<PAGE>
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-30999
-----------------------
R.P. SCHERER CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3523163
(State of Incorporation) (I.R.S. Employer Identification Number)
2301 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 649-0900
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. YES X NO _
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of the registrant's common stock as of November 10,
1997: 24,174,764 shares of common stock, par value $.01.
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
1997 1996 1997 1996
---------- -------- -------- --------
Net sales $144,506 $143,454 $293,597 $288,751
Cost of sales 96,369 99,201 196,254 195,690
Selling and administrative
expenses 17,250 17,830 35,887 34,906
Research and development
expenses, net 6,364 4,661 11,661 9,322
---------- -------- -------- --------
Operating income 24,523 21,762 49,795 48,833
Interest expense 2,051 3,001 4,289 5,973
Interest earned and other (317) (755) (928) (1,104)
---------- -------- -------- --------
Income from continuing
operations before income
taxes and minority
interests 22,789 19,516 46,434 43,964
Income taxes 6,269 5,759 12,774 12,974
Minority interests 2,578 2,291 5,502 5,931
---------- -------- -------- --------
Net income $13,942 $11,466 $28,158 $25,059
---------- -------- -------- --------
---------- -------- -------- --------
Per Common and Common
Equivalent Share:
Net income $0.56 $0.47 $1.13 $1.02
---------- -------- -------- --------
---------- -------- -------- --------
Average number of common
and common equivalent
shares 25,041 24,598 24,849 24,528
The accompanying notes are an integral part of this statement.
2
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, MARCH 31,
1997 1997
------------- ---------
ASSETS (UNAUDITED)
------
CURRENT ASSETS:
Cash and cash equivalents $ 27,544 $ 24,955
Short-term investments 3,566 3,262
Receivables, less reserves of:
September 30, 1997- $3.7 million;
March 31, 1997- $3.5 million 141,530 127,717
Inventories 67,412 59,280
Other current assets 10,681 8,620
------------- ---------
250,733 223,834
------------- ---------
PROPERTY:
Property, plant and equipment, at cost 473,923 439,069
Accumulated depreciation and reserves (126,108) (119,895)
------------- ---------
347,815 319,174
------------- ---------
OTHER ASSETS:
Goodwill and intangibles, net of
amortization 164,824 168,772
Other assets 21,019 16,465
------------- ---------
185,843 185,237
------------- ---------
$784,391 $728,245
------------- ---------
------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion
of long-term debt $ 5,110 $ 1,499
Accounts payable 71,396 61,026
Accrued liabilities 43,882 37,329
Accrued income taxes 2,656 10,934
------------- ---------
123,044 110,788
------------- ---------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 163,024 141,822
Other long-term liabilities 49,495 50,758
Deferred income taxes 33,841 36,086
Minority interests in subsidiaries 30,612 35,762
------------- ---------
276,972 264,428
------------- ---------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY:
Preferred stock, 500,000 shares
authorized, none issued - -
Common stock, $.01 par value, 50,000,000
shares authorized; shares issued:
September 30, 1997 - 24,158,395 shares;
March 31, 1997 - 23,568,255 shares 242 236
Additional paid-in capital 251,658 242,500
Retained earnings 150,830 122,673
Currency translation adjustment (18,355) (12,380)
------------- ---------
384,375 353,029
------------- ---------
$784,391 $728,245
------------- ---------
------------- ---------
The accompanying notes are an integral part of this statement.
3
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
FOR THE SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
-------- ----------
OPERATING ACTIVITIES:
Net income $28,158 $25,059
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 10,892 13,460
Amortization of intangible assets
and debt discount 3,009 3,306
Minority interests in net income 5,502 5,931
Deferred tax provision and other 1,415 273
Increase in receivables (17,303) (1,702)
Increase in inventories and other
current assets (12,433) (7,325)
Increase in accounts payable and
accrued expenses 5,556 2,133
-------- ----------
Net cash provided by operating activities 24,796 41,135
-------- ----------
INVESTING ACTIVITIES:
Purchases of plant and equipment (49,806) (28,372)
Other 1,715 2,268
-------- ----------
Net cash used by investing activities (48,091) (26,104)
-------- ----------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 26,301 23,612
Long-term debt retirements and payments (4,113) (13,494)
Short-term borrowings, net 3,690 (207)
Proceeds from exercise of stock options 10,922 -
Repurchase of common shares (9,986) -
Cash dividends paid to minority
shareholders of subsidiaries (352) (8,850)
-------- ----------
Net cash provided by financing activities 26,462 1,061
-------- ----------
Effect of currency translation on cash
and cash equivalents (578) (373)
-------- ----------
Net increase in cash and cash equivalents 2,589 15,719
Cash and cash equivalents, beginning
of period 24,955 21,007
-------- ----------
Cash and cash equivalents, end of period $27,544 $36,726
-------- ----------
-------- ----------
The accompanying notes are an integral part of this statement.
4
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of R.P. Scherer Corporation (the "Company"), a Delaware corporation and
its subsidiaries, some of which are less than wholly-owned. In the opinion of
management, the accompanying unaudited consolidated financial statements include
all adjustments (consisting only of normal recurring items) necessary for the
fair presentation of financial position and results of operations. These
consolidated financial statements and related notes have been prepared pursuant
to the Rules and Regulations set forth by the Securities and Exchange Commission
and should be read in conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended March
31, 1997, as filed with the Securities and Exchange Commission.
2. INCOME TAXES
The effective income tax rates in the current and prior year quarters were
lower than the U.S. Federal income tax rate due primarily to the mix of
taxable income between jurisdictions as well as the anticipated utilization
of carryforward foreign and other tax credits.
3. INVENTORIES
The components of inventories are as follows:
(IN THOUSANDS) SEPTEMBER 30, MARCH 31,
1997 1997
------------- ---------
Raw materials and supplies $36,666 $32,886
Work in process 10,178 8,604
Finished goods 20,568 17,790
------------- ---------
$67,412 $59,280
------------- ---------
------------- ---------
4. CONTINGENCIES
On March 30, 1992, OCAP Acquisition Corp. ("OCAP") commenced an action in the
Supreme Court of the State of New York, County of New York, against Paco
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
5
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. CONTINGENCIES (CONTINUED)
Company's counterclaim against OCAP. Subsequently, OCAP filed a notice of
appeal for the dismissal of its claims and the Company filed a notice of cross
appeal for the dismissal of its counter claim. In October 1997, the court
affirmed the favorable April 1996 verdict, effectively ending the appeal
process.
The Company is a party to various other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources.
5. ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"), effective for periods ending after December 15, 1997. The Company will
adopt the new standard in its fiscal 1998 third-quarter financial statements.
Early adoption is not permitted. FAS 128 supersedes existing generally accepted
accounting principles related to the calculation of earnings per share and
requires restatement of all prior period earnings per share information upon
adoption. FAS 128 requires a dual presentation of "basic" and "diluted"
earnings per share amounts on the face of the income statement. Basic earnings
per share excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average common shares outstanding during the
period. Diluted earnings per share, which is computed similarly to current
fully diluted earnings per share, takes into effect the potential dilution that
could occur were outstanding stock options to be exercised. Diluted earnings
per share as calculated under FAS 128 is not expected to be materially different
from earnings per share as calculated currently.
6. FINANCIAL INSTRUMENTS
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 and
accounted for as part of the basis of such transaction. No forward currency
exchange contracts were outstanding at September 30, 1997.
6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis of financial results and condition covers
the three and six month periods ended September 30, 1997 and 1996. A majority
of the Company's sales, income and cash flows are 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 the foreign currency exchange
rates in effect at the end of each period. Accordingly, the Company's
consolidated shareholders' equity will fluctuate depending upon the
strengthening or weakening of the U.S. dollar.
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Second-quarter sales of $144.5 million increased 1% over the $143.5 million
reported in the prior year period. The strength of the U.S. dollar relative to
certain key foreign currencies adversely affected financial statement
comparisons in the quarter; second-quarter sales increased 7% when measured
using constant foreign exchange rates. The second-quarter sales increase was
driven by a 9% constant dollar gain in sales of pharmaceutical products combined
with a 63% increase in total ZYDIS-Registered Trademark- revenue. Production
revenue from the Company's ZYDIS-Registered Trademark- rapid-dissolve drug
delivery system increased 49% in the second quarter. The constant dollar
pharmaceutical softgel sales gain resulted from a 30% increase in sales of
Novartis' NEORAL-Registered Trademark- softgels and strong demand for Abbot's
HYTRIN-Registered Trademark- and other prescription softgel products in the
United States. Constant dollar over-the-counter ("OTC") pharmaceutical softgel
sales increased 5% in the quarter due primarily to the strength of demand in the
United States. Second-quarter, constant dollar sales of Vitamin E and other
health and nutritional ("H&N") softgels grew only 2% as strong demand for
natural Vitamin E and complex nutritional products in the United States,
Australia and Japan was offset by market weakness throughout Europe, which
worsened as the quarter progressed.
Operating income for the quarter ended September 30, 1997 increased 13% to
$24.5 million as compared to the $21.8 million earned in the prior year
quarter. On a constant exchange rate basis, second-quarter operating income
increased 19%. Second-quarter operating income comparisons were favorably
affected by revenue from the sale of the OPTIDYNE-Registered Trademark-
technology rights and interests and the above discussed sales increases,
combined with tight control of Selling, General and Administrative ("SG&A")
expenses in the quarter. Second-quarter SG&A expenses represented 11.9% of
sales versus 12.4% of sales in the same period last year. Total research and
development expense ("R&D") increased $1.7 million, or $0.05 per share, in
the second quarter. Net of customer reimbursement, spending on recurring
softgel R&D increased 28% to $3.5 million in the second quarter. This
substantial increase in softgel R&D expenditures was partially compensated by
a $1.6 million increase, to $3.3 million, in customer reimbursements for
pharmaceutical softgel development services. As a result of expenditures for
clinical trials, second-quarter R&D spending by the Company's Advanced
Therapeutic Products Group ("ATP") increased $0.9 million,
7
<PAGE>
or 48%, to $2.9 million as compared to the same quarter last year. ATP is
engaged in the development of pharmaceutical products incorporating
off-patent drugs in the Company's proprietary drug delivery technologies.
The Company generated net income of $13.9 million, or $0.56 per share, in the
quarter ended September 30, 1997, as compared to the $11.5 million, or $0.47
per share, earned in last year's second quarter. The strengthening of the
U.S. dollar had the effect of reducing second-quarter net income by $0.03 per
share. The higher average price of the Company's common stock in the current
fiscal quarter as compared to the prior year resulted in an increase in the
number of weighted average shares outstanding, as computed using the
"Treasury Stock Method," reducing reported earnings by an additional $0.01
per share as compared to the same quarter last year. Net interest expense
fell 23% versus the prior-year second quarter due to lower average net
borrowings and favorable short-term interest rates. Additionally, current
quarter net income comparisons benefited from a reduction of the estimated
consolidated effective tax rate to 28% versus 30% in the prior year period.
The lower effective income tax rate reflects a favorable shift in the
geographic mix of pretax income and expected improvements in the utilization
of foreign tax credits and other tax benefits in the current fiscal year.
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
First-half sales of $293.6 million increased 2% over the $288.8 million
reported in the prior-year first half. The strength of the U.S. dollar
relative to certain key foreign currencies adversely affected financial
statement comparisons in the period; first-half sales increased 7% when
measured using constant foreign exchange rates. The first-half sales
increase was driven by a 8% constant dollar gain in sales of pharmaceutical
softgel products combined with an 71% increase in ZYDIS-Registered Trademark-
revenue. The pharmaceutical softgel sales gain reflected an 8% increase in
constant dollar OTC pharmaceutical softgel sales primarily in the United
States, a 30% constant dollar increase in sales of Novartis'
NEORAL-Registered Trademark- softgels and strong demand for Abbot's
HYTRIN-Registered Trademark- and other prescription softgel products in the
United States. Constant dollar sales of H&N softgels increased only 2% in
the period, as continued strength of U.S., Australian and Japanese demand for
Vitamin E and complex nutritional softgel products were largely offset by
weakness throughout European H&N markets.
Operating income for the six months ended September 30, 1997 was $49.8
million as compared to the $48.8 million earned in the prior year period, a
2% increase. First-half operating income increased 8% on a constant dollar
basis. First-half operating income comparisons were favorably affected by
revenue from the sale of OPTIDYNE-Registered Trademark- technology rights and
interests and the previously discussed sales increases, partially offset by
lower profitability in continental Europe resulting from continued weak
demand for discretionary OTC and H&N softgel products, and by incremental
manufacturing and staffing expense incurred as certain of the Company's "Best
in Class" pharmaceutical facilities near completion. First-half SG&A
expenses as a percent of sales approximated the prior year period as
incremental costs related to information systems and Good Manufacturing
Practice ("GMP") infrastructure enhancements were offset by cost control
measures. However, for the full fiscal year the Company expects that SG&A
expenses as a percent of sales will be near fiscal 1997 levels. Net R&D
expense increased $2.3 million, or $0.07 per share, to $11.7 million in the
first half of fiscal 1998. As compared to the same period last year,
first-half R&D spending by the Company's ATP Group increased $1.6 million due
to expenditures for clinical trials. Net recurring R&D spending of $6.7
million increased $0.8 million over the prior year first half as increased
softgel R&D outlays were compensated by a $3.0 million increase, to $6.0
million, in customer reimbursement of pharmaceutical softgel development
services.
The Company generated net income of $28.2 million, or $1.13 per share, in the
six months ended September 30, 1997, as compared to the $25.1 million, or
$1.02 per share, earned in last year's first half. The strengthening of the
U.S. dollar had the effect of reducing reported first-half net income by
$0.06 per share as compared to the prior year. Net interest expense fell 31%
versus the prior-year first half due to lower average net borrowings and
favorable short-term interest rates. Minority interests in net income fell
8
<PAGE>
$0.4 million due primarily to a combination of lower earnings and the adverse
impact of the stronger U.S. dollar on less than wholly-owned subsidiaries in
Germany, France and Japan. Additionally, current year net income comparisons
benefited from a reduction of the estimated consolidated effective tax rate
to 28% versus 30% in the prior year period. The lower effective income tax
rate reflects a favorable shift in the geographic mix of pretax income and
expected improvements in the utilization of foreign tax credits and other tax
benefits in the current fiscal year.
RESULTS BY GEOGRAPHIC SEGMENT
The following sets forth operating results for each of the Company's geographic
segments for the quarters ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS) SALES OPERATING INCOME OPERATING MARGIN
--------------------- --------------------- ----------------
1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
United States $ 95,576 $ 83,814 $ 22,098 $ 17,914 23.1% 21.4%
Europe 144,132 150,298 26,344 25,675 18.3 17.1
Other International 53,889 54,639 9,621 11,942 17.9 21.9
Unallocated (1) - - (8,268) (6,698) - -
--------- --------- --------- --------- ----- -----
$293,597 $288,751 $49,795 $48,833 17.0% 16.9%
--------- --------- --------- --------- ----- -----
--------- --------- --------- --------- ----- -----
</TABLE>
(1) Includes general Corporate expenses and expenses associated with the
ATP Group.
The Company's United States operations generated a 14% sales gain in the six
months ended September 30, 1997. The increase resulted from strong sales of
prescription and OTC pharmaceutical softgel products and increased production
of more profitable natural Vitamin E. First-half prescription pharmaceutical
sales increased 43% due primarily to strong demand for valproic acid, Abbot's
HYTRIN-Registered Trademark- and other prescription softgel products. OTC
pharmaceutical softgel sales increased 22% in the first six months of fiscal
1998, primarily as a result of increased penetration of Scherer OTC softgel
products into generic markets. Operating income grew by 23%, or $4.2
million, yielding a 23.1% operating margin as compared with 21.4% in the
prior year period. The stronger operating margin in the first half of fiscal
1998 resulted from a higher proportion of more profitable pharmaceutical
softgel products in the sales mix partially offset by a shift in sourcing of
certain pharmaceutical and recreational softgel products from the United
States to Company production facilities in other geographic segments.
Sales in Europe decreased 4% in the first six months of fiscal 1998 as
compared to the same period last year. Reported European sales growth was
adversely impacted by the strength of the U.S. dollar versus key European
currencies, primarily the German deutsche mark. On a constant dollar basis,
first-half sales in Europe increased 4% as a result of a 71% increase in
ZYDIS-Registered Trademark- revenue, revenue from the sale of
OPTIDYNE-Registered Trademark-technology rights and interests, a 30% increase
in sales of Novartis' NEORAL-Registered Trademark- softgels and increased
export of other pharmaceutical softgel products from Germany and France,
partially offset by weak demand for both pharmaceutical and
non-pharmaceutical softgel products throughout Europe. The first-half
increase in European operating margin was primarily attributable to a
stronger sales mix in Germany, sale of OPTIDYNE-Registered Trademark-
technology rights and interests and increased ZYDIS-Registered Trademark-
profitability.
Sales in the Company's Other International segment declined 1% as reported,
but increased 7% on a constant dollar basis, in the six months ended
September 30, 1997. Strong first-half sales gains in Australia, Argentina
and Japan were partially offset by the weakness of the Japanese yen and
Australian dollar versus the U.S. dollar. Excluding prior year sales from
the closed Canada softgel facility, Other International sales on a constant
dollar basis increased 11% due primarily to the strengthening of Vitamin E
and H&N softgel markets in Australia and Japan and expanded export of
pharmaceutical softgels from Argentina. For the same period, operating
income declined significantly due to development costs associated with the
Windsor, Canada cytotoxic softgel facility.
9
<PAGE>
OUTLOOK
The Company's business strategy is focused on strengthening its presence and
capabilities in the global pharmaceutical industry. Execution of this
strategy will continue to require significant outlays for development and
manufacturing resources, including new staff, information systems 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 the remainder of fiscal 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. 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 and Japan, as well as the precise timing of new product
launches, the conclusion of certain product licensing agreements and the
timing and extent of ATP clinical trial expenditures.
CASH FLOWS
Cash and cash equivalents increased by $2.6 million and $15.7 million in the
first six months of fiscal 1998 and 1997, respectively. Operating activities
provided cash of $24.8 million and $41.1 million in the respective current
and prior year periods. The decrease in cash provided by operations in the
fiscal 1998 period resulted primarily from increased inventory and other
working capital requirements in the current year quarter. Year-to-date
fiscal 1998 depreciation expense declined due to the strong dollar and to
inclusion in the prior year of depreciation expense related to two softgel
plants closed last year.
Capital expenditures for the current year quarter totaled $49.8 million as
compared to $28.4 million in the prior year period. Fiscal 1998 capital
expenditures are currently expected to approximate $90-to-$100 million versus
fiscal 1997 expenditures of $69.9 million. Year-to-date fiscal 1998 capital
expenditures consisted primarily of costs related to the continued expansion
of the ZYDIS-Registered Trademark- production facility in the United Kingdom
and softgel production facilities in France, the United States, Argentina and
Japan. In the prior year period, capital spending consisted primarily of
expenditures for the expansion and upgrade of softgel production facilities
in France, the United States and Japan.
Financing activities for the six months ended September 30, 1997 were
primarily comprised of $10.9 million in proceeds from the exercise of stock
options, $10.0 million for the repurchase of the Company's stock on the open
market and net borrowings of $25.9 million, used primarily to fund capital
expenditures. The prior year period included net proceeds of $9.7 million,
primarily from borrowings under the Company's bank credit facility, to fund
capital and research expenditures in the U.K., and cash dividends paid to
minority owners of subsidiaries of $8.9 million.
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 $31.1 million at September 30, 1997 and
amounts available under existing bank credit facilities totaling $151.5
million at September 30, 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 September 30, 1997 the Company's debt-to-equity ratio, assuming the
capitalization of operating leases, was 33%. 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%.
10
<PAGE>
Capital expenditures are currently anticipated to approximate $90-to-$100
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 "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
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 September
30, 1997, the Company had approximately $6.6 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 during
the remainder of fiscal 1998 due to costs related to certain clinical trials.
ATP expenses in the first half of fiscal 1998 totaled $5.0 million. 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%.
In September 1997, the Company entered into a development agreement with
Quadrant Healthcare PLC ("Quadrant"). Under the agreement, Scherer acquired
exclusive rights to Quadrant's technology as it pertains to fast-dissolving
dosage forms. This technology has a broad range of potential applications,
including the possible development of controlled release versions of
ZYDIS-Registered Trademark-. In addition to the development agreement,
Scherer invested approximately $5.7 million in Quadrant in return for $0.8
million of Quadrant's common stock and $4.9 million in the form of a loan
note convertible into common stock upon the occurrence of certain events or
at the election of the Company.
At September 30, 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, $47.5 million of borrowings
under the Company's bank credit facility, $6.3 million of industrial
development revenue bonds and $9.7 million of other indebtedness.
Subsequent to the quarter ended September 30, 1997, the Company extended the
term of its existing bank credit facility by five years and amended certain
provisions within the agreement. The amended credit facility: expires October
29, 2002; maintains the previous aggregate borrowing limit of up to $175.0
million in various currencies; sets interest rates on outstanding borrowings at
LIBOR plus 0.350%, or the bank's prime rate; and includes an annual facility fee
of 0.125% of the total credit facility.
INFLATION
In the view of management, the effects of inflation and changing prices on the
Company's net results of operations and financial condition were not
significant.
11
<PAGE>
FORWARD LOOKING INFORMATION
Except for the historical information contained herein, the matters discussed
in this Report Form 10-Q are forward looking statements that involve risks
and uncertainties. Certain important factors could cause the Company's
actual results to differ materially from expected and historical results,
including, but not limited to, the following: 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 expected time
frame, global economic factors; regulatory matters related to product testing
and approvals for the Company and its customers; competitive products and
pricing; and product and drug delivery system development and other
technological issues. These forward looking statements, as further described
in the Company's Annual Report and on Form 10-K, as filed with the Securities
and Exchange Commission, represent R.P. Scherer's judgment as of the date the
information was prepared.
12
<PAGE>
PART II
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The Annual Meeting of Stockholders of R.P. Scherer Corporation was
held on September 11, 1997, for the purpose of electing a Board of
Directors, ratifying the 1997 Stock Option Plan and approving the
appointment of independent auditors.
The shareholders elected the Company's entire Board of Directors. The
persons elected to the Company's Board of Directors and the number of
shares cast for, and the number of shares withheld, with respect to each of
these persons were as follows:
FOR WITHHELD
--- --------
Aleksandar Erdeljan 21,537,177 10,212
Lori G. Koffman 21,535,927 11,462
Frederick Frank 21,535,927 11,462
James A. Stern 21,535,527 11,862
Louis Lasagna 21,537,117 10,272
Robert H. Rock 21,537,177 10,212
John E. Avery 21,534,327 13,062
Kenneth L. Way 21,535,927 11,462
The shareholders ratified the appointment of Arthur Andersen LLP as
auditors of the Company for the fiscal year ending March 31, 1998 by the
following vote: 18,331,832 shares having voted "for", 3,172,711 shares
having voted "against", 42,846 shares having abstained from voting, and
zero shares having not voted.
The shareholders ratified the 1997 Stock Option Plan by the following
vote: 14,570,097 shares having voted "for", 5,742,506 shares having voted
"against", 1,234,786 shares having abstained from voting, and zero shares
having not voted.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
27 Financial Data Schedule. Filed herewith.
(b) REPORTS ON FORM 8-K: None.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
R.P. SCHERER CORPORATION
Date: November 14, 1997 By: /s/ Nicole S. Williams
------------------------------------
Nicole S. Williams
Executive Vice President, Finance,
Chief Financial Officer and
Secretary
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from R.P. Scherer
Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997, and is qualified in its entirety by reference to such Form 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 27,544
<SECURITIES> 3,566
<RECEIVABLES> 145,243
<ALLOWANCES> 3,713
<INVENTORY> 67,412
<CURRENT-ASSETS> 250,733
<PP&E> 473,923
<DEPRECIATION> 126,108
<TOTAL-ASSETS> 784,391
<CURRENT-LIABILITIES> 123,044
<BONDS> 163,024
0
0
<COMMON> 242
<OTHER-SE> 384,133
<TOTAL-LIABILITY-AND-EQUITY> 784,391
<SALES> 293,597
<TOTAL-REVENUES> 293,597
<CGS> 196,254
<TOTAL-COSTS> 243,802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,361
<INCOME-PRETAX> 46,464
<INCOME-TAX> 12,774
<INCOME-CONTINUING> 28,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,158
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
