<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 33-30999
-----------------------------
R.P. SCHERER CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3523163
(State of Incorporation) (I.R.S. Employer Identification Number)
2075 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (810) 649-0900
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of the registrant's common stock as of February 7,
1997: 23,546,817 shares of common stock, par value $.01.
==============================================================================
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------- ----------------------------------
1996 1995 1996 1995
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales $149,874 $137,582 $438,625 $419,471
Cost of sales 98,950 90,201 294,640 273,203
Selling and administrative expenses 18,576 16,672 53,482 53,127
Research and development expenses, net 5,907 5,590 15,229 17,385
-------- ------- -------- --------
Operating income 26,441 25,119 75,274 75,756
Interest expense 2,620 2,953 8,593 9,938
Interest earned and other (695) (675) (1,799) (1,474)
------- -------- --------- --------
Income from continuing operations before
income taxes and minority interests 24,516 22,841 68,480 67,292
Income taxes 6,542 6,286 19,516 20,222
Minority interests 2,890 3,301 8,821 11,797
--------- --------- -------- ---------
Net income $15,084 $13,254 $40,143 $35,273
========= ========= ======= ========
Per Common and Common Equivalent Share:
Net income $0.61 $0.54 $1.63 $1.43
======== ======== ====== =======
Average number of common and common
equivalent shares 24,577 24,600 24,679 24,612
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
1996 1996
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 52,097 $ 21,007
Short-term investments 3,455 4,880
Receivables, less reserves of:
December 31, 1996 - $4.0 million;
March 31, 1996 - $4.8 million 118,736 129,472
Inventories 70,274 59,718
Other current assets 8,417 6,659
------- ----------
252,979 221,736
PROPERTY: ------- -----------
Property, plant and equipment, at cost 449,785 411,396
Accumulated depreciation (139,288) (124,676)
--------- ----------
310,497 286,720
OTHER ASSETS: --------- ---------
Goodwill and intangibles, net of 170,589 175,622
amortization
Other assets 20,090 23,303
-------- ---------
190,679 198,925
-------- ---------
$754,155 $707,381
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of $ 6,435 $ 5,834
long-term debt
Accounts payable 47,677 57,985
Accrued liabilities 34,712 41,839
Accrued income taxes 11,508 9,632
-------- -------
100,332 115,290
-------- -------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 185,886 164,652
Other long-term liabilities 57,189 57,329
Deferred income taxes 36,126 32,482
Minority interests in subsidiaries 34,388 37,268
------- -------
313,589 291,731
------- -------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock, 500,000 shares authorized, - -
none issued
Common stock, $.01 par value, 50,000,000
shares authorized; shares issued:
December 31, 1996 - 23,534,179 shares;
March 31, 1996 - 23,460,453 shares 235 235
Additional paid-in capital 241,604 239,705
Retained earnings 105,847 65,705
Currency translation adjustment (7,453) (5,285)
--------- ----------
340,234 300,360
--------- ----------
$754,155 $707,381
========= ==========
The accompanying notes are an integral part of this statement.
3
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1996 1995
---------- -----------
OPERATING ACTIVITIES:
Net income $ 40,143 $ 35,273
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 18,805 17,990
Amortization of intangible assets and debt 4,894 4,809
discount
Minority interests in net income 8,821 11,797
Deferred tax provision and other 8,086 785
Decrease in receivables 10,251 3,363
(Increase) decrease in inventories and other (10,379) 1,547
current assets
Decrease in accounts payable and accrued (14,460) (35,684)
expenses ---------- ----------
Net cash provided by operating activities 66,161 39,880
---------- ---------
INVESTING ACTIVITIES:
Purchases of plant and equipment (42,227) (44,036)
Other (2,306) (4,660)
---------- ---------
Net cash used by investing activities (44,533) (48,696)
---------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 32,319 30,595
Long-term debt retirements and payments (15,741) (16,131)
Short-term borrowings, net 1,294 1,744
Cash dividends paid to minority shareholders of (8,214) (13,504)
subsidiaries --------- --------
Net cash provided by financing activities 9,658 2,704
--------- --------
Effect of currency translation on cash and cash (196) (1,002)
equivalents --------- ---------
Net increase (decrease) in cash and cash 31,090 (7,114)
equivalents
Cash and cash equivalents, beginning of period 21,007 33,715
-------- ---------
Cash and cash equivalents, end of period $52,097 $26,601
======== ==========
The accompanying notes are an integral part of this statement.
4
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of R.P. Scherer Corporation (the "Company"), a Delaware corporation and
its subsidiaries, some of which are less than wholly-owned. In the opinion of
management, the accompanying unaudited consolidated financial statements include
all adjustments (consisting only of normal recurring items) necessary for the
fair presentation of financial position and results of operations. These
consolidated financial statements and related notes have been prepared pursuant
to the Rules and Regulations set forth by the Securities and Exchange Commission
and should be read in conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended March
31, 1996, as filed with the Securities and Exchange Commission.
2. RESTRUCTURING
In the fourth quarter of fiscal 1996, the Company announced a restructuring plan
designed to enhance the Company's long-term profitability by reducing and
rationalizing manufacturing and overhead structures which were primarily
servicing non-pharmaceutical markets (the "Restructuring"). The Restructuring
included the closure of two softgel manufacturing plants, as well as the
consolidation and elimination of certain marketing, administrative, and
development staff in several other locations. The Restructuring was
substantially completed in the first nine months of fiscal 1997. As a result of
the Restructuring and other special charges, the Company recorded a special
provision totaling $33.8 million before income tax effects in the fourth quarter
of fiscal 1996. Further information with regard to the Restructuring is
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, as filed with the Securities and Exchange Commission.
A summary of the restructuring reserve activity for the nine months ended
December 31, 1996 follows:
(IN THOUSANDS) UTILIZED IN
THE NINE
MONTHS BALANCE
BALANCE AT ENDED AT
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996
---------- ------------ -----------
Severance and other employee
termination costs $ 8,399 $7,330 $ 1,069
Fixed asset recovery reserves 13,100 6,317 6,783
Other current assets 299 299 -
Contractual obligations 3,281 2,283 998
-------- --------- --------
$25,079 $16,229 $8,850
======== ========= =========
Of the restructuring reserve remaining at December 31, 1996, $1.4 million was
included in accrued liabilities, $0.7 million was included in other long-term
liabilities and $6.8 million was reported as a reduction of property, plant and
equipment.
3. INCOME TAXES
The effective income tax rates in the current and prior year periods were lower
than the U.S. Federal income tax rate due primarily to the mix of taxable income
between jurisdictions as well as an increase in the expected utilization of
carryforward foreign and other tax credits.
5
<PAGE>
4. INVENTORIES
The components of inventories are as follows:
(IN THOUSANDS) DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
Raw materials and supplies $41,795 $30,892
Work in process 7,676 10,593
Finished goods 20,803 18,233
----------- ----------
$70,274 $59,718
========== ==========
5. CONTINGENCIES
On March 30, 1992, OCAP Acquisition Corp. ("OCAP") commenced an action in the
Supreme Court of the State of New York, County of New York, against Paco
Pharmaceutical Services, Inc. ("Paco"), certain of its subsidiaries, the Company
and R.P. Scherer International Corporation (collectively, the "defendants"),
arising out of the termination of an Asset Purchase Agreement dated February 21,
1992 (the "Purchase Agreement") between OCAP and the defendants providing for
the purchase of substantially all the assets of Paco. On May 15, 1992, OCAP
served an amended verified complaint (the "Amended Complaint"), asserting causes
of action for breach of contract and breach of the implied covenant of good
faith and fair dealing, arising out of defendants' March 25, 1992 termination of
the Purchase Agreement, as well as two additional causes of action that were
subsequently dismissed by order of the court. The Amended Complaint sought $75
million in actual damages and $100 million in punitive damages, as well as
OCAP's attorney fees and other litigation expenses, costs and disbursements
incurred in bringing this action. The Company and R.P. Scherer International
Corporation asserted a counterclaim against OCAP for breach of contract and
breach of the covenant of good faith and fair dealing arising out of the
termination of the Purchase Agreement. In April 1996, the court rendered a
verdict in the Company's favor on all claims in the Amended Complaint and also
dismissed the Company's counterclaim against OCAP. OCAP has filed a notice of
appeal for the dismissal of its claims and the Company has filed a notice of
cross appeal for the dismissal of its counter claim. In the opinion of
management, the ultimate outcome of any potential appeals related to this
decision will not have a material adverse effect on the Company's business or
financial condition.
The Company was informed in August 1992 that soil at a manufacturing facility in
North Carolina owned and operated by the Company from 1975 to 1985 contained
levels of tetrachlorethene and other substances which exceeded environmental
standards. The Company voluntarily conducted a remedial investigation and
remedial and removal actions by the Company and the current owner of the
facility are ongoing. The Company will continue to perform additional studies
and remediation of the area, including testing and removal of groundwater, which
may indicate the necessity for additional remedial and removal actions in the
future. On the basis of the results of investigations performed to date, the
Company does not believe that potential future costs associated with either the
investigation or any potential remedial or removal action will ultimately have a
material adverse impact on the Company's business or financial position.
The Company is a party to various other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources.
6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis of financial results and condition covers
the three and nine month periods ended December 31, 1996 and 1995. A majority of
the Company's sales, income and cash flows are derived from its international
operations. With the exception of operations in highly inflationary economies,
which are measured in U.S. dollars, the financial position and the results of
operations of the Company's foreign operations are measured using the local
currencies of the countries in which they operate and are translated into U.S.
dollars. Although the effects of foreign currency fluctuations are mitigated by
the fact that expenses of foreign subsidiaries are generally incurred in the
same currencies in which sales are generated, the reported results of operations
of the Company's foreign subsidiaries are affected by changes in foreign
currency exchange rates and, as compared to prior periods, will be higher or
lower depending upon a weakening or strengthening of the U.S. dollar. In
addition, a substantial portion of the Company's net assets are based in its
foreign operations and are translated into U.S. dollars at the foreign currency
exchange rates in effect at the end of each period. Accordingly, the Company's
consolidated shareholders' equity will fluctuate depending upon the
strengthening or weakening of the U.S. dollar.
RESULTS OF OPERATIONS
QUARTERS ENDED DECEMBER 31, 1996 AND 1995
Third-quarter sales of $149.9 million increased 9% over the $137.6 million
reported in the prior year period. Measured using constant foreign exchange
rates, third-quarter sales increased 11%. The third-quarter sales increase
resulted primarily from: a 12% increase in sales of Vitamin E and other
health and nutritional ("H&N") softgels, primarily in the United States, the
United Kingdom and Australia; an 11% increase in sales of over-the-counter
softgel products reflecting a strong cough/cold season in the United States;
and from a 60% increase in ZYDIS-Registered Trademark- revenue. Prescription
pharmaceutical softgel sales increased marginally in the third quarter,
reflecting primarily increased U.S. pharmaceutical softgel sales and
increased sales of Novartis' NEORAL-Registered Trademark-softgel products
versus the prior year period, partially offset by reduced world-wide sales of
nifedipine due in part to concern in the medical community regarding use of
the immediate release form of the product.
Operating income for the quarter ended December 31, 1996 was $26.4 million as
compared to the $25.1 million earned in the prior year quarter, a 5%
increase. On a constant exchange rate basis, third-quarter operating income
increased 8%. Third-quarter operating income comparisons were favorably
affected by the previously discussed sales increases, partially offset by a
higher proportion of lower margin H&N products in the sales mix and by lower
profitability in continental Europe resulting primarily from the weakness of
key European economies. Third-quarter selling, general and administrative
("SG&A") expense represented 12.4% of sales versus 12.1% of sales in the same
period last year. Third-quarter net research and development ("R&D") expense
increased $0.3 million to $5.9 million. Net recurring research and
development spending decreased 9% versus the year-ago period as a $0.9
million increase in customer reimbursement more than offset a 32% increase in
gross recurring R&D expense. Third-quarter R&D expense related to the
Company's Advanced Therapeutic Products ("ATP") group was $2.3 million, an
increase of $0.7 million over the prior year period due to increased expense
resulting from clinical studies.
The Company generated net income of $15.1 million, or $0.61 per share, in the
quarter ended December 31, 1996, as compared to the $13.3 million, or $0.54 per
share, earned in last year's third quarter. The strengthening of the U.S.
dollar had the effect of reducing third-quarter net income by $0.01 per share as
compared to the third-quarter last year. Net interest expense fell 15% versus
the prior year third quarter due primarily to favorable short-term interest
rates and lower average borrowings reflecting the Company's
7
<PAGE>
ability to fund capital investment with internally generated funds. In
addition to lower net interest expense, current quarter comparisons benefited
from a reduction of the estimated consolidated effective tax rate to 26.7%
versus 27.5% in the prior year quarter. The lower effective income tax rate
in the quarter reflected a favorable shift in the geographic mix of pretax
income and expected improvements in the utilization of foreign tax credits
and other tax benefits in the current fiscal year, and changes in the
estimated tax benefits realized resulting from the fiscal 1996 Restructuring.
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Consolidated sales for the nine month period ended December 31, 1996 were
$438.6 million, a 5% increase versus the $419.5 million reported in the same
period last year. The stronger U.S. dollar relative to most foreign
currencies reduced reported sales for the nine-month period. Measured using
constant foreign exchange rates, sales in the current year period increased
7%. The current year sales increase resulted primarily from gains in Vitamin
E and H&N softgel sales in the United States, the United Kingdom and
Australia, partially offset by weak demand for all types of softgel products
in continental Europe, a 44% decline in sales of nifedipine and lower
first-half SANDIMMUNE-Registered Trademark- / NEORAL-Registered Trademark-
volume as compared to the prior year period which included pipeline loading
related to the U.S. launch of NEORAL-Registered Trademark-. ZYDIS-Registered
Trademark-revenue increased 37% in the first three quarters of fiscal 1997,
continuing that business' strong growth.
Operating income for the nine months ended December 31, 1996 was $75.3 million
as compared to the $75.8 million earned in the prior year, a 1% decrease.
However, on a constant exchange rate basis, year-to-date operating income
increased 2%. Operating income comparisons for the nine month period reflect a
higher proportion of lower margin H&N product in the sales mix, including a
large increase in sales of Vitamin E softgels. Lower gross profit margins in
the year-to-date period were partially offset by the benefit of cost reduction
efforts undertaken in fiscal 1996, as evidenced by a decline in SG&A expense as
a percentage of sales to 12.2% versus 12.7% in the prior year period. The
improvement in the SG&A ratio was largely attributable to cost savings resulting
from the previously announced closing of softgel facilities in Neuvic, France
and Windsor, Canada and from the elimination of certain administrative,
marketing and development staff positions at other locations. For the nine
months ended December 31, 1996, net research and development expense was $2.2
million below the prior year period. While gross recurring softgel R&D expenses
approximated prior year levels, reduced PULSINCAP-TM- expenditures and increased
customer reimbursement resulted in lower net recurring R&D expense versus the
same period last year. Also for the first nine months of fiscal 1997, R&D
expense related to the Company's ATP group of $5.7 million approximated prior
year outlays.
The Company generated net income of $40.1 million, or $1.63 per share, in the
nine months ended December 31, 1996, as compared to the $35.3 million, $1.43
per share, earned in the same period last year. The strengthening of the U.S.
dollar had the effect of reducing net income by $0.05 per share in the nine
months ended December 31, 1996, as compared to the same period last year.
Interest expense was $1.3 million, or 13%, below the prior year due primarily to
lower borrowing rates and lower average borrowings. In addition to lower net
interest expense, current fiscal year comparisons benefited from a reduction of
the estimated consolidated effective tax rate to 28% versus 30% in the prior
year period. The lower effective income tax rate reflects a favorable shift in
the geographic mix of pretax income and expected improvements in the utilization
of foreign tax credits and other tax benefits in the current fiscal year, and
changes in the estimated tax benefits realized resulting from the fiscal 1996
Restructuring.
8
<PAGE>
RESULTS BY GEOGRAPHIC SEGMENT
The following sets forth operating results for each of the Company's geographic
segments for the nine month periods ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS) SALES OPERATING INCOME OPERATING MARGIN
---------------------------- ------------------------------- --------------------------
1996 1995 1996 1995 1996 1995
---------- -------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
United States $130,025 $99,703 $ 27,598 $24,540 21.2% 24.6%
Europe 226,742 237,965 38,121 48,060 16.8 20.2
Other International 81,858 81,803 17,406 15,618 21.3 19.1
Unallocated (1) - - (7,851) (12,462) - -
--------- ---------- --------- -------- ------- ------
$438,625 $419,471 $75,274 $75,756 17.2% 18.1%
========= ========== ======== ========
</TABLE>
(1) Includes general Corporate expenses and expenses associated with the ATP
Group.
The Company's United States operations generated a 30% sales gain for the
nine months ended December 31, 1996, reflecting in part increased production
of softgels for the Canadian market as a result of the Spring 1996 closing of
the Windsor, Canada softgel facility. However, the majority of the
nine-month increase resulted from a 61% increase in nutritional softgel
sales, driven primarily by increased sales of Vitamin E softgel products.
Total U.S. pharmaceutical softgel sales increased 3% versus the year ago
period as a 15% increase in over-the-counter ("OTC") pharmaceutical softgel
sales resulting from a strong cough/cold season offset reduced sales of
nifedipine and Abbott Laboratories' HYTRIN-Registered Trademark-. For this
same period, operating income grew by 12%, or $3.1 million, yielding a 21.2%
operating margin as compared with 24.6% in the prior year period, primarily
as a result of the shift in product mix toward lower margin Vitamin E
softgels.
As compared to the same period last year, sales in Europe decreased 5% for
the nine months ended December 31, 1996. On a constant dollar basis,
year-to-date European sales were flat as strong United Kingdom H&N sales
gains were offset by weak sales throughout continental Europe. Sales of the
Company's German operations were adversely influenced by lower sales of
nifedipine, comparison against the prior year first-half launch of
NEORAL-Registered Trademark- in the United States, and by lower first-half
OTC pharmaceutical softgel sales. Economic weakness throughout continental
Europe contributed to a 25% decrease in sales of discretionary cosmetic and
H&N softgel products. As a result of these factors, and of the resulting
under utilization of capacity, European constant dollar operating income
decreased 17% between the two periods and the operating margin fell to 16.8%
of sales versus 20.2% in the prior year.
For the nine months ended December 31, 1996, sales in the Company's Other
International segment approximated the prior year due primarily to the transfer
of Canadian softgel production to the United States and the weakness of the
Japanese yen versus the U.S. dollar, offset by strong H&N sales in Australia and
Japan. Excluding Canada softgels, Other International sales on a constant
dollar basis increased 14% due primarily to the strengthening of Vitamin E and
H&N softgel markets in Australia and Japan and strong demand for the Company's
hardshell capsules. For the same period, the operating margin increased to
21.3% of sales versus 19.1% in the same period last year due to improved
profitability in Australia, Japan and the hardshell business as well as the
closing of the less profitable Canadian softgel facility.
9
<PAGE>
CASH FLOWS
Cash and cash equivalents increased by $31.1 million for the nine months ended
December 31, 1996, as compared with a decrease of $7.1 million in the same
period in 1995. Cash provided by operations increased $26.3 million to $66.2
million in the current year period versus the $39.9 million provided by
operations in the prior year period. The fiscal 1997 increase in cash provided
by operations resulted from increased earnings, a reduction in restructuring
related deferred tax assets and a significantly lower use of cash for working
capital as compared to the first nine months of fiscal 1996. In the fiscal 1997
period, the use of cash for working capital was due primarily to a reduction in
Restructuring reserves, to an increase in raw material inventories attributable
to increased production of Vitamin E and other H&N products and to the timing of
gelatin purchases. For the prior year period ended December 31, 1995, cash
provided by earnings was significantly offset by a $30.8 million increase in net
working capital. Such net working capital increase resulted primarily from a
reduction of current liabilities due to the timing of foreign tax payments and
capital asset purchases and the timing of dividend and interest payments to
minority shareholders.
Capital expenditures for the current year period were $42.2 million, compared
to the prior year period's capital expenditures of $44.0 million.
Year-to-date capital expenditures consisted primarily of costs related to the
expansion and upgrade of softgel production facilities in France and Japan
and of the ZYDIS-Registered Trademark- production facility in Swindon, United
Kingdom. In the prior year period, capital spending consisted primarily of
expenditures in the United Kingdom related to the continuing expansion of the
ZYDIS-Registered Trademark-production facility, to the ongoing expansion and
renovation of pharmaceutical softgel facilities in Germany and France, and to
general facility and equipment additions and improvements.
Financing activities for the nine months ended December 31, 1996, include the
payment of $8.2 million of dividends to minority shareholders as well as net
borrowings of $16.6 million under the Company's bank credit facilities,
primarily to fund capital requirements in the United Kingdom and Japan and
research expenditures in the United Kingdom. In the prior year period,
financing activities principally reflect the payment of $13.5 million of
dividends to minority shareholders, as well as a net $14.5 million of borrowings
under the Company's bank credit facility used principally to fund capital and
research expenditures in the United Kingdom.
LIQUIDITY AND FINANCIAL CONDITION
During the next several years, a significant portion of the Company's cash flow
will be used to fund capital expenditures, to fund research and development, to
service and reduce indebtedness and, depending on market conditions, to
repurchase up to 5% of the Company's outstanding common stock. The Company
believes that future cash flow from operations, together with cash and short-
term investments aggregating $55.6 million at December 31, 1996 and amounts
available under existing bank credit facilities, will be adequate to meet
anticipated capital investment, operating, stock repurchase and debt service
requirements. The Company does not currently have plans to declare or pay cash
dividends. At December 31, 1996, the Company's substantial cash position
resulted, in part, from an accumulation of cash in certain foreign affiliates
pending the execution of various tax planning or other strategic initiatives.
At December 31, 1996, the Company's outstanding indebtedness consisted of $99.5
million of 6 3/4% senior notes (net of a $0.5 million discount), $71.4 million
of borrowings under the Company's bank credit facilities, $6.4 million of
industrial development revenue bonds and approximately $12.3 million of other
indebtedness.
10
<PAGE>
Capital expenditures are anticipated to approximate $70 million in each of
fiscal years 1997 and 1998 and are expected to decline somewhat per year
thereafter. Such expenditures will be used primarily to continue the upgrade
and expansion of dedicated pharmaceutical softgel production capacity to meet
anticipated customer demand, as well as to ensure continuing compliance with
pharmaceutical Good Manufacturing Practices (GMP) standards. In addition,
such expenditures will include further major expansions of production
facilities for ZYDIS-Registered Trademark-. As of December 31, 1996, the
Company had $8.5 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
approximate $9-$10 million in fiscal 1997 and that such expenses will increase
in fiscal 1998 due to costs related to certain clinical trials. The Company
anticipates that ATP group expenses will represent a significant portion of the
Company's total R&D spending over the next few years. The Company further
anticipates that ATP product sales and royalty revenues will exceed ATP group
expenses no earlier than fiscal 2000, assuming that the development and
commercialization of such ATP products is successful.
The Company periodically reviews drug delivery technologies and other businesses
for potential investment, consistent with its strategic objectives. Such
investments will not necessarily involve significant initial funding or funding
commitments by the Company. Management intends that any acquisition which would
require significant funding would be financed using a combination of available
cash and short-term investments and, depending upon market conditions, the
issuance of common stock. Management further intends that the Company's
financing of any such acquisition would not materially increase the Company's
debt to equity ratio.
INFLATION
In the view of management, the effects of inflation and changing prices on the
Company's results of operations and financial condition were not significant.
FORWARD LOOKING INFORMATION
Except for the historical information contained herein, the matters discussed in
this Report Form 10-Q are forward looking statements that involve risks and
uncertainties. Certain important factors could cause the Company's actual
results to differ materially from expected and historical results, including,
but not limited to, the following: whether expected operating results can be
achieved, the volatility of key nutritional products markets; generic
competition to key customer pharmaceutical products; successful formulation,
scale-up, development, and commercialization of customer, ATP and other company
products; global economic factors and foreign exchange rate fluctuations;
regulatory matters related to product testing and approvals for the Company and
its customers; competitive products and pricing; and product and drug delivery
system development and other technological issues. These forward looking
statements, as further described in the Company's Annual Report and on Form 10-
K, as filed with the Securities and Exchange Commission, represent the Company's
judgment as of the date the information was prepared.
11
<PAGE>
PART II
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION
-------------- ----------------
27 Financial Data Schedule. Filed herewith.
(b) REPORTS ON FORM 8-K: None.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R.P. SCHERER CORPORATION
Date: FEBRUARY 13, 1997 By: /s/ NICOLE S. WILLIAMS
----------------- ---------------------------
Nicole S. Williams
Executive Vice President, Finance,
Chief Financial Officer and
Secretary
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from R. P.
Scherer Corporation's Quarterly Report on Form 10Q for the quarter ended
December 31, 1996, 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-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 52,097
<SECURITIES> 3,455
<RECEIVABLES> 122,736
<ALLOWANCES> 4,000
<INVENTORY> 70,274
<CURRENT-ASSETS> 252,979
<PP&E> 449,785
<DEPRECIATION> 139,288
<TOTAL-ASSETS> 754,155
<CURRENT-LIABILITIES> 100,332
<BONDS> 185,886
0
0
<COMMON> 235
<OTHER-SE> 339,999
<TOTAL-LIABILITY-AND-EQUITY> 754,155
<SALES> 438,625
<TOTAL-REVENUES> 438,625
<CGS> 294,640
<TOTAL-COSTS> 363,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,593
<INCOME-PRETAX> 68,480
<INCOME-TAX> 19,516
<INCOME-CONTINUING> 40,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,142
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.63
</TABLE>
