<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-6440
------------------
R.P. SCHERER INTERNATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 38-1207288
(State of Incorporation) (I.R.S. Employer Identification Number)
2075 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (810) 649-0900
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /x/ NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of the registrant's common stock as of November
10, 1994: 1,000 shares of common stock, par value $.33 1/3.
The registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
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<PAGE> 2
PART I
ITEM 1 FINANCIAL STATEMENTS
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------------------
For the three months ended For the six months ended
September 30, September 30,
--------------------------- -------------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $121,312 $105,179 $254,250 $213,633
Cost of sales 77,113 69,715 160,869 137,461
Selling and administrative expenses 16,815 14,402 34,343 28,734
Research and development expenses, net 4,591 3,104 8,982 6,212
-------- -------- -------- --------
Operating income 22,793 17,958 50,056 41,226
Interest expense 3,674 6,027 7,220 11,727
Interest earned and other (293) (364) (702) (954)
-------- -------- -------- --------
Income from continuing operations before
income taxes and minority interests 19,412 12,295 43,538 30,453
Income taxes 6,890 3,602 15,430 10,050
Minority interests 3,379 2,136 7,540 5,250
-------- -------- -------- --------
Net income $ 9,143 $ 6,557 $ 20,568 $ 15,153
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE> 3
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In thousands)
September 30, March 31,
1994 1994
------------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,281 $ 16,576
Short-term investments 4,412 6,041
Receivables, less reserves of:
September 30, 1994 - $3.5 million;
March 31, 1994 - $2.9 million 97,128 98,775
Inventories 66,134 56,492
Other current assets 6,592 5,260
-------- --------
196,547 183,144
-------- --------
PROPERTY:
Property, plant and equipment, at cost 318,092 284,992
Accumulated depreciation (76,927) (63,277)
-------- --------
241,165 221,715
-------- --------
OTHER ASSETS:
Intangibles, net of amortization 189,754 188,396
Deferred financing fees, net of amortization 1,805 1,658
Other assets 17,003 18,501
-------- --------
208,562 208,555
-------- --------
$646,274 $613,414
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 4,545 $ 3,936
Accounts payable 36,111 52,086
Accrued liabilities 43,304 36,802
Accrued income taxes 8,731 1,967
-------- --------
92,691 94,791
-------- --------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 190,514 187,949
Other long-term liabilities 52,253 49,865
Deferred income taxes 30,533 30,745
Minority interests in subsidiaries 36,206 35,354
-------- --------
309,506 303,913
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDER'S EQUITY:
Common stock, $.33 1/3 par value, 1,000 shares
authorized and issued 1 1
Additional paid-in capital 234,641 234,389
Retained earnings (deficit) 10,711 (9,857)
Currency translation adjustment (1,276) (9,823)
-------- --------
244,077 214,710
-------- --------
$646,274 $613,414
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 4
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
For the six months ended
September 30,
---------------------------
1994 1993
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 20,568 $ 15,153
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 10,784 8,582
Amortization of intangible assets 2,892 2,383
Amortization of deferred financing costs and debt discount 464 735
Minority interests in net income 7,540 5,250
Deferred tax provision and other (142) (1,192)
(Increase) decrease in receivables 5,613 (4,825)
Increase in inventories and other current assets (6,931) (3,613)
Decrease in accounts payable and accrued expenses (8,008) (4,879)
-------- --------
Net cash provided by operating activities 32,780 17,594
-------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (19,022) (16,469)
Acquisitions of businesses, net of cash acquired (Note 5) - (33,761)
Proceeds from sales of plant and equipment 373 155
Other (3,047) (3,049)
-------- --------
Net cash used by investing activities (21,696) (53,124)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 45,259 44,150
Long-term debt retirements and payments (45,486) (10,389)
Short-term borrowings, net 915 (240)
Cash dividends paid to minority shareholders of subsidiaries (7,073) (1,203)
-------- --------
Net cash provided (used) by financing activities (6,385) 32,318
-------- -------
Effect of currency translation on cash and cash equivalents 1,006 (160)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,705 (3,372)
Cash and cash equivalents, beginning of period 16,576 30,389
-------- --------
Cash and cash equivalents, end of period $ 22,281 $ 27,017
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 5
R.P. SCHERER INTERNATIONAL 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 International Corporation ("Scherer International"), a
Delaware corporation, and its subsidiaries, some of which are less than
wholly-owned. Scherer International is a wholly-owned subsidiary of R.P.
Scherer Corporation. R.P. Scherer Corporation's only operating asset is its
investment in Scherer International. Unless otherwise stated herein, the term
"Company" refers to either or both of Scherer International and R.P. Scherer
Corporation.
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, 1994, as filed with the Securities and Exchange
Commission. Certain items in the prior years' financial statements have been
reclassified to conform with the current year presentation.
2. INCOME TAXES
The Company records income tax expense for interim periods based on an
estimated consolidated effective income tax rate for the fiscal year. The
effective income tax rate in 1994 is higher than the U.S. Federal income tax
rate due to higher foreign income tax rates and goodwill amortization not
deductible for income tax purposes. For 1993, the effective rate is lower than
the U.S. Federal income tax rate primarily due to the recognition of foreign
income tax credits generated in the current year for U.S. tax purposes, offset
by goodwill amortization not deductible for income tax purposes.
3. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
(In thousands) September 30, March 31,
1994 1994
------------- ---------
<S> <C> <C>
Raw materials and supplies $35,146 $26,760
Work in process 11,593 10,289
Finished goods 19,395 19,443
------- -------
$66,134 $56,492
======= =======
</TABLE>
4. CONTINGENCIES
Three separate actions, which sought damages for, among other things, alleged
violations of state securities laws, fraud, misrepresentation, breach of
contract, conversion and negligence in connection with the 1986 private
placement sale of limited partnership interests and warrants of Paco
Development Partners II, a research and development partnership of which a
former subsidiary of the Company serves as general partner, have been settled
in a class action settlement. These actions include two New Jersey State court
actions which were consolidated (Nelson v. Dean Witter Reynolds, Inc., and
Barrios
5
<PAGE> 6
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
et al. v. Paco Pharmaceutical Services, Inc., et al.) and a New Jersey
federal court action (Nelson v. Ian Ferrier). The Company recognized during
the fourth quarter of fiscal 1994 a special charge of approximately $3.2
million representing the anticipated amount of all settlement-related costs in
excess of previously provided reserves.
On March 30, 1992, OCAP Acquisition Corp. ("OCAP") commenced an action in the
Supreme Court of the State of New York, County of New York, against Paco,
certain of its subsidiaries, the Company and Scherer International
(collectively, the "defendants"), arising out of the 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 seeks $75 million in actual damages, $100
million in punitive damages, as well as OCAP's attorney fees and other
litigation expenses, costs and disbursements incurred in bringing this action.
Pre-trial discovery with respect to the action is presently under way. Based
upon the investigation conducted by the Company to date, the Company believes
that this action lacks merit and intends to defend against it vigorously. In
the opinion of management, the ultimate outcome of this litigation will not
have a material adverse effect on the Company's business or financial
condition.
The Company was informed in August 1992 that soil at a manufacturing facility
in North Carolina owned and operated by the Company from 1975 to 1985 contained
levels of tetrachlorethene and other substances which exceeded environmental
standards. The Company voluntarily initiated a remedial investigation, and
initial remedial and removal actions have been completed by the Company and the
current owner of the facility for the known soil contamination at such site.
The Company continues to perform additional studies and remediation of the
area, including testing and removal of groundwater, which may also indicate the
necessity for additional remedial and removal actions. On the basis of the
results of investigations performed to date, the Company does not believe that
potential future costs associated with either the investigation or any
potential remedial or removal action will ultimately have a materially adverse
impact on the Company's business or financial condition.
The Company is a party to various other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources.
5. BUSINESS ACQUISITION
On July 1, 1993, the Company acquired all outstanding capital stock of
Pharmagel S.p.A. (Italy) and Pharmagel S.A. (France) (jointly "Pharmagel"), a
manufacturer of softgels which had been privately held. The Company accounted
for the acquisition as a purchase for financial reporting purposes, and has
included the net assets and results of operations of Pharmagel in the Company's
consolidated financial statements beginning July 1, 1993. The aggregate
purchase price, which approximated $30 million, was allocated to assets and
liabilities based on their fair values as of the date of acquisition, as well
as to a five year, $3.0 million non-compete agreement with the former owners of
Pharmagel. The purchase was funded primarily by borrowings under the Company's
bank credit facility, plus an additional amount payable to the sellers in
installments through June 30, 1999, not to exceed $4.5 million plus interest.
6
<PAGE> 7
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The allocation of the purchase price to the assets and liabilities of Pharmagel
was based upon various valuations and studies. The adjustments to the
historical net assets of Pharmagel are summarized as follows (amounts in
thousands):
<TABLE>
<S> <C>
Historical net assets of Pharmagel at July 1, 1993 $ 5,242
Adjustments of assets and liabilities:
Current assets (675)
Plant and equipment 1,321
Covenant not to compete 3,000
Goodwill 27,200
Current liabilities (3,764)
Long-term liabilities (2,324)
-------
$30,000
=======
</TABLE>
The cost of the covenant not to compete is being amortized over the life of the
agreement. Goodwill is being amortized on a straight-line basis over forty
years.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company and Pharmagel as if the acquisition had occurred at
the beginning of the period presented after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense on
acquisition borrowings, and related income tax effects. The pro forma
information is not necessarily indicative of what would have occurred had the
acquisition been made as of that date, and is not intended to be a projection
of future results or trends.
<TABLE>
<CAPTION>
(In thousands) For the six months ended
September 30, 1993
------------------------
<S> <C>
Net sales $220,770
Net income $ 15,006
</TABLE>
As of September 1, 1993, the Company also acquired certain tangible and
intangible assets of Gayoso Wellcome S.A., a softgel manufacturer in Spain, for
a purchase price of approximately $9.5 million. Gayoso Wellcome's operations
were not material in relation to the Company's consolidated financial
statements, and pro forma information for this acquisition is therefore not
presented.
7
<PAGE> 8
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, 1994 and 1993. 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 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 shareholder's equity will fluctuate depending upon the
strengthening or weakening of the U.S. dollar.
RESULTS OF OPERATIONS
Quarters Ended September 30, 1994 and 1993
The Company's sales for the second fiscal quarter ended September 30, 1994 were
$121.3 million, representing a 15% increase from sales of $105.2 million for
the same quarter last year. A majority of the increase in sales was achieved
in Europe, where the continued strengthening of the pharmaceutical business
situation in Germany contributed to a 25% European sales gain. The weakening
of the U.S. dollar relative to certain foreign currencies in the current fiscal
year quarter also added to the reported sales gain. On a constant foreign
exchange rate basis, the sales increase would have been 11% for the second
quarter of fiscal 1995 compared to the same quarter of the prior year.
Operating income for the second quarter of fiscal 1995 amounted to $22.8
million, a 27% increase from the $18.0 million earned in the second quarter of
fiscal 1994. On a constant exchange rate basis, operating income rose 22%
between these two quarters. Operating margin improved to 18.8% of sales for
the quarter ended September 30, 1994 from 17.1% of sales for the same quarter
last year. The improvement in profitability resulted from both the
comparatively higher sales volumes as well as a shift in product sales mix
towards higher margin pharmaceutical softgels (as described further below).
Sales of pharmaceutical softgels increased nearly 26% between the second fiscal
quarters of 1995 and 1994, while traditionally lower margin nutritional softgel
sales were essentially flat. A $2.4 million, or 17%, rise in selling and
administrative expenses partially offset the improvement in operating income
for the current fiscal year second quarter. Additions to marketing staffs,
advertising costs, commissions to sales agents related to the higher sales
levels and general inflationary factors account for the expense increase.
The Company incurred research and development expenses of $4.6 million during
the quarter ended September 30, 1994, representing a 48% increase from the $3.1
million expended in the prior year second quarter. Most of this increase is
associated with the Company's ATP initiative (as discussed further below),
partially offset by higher customer reimbursements for pharmaceutical softgel
development work in the United States. Excluding the increase in research and
development expenses, operating income increased 30% between the quarters ended
September 30, 1994 and 1993. Operating margins before research and development
expense were 22.6% for the quarter ended September 30, 1994 and 20.0% for the
quarter ended September 30, 1993.
Net income for the three months ended September 30, 1994 was $9.1 million,
representing a new second quarter earnings record and a 39% improvement from
the $6.6 million recorded for the same period last
8
<PAGE> 9
year. Net income for the current fiscal year quarter includes a $2.4 million
reduction in interest expense associated with the January 1994 refinancing of
Scherer International's $125.0 million 14% senior subordinated debentures
discussed below. The net income gain occurred in spite of a rise in the
Company's effective income tax rate to 35.4% in the fiscal 1995 second
quarter from 29.3% for the second quarter last year. The higher income tax
rate is attributable to changes in the geographic mix of pretax income
towards higher tax rate countries and increases in income tax rates in
certain countries.
Six Months Ended September 30, 1994 and 1993
Sales for the six month period ended September 30, 1994 were $254.3 million,
representing a 19% increase compared to sales of $213.6 million in the same
period last year. Sales gains were achieved in all of the Company's geographic
segments, especially Europe. The effects of a weaker U.S. dollar relative to
most foreign currencies increased reported sales only slightly during the
current year period. On a constant exchange rate basis, the sales increase
would have been 18% for the six months ended September 30, 1994, as compared to
the same period of the prior year.
The Company's 12-month sales order backlog rose to $141.8 million at September
30, 1994, a 26% increase from backlog at the same time last year. Sales
backlog increased 24% as measured using constant exchange rates. The increase
in backlog reflects continuing strong orders for the Company's products, most
notably for pharmaceutical softgels in Germany and North America and
nutritional softgels in the United Kingdom.
The Company earned operating income of $50.1 million for the six months ended
September 30, 1994, a 21% gain from the $41.2 million earned in the same period
of the prior year. On a constant exchange rate basis, operating income rose
20% between these two periods. Operating margin improved to 19.7% of sales for
the September 30, 1994 period from 19.3% for the same period last year. Such
improvement includes significant profit gains in Germany (discussed below), as
well as a sales mix shift toward higher margin pharmaceutical softgels. Sales
of pharmaceutical softgels rose 23%, while health and nutritional softgel sales
increased only 10% between the six month periods ended September 30, 1994 and
1993. The improvement in operating income was achieved in spite of increased
administrative expenses attributable in large part to additional investments in
marketing staffs and related costs in Germany and the United States and the
inclusion of Pharmagel (acquired July 1, 1993) for the full six months ended
September 30, 1994.
An intensification of research and development efforts further reduced reported
operating income and margin growth for the six months ended September 30, 1994.
Excluding research and development expenses, operating margin grew to 23.2% of
sales for the September 30, 1994 period, compared to 22.2% for the same period
of the prior year. Research and development costs were $9.0 million for the
six months ended September 30, 1994, representing a 45% increase from the $6.2
million incurred during last fiscal year's first six months. A substantial
majority of this increase relates to the Advanced Therapeutic Products group
("ATP"), which was formed in fiscal 1994 to engage in the development of
off-patent or soon to become off-patent drug compounds reformulated utilizing
the Company's advanced drug delivery systems. The Company expects that
spending for ATP activities will continue to increase at a significant rate for
the foreseeable future.
Net income for the first six months of fiscal 1995 reached $20.6 million,
compared to $15.2 million for the same period last fiscal year. In addition
to the operating income improvement discussed above, the Company realized the
benefit of a $4.5 million reduction in interest expense, primarily associated
with the January, 1994 refinancing through defeasance of $125 million of 14%
senior subordinated debentures with a combination of $100 million 6-3/4% senior
notes and bank debt. The Company's effective income tax rate rose to 35.4% for
the September 30, 1994 six months compared to 33.0% for the same period last
year. The higher effective income tax rate is the result of changes in the
geographic mix of pretax income and increases in income tax rates in certain
countries. Minority interests in income of subsidiaries for the six months
ended September 30, 1994 increased $2.3 million as a result of a substantial
improvement in earnings of the Company's 51%-owned German operation.
9
<PAGE> 10
Overview Of Results By Geographic Region
The following sets forth operating results for each of the Company's geographic
segments for the six months ended September 30, 1994 and 1993:
<TABLE>
<CAPTION>
(In thousands) Sales Operating Income Operating Margin
------------------------ ----------------------- -------------------
1994 1993 1994 1993 1994 1993
-------- -------- -------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States $ 60,524 $ 55,803 $14,798 $14,367 24.4% 25.7%
Europe 142,486 111,476 31,043 19,606 21.8 17.6
Other International 51,240 46,354 10,186 9,929 19.9 21.4
Unallocated (1) - - (5,971) (2,676) - -
-------- -------- -------- ------- ---- ----
$254,250 $213,633 $50,056 $41,226 19.7% 19.3%
======== ======== ======= ======= ==== ====
</TABLE>
(1) Includes general Corporate expenses and, in 1994, expenses associated
with ATP.
The Company's United States operations achieved an 8% sales gain for the six
months ended September 30, 1994. Sales of over-the- counter ("OTC")
pharmaceutical softgels were particularly strong, as planned customer launches
of several cough/cold and other OTC softgels led to a 30% sales gain in this
product line. Major branded products launched during the first six months of
fiscal 1995 include Alka-Seltzer Plus from Miles Laboratories and Drixoral from
Schering-Plough. Sales of nutritional softgels slowed during the first six
months of fiscal 1995, dropping nearly 10% from sales for the same period of the
prior fiscal year. All of this decline is attributable to reductions in sales
of Vitamin E, resulting from a general decline in demand which began in the
fourth quarter of fiscal 1994, and a temporary delay in orders by the Company's
largest nutritional customer in the United States. The decrease in nutritional
softgel sales had little effect on operating income as a result of the
relatively low margins of Vitamin E products due to their high material cost
content and commodity nature. Overall operating income improved slightly,
increasing by 3% to $14.8 million for the six months ended September 30, 1994,
as the incremental profits from sales of pharmaceutical and other softgels was
mostly offset by the costs of increased marketing staffs, promotional expenses
and development resources to meet the increasing demand for the Company's
products.
Sales in Europe increased 28% for the six months ended September 30, 1994, as
compared to the same period last year. The most significant sales increase was
achieved in Germany, where the Company's sales continued to recover from the
effects of government healthcare reforms instituted in January 1993. Sales
elsewhere in Europe also increased at double digit rates, aided in large part by
the acquisition of Pharmagel on July 1, 1993. Primarily as a result of the
recent strength in the German pharmaceutical market, operating income grew 58%
to $31.0 million for the six months ended September 30, 1994, with a related
improvement in operating margin for the period. As the adverse business
environment in Germany began to improve in the last half of fiscal 1994, the
Company expects that the rate of growth in sales and operating income will slow
somewhat in the second half of fiscal 1995 compared with that experienced in the
first half of fiscal 1995.
The Company's Other International segment contributed a $4.9 million, or 11%,
increase in sales for the six months ended September 30, 1994 due to the
continued strength of softgel operations in Japan, Canada and South America, as
well as hardshell capsules produced by the Company's Pharmaphil division in
Canada. Operating income, however, grew a modest 3% as a less favorable product
sales mix in the Australian nutritionals market dampened the income growth of
the Other International segment operations.
CASH FLOWS
Cash and cash equivalents increased by $5.7 million for the six month period
ended September 30, 1994, as compared with a decrease of $3.4 million in the
same period in 1993. Operating activities provided cash of $32.8 million and
$17.6 million for the current and prior year periods, respectively. For the
period ended September 30, 1994, cash generated from continued strong earnings
was partially offset by a $9.3 million increase in net working capital. Such
increase is related primarily to the timing of payments for value added taxes
in certain European subsidiaries, as well as increases in raw materials
inventories related to higher order
10
<PAGE> 11
levels, offset by reductions in receivables largely due to the timing of
collections from certain major customers. For the prior year period, cash
generated from operating earnings was offset by a $13.3 million increase in
net working capital. Increases in receivables and inventories associated with
increased sales levels, offset by decreases in current liabilities primarily
related to the timing of value added tax payments in Europe, contributed to the
prior year net working capital increase.
Capital expenditures for the current year six months amounted to $19.0 million,
compared to the prior year period's capital expenditures of $16.5 million.
Current period capital spending consisted primarily of expenditures in North
America related to the completion of a new satellite softgel production
facility for nutritional products, in the United Kingdom related to the
continuing expansion of the Zydis(R) production facility and in Australia for
the construction of a replacement manufacturing facility, as well as general
facility and equipment additions and improvements. In the prior year, capital
expenditures were related primarily to the construction in the United Kingdom
of the Zydis(R) production and Pulsincap(R) development facilities, and other
general facility and equipment additions and improvements. For the six months
ended September 30, 1993, $33.8 million was used for the acquisition of the
capital stock of Pharmagel and of certain softgel assets of Gayoso Wellcome (as
discussed in Note 5 to the consolidated financial statements).
Financing activities for the six months ended September 30, 1994, include
primarily $7.1 million of dividends paid to minority shareholders of
subsidiaries. In the prior year period, financing activities reflect
primarily $24.5 million of net borrowings under the Company's bank credit
facility to fund the acquisition of Pharmagel, as well as a net $9.3 million of
other borrowings under the bank credit facility to fund working capital needs
and capital expenditures.
LIQUIDITY AND FINANCIAL CONDITION
During the next several years, a significant portion of the Company's cash flow
will be used to fund capital expenditures, increased investments in research
and development, and to service and reduce indebtedness. Capital expenditures
are estimated at $50 million for each of fiscal years 1995 and 1996, and are
expected to decline to the $30-40 million level per year thereafter. Such
expenditures will be used to continue the expansion of softgel production
capacity to meet anticipated customer demand, as well as to ensure continuing
compliance with pharmaceutical Good Manufacturing Practices (GMP) standards for
the Company's facilities. In addition, such expenditures include the expansion
of production facilities for Zydis(R) and the construction of equipment and
facilities for the Company's other advanced drug delivery systems. As of
September 30, 1994, the Company had approximately $10.5 million of commitments
for future capital expenditures.
The Company will also continue to invest a significant portion of its cash flow
in research and development activities for its advanced drug delivery systems,
including the Scherersol(TM), Zydis(R) and Pulsincap(R) technologies, as well
as to develop new drug delivery technologies and to fund the Company's ATP
initiative. The Company believes that changes currently affecting worldwide
pharmaceutical markets will enhance the commercial value of products which can
demonstrate therapeutic and cost benefits over existing therapies, and through
ATP intends to capitalize upon these trends by creating new products which
reformulate existing compounds utilizing the Company's proprietary drug
delivery technologies. The Company expects that expenses associated with ATP
will approximate $30-40 million in aggregate over the next three to four years.
Revenues from ATP product sales and royalties are expected to begin no
earlier than fiscal 1997, assuming the development and commercialization of
such products is successful.
The Company actively reviews drug delivery systems businesses and technologies
for potential investment, consistent with its strategic objectives. Examples
are the Company's fiscal 1994 acquisition of an ophthalmic drug delivery
technology from Zeneca Limited, and an agreement to fund feasibility studies
for a dry powder inhaler device and a controlled-release tablet product with a
UK-based drug research concern. Generally, such investments are not expected
to involve significant initial funding or funding commitments on the part of
the Company. Management intends that any acquisition which would require
significant funding would be
11
<PAGE> 12
financed largely through the issuance of R.P. Scherer Corporation common
stock, depending upon market conditions, so as not to materially increase the
Company's debt to equity ratio.
At September 30, 1994, the Company's outstanding long-term indebtedness
consisted of approximately $99.3 million of 6-3/4% senior notes (net of a $0.7
million discount), $67.4 million of borrowings under the Company's bank credit
facility, $13.1 million of industrial development revenue bonds, and
approximately $11.6 million of other indebtedness.
In January 1994, Scherer International completed the refinancing of a
significant portion of its outstanding debt. Using the net proceeds from the
offering of the senior notes and additional proceeds from borrowing under the
Company's bank credit facility, the Company defeased its 14% senior
subordinated debentures. The senior notes bear interest at 6-3/4% of face
value, payable semi- annually, and mature in full in February 2004. The 6-3/4%
senior notes are noncallable and unsecured, ranking pari passu with all other
unsecured and senior indebtedness of Scherer International. Annual interest
expense on the senior notes outstanding is approximately $6.8 million
(excluding amortization of the original issue discount and deferred financing
fees), payable semi- annually. The indenture under which the senior notes were
issued restricts the Company's ability to incur additional liens, enter into
sale-leaseback transactions, engage in certain transactions with affiliates,
and engage in certain business combinations.
In March 1994, the Company entered into a new bank credit facility as a
replacement for the Company's previous bank credit agreement. This credit
facility allows for revolving credit borrowings up to an aggregate of $175.0
million in various currencies, and expires April 1, 1999. Interest is payable
quarterly at LIBOR plus .575% with a further reduction anticipated later during
the term of the facility based on certain financial performance criteria, or at
the bank's prime rate. Unused borrowing availability is subject to annual
commitment fees of 1/4%. Borrowings under this agreement are unsecured, and
rank pari passu with all other unsecured and senior indebtedness.
The bank credit facility requires the Company to satisfy various annual and
quarterly financial tests, including maintenance on a consolidated basis of
specified levels of tangible net worth and cash flow coverage, leverage, and
fixed charge ratios. The agreement also restricts the Company's ability to
incur additional indebtedness or liens, make investments and loans, dispose of
assets, or consummate a business combination, and limits the ability of the
Company to pay dividends.
Pursuant to other revolving credit arrangements, the Company and certain of its
subsidiaries may borrow up to $12.9 million. As of September 30, 1994, the
Company had outstanding approximately $3.6 million under these revolving credit
arrangements.
The Company believes that its future cash flows from operations, together with
cash and short-term investments aggregating $26.7 million at September 30, 1994
and amounts available under bank credit facilities will be adequate to meet
anticipated capital investment, operating, and debt service requirements.
Inflation and Accounting Policies
In the view of management, the effects of inflation and changing prices on the
Company's net results of operations and financial condition were not
significant.
In November 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, Employer's Accounting for
Postemployment Benefits, which must be adopted for the Company's 1995 fiscal
year. This statement requires the use of the accrual method to recognize
liabilities for postemployment benefits. The Company has determined that the
adoption of this statement will not significantly affect the Company's future
financial results or position.
12
<PAGE> 13
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 - None.
(b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed with the
Securities and Exchange Commission during the period for which
this report is filed.
13
<PAGE> 14
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 INTERNATIONAL
CORPORATION
Date: November 14, 1994 By: /s/ Nicole S. Williams
---------------------------------
Nicole S. Williams
Executive Vice President, Finance
and Chief Financial Officer,
Treasurer, and Secretary
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- ----------- ----
<S> <C> <C>
27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000087243
<NAME> R P SCHERER INTERNATIONAL
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> SEP-30-1994
<CASH> 22,281
<SECURITIES> 4,412
<RECEIVABLES> 100,628
<ALLOWANCES> 3,500
<INVENTORY> 66,134
<CURRENT-ASSETS> 196,547
<PP&E> 318,092
<DEPRECIATION> 76,927
<TOTAL-ASSETS> 646,274
<CURRENT-LIABILITIES> 92,691
<BONDS> 190,514
<COMMON> 1
0
0
<OTHER-SE> 244,076
<TOTAL-LIABILITY-AND-EQUITY> 646,274
<SALES> 254,250
<TOTAL-REVENUES> 254,250
<CGS> 160,869
<TOTAL-COSTS> 204,194
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,518
<INCOME-PRETAX> 43,538
<INCOME-TAX> 15,430
<INCOME-CONTINUING> 20,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,568
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
