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As filed with the Securities and Exchange Commission on June 30, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
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: (248) 649-0900
---------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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
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, 1997 was approximately
$1,321,244,000 (based on closing price of $54.69 per share as of June 25,
1997).
Number of shares outstanding of each class of the Registrant's common stock as
of June 25, 1997: 24,277,927 shares of common stock, par value $.01.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's proxy statement relating to the 1997 annual
meeting of shareholders to be held on September 11, 1997, 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
The R.P. Scherer Corporation (the "Company") is a leading international
manufacturer and developer of drug delivery systems. The Company is the
world's largest producer of softgels for the pharmaceutical and nutritional
supplements markets and holds, or is developing, several other innovative
drug delivery technologies. The two most significant drug delivery systems
center around RP SCHERERSOL -TM- and ZYDIS-Registered Trademark- 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 several thousand products in softgel form, including a
wide variety of pharmaceutical, vitamin, cosmetic and recreational products.
R.P. Scherer has a broad domestic and international base of softgel
customers, including manufacturers and wholesalers of pharmaceutical, health
and nutritional, cosmetic and recreational products, with approximately
one-half of the Company's sales made to the pharmaceutical industry. To meet
the needs of its multinational customers and to serve new markets, the
Company operates 19 softgel manufacturing facilities in 12 countries
throughout the world and manufactures hardshell capsules in three of these
countries. Approximately two-thirds of the Company's fiscal 1997 sales and
operating income were derived from operations outside the United States.
The Company's Scherer DDS division focuses on the development of advanced
drug delivery systems including 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. Other technologies under development include the PASSCAL dry
powder inhalation system, the OPTIDYNE ophthalmic drug delivery system and
the PULSINCAP-Registered Trademark- technology which enables the contents of
a capsule to be released at a predetermined time in contact with a liquid.
The Company is actively searching for promising new drug delivery systems
which complement the Company's existing technologies.
The Company's Advanced Therapeutic Products Group ("ATP") manages the
development and registration of new pharmaceutical products by applying the
Company's drug delivery technologies to off-patent compounds. The Company
expects that ATP will help it service the growing global demand for
therapeutically improved, cost-effective pharmaceutical products.
SOFTGEL PRODUCTS AND MARKETS
Softgel products accounted for 90% of the Company's fiscal 1997 sales.
Softgel capsules are one-piece soft elastic gelatin capsules typically
containing water or oil soluble liquids, pastes or solids in solution or
suspension. Softgel products are used in a wide range of pharmaceutical,
nutritional, cosmetic and recreational products.
First developed by Robert Pauli Scherer in 1933, softgel technology is the
only widely accepted process for encapsulating oils, liquids or suspended
solids in an oral dosage form. Importantly, the rapid dissolution or
disintegration characteristics of softgel capsules often result in improved
bioavailability and efficacy versus tablets or hardshell capsule
formulations. Other advantages of softgels include ease of use, precise
dosage control, minimal ingredient loss during manufacturing, effective taste
masking, improved product stability, tamper resistance and longer shelf life.
The Company continues to advance softgel technology with the recent
introduction of patentable shell barrier and "bead" technologies. The new
shell barrier technology significantly broadens potential softgel
encapsulation opportunities to include dermatological and cosmetic
applications with high water content fill material. Dual-action bead
technology combines the benefit of immediate release liquid softgels with
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sustained release beads, all in one softgel capsule. Developed in
collaboration with a customer, this unique presentation is patentable and
ideal for reinforcing brand image. The Company expects the launch of the
first commercial bead technology softgel product in fiscal 2000.
The Company produces softgel capsules for the following markets: (i)
prescription and over-the-counter ("OTC") pharmaceuticals; (ii) health and
nutritional; and (iii) other, primarily cosmetics and recreational.
PHARMACEUTICAL. The world's various pharmaceutical markets are relatively
similar due to the high degree of regulation worldwide, together with the
increasing globalization of the pharmaceutical industry. The Company
performs especially well in highly regulated environments where the
customers' emphasis is on quality and service rather than price. In fiscal
1997, roughly one-half of the Company's softgel sales were derived from the
sale of pharmaceutical products.
The Company works closely with its customers to identify product
opportunities and to develop and commercialize new softgel products. The
Company's RP SCHERERSOL -TM- softgel systems consist of various liquid
formulation technologies which improve the bioavailability of pharmaceutical
compounds which are inconsistently, incompletely or too slowly absorbed from
traditional oral dosage forms. These proprietary systems also broaden the
range of pharmaceutical products to which softgel technology may be
effectively applied. The technology, most of which is patented, often
enables pharmaceutical companies to combine the advantages of drugs in liquid
solution with the convenience and dosage accuracy of oral softgels.
Importantly, RP SCHERERSOL -TM- technologies' unique, patented dosage delivery
system can help protect pharmaceutical compounds against generic drug
competition throughout the life of the RP SCHERERSOL -TM- patents.
To date, the most significant product reformulated using RP SCHERERSOL -TM-
systems are Novartis Ltd.'s NEORAL-Registered Trademark- and
SANDIMMUN-Registered Trademark- softgel products. These cyclosporin-A
products are immunosuppressants which are administered daily to organ
transplant patients throughout their lives to prevent post-operative organ
rejection. The Company's softgel formulation of these drugs improves patient
compliance by increasing ease of use, masking cyclosporin-A's unpleasant
taste and better regulating dosage. NEORAL-Registered Trademark-, a new
formulation of cyclosporin-A developed and patented by the Company and
Novartis Ltd., provides a significant improvement in the bioavailability of
cyclosporin-A providing more consistent and reliable dosing for organ
transplant patients. NEORAL-Registered Trademark-is also intended to expand
the use of cyclosporin-A to additional indications, including rheumatoid
arthritis and psoriasis. NEORAL-Registered Trademark- has received approval
in Europe for the treatment of psoriasis and is pending approval in the
United States for the treatment of rheumatoid arthritis. Novartis Ltd.'s
annual worldwide sales of SANDIMMUN-Registered Trademark- and
NEORAL-Registered Trademark- are currently estimated to exceed $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
3% of the Company's fiscal 1997 softgel sales.
The Company currently anticipates that its customers will launch several
important new pharmaceutical softgel products over the next three years,
although the Company cautions that such forward-looking estimates as to
probability and timing of successful product launches by its customers are
subject to numerous risks, the most relevant of which are outlined on page 8,
"Forward Looking Information."
The Company's softgel technologies have proven especially successful in the
formulation of the new anti-HIV protease inhibitors and the Company currently
anticipates that three of the top five new protease inhibitors will be
marketed in softgel form in fiscal 1998 and 1999, one of which is Hoffmann-La
Roche's INVIRASE-TM-. Hoffmann-La Roche has indicated that, at the dosage
used in clinical trials, the new INVIRASE-TM- softgel formulation provides
eight-to-nine times the drug exposure of the existing formulation. The
improved bioavailability of the softgel form of these products may
substantially reduce the number of times that patients must take these
products each day, thereby enhancing patient compliance and minimizing
adverse side effects.
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Five significant additional launches of softgel pharmaceutical products are
anticipated over the next six to 24 months, including: an American Home
Products ibuprofen softgel, FDA approval of Novartis' NEORAL-Registered
Trademark- for rheumatoid arthritis, three protease inhibitors and a hormone
replacement therapy softgel to be produced for Schering Plough.
British Biotech's promising new anti-cancer agent MARIMASTAT is currently in
phase II trials. British Biotech believes that the drug may potentially
exceed $2 billion per year in sales. The Company believes that MARIMASTAT
may begin providing product revenue as early as fiscal 2000 and may provide
significant revenues three to four years thereafter.
The Company continues to develop new softgel products for the OTC market. In
addition to the anticipated launch of American Home Products'
ADVIL-Registered Trademark- ibuprofen pain reliever in softgel form in the
latter half of fiscal 1998, the Company projects the launch of additional
ibuprofen cough-cold combination softgels for American Home Products in
fiscal 2000. 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-, Miles Laboratories' ALKA-SELTZER
PLUS-Registered Trademark- and Pfizer's UNISOM SLEEPGELS-Registered
Trademark-, among others.
HEALTH AND NUTRITIONAL. Health and nutritional softgel products consist
primarily of vitamins, minerals, herbal supplements, and plant and fish oils
and extracts. Some of the Company's products involve relatively simple
encapsulation of oils, such as vitamin E and cod liver oil, while many more
complex formulations are specifically formulated to customer requirements.
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 36% of the
Company's fiscal 1997 softgel sales.
OTHER-COSMETICS AND RECREATIONAL. Other softgel products, consisting
primarily of cosmetic and recreational softgel products, comprised 8% of
fiscal 1997 softgel sales, with 4% of softgel sales attributable to cosmetics
and 4% of softgel sales to recreational products.
The Company's cosmetics softgel products consist principally of specially
shaped softgels containing topical oils and creams, and bath pearls or
capsules containing oils and fragrances. Additionally, the Company's
cosmetics customers have introduced facial products using special twist-off
softgel capsules which 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. Examples include the fragrance
softgel TRUSCENT-Registered Trademark-, which represents an economical,
biodegradable twist-off sampler providing a unit dose of perfume and new skin
care capsules containing a combination of vitamin C and retinol, a form of
vitamin A.
The Company also 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. The Company is the world's leading producer of
recreational paintball softgels.
SCHERER DDS
Formed as a separate division of the Company in 1991, Scherer DDS focuses on
the development and commercialization of advanced drug delivery systems.
Scherer DDS represents a broadening of the Company's business and reflects
the Company's commitment to the rapidly growing drug delivery market segment.
The Company believes that demand for advanced drug delivery systems will
continue to grow as the pharmaceutical industry recognizes limitations to
improving drug efficacy and tolerance with conventional dosage forms. In
addition, novel and patented formulation and delivery technologies can
often extend the product life cycle of major drugs for many years, thereby
maximizing return on the customers' significant investment.
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Scherer DDS Technologies include ZYDIS-Registered Trademark- as well as
several other novel advanced drug delivery technologies which are under
development. ZYDIS-Registered Trademark- is an oral dosage form which
dissolves instantaneously on the tongue and does not require water to aid
swallowing. Other technologies currently under development include the
PASSCAL dry powder inhalation system, the OPTIDYNE ophthalmic drug delivery
system and the PULSINCAP-Registered Trademark- technology which enables the
contents of a capsule to be released at a predetermined time in contact with
a liquid. The Company is continually 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 making the product particularly suitable for improving compliance
among groups such as 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 2007 or later, with such 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 25 countries.
The Company's customers received U.S. Food and Drug Administration ("FDA")
approval and launched two new ZYDIS-Registered Trademark- products in fiscal
1997, including American Home Product's DIMETAPP-Registered Trademark- COLD
AND ALLERGY children's product launched in Fall 1996 and Schering-Plough
Corporation's CLARITIN-Registered Trademark- REDITABS-TM- launched in Spring
1997. In addition to DIMETAPP-Registered Trademark- and CLARITIN-Registered
Trademark- REDITABS-TM-, the Company currently produces five other
ZYDIS-Registered Trademark- products, including: 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 sold in Europe and Latin
America. There are currently 12 major products encompassing ZYDIS-Registered
Trademark- technology in different stages of development and regulatory
approval, including Glaxo's ZOFRAN-Registered Trademark- (ondansetron) and
Janssen's MOTILIUM (domperidone). Because patents covering active compounds
in many of 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 license 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 fiscal 1997 revenues of $23.0 million
related to ZYDIS-Registered Trademark- products.
OTHER TECHNOLOGIES. In-vitro development work and, in certain cases clinical
development work, has proceeded for all three 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. The
OPTIDYNE system is a pocket-sized device that delivers precise,
sensation-free droplets of medicine to the eye. Despite its advantages over
conventional dispensers, Scherer decided that the potential development
timetables and financial returns did not warrant the Company's further
investment in this ophthalmic technology. OPTIDYNE was put up for sale in
fiscal 1997 and Scherer is currently negotiating a purchase agreement with a
buyer having a major interest in the eye-care market. Finally, PULSINCAP
technology enables the contents of a capsule to be released at a
predetermined time in contact with a liquid. In March 1997, the Company and
Oxoid Limited entered into a License and Supply agreement covering the
exclusive worldwide use of patented PULSINCAP technology in test kits for the
detection of specific bacterial contamination in foods. The use of the
PULSINCAP capsules in the Oxoid test kits is expected to reduce the time
required to test foods for bacterial contamination by up to one-half, thereby
resulting in considerable cost savings for food manufacturers. The Company
has ceased PULSINCAP development work for pharmaceutical applications.
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, with
the exception of PULSINCAP, the earliest commercialization date for these
technologies would be no earlier than the year 2000.
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ADVANCED THERAPEUTIC PRODUCTS GROUP
The Company believes that changes currently affecting worldwide
pharmaceutical markets will enhance the commercial value of pharmaceutical
products which 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 much of the clinical development of ATP
products and take these products through the regulatory process in the
various markets for its own account. The Company believes that engaging in
the development of products using its technologies is a logical extension of
the Company's expertise in the drug delivery business and is complementary to
its ongoing customer-sponsored drug delivery activities. The Company has
hired key executive and technical personnel with extensive expertise in
pharmaceutical development, clinical testing and regulatory affairs to manage
the activities of ATP. The Company does not intend to build a sales and
marketing infrastructure for ATP products, but rather will license marketing
rights to pharmaceutical companies with well-developed distribution
capabilities. The Company believes that license fees, royalties and/or
profit sharing resulting from the development of ATP products will be
significantly greater than those that can be obtained on customer-directed
work.
ATP products involve the reformulation of existing compounds whose patent
protection has expired or is near expiration. Five products are currently
under 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 already
have established records for safety, toxicity and tolerability.
Initial revenue related to ATP developed products began in Fiscal 1997
resulting from the licensing of ZYDIS-Registered Trademark- selegiline to
Athena Neurosciences, Inc., a unit of Elan Corporation plc. Revenues
related to other ATP products are expected to begin no earlier than fiscal
1999, assuming the development and commercialization of such products is
successful. Expenses associated with ATP totaled $8.0 million in fiscal 1997
and are expected to increase significantly 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.
INTERNATIONAL OPERATIONS
To serve new markets and to meet the needs of its multinational customers,
the Company operates softgel manufacturing facilities in 12 countries
throughout the world and manufactures hardshell capsules in three of these
countries. For financial reporting purposes, 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,
Australia, Japan, Brazil and Argentina. The Company has the flexibility to
transfer some of its production from one plant to another within its
worldwide network. See Note 13 to the consolidated financial statements for
financial information concerning the Company's geographic segments.
Currently, the Company is not subject to significant government restrictions
as to the availability of 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.
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COMPETITION
The Company's various drug delivery technologies compete with a growing
number of new drug delivery technologies and with continued refinements to
existing delivery technologies. Major pharmaceutical companies have become
increasingly interested in the development and commercialization of both
existing and newly developed pharmaceutical products incorporating advanced
drug delivery systems. In recent years, a number of companies have been
formed to develop new drug formulations, products and drug delivery systems,
many of which compete, either directly of indirectly, with the Company's
products or technologies.
The greatest competition to the Company's pharmaceutical softgel dosage form
is from the manufacturers of tablets and hardshell capsules. The Company
believes that the most significant competitive disadvantages of softgel
capsules versus tablets or hardshell capsules are the higher cost of softgels
and the lack of direct control by the originating manufacturers over the
softgel manufacturing process. However, 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 produce softgels internally.
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 and expertise, 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 softgel markets. The Company
is committed to continual investment in people, plant and technology to
further strengthen its competitive position.
Competition in hardshell capsules is comprised primarily of two multinational
pharmaceutical manufacturers each of which have substantially greater assets
and sales than the Company. In addition, the Company competes in various
countries with smaller hardshell manufacturers.
Competition to the Company's ZYDIS-Registered Trademark- quick dissolve drug
delivery systems centers on five drug delivery manufacturers, none of which
has successfully received regulatory approval for or commercialized a
prescription pharmaceutical product. The Company believes that its
ZYDIS-Registered Trademark- technology and proven pharmaceutical
manufacturing capacity places it in a leading position in the quick dissolve
drug delivery segment.
PRODUCT INFORMATION
The Company's business is not dependent upon a single product or a few
products. No product represents 10% or more of the Company's sales.
CUSTOMERS
No material part of the Company's business is considered to be dependent upon a
single customer or a few customers and no single customer represents 10% or more
of the Company's sales.
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SOURCES OF MATERIALS
The principal raw material used in the manufacture of softgels and hardshell
capsules is gelatin. The Company has never experienced any significant
shortage of gelatin or other significant raw materials. 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).
Various regulatory agencies in the United States and elsewhere have been
reviewing the risk of human exposure to a group of diseases known as
transmissible spongiform encephalopathies ("TSEs") from a variety of food and
pharmaceutical products derived from animals, including certain types of
gelatin. Most of the attention on this matter to date has been focused on
gelatin manufactured from parts of cattle imported from countries with
reported cases of one particular form of TSE, bovine spongiform
encephalopathy ("BSE"), commonly referred to as "mad cow disease". There is
no evidence whatsoever that such gelatin could contain the BSE agent, or if
it did, that the human consumption of such gelatin products could result in
transmission of the disease.
In April 1997, a United States Food and Drug Administration ("FDA") advisory
panel recommended that the FDA reinstate a restriction on the use of gelatin
manufactured from bovine materials from certain countries known to have cases
of BSE. The FDA is not obligated to follow recommendations of the advisory
panel, and has not yet expressed its position on, or otherwise acted upon,
such recommendation. Other regulatory bodies, including the World Health
Organization and the European Community Commission have undertaken similar
reviews and implemented various measures regulating the production, export,
and use of gelatin and its source materials. While the Company believes that
a substantial majority of the gelatin it uses will not be affected by these
regulatory measures, it is possible that the supply of certain types of
gelatin could become limited, which may result in an increase in the cost of
gelatin.
Management believes that any effects from the BSE-related gelatin issues will
not be material to the Company's business.
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
fiscal 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 $157.1 million at March 31,
1997, as compared to approximately $ 137.5 million at March 31, 1996. The
Company believes that such backlog of orders at March 31, 1997 is firm and
will be filled within the next 12 months. The increase in the backlog
primarily reflects the strengthening of softgel demand in the United States.
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.
The Company is also generally required to obtain FDA 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.
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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 $27.8 million, $28.1 million and $24.4 million in
fiscal 1997, 1996 and 1995, respectively.
EMPLOYEES
At March 31, 1997, the Company employed approximately 3,500 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: the relative strength of key nutritional products markets; generic
competition to key customer pharmaceutical products; successful formulation,
scale-up, development and commercialization of customer and company products
within the time frame outlined; 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.
8
<PAGE>
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:
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
<S> <C> <C>
Aleksandar Erdeljan 47 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.
Nicole S. Williams 52 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 36 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 44 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 43 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.
Ronald E. Pauli 36 Corporate Controller of the Company since June 1996. Assistant Treasurer of Kmart Corporation
from January 1996 to June 1996, Assistant Controller Financial Planning of Kmart
Corporation from January 1995 to January 1996, Assistant Director Investor Relations of
Kmart Corporation from March 1994 to January 1995 and Assistant Controller Corporate
Reporting of Kmart Corporation from November 1990 to January 1994.
Lori G. Koffman 38 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. Also a director of LifeCell Corporation,
Sinclair Montrose Healthcare plc, Collegiate Health Care, Inc., Mulberry Child Care
Centers, Inc. and iVillage Inc.
Frederick Frank 65 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
Pharmaceutical Product Development, Inc., Physicians Computer Network and Diagnostic
Products, Inc.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
<S> <C> <C>
James A. Stern 46 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,
Cinemark USA, Inc., and AMTROL Inc.
Louis Lasagna, M.D. 74 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 47 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 the Penn Mutual Life
Insurance Company, Hunt Manufacturing Company, Alberto-Culver Company, Quaker Chemical
Corporation and the Wistar Institute.
John E. Avery 68 Director of the Company since January 1995. Formerly Chairman of the Americas Society and
Council of the Americas through December 1996. 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 American Society, Council of Americas and Argentine-American Chamber
of Commerce. Member of the Dean's Council at the Yale University School of Medicine, the
operating board of TCW/Latin America Partners, LLC, and the Council on Foreign Relations.
Kenneth L. Way 57 Director of the Company since January 1997. Chairman and Chief Executive Officer of Lear
Corporation since 1988. Also a director of Comerica Bank.
</TABLE>
(1) Where no starting date is given for a principal occupation or
employment, such occupation or employment commenced prior to 1991.
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 18 principal worldwide
locations with an aggregate floor space of approximately 1.6 million square
feet. Fourteen of these facilities are owned in fee by the Company and four
facilities, with an aggregate floor
10
<PAGE>
space of 537,000 square feet, are leased. The U.S. softgel manufacturing
facilities total three, of which two totaling approximately 100,000 square
feet, are leased. The 15 foreign manufacturing facilities include 13 owned
facilities with an aggregate floor space of 930,000 square feet and two
leased facilities with 429,000 square feet aggregate floor space.
Approximately 90% of the foreign facilities primarily manufacture softgels
and other dosage delivery systems, while 10% of the foreign facilities
produce hardshell capsules. The foreign facilities are located in Argentina,
Australia, Brazil, Canada, France, Germany (three facilities), Italy (two
facilities), Japan, South Korea and the United Kingdom (three facilities).
Portions of these facilities are also used for related research and
development, administration and warehousing activities.
The Company's primary leased facility, a German manufacturing facility of
approximately 389,000 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 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 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.
11
<PAGE>
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, 1997.
12
<PAGE>
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, 1997:
First Quarter $45.00 $39.00
Second Quarter $50.63 $39.50
Third Quarter $51.13 $43.38
Fourth Quarter $62.00 $49.50
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
The Company had 153 common shareholders of record at June 25, 1997.
The Company did not declare any dividends in the two year period ended March
31, 1997. Restrictions contained in certain of the Company's long-term debt
agreements limit the payment of dividends. The Company does not have any
present plans to declare or pay cash dividends.
13
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
______________________________________________________
1997 1996 1995 1994 1993
______________________________________________________
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA (1):
Net sales ....................................................... $588,699 $571,710 $536,682 $449,297 $398,011
Cost of sales ................................................... 391,648 375,088 339,923 287,389 242,108
Selling and administrative expense .............................. 72,752 72,485 71,661 61,427 56,413
Research and development expense ................................ 19,979 23,387 21,276 13,090 11,393
Restructuring and other charges (2).............................. - 33,804 - 4,478 -
Operating income (2)............................................. 104,320 66,946 103,822 82,913 88,097
Interest expense ................................................ 11,693 12,595 13,758 22,480 25,436
Net income (loss) from continuing operations .................... 56,968 30,703 44,859 30,914 28,960
Net income (loss) (3) ........................................... 56,968 30,703 44,859 15,094 20,895
Depreciation and amortization (4) ............................... 31,153 29,944 27,449 25,314 22,678
Capital additions ............................................... 69,887 56,195 54,076 39,503 33,192
PER COMMON SHARE:
Net income (loss) from continuing operations (2) ................ $2.31 $1.25 $1.83 $1.27 $1.20
Net income (loss) ............................................... 2.31 1.25 1.83 0.62 0.86
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (5) ............................................. $113,854 $110,794 $113,656 $ 89,681 $ 82,874
Total assets .................................................... 728,245 707,381 711,373 613,414 532,184
Long-term debt, including current portion ....................... 142,630 169,000 185,410 189,277 142,508
Minority interests .............................................. 35,762 37,268 42,706 35,354 32,369
Shareholders' equity ............................................ 353,029 300,360 273,646 214,710 203,001
</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 relocation
of operations in Australia.
(3) Includes extraordinary loss of $15.8 million from debt extinguishment
for the year ended March 31, 1994 and an 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.
(4) Includes amortization of deferred financing costs and debt discount of
$0.3 million, $0.4 million, $0.5 million, $1.3 million and $1.8
million for the years ended March 31, 1997, 1996, 1995, 1994 and
1993, respectively.
(5) Includes notes payable but does not include current portion of
long-term debt.
14
<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, 1997, 1996 and 1995.
A majority of the Company's sales, income and cash flows is derived from its
international operations. 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 13 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, 1997 AND 1996
SALES for the fiscal year ended March 31, 1997 were $588.7 million, a 3%
increase versus the $571.7 million reported in the prior year. The stronger
U.S. dollar relative to most foreign currencies reduced fiscal 1997 sales as
compared to the prior fiscal year. Measured using constant foreign exchange
rates, fiscal 1997 sales increased 6%. The current year sales increase
resulted primarily from a 40% increase in Zydis revenues and strong gains in
Vitamin E and health and nutritional ("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 46% decline in
world-wide sales of nifedipine and flat SANDIMMUNE-Registered Trademark- /
NEORAL-Registered Trademark- volume as compared to the prior year which
included pipeline loading related to the U.S. launch of NEORAL-Registered
Trademark-.
GROSS MARGIN was $197.1 million, or 33.5% of sales, in fiscal 1997 versus
$196.6 million, or 34.4% of sales in the prior fiscal year. The lower gross
margin rate in fiscal 1997 was due to a higher proportion of lower margin H&N
product in the sales mix, including a 46% increase in sales of Vitamin E
softgels, and to a decline in sales of higher-margin pharmaceutical softgels
in Europe resulting from the continuing weakness of key economies and from
budgetary measures aimed at reducing government pharmaceutical spending.
SELLING AND ADMINISTRATIVE EXPENSES ("SG&A") were $72.8 million, or 12.4% of
sales, in fiscal 1997 compared to the $72.5 million, or 12.7% of sales,
reported in the prior fiscal year. The improvement in the SG&A ratio was
largely attributable to cost savings resulting from the fiscal 1997 closing
of two softgel facilities and the elimination of certain administrative,
marketing and development staff positions at other locations, partially
offset by increased spending in North America and France.
15
<PAGE>
NET RESEARCH AND DEVELOPMENT EXPENSE ("R&D") was $20.0 million in fiscal
1997, a decrease of $3.4 million from fiscal 1996 expenditures of $23.4
million. While gross recurring softgel R&D expenses exceeded prior year
levels, reduced PULSINCAP-TM- expenditures and a $3.1 million increase in
customer reimbursement resulted in lower net recurring R&D expense versus
fiscal 1996. R&D expense related to the Company's Advanced Therapeutic
Products group ("ATP") was $8.0 million and $8.5 million in fiscal 1997 and
1996, respectively. ATP is engaged in the development of pharmaceutical
products incorporating off-patent drugs in the Company's proprietary drug
delivery technologies.
OPERATING INCOME was $104.3 million for fiscal 1997 as compared to the $100.8
million, exclusive of restructuring and other special charges, reported in
the prior fiscal year. On this same basis, fiscal 1997 operating income
increased 4%, and increased 6% on a constant exchange rate basis. Fiscal
1997 operating income comparisons primarily reflect the benefit of cost
reduction efforts and increased customer reimbursement of softgel R&D
expense, partially offset by lower gross profit margins.
NET INTEREST EXPENSE was $8.8 million in fiscal 1997 versus the $10.3 million
reported in the prior fiscal year. The $1.5 million decline in net interest
expense in fiscal 1997 resulted primarily from favorable short-term interest
rates and lower average debt levels during fiscal 1997, reflecting the
Company's ability to fund capital investment with internally generated funds.
INCOME TAX EXPENSE was $26.3 million with an effective rate of 28% in fiscal
1997 as compared with $11.7 million with an effective rate of 21% in fiscal
1996. The prior year effective income tax rate benefited from a favorable
income tax adjustment of $3.8 million resulting primarily from resolution of
an Australian tax issue and also included certain tax benefits resulting from
the restructuring. Exclusive of such items, the Company's consolidated
effective income tax rate in fiscal 1996 approximated 29%. On this
comparable basis, the slightly lower effective income tax rate in fiscal 1997
reflects changes in the geographic mix of pretax income and the utilization
of foreign tax credits and other tax benefits.
MINORITY INTERESTS in the earnings of less than wholly-owned subsidiaries was
$12.3 million in fiscal 1997 as compared to $14.3 million in fiscal 1996.
The reduction in minority interests was due primarily to a decline in
earnings of the Company's less-than-wholly-owned subsidiary in Germany.
NET INCOME was $57.0 million, or $2.31 per share, for the year ended March
31, 1997 as compared to net income of $50.2 million, or $2.04 per share, in
fiscal 1996, before the effects of the fiscal 1996 restructuring and other
special items. Such 13% increase in net income resulted primarily from
increased sales and resulting gross margin, increased customer reimbursement
of softgel R&D expense, lower net interest expense and a reduction in
minority interests. The strengthening of the U.S. dollar had the effect of
reducing net income by $0.07 per share in the year ended March 31, 1997, as
compared to the prior fiscal year. After the effects of the restructuring
and other special items, fiscal 1996 net income was $30.7 million, or $1.25
per share.
FINANCIAL OUTLOOK
The Company's business strategy is focused on strengthening its presence and
capabilities in the pharmaceutical industry. Execution of this strategy will
continue to require significant outlays for development and manufacturing
resources, including new staff and state-of-the-art pharmaceutical
development and production facilities. These costs will, to a large extent,
precede the related revenues from anticipated pharmaceutical product sales
and, therefore, will continue to impact the Company's operating results for
fiscal year 1998 and thereafter.
In addition to the substantial incremental infrastructure costs supporting
the Company's pharmaceutical strategy, a number of other factors are expected
to influence sales and earnings growth in fiscal 1998.
16
<PAGE>
These factors include the recent strength of the U.S. dollar as compared to
that experienced in fiscal 1997, the weak pharmaceutical and economic
environments in certain European markets as well as the precise timing of new
product launches, the conclusion of certain ATP licensing agreements and the
timing and extent of ATP clinical trial expenditures.
FISCAL YEARS ENDED MARCH 31, 1996 AND 1995
SALES for the fiscal year ended March 31, 1996 were $571.7 million, a 7%
increase over sales of $536.7 million in fiscal year 1995. A portion of the
fiscal 1996 sales increase resulted from the comparative weakness of the U.S.
dollar relative to key foreign currencies during most of fiscal 1996.
Exclusive of this effect, fiscal 1996 sales increased 3% on a constant
exchange rate basis. The majority of the sales gain resulted from a 13%
increase in pharmaceutical softgel revenues, which comprised nearly one-half
of fiscal 1996 sales. Commercialization of the Company's Zydis
fast-dissolving drug delivery device also progressed, with sales increasing
40% to $16.2 million in fiscal 1996. However, fiscal 1996 sales growth was
dampened by a 2% decline in sales of non-pharmaceutical softgel products,
primarily H&N softgels, as a result of the weakness of Europe and other key
markets.
GROSS MARGIN was $196.6 million, or 34.4% of sales, in fiscal 1996 versus
$196.8 million, or 36.7% of sales in the prior fiscal year. The lower gross
margin rate in fiscal 1996 was due primarily to increased staffing and fixed
costs, including a $2.6 million increase in depreciation expense resulting
from new and upgraded manufacturing facilities; and to reduced product
pricing and sub-optimal capacity utilization resulting from competitive and
market forces. These factors were partially offset by a shift in the sales
mix to higher margin pharmaceutical products.
SELLING AND ADMINISTRATIVE EXPENSES of $72.5 million, or 12.7% of sales, were
essentially unchanged in fiscal 1996 compared to the $71.7 million, or 13.4%
of sales, reported in the prior fiscal year.
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 plan included the closure of
softgel manufacturing plants in Windsor, Canada and Neuvic, France, as well
as the consolidation and elimination of administrative, marketing and
development staff positions in several other locations. A total of about 250
people were 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 3 to the consolidated financial statements), the
Company recorded a pre-tax provision of $33.8 million in fiscal 1996,
comprised of $17.1 million in cash expenses primarily for severance and other
employee termination benefits and $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 $23.1 million, or $0.94 per common share. The
restructuring was completed in fiscal 1997 with the final cost of the program
approximating the Company's original estimate.
NET RESEARCH AND DEVELOPMENT EXPENSE was $23.4 million in fiscal 1996, an
increase of $2.1 million. The fiscal 1996 increase resulted from a 42%, or
$2.5 million, increase in spending by the Company's ATP group.
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 was $100.8 million, $3.0 million,
or 3%, below the prior year. The $3.0 million decrease in fiscal 1996
operating income resulted primarily from increased R&D spending by the ATP
group.
NET INTEREST EXPENSE was $10.3 million in fiscal 1996 versus the $12.2
million reported in the prior fiscal year. The decline in interest expense
resulted from both lower average debt levels during fiscal 1996 and to an
increase in interest costs capitalized on major construction projects.
17
<PAGE>
MINORITY INTERESTS in the earnings of less than wholly-owned subsidiaries was
$14.3 million in fiscal 1996 as compared to $16.4 million in fiscal 1995.
The reduction in minority interests was primarily attributable to the
restructuring and other special charges, a portion of which related to
minority owned subsidiaries and, to a lesser extent, a decline in earnings of
the Company's less-than-wholly-owned subsidiary in Japan.
INCOME TAX EXPENSE was $11.7 million with an effective rate of 21% in fiscal
1996 as compared with $30.4 million with an effective rate of 33% in fiscal
1995. The effective income tax rate in fiscal 1996 benefited from a
favorable income tax adjustment of $3.8 million, primarily related to the
resolution of an Australian tax audit 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 29% of pretax income, versus 33%
of pretax income in the prior fiscal year. The lower effective income tax
rate in fiscal 1996 reflected changes in the geographic mix of pretax income,
better utilization of foreign and other tax credits and the benefits derived
from various tax planning strategies.
NET INCOME was $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
and the income tax reserve adjustment discussed above, fiscal 1996 net income
was $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
reflected 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 weaker U.S.
dollar increased earnings by $.04 per common share for fiscal 1996 as
compared to the prior fiscal year.
GEOGRAPHIC SEGMENT INFORMATION
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
--------------------------------------------
1997 % CHANGE 1996(1) % CHANGE 1995
---- -------- ------- -------- ----
<S> <C> <C> <C> <C> <C>
Sales:
United States $174,903 24.0 $141,100 9.5 $128,912
Europe 307,793 (3.7) 319,540 5.7 302,172
Other International 106,003 (4.6) 111,070 5.2 105,598
-------- -------- --------
Net sales $588,699 3.0 $571,710 6.5 $536,682
-------- -------- --------
-------- -------- --------
Operating Income:
United States $36,667 7.1 $ 34,239 15.6 $ 29,612
Europe 59,812 (4.6) 62,677 (6.4) 66,973
Other International 20,743 2.6 20,221 (5.6) 21,411
Unallocated (12,902) (21.3) (16,387) 15.6 (14,174)
------- -------- --------
Operating income $104,320 3.5 $100,750 (3.0) $103,822
------- -------- --------
------- -------- --------
</TABLE>
(1) Fiscal 1996 operating income excludes restructuring and other charges.
UNITED STATES OPERATIONS consist of three softgel manufacturing facilities in
St. Petersburg, Florida, including a main plant focused on pharmaceutical and
over-the-counter ("OTC") softgel products and separate softgel production
facilities dedicated to the production of H&N softgel products and to
recreational paintball and cosmetic products. The Company's United States
operations generated a 24% sales gain in fiscal 1997, 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 fiscal 1997 change resulted from a 42% increase in
nutritional softgel sales, driven primarily by increased sales of Vitamin E
softgel products resulting from favorable publicity regarding this product's
health benefits. Total U.S. pharmaceutical softgel sales increased 3% versus
the year ago period as an 11% increase in OTC pharmaceutical softgel sales
resulting from fiscal 1997 OTC launches and a full year sales for the several
OTC products launched in the prior year, partially offset reduced sales of
nifedipine due to that product's continuing sales decline. In the prior
fiscal year, sales by the Company's United States operations increased 9% to
$141.1 million. Fiscal 1996 United States sales of pharmaceutical products
rose 12%, paced by strong sales of Abbott Laboratories HYTRIN prescription
drug for the treatment of hypertension and benign prostate enlargement,
following its launch in
18
<PAGE>
softgel form in the latter part of fiscal 1995. Sales of OTC softgel
products also increased significantly during fiscal 1996 as a result of
continued strong demand for branded cough/cold and other OTC softgels,
including the launch of several new branded products. Sales of H&N softgel
products increased 17% in fiscal 1996, in spite of a decline in sales of
low-margin Vitamin E softgels due to weak consumer demand as a result of
adverse publicity during fiscal 1996.
Fiscal 1997 operating income from United States operations increased 7%, or
$2.4 million, yielding a 21.0% operating margin as compared with 24.3% in the
prior year, exclusive of fiscal 1996 restructuring and other charges. The
increase in operating income resulted primarily from the strength of H&N
softgel sales; however, operating margin was impeded by these products' lower
margin. Exclusive of restructuring and other charges, fiscal 1996 operating
income from United States operations increased 16%, or $4.6 million,
primarily due to the 9% sales increase and a shift in the product mix to
higher-margin pharmaceutical softgels as a result of both new product
launches and reduced demand for Vitamin E.
EUROPEAN OPERATIONS consist of softgel manufacturing facilities in France,
Italy and Germany, of softgel and Zydis production facilities in the United
Kingdom and a hardcapsule manufacturing facility in Germany. The region's
softgel and hardshell operations are coordinated through a European
headquarters located in Baar, Switzerland. Sales of the Company's European
segment declined 4% in fiscal 1997, and were flat on a constant dollar basis,
as strong United Kingdom H&N sales gains were offset by weak sales throughout
continental Europe. Fiscal 1997 sales of the Company's German operations
were adversely influenced by lower sales of nifedipine, by comparison against
the prior year first-half launch of NEORAL-Registered Trademark- in the
United States, and by weak first-half OTC pharmaceutical softgel sales.
Economic weakness throughout continental Europe contributed to an 18%
decrease in sales of cosmetic and H&N softgel products in the region. Fiscal
1996 sales of the Company's European segment increased 6%, to $319.5 million,
from $302.2 million in fiscal 1995. A majority of the fiscal 1996 sales
growth resulted from strong pharmaceutical product sales and the financial
statement effect of the weaker average U.S. dollar. The most significant
product sales advance related to SANDIMMUNE-Registered Trademark- and
NEORAL-Registered Trademark- CYCLOSPORIN-A softgels, which are produced by
the Company for Novartis Ltd. Sales of SANDIMMUNE-Registered Trademark- and
NEORAL-Registered Trademark- grew nearly 40% in fiscal 1996, primarily as a
result of the U.S. Food and Drug Administration granting marketing approval
for NEORAL-Registered Trademark- in July 1995. Fiscal 1996 sales growth in
Europe was restrained by generally weak nutritionals markets. Markets
serviced by the Company's United Kingdom softgel operation, where sales
declined 12%, were especially weak experiencing both lower demand for
nutritional products at the consumer level and, to a lesser extent, reduced
pricing in response to competitive pressures.
As a result of the weak fiscal 1997 sales described above, European operating
income decreased 5%, and was flat in constant dollars, in fiscal 1997, and the
operating margin fell to 19.4% of sales versus 19.6% of sales in fiscal 1996.
Fiscal 1996 operating income decreased 6%, largely as a result of lower
profitability in the Company's United Kingdom softgel operation.
OTHER INTERNATIONAL OPERATIONS represent softgel business units operating in
Japan, Korea, Australia, Brazil and Argentina and hardcapsule facilities in
Canada and Brazil. Fiscal 1997 sales of the Company's Other International
segment declined 5% versus the prior fiscal 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, partially offset by strong H&N
sales in Australia and Japan. Excluding the effect of Canadian softgels,
Other International sales on a constant dollar basis increased 8% due
primarily to the strengthening of H&N softgel markets in Australia and Japan
and strong demand for the Company's hardshell capsules. The Company's Other
International segment reported fiscal 1996 sales of $111.1 million, a 5%
increase over fiscal 1995 sales. A majority of the fiscal 1996 sales
increase was produced by the Company's Argentinean softgel operation and the
Canadian hardshell capsule division. Fiscal 1996 sales of other operations
in this geographic segment increased marginally as growth was constrained by
the impact of recessionary and competitive conditions on nutritional softgel
sales in Japan and Australia and lower Canadian softgel sales.
19
<PAGE>
The Other International group's fiscal 1997 operating margin increased to
19.6% of sales versus 18.2% of sales last year due to improved profitability
in Australia, Japan and the hardshell business as well as the spring 1996
closing of the less profitable Canadian softgel facility. Fiscal 1996
operating income decreased 6% due primarily to declining profitability at the
Canadian softgel facility and weakness in Japan and Australian H&N markets,
partially offset by strong growth in the Canadian hardshell manufacturing
plant.
CASH FLOWS
CASH AND CASH EQUIVALENTS increased by $3.9 million in fiscal 1997, as
compared with a decrease of $12.7 million and an increase of $17.1 million in
fiscal 1996 and 1995, respectively.
NET CASH PROVIDED BY OPERATIONS totaled $106.7 million, $75.5 million and
$89.2 million during fiscal years 1997, 1996 and 1995, respectively. The
$31.2 million improvement in operating cash flow in fiscal 1997 resulted
primarily from increased income, a reduction in taxes receivable and modest
growth in working capital requirements as working capital freed by the
closing of two facilities was shifted to faster growing segments of the
business. Cash provided by operations decreased $13.7 million in fiscal 1996
due primarily to increased value-added and other tax-related receivables,
partially offset by increased earnings before restructuring and other non-cash
charges.
NET CASH USED BY INVESTING activities was $67.4 million, $59.1 million and
$54.8 million for fiscal 1997, 1996 and 1995, respectively. In all periods
presented, net cash used by investing activities is comprised primarily of
capital expenditures for expansion or improvement of dedicated,
"best-in-class" pharmaceutical softgel facilities and for the
ZYDIS-Registered Trademark-production facility in the United Kingdom as well
as for general facility and equipment upgrades and renovations. Fiscal 1997
expenditures focused on the expansion and upgrade of softgel production
facilities in France and Japan and the addition of ZYDIS-Registered
Trademark- production capacity. Fiscal 1996 softgel expenditures included
outlays resulting from the modernization initiative in France and the major
upgrade and renovation of the German softgel facility. Fiscal 1995 softgel
activities included expenditures in North America related to the completion
of a dedicated nutritional softgel product facility, in France for the
initial expansion and upgrade of softgel production facilities and in
Australia for the construction of a replacement manufacturing facility.
NET CASH USED BY FINANCING ACTIVITIES was $34.2 million, $27.3 million and
$20.4 million in fiscal 1997, 1996, and 1995, respectively. The Company's
financing activities primarily include net borrowings under the Company's
bank credit facilities and dividends paid to minority shareholders of
subsidiaries. Net repayments on the Company's bank credit facility total
$23.2 million, $13.3 million and $8.5 million in fiscal 1997, 1996 and 1995,
respectively. Dividends paid to holders of minority interests in
subsidiaries were $8.2 million, $13.5 million and $11.5 million in fiscal
1997, 1996 and 1995, respectively. The decline in dividends paid to holders
of minority interests in fiscal 1997 was primarily a result of lower
profitability in Germany during fiscal 1996.
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 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 $28.2 million at March 31, 1997 and
amounts available under existing bank credit facilities totaling $174.1
million at March 31, 1997 will be adequate to meet anticipated capital
investment, working capital, stock repurchase and debt service requirements.
The Company does not currently have plans to declare or pay cash dividends.
At March 31, 1997 the Company's debt-to-equity ratio was 32%. The Company
has as one of its long-term financial objectives maintenance of a
debt-to-equity ratio within the range of 35% to 40%.
Capital expenditures are currently anticipated to approximate $90 million in
each of fiscal 1998 and fiscal 1999 and to decline to a lower level per year
thereafter. Such expenditures will be used to upgrade and expand the
20
<PAGE>
"best-in-class" pharmaceutical softgel production facilities in France,
Japan, Germany and the United States to meet anticipated customer demand and
to ensure compliance with increasingly stringent pharmaceutical Good
Manufacturing Practices (GMP) standards worldwide. In addition, a
significant portion of capital spending will include the further expansion of
production facilities for the ZYDIS-Registered Trademark- advanced drug
delivery system. As of March 31, 1997, the Company had approximately $17.8
million of commitments for future capital expenditures.
The Company will also continue to increase its spending for 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
demonstrate therapeutic and cost benefits over existing therapies. Through
ATP, the Company intends to capitalize upon these trends by creating new
products which reformulate existing compounds utilizing the Company's
proprietary drug delivery technologies. Expenses associated with ATP totaled
$8.0 million in fiscal 1997 and are expected to increase significantly 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
over its stated long-term objective of 35% to 40%.
At March 31, 1997, the Company's outstanding long-term indebtedness consisted
of approximately $99.5 million of 6 3/4% senior notes (net of a $0.5 million
discount) due in February 2004, $28.5 million of borrowings under the
Company's bank credit facility, $6.4 million of industrial development
revenue bonds and approximately $8.2 million of other indebtedness.
The Company's bank credit facility provides access to revolving credit
borrowings, in various currencies, totaling $175.0 million and expires April
1, 1999. At March 31, 1997, the Company had outstanding $28.5 million under
the bank credit facility. 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%. Pursuant to other revolving
credit arrangements, the Company may borrow up to $28.3 million. As of March
31, 1997, the Company had outstanding $0.7 million under these revolving
credit arrangements.
See Notes 2 and 15 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 February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128")
and Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" ("FAS 129"). Both statements are
effective for fiscal years ending after December 15, 1997. FAS 128
supersedes existing generally accepted
21
<PAGE>
accounting principles relative to the calculation of earnings per share and
requires restatement of all prior period earnings per share information upon
adoption. Generally, FAS 128 requires a calculation of basic earnings per
share, which takes into consideration income available to common shareholders
and the weighted average of common shares outstanding. FAS 128 also requires
the calculation of a diluted earnings per share, which takes into effect the
impact of all additional common shares that would have been outstanding if
all dilutive potential common shares relating to options, warrants, and
convertible securities had been issued, as long as their effect is dilutive,
with a related adjustment of income available for common shareholders, as
appropriate. FAS 128 requires dual presentation of basic and diluted
earnings per share on the face of the statement of operations and requires a
reconciliation of the numerator and denominator of the basic earnings per
share computation. FAS 129 requires, among other disclosure requirements, a
reconciliation of the numerators and denominators of the basic and diluted
per share calculations and a description of transactions which occur after
the end of the reporting period but before the issuance of the financial
statements which would have materially changed the number of common, or
potential common, shares outstanding. The Company does not expect the effect
of its adoption of FAS 128 or FAS 129 to be material.
22
<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,
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $588,699 $571,710 $536,682
Cost of sales 391,648 375,088 339,923
Selling and administrative expenses 72,752 72,485 71,661
Restructuring and other charges (Note 3) - 33,804 -
Research and development expenses, net 19,979 23,387 21,276
------- -------- --------
Operating income 104,320 66,946 103,822
Interest expense 11,693 12,595 13,758
Interest earned and other (2,885) (2,281) (1,523)
------- -------- --------
Income before income taxes and
minority interests 95,512 56,632 91,587
Income taxes 26,275 11,655 30,352
Minority interests 12,269 14,274 16,376
------- -------- --------
Net income $56,968 $30,703 $44,859
------- -------- --------
------- -------- --------
Per Common and Common Equivalent Share:
Net income $2.31 $1.25 $1.83
------- -------- --------
------- -------- --------
The accompanying notes are an integral part of this statement.
</TABLE>
23
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(IN THOUSANDS)
AS OF MARCH 31,
----------------------
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,955 $ 21,007
Short-term investments 3,262 4,880
Receivables, less reserves of: 1997 - $3,500,000
1996 - $4,800,000 127,717 129,472
Inventories 59,280 59,718
Other current assets 8,620 6,659
-------- --------
223,834 221,736
-------- --------
PROPERTY:
Property, plant and equipment, at cost 439,069 411,396
Accumulated depreciation and reserves (119,895) (124,676)
-------- --------
319,174 286,720
-------- --------
OTHER ASSETS:
Goodwill and intangibles, net of amortization 168,772 175,622
Other assets 16,465 23,303
-------- --------
185,237 198,925
-------- --------
$728,245 $707,381
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 1,499 $ 5,834
Accounts payable 61,026 57,985
Accrued liabilities 37,329 41,839
Accrued income taxes 10,934 9,632
-------- --------
110,788 115,290
-------- --------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 141,822 164,652
Other long-term liabilities 50,758 57,329
Deferred income taxes 36,086 32,482
Minority interests in subsidiaries 35,762 37,268
-------- --------
264,428 291,731
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock, 500,000 shares authorized, none issued - -
Common stock, $.01 par value, 50,000,000 shares
authorized, shares issued: 1997 - 23,568,255;
1996 - 23,460,453 236 235
Additional paid-in capital 242,500 239,705
Retained earnings 122,673 65,705
Currency translation adjustment (12,380) (5,285)
-------- --------
353,029 300,360
-------- --------
$728,245 $707,381
-------- --------
-------- --------
The accompanying notes are an integral part of this statement.
</TABLE>
24
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 56,968 $ 30,703 $ 44,859
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 25,131 23,586 20,998
Amortization of intangible assets and debt discount 6,022 6,358 6,451
Non-cash restructuring and other charges (Note 3) - 16,690 -
Minority interests in net income 12,269 14,274 16,376
Deferred tax provision and other 7,130 (10,942) 3,579
Increase in receivables (3,823) (13,865) (10,626)
(Increase) decrease in inventories and other current assets (2,306) 4,763 (3,936)
Increase in accounts payable and accrued liabilities 5,347 3,948 11,465
-------- -------- --------
Net cash provided by operating activities 106,738 75,515 89,166
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (69,887) (56,195) (54,076)
Other 2,488 (2,906) (779)
-------- -------- --------
Net cash used by investing activities (67,399) (59,101) (54,855)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from other long-term borrowings 32,363 29,585 70,255
Other long-term debt retirements and payments (57,628) (42,649) (78,726)
Short-term borrowings, net (729) (721) (439)
Cash dividends paid to minority shareholders of subsidiaries (8,214) (13,504) (11,528)
-------- -------- --------
Net cash used by financing activities (34,208) (27,289) (20,438)
-------- -------- --------
Effect of currency translation on cash and cash equivalents (1,183) (1,833) 3,266
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,948 (12,708) 17,139
Cash and cash equivalents, beginning of year 21,007 33,715 16,576
-------- -------- --------
Cash and cash equivalents, end of year $ 24,955 $ 21,007 $ 33,715
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of year $ 235 $ 233 $ 233
Issuance of common stock for stock option exercises 1 2 -
-------- -------- --------
Balance at end of year $ 236 $ 235 $ 233
======== ======== ========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year $239,705 $235,383 $234,157
Stock options exercised, net of related tax effects 2,795 4,322 557
Compensation expense related to stock options granted - - 669
-------- -------- --------
Balance at end of year $242,500 $239,705 $235,383
======== ======== ========
RETAINED EARNINGS (DEFICIT):
Balance at beginning of year $ 65,705 $ 35,002 $ (9,857)
Net income 56,968 30,703 44,859
-------- -------- --------
Balance at end of year $122,673 $ 65,705 $ 35,002
======== ======== ========
CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of year $ (5,285) $ 3,028 $ (9,823)
Adjustment for the year (7,095) (8,313) 12,851
-------- -------- --------
Balance at end of year $(12,380) $ (5,285) $ 3,028
======== ======== ========
TOTAL SHAREHOLDERS' EQUITY $353,029 $300,360 $273,646
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
26
<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.
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 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.
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 a net decrease in income of $0.1 million for the year ended March 31,
1997, a net increase of $0.2 million in fiscal 1996 and a net decrease of
$2.8 million in 1995. Aggregate sales of operations in highly inflationary
economies represented less than 5% of consolidated sales for each period
presented in the consolidated statement of income.
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 15 for further discussion).
27
<PAGE>
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 $8.0 million, $4.7
million and $3.1 million were received for the fiscal years ended March 31,
1997, 1996 and 1995, respectively. Research and development expenses
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 the parent and earnings of
subsidiary companies which are intended to be remitted to the parent company
in the future. Unremitted earnings of subsidiary companies 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 24,668,752, 24,535,222 and 24,518,528 shares for the years ended
March 31, 1997, 1996 and 1995, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128")
and Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" ("FAS 129"). Both statements are
effective for fiscal years ending after December 15, 1997. FAS 128
supersedes existing generally accepted accounting principles relative to the
calculation of earnings per share and requires restatement of all prior
period earnings per share information upon adoption. Generally, FAS 128
requires a calculation of basic earnings per share, which takes into
consideration income available to common shareholders and the weighted
average of common shares outstanding. FAS 128 also requires the calculation
of a diluted earnings per share, which takes into effect the impact of all
additional common shares that would have been outstanding if all dilutive
potential common shares relating to options, warrants, and convertible
securities had been issued, as long as their effect is dilutive, with a
related adjustment of income available for common shareholders, as
appropriate. FAS 128 requires dual presentation of basic and diluted
earnings per share on the face of the statement of operations and requires a
reconciliation of the numerator and denominator of the basic earnings per
share computation. FAS 129 requires, among other disclosure requirements, a
reconciliation of the numerators and denominators of the basic and diluted
per share calculations and a description of transactions which occur after
the end of the reporting period but before the issuance of the financial
statements which would have materially changed the number of common, or
potential common, shares outstanding. The Company does not expect the effect
of its adoption of FAS 128 or FAS 129 to be material.
CASH EQUIVALENTS - For purposes of reporting cash flows, all highly liquid
investments which are readily convertible to known amounts of cash and which
have a 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.
28
<PAGE>
The components of inventories are as follows:
(IN THOUSANDS) 1997 1996
-------- --------
Raw materials and supplies $ 32,886 $ 30,892
Work in process 8,604 10,593
Finished goods 17,790 18,233
-------- --------
$ 59,280 $ 59,718
======== ========
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 $2.1 million, $3.1 million and $1.2 million in
fiscal years 1997, 1996 and 1995, respectively. A summary of property, plant
and equipment follows:
(IN THOUSANDS) 1997 1996
-------- --------
Land and improvements $ 17,772 $ 18,582
Building and equipment 99,011 106,685
Machinery and equipment 277,310 259,437
Construction in progress 44,976 26,692
-------- --------
$439,069 $411,396
======== ========
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, totaling $2.5 million and $3.2
million net of accumulated amortization as of March 31, 1997 and 1996,
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. The accumulated amortization of goodwill and other
intangibles is $43.6 million and $40.7 million as of March 31, 1997 and 1996,
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.
29
<PAGE>
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. RESTRUCTURING AND OTHER CHARGES
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 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 was completed by mid-fiscal 1997.
As a result of the Restructuring, the Company's total work force was reduced
by approximately 250 employees, or 7%. The Restructuring was completed in
fiscal 1997 with the final cost of the program approximating the Company's
original estimate.
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 represented cash
charges and $16.7 million represents non-cash charges.
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.
A summary of fiscal 1997 activity related to the restructuring reserve
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) ORIGINAL UTILIZED UTILIZED BALANCE AT
RESERVE IN FISCAL 1996 IN FISCAL 1997 MARCH 31, 1997
-------- -------------- -------------- --------------
<S> <C> <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>
30
<PAGE>
4. 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 representative of actual
tax rates.
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income before income taxes and minority
interests
United States $ 26,641 $ 12,536 $ 10,105
Foreign 68,871 44,096 81,482
-------- -------- --------
$ 95,512 $ 56,632 $ 91,587
======== ======== ========
Provision for currently payable
income taxes:
United States $ 1,697 $ 4,516 $ 5,443
Foreign 17,884 17,374 23,161
-------- -------- --------
19,581 21,890 28,604
-------- -------- --------
Provision (credit) for deferred
income taxes:
United States 6,319 (8,772) (6)
Foreign 375 (1,463) 1,754
-------- -------- --------
6,694 (10,235) 1,748
-------- -------- --------
Total income taxes $ 26,275 $ 11,655 $ 30,352
======== ======== ========
</TABLE>
The deferred tax provision for fiscal 1997 includes a net $3.7 million credit
resulting from a decrease in deferred tax valuation allowances, as well as a
$0.2 million charge resulting from changes in enacted statutory tax rates in
certain countries. The deferred tax provision for fiscal 1996 included a net
$5.6 million credit resulting from a decrease in deferred tax valuation
allowances. The deferred tax provision for fiscal year 1995 included 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 components of deferred
taxes as of March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
---------------------------- ----------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Property, plant and equipment $ 2,690 $ 48,351 $ 3,518 $ 40,609
Foreign and other tax credit carryforwards 8,732 - 10,417 -
Capital loss carryforwards 6,379 - 6,379 -
Restructuring and other charges (Note 3) - - 6,866 -
Pensions and other postretirement benefits 6,341 803 6,736 849
Stock options 3,610 - 3,843 -
Defeasance of debt 1,524 - 1,929 -
Miscellaneous other 6,466 63 4,495 2,762
-------- -------- -------- --------
Subtotal 35,742 49,217 44,183 44,220
Valuation allowances (16,322) - (20,068) -
-------- -------- -------- --------
Total deferred taxes $ 19,420 $ 49,217 $ 24,115 $ 44,220
======== ======== ======== ========
</TABLE>
At March 31, 1997, net current future tax benefits of $2.8 million were
included in other current assets, $3.5 million of net long-term future tax
benefits were included in other assets and $36.1 million of net long-term
liabilities were reflected in the accompanying consolidated statement of
financial position. 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.
31
<PAGE>
The capital loss carryforwards noted above expire in 2001. The foreign tax
credit carryforwards noted above expire through 1998. At March 31, 1997,
foreign earnings of approximately $97.6 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,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
United States statutory tax $ 33,429 $ 19,821 $ 32,056
Increases (reductions) in taxes due to:
Difference in effective foreign tax rates (1,032) (1,883) (3,620)
Foreign tax credit carryforwards utilized (3,416) (1,452) (1,330)
Other tax credit generation (utilization) 1,200 (1,148) -
Goodwill amortization 1,481 1,532 1,532
Translation losses (581) (12) 1,739
Changes in valuation allowances
and other items, net (4,806) (5,203) (25)
-------- -------- --------
Consolidated income taxes $ 26,275 $ 11,655 $ 30,352
======== ======== ========
</TABLE>
Income tax payments, net of refunds, were $3.1 million, $24.6 million and
$19.2 million for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
5. SHORT-TERM BORROWINGS AND LINES OF CREDIT
At March 31, 1997, the Company had short-term line of credit arrangements
with foreign banking institutions under which the Company and its
subsidiaries may borrow up to $28.3 million, subject to limitations imposed
by the bank credit facility (Note 7). There are no compensating balance
requirements related to these lines of credit. The total indebtedness
outstanding under such arrangements was $0.7 million and $1.5 million at
March 31, 1997 and 1996, 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,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Maximum amount outstanding $ 1,620 $ 4,751 $ 2,286
Average amount outstanding 1,357 2,166 1,634
Weighted average interest rate during the year 7.3% 9.3% 13.8%
Weighted average interest rate at March 31 10.8% 11.3% 10.8%
</TABLE>
6. ACCRUED AND OTHER LONG-TERM LIABILITIES
Accrued and other long-term liabilities consist of the following as of March 31,
1997 and 1996:
(IN THOUSANDS) 1997 1996
-------- --------
Accrued Liabilities:
Salaries, wages and bonuses $ 13,721 $ 14,717
Interest 1,528 1,955
Other 22,080 25,167
-------- --------
$ 37,329 $ 41,839
======== ========
Other Long-Term Liabilities:
Pension and welfare benefits (Note 9) $ 34,194 $ 35,366
Postretirement benefits (Note 9) 6,568 6,304
Other 9,996 15,659
-------- --------
$ 50,758 $ 57,329
======== ========
32
<PAGE>
7. LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1997 and 1996:
(IN THOUSANDS) 1997 1996
-------- --------
6 3/4% Senior Notes due 2004 (net of discount of
$504 and $577 in fiscal 1997 and 1996,
respectively) $ 99,496 $ 99,423
Borrowings under bank credit agreement 28,504 52,051
Industrial development revenue bonds 6,350 6,350
Other 8,280 11,176
-------- --------
142,630 169,000
Less - current portion (808) (4,348)
-------- -------
$141,822 $164,652
======== ========
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. 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.
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 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. The bank credit facility requires that the
Company 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. As of March 31, 1997, the Company does not have
plans to declare or pay any cash dividends.
At March 31, 1997 the Company had variable interest rate industrial
development revenue bonds aggregating $6.3 million due in 2015. The interest
rate in effect at March 31, 1997, was 4%.
The annual maturities of long-term debt, excluding amounts payable under
capitalized lease obligations, for the five succeeding fiscal years are: 1998
- -$0.8 million; 1999 - $0.5 million; 2000 - $29.7 million; 2001 - $ 0.7
million; and 2002 - $0.7 million. Interest paid was $13.8 million, $15.1
million and $14.4 million for the years ended March 31, 1997, 1996 and 1995,
respectively.
8. LEASES
Total rental expense under operating leases was $7.9 million, $9.2 million
and $8.5 million for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively. The annual minimum rental commitments under long-term
operating leases for the five succeeding fiscal years are: 1998 - $6.3
million; 1999 -$5.9 million; 2000 - $5.8 million; 2001 - $5.1 million; 2002 -
$4.4 million; and 2003 and thereafter - $26.8 million. Future capitalized
lease commitments are not significant.
33
<PAGE>
9. 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 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:
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
-----------------------------
1997 1996 1995
-------- ------- --------
Service cost of benefits earned during year $ 4,499 $ 3,994 $ 3,722
Interest cost on projected benefit obligation 5,166 4,800 4,754
Actual return on plan assets (4,074) (4,536) (2,236)
Net amortization and deferral 1,028 1,889 (781)
------- ------- -------
$ 6,619 $ 6,147 $ 5,459
======= ======= =======
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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------------------- -----------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $23,947 $35,071 $ 3,213 $54,189
Non-vested benefit obligation 125 5,250 264 5,834
------- ------- ------- -------
Accumulated benefit obligation 24,072 40,321 3,477 60,023
Effects of anticipated future
compensation increases 985 7,586 402 9,380
------- ------- ------- -------
Projected benefit obligation 25,057 47,907 3,879 69,403
Plan assets at fair value 25,612 8,927 5,494 25,439
------- ------- ------- -------
Projected benefit obligation in
excess of (less than) plan assets (555) 38,980 (1,615) 43,964
Unamortized net loss (549) (4,844) (29) (8,453)
Unrecognized prior service cost (202) 58 - (145)
------- ------- ------- -------
Accrued pension (asset) liability
recorded in the consolidated
statement of financial position $(1,306) $34,194 $(1,644) $35,366
======= ======= ======= =======
</TABLE>
Plan assets consist primarily of marketable securities, equity securities,
cash equivalents, U.S. government securities, foreign government securities
and corporate bonds.
The average of the assumptions used as of March 31, 1997, 1996 and 1995 in
determining the pension expense and benefit obligation information shown
above were as follows:
1997 1996 1995
-------- ------- --------
Discount rate 7.5% 7.4% 7.8%
Rate of compensation increase 4.3 4.5 4.7
Long-term rate of return on plan assets 10.0 9.8 9.6
34
<PAGE>
POSTRETIREMENT AND OTHER BENEFITS - The Company charges the expected cost of
postretirement benefits 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):
(IN THOUSANDS) 1997 1996
------ ------
Accumulated postretirement benefit obligation:
Retirees $1,816 $2,788
Active employees 1,826 1,735
------ ------
Accumulated postretirement benefit obligation
in excess of plan assets 3,642 4,523
Unrecognized net gain 3,126 1,981
------ ------
Accrued postretirement benefit liability (including
$200 in current liabilities) $6,768 $6,504
====== ======
Net postretirement benefits cost for the years ended March 31, 1997, 1996 and
1995 included:
(IN THOUSANDS) 1997 1996 1995
---- ---- ----
Service cost $210 $136 $168
Interest cost on accumulated
postretirement benefit obligation 204 186 228
---- ---- ----
Net postretirement benefit cost $414 $322 $396
==== ==== ====
For measurement purposes, annual rates of increase in the per capita costs of
covered health care claims of 8%, 9% and 10% were assumed for 1997, 1996 and
1995, respectively. The rate was assumed to decrease by 1% in fiscal 1998
and each year thereafter to a rate of 6% beyond 2001. 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, 1997, by $0.6
million and the aggregate of the service and interest cost components of net
postretirement cost for fiscal 1997 by $0.1 million. The discount rate used
in determining the accumulated postretirement benefit obligation was 7.75%
and 7.25% for fiscal years 1997 and 1996, respectively.
10. STOCK COMPENSATION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting model provided for
under Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), requires the use of option valuation
models that were not developed for use in valuing employee stock options.
1992 STOCK OPTION PLAN - In fiscal 1992, the Company adopted a management
stock option plan designed to provide key management personnel stock options
for maximizing shareholder value through improved Company financial
performance. Under such plan, management participants are required to
purchase options for common stock at a cost determined under the provisions
of the plan at the beginning of the fiscal year. The exercise price of such
options is set at a value based on the provisions of the plan, net of the
purchase cost, increased by a 10% annual rate compounded over five years.
The number of stock options a participant is required to purchase is based
upon a financial performance formula established by the Compensation
Committee of the Board of Directors.
As an added incentive to increase shareholder value, participants are
provided one standard stock option for each purchased stock option. Each
standard stock option is exercisable at an average market value per share at
the beginning of the fiscal year and may only be exercised when the purchased
option is exercised. Both types of options vest after three years from the
date of grant and expire four years after the date of vesting.
35
<PAGE>
The following summarizes stock option activity over the past three years under
the 1992 Stock Option Plan:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 1,648,385 $38.92 1,515,783 $35.11 1,043,700 $29.42
Option activity for the year:
Granted for fiscal year 368,172 $53.85 222,239 $59.81 484,457 $47.28
Exercised (98,752) $27.33 (89,637) $26.33 (12,374) $22.05
Canceled - - -
--------- --------- ---------
Balance at end of year 1,917,805 $42.69 1,648,385 $38.92 1,515,783 $35.11
========= ========= =========
</TABLE>
Under APB 25, no compensation expense was recognized for fiscal 1997, 1996 or
1995 in connection with the 1992 Stock Option Plan. As of March 31, 1997, no
options for common shares were available for grant under the 1992 Stock
Option Plan.
DIRECTOR STOCK OPTIONS - In fiscal 1997, 12,000 options, exercisable at
$50.25 per share, were granted to an outside director of the Company. In
fiscal 1995, 48,000 options, exercisable at $45.38 per share, were granted to
four outside directors of the Company. In fiscal 1992, 36,000 options,
exercisable at $18.00 per share, were granted to three outside directors of
the Company. Director options vest three years from the date of grant and
expire seven years after the date of vesting. During fiscal 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. From time-to-time
additional grants are made under the 1990 Stock Option Plans. Additional
grants typically vest over the three years following the date of grant. All
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 follows:
1997 1996 1995
Balance at beginning of year 1,034,841 1,084,983 1,073,665
Granted during year 10,465 - 16,575
Exercised (9,050) (50,142) (5,257)
--------- --------- ---------
Balance at end of year 1,036,256 1,034,841 1,084,983
========= ========= =========
In accordance with APB 25, the Company recognized compensation expense
related to these grants of $0.1 million in fiscal 1997 and $0.3 million in
fiscal 1995.
Options exercisable under the Company's three plans at each of March 31, 1997
and March 31, 1996, totaled 1,534,742 and 1,637,362, respectively. A summary
of stock options outstanding at March 31, 1997, follows:
36
<PAGE>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT MARCH 31, 1997 MARCH 31, 1997
- ----------------------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES OPTIONS LIFE (YRS.) PRICE OPTIONS PRICE
- --------------- ------- ----------- -------- ------- --------
$5.49 to $18.00 1,051,124 4.9 $ 5.73 1,038,571 $ 5.73
$22.05 to $33.52 238,140 2.2 22.05 238,140 22.05
$33.53 to $59.81 1,744,797 5.4 45.72 258,031 33.53
--------- ---------
3,034,061 4.9 $29.74 1,534,742 $12.94
========= =========
PRO FORMA STOCK OPTION DATA - The Company measures stock compensation expense
in accordance with APB 25 and related interpretations. Had compensation cost
been determined using the fair market value-based accounting method for
options granted in fiscal 1997 and 1996, pro forma net income for fiscal 1997
and 1996 would have been $55.3 million and $29.9 million, respectively, and
pro forma net income per share for fiscal 1997 and 1996 would have been $2.24
per share and $1.22 per share, respectively. The fair value of these options
was estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for fiscal 1997 and 1996, respectively: risk
free interest rates of 6.5% and 6.3%; dividend yield of 0%; volatility
factors of the expected market price of the Company's common stock of 0.27
and 0.28; and a weighted average expected life of the options of five years.
The weighted average fair value of stock options granted, as calculated using
the Black-Scholes option valuation model was $12.68 per share and $13.79 per
share in fiscal 1997 and 1996, respectively.
For the pro forma disclosures, the options' estimated fair value was
amortized over their expected life. These pro forma disclosures are not
indicative of anticipated future disclosures because FAS 123 does not apply
to grants made prior to 1995. The pro forma disclosures include only the
first year of vesting for fiscal 1997 awards and the second year of vesting
for fiscal 1996 awards. Additionally, the fair value of these options was
estimated as of the date of grant using an option pricing model which was
designed to estimate the fair value of options which, unlike employee stock
options, can be traded at any time and are fully transferable. The model
requires the input of several highly subjective assumptions including the
expected future volatility of the stock price.
11. 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 $24.6 million, $23.9 million and $21.6 million for the years ended March
31, 1997, 1996 and 1995, respectively. Rental payments amounted to $5.4
million, $5.8 million and $5.3 million and purchased services amounted to
$5.5 million, $5.9 million and $5.2 million for each of the respective years.
12. COMMITMENTS AND CONTINGENCIES
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
37
<PAGE>
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, 1997, the Company has capital expenditure commitments related
primarily to plant expansions amounting to approximately $17.8 million.
13. SEGMENT DATA
The Company is engaged principally in the production of softgels,
hardcapsules 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.
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
-----------------------------
1997 1996 1995
-------- -------- ---------
Sales:
United States $174,903 $141,100 $128,912
Europe 307,793 319,540 302,172
Other International 106,003 111,070 105,598
-------- -------- --------
Net sales 1 $588,699 $571,710 $536,682
======== ======== ========
Operating Income:
United States $ 36,667 $ 33,453 $ 29,612
Europe 59,812 39,330 66,973
Other International 20,743 12,960 21,411
Unallocated 2 (12,902) (18,797) (14,174)
-------- -------- --------
Operating income $104,320 $ 66,946 $103,822
======== ======== ========
Identifiable assets:
United States $104,750 $100,298 $ 90,036
Europe 389,447 375,873 389,581
Other International 133,488 134,102 144,930
Unallocated 3 100,560 97,108 86,826
-------- -------- --------
Total assets $728,245 $707,381 $711,373
======== ======== ========
(1) No single customer or product represents 10% or more of sales and
intersegment sales are not significant.
(2) Unallocated operating income includes $8.0 million, $8.8 million and
$6.0 million of expenses associated with the Company's Advanced
Therapeutic Products group in fiscal years 1997, 1996 and 1995,
respectively.
(3) Unallocated identifiable assets are principally cash, cash
equivalents, short-term investments and other assets.
The net assets of foreign subsidiaries were $217.0 million, $216.3 million
and $218.8 million at March 31, 1997, 1996 and 1995, respectively. The
Company's share of foreign net income was $36.5 million, $18.3 million and
$41.6 million for the years ended March 31, 1997, 1996 and 1995,
respectively, after deducting minority interests, income taxes on unremitted
earnings and various charges billed by the parent company.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
--------------------- --------------------- --------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $145,297 $148,378 $143,454 $133,511 $149,874 $137,582 $150,074 $152,239
Gross profit 48,809 54,693 44,253 44,194 50,923 47,380 53,066 50,354
Net income (loss) 13,593 13,695 11,466 8,324 15,084 13,254 16,825 (4,570)
Net income (loss) per
common share 1 $0.56 $0.56 $0.47 $0.34 $0.61 $0.54 $0.68 ($0.19)
===================== ===================== ===================== ======================
</TABLE>
38
<PAGE>
(1) 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 3).
15. FINANCIAL INSTRUMENTS
Summarized below are the carrying and estimated fair values for certain of
the Company's financial instruments as of March 31, 1997 and 1996. 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>
1997 1996
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Short-term investments $ 3,262 $ 3,333 $ 4,880 $ 4,953
Long-term debt (including current and
long-term portions and notes payable) 143,321 137,481 170,486 166,938
DERIVATIVE FINANCIAL INSTRUMENTS:
Forward foreign currency exchange contracts - 597 - 196
</TABLE>
Certain investments in marketable debt and equity securities are required to
be recorded at fair value if held for trading purposes or otherwise available
for sale, or at cost if held to maturity. The Company categorizes all such
investments as held-to-maturity and therefore carries all such investments at
cost.
The Company periodically enters into forward foreign currency exchange
contracts to hedge certain exposures related to identifiable foreign currency
transactions that are relatively certain as to both timing and amount and
does not engage in speculation. Gains and losses on the forward contracts
are recognized concurrently with the gains or losses from the underlying
transactions. At March 31, 1997 and 1996, the Company was party to forward
foreign currency exchange contracts of $65.4 million and $14.2 million
(notional amounts), respectively, denominated in European currencies. The
contracts outstanding at March 31, 1997 generally mature on various dates
through fiscal 1998 and are intended to hedge various foreign currency
commitments . The Company is exposed to credit loss in the event of
nonperformance by the counterparties to these contracts, but does not
anticipate any such nonperformance given the financial soundness of such
counterparties.
39
<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, 1997 and 1996 and the related consolidated statements of income,
cash flows and shareholders' equity for each of the three years in the period
ended March 31, 1997. 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, 1997 and 1996 and the results of their
operations and cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
Our audits were 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, ARTHUR ANDERSEN LLP
April 29, 1997.
40
<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.
41
<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 1997, which will be filed not later
than 120 days after the close of the Company's fiscal year ended March 31,
1997 and is hereby incorporated by reference to such proxy statement.
Information with respect to Item 10 above is included on pages 8 through 10
of this Annual Report on Form 10-K.
42
<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.
43
<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.
27 Financial Data Schedule. Filed herewith.
44
<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, 1997.
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, 1997:
SIGNATURES TITLE
/s/ Aleksandar Erdeljan Chairman, President and Chief
------------------------ Executive Officer
Aleksandar Erdeljan
/s/ Nicole S. Williams Executive Vice President, Finance,
---------------------- Chief Financial Officer, and Secretary
Nicole S. Williams
/s/ Ronald E. Pauli Corporate Controller
------------------- (Principal Accounting Officer)
Ronald E. Pauli
/s/ John E. Avery Director
-----------------
John E. Avery
/s/ Frederick Frank Director
-------------------
Frederick Frank
/s/ Lori G. Koffman Director
-------------------
Lori G. Koffman
/s/ Louis Lasagna Director
-----------------
Louis Lasagna
/s/ Robert H. Rock Director
------------------
Robert H. Rock
/s/ James A. Stern Director
------------------
James A. Stern
/s/ Kenneth L. Way Director
------------------
Kenneth L. Way
45
<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, 1997:
Valuation accounts deducted from
related assets -
Reserve for doubtful accounts $ 4,824 $ 511 $ (170) $(1,633) $ 3,532
Reserve for unmerchantable inventories 2,469 1,749 (87) (1,805) 2,326
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
</TABLE>
(a) Includes changes due to fluctuations in foreign currency exchange rates.
46
<PAGE>
EXHIBIT DESCRIPTION PAGE
- ------------------- ----
Exhibit 21 - Subsidiaries 48
Exhibit 23 - Consent of Arthur Andersen LLP 50
Exhibit 27 - Financial Data Schedule 52
47
<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
<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, 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM R.P.
SCHERER CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
MARCH 31, 1997 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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 24,955
<SECURITIES> 3,262
<RECEIVABLES> 131,217
<ALLOWANCES> 3,500
<INVENTORY> 59,280
<CURRENT-ASSETS> 223,834
<PP&E> 439,069
<DEPRECIATION> 119,895
<TOTAL-ASSETS> 728,245
<CURRENT-LIABILITIES> 110,788
<BONDS> 141,822
0
0
<COMMON> 236
<OTHER-SE> 352,793
<TOTAL-LIABILITY-AND-EQUITY> 728,245
<SALES> 588,699
<TOTAL-REVENUES> 588,699
<CGS> 391,648
<TOTAL-COSTS> 484,379
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,693
<INCOME-PRETAX> 95,512
<INCOME-TAX> 26,275
<INCOME-CONTINUING> 56,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,968
<EPS-PRIMARY> 2.31
<EPS-DILUTED> 2.31
</TABLE>
