-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, HOMsins07w2bdQdYrfjL4xmwnVDVUhN0XOnsYQTbO9WGRM5/JsULBTiM6ufA4Gb7 HrKt3lf+4aT0ZV95McrhQQ== 0000950124-95-000196.txt : 19950515 0000950124-95-000196.hdr.sgml : 19950515 ACCESSION NUMBER: 0000950124-95-000196 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHERER R P CORP /DE/ CENTRAL INDEX KEY: 0000855106 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133523163 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-30999 FILM NUMBER: 95510751 BUSINESS ADDRESS: STREET 1: 2075 W BIG BEAVER RD CITY: TROY STATE: MI ZIP: 48084 BUSINESS PHONE: 3136490900 FORMER COMPANY: FORMER CONFORMED NAME: RPS CORP DATE OF NAME CHANGE: 19920218 10-Q 1 FORM 10-Q 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, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 33-30999 R.P. SCHERER CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 13-3523163 (State of Incorporation) (I.R.S. Employer Identification Number)
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, 1995: 23,311,417 shares of common stock, par value $.01. 2 PART I ITEM 1 FINANCIAL STATEMENTS R.P. SCHERER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data) ------------------------------------------------------------------ For the three months ended For the nine months ended December 31, December 31, ----------------------------- -------------------------- 1994 1993 1994 1993 ---------- ---------- --------- --------- Net sales $132,215 $114,820 $386,465 $328,453 Cost of sales 83,743 74,848 244,612 212,309 Selling and administrative expenses 17,432 15,769 51,775 44,503 Research and development expenses, net 5,236 3,287 14,218 9,499 -------- -------- -------- -------- Operating income 25,804 20,916 75,860 62,142 Interest expense 3,410 6,069 10,630 17,796 Interest earned and other (555) (587) (1,257) (1,541) -------- -------- -------- -------- Income from continuing operations before income taxes and minority interests 22,949 15,434 66,487 45,887 Income taxes 7,840 4,404 23,270 14,454 Minority interests 3,502 2,126 11,041 7,376 -------- -------- -------- -------- Income from continuing operations 11,607 8,904 32,176 24,057 -------- -------- -------- -------- Extraordinary loss from debt extinguishment, net of tax effects (Note 6) - (15,500) - (15,500) -------- -------- -------- -------- Net income (loss) $11,607 ($6,596) $32,176 $8,557 ======== ======= ======== ======== Per Common and Common Equivalent Share: Income before other items $0.47 $0.37 $1.31 $0.99 Extraordinary loss from debt extinguishment, net of tax (Note 6) - (0.64) - (0.64) -------- -------- -------- -------- Net income (loss) $0.47 ($0.27) $1.31 $0.35 ======== ======== ========= ======== Average number of common and common equivalent shares 24,573 24,355 24,476 24,242
The accompanying notes are an integral part of this statement. 2 3 R.P. SCHERER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(In thousands) December 31, March 31, 1994 1994 ------------- ------------ ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 23,142 $ 16,576 Short-term investments 4,426 6,041 Receivables, less reserves of: December 31, 1994 - $3.6 million; March 31, 1994 - $2.9 million 100,336 98,775 Inventories 64,438 56,492 Other current assets 7,552 5,260 -------- -------- 199,894 183,144 PROPERTY: -------- -------- Property, plant and equipment, at cost 331,378 284,992 Accumulated depreciation (81,392) (63,277) -------- -------- 249,986 221,715 -------- -------- OTHER ASSETS: Intangibles, net of amortization 187,247 188,396 Deferred financing fees, net of amortization 1,647 1,658 Other assets 16,951 18,501 -------- -------- 205,845 208,555 -------- -------- $655,725 $613,414 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 5,286 $ 3,936 Accounts payable 36,524 52,086 Accrued liabilities 43,489 36,802 Accrued income taxes 6,911 1,967 -------- -------- 92,210 94,791 -------- -------- LONG-TERM LIABILITIES AND OTHER: Long-term debt 191,451 187,949 Other long-term liabilities 51,000 49,865 Deferred income taxes 32,157 30,745 Minority interests in subsidiaries 34,537 35,354 -------- -------- 309,145 303,913 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 4) SHAREHOLDERS' EQUITY: Preferred stock, 500,000 shares authorized, none - - issued Common stock, $.01 par value, 50,000,000 shares authorized, shares issued: December 31, 1994 - 23,299,417; March 31, 1994 - 23,287,043 233 233 Additional paid-in capital 234,409 234,157 Retained earnings (deficit) 22,319 (9,857) Currency translation adjustment (2,591) (9,823) -------- -------- 254,370 214,710 -------- -------- $655,725 $613,414 ======== ========
The accompanying notes are an integral part of this statement. 3 4 R.P. SCHERER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands) For the nine months ended December 31, ---------------------------- 1994 1993 ---------- ---------- OPERATING ACTIVITIES: Net income $ 32,176 $ 8,557 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 16,094 13,131 Amortization of intangible assets 4,376 3,808 Amortization of deferred financing costs and debt discount 443 1,110 Minority interests in net income 11,041 7,376 Deferred tax provision and other 898 (180) Extraordinary loss on debt extinguishment (Note 6) - 15,500 (Increase) decrease in receivables 5,655 (9,771) Increase in inventories and other current assets (5,889) (2,179) Decrease in accounts payable and accrued expenses (12,443) (13,555) -------- --------- Net cash provided by operating activities 52,351 23,797 -------- --------- INVESTING ACTIVITIES: Purchases of plant and equipment (33,842) (27,789) Acquisitions of businesses, net of cash acquired (Note 5) - (33,761) Proceeds from sales of plant and equipment 484 864 Other (4,468) (3,768) -------- --------- Net cash used by investing activities (37,826) (64,454) -------- --------- FINANCING ACTIVITIES: Proceeds from long-term borrowings 68,940 61,751 Long-term debt retirements and payments (67,097) (26,375) Short-term borrowings, net 885 (395) Cash dividends paid to minority shareholders of subsidiaries (11,539) (7,014) -------- --------- Net cash provided (used) by financing activities (8,811) 27,967 -------- --------- Effect of currency translation on cash and cash equivalents 852 (549) -------- --------- Net increase (decrease) in cash and cash equivalents 6,566 (13,239) Cash and cash equivalents, beginning of period 16,576 30,389 -------- --------- Cash and cash equivalents, end of period $23,142 $ 17,150 ======== =========
The accompanying notes are an integral part of this statement. 4 5 R.P. SCHERER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of R.P. Scherer Corporation (the "Company"), a Delaware corporation, and its wholly-owned subsidiary, R.P. Scherer International Corporation ("Scherer International"). The Company's only operating asset is the common stock of Scherer International and the term "Company" as used herein refers to either or both of the Company and Scherer International. 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 the 1994 period approximates the U.S. Federal income tax rate as higher foreign income tax rates and goodwill amortization not deductible for income tax purposes were offset by the recognition of foreign income tax credits utilized in the current year. For the 1993 period, 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:
(In thousands) December 31, March 31, 1994 1994 -------------- ------------- Raw materials and supplies $32,440 $26,760 Work in process 8,467 10,289 Finished goods 23,531 19,443 --------- ------- $64,438 $56,492 ========= =======
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 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 5 6 R.P. SCHERER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued million representing the anticipated amount of all settlement-related costs in excess of previously provided reserves. Such payments were made subsequent to December 31, 1994. 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 7 R.P. SCHERER CORPORATION AND SUBSIDIARY 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): 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 ========
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.
(In thousands, except per share amounts) For the nine months ended December 31, 1993 ------------------------- Net sales $335,590 Net income $8,410 Net income per share $0.35
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. 6. EXTINGUISHMENT OF DEBT In January 1994, Scherer International 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 proceeds of the Offering (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 Scherer International's 14% Senior Subordinated Debentures ("Subordinated Debentures"), which had 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 7 8 R.P. SCHERER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued call premium thereon and the outstanding principal thereof when due upon redemption ("Defeasance"). The Subordinated Debentures were retired at the Call Date. As a result of the Defeasance, the Company recognized an extraordinary loss for accounting purposes of $15.5 million ($0.64 per share) 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. Approximately $4.8 million of future tax benefits resulting from the Defeasance were also recognized in the December 31, 1993 quarter. 7. SECONDARY OFFERING OF COMMON STOCK In December 1994, the Company completed a secondary offering of 7.0 million shares of its common stock. The shares were sold by certain merchant banking partnerships affiliated with Lehman Brothers, Inc. (collectively "Lehman"). The offering did not result in any additional shares outstanding of the Company's common stock, and the Company did not receive any proceeds from the offering. As a result of the offering, Lehman no longer has any beneficial ownership of the Company. 8. ANTICIPATED MERGER OF SCHERER INTERNATIONAL INTO R.P. SCHERER CORPORATION For administrative purposes, the Company intends to merge Scherer International into R.P. Scherer Corporation, through which the assets and liabilities of Scherer International will be assumed by R.P. Scherer Corporation. Such merger, which may be completed prior to the end of the current fiscal year, will have essentially no impact on the Company's financial results or position. 8 9 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, 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 shareholders' equity will fluctuate depending upon the strengthening or weakening of the U.S. dollar. RESULTS OF OPERATIONS Quarters Ended December 31, 1994 and 1993 The Company reported consolidated sales of $132.2 million for its third fiscal quarter ended December 31, 1994, a 15% increase as compared to $114.8 million of sales for the same quarter last year. A substantial majority of the sales improvement was provided by the Company's operations in Europe, where a continued strengthening of the over-the-counter ("OTC") pharmaceutical market and significant increases in Sandimmune/Neoral(R) sales in Germany contributed to 26% European sales growth. A further strengthening of most foreign currencies relative to the U.S. dollar also favorably impacted sales performance in the current fiscal year quarter. On a constant foreign currency exchange rate basis, the consolidated sales increase would have been 10% for the quarter ended December 31, 1994 versus the same quarter of the prior year. The Company's twelve month sales order backlog was $148.9 million at December 31, 1994, a 21% increase from the $123.4 million backlog at the same date last year. Sales backlogs increased 20% when measured using constant exchange rates. The backlog gain represents continuing strong demand for the Company's products, especially for pharmaceutical softgels in Germany and elsewhere, and nutritional softgels in the United Kingdom. Operating income was $25.8 million for the third quarter of fiscal year 1995, representing a 23% increase from the $20.9 million of operating income generated in last year's third fiscal quarter. On a constant exchange rate basis, operating income grew 17% between the two quarters. Operating margin rose to 19.5% of sales for the quarter ended December 31, 1994 from 18.2% of sales for the same quarter of the prior year. This margin expansion resulted from both efficiencies related to the higher sales volumes and a shift in sales mix towards higher margin pharmaceutical products. Pharmaceutical sales grew 35% comparing these two quarters, whereas lower margin nutritional product sales were flat primarily as a result of the continued reduced demand for Vitamin E experienced since the beginning of calendar year 1994. The operating income improvement was somewhat offset by increases of $1.7 million, or 11%, in selling and administrative expenses and $1.9 million, or 59%, in research and development expenses. The increase in selling and administrative expenses, which was only 6% on a constant exchange rate basis, resulted primarily from additions to marketing staffs, advertising and promotion costs and commissions to sales agents related to the higher sales levels. Research and development expenses were $5.2 million for the third quarter of fiscal 1995 as compared to $3.3 million for the third quarter of fiscal 1994. Approximately $1.4 million of the increase in research 9 10 and development expenses represents the Company's planned investment in ATP, as discussed further below. Excluding research and development expenses, income increased 28% between the quarters ended December 31, 1994 and 1993. Operating margins before research and development expenses were 23.5% and 21.1% for the respective third fiscal quarters of 1995 and 1994. Income from continuing operations was $11.6 million, or $0.47 per share, for the quarter ended December 31, 1994, representing a new third fiscal quarter earnings record and a 30% improvement over the $8.9 million, or $0.37 per share, recognized in the same quarter last year. Income of the current fiscal year third quarter includes a $2.7 million decline in interest expense associated with the January 1994 refinancing of Scherer International's 14% senior subordinated debentures, as described below. The Company's income tax provision rose to 34.1% of pretax income in the fiscal 1995 third quarter, compared to 28.5% for the third 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 statutory income tax rates in certain countries. The Company incurred a net loss of $6.6 million, or ($0.27) per share, in the prior year quarter ended December 31, 1993, as the result of an extraordinary $15.5 million, or $0.64 per share, charge related to the January 1994 refinancing described below. Nine Months Ended December 31, 1994 and 1993 Consolidated sales for the nine month period ended December 31, 1994 were $386.5 million, amounting to an 18% increase from sales of $328.5 million in the same period last year. Sales gains were achieved in all of the Company's geographic segments, most notably Europe. The effects of a weaker U.S. dollar relative to most foreign currencies increased reported sales during the current year period. On a constant exchange rate basis, the sales increase would have been 15% for the nine months ended December 31, 1994, as compared to the same period of the prior year. The Company earned operating income of $75.9 million for the nine months ended December 31, 1994, a 22% gain from the $62.1 million earned in the same period of the prior year. On a constant exchange rate basis, operating income rose 19% between these two periods. Operating margin improved to 19.6% of sales for the December 31, 1994 period from 18.9% 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 27%, while health and nutritional softgel sales increased only 6% between the nine month periods ended December 31, 1994 and 1993. The slow growth rate for nutritional softgels is due to the reduced demand for comparatively low margin Vitamin E products as a result of recent published studies questioning the health benefits of Vitamin E and other anti-oxidants. By contrast, sales of other nutritional softgels increased by 15% in the current fiscal year period. The improvement in operating income was achieved in spite of a 16% increase in selling and administrative expenses attributable in large part to additional investments in marketing staffs and related costs, particularly in Germany and the United States, and sales commissions in Germany and Argentina. Planned spending for research and development further reduced reported operating income and margin growth for the nine months ended December 31, 1994. Excluding research and development expenses, operating margin grew to 23.3% of sales for the December 31, 1994 period, compared to 21.8% for the same period of the prior year. Research and development costs were $14.2 million for the nine months ended December 31, 1994, representing a 50% increase from the $9.5 million incurred during last fiscal year's first nine months. Approximately $3.4 million of this increase relates to the Advanced Therapeutic Products group ("ATP"), which was formed late 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. 10 11 Income from continuing operations and net income for the first nine months of fiscal 1995 reached $32.2 million, or $1.31 per share, compared to income from continuing operations of $24.1 million, or $0.99 per share, for the same period last fiscal year. In addition to the operating income improvement discussed above, the Company realized the benefit of a $6.9 million reduction in interest expense, primarily associated with the January, 1994 refinancing through defeasance of $125 million of 14% subordinated debentures with a combination of $100 million 6 3/4% senior notes and bank debt. After the $15.5 million, or $0.64 per share, extraordinary charge related to this refinancing, net income for the nine months ended December 31, 1993 was $8.6 million, or $0.35 per share. The Company's effective income tax rate rose to 35.0% for the December 31, 1994 nine months compared to 31.5% 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 nine months ended December 31, 1994 increased $3.7 million as a result of the substantial improvement in earnings of the Company's 51%-owned German operation. Overview of Interim Results by Geographic Segment The following sets forth operating results for each of the Company's geographic segments for the nine months ended December 31, 1994 and 1993:
(In thousands) Sales Operating Income Operating Margin --------------------- --------------------- ------------------- 1994 1993 1994 1993 1994 1993 ------ ------- ------- -------- ------- ------ United States $ 91,462 $ 87,426 $ 21,502 $22,133 23.5% 25.3% Europe 215,209 169,239 46,609 28,674 21.7 16.9 Other International 79,794 71,788 16,689 15,101 20.9 21.0 Unallocated (1) - - (8,940) (3,766) - - -------- -------- -------- --------- ---- ---- $386,465 $328,453 $75,860 $62,142 19.6% 18.9% ======== ======== ========= ========= ==== ====
(1) Includes general Corporate expenses and, in the December 31, 1994 period, expenses associated with ATP. The Company's United States operations achieved a 5% sales gain for the nine months ended December 31, 1994. Sales of OTC pharmaceutical softgels were particularly strong, as planned customer launches of several cough/cold and other OTC softgels led to a 28% sales gain in this product line. Major branded products launched during the first nine months of fiscal 1995 include Alka-Seltzer Plus from Miles Laboratories, Drixoral from Schering-Plough and Excedrin PM from Bristol-Myers. Sales of nutritional softgels slowed during the first nine months of fiscal 1995, dropping nearly 8% from sales of the same period last fiscal year. All of this decline is attributable to reductions in sales of Vitamin E, resulting from the general decline in demand previously mentioned. The decrease in nutritional softgel sales had a minimal effect on operating income as a result of the relatively low margins related to Vitamin E products due to their high material cost content and commodity nature. Operating income declined by 3% to $21.5 million for the nine months ended December 31, 1994, as the incremental profits from sales of pharmaceutical and other softgels were mostly offset by the costs of increased marketing staffs, promotional expenses and development resources to meet the increasing demand for the Company's softgel products. Sales in Europe increased 27% for the nine months ended December 31, 1994, as compared to the same period last year. The most significant sales increase was achieved in Germany, as the Company continued to rebound 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 63% to $46.6 million for the nine months ended December 31, 1994, with a related improvement in operating margin for the period. The business situation in Europe began to improve noticeably in the latter part of fiscal 1994. As a result, the Company expects that the rate of growth in sales and operating income 11 12 will slow somewhat in future periods as compared with that experienced in the first nine months of fiscal 1995. The Company's Other International segment contributed a $8.0 million, or 11%, increase in sales for the nine months ended December 31, 1994 due to the continued strength of softgel operations in Japan, Canada and South America, as well as gains achieved by the Company's Pharmaphil hardshell capsule division in Canada. Operating income also grew 11% between the two nine month periods, and a less favorable product sales mix in Australia resulted in constant operating margins in this segment. CASH FLOWS Cash and cash equivalents increased by $6.6 million for the nine month period ended December 31, 1994, as compared with a decrease of $13.2 million in the same period in 1993. Operating activities provided cash of $52.4 million and $23.8 million for the current and prior year periods, respectively. For the period ended December 31, 1994, cash generated from continued strong earnings was partially offset by a $12.7 million increase in net working capital. Such increase is related to a decrease in current liabilities resulting from the timing of payments for significant capital expenditures and inventory purchases, as well as by increases in inventory related to higher sales levels and changes in sales mix. The increase in working capital was partially offset by reductions in receivables largely due to the timing of sales to and collections from certain major nutritional customers. For the prior year period, cash generated from operating earnings was offset by a $25.5 million increase in net working capital. Increases in accounts receivable due to increased sales and shifts in sales mix towards nutritional products customers (who are generally provided longer payment terms) were accompanied by a decrease in current liabilities relating primarily to the timing of value added tax payments for certain of the Company's European subsidiaries and the timing of interest payments. Capital expenditures for the current year nine months amounted to $33.8 million, compared to the prior year period's capital expenditures of $27.8 million. Current period capital spending consisted primarily of expenditures in North America related to the completion of a 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 facility and in Australia for the construction of the replacement facility in Australia, and other general facility and equipment additions and improvements. For the nine months ended December 31, 1994, $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 nine months ended December 31, 1994, reflects the early retirement of $7.1 million of industrial revenue bonds, offset by $7.8 million of net borrowings under the Company's bank credit facility primarily to fund such retirement. The current year also reflects $11.5 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 $10.9 million of other borrowings (primarily under the bank credit facility) to fund previously mentioned capital expenditures, and $7.0 million of dividends paid to minority shareholders of subsidiaries. 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 fiscal year 1995 and $50-60 million for fiscal 1996, and are expected to decline to a lower 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. 12 13 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 December 31, 1994, the Company had approximately $19.0 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 financed largely through the issuance of common stock, depending upon market conditions, so as not to materially increase the Company's debt to equity ratio. At December 31, 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), $75.3 million of borrowings under the Company's bank credit facility, $6.3 million of industrial development revenue bonds, and approximately $12.3 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. 13 14 Pursuant to other revolving credit arrangements, the Company and certain of its subsidiaries may borrow up to approximately $13 million. As of December 31, 1994, the Company had outstanding approximately $3.5 million under these revolving credit arrangements. The Company believes that its future cash flows from operations, together with cash and short-term investments aggregating $27.6 million at December 31, 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. In October 1994, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 119, Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments, which also must be adopted for the Company's 1995 fiscal year. This statement requires expanded disclosures about the amount, nature, purpose, and terms of derivative financial instruments. 14 15 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. 15 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. R.P. SCHERER CORPORATION Date: February 13, 1995 By: /s/ Nicole S. Williams ------------------- ----------------------- Nicole S. Williams Executive Vice President, Finance and Chief Financial Officer, Treasurer, and Secretary
16 17 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAGE NO. - ----------- ----------- -------- Exhibit 27 Financial Data Schedule EX-27 2 EXHIBIT 27
5 1,000 9-MOS MAR-31-1995 DEC-31-1994 23,142 4,426 103,936 3,600 64,438 199,894 331,378 81,392 655,725 92,210 191,451 233 0 0 254,137 655,725 386,465 386,465 244,612 310,605 0 0 9,373 66,487 23,270 32,176 0 0 0 32,176 1.31 1.31
-----END PRIVACY-ENHANCED MESSAGE-----