<PAGE>
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 February 10,
1998: 24,159,769 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)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $155,768 $149,874 $449,365 $438,625
Cost of sales 105,706 98,950 301,960 294,640
Selling and administrative expenses 18,567 18,576 54,454 53,482
Research and development expenses, net 6,686 5,907 18,347 15,229
-------- -------- -------- --------
Operating income 24,809 26,441 74,604 75,274
Interest expense 2,509 2,620 6,798 8,593
Interest earned and other (574) (695) (1,502) (1,799)
-------- -------- -------- --------
Income from continuing operations before
income taxes and minority interests 22,874 24,516 69,308 68,480
Income taxes (5,409) 6,542 7,365 19,516
Minority interests 3,650 2,890 9,153 8,821
-------- -------- -------- --------
Net income $ 24,633 $ 15,084 $ 52,790 $ 40,143
======== ======== ======== ========
Basic earnings per common share $1.02 $0.64 $2.19 $1.71
======== ======== ======== ========
Diluted earnings per common share $0.98 $0.61 $2.12 $1.63
======== ======== ======== ========
Average common shares outstanding - Basic 24,171 23,530 24,122 23,491
Average common shares outstanding - Diluted 25,079 24,679 24,927 24,583
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
1997 1997
----------- --------
<S> <C> <C>
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 30,982 $ 24,955
Short-term investments 2,822 3,262
Receivables, less reserves of:
December 31, 1997- $3.6 million;
March 31, 1997- $3.5 million 131,431 127,717
Inventories 66,804 59,280
Other current assets 11,790 8,620
--------- ---------
243,829 223,834
--------- ---------
PROPERTY:
Property, plant and equipment, at cost 481,612 439,069
Accumulated depreciation and reserves (128,273) (119,895)
--------- ---------
353,339 319,174
--------- ---------
OTHER ASSETS:
Goodwill and intangibles, net of amortization 162,951 168,772
Other assets 21,889 16,465
--------- ---------
184,840 185,237
--------- ---------
$ 782,008 $ 728,245
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 5,632 $ 1,499
Accounts payable 64,267 61,026
Accrued liabilities 36,013 37,329
Accrued income taxes 3,143 10,934
--------- ---------
109,055 110,788
--------- ---------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 159,389 141,822
Other long-term liabilities 48,699 50,758
Deferred income taxes 30,250 36,086
Minority interests in subsidiaries 32,255 35,762
--------- ---------
270,593 264,428
--------- ---------
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: December 31, 1997 -
24,182,769 shares; March 31, 1997 - 23,568,255 shares 242 236
Additional paid-in capital 251,338 242,500
Retained earnings 175,463 122,673
Currency translation adjustment (24,683) (12,380)
--------- ---------
402,360 353,029
--------- ---------
$ 782,008 $ 728,245
========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $52,790 $40,143
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 17,371 18,805
Amortization of intangible assets and debt discount 4,756 4,894
Minority interests in net income 9,153 8,821
Deferred tax provision and other (7,873) 8,086
(Increase) decrease in receivables (9,603) 10,251
Increase in inventories and other current assets (12,423) (10,379)
Increase (decrease) in accounts payable and accrued expenses 10,326 (14,460)
------- -------
Net cash provided by operating activities 64,497 66,161
------- -------
INVESTING ACTIVITIES:
Purchases of plant and equipment (67,951) (42,227)
Other (7,943) (2,306)
------- -------
Net cash used by investing activities (75,894) (44,533)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 23,090 32,319
Long-term debt retirements and payments (4,453) (15,741)
Short-term borrowings, net 4,855 1,294
Proceeds from exercise of stock options 13,268 -
Repurchase of common shares (12,605) -
Cash dividends paid to minority shareholders of subsidiaries (5,552) (8,214)
------- -------
Net cash provided by financing activities 18,603 9,658
------- -------
Effect of currency translation on cash and cash equivalents (1,179) (196)
------- -------
Net increase in cash and cash equivalents 6,027 31,090
Cash and cash equivalents, beginning of period 24,955 21,007
------- -------
Cash and cash equivalents, end of period $30,982 $52,097
======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of R.P. Scherer Corporation (the "Company"), a Delaware corporation
and its subsidiaries, some of which are less than wholly-owned. In the
opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting only of normal recurring
items) necessary for the fair presentation of financial position and results
of operations. These consolidated financial statements and related notes
have been prepared pursuant to the Rules and Regulations set forth by the
Securities and Exchange Commission and should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on
Form 10-K for the year ended March 31, 1997, as filed with the Securities and
Exchange Commission.
2. INCOME TAXES
In December 1997, the Company finalized part of its long-term tax planning
strategy by converting, with its joint venture partner, the legal ownership
structure of the Company's 51% owned subsidiary in Germany, R.P. Scherer
GmbH, and a subsidiary thereof, from a corporation to a partnership. As a
result of this change in tax status, the Company's tax basis in R.P. Scherer
GmbH was adjusted, resulting in a one-time tax refund of approximately $4.6
million, as well as a reduction in cash taxes to be paid in current and
future years. Combined, these factors reduced third-quarter income tax
expense by $11.7 million and increased reported diluted earnings per share by
$0.47. Exclusive of the impact of the change in tax status, the estimated
consolidated effective tax rate was 28% in both the current and prior
year-to-date periods.
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, MARCH 31,
1997 1997
---- ----
<S> <C> <C>
Raw materials and supplies $36,986 $32,886
Work in process 5,172 8,604
Finished goods 24,646 17,790
------- -------
$66,804 $59,280
======= =======
</TABLE>
4. CONTINGENCIES
The Company is a party to various 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
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," ("FAS 128") in its fiscal quarter ended December 31,
1997. Adoption of FAS 128 did not affect previously reported earnings per
share. Under FAS 128, basic earnings per common share are computed by
dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share are
computed by dividing net income by the sum of the weighted average number of
common shares and the number of equivalent shares assumed outstanding under
the Company's stock option plans during the period. Diluted earnings per
share were computed as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $24,633 $15,084 $52,790 $40,143
======= ======= ======= =======
Weighted average number of
common shares outstanding 24,171 23,530 24,122 23,491
Effect of options assumed exercised 908 1,149 805 1,092
------- ------- ------- -------
Total 25,079 24,679 24,927 24,583
======= ======= ======= =======
Diluted earnings per common share $0.98 $0.61 $2.12 $1.63
======= ======= ======= =======
</TABLE>
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 transactions. At
December 31, 1997, the Company was party to outstanding British pound
sterling forward exchange contracts with a notational amount totaling $31.7
million. The contracts expired in January 1998 and were intended to hedge
various foreign currency commitments.
6
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis of financial results and condition
covers the three and nine month periods ended December 31, 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 DECEMBER 31, 1997 AND 1996
Third-quarter sales of $155.8 million increased 4% over the $149.9 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; third-quarter sales increased 11% when measured
using constant foreign exchange rates. Third-quarter pharmaceutical softgel
sales grew 10% on a constant dollar basis. The pharmaceutical softgel sales
gain resulted primarily from the November launch of Hoffman-La Roche's
FORTOVASE-Registered Trademark- protease inhibitor softgel product and a 21%
constant dollar gain in sales of over-the-counter ("OTC") pharmaceutical
softgels due to the strength of demand in the United States and strong export
sales by the Company's German subsidiary. These gains were partially offset
by the ongoing decline in sales of the softgel form of Nifedipine and by flat
sales of Novartis' NEORAL-Registered Trademark- softgels in the quarter.
Third-quarter, constant dollar sales of Vitamin E and other health and
nutritional ("H&N") softgels grew 11% as strong demand for natural Vitamin E
and complex nutritional products in the United States, Australia and Japan
was offset by a 6% decline in H&N sales in Europe. Despite continued delays
in anticipated customer product launches, third-quarter ZYDIS-Registered
Trademark- revenue increased 45%.
Operating income for the quarter ended December 31, 1997 was $24.8 million as
compared to the $26.4 million earned in the same quarter last year. On a
constant exchange rate basis, third-quarter operating income increased 2%.
Gross margin was 32.1% in the current year quarter as compared to 34.0% in
the prior-year third quarter. The lower third-quarter gross margin resulted
from: increased fixed manufacturing costs, including an increase of $0.8
million in depreciation expense, as new or expanded facilities in Japan,
France and the United Kingdom enter production; strong demand in the quarter
for lower-margin Vitamin E softgels; and a lower proportion of licensing
revenue in the sales mix. Selling, General and Administrative expenses were
flat in the quarter, representing 11.9% of sales versus 12.4% of sales in the
same period last year. Primarily due to increased Advanced Therapeutic
Products group ("ATP") spending, total net research and development ("R&D")
expense increased $0.8 million, or $0.02 per share, in the third quarter.
Before customer reimbursements, third-quarter spending on recurring softgel
R&D increased 61% to $8.8 million. This substantial increase in softgel R&D
expenditures was largely compensated by a $3.2 million increase, to $5.0
million, in customer reimbursements for
7
<PAGE>
pharmaceutical softgel development services. As a result of expenditures for
clinical trials, third-quarter ATP spending increased $0.6 million, or 28%,
as compared to the same quarter last year.
The Company generated net income of $24.6 million in the quarter ended
December 31, 1997, as compared to the $15.1 million earned in last year's
third quarter. Diluted earnings per share were $0.98 in the fiscal 1998 third
quarter versus $0.61 in the prior year third quarter. Exclusive of the
favorable impact of a change in the tax status of the Company's 51% owned
German subsidiary, diluted earnings per share were $0.52 in the current year
quarter.
In December 1997, the Company finalized part of its long-term tax planning
strategy by converting, with its joint venture partner, the legal ownership
structure of the Company's 51% owned subsidiary in Germany, R.P. Scherer
GmbH, and a subsidiary thereof, from a corporation to a partnership. As a
result of this change in tax status, the Company's tax basis in R.P. Scherer
GmbH has been adjusted, resulting in a one-time tax refund of approximately
$4.6 million, as well as a reduction in cash taxes to be paid in current and
future years. Combined, these factors reduced third-quarter income tax
expense by $11.7 million and increased reported diluted earnings per share by
$0.47.
Exclusive of the impact of the change in tax status, the estimated
consolidated effective tax rate was 28% in both the current and prior
year-to-date periods. In comparing the fiscal 1998 third quarter against the
prior year quarter, the strengthening of the U.S. dollar had the effect of
reducing third-quarter net income by $0.06 per share. Third-quarter expense
related to minority interests in subsidiary income increased $0.8 million, or
$0.03 per share, as a result of increased profitability at the Company's
majority owned German subsidiary. Additionally, 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
assumed outstanding, reducing reported earnings by an additional $0.01 per
share as compared to the same quarter last year.
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Sales in the first nine months of fiscal 1998 of $449.4 million increased 2%
over the $438.6 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 period. For the nine months ended
December 31, 1997, sales increased 8% when measured using constant foreign
exchange rates. The nine-month sales increase was driven by an 8% constant
dollar gain in sales of pharmaceutical softgel products combined with a 60%
increase in ZYDIS-Registered Trademark- revenue. The pharmaceutical softgel
sales gain reflected a 12% increase in constant dollar OTC pharmaceutical
softgel sales reflecting: strong OTC gains in the United States and in
German export sales; an 18% constant dollar increase in sales of Novartis'
NEORAL-Registered Trademark- softgels; the November launch of Hoffman-La
Roche's FORTOVASE-Registered Trademark- protease inhibitor softgel product
and strong first-half demand for Abbot's HYTRIN-Registered Trademark-.
Constant dollar sales of H&N softgels increased 5% in the period due to the
continued strength of U.S., Australian and Japanese demand for Vitamin E and
complex nutritional softgel products, partially offset by weakness throughout
European H&N markets.
Operating income for the nine months ended December 31, 1997 was $74.6
million as compared to the $75.3 million earned in the prior year period, a
1% decline. For this same period, operating income increased 6% on a constant
dollar basis. As a percentage of sales, gross margin was 32.8% in both the
current and prior year-to-date periods. Operating income comparisons for the
first nine months of fiscal 1998 were favorably affected by revenue from the
second-quarter sale of OPTIDYNE-Registered Trademark- technology rights and
interests and by the previously discussed sales increases, partially offset
by lower profitability in 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 are completed. As a percentage of sales, SG&A
expenses in the nine-month period 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. Total
8
<PAGE>
net R&D expense increased $3.1 million, or $0.09 per share, to $18.3 million
in the first nine months of fiscal 1998. As compared to the same period last
year, R&D spending by ATP increased $2.2 million, or $0.06 per share, due
primarily to expenditures for clinical trials. Net recurring R&D spending of
$10.4 million increased $0.9 million over the prior year-to-date period as
increased softgel R&D outlays were compensated by a $4.7 million increase, to
$9.5 million, in customer reimbursement of pharmaceutical softgel development
services.
The Company generated net income of $52.8 million in the first three quarters
of fiscal 1998, as compared to the $40.1 million earned in same period last
year. Diluted earnings per share were $2.12 in the fiscal 1998 year-to-date
period versus $1.63 in the prior year period. Exclusive of the previously
discussed favorable impact of a change in the tax status of the Company's 51%
owned German subsidiary, diluted earnings per share were $1.65 in the current
year period. The strengthening of the U.S. dollar had the effect of reducing
reported year-to-date net income by $0.12 per share as compared to the prior
year. Additionally, increased ATP spending in support of clinical trials
reduced reported earnings per share by $0.06 in the year-to-date period. Net
interest expense fell 22% versus the first nine months of last year due to
lower average net borrowings and favorable short-term interest rates.
Minority interests in net income increased $0.3 million due primarily to a
combination of higher earnings at the Company's 51% owned subsidiary in
Germany, partially offset by the adverse impact of the stronger U.S. dollar
on less than wholly-owned subsidiaries in Germany, France and Japan.
Exclusive of the impact of the change in tax status, the estimated
consolidated effective tax rate was 28% in both the current and prior
year-to-date periods.
RESULTS BY GEOGRAPHIC SEGMENT
The following sets forth operating results for each of the Company's
geographic segments for the three quarters ended December 31, 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 $149,023 $130,025 $34,560 $27,598 23.2% 21.2%
Europe 220,503 226,742 39,691 38,121 18.0 16.8
Other International 79,839 81,858 13,461 17,406 16.9 21.3
Unallocated (1) - - (13,108) (7,851) - -
-------- -------- ------- ------- ---- ----
$449,365 $438,625 $74,604 $75,274 16.6% 17.2%
======== ======== ======= ======= ==== ====
</TABLE>
(1) Includes general Corporate expenses and expenses associated with the
ATP Group.
The Company's United States operations generated a 15% sales gain in the nine
months ended December 31, 1997. The increase resulted from strong sales of
prescription and OTC pharmaceutical softgel products and natural Vitamin E.
Prescription pharmaceutical sales increased 14% in the year-to-date period
due primarily to strong first-half demand for valproic acid, Abbot's
HYTRIN-Registered Trademark- and other prescription softgel products. OTC
pharmaceutical softgel sales increased 20% in the first nine months of fiscal
1998, primarily as a result of increased penetration of OTC softgel products
into private label markets. Operating income grew by 25%, or $7.0 million,
yielding a 23.2% operating margin as compared with 21.2% in the prior year
period. The improvement in fiscal 1998 year-to-date operating margin
resulted primarily from a higher proportion of more profitable pharmaceutical
softgel products in the sales mix.
9
<PAGE>
Sales in Europe decreased 3% in the first nine 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,
sales in Europe for the nine months ended December 31, 1997 increased 6% as a
result of a 60% increase in ZYDIS-Registered Trademark- revenue, revenue from
the sale of OPTIDYNE-Registered Trademark- technology rights and interests,
the November 1997 launch of Hoffman-La Roche's FORTOVASE-Registered
Trademark- protease inhibitor softgel product, an 18% increase in sales of
Novartis' NEORAL-Registered Trademark- softgels and increased export of other
pharmaceutical softgel products from Germany and France. These sales gains
were partially offset by weak demand for both pharmaceutical and
non-pharmaceutical softgel products throughout Europe. The year-to-date
increase in European operating margin was primarily attributable to a more
profitable sales mix in Germany, sale of OPTIDYNE-Registered Trademark-
technology rights and interests and increased ZYDIS-Registered Trademark-
profit contribution, partially offset by increased manufacturing
infrastructure costs incurred in anticipation of new pharmaceutical product
launches.
Sales in the Company's Other International segment declined 2% as reported,
but increased 5% on a constant dollar basis, in the nine months ended
December 31, 1997. Strong year-to-date sales gains in Australia, Argentina
and Japan were offset by the weakness of the Japanese yen, Korean won and
Australian dollar versus the U.S. dollar. Other International sales gains
were due primarily to the strong H&N softgel markets in Australia and Japan.
For the same period, operating income declined significantly due in part to
R&D costs associated with the Windsor, Canada cytotoxic softgel facility.
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 for at least the next 12 to 18 months.
These factors include the recent strength of the U.S. dollar as compared to
that experienced in fiscal 1997, the weak consumer products 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 $6.0 million and $31.1 million in the
first nine months of fiscal 1998 and 1997, respectively. Operating
activities provided cash of $64.5 million and $66.2 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. Increased
working capital requirements in the current year period relate primarily to
increased unit volumes and the receipt in the prior year period of
substantial foreign withholding tax receivables. Year-to-date fiscal 1998
depreciation expense declined slightly due to the strong dollar and to
inclusion in the first half of the prior year of depreciation expense related
to two softgel plants closed in fiscal 1997.
Capital expenditures in the year-to-date period totaled $68.0 million as
compared to $42.2 million in the same period last year. Fiscal 1998 capital
expenditures are currently expected to approximate $90 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 and Japan. In
the prior year period, capital spending consisted
10
<PAGE>
primarily of expenditures for the expansion and upgrade of softgel production
facilities in France, the United States and Japan.
Financing activities for the nine months ended December 31, 1997 were
primarily comprised of $13.3 million in proceeds from the exercise of stock
options, the expenditure of $12.6 million for the repurchase of the Company's
stock on the open market and net borrowings of $23.5 million, used primarily
to fund capital expenditures. The prior year period included net proceeds of
$17.9 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 $8.2 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 and other
conditions, to repurchase the Company's outstanding common stock. The
Company believes that future cash flow from operations, together with cash
and short-term investments aggregating $34.0 million at December 31, 1997 and
amounts available under existing bank credit facilities 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 December 31, 1997 the Company's
debt-to-equity ratio, assuming the capitalization of operating leases, 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
"Best-in-Class" pharmaceutical softgel production facilities in France,
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 December
31, 1997, the Company had approximately $12.1 million of commitments for
future capital expenditures.
The Company also intends to 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 have increased to $7.9 million in the first
nine months of fiscal 1998 alone due to costs related to certain clinical
trials. The Company anticipates that ATP 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 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, short-term investments, debt
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%.
11
<PAGE>
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 December 31, 1997, the Company's outstanding long-term indebtedness
consisted of approximately $99.6 million of 6 3/4% senior notes (net of a
$0.4 million discount) due in February 2004, $44.6 million of borrowings
under the Company's bank credit facility, $6.3 million of industrial
development revenue bonds and $8.9 million of other indebtedness.
During the quarter ended December 31, 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.
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
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION
27 Financial Data Schedule. Filed herewith.
(b) REPORTS ON FORM 8-K: None.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
R.P. SCHERER CORPORATION
Date: February 13, 1998 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 DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-Q FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
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<RECEIVABLES> 134,998
<ALLOWANCES> 3,566
<INVENTORY> 66,804
<CURRENT-ASSETS> 243,829
<PP&E> 481,612
<DEPRECIATION> 128,273
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<CURRENT-LIABILITIES> 109,055
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