to LIBOR plus
.475% 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. As of March 31, 1995, the Company
does not currently have plans to declare or pay any cash dividends.
Pursuant to other revolving credit arrangements, the Company and certain of its
subsidiaries may borrow up to approximately $25.0 million. As of March 31,
1995, the Company had outstanding approximately $2.1 million under these
revolving credit arrangements.
The Company believes that its future cash flows from operations, together with
cash and short-term investments aggregating $38.8 million at March 31, 1995 and
amounts available under bank credit facilities will be adequate to meet
anticipated capital investment, operating, and debt service requirements.
See Notes 2 and 17 to the consolidated financial statements for information
regarding the use of financial instruments and derivatives thereof, including
foreign currency hedging instruments. As a matter of policy, the Company does
not engage in "speculative" transactions involving derivative financial
instruments.
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.
20
<PAGE> 22
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the years ended March 31,
---------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales $536,682 $449,297 $398,011
Cost of sales 339,923 287,389 242,108
Selling and administrative expenses 71,661 61,427 56,413
Litigation settlement and other (Notes 2, 14) - 4,478 -
Research and development expenses, net 21,276 13,090 11,393
-------- -------- --------
Operating income 103,822 82,913 88,097
Interest expense 13,758 22,480 25,436
Interest earned and other (1,523) (1,911) (3,630)
-------- -------- --------
Income from continuing operations before income
taxes, minority interests, and extraordinary loss 91,587 62,344 66,291
Income taxes 30,352 18,737 24,056
Minority interests 16,376 12,693 13,275
-------- -------- --------
Income from continuing operations before
extraordinary loss and accounting change 44,859 30,914 28,960
Loss from discontinued operation, net of
income taxes (Note 5) - - (647)
-------- -------- --------
Income before extraordinary loss
and accounting change 44,859 30,914 28,313
Extraordinary loss from debt extinguishments (Note 9) - (15,820) (8,392)
Cumulative effect of accounting change (Note 6) - - 974
-------- -------- --------
Net income $ 44,859 $ 15,094 $ 20,895
======== ======== ========
Per Common Share Data (Note 2):
Income from continuing operations $ 1.83 $ 1.27 $ 1.20
Loss from discontinued operation - - (0.03)
Extraordinary loss - (0.65) (0.35)
Accounting change - - 0.04
-------- -------- --------
Net income per common share $ 1.83 $ 0.62 $ 0.86
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
21
<PAGE> 23
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In thousands)
As of March 31,
--------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,715 $ 16,576
Short-term investments 5,060 6,041
Receivables, less reserves of: 1995 - $3,900,000;
1994 - $2,900,000 111,772 98,775
Inventories 66,610 56,492
Other current assets 6,404 5,260
-------- --------
223,561 183,144
-------- --------
PROPERTY:
Property, plant and equipment, at cost 372,237 284,992
Accumulated depreciation (92,734) (63,277)
-------- --------
279,503 221,715
-------- --------
OTHER ASSETS:
Goodwill, net of amortization 183,662 187,825
Other intangible assets, net of amortization 1,797 2,229
Other assets 15,850 18,501
-------- --------
201,309 208,555
-------- --------
$704,373 $613,414
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 4,635 $ 3,936
Accounts payable 63,549 52,086
Accrued liabilities 38,976 36,802
Accrued income taxes 5,287 1,967
-------- --------
112,447 94,791
-------- --------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 182,868 187,949
Other long-term liabilities 56,900 49,865
Deferred income taxes 35,806 30,745
Minority interests in subsidiaries 42,706 35,354
-------- --------
318,280 303,913
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY (Note 2):
Preferred stock, 500,000 shares authorized, none issued - -
Common stock, $.01 par value, 50,000,000 shares authorized,
shares issued: 1995 - 23,316,674; 1994 - 23,287,043 233 233
Additional paid-in capital 235,383 234,157
Retained earnings (deficit) 35,002 (9,857)
Currency translation adjustment 3,028 (9,823)
-------- --------
273,646 214,710
-------- --------
$704,373 $613,414
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
22
<PAGE> 24
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
For the years ended March 31,
-------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 44,859 $ 15,094 $ 20,895
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 20,998 17,121 16,530
Amortization of intangible assets 5,988 5,519 4,325
Amortization of deferred financing costs and debt discount 463 1,330 1,823
Minority interests in net income 16,376 12,693 13,275
Deferred tax provision and other 3,579 2,631 1,682
Extraordinary loss from debt extinguishments (Note 9) - 15,820 8,392
Loss from discontinued operation (Note 5) - - 647
Cumulative effect of accounting change - - (974)
Increase in receivables (3,626) (12,458) (16,160)
Increase in inventories and other current assets (3,936) (8,056) (6,161)
Increase (decrease) in accounts payable and accrued liabilities 4,465 (1,972) 1,699
-------- -------- --------
Net cash provided by operating activities 89,166 47,722 45,973
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (54,076) (39,503) (33,192)
Acquisition of businesses, net of cash acquired (Note 3) - (33,761) -
Proceeds from sales of plant and equipment 583 1,859 187
Proceeds from disposition of subsidiary - - 28,047
Other (1,362) (3,279) 1,221
-------- -------- --------
Net cash used by investing activities (54,855) (74,684) (3,737)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of 6-3/4% Senior Notes (Note 9) - 99,268 -
Defeasance of 14% Senior Subordinated Debentures (Note 9) - (141,546) -
Proceeds from other long-term borrowings 70,255 109,788 34,609
Other long-term debt retirements and payments (78,726) (47,608) (80,177)
Short-term borrowings, net (439) 642 (726)
Cash dividends paid to minority shareholders of subsidiaries (11,528) (7,022) (9,979)
-------- -------- --------
Net cash provided (used) by financing activities (20,438) 13,522 (56,273)
-------- -------- --------
Effect of currency translation on cash and cash equivalents 3,266 (373) (335)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 17,139 (13,813) (14,372)
Cash and cash equivalents, beginning of period 16,576 30,389 44,761
-------- -------- --------
Cash and cash equivalents, end of period $ 33,715 $ 16,576 $ 30,389
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
23
<PAGE> 25
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
For the years ended March 31,
---------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
COMMON STOCK (Note 4):
Balance at beginning of period $ 233 $ 233 $ 232
Issuance of common stock, including stock options exercised - - 1
-------- -------- --------
Balance at end of period $ 233 $ 233 $ 233
======== ======== ========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period $234,157 $233,511 $232,935
Stock options exercised, net of related tax effects 557 140 576
Compensation expense related to stock options granted 669 506 -
-------- -------- --------
Balance at end of period $235,383 $234,157 $233,511
======== ======== ========
RETAINED EARNINGS (DEFICIT):
Balance at beginning of period $ (9,857) $(24,951) $(45,846)
Net income 44,859 15,094 20,895
-------- -------- --------
Balance at end of period $ 35,002 $ (9,857) $(24,951)
======== ======== ========
CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period $ (9,823) $ (5,792) $ 4,313
Adjustment for the period 12,851 (4,031) (10,105)
-------- -------- --------
Balance at end of period $ 3,028 $ (9,823) $ (5,792)
======== ======== ========
TOTAL SHAREHOLDERS' EQUITY $273,646 $214,710 $203,001
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
24
<PAGE> 26
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated statement of financial position as of March 31, 1995 and 1994,
and the consolidated statements of income, shareholders' equity and cash flows
for the years ended March 31, 1995, 1994, and 1993 include the accounts of R.P.
Scherer Corporation (the "Company"), a Delaware corporation, and its
subsidiaries, some of which are less than wholly-owned.
Prior to February 28, 1995, a wholly-owned subsidiary of the Company, R.P.
Scherer International Corporation ("Scherer International"), directly owned all
operations of the Company, and the Company's only asset was its investment in
Scherer International. For administrative reasons, on February 28, 1995, the
Company merged Scherer International into the Company, through which the assets
and liabilities of Scherer International were assumed by the Company. Such
merger did not have any impact on the Company's results of operations or
financial position.
2. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Company in preparing the consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all of its domestic and foreign subsidiaries, some of which are less than
wholly-owned. All intercompany accounts and transactions have been eliminated.
Certain items in the prior years' consolidated financial statements and notes
thereto have been reclassified to conform with the current year presentation.
Revenue Recognition and Concentration of Credit Risk
Revenues from sales of the Company's products to its customers are recognized
primarily upon shipment. The majority of the Company's customers are
concentrated in the pharmaceutical, health and nutritional, and cosmetic
markets.
Translation of Foreign Currencies and Foreign Currency Hedging
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 are
affected by changes in foreign currency exchange rates, and as compared to
prior periods 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 subsidiaries, 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.
25
<PAGE> 27
Borrowings under long-term foreign currency loans are used to partially hedge
against declines in the value of net investments in certain foreign
subsidiaries. The Company also periodically enters into foreign currency
exchange contracts to hedge certain exposures related to selected transactions
that are relatively certain as to both timing and amount (see Note 17 for
further discussion).
Foreign currency transaction and translation adjustments (reflecting primarily
the translation of net assets at historical exchange rates for operations in
highly inflationary economies) included in net income resulted in net decreases
in income of $2.8 million, $7.1 million, and $3.5 million for the years ended
March 31, 1995, 1994, and 1993, respectively. Aggregate sales of operations in
highly inflationary economies represented less than 5% of consolidated sales
for each period presented in the consolidated statement of income.
Litigation Settlement and Other
In the fourth quarter of fiscal year 1994, the Company recognized a pretax
charge in the amount of $4.5 million as a result of the accrual of settlement
costs for Paco Development Partners II ("PDP II") litigation (see Note 14 for
discussion) and a decision made by the Company to relocate its Australian
production operations to new facilities. In fiscal year 1994, the Company
recognized a charge to operations of approximately $1.3 million representing
the anticipated costs of disposal related to the former Australian facility and
land.
Research and Development Costs
Costs incurred in connection with the development of new products and
manufacturing methods are charged to income as incurred. Customer
reimbursements in the amount of $3.1 million, $2.9 million, and $1.1 million
were received for the fiscal years ended March 31, 1995, 1994, and 1993,
respectively. The amounts reflected in the consolidated statement of income
are net of such reimbursements.
Income Taxes
Deferred U.S. and foreign income taxes are provided based on enacted tax laws
and rates on earnings of subsidiary companies which are intended to be remitted
to the parent company in the future. Unremitted earnings on which deferred
taxes have not been provided would, if remitted, be taxed at substantially
reduced effective rates due to the utilization of foreign or other tax credits.
Earnings Per Common Share
The computation of earnings per share is based on income divided by the
weighted average number of shares of common stock and dilutive common stock
equivalents outstanding (consisting solely of stock options) of 24,518,528,
24,387,791, and 24,223,059 for the years ended March 31, 1995, 1994, and 1993,
respectively.
Cash and Cash Equivalents and Short-Term Investments
For purposes of reporting cash flows, all highly liquid investments which are
readily convertible to known amounts of cash and have an original maturity of
three months or less when purchased are considered cash equivalents.
Inventories
Inventories are stated at the lower of cost or market with cost determined on a
first-in, first-out basis for substantially all inventories. Market is the
lower of replacement cost or estimated net realizable value. Finished goods
and work-in-process inventories include material, labor and manufacturing
overhead costs.
26
<PAGE> 28
The components of inventories are as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
-------- --------
<S> <C> <C>
Raw materials and supplies $32,312 $26,760
Work in process 10,235 10,289
Finished goods 24,063 19,443
------- -------
$66,610 $56,492
======= =======
</TABLE>
Property, Plant & Equipment
Property, plant and equipment is recorded at cost and is depreciated over
related estimated useful lives primarily using the straight-line method.
Accelerated methods are generally used for tax reporting. Maintenance and
repair costs are expensed as incurred. Upon sale or retirement, property cost
and related depreciation is eliminated, and resulting gains or losses are
reflected in income. Interest cost capitalized as part of the construction
cost of capital assets amounted to $1.2 million and $0.9 million in fiscal
years 1995 and 1994, respectively, and was not significant in fiscal 1993. A
summary of property follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
-------- --------
<S> <C> <C>
Land and improvements $ 18,622 $ 16,844
Building and equipment 82,842 68,767
Machinery and equipment 223,837 174,203
Construction in progress 46,936 25,178
-------- --------
$372,237 $284,992
======== ========
</TABLE>
Goodwill and Other Assets
Goodwill represents the excess of cost over the fair value of identifiable net
assets of businesses acquired, primarily related to the acquisition of the
Company in June 1989 and the acquisition of Pharmagel in July 1993. Goodwill
is amortized using the straight-line method, generally over forty years. Other
intangible assets include deferred financing fees, patents, licenses and
trademarks. Deferred financing fees are amortized over the life of the related
obligations using the effective interest method. Other intangible assets are
recorded at cost and amortized over their expected useful lives using the
straight-line method.
The accumulated amortization of goodwill and other intangibles is $31.2 million
and $21.6 million as of March 31, 1995 and 1994, respectively. Goodwill and
other intangible assets are periodically reviewed to assess recoverability from
future operations using anticipated undiscounted future cash flows. Any
permanent diminution in the value of goodwill or other intangibles would be
recognized as a charge against earnings when identified.
Effective March 31, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which had no
impact on the Company's consolidated results of operations or financial
position.
Preferred Stock
The Company is authorized to issue 500,000 shares of preferred stock in one or
more series, and to fix as to any series the dividend rate, redemption prices,
preferences in liquidation or dissolution, sinking fund terms, if any,
conversion rights, voting rights and any other preference or special rights and
qualifications. The issuance of preferred stock in certain circumstances may
have the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Company's common stock at a premium over
the market price of the common stock, and may adversely affect the market price
of and other rights of the holders of common stock. The Company has no present
plans to issue any shares of preferred stock.
27
<PAGE> 29
3. ACQUISITIONS
On July 1, 1993, the Company acquired all outstanding capital stock of
Pharmagel S.p.A. (Italy) and Pharmagel S.A. (France) (jointly "Pharmagel"), a
manufacturer of softgels which had been privately held. The Company accounted
for the acquisition as a purchase for financial reporting purposes, and has
included the net assets and results of operations of Pharmagel in the Company's
consolidated financial statements beginning July 1, 1993. The aggregate
purchase price, which approximated $30 million, was allocated to assets and
liabilities based on 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.
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 five year
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 periods presented after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense on
acquisition borrowings, and related income tax effects. The pro forma
information is not necessarily indicative of what would have occurred had the
acquisition been made as of those dates, and is not intended to be a projection
of future results or trends.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) For the years ended March 31,
-----------------------------
1994 1993
-------- --------
<S> <C> <C>
Net sales $456,434 $426,498
Income from continuing operations 30,767 27,972
Net income 14,947 19,907
Earnings per share from continuing operations 1.26 1.16
Net income per share 0.61 0.82
</TABLE>
As of September 1, 1993, the Company also acquired certain tangible and
intangible assets of Gayoso Wellcome S.A., a softgel manufacturer in Spain, for
a purchase price of approximately $9.5 million. Gayoso Wellcome's operations
were not material in relation to the Company's consolidated financial
statements, and pro forma information for this acquisition is therefore not
presented.
28
<PAGE> 30
4. SALE OF COMMON STOCK AND RELATED TRANSACTIONS
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 (see Note 13).
In October 1992, the Company completed a secondary offering of 3.5 million
shares of its common stock. The shares were sold by Lehman. The offering did
not result in any additional shares outstanding of the Company's common stock,
and the Company did not receive any proceeds from the sale.
5. DISCONTINUED OPERATION
In fiscal 1992, the Company reached a decision to dispose of Paco
Pharmaceutical Services, Inc. ("Paco"). During fiscal 1993, Paco completed an
initial public offering of its common stock, and, with the proceeds of such
offering, paid $28.0 million to the Company in satisfaction of an intercompany
promissory note. In connection with the offering, the Company agreed to
indemnify Paco for any liabilities and costs incurred subsequent to March 31,
1992, related to the litigation involving Paco specifically described in Note
14. In addition, the Company has indemnified Paco for any additional U. S.
Federal and state income tax liabilities arising from the date of the Company's
acquisition of Paco through the date of completion of the offering. The
Company recorded an additional $0.6 million extraordinary loss in connection
with the final accounting for the disposition of Paco, representing the
after-tax difference between net proceeds received and the Company's carrying
value of Paco as of August 26, 1992.
For the fiscal year beginning April 1, 1992 through August 26, 1992 (the "date
of disposal"), Paco recognized net sales of $30.2 million, interest expense
(allocated portion of consolidated interest expense based on debt attributable
to Paco) of $1.1 million, income tax expense of $1.0 million, and no net
income. Net current assets of $3.2 million and net non-current assets of $25.5
million were disposed of through the sale of Paco. The consolidated statement
of cash flows excludes Paco's net cash used of ($0.6) million for the fiscal
year ended March 31, 1993.
6. INCOME TAXES
Effective April 1, 1992, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
SFAS 109 requires that deferred income taxes reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities and
the financial reporting amounts. As of April 1, 1992, the Company recorded
income of approximately $1.0 million, or $0.04 per share, which represented the
net decrease in deferred tax liabilities resulting from the adoption of SFAS
109. Such amount was reflected in the consolidated statement of income as the
cumulative effect of an accounting change.
A summary of income from continuing operations before income taxes, minority
interests and extraordinary items is reflected below. Such income is exclusive
of various intercompany income/expense items, such as royalties, interest,
dividends and similar items, which are taxable/deductible in the respective
locations.
29
<PAGE> 31
Therefore, the relationship of domestic and foreign taxes to reported domestic
and foreign income is not representative of actual tax rates.
<TABLE>
<CAPTION>
(In thousands) For the years ended March 31,
--------------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Income from continuing operations
before income taxes, minority interest and
extraordinary items:
United States $10,105 $ 1,505 $ 3,194
Foreign 81,482 60,839 63,097
------- ------- --------
$91,587 $62,344 $ 66,291
======= ======= ========
Provision for currently payable
income taxes:
United States $ 5,443 $ 2,620 $ 1,570
Foreign 23,161 15,953 21,442
------- ------- --------
28,604 18,573 23,012
------- ------- --------
Provision (credit) for deferred
income taxes:
United States (6) (21) (125)
Foreign 1,754 185 1,169
------- ------- --------
1,748 164 1,044
------- ------- --------
Total income taxes $30,352 $18,737 $ 24,056
======= ======= ========
</TABLE>
The deferred tax provision for fiscal year 1995 includes a net $0.4 million
charge resulting from an increase in deferred tax valuation allowances, as well
as a $0.3 million charge resulting from changes in enacted statutory tax rates
in certain countries. The deferred tax provision for fiscal year 1994 includes
a credit of $1.7 million from net reductions in enacted statutory tax rates in
certain countries, as well as a $0.8 million charge resulting from an increase
in deferred tax valuation allowances during the period. The deferred tax
provision for fiscal year 1993 includes a charge of $4.5 million resulting from
increases in deferred tax valuation allowances during the period.
The components of deferred taxes as of March 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---------------------------- -----------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Property, plant and equipment $ 1,473 $41,638 $ 852 $35,974
Foreign and other tax credit carryforwards 11,531 - 9,050 -
Capital loss carryforwards 6,379 - 6,379 -
Pensions and other postretirement
benefits 4,876 1,309 5,782 1,299
Stock options 3,890 - 3,665 -
Defeasance of debt (Note 9) 2,175 - 4,758 -
Miscellaneous other 7,255 795 8,678 790
-------- ------- -------- -------
Subtotal 37,579 43,742 39,164 38,063
Valuation allowances (25,754) - (25,390) -
-------- ------- -------- -------
Total deferred taxes $ 11,825 $43,742 $ 13,774 $38,063
======== ======= ======== =======
</TABLE>
At March 31, 1995, net current future tax benefits of $1.8 million were included
in other current assets, while $0.1 million of net current deferred tax
liabilities were included in accrued liabilities in the accompanying
consolidated statement of financial position. In addition, $2.2 million of net
long-term future tax benefits were included in other assets, and $35.8 million
of net long-term deferred tax liabilities were reflected in that statement. At
March 31, 1994, net current future tax benefits of $1.8 million were included in
other current assets, while $0.1 million of net current deferred tax liabilities
were included in accrued liabilities in the accompanying consolidated statement
of financial position. In addition, $4.8 million of net long-term future tax
benefits were included in other assets, and $30.7 million of net long-term
deferred tax liabilities were included in deferred income taxes.
30
<PAGE> 32
The capital loss carryforwards noted above expire in 2001. The foreign tax
credit carryforwards noted above expire through 1998. At March 31, 1995,
foreign earnings of approximately $84.6 million have been retained indefinitely
by subsidiaries for reinvestment, and accordingly no provision is made for
income taxes that would be payable upon the distribution of such earnings. It
is not practicable to determine the amount of the related unrecognized deferred
income tax liability, if any.
The difference between consolidated income taxes as computed at the United
States statutory rate and as reported in the consolidated statement of income
is summarized as follows:
<TABLE>
<CAPTION>
(In thousands) For the years ended March 31,
-----------------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
United States statutory tax $32,056 $21,820 $22,539
Increases (reductions) in taxes due to:
Difference in effective foreign tax rates (3,620) (2,467) 1,590
Foreign tax credit carryforwards (utilized) generated (1,330) (1,803) 2,388
Goodwill amortization 1,532 1,490 1,252
Translation losses 1,739 (595) (1,752)
Changes in valuation allowances
and other items, net (25) 292 (1,961)
------- ------- -------
Consolidated income taxes $30,352 $18,737 $24,056
======= ======= =======
</TABLE>
The Company's U.S. and Australian income tax returns are undergoing routine
reviews encompassing several fiscal years. Various open issues involving the
U.S. tax returns are awaiting final resolution with the Internal Revenue
Service, however, the Company believes that the impact of the resolution of
such issues will not be material to its financial position. While the Company
has not received any formal notification from the Australian tax authorities,
communications indicate the Company's positions on deductibility of certain
expenses will be challenged. Based upon review of these issues by management
and legal and tax advisors, the Company does not believe the ultimate outcome
of these matters will have a material adverse impact on its business or
financial position.
Income tax payments, net of refunds, were $19.2 million, $18.9 million, and
$22.5 million for the years ended March 31, 1995, 1994 and 1993, respectively.
7. ACCRUED AND OTHER LONG-TERM LIABILITIES
Accrued and other long-term liabilities consist of the following as of March
31, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
-------- --------
<S> <C> <C>
Accrued Liabilities:
Salaries, wages and bonuses $13,915 $11,606
Interest 1,710 1,695
Other 23,351 23,501
------- -------
$38,976 $36,802
======= =======
Other Long-Term Liabilities:
Pension and welfare benefits (Note 11) $36,553 $29,310
Postretirement benefits (Note 11) 6,207 5,968
Other 14,140 14,587
------- -------
$56,900 $49,865
======= =======
</TABLE>
8. SHORT-TERM BORROWINGS AND LINES OF CREDIT
The Company has short-term line of credit arrangements with foreign banking
institutions whereunder, at March 31, 1995, the Company and its subsidiaries
may borrow up to approximately $25.0 million subject to limitations imposed by
the bank credit facility (Note 9). There are no compensating balance
31
<PAGE> 33
requirements related to these lines of credit. The total indebtedness
outstanding under such arrangements was $2.1 million and $2.6 million at March
31, 1995 and 1994, respectively.
Short-term borrowings, based on the amounts outstanding at the end of each
month, were as follows:
<TABLE>
<CAPTION>
(In thousands) As of March 31,
-------------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Maximum amount outstanding $2,286 $2,607 $1,551
Average amount outstanding 1,634 2,052 1,163
Weighted average interest rate during the year 13.8% 9.0% 7.9%
Weighted average interest rate at March 31 10.8% 8.5% 7.5%
</TABLE>
9. LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
-------- --------
<S> <C> <C>
6-3/4% Senior Notes due 2004 (net of discount of $651 and
$723 in 1995 and 1994, respectively) $ 99,349 $ 99,277
Borrowings under bank credit agreement 65,575 65,842
Capitalized lease obligations (Note 10) 1,824 1,398
Industrial development revenue bonds 6,350 10,922
Other 12,312 11,838
-------- --------
185,410 189,277
Less - current portion (2,542) (1,328)
-------- --------
$182,868 $187,949
======== ========
</TABLE>
The 6-3/4% Senior Notes ("Senior Notes") due February 1, 2004 are noncallable
and are unsecured obligations, ranking pari passu with all other unsecured and
senior indebtedness of the Company. 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.
In January 1994, the Company completed a public offering of $100.0 million
aggregate principal amount of the Senior Notes ("Offering"). The proceeds of
the Offering to the Company were $99.3 million. 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 had a then 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"). As a result of the
Defeasance, the Company recognized an extraordinary loss of $15.5 million
($0.64 per share) in the quarter ended December 31, 1993, reflecting the
estimated after-tax difference between the recorded value of the Subordinated
Debentures and their face value, the call premium, the prepayment of net
interest through the Call Date, and the write-off of unamortized deferred
financing costs related to the Subordinated Debentures. The Company also
recognized future tax benefits of approximately $4.8 million related to the
Defeasance. All of the Company's remaining obligations relating to the
Subordinated Debentures were relieved at the Call Date, and all Subordinated
Debentures were retired.
In March 1994, the Company entered into a bank credit facility as a replacement
for the Company's previous bank credit agreement. The 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
32
<PAGE> 34
at LIBOR plus .575% currently, with a further reduction in the interest rate
spread to LIBOR plus .475% 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 of the Company. In connection with the
new credit facility, the Company recognized a $0.3 million extraordinary loss
in the fourth quarter of fiscal 1994, reflecting the write-off of unamortized
deferred financing costs related to the former credit agreement, net of $0.1
million tax effects.
The bank credit facility requires the Company to satisfy various annual and
quarterly financial tests, including maintenance on a consolidated basis of a
specified minimum or maximum current level of tangible net worth and cash flow
coverage, leverage, and fixed charge ratios. The agreement also restricts the
Company's ability to incur additional indebtedness or liens, make investments
and loans, dispose of assets, or engage in certain business combinations, and
limits the ability of the Company to pay dividends. The indenture under which
the Senior Notes were issued also restricts the Company's ability to incur
additional liens, enter into sale-leaseback transactions, engage in certain
transactions with affiliates, and engage in certain business combinations. As
of March 31, 1995, the Company does not currently have plans to declare or pay
any cash dividends.
The Company has variable interest rate industrial development revenue bonds
aggregating $6.4 million due in 2012. The interest rate in effect at March 31,
1995, was 4.15%.
The annual maturities of long-term debt, excluding amounts payable under
capitalized lease obligations, for the five succeeding fiscal years are: 1996
- - $2.3 million; 1997 - $2.5 million; 1998 - $0.9 million; 1999 - $0.6 million;
and 2000 - $66.6 million. Interest paid was $14.4 million, $28.1 million, and
$23.7 million for the years ended March 31, 1995, 1994, and 1993, respectively.
10. LEASES
Total rental expense under operating leases was $8.5 million, $7.1 million, and
$7.6 million for the years ended March 31, 1995, 1994, and 1993, respectively.
The present value of capitalized lease obligations is classified as long-term
debt and the related assets are classified as land, buildings and equipment.
As of March 31, 1995, the minimum rental commitments under long-term operating
and capitalized leases are as follows:
<TABLE>
<CAPTION>
(In thousands) Capital Operating
Leases Leases
---------- -------------
<S> <C> <C>
1996 $ 407 $ 7,491
1997 341 7,211
1998 227 6,679
1999 207 6,464
2000 207 6,431
2001 and thereafter 1,543 40,769
------- -------
2,932 $75,045
Less - amount representing interest (1,108) =======
Present value of net minimum lease payments -------
$ 1,824
=======
</TABLE>
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pensions
The Company has several pension plans covering substantially all salaried and
hourly employees. In general, the Company's domestic plans provide defined
pension benefits based on years of service and the level of compensation.
Foreign subsidiaries provide for pension benefits in accordance with local
customs or law. The Company funds its pension plans at amounts required by the
applicable regulations. Pension expense included
33
<PAGE> 35
THE FOLLOWING:
<TABLE>
<CAPTION>
(In thousands) For the years ended March 31,
------------------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost of benefits earned during year $ 3,722 $ 3,255 $ 2,474
Interest cost on projected benefit obligation 4,754 4,191 3,665
Actual return on plan assets (2,236) (3,602) (2,633)
Net amortization and deferral (781) 774 705
------- ------- -------
$ 5,459 $ 4,618 $ 4,211
======= ======= =======
</TABLE>
The following table shows the status of the various plans and amounts included
in the Company's consolidated statement of financial position as of March 31,
1995 and 1994:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
------------------------------------- -------------------------------------
Plans whose Plans whose Plans whose Plans whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 5,261 $44,880 $ 4,723 $41,507
Non-vested benefit obligation 237 5,705 293 4,331
------- ------- ------- -------
Accumulated benefit obligation 5,498 50,585 5,016 45,838
Effects of anticipated future
compensation increases 983 10,058 987 8,228
------- ------- ------- -------
Projected benefit obligation 6,481 60,643 6,003 54,066
Plan assets at fair value 9,318 21,795 9,504 18,576
------- ------- ------- -------
Projected benefit obligation in
excess of (less than) plan assets (2,837) 38,848 (3,501) 35,490
Unamortized net gain (loss) (566) (2,119) 44 (5,794)
Unrecognized prior service cost (151) (176) (152) (386)
------- ------- ------- -------
Accrued pension (asset) liability
recorded in the consolidated
statement of financial position $(3,554) $36,553 $(3,609) $29,310
======= ======= ======= =======
</TABLE>
Plan assets consist primarily of annuities, marketable securities and mortgage
notes receivable.
The average of the assumptions used as of March 31, 1995, 1994, and 1993 in
determining the pension expense and benefit obligation information shown above
were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Discount rate 7.8% 7.4% 8.0%
Rate of compensation increase 4.7 5.0 5.0
Long-term rate of return on plan assets 9.6 9.9 9.9
</TABLE>
Postretirement and Other Benefits
In fiscal year 1992, the Company adopted Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS 106"). SFAS 106 requires that the expected cost of
postretirement benefits be charged to expense during the years that eligible
employees render service. The following table reconciles the status of the
accrued postretirement liability as of March 31 (based on January 1
34
<PAGE> 36
measurement dates):
<TABLE>
<CAPTION>
(In thousands) 1995 1994
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,542 $2,940
Active employees 1,072 1,171
------ ------
Accumulated postretirement benefit obligation
in excess of plan assets 3,614 4,111
Unrecognized net gain 2,793 2,057
Accrued postretirement benefit liability (including ------ ------
$200 in current liabilities) $6,407 $6,168
====== ======
</TABLE>
Net postretirement benefits cost for the years ended March 31, 1995, 1994 and
1993 included:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost $168 $173 $129
Interest cost on accumulated
postretirement benefit obligation 228 441 468
---- ---- ----
Net postretirement benefit cost $396 $614 $597
==== ==== ====
</TABLE>
For measurement purposes, a 10% annual rate of increase in the per capita costs
of covered health care claims was assumed for 1995, compared with 11% in 1994
and 12% for 1993. The rate was assumed to decrease by 1% in fiscal 1996 and
each year thereafter to a rate of 6% beyond 1999. The health care cost trend
rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of the measurement date of January 1, 1995, by $0.4
million and the aggregate of the service and interest cost components of net
postretirement cost for fiscal 1995 by $0.1 million. The discount rate used in
determining the accumulated postretirement benefit obligation was 8.5 % and
7.5% for fiscal years 1995 and 1994, respectively.
In November 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits, which the Company adopted as of April 1, 1994. This
statement requires the use of the accrual method to recognize liabilities for
postemployment benefits. The adoption of this statement did not have a
significant impact on the Company's financial results or position.
12. STOCK COMPENSATION PLANS
1992 Stock Option Plan
In fiscal 1992, the Company adopted a management stock option plan designed to
provide key management personnel stock options for maximizing shareholder value
through improved Company financial performance. Under such plan, management
participants are required to purchase options for common stock at a cost
determined under the provisions of the plan at the beginning of the fiscal
year. The exercise price of such options is set at a value based on the
provisions of the plan, net of the purchase cost, increased by a 10% annual
rate compounded over five years. The number of stock options a participant is
required to purchase is based upon a financial performance formula established
by the Compensation Committee of the Board of Directors.
As an added incentive to increase shareholder value, participants are provided
one standard stock option for each purchased stock option. Each standard stock
option is exercisable at an average market value per share at the beginning of
the fiscal year, and may only be exercised when the purchased option is
exercised. Both types of options vest after three years from the date of
grant, and expire four years after the date of vesting.
35
<PAGE> 37
The following summarizes stock option activity over the past two years under
the 1992 Stock Option Plan:
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------
Number of Average Number of Average
Shares Price Shares Price
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of year 1,043,700 $29.42 708,823 $27.33
Option activity for the year:
Granted for fiscal year 484,457 $47.28 334,877 $33.86
Exercised (12,374) $22.05 -
Canceled - -
--------- ---------
Balance at end of year 1,515,783 $35.11 1,043,700 $29.42
========= =========
</TABLE>
Compensation expense of $0.3 million was recorded for fiscal 1994 in connection
with the 1992 Stock Option Plan. No compensation expense was recognized for
fiscal 1995 or 1993 in connection with this plan. As of March 31, 1995, a
total of 271,843 options for common shares remain available for grant.
Director Stock Options
For fiscal 1995, a total of 48,000 options were granted to four outside
directors of the Company. These options are exercisable at $45.38 per share,
vest after three years from the date of grant, and expire seven years after the
date of vesting. The Company recognized compensation expense of $0.1 million
in fiscal 1995 related to such grants.
In fiscal 1992, a total of 36,000 options were granted to three outside
directors of the Company. These options are exercisable at $18.00 per share,
vest after three years from the date of grant, and expire seven years after the
date of vesting. During 1995, 12,000 of these shares were exercised.
1990 Stock Option Plans
In November 1990, the Company implemented three stock option plans under which
a total of 1,239,612 options for shares of the Company's common stock were
authorized for issuance to key management personnel. As a result of the
Company's sale of common stock in October 1991, all options granted under such
plans became fully vested. Such options expire ten years from the date of
grant. Information on the number of shares under option for the 1990 Plan,
exercisable at $5.49 per share, is as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Balance at beginning of year 1,073,665 1,099,272
Granted during year 16,575 -
Exercised (5,257) (25,607)
--------- ---------
Balance at end of year 1,084,983 1,073,665
========= =========
</TABLE>
The Company recognized compensation expense of $0.3 million in fiscal 1995
related to these grants.
13. RELATED PARTY TRANSACTIONS
Certain foreign subsidiaries purchase gelatin materials and the Company's
German subsidiary leases plant facilities, purchases other services and
receives loans from time-to-time from a German company which is also the
minority shareholder of the Company's German and certain other European
subsidiaries.
Gelatin purchases, at prices comparable to estimated market prices, amounted to
$21.6 million, $18.7 million, and $19.6 million for the years ended March 31,
1995, 1994, and 1993, respectively. Rental payments amounted to $5.3 million,
$4.7 million, and $4.7 million, and purchased services amounted to $5.2
million, $4.6 million, and $5.4 million for each of the respective years.
36
<PAGE> 38
During the period in which Lehman held a beneficial interest in the Company,
Lehman and certain of its affiliates received fees for services in connection
with certain public offerings of the Company's securities and other matters.
During the year ended March 31, 1994, the Company paid $0.7 million for
underwriting fees to Lehman in connection with the January 1994 Senior Notes
offering (Note 9). No fees were paid by the Company to Lehman or its
affiliates during fiscal years 1995 or 1993.
14. COMMITMENTS AND 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 ("Settlement Agreement"). These actions included
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 in fiscal 1994 a special charge of approximately $3.2
million representing the amount of all settlement-related costs in excess of
previously provided reserves. The Settlement Agreement entered into by the
parties to the three lawsuits was approved as fair, adequate and reasonable by
order of a judge of the district court of New Jersey dated July 19, 1994, and
all three actions were dismissed with prejudice. All distributions to class
members and class counsel were paid during fiscal 1995.
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 and its counsel to date, the
Company believes that this action lacks merit and intends to defend against it
vigorously. The Company intends to file a counterclaim seeking damages as a
result of the termination of the Purchase Agreement. 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.
37
<PAGE> 39
As of March 31, 1995, the Company has capital expenditure commitments related
primarily to plant expansions amounting to approximately $11.5 million.
15. SEGMENT DATA
The Company is engaged principally in the production of softgels, hardshells
and other drug delivery systems for the pharmaceutical, health and nutritional
and cosmetic products industries. The Company's operations are divided into
three geographical areas: United States, Europe and Other International.
Europe represents operations in the United Kingdom, France, Italy and Germany.
Other International consists of operations in Canada, the Pacific and Latin
America.
<TABLE>
<CAPTION>
(In thousands) For the years ended March 31,
-----------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Sales:
United States $128,912 $120,687 $ 86,687
Europe 302,172 233,716 229,937
Other International 105,598 94,894 81,387
-------- -------- --------
Net sales (1) $536,682 $449,297 $398,011
======== ======== ========
Operating Income:
United States $ 29,612 $ 28,241 $ 23,327
Europe 66,973 46,249 53,941
Other International 21,411 19,238 13,450
Unallocated (2) (14,174) (10,815) (2,621)
-------- -------- --------
Operating income $103,822 $ 82,913 $ 88,097
======== ======== ========
Identifiable assets:
United States $ 90,036 $ 86,410 $ 74,886
Europe 382,581 316,623 263,099
Other International 144,930 121,318 106,372
Unallocated (3) 86,826 89,063 87,827
-------- -------- --------
Total assets $704,373 $613,414 $532,184
======== ======== ========
Capital expenditures:
Drug Delivery Systems $ 53,221 $ 39,294 $ 33,132
Unallocated (4) 855 209 60
-------- -------- --------
Total capital expenditures $ 54,076 $ 39,503 $ 33,192
======== ======== ========
Depreciation and amortization:
Drug Delivery Systems $ 25,697 $ 21,008 $ 19,589
Unallocated (4) 1,752 2,962 3,089
-------- -------- --------
Total depreciation and amortization $ 27,449 $ 23,970 $ 22,678
======== ======== ========
</TABLE>
(1) No single customer or product represents 10% or more of sales, and
intersegment sales are not significant.
(2) Unallocated operating income includes principally general corporate
expenses, and in 1994 $4.5 million related to the special charges for
the litigation settlement and plant revaluation (Note 2). Unallocated
operating income also reflects $6.0 million and $0.8 million of
expenses associated with the Company's Advanced Therapeutic Products
group in the 1995 and 1994 fiscal years, respectively.
(3) Unallocated identifiable assets are principally cash, cash
equivalents, short-term investments, other assets and, in fiscal 1993,
net assets of discontinued operations.
(4) Unallocated capital expenditures and depreciation and amortization
represent primarily corporate amounts.
The net assets of foreign subsidiaries were $218.8 million, $216.5 million, and
$216.6 million at March 31, 1995, 1994, and 1993, respectively. The Company's
share of foreign net income was $41.6 million, $34.6 million, and $27.9 million
for the years ended March 31, 1995, 1994, and 1993, respectively, after
deducting minority interests, income taxes on unremitted earnings and various
charges billed by the parent company.
38
<PAGE> 40
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ------------------ ----------------- -------------------
1995 1994 1995 1994 1995 1994(1) 1995 1994(1)
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $132,938 $108,454 $121,312 $105,179 $132,215 $114,820 $150,217 $120,844
Gross profit 49,182 40,708 44,199 35,464 48,472 39,972 54,906 45,764
Income from continuing
operations before
extraordinary loss 11,425 8,596 9,143 6,557 11,607 8,904 12,683 6,857
Net income (loss) $ 11,425 $ 8,596 $ 9,143 $ 6,557 $ 11,607 $ (6,596) $ 12,683 $ 6,537
=================== =================== =================== ===================
Income from continuing
operations before extraordinary
loss per common share
$0.47 $0.36 $0.37 $0.27 $0.47 $0.37 $0.51 $0.28
=================== =================== =================== ===================
Net income (loss) per
common share $0.47 $0.36 $0.37 $0.27 $0.47 $(0.27) $0.51 $0.27
=================== =================== =================== ===================
</TABLE>
(1) Net income includes extraordinary loss of $15.5 million ($0.64 per share)
and $0.3 million ($0.01 per share) related to debt extinguishment in the
third and fourth quarters of fiscal 1994, respectively.
17. FINANCIAL INSTRUMENTS
Summarized below are the carrying and estimated fair values for certain of the
Company's financial instruments as of March 31, 1995 and 1994. The carrying
values of all other financial instruments in the consolidated statement of
financial position approximate fair values.
<TABLE>
<CAPTION>
(In thousands) 1995 1994
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Short-term investments $ 5,060 $ 5,117 $ 6,041 $ 6,041
Long-term debt (including current and long-term
portions, and notes payable) 187,503 175,454 191,885 181,108
Derivative financial instruments:
Forward foreign currency exchange contracts - (1,138) - (138)
</TABLE>
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and
Equity Securities, effective April 1, 1994, which requires certain investments
to be recorded at fair value if held for trading purposes or otherwise
available for sale, or at cost if held to maturity. Adoption of SFAS 115 had
no impact on the Company's results of operations, as all such investments are
categorized as held-to-maturity, and therefore the carrying basis of such
investments did not change.
The Company periodically enters into forward foreign currency exchange
contracts to hedge certain exposures related to identifiable foreign currency
transactions that are relatively certain as to both timing and amount, and does
not engage in speculation. Gains and losses on the forward contracts are
recognized concurrently with the gains or losses from the underlying
transactions. At March 31, 1995 and 1994, the Company was party to forward
foreign currency exchange contracts of approximately $18.2 million and $10.9
million (notional amounts), respectively, denominated in European currencies.
The contracts outstanding at March 31, 1995 generally mature on various dates
through fiscal 1996 and are intended to hedge various foreign currency
commitments due from foreign subsidiaries. The Company is exposed to credit
loss in the event of nonperformance by the counterparties of these contracts,
but does not anticipate any such nonperformance given the financial soundness
of such counterparties.
39
<PAGE> 41
The fair value of short-term investments approximates their carrying value,
given the relatively short period to maturity of such instruments. The fair
value of the Senior Notes is estimated based upon the quoted market price for
such securities, which are publicly traded on the New York Stock Exchange.
Fair values of other long-term debt, determined based on interest rates that
are currently available to the Company for similar types of borrowings,
approximate carrying value. The fair value of the forward foreign exchange
contracts reflects the estimated amount that the Company would pay to terminate
the contracts at the reporting date, thereby taking into account the unrealized
gains or losses of open contracts.
40
<PAGE> 42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To R.P. Scherer Corporation:
We have audited the accompanying consolidated statement of financial position
of R.P. SCHERER CORPORATION (a Delaware corporation) and subsidiaries as of
March 31, 1995 and 1994, and the related consolidated statements of income,
cash flows and shareholders' equity for each of the three years in the period
ended March 31, 1995. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and this schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of R.P. Scherer Corporation and
subsidiaries as of March 31, 1995 and 1994, and the results of their operations
and cash flows for each of the three years in the period ended March 31, 1995,
in conformity with generally accepted accounting principles.
As explained in Note 6 to the consolidated financial statements, effective
April 1, 1992, the Company changed its method of accounting for income taxes.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation allowances included
herein is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Detroit, Michigan,
April 28, 1995.
ARTHUR ANDERSEN LLP
41
<PAGE> 43
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has not been any change of accountants or any disagreements on any matter
of accounting practice or financial disclosure in the period for which this
report is filed.
42
<PAGE> 44
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11 EXECUTIVE COMPENSATION
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10 through 13 will be included in the R.P.
Scherer Corporation Proxy Statement for 1995, which will be filed not later
than 120 days after the close of the Company's fiscal year ended March 31,
1995, and is hereby incorporated by reference to such proxy statement.
Information with respect to Item 10 above is included on pages 8 and 9 of this
Annual Report on Form 10-K.
43
<PAGE> 45
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS - the consolidated financial statements
of R.P. Scherer Corporation and Subsidiaries and the related
report of independent public accountants are included in Item
8 of this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES - the financial statement
schedule "Schedule II - Valuation Allowances" for R.P. Scherer
Corporation is included herein.
3. EXHIBITS - The following exhibits are filed as part of this
Annual Report on Form 10-K or, where indicated, were
heretofore filed and are hereby incorporated by reference:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company dated May 15, 1990.
Incorporated by reference to Exhibit 3.1 filed with the Company's Registration
Statement on Form S-4, No. 33-30999.
3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company
dated August 21, 1991. Incorporated by reference to Exhibit 3.4 filed with the
Company's Registration Statement on Form S-1, No. 33-42392.
3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company
dated October 11, 1991. Incorporated by reference to Exhibit 3.5 filed with the
Company's Registration Statement on Form S-1, No. 33-42392.
3.4 Certificate of Correction of Restated Certificate of Incorporation of the Company
dated November 25, 1991. Incorporated by reference to Exhibit 3.3 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1991.
3.5 Certificate of Ownership merging Scherer International into the Company, dated
February 27, 1995. Incorporated by reference to Exhibit 4.3 filed with the
Company's Current Report on Form 8-K dated March 6, 1995.
3.6 By-Laws of the Company. Incorporated by reference to Exhibit 3.2 filed with the
Company's Registration Statement on Form S-4, No. 33-30999.
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
4.1 Indenture dated as of January 1, 1994, between Scherer International and Comerica
Bank, Trustee. Incorporated by reference to Exhibit 2.1 filed with Scherer
International's Registration Statement on Form 8-A, dated May 2, 1994.
4.2 First Supplemental Indenture dated as of February 28, 1995, between Scherer
International, the Company, and Comerica Bank, Trustee. Incorporated by reference
to Exhibit 4.1 filed with the Company's Current Report on Form 8-K, dated March 6,
1995.
4.3 Stock Option Plan of the Company, Amended and Restated July, 1993. Incorporated
by reference to Exhibit B.2 filed with the Company's Proxy Statement dated August
24, 1993.
4.4 First Amendment to Stock Option Plan of the Company, dated July 28, 1994.
Incorporated by reference to Exhibit A filed with the Company's Proxy Statement
dated August 26, 1994.
4.5 Form of the Company's 1990 Nonqualified Stock Option Plan, 1990 Nonqualified
Performance Stock Option Plan A, and 1990 Nonqualified Performance Stock Option
Plan B. Incorporated by reference to Exhibits 10.6 through 10.8 filed with the
Company's Post-Effective Amendment No. 2 to Form S-1 dated February 11, 1991.
4.6 Amendments to 1990 Nonqualified Stock Option Plans, dated February 18, 1994 and
September 1, 1994. Incorporated by reference to Exhibit B filed with the Company's
Proxy Statement dated August 26, 1994.
4.7 Form of Outside Director Stock Option Agreements. Incorporated by reference to
Exhibit 4.7 filed with the Company's Registration Statement on Form S-8 dated
February 1, 1995, No. 33-57555.
4.8 Amended and Restated $175,000,000 Credit Agreement, dated as of March 30, 1994,
among Scherer International, certain of its subsidiaries, Comerica Bank, NBD Bank,
N.A., Societe Generale, The Bank of Nova Scotia, and ABN AMRO Bank N.V.
Incorporated by reference to Exhibit 10.1 filed with R.P. Scherer International
Corporation's Annual Report on Form 10-K for the year ended March 31, 1994.
4.9 Assumption Agreement, dated as of February 28, 1995, among the Company, Comerica
Bank, NBD Bank, N.A., Societe Generale, The Bank of Nova Scotia, and ABN AMRO Bank
N.V. Incorporated by reference to Exhibit 4.2 filed with the Company's Current
Report on Form 8-K dated March 6, 1995.
10.1 Management Incentive Compensation Plan of the Company, Amended and Restated July,
1993. Incorporated by reference to Exhibit A.2 filed with the Company's Proxy
Statement dated August 24, 1993.
10.2 Employees' Retirement Income Plan of the Company effective August 6, 1986.
Incorporated by reference to Exhibit 10.33 of the Company's Registration Statement
on Form S-1, No. 33-30362.
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
10.3 Employment Agreement, dated June 1, 1994, between the Company and John P. Cashman.
Incorporated by reference to Exhibit 10.7 of Scherer International's Annual Report
on Form 10-K as of March 31, 1994.
10.4 Employment Agreement, dated June 1, 1994, between the Company and Aleksandar
Erdeljan. Incorporated by reference to Exhibit 10.8 of Scherer International's
Annual Report on Form 10-K as of March 31, 1994.
10.5 Employment Agreement, dated June 1, 1994, between the Company and Nicole S.
Williams. Incorporated by reference to Exhibit 10.9 of Scherer International's
Annual Report on Form 10-K as of March 31, 1994.
10.6 Supplemental Retirement Plan for Key Employees of the Company, dated December 16,
1994. Filed herewith.
21 Subsidiaries of the registrant. Filed herewith.
23 Consent of Arthur Andersen LLP. Filed herewith.
27 Financial Data Schedule. Filed herewith.
</TABLE>
(b) One Current Report on Form 8-K, concerning the merger of Scherer
International with and into the Company (as discussed further in
Note 1 to the consolidated financial statements included in Item 8
herein), was filed with the Securities and Exchange Commission on
March 6, 1995.
46
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, R.P. Scherer Corporation has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
June 23, 1995.
R.P. SCHERER CORPORATION
By: /s/ John P. Cashman
------------------------------------
John P. Cashman
Chairman and Co-Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this
Report has been signed below by the following persons on behalf of R.P. Scherer
Corporation in the capacities indicated on June 23, 1995:
<TABLE>
<CAPTION>
SIGNATURES TITLE
<S> <C>
/s/ John P. Cashman Chairman and Co-Chief
------------------- Executive Officer
John P. Cashman
/s/ Aleksandar Erdeljan President and Co-Chief
----------------------- Executive Officer
Aleksandar Erdeljan
/s/ Nicole S. Williams Executive Vice President, Finance,
---------------------- Chief Financial Officer, Treasurer
Nicole S. Williams and Secretary
/s/ Thomas J. Stuart Vice President and Controller
-------------------- (Principal Accounting Officer)
Thomas J. Stuart
/s/ John E. Avery Director
-----------------
John E. Avery
/s/ Frederick Frank Director
-------------------
Frederick Frank
/s/ Lori G. Koffman Director
-------------------
Lori G. Koffman
/s/ Louis Lasagna Director
-----------------
Louis Lasagna
/s/ Robert H. Rock Director
------------------
Robert H. Rock
/s/ James A. Stern Director
------------------
James A. Stern
</TABLE>
47
<PAGE> 49
R.P. SCHERER CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNTS
<TABLE>
<CAPTION>
(In thousands) Balance at Charged to Other Balance at
Beginning Costs and Changes Add End of
Description of Period Expenses (Deduct) (a) Deductions Period
- ----------- --------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED MARCH 31, 1995:
Valuation accounts deducted from
related assets -
Reserve for doubtful accounts $2,903 $1,449 $309 $ (727) $3,934
Reserve for unmerchantable
inventories 1,701 1,127 215 (1,295) 1,748
FOR THE YEAR ENDED MARCH 31, 1994:
Valuation accounts deducted from
related assets -
Reserve for doubtful accounts $2,260 $1,123 $(53) $ (427) $2,903
Reserve for unmerchantable
inventories 2,188 828 (44) (1,271) 1,701
FOR THE YEAR ENDED MARCH 31,1993:
Valuation accounts deducted from
related assets - $2,064 $ 638 $(35) $ (407) $2,260
Reserve for doubtful accounts
Reserve for unmerchantable 1,900 706 (43) (375) 2,188
inventories
</TABLE>
(a) Includes changes due to fluctuations in foreign currency exchange
rates.
48
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Page
- ------------------- ----
<S> <C>
Exhibit 10.8 - Supplemental Retirement Plan for Key Employees 50
Exhibit 21 - Subsidiaries 55
Exhibit 23 - Consent of Arthur Andersen LLP 57
Exhibit 27 - Financial Data Schedule 59
</TABLE>
49
<PAGE> 1
EXHIBIT 10.8
50
<PAGE> 2
EXHIBIT 10.8
SUPPLEMENTAL BENEFIT PLAN
FOR
KEY EMPLOYEES OF R.P. SCHERER CORPORATION
R.P. SCHERER CORPORATION, a Delaware corporation (the
"Corporation"), established a supplemental benefit plan, effective January 1,
1994, for certain key management employees to provide benefits supplemental to
those provided under the R.P. Scherer Corporation Employees' Retirement Income
Plan (the "Retirement Plan"), known as the Supplemental Benefit Plan For Key
Employees of R.P. Scherer Corporation effective January 1, 1994.
Section 1. Purpose. The purpose of this Plan is to
provide retirement benefit payments to certain key management employees of the
Corporation as designated by the Committee, and their Beneficiaries, to the
extent retirement benefits are, or will be, reduced by the amendments made to
the Retirement Plan by the Corporation effective January 1, 1994, including
amendments required by applicable laws from the general assets of the
Corporation.
Section 2. Definitions. Whenever used herein, the
following terms shall have the following meanings unless the context requires
otherwise:
(a) "Beneficiary" means the person or persons
designated by a Participant who is or may be entitled to a benefit hereunder,
subject to Section 3.
(b) "Board of Directors" means the Board of
Directors of the Corporation.
(c) "Committee" means the Compensation Committee
of the Board of Directors.
(d) "Corporation" means R.P. Scherer Corporation
and R.P. Scherer International Corporation; provided, however, that whenever
this Plan indicates that the "Corporation" may or shall take any action under
the Plan, such action shall be taken by R.P. Scherer Corporation for itself
and as agent for R.P. Scherer International Corporation.
(e) "Participant" means any key management
employee who is designated to be a Participant in the Plan in accordance with
Section 3.
(f) "Plan" means the Supplemental Benefit Plan
For Key Employees of R.P. Scherer Corporation, as described herein or hereafter
amended.
(g) "Retirement Plan" means the R.P. Scherer
Corporation Employees' Retirement Income Plan, as from time to time amended.
Section 3. Eligibility. Eligibility for participation
shall be limited to those key management employees who, in the sole discretion
of the Committee, are designated by the Committee; provided however, that
benefits under this Plan shall be payable to a Participant who qualifies for a
benefit under the Retirement Plan upon Normal Retirement, Early Retirement,
Disability Retirement or termination of employment, and to his Spouse or
designated Beneficiary if such Spouse or designated Beneficiary is paid a
survivor benefit under the Retirement Plan, but only provided such Participant
attains Normal Retirement Age as defined in the Retirement Plan while an
employee of the Corporation or upon a final determination by the Committee at
retirement or termination, and in its sole discretion, entitling a Participant
and his Spouse to such benefits. In no event shall any benefits be payable
under this Plan under any other circumstances. If the Committee designates a
key management employee to be a
51
<PAGE> 3
Participant at any time other than effective as of January 1, 1994, then such
Participant shall be deemed to be a Participant in this Plan only as of the
date designated by the Committee.
Section 4. Administration of the Plan. The Plan shall
be administered by the Committee which shall have full and exclusive power to
interpret the Plan, to determine the amount and manner of any payments and to
adopt such rules and regulations as are necessary for its administration. A
member of the Committee who is a Participant shall not vote on any question
relating specifically to himself; and, in the event the remaining members of
the Committee are unable to come to a determination of any question, the same
shall be determined by the Board of Directors. The decisions of the Committee
shall be final and conclusive on all persons and the Committee shall not be
subject to liability thereon. The Committee may delegate specific
responsibilities it assumes under this Plan which are administrative or
ministerial in nature by notifying a delegate as to the duties and
responsibilities delegated.
Section 5. Benefits.
(a) Benefits are payable, provided such
Participant attains Normal Retirement Age as defined in the Retirement Plan
while an Employee of the Corporation or there has been a determination by the
Committee in its sole discretion pursuant to Section 3, upon commencement of
retirement benefits under the Retirement Plan, and shall be equal to the
excess, if any, of:
(1) The amount of benefit which would be
payable to or on behalf of such Participant under the
Retirement Plan computed under the provisions of the
Retirement Plan, taking into account the amendments to the
Retirement Plan effective January 1, 1994, and all subsequent
amendments but computed as if:
(A) The limitations contained in
Section 415 of the Internal Revenue Code of 1986, as amended
from time to time (the "Code") were inapplicable; and
(B) The limitation of "$150,000,
multiplied by the Adjustment Factor" (as defined in the
Retirement Plan) on the amount of Compensation to be taken
into account for all Retirement Plan purposes in any Plan Year
was inapplicable and, instead, the limitation in effect under
the Retirement Plan on the amount of Compensation to be taken
into account is $242,286 for the 1994 Plan Year, adjusted each
Plan Year thereafter by the lesser of (i) the percentage
increase in the Consumer Price Index for All Urban Consumers
as published by the U.S. Department of Labor (CPI-U) from
January of the Prior Plan Year to January of the Present Plan
Year or (ii) 4%; provided, however, that the limitation on
Compensation taken into account shall not be decreased from
year to year;
over
(2) The amount payable to or on behalf
of such Participant under said Retirement Plan computed under
the provisions of said Retirement Plan, taking into account
the amendments to the Retirement Plan effective January 1,
1994, and all subsequent amendments.
(b) Benefits payable under this Plan shall be
payable to a Participant in the same manner and subject to all the same
options, conditions, privileges and restrictions as are applicable to the
benefits payable to the Participant and to his Spouse or designated Beneficiary
if such Spouse or designated Beneficiary is paid a benefit under the Retirement
Plan, and taking into consideration any adjustment in benefits payable to the
Participant under the Retirement Plan by reason of any modification in the
application of the Section 5(a)(1)(A) limitations due to the form of benefit
elected
52
<PAGE> 4
by the Participant. The amounts determined by Section 5(a), as so adjusted,
shall be converted to the form of benefit elected based upon the same
actuarially equivalent factors as used under the Retirement Plan.
(c) Benefits Upon Termination of Participation.
If a Participant ceases to be a Participant in the Retirement Plan, he shall
immediately cease to be a Participant in this Plan. Thereafter, subject to
Section 3 and Section 5, the amounts determined under Section 5(a)(1)(A),
5(a)(1)(B) and 5(a)(2) of this Plan shall continue to be adjusted from time to
time in accordance with applicable law and the terms of the Retirement Plan,
respectively.
(d) Benefits Unfunded. The undertakings of the
Corporation herein constitute merely the unsecured promise of the Corporation.
The benefits under this Plan shall be paid by the Corporation out of its
general assets and shall not be funded in any manner. If the Corporation shall
acquire any assets in connection with the liabilities assumed by it hereunder,
it is expressly understood and agreed that no Participant or Beneficiary of the
Participant shall have any right with respect to, or claim against, such
assets. Such assets shall not be held in any way as collateral security for
fulfilling the obligations of the Corporation under this Agreement, and shall
be subject to the claims of creditors of the Corporation.
(e) Allocation of Payments. R.P. Scherer
Corporation shall, after consultation with its actuary, determine the actuarial
method and assumptions to be used in determining the amount to be paid by R.P.
Scherer International Corporation and R.P. Scherer Corporation and when such
amounts shall be paid.
Section 6. Rights of Participants. The Plan shall not
in any manner be liable for or subject to or for the debts of any Participant
or Beneficiary. No right or benefit at any time under the Plan shall be
subject in any manner to alienation, sale, transfer, assignment, pledge or
encumbrance of any kind. If a Participant or beneficiary shall attempt to or
shall alienate, sell, transfer, assign, pledge or otherwise encumber his rights
or benefits under the Plan or any part thereof or if by reason of his
bankruptcy or other event such benefits would otherwise be received by anyone
else or would not be enjoyed by him, the Committee in its discretion may
terminate his interest in any such benefit and hold or apply such benefit to or
for the benefit of such person, his spouse, children or other dependents, or
any of them as the Committee shall determine.
Neither the establishment of this Plan nor any
provisions of the Plan or modifications thereof shall be held or construed as
giving any Participant in the Plan the right to be retained in the service of
the Corporation and the Corporation expressly reserves its right to discharge
any such Participant whenever the interests of the Corporation may so require.
Section 7. Representations and Warranties. No Employee
shall at any time have a right to be selected to be a Participant in the Plan,
and no person shall have any authority to enter into any agreement assuring
such selection or making any warranty or representation with respect thereto.
Section 8. Indemnification. To the extent permitted by
applicable law, the Corporation shall indemnify any person who was or is a
party to or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that he is or was a member of the
Committee, against any and all losses, costs, expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation or its shareholders, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation or its shareholders and,
with respect to any criminal action or proceeding, had reasonable cause to
believe his conduct was unlawful. This right of
53
<PAGE> 5
indemnification shall not be deemed exclusive of any other rights to which any
Committee member may be entitled as a matter of law or otherwise, to the extent
permitted by law.
Section 9. Amendment. The Board of Directors shall have
the power to amend the Plan or to terminate the Plan at any time; provided,
however, that such power shall not affect the obligation of the Corporation to
pay the benefits accrued under the Plan to the extent they have been accrued as
of the date of any such amendment or termination.
Section 10. Governing Law. This Plan and all
determinations made and actions taken pursuant thereto shall be governed by the
laws of the State of Michigan, where it is made and where it shall be enforced.
Any amendment to this Plan shall be valid only if made in the State of
Michigan.
IN WITNESS WHEREOF, the Corporation has adopted this Plan,
which amends and supersedes any and all prior versions of the Plan, this 16th
day of December, 1994, effective as of January 1, 1994.
ATTEST: R.P. SCHERER CORPORATION
/s/ Nicole S. Williams By: /s/ Aleksandar Erdeljan
- ---------------------- -------------------------
Secretary
Its: President
---------
54
<PAGE> 1
EXHIBIT 21
55
<PAGE> 2
EXHIBIT 21
R. P. SCHERER CORPORATION AND SUBSIDIARIES
The following is a list of all of the directly and indirectly owned
subsidiaries of R.P. Scherer Corporation, their jurisdiction of incorporation
and the percentage of their outstanding capital stock owned by R.P. Scherer
Corporation or another subsidiary of R.P. Scherer Corporation.
<TABLE>
<CAPTION>
EFFECTIVE PERCENTAGE
JURISDICTION OF OWNERSHIP BY
NAME OF SUBSIDIARY INCORPORATION R. P. SCHERER CORPORATION
------------------ --------------- -------------------------
<S> <C> <C>
R. P. Scherer Hardcapsule, Inc.* New Jersey 100%
R. P. Scherer Hardcapsule (West)* Utah 100%
Gelatin Products International Delaware 100%
Science Labs Inc.* Delaware 100%
The LVC Corporation* Missouri 100%
R. P. Scherer Argentina S.A.I.C. Argentina 100%
Vivax Interamericana S.A. Argentina 99% (1)
R. P. Scherer do Brasil Encapsulacoes, Ltda. Brazil 100%
R. P. Scherer Canada Inc. Ontario, Canada 100%
R.P. Scherer (Europe) AG Switzerland 100%
F&F Holding GmbH Germany 100%
R. P. Scherer GmbH Germany 51% (2)
Allcaps Weichgelatinekapseln GmbH Germany 51% (3)
R. P. Scherer S.A. France 70% (4)
R.P. Scherer Production S.A. France 100%
R. P. Scherer S.p.A. Italy 95% (5)
R. P. Scherer Holdings Pty. Ltd. Australia 100%
R. P. Scherer Pty. Limited Australia 100% (6)
R. P. Scherer Holdings Ltd. England 100%
R. P. Scherer Limited England 100% (7)
Scherer DDS Limited England 100% (7)
R. P. Scherer K.K. Japan 60%
R. P. Scherer Korea Limited Korea 50%
R. P. Scherer Egypt Egypt 10%
</TABLE>
(1) The Company owns 1.875% directly and R. P. Scherer Argentina S.A.I.C. owns
an additional 98.125%.
(2) The 51% interest in R. P. Scherer GmbH is owned directly by F&F Holding
GmbH.
(3) This corporation is 100% owned directly by R. P. Scherer GmbH (of which F&F
Holding GmbH owns 51%).
(4) The Company owns 50.01% directly and R. P. Scherer GmbH (of which F&F
Holding GmbH owns 51%) owns an additional 39.975%.
(5) The Company owns 90% directly and R. P. Scherer GmbH (of which F&F Holding
GmbH owns 51%) owns an additional 10%.
(6) This corporation is 100% owned by R. P. Scherer Holdings Pty. Ltd.
(7) This corporation is 100% owned by R. P. Scherer Holdings Ltd.
* Inactive
56
<PAGE> 1
EXHIBIT 23
57
<PAGE> 2
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statements, File Numbers 33-47056, 33-51231, 33-51920, 33-56507,
and 33-57555.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
June 27, 1995.
58
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 33,715
<SECURITIES> 5,060
<RECEIVABLES> 115,672
<ALLOWANCES> 3,900
<INVENTORY> 66,610
<CURRENT-ASSETS> 223,561
<PP&E> 372,237
<DEPRECIATION> 92,734
<TOTAL-ASSETS> 704,373
<CURRENT-LIABILITIES> 112,447
<BONDS> 182,868
<COMMON> 233
0
0
<OTHER-SE> 273,413
<TOTAL-LIABILITY-AND-EQUITY> 704,373
<SALES> 536,682
<TOTAL-REVENUES> 536,682
<CGS> 339,923
<TOTAL-COSTS> 432,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,235
<INCOME-PRETAX> 91,587
<INCOME-TAX> 30,352
<INCOME-CONTINUING> 44,859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,859
<EPS-PRIMARY> 1.83
<EPS-DILUTED> 1.83
</TABLE>
