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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-30999
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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
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Securities registered pursuant to Section 12(b) of the Act:
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
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES /X/ NO / /
The aggregate market value of all shares of common stock held by non-affiliates
of the registrant as of June 25, 1996 was approximately $1,012,635,000 (based on
closing price of $43.38 per share as of June 25, 1996).
Number of shares outstanding of each class of the registrant's common stock as
of June 25, 1996: 23,464,503 shares of common stock, par value $.01.
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DOCUMENTS INCORPORATED BY REFERENCE:
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Portions of the registrant's proxy statement relating to the 1996 annual meeting
of shareholders to be held on September 11, 1996, 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 for the pharmaceutical and nutritional supplements industries. The
Company two most significant drug delivery systems are RP SCHERERSOL-TM- and
ZYDIS-Registered Trademark- technologies. The Company also is currently
developing and holds the rights to acquire several other drug delivery
technologies. The Company's proprietary drug delivery systems improve the
therapeutic effectiveness of drugs by controlling the rate, time and place of
release of the drug in the body.
The Company produces over 4,000 products in softgel form, which accounted for
approximately 90% of the Company's fiscal 1996 sales. Softgels are used for a
wide range of pharmaceutical, nutritional, 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 one-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 1996 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-TM- systems to broaden the range of
pharmaceutical products which may be encapsulated in softgel form. RP
SCHERERSOL-TM- systems, most of which are patented, often enable pharmaceutical
companies to combine the advantages of drugs in liquid solution with the
convenience and dosage accuracy of softgels. Additionally, RP SCHERERSOL-TM-
technologies, by providing a unique, patented dosage delivery system, can help
protect a pharmaceutical compound against competition from generic drugs
throughout the life of the RP SCHERERSOL-TM- patents.
In 1991, the Company formed a separate division, Scherer DDS, to focus on the
development of advanced drug delivery systems, including the ZYDIS-Registered
Trademark- and other technologies. ZYDIS-Registered Trademark- is an oral
dosage form which dissolves instantaneously on the tongue and does not require
water to aid swallowing. Technologies under development include the PASSCAL dry
powder inhaler system, the DIFFCORE patented controlled-release tablet dosage
form, the OPTIDYNE ophthalmic drug delivery system and PULSINCAP-Registered
Trademark-, 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 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.
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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 ("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.
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SOFTGEL PRODUCTS AND MARKETS
There are three primary solid oral dosage delivery systems: tablets, hardshell
gelatin capsules, and softgel capsules. Softgel products accounted for
approximately 90% of the Company's fiscal 1996 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 1996,
approximately half 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-TM- systems broadens the range of pharmaceutical products which
may be encapsulated in softgel form. RP SCHERERSOL-TM- 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-TM- 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-TM- systems is SANDIMMUN-Registered Trademark-, a product developed
and marketed by Novartis Ltd. SANDIMMUN-Registered Trademark- (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-Registered Trademark- unpleasant taste and regulate the
dosage size.
In addition, NEORAL-Registered Trademark-, a new formulation of cyclosporin A,
has been developed and patented by the Company and Novartis Ltd. NEORAL
- -Registered Trademark- provides a significant improvement in bioavailability of
cyclosporin A and is intended to be used as an immunosupressant as well as for
additional indications. NEORAL-Registered Trademark- has received approval in
Europe for the treatment of psoriasis, and applications are pending in the U.S.
for both psoriasis and rheumatoid arthritis. Novartis Ltd.'s annual worldwide
sales of SANDIMMUN-REGISTERED TRADEMARK- and NEORAL-Registered Trademark- are
currently estimated to approximate $1 billion. The Company believes that a
majority of SANDIMMUN-Registered Trademark- and NEORAL-Registered Trademark-
sales are in softgel form. SANDIMMUN-Registered Trademark- and NEORAL
- -Registered Trademark- combined represented approximately 4% of the Company's
fiscal 1996 softgel sales.
The Company continues to develop new products for the OTC market. The market's
favorable response to softgel formulations of A.H. Robins' DIMETAPP-Registered
Trademark- and ROBITUSSIN-Registered Trademark- and Burroughs Wellcome's
SUDAFED-Registered Trademark- has resulted in similar product line extension
strategies for Schering-Plough's DRIXORAL-Registered Trademark- and Miles
Laboratories' ALKA-SELTZER PLUS-Registered Trademark- and Pfizer's UNISOM
SLEEPGELS-Registered Trademark-, among others.
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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 33% of the Company's fiscal 1996 softgel sales.
OTHER-COSMETICS AND RECREATIONAL. Other products represented approximately 8%
of the Company's softgel sales in fiscal 1996, with approximately 4% of softgel
sales attributable to cosmetics and 4% of softgel sales 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 cosmetics customers have introduced facial products using special
twist-off softgel capsules to provide unit dosing and prevent oxidation of the
products before use. The Company continues to develop and market new products
for the growing cosmetic market. An example is its fragrance softgel TRUSCENT
- -Registered Trademark-, which represents an economical, biodegradable twist-off
sampler providing a unit dose of 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 and commercialization 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.
Technologies under development within Scherer DDS include ZYDIS-Registered
Trademark- as well as several other novel advanced drug delivery technologies.
ZYDIS-Registered Trademark- is an oral dosage form which dissolves
instantaneously on the tongue and does not require water to aid swallowing.
Other technologies under development include the PASSCAL dry powder inhaler
system, the DIFFCORE patented controlled-release tablet dosage form, the
OPTIDYNE ophthalmic drug delivery system and PULSINCAP-Registered Trademark-, an
oral drug delivery device which is designed to release a drug at either a
predetermined time following ingestion. The Company is engaged in the search
for other advanced drug delivery systems which would complement the Company's
existing technologies.
ZYDIS-REGISTERED TRADEMARK-. ZYDIS-Registered Trademark- 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
- -Registered Trademark- is expected to improve patient compliance, particularly
among children and the elderly who frequently experience difficulties in
swallowing conventional dosage forms. The ZYDIS-Registered Trademark- system
has been patented in major markets extending through the year 2002, with such
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patent protection extending to the active ingredients being delivered using
ZYDIS-Registered Trademark-. Products incorporating ZYDIS-Registered Trademark-
technology have received approvals for use in eighteen countries.
The Company currently produces five ZYDIS-Registered Trademark- products:
Pfizer's FELDENE MELT-Registered Trademark- and FELDENE FAST-Registered
Trademark- (piroxicam), Merck's PEPCIDIN RAPITAB-Registered Trademark-
(famotidine), Janssen's IMODIUM LINGUAL-Registered Trademark- (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 twelve major products encompassing ZYDIS
- -Registered Trademark- technology in different stages of development and
regulatory approval, including Glaxo's ZOFRAN-Registered Trademark-
(ondansetron), and an additional six 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. 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
$16.2 million in fiscal 1996 related to ZYDIS-Registered Trademark- products.
OTHER TECHNOLOGIES. In-vitro development work and, in certain cases clinical
development work, has proceeded for all four of the emerging drug delivery
technologies. Recent in-vitro development work has confirmed the ability of
PASSCAL, a unique powder-processing technology, to improve overall inhalation
performance and reproducibility using a variety of dry powder inhalers.
DIFFCORE, a controlled-release tablet technology, is expected to have
significant potential in providing low-cost, ANDA generic formulations
equivalent to the leading sustained-release brands in the U.S. market.
Development of a novel device for ophthalmic drug delivery, OPTIDYNE, has
progressed strongly. The discussions with potential licensing partners having
expertise in ophthalmic marketing and sterile manufacturing, as well as having
specific product applications for OPTIDYNE, are well-advanced. Finally,
PULSINCAP, Scherer's time-controlled oral drug delivery system, has the
potential of reducing dosing frequency and making possible the delivery of drugs
where symptoms are most acute, often in the early morning hours when patients
are asleep. Interest in new applications of the technology has been expressed
by a number of potential licensing partners.
All these technologies are the subject of numerous patents and patent
applications around the globe. Discussions are proceeding with potential
licensing partners with proven marketing skills and expertise in the respective
areas. Current development plans, however, indicate that the earliest
commercialization date for these technologies would be no earlier than the year
2000.
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, the Company formed ATP within its Scherer DDS
subsidiary 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
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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 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 research and development expenses associated with the
ATP initiative will aggregate $30-40 million over the next three to four years.
Revenues related to ATP products are expected to begin no earlier than fiscal
1997, assuming the development and commercialization of such products is
successful.
ATP products involve the reformulation of existing compounds whose patent
protection has expired or is near expiration. Five generic products are
currently under development or planned for development by ATP using RP
SCHERERSOL-Registered Trademark- and ZYDIS-Registered Trademark- 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.
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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 14 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.
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.
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.
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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.
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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 $137.5 million at March 31,
1996, as compared to approximately $161.1 million at March 31, 1995. The
Company believes that such backlog of orders at March 31, 1996 is firm and will
be filled within the next 12 months. The Company's ongoing program to expand
and rationalize its manufacturing capacity and improve customer service, as well
as generally weak nutritional products markets in Europe and Asia Pacific (see
Item 7, "Management's Discussion and Analysis of Results of Operations and
Financial Condition") have resulted in lower lead times and, consequently, lower
backlog levels.
GOVERNMENT REGULATION
The Company's products and manufacturing processes and services are subject to
the applicable Good Manufacturing Practice standards for the pharmaceutical
industry and to other regulations by governmental agencies or departments in
each of the countries in which it operates. In the United States, the Company's
encapsulation products and manufacturing and packaging services are subject to
the Federal Food, Drug and Cosmetic Act, the Comprehensive Drug Abuse Prevention
and Control Act of 1970 and various rules and regulations of the Bureau of
Alcohol, Tobacco and Firearms of the United States Department of Treasury, the
Bureau of Narcotics of the United States Department of Justice and state
narcotic regulatory agencies. In other countries, the Company's products and
services are subject to analogous regulation.
The Company is regularly subjected to testing and inspection of its products and
facilities by representatives of various Federal agencies and in addition, the
Company comes under the regulation of various state, municipal and foreign
health agencies.
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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
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 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 $28.1 million, $24.4 million, and $16.0 million in
fiscal 1996, 1995, and 1994, respectively.
EMPLOYEES
At March 31, 1996, the Company employed approximately 3,300 full-time employees.
The Company considers its relations with its employees to be good.
FORWARD LOOKING INFORMATION
The Company's Annual Report to Shareholders and Annual Report on Form 10-K
contain various forward looking statements including statements regarding its
market position, results of product development activities of the Company and
its customers, financial position and results of operations. These forward
looking statements are based on current expectations. 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: recovery of
key nutritional products markets; generic competition to key customer
pharmaceutical products; timing of completion of the Company's restructuring
program (see Note 4 to the consolidated financial statements); successful
formulation, scale-up, development, and commercialization of customer and
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.
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
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
- ---- --- ------------------------------------------
Aleksandar Erdeljan 46 Chairman and Chief Executive of the Company
since March 1996. 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.
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PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
- ---- --- ------------------------------------------
Nicole S. Williams 51 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 from June 1993
through May 1996, 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.
Thomas J. Stuart 35 Senior Vice President, Corporate Planning and
Development since April 1996. Vice President
and Controller of the Company from June 1994
to April 1996, 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 43 Treasurer of the Company since May, 1996.
Director of Tax Operations of the Company
since August 1993, and of R.P. Scherer
International Corporation from August 1993
through February 1995. Assistant Treasurer
of the Company from August 1993 through May
1996, 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.
Joseph E. Mitchell 42 General Counsel and Assistant Secretary of
the Company since April 1996. Associate
General Counsel for Hiram Walker & Sons, Inc.
from September 1994 to February, 1996, and
Senior Commercial and Corporate Counsel from
April 1991 to September 1994.
John P. Cashman 55 Director of the Company since June 1990.
Chairman of the Company from August 1991 to
March 1996. Chairman and Director of R.P.
Scherer International Corporation from 1989
to February 1995.
Lori G. Koffman 37 Director of the Company since September 1989,
and of R.P. Scherer International from
September 1989 through February 1995.
Assistant Secretary of the Company from
December 1989 to May 1996. Managing
Director, CIBC Wood Gundy Capital since April
1995. Senior Vice President, Lehman from
1990 to December 1994.
Frederick Frank 64 Director of the Company since June 1990, and
of R.P. Scherer International Corporation
from August 1988 through February 1995. Vice
Chairman of Lehman Brothers. Also a director
of Applied Bioscience International, Inc. and
Physicians Computer Network.
James A. Stern 45 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 LLC, 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 Corporation, Infinity
Broadcasting Corporation, and Cinemark USA,
Inc.
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PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
- ---- --- ------------------------------------------
Louis Lasagna, M.D 73 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 Astra USA. 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 46 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 Holdings LLC
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,
Alberto-Culver Company, Quaker Chemical
Corporation, and the Wistar Institute.
John E. Avery 67 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.
(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 eighteen principal
worldwide locations with an aggregate floor space of approximately 1.5 million
square feet. Fourteen of these facilities are owned in fee by the Company, and
four facilities, with an aggregate floor space of 480,000 square feet, are
leased. The U.S. softgel manufacturing facilities total three, of which two, of
100,000 square feet, are leased. The fifteen foreign manufacturing facilities
include thirteen owned facilities with an aggregate floor space of 890,000
square feet, and two leased facilities with 400,000 square feet aggregate floor
space. Approximately 80% of the foreign facilities primarily manufacture
softgels and other dosage delivery systems, while 20% of the foreign facilities
produce hardshell capsules. The foreign facilities are located in Argentina,
Australia, Brazil, Canada, France, Germany (three
13
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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 360,000 square feet in size, has a lease term (including renewal
options) extending through December 2008. The Company also leases 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
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 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 Scherer International 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.
The time in which the verdict may be appealed has not yet expired. 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
materially adverse impact on the Company's business or financial condition.
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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, 1996.
15
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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.
MARKET PRICE
------------------------
High Low
---- ---
Year ended March 31, 1996:
First Quarter $50.25 $41.13
Second Quarter $47.00 $37.25
Third Quarter $49.13 $40.13
Fourth Quarter $49.13 $37.75
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
The Company had 122 common shareholders of record at June 25, 1996.
The Company did not declare any dividends in the two year period ended March 31,
1996. Restrictions contained in certain of the Company's long-term debt
agreements limit the payment of dividends. The Company does not have any plans
to declare or pay cash dividends.
16
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ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA (1):
Net sales......................................... $571,710 $536,682 $449,297 $398,011 $337,786
Cost of sales..................................... 375,088 339,923 287,389 242,108 201,991
Selling and administrative expense................ 72,485 71,661 61,427 56,413 50,305
Research and development expense.................. 23,387 21,276 13,090 11,393 8,453
Restructuring and other charges (2)............... 33,804 - 4,478 - 13,060
Operating income (2).............................. 66,946 103,822 82,913 88,097 63,977
Interest expense.................................. 12,595 13,758 22,480 25,436 35,348
Net income (loss) from continuing
operations...................................... 30,703 44,859 30,914 28,960 (1,224)
Net income (loss) from continuing
operations attributable to common
shares (3)...................................... 30,703 44,859 30,914 28,960 (7,596)
Net income (loss) attributable to common
shares (3, 4)................................... 30,703 44,859 15,094 20,895 (31,118)
Depreciation and amortization (5)................. 29,944 27,449 25,314 22,678 19,940
Capital additions................................. 56,195 54,076 39,503 33,192 20,947
PER COMMON SHARE:
Net income (loss) from continuing
operations (2, 3)............................... $1.25 $1.83 $1.27 $1.20 $(0.50)
Net income (loss) (3, 4).......................... 1.25 1.83 0.62 0.86 (2.05)
BALANCE SHEET DATA (1)
(AT END OF PERIOD):
Working capital (6)............................... $110,794 $113,656 $ 89,681 $ 82,874 $ 79,248
Total assets...................................... 707,381 711,373 613,414 532,184 525,977
Long-term debt, including current portion ........ 169,000 185,410 189,277 142,508 178,639
Minority interests................................ 37,268 42,706 35,354 32,369 28,357
Shareholders' equity.............................. 300,360 273,646 214,710 203,001 191,634
</TABLE>
NOTES TO SELECTED FINANCIAL DATA
1. Excludes the discontinued operations of Paco Pharmaceutical Services, Inc.
("Paco").
2. For the year ended March 31, 1996, includes restructuring and other charges
totaling $33.8 million before tax effects ($0.94 per share after tax
effects). Those charges include approximately $17.1 million of cash
expenses, primarily for severance and other termination benefits, and
approximately $16.7 million for fixed asset write-downs and other non-cash
costs primarily in connection with certain facility closures. For the year
ended March 31, 1994, includes charges totaling $4.5 million for the accrual
of a settlement of Paco Development Partners (PDP II) litigation, which had
been outstanding since 1990, and the write-down of buildings and property
related to the
17
<PAGE>
relocation of operations in Australia. For the year ended March 31, 1992,
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.
3. 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.
4. 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 the year ended
March 31, 1993; a 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.
5. Includes amortization of deferred financing costs and debt discount of $0.4
million, $0.5 million, $1.3 million, $1.8 million, and $2.0 million for the
years ended March 31, 1996, 1995, 1994, 1993, and 1992, respectively.
6. Includes notes payable but does not include current portion of long-term
debt.
18
<PAGE>
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, 1996, 1995, and 1994.
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 14 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, 1996 AND 1995
Consolidated sales for the fiscal year ended March 31, 1996 were a record $571.7
million, amounting to an increase of 7% from sales of $536.7 million generated
in fiscal year 1995. A majority of such sales gain is attributable to growth in
revenues from the Company's pharmaceutical softgel products, which increased by
13% over the prior fiscal year and represented nearly one-half of total sales in
fiscal 1996. Commercialization of the Company's ZYDIS fast-dissolving drug
delivery device also progressed, with sales increasing by nearly 40% to $16.2
million in fiscal 1996. Sales growth in the latest full fiscal year was
dampened by sluggish sales of non-pharmaceutical softgels (primarily health and
nutritional products), which declined 2% overall in fiscal 1996 as a result of
the weakness of certain markets, especially in Europe.
A portion of the reported sales increase relates to the comparative weakness of
the U.S. dollar relative to key foreign currencies, during most of the 1996
fiscal year. On a constant exchange rate basis, the sales increase for the year
ended March 31, 1996 was 3% as compared to the prior fiscal year .
United States operations generated sales of $141.1 million in fiscal 1996, an
increase of nearly 10% from sales in the prior fiscal year. Sales of
pharmaceutical products rose 12%,
19
<PAGE>
paced by strong sales of Abbott Laboratories HYTRIN (terazosin HCI) prescription
drug, used for the treatment of hypertension and benign prostate enlargement,
following its launch in softgel form in the latter part of fiscal year 1995.
Sales of over-the-counter ("OTC") softgel products also increased significantly
during the year as a result of continued strong demand for branded cough/cold
and other OTC softgels, including the launch of several new branded products
during fiscal year 1996. Sales of the Company's nutritional softgel products
were also strong in fiscal 1996, increasing by 17% over fiscal 1995, in spite of
a continued decline in sales of relatively low margin Vitamin E softgels (as
discussed further below).
Sales of the Company's European segment increased to $319.5 million in fiscal
1996, representing an improvement of 6% from sales of $302.2 million last fiscal
year. A majority of such sales growth resulted from strong pharmaceutical
product sales, as well as the effects of the weaker average U.S. dollar. The
most significant product sales advance related to SANDIMMUNE and NEORAL
cyclosporin A softgels, which are produced by the Company for Novartis Ltd.
Sales of SANDIMMUNE and NEORAL grew nearly 40% in fiscal 1996, primarily as a
result of the U.S. Food and Drug Administration granting marketing approval for
NEORAL in July 1995. Sales growth in Europe was restrained in fiscal 1996 by
generally weak nutritionals markets, especially those serviced by the Company's
United Kingdom softgel operation, where sales declined 12% from the prior year.
Such decline is the result of a variety of factors, including lower demand for
nutritional products at the consumer level and to a lesser extent reduced
pricing in response to competitive pressures.
The Company's Other International segment, which represents business units in
Asia Pacific, South America and Canada, reported sales of $111.1 million for the
year ended March 31, 1996, amounting to a 5% increase from sales of $105.6
million in the prior fiscal year. A majority of the sales increase was achieved
by the Company's softgel operation in Argentina and the Pharmaphil hardshell
capsule division, located in Canada. Sales of other operations in this
geographic segment were only marginally higher than in the prior year as growth
was constrained by recessionary and competitive conditions, especially impacting
nutritional softgel sales in Japan and Australia.
Gross margin was $196.6 million for the year ended March 31, 1996, essentially
unchanged from the prior year figure of $196.8 million. As a percentage of
sales, however, gross margin declined to 34.4% in fiscal 1996 from 36.7% in
fiscal 1995. The decline in the gross margin rate is partially attributable to
staffing and other overhead costs associated with new and upgraded manufacturing
facilities and equipment, including a $2.6 million increase in depreciation
expense. The decline also reflects reduced product prices and sub-optimal
capacity utilization resulting from the competitive and market factors discussed
above. The shift in sales mix toward generally higher margin pharmaceutical
products in fiscal 1996 only partially offset the reduction in gross margin
rate.
In January 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 ("Restructuring"). The restructuring plan includes
the closure of softgel manufacturing plants in Windsor, Canada and Neuvic,
France, as well as the consolidation and elimination of certain administrative,
marketing and development staff positions in several other locations. A total
of about 250 people have been or will be affected by the plan, representing
approximately 7% of the Company's total work force. As a result of the
restructuring plan and other special charges (see Note 4 to the consolidated
financial statements), the Company recorded provisions totaling $33.8 million
before income tax effects, including approximately $17.1 million in cash
expenses primarily for severance and other employee termination benefits and
approximately $16.7 million for fixed asset writedowns and other non-cash
expenses. The after tax cost of the restructuring plan and other special
charges was approximately $23.1
20
<PAGE>
million, or $0.94 per common share. The restructuring plan will result in cost
savings estimated at between $7 million and $9 million pretax in its fiscal year
ending March 31, 1997, depending upon the timing of completion of the
restructuring plan. Cost savings after the 1997 fiscal year are expected to
exceed $10 million annually.
Operating income was $66.9 million for fiscal 1996, as compared to $103.8
million in the prior fiscal year. Before the restructuring and other special
charges, operating income for fiscal 1996 amounted to $100.8 million,
representing a decline of $3 million or 3% from the prior year level. This
decline was primarily the result of a $2.1 million increase in net research and
development expenditures, including a $2.5 million, or 42%, increase in spending
in connection with the Company's Advanced Therapeutic Products group ("ATP").
ATP is engaged in the development of pharmaceutical products incorporating
off-patent drugs in the Company's proprietary drug delivery technologies.
Selling and administrative expenses were $72.5 million in fiscal 1996, declining
to 12.7% of sales compared to $71.7 million, or 13.4% of sales, in the prior
fiscal year.
The Company generated net income of $30.7 million, or $1.25 per share, for the
year ended March 31, 1996. Before the effects of the restructuring and other
special charges, as well as an income tax reserve adjustment discussed below,
the Company's net income for fiscal 1996 approximated $50.2 million, or $2.04
per share, an increase of 11% from net income of $44.9 million, or $1.83 per
share, earned in fiscal 1995. Such improvement reflects a $1.9 million decline
in net interest and other, a lower consolidated effective income tax rate in
fiscal 1996 and a $2.1 million reduction in minority interests in earnings of
subsidiaries. The decline in interest expense resulted from both lower debt
levels, on average, during fiscal 1996 and an increase in interest costs
capitalized on major fixed assets under construction. The reduction in minority
interests in earnings of subsidiaries is primarily attributable to the
restructuring and other special charges, a portion of which relates to minority
owned subsidiaries, and, to a lesser extent, a decline in earnings of the
Company's less-than-wholly-owned subsidiary in Japan.
Earnings in fiscal year 1996 benefited from an approximate $3.8 million
favorable income tax adjustment, primarily related to the resolution of an
outstanding tax audit issue in Australia concerning the deductibility of certain
intercompany interest expense. Before the effects of this adjustment and the
tax benefits of the restructuring and other special charges, the Company's
consolidated effective income tax rate was approximately 30% of pretax income,
versus 33% of pretax income in the prior fiscal year. The lower effective
income tax rate in fiscal 1996 reflects changes in the geographic mix of pretax
income, better utilization of foreign tax and other tax credits and the benefits
derived from various tax planning strategies.
The weaker U.S. dollar had the effect of increasing earnings by an estimated
$.04 per common share for fiscal 1996 as compared to the prior fiscal year.
FINANCIAL OUTLOOK
As part of its business plan, the Company has focused on strengthening its
presence and capabilities in the pharmaceutical industry. This strategy has
required, and will continue to require, significant investments in development
and manufacturing resources, including new staff and state-of-the-art
pharmaceutical development and production facilities. These investments will,
to a large extent, precede the related revenues from anticipated pharmaceutical
product sales, and, therefore, will impact the Company's operating results for
fiscal year 1997 and after.
21
<PAGE>
In addition to the infrastructure costs pertaining to the Company's
pharmaceutical strategy, a number of factors are expected to adversely influence
sales and earnings results for fiscal 1997. These factors include the recent
strength of the U.S. dollar as compared to that experienced in fiscal 1996, and
the expectation that certain pharmaceutical softgel products which provided
significant sales in fiscal 1996 may decline in fiscal 1997 as a result of
inventory pipeline adjustments, generic competition and other reasons. Other
uncertainties expected to affect fiscal 1997 financial results include the
timing of completion of the Company's restructuring plan and the extent and
timing of improvement in the nutritionals product markets in Europe and Asia.
While the cost savings of the restructuring program are expected to provide
earnings improvements in fiscal 1997, the uncertainties described above may
result in lower sales and income growth rates as compared to those experienced
in recent years.
FISCAL YEARS ENDED MARCH 31, 1995 AND 1994
Sales for the fiscal year ended March 31, 1995 reached $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 as compared to
fiscal 1994. 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 various cough/cold and other OTC softgels contributed to
a 28% sales gain in this product category. Pharmaceutical sales in the United
States also benefited from the introduction of Abbott Laboratories' HYTRIN
product 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 studies questioning the
purported health benefits of Vitamin E and other anti-oxidant products. 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 in the prior 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 of SANDIMMUNE and NEORAL cyclosporin A softgels, which
continued 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.
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 Pharmaphil hardshell capsule division. Most of
the sales gain resulted from incremental
22
<PAGE>
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 downturn in the nutritionals market resulted
in nearly flat sales levels.
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% in the prior 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. 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.
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 fiscal 1994. 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 related to ATP.
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 as compared to
fiscal 1994.
CASH FLOWS
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Cash and cash equivalents decreased by $12.7 million for fiscal 1996, as
compared with an increase of $17.1 million in fiscal 1995 and a decrease of
$13.8 million in fiscal 1994. Operating activities provided net cash of $75.5
million, $89.2 million, and $47.7 million during fiscal years 1996, 1995, and
1994, respectively. In fiscal 1996, cash generated by after-tax operating
earnings was reduced by an increase in net working capital of $5.1 million. The
net effects of changes in value-added and other tax-related receivables
accounted for the majority of the increase in receivables and working capital in
fiscal 1996. Inventories and related accounts payable declined slightly, and
accrued liabilities experienced a slight increase due to accrued costs related
to the Restructuring. In fiscal 1995, cash generated from the Company's
after-tax earnings was slightly mitigated by a $3.1 million net increase in
working capital, due most significantly to increases in receivables and
inventories associated with the fiscal 1995 sales growth. Such increase was at a
lower rate than sales growth 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, and which products generally
have lower raw materials cost content than nutritional products. In fiscal
1994, growth in cash generated from 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.
Net cash used by investing activities was $59.1 million, $54.8 million, and
$74.7 million for the 1996, 1995, and 1994 fiscal years, respectively. Fiscal
1996 activities principally reflect the use of $56.2 million cash for capital
expenditures, comprised primarily of expenditures in France related to the
continued expansion and upgrade of a softgel production facility, in Germany for
major facilities upgrades and renovations, in the United Kingdom related to the
further expansion of the ZYDIS-Registered Trademark- production facility, and
for general facility and equipment additions and improvements. Fiscal 1995
activities primarily include cash used for capital expenditures of $54.1
million, most significantly including expenditures in North America related to
the completion of a satellite softgel production facility for nutritional
products, in the United Kingdom related to the expansion of the ZYDIS-Registered
Trademark- 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 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-Registered Trademark- production
facility and in Australia for the construction of a replacement manufacturing
facility, as well as general facility and equipment additions and improvements.
Net cash used by financing activities was $27.3 million and $20.4 million in
fiscal 1996 and 1995, respectively, as compared with cash provided of $13.5
million in fiscal 1994. Fiscal 1996 financing activities reflect primarily net
repayments of $13.3 million on the Company's bank credit facility. Dividends
paid to holders of minority interests in subsidiaries amounted to $13.5 million
for fiscal 1996. Financing activities for fiscal 1995 reflect primarily a $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
24
<PAGE>
$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 from industrial revenue bonds to finance a facility upgrade and
expansion.
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, investments in research and
development, to service and reduce indebtedness, and, in fiscal 1997, remaining
Restructuring-related cash outlays. Capital expenditures are anticipated to
approximate $80-90 million for fiscal 1997, and are expected to decline to a
lower level per year thereafter. Such expenditures will be used to continue the
upgrade and expansion of softgel production facilities in certain regions to
meet anticipated customer demand, as well as to ensure compliance with
increasing pharmaceutical Good Manufacturing Practices (GMP) standards for the
Company's pharmaceutical facilities. In addition, such expenditures will
include further expansions of production facilities for the ZYDIS-Registered
Trademark- advanced drug delivery system. As of March 31, 1996, the Company had
approximately $7.7 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 $9-10 million in fiscal 1997. No significant revenues from ATP
product sales and royalties are expected until after fiscal 1997, assuming the
development and commercialization of such 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 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, 1996, the Company's outstanding long-term indebtedness consisted of
approximately $99.4 million of 6 3/4% senior notes (net of a $0.6 million
discount), $52.1 million of borrowings under the Company's bank credit facility,
$6.4 million of industrial development revenue bonds, and approximately $11.1
million of other indebtedness.
In fiscal 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.
25
<PAGE>
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 at LIBOR plus .575%,
with a further reduction in the interest rate spread to LIBOR plus .475%
possible 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, 1996, the Company does not 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 $27 million. As of March 31, 1996,
the Company had outstanding approximately $1.5 million under these revolving
credit arrangements.
The Company believes that its future cash flows from operations, together with
cash and short-term investments aggregating $25.9 million at March 31, 1996 and
amounts available under bank credit facilities will be adequate to meet
anticipated capital investment, operating, restructuring, and debt service
requirements.
See Notes 2 and 16 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.
In December 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
which must be adopted for the Company's 1997 fiscal year. This statement calls
for the use of a fair value-based method of accounting for stock options granted
to employees to measure compensation expense. The Statement also provides that
accounting for such activities may instead follow existing accounting standards.
However, if this approach is chosen, the Company must disclose the effects of
the fair value-based method in notes to the financial statements. The Company
has not yet determined in what manner the requirements of this Statement will be
adopted, nor quantified the impact on the Company's future financial results or
position.
26
<PAGE>
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,
-------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $571,710 $536,682 $449,297
Cost of sales 375,088 339,923 287,389
Selling and administrative expenses 72,485 71,661 61,427
Restructuring and other charges (Note 4) 33,804 - 4,478
Research and development expenses, net 23,387 21,276 13,090
------------- ------------- -------------
Operating income 66,946 103,822 82,913
Interest expense 12,595 13,758 22,480
Interest earned and other (2,281) (1,523) (1,911)
------------- ------------- -------------
Income from continuing operations before income
taxes, minority interests, and extraordinary loss 56,632 91,587 62,344
Income taxes 11,655 30,352 18,737
Minority interests 14,274 16,376 12,693
------------- ------------- -------------
Net income before extraordinary loss 30,703 44,859 30,914
Extraordinary loss from debt extinguishments - - (15,820)
(Note 8)
------------- ------------- -------------
Net income $30,703 $44,859 $15,094
------------- ------------- -------------
------------- ------------- -------------
Per Common Share Data:
Income from continuing operations $1.25 $1.83 $1.27
Extraordinary loss - - (0.65)
------------- ------------- -------------
Net income per common share $1.25 $1.83 $0.62
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
27
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(IN THOUSANDS)
AS OF MARCH 31,
-------------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,007 $ 33,715
Short-term investments 4,880 5,060
Receivables, less reserves of: 1996 - $4,800,000;
1995 - $3,900,000 129,472 118,772
Inventories 59,718 66,610
Other current assets 6,659 6,404
------------- -------------
221,736 230,561
------------- -------------
PROPERTY:
Property, plant and equipment, at cost 411,396 372,237
Accumulated depreciation and reserves (124,676) (92,734)
------------- -------------
286,720 279,503
------------- -------------
OTHER ASSETS:
Goodwill and intangibles, net of amortization 175,622 185,459
Other assets 23,303 15,850
------------- -------------
198,925 201,309
------------- -------------
$707,381 $711,373
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 5,834 $ 4,635
Accounts payable 57,985 70,549
Accrued liabilities 41,839 38,976
Accrued income taxes 9,632 5,287
------------- -------------
115,290 119,447
------------- -------------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 164,652 182,868
Other long-term liabilities 57,329 56,900
Deferred income taxes 32,482 35,806
Minority interests in subsidiaries 37,268 42,706
------------- -------------
291,731 318,280
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Preferred stock, 500,000 shares authorized, none issued - -
Common stock, $.01 par value, 50,000,000 shares authorized,
shares issued: 1996 - 23,460,453; 1995 - 23,316,674 235 233
Additional paid-in capital 239,705 235,383
Retained earnings 65,705 35,002
Currency translation adjustment (5,285) 3,028
------------- -------------
300,360 273,646
------------- -------------
$707,381 $711,373
------------- -------------
------------- -------------
</TABLE>
28
<PAGE>
The accompanying notes are an integral part of this statement.
29
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $30,703 $44,859 $15,094
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 23,586 20,998 17,121
Amortization of intangible assets and debt discount 6,358 6,451 6,849
Non-cash restructuring and other charges (Note 4) 16,690 - -
Minority interests in net income 14,274 16,376 12,693
Deferred tax provision and other (10,942) 3,579 2,631
Extraordinary loss from debt extinguishments (Note 8) - - 15,820
Increase in receivables (13,865) (10,626) (12,458)
(Increase) decrease in inventories and other current assets 4,763 (3,936) (8,056)
Increase (decrease) in accounts payable and accrued liabilities 3,948 11,465 (1,972)
---------- ---------- ----------
Net cash provided by operating activities 75,515 89,166 47,722
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of plant and equipment (56,195) (54,076) (39,503)
Acquisition of businesses, net of cash acquired (Note 3) - - (33,761)
Other (2,906) (779) (1,420)
---------- ---------- ----------
Net cash used by investing activities (59,101) (54,855) (74,684)
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of 6 3/4% Senior Notes (Note 8) - - 99,268
Defeasance of 14% Senior Subordinated Debentures (Note 8) - - (141,546)
Proceeds from other long-term borrowings 29,585 70,255 109,788
Other long-term debt retirements and payments (42,649) (78,726) (47,608)
Short-term borrowings, net (721) (439) 642
Cash dividends paid to minority shareholders of subsidiaries (13,504) (11,528) (7,022)
---------- ---------- ----------
Net cash provided (used) by financing activities (27,289) (20,438) 13,522
---------- ---------- ----------
Effect of currency translation on cash and cash equivalents (1,833) 3,266 (373)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (12,708) 17,139 (13,813)
Cash and cash equivalents, beginning of period 33,715 16,576 30,389
---------- ---------- ----------
Cash and cash equivalents, end of period $21,007 $33,715 $16,576
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
30
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of period $ 233 $ 233 $ 233
Issuance of common stock, including stock options exercised 2 - -
----------- ----------- -----------
Balance at end of period $ 235 $ 233 $ 233
----------- ----------- -----------
----------- ----------- -----------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period $235,383 $234,157 $233,511
Stock options exercised, net of related tax effects 4,322 557 140
Compensation expense related to stock options granted - 669 506
----------- ----------- -----------
Balance at end of period $239,705 $235,383 $234,157
----------- ----------- -----------
----------- ----------- -----------
RETAINED EARNINGS (DEFICIT):
Balance at beginning of period $ 35,002 $ (9,857) $(24,951)
Net income 30,703 44,859 15,094
----------- ----------- -----------
Balance at end of period $ 65,705 $ 35,002 $ (9,857)
----------- ----------- -----------
----------- ----------- -----------
CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period $ 3,028 $ (9,823) $ (5,792)
Adjustment for the period (8,313) 12,851 (4,031)
----------- ----------- -----------
Balance at end of period $ (5,285) $ 3,028 $ (9,823)
----------- ----------- -----------
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY $300,360 $273,646 $214,710
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
31
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
R.P. Scherer Corporation (the "Company"), a Delaware corporation, is a leading
international developer and manufacturer of drug delivery systems. The
Company's proprietary advanced drug delivery systems improve the efficacy of
drugs by regulating their dosage, rate of absorption and place of release.
Customers for the Company's products include global and regional manufacturers
of prescription and over-the-counter pharmaceutical products, nutritional
supplements, cosmetics, and recreational products.
2. SUMMARY OF ACCOUNTING POLICIES
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.
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.
REVENUE RECOGNITION - Revenues from sales of the Company's products to its
customers are recognized primarily upon shipment.
TRANSLATION OF FOREIGN CURRENCIES - 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.
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 $0.2 million, $2.8 million, and $7.1 million for the years ended
March 31, 1996, 1995, and 1994, respectively. Aggregate
32
<PAGE>
sales of operations in highly inflationary economies represented less than 5% of
consolidated sales for each period presented in the consolidated statement of
income.
FOREIGN CURRENCY HEDGING - 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
16 for further discussion).
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 $4.7 million, $3.1 million,
and $2.9 million were received for the fiscal years ended March 31, 1996, 1995,
and 1994, 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 24,535,222, 24,518,528, and 24,387,791 shares for the years ended
March 31, 1996, 1995, and 1994, respectively.
CASH EQUIVALENTS - For purposes of reporting cash flows, all highly liquid
investments which are readily convertible to known amounts of cash and have an
original maturity of three months or less when purchased are considered cash
equivalents.
INVENTORIES - Inventories are stated at the lower of cost or market with cost
determined on a first-in, first-out basis for substantially all inventories.
Market is the lower of replacement cost or estimated net realizable value.
Finished goods and work-in-process inventories include material, labor and
manufacturing overhead costs.
The components of inventories are as follows:
(IN THOUSANDS) 1996 1995
-------------- --------------
Raw materials and supplies $30,892 $32,312
Work in process 10,593 10,235
Finished goods 18,233 24,063
-------------- --------------
$59,718 $66,610
-------------- --------------
-------------- --------------
PROPERTY, PLANT & EQUIPMENT - Property, plant and equipment are recorded at cost
and are depreciated over their related estimated useful lives primarily using
the straight-line method for financial reporting, and accelerated methods for
tax reporting. Maintenance and repair costs are expensed as incurred. Interest
cost capitalized as part of the construction cost of capital assets amounted to
$3.1 million, $1.2 million and $0.9 million in fiscal years 1996, 1995 and 1994,
respectively. A summary of property follows:
(IN THOUSANDS) 1996 1995
--------------- ---------------
Land and improvements $ 18,582 $ 18,622
33
<PAGE>
Building and equipment 106,685 82,842
Machinery and equipment 259,437 223,837
Construction in progress 26,692 46,936
--------------- ---------------
$411,396 $372,237
--------------- ---------------
--------------- ---------------
GOODWILL AND INTANGIBLES - 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, amounting to $3.2 million and $6.3 million net of amortization as of
March 31, 1996 and 1995, respectively, are recorded at cost and amortized over
their expected useful lives using the straight-line method. In accordance with
generally accepted accounting principles, goodwill and other intangibles 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 (see Note 4). The accumulated amortization of goodwill
and other intangibles is $40.7 million and $31.2 million as of March 31, 1996
and 1995, respectively.
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.
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 12).
USE OF ESTIMATES - The financial statements are prepared in conformity with
generally accepted accounting principles and, accordingly, include amounts that
are based on management's best estimates and judgments.
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
34
<PAGE>
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. Current assets were adjusted
downward by $0.7 million, plant and equipment increased by $1.3 million, current
liabilities increased by $3.8 million, and long-term liabilities increased by
$2.3 million, with a net $27.2 million allocated to goodwill. 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 amounts summarize the consolidated results of
operations of the Company and Pharmagel as if the acquisition had occurred at
the beginning of the period presented after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense on
acquisition borrowings, and related income tax effects. The pro forma
information is not necessarily indicative of what would have occurred had the
acquisition been made as of those dates, and is not intended to be a projection
of future results or trends. For the year ended March 31, 1994, net sales would
have been $456.4 million; income from continuing operations would have amounted
to $30.8 million; net income would have been $14.9 million; earnings per share
from continuing operations would have been $1.26, and net income per share would
have been $0.61.
4. RESTRUCTURING AND OTHER CHARGES
RESTRUCTURING - In January 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
includes the closure of softgel manufacturing plants in Windsor, Canada and
Neuvic, France, as well as the consolidation and elimination of certain
administrative, marketing and development staff positions in several other
locations, and is expected to be completed by mid-fiscal 1997. The Company's
total work force will be reduced by approximately 250 employees, or
approximately 7% as a result of the Restructuring. The Company currently
estimates the Restructuring will result in cost savings of between $7 million
and $9 million pretax in its fiscal year ending March 31, 1997, depending upon
the timing of completion of the Restructuring. Cost savings after the 1997
fiscal year are expected to exceed $10 million annually.
In the fourth quarter of fiscal 1996, the Company recorded special provisions
totaling $33.8 million before income tax effects related to the Restructuring
and other charges discussed below. On an after-tax basis, the cost of the
Restructuring and other charges was approximately $23.1 million, or $0.94 per
common share. Of this amount, approximately $17.1 million represents cash
charges, and $16.7 million represents non-cash charges. A summary of the
restructuring reserve established in fiscal 1996 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) ORIGINAL UTILIZED BALANCE AT
RESERVE IN FISCAL MARCH 31,
1996 1996
------------- --------------- ---------------
<S> <C> <C> <C>
Severance and other employee
termination costs $ 12,000 $3,601 $ 8,399
Fixed asset recovery reserves 13,100 - 13,100
Other current assets 490 191 299
Other long-term assets 3,040 3,040 -
Contractual obligations 5,174 1,893 3,281
------------- --------------- ---------------
$33,804 $8,725 $25,079
------------- --------------- ---------------
------------- --------------- ---------------
</TABLE>
35
<PAGE>
Of the restructuring reserve remaining at March 31, 1996, $11.0 million is
included in accrued liabilities, $0.7 million is included in other long-term
liabilities, $0.3 million is classified in current asset reserves, and $13.1
million as a reduction of property, plant and equipment.
OTHER CHARGES- In the fourth quarter of fiscal 1996, the Company recognized
other pretax charges totaling $7.3 million for matters not related to the
Company's Restructuring, including $1.5 million related to retirement or
severance costs for employees not included in the Restructuring, $1.9 million
related to a long-term asset write-off resulting from a pension plan
termination, and a $2.8 million write-off of an intangible asset for which
recoverability was determined to be impaired.
In fiscal year 1994, the Company recognized a pretax charge in the amount of
$3.2 million as a result of the accrual of settlement costs for Paco Development
Partners II ("PDP II") litigation. The Company also recognized in 1994 a $1.3
million charge as a result of a decision made by the Company to relocate its
Australian production operations to new facilities, related to the anticipated
costs of disposal of the former facility and land.
5. INCOME TAXES
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. Therefore, the relationship of domestic and foreign taxes to
reported domestic and foreign income is not
36
<PAGE>
representative of actual tax rates.
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Income from continuing operations
before income taxes, minority interests and
extraordinary items:
United States $ 12,536 $ 10,105 $ 1,505
Foreign 44,096 81,482 60,839
-------------- -------------- ---------------
$ 56,632 $ 91,587 $ 62,344
-------------- -------------- ---------------
-------------- -------------- ---------------
Provision for currently payable
income taxes:
United States $ 4,516 $ 5,443 $ 2,620
Foreign 17,374 23,161 15,953
-------------- -------------- ---------------
21,890 28,604 18,573
-------------- -------------- ---------------
Provision (credit) for deferred
income taxes:
United States (8,772) (6) (21)
Foreign (1,463) 1,754 185
-------------- -------------- ---------------
(10,235) 1,748 164
-------------- -------------- ---------------
Total income taxes $ 11,655 $ 30,352 $ 18,737
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
The deferred tax provision for fiscal 1996 includes a net $5.6 million credit
resulting from a decrease in deferred tax valuation allowances. 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 components of deferred taxes as of March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
------------------------------- -------------------------------
Deferred Deferred Deferred Deferred
Tax Assets Tax Tax Assets Tax
Liabilities Liabilities
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Property, plant and equipment $3,518 $40,609 $ 1,473 $41,638
Foreign and other tax credit carryforwards 10,417 - 11,531 -
Capital loss carryforwards 6,379 - 6,379 -
Restructuring and other charges (Note 4) 6,866 - - -
Pensions and other postretirement
benefits 6,736 849 4,876 1,309
Stock options 3,843 - 3,890 -
Defeasance of debt (Note 8) 1,929 - 2,175 -
Miscellaneous other 4,495 2,762 7,255 795
-------------- --------------- -------------- ---------------
Subtotal 44,183 44,220 37,579 43,742
Valuation allowances (20,068) - (25,754) -
-------------- --------------- -------------- ---------------
Total deferred taxes $24,115 $44,220 $11,825 $43,742
-------------- --------------- -------------- ---------------
-------------- --------------- -------------- ---------------
</TABLE>
At March 31, 1996, net current future tax benefits of $2.4 million were included
in other current assets, $10.0 million of net long-term future tax benefits were
included in other assets, and $32.5 million of net long-term liabilities were
reflected in the accompanying consolidated statement of financial position. 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
37
<PAGE>
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.
The capital loss carryforwards noted above expire in 2001. The foreign tax
credit carryforwards noted above expire through 1998. At March 31, 1996,
foreign earnings of approximately $91.0 million have been retained indefinitely
by subsidiaries for reinvestment, and accordingly no provision was 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,
---------------------------------------------------------
1996 1995 1994
-------------- --------------- ----------------
<S> <C> <C> <C>
United States statutory tax $19,821 $32,056 $21,820
Increases (reductions) in taxes due to:
Difference in effective foreign tax rates (1,883) (3,620) (2,467)
Foreign tax credit carryforwards utilized (1,452) (1,330) (1,803)
Other tax credit utilization (1,148) - -
Goodwill amortization 1,532 1,532 1,490
Translation losses (12) 1,739 (595)
Changes in valuation allowances
and other items, net (5,203) (25) 292
-------------- --------------- ----------------
Consolidated income taxes $11,655 $30,352 $18,737
-------------- --------------- ----------------
-------------- --------------- ----------------
</TABLE>
Income tax payments, net of refunds, were $24.6 million, $19.2 million, and
$18.9 million for the years ended March 31, 1996, 1995 and 1994, respectively.
6. SHORT-TERM BORROWINGS AND LINES OF CREDIT
The Company has short-term line of credit arrangements with foreign banking
institutions whereunder, at March 31, 1996, the Company and its subsidiaries may
borrow up to approximately $27 million subject to limitations imposed by the
bank credit facility (Note 8). There are no compensating balance requirements
related to these lines of credit. The total indebtedness outstanding under such
arrangements was $1.5 million and $2.1 million at March 31, 1996 and 1995,
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,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Maximum amount outstanding $4,751 $2,286 $2,607
Average amount outstanding 2,166 1,634 2,052
Weighted average interest rate during the year 9.3% 13.8% 9.0%
Weighted average interest rate at March 31 11.3% 10.8% 8.5%
</TABLE>
7. ACCRUED AND OTHER LONG-TERM LIABILITIES
38
<PAGE>
Accrued and other long-term liabilities consist of the following as of March 31,
1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
------------- -------------
<S> <C> <C>
Accrued Liabilities:
Salaries, wages and bonuses $14,717 $13,915
Interest 1,955 1,710
Other 25,167 23,351
------------- -------------
$41,839 $38,976
------------- -------------
------------- -------------
Other Long-Term Liabilities:
Pension and welfare benefits (Note 10) $35,366 $36,553
Postretirement benefits (Note 10) 6,304 6,207
Other 15,659 14,140
------------- -------------
$57,329 $56,900
------------- -------------
------------- -------------
</TABLE>
39
<PAGE>
8. LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
-------------- --------------
<S> <C> <C>
6 3/4% Senior Notes due 2004 (net of discount of $577 and
$651 in 1996 and 1995, respectively) $99,423 $99,349
Borrowings under bank credit agreement 52,051 65,575
Capitalized lease obligations 152 1,824
Industrial development revenue bonds 6,350 6,350
Other 11,024 12,312
-------------- --------------
169,000 185,410
Less - current portion (4,348) (2,542)
-------------- --------------
$164,652 $182,868
-------------- --------------
-------------- --------------
</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 at LIBOR plus .575%
currently, with a possible further reduction in the interest rate spread to
LIBOR plus .475% 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
40
<PAGE>
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, 1996, the Company does not 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,
1996, was 4%.
The annual maturities of long-term debt, excluding amounts payable under
capitalized lease obligations, for the five succeeding fiscal years are:
1997 - $4.2 million; 1998 - $1.0 million; 1999 - $0.6 million; 2000 - $ 52.7
million; and 2001 - $0.6 million. Interest paid was $15.1 million, $14.4
million, and $28.1 million for the years ended March 31, 1996, 1995, and 1994,
respectively.
9. LEASES
Total rental expense under operating leases was $9.2 million, $8.5 million, and
$7.1 million for the years ended March 31, 1996, 1995, and 1994, respectively.
The annual minimum rental commitments under long-term operating leases for the
five succeeding fiscal years are: 1997 - $6.8 million; 1998 - $6.4 million; 1999
- - $6.1 million; 2000 - $6.1 million; 2001 - $5.8 million; and 2002 and
thereafter - $32.9 million. Future capitalized lease commitments are not
significant.
10. 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 the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Service cost of benefits earned during year $3,994 $3,722 $3,255
Interest cost on projected benefit obligation 4,800 4,754 4,191
Actual return on plan assets (4,536) (2,236) (3,602)
Net amortization and deferral 1,889 (781) 774
-------------- -------------- --------------
$6,147 $5,459 $4,618
-------------- -------------- --------------
-------------- -------------- --------------
</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,
1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
----------------------------------------------------------------
41
<PAGE>
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $3,213 $54,189 $5,261 $44,880
Non-vested benefit obligation 264 5,834 237 5,705
------------- ------------- ------------- -------------
Accumulated benefit obligation 3,477 60,023 5,498 50,585
Effects of anticipated future
compensation increases 402 9,380 983 10,058
------------- ------------- ------------- -------------
Projected benefit obligation 3,879 69,403 6,481 60,643
Plan assets at fair value 5,494 25,439 9,318 21,795
------------- ------------- ------------- -------------
Projected benefit obligation in
excess of (less than) plan assets (1,615) 43,964 (2,837) 38,848
Unamortized net loss (29) (8,453) (566) (2,119)
Unrecognized prior service cost - (145) (151) (176)
------------- ------------- ------------- -------------
Accrued pension (asset) liability
recorded in the consolidated
statement of financial position $(1,644) $35,366 $(3,554) $36,553
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
42
<PAGE>
Plan assets consist primarily of annuities, marketable securities and mortgage
notes receivable.
The average of the assumptions used as of March 31, 1996, 1995, and 1994 in
determining the pension expense and benefit obligation information shown above
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Discount rate 7.4% 7.8% 7.4%
Rate of compensation increase 4.5 4.7 5.0
Long-term rate of return on plan assets 9.8 9.6 9.9
</TABLE>
POSTRETIREMENT AND OTHER BENEFITS - The Company follows the provisions of
Statement of Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS ("SFAS 106") to account for such
benefits. 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 measurement dates):
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
-------------- --------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,788 $2,542
Active employees 1,735 1,072
-------------- --------------
Accumulated postretirement benefit obligation
in excess of plan assets 4,523 3,614
Unrecognized net gain 1,981 2,793
-------------- --------------
Accrued postretirement benefit liability (including
$200 in current liabilities) $6,504 $6,407
-------------- --------------
-------------- --------------
</TABLE>
Net postretirement benefits cost for the years ended March 31, 1996, 1995 and
1994 included:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Service cost $136 $168 $173
Interest cost on accumulated
postretirement benefit obligation 186 228 441
-------------- -------------- --------------
Net postretirement benefit cost $322 $396 $614
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
For measurement purposes, a 9% annual rate of increase in the per capita costs
of covered health care claims was assumed for 1996, compared with 10% in 1995
and 11% for 1994. The rate was assumed to decrease by 1% in fiscal 1997 and
each year thereafter to a rate of 6% beyond 2000. The health care cost trend
rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rate by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of the measurement date of January 1, 1996, by $0.5 million and
the aggregate of the service and interest cost components of net postretirement
cost for fiscal 1996 by $0.1 million. The discount rate used in determining the
accumulated postretirement benefit obligation was 7.25% and 8.5% for fiscal
years 1996 and 1995, respectively.
11. 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,
43
<PAGE>
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.
The following summarizes stock option activity over the past two years under the
1992 Stock Option Plan:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES PRICE SHARES PRICE
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of year 1,515,783 $35.11 1,043,700 $29.42
Option activity for the year:
Granted for fiscal year 222,239 $59.81 484,457 $47.28
Exercised (89,637) $26.33 (12,374) $22.05
Canceled - -
--------------- ---------------
Balance at end of year 1,648,385 $38.92 1,515,783 $35.11
--------------- ---------------
--------------- ---------------
</TABLE>
No compensation expense was recognized for fiscal 1996 or 1995 in connection
with this plan, and $0.3 million of expense was recorded for fiscal 1994 in
connection with the 1992 Stock Option Plan. As of March 31, 1996, a total of
59,716 options for common shares remain available for grant.
DIRECTOR STOCK OPTIONS - No director options were granted during 1996, and no
compensation expense was recognized. 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 fiscal years 1996 and 1995, respectively, 4,000 and 12,000
fiscal-1992 granted options 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:
1996 1995
-------------- --------------
44
<PAGE>
Balance at beginning of year 1,084,983 1,073,665
Granted during year - 16,575
Exercised (50,142) (5,257)
-------------- --------------
Balance at end of year 1,034,841 1,084,983
-------------- --------------
The Company recognized compensation expense of $0.3 million in fiscal 1995
related to these grants. No compensation expense was recognized with regard to
these options in either fiscal 1996 or 1994.
12. 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
$23.9 million, $21.6 million, and $18.7 million for the years ended March 31,
1996, 1995, and 1994, respectively. Rental payments amounted to $5.8 million,
$5.3 million, and $4.7 million, and purchased services amounted to $5.9 million,
$5.2 million, and $4.6 million for each of the respective years.
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 8). No fees were paid by the Company to Lehman or its affiliates
during fiscal year 1995.
13. COMMITMENTS AND 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 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 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 Scherer International 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.
The time in which this verdict may be appealed has not yet expired. 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.
45
<PAGE>
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
materially adverse impact on the Company's business or financial condition.
The Company is a party to various other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources.
As of March 31, 1996, the Company has capital expenditure commitments related
primarily to plant expansions amounting to approximately $7.7 million.
46
<PAGE>
14. 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,
----------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Sales:
United States $141,100 $128,912 $120,687
Europe 319,540 302,172 233,716
Other International 111,070 105,598 94,894
-------------- -------------- --------------
Net sales(1) $571,710 $536,682 $449,297
-------------- -------------- --------------
-------------- -------------- --------------
Operating Income:
United States $33,453 $29,612 $28,241
Europe 39,330 66,973 46,249
Other International 12,960 21,411 19,238
Unallocated(2) (18,797) (14,174) (10,815)
-------------- -------------- --------------
Operating income $66,946 $103,822 $82,913
-------------- -------------- --------------
-------------- -------------- --------------
Identifiable assets:
United States $100,298 $ 90,036 $ 86,410
Europe 375,873 389,581 316,623
Other International 134,102 144,930 121,318
Unallocated(3) 97,108 86,826 89,063
-------------- -------------- --------------
Total assets $707,381 $ 711,373 $ 613,414
-------------- -------------- --------------
-------------- -------------- --------------
Capital expenditures:
Drug Delivery Systems $55,938 $53,221 $39,294
Unallocated(4) 257 855 209
-------------- -------------- --------------
Total capital expenditures $56,195 $54,076 $39,503
-------------- -------------- --------------
-------------- -------------- --------------
Depreciation and amortization:
Drug Delivery Systems $27,824 $25,697 $21,008
Unallocated(4) 2,120 1,752 2,962
-------------- -------------- --------------
Total depreciation and amortization $29,944 $27,449 $23,970
-------------- -------------- --------------
-------------- -------------- --------------
</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, in 1994 $4.5 million related to the special charges for the
litigation settlement and plant revaluation (Note 4). Unallocated
operating income also reflects $8.8 million, $6.0 million and $0.8
million of expenses associated with the Company's Advanced Therapeutic
Products group in fiscal years 1996, 1995, and 1994, respectively.
(3) Unallocated identifiable assets are principally cash, cash equivalents,
short-term investments, and other assets.
(4) Unallocated capital expenditures and depreciation and amortization
represent primarily corporate amounts.
The net assets of foreign subsidiaries were $216.3 million, $218.8 million, and
$216.5 million at March 31, 1996, 1995, and 1994, respectively. The Company's
share of foreign net income was $18.3 million, $41.6 million, and $34.6 million
for the years ended March 31, 1996, 1995, and 1994, respectively, after
deducting minority interests, income taxes on unremitted earnings and various
charges billed by the parent company.
47
<PAGE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
---------------------- ---------------------- ---------------------- -----------------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $148,378 $132,938 $133,511 $121,312 $137,582 $132,215 $152,239 $150,217
Gross profit 54,693 49,182 44,194 44,199 47,380 48,472 50,354 54,906
Income (loss) from
continuing operations 13,695 11,425 8,324 9,143 13,254 11,607 (4,570) 12,683
Net income (loss) $ 13,695 $ 11,425 $ 8,324 $ 9,143 $ 13,254 $ 11,607 ($4,570) $ 12,683
---------------------- ---------------------- ---------------------- -----------------------
---------------------- ---------------------- ---------------------- -----------------------
Income from continuing
operations per common share(1) $ 0.56 $ 0.47 $ 0.34 $ 0.37 $ 0.54 $ 0.47 ($0.19) $ 0.51
---------------------- ---------------------- ---------------------- -----------------------
---------------------- ---------------------- ---------------------- -----------------------
Net income (loss) per
common share(1) $ 0.56 $ 0.47 $ 0.34 $ 0.37 $ 0.54 $ 0.47 ($0.19) $ 0.51
---------------------- ---------------------- ---------------------- -----------------------
---------------------- ---------------------- ---------------------- -----------------------
</TABLE>
(1) In the fourth quarter of fiscal 1996, includes a $33.8 million pretax
charge ($0.94 per share after tax effects) for restructuring and other
items (see Note 4).
16. FINANCIAL INSTRUMENTS
Summarized below are the carrying and estimated fair values for certain of the
Company's financial instruments as of March 31, 1996 and 1995. The carrying
values of all other financial instruments in the consolidated statement of
financial position approximate fair values. 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 receive/(pay) to terminate the contracts at the reporting
date, thereby taking into account the unrealized gains or losses of open
contracts.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Short-term investments $ 4,880 $ 4,953 $ 5,060 $ 5,117
Long-term debt (including current and long-term
portions, and notes payable) 170,486 166,938 187,503 175,454
DERIVATIVE FINANCIAL INSTRUMENTS:
Forward foreign currency exchange contracts - 196 - (1,138)
</TABLE>
In 1994, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 115 (SFAS 115), ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, which require 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
48
<PAGE>
are recognized concurrently with the gains or losses from the underlying
transactions. At March 31, 1996 and 1995, the Company was party to forward
foreign currency exchange contracts of approximately $14.2 million and $18.2
million (notional amounts), respectively, denominated in European currencies.
The contracts outstanding at March 31, 1996 generally mature on various dates
through fiscal 1997 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.
49
<PAGE>
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, 1996 and 1995, and the related consolidated statements of income, cash flows
and shareholders' equity for each of the three years in the period ended March
31, 1996. 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, 1996 and 1995, and the results of their operations
and cash flows for each of the three years in the period ended March 31, 1996,
in conformity with generally accepted accounting principles.
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 29, 1996.
ARTHUR ANDERSEN LLP
50
<PAGE>
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.
51
<PAGE>
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 1996, which will be filed not later than
120 days after the close of the Company's fiscal year ended March 31, 1996, and
is hereby incorporated by reference to such proxy statement. Information with
respect to Item 10 above is included on pages 7 through 9 of this Annual Report
on Form 10-K.
52
<PAGE>
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:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
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.
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.
53
<PAGE>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
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.
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. Incorporated by
reference to Exhibit 10.6 of R.P. Scherer Corporation's
Annual Report on Form 10-K as of March 31, 1995.
10.7 Deferred Compensation Plan for Outside Directors, dated
December 6, 1995. Incorporated by reference to Exhibit
10 of R.P. Scherer Corporation's Quarterly Report on
Form 10-Q as of December 31, 1996.
21 Subsidiaries of the registrant. Filed herewith.
23 Consent of Arthur Andersen LLP. Filed herewith.
54
<PAGE>
27 Financial Data Schedule. Filed herewith.
(b) One Current Report on Form 8-K, reporting the Company's fiscal 1996
results, was filed with the Securities and Exchange Commission on May 14, 1996.
55
<PAGE>
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
25, 1996.
R.P. SCHERER CORPORATION
By: /s/ Aleksandar Erdeljan
-------------------------------
Aleksandar Erdeljan
Chairman, President and 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 25, 1996:
SIGNATURES TITLE
/s/ Aleksandar Erdeljan Chairman, President and Chief
------------------------
Aleksandar Erdeljan Executive Officer
/s/ Nicole S. Williams Executive Vice President, Finance,
----------------------
Nicole S. Williams Chief Financial Officer, and
Secretary
/s/ Thomas J. Stuart Senior Vice President
--------------------
Thomas J. Stuart (Principal Accounting Officer)
/s/ John E. Avery Director
-----------------
John E. Avery
/s/ John P. Cashman Director
--------------------
John P. Cashman
/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
56
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION ALLOWANCES
<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, 1996:
Valuation accounts deducted from
related assets -
Reserve for doubtful accounts $ 3,934 $ 1,521 $ (570) $ (61) $ 4,824
Reserve for unmerchantable inventories 1,748 1,971 34 (1,284) 2,469
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
</TABLE>
(a) Includes changes due to fluctuations in foreign currency exchange
rates.
57
<PAGE>
INDEX TO EXHIBITS
Exhibit Description Page
- ------------------- ----
Exhibit 21 - Subsidiaries 46
Exhibit 23 - Consent of Arthur Andersen LLP 48
Exhibit 27 - Financial Data Schedule 50
58
<PAGE>
EXHIBIT 21
59
<PAGE>
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
60
<PAGE>
EXHIBIT 23
61
<PAGE>
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 25, 1996.
62
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from R.P. Scherer
Corporation's Annual Report of Form 10-K for the year ended March 31, 1996, and
is qualified in its entirety by reference to such Form 10-K filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 21,007
<SECURITIES> 4,880
<RECEIVABLES> 134,272
<ALLOWANCES> 4,800
<INVENTORY> 59,718
<CURRENT-ASSETS> 221,736
<PP&E> 411,396
<DEPRECIATION> 124,676
<TOTAL-ASSETS> 707,381
<CURRENT-LIABILITIES> 115,290
<BONDS> 164,652
0
0
<COMMON> 235
<OTHER-SE> 300,125
<TOTAL-LIABILITY-AND-EQUITY> 707,381
<SALES> 571,710
<TOTAL-REVENUES> 571,710
<CGS> 375,088
<TOTAL-COSTS> 504,764
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,595
<INCOME-PRETAX> 56,632
<INCOME-TAX> 11,655
<INCOME-CONTINUING> 30,703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,703
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
</TABLE>
