<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-30999
-------------------------
R.P. SCHERER CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3523163
(State of Incorporation) (I.R.S. Employer Identification Number)
2075 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (810) 649-0900
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of the registrant's common stock as of February 8,
1996: 23,424,261 shares of common stock, par value $.01.
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<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $137,582 $132,215 $419,471 $386,465
Cost of sales 90,201 83,743 273,203 244,612
Selling and administrative expenses 16,672 17,432 53,127 51,775
Research and development expenses, net 5,590 5,236 17,385 14,218
-------- -------- -------- --------
Operating income 25,119 25,804 75,756 75,860
Interest expense 2,953 3,410 9,938 10,630
Interest earned and other (675) (555) (1,474) (1,257)
-------- -------- -------- --------
Income from continuing operations before
income taxes and minority interests 22,841 22,949 67,292 66,487
Income taxes 6,286 7,840 20,222 23,270
Minority interests 3,301 3,502 11,797 11,041
-------- -------- -------- --------
Net income $13,254 $11,607 $35,273 $32,176
-------- -------- -------- --------
-------- -------- -------- --------
Net income per common and
common equivalent share $0.54 $0.47 $1.43 $1.31
-------- -------- -------- --------
-------- -------- -------- --------
Average number of common
and common equivalent shares 24,600 24,573 24,612 24,476
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
1995 1995
------------ ---------
<S> <C> <C>
-------- --------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 26,601 $ 33,715
Short-term investments 4,843 5,060
Receivables, less reserves of:
December 31, 1995 - $4.5 million;
March 31, 1995 - $3.9 million 112,041 118,772
Inventories 62,602 66,610
Other current assets 7,465 6,404
-------- --------
213,552 230,561
-------- --------
PROPERTY:
Property, plant and equipment, at cost 401,108 372,237
Accumulated depreciation (106,890) (92,734)
-------- --------
294,218 279,503
-------- --------
OTHER ASSETS:
Goodwill, net of amortization 179,610 183,662
Deferred financing fees, net of amortization 1,448 1,797
Other assets 23,560 15,850
-------- --------
204,618 201,309
-------- --------
$712,388 $711,373
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 7,471 $ 4,635
Accounts payable 40,719 70,549
Accrued liabilities 34,432 38,976
Accrued income taxes 3,903 5,287
-------- --------
86,525 119,447
-------- --------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 194,177 182,868
Other long-term liabilities 55,877 56,900
Deferred income taxes 35,684 35,806
Minority interests in subsidiaries 35,933 42,706
-------- --------
321,671 318,280
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY:
Preferred stock, 500,000 shares authorized, none issued - -
Common stock, $.01 par value, 50,000,000 shares
authorized, shares issued: December 31, 1995 -
23,361,714; March 31, 1995 - 23,316,674 234 233
Additional paid-in capital 236,275 235,383
Retained earnings 70,275 35,002
Currency translation adjustment (2,592) 3,028
-------- --------
304,192 273,646
-------- --------
$712,388 $711,373
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
DECEMBER 31,
--------------------------
<S> <C> <C>
1995 1994
------- -------
OPERATING ACTIVITIES:
Net income $ 35,273 $ 32,176
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 17,990 16,094
Amortization of intangible assets 4,490 4,376
Amortization of deferred financing costs and debt discount 319 443
Minority interests in net income 11,797 11,041
Deferred tax provision and other 785 898
Decrease in receivables 3,363 5,655
(Increase) decrease in inventories and other current assets 1,547 (5,889)
Decrease in accounts payable and accrued expenses (35,684) (12,443)
------- -------
Net cash provided by operating activities 39,880 52,351
------- -------
INVESTING ACTIVITIES:
Purchases of plant and equipment (44,036) (33,842)
Other (4,660) (3,984)
------- -------
Net cash used by investing activities (48,696) (37,826)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 30,595 53,058
Long-term debt retirements and payments (16,131) (51,215)
Short-term borrowings, net 1,744 885
Cash dividends paid to minority shareholders of subsidiaries (13,504) (11,539)
------- -------
Net cash provided (used) by financing activities 2,704 (8,811)
------- -------
Effect of currency translation on cash and cash equivalents (1,002) 852
------- -------
Net increase (decrease) in cash and cash equivalents (7,114) 6,566
Cash and cash equivalents, beginning of period 33,715 16,576
------- -------
Cash and cash equivalents, end of period $26,601 $23,142
======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of R.P. Scherer Corporation (the "Company"), a Delaware corporation,
and its subsidiaries, some of which are less than wholly-owned. In the opinion
of management, the accompanying unaudited consolidated financial statements
include all adjustments (consisting only of normal recurring items) necessary
for the fair presentation of financial position and results of operations.
These consolidated financial statements and related notes have been prepared
pursuant to the Rules and Regulations set forth by the Securities and Exchange
Commission and should be read in conjunction with the financial statements and
notes included in the Company's Annual Report on Form 10-K for the year ended
March 31, 1995, as filed with the Securities and Exchange Commission.
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,
Scherer International was merged 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.
Certain items in the prior year's consolidated financial statements and notes
thereto have been reclassified to conform with the current year presentation.
2. INCOME TAXES
The effective income tax rate in 1995 is lower than the U.S. Federal income tax
rate due primarily to the anticipated utilization of foreign and other tax
credits generated in the current year as well as carried forward from prior
years. In 1994, the effective tax rate approximates the U.S. Federal income tax
rate primarily due to the recognition of foreign income tax credits generated in
that year for U.S. tax purposes, offset by goodwill amortization not deductible
for income tax purposes.
3. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, MARCH 31,
1995 1995
------------ ---------
<S> <C> <C>
Raw materials and supplies $32,372 $32,312
Work in process 7,862 10,235
Finished goods 22,368 24,063
------- -------
$62,602 $66,610
------- -------
------- -------
</TABLE>
4. 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,
certain of its subsidiaries, the Company and Scherer International
(collectively, the "defendants"), arising out of the defendants' March 25, 1992
5
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 the termination of the Purchase Agreement, as well as
two additional causes of action that were subsequently dismissed by order of the
court. The Amended Complaint seeks $75 million in actual damages, $100 million
in punitive damages, as well as OCAP's attorney fees and other litigation
expenses, costs and disbursements incurred in bringing this action. Pre-trial
discovery with respect to the action has been completed, and a trial date of
March 21, 1996 has been set. The Company has also filed a counterclaim seeking
damages as a result of the termination of the Purchase Agreement. Based upon
the investigation conducted by the Company and its counsel to date, the Company
believes that this action lacks merit and is defending against it vigorously.
In the opinion of management, the ultimate outcome of this litigation will not
have a material adverse effect on the Company's business or financial condition.
The Company was informed in August 1992 that soil at a manufacturing facility in
North Carolina owned and operated by the Company from 1975 to 1985 contained
levels of tetrachlorethene and other substances which exceeded environmental
standards. The Company voluntarily 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.
5. SUBSEQUENT EVENT -- RESTRUCTURING OF OPERATIONS
On January 25, 1996, the Company announced a plan to restructure and consolidate
certain of its softgel operations. The plan, designed to enhance long-term
profitability by reducing and rationalizing certain manufacturing and overhead
structures, will primarily affect non-pharmaceutical operations in Europe and
North America. As part of the restructuring plan, the Company intends to close
its softgel manufacturing facilities in Neuvic, France, and Windsor, Canada,
during the next several months. Additionally, administrative, marketing and
development staffs will be consolidated and reduced in other locations. The
worldwide workforce will be reduced by approximately 250 people, or 7% of the
Company's total work force.
As a result of the plan, the Company will recognize special charges currently
estimated at $30 million before income tax effects in its fourth fiscal quarter
ending March 31, 1996. Such charges will include severance and other employee
termination benefits, as well as fixed asset write-downs in connection with the
facility closures.
6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis of financial results and condition covers
the three and nine month periods ended December 31, 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.
RESULTS OF OPERATIONS
QUARTERS ENDED DECEMBER 31, 1995 AND 1994
Consolidated sales reached a third quarter record of $137.6 million for the
three months ended December 31, 1995, representing a 4% increase from sales of
$132.2 million for the same quarter last year. The continuing sluggishness in
certain key nutritionals markets, particularly the United Kingdom, Australia
and Japan, constrained sales growth in the quarter, as consolidated nutritional
softgel sales were flat between the current and prior fiscal years' third
quarters. Pharmaceutical softgel sales increased by 4% over the prior year
quarter, and sales of the Company's ZYDIS-Registered Trademark- fast dissolving
drug delivery system rose 46% in the quarter.
Operating income was $25.1 million for the December 31, 1995 quarter, a decline
of 3% from the $25.8 million earned in the same period of the prior year. The
current year quarter's results reflect the adverse effects of the weak
nutritional market conditions, which resulted in downward pricing pressures on
nutritional softgels and sub-optimal capacity utilization. These factors,
combined with an increase in research and development expenses, and with higher
depreciation and overhead costs associated with recent manufacturing facility
additions and pharmaceutical GMP upgrades, led to the reduced operating income.
Excluding research and development expenses, operating income declined by 1% as
compared with the prior year quarter, resulting in an operating margin of 22.3%
for the December 31, 1995 quarter, compared with 23.5% for the same quarter a
year earlier.
Net research and development costs were $5.6 million for the quarter ended
December 31, 1995, representing a 7% increase from the $5.2 million incurred
during last year's third quarter. Gross research and development expenses
increased by 9%, but were partially offset by a 22% increase in customer
reimbursements for the quarter. Approximately $1.6 million of the December 31,
1995 quarter's research and development spending related to the Company's
Advanced Therapeutic Products ("ATP") initiative, representing a 15% increase
from expenses of $1.4 million in the same quarter a year ago. ATP was formed
by the Company in fiscal 1994 to engage in the development of pharmaceutical
products incorporating off-patent or soon to become off-patent drug compounds
reformulated utilizing the Company's proprietary advanced drug delivery
systems. As discussed further below, the Company expects that spending for ATP
activities will remain a significant component of research and development
spending for the foreseeable future.
7
<PAGE>
The Company earned net income of $13.3 million, or $0.54 per share, for the
quarter ended December 31, 1995, a 14% increase as compared to net income of
$11.6 million, or $0.47 per share, for the same quarter last year. The
consolidated effective income tax rate for the quarter declined to 27.5% from
34.2% between the December 31, 1995 and 1994 quarters. Such decline primarily
resulted from geographic shifts in the mix of income between the current and
prior fiscal years and increases in the anticipated utilization of foreign and
other tax credits in the current year period, and a $0.4 million benefit from a
revision in the estimated annual consolidated tax rate from that used for the
first half of the fiscal year. Foreign currency exchange rate fluctuations did
not have a significant effect on the reported financial results when comparing
the third fiscal quarters of the current and prior fiscal years.
NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994
Consolidated sales for the nine month period ended December 31, 1995 were $419.5
million, a 9% increase from sales of $386.4 million in the same period of the
prior fiscal year. Sales gains were reported in all of the Company's geographic
segments, in spite of the weakness in certain key nutritional softgel markets
discussed below. The effects of a weaker U.S. dollar relative to most foreign
currencies increased reported sales during the current year period. On a
constant exchange rate basis, the sales increase would have been 3% for the nine
months ended December 31, 1995, as compared with the same period last year.
The Company earned operating income of $75.8 million for the nine months ended
December 31, 1995, comparable with the $75.9 million earned in the same period
of the prior year. On a constant exchange rate basis, operating income
declined by 5% between these two periods. Operating margin declined to 18.1%
of sales for the current year nine months, from 19.6% for the same period a
year ago. Such decline is attributable in part to the continued weak
nutritional market conditions and downward pricing pressures in certain key
nutritionals markets, particularly the United Kingdom, Australia and Japan.
The resulting reduced demand for such products in these key markets also led to
reduced capacity utilization and consequent lower margins. Consolidated health
and nutritional products sales increased only 1% between the nine month periods
ended December 31, 1995 and 1994, largely due to the 10% decline in sales of
Vitamin E softgels. In addition, recent pharmaceutical GMP upgrades and other
facilities expansions resulted in additional depreciation expense and other
fixed manufacturing cost increases in the current year nine months. Mitigating
this decline to some extent, however, is the continuing sales mix shift towards
higher margin pharmaceutical softgels, sales of which grew 15% as compared with
the prior year nine months. Additionally, sales of the Company's
ZYDIS-Registered Trademark- fast dissolving drug delivery system rose 37% in
the current year nine month period. The Company contained selling and
administrative expenses to $53.1 million in the nine month period ended
December 31, 1995, representing a decline to 12.7% of sales, as compared with
$51.8 million, or 13.4% of sales, in the prior year nine months.
Research and development costs were $17.4 million for the nine months ended
December 31, 1995, representing a 22% increase from the $14.2 million expensed
during last year's nine months. Approximately 77% (or $2.4 million) of the
increase related to the ATP initiative discussed above. The current year nine
months' customer reimbursements for research and development activities rose to
$3.6 million, an 81% increase over the prior year period. Excluding research
and development expenses, operating margin was 22.2% in the nine months ended
December 31, 1995, as compared with 23.3% in the prior year nine months.
Net income for the first nine months of fiscal 1996 reached $35.3 million, or
$1.43 per share, compared to net income of $32.2 million, or $1.31 per share,
for the same period last fiscal year. In addition to the operating income
changes discussed above, the Company realized the benefit of a reduction in the
effective income tax rate to 30.1% for the current year nine months, compared to
35.0% for the same period a year ago. The lower effective income tax rate
resulted primarily from geographic shifts in the mix of income, and the
anticipated improvements in the utilization of foreign and other tax credits in
the current year. Minority interests in income of subsidiaries for the nine
months ended December 31, 1995 increased by $0.7 million as a result of
increased earnings of the Company's 51%-owned German operation.
8
<PAGE>
RESULTS BY GEOGRAPHIC SEGMENT
The following sets forth operating results for each of the Company's geographic
segments for the nine months ended December 31, 1995 and 1994:
<TABLE>
(IN THOUSANDS) SALES OPERATING INCOME OPERATING MARGIN
------------------ ----------------- ----------------
1995 1994 1995 1994 1995 1994
-------- -------- -------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States $ 99,703 $ 91,462 $ 24,540 $21,502 24.6% 23.5%
Europe 237,965 215,209 48,060 46,609 20.2 21.7
Other International 81,803 79,794 15,618 16,689 19.1 20.9
Unallocated (1) - - (12,462) (8,940) - -
-------- -------- -------- ------- ---- ----
$419,471 $386,465 $ 75,756 $75,860 18.1% 19.6%
-------- -------- -------- ------- ---- ----
-------- -------- -------- ------- ---- ----
</TABLE>
(1) Includes general Corporate expenses and expenses associated with the
ATP Group.
The Company's United States operations achieved a 9% sales gain for the nine
months ended December 31, 1995. Sales of pharmaceutical softgels increased by
14% principally as a result of first quarter sales of Abbot Laboratories'
HYTRIN-Registered Trademark- (terazosin HCI), used for the treatment of
hypertension and benign prostate enlargement. Weak demand for Vitamin E and
other anti-oxidant softgels continued in the current fiscal year. However,
total nutritional softgel sales increased by 12% between the current and prior
year periods, with 20% sales growth of other nutritional products. Cosmetic
products sales increased by a modest 4%, as a result of previously disclosed
customer order cancellations of certain high margin softgel products. As a
result of such sales growth and shifts in product mix towards higher margin
pharmaceutical softgel products, and despite increases in fixed costs resulting
from recent facility upgrades, operating income grew by 14%, or $3.0 million,
yielding a 24.6% operating margin as compared with 23.5% in the prior year
period.
Sales in Europe increased by 11% for the nine months ended December 31, 1995,
as compared to the same period last year. On a constant exchange rate basis,
this sales increase amounted to 1%. Continuing sales gains throughout most of
continental Europe were partially offset by sales declines due to weak demand
for nutritional softgels in the United Kingdom. The Company's German
operations realized continued growth of sales to Sandoz of
SANDIMMUNE-Registered Trademark- and NEORAL-Registered Trademark- (cyclosporin
A) softgels, which are performing well in the expanding immuno-suppressant drug
category. In addition, during the first quarter of the current fiscal year
NEORAL-Registered Trademark- was approved for use in the United States for the
prevention of organ rejection in kidney, liver, and heart transplants. The
Company's Beinheim, France operation also continues to experience strong sales
growth, particularly in the pharmaceutical and nutritional segments. As a
result of the sales increases, operating income increased 3%, or $1.5 million,
between the two years. Operating margin decreased to 20.2% for the current year
nine months compared to 21.7% a year ago, however, largely due to the
production volume declines due to the continuing weakness of the United Kingdom
nutritionals market, as well as an approximate 9% increase on a constant
foreign exchange rate basis in fixed manufacturing costs, resulting largely
from depreciation and other fixed costs related to recent facility expansions
and upgrades.
The Company's Other International segment contributed a $2.0 million, or 3%,
increase in reported sales for the nine months ended December 31, 1995,
primarily as a result of increases in Canada, Korea and South America. The
continuing weak demand in the Australian nutritionals market and the presence
of the first Australian-based competitor resulted in a decline in sales and
margin levels at the Company's Australian operation, and the softness in the
Japanese nutritionals market adversely impacted margin levels in Japan. A 6%
decline in operating income for the segment was experiencedrealized, as income
from the reported sales gains in other operations was offset by reduced
operating margins in Australia and Japan and increased research and development
expenses in Canada related to the Company's previously announced cytotoxic
softgel development facility activities.
9
<PAGE>
RESTRUCTURING OF OPERATIONS
On January 25, 1996, the Company announced a plan to restructure and
consolidate certain of its softgel operations to improve efficiencies. The
plan, designed to enhance long-term profitability by reducing and rationalizing
certain manufacturing and overhead structures, will primarily affect
non-pharmaceutical operations in Europe and North America. As part of the
restructuring plan, the Company intends to close its softgel manufacturing
facilities in Neuvic, France, and Windsor, Canada, during the next several
months. Additionally, administrative, marketing and development staffs will be
consolidated and reduced in other locations. The worldwide workforce will be
reduced by approximately 250 people, or 7% of the Company's total work force.
As a result of the plan, the Company will recognize special charges currently
estimated at $30 million before income tax effects in its fourth fiscal quarter
ending March 31, 1996. Such charges will include severance and other employee
termination benefits, as well as fixed asset write-downs in connection with the
facility closures. The total restructuring initiative is expected to result in
substantial continuing cost savings in future periods, presently estimated to
be in excess of $10 million on an annualized basis, once the plan is fully
implemented. Management does not anticipate that the cash costs of the plan,
representing approximately one-half of the total charges incurred under the
plan, will have a material adverse impact on the Company's liquidity.
CASH FLOWS
Cash and cash equivalents decreased by $7.1 million for the nine months ended
December 31, 1995, as compared with an increase of $6.5 million in the same
period in 1994. Operating activities provided cash of $39.9 million and $52.4
million for the current and prior year periods, respectively. For the period
ended December 31, 1995, increased cash generated from operating earnings was
significantly offset by a $30.8 million increase in net working capital. Such
net working capital increase resulted was generated primarily fromby
significant reductions in current liabilities related to the timing of foreign
tax payments, dividend and interest payments to minority shareholders, and
capital asset purchases, offset by declines in receivables and inventories.
For the prior year period, cash generated from earnings was partially offset by
a $12.7 million increase in net working capital. Such increase was related
primarily to declines in current liabilities resulting from the timing of
payments for significant capital expenditures and inventory purchases, as well
as by increases in inventory related to higher sales levels and changes in
sales mix. Reductions in receivables largely due to the timing of collections
from certain major nutritional customers partially offset the other working
capital increases in the prior year period.
Capital expenditures for the current year period amounted to $44.0 million,
compared to the prior year period's capital expenditures of $33.8 million.
Current period capital spending consisted primarily of expenditures in the
United Kingdom related to the continuing production facility expansion for
ZYDIS-Registered Trademark-, in Germany and France for the ongoing expansion
and renovation of pharmaceutical softgel facilities, and general facility and
equipment additions and improvements. In the prior year, capital expenditures
were related primarily to the completion of a satellite softgel production
facility in North America for nutritional products, expansion of the
ZYDIS-Registered Trademark- production facility in the United Kingdom, and
construction of a replacement manufacturing facility in Australia, as well as
other general facility and equipment additions and improvements.
Financing activities for the nine months ended December 31, 1995, reflect a net
$14.5 million of borrowings under the Company's bank credit facility used
principally to fund capital expenditures in the United Kingdom and France, and
research expenditures in the United Kingdom related to the activities of the
ATP Group. Current period financing activities also reflect the payment of
$13.5 million of dividends to minority shareholders, and the payment of $13.5
million of dividends to minority shareholders. In the prior year period, net
financing activities principally include $11.5 million of dividends paid to
minority shareholders of subsidiaries.
10
<PAGE>
LIQUIDITY AND FINANCIAL CONDITION
During the next several years, a significant portion of the Company's cash flow
will be used to fund capital expenditures, increased investments in research
and development, and to service and reduce indebtedness. Capital expenditures
are anticipated to approximate $55 to $60 million for the fiscal year ending
March 31, 1996, down from the previously anticipated $75 to $85 million as a
result of deferrals of spending into fiscal 1997 for a major plant expansion in
Japan and for further expansions of the ZYDIS-Registered Trademark- production
facilities. Such expenditures will be used to continue the expansion of
softgel and ZYDIS-Registered Trademark- production capacity to meet
anticipated customer demand, as well as to ensure continuing compliance with
pharmaceutical Good Manufacturing Practices (GMP) standards for the Company's
facilities. As of December 31, 1995, the Company had approximately $7.5
million of commitments for future capital expenditures.
The Company will also continue to invest a significant portion of its cash flow
in research and development activities for its advanced drug delivery systems,
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 represent a significant portion of the Company's
research and development spending over the next several years. Revenues from
ATP are expected to begin no earlier than fiscal 1997, assuming the development
and commercialization of such products is successful.
The Company actively reviews drug delivery systems businesses and technologies
for potential investment, consistent with its strategic objectives. Generally,
such investments are not expected to involve significant initial funding or
financial commitments on the part of the Company. Management intends that any
acquisition which would require significant funding would be financed largely
through the issuance of common stock, depending upon market conditions, so as
not to materially increase the Company's debt to equity ratio.
At December 31, 1995, 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), $78.2 million of borrowings under the Company's bank credit
facility, $6.4 million of industrial development revenue bonds, and
approximately $13.7 million of other indebtedness.
The Company's 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.
The Company's bank credit facility allows for revolving credit borrowings up to
an aggregate of $175.0 million in various currencies, and expires April 1,
1999. Interest is payable quarterly at LIBOR plus .575%, with a further
reduction in the interest rate spread to LIBOR plus .475% anticipated later
during the term of the facility based on certain financial performance
criteria, or at the bank's prime rate. Unused borrowing availability is
subject to annual commitment fees of 1/4%. Borrowings under this agreement
are unsecured, and rank PARI PASSU with all other unsecured and senior
indebtedness of the Company and certain of its subsidiaries. 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 December 31, 1995, the Company does not currently have plans
to declare or pay any cash dividends.
11
<PAGE>
Pursuant to other revolving credit arrangements, the Company and certain of its
subsidiaries may borrow up to approximately $25.0 million. As of December 31,
1995, the Company had outstanding approximately $3.9 million under these
revolving credit arrangements.
The Company believes that its future cash flows from operations, together with
cash and short-term investments aggregating $31.4 million at December 31, 1995
and amounts available under bank credit facilities will be adequate to meet
anticipated capital investment, operating, and debt service requirements.
INFLATION AND ACCOUNTING POLICIES
In the view of management, the effects of inflation and changing prices on the
Company's net results of operations and financial condition were not
significant.
In 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.
12
<PAGE>
PART II
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10 R.P. Scherer Corporation Deferred Fee Plan for
Directors, dated December 6, 1995. Filed herewith.
27 Financial Data Schedule. Filed herewith.
(b) REPORTS ON FORM 8-K
Two Current Reports on Form 8-K were filed with the Securities and
Exchange Commission during the period covered by this report. The
first, filed with the Commission on December 18, 1995,concerned the
Company's announcement that John P. Cashman has informed the Company
of his intention to step down from the position of Chairman and
Co-Chief Executive Officer effective March 31, 1996, the end of the
Company's current fiscal year. The second, filed with the Commission
on January 26, 1996, concerned the announcement of the Company's
quarterly and year-to-date earnings for the period ended December 31,
1995, as well as the Company's plans to restructure and consolidate
certain of its softgel operations to improve efficiencies and
profitability (as discussed further in Note 5 to the consolidated
financial statements included in Part I, Item 1 herein).
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
R.P. SCHERER CORPORATION
Date: February 12, 1996 By: /s/ Nicole S. Williams
------------------------ ---------------------------------
Nicole S. Williams
Executive Vice President, Finance
and Chief Financial Officer,
Treasurer, and Secretary
14
<PAGE>
EXHIBIT 10
R.P. SCHERER CORPORATION
DEFERRED FEE PLAN FOR DIRECTORS
PURPOSE: The purpose of this Plan is to provide outside directors of R.P.
Scherer Corporation (the "Company") the opportunity to defer receipt of
compensation earned as a Director to a date following termination of such
service. The provision of such an opportunity is designed to aid the Company
in attracting and retaining as members of its Board of Directors persons whose
abilities, experience and judgment can contribute to the well being of the
Company.
EFFECTIVE DATE: The Effective date of the Deferred Fee Plan for Directors (the
"Plan") is January 1, 1995.
ELIGIBILITY: Any Director of the Company who is not also an Employee of the
Company or any related company is eligible to participate in the Plan.
DEFERRED COMPENSATION ACCOUNT: A deferred compensation account shall be
established for each Director who elects to participate in the Plan.
AMOUNT OF DEFERRAL: A participant may elect to defer receipt of all or a
specified part of the compensation payable to the participant for serving on
the Board of Directors or committees of the Board of Directors of the Company.
An amount equal to the compensation deferred will be credited to the
participant's deferred compensation account on the date such compensation is
otherwise initially payable.
ELECTION OF DEFERRAL: An election to defer compensation shall be made on a
form provided by the Company for that purpose and shall be effective when made
with respect to any compensation to be earned thereafter until a change in
election is made. Other than for the initial year of this Plan, any election
shall be made by December 31 of the calendar year prior to the period(s) to
which the deferral relates.
INVESTMENT: Each deferred compensation account will be credited with quarterly
compounded interest from the date on which deferred compensation would
initially have been payable, until payment, at a rate equal to the annual
discount rate assumed for the Company's U.S. defined benefit pension plan.
Such rate shall be updated by the Company on an annual basis.
PAYMENT OF DEFERRED COMPENSATION: No withdrawal may be made from the
participant's deferred compensation account prior to termination of the
participant's service as a Director. The value of a participant's deferred
compensation account as of the participant's termination of service as a
Director will be payable in cash in a lump sum as soon as practicable following
the termination of said service.
DESIGNATION OF BENEFICIARY: A participant may designate one or more
beneficiaries by giving written notice to the Company on the form provided by
the Company for that purpose. If no beneficiary is designated, the beneficiary
will be the participant's estate. If more than one beneficiary statement has
been filed, the beneficiary(s) designated in the statement bearing the most
recent date will be deemed the valid beneficiary(s).
15
<PAGE>
DEATH OF PARTICIPANT: In the event of a participant's death before the
participant has received the deferred payments to which the participant is
entitled hereunder, the value of the participant's deferred compensation
account shall be determined as of the day immediately following death and such
amounts shall be paid to the beneficiary(s) of the deceased participant as soon
as practicable thereafter in cash in a lump sum.
PARTICIPANT'S RIGHTS UNSECURED: The right of any participant to receive
payment under the provisions of the Plan shall be an unsecured claim against
the general assets of the Company, and no provisions contained in the Plan
shall be construed to give any participant or beneficiary(s) at any time a
security interest in the deferred compensation account or any other asset in
trust with the Company for the benefit of any participant or beneficiary(s).
STATEMENT OF ACCOUNT: A statement will be sent to participants a soon as
practical following the end of each calendar year as to the value of their
deferred compensation accounts as of December 31 of such year.
ASSIGNABILITY: No right to receive payments hereunder shall be transferable or
assignable by a participant or a beneficiary, except by will or by the laws of
descent and distribution.
ADMINISTRATION OF THE PLAN: The Plan shall be administered by an officer or
officers of the Company as determined by its Chairman of the Board of Directors.
AMENDMENT OR TERMINATION OF PLAN: This Plan may at any time or from time to
time be amended, modified or terminated by the Board of Directors of the
Company. No amendment, modification or termination shall, without the consent
of a participant, adversely affect such participant's accruals in his deferred
compensation account.
GOVERNING LAW: This Agreement shall be governed by and construed in accordance
with the Laws of the State of Michigan.
Dated this 6th day of December, 1995
S/S NICOLE S. WILLIAMS
Nicole S. Williams
Executive Vice President and Secretary
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from R.P. Scherer
Corporation's Quarterly Report on Form 10-Q for the quarter ended December 31,
1995, and is qualified in its entirety by reference to such Form 10-Q filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 26,601
<SECURITIES> 4,843
<RECEIVABLES> 116,541
<ALLOWANCES> 4,500
<INVENTORY> 62,602
<CURRENT-ASSETS> 213,552
<PP&E> 401,108
<DEPRECIATION> 106,890
<TOTAL-ASSETS> 712,388
<CURRENT-LIABILITIES> 86,525
<BONDS> 194,177
0
0
<COMMON> 234
<OTHER-SE> 303,958
<TOTAL-LIABILITY-AND-EQUITY> 712,388
<SALES> 419,471
<TOTAL-REVENUES> 419,471
<CGS> 273,203
<TOTAL-COSTS> 343,715
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,938
<INCOME-PRETAX> 67,292
<INCOME-TAX> 20,222
<INCOME-CONTINUING> 35,273
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,273
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
</TABLE>
