<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES /X/ NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of the registrant's common stock as of November 4,
1996: 23,534,219 shares of common stock, par value $.01.
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
1996 1995 1996 1995
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $143,454 $133,511 $288,751 $281,889
Cost of sales 99,201 89,318 195,690 183,002
Selling and administrative expenses 17,830 17,944 34,906 36,455
Research and development expenses, net 4,661 5,796 9,322 11,796
----------- ----------- --------- ----------
Operating income 21,762 20,453 48,833 50,636
Interest expense 3,001 3,605 5,973 6,985
Interest earned and other (755) (179) (1,104) (799)
----------- ----------- --------- ----------
Income from continuing operations before
income taxes and minority interests 19,516 17,027 43,964 44,450
Income taxes 5,759 5,174 12,974 13,936
Minority interests 2,291 3,530 5,931 8,496
----------- ----------- --------- ----------
Net income $11,466 $8,323 $25,059 $22,018
=========== ========== ========= ==========
Per Common and Common Equivalent Share:
Net income $0.47 $0.34 $1.02 $0.90
=========== ========== ========= ==========
Average number of common and common
equivalent shares 24,598 24,533 24,528 24,586
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(IN THOUSANDS)
SEPTEMBER 30, MARCH 31,
1996 1996
------------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,726 $ 21,007
Short-term investments 3,764 4,880
Receivables, less reserves of:
September 30, 1996 - $3.9 million;
March 31, 1996 - $4.8 million 129,709 129,472
Inventories 66,195 59,718
Other current assets 8,908 6,659
------------- ---------
245,302 221,736
------------- ---------
PROPERTY:
Property, plant and equipment, at cost 428,995 411,396
Accumulated depreciation (133,481) (124,676)
------------- ---------
295,514 286,720
------------- ---------
OTHER ASSETS:
Goodwill and intangibles, net of amortization 172,075 175,622
Other assets 24,286 23,303
------------- ---------
196,361 198,925
------------- ---------
$737,177 $707,381
============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 4,119 $ 5,834
Accounts payable 53,542 57,985
Accrued liabilities 44,116 41,839
Accrued income taxes 12,797 9,632
------------- ---------
114,574 115,290
------------- ---------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 176,937 164,652
Other long-term liabilities 57,200 57,329
Deferred income taxes 34,636 32,482
Minority interests in subsidiaries 32,591 37,268
------------- ---------
301,364 291,731
------------- ---------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock, 500,000 shares authorized, none issued - -
Common stock, $.01 par value, 50,000,000 shares
authorized; shares issued: September 30, 1996 -
23,517,953 shares; March 31, 1996 - 23,460,453 shares 235 235
Additional paid-in capital 241,059 239,705
Retained earnings 90,764 65,705
Currency translation adjustment (10,819) (5,285)
------------- ---------
321,239 300,360
------------- ---------
$737,177 $707,381
============ =========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 25,059 $ 22,018
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 13,460 11,930
Amortization of intangible assets and debt discount 3,306 3,317
Minority interests in net income 5,931 8,496
Deferred tax provision and other 273 1,965
Increase in receivables (1,702) (3,758)
Increase in inventories and other current assets (7,325) (48)
Increase (decrease) in accounts payable and accrued expenses 2,133 (23,202)
---------- ---------
Net cash provided by operating activities 41,135 20,718
---------- ---------
INVESTING ACTIVITIES:
Purchases of plant and equipment (28,372) (26,108)
Other 2,268 (2,554)
---------- ---------
Net cash used by investing activities (26,104) (28,662)
---------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 23,612 22,450
Long-term debt retirements and payments (13,494) (11,270)
Short-term borrowings, net (207) 1,685
Cash dividends paid to minority shareholders of subsidiaries (8,850) (13,504)
---------- ---------
Net cash provided (used) by financing activities 1,061 (639)
---------- ---------
Effect of currency translation on cash and cash equivalents (373) (769)
---------- ---------
Net increase (decrease) in cash and cash equivalents 15,719 (9,352)
Cash and cash equivalents, beginning of period 21,007 33,715
---------- ---------
Cash and cash equivalents, end of period $36,726 $24,363
========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of R.P. Scherer Corporation (the "Company"), a Delaware corporation
and its subsidiaries, some of which are less than wholly-owned. In the
opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting only of normal recurring
items) necessary for the fair presentation of financial position and results
of operations. These consolidated financial statements and related notes
have been prepared pursuant to the Rules and Regulations set forth by the
Securities and Exchange Commission and should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, as filed with the Securities and
Exchange Commission.
2. RESTRUCTURING
In the fourth quarter of fiscal 1996, the Company announced a restructuring
plan designed to enhance the Company's long-term profitability by reducing
and rationalizing manufacturing and overhead structures which were primarily
servicing non-pharmaceutical markets (the "Restructuring"). The
Restructuring included the closure of two softgel manufacturing plants, as
well as the consolidation and elimination of certain marketing,
administrative, and development staff in several other locations. The
Restructuring is expected to be completed in fiscal 1997. As a result of the
Restructuring and other special charges, the Company recorded a special
provision totaling $33.8 million before income tax effects in the fourth
quarter of fiscal 1996. Further information with regard to the Restructuring
is included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996, as filed with the Securities and Exchange Commission.
A summary of the restructuring reserve activity for the six months ended
September 30, 1996 follows:
(IN THOUSANDS)
UTILIZED IN
THE SIX
MONTHS ENDED BALANCE AT
BALANCE AT SEPTEMBER 30, SEPTEMBER 30,
MARCH 31, 1996 1996 1996
-------------- ------------- -------------
Severance and other employee
termination costs $ 8,399 $5,761 $ 2,638
Fixed asset recovery reserves 13,100 - 13,100
Other current assets 299 277 22
Contractual obligations 3,281 1,295 1,986
-------------- ------------- -------------
$25,079 $7,333 $17,746
============== ============= =============
Of the restructuring reserve remaining at September 30, 1996, $3.8 million was
included in accrued liabilities, $0.8 million was included in other long-term
liabilities and $13.1 million was reported as a reduction of property, plant and
equipment.
3. INCOME TAXES
The effective income tax rates in the current and prior year periods were
lower than the U.S. Federal income tax rate due primarily to the mix of
taxable income between jurisdictions as well as the anticipated utilization
of carryforward foreign and other tax credits.
5
<PAGE>
4. INVENTORIES
The components of inventories are as follows:
(IN THOUSANDS)
SEPTEMBER 30, MARCH 31,
1996 1996
------------- -----------
Raw materials and supplies $37,687 $30,892
Work in process 11,892 10,593
Finished goods 16,616 18,233
------------- -----------
$66,195 $59,718
============= ===========
5. CONTINGENCIES
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 R.P. Scherer International Corporation (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 sought $75 million in actual damages and
$100 million in punitive damages, as well as OCAP's attorney fees and other
litigation expenses, costs and disbursements incurred in bringing this
action. The Company and R.P. Scherer International Corporation asserted a
counterclaim against OCAP for breach of contract and breach of the covenant
of good faith and fair dealing arising out of the termination of the Purchase
Agreement. In April 1996, the court rendered a verdict in the Company's
favor on all claims in the Amended Complaint and also dismissed the Company's
counterclaim against OCAP. OCAP has filed a notice of appeal for the
dismissal of its claims and the Company has filed a notice of cross appeal
for the dismissal of its counter claim. In the opinion of management, the
ultimate outcome of any potential appeals related to this decision 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 conducted a remedial
investigation and remedial and removal actions by the Company and the current
owner of the facility are ongoing. The Company will continue to perform
additional studies and remediation of the area, including testing and removal
of groundwater, which may indicate the necessity for additional remedial and
removal actions in the future. 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 material adverse impact on the Company's
business or financial position.
The Company is a party to various other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources.
6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis of financial results and condition
covers the three and six month periods ended September 30, 1996 and 1995. A
majority of the Company's sales, income and cash flows are 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 the foreign currency
exchange rates in effect at the end of each period. Accordingly, the
Company's consolidated shareholders' equity will fluctuate depending upon the
strengthening or weakening of the U.S. dollar.
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
Second-quarter sales of $143.5 million increased 7.4% over the $133.5 million
reported in the prior year period. Measured using constant foreign exchange
rates, second-quarter sales increased 9.3%. The second-quarter sales
increase resulted primarily from a 23.6% increase in sales of Vitamin E and
other health and nutritional ("H&N") softgels, predominantly in the United
States, the United Kingdom and Australia, combined with a 9.7% increase in
sales of over-the-counter ("OTC") softgel products. Such sales gains were
partially offset by a 14.8% decline in prescription pharmaceutical softgel
sales, attributable to a 33.6% decline in prescription pharmaceutical
softgels sales by the Company's German subsidiary versus the same period last
year. The German subsidiary's second-quarter prescription pharmaceutical
softgel sales comparison was adversely affected by the inclusion of strong
launch-related sales of Novartis' NEORAL-Registered Trademark- softgel
product in the prior year period and by the German government's current
effort to reduce spending on prescription products. ZYDIS-Registered
Trademark- revenue increased 31.7% in the second quarter, continuing that
business' strong growth.
Operating income for the quarter ended September 30, 1996 was $21.8 million
as compared to the $20.5 million earned in the prior year, a 6.4% increase.
On a constant exchange rate basis, second-quarter operating income increased
7.8%. Operating income gains were driven by the strength of Vitamin E and
other H&N sales worldwide, partially offset by lower profitability in Germany
resulting from decreased demand for higher margin prescription pharmaceutical
softgel products. For the quarter ended September 30, 1996, net recurring
Research and Development expense was $1.1 million below last year's second
quarter. While gross recurring R&D expenses approximated prior year levels,
reduced PULSINCAP-Registered Trademark- expenditures and a $0.6 million
increase in customer reimbursements resulted in the lower net recurring R&D
expense versus the same period last year. Second quarter R&D expense related
to the Company's Advanced Therapeutic Products ("ATP") group of $1.9 million
approximated prior year levels. Second-quarter selling, general and
administrative ("SG&A") expense was 12.4% of sales versus 13.4% of sales in
the same period last year. The improvement in the SG&A ratio was largely
attributable to cost savings resulting from the previously announced closing
of softgel facilities in Neuvic, France and Windsor, Canada.
The Company generated net income of $11.5 million, or $0.47 per share, in the
quarter ended September 30, 1996, as compared to the $8.3 million, or $0.34
per share, earned in last year's second quarter. The
7
<PAGE>
strengthening of the U.S. dollar had the effect of reducing second-quarter
net income by $0.02 per share as compared to the second-quarter last year.
Interest expense fell 16.8% versus the prior year second quarter due to debt
reductions reflecting the Company's strong operating cash flow and lower
average borrowing rates. The effective tax rate in both years
approximated 30%.
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Consolidated sales for the six month period ended September 30, 1996 were
$288.8 million, a 2.4% increase versus the $281.9 million reported in the
prior year period. The stronger U.S. dollar relative to most foreign
currencies reduced reported first-half sales. Measured using constant
foreign exchange rates, sales in the current year period increased 5.3%. The
current year sales increase resulted primarily from gains in Vitamin E and
H&N softgel sales in the United States, the United Kingdom and Australia,
partially offset by lower pharmaceutical product sales of nifedipine, due to
public concern regarding use of the immediate release form of the product,
and of SANDIMMUNE-Registered Trademark- / NEORAL-Registered Trademark- and
Abbott Laboratories' HYTRIN-Registered Trademark-. ZYDIS-Registered
Trademark- revenue increased 24% in the first half of fiscal 1997.
Operating income for the six months ended September 30, 1996 was $48.8
million as compared to the $50.6 million earned in the prior year, a 3.6%
decrease. On a constant exchange rate basis, year-to-date operating income
declined 1.1%. First-half operating income comparisons reflect a higher
proportion of H&N product in the sales mix, including a large increase in
sales of Vitamin E softgels. Lower gross profit margins were partially
offset by the benefit of cost reduction efforts undertaken in fiscal 1996, as
evidenced by a decline in first-half SG&A expense as a percentage of sales to
12.1% versus 12.9% in the prior year period. The improvement in the SG&A
ratio was largely attributable to cost savings resulting from the previously
announced closing of softgel facilities in Neuvic, France and Windsor, Canada
and from the elimination of certain administrative, marketing and development
staff positions at other locations. For the six months ended September 30,
1996, net recurring Research and Development expense was $1.7 million below
the prior year period. While gross recurring softgel R&D expenses
approximated prior year levels, reduced PULSINCAP-Registered Trademark-
expenditures and a $0.9 million increase in customer reimbursement resulted
in the lower net recurring R&D expense versus the same period last year.
Also for the first six months of fiscal 1997, R&D expense related to the
Company's ATP group decreased $0.8 million to $3.4 million, due primarily to
the timing of certain expenditures related to clinical studies of ATP
products.
The Company generated net income of $25.1 million, or $1.02 per share, in the
six months ended September 30, 1996, as compared to the $22.0 million, $0.90
per share, earned in last year's first half. The strengthening of the U.S.
dollar had the effect of reducing net income by $0.04 per share in the six
months ended September 30, 1996, as compared to the same period last year.
Interest expense was $1.0 million, or 14.5%, below the prior year due
primarily to lower borrowing rates and the strong cash flow provided by
operations. The effective tax rate in the current year period approximated
30%.
8
<PAGE>
RESULTS BY GEOGRAPHIC SEGMENT
The following sets forth operating results for each of the Company's
geographic segments for the six month periods ended September 30, 1996 and
1995:
<TABLE>
<CAPTION>
(IN THOUSANDS) SALES OPERATING INCOME OPERATING MARGIN
---------------------------- ----------------------- -------------------
1996 1995 1996 1995 1996 1995
---------- ---------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
United States $ 83,814 $ 64,280 $ 17,914 $ 15,353 21.4% 23.9%
Europe 150,298 164,126 25,675 35,060 17.1 21.4
Other International 54,639 53,483 11,942 9,078 21.9 17.0
Unallocated (1) - - (6,698) (8,855) - -
---------- ---------- --------- --------- ------- -------
$288,751 $281,889 $48,833 $50,636 16.9% 18.0%
========== ========== ========= ========= ======= =======
</TABLE>
(1) Includes general Corporate expenses and expenses associated with the ATP
Group.
The Company's United States operations generated a 30.4% sales gain for the
six months ended September 30, 1996, reflecting in part increased production
of softgels for the Canadian market as a result of the Spring 1996 closing of
the Windsor, Canada softgel facility. However, the majority of the
first-half increase resulted from a 79.3% increase in nutritional softgel
sales, driven primarily by increased sales of Vitamin E softgel products.
First-half sales of prescription pharmaceutical softgels declined versus the
year ago period, due primarily to reduced sales of nifedipine and
HYTRIN-Registered Trademark-, partially offset by a 9.7% increase in OTC
pharmaceutical softgel sales. For this same period, operating income grew by
16.7%, or $2.6 million, yielding a 21.4% operating margin as compared with
23.9% in the prior year period, primarily as a result of the shift in product
mix toward lower margin Vitamin E softgels.
Sales in Europe decreased 8.4% for the six months ended September 30, 1996,
as compared to the same period last year. The first-half sales change
resulted primarily from lower nifedipine and SANDIMMUNE-Registered Trademark-
/ NEORAL-Registered Trademark- softgel sales and lower OTC pharmaceutical
softgel sales by the Company's German subsidiary, partially offset by
increased United Kingdom H&N sales. As a result of lower sales volume and a
shift in sales mix from higher margin pharmaceutical products to lower margin
H&N product sales, operating income decreased 26.8% between the two periods.
Sales in the Company's Other International segment increased only 2.2% for
the six months ended September 30, 1996, due primarily to the transfer of
Canadian softgel production to the United States and the weakness of the
Japanese yen versus the U.S. dollar. Excluding Canada softgels, Other
International sales on a constant dollar basis increased 15.9% due primarily
to the strengthening of Vitamin E and H&N softgel markets in Australia and
Japan and strong demand for the Company's hardshell capsules. For the same
period, operating income increased 31.5% due to improved profitability in
Australia, Japan and in the hardshell business as well as the closing of the
unprofitable Canadian softgel facility.
9
<PAGE>
CASH FLOWS
Cash and cash equivalents increased by $15.7 million for the six months ended
September 30, 1996, as compared with an decrease of $9.4 million in the same
period in 1995. Cash provided by operations increased $20.4 million to $41.1
million in the current year period versus the $20.7 million provided by
operations in the prior year period. The fiscal 1997 increase in cash
provided by operations resulted from increased earnings combined with a
dramatically lower rate of increase in cash used for working capital as
compared to the first half of fiscal 1996. In the fiscal 1997 period, the
increase in working capital resulted primarily from an increase in raw
material inventory due to increased production of Vitamin E and other H&N
products and to the timing of gelatin purchases. For the period ended
September 30, 1995, cash provided by earnings was significantly offset by a
$27.0 million increase in net working capital. Such net working capital
increase resulted primarily from a reduction of current liabilities due to
the timing of foreign tax payments and capital asset purchases, the timing of
dividend and interest payments to minority shareholders and an increase in
customer receivables.
Capital expenditures for the current year period amounted to $28.4 million,
compared to the prior year period's capital expenditures of $26.1 million.
First-half capital expenditures consisted primarily of costs related to the
expansion and upgrade of softgel production facilities in France and Japan
and of the ZYDIS-Registered Trademark- production facility in Swindon, U.K.
Prior period capital spending consisted primarily of expenditures in the
United Kingdom related to the continuing expansion of the ZYDIS-Registered
Trademark- production facility, for the ongoing expansion and renovation of
pharmaceutical softgel facilities in Germany and France, and general facility
and equipment additions and improvements.
Financing activities for the six months ended September 30, 1996, include net
borrowings of $10.1 million under the Company's bank credit facilities,
primarily to fund capital and research expenditures in the United Kingdom,
and the payment of $8.9 million of dividends to minority shareholders. In
the prior year period, financing activities principally reflect the payment
of $13.5 million of dividends to minority shareholders, as well as a net $9.7
million of borrowings under the Company's bank credit facility used
principally to fund capital and research expenditures in the United States.
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, to fund research and
development, to service and reduce indebtedness, to fund
Restructuring-related cash outlays during 1997 and, depending on market
conditions, to repurchase up to 5% of the Company's outstanding common stock.
The Company believes that future cash flow from operations, together with
cash and short-term investments aggregating $40.5 million at September 30,
1996 and amounts available under existing bank credit facilities, will be
adequate to meet anticipated capital investment, operating, restructuring,
stock repurchase and debt service requirements. The Company does not
currently have plans to declare or pay cash dividends.
On October 29, 1996, Standard & Poor's raised R.P. Scherer Corporation's
corporate credit rating and senior unsecured credit rating to triple-B from
triple-B-minus. At September, 30, 1996, the Company's outstanding
indebtedness consisted of $99.5 million of 6 3/4% senior notes (net of a $0.5
million discount), $63.4 million of borrowings under the Company's bank
credit facilities, $6.4 million of industrial development revenue bonds and
approximately $10.5 million of other indebtedness.
10
<PAGE>
Capital expenditures are anticipated to approximate $80 million for fiscal
1997 and are expected to decline somewhat per year thereafter. Such
expenditures will be used primarily to continue the upgrade and expansion of
dedicated pharmaceutical softgel production capacity to meet anticipated
customer demand, as well as to ensure continuing compliance with
pharmaceutical Good Manufacturing Practices (GMP) standards. In addition,
such expenditures will include further major expansions of production
facilities for ZYDIS-Registered Trademark-. As of September 30, 1996, the
Company had $9.1 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, 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 $9 million in fiscal 1997.
While ATP option or licensing fees may be earned and recognized in the latter
half of fiscal 1997, no significant revenues from ATP product sales or
royalties are expected until after fiscal 1997, assuming the development and
commercialization of such ATP products is successful.
The Company periodically reviews drug delivery technologies and other
businesses for potential investment, consistent with its strategic
objectives. Such investments will not necessarily involve significant
initial funding or funding commitments by 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.
INFLATION
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.
FORWARD LOOKING INFORMATION
Except for the historical information contained herein, the matters discussed
in this Report Form 10-Q are forward looking statements that involve risks
and uncertainties. Certain important factors could cause the Company's
actual results to differ materially from expected and historical results,
including, but not limited to, the following: volatility of key nutritional
products markets; generic competition to key customer pharmaceutical
products; timing of completion of the Company's restructuring program;
successful formulation, scale-up, development, and commercialization of
customer, ATP and other company products; global economic factors; regulatory
matters related to product testing and approvals for the Company and its
customers; competitive products and pricing; and product and drug delivery
system development and other technological issues. These forward looking
statements, as further described in the Company's Annual Report and on Form
10-K, as filed with the Securities and Exchange Commission, represent the
Company's judgment as of the date the information was prepared.
11
<PAGE>
PART II
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The Annual Meeting of Stockholders of R.P. Scherer Corporation was held on
September 11, 1996, for the purpose of electing a Board of Directors and
approving the appointment of independent auditors.
The shareholders elected the Company's entire Board of Directors. The
persons elected to the Company's Board of Directors and the number of shares
cast for, and the number of shares withheld, with respect to each of these
persons were as follows:
FOR WITHHELD
Aleksandar Erdeljan 18,751,270 13,165
Lori G. Koffman 18,747,620 16,815
Frederick Frank 18,746,453 17,982
James A. Stern 18,750,480 13,955
Louis Lasagna 18,743,521 20,914
Robert H. Rock 18,750,495 13,940
John E. Avery 18,746,220 18,218
The shareholders ratified the appointment of Arthur Andersen LLP as auditors
of the Company for the fiscal year ending March 31, 1997 by the following
vote: 18,691,855 shares having voted "for", 37,775 shares having voted
"against", 34,805 shares having abstained from voting, and zero shares having
not voted.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K: None.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
R.P. SCHERER CORPORATION
Date: November 13, 1996 By: /s/ Nicole S. Williams
--------------------------------
Nicole S. Williams
Executive Vice President, Finance,
Chief Financial Officer and
Secretary
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from R.P. Scherer
Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, and is qualified in its entirety by reference to such Form 10-Q filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 36,726
<SECURITIES> 3,765
<RECEIVABLES> 133,609
<ALLOWANCES> 3,900
<INVENTORY> 66,195
<CURRENT-ASSETS> 245,302
<PP&E> 428,995
<DEPRECIATION> 133,481
<TOTAL-ASSETS> 737,177
<CURRENT-LIABILITIES> 114,574
<BONDS> 176,937
0
0
<COMMON> 235
<OTHER-SE> 321,004
<TOTAL-LIABILITY-AND-EQUITY> 737,177
<SALES> 288,751
<TOTAL-REVENUES> 288,751
<CGS> 195,690
<TOTAL-COSTS> 239,918
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,973
<INCOME-PRETAX> 43,964
<INCOME-TAX> 12,974
<INCOME-CONTINUING> 25,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,059
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
