<PAGE> 1
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, 1993
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 February
10, 1994: 1,000 shares of common stock, par value $.33 1/3.
The registrant meets the conditions set forth in the General Instructions
H(1)(a) and (b) for Form 10-Q and is therefore filing this Form with the
reduced disclosure format.
<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 nine months ended
December 31, December 31,
---------------------------- ----------------------------
1993 1992 1993 1992
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $114,820 $97,966 $328,453 $298,990
Cost of sales 74,848 60,540 212,309 181,097
Selling and administrative expenses 15,769 13,683 44,503 41,235
Research and development expenses, net 3,287 2,850 9,499 8,524
---------- ---------- ---------- ----------
Operating income 20,916 20,893 62,142 68,134
Interest expense 6,069 5,600 17,796 19,704
Interest earned and other (587) (402) (1,541) (2,643)
---------- ---------- ---------- ----------
Income from continuing operations before income
taxes, minority interests and accounting change 15,434 15,695 45,887 51,073
Income taxes 4,404 5,491 14,454 19,313
Minority interests 2,126 3,101 7,376 10,210
---------- ---------- ---------- ----------
Income from continuing operations before
accounting change 8,904 7,103 24,057 21,550
Loss from discontinued operation (Note 2) - - - (647)
Extraordinary loss from debt extinguishments (Notes 7,8) (15,500) (8,392) (15,500) (8,392)
Cumulative effect of accounting change (Note 3) - - - 974
---------- ---------- ---------- ----------
Net income (loss) $(6,596) $(1,289) $8,557 $13,485
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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)
December 31, March 31,
1993 1993
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,150 $ 30,389
Short-term investments 4,337 3,476
Receivables, less reserves of:
December 31, 1993 - $2.1 million;
March 31, 1993 - $2.3 million 90,470 80,537
Inventories 51,010 48,310
Other current assets 5,675 4,573
------------ ------------
168,642 167,285
------------ ------------
PROPERTY:
Property, plant and equipment, at cost 270,636 243,538
Accumulated depreciation (60,657) (48,987)
------------ ------------
209,979 194,551
------------ ------------
OTHER ASSETS:
Intangibles, net of amortization 182,940 155,595
Deferred financing fees, net of amortization 695 4,407
Other assets 17,263 10,346
------------ ------------
200,898 170,348
------------ ------------
$579,519 $532,184
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 2,859 $ 2,465
Accounts payable 36,458 41,557
Accrued liabilities 31,745 34,410
Accrued income taxes 3,325 7,336
------------ ------------
74,387 85,768
------------ ------------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt 198,455 141,151
Other long-term liabilities 45,151 38,812
Deferred income taxes 27,221 31,083
Minority interests in subsidiaries 29,575 32,369
------------ ------------
300,402 243,415
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDER'S EQUITY:
Common stock, $.33 1/3 par value, 1,000 shares
authorized and outstanding 1 1
Additional paid-in capital 234,144 233,743
Retained deficit (16,394) (24,951)
Currency translation adjustment (13,021) (5,792)
------------ ------------
204,730 203,001
------------ ------------
$579,519 $532,184
------------ ------------
------------ ------------
</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 nine months ended
December 31,
-----------------------------
1993 1992
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $8,557 $13,485
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 13,131 12,526
Amortization of intangible assets 3,808 3,270
Amortization of deferred financing costs and debt 1,110 1,455
discount
Minority interests in net income 7,376 10,210
Deferred tax provision and other (180) (2,444)
Loss from discontinued operation - 647
Extraordinary loss on debt extinguishments (Notes 7,8) 15,500 8,392
Cumulative effect of accounting change - (974)
Increase in receivables (9,771) (3,238)
Increase in inventories and other current assets (2,179) (3,815)
Decrease in accounts payable and accrued expenses (13,555) (12,592)
--------- ---------
Net cash provided by operating activities 23,797 26,922
--------- ---------
INVESTING ACTIVITIES:
Purchases of plant and equipment (27,789) (20,463)
Acquisition of businesses, net of cash acquired (Note 6) (33,761) -
Proceeds from sales of plant and equipment 864 128
Proceeds from disposition of subsidiary - 28,047
Other (3,768) (259)
--------- ---------
Net cash provided (used) by investing activities (64,454) 7,453
--------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 61,751 21,006
Long-term debt retirements and payments (26,375) (57,983)
Short-term borrowings, net (395) (929)
Cash dividends paid to minority shareholders of subsidiaries (7,014) (626)
--------- ---------
Net cash provided (used) by financing activities 27,967 (38,532)
--------- ---------
Effect of currency translation on cash and cash equivalents (549) (507)
--------- ---------
Net decrease in cash and cash equivalents (13,239) (4,664)
Cash and cash equivalents, beginning of period 30,389 44,761
--------- ---------
Cash and cash equivalents, end of period $17,150 $40,097
--------- ---------
--------- ---------
</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, and 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, 1993, as filed with the Securities and Exchange
Commission.
2. DISCONTINUED OPERATION
In fiscal 1992, the Company reached a decision to dispose of its former
subsidiary, Paco Pharmaceutical Services, Inc. ("Paco"). Accordingly, the net
operating results of Paco and the loss from Paco's disposal are reported as a
discontinued operation in the consolidated statement of operations. In August
1992, the Company disposed of Paco through an initial public offering of Paco's
common stock, and realized net proceeds of $28.0 million. In connection with
the offering, the Company agreed to indemnify Paco for any liabilities and
costs incurred subsequent to March 31, 1992, related to the litigation
involving Paco specifically described in Note 5. In addition, the Company has
indemnified Paco for any additional U.S. federal and certain state tax
liabilities arising from the date of the Company's acquisition of Paco through
the date of completion of the offering.
For the nine month period ended December 31, 1992 (through the August 26, 1992
date of disposal), Paco had net sales of $30.2 million, interest expense of
$1.1 million (including an allocation of consolidated interest expense for debt
attributable to Paco), income taxes of $1.0 million, and no net income. The
consolidated statement of cash flows excludes Paco's net cash used of $0.1
million for the nine month period ended December 31, 1992.
3. 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 1993 is lower than the U.S. Federal income tax
rate primarily due to the recognition of foreign income tax credits generated
in the current fiscal year for U.S. tax purposes, offset by goodwill
amortization not deductible for income tax purposes. In 1992, the effective
tax rate was higher than the U.S. Federal income tax rate primarily due to
higher foreign income tax rates, goodwill amortization not deductible for
income tax purposes, and restrictions as to the recognition of foreign income
tax credits for U.S. tax purposes.
Effective April 1, 1992, the Company adopted the provisions of the Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). As a result, the Company recorded
5
<PAGE> 6
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
income of approximately $1.0 million, which represented the net decrease in
deferred tax liabilities resulting from the adoption of SFAS 109 as of that
date. Such amount has been reflected in the consolidated statement of
operations as the cumulative effect of an accounting change for the nine months
ended December 31, 1992.
4. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, March 31,
1993 1993
------- -------
<S> <C> <C>
Raw materials and supplies $26,469 $23,881
Work in process 6,654 7,365
Finished goods 17,887 17,064
------- -------
$51,010 $48,310
------- -------
------- -------
</TABLE>
5. CONTINGENCIES
The Company's former subsidiary Paco, certain of Paco's subsidiaries, the
Company and other defendants are parties to a group of actions commenced,
beginning in April 1990, in Federal and state courts in New Jersey and in
Federal courts in New York and Massachusetts by limited partners of Paco
Development Partners II ("PDP II"), a research and development partnership in
which a subsidiary of Paco serves as the general partner. The defendants were
granted summary for dismissal judgment with respect to the New York actions on
March 29, 1993, and the time to appeal this decision has expired. In the New
Jersey state court action (Nelson v. Dean Witter Reynolds, Inc.,
MRS-L-5014-90), a class consisting of the 14 investors who reside in New Jersey
has been certified. On October 23, 1992, the Company, Paco and its affiliates
moved for summary judgment as to three counts of the complaint. This motion
was denied on January 6, 1993. A second action commenced in New Jersey Federal
court, has been stayed pending resolution of the New Jersey state court action
(Nelson v. Ian Ferrier, Civil Action 91-5334(JWB)). No class has been
certified in this federal action.
Plaintiffs in each of these actions seek damages of an unspecified amount for,
among other things, alleged violations of state securities law, fraud,
misrepresentation, breach of contract, conversion and negligence in connection
with the $25 million private placement sale of PDP II limited partnership
interests and warrants in 1986. Plaintiffs in the state court action also seek
damages, derivatively, on behalf of PDP II, for alleged breaches of fiduciary
duty and breach of contract in connection with the management of PDP II. On
October 19, 1993, the plaintiffs in the New York federal court action described
above (in which the defendants were granted summary judgment) filed a new
complaint in state court in New Jersey. This complaint alleges state law
causes of action for fraud, negligent misrepresentation, breach of fiduciary
duty and breach of contract. The Company believes that it has meritorious
defenses to these actions and intends to defend against them 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.
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
6
<PAGE> 7
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. Discovery with respect to the action has commenced;
however, discovery has been temporarily stayed by OCAP's filing of a motion for
partial summary judgment. The Company has filed a cross-motion for dismissal
based on discovery to date and is awaiting the decision of the Court. 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.
6. 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"), and
has accounted for such acquisition as a purchase for financial reporting
purposes. Pharmagel is a manufacturer of softgels, and had been privately
held. The net assets and results of operations of Pharmagel are included in
the Company's consolidated financial statements beginning July 1, 1993. The
aggregate purchase price, which approximates $30 million, was allocated to
assets and liabilities based on preliminary estimates of their fair values as
of the date of acquisition. The purchase was funded primarily by borrowings
under the Company's bank credit facility, plus an additional amount not to
exceed $4.5 million payable to the sellers during the next six years. The
purchase price exceeds the fair value of the net assets acquired by a currently
estimated $22.4 million, which is classified as goodwill in the statement of
financial position and 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 periods 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
7
<PAGE> 8
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
indicative of what would have occurred had the acquisition been made as of
those dates, and is not intended to be a projection of future results or
trends.
<TABLE>
<CAPTION>
(In thousands) For the
quarter
ended For the nine months ended
December 31, December 31,
------------ --------------------------
1992 1993 1992
------------ --------- ---------
<S> <C> <C> <C>
Net sales $104,847 $335,590 $321,373
Income from continuing
operations $6,787 $23,910 $21,037
Net income $(1,605) $8,410 $12,972
</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 $9.4 million. Gayoso Wellcome's operations
are not material in relation to the Company's consolidated financial
statements, and pro forma information for this acquisition is therefore not
presented.
7. FISCAL YEAR 1993 REPURCHASE OF SUBORDINATED DEBENTURES
During the quarter ended December 31, 1992, the Company repurchased
approximately $42.5 million principal amount of the Subordinated Debentures for
an aggregate purchase price of approximately $49.3 million, plus accrued
interest. As a result of these repurchases, the Company recognized an
extraordinary charge of $10.3 million, less related income tax benefits of $1.9
million, including the write-off of unamortized bond discount and deferred
financing costs. Annual interest expense on the Subordinated Debentures
repurchased was approximately $6.4 million. Sources of funds for the
repurchases consisted primarily of cash on hand and, to a lesser extent,
borrowings under the Company's bank credit facility.
8. SUBSEQUENT EVENTS - FINANCING ACTIVITIES
In January 1994, Scherer International successfully completed a public offering
of $100 million aggregate principal amount of its 6 3/4% Senior Notes ("Senior
Notes") due February 1, 2004 ("Offering"). The Senior Notes are noncallable
and are unsecured obligations, ranking pari passu with all other unsecured and
senior indebtedness of Scherer International. Prior to the issuance of this
debt, the Company executed an amendment to the Company's bank credit facility
which removed all collateral requirements. Interest on the Senior Notes is
payable February 1 and August 1, commencing August 1, 1994. The indenture under
which the Senior Notes were issued contains certain covenants which, among
other things, limit the ability of the Company and its subsidiaries to incur
liens, to enter into sale and lease-back transactions, to engage in certain
transactions with affiliates, and to merge or consolidate with, or transfer all
or substantially all, of its assets to another person. The proceeds of the
Offering to the Company (prior to deducting certain expenses related to the
Offering) were $98.1 million.
On January 28, 1994, with the net proceeds from the Offering and additional
proceeds from borrowings under the Company's bank credit facility, the Company
defeased its 14% Senior Subordinated Debentures ("Subordinated Debentures"),
which have an outstanding principal amount of $125.1 million. The Company
deposited into an irrevocable trust account for the benefit of the holders of
the Subordinated Debentures an amount of United States government obligations
sufficient to pay, with respect to the Subordinated Debentures, all interest
thereon through the November 1, 1994 call date ("Call Date"), the call premium
thereon and the outstanding principal thereof when due upon redemption
("Defeasance"). The Company remains obligated to pay interest and principal on
the Subordinated Debentures when due but, subject to certain exceptions, is no
longer subject to the terms, agreements and covenants related to the
Subordinated Debentures.
As a result of the Defeasance, the Company recognized an extraordinary loss for
accounting purposes of $15.5 million in the quarter ended December 31, 1993,
reflecting the estimated after-tax difference between the recorded value of the
Subordinated Debentures and their face value, the call premium, the prepayment
of net interest through the Call Date, and the write-off of unamortized
deferred financing costs related to the Subordinated Debentures. As of
December 31, 1993, the Company recognized future
8
<PAGE> 9
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
tax benefits of approximately $4.8 million resulting from the Defeasance, which
are included in Other Long-Term Assets in the accompanying Consolidated
Statement of Financial Position. The Company also recorded a $17.0 million
liability as a component of long-term debt for its commitments related to the
Defeasance.
9
<PAGE> 10
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, 1993 and 1992. A majority
of the Company's sales, income and cash flows is derived from its international
operations. With the exception of Brazil, the financial position and the
results of operations of the Company's foreign subsidiaries are measured using
the local currency 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
income of foreign subsidiaries will be higher or lower depending upon a
weakening or strengthening of the U.S. dollar. In addition, a substantial
amount of the Company's net assets are based in its foreign operations, and are
translated into U.S. dollars primarily 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 December 31 1993 and 1992
Sales for the third fiscal quarter ended December 31, 1993 were a record $114.8
million, amounting to a 17% increase from the $98.0 million reported for last
year's third quarter. A significantly stronger U.S. dollar in the current year
quarter had the effect of depressing the reported sales gain. On a constant
exchange rate basis, the sales increase would have been 22% for the quarter
ended December 31, 1993. Sales for this year's third quarter included $5.5
million from Pharmagel operations, which were acquired July 1, 1993 (see Note 6
to the Consolidated Financial Statements).
The Company's 12-month sales backlog was $123.4 million at December 31,
1993, a 24% increase from the same time a year ago. Sales backlog increased 28%
as measured using constant foreign exchange rates. This increase primarily
reflects significant additional order activity in the Company's United States
and German operations as compared to the prior year. The increase in Germany
is the first within the past several quarters and amounts to an 18%
improvement from the prior year and a 23% gain from September 30, 1993.
Operating income was $20.9 million for the quarter ended December 31, 1993,
unchanged from the same quarter last year. Operating income grew by 4% on a
constant exchange rate basis. The Company continued to experience a decline in
operating margin, falling to 18.2% for the quarter ended December 31, 1993 as
compared to 21.3% in the same quarter last year. As described further below,
this decline results primarily from a sales mix shift towards lower margin
health and nutritional products. Selling and administrative expenses increased
15% to $25.8 million in the December 31, 1993 quarter, primarily as a result of
the Pharmagel acquisition. Before the increase related to Pharmagel, selling
and administrative expenses fell to 12.7% of sales in the quarter ended
December 31, 1993 as compared to 14.0% of sales for last year's third quarter.
Research and development expenses also increased by 15%, amounting to nearly
$3.3 million for the three months ended December 31, 1993. This increase
reflects continued spending for development of the Company's Scherersol(TM) and
Pulsincap(R) products and costs associated with the newly formed Advanced
Therapeutic Products group in the United Kingdom.
Income from continuing operations reached a record $8.9 million for the quarter
ended December 31, 1993, compared to $7.1 million for the same quarter last
year, primarily as a result of lower non-operating expenses in the current year
quarter. Net interest expense rose $0.3 million to $5.5 million in the quarter
ended December 31, 1993, largely as a result of interest expense on debt used
to fund the Pharmagel acquisition and transaction losses related to monetary
inflation experienced by the Company's Brazilian subsidiary. Income tax
provisions were $4.4 million (28.5% of pretax income) for the quarter ended
December 31, 1993 and $5.5 million (35.0% pretax income) for the quarter ended
December 31, 1992. The lower tax provision in the 1993 quarter resulted from a
shift in income toward lower tax rate countries, reduced Corporate income tax
rates in Germany and Australia and a $.5 million benefit from a revision in the
estimated annual consolidated tax rate from that used for the first half of the
fiscal year. Minority interests in income fell nearly $1.0 million in the
quarter ended December 31, 1993 compared to the same quarter last fiscal year
as a result of reduced income from the Company's 51% owned Germany subsidiary.
In January, 1994, the Company successfully refinanced, through defeasance, the
outstanding 14% Senior Subordinated Debentures of Scherer International. For
financial reporting purposes, the extraordinary loss of $15.5 million related
to the defeasance was recorded as of December 31, 1993, resulting in a $6.6
million net loss for the quarter. See "Liquidity and Financial Condition"
below for further discussion.
The following sets forth operating results for each of the Company's geographic
segments for the quarters ended December 31, 1993 and 1992:
<TABLE>
<CAPTION>
(In thousands) Sales Operating Income Operating Margin
-------------------- ------------------- -------------------
1993 1992 1993 1992 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States $ 31,623 $21,952 $ 7,766 $ 6,508 24.6% 29.6%
Europe 57,763 55,672 9,068 12,784 15.7 23.0
Other International 25,434 20,342 5,172 3,774 20.3 18.6
Unallocated - - (1,090) (2,173) - -
--------- -------- -------- -------- ------ ------
$114,820 $97,966 $20,916 $20,893 18.2% 21.3%
--------- -------- -------- -------- ------ ------
--------- -------- -------- -------- ------ ------
</TABLE>
The Company's U.S. operations generated a 44% sales gain for the quarter ended
December 31, 1993. Sales of the Company's anti- oxidant softgels (primarily
Vitamin E) more than doubled, resulting in part from the increased popularity
of these products due to favorable medical studies and media reports. Sales
for the quarter also benefited from record demand for over-the-counter ("OTC")
pharmaceutical softgels, including several new branded cough/cold products.
Operating income increased 19% for the 1993 quarter compared to the same
quarter a year earlier, while operating margin declined from 29.6% in last
year's third quarter to 24.6% in the current year quarter. This decline in
margin rate is due to the higher proportion of low margin nutritional softgel
sales in the 1993 quarter.
Sales in Europe increased 4% for the quarter ended December 31, 1993, despite a
stronger U.S. dollar as compared to the same quarter last year. On a constant
exchange rate basis, sales would have increased _____%. The sales increase is
attributable to the addition of Pharmagel in the current fiscal year and strong
sales of specialty nutritional softgels in the United Kingdom. Operating
income declined 29% due in part to significantly lower sales of higher margin
pharmaceutical softgels in Germany and elsewhere. Although the market
situation is improving in Germany, the Company continues to be adversely
affected by government healthcare reforms implemented at the beginning of
calendar year 1993 and recessionary economic conditions. In addition,
Pharmagel operated at a break-even level in the December 31, 1993 quarter,
reducing the Company's margin rate in Europe. The Company expects Pharmagel to
provide a positive income contribution next fiscal year when it is integrated
with Scherer's other European operations.
The Company's Other International segment achieved a 25% sales increase
for the current year quarter as a result of strong demand for both nutritional
and pharmaceutical softgels, particularly in Australia, Canada and Japan.
Profits from these additional sales led to a 37% improvement in operating income
for the current year quarter.
Nine Months Ended December 31, 1993 and 1992
Sales for the nine months ended December 31, 1993 were $328.5 million,
representing a 10% increase over sales of $299.0 million for the same period
last year. Strong sales results were achieved in the United States and Other
International segments, offset by the effects of a stronger U.S. dollar
relative to most foreign currencies and the aforementioned weakness of the
German pharmaceutical market. The sales increase between the two periods was
16% as measured using constant exchange rates.
Operating income amounted to $62.1 million for the nine months ended December
31, 1993, a decrease of $6.0 million, or 9%, from the $68.1 million recorded
for the same period a year earlier. The decline would have been 5% if measured
using constant exchange rates. A significant part of the decline in operating
income is attributable to the Company's German operations. The Company
contained selling and administrative expenses to $44.5 million in the current
year nine months (an 8% increase), despite a $3.1 million addition due to the
acquisition of Pharmagel. Before the sales and expenses attributable to
Pharmagel, selling and administrative expenses declined to 13.0% of sales in
the 1993 nine months from 13.8% last year. The Company increased net research
and development spending by $1.0 million, or 11% (18% at constant exchange
rates) in the nine months ended December 31, 1993, primarily for pharmaceutical
softgel development activities and continued investments in the Company's
Pulsincap(R) drug delivery device.
The Company reported income from continuing operations of $24.1 million for the
nine months ended December 31, 1993, a 12% improvement versus the $21.6 million
for the same period a year ago. Reductions in income taxes and minority
interests in income of subsidiaries for the same reasons mentioned under the
quarterly discussion above provided a combined $7.7 million earnings increase.
A reduction in interest expense of $1.9 million due primarily to the Company's
October 1992 repurchase of $42.5 million for value of its 14% Senior
Subordinated Debentures also contributed to this improvement.
The following table shows the operating results of the Company's geographic
segments for the nine months ended December 31, 1993 and 1992:
<TABLE>
<CAPTION>
(In thousands) Sales Operating Income Operating Margin
-------------------- -------------------- -------------------
1993 1992 1993 1992 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States $ 87,426 $ 63,167 $22,133 $18,908 25.3% 29.9%
Europe 169,239 176,027 28,674 41,772 16.9 23.7
Other International 71,788 59,796 15,101 11,240 21.0 18.8
Unallocated - - (3,766) (3,736) - -
------- ------- ------- ------- ------- -------
$328,453 $298,990 $62,142 $68,134 18.9% 22.8%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
10
<PAGE> 11
Sales of U.S. operations increased 38% for the nine months ended December 31,
1993, reflecting strong demand for Vitamin E and other anti-oxidant vitamin
softgels, as well as significant growth of OTC softgel medications. Operating
income in the U.S. increased 17% in the December 31, 1993 nine months due to
the additional sales volumes. Operating margins, however, declined
significantly as a majority of the sales gain was from nutritional softgels
which, in the U.S., generally have a high material cost content relative to
their sales value when compared to other softgel types.
The Company experienced a 5% decline in sales of its European operations for
the nine months ended December 31, 1993. Sales in Germany declined $13.8
million due to the difficult industry and economic factors discussed previously
and the effects of a comparatively stronger U.S. dollar. The Company's other
European operations registered local currency sales gains over the prior year
period, including $10.4 million of sales contributed by Pharmagel. Operating
income in Europe decreased by 31% due primarily to the weaker foreign currency
exchange rates and lower prescription pharmaceutical sales in Germany. The
shift in product mix in Germany and elsewhere away from prescription
pharmaceutical softgels, break-even results from Pharmagel and higher research
and development costs all contributed to a 6.8 point decrease in European
operating margins.
In Other International operations, sales increased by 20% for the nine months
ended December 31, 1993 compared to the same period last year. Significant
sales gains of nutritional softgels were achieved in Australia, Japan and
Canada. The sales volume growth led to a 34% increase in operating income. As
a result of efficiencies of scale related to the growth in sales of nutritional
softgels (which are characterized by strong gross margin rates in both
Australia and Japan), operating margin improved from 18.8% in the prior year
period to 21.0% for the 1993 nine months.
CASH FLOWS
Cash and cash equivalents decreased by $13.2 million for the nine month period
ended December 31, 1993, as compared with a decrease of $4.7 million in the
same period in 1992. Operating activities provided cash of $20.2 million and
$26.9 million for the current and prior year periods, respectively. For the
period ended December 31, 1993, cash generated from continued strong earnings
was offset by a $28.1 million increase in net working capital. Such increase
resulted primarily from an increase in accounts receivable due to increased
sales and shifts in sales mix towards nutritional products customers which are
generally provided longer payment terms. Working capital was further impacted
by a decrease in current liabilities relating primarily to the timing of value
added tax payments for certain of the Company's European subsidiaries. For the
prior year period, cash generated from operating earnings was offset by a $19.6
million increase in net working capital. Increases in receivables and
inventory levels due to increased sales and decreases in current liabilities
primarily related to the timing of value added tax payments contributed to the
prior year net working capital decrease.
Capital expenditures for the current year nine months amounted to $27.8
million, compared to the prior year period's capital expenditures of $20.5
million. Current quarter capital spending consisted primarily of expenditures
in the United Kingdom related to the new Zydis(R) production facility and in
Australia related to the construction of a new production facility, as well as
general facility and equipment additions and improvements worldwide. In the
prior year, capital expenditures were related primarily to facility upgrades of
the Company's German softgel operation, expansion in the United Kingdom related
to the Zydis(R) production and Pulsincap(TM) development facilities, and
general facility and equipment additions and improvements. For the nine months
ended December 31, 1993, $33.8 million was used for the acquisitions of the
capital stock of Pharmagel and certain softgel assets of Gayoso Wellcome (as
discussed in Note 6 to the consolidated financial statements). For the same
period last year, cash of $28.0 million was provided resulting from the
disposition of Paco (as discussed in Note 2 to the consolidated financial
statements).
Financing activities for the nine months ended December 31, 1993,
reflect primarily $24.5 million of borrowings under the Company's bank credit
facility to fund the acquisition of Pharmagel, as well as a net $10.9 million
of other borrowings (primarily under the bank credit facility) to fund
previously mentioned capital expenditure needs. In the prior year period, the
financing activities primarily reflect the repurchase of $42.5 million
principal amount of the Company's 14% Senior Subordinated Debentures for
approximately $49.3 million, funded primarily by cash on hand and, to a lesser
extent, borrowings under the Company's bank credit facility.
LIQUIDITY AND FINANCIAL CONDITION
Subsequent Events - Refinancing
In January 1994, Scherer International completed the refinancing of a
significant portion of its outstanding debt through the issuance of $100.0
million face value 6 3/4% Senior Notes and the Defeasance of approximately
$125.1 million face value 14% Senior Subordinated Debentures. These actions
will result in interest savings of approximately $9 million annually.
The noncallable Senior Notes are due February 1, 2004 and are unsecured,
ranking pari passu with all other unsecured and senior indebtedness of Scherer
International. Interest on the Senior Notes is payable February 1 and August
1, commencing August 1, 1994. The proceeds of the Offering to the Company
(prior to deducting certain expenses related to the Offering) were $98.1
million.
11
<PAGE> 12
Using the net proceeds from the Offering and additional proceeds from
borrowings under the Company's bank credit facility, the Company defeased its
Subordinated Debentures. The Company deposited into an irrevocable trust
account for the benefit of the holders of the Subordinated Debentures an amount
of United States government obligations sufficient to pay, with respect to the
Subordinated Debentures, all interest thereon through the Call Date, the call
premium thereon and the outstanding principal thereof when due upon redemption.
The Company remains obligated to pay interest and principal on the Subordinated
Debentures when due but, subject to certain exceptions, is no longer subject to
the terms, agreements and covenants contained in the indenture under which the
Subordinated Debentures were issued.
As a result of the Defeasance, the Company recognized an extraordinary loss for
accounting purposes of $15.5 million in the quarter ended December 31, 1993,
reflecting the estimated after-tax difference between the recorded value of the
Subordinated Debentures and their face value, the call premium, the prepayment
of net interest through the Call Date, and the write-off of unamortized
deferred financing costs related to the Subordinated Debentures. The Company
also recorded a $17.0 million liability as a component of long-term debt for
its commitments related to the Defeasance.
During the next several years, a significant portion of the Company's
cash flow will be used to service indebtedness and fund capital expenditures.
The Company believes that its future cash flows from operations, together with
cash and short-term investments aggregating $21.5 million at December 31, 1993,
and amounts available under bank credit facilities will be adequate to meet
anticipated debt service, capital investment and operating cash requirements.
The Company actively reviews drug delivery systems businesses and
technologies for potential acquisition, consistent with its strategic
objectives. Management anticipates that most such acquisitions would not
involve material initial cost. An example is the Company's recently announced
acquisition of an opthalmic drug delivery technology from Zeneca Limited.
Management intends that any acquisition requiring significant funding would be
financed largely through the issuance of R.P. Scherer Corporation common stock,
depending upon market conditions, so as not to adversely impact the Company's
capital structure.
At December 31, 1993, the Company's outstanding long-term indebtedness
consisted of approximately $120.0 million of Subordinated Debentures (net of a
$5.1 million discount) which were subsequently defeased as discussed above;
approximately $37.3 million under the Company's bank credit facility; $17.0
million relating to commitments under the Defeasance as discussed above which
was funded subsequent to quarter end with funds from the Company's bank credit
facility; $10.1 million of industrial revenue bonds; and $14.1 million of other
instruments.
The Company's bank credit facility provides that the Company may borrow up to
an aggregate of $120.0 million in various currencies, and expires March 31,
1995. In January 1994, the bank credit facility was amended to remove all
collateral requirements; the facility had previously been collateralized by a
first lien on a significant portion of the Company's and certain subsidiaries'
present and future assets. Borrowings under the facility remain guaranteed by
cross-guarantees among the Company and such subsidiaries.
Pursuant to other local credit arrangements, the Company and certain of its
subsidiaries may borrow up to $12.0 million, subject to certain limitations
imposed by the Company's bank credit facility. Approximately $0.7 million was
outstanding under these arrangements as of December 31,1993.
Capital expenditures in fiscal 1994 are expected to approximate $40
million and will include facilities expansions or replacement in Europe, Latin
America and Australia, continuing facility and equipment expenditures for the
manufacture of Zydis(R) fast dissolving dosage products, and general facility
and equipment upgrade and replacement costs. As of December 31, 1993, the
Company has
12
<PAGE> 13
approximately $7.1 million of commitments for future capital expenditures.
The Company expects to fund such capital expenditures primarily from operating
cash flows and, to the extent necessary from its bank credit facility.
The indenture under which the Senior Notes were issued contains certain
covenants which, among other things, limit the ability of the Company and its
subsidiaries to incur liens, to enter into sale and lease-back transactions, to
engage in certain transactions with affiliates, and to merge or consolidate
with, or transfer all or substantially all, of its assets to another person.
The Company's bank credit facility contains covenants which limit the Company's
ability to incur additional indebtedness or contingent obligations, make
investments and loans, dispose of assets, consummate a business combination and
declare or pay cash dividends. The bank credit facility allows increasing
levels of cash dividends based upon future income. The Company does not
currently have any plans to declare or pay dividends.
ACCOUNTING POLICIES
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 would require accounting for other postemployment
benefits similar to that currently required for postretirement benefits. Upon
adoption, the standard requires the recognition of a cumulative adjustment to
the results of operations. The determination of the impact from adoption of
this statement on the Company's financial statements has not yet been
completed, however, the Company believes that it will not significantly affect
the Company's future financial results or position.
13
<PAGE> 14
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
4.1 Third Amendment to Credit Agreement,
First Amendment to Parent Guaranty and
Company Guaranty, Second Amendment to
Permitted Borrowers Guaranty and
Release of Collateral, dated as of
January 12, 1994, among R.P. Scherer
International Corporation, the
permitted borrowers referred to
therein, Comerica Bank, NBD Bank,
N.A., Societe Generale, The Bank of
Nova Scotia, and ABN AMRO Bank N.V..
Filed herewith.
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the period for which this report is filed.
14
<PAGE> 15
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
<TABLE>
<S> <C> <C>
Date: February 14, 1994 By: /s/ Nicole S. Williams
--------------------------- -----------------------
Nicole S. Williams
Executive Vice President, Finance
and Chief Financial Officer,
Treasurer, and Secretary
</TABLE>
15
<PAGE> 1
----------------------------------------------------------------
----------------------------------------------------------------
R.P. SCHERER INTERNATIONAL CORPORATION
THIRD AMENDMENT TO CREDIT AGREEMENT,
FIRST AMENDMENT TO PARENT GUARANTY
AND COMPANY GUARANTY, SECOND AMENDMENT TO
PERMITTED BORROWERS GUARANTY AND
RELEASE OF COLLATERAL
DATED AS OF JANUARY 12, 1994
NBD BANK, N.A. and COMERICA BANK, AS AGENTS
----------------------------------------------------------------
----------------------------------------------------------------
<PAGE> 2
THIRD AMENDMENT TO CREDIT AGREEMENT,
FIRST AMENDMENT TO PARENT GUARANTY
AND COMPANY GUARANTY, SECOND AMENDMENT TO
PERMITTED BORROWERS GUARANTY AND
RELEASE OF COLLATERAL
THIS THIRD AMENDMENT ("Third Amendment") is made as of this 12th day of
January, 1994 by and among R.P.Scherer International Corporation, a Delaware
corporation ("Company"), the undersigned Permitted Borrowers, Comerica Bank, a
Michigan banking corporation, successor by merger to Manufacturers Bank, N.A.
("Comerica"), NBD Bank, N.A., ("NBD"), Societe Generale ("SocGen"), The Bank of
Nova Scotia ("ScotiaBank") and ABN AMRO Bank N.V. ("ABN Amro") (individually,
"Bank," and collectively "Banks"), NBD Bank, N.A., as administrative agent for
the Banks (in such capacity, "Administrative Agent"), and Comerica Bank, a
Michigan banking corporation, successor by merger to Manufacturers Bank, N.A.,
as collateral and documentation agent for the Banks (in such capacity,
"Collateral Agent").
RECITALS:
A. Company, the Permitted Borrowers (excluding Scherer Italy),
Administrative Agent, Collateral Agent and the Banks, other than ABN Amro
(collectively, the "Prior Banks"), entered into that certain R.P. Scherer
International Corporation $120,000,000 Credit Agreement dated as of June 29,
1992 ("Credit Agreement") under which the Prior Banks committed to extend
credit to the Company and the Permitted Borrowers (excluding Scherer Italy) on
the terms set forth therein.
B. Pursuant to the First Amendment to Credit Agreement and Release of
Guaranty dated as of October 30, 1992 ("First Amendment") by and among Company,
the Permitted Borrowers (excluding Scherer Italy), Banks and the Agents, the
parties thereto agreed to amend certain provisions of the aforesaid Credit
Agreement to provide for the addition of ABN Amro (as a Bank) to such Credit
Agreement and the Loan Documents and to make certain other changes to such
Credit Agreement and the Loan Documents.
C. Pursuant to the Second Amendment to Credit Agreement dated as of
June 30, 1993 ("Second Amendment" and, together with the First Amendment, the
"Amendments") by and among Company, the Permitted Borrowers, Scherer Italy,
Banks and the Agents, the parties thereto consented to the Italian Acquisition
and agreed to amend certain provisions of the aforesaid Credit Agreement
(hereinafter, as amended by the Amendments, the "Credit Agreement") in order to
accommodate such acquisition and to add Scherer Italy as a Permitted Borrower
thereunder.
D. In accordance with that certain commitment letter dated November 24,
1993 and issued to the Company by the Agents, for
<PAGE> 3
themselves and for and on behalf of the Banks (the "1993 Commitment"), Agents
and the Banks have agreed to the release and discharge of the mortgages,
security agreements, collateral assignments, stock pledges and other Collateral
provided by the Company, the Permitted Borrowers and the Parent under the
Credit Agreement and the other Loan Documents, on the terms and conditions set
forth in the 1993 Commitment.
E. For purposes of releasing and discharging the Collateral and setting
forth the amendments to the Credit Agreement and certain Loan Documents
required to be made pursuant to the 1993 Commitment, Company, Parent, the
undersigned Permitted Borrowers, Agents and the Banks have entered into this
Third Amendment.
NOW THEREFORE, Company, Parent, the undersigned Permitted Borrowers,
Agents and the Banks agree:
1. Agents and the Banks hereby agree that, on the Effective Date hereof
(as defined below), the liens, mortgages, security interests, collateral
assignments, stock pledges and other collateral established by the Loan
Documents listed on the attached Exhibit "A" (collectively, the "Collateral")
shall be fully and irrevocably released and discharged; provided, however, that
nothing contained herein shall be deemed to limit, reduce, abrogate or
otherwise affect the Indebtedness or the Company Guaranty, the Parent Guaranty,
the Permitted Borrowers Guaranty or the German Guaranty (delivered under the
First Amendment), all of which guaranties shall remain in full force and
effect, as amended hereby.
2. Promptly following the Effective Date hereof, the Collateral Agent
shall undertake to use such good faith, diligent efforts to file or record such
discharges, releases, terminations or other instruments as may be reasonably
required to evidence or further effectuate the discharge and release of the
Collateral and shall return to Company, on its own behalf and on behalf of the
Permitted Borrowers, all Collateral in its possession, including, without
limitation, those share certificates listed on the attached Exhibit "B." All
costs and expenses of the Collateral Agent relating to the discharge and
release of the Collateral shall be paid by the Company and the Permitted
Borrowers on demand pursuant to Section 12.5 of the Credit Agreement,
including, without limitation, all recording fees, filing fees, notarial fees,
taxes and reasonable fees and expenses of counsel. Furthermore, Company and
the Permitted Borrowers shall execute and deliver, or cause to be executed and
delivered, such documents or instruments as reasonably determined by Collateral
Agent to be necessary or appropriate in connection with the release and
discharge of the Collateral hereunder.
3. Section 1 of the Credit Agreement is hereby amended as follows:
2
<PAGE> 4
(a) Section 1.22 is deleted.
(b) Section 1.26 is amended and restated in its entirety as
follows:
"1.26 `Company Collateral Documents' shall mean the
Company Guaranty."
(c) Section 1.67 is amended to replace the words "the
Collateral, any Material Property" (in the sixth and seventh lines thereof)
with the words "any property owned or occupied by the Company or any of its
Subsidiaries."
(d) Section 1.84 is amended to delete the last sentence
thereof.
(e) Section 1.86 is amended and restated in its entirety as
follows:
"Section 1.86 `Material Property' shall mean any
property, whether personal or real, owned, leased or
otherwise used from time to time by the Company or any of
its Subsidiaries which is material to the operations of
the Company and its Subsidiaries, taken as a whole."
(f) Section 1.97 is amended and restated in its entirety as
follows:
"1.97 `Parent Collateral Documents' shall mean the
Parent Guaranty."
(g) Section 1.103 is amended and restated in its entirety as
follows:
"1.103 `Permitted Borrowers Collateral Documents'
shall mean the Permitted Borrowers Guaranty."
(h) Section 1.107(b) is amended by deleting from subsection
(i) thereof, following the words "Scherer S.A.", the phrase "of property
encumbered in favor of the Banks at the time of such disposition" and deleting
from subsection (ii) thereof, following the words "Scherer Italy", the phrase
"of property encumbered in favor of the Banks at the time of such disposition."
(i) Section 1.07(e) is amended by deleting from clause (ii)
thereof the words ", subject to the pledge of such shares in favor of the
Banks".
3
<PAGE> 5
(j) Section 1.108(a) is amended by deleting the text and replacing it
with the word "[Reserved]."
(k) Section 1.108(b) is amended by changing the comma following the
word "GAAP" in the fifth line thereof to a semi-colon and deleting the
remainder of said subsection.
(l) Section 1.110(b) is amended by adding a semi-colon after the words
"Loan Documents" in the tenth line thereof and deleting the remainder of said
subsection.
(m) Section 1.144 is deleted and replaced by the word "[Reserved]."
4. Section 4 of the Credit Agreement is hereby amended as follows:
(a) Section 4.3 is amended to delete the last seventeen lines of said
Section, beginning with the words "In addition" (in the tenth line
thereof).
(b) Section 4.4 is amended to delete the last eighteen lines of said
Section, beginning with the words "In addition" (in the eleventh
line thereof).
5. Section 5 of the Credit Agreement is hereby amended as follows:
(a) Section 5.4 is amended and restated in its entirety as follows:
"5.4 Title to Property - Company. The Company has good and
valid title to the Material Property owned by the Company."
(b) Section 5.5 is amended and restated in its entirety as follows:
"5.5 Title to Property - Permitted Borrowers and Parent. Each
of the Permitted Borrowers and the Parent has good and valid title
to the Material Property owned by it."
(c) Section 5.6 is amended and restated in its entirety as follows:
"5.6 Encumbrances. There are no security interests in, Liens,
mortgages or other encumbrances on and no financing statements on
file with respect to any property of Company,
4
<PAGE> 6
Parent or any of the Permitted Borrowers, except for those Liens
permitted under Section 7.5 hereof."
(d) Clause (ii) of the first sentence of Section 5.16 is amended and
restated in its entirety as follows:
"(ii) by the Parent and each of the Permitted Borrowers of
the Loan Documents to which they are a party."
6. Section 6 of the Credit Agreement is hereby amended as follows:
(a) Section 6.10 is amended and restated in its entirety as follows:
"6.10 Further Assurances. Execute and deliver or cause to be
executed and delivered within a reasonable time following
Collateral Agent's request, and at the Company's expense, such
other documents or instruments as Collateral Agent may reasonably
require to effectuate more fully the purposes of this Agreement."
(b) Section 6.11 is deleted and replaced by the word "[Reserved]."
(c) Section 6.12 is amended and restated in its entirety, as follows:
"6.12 Indemnification. With respect to the Company,
indemnify and save each Agent and the Banks harmless from all
reasonable loss, cost, damage, liability or expenses, including
reasonable attorneys' fees and disbursements, incurred by each of
the Agents and the Banks by reason of an Event of Default or
enforcing the obligations of the Company or the Permitted
Borrowers under this Agreement or in the prosecution or defense of
any action or proceeding concerning any matter growing out of or
connected with this Agreement or any of the Loan Documents or any
mortgage or security agreement released by Agents or the Banks
from time to time hereunder; and, with respect to each of the
Permitted Borrowers, indemnify and save each Agent and the Banks
harmless from all reasonable loss, cost, damage, liability or
expenses, including reasonable attorneys' fees and disbursements,
incurred by each of the Agents and the Banks with respect to a
Permitted Borrower by reason of an Event of Default or enforcing
the obligations of the Permitted Borrowers under this
5
<PAGE> 7
Agreement or the Loan Documents or in the prosecution or defense
of any action or proceeding concerning any matter growing out of
or connected with this Agreement or any of the Loan Documents or
any mortgage or security agreement released by Agents or the Banks
from time to time hereunder."
(d) Clause (ii) of Section 6.13 is amended and restated in its
entirety as follows:
"(ii) by each of the Permitted Borrowers, of this Agreement
and the Loan Documents."
(e) Section 6.14 is amended and restated in its entirety as follows:
"6.14 Insurance. Maintain insurance coverage on its physical
assets and against other business risks in such amounts and of
such types as are customarily carried by companies similar in size
and nature, and in the event of any acquisition of additional
property, real or personal, or of the incurrence of additional
risks of any nature, increase such insurance coverage in such
manner and to such extent as prudent business judgment and then
current practice would dictate."
(f) Section 6.17 is deleted and replaced with the word "[Reserved]."
(g) Section 6.18 is amended to delete the phrase "to execute on behalf
of the Company, or any of the Permitted Borrowers, as the case may be, any
financing statements, amendments, subordinations or other filings pursuant to
this Agreement or any of the Loan Documents," beginning on the twenty-first
line thereof, to change the semi-colon following the words "and the Loan
Documents" in line thirty-six thereof to a period, and to delete the remainder
of said section.
(h) Section 6.19 is amended and restated in its entirety as follows:
"6.19 Special Covenants Regarding Italian Acquisition.
Provided that the Italian Acquisition is consummated, within
forty-five (45) days of such consummation, Company shall cause
Scherer Italy (i) to commence, or cause to be commenced, by
appropriate proceedings under applicable law, the Italian Merger
and shall cause such merger to be completed as soon as reasonably
practicable, but in no event later than March 31, 1994; and (ii)
to deliver or cause to be delivered to Collateral
6
<PAGE> 8
Agent, with sufficient copies for each Bank, Environmental
Questionnaires for Pharmagel Italy and for Pharmagel France dated
after the date of the Italian Acquisition, such questionnaires to
contain responses consistent with the representations and
warranties provided under this Agreement and otherwise
satisfactory in form and substance to Agents and the Majority
Banks."
7. Section 7 of the Credit Agreement is hereby amended as follows:
(a) Section 7.1(a) is amended by adding the word "or" at the end
thereof.
(b) Section 7.1(b) is deleted.
(c) Section 7.1(c) is redesignated as Section 7.1(b).
(d) Section 7.5(c) is amended in its entirety as follows:
"(c) Liens securing any other indebtedness permitted under Section
7.4(d) hereof;"
8. Section 8 of the Credit Agreement is hereby amended as follows:
(a) Section 8.4 is amended to delete (in the tenth line thereof) the
words "contemplated by or."
(b) Section 8.6 is deleted, and the text of such Section replaced by
the word "[Reserved]."
(c) Section 8.7 is amended to delete the second to last sentence
thereof beginning (in the thirty-sixth line of said Section) with
the words "The Company" and ending (in the forty-third line of
said Section) with the words "Event of Default)."
9. Section 9 of the Credit Agreement is hereby amended as follows:
(a) Section 9.2 is amended to change the caption of said section from
"Application of Proceeds of Collateral." to "Application of Proceeds.", to
delete (in the second and third lines of said section) the words "the proceeds
of any of the Collateral, together with", and to delete the parenthetical
phrase, "(to the extent secured by the Collateral in accordance with the Loan
Documents)" beginning on line seven thereof.
7
<PAGE> 9
(b) Sections 9.4 and 9.5 are deleted, and the text of each Section
replaced by the word "[Reserved]."
10. Section 12.3 of the Credit Agreement is hereby amended to delete
the words (beginning in the fourth line thereof) "except to the extent that the
Uniform Commercial Code, other personal property law or real property law of a
jurisdiction where Collateral is located is applicable and".
11. The Company Guaranty, the Parent Guaranty and the Permitted
Borrowers Guaranty (as amended) are hereby amended as follows:
(a) The words "among other Collateral," in the fifth line of paragraph
B of the recitals in each such guaranty are deleted.
(b) Section 5 of the Company Guaranty and the Permitted Borrowers
Guaranty is deleted and Section 8 of the Parent Guaranty is deleted, in each
case replaced by the word "[Reserved].".
12. This Third Amendment shall become effective only upon the date
("Effective Date") of the satisfaction by the Company and the Permitted
Borrowers (as determined by the Banks) of the following conditions:
(a) Collateral Agent shall have received counterpart originals of this
Third Amendment, duly executed and delivered and in form satisfactory to Agents
and the Banks;
(b) Collateral Agent shall have received from Company and each of the
Permitted Borrowers (other than Scherer S.A.) copies, certified by a duly
authorized officer to be true and complete as of the date hereof, of records of
all action taken by such parties, to authorize (i) the execution and delivery
of this Third Amendment and all other documents, certificates and instruments
executed or to be executed by each such party hereunder, and (ii) the
performance of all of the obligations of each such party under this Third
Amendment and each of such other documents, certificates and instruments;
(c) Collateral Agent shall have received satisfactory written
confirmation that the Company's implied senior debt rating from Standard &
Poor's is not less than BBB-;
(d) As of the date on which this Third Amendment is to become
effective (according to the terms hereof), no Event of Default has occurred and
is continuing under the Credit Agreement, and no material adverse change in the
financial condition of the Company and its Subsidiaries has occurred since the
date of the most recent financial statements required to be delivered by
Company under the Credit Agreement; and
8
<PAGE> 10
(e) Company, Parent and each of the Permitted Borrowers shall have
executed and/or delivered such other confirmations, documents and instruments
as necessary or appropriate in connection with this Third Amendment, and the
transactions incident thereto, as reasonably requested by Agents or the Banks.
If the foregoing conditions have not been satisfied or waived on or before
February 15, 1994, this Third Amendment shall be of no further force and
effect.
13. Scherer S.A. shall deliver or cause to be delivered to Collateral
Agent, on or before February 15, 1994, the authorizing documentation
(applicable to it) referred to in subparagraphs (i) and (ii) of paragraph
10(b), above, and the failure to deliver such documentation will constitute an
additional Event of Default under the Credit Agreement. Until such
documentation has been received by Collateral Agent, Scherer S.A. shall not
request, or be entitled to request, Advances under the Credit Agreement.
14. Each of the Company and the Permitted Borrowers hereby ratifies
and confirms, as of the date hereof (after giving effect to this Third
Amendment), each of the representations and warranties set forth in Sections
5.1 through 5.21, inclusive, of the Credit Agreement as amended by this
Amendment, and certifies that there is no Event of Default in existence, and no
event which, with the giving of notice or the lapse of time, or both, would
constitute an Event of Default.
15. Except as specifically set forth herein, this Third Amendment
shall not be deemed to amend or alter in any respect the terms and conditions
of the Credit Agreement, any of the Notes issued thereunder, or any of the
other Loan Documents, or to constitute a waiver by Banks or Agents of any right
or remedy under the Credit Agreement, any of the Notes issued thereunder or any
of the other Loan Documents.
16. Unless otherwise expressly defined to the contrary herein, all
capitalized terms used in this Third Amendment shall have the meaning set forth
in the Credit Agreement.
17. This Third Amendment may be executed in counterpart, in accordance
with Section 12.10 of the Credit Agreement.
9
<PAGE> 11
IN WITNESS WHEREOF, Company, Parent, Permitted Borrowers, the Banks,
and Agents have each caused this Third Amendment to be executed by their
respective duly authorized officers or agents, as applicable, and delivered as
of the date set forth above.
COMERICA BANK, successor by R.P. SCHERER INTERNATIONAL
merger to Manufacturers CORPORATION
Bank, N.A., as Collateral
Agent
By: /s/ D. MCCANN By: /s/ NICOLE S. WILLIAMS
Its: Assistant Vice President Its: Chief Financial Officer
R.P. SCHERER CORPORATION
By: /s/ NICOLE S. WILLIAMS
Its: Chief Financial Officer
NBD BANK, N.A., as
Administrative Agent F&F HOLDING GMBH
By: /s/ KENNETH R. EHRHARDT By: /s/ NICOLE S. WILLIAMS
Its: Vice President Its: Attorney-in-Fact
R.P. SCHERER LIMITED R.P. SCHERER CANADA INC.
By: /s/ NICOLE S. WILLIAMS By: ALEKSANDAR ERDELJAN
Its: Attorney-in-Fact Its: Vice President
10
<PAGE> 12
SCHERER DDS LIMITED R.P. SCHERER HOLDINGS LTD.
By: /s/ NICOLE S. WILLIAMS By: /s/ NICOLE S. WILLIAMS
Its: Atrorney-in-Fact Its: Attorney-in-Fact
R.P. SCHERER HOLDINGS PTY. LTD. R.P. SCHERER PTY. LTD.
By: /s/ NICOLE S. WILLIAMS By: /s/ NICOLE S. WILLIAMS
Its: Atrorney-in-Fact Its: Attorney-in-Fact
R.P. SCHERER S.A. R.P. SCHERER S.p.A.
By: /s/ NICOLE S. WILLIAMS By: /s/ NICOLE S. WILLIAMS
Its: Atrorney-in-Fact Its: Attorney-in-Fact
BANKS:
NBD BANK, N.A. COMERICA BANK, successor by
merger to Manufacturers Bank,
N.A.
By: KENNETH R. EHHARDT By: PHYLLIS D. MCCANN
Its: Vice President Its: Assistant Vice President
THE BANK OF NOVA SCOTIA SOCIETE GENERALE
By: F.C.H. ASHBY By: /s/ CLAUDE GARSIN
Its: Senior Manager Loan Operations Its: Vice President
11
<PAGE> 13
ABN AMRO BANK N.V.
By: ROBERT J. GRAFF
Its: Vice President
By: BERNARD J. MCGULGAN
Its: Vice President
12
<PAGE> 14
EXHIBIT A
TO THIRD AMENDMENT
LOAN DOCUMENTS TO BE DISCHARGED
A. Parent Collateral Documents
1. Parent Stock Pledge
B. Company Collateral Documents
2. Company Stock Pledge and Security Agreement (covering Company's
share capital in Domestic Subsidiaries)
3. Australian Share Mortgage (First Company Pledge)
4. Australian Share Mortgage (Second Company Pledge)
5. Canadian Securities Pledge Agreement (First Pledge)
a. PPSA financing statement
6. Canadian Securities Pledge Agreement (Second Pledge)
7. English Share Charge (First Charge)
8. English Share Charge (Second Charge)
9. Company Stock Pledge (100%) (covering Company's share capital in
Scherer S.A. and R.P. Scherer K.K.)
a. Contrat De Nantissement D'Actions
b. Declaration De Gage
c. Attestation De Constitution De Gage
10. Company Stock Pledge (65%) (covering Company's share capital in
Scherer S.A. and R.P. Scherer K.K.)
11. Company Stock Pledge (100%) (covering Company's share capital in
Scherer Italy)
12. Company Stock Pledge (65%) (covering Company's share capital in
Scherer Italy)
13. Pinellas County, Florida Mortgage and Security Agreement
14. Financing Statements
a. Michigan Secretary of State
b. Pinellas County, Florida
<PAGE> 15
c. Florida Secretary of State
d. New Jersey Secretary of State
e. Utah Secretary of State
C. Permitted Borrower Collateral Documents
English Collateral Documents
15. Debenture (RPS Limited)
16. Debenture (Scherer Holdings Ltd.)
French Collateral Documents
17. Mortgage (Hypotheque)
18. Pledge of Going Business Activity (Nantissement de Fonds de Commerce)
19. Security Assignment (Cession a titre de garantie) over Accounts
Receivable (Creances professionnelles)
Canadian Collateral Documents
20. Demand Debenture
a. PPSA Financing Statement
21. Debenture Pledge Agreement
22. Charge/Mortgage of Land
23. General Assignment of Book Debts
Australian Collateral Documents
24. Deed of Charge (Scherer Pty.)
25. Deed of Charge (Scherer Holdings Pty.)
26. Wells Road Victoria, Australia Real Property Mortgage
27. Stafford Street Victoria, Australia Real Property Mortgage
Scottish Collateral Documents
28. Charge
29. Standard Security
<PAGE> 16
EXHIBIT B
TO THIRD AMENDMENT
SHARE CERTIFICATES
1. R.P. Scherer International Corporation - Certificate No. XI (1,000 shares)
2. R.P.S. Hardcapsule, Inc.
Certificate No. 1 (250 shares)
Certificate No. 2 (2,250 shares)
3. R.P.S. Hardcapsule (West) - Certificate No. 1 (1,000 shares)
4. The LVC Corporation - Certificate No. 2 (1,000 shares)
5. Science Labs, Inc. - Certificate No. 18 (1,000 shares)
6. Paco Pharmaceutical Services, Inc. - Certificate No. 2 (1,000 shares)
7. Gelatin Products International, Inc. Certificate
8. R.P. Scherer Canada, Inc.
Certificate No. 4 (978 1/4 shares)
Certificate No. 5 (526 3/4 shares)
9. R.P. Scherer Limited -
Certificate No. 21 (10,000 shares)
Certificate No. 81 (101,669 shares)
Certificate No. 82 (1 share)
10. R.P. Scherer Holdings Ltd. -
Certificate No. 2 (1 share)
Certificate No. 3 (16,900,000 shares)
Certificate No. 4 (1 share)
11. R.P. Scherer K.K. -
Certificate No. 1 (37,500 shares)
Certificate No. 2 (15,000 shares)
Certificate No. 3 (22,500 shares)
Certificate No. 4 (20,000 shares)
Certificate No. 5 (224,000 shares)
Certificate No. 6 (25,000 shares)
Certificate No. S-1 (500,000 shares)
Certificate No. T-1 (100,000 shares)
Certificate No. S-2 (500,000 shares)
Certificate No. T-2 (100,000 shares)
<PAGE> 17
Certificate No. U-1 (20,000 shares)
Certificate No. U-2 (20,000 shares)
Certificate No. U-3 (20,000 shares)
Certificate No. U-4 (20,000 shares)
Certificate No. U-5 (20,000 shares)
Certificate No. U-6 (20,000 shares)
12. R.P. Scherer Holdings Pty. Ltd. -
Certificate No. H6 (5,655,000 shares)
Certificate No. H7 (3,045,001 shares)
Certificate No. H8 (1 share)
13. Scherer Italy Certificates
Certificate Nos. 1-20 and 34-42 (5400 shares)
