<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 10, 1996)
800 SHARES
SMITHKLINE BEECHAM HOLDINGS CORPORATION
FLEXIBLE MONEY MARKET CUMULATIVE PREFERRED STOCK (MMP(R)), SERIES I
LIQUIDATION PREFERENCE $100,000 PER SHARE
WITH A LIMITED GUARANTEE OF DECLARED AND UNPAID DIVIDENDS BY
SMITHKLINE BEECHAM PLC
------------------------
The shares of Auction Rate Preferred Stock of the Company offered hereby
are designated as Flexible Money Market Cumulative Preferred Stock ("MMP"),
Series I (the "Shares"). The Initial Dividend Rate on the Shares will be 3.99%
until September 23, 1996 (the "Initial Period-End Dividend Payment Date"). The
first Auction Date will be September 20, 1996. The Company may not elect a
Special Dividend Period for the Shares until after the first anniversary of the
Date of Original Issue for the Shares. Until the Initial Period-End Dividend
Payment Date and during any Regular Dividend Period, the Shares shall be subject
to the Mandatory Redemption Upon Change of Control Provision as described under
"Description of Securities -- Redemption" in the accompanying Prospectus. The
Shares shall otherwise have the terms described under "Description of
Securities" in the accompanying Prospectus.
The Auction Agent for the Shares is The Bank of New York and the initial
Broker-Dealers for the Shares are Lehman Brothers Inc., Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated and Smith Barney Inc.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE 18 OF THE ACCOMPANYING PROSPECTUS.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- ------------------------------------------------------------------------------------------------------
Per Share.............................. $100,000 $33.125 $99,966.875
- ------------------------------------------------------------------------------------------------------
Total.................................. $80,000,000 $26,500 $79,973,500
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the Date of Original Issue.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(3) Before deducting expenses, estimated to be $127,000.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The Shares offered by this Prospectus Supplement are offered by the
Underwriters subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the Underwriters and
to certain further conditions. It is expected that delivery of the Shares will
be made in book-entry form through The Depository Trust Company on or about
August 1, 1996 (the "Date of Original Issue").
------------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
July 29, 1996
- ---------------
(R)Registered trademark of Lehman Brothers Inc.
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OFFERED
HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
and the related Terms Agreement, the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters has agreed to purchase,
the number of Shares set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers Inc....................................................... 160
Goldman, Sachs & Co. ..................................................... 160
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................. 160
Morgan Stanley & Co. Incorporated......................................... 160
Smith Barney Inc.......................................................... 160
-------
Total........................................................... 800
=======
</TABLE>
Each Underwriter will be paid its discount based on the number of Shares
actually allocated to it for sale, which may be greater or less than the number
of Shares it has agreed to purchase as set forth above. The Company has been
advised that the Underwriters propose initially to offer the Shares to the
public at the public offering price set forth on the cover page of this
Prospectus Supplement. After the initial public offering, the public offering
price may be changed.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
S-2
<PAGE> 3
SMITHKLINE BEECHAM HOLDINGS CORPORATION
Flexible Auction Rate Preferred Stock
Liquidation Preference $100,000 Per Share
With a limited guarantee of declared and unpaid dividends by
SMITHKLINE BEECHAM PLC
------------------------
SmithKline Beecham Holdings Corporation, a Delaware corporation (the
"Company"), from time to time may issue in one or more series ("Series") up to
12,920 shares of its flexible auction rate preferred stock (the "Shares"). Each
Share will have a liquidation preference of $100,000. All of the shares of
common stock, no par value, of the Company ("Common Stock") are owned indirectly
by SmithKline Beecham plc, an English public limited company ("SmithKline
Beecham"). SmithKline Beecham will issue a limited guarantee of the payment of
dividends declared by the Company and unpaid (the "Guarantee"), and will agree
to provide additional capital to the Company, in each case, under circumstances,
and subject to limitations, described herein. See "Description of SmithKline
Beecham Support".
The designation, the number of Shares, certain dividend and any special
redemption or repurchase provisions for the Initial Dividend Period and other
applicable terms for each Series not described herein will be described in the
Prospectus Supplement relating to such Series. Dividends on the Shares of each
Series will accumulate from the date such Shares are originally issued by the
Company (the "Date of Original Issue") until the Initial Period-End Dividend
Payment Date specified in the Prospectus Supplement for such Series (the
"Initial Dividend Period") at the cash dividend rate (the "Applicable Rate")
described in the Prospectus Supplement for such Series. The Applicable Rate for
each Subsequent Dividend Period for each Series will be determined pursuant to
periodic auctions conducted in accordance with the procedures described in
Appendix B hereto (each, an "Auction"). After the Initial Dividend Period,
except as otherwise provided herein, each Subsequent Dividend Period for each
Series will be a Regular Dividend Period; provided, however, that prior to any
Auction for a Subsequent Dividend Period, the Company may designate, subject to
certain limitations and notice requirements described herein, such Subsequent
Dividend Period as a Special Dividend Period. See "Description of Securities --
Dividends".
The Applicable Rate for each Series for each Subsequent Dividend Period
therefor will be reset on the basis of Bids, Hold Orders and Sell Orders placed
by Existing Holders and Potential Holders of Shares of such Series in an Auction
conducted on the Business Day next preceding the commencement of such Dividend
Period. The Applicable Rate that results from an Auction for any Dividend Period
will not be greater than the Maximum Applicable Rate. See "Description of
Securities -- The Auction -- Orders by Existing Holders and Potential Holders".
If the Company fails to pay within the applicable grace period for any
Series the full amount of any accumulated and unpaid dividends on Shares of such
Series on any Period-End Dividend Payment Date or the redemption or repurchase
price of Shares of such Series called for redemption or subject to repurchase,
the Applicable Rate will not be based on the results of an Auction but instead
will be equal to the Non-Payment Period Rate and each Subsequent Dividend Period
for such Series will be a Regular Dividend Period until such failure to pay is
cured. See "Description of Securities -- Determination of Dividend Rate".
Each prospective purchaser should review carefully the detailed information
regarding the Auction Procedures which appears in this Prospectus, including the
Appendices, and should note that (i) an Order constitutes an irrevocable
commitment to hold, purchase or sell Shares based upon the results of the
related Auction, (ii) the Auctions will be conducted through telephone
communications, (iii) settlement for purchases and sales will be on the Business
Day following the Auction and (iv) ownership of Shares will be maintained in
book-entry form by or through the Securities Depository. Under certain
circumstances, holders of Shares may be unable to sell their Shares in an
Auction and thus may lack liquidity of investment. Shares may be transferred
through a Broker-Dealer pursuant to a Bid or a Sell Order placed in an Auction
or in the secondary market, if any.
Except during the Initial Dividend Period (unless otherwise specified in the
applicable Prospectus Supplement) and any Non-Call Period therefor, the Shares
of each Series will be redeemable, in whole or in part, on the second Business
Day prior to any Dividend Payment Date, at the option of the Company, at
$100,000 per Share upon the payment of accumulated and unpaid dividends thereon.
During a Regular Dividend Period and, if designated by the Company, a Special
Dividend Period, Shares of each Series will be subject to mandatory redemption
upon the occurrence of a Change of Control, in whole, at a redemption price of
$100,000 per Share plus accumulated and unpaid dividends thereon. If designated
by the Company, during a Special Dividend Period, holders of Shares of the
applicable Series will have the right to require the Company to repurchase such
Shares upon the occurrence of a Change of Control, at a repurchase price equal
to the sum of $100,000 per Share plus accumulated and unpaid dividends thereon.
Holders of Shares of each Series will have certain general and class voting
rights, including the right, voting together with holders of Common Stock and
other holders of capital stock of the Company similarly entitled, to vote
cumulatively on the election of directors of the Company and on other matters
submitted generally to holders of Common Stock and to elect additional directors
in the event of nonpayment of dividends or a Credit Rating Event. Also, except
under certain circumstances, the Company may not merge or consolidate with
another entity or liquidate or dispose of all or substantially all of its assets
unless it obtains the approval of holders of at least two-thirds of the Shares
of each Series with a Dividend Period that has more than 99 days remaining.
The Shares will not be listed on any stock exchange or quoted on the
National Association of Securities Dealers Automated Quotation system.
If any agent of the Company, or any underwriter, is involved in the sale of
the Shares offered hereby, the name of such agent or underwriter and any
applicable commissions or discounts will be set forth in, or may be calculated
from, the Prospectus Supplement, and the net proceeds to the Company from such
sale will be the purchase price of such Shares less such commissions or
discounts and other attributable issuance and distribution expenses. The
aggregate net proceeds to the Company from the sale of all the Shares will be
the public offering or purchase price of the Shares sold less the aggregate of
such commissions and discounts and other expenses of issuance and distribution.
See "Plan of Distribution" for a description of possible indemnification
arrangements for agents or underwriters.
This Prospectus may not be used to consummate sales of Shares unless
accompanied by a Prospectus Supplement.
SEE "RISK FACTORS" ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE SHARES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS JULY 10, 1996.
<PAGE> 4
AVAILABLE INFORMATION
SmithKline Beecham is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file reports, including annual reports on
Form 20-F, and other information with the Securities and Exchange Commission
(the "Commission"). Copies of SmithKline Beecham's Annual Report on Form 20-F
for the year ended December 31, 1995 (the "1995 Form 20-F"), and of other
reports and information filed by SmithKline Beecham with the Commission, may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the Commission's regional offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
at 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such
materials may also be obtained by mail from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such material may be inspected and copied at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005. The
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission, including the Company.
The Company and SmithKline Beecham have filed with the Commission a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities covered by this Prospectus
(the "Registration Statement"). This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to SmithKline Beecham, the Company and such securities, reference is
hereby made to such Registration Statement, including the exhibits filed
therewith. The Registration Statement, the exhibits thereto, and reports and
other information to be filed pursuant to the Exchange Act can be obtained by
mail from or inspected and copied at the public reference facilities maintained
by the Commission as provided in the prior paragraph.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by SmithKline Beecham with the Commission are
incorporated by reference in this Prospectus:
(1) The 1995 Form 20-F; and
(2) Reports on Form 6-K dated April 18, 1996 (filing the SmithKline Beecham
earnings release for the three months ended March 31, 1996) and dated April 15,
1996 (regarding completion of share structure simplification).
All documents subsequently filed by the Company or SmithKline Beecham
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the termination of the Offering in
respect of which this Prospectus is being delivered shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute part of this
Prospectus.
The Company or SmithKline Beecham will provide without charge to each
person to whom a copy of this Prospectus is delivered, upon written or oral
request of such person, a copy of any or all of the documents incorporated
herein by reference (not including exhibits to such information, unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Written or oral requests for such copies should
be directed to the Secretary of the Company, care of SmithKline Beecham
Corporation (FP2225), One Franklin Plaza, Philadelphia, Pennsylvania 19101
(Telephone: 215-751-7633), or
2
<PAGE> 5
to the Secretary of SmithKline Beecham, at One New Horizons Court, Brentford,
Middlesex TW8 9EP, England (Telephone: 44-181-975-2000).
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
SmithKline Beecham is a public limited company incorporated in England and
Wales. A number of the directors and executive officers of SmithKline Beecham
are non-residents of the United States, and all or a substantial portion of the
assets of such persons are located outside the United States. As a result, it
may not be possible for investors to effect service of process within the United
States upon such persons or to enforce against them in U.S. courts judgments
obtained in U.S. courts predicated upon the civil liability provisions of the
federal securities laws of the United States. SmithKline Beecham has been
advised by its English solicitors, Linklaters & Paines, that there is doubt as
to the enforceability in England, in original actions or in actions for
enforcement of judgments of U.S. courts, of civil liabilities to the extent
predicated upon the federal securities laws of the United States. See "Risk
Factors -- Enforceability of U.S. Securities Laws". SmithKline Beecham has
expressly submitted to the jurisdiction of New York state and federal courts
sitting in the City of New York for the purpose of any suit, action or
proceeding arising out of the Guarantee. Service of process on SmithKline
Beecham may be made by mailing a copy thereof to SmithKline Beecham at its
address set forth above or to Donald F. Parman, authorized representative of
SmithKline Beecham in the United States, care of SmithKline Beecham Corporation
(FP2225), One Franklin Plaza, Philadelphia, Pennsylvania 19101.
EXCHANGE RATE INFORMATION
SmithKline Beecham publishes its consolidated financial statements in
pounds sterling ("L"). Each pound sterling is comprised of 100 pence ("p"). The
following table sets forth, for each period indicated, the high and low exchange
rates for pounds sterling expressed in United States dollars, based upon the
inverse of the noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New
York (the "Noon Buying Rate"), the average of such exchange rates on the last
day of each full month during such period, and such exchange rate at the end of
such period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
---------------------------------------- ENDED MARCH 31,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C>
High............................ 1.99 2.01 1.59 1.64 1.64 1.55
Low............................. 1.60 1.50 1.42 1.46 1.53 1.50
Average......................... 1.78 1.75 1.50 1.54 1.58 1.52
Rate at period end.............. 1.87 1.51 1.48 1.57 1.55 1.53
</TABLE>
On July 1, 1996, the inverse of the Noon Buying Rate was L1 = U.S.$1.55.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following information is qualified in its entirety by, and is subject
to, the detailed information and financial statements, including the notes
thereto, appearing elsewhere or incorporated by reference in this Prospectus.
All financial and other information at dates and for periods prior to the
formation of the Company was prepared as if the Company (together with the
subsidiaries and investments that it will have at the time of the initial
issuance of Shares) had existed and operated as a separate business at such
dates and during such periods. Except where the context requires otherwise,
references to the Company include the Company and its consolidated subsidiaries.
Terms not defined in this Prospectus Summary are defined elsewhere in this
Prospectus. For a reference to the definitions of certain capitalized terms used
herein, see the Glossary that appears at the end of this Prospectus.
THE COMPANY AND SMITHKLINE BEECHAM
The Company was incorporated in May 1996 for the principal purpose of
acquiring, owning and managing certain non-U.S. assets of SmithKline Beecham,
primarily in the pharmaceuticals business. SmithKline Beecham owns indirectly
100 percent of the Common Stock of the Company. The Company had combined sales
of $1,698 million and $389 million and combined net income of $110 million and
$19 million for 1995 and the first quarter of 1996, respectively. The Company is
a holding company and conducts its operations through approximately 60
subsidiaries. The Company's holdings also include fixed rate cumulative
preferred stock of SmithKline Beecham Biologicals S.A., an indirect Belgian
pharmaceuticals subsidiary of SmithKline Beecham ("SB Biologicals"), having an
aggregate redemption price of $650 million (the "SB Biologicals Preferred
Stock"). See "Business -- SB Biologicals". The Company's primary activities
consist of the manufacture and sale of pharmaceuticals (prescription medicines)
and the manufacture and sale of certain consumer healthcare products, such as
over-the-counter ("OTC") medicines, oral care products and nutritional drinks,
as part of the worldwide business of SmithKline Beecham and its subsidiaries
(collectively, "SmithKline Beecham Group"). The Company also engages in
intercompany lending to other companies within SmithKline Beecham Group.
The principal activities of SmithKline Beecham Group are the discovery,
development, manufacture and marketing of pharmaceuticals and vaccines, the
provision of disease management and pharmaceutical benefit management services,
OTC medicines and health-related consumer products, and the provision of
clinical laboratory testing services.
The Company's principal executive offices are located at 1403 Foulk Road,
Suite 102, P.O. Box 7108, Wilmington, Delaware 19803-2775, telephone (302)
479-5801. SmithKline Beecham's principal executive offices are located at New
Horizons Court, Brentford, Middlesex TW8 9EP, England, telephone 44-181-
975-2000.
RELATIONSHIP WITH SMITHKLINE BEECHAM GROUP
SmithKline Beecham conducts its pharmaceutical and consumer healthcare
businesses on a worldwide basis directly and through approximately 330
subsidiaries, including the Company and its subsidiaries. The operations of the
Company and its subsidiaries are fully integrated with those of SmithKline
Beecham Group as a whole through a series of intercompany arrangements including
purchases and sales of active ingredients and finished products, product and
intellectual property licenses, intercompany loans and management and shared
services agreements (see "Arrangements with SmithKline Beecham Group"). For
example, the Company's manufacturing operations produce certain pharmaceutical
and consumer healthcare products for sale by SmithKline Beecham Group marketing
units worldwide. Other operations produce certain raw materials or semi-finished
ingredients which are sold to other SmithKline Beecham Group entities for use in
the manufacture of other products, which may in turn be sold back to the
Company's subsidiaries in finished form for marketing and sale to end users.
SmithKline Beecham Group also supplies a substantial portion of the raw
materials used by the Company in manufacturing finished products. In addition,
the Company and other members of SmithKline Beecham Group generally share the
results of their research and development efforts through mutual licensing
agreements or arrangements.
4
<PAGE> 7
While there may be no direct correlation between the financial results of
the Company and those of SmithKline Beecham in any particular period, the
overall performance of the Company is interdependent with the performance of
other units of SmithKline Beecham Group. Moreover, the Company is dependent upon
other members of SmithKline Beecham Group with respect to new product
development, the addition of any resulting new products to the Company's product
line and the expansion of the Company's marketing and distribution activities.
The Company believes that the agreements and arrangements between the
Company and its subsidiaries, on the one hand, and other members of SmithKline
Beecham Group, on the other hand, are on arm's length terms. However, SmithKline
Beecham's determination to seek to establish, modify or terminate any such
agreement or arrangement is made on a case-by-case basis, generally with a view
to the objectives of SmithKline Beecham Group as a whole. There can be no
assurance that the Company or its subsidiaries will be requested to produce or
market any particular product or to engage in any particular business of
SmithKline Beecham Group, or that any existing business relationship between the
Company and its subsidiaries, on the one hand, and other members of SmithKline
Beecham Group, on the other hand, will not be so modified or terminated.
SmithKline Beecham will have the ability to modify or terminate business
relationships affecting the Company without seeking the approval of the holders
of Shares. See "Arrangements with SmithKline Beecham Group".
The Company intends to pay dividends on the Shares out of earnings derived
from dividends from its subsidiaries, dividends on the SB Biologicals Preferred
Stock and interest income on intercompany loans. Although the ability of the
Company's subsidiaries and SB Biologicals to pay dividends to the Company is
dependent upon the subsidiaries' and SB Biologicals' profitability, regulatory
requirements and other factors, the Company expects its subsidiaries and SB
Biologicals to continue to have sufficient earnings and cash flow to enable them
to declare and pay dividends in amounts sufficient (together with the Company's
interest income) to permit the Company to meet its dividend obligations with
respect to the Shares, after adequate provision has been made for the Company's
operating expenses, taxes, working capital, capital expenditures and other
corporate requirements.
SMITHKLINE BEECHAM SUPPORT
SmithKline Beecham plc will unconditionally and irrevocably guarantee the
due and punctual payment by the Company of dividends on the Shares to the extent
that such dividends have been declared by the Company's Board of Directors out
of funds legally available therefor and remain unpaid, and will enter into a
support agreement with the Company which will require it to make additional
capital contributions to the Company (the "Support Agreement") in the
circumstances described under "Description of SmithKline Beecham Support -- The
Support Agreement". The rights of holders of Shares of any Series under the
Guarantee will be limited and subordinated to the rights of other creditors of
SmithKline Beecham. Similarly, the rights of the Company under the Support
Agreement will be subordinated to the rights of other creditors of SmithKline
Beecham. SmithKline Beecham will in no event be required to make any payment
pursuant to the Guarantee or to make, or cause to be made, a Capital Increase
(as defined in the Guarantee and the Support Agreement) under the Support
Agreement at any time in an amount that would exceed the Adjusted Distributable
Reserves (as defined in the Guarantee and the Support Agreement) of SmithKline
Beecham plc at such time. At December 31, 1995, the Adjusted Distributable
Reserves of SmithKline Beecham were L576 million ($893 million). In addition,
SmithKline Beecham's obligations under the Support Agreement will be limited
initially to an aggregate amount of $3 billion, which shall be increased to a
limited extent if the aggregate liquidation preference of the Shares issued by
the Company exceeds $1.15 billion, and will be reduced to the extent of any
payments made under the SB Biologicals Support Agreement. The Support Agreement
is not a guarantee by SmithKline Beecham of any obligation, liability or
indebtedness of the Company, including the Shares of any Series. SmithKline
Beecham will not, by virtue of the Support Agreement, have any obligation or
liability to any holder of Shares of any Series and, accordingly, the Support
Agreement is not enforceable directly by any such holder.
SmithKline Beecham will also guarantee the payment to the Company by SB
Biologicals of dividends declared by SB Biologicals on the shares of SB
Biologicals Preferred Stock held by the Company out of funds
5
<PAGE> 8
legally available therefor, as described under "Business -- SB Biologicals" (the
"SB Biologicals Guarantee"), and will enter into a support agreement with SB
Biologicals under which SmithKline Beecham will agree to make additional capital
contributions to SB Biologicals in certain circumstances in order to enable SB
Biologicals to declare and pay dividends on the SB Biologicals Preferred Stock
(the "SB Biologicals Support Agreement"). SmithKline Beecham's obligations under
the SB Biologicals Support Agreement will be limited to an aggregate amount of
$1 billion. The SB Biologicals Support Agreement is not a guarantee of any
obligation, liability or indebtedness of SB Biologicals, including the SB
Biologicals Preferred Stock. Accordingly, SmithKline Beecham will not, by virtue
of the SB Biologicals Support Agreement, have any obligation to the Company or
any holder of the Shares of any Series, and the SB Biologicals Support Agreement
is not enforceable directly by the Company or any such holder. See
"Business -- SB Biologicals" and "Description of SmithKline Beecham Support".
SmithKline Beecham has committed not to dispose of any shares of Common
Stock of the Company so long as any Shares are outstanding. In addition,
SmithKline Beecham's policy will be that the Company will have sufficient
earnings and profits to pay dividends on the Shares, and sufficient assets to
perform its obligations in respect of the Shares. This policy does not
constitute a guarantee or other legal obligation, and SmithKline Beecham's sole
legal obligations with respect to the payment of dividends or performance of
other obligations in respect of the Shares are those arising under the
Guarantee.
FLEXIBLE AUCTION RATE PREFERRED STOCK
The Company may issue Shares in one or more Series. The designation, the
number of Shares, certain dividend and special redemption or repurchase
provisions for the Initial Dividend Period and other applicable terms for each
Series not described herein will be described in the Prospectus Supplement for
such Series.
The Shares will be shares of Preferred Stock that entitle their holders to
receive cash dividends at a rate per annum that may vary from Dividend Period to
Dividend Period. In general, as described below, each Dividend Period after the
Initial Dividend Period (each, a "Subsequent Dividend Period", and each Initial
Dividend Period and Subsequent Dividend Period being a "Dividend Period") will
be 49 days in length (or such greater number of days (not exceeding 98 days) as
is at least equal to the Minimum Holding Period) unless the Company has
designated such Subsequent Dividend Period as a Special Dividend Period of
longer than 49 days. The Applicable Rate for a particular Dividend Period
generally will be determined by an Auction conducted on the Business Day next
preceding the start of such Dividend Period.
Through Broker-Dealers, Existing Holders and Potential Holders of Shares of
each Series may participate in Auctions for such Series, although, except in the
case of a Special Dividend Period, Existing Holders desiring to continue to hold
all of their Shares regardless of the Applicable Rate resulting from Auctions
need not participate. For an explanation of Auctions and the method of
determining the Applicable Rate, see "Description of Securities -- The Auction".
Except as described herein, investors in Shares will not receive
certificates representing ownership of their Shares. Ownership of Shares will be
maintained in book-entry form by the Securities Depository (DTC or a successor
securities depository) or its nominee for the account of the investor's Agent
Member. The investor's Agent Member, in turn, will maintain records of such
investor's beneficial ownership of their Shares. Accordingly, references herein
to an investment in or purchase, sale or ownership of Shares are to purchases,
sales or ownership of those Shares by beneficial owners.
Dividends and Dividend Periods
The Initial Dividend Period for each Series of Shares will commence on the
Date of Original Issue and end on the day prior to the Initial Period-End
Dividend Payment Date, in each case as specified in the Prospectus Supplement
for such Series. Each Subsequent Dividend Period for each Series of Shares will
be a Regular Dividend Period unless, prior to any Auction, the Company shall
designate, subject to certain limitations and notice provisions, such Subsequent
Dividend Period as a Special Dividend Period. There shall be 49 days in a
Regular Dividend Period and at least 49 days in any Special Dividend Period, or,
in each case, such greater number of days (not exceeding 98 days) as shall at
least equal the Minimum Holding Period.
6
<PAGE> 9
The Mandatory Redemption Upon Change of Control Provision, but not the DRD
Gross-Up Provision, will apply to Shares of any Series as to which the then
applicable Dividend Period is a Regular Dividend Period. Shares in a Special
Dividend Period may, at the election of the Company, be subject to any or all of
a Non-Call Period, the Mandatory Redemption Upon Change of Control Provision,
the Repurchase Upon Change of Control Provision and the DRD Gross-Up Provision.
See "Description of Securities".
Dividends on Shares of each Series will be cumulative from the Date of
Original Issue for such Series and will be payable when, as and if declared by
the Board of Directors of the Company or a duly authorized committee thereof,
out of funds legally available therefor. Dividends on each Series of Shares will
be paid through the Securities Depository in accordance with its normal
procedures in same-day funds to Agent Members, who are in turn expected to
distribute such dividends to the person for whom they are acting as agent in
accordance with the instructions of such person. See "Description of
Securities -- Dividends".
Subject to declaration as described above, dividends will be payable on
Shares of each Series on the day following the last day of each Dividend Period
with respect thereto, regardless of its length (the "Period-End Dividend Payment
Date"), and, in addition, in the case of Dividend Periods of more than 99 days,
on the following additional dates: (a) if such Dividend Period is from 100 to
190 days, on the 91st day; (b) if such Dividend Period is from 191 to 281 days,
on the 91st and 182nd days; (c) if such Dividend Period is from 282 days to 364
days, on the 91st, 182nd and 273rd days; and (d) if such Dividend Period is one
year or longer, on January 15, April 15, July 15 and October 15 of each year,
provided that in all such cases, if such date is not a Business Day, the
Dividend Payment Date will be the Business Day next succeeding such date.
Although any particular Dividend Payment Date may not occur on the originally
scheduled day or date because of the exception discussed above, the next
succeeding Dividend Payment Date, subject to such exception, will occur on the
day or date on which it was originally scheduled to occur.
The cash dividend rate for the Initial Dividend Period for each Series of
Shares will be the Initial Dividend Rate specified in the Prospectus Supplement
for such Series. For each Subsequent Dividend Period, the cash dividend rate on
each Series of Shares will be the Applicable Rate that the Auction Agent advises
the Company has resulted from an Auction relating to such Series of Shares. See
"Description of Securities -- Dividends".
A Special Dividend Period will not be effective for any Series of Shares
unless Sufficient Clearing Bids exist at the Auction in respect of such Special
Dividend Period. If Sufficient Clearing Bids do not exist at such Auction, the
Subsequent Dividend Period for such Series will be a Regular Dividend Period. In
the event that the Company fails to pay all dividends in respect of any Shares
of any Series which have accumulated during any Dividend Period applicable to
such Series by no later than the third Business Day following the last day of
such Dividend Period or the Company fails to pay all redemption or repurchase
payments for Shares of such Series due on the third Business Day following the
redemption or repurchase date, then, except in certain cases with respect to a
Special Dividend Period, the next Dividend Period shall be a Regular Dividend
Period regardless of any Special Dividend Period designation by the Company. See
"Description of Securities -- Dividends".
If all Existing Holders submit (or are deemed to have submitted) Hold
Orders in an Auction, the Applicable Rate for the next succeeding Dividend
Period will equal 59% of the Reference Rate.
Maximum Applicable Rate; Non-Payment Period
Except during a Non-Payment Period, the Applicable Rate for any Dividend
Period for Shares of any Series will not be more than the Maximum Applicable
Rate applicable to such Series. The Maximum Applicable Rate for the Shares will
depend on the credit rating assigned to such Shares and the length of the
Dividend Period. The "Maximum Applicable Rate" for any Dividend Period will be
the rate obtained by multiplying the Reference Rate on the Auction Date therefor
by a percentage determined as set forth below based on the lower of the credit
ratings assigned to such Series by Moody's and S&P (or, if Moody's or S&P or
both shall not make such rating available, the equivalent of either or both of
such ratings by a Substitute Rating Agency or two Substitute Rating Agencies, as
the case may be, or, in the event that only one such
7
<PAGE> 10
rating shall be available, such rating) at the close of business on the Business
Day immediately preceding such Auction Date:
<TABLE>
<CAPTION>
CREDIT RATING
- -------------------------------------- APPLICABLE PERCENTAGE
MOODY'S S&P OF REFERENCE RATE
- --------------------- ------------- ---------------------
<S> <C> <C>
"aa3" or above AA- or above 110%
"a3" to "a1" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
below "baa3"......... below BBB- 200%
</TABLE>
The Reference Rate, with respect to a Dividend Period of 49 days to 183
days, is the "AA" Composite Commercial Paper Rate; with respect to a Dividend
Period of 184 days to 364 days, is the U.S. Treasury Bill Rate; with respect to
a Dividend Period of one year to ten years, is the U.S. Treasury Note Rate; and,
with respect to a Dividend Period in excess of ten years, is the U.S. Treasury
Bond Rate.
There is no minimum Applicable Rate in respect of any Dividend Period.
Notwithstanding the foregoing, during any Non-Payment Period for Shares of
any Series, Auctions for such Shares will be suspended, all Dividend Periods for
such Series commencing during such Non-Payment Period will be Regular Dividend
Periods and the Applicable Rate for the Shares of such Series during each such
Dividend Period will be 200% of the Reference Rate. A failure to pay dividends
or the redemption or repurchase price of Shares may be cured by making the
required payment within three Business Days after the due date therefor,
together with additional dividends in respect of the period in which the
dividends or the redemption or repurchase price remain unpaid. See "Description
of Securities -- Dividends".
Changes in the Dividends Received Percentage
If any amendment to the Internal Revenue Code of 1986 (the "Code") is
enacted and becomes effective after the date of this Prospectus that changes the
percentage of dividends received by corporate taxpayers which may be deducted
for federal income tax purposes pursuant to section 243(a)(1) of the Code (or
any successor provision) (the "Dividends Received Percentage"), then the
Applicable Rate with respect to the Shares of any Series for the Dividend Period
in which the effective date of such change occurs will, if this provision
applies to such Dividend Period, be adjusted on and after such effective date
for the remainder of such Dividend Period by multiplying the Applicable Rate
(determined before any adjustment described in this paragraph) by a factor,
which will be the number determined in accordance with the following formula
(the "DRD Formula"), and rounding the result to the nearest basis point:
1-[.35(1-.70)]
-------------------
1-[.35(1-DRP)]
For purposes of this formula, "DRP" means the Dividends Received
Percentage, expressed as a fraction, applicable to the dividend in question. No
amendment to the Code other than a change in the percentage of the dividends
received deduction set forth in section 243(a)(1) (or any successor provision)
will give rise to an adjustment described in this paragraph. Notwithstanding the
foregoing provisions, if, with respect to any such amendment, the Company
receives either an opinion of independent tax counsel or a private letter ruling
or similar form of guidance from the IRS to the effect that such amendment to
the Code generally would not affect corporate holders of such Shares, then such
amendment will not result in the adjustment provided for above. Notwithstanding
the foregoing, in no event will (i) the Applicable Rate for any Dividend Period
(if and as adjusted from time to time as set forth above) be more than the
Maximum Applicable Rate as of the Date of Original Issue or the preceding
Auction Date, as the case may be, or (ii) DRP be less than 0.50. If the
Applicable Rate for each Series is adjusted as described above, the Company will
send notice of such adjustment to each holder of Shares, the Auction Agent and
the Paying Agent on or prior to the next Dividend Payment Date for such Series.
Unless the context requires otherwise, all references to dividends in this
Prospectus and the applicable Prospectus Supplement mean dividends adjusted as
described above.
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<PAGE> 11
The foregoing provision (the "DRD Gross-Up Provision") shall not apply to
any Regular Dividend Period and will only apply to the Initial Dividend Period
or any Special Dividend Period for Shares of any Series if designated by the
Company and specified in the Prospectus Supplement or the applicable Special
Dividend Period Notice, as the case may be, for such Series.
Redemption or Repurchase of Shares
Optional Redemption. At the option of the Company, the Shares of any
Series may be redeemed after the Initial Dividend Period therefor, other than
during a Non-Call Period therefor, as a whole or from time to time in part, out
of funds legally available therefor, on the second Business Day immediately
preceding any Dividend Payment Date for such Series, upon at least 15 but not
more than 45 days' notice pursuant to a Notice of Redemption, at a redemption
price per Share equal to $100,000, upon payment of accumulated and unpaid
dividends. The Company shall be required to declare and pay on the redemption
date a dividend in an amount equal to the accumulated and unpaid dividends on
such Shares to the date that the Company pays the full amount payable upon
redemption of such Shares. Pursuant to such right of optional redemption, the
Company may elect to redeem all or less than all of the Shares of a Series
without redeeming Shares of any other Series. Notwithstanding the foregoing, if
any dividends on Shares of any Series are in arrears, no Shares of any Series
shall be redeemed unless all outstanding Shares are simultaneously redeemed, and
the Company shall not purchase or otherwise acquire any Shares of any Series;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of Shares pursuant to an otherwise lawful purchase or exchange offer
made on the same terms to holders of all outstanding shares of such Series.
Mandatory Redemption Upon Change of Control. The following provision (the
"Mandatory Redemption Upon Change of Control Provision") shall apply to each
Regular Dividend Period, but will only apply to the Initial Dividend Period or
any Special Dividend Period for Shares of any Series if elected by the Company
and specified in the Prospectus Supplement or the applicable Special Dividend
Period Notice, as the case may be, for such Series. If SmithKline Beecham shall
at any time cease to beneficially own, directly or indirectly, shares of capital
stock of the Company representing more than 50% of the voting power in respect
of all outstanding shares of capital stock of the Company (such event being
herein called a "Change of Control"), the Company shall redeem all outstanding
Shares of each Series as to which this provision at the time applies, to the
extent of funds legally available therefor, within 30 days of such event upon at
least 10 but not more than 20 days' notice pursuant to a Notice of Redemption,
at a redemption price per Share equal to the sum of $100,000, plus an amount
equal to the accumulated and unpaid dividends on such Shares to the date that
the Company pays the full amount payable upon redemption of such Shares.
Holder's Right to Require Repurchase of Shares Upon Change of Control. The
following provision (the "Repurchase Upon Change of Control Provision") shall
not apply to any Regular Dividend Period and shall apply to the Initial Dividend
Period or any Special Dividend Period for Shares of any Series only if
designated by the Company and specified in the Prospectus Supplement or the
applicable Special Dividend Period Notice, as the case may be, for such Series.
Upon the occurrence of a Change of Control, the Company shall be obligated to
purchase from all holders of Shares of each Series as to which this provision at
the time applies, at the option of such holders, Shares of such Series tendered
to the Company by such holders at a purchase price per Share equal to the sum of
$100,000 and the amount of accumulated and unpaid dividends thereon (whether or
not earned or declared) to the repurchase date. If Shares of any Series are to
be purchased pursuant to this provision, within 20 days following a Change of
Control, the Company shall cause to be mailed, by first-class mail, postage
prepaid, within the applicable notice period specified above, a written notice
of offer to purchase (a "Notice of Offer to Purchase") to each holder of record
of Shares of such Series (initially the nominee of the Securities Depository)
and the Auction Agent. The Company will comply with any tender offer rules under
the Exchange Act which may then be applicable in connection with any offer
required to be made by the Company in accordance with the Repurchase Upon Change
of Control Provision.
SmithKline Beecham has committed not to dispose of any shares of Common
Stock of the Company so long as any Shares are outstanding. See "Description of
SmithKline Beecham Support -- Other SmithKline Beecham Policies and
Commitments".
9
<PAGE> 12
Auction Procedures
Separate Auctions will be conducted on the Auction Dates for each Series of
Shares. Accordingly, as stated in the following description of the Auction
Procedures, unless the context otherwise requires, "Shares" means Shares of the
Series subject to the related Auction, and "Existing Holders" and "Potential
Holders" means Existing Holders and Potential Holders thereof, respectively.
Unless otherwise permitted by the Company, Existing Holders and Potential
Holders of Shares may only participate in Auctions through their Broker-Dealers.
Broker-Dealers will submit the Orders of their respective customers to the
Auction Agent (with a separate Order being submitted for each customer),
designating themselves as Existing Holders in respect of Shares subject to
Orders submitted or deemed submitted to them by beneficial owners and as
Potential Holders in respect of Shares subject to Orders submitted to them by
potential beneficial owners.
On or prior to the Submission Deadline on each Auction Date for the Shares
(the Business Day next preceding the first day of each Subsequent Dividend
Period), each Existing Holder may submit Orders through a Broker-Dealer to the
Auction Agent as follows:
- Hold Order -- indicating its desire to hold Shares without regard to the
Applicable Rate for the next Dividend Period for such Shares.
- Bid -- indicating its desire to hold Shares if the Applicable Rate for
the next Dividend Period for such Shares is not less than the rate
specified in such Bid.
- Sell Order -- indicating its desire to sell Shares without regard to the
Applicable Rate for the next Dividend Period for such Shares.
An Existing Holder may submit different types of Orders in any Auction with
respect to Shares then held by such Existing Holder, provided that the total
number of Shares covered by such Orders does not exceed the number of Shares
held by such Existing Holder. If, however, an Existing Holder offers to purchase
additional Shares in such Auction, such Existing Holder, for purposes of such
offer to purchase additional Shares, will be treated as a Potential Holder as
described below. Bids by Existing Holders with rates higher than the Maximum
Applicable Rate will be treated as Sell Orders. A Hold Order (in the case of an
Auction relating to a Regular Dividend Period) or a Sell Order (in the case of
an Auction relating to a Special Dividend Period) shall be deemed to have been
submitted on behalf of an Existing Holder if an Order with respect to Shares
then held by such Existing Holder is not submitted on behalf of such Existing
Holder for any reason, including the failure of a Broker-Dealer to submit such
Existing Holder's Order to the Auction Agent.
Potential Holders of Shares may submit Bids in which they offer to purchase
Shares if the Applicable Rate for the next Dividend Period for such Shares is
not less than the rate specified in such Bid. A Bid by a Potential Holder
specifying a rate higher than the Maximum Applicable Rate will not be
considered.
Neither the Company nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with any of the foregoing.
A Broker-Dealer also may hold Shares for its own account. A Broker-Dealer
thus may submit Orders to the Auction Agent as an Existing Holder or a Potential
Holder and therefore participate in an Auction on behalf of both itself and its
customers. An Order placed with the Auction Agent by a Broker-Dealer as an
Existing Holder or a Potential Holder as or on behalf of a customer will be
treated in the same manner as an Order placed with a Broker-Dealer by such
customer. Similarly, any failure by a Broker-Dealer to submit to the Auction
Agent an Order in respect of any Shares held by its customer will be treated in
the same manner as such customer's failure to submit to its Broker-Dealer an
Order in respect of Shares held by it, as described above. Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of its customers, all discussions herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also apply to the underlying beneficial ownership interests.
If Sufficient Clearing Bids exist in an Auction (that is, in general, the
number of Shares subject to Bids by Potential Holders is at least equal to the
number of Shares subject to Sell Orders by Existing Holders), the Applicable
Rate will be the lowest rate specified in the Submitted Bids which, taking into
account such rate and all lower rates bid by Existing Holders and Potential
Holders, would result in all Shares subject to Sell
10
<PAGE> 13
Orders by Existing Holders being purchased in the Auction. If all of the
Outstanding Shares are subject to Submitted Hold Orders, the Applicable Rate for
the next succeeding Dividend Period for such Shares shall be 59% of the
Reference Rate. If Sufficient Clearing Bids do not exist in an Auction (other
than because all of the Outstanding Shares are the subject of Submitted Hold
Orders), the Dividend Period for such Shares next following the Auction will be
a Regular Dividend Period (regardless of whether it was designated a Special
Dividend Period by the Company), the Applicable Rate for such Dividend Period
will be the Maximum Applicable Rate and, in such event, Existing Holders that
have submitted Sell Orders will not be able to sell in the Auction all, and may
not be able to sell any, Shares subject to such Sell Orders. Thus, under certain
circumstances, Existing Holders may not have liquidity of investment.
The Auction Procedures include a pro rata allocation of Shares for purchase
and sale, which may result in an Existing Holder selling or holding, or a
Potential Holder purchasing, a number of Shares that is fewer than the number of
Shares specified in its Order.
A Sell Order by an Existing Holder will constitute an irrevocable offer to
sell the number of Shares subject thereto, and a Bid placed by an Existing
Holder will also constitute an irrevocable offer to sell the number of Shares
subject thereto if the rate specified in the Bid is higher than the Applicable
Rate determined in the Auction, in each case at a price per Share of $100,000. A
Bid placed by a Potential Holder will constitute an irrevocable offer to
purchase the Shares subject thereto at a price per Share of $100,000 if the rate
specified in such Bid is less than or equal to the Applicable Rate determined in
the Auction. Settlement of purchases and sales will be made on the next Business
Day (also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery by book-entry to their Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment in same-day funds. See "Description of Securities -- The
Auction".
Structural Requirements
Under the Certificate of Designations, unless the Company has received
written confirmation from Moody's and S&P (and, as appropriate, any Substitute
Rating Agency or Substitute Rating Agencies) that such action will not impair
the then current ratings then assigned to the Shares of each Series by each of
them, the Company will not (i) issue any Parity Preferred or Senior Preferred if
the aggregate liquidation preference of all outstanding Shares, Parity Preferred
and Senior Preferred would thereupon exceed 75% of the maximum amount of
SmithKline Beecham's obligations under the Support Agreement (the "Preferred
Stock Limitation Provision"), (ii) incur any indebtedness if the aggregate
amount of the Company's indebtedness would thereupon exceed one-third of the
Company's shareholders' equity (after deducting therefrom the aggregate
liquidation preference, including accumulated and unpaid but not declared
dividends, of all outstanding Shares, Parity Preferred and Senior Preferred)
(the "Debt Limitation Provision"), and (iii) make any loans to members of
SmithKline Beecham Group other than the Company and its subsidiaries unless such
loans are guaranteed as to payment of principal and interest by SmithKline
Beecham (the "Loan Guarantee Provision").
Liquidation Preference
The liquidation preference of each Share will be $100,000, plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared).
Ratings
The Company expects that the Shares will be issued with a rating of "aa3"
from Moody's Investors Service, Inc. ("Moody's") and A from Standard & Poor's
Ratings Group ("S&P").
11
<PAGE> 14
Voting Rights
The Securities Depository, while it or its nominee is the registered owner
of the Shares, will not independently exercise any voting rights with respect
thereto. Rather, the Securities Depository, in accordance with its normal
procedures, will extend such voting rights to its Agent Members whose accounts
are credited with such Shares. Each Agent Member will in turn extend such voting
rights to the holders for whom it is Agent Member in accordance with its normal
procedures.
General. Each Share will carry 0.08507 of a vote in connection with the
election of directors and other matters submitted generally to the holders of
Common Stock, voting cumulatively and together as a single class with shares of
Common Stock and other capital stock of the Company entitled to vote generally
in the election of directors and other matters submitted to stockholders
generally. Based on the number of shares of Common Stock outstanding as of the
date of this Prospectus and assuming that all Shares offered hereby were issued
and outstanding, the Shares would represent, in the aggregate, approximately 27%
of the combined voting power of the Shares and the Common Stock. All of the
issued and outstanding shares of Common Stock, representing approximately 73% of
such combined voting power, are held indirectly by SmithKline Beecham. As a
result, SmithKline Beecham will be able to direct the outcome of matters
submitted to stockholders of the Company.
Right to Vote in Connection with a Merger, Liquidation, Etc. Without the
affirmative vote of the holders of at least two-thirds of the Shares of each
Series with any outstanding Dividend Period having more than 99 remaining
Dividend Period Days voting in person or by proxy at one or more special
meetings for the purpose, or the unanimous written consent of the holders of
Shares of each such Series, the Company shall not (i) consolidate with or merge
with or into, or convey, transfer or lease substantially all of its assets to,
any person unless: (A) the resulting, surviving or transferee Person (if not the
Company) shall be a corporation organized and existing under the laws of the
United States, any State thereof or the District of Columbia which shall, by a
valid and legally binding instrument, expressly assume all the obligations of
the Company with respect to, and afford the holders of all Outstanding Shares
all the legal rights as holders of, the Shares, including the rights established
by the Certificate of Designations and the Certificate of Incorporation; (B)
there shall not have occurred any downgrading, nor shall any notice have been
given of any intended or potential downgrading, in the rating accorded the
Shares by Moody's or S&P, or if Moody's or S&P, or both, shall not make a rating
available with respect to the Shares, by any Substitute Rating Agency, in
connection with such transaction; and (C) there shall have been delivered to the
holders of the Outstanding Shares an opinion of nationally recognized, qualified
legal counsel to the effect that (1) the holders of such Shares will not
recognize income, gain or loss for United States federal income tax purposes as
a result of such transaction, and will be subject to United States federal
income tax on the same amounts and at the same times as would be the case if the
transaction had not occurred and (2) such transaction complies with the terms of
the foregoing clause (i)(A), or (ii) voluntarily liquidate, dissolve or wind up.
On such matters, holders of Shares will vote on the basis of one vote per
$100,000 in liquidation preference.
Rights to Elect Two Additional Directors. During any period (referred to
herein as a "Default Period") when dividend payments on any Shares of any Series
or Parity Preferred for such number of dividend periods or portions thereof (or
the equivalent thereof in the case of Parity Preferred), which in the aggregate
contain at least 180 days, shall not have been paid or declared and a sum
sufficient for the payment thereof set aside for payment, then in any such case
the number of directors of the Company will automatically be increased by two
additional directors and the holders of record of the Shares of all Series and
Parity Preferred upon which like voting rights have been conferred and are then
exercisable will possess full voting powers (to the exclusion of the holders of
all other series and classes of capital stock of the Company), voting as a
single class, to elect such two directors (the "Default Directors").
During any period in which a Credit Rating Event shall exist (a "Downgrade
Period"), the authorized number of members of the Board of Directors of the
Company shall automatically be increased by two and the holders of record of the
Shares of all Series and Parity Preferred upon which like voting rights have
been conferred and are then exercisable will be entitled to fill the vacancies
so created on the Board of Directors of the Company by electing two additional
directors for the Company. Each director so elected (each a
12
<PAGE> 15
"Downgrade Director") shall be entitled to such number of votes on all matters
before the Board of Directors of the Company as shall result in the Downgrade
Directors together having a majority of the total voting power of all directors
on the Board of Directors of the Company; provided, however, that each Downgrade
Director shall be entitled to only one vote with respect to matters concerning
the redemption of Shares of any Series or the liquidation, dissolution or
winding up of the Company.
If a Downgrade Period shall commence and be continuing at any time during a
Default Period, or if a Default Period shall commence and be continuing during a
Downgrade Period, then the powers conferred upon the Default Directors elected
pursuant to the provisions set forth above shall be suspended or if Default
Directors shall not have been so elected, then the right of holders of the
Shares of all Series and Parity Preferred to elect the Default Directors as
described above shall be suspended, in either case, at such time and during such
period as the Downgrade Directors shall have assumed and remain in office,
provided that upon the expiration of such Downgrade Period, such powers of the
Default Directors or voting rights of holders of the Shares of all Series and
Parity Preferred, as the case may be, shall be automatically and immediately
reinstated.
Right to Vote in Certain Events. Without the affirmative vote of the
holders of at least two-thirds of the outstanding Shares of all Series voting in
person or by proxy at a special meeting for the purpose, or the unanimous
written consent of the holders of the outstanding Shares of all Series acting
without such a meeting (subject to the provisions of any applicable law), the
Company may not amend, alter or repeal any provisions of the Certificate of
Designations or the Certificate of Incorporation so as to affect adversely the
preferences, special rights or powers of the Shares of any Series. Any increase
in the authorized number of any series of capital stock ranking on a parity with
the Shares with respect to the payment of dividends or the distribution of
assets, or creation, authorization or issuance of any securities convertible
into, or warrants, options or similar rights to purchase, acquire or receive,
shares of such capital stock or reclassification of any authorized capital stock
of the Company into any share ranking on a parity with Shares with respect to
the payment of dividends or the distribution of assets in accordance with the
Preferred Stock Limitation Provision shall be deemed not to affect adversely the
preferences, special rights or powers of the Shares.
In addition, without the affirmative vote of the holders of at least
two-thirds of the outstanding Shares of all Series and Parity Preferred upon
which like voting rights have been conferred and are then exercisable, voting
together as a single class, in person or by proxy at a special meeting for the
purpose, or the unanimous written consent of the holders of the outstanding
Shares of all Series and such Parity Preferred acting without such a meeting
(subject to the provisions of any applicable law), the Company may not create,
authorize or issue shares of any class or series of capital stock ranking senior
to the Shares and such Parity Preferred with respect to the payment of dividends
or the distribution of assets, or create, authorize or issue any securities
convertible into, or warrants, options or similar rights to purchase, acquire or
receive, shares of capital stock ranking senior to the Shares and such Parity
Preferred with respect to the payment of dividends or the distribution of assets
or reclassify any authorized capital stock of the Company into any shares
ranking senior to the Shares and such Parity Preferred with respect to the
payment of dividends or the distribution of assets.
No Right to Vote in Certain Events. With respect to any right of holders
of Shares to vote on any matter, whether such right is created by the
Certificate of Designations, by applicable law or otherwise, no holder of any
Share will be entitled to vote and no Share will be deemed to be outstanding for
the purpose of voting or determining the number of Shares required to constitute
a quorum, if prior to or concurrently with a determination of Shares entitled to
vote or of Shares deemed outstanding for quorum purposes, as the case may be,
such Share is held beneficially or of record by the Company or any affiliate of
the Company or if the Company or any affiliate has, directly or indirectly, the
power to vote or dispose of such Share. In addition, Shares with respect to
which a Notice of Redemption has been issued and the redemption price has been
deposited irrevocably with the Auction Agent will be deemed not to be
outstanding for the purpose of voting or determining the number of Shares
required to constitute a quorum.
13
<PAGE> 16
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Company will receive an opinion of Cleary, Gottlieb, Steen & Hamilton,
special U.S. counsel to the Company, that (i) the Shares will be treated as
stock of the Company for federal income tax purposes; (ii) distributions with
respect to the Shares (other than liquidating distributions and certain
redemptions) will constitute dividends to the extent made out of current or
accumulated earnings and profits of the Company, as determined under federal
income tax principles; and (iii) a corporate holder that generally is entitled
to the dividends received deduction will be allowed that deduction with respect
to dividends received on the Shares. Opinions of counsel are not binding on the
Internal Revenue Service (the "IRS") and the IRS could assert contrary
positions, although in the opinion of counsel the IRS would be unlikely to
prevail if it asserted those positions in a proceeding in which the issues were
properly presented. See "Certain Federal Income Tax Considerations".
14
<PAGE> 17
SUMMARY COMBINED FINANCIAL DATA OF THE COMPANY
The summary combined financial data of the Company set forth below as of
December 31, 1994 and 1995 and for the three years ended December 31, 1995 have
been derived from, and should be read in conjunction with, the audited and
unaudited combined financial statements of the predecessor companies to the
Company, including the notes thereto, contained elsewhere in this Prospectus
(the "Combined Financial Statements"). The summary combined financial statement
data set forth below as of December 31, 1993 and as of March 31, 1995 and 1996
and for the three month periods then ended are unaudited. The summary combined
financial data should also be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
in this Prospectus. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
information with respect to interim periods have been included. Results of
operations with respect to interim periods may not be indicative of the results
for the full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------------- -------------
1993 1994 1995 1995 1996
------ ------ ------ ---- ----
(UNAUDITED)
(IN MILLIONS EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales........................................ $1,281 $1,490 $1,698 $418 $389
Operating costs and expenses:
Cost of sales.................................. 629 783 867 219 199
Marketing, administrative and general.......... 412 449 531 122 117
Research and development....................... 16 18 22 5 6
Restructuring.................................. -- -- 60 60 --
Operating income................................. 224 240 218 12 67
Non-operating income (expense):
Interest expense............................... (19) (13) (3) (1) (1)
Interest income................................ 33 20 33 7 6
Minority interests............................. (42) (45) (45) (6) (9)
Equity in net income of affiliates............. 20 9 21 9 4
Other, net..................................... (5) 19 (5) (1) (36)
Income before income taxes....................... 211 230 219 20 31
Provision for income taxes..................... 61 81 109 10 12
Net income..................................... $ 150 $ 149 $ 110 $ 10 $ 19
====== ====== ====== ==== ====
Ratio of Earnings to Fixed Charges............. 10.5x 16.7x 50.3x 12.0x 28.0x
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------- AT MARCH 31,
1994 1995 1996
------ ------ ------------
1993 (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
(IN MILLIONS)
BALANCE SHEET DATA
Total assets..................................... $ 1,582 $1,853 $2,615 $2,168
Total liabilities................................ 688 731 1,182 723
Total intercompany loans receivable (payable),
net............................................ 139 265 676 731
Total shareholders' equity....................... 894 1,122 1,433 1,445
</TABLE>
15
<PAGE> 18
SUMMARY CONSOLIDATED FINANCIAL DATA OF SMITHKLINE BEECHAM
The summary financial data set forth below as of December 31, 1994 and 1995
and for the three years ended December 31, 1995 have been derived from, and
should be read in conjunction with, the audited consolidated financial
statements of the SmithKline Beecham Group included in the 1995 Form 20-F (the
"Consolidated Financial Statements"). Financial data as of December 31, 1993
have been derived from SmithKline Beecham's audited consolidated financial
statements contained in SmithKline Beecham's Annual Reports to Shareholders. The
financial information for the interim periods as of March 31, 1995 and 1996 and
for the three months then ended is unaudited. Results of operations with respect
to interim periods may not be indicative of the results for the full fiscal
year.
SmithKline Beecham prepares its Consolidated Financial Statements in
accordance with accounting principles generally accepted in the U.K. ("U.K.
GAAP") which differ in certain significant respects from accounting principles
generally accepted in the United States ("U.S. GAAP"). There is a fundamental
difference between U.K. GAAP and U.S. GAAP in the accounting for the combination
(the "Combination") of SmithKline Beckman Corporation, a Pennsylvania
corporation (now SmithKline Beecham Corporation, "SB Corp"), and Beecham Group
p.l.c., a public limited company incorporated under the laws of England in 1989
to form SmithKline Beecham. Under U.K. GAAP, the Combination has been accounted
for using merger accounting principles, whereas under U.S. GAAP, the transaction
has been accounted for using the purchase accounting method. In addition, the
requirements for making provision for restructuring costs are more prescriptive
under U.S. GAAP than under U.K. GAAP. A reconciliation to U.S. GAAP of certain
amounts at December 31, 1995 and 1994 and for the three years ended December 31,
1995 is set forth in Note 32 to the Consolidated Financial Statements of
SmithKline Beecham included in the 1995 Form 20-F.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------------ ---------------
1993 1994 1995 1995 1995 1996
------ ------ ------ ------- ------ ------
(L) ($) (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA
AMOUNTS IN ACCORDANCE WITH U.K. GAAP
Net sales
Continuing operations....................... L5,631 L6,071 L7,011 $11,077 L1,712 L1,874
Discontinued operations(1).................. 533 421 -- -- -- --
------ ------ ------ ------- ------ ------
Total sales................................. 6,164 6,492 7,011 11,077 L1,712 L1,874
Operating exceptional items................. -- (580) (250) (395) -- --
Research and development expenditure........ (575) (638) (653) (1,032) (135) (162)
Trading income of continuing
operations(2)............................. 1,078 657 1,216 1,921 384 414
Trading income of discontinued
operations(1)............................. 102 84 -- -- --
Non-operating exceptional items............. 51 -- 512 809 512 --
Income before taxes and minority
interests................................. 1,220 691 1,623 2,564 873 387
Taxes on income............................. (378) (571)(3) (591) (934) (348) (112)
Auction Rate Preference Stock (SB Corp MMP)
dividends................................. (15) (18) (24) (38) (6) (6)
Net income.................................. 813 72 970 1,533 510 260
Per Share/Equity Unit
Income excluding exceptional items.......... 29.1p 32.3p 34.4p 0.54 9.1p 9.6p
Net income.................................. 30.4p 2.7p 36.1p 0.57 18.9p 9.6p
Per Equity Unit ADR
Income excluding exceptional items.......... 145.5p 161.5p 172.0p 2.72 45.5p 48.0p
Net income.................................. 152.0p 13.5p 180.5p 2.85 94.5p 48.0p
Ratio of Earnings to Fixed Charges.......... 6.01x 3.85x 5.16x 5.16x 7.84x 5.24x
------ ------ ------ ------- ------ ------
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
---------------------------------
1993 1994
---- ----- 1995 1995
----- ----
(L) ($)
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE
DATA AND RATIOS)
APPROXIMATE AMOUNTS IN ACCORDANCE WITH U.S. GAAP
Income from continuing operations............................ L473 L546 L357 $564
Net income................................................... 518 600 446 705
Per Share/Equity Unit
Income from continuing operations............................ 17.7p 20.3p 13.3p 0.21
Net income................................................... 19.4p 22.4p 16.6p 0.26
Per Equity Unit ADR
Income from continuing operations............................ 88.5p 101.5p 66.5p 1.05
Net income................................................... 97.0p 112.0p 83.0p 1.31
Ratio of Earnings to Fixed Charges........................... 4.98x 4.97x 3.14x 3.14x
</TABLE>
- ---------------
(1) The businesses disposed of in 1993 were the hair care and the bath and body
care businesses. The business disposed of in 1994, with completion in
January 1995, was the animal health business. Prior year amounts have been
restated on a comparable basis.
(2) The trading income of continuing operations is after charging exceptional
items of L250 million in 1995 and L580 million in 1994. For information on
exceptional items, see Note 1 to the Consolidated Financial Statements.
(3) Taxes on income includes L216 million representing a charge on the
reorganization of Sterling Winthrop Inc. ("Sterling") in connection with
the sale by SmithKline Beecham of Sterling's North American business and a
credit associated with the deferred tax asset arising on the creation of
the restructuring provision.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------- AT MARCH 31,
1993 1994 1995 1995 1996
------ ------ ------ ------- -------------
(L) ($) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
AMOUNTS IN ACCORDANCE WITH U.K. GAAP
Current assets............................ L3,476 L3,479 L3,403 $ 5,275 L 3,536
Intangible assets......................... 50 2,304 2,246 3,481 2,272
Total assets(2)........................... 5,569 8,071 8,153 12,637 8,397
Long-term debt............................ 852 1,086 1,718 2,663 1,737
Total debt................................ 1,225 2,978 2,320 3,596 2,560
Total liabilities......................... 3,726 6,940 6,414 9,942 6,596
Shareholders' funds -- equity
interests(2)............................ 1,302 618 1,223 1,895 1,278
Auction Rate Preference Stock (SB Corp
MMP).................................... 541 513 516 800 523
----- ----- ----- ----- -----
APPROXIMATE AMOUNTS IN ACCORDANCE WITH
U.S. GAAP
Shareholders' funds -- equity
interests(1)............................ 4,596 4,769 4,901 7,597 N/A
</TABLE>
- ---------------
(1) Increase in shareholders' equity under U.S. GAAP principally arises from
goodwill and purchase accounting adjustments. See Note 32 to the
Consolidated Financial Statements included in the 1995 Form 20-F.
(2) The total assets and shareholders' funds have been restated for
capitalization of interest. See Statement of Accounting Policies, included
in the Consolidated Financial Statements included in the 1995 Form 20-F.
17
<PAGE> 20
RISK FACTORS
Prospective purchasers of the Shares should carefully consider all the
information contained in this Prospectus, including the risk factors set forth
below.
LIMITED NATURE OF GUARANTEES AND SUPPORT AGREEMENTS
SmithKline Beecham plc will unconditionally and irrevocably guarantee the
due and punctual payment of declared and unpaid dividends on the Shares to the
extent that such dividends have been declared by the Company's Board of
Directors out of funds legally available therefor and will enter into a Support
Agreement with the Company which will require it to make additional capital
contributions to the Company in the circumstances and subject to the limitations
described under "Description of SmithKline Beecham Support -- The Support
Agreement". The rights of holders of Shares of any Series under the Guarantee
will be subordinated to the rights of other creditors of SmithKline Beecham.
Similarly, the rights of the Company under the Support Agreement will be
subordinated to the rights of other creditors of SmithKline Beecham. SmithKline
Beecham will in no event be required to make any payment pursuant to the
Guarantee or to make, or cause to be made, a Capital Increase under the Support
Agreement at any time in an amount that would exceed the Adjusted Distributable
Reserves of SmithKline Beecham at such time. At December 31, 1995, the Adjusted
Distributable Reserves of SmithKline Beecham were L576 million ($893 million).
In addition, SmithKline Beecham's obligations under the Support Agreement will
be limited initially to an aggregate amount of $3 billion, which shall be
increased to a limited extent if the aggregate liquidation preference of the
Shares issued by the Company exceeds $1.15 billion, and will be reduced to the
extent of any payments made under the SB Biologicals Support Agreement described
below. The Support Agreement is not a guarantee by SmithKline Beecham of any
obligation, liability or indebtedness of the Company, including the Shares of
any Series. SmithKline Beecham will not, by virtue of the Support Agreement,
have any obligation or liability to any holder of Shares of any Series and,
accordingly, the Support Agreement is not enforceable directly by any such
holder. See "Description of SmithKline Beecham Support -- The Guarantee" and
"-- The Support Agreement".
SmithKline Beecham will also guarantee the payment to the Company by SB
Biologicals of dividends declared and unpaid by SB Biologicals out of funds
legally available therefor on the shares of SB Biologicals Preferred Stock held
by the Company pursuant to the SB Biologicals Guarantee, and will enter into the
SB Biologicals Support Agreement, which will be in form and substance similar to
the Guarantee and the Support Agreement, respectively, and which will be subject
in each case to limitations corresponding to those described in the preceding
paragraph (except that SmithKline Beecham's obligations under the SB Biologicals
Support Agreement will be limited to an aggregate amount of $1 billion). The SB
Biologicals Support Agreement is not a guarantee of any obligation, liability or
indebtedness of SB Biologicals, including the SB Biologicals Preferred Stock.
Accordingly, SmithKline Beecham will not, by virtue of the SB Biologicals
Support Agreement, have any obligation to the Company or any holder of Shares of
any Series, and the SB Biologicals Support Agreement is not enforceable directly
by the Company or any such holder. See "Business -- SB Biologicals".
RELATIONSHIP WITH SMITHKLINE BEECHAM GROUP
All of the Common Stock of the Company is owned indirectly by SmithKline
Beecham and the operations of the Company are integrated with the rest of the
SmithKline Beecham Group on a worldwide basis. As a result, a portion of
products manufactured or sold by the Company will be sold to or purchased from
SmithKline Beecham and its subsidiaries (other than the Company and its
subsidiaries). The business and the operating and financial performance of the
Company is highly dependent on SmithKline Beecham and such subsidiaries.
Moreover, the Company is largely dependent on SmithKline Beecham and such
subsidiaries for new product development and patent and trademark rights. The
Company has entered into a management agreement under which it will receive
services from SmithKline Beecham, and subsidiaries of the Company have entered
into management, licensing and service agreements with other members of
SmithKline Beecham Group. However, SmithKline Beecham may establish, modify or
terminate business relationships affecting the Company without seeking the
approval of the holders of Shares. SmithKline
18
<PAGE> 21
Beecham's determination to seek to establish, modify or terminate any agreement
or arrangement will be made on a case-by-case basis, generally with a view to
achieving the objectives of SmithKline Beecham Group as a whole, which may not
in each case be the same as the independent objectives of the Company and the
holders of the Shares. There can be no assurance that the Company or its
subsidiaries will be requested to produce or market any particular product or to
engage in any particular business of other members of SmithKline Beecham Group,
or that any existing business relationship between the Company and its
subsidiaries, on the one hand, and other members of SmithKline Beecham Group, on
the other hand, will not be so modified or terminated. See
"Business -- Relationship with SmithKline Beecham Group" and "Arrangements with
SmithKline Beecham Group". Further, a substantial portion of the Company's
assets, revenues and net income consist of or are derived from loans made by the
Company or its subsidiaries to other members of SmithKline Beecham Group and the
SB Biologicals Preferred Stock held by the Company. A substantial portion of the
proceeds of the offerings of the Shares will be used to make intercompany loans.
See "Use of Proceeds", "Arrangements with SmithKline Beecham
Group -- Intercompany Finance" and "Business -- SB Biologicals". The
availability of cash flow for dividends on the Shares will therefore be
dependent in part on the receipt of payments on loans made by the Company to
SmithKline Beecham and its subsidiaries and the receipt of dividends on the
shares of SB Biologicals Preferred Stock held by the Company.
HOLDING COMPANY STRUCTURE
All of the operations of the Company are conducted through subsidiaries
and, therefore, the Company is dependent on the earnings and cash flow of its
subsidiaries (and on the $41.25 million in dividends payable on the SB
Biologicals Preferred Stock per year) to meet its obligations with respect to
the Shares. The claims of holders of the Shares will be subordinate to claims of
stockholders and creditors of the Company's subsidiaries (and of creditors of SB
Biologicals).
NO OPERATING HISTORY AS A SEPARATE LEGAL ENTITY
The Company has no operating history as a separate legal entity. The
historical financial information of the Company presented in this Prospectus may
not necessarily be indicative of the results that would have been attained if
the Company had operated as a separate legal entity. See Note 1 to the Combined
Financial Statements.
CURRENCY FLUCTUATIONS
The operations of the Company are conducted in international markets and
therefore the combined financial results of the Company are subject to exchange
rate fluctuations involving the United States dollar and a number of foreign
currencies. Since dividends on the Shares are paid in United States dollars,
decreases in value in the currencies other than the dollar in which the
Company's revenues are derived could adversely affect the amount of funds
available for such payments.
IMPACT OF GOVERNMENT REGULATION
The operations of the Company's subsidiaries are subject to extensive
regulation by governmental agencies in each of the countries in which it
conducts manufacturing operations and to which it exports its products. These
governmental authorities have substantial power over manufacturers and exporters
of pharmaceutical products, including the power to withhold approvals, to
require the recall of products, to delay or prevent product sales and to halt
operations. The Company's operations are dependent on maintaining the approval
for its existing products and facilities and on receiving approval for each new
product and facility. In addition, the Company's business is dependent in part
upon government mandated public health programs, including vaccination programs.
There can be no assurance that the Company's business, operations or prospects
will not be adversely affected by future regulatory actions in its countries of
operation or its export markets, including actions relating to national
healthcare programs, quality control and environmental regulations, or by delays
or difficulties in maintaining existing approvals for its products or its plants
or in obtaining approvals in the future for new products or new manufacturing
facilities.
19
<PAGE> 22
ABILITY TO ISSUE ADDITIONAL SHARES
Under the Company's Certificate of Incorporation, the Company's Board of
Directors has the ability to issue additional shares of preferred stock ranking
pari passu with or junior to the Shares, as to participation in the profits or
assets of the Company, without the consent or approval of the holders of the
Shares.
ENFORCEABILITY OF U.S. SECURITIES LAWS
SmithKline Beecham is a public limited company incorporated in England and
Wales. Many of the directors and executive officers of SmithKline Beecham are
non-residents of the United States, and all or a substantial portion of the
assets of such persons are located outside the United States. As a result,
service of process upon such persons and enforcement against such persons of
judgments obtained in U.S. courts predicated upon the civil liability provisions
of the federal securities laws of the United States may be difficult to obtain
within the United States. SmithKline Beecham has been advised by its English
solicitors, Linklaters & Paines, that there is doubt as to the enforceability in
England, in original actions or in actions for enforcement of judgments of U.S.
courts, of civil liabilities to the extent predicated upon the federal
securities laws of the United States.
20
<PAGE> 23
THE COMPANY AND SMITHKLINE BEECHAM
The Company was incorporated in May 1996 for the principal purpose of
acquiring, owning and managing certain non-U.S. assets of SmithKline Beecham,
principally in the pharmaceuticals business. SmithKline Beecham owns indirectly
100 percent of the Common Stock of the Company. The Company had combined sales
of $1,698 million and $389 million and combined net income of $110 million and
$19 million for 1995 and the first quarter of 1996, respectively. The Company is
a holding company and conducts its operations through approximately 60
subsidiaries. The Company's holdings will also include fixed rate cumulative
preferred stock of SB Biologicals, an indirect Belgian pharmaceuticals
subsidiary of SmithKline Beecham, having an aggregate redemption price of $650
million. See "Business -- SB Biologicals". The Company's primary activities
consist of the manufacture and sale of pharmaceuticals (prescription medicines)
and consumer products (OTC medicines), as part of the worldwide business of
SmithKline Beecham Group, as well as intercompany lending to other companies
within SmithKline Beecham Group.
The principal activities of SmithKline Beecham Group are the discovery,
development, manufacture and marketing of pharmaceuticals and vaccines, the
provision of disease management and pharmaceutical benefit management services,
OTC medicines and health-related consumer products, and the provision of
clinical laboratory testing services.
The Company and its subsidiaries are, or will on or prior to the issuance
of the Shares be, parties to certain management, licensing and service
agreements with SmithKline Beecham and its subsidiaries that are expected to
remain in effect. See "Arrangements with SmithKline Beecham Group".
SmithKline Beecham will unconditionally and irrevocably guarantee the due
and punctual payment of dividends on the Shares to the extent that such
dividends have been declared by the Company's Board of Directors out of funds
legally available therefor and remain unpaid. SmithKline Beecham has also
entered into the Support Agreement with the Company pursuant to which SmithKline
Beecham has agreed to provide additional capital to the Company under certain
circumstances and subject to certain limitations so as to ensure that the equity
of the Company exceeds the sum of its debt and the aggregate liquidation
preference of the Shares. The obligations of SmithKline Beecham under the
Guarantee and the Support Agreement are limited in amount to the Adjusted
Distributable Reserves (as defined therein) of SmithKline Beecham, in the case
of the Support Agreement, have been capped initially at an aggregate amount of
$3 billion, which cap shall be increased to a limited extent if the aggregate
liquidation preference of the Shares issued by the Company exceeds $1.15
billion, and are subordinated to the obligations of SmithKline Beecham to its
other creditors. SmithKline Beecham will enter into similar arrangements in
respect of the SB Biologicals Preferred Stock. See "Description of SmithKline
Beecham Support" and "Risk Factors -- Limited Nature of Guarantees and Support
Agreements".
The Company's principal executive offices are located at 1403 Foulk Road,
Suite 102, P.O. Box 7108, Wilmington, Delaware 19803-2775, telephone (302)
479-5801. SmithKline Beecham's principal executive offices are located at New
Horizons Court, Brentford, Middlesex TW8 9EP, England, telephone
44-181-975-2000.
USE OF PROCEEDS
Of the net proceeds from the sale of the Shares, it is expected that
approximately $400 million will be loaned by the Company or one of its
subsidiaries to SB Corp and that SB Corp will use that amount to redeem five
outstanding series of its Money Market Cumulative Preferred Stock issued in a
private placement in April 1990 ("SB Corp MMP"). The remainder of the net
proceeds from the sale of the Shares will be loaned by the Company and its
subsidiaries to members of SmithKline Beecham Group for use for general
corporate purposes (including the possible redemption of other series of SB Corp
MMP). See "Arrangements with SmithKline Beecham Group -- Intercompany Finance".
21
<PAGE> 24
SELECTED COMBINED FINANCIAL DATA OF THE COMPANY
The selected combined financial data set forth below as of December 31,
1994 and 1995 and for the three years ended December 31, 1995 have been derived
from, and should be read in conjunction with, the Combined Financial Statements.
The selected combined financial data set forth below as of December 31, 1991,
1992 and 1993 and as of March 31, 1995 and 1996 and for the three month periods
then ended are unaudited. The selected combined financial data should also be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Prospectus. The
information for interim periods is unaudited; however, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information have been included. The
interim results of operations may not be indicative of the results for the full
fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
FISCAL YEAR ENDED DECEMBER 31, 31,
-------------------------------------------------- -------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ---- ----
(UNAUDITED) (IN MILLIONS EXCEPT RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales................... $1,056 $1,221 $1,281 $1,490 $1,698 $418 $389
Operating costs and
expenses:
Cost of sales............. 499 607 629 783 867 219 199
Marketing, administrative
and general............ 352 388 412 449 531 122 117
Research and
development............ 13 14 16 18 22 5 6
Restructuring............. -- -- -- -- 60 60 --
------ ------ ------ ------ ------ ---- ----
Operating income............ 192 212 224 240 218 12 67
Non-operating income
(expense):
Interest expense.......... (35) (22) (19) (13) (3) (1) (1)
Interest income........... 27 35 33 20 33 7 6
Minority interests........ (32) (52) (42) (45) (45) (6) (9)
Equity in net income of
affiliates............. 4 21 20 9 21 9 4
Other, net................ (7) -- (5) 19 (5) (1) (36)
------ ------ ------ ------ ------ ---- ----
Income before income
taxes..................... 149 194 211 230 219 20 31
Provision for income
taxes..................... 66 87 61 81 109 10 12
------ ------ ------ ------ ------ ---- ----
Net income.................. $ 83 $ 107 $ 150 $ 149 $ 110 $ 10 $ 19
====== ====== ====== ====== ====== ==== ====
Ratio of earnings to fixed
charges................... 5.0x 8.5x 10.5x 16.7x 50.3x 12.0x 28.0x
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------- AT MARCH 31,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------------
(UNAUDITED) (IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets................. $1,511 $1,487 $1,582 $1,853 $2,615 $2,168
Total liabilities............ $1,224 $ 696 $ 688 $ 731 $1,182 $ 723
Total intercompany loans
receivable (payable),
net........................ $ (567) $ 71 $ 139 $ 265 $ 676 $ 731
Total shareholders' equity... $ 287 $ 791 $ 894 $1,122 $1,433 $1,445
</TABLE>
22
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA OF SMITHKLINE BEECHAM
The selected financial data set forth below as of December 31, 1994 and
1995 and for the three years ended December 31, 1995 have been derived from, and
should be read in conjunction with, the audited Consolidated Financial
Statements of the SmithKline Beecham Group included in the 1995 Form 20-F.
Financial data as of December 31, 1991, 1992 and 1993 and for the two years
ended December 31, 1992 have been derived from SmithKline Beecham's audited
Consolidated Financial Statements contained in the SmithKline Beecham's Annual
Reports to Shareholders.
SmithKline Beecham prepares its Consolidated Financial Statements in
accordance with U.K. GAAP which differ in certain significant respects from U.S.
GAAP. There is a fundamental difference between U.K. and U.S. GAAP in the
accounting for the Combination. Under U.K. GAAP the Combination has been
accounted for using merger accounting principles, whereas under U.S. GAAP the
transaction has been accounted for using the purchase accounting method. In
addition the requirements for making provision for restructuring costs are more
prescriptive under U.S. GAAP than under U.K. GAAP. A reconciliation to U.S. GAAP
of certain amounts at December 31, 1995 and 1994 and for the three years ended
December 31, 1995 is set out in Note 32 to the Consolidated Financial Statements
of SmithKline Beecham included in the 1995 Form 20-F.
CONSOLIDATED INCOME STATEMENT DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1995 1996
------ ------ ------ ------ ------ ------- ------ ------
(L) ($) (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMOUNTS IN ACCORDANCE WITH U.K. GAAP
Net sales
Continuing operations......................... L4,046 L4,587 L5,631 L6,071 L7,011 $11,077 L1,712 L1,874
Discontinued operations(1).................... 639 632 533 421 -- -- --
------ ------ ------ ------ ------ ------- ------ ------
Total sales................................. 4,685 5,219 6,164 6,492 7,011 11,077 L1,712 L1,874
Operating exceptional items................... -- -- -- (580) (250) (395) -- --
Research and development expenditure.......... (432) (478) (575) (638) (653) (1,032) (135) (162)
Trading income of continuing operations(2).... 898 942 1,078 657 1,216 1,921 384 414
Trading income of discontinued
operations(1)............................... 132 131 102 84 -- -- --
Non-operating exceptional items............... -- 42 51 -- 512 809 512 --
Income before taxes and minority interests.... 975 1,089 1,220 691 1,623 2,564 873 387
Taxes on income............................... (321) (351) (378) (571)(3) (591) (934) (348) (112)
Auction Rate Preference Stock (SB Corp MMP)
dividends................................... (24) (16) (15) (18) (24) (38) (6) (6)
Net income.................................... 619 711 813 72 970 1,533 510 260
Per Share/Equity Unit
Income excluding exceptional items............ 23.3p 25.3p 29.1p 32.3p 34.4p 0.54 9.1p 9.6p
Net income.................................... 23.3p 26.7p 30.4p 2.7p 36.1p 0.57 18.9p 9.6p
Per Equity Unit ADR
Income excluding exceptional items............ 116.5p 126.5p 145.5p 161.5p 172.0p 2.72 45.5p 48.0p
Net income.................................... 116.5p 133.5p 152.0p 13.5p 180.5p 2.85 94.5p 48.0p
Ratio of Earnings to Fixed Charges............ 4.03x 4.81x 6.01x 3.85x 5.16x 5.16x 7.84x 5.24x
------ ------ ------ ------ ------ ------- ------ ------
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------------
1991 1992 1993 1994 1995 1995
----- ----- ----- ----- ----- -----
(L) ($)
(IN MILLIONS, EXCEPT PER SHARE DATA AND
RATIOS)
<S> <C> <C> <C> <C> <C> <C>
APPROXIMATE AMOUNTS IN ACCORDANCE WITH U.S. GAAP
Income from continuing operations.................... L 402 L 321 L 473 L 546 L 357 $ 564
Net income........................................... 474 385 518 600 446 705
Per Share/Equity Unit
Income from continuing operations.................... 15.1p 12.0p 17.7p 20.3p 13.3p 0.21
Net income........................................... 17.8p 14.4p 19.4p 22.4p 16.6p 0.26
Per Equity Unit ADR
Income from continuing operations.................... 75.5p 60.0p 88.5p 101.5p 66.5p 1.05
Net income........................................... 89.0p 72.0p 97.0p 112.0p 83.0p 1.31
Ratio of Earnings to Fixed Charges................... 3.15x 3.18x 4.98x 4.97x 3.14x 3.14x
</TABLE>
- ---------------
(1) The businesses sold in 1992 were the Manetti Roberts toiletries business and
the North American men's personal care business. The businesses disposed of
in 1993 were the hair care and the bath and body care businesses. The
business disposed of in 1994, with completion in January 1995, was the
animal health business. Prior year amounts have been restated on a
comparable basis.
(2) The trading income of continuing operations is after charging exceptional
items of L250 million in 1995 and L580 million in 1994. For information on
exceptional items, see Note 1 to the Consolidated Financial Statements.
(3) Taxes on income includes L216 million representing a charge on
reorganization of Sterling in connection with the sale by SmithKline Beecham
of Sterling's North American business and a credit associated with the
deferred tax asset arising on the creation of the restructuring provision.
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------- AT MARCH 31,
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------- ------------
(L) ($) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
AMOUNTS IN ACCORDANCE WITH U.K.
GAAP
Current assets.................... L2,595 L3,384 L3,476 L3,479 L3,403 $ 5,275 L3,536
Intangible assets................. -- -- 50 2,304 2,246 3,481 2,272
Total assets(2)................... 4,230 5,340 5,569 8,071 8,153 12,637 8,397
Long-term debt.................... 252 219 852 1,086 1,718 2,663 1,737
Total debt........................ 1,284 1,611 1,225 2,978 2,320 3,596 2,560
Total liabilities................. 3,143 3,854 3,726 6,940 6,414 9,942 6,596
Shareholders' funds -- equity
interests(2).................... 659 956 1,302 618 1,223 1,895 1,278
Auction Rate Preference Stock (SB
Corp MMP)....................... 428 530 541 513 516 800 523
------ ------ ------ ------ ------ ------- ------
APPROXIMATE AMOUNTS IN ACCORDANCE
WITH U.S. GAAP
Shareholders' funds -- equity
interests(1).................... L4,113 L4,385 L4,596 L4,769 L4,901 $ 7,597 N/A
</TABLE>
- ---------------
(1) Increase in shareholders' equity under U.S. GAAP principally arises from
goodwill and purchase accounting adjustments. See Note 32 to the
Consolidated Financial Statements included in the 1995 Form 20-F.
(2) The total assets and shareholders' funds have been restated for
capitalization of interest. See Statement of Accounting Policies, page 50,
included in the Consolidated Financial Statements included in the 1995 Form
20-F.
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
GENERAL
On May 20, 1996, the Company was formed with the intent of holding the
stock of certain indirectly owned subsidiaries of SmithKline Beecham, which was
transferred to it in consideration for all of the shares of Common Stock and
Junior Preferred Stock of the Company. The principal purpose of the formation of
the Company is the acquiring, owning and managing of certain non-U.S. assets of
SmithKline Beecham, primarily in the pharmaceutical business.
The Combined Financial Statements reflect the financial position and
results of operations of the entities comprising the Company and its
subsidiaries, on a combined basis at all dates and for all periods presented.
All financial information at dates and for periods prior to the formation
of the Company was prepared as if the Company had existed and operated as a
separate business at such dates and during such periods. Such financial
information reflects operating expenses incurred by SmithKline Beecham Group
that are specifically identifiable to the Company, and certain corporate
overhead allocations that management believes represent the value of services
performed on behalf of the Company.
The operations of the Company are conducted in international markets and
therefore the consolidated financial results of the Company are subject to
exchange rate fluctuations involving the United States dollar and a number of
foreign currencies. The functional currency for the majority of the Company's
foreign operations is the applicable local currency. The principal functional
currencies of the Company are the French franc, Singapore dollar, Belgian franc,
Irish punt and the Portuguese escudo. The Company's operations in Brazil and
Venezuela operate in highly inflationary economies and are re-measured as if the
functional currency were the U.S. dollar. Inflation in more highly developed
economies is at reduced levels in recent years. However, inflation continues to
raise the cost of goods and services used by the Company. Although the Company
attempts to fully recover higher costs through increased selling prices, the
competitive environment as well as government health policy in certain major
markets may restrict this ability. The Company is unable to predict what effect
inflation and pricing restrictions may ultimately have on its business.
In 1995, the Company recorded a provision of $60 million in connection with
the cost of integrating the consumer healthcare operations; the creation of
shared services across all of the business operations in finance, information
resources, human resources and purchasing; and the reorganization of the
Company's supply chain. The costs will be substantially incurred over two years
and include approximately $16 million of asset write-offs.
SmithKline Beecham continually analyzes its operational structure and
supply chain and explores possible opportunities to reduce operating costs and
increase manufacturing efficiencies. The Company's assets, including goodwill,
have been reviewed for permanent impairment in value. There has been no
identified reduction in the value of the Company's assets. In connection with
previous restructuring activity, the Company's manufacturing facility in Ireland
was designated as one of the principal cimetidine manufacturing facilities for
SmithKline Beecham Group, and its manufacturing activities were realigned
accordingly. Further restructuring of the Company's operations may occur as
SmithKline Beecham continues to explore opportunities to increase efficiencies.
While there may be no direct correlation between the financial results of
the Company and those of SmithKline Beecham in any particular period, the
overall performance of the Company is interdependent with the performance of
other units of SmithKline Beecham Group. Moreover, the Company is dependent upon
SmithKline Beecham Group with respect to new product development, the addition
of any resulting new products to the Company's product line and the expansion of
the Company's marketing and distribution activities. There can be no assurance
that the Company or its subsidiaries will be requested to market any particular
product or to engage in any particular business of SmithKline Beecham Group. See
"Business".
25
<PAGE> 28
RESULTS OF OPERATIONS
The following tables have been derived from the Combined Financial
Statements contained elsewhere in this document.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ---------------
1993 1994 1995 1995 1996
------ ------ ------ ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Sales
Pharmaceuticals.................... $1,106 $1,285 $1,445 $357 $326
Consumer Healthcare................ 175 205 253 61 63
------ ------ ------ ---- ----
Total Sales.............. $1,281 $1,490 $1,698 $418 $389
====== ====== ====== ==== ====
Operating Income
Pharmaceuticals.................... $ 222 $ 225 $ 201 $ 25 $ 59
Consumer Healthcare................ 2 15 17 (13) 8
------ ------ ------ ---- ----
Total Operating Income... $ 224 $ 240 $ 218 $ 12 $ 67
====== ====== ====== ==== ====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
(GROWTH RATES ARE AT COMPARABLE EXCHANGE RATES UNLESS OTHERWISE STATED.)
Pharmaceutical sales in the first quarter of 1996 (the "1996 Period") were
$326 million, compared to $357 million in the first quarter of 1995 (the "1995
Period"). Engerix-B sales for the 1996 Period declined $38 million. The
completion of the French-mandated hepatitis B vaccination campaign and a
reduction of intercompany antibiotic sales were the principal factors
contributing to the decline in 1996 first quarter sales. The decline in
Engerix-B sales in the first quarter of 1996 was partially offset by an increase
in new product sales, and the continued strong growth in the Brazil market.
Major contributors to the new product growth were Seroxat, Kytril and Havrix.
Seroxat sales in France were $13 million above those for the first quarter of
1995 driving much of the Company's new product growth. Brazil sales increased 25
percent, with Amoxil, Engerix-B, Seroxat, Augmentin and Bactroban each reporting
sales growth in excess of 16 percent or more.
Pharmaceutical operating income for the 1996 Period was $59 million
compared to $61 million of operating income, excluding a restructuring
provision, in the 1995 Period. The reduction is attributable to lower sales and
margins associated with intercompany antibiotics sales and lower third party
sales in France.
The Company's consumer healthcare segment reported sales of $63 million in
the 1996 Period, representing an increase of 2 percent over 1995 Period sales.
The increase is due primarily to increased Contac sales in Japan, resulting from
increased promotional activity and line extensions introduced in 1995.
The increase in consumer healthcare operating profit is attributed to a
non-recurring restructuring charge in the 1995 Period and an increase in margins
in Japan and Ireland. Also contributing to the increase in operating income are
lower monetary re-measurement costs in Brazil.
Net equity income decreased in the 1996 Period compared to the 1995 Period
due to lower royalty and interest income realized by equity investees.
Other net non-operating expense increased in the 1996 Period over that for
the 1995 Period by $35 million principally from the movement in exchange gains
and losses ($34 million) on unhedged intercompany financing activity.
The effective tax rate was 38.7 percent and 49.8 percent for the 1996
Period and 1995 Period, respectively. The decrease in the effective rate was due
to the 1996 Period not being impacted by the French exceptional tax, an increase
in foreign tax exempt income and the effects of increased income in operations
experiencing lower effective tax rates.
26
<PAGE> 29
Net income rose $9 million in the 1996 Period, an increase from $10 million
in the 1995 Period. The growth rate in net income is below the growth rate of
operating income in the 1996 Period, principally due to exchange losses on
unhedged related party loans.
FISCAL YEARS 1995 AND 1994
(GROWTH RATES ARE AT COMPARABLE EXCHANGE RATES UNLESS OTHERWISE STATED.)
The Company achieved pharmaceutical sales of $1,445 million in 1995, an
increase of 3 percent at comparable rates and 12 percent at actual rates over
the previous year. The growth was due primarily to strong anti-infective sales,
changing market dynamics in Brazil and increased new product sales. The growth
was partially offset by a reduction of related party raw material sales.
The Company's anti-infective products, including Amoxil, Augmentin and
Bactroban, increased $100 million. Sales of Augmentin increased $58 million,
with Brazil, Switzerland, Portugal and Austria each reporting growth rates in
excess of 15 percent over 1994.
Brazil's economic stability was maintained in 1995 and strengthened by
change directed at the privatization of government-owned companies,
acknowledgment of industrial patents and intellectual property rights, and
removal of importation barriers. Sales for Brazil increased by over 50 percent,
resulting in Brazil being the Company's second largest market. The increase over
1994 is due primarily to a change in the market dynamics as a result of the
stabilization program. The Company believes that Brazil's stabilization program
has improved purchasing power of the consumer and assisted in segments of the
population moving into the middle and upper income classes.
New products represented 11 percent of total product sales in 1995, up from
8 percent in 1994. The key performer was the antidepressant Seroxat, with sales
increasing $50 million to $57 million. In France, the Company's largest market,
the Company launched Seroxat, accounting for $40 million of the increase. Also
launched in 1995 was Infanrix, the combined acellular vaccine for diphtheria,
tetanus and pertussis (whooping cough) in Switzerland. Havrix continued its
success as a new product, reporting 22 percent growth over 1994.
Related party sales of active ingredients decreased by $101 million due
principally to the expiration of a related party manufacturing agreement for
paroxetine, the active ingredient in Seroxat, and termination of a related party
manufacturing agreement for famciclovir, the active ingredient in Famvir.
Famvir, indicated in the U.S. and U.K. for the treatment of shingles, is
scheduled for launch in Ireland in early 1996. The Irish manufacturing operation
disposed of $74 million of assets associated with the manufacturing activity of
paroxetine and famciclovir in 1995.
Pharmaceutical operating income in 1995 was adversely affected by
restructuring and one-time government-mandated social levy costs and the
expiration and termination of manufacturing agreements. The impact of the
preceding items was partially offset by lower monetary costs in Brazil.
The Company's consumer healthcare sales in 1995 were $253 million compared
to $205 million in 1994. The increase is primarily attributable to the inclusion
of 12 months of sales activity for products acquired via the Sterling
acquisition, as opposed to inclusion of 2 months of sales activity in 1994.
Sales of the Contac line in Japan increased by $6 million, or 6 percent,
reflecting the launch of two line extensions, Contac Cough and Contac Day.
Contac sales account for over 90 percent of the Company's consumer healthcare
sales in Japan. Other contributors to the growth in consumer healthcare 1995
sales were Lucozade and Aquafresh in Ireland, which grew by 23 and 20 percent,
respectively. Lucozade accounted for 54 percent of the consumer healthcare sales
in Ireland.
The consumer healthcare segment commenced restructuring programs in both
Brazil and Japan in 1995. The restructuring program in Brazil includes the
integration of the consumer healthcare organizations, restructuring of existing
manufacturing facilities, and the disposal of personal care products. The
program also includes co-location of existing operations. Staffing levels were
reduced in Japan by approximately 35 percent in 1995, redirecting the investment
towards promotional activity.
27
<PAGE> 30
Consumer healthcare operating income increased by $2 million in 1995, or
13% at actual rates. The increase is due to the full year inclusion of operating
income related to the businesses acquired by the Sterling acquisition, and a
significant reduction of currency devaluation costs in Brazil offset by
restructuring charges.
Net interest income for 1995 was $30 million (an increase of $23 million),
due to the settlement of related party loans. A significant amount of the
settlement relates to loans associated with a stock redemption program. In
addition, the Company's pharmaceutical operation in France loaned additional
funds to related parties.
Other net non-operating expense of $5 million in 1995 compares to an
operating income of $19 million in 1994. The reduction is primarily the result
of the inclusion in 1994 of $16 million of income associated with the gain on
disposal of fixed assets.
The effective income tax rate increased from 35.2 percent in 1994 to 49.8
percent in 1995. The significant items impacting the 1995 income tax rate are
net operating losses, reduction in foreign tax exempt income, the French
exceptional tax, and the effects of increased income in operations experiencing
higher effective tax rates.
Net income declined to $110 million in 1995, a reduction of 26 percent at
actual rates over 1994. The decline is primarily attributed to restructuring
charges.
FISCAL YEARS 1994 AND 1993
(GROWTH RATES ARE AT COMPARABLE EXCHANGE RATES UNLESS OTHERWISE STATED.)
The Company's sales of pharmaceutical products increased 15 percent at
comparable rates and 16 percent at actual rates in 1994 despite continued
pressure on prices in France, and the introduction of a new economic
stabilization program in Brazil.
In 1994, the pharmaceutical segment of the Company was favorably impacted
by the French government inspired campaign to vaccinate "at risk" sectors of
their population against hepatitis B and increased sales of active ingredients
to related parties. The French vaccination campaign was the primary contributor
to Engerix B sales, which increased by $103 million.
In 1993, the Company's primary production facility entered into short-term
contracts with SmithKline Beecham to produce the active ingredients of two new
products, Seroxat (paroxetine) and Famvir (famciclovir). Related party raw
material sales of these active ingredients increased by $108 million in 1994.
Partially offsetting the increase in vaccine and related party active
ingredient sales were lower sales of anti-infective products. Anti-infective
sales, which include Augmentin, Amoxil and Timentin, were impacted by low levels
of pathogens prevalent in Europe. In addition, France experienced
government-induced prescribing restrictions that were imposed due to the
successful volume growth of the Augmentin brand.
Growth in pharmaceutical operating income was lower than pharmaceutical
sales growth in 1994 due to lower margins on related party manufacturing
agreements.
The consumer healthcare business sector accounted for 14 percent of the
Company's sales, and 6 percent of the Company's operating income, in 1994. Sales
of $205 million in 1994 represented an increase of 11 percent at comparable
rates and 17 percent at actual rates over 1993 sales, with the oral care sales
increasing $21 million. Contac, the leading product for consumer healthcare,
declined 5 percent due to a weak cold and flu season in Japan. The
gastrointestinal category was led by sales of Eno, an effervescent antacid, that
grew 9 percent in 1994, primarily due to growth of Eno in Brazil and France.
Nutritional healthcare sales increased 11 percent, with Lucozade increasing 16
percent.
Consumer healthcare operating income at actual rates grew $13 million in
1994. This growth was driven by increased volume in France and Singapore and
lower monetary re-measurement expenses in Brazil.
Net interest income declined in 1994 from $14 million to $7 million due to
settlement of related party loans prior to consolidation of two entities in
Belgium.
The increase in other non-operating income is due to gain on disposal of
fixed assets of $16 million.
28
<PAGE> 31
The effective tax rate in 1994 increased primarily due to the effects of
reduced income in operations experiencing lower effective tax rates.
Net income declined slightly, versus a 7 percent growth in operating
income. The decline is principally due to increased income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's anticipated cash requirements will be funded primarily by
cash flow from operations, supplemented by dividends on the SB Biologicals
Preferred Stock, payments on loans to affiliates and the utilization of local
lines of credit for small daily cash activities in certain countries. Management
believes that these sources will be sufficient to fund the cash needs of the
Company's business for the foreseeable future.
Long-term liquidity is dependent upon the Company's competitive position,
including its ability to license and market new products and to maximize
benefits from new business alliances.
Net cash provided by operating activities was $142 million in 1993, $99
million in 1994 and $227 million in 1995. In 1995, net cash provided by
operations benefited from significant reduced working capital needs offset by
lower income due to $60 million in restructuring charges of which $35 million
will be paid in 1996 and 1997, and an increase in the effective tax rate. The
decrease in 1994 over 1993 reflects a continued reduction in working capital
needs.
Investing activities utilized cash in an amount of $45 million in 1993, and
$13 million in 1994 and provided cash of $60 million in 1995. Net cash provided
by investing activities in 1995 resulted from the sale of fixed assets for $86
million. Cash used in 1994 increased from 1993 due to the acquisition of
goodwill related to the purchase of Sterling.
Cash used in financing activities was $109 million in 1993, $84 million in
1994 and $227 million in 1995. The cash used in 1995 increased from 1994 due to
increased loans to affiliates, offset by cash provided from SmithKline Beecham
primarily related to the sale of the animal health business. Cash used in
financing activities decreased in 1994 due to increased loans to affiliates
offset mainly by liquidation dividends received from animal health companies
prior to sale.
Cash outflows for income taxes increased by $56 million from 1994 to 1995
due to the prior year deferral of tax payments and an increased effective tax
rate in 1995.
29
<PAGE> 32
BUSINESS
GENERAL
The Company was incorporated in May 1996 for the principal purpose of
acquiring, owning and managing certain non-U.S. assets of SmithKline Beecham,
primarily in the pharmaceuticals business. SmithKline Beecham owns indirectly
100 percent of the Common Stock of the Company. The Company had $1,698 million
and $389 million in sales and $110 million and $19 million in net income for
1995 and the first quarter of 1996, respectively. The Company is a holding
company and conducts its operations through approximately 60 subsidiaries. The
Company's holdings will also include fixed rate cumulative preferred stock of SB
Biologicals, a Belgian pharmaceuticals subsidiary of SmithKline Beecham, with an
aggregate redemption price of $650 million. See "-- SB Biologicals". The
Company's primary activities consist of the manufacture and sale of
pharmaceuticals (prescription medicines) and the manufacture and sale of certain
consumer healthcare products, such as OTC medicines, oral care products and
nutritional drinks as part of the worldwide sales of SmithKline Beecham Group.
The Company also engages in intercompany lending to other companies in
SmithKline Beecham Group.
RELATIONSHIP WITH SMITHKLINE BEECHAM GROUP
SmithKline Beecham conducts its pharmaceutical and consumer healthcare
businesses on a worldwide basis directly and through approximately 330
subsidiaries, including the Company and its subsidiaries. The operations of the
Company and its subsidiaries are fully integrated with those of SmithKline
Beecham Group as a whole through a series of intercompany arrangements including
purchases and sales of active ingredients and finished products, product and
intellectual property licenses, intercompany loans and management and shared
services agreements (see "Arrangements with SmithKline Beecham Group"). For
example, the Company's manufacturing operations produce certain pharmaceutical
and consumer healthcare products for sale by SmithKline Beecham Group marketing
units worldwide. Other operations produce the raw materials or semi-finished
ingredients which are sold to other SmithKline Beecham Group entities for use in
the manufacture of other products, which may in turn be sold back to the
Company's subsidiaries in finished form for marketing and sale to end users.
SmithKline Beecham Group also supplies a substantial portion of the raw
materials used by the Company in manufacturing finished products. In addition,
the Company and other members of SmithKline Beecham Group generally share the
results of their research and development efforts through mutual licensing
agreements or arrangements.
While there may be no direct correlation between the financial results of
the Company and those of SmithKline Beecham in any particular period, the
overall performance of the Company is interdependent with the performance of
other units of SmithKline Beecham Group. Moreover, the Company is dependent upon
other members of SmithKline Beecham Group with respect to new product
development, the addition of any resulting new products to the Company's product
line and the expansion of the Company's marketing and distribution activities.
The Company believes that the agreements and arrangements between the
Company and its subsidiaries, on the one hand, and other members of SmithKline
Beecham Group, on the other hand, are on arm's length terms. However, SmithKline
Beecham's determination to seek to establish, modify or terminate any such
agreement or arrangement is made on a case-by-case basis, generally with a view
to the objectives of SmithKline Beecham Group as a whole. There can be no
assurance that the Company or its subsidiaries will be requested to produce or
market any particular product or to engage in any particular business of
SmithKline Beecham Group, or that any existing business relationship between the
Company and its subsidiaries, on the one hand, and other members of SmithKline
Beecham Group, on the other hand, will not be so modified or terminated.
SmithKline Beecham will have the ability to modify or terminate business
relationships affecting the Company without seeking the approval of the holders
of Shares. See "Arrangements with SmithKline Beecham Group".
30
<PAGE> 33
The descriptions of the Company's two principal business
segments -- pharmaceuticals and consumer healthcare -- below summarize the
Company's role in SmithKline Beecham Group and should be read in conjunction
with the description of SmithKline Beecham's business contained in the 1995 Form
20-F.
BUSINESS SEGMENTS
Pharmaceuticals
The Company, in conjunction with other members of SmithKline Beecham Group,
manufactures and sells prescription medicines concentrated in three therapeutic
areas: anti-infectives/biologicals (vaccines), gastrointestinal and
neurosciences.
In 1995, the Company's total pharmaceuticals sales were $1,445 million or
approximately 85 percent of total sales. Approximately 78 percent of these sales
were made outside of SmithKline Beecham Group. The Company's sales of
pharmaceuticals to third parties represented approximately 13 percent of
SmithKline Beecham Group's continuing pharmaceuticals sales (after elimination
of intercompany sales) in 1995.
The Company's main anti-infective products marketed and sold to third
parties are Augmentin (amoxicillin and potassium clavulanate), a leading
broad-spectrum anti-infective against many penicillin-resistant organisms, and
Amoxil (amoxicillin), another antibiotic with a wide range of applications. The
leading vaccine products are Engerix-B, a hepatitis B vaccine, and Havrix, a
hepatitis A vaccine. In 1995, the Company's antibiotic and vaccines business
accounted for approximately 72 percent of its third party sales.
Tagamet (cimetidine), an H2 receptor antagonist product used in the
treatment of ulcer and other gastrointestinal diseases, is the Company's
principal gastrointestinal product. Sales of gastrointestinal products
represented approximately 12 percent of the Company's third party
pharmaceuticals sales in 1995.
Seroxat (paroxetine), belonging to the class of selective seratonin
reuptake inhibitors ("SSRI"), a treatment for depression and anxiety, is the
Company's leading neuroscience product. Sales of neuroscience products
represented approximately 8 percent of the Company's third party pharmaceuticals
sales in 1995.
Consumer Healthcare
The Company markets a varied range of OTC medicines, nutritional drinks and
oral care products. In 1995, the Company's consumer healthcare sales amounted to
$253 million, or approximately 15 percent of total sales, substantially all of
which were made to third parties. The Company's sales to third parties
represented approximately 11 percent of SmithKline Beecham Group's continuing
consumer health care sales (after elimination of intercompany sales).
The Company's OTC medicines include a range of respiratory tract,
gastrointestinal and analgesic medicines, skin care products and vitamins and
natural medicines. The most significant of these products are Contac, for the
treatment of colds and influenza; Eno, an effervescent antacid; Sonrisal, an
antacid; and Sythal, a dermatological product. Leading oral care products
include Aquafresh and Odol. The principal nutritional drink product is Lucozade,
a glucose-based energy replacement drink.
PRINCIPAL MARKETS
The Company's sales are made throughout the world, the principal markets
being France, Brazil, Japan, Africa, Belgium, Austria, Switzerland and Ireland.
Sales in these countries together accounted for approximately 79 percent of the
Company's sales in 1995. France is the most important country for the sale of
the Company's prescription medicines, which sales in France accounted for
approximately 40 percent of the Company's total sales in 1995. See Note 12 to
the Combined Financial Statements.
PRODUCTION
SmithKline Beecham's prescription medicines are manufactured at its bulk
chemical and secondary pharmaceutical production facilities. The Company is
involved in both types of manufacturing.
Bulk chemical production involves the manufacture in quantity of
therapeutically active compounds, principally through the application of
chemical synthesis or biological processes, such as fermentation. The Company's
principal bulk chemical production operations are located in Ireland and
Singapore.
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<PAGE> 34
Production facilities for prescription drugs and OTC products are engaged
in the formulation of active ingredients and packaging into finished dosage
forms, including oral dosage forms, such as capsules, syrups and tablets, and
injectable dosage forms. The Company maintains its principal production plants
in France, Brazil, Austria and Pakistan.
The Company or other members of SmithKline Beecham Group manufacture most
of the active ingredients contained in the Company's pharmaceutical products and
therefore the Company is generally not dependent on third-party suppliers for
these materials. The Company procures Contac for the Japanese market and
toothbrushes from third party manufacturers.
Approximately $318 million, or 19 percent, of the Company's total sales
were derived from production activities for members of SmithKline Beecham Group
(other than the Company's subsidiaries) in 1995.
MARKETING AND DISTRIBUTION
The Company sells its prescription medicines primarily to wholesale drug
distributors, independent and chain retail drug outlets, physicians, hospitals,
clinics, government entities and other institutions. These products are
ordinarily dispensed to the public through pharmacies on the prescription of a
physician. Promotion of these products is directed primarily to physicians,
hospitals and pharmacists through personal visits by sales representatives
employed by SmithKline Beecham Group. Promotion of these products is
supplemented by scientific seminars, advertising in medical and other journals,
the provision of samples and the direct mailing of printed material.
The Company's OTC and oral care products are distributed to retail outlets
directly or through wholesalers who are not necessarily drug specialists.
Methods of selling are constantly under review to take advantage of changes in
market conditions.
Distribution of nutritional drinks is made to a wide selection of outlets,
either directly or through wholesalers. The organization of the selling teams is
very dependent on the outlet pattern of individual countries. Consumer
acceptance of the products is supported by specific advertising associated with
outlet promotions.
Approximately $1,380 million, or 81 percent, of the Company's total sales
was derived from marketing activities in 1995.
COMPETITION
The pharmaceutical industry is highly competitive. The principal
competitors of SmithKline Beecham Group are large international companies with
substantial resources operating in a worldwide marketplace. Some of these
companies and their major competing products are mentioned below. As an
affiliate of one of the largest pharmaceutical companies in the world, the
Company believes it has access to the resources to compete effectively and
efficiently in those markets and for the products for which it serves as the
SmithKline Beecham marketing organization.
A drug may be subject to competition from alternative therapies during the
period of patent protection and thereafter from generic copies. The
manufacturers of generic products typically do not bear the related research and
development costs and consequently are able to offer such products at
considerably lower prices than the branded equivalents. A research and
development-based pharmaceutical company will therefore normally seek to achieve
a sufficiently high profit margin and sales volume during the period of patent
protection to justify the original investment and to fund research for the
future. There are, however, a number of factors which enable products to remain
profitable once patent protection has ceased. These include the establishment of
a strong brand image with the prescriber or the consumer, supported by an active
trademark registration and enforcement policy, and the development of a broader
range of alternative formulations than the manufacturers of generic products
typically supply.
As is the case for the pharmaceutical industry in general, the introduction
of new products and processes by competitors may affect pricing levels or result
in product replacement for existing products, and there can
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<PAGE> 35
be no assurance that any of the Company's products may not become outmoded,
notwithstanding patent or trademark protection. In addition, increasing
governmental and other pressure towards the dispensing of generic products in
substitution for brand-name drugs may increase competition for products no
longer covered by patents.
Major products competing with the Company's semi-synthetic penicillins
(Augmentin and Amoxil) are other anti-infectives, including, but not limited to,
generic brands, cephalosporins and, to an increasing degree, quinolones. Amoxil,
the Company's third largest selling product in 1995, has been without patent
protection for a number of years and is subject to competition from generic
brands. Seroxat's major competitors in the SSRIs market are Prozac from Eli
Lilly, Zoloft from Pfizer and Efexor from Wyeth-Ayerst. Tagamet faces
competition from generic cimetidine products and other branded H2 receptor
antagonists, including Zantac from Glaxo Wellcome and Pepcid from Merck.
Competition from generic products generally occurs as patents in major
markets expire; in other markets the absence of patent protection permits
generic competition shortly after product launch. Strenuous efforts to counter
the effects of this competition are directed at three main areas: first, the
introduction of new ranges of products into as many markets as possible, second,
accelerating the process by which new compounds under development are brought to
the market, and third, increasing brand awareness among consumers. Ultimately,
the Company believes that its competitive position in the markets in which its
prescription drugs compete is dependent upon the discovery and development of
new products, together with effective marketing of existing and future products.
The major competitors in the consumer healthcare markets are Procter and
Gamble, Colgate-Palmolive, American Home Products, Unilever, Rhone Poulenc
Rorer, Bristol Myers Squibb, Warner Lambert and Johnson & Johnson. All of these
companies are major international companies and continue to be extremely active
in what is a highly competitive market. In addition, there are many other large
and small companies which compete with SmithKline Beecham Group, including the
Company's subsidiaries, in selected markets.
The consumer healthcare business of SmithKline Beecham Group has grown
through the development of high quality branded products with good consumer
acceptance, supported by advertising and brand promotion, line extensions, new
formulations and packaging innovations. SmithKline Beecham's (and the Company's)
ability to compete effectively is dependent on its skills in developing new
scientifically supported products and line extensions with performance superior
to those of its competitors.
RESEARCH AND DEVELOPMENT
The Company conducts no significant research and development activities and
is dependent upon SmithKline Beecham Group for such activities. For a discussion
of SmithKline Beecham Group's research and development activities, see the 1995
Form 20-F.
INTELLECTUAL PROPERTY
The Company is dependent upon SmithKline Beecham Group for intellectual
property rights in connection with its products, principally by way of licensing
agreements. See "Arrangements with SmithKline Beecham Group". For a more
detailed discussion of SmithKline Beecham Group's intellectual property, see the
1995 Form 20-F.
Patents
The Company has patent protection through licensing agreements with other
members of SmithKline Beecham Group for one or more forms of most of its
important existing pharmaceutical products in its major markets and, also
through SmithKline Beecham Group, either has obtained patents or anticipates
that patent protection will be granted for the new drugs which are under
development. However, the absence of effective patent protection for
pharmaceuticals in some developing countries continues to have an adverse effect
on pharmaceutical companies, including the Company, that conduct business in
those countries.
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The patent expiry date for the active ingredient in Seroxat is on or after
2005 in major countries around the world. The patent situation on potassium
clavulanate (Augmentin) is complex. Although patents on the compound expired in
some markets in 1995, patent extension regulations in France provide protection
beyond 2000. Useful secondary protection in important markets also lasts until
2000 or beyond. The patent on Amoxil has expired. Patents on Tagamet
(cimetidine) have expired in most countries. The patent positions on Engerix-B
and Havrix are complex but in general, the Company believes that key patents for
both products will extend into the next decade.
Trademarks
All of the Company's significant pharmaceutical products are protected by
registered trademarks in its major markets held by SmithKline Beecham Group.
SmithKline Beecham Group pursues a policy of enforcing its trademark rights
vigorously against infringements and other unauthorized uses. These trademarks
are used in many countries, although there may be local variations for each of
these trademarks.
Trademark protection continues in some countries as long as a trademark is
used and, in other countries, as long as a trademark is registered. The
Company's trademark rights with respect to a pharmaceutical product generally
assumes increasing importance when the patent for such product expires.
The Company's consumer healthcare businesses are brand-oriented, and
therefore the Company considers trademark rights for these products to be of
particular value. Most of its consumer brands are protected by trademarks held
by SmithKline Beecham Group in the majority of the markets where those brands
are sold and SmithKline Beecham Group vigorously protects these trademarks from
infringement.
SB BIOLOGICALS
The Company's assets will include 53,629 shares of Class A 6.5% Preferred
Shares of SB Biologicals with an aggregate liquidation preference of $550
million and 2,627,821 shares of Class B 5.5% Preferred Shares of SB Biologicals
with an aggregate liquidation preference of $100 million. Subject to funds
legally available for payment, the SB Biologicals Preferred Stock would entitle
the Company to an annual dividend of $41.25 million, prior to any applicable
withholding taxes. Under Belgian law, preferred stock dividends will be payable
from earnings of SB Biologicals accrued from January 1, 1996. All of SB
Biologicals' common stock is owned indirectly by SmithKline Beecham. The SB
Biologicals Preferred Stock is redeemable at the option of SB Biologicals at an
aggregate redemption price of $650 million, and represents, in the aggregate,
50% of the combined voting power of all classes of capital stock of SB
Biologicals. There are no other preferred shares of SB Biologicals outstanding.
In connection with the issuance of the SB Biologicals Preferred Stock,
SmithKline Beecham will issue the SB Biologicals Guarantee, pursuant to which
SmithKline Beecham will guarantee the payment to the Company by SB Biologicals
of dividends declared by SB Biologicals on the shares of SB Biologicals
Preferred Stock held by the Company, and will enter into the SB Biologicals
Support Agreement, under which SmithKline Beecham will agree to make additional
capital contributions to SB Biologicals in certain circumstances in order to
enable SB Biologicals to declare and pay dividends on the SB Biologicals
Preferred Stock. The terms and provisions of the SB Biologicals Guarantee and
the SB Biologicals Support Agreement are substantially identical to those of the
Guarantee and the Support Agreement, respectively. The obligations of SmithKline
Beecham under the SB Biologicals Support Agreement will be limited to an
aggregate amount of $1 billion. The SB Biologicals Support Agreement is not a
guarantee of any obligation, liability or indebtedness of SB Biologicals,
including the SB Biologicals Preferred Stock. Accordingly, SmithKline Beecham
will not, by virtue of the SB Biologicals Support Agreement, have any obligation
to the Company or any holder of the Shares of any Series, and the SB Biologicals
Support Agreement is not enforceable directly by the Company or any such holder.
See "Description of SmithKline Beecham Support".
SB Biologicals is a vertically integrated vaccines company engaged in the
research and development, manufacturing, marketing and selling of the full range
of SmithKline Beecham vaccine products. SB Biologicals sells directly to certain
categories of customers and to customers located in certain countries; in
others, vaccine products are sold to SmithKline Beecham affiliates on an
intercompany basis. SmithKline
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Beecham's worldwide vaccine sales to third parties were $966.6 million in 1995
and $817.4 million in 1994. Net income for SB Biologicals as an entity on a
Belgian statutory basis was $122.6 million for 1995 and $143.9 million for 1994.
On these bases SB Biologicals had total indebtedness and stockholders' equity of
$673.1 million at December 31, 1995.
REGULATION
The international pharmaceutical industry is highly regulated. National
drug regulatory authorities administer numerous laws and regulations governing
the testing, approval, manufacturing, importing, labeling and marketing of drugs
and also review the safety and efficacy of pharmaceutical products. Consumer
healthcare products are subject to similar laws, regulations and review. These
regulatory requirements are a major factor in determining whether a substance
can be developed into a marketable product and can also determine the amount of
time and expense associated with such development.
The national regulatory authorities in many countries, including those of
continental Europe and Japan, have high standards of technical appraisal and,
consequently, the introduction of new pharmaceutical and consumer healthcare
products generally entails a lengthy approval process. Of particular importance
is the requirement in all major countries that products be authorized or
registered prior to marketing and that such authorization or registration be
subsequently maintained. The Company anticipates that the introduction of new
products will continue to require substantial effort, time and expense in order
to comply with applicable regulatory requirements. National regulatory
authorization is also required to approve the switch of products from
prescription to OTC use. The process required to switch products from
prescription to OTC use requires a number of basic requirements. These include
the long-term experience of the quality, safety and efficacy of the product in a
wide patient population and data to confirm that the relevant condition is both
self-limiting and can easily be diagnosed by the patient.
The European Medicines Evaluation Agency has been established in the U.K.
and has been operational from January 1, 1995. From that date, two new
registration systems, the Centralized Procedure and the Decentralized Procedure,
have been introduced. Both of these procedures can lead to a binding decision
allowing a new product to be marketed simultaneously in all European Union
countries. These are major changes and only time will demonstrate whether the
new procedures will lead to faster or slower registration approvals in Europe.
The overall cost of providing healthcare services has been and will
continue to be subject to review. Prices for products are sometimes subject to
direct price controls and drug reimbursement programs which have varying price
control mechanisms. Elsewhere in many countries the prices of pharmaceutical
products are controlled by law. In some countries, such as France, the prices of
individual products are regulated. Governments may also influence the prices of
pharmaceutical products through their control of national healthcare
organizations which may bear a large part of the cost of supply of such products
to consumers.
In France, the government's medium-term program to reform its finances to
meet the economic conditions for European Monetary Union is having a significant
impact on the pharmaceutical sector. In 1995 the sector was required to pay a
special contribution towards the social security deficit.
The Company is unable to predict whether, and the extent to which, its
business may in the future be affected by legislative and regulatory
developments relating to specific products and to the pricing of such products.
ENVIRONMENTAL MATTERS
SmithKline Beecham Group has a worldwide program of corporate environmental
standards. These standards are designed to ensure that environmental protection
is a key business objective and they detail the purpose, scope, procedures and
responsibilities of every environmental concern throughout SmithKline Beecham
Group's worldwide operations. The Company is committed to adhering to these
standards and to being an environmentally responsible member in the local,
national and worldwide community in which it operates.
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<PAGE> 38
The Company believes that its operations comply in all material respects
with applicable environmental laws and regulations. Although the Company makes
ongoing capital expenditures for environmental protection equipment, as well as
cash expenditures for site remediation and the operation and maintenance of
environmental facilities, it does not anticipate any such expenditures to have a
material impact upon the Company's capital expenditures, cash flow or financial
position.
The Company does not expect that its liability for environmental matters
will have a material impact on its financial condition, results of operations or
liquidity.
EMPLOYEES
On December 31, 1995, the Company had approximately 4,600 employees.
Employees in several countries, including France, are represented by unions or
work councils. The Company has not experienced any material work stoppages in
recent years, and it considers its employee relations to be good.
PROPERTIES
The Company's headquarters and principal executive offices are located at
1403 Foulk Road, Wilmington, Delaware.
The Company owns or leases nine production facilities, with its principal
facilities being located in France, Ireland, Singapore and Brazil. For further
information regarding the Company's principal production and research and
development facilities, see "Business -- Business Segments -- Pharmaceuticals"
and "-- Consumer Healthcare".
LEGAL PROCEEDINGS
The Company is involved from time to time in various legal and
administrative proceedings which it considers normal for its business, including
suits claiming damages as a result of the use of the Company's products and
other matters. Although the outcome of claims, legal proceedings and other
matters in which the Company is involved cannot be predicted with any certainty,
the Company does not expect its ultimate liability for such matters to have a
material adverse effect on its financial condition, results of operations or
liquidity.
ARRANGEMENTS WITH SMITHKLINE BEECHAM GROUP
The Company is an indirect wholly-owned subsidiary of SmithKline Beecham.
The Company and SmithKline Beecham have entered into a number of arrangements
relating to the ongoing relationship between them. The Company and SmithKline
Beecham believe that such arrangements and transactions, taken as a whole,
accommodate the parties' interests in a manner that is fair to both parties and
their respective economic interests, and that the terms and conditions of such
arrangements are consistent with those that would result from arm's-length
dealings.
GENERAL SERVICES AGREEMENT
The Company, SmithKline Beecham and SB Corp will enter into a management
and services agreement (the "General Services Agreement") under which SmithKline
Beecham and SB Corp will provide executive management services to the Company.
At present all the officers and directors of the Company are officers or
employees of SmithKline Beecham or SB Corp. There is no present intention that
officers and directors of the Company would become employees of the Company.
The General Services Agreement also provides that SmithKline Beecham, SB
Corp and certain of their subsidiaries will provide various services to the
Company. Such services will include executive management, legal, corporate
accounting, tax, treasury, internal audit, information resources, corporate
affairs and risk management. Employees of SmithKline Beecham and SB Corp
rendering services to the Company will continue to be, and will be paid as,
employees of SmithKline Beecham and SB Corp. In addition to the other
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<PAGE> 39
services to be provided under the General Services Agreement, SmithKline Beecham
will continue to provide the Company with insurance coverage under SmithKline
Beecham's policies and self insurance programs as long as SmithKline Beecham
owns all the outstanding Common Stock of the Company. Such insurance includes
coverage for public liability, workers' compensation, environmental impairment
liability, property damage, business interruption, directors' and officers'
liability, criminal liability, fiduciary liability and surety bonds. The charge
to the Company for such insurance will constitute an allocation of the costs to
SmithKline Beecham of maintaining the various policies. This charge will be
renegotiated annually based upon SmithKline Beecham's cost for the insurance and
the Company's loss experience.
The Company may terminate any type of service which it receives under the
General Services Agreement at any time upon 60 days' prior written notice. The
Company will reimburse SmithKline Beecham for reasonable charges for services
under the General Services Agreement, currently estimated to be approximately $1
million per year.
The Company, like other members of SmithKline Beecham Group, is party to a
number of shared service arrangements with other members of SmithKline Beecham
Group, including with respect to human resources, information resources and
finance. The amounts paid by members of SmithKline Beecham Group, including the
Company, for such shared services are generally determined by allocating the
full cost of the services based on the usage by the SmithKline Beecham Group
member.
PRODUCT AGREEMENTS
Within SmithKline Beecham Group, there are a number of supply and license
arrangements between and among SmithKline Beecham and its subsidiaries,
including the Company and its subsidiaries. The historical financial information
in the Combined Financial Statements reflects the financial effect of these
arrangements. Generally such arrangements are subject to termination on notice
of 30 to 180 days without provision for compensation with regard to such
termination. Product sales prices are typically based on an estimate of market
prices and a reasonable margin for the purchaser. The Company's subsidiaries pay
royalties to SmithKline Beecham Group based on a percentage of the Company's
third party sales for a number of products, based on patent, trademark, know-how
or other intellectual property rights retained by SmithKline Beecham Group. As a
general matter, the Company and its subsidiaries do not have license or
distribution rights to new SmithKline Beecham products within their respective
geographic markets.
INTERCOMPANY FINANCE
A substantial portion of the Company's assets, revenues and net income
consist of or are derived from loans made by the Company to other members of
SmithKline Beecham Group. The aggregate principal amount of loans made by the
Company to members of SmithKline Beecham Group (other than the Company's
subsidiaries) outstanding at December 31, 1995 was $1,144 million and the
Company recorded aggregate interest income of $33 million in respect of such
loans for the year ended December 31, 1995. The Company expects to increase the
amount of these loans substantially by lending all or a substantial portion of
the proceeds of the Offering to members of the SmithKline Beecham Group (see
"Use of Proceeds"). Such new loans will be fully and unconditionally guaranteed
by SmithKline Beecham. The intercompany loans will generally mature within one
year and bear interest at rates based upon the London Interbank Offered Rate
("LIBOR"), which rates will, in the Company's view, be no less favorable to the
Company in the aggregate than those offered by third parties for similar loans.
GUARANTEE AND SUPPORT AGREEMENT
SmithKline Beecham will enter into the Guarantee and Support Agreement in
relation to the Shares. See "Description of SmithKline Beecham Support".
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MANAGEMENT
Directors of the Company are to be elected at the annual meeting to serve
until the next annual meeting and until successors are elected and qualified.
Holders of the Common Stock and the Shares will be entitled to vote in each such
election, and through the exercise of cumulative voting rights, holders of the
Shares will have the power to elect up to approximately 27% of the Company's
directors, assuming the issuance of all of the Shares offered hereby. As the
indirect holder of all shares of Common Stock, SmithKline Beecham will have the
ability to elect the remainder of the Company's directors. Currently, eight
individuals have been elected to the Board of Directors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board. Set
forth below is information with respect to each person who is a director or
executive officer of the Company as of June 26, 1996:
<TABLE>
<CAPTION>
NAME POSITION WITH COMPANY
- ----------------------------------------------- ------------------------------------
<S> <C>
Hugh R. Collum................................. Director, Vice President and Chief
Financial Officer
William J. Creelman............................ Director
Jean-Pierre Garnier, Ph.D...................... Director and Vice President
Jan Leschly.................................... Director, President and Chief
Executive Officer
Donald F. Parman............................... Director, Vice President and
Secretary
George H. Poste, D.V.M., Ph.D.................. Director and Vice President
William J. Shulby.............................. Director, Treasurer and Assistant
Secretary
Tadataka Yamada, M.D........................... Director and Vice President
</TABLE>
HUGH R. COLLUM, 55, DIRECTOR, VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER. Mr. Collum was appointed a director and Vice President and Chief
Financial Officer of the Company at the Company's inception in May 1996. He has
been a director and Chief Financial Officer of SmithKline Beecham since July
1989. Mr. Collum is also a director of M&G Group plc.
WILLIAM J. CREELMAN, 42, DIRECTOR. Mr. Creelman was appointed a director
of the Company at the Company's inception in May 1996. Mr. Creelman has been
Director of Audits and Tax Counsel-U.S. of SB Corp since June 1992. Prior
thereto, he was Associate Tax Counsel of SB Corp.
JEAN-PIERRE GARNIER, PH.D., 48, DIRECTOR AND VICE PRESIDENT. Dr. Garnier
was appointed a director and Vice President of the Company at the Company's
inception in May 1996. Dr. Garnier has served as President, SmithKline Beecham
Pharmaceuticals since April 1994 and Chief Operating Officer of SmithKline
Beecham since October 1995. Prior thereto he had been Executive Vice President,
SmithKline Beecham Pharmaceuticals since April 1993 and President, North
American Pharmaceuticals from September 1990 to April 1993. Dr. Garnier has been
a director of SmithKline Beecham since 1992.
JAN LESCHLY, 55, DIRECTOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Mr.
Leschly was appointed a director and President and Chief Executive Officer of
the Company at the Company's inception in May 1996. Mr. Leschly has been Chief
Executive of SmithKline Beecham since April 1994. He joined SmithKline Beecham
as a director and Chairman, SmithKline Beecham Pharmaceuticals in June 1990.
DONALD F. PARMAN, 45, DIRECTOR, VICE PRESIDENT AND SECRETARY. Mr. Parman
was appointed a director and Secretary of the Company at the Company's inception
in May 1996 and a Vice President of the Company in June 1996. He has been the
Secretary and Associate General Counsel of SB Corp since July 1994. Prior
thereto he had been Assistant Secretary and Associate General Counsel of SB
Corp.
GEORGE H. POSTE, D.V.M., PH.D., 52, DIRECTOR AND VICE PRESIDENT. Dr. Poste
was appointed a director and Vice President of the Company at the Company's
inception in May 1996. Dr. Poste has served as Chairman, Pharmaceuticals
Research and Development, since 1991. He has held several senior R&D positions
prior to his appointment as Vice Chairman and Executive Vice President, R&D, in
1990. Dr. Poste has been a director of SmithKline Beecham since 1992.
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<PAGE> 41
WILLIAM J. SHULBY, 40, DIRECTOR, TREASURER AND ASSISTANT SECRETARY. Mr.
Shulby was appointed a director and Treasurer of the Company at the Company's
inception in May 1996 and an Assistant Secretary of the Company in June 1996. He
has served as Assistant Treasurer of SB Corp since July 1993. Mr. Shulby joined
SB Corp as Director, Corporate Finance in June 1992. Prior thereto, he was a
Senior Audit Manager with Coopers & Lybrand.
TADATAKA YAMADA, M.D., 51, DIRECTOR AND VICE PRESIDENT. Dr. Yamada was
appointed a director and Vice President of the Company at the Company's
inception in May 1996. Dr. Yamada joined SmithKline Beecham as President,
SmithKline Beecham Healthcare Services in February 1996. Prior thereto he had
been the John G. Searle Professor and Chairman of the Department of Internal
Medicine, Professor and Physician-in-Chief at the University of Michigan Medical
Center since 1990. Dr. Yamada has been a director of SmithKline Beecham since
February 1994.
EXECUTIVE COMPENSATION
SmithKline Beecham expects that each of the five most highly compensated
executive officers of the Company for 1996 will be a director and an executive
officer of SmithKline Beecham. Executive management services are provided to the
Company by SmithKline Beecham under the General Services Agreement. The Company
will not separately compensate any of its directors or officers. Information
concerning the compensation and stock options of directors and officers of
SmithKline Beecham is reported by SmithKline Beecham in Item 11 (Compensation of
Directors and Officers) and Item 12 (Options to Purchase Securities from
Registrant or Subsidiaries) of the 1995 Form 20-F.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of May 31, 1996, the beneficial interest
of the Company's directors individually and for current directors and executive
officers as a group in the voting securities of SmithKline Beecham. As of May
31, 1996, all of the Company's directors and executive officers as a group owned
less than 0.5 percent of the Ordinary Shares of SmithKline Beecham.
<TABLE>
<CAPTION>
NUMBER OF ORDINARY SHARES OF
NAME OF BENEFICIAL OWNER SMITHKLINE BEECHAM BENEFICIALLY OWNED(1)(2)
------------------------------------------------- -------------------------------------------
<S> <C>
Hugh R. Collum................................... 745,538(3)
William J. Creelman.............................. 20,240
Dr. Jean-Pierre Garnier.......................... 239,715
Jan Leschly...................................... 915,920
Donald F. Parman................................. 109,972
George Poste, D.V.M., Ph.D....................... 395,335
William J. Shulby................................ 1,960
Tadataka Yamada, M.D............................. 15,150
All current directors and officers as a group
(eight persons)................................ 2,443,830
</TABLE>
- ---------------
(1) To the extent that the Company's directors and executive officers
beneficially own American Depositary Receipts ("ADRs"), the table reflects
ownership of the underlying shares, i.e., ownership of 100 Ordinary Share
ADRs would be shown as ownership of 500 Ordinary Shares.
(2) The table also includes Ordinary Shares issuable under employee stock option
plans exercisable within 60 days as follows: Mr. Collum, 252,910 shares; Mr.
Creelman, 15,155 shares; Dr. Garnier, 233,165 shares; Mr. Leschly, 501,822
shares; Mr. Parman, 90,910 shares; Dr. Poste, 386,475 shares; Mr. Shulby,
none; Dr. Yamada, none; and all directors and officers as a group, 1,480,437
Ordinary Shares.
(3) Includes 1,968 shares held in a trust through which Mr. Collum has voting
and investment power as a trustee as to which Mr. Collum disclaims
beneficial ownership.
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<PAGE> 42
At June 26, 1996 wholly-owned subsidiaries of SmithKline Beecham owned all
the outstanding shares of the Company's Common Stock. Under the rules of the
Commission, in their capacity as directors of SmithKline Beecham or such
subsidiaries, Messrs. Collum, Creelman, Garnier, Leschly, Parman, Poste, Shulby
and Yamada may be deemed to beneficially own such shares. As of the date of this
Prospectus, no shares of the Company's voting stock other than its Common Stock
have been issued.
DESCRIPTION OF SECURITIES
The following is a summary of the terms of the Shares of each Series. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Company's Certificate of Incorporation (the "Certificate of
Incorporation") and the Certificate of Designations authorizing the issuance of
the Shares of the particular Series offered hereby and by the accompanying
Prospectus Supplement (the "Certificate of Designations"). Copies of the
Certificate of Incorporation and the Certificate of Designations may be obtained
upon request from the Company or SmithKline Beecham.
Certain of the capitalized terms used herein may be found by reference to
the Glossary that appears at the back of this Prospectus.
GENERAL
Under the Certificate of Incorporation, the Company's Board of Directors is
authorized, without further stockholder action, to issue from time to time up to
50,000 shares of preferred stock, no par value ("Preferred Stock"), in one or
more series and with such terms and conditions and at such times and for such
consideration as the Board of Directors or an authorized committee thereof may
determine. At the date of this Prospectus, no shares of Preferred Stock are
outstanding and, accordingly, there has not been a market for the Shares of any
Series.
The Shares will be shares of Preferred Stock that entitle their holders to
receive dividends when, as and if declared by the Board of Directors, out of
funds legally available therefor, at a rate per annum that may vary from
Dividend Period to Dividend Period for each Series. In general, as described
below, each Dividend Period after the Initial Dividend Period will be 49 days in
length (or such greater number of days as is at least equal to the Minimum
Holding Period) unless the Company has designated such Subsequent Dividend
Period as a Special Dividend Period of longer than 49 days. The Applicable Rate
for a particular Dividend Period generally will be determined by an Auction
conducted on the Business Day next preceding the start of such Dividend Period.
Through Broker-Dealers, Existing Holders and Potential Holders of Shares of
each Series may participate in Auctions for such Series, although, except in the
case of a Special Dividend Period, Existing Holders desiring to continue to hold
all of their Shares regardless of the Applicable Rate resulting from Auctions
need not participate. For an explanation of Auctions and the method of
determining the Applicable Rate, see "-- The Auction". The Shares of each Series
will be identical, except as to such matters as are specified in the applicable
Prospectus Supplement.
Except as otherwise required by law or as described below, or unless there
is no Securities Depository, all outstanding Shares of each Series will be
represented by one or more certificates registered in the name of the Securities
Depository or its nominee and no person acquiring Shares will be entitled to
receive a certificate for such Shares. The Depository Trust Company ("DTC") will
initially act as Securities Depository for the Shares and one or more
certificates for all of the Shares of each Series shall be issued to the
Securities Depository and registered in the name of Cede & Co. ("Cede") as
nominee of DTC. Each such certificate shall bear a legend to the effect that
such certificate is issued subject to the provisions restricting the transfer of
Shares contained in the Certificate of Designations. During a Non-Payment
Period, an Existing Holder may obtain a certificate for the Shares owned by it.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants (including members of the Securities Depository
acting on behalf of an Existing Holder, Potential Holder, beneficial owner or
potential beneficial owner of Shares of any Series, each an "Agent Member"),
some of whom (and/or their representatives) own shares of common
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<PAGE> 43
stock of DTC. DTC will maintain lists of its participants and the Shares held by
each Agent Member whether as an Existing Holder for its own account or as a
nominee for another Existing Holder.
When issued and sold, the Shares will have a liquidation preference per
Share equal to the sum of $100,000 plus an amount equal to accumulated and
unpaid dividends thereon (whether or not earned or declared), and will be fully
paid and nonassessable. See "Liquidation Rights" below. For each Share issued,
the amount of $100,000 will be credited to the Company's capital in excess of
par value account and the aggregate expenses of the offering of the Shares will
be charged to the same account.
The Shares will not be convertible into shares of Common Stock or any other
securities of the Company and will have no preemptive rights. Except during the
Initial Dividend Period (unless otherwise specified in the applicable Prospectus
Supplement) and any Non-Call Period therefor, the Shares of each Series will be
redeemable, in whole or in part, on the second Business Day prior to any
Dividend Payment Date at the option of the Company, at $100,000 per Share plus
accumulated and unpaid dividends thereon. During a Regular Dividend Period, and,
if designated by the Company, a Special Dividend Period, Shares of each Series
will be subject to mandatory redemption upon the occurrence of a Change of
Control, in whole and not in part, at a redemption price of $100,000 per Share
plus accumulated and unpaid dividends thereon. If designated by the Company,
during the Initial Dividend Period or a Special Dividend Period, Shares of each
Series will be subject to repurchase by the Company at the holder's option upon
occurrence of a Change of Control at a purchase price of $100,000 per Share plus
any accumulated and unpaid dividends thereon. During the Initial Dividend Period
for Shares of each Series, such Shares may be subject to such further redemption
or repurchase provisions as are set forth in the Prospectus Supplement for such
Series.
The Shares of each Series will rank prior to or on a parity with any other
shares of Preferred Stock as to dividends and upon the liquidation, dissolution
or winding up of the Company, except under the circumstances described under
"-- Voting Rights" below.
The Certificate of Designations provides that, so long as any Shares are
outstanding, unless the Company has received written confirmation from Moody's
and S&P (and, as appropriate, any Substitute Rating Agency or Substitute Rating
Agencies) that such action will not impair the then current ratings then
assigned to the Shares of each Series by each of them, the Company will not (i)
issue any Parity Preferred or Senior Preferred if the aggregate liquidation
preference, including accumulated and unpaid dividends, of all outstanding
Shares, Parity Preferred and Senior Preferred would thereupon exceed 75% of the
maximum amount of SmithKline Beecham's obligations under the Support Agreement
(the "Preferred Stock Limitation Provision"), (ii) incur any indebtedness if the
aggregate amount of the Company's indebtedness would thereupon exceed one-third
of the Company's shareholders' equity (after deducting therefrom the aggregate
liquidation preference, including accumulated and unpaid but not declared
dividends, of all outstanding Shares, Parity Preferred and Senior Preferred)
(the "Debt Limitation Provision"), and (iii) make any loans to members of
SmithKline Beecham Group other than the Company and its subsidiaries unless such
loans are guaranteed as to payment of principal and interest by SmithKline
Beecham (the "Loan Guarantee Provision").
The Auction Agent will be specified in the applicable Prospectus Supplement
and will also be the transfer agent, registrar and dividend disbursing and
redemption agent for the Shares.
Except in an Auction, or as otherwise provided herein or as limited by law,
the Company shall have the right to purchase or otherwise acquire any Shares at
any price. Any Shares purchased or otherwise acquired by the Company may be
restored to the status of authorized but undesignated and unissued shares of
Preferred Stock.
DIVIDENDS
General. The holders of Shares of each Series shall be entitled to
receive, when, as and if declared by the Board of Directors of the Company or a
duly authorized committee thereof out of funds legally available therefor,
cumulative cash dividends at the Applicable Rate for the Shares of such Series,
determined as set
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<PAGE> 44
forth below under "Determination of Dividend Rate", payable on the respective
dates as described below. Dividends on the Shares so declared and payable will
be paid in preference to and priority over any dividends declared and payable on
the Common Stock.
Dividends on the Shares of each Series will accumulate (whether or not
earned or declared) at the Applicable Rate for the Shares of such Series from
the date on which the Company originally issues the Shares of such Series (the
"Date of Original Issue"). Dividends on the Shares of each Series will be
payable for the Initial Dividend Period with respect thereto on the Dividend
Payment Date or Dates specified in the Prospectus Supplement for such Series or,
if any such date is not a Business Day, on the Business Day next succeeding such
date (each, an "Initial Dividend Payment Date"). Dividends on Shares of each
Series will be payable on the Business Day following the last day of each
Dividend Period with respect thereto, regardless of its length (the "Period-End
Dividend Payment Date"), and, in addition, in the case of Subsequent Dividend
Periods of more than 99 days, on the following additional dates: (a) if such
Dividend Period is from 100 to 190 days, on the 91st day of such Dividend
Period; (b) if such Dividend Period is from 191 to 281 days, on the 91st and
182nd days of such Dividend Period; (c) if such Dividend Period is from 282 days
to 364 days, on the 91st, 182nd and 273rd days of such Dividend Period; and (d)
if such Dividend Period is one year or longer, on January 15, April 15, July 15
and October 15 of each year, provided that in all such cases, if such date is
not a Business Day, the Dividend Payment Date will be the Business Day next
succeeding such date.
Notwithstanding the foregoing, if any date on which dividends on the Shares
of any Series would be payable as described in the preceding paragraph is a day
that would result in the number of days in the then current Dividend Period not
being at least equal to the then current minimum holding period required for
corporate taxpayers to be entitled to the dividends received deduction in
respect of dividends (other than extraordinary dividends) paid on preferred
stock held by nonaffiliated corporations (the "Minimum Holding Period"), then
dividends with respect to such Dividend Period shall be payable on the first
Business Day following such date on which dividends would be so payable that
results in the number of days in such Dividend Period being at least equal to
the Minimum Holding Period or, if earlier, the 98th day of such Dividend Period.
Moreover, notwithstanding the foregoing, in the event of a change in law
altering the Minimum Holding Period, the Board of Directors of the Company or a
duly authorized committee thereof will be required to adjust, if necessary, the
number of days in each Regular Dividend Period and the minimum number of days of
each Special Dividend Period (such number of days being referred to herein as
"Dividend Period Days") commencing after the date of such change in law to equal
or exceed the Minimum Holding Period, provided that the number of Dividend
Period Days in a Regular Dividend Period shall not exceed by more than nine days
the length of the Minimum Holding Period and shall be evenly divisible by seven,
and the maximum number of Dividend Period Days in a Regular Dividend Period, as
adjusted pursuant to this provision, shall in no event exceed 98 days.
Upon any change in the number of Dividend Period Days in any then current
Dividend Period or in a Regular Dividend Period or Special Dividend Period as a
result of a change in the Minimum Holding Period, the Company will mail notice
of such change to all holders of record of Shares of the applicable Series. In
addition, under the Broker-Dealer Agreements (as defined below), each
Broker-Dealer will be required to mail notice of such change to each Existing
Holder who acquired Shares of such Series through such Broker-Dealer and, to the
knowledge of such Broker-Dealer, has not disposed of such shares of such Series.
Each date on which dividends on the Shares of a Series shall be payable as
determined as set forth above is referred to herein as a "Dividend Payment Date"
for the Shares of such Series. Although any particular Dividend Payment Date for
the Shares of a Series may not occur on the day of the week or the date
originally scheduled as a Dividend Payment Date for the Shares of such Series
because of the adjustments set forth above, each succeeding Dividend Payment
Date for the Shares of such Series shall occur, subject to such adjustments, on
the day of the week or the date originally scheduled as a Dividend Payment Date
for the Shares of such Series as if each preceding Dividend Payment Date had
occurred on such day of the week or date.
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<PAGE> 45
On or prior to any Dividend Payment Date for the Shares of any Series, the
Company is required to pay to the Auction Agent sufficient funds for the payment
in full of all accumulated dividends with respect to the Shares of such Series
payable on such Dividend Payment Date. The Company does not intend to establish
any reserves for the payment of dividends.
Each dividend on the Shares of any Series shall be payable to the holder or
holders of record of the Shares of such Series as they appear on the stock books
of the Company on the Business Day next preceding the applicable Dividend
Payment Date. Dividends in arrears for any past Dividend Period may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
such holder or holders of such Shares. Any dividend payment made on Shares of
any Series shall first be credited against the accumulated dividends with
respect to the earliest Dividend Period for the Shares of such Series for which
dividends have not been paid.
So long as the Shares of each Series are held of record by the nominee of
the Securities Depository, dividends will be paid to the nominee of the
Securities Depository on each Dividend Payment Date for the Shares of such
Series. The Securities Depository will credit the accounts of the Agent Members
of Existing Holders of the Shares of such Series in accordance with the
Securities Depository's normal procedures, which now provide for payments in
same-day funds. The Agent Member of an Existing Holder will be responsible for
holding or disbursing such payments to such Existing Holder in accordance with
the instructions of such Existing Holder.
Except as described below under "-- Determination of Dividend Rate", (i)
holders of Shares of any Series shall not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends on
the Shares of such Series as provided herein, and (ii) no interest or amount in
lieu of interest or other charge shall be payable in respect of any dividend
payment or payments on the Shares of any Series which may be in arrears.
Except as provided in the next sentence, the Company shall not declare, pay
or set aside for payment any dividend or other distribution in respect of any
shares of Parity Preferred for any period unless full cumulative dividends for
all past Dividend Periods have been or contemporaneously are declared and paid
(or declared and a sum sufficient for payment of the dividends set aside for
payment) on all outstanding Shares of such Series. If full cumulative dividends
are not paid on the Shares of any Series and any Parity Preferred, all dividends
and other distributions paid upon the Shares of such Series and such Parity
Preferred will be paid pro rata so that the amount of dividends paid per Share
on the Shares of such Series and such Parity Preferred will in all cases bear to
each other the same ratio that accumulated dividends per share on the Shares of
such Series and shares of such Parity Preferred bear to each other.
The Certificate of Designations provides that, so long as any Shares of any
Series are outstanding, the Company shall not declare, pay or set aside for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase shares of, Common Stock or in any other shares of the Company of any
class ranking junior to the shares of such Series as to dividends) in respect of
its Common Stock or any other shares of the Company of any class ranking junior
to the Shares of such Series as to dividends, or call for redemption, redeem,
purchase or otherwise acquire for consideration (or pay or make available for
payment any moneys for a sinking fund for the redemption of) any shares of its
Common Stock or any other shares of the Company of any class ranking junior to
or on a parity with the Shares of such Series as to dividends or upon the
liquidation, dissolution or winding up of the Company (except by conversion into
or exchange for shares of the Company of any class ranking junior to the shares
of such Series as to dividends or upon the liquidation, dissolution or winding
up of the Company) unless (i) full cumulative dividends for all past Dividend
Periods have been or contemporaneously are declared and paid (or declared and a
sum sufficient for the payment of the dividends set aside for payment) on all
outstanding Shares of such Series and (ii) the stockholders' equity of the
Company as a result would not be less than the aggregate liquidation preference
of, including any accumulated and unpaid dividends on, all Shares, Parity
Preferred and Senior Preferred.
The amount of dividends accumulated and payable on each Share on any
Dividend Payment Date with respect to any Dividend Period will be computed by
(i) multiplying the Applicable Rate for such Dividend
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<PAGE> 46
Period by a fraction, the numerator of which is the actual number of days in the
portion of such Dividend Period prior to such Dividend Payment Date as to which
dividends have not been paid and the denominator of which is 360, and (ii)
multiplying $100,000 by the rate so obtained.
Dividend Periods. After the Initial Dividend Period for the Shares of any
Series, each subsequent Dividend Period for the Shares of such Series will be 49
days (such period, as it may be adjusted as a result of a change in the Minimum
Holding Period as described above, being herein referred to as a "Regular
Dividend Period" for the Shares of such Series); provided that, subject to the
Certificate of Designations and except as described in the next paragraph and
under "-- Dividends -- Determination of Dividend Rate" below, the Company may
specify the duration for any Dividend Period (a "Special Dividend Period") and
other special provisions for any Series by a notice (a "Special Dividend Period
Notice") sent by the Company to holders of such Series, by first-class mail,
postage prepaid, to the address of each such holder appearing in the record of
stockholders of the Company, not less than 10 days nor more than 60 days prior
to the Auction Date for such Subsequent Dividend Period, which notice will
specify (A) the Company's determination of the length of the Special Dividend
Period (which shall be at least as long as the Minimum Holding Period), (B) in
the case of any Special Dividend Period in excess of 99 days in duration, any
Subsequent Dividend Payment Date or Dates other than the Subsequent Period-End
Dividend Payment Date for such Dividend Period, (C) if the Company has elected
that the Shares of such Series should not be subject to redemption during all or
any specified portion of such Special Dividend Period (a "Non-Call Period"), a
statement with respect to such election, (D) if the Company has elected that the
Shares of such Series will be subject to the Mandatory Redemption Upon Change of
Control Provision during such Special Dividend Period, a statement to that
effect, (E) if the Company has elected that the Shares of such Series will be
subject to the Repurchase Upon Change of Control Provision during such Special
Dividend Period, a statement to that effect, and (F) if the Company has elected
that the DRD Gross-Up Provision shall apply during such Special Dividend Period,
a statement to that effect. In the event the Company has elected a Special
Dividend Period for a Subsequent Dividend Period for any Series, it may withdraw
such election by giving notice to holders of Shares of such Series by no later
than 3:00 p.m., New York City time, on the Business Day immediately preceding
the initial Auction Date with respect to which such notice was delivered, and in
such event such election shall be of no force and effect. Copies of such notices
shall be delivered physically, by telecopier or by other written electronic
communication to the Auction Agent by the Company at the same time they are
transmitted to the record holders of Shares of such Series. The Auction Agent
will thereupon provide copies of such notices to each Broker-Dealer as soon as
practicable after receiving such notice. No defect in the notice or in the
mailing thereof shall affect the validity of any change in any Dividend Period.
In the event that Sufficient Clearing Bids have not been made in any
Auction, such that the Dividend Rate for the next Dividend Period will be equal
to the Maximum Applicable Rate, then such Subsequent Dividend Period will be a
Regular Dividend Period (regardless of whether the Company has elected a Special
Dividend Period), and the Maximum Applicable Rate shall be determined based upon
such Dividend Period. In such event, Existing Holders that have submitted Sell
Orders will not be able to sell in the Auction all, and may not be able to sell
any, Shares subject to such Sell Orders. Thus, under certain circumstances,
Existing Holders may not have liquidity of investment.
Determination of Dividend Rate. The "Initial Dividend Rate" for the
Initial Dividend Period for the Shares of each Series will be described in the
Prospectus Supplement. The dividend rate for each Subsequent Dividend Period for
the Shares of each Series will be, except as provided below, the rate per annum
that the Auction Agent advises the Company has resulted from the implementation
of the Auction Procedures with respect to such Series. As used in this
Prospectus and any Prospectus Supplement with respect to the Shares of any
Series, "Applicable Rate" means the rate per annum at which dividends are
payable on the Shares of such Series for any Dividend Period. See "-- The
Auction -- Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate".
In the event that an Auction for any Subsequent Dividend Period for the
Shares of any Series is not held for any reason (other than as a result of the
existence of a failure to pay as described below), such Subsequent Dividend
Period shall be a Regular Dividend Period and the dividend rate on the Shares of
such Series for such Subsequent Dividend Period will be the Maximum Applicable
Rate on the Business Day immediately
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<PAGE> 47
preceding the commencement of such Subsequent Dividend Period. See "-- The
Auction -- Orders by Existing Holders and Potential Holders".
If the Company fails to pay to the Auction Agent on or prior to any
Period-End Dividend Payment Date for the Shares of any Series the full amount of
all accumulated and unpaid dividends payable on the Shares of such Series on
such Period-End Dividend Payment Date, then:
(a) if such failure to pay is cured as provided below, the Applicable Rate
for the Shares of such Series for the Dividend Period commencing on the
Period-End Dividend Payment Date on which the Company failed to pay shall be
equal to the dividend rate determined on the Auction Date immediately preceding
such Period-End Dividend Payment Date; and
(b) if such failure to pay is not cured as provided below, then, for the
period (the "Dividend Non-Payment Period") commencing on and including such
Period-End Dividend Payment Date and ending on and including the Business Day on
which, by 12:00 noon, New York City time, all unpaid cash dividends shall have
been deposited with the Auction Agent or otherwise made available for payment to
the applicable holders in same day funds (provided that, at least two Business
Days but no more than 30 days prior to such Business Day, the Company shall have
given the Auction Agent, the Securities Depository and the applicable holders
written notice of such deposit or availability):
(i) each Subsequent Dividend Period shall be a Regular Dividend Period
(regardless of any Special Dividend Period election made by the Company)
and Auctions for the Shares of such Series shall be suspended and shall not
resume, in each case until all accumulated and unpaid dividends on the
Shares of such Series for all past Dividend Periods shall have been paid to
the Auction Agent, not later than the second Business Day immediately
preceding an Auction Date for the Shares of such Series; and
(ii) the Applicable Rate for the Shares of such Series during such
Dividend Non-Payment Period shall be equal to the Maximum Applicable Rate
for the Shares of such Series, as determined on the Business Day
immediately preceding the first day of each such Subsequent Dividend
Period, but with the credit ratings for the Shares of such Series, for
purposes of determining such Maximum Applicable Rate, being deemed to be
below "baa3" by Moody's and below BBB- by S&P (the "Non-Payment Period
Rate").
If the Company fails to pay to the Auction Agent on or prior to any date
set for redemption or repurchase of less than all of the Shares of any Series
the full amount payable upon redemption of the Shares of such Series called for
redemption or upon repurchase of the Shares pursuant to the Repurchase Upon
Change of Control Provision, then:
(a) Auctions for the Shares of such Series shall be suspended and shall not
resume until all amounts payable upon the redemption or repurchase of the Shares
of such Series called for redemption or tendered for repurchase shall have been
paid to the Auction Agent not later than the second Business Day immediately
preceding an Auction Date for the outstanding Shares of such Series;
(b) if such failure to pay is cured as provided below, the Applicable Rate
for the Shares of such Series for the Dividend Period commencing after the
redemption or repurchase date on which the Company failed to pay shall be equal
to the Maximum Applicable Rate for the Shares of such Series (as determined on
the Business Day immediately preceding the first day of such Dividend Period)
and such Dividend Period shall be a Regular Dividend Period (regardless of any
Special Dividend Period election made by the Company), unless on the Auction
Date for such Dividend Period, Auctions for the Shares of such Series may be
resumed as provided in clause (a) above; and
(c) if such failure to pay is not cured as provided below, then:
(i) each Subsequent Dividend Period shall be a Regular Dividend Period
(regardless of any Special Dividend Period election made by the Company)
and the Applicable Rate for the Shares of such Series not called for
redemption or subject to repurchase for each Dividend Period, commencing
after the redemption or repurchase date on which the Company failed to pay,
to but excluding the Dividend Period, if any, next succeeding the Auction
Date on which Auctions for the Shares of such Series may be
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<PAGE> 48
resumed as provided in clause (a) above (the "Redemption Non-Payment
Period" and, together with the "Dividend Non-Payment Period", a
"Non-Payment Period"), shall be equal to the Non-Payment Period Rate for
the Shares of such Series (as determined on the Business Day immediately
preceding the first day of each such Dividend Period); and
(ii) the Applicable Rate for the Shares of such Series called for
redemption or subject to repurchase for each Dividend Period for the Shares
of such Series commencing after the redemption or repurchase date on which
the Company failed to pay shall be equal to the Non-Payment Period Rate for
the Shares of such Series (as determined on the Business Day immediately
preceding the first day of each such Dividend Period).
For purposes of the two preceding paragraphs, any such failure to pay with
respect to the Shares of any Series shall be deemed cured if, not later than
12:00 noon, New York City time, on the third Business Day next succeeding such
failure to pay, there shall have been paid to the Auction Agent (i) all
accumulated and unpaid dividends on the Shares of such Series, including the
full amount of any dividends to be paid on the Period-End Dividend Payment Date
with respect to which such failure to pay occurred but excluding amounts
accumulated after such Period-End Dividend Payment Date, plus additional
dividends in an amount computed by multiplying (1) the Non-Payment Period Rate
for the Shares of such Series (as determined on the Business Day immediately
preceding such Dividend Payment Date) by (2) a fraction, the numerator of which
shall be the number of days for which such failure to pay is not cured in
accordance herewith (including the day such failure to pay occurs and excluding
the day such failure to pay is cured) and the denominator of which shall be 360,
and multiplying the rate so obtained by the product of $100,000 times the number
of Shares of such Series then outstanding and (ii) the full amount payable upon
redemption or repurchase of the Shares of such Series called for redemption or
tendered for repurchase that have not been so redeemed or repurchased, plus
(except to the extent such amount has been paid pursuant to clause (i) above) an
amount computed by multiplying (1) the Non-Payment Period Rate for the Shares of
such Series (as determined on the Business Day immediately preceding the first
day of the current Dividend Period), by (2) a fraction, the numerator of which
shall be the number of days for which such failure to pay is not cured in
accordance herewith (including the day such failure to pay occurs and excluding
the day such failure to pay is cured) and the denominator of which shall be 360,
and applying the rate obtained against the product of $100,000 times the number
of Shares of such Series called for redemption or tendered for repurchase that
have not been so redeemed or repurchased.
If the Company fails to pay to the Auction Agent on or prior to any date
set for redemption or repurchase of all the Shares of any Series the full amount
payable upon such redemption or repurchase of the Shares of such Series, then
the Applicable Rate for the Shares of such Series for each Dividend Period for
the Shares of such Series or portion thereof commencing on or after the
redemption or repurchase date on which the Company failed to pay shall be equal
to the Non-Payment Period Rate for the Shares of such Series (as determined on
the Business Day immediately preceding the first day of each such Dividend
Period or portion thereof).
CHANGES IN THE DIVIDENDS RECEIVED DEDUCTION
If any amendment to the Code is enacted and becomes effective after the
date of this Prospectus that changes the percentage of dividends received by
corporate taxpayers which may be deducted for federal income tax purposes
pursuant to section 243(a)(1) of the Code (or any successor provision) (the
"Dividends Received Percentage"), then the Applicable Rate with respect to the
Shares of any Series for the Dividend Period in which the effective date of such
change occurs will, if this provision applies to such Dividend Period, be
adjusted on and after such effective date for the remainder of such Dividend
Period by multiplying the Applicable Rate (determined before any adjustment
described in this paragraph) by a factor, which will be the number
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<PAGE> 49
determined in accordance with the following formula (the "DRD Formula"), and
rounding the result to the nearest basis point:
1-[.35(1-.70)]
-------------------
1-[.35(1-DRP)]
For purposes of this formula, "DRP" means the Dividends Received
Percentage, measured as a fraction, applicable to the dividend in question. No
amendment to the Code other than a change in the percentage of the dividends
received deduction set forth in section 243(a)(1) (or any successor provision)
will give rise to an adjustment described in this paragraph. Notwithstanding the
foregoing provisions, if with respect to any such amendment, the Company
receives either an opinion of independent tax counsel or a private letter ruling
or similar form of guidance from the IRS to the effect that such amendment to
the Code generally would not affect corporate holders of such Shares, then such
amendment will not result in the adjustment provided for above. Notwithstanding
the foregoing, in no event will (i) the Applicable Rate for any Dividend Period
(if and as adjusted from time to time as set forth above) be more than the
Maximum Applicable Rate as of the Date of Original Issue or the preceding
Auction Date, as the case may be, or (ii) DRP be less than 0.50. If the
Applicable Rate is adjusted as described above, the Company will send notice of
such adjustment to each holder of Shares of each Series, the Auction Agent and
the Paying Agent on or prior to the next Dividend Payment Date for each Series.
Unless the context requires otherwise, all references to dividends in this
Prospectus and the applicable Prospectus Supplement mean dividends adjusted as
described above.
The foregoing provision (the "DRD Gross-Up Provision") shall not apply to
any Regular Dividend Period and will only apply to the Initial Dividend Period
or any Special Dividend Period for Shares of any Series if elected by the
Company and specified in the Prospectus Supplement or the applicable Special
Dividend Period Notice, as the case may be, for such Series.
REDEMPTION
Optional Redemption. At the option of the Company, the Shares of any
Series may be redeemed after the Initial Dividend Period therefor, other than
during a Non-Call Period therefor, as a whole or from time to time in part, out
of funds legally available therefor, on the second Business Day immediately
preceding any Dividend Payment Date for such Series, upon at least 15 but not
more than 45 days' notice pursuant to a Notice of Redemption, at a redemption
price per Share of $100,000, upon payment of accumulated and unpaid dividends as
described in the next sentence. The Company shall be required to declare and pay
on the redemption date a dividend in an amount equal to the accumulated and
unpaid dividends on such Shares (whether or not earned or declared) to the date
that the Company pays the full amount payable upon redemption of such Shares.
Pursuant to such right of optional redemption, the Company may elect to redeem
all or less than all of the Shares of a Series without redeeming Shares of any
other Series. Notwithstanding the foregoing, if any dividends on Shares of any
Series are in arrears, no Shares of any Series shall be redeemed unless all
outstanding Shares are simultaneously redeemed, and the Company shall not
purchase or otherwise acquire any Shares of any Series; provided, however, that
the foregoing shall not prevent the purchase or acquisition of Shares pursuant
to an otherwise lawful purchase or exchange offer made on the same terms to
holders of all outstanding Shares of such Series.
Mandatory Redemption Upon Change of Control. If SmithKline Beecham shall
at any time cease to beneficially own, directly or indirectly, shares of capital
stock of the Company representing more than 50% of the voting power in respect
of all outstanding shares of capital stock of the Company (such event being
herein called a "Change of Control"), the Company shall redeem all outstanding
Shares of each Series as to which this provision at the time applies, to the
extent of funds legally available therefor, within 30 days of such event upon at
least 10 but not more than 20 days' notice pursuant to a Notice of Redemption,
at a redemption price per Share equal to the sum of $100,000 and an amount equal
to the accumulated and unpaid dividends on such Shares (whether or not earned or
declared) to the date that the Company pays the full amount payable upon
redemption of such Shares. The foregoing provision (the "Mandatory Redemption
Upon Change of Control Provision") shall apply to each Regular Dividend Period,
but will only apply to the Initial Dividend
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Period or any Special Dividend Period for Shares of any Series if elected by the
Company and specified in the Prospectus Supplement or the applicable Special
Dividend Period Notice, as the case may be, for such Series.
Redemption Procedures. If Shares of any Series are to be redeemed, the
Company will cause to be mailed, by first-class mail, postage prepaid, within
the applicable notice period specified above, a written notice of redemption (a
"Notice of Redemption") to each holder of record of Shares of such Series
(initially, the nominee of the Securities Depository) and the Auction Agent.
Each Notice of Redemption will state (i) the redemption date, (ii) the
redemption price, (iii) the Series of Shares and the number of such Shares to be
redeemed, (iv) the place or places where Shares of such Series are to be
surrendered for payment of the redemption price, (v) that dividends on the
Shares of such Series will cease to accumulate on the date that the Company pays
the full amount payable upon redemption of such Shares of such Series, and (vi)
the provision of the Certificate of Designations under which the redemption is
being made. No defect in the Notice of Redemption or in the mailing thereof
shall affect the validity of the redemption proceedings, except as required by
applicable law. A Notice of Redemption shall be deemed given on the day that it
is mailed in accordance with this provision.
In the event that less than all of the outstanding Shares of any Series are
to be redeemed, the number of Shares to be redeemed will be determined by the
Board of Directors of the Company and communicated to the Auction Agent. So long
as the Securities Depository's nominee is the record holder of all outstanding
Shares of any Series, the Auction Agent will give notice to the Securities
Depository, and the Securities Depository will determine the number of Shares of
such Series to be redeemed from the account of the Agent Member of each Existing
Holder of Shares of such Series. Each Agent Member may determine (i) whether to
redeem any Shares and (ii) the number of Shares to be so redeemed from the
account of each Existing Holder for which it acts as agent. An Agent Member may
select for redemption Shares from the accounts of some Existing Holders without
selecting for redemption any Shares from the accounts of other Existing Holders.
Notwithstanding the foregoing, if neither the Securities Depository nor its
nominee is the record holder of all of the Shares, the particular Shares to be
redeemed shall be redeemed pro rata from the holders of record of the Shares in
proportion to the number of such Shares held by such holders or by such other
method as the Company shall deem fair and equitable (with adjustments to avoid
redemption of fractional Shares). Any such redemption will be made in accordance
with applicable securities laws and rules.
On or prior to a date set for redemption of Shares of any Series, the
Company shall be required to pay to the Auction Agent sufficient funds for the
payment of the full amount payable upon redemption of such Shares.
If the Company gives or causes to be given a Notice of Redemption, timely
pays to the Auction Agent a sum sufficient to redeem the Shares of the Series as
to which such Notice of Redemption has been given and gives the Auction Agent
irrevocable instructions and authority to pay the full amount payable on
redemption of such Shares to the holders of such Shares, then on the date of
such payment, all rights of the holders of the Shares of such Series to be
redeemed, as such, will terminate (except the right of the holders of such
Shares to receive the full amount payable upon redemption thereof upon surrender
of the certificate or certificates therefor, but without interest) and such
Shares will no longer be deemed to be outstanding for any purpose (including,
without limitation, the right of holders of such Shares to vote on any matter or
to participate, with respect to such Shares, in any subsequent Auction for the
outstanding Shares of such Series). In addition, any Shares of any Series as to
which a Notice of Redemption has been given by the Company will be deemed to be
not outstanding for purposes of any Auction for the Shares of such Series held
subsequent to the date of such Notice of Redemption. The Company will be
entitled to receive from time to time from the Auction Agent the income, if any,
derived from the investment of monies or other assets paid it (to the extent
that such income is not required to pay the redemption price of the Shares to be
redeemed), and the holders of any Shares to be redeemed will not have any claim
to such income. Any funds so paid to the Auction Agent which are unclaimed at
the end of two years from the redemption date will be returned to the Company,
after which the holders of the Shares of the Series so called for redemption
will look only to the Company for payment of the redemption price of such
Shares.
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So long as all of the outstanding Shares of any Series are held by records
by a nominee of the Securities Depository, the amounts payable upon redemption
of such Shares will be paid to the Securities Depository on the redemption date.
The normal procedures of the Securities Depository currently provide for it to
distribute amounts payable upon redemption to Agent Members, who, in turn, are
to distribute such funds to the persons for whom they are acting as agent.
REPURCHASE UPON CHANGE OF CONTROL PROVISION
Upon the occurrence of a Change of Control, the Company shall be obligated
to purchase from all holders of Shares of each Series as to which this provision
at the time applies, at the option of such holders, Shares of such Series
tendered to the Company by such holders at a purchase price per Share equal to
the sum of $100,000 and the amount of accumulated and unpaid dividends thereon
(whether or not earned or declared) to the repurchase date.
If Shares of any Series are to be purchased pursuant to the Repurchase Upon
Change of Control Provision, within 20 days following a Change of Control, the
Company shall mail, or cause to be mailed, by first-class mail, postage prepaid,
within the applicable notice period specified above, a written Notice of Offer
to Purchase to each holder of record of Shares of such Series (initially the
nominee of the Securities Depository) and the Auction Agent. Each Notice of
Offer to Purchase will describe the circumstances resulting in the Change of
Control and state (i) that a Change of Control has occurred and that such holder
has the right to require the Company to purchase all or any part of such
holder's Shares of such Series, (ii) the purchase price, (iii) the Series of
Shares, (iv) the place or places where Shares of such Series are to be
surrendered for payment of the purchase price, (v) the circumstances and
relevant facts regarding the Change of Control, (vi) the purchase date (which
shall be no earlier than 30 days and no later than 60 days from the date such
notice is mailed), (vii) any other instructions that a holder must follow in
order to have such holder's Shares of such Series purchased by the Company and
(viii) the provision of the Certificate of Designations under which the offer to
purchase is being made.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable in connection with any offer required to be made by
the Company in accordance with the Repurchase Upon Change of Control Provision.
The Repurchase Upon Change of Control Provision shall not apply to any
Regular Dividend Period and shall apply to the Initial Dividend Period or any
Special Dividend Period for Shares of any Series only if designated by the
Company and specified in the Prospectus Supplement or the applicable Special
Dividend Period Notice, as the case may be, for such Series.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Shares of each Series then
outstanding will be entitled to receive and to be paid, out of the assets of the
Company available for distribution to stockholders after satisfying claims of
creditors but before any payment or distribution of assets is made to holders of
the Common Stock or any other shares of the Company of any class ranking junior
to the Shares of such Series upon such a liquidation, dissolution or winding up,
liquidating distributions in an amount per Share equal to the sum of $100,000
and an amount equal to accumulated and unpaid dividends (whether or not earned
or declared) to and including the date of final dissolution. If, upon any such
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the amounts payable with respect to the Shares of any Series and any other
shares of the Company of any class ranking on a parity with the Shares of such
Series upon any such liquidation, dissolution or winding up are not paid in
full, the holders of the Shares of such Series and of such other shares will
share ratably in any such distribution of assets of the Company in proportion to
the full respective amounts to which they are entitled. After payment of the
full amount of the liquidating distributions to which they are entitled, the
holders of Shares of such Series will have no further right or claim to any of
the remaining assets of the Company and will not be entitled to any further
participation in such distribution of assets of the Company. Neither the sale,
lease or exchange (for cash, stock, securities or other consideration) of all or
substantially all
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of the property and assets of the Company, nor the merger or consolidation of
the Company with or into any other corporation, nor the merger or consolidation
of any other corporation with or into the Company, shall be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary, of the Company
for purposes of the foregoing.
VOTING RIGHTS
General. Each Share will carry 0.08507 of a vote in connection with the
election of directors and other matters submitted generally to the holders of
shares of the Company's voting stock, voting cumulatively and together as a
single class with shares of Common Stock and other capital stock of the Company
entitled to vote generally in the election of directors and other matters
submitted to stockholders generally. Based on the number of shares of Common
Stock outstanding as of the date of this Prospectus and assuming that all Shares
offered hereby were issued and outstanding, the Shares would represent, in the
aggregate, approximately 27% of the combined voting power of the Shares and the
Common Stock. All of the issued and outstanding shares of Common Stock,
representing approximately 73% of such combined voting power, are held
indirectly by SmithKline Beecham. As a result, SmithKline Beecham will be able
to direct the outcome of matters submitted to stockholders of the Company.
Right to Vote in Connection with a Merger, Liquidation, Etc. Without the
affirmative vote of the holders of at least two-thirds of the Shares of each
Series outstanding with a Dividend Period having more than 99 remaining Dividend
Period Days, voting in person or by proxy at one or more special meetings for
the purpose, or the unanimous written consent of the holders of Shares of each
such Series, the Company shall not (i) consolidate with or merge with or into,
or convey, transfer or lease substantially all of its assets to, any person
unless: (A) the resulting, surviving or transferee Person (if not the Company)
shall be a corporation organized and existing under the laws of the United
States, any State thereof or the District of Columbia which shall, by a valid
and legally binding instrument, expressly assume all the obligations of the
Company with respect to, and afford the holders of all Outstanding Shares all
the legal rights as holders of, the Shares, including the rights established by
the Certificate of Designations and the Certificate of Incorporation; (B) there
shall not have occurred any downgrading, nor shall any notice have been given of
any intended or potential downgrading, in the rating accorded the Shares by
Moody's or S&P, or if Moody's or S&P, or both, shall not make a rating available
with respect to the Shares, by any Substitute Rating Agency, in connection with
such transaction; and (C) there shall have been delivered to the holders of the
Outstanding Shares an opinion of nationally recognized, qualified legal counsel
to the effect that (1) the holders of such Shares will not recognize income,
gain or loss for United States federal income tax purposes as a result of such
transaction, and will be subject to United States federal income tax on the same
amounts and at the same times as would be the case if the transaction had not
occurred and (2) such transaction complies with the terms of the foregoing
clause (i)(A), or (ii) voluntarily liquidate, dissolve or wind up. On such
matters, holders of Shares will vote on the basis of one vote per $100,000 in
liquidation preference and not cumulatively.
Right to Elect Two Additional Directors. During any period (referred to
herein as a "Default Period") in which accumulated dividends (whether or not
earned or declared, and whether or not funds are then legally available in an
amount sufficient therefor) on any Shares of any Series or Parity Preferred for
such number of dividend periods or portions thereof (or the equivalent thereof
in the case of Parity Preferred), which in the aggregate contain at least 180
days, shall not have been paid or declared and a sum sufficient for the payment
thereof set aside for payment, then in any such case the number of directors of
the Company will automatically be increased by two additional directors
("Default Directors") and the holders of record of the Shares of all Series and
Parity Preferred upon which like voting rights have been conferred and are then
exercisable will possess full voting powers (to the exclusion of the holders of
all other series and classes of capital stock of the Company), voting as a
single class, to elect such two Default Directors.
The Default Period and voting rights created by the occurrence of the
circumstances described in the next preceding paragraph will continue unless and
until all accumulated and unpaid dividends on all Shares and Parity Preferred
then outstanding shall have been paid or sufficient funds for the payment
thereof shall have been set apart, at which time the voting rights described in
the next preceding paragraph will cease,
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subject always, however, to the revesting of such voting power in the holders of
Shares of all Series and Parity Preferred upon the further occurrence of any of
the circumstances described in the next preceding paragraph.
Within five days following the accrual of any right of the holders of
Shares of any Series and Parity Preferred to elect directors upon the
commencement of a Default Period as described above, the Company will mail or
cause to be mailed to the holders of Shares of each Series and Parity Preferred
notice of a special meeting of stockholders for a date not less than 20 days nor
more than 60 days after the date of such notice. If the Company does not mail or
cause to be mailed notice of such meeting as provided in the next preceding
sentence, a meeting may be called by any holder of Shares or Parity Preferred.
The Company will notify the Auction Agent of the date on which such right
accrued, and such date will be the record date for determining the holders of
stock entitled to notice of and to vote at the special meeting. Holders of all
such stock will vote in such elections on the basis of one vote per $100,000
liquidation preference and not cumulatively, and the holder or holders of
one-third of the shares of such stock then outstanding, present in person or by
proxy, will constitute a quorum for the election of directors by them. At any
such meeting or adjournment thereof in the absence of a quorum, a majority of
the holders of such stock present in person or by proxy will have the power to
adjourn the meeting for the election of directors without notice, other than an
announcement at the meeting, until a quorum is present.
The term of office of all persons who are directors of the Company at the
time of such meeting will continue, notwithstanding the election of Default
Directors at such meeting by the holders of Shares of all Series and Parity
Preferred. The Default Directors, together with the incumbent directors elected
by stockholders of the Company generally, will constitute the duly elected
directors of the Company.
Simultaneously with the expiration of the Default Period, the term of
office of the Default Directors elected by the holders of Shares and Parity
Preferred at the special meeting referred to above will terminate, the number of
directors of the Company will automatically be decreased by two, only the
incumbent directors otherwise elected by stockholders of the Company generally
will constitute the duly elected directors of the Company, and the right of the
holders of Shares and Parity Preferred during a Default Period to elect
directors as provided above will cease.
During any Downgrade Period in which a Credit Rating Event shall exist, the
authorized number of members of the Board of Directors of the Company shall
automatically be increased by two and the holders of record of the Shares of all
Series and Parity Preferred upon which like voting rights have been conferred
and are then exerciseable (the Shares of all Series and all such other shares
being referred to as the "Downgrade Voting Parity Shares") will be entitled to
fill the vacancies so created on the Board of Directors of the Company by
electing two additional directors for the Company. Each Downgrade Director so
elected shall be entitled to such number of votes on all matters before the
Board of Directors of the Company as shall result in the Downgrade Directors
together having a majority of the total voting power of all directors on the
Board of Directors of the Company; provided, however, that each Downgrade
Director shall be entitled to only one vote with respect to matters concerning
the redemption of Shares of any Series or the liquidation, dissolution or
winding up of the Company. The provisions set forth above with respect to the
calling of and voting at special meetings of holders of Shares and Parity
Preferred to elect Default Directors, the filling of vacancies in the offices of
Default Directors and related matters will apply equally to the exercise of the
right of the holders of Downgrade Voting Parity Preferred to elect the Downgrade
Directors.
A Credit Rating Event shall exist if: (i) the Company and SmithKline
Beecham shall have amended or terminated the Support Agreement (other than an
amendment solely to increase the maximum amount of SmithKline Beecham's
obligations thereunder); and (ii) (A) either Moody's shall have reduced its
credit rating assigned to the Shares of any Series to below "a3" (and shall not
have subsequently increased such rating to "a3" or higher) and Moody's shall
have issued a written statement stating that it so reduced such rating as a
result, in whole or in part, of such amendment or termination of the Support
Agreement or S&P shall have reduced its credit rating assigned to the Shares of
any Series to below A- (and shall not have subsequently increased such rating to
A- or higher) and S&P shall have issued a written statement stating that it so
reduced such rating as a result, in whole or in part, of such amendment or
termination of the Support Agreement and (B) such rating shall have been so
reduced and such statement so issued within 60 calendar
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days after Moody's or S&P, as the case may be, having been informed of such
amendment or termination of the Support Agreement; and (iii) any Downgrade
Voting Parity Shares shall not have been redeemed, retired, repurchased or
otherwise acquired by the Company. In no event shall a Credit Rating Event be
deemed to exist if, on or prior to the date of effectiveness of any such
amendment or termination of the Support Agreement, the Company shall have
informed Moody's and S&P in writing of such amendment or termination and Moody's
shall have confirmed in writing a credit rating of "a3" or higher for the Shares
of each Series and S&P shall have confirmed in writing a credit rating of A- or
higher for the Shares of each Series.
If a Downgrade Period shall commence and be continuing at any time during a
Default Period, or if a Default Period shall commence and be continuing during a
Downgrade Period, then the powers conferred upon the Default Directors elected
pursuant to the provisions set forth above shall be suspended or if Default
Directors shall not have been so elected, then the right of holders of the
Shares of all Series and Parity Preferred to elect the Default Directors as
described above shall be suspended, in either case, at such time and during such
period as the Downgrade Directors shall have assumed and remain in office,
provided that upon the expiration of such Downgrade Period, such powers of the
Default Directors or voting rights of holders of the Shares of all Series and
Parity Preferred, as the case may be, shall be automatically and immediately
reinstated.
If either Moody's or S&P shall change its rating categories for preferred
stock, then the determination of whether a Credit Rating Event exists shall be
made based upon the substantially equivalent new rating categories for preferred
stock of such rating agency. If either Moody's or S&P, or both, shall not make a
rating available for the Share of any Series or of any other series necessary to
make such a determination or neither Moody's nor S&P shall make such a rating
available, such determination will be made based upon the substantial equivalent
of either or both of such ratings by a Substitute Rating Agency or two
Substitute Rating Agencies or, in the event that only one such rating shall be
available, based upon such available rating. If an alternative nationally
recognized securities rating agency or agencies are not available, then for
purposes of such determination the rating for the Shares of such Series and of
any such other series shall be deemed to be the highest relevant rating last
published by Moody's, S&P or any such Substitute Rating Agency.
Right to Vote in Certain Events. Without the affirmative vote of the
holders of at least two-thirds of the outstanding Shares of all Series voting in
person or by proxy at a special meeting for the purpose, or the unanimous
written consent of the holders of the outstanding Shares of all Series acting
without such a meeting (subject to the provisions of any applicable law), the
Company may not amend, alter or repeal any provisions of the Certificate of
Designations or the Certificate of Incorporation so as to affect adversely the
preferences, special rights or powers of the Shares of any Series. Any increase
in the authorized number of any series of capital stock ranking on a parity with
the Shares with respect to the payment of dividends or the distribution of
assets, or creation, authorization or issuance of any securities convertible
into, or warrants, options or similar rights to purchase, acquire or receive,
shares of such capital stock or reclassification of any authorized capital stock
of the Company into any share ranking on a parity with Shares with respect to
the payment of dividends or the distribution of assets in accordance with the
Preferred Stock Limitation Provision shall be deemed not to affect adversely the
preferences, special rights or powers of the Shares.
In addition, without the affirmative vote of the holders of at least
two-thirds of the outstanding Shares of all Series and Parity Preferred upon
which like voting rights have been conferred and are then exercisable, voting
together as a single class, in person or by proxy at a special meeting for the
purpose, or the unanimous written consent of the holders of the outstanding
Shares of all Series and such Parity Preferred acting without such a meeting
(subject to the provisions of any applicable law), the Company may not create,
authorize or issue shares of any class or series of capital stock ranking senior
to the Shares and such Parity Preferred with respect to the payment of dividends
or the distribution of assets, or create, authorize or issue any securities
convertible into, or warrants, options or similar rights to purchase, acquire or
receive, shares of capital stock ranking senior to the Shares and such Parity
Preferred with respect to the payment of dividends or the distribution of assets
or reclassify any authorized capital stock of the Company into any shares
ranking senior to the Shares and such Parity Preferred with respect to the
payment of dividends or the distribution of assets.
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No Right to Vote in Certain Events. With respect to any right of holders
of Shares to vote on any matter, whether such right is created by the
Certificate of Designations, by applicable law or otherwise, no holder of any
Share will be entitled to vote and no Share will be deemed to be outstanding for
the purpose of voting or determining the number of Shares required to constitute
a quorum, if prior to or concurrently with a determination of shares entitled to
vote or of shares deemed outstanding for quorum purposes, as the case may be,
such Share is held beneficially or of record by the Company or any affiliate of
the Company or if the Company of any affiliate has, directly or indirectly, the
power to vote or dispose of such Share. In addition, Shares with respect to
which a Notice of Redemption has been issued and the redemption price has been
deposited with the Auction Agent will be deemed not to be outstanding for the
purpose of voting or determining the number of Shares required to constitute a
quorum.
Voting by Securities Depository. Whenever the Shares are held of record by
the nominee of the Securities Depository in accordance with its normal
procedures, the Securities Depository will extend voting rights with respect to
such Shares to the Agent Members whose accounts are credited with such Shares.
In accordance with their normal procedures, such Agent Members are expected in
turn to extend such voting rights to Existing Holders.
Exclusive Remedy. If the Company fails to pay any dividends on the Shares
as required, the exclusive remedy of the holders of Shares will be the right to
vote for directors as described under "Voting Rights". In no event shall holders
of Shares have any right to sue for, or maintain a proceeding with respect to,
such dividends or damages for the failure to receive the same.
THE AUCTION
General. The Certificate of Designations authorizing the issuance of the
Shares of each Series by this Prospectus and the applicable Prospectus
Supplement which provide that the Applicable Rate for the Shares of each Series
for each Dividend Period after the Initial Dividend Period shall be equal to the
rate per annum that the Auction Agent advises the Company has resulted on the
Business Day preceding the first day of such Subsequent Dividend Period from
implementation of the auction procedures (the "Auction Procedures") set forth in
the Certificate of Designations. See Appendix B hereto. Each periodic
implementation of the Auction Procedures, under which persons determine to hold
or, based upon dividend rates bid by them, offer to sell or to purchase Shares
of any Series, is referred to herein as an "Auction". If, however, the Company
should fail to pay or duly provide for the full amount of any dividend on Shares
of any Series on any Dividend Payment Date or the redemption or repurchase price
of Shares of such Series called for redemption or subject to repurchase, as the
case may be, the Applicable Rate for Shares of such Series will be determined as
described under "-- Dividends -- Determination of Dividend Rate" above.
As used herein, an "Existing Holder" of any Shares of a Series means a
person who is listed as the beneficial owner of such Shares of such Series in
the records of the Auction Agent. The Auction Agent may rely upon, as evidence
of the identities of the Existing Holders, a list of the owners of the Shares of
each Series provided by the Company or the Broker-Dealers, the results of
Auctions and notices from any Existing Holder, the Agent Member of any Existing
Holder or the Broker-Dealer of any Existing Holder with respect to such Existing
Holder's transfer of Shares of such Series to another person. References herein
to Existing Holders and Potential Holders shall, unless the context otherwise
requires, be deemed to include beneficial owners and potential beneficial owners
acting through their Broker-Dealers.
The Auction Agent will be required to register a transfer of Shares of any
Series from an Existing Holder to another person only if (i) such transfer is
pursuant to an Auction or (ii) the Auction Agent has been notified in writing
(A) by such Existing Holder, the Agent Member of such Existing Holder or the
Broker-Dealer of such Existing Holder of such transfer or (B) by the
Broker-Dealer of any person that purchased or sold such Shares in an Auction of
the failure of such Shares to be transferred as a result of such Auction. The
Auction Agent is not required to accept any such notice of transfer delivered
prior to an Auction unless it is received by the Auction Agent by 3:00 p.m. (New
York City time) on the Business Day next preceding such Auction.
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Auction Agent Agreement. The Company will enter into an agreement (the
"Auction Agent Agreement") with an institution specified as the Auction Agent in
the applicable Prospectus Supplement (together with any successor bank or trust
company or other entity entering into a similar agreement with the Company, the
"Auction Agent") which will provide, among other things, that the Auction Agent
will follow the Auction Procedures for the purposes of determining the
Applicable Rate for the Shares of each Series for so long as the Applicable Rate
for the Shares of such Series is to be based on the results of an Auction. See
"-- Concerning the Auction Agent".
Broker-Dealer Agreements. The Auctions require the participation of one or
more broker-dealers. The Auction Agent will enter into agreements (collectively,
the "Broker-Dealer Agreements") with one or more other broker-dealers
(collectively, the "Broker-Dealers") selected by the Company and specified in
the applicable Prospectus Supplement, which will provide for the participation
of such Broker-Dealers in Auctions. See "-- Broker-Dealers". A Broker-Dealer
Agreement may be terminated by the Auction Agent or a Broker-Dealer on five
days' notice to the other party.
Securities Depository. DTC will act as Securities Depository for the Agent
Members with respect to Shares of each Series (DTC, together with any successor
securities depositary selected by the Company, being referred to herein as the
"Securities Depository"). One or more registered certificates representing all
of the Shares of each Series offered hereby initially will be registered in the
name of Cede, as nominee of DTC. Such certificates will bear a legend to the
effect that such certificate is issued subject to the provisions restricting
transfers of Shares of any Series contained in the Certificate of Designations.
The Company will also issue stop-transfer instructions to the transfer agent for
the Shares of each Series. Cede will be the initial holder of record of all
Shares of each Series, and Existing Holders of the Shares of any Series will not
receive certificates representing their ownership interest in such Shares.
DTC, which is a New York chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of which
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each Agent Member
in Shares of any Series, whether as an Existing Holder for its own account or as
nominee for another Existing Holder.
Except as otherwise provided herein, payments and communications made by
the Company to holders of Shares of any Series will be duly made by making
payments to, and communicating with, the Securities Depository, whose nominee
will be the record holder of all Shares of each Series.
Auction Procedures. The following summary of the Auction Procedures does
not purport to be complete and is qualified in its entirety by reference to the
Auction Procedures, which are attached to this Prospectus as Appendix B.
Separate auctions will be conducted for each Series. Accordingly, as used in the
following brief summary, unless the context otherwise requires, "Shares" means
the Series of Shares subject to the related Auction and "Existing Holders" and
"Potential Holders" mean Existing Holders and Potential Holders of such Series,
respectively. The Settlement Procedures to be used with respect to Auctions are
set forth in Appendix A hereto.
Auction Dates. After the Initial Dividend Period for the Shares of a
Series, an Auction to determine the Applicable Rate for the Shares of such
Series for a particular Dividend Period for the Shares of such Series will be
held on the first Business Day preceding the first day of such Dividend Period
(the date of each Auction being referred to herein as an "Auction Date"). The
term "Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a day on which banks in New York City are authorized or
obligated by law to close. Both the Auction Date and the first day of the
related Dividend Period (also a Period-End Dividend Payment Date) must be
Business Days but need not be consecutive calendar days. For example, in most
cases, if the date or day that would normally be an Auction Date is not a
Business Day, then such Auction Date will be the next preceding day that is a
Business Day even though such Period-End Dividend Payment Date remains the same.
See "Dividends" above for information concerning the circumstances under which a
Dividend Payment Date may fall on a date other than a date that would normally
be such Dividend Payment Date.
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<PAGE> 57
The first Auction Dates for the Shares of each Series will be specified in
the applicable Prospectus Supplement.
Orders by Existing and Potential Holders. Prior to the Submission Deadline
on each Auction Date:
(a) each Existing Holder of Shares of such Series may submit to a
Broker-Dealer by telephone or otherwise a:
(i) Hold Order -- indicating the number of outstanding Shares, if any,
held by such Existing Holder that such Existing Holder desires to continue
to hold without regard to the Applicable Rate for the next Dividend Period
for such Shares;
(ii) Bid -- indicating the number of outstanding Shares, if any, held
by such Existing Holder that such Existing Holder desires to hold if the
Applicable Rate for the next Dividend Period for such Shares is less than
the rate specified by such Existing Holder; and/or
(iii) Sell Order -- indicating the number of outstanding Shares, if
any, held by such Existing Holder that such Existing Holder desires to sell
without regard to the Applicable Rate for the next Dividend Period for such
Shares; and
(b) Broker-Dealers will contact prospective purchasers of Shares of such
Series (each such prospective purchaser is referred to herein as a "Potential
Holder", and the term Potential Holder includes an Existing Holder with respect
to an offer by such Existing Holder to purchase additional Shares) by telephone
or otherwise to determine whether such Potential Holders desire to submit Bids
in which such Potential Holders will indicate the number of Shares that they
offer to purchase if the Applicable Rate for the next Dividend Period for the
Shares is not less than the rates per annum specified in such Bids.
The communication to a Broker-Dealer by an Existing Holder of the
information referred to in paragraph (a) above and by a Potential Holder of the
information referred to in paragraph (b) above, and the communication by a
Broker-Dealer, whether or not for its own account, to the Auction Agent of the
foregoing information, is hereinafter referred to as an "Order", and
collectively, as "Orders". An Existing Holder or a Potential Holder placing an
Order, including a Broker-Dealer acting in such capacity for its own account, is
referred to herein as a "Bidder" and, collectively, as "Bidders". Any Order
submitted by an Existing Holder or a Potential Holder to its Broker-Dealer, or
by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date shall be irrevocable.
An Existing Holder may submit different types of Orders in an Auction with
respect to Shares then held by such Existing Holder, as well as Bids for
additional Shares. An Existing Holder that offers to purchase additional Shares
is, for purposes of such offer, treated as a Potential Holder. For information
concerning the priority given to different types of Orders placed by an Existing
Holder, see "-- Submission of Orders by Broker-Dealers to Auction Agent".
Any Bid for Shares by an Existing Holder specifying a rate higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid for Shares
by a Potential Holder specifying a rate higher than the Maximum Applicable Rate
for the Shares will not be accepted. Accordingly, the Auction Procedures
establish the Maximum Applicable Rate as the maximum rate per annum that can
result from an Auction. See "-- Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate" and "-- Acceptance and Rejection of
Submitted Bids and Submitted Sell Orders and Allocation of Shares".
Neither the Company nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with any of the foregoing.
The Maximum Applicable Rate on any Auction Date for the Shares will be the
rate obtained by multiplying the Reference Rate on such Auction Date by a
percentage determined by the Auction Agent (with each Maximum Applicable Rate
being rounded to the nearest one thousandth (0.001) of one percent per annum,
with any such number ending in five ten-thousandths of one percent rounded
upwards to the nearest one thousandth (0.001) of one percent) as set forth below
based on the lower of the credit ratings assigned to the Shares by Moody's and
S&P (or if Moody's or S&P, or both, shall not make such a rating
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<PAGE> 58
available, the equivalent of either or both of such ratings by a Substitute
Rating Agency or two Substitute Rating Agencies or, in the event that only one
such rating shall be available, the percentage based on such available rating)
at the close of business on the Business Day immediately preceding such Auction
Date:
<TABLE>
<CAPTION>
CREDIT RATING
- ---------------------------------- APPLICABLE PERCENTAGE
MOODY'S S&P OF REFERENCE RATE
- ----------------- ------------- ---------------------
<S> <C> <C>
"aa3" or above AA- or above 110%
"a3" to "a1" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
below "baa3" below BBB- 200%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend Period.
The "Reference Rate", with respect to a Dividend Period of 49 days to 183
days, is the "AA" Composite Commercial Paper Rate; with respect to a Dividend
Period of 184 days to 364 days, is the comparable U.S. Treasury Bill Rate; with
respect to a Dividend Period of one year to ten years, is the comparable U.S.
Treasury Note Rate; and, with respect to a Dividend Period in excess of ten
years, is the comparable U.S. Treasury Bond Rate.
" 'AA' Composite Commercial Paper Rate" on any date means (i) the Interest
Equivalent of the rate on commercial paper placed on behalf of issuers whose
corporate bonds are rated AA by S&P or "Aa" by Moody's or the equivalent of such
rating by another nationally recognized statistical rating organization, as such
rate is made available on a discount basis or otherwise by the Federal Reserve
Bank of New York for the Business Day immediately preceding such date, or (ii)
in the event that the Federal Reserve Bank of New York does not make available
such a rate, then the arithmetic average of the Interest Equivalent of the rate
on commercial paper placed on behalf of such issuers, as quoted on a discount
basis or otherwise by Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Lehman Brothers Inc. or their respective successors (the "Commercial Paper
Dealers"), to the Auction Agent for the close of business on the Business Day
immediately preceding such date. If one of the Commercial Paper Dealers does not
quote a rate required to determine the "AA" Composite Commercial Paper Rate, the
"AA" Composite Commercial Paper Rate will be determined on the basis of the
quotation or quotations furnished by any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Company to provide such rate
or rates not being supplied by the Commercial Paper Dealers. If the number of
Dividend Period Days shall be (i) 7 or more but fewer than 49 days, such rate
shall be the Interest Equivalent of the 30-day rate on such commercial paper;
(ii) 49 or more but fewer than 70 days, such rate shall be the Interest
Equivalent of the 60-day rate on such commercial paper; (iii) 70 or more but
fewer than 85 days, such rate shall be the arithmetic average of the Interest
Equivalent of the 60-day and 90-day rate on such commercial paper; (iv) 85 or
more days but fewer than 99 days, such rate shall be the Interest Equivalent of
the 90-day rate on such commercial paper; or (v) 99 or more days but fewer than
183 days, such rate shall be determined by linear interpolation between the
Interest Equivalents of the 90-day rate and the 180-day rate on such commercial
paper.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on
any date means the Interest Equivalent of the yield as calculated by reference
to the arithmetic average of the bid price quotations of the actively traded
Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
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<PAGE> 59
"U.S. Treasury Bond Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Bond with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bond Rate on such date. "Alternate Treasury Bond Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Bond
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
Notwithstanding the foregoing, if at 9:00 a.m., New York City time, on any
Auction Date, (i) the rating of the Shares of any Series by Moody's shall be on
the "Corporate Credit Watch List" of Moody's with a designation of "downgrade"
or "uncertain", (ii) the rating of the Shares by S&P shall be on the
"CreditWatch" of S&P with a designation of "negative implications" or
"developing" or (iii) if Moody's or S&P, or both, shall not make such a rating
available, the rating of the Shares by any Substitute Rating Agency shall be the
substantial equivalent of clause (i) or (ii), then the Maximum Applicable Rate
for the Shares of the Series to which such Auction Date relates will be
determined as described above but as if the credit rating assigned to the Shares
by Moody's and S&P (or, as appropriate, by a Substitute Rating Agency) each fell
within a range one full level lower in the above table.
The Company will take all reasonable action necessary to enable Moody's and
S&P (and, as appropriate, any Substitute Rating Agency or Substitute Rating
Agencies referred to below) to provide a rating for the Shares. If either
Moody's or S&P shall not make such a rating available, or neither Moody's nor
S&P shall make such a rating available, the Company will select, after
consultation with the Broker-Dealers or their affiliates and successors, a
nationally recognized statistical rating organization (a "Substitute Rating
Agency") or two nationally recognized statistical rating organizations
("Substitute Rating Agencies") to act as a Substitute Rating Agency or
Substitute Rating Agencies, as the case may be. If an alternative nationally
recognized securities rating agency or agencies are not available, the
applicable rating shall be the highest rating last published by Moody's, S&P or
such Substitute Rating Agency or Agencies.
A Broker-Dealer also may hold Shares for its own account. A Broker-Dealer
thus may submit Orders to the Auction Agent as an Existing Holder or a Potential
Holder and therefore participate in an Auction on behalf of both itself and its
customers. An Order placed with the Auction Agent by a Broker-Dealer as an
Existing Holder or a Potential Holder as or on behalf of a customer will be
treated in the same manner as an Order placed with a Broker-Dealer by such
customer. Similarly, any failure by a Broker-Dealer to submit to the Auction
Agent an Order in respect of any Shares held by its customer will be treated in
the same manner as such customer's failure to submit to its Broker-Dealer an
Order in respect of Shares held by it, as described above. Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interest of its customers, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial ownership interests.
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<PAGE> 60
The number of Shares purchased or sold may be subject to proration
procedures. See "-- Acceptance and Rejection of Submitted Bids and Submitted
Sell Orders and Allocation of Shares". Each purchase or sale of Shares shall be
made for settlement on the Business Day (also a Period-End Dividend Payment
Date) next succeeding the Auction Date at a price per Share equal to $100,000,
and such settlement will be made regardless of whether or not the Company shall
have paid on such Business Day or on any other day the full amount of any
dividends or any other amounts payable in respect of any Shares. See
"-- Notification of Results; Settlement".
If any Order or Orders covering in the aggregate all of the outstanding
Shares of a Series held by an Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline for any reason (including the failure of
a Broker-Dealer to contact such Existing Holder or to submit such Existing
Holder's Order or Orders), such Existing Holder shall be deemed to have
submitted a Hold Order (in the case of an Auction relating to a Regular Dividend
Period) or a Sell Order (in the case of an Auction relating to a Special
Dividend Period) covering the number of outstanding Shares held by such Existing
Holder and that are not subject to Orders submitted to the Auction Agent.
For purposes of an Auction, Shares for which the Company shall have given
notice of redemption and deposited moneys therefor with the Auction Agent will
not be considered as outstanding and will not be included in such Auction.
Neither the Company nor any affiliate of the Company may submit an Order in
any Auction except as described below under the caption "Broker-Dealers".
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00
p.m., New York City time, on each Auction Date, or such other time on the
Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit in writing or through the Auction
Agent's auction processing system to the Auction Agent all Orders obtained by it
for the Auction to be conducted on such Auction Date, designating itself (unless
otherwise permitted by the Company) as the Existing Holder or Potential Holder
in respect of the Shares subject to such Orders (each such "Hold Order", "Bid"
or "Sell Order" as submitted or deemed submitted by a Broker-Dealer being
referred to herein as a "Submitted Hold Order", a "Submitted Bid" or a
"Submitted Sell Order", as the case may be, or as a "Submitted Order"). Any
Order submitted by an Existing Holder or a Potential Holder to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on an Auction Date, shall be irrevocable.
If any rate specified in any Submitted Bid contains more than three figures
to the right of the decimal point, then the Auction Agent shall round such rate
up to the next highest one thousandth (0.001) of one percent.
A Submitted Order or Submitted Orders of an Existing Holder that cover in
the aggregate more than the number of outstanding Shares held by such Existing
Holder shall be considered valid in the following order of priority:
(i) any Submitted Hold Order of such Existing Holder shall be
considered valid up to and including the number of outstanding Shares held
by such Existing Holder, provided that if there is more than one Submitted
Hold Order of such Existing Holder and the number of Shares subject to such
Submitted Hold Orders exceeds the number of outstanding Shares held by such
Existing Holder, the number of such Shares subject to each such Submitted
Hold Order shall be reduced pro rata so that such Submitted Hold Orders
shall cover the number of outstanding Shares held by such Existing Holder;
(ii) (A) any Submitted Bids of such Existing Holder shall be
considered valid if more than one such Submitted Bid is submitted, up to
and including the excess of the number of outstanding Shares held by such
Existing Holder over the number of Shares of such Series subject to any
Submitted Hold Order referred to in clause (i) above, and (B) subject to
subclause (A), if there is more than one Submitted Bid of such Existing
Holder specifying the same rate and the number of outstanding Shares of
such Series subject to such Submitted Bids is greater than such excess,
such Submitted Bids shall be considered valid up to and including the
amount of such excess, and the number of such Shares subject to such
Submitted Bids shall be reduced pro rata so that such Submitted Bids, in
the aggregate shall cover
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<PAGE> 61
the number of outstanding Shares of such Series equal to such excess, and
(C) subject to subclause (A) and (B), if there are two or more Submitted
Bids of such Existing Holder specifying different rates, such Submitted
Bids shall be considered valid in the ascending order of their respective
rates and in any such event the number, if any, of such Shares subject to
Submitted Bids not valid under this clause (ii) shall be treated as subject
to a Submitted Bid by a Potential Holder; and
(iii) any Submitted Sell Order of an Existing Holder shall be
considered valid up to and including the excess of the number of
outstanding Shares held by such Existing Holder over the number of Shares
of such Series subject to Submitted Holder Orders referred to in clause (i)
and valid Submitted Bids referred to in clause (ii) above; provided that if
there is more than one Submitted Sell Order of such Existing Holder and the
number of such Shares subject to such Submitted Sell Orders is greater than
such excess, the number of such Shares subject to such Submitted Sell
Orders shall be reduced pro rata so that such Submitted Sell Orders, in the
aggregate, shall cover the number of outstanding Shares equal to such
excess.
If there is more than one Submitted Bid of any Potential Holder, each such
Submitted Bid shall be considered a separate Submitted Bid with the rate and
number of Shares therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate. Not earlier than the Submission Deadline on an Auction Date for the Shares
of a Series, the Auction Agent will assemble all Submitted Orders and will
determine the excess of the number of outstanding Shares of such Series over the
number of outstanding Shares of such Series subject to Submitted Hold Orders
(such excess being referred to herein as the "Available Shares") and whether
Sufficient Clearing Bids exist. "Sufficient Clearing Bids" will exist if the
number of outstanding Shares that are the subject of Submitted Bids by Potential
Holders specifying rates not higher than the Maximum Applicable Rate equals or
exceeds the number of outstanding Shares that are the subject of Submitted Sell
Orders (including the number of such Shares subject to Submitted Bids by
Existing Holders specifying rates higher than the Maximum Applicable Rate).
If Sufficient Clearing Bids exist, the Auction Agent will determine the
lowest rate specified in the Submitted Bids (the "Winning Bid Rate") that,
taking into account such rate and all lower rates bid by Existing Holders and
Potential Holders, would result in Existing Holders and Potential Holders owning
not less than the Available Shares. In that event, the Winning Bid Rate will be
the Applicable Rate for the next Dividend Period for all Shares of such Series
then outstanding.
If Sufficient Clearing Bids do not exist (other than because all of the
outstanding Shares are the subject of Submitted Hold Orders), the next Dividend
Period will be a Regular Dividend Period and the Applicable Rate for the next
Dividend Period will be the Maximum Applicable Rate. If Sufficient Clearing Bids
do not exist, Existing Holders that have submitted or are deemed to have
submitted Sell Orders will not be able to sell in the Auction all, and may not
be able to sell any, Shares subject to such Submitted Sell Orders. See
"Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares" below.
If all of the outstanding Shares of a Series are subject to Submitted Hold
Orders, the Applicable Rate for the next Dividend Period for the Shares of such
Series will be 59% of the Reference Rate in effect on the Auction Date with
respect to such Dividend Period.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations made under "-- Determination
of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" above, and
subject to the discretion of the Auction Agent to round and allocate as
described below, Submitted Bids and Submitted Sell Orders shall be accepted or
rejected in the order of priority set forth in the Auction Procedures, with the
result that Existing Holders and Potential Holders shall sell, continue to hold
and/or purchase Shares as set forth below. Existing Holders that submit or are
deemed to have submitted Hold Orders shall continue to hold the Shares subject
to such Hold Orders.
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<PAGE> 62
If Sufficient Clearing Bids exist:
(a) each Existing Holder that placed a Submitted Sell Order or a Submitted
Bid specifying a rate higher than the Winning Bid Rate will sell the outstanding
Shares subject to such Submitted Sell Order or Submitted Bid;
(b) each Existing Holder that placed a Submitted Bid specifying a rate
lower than the Winning Bid Rate will continue to hold the outstanding Shares
subject to such Submitted Bid;
(c) each Potential Holder that placed or is deemed to have placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will purchase
the number of outstanding Shares subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate
equal to the Winning Bid Rate shall continue to hold the outstanding Shares
subject to such Submitted Bid, unless the number of outstanding Shares subject
to all such Submitted Bids is greater than the excess of the Available Shares
over the number of Shares accounted for in clauses (b) and (c) above, in which
event each Existing Holder with such a Submitted Bid will continue to hold a
number of outstanding Shares determined on a pro rata basis based on the number
of outstanding Shares subject to all such Submitted Bids by such Existing
Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a rate
equal to the Winning Bid Rate will purchase any Available Share not accounted
for in clause (b), (c) or (d) above on a pro rata basis based on the number of
outstanding Shares subject to all such Submitted Bids.
If Sufficient Clearing Bids do not exist (other than because all of the
outstanding Shares are subject to Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate
equal to or lower than the Maximum Applicable Rate will continue to hold the
outstanding Shares subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a rate
equal to or lower than the Maximum Applicable Rate will purchase the number of
outstanding Shares subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Sell Order or a Submitted
Bid specifying a rate higher than the Maximum Applicable Rate will sell a number
of outstanding Shares determined on a pro rata basis based on the number of
outstanding Shares subject to all such Submitted Sell Orders and Submitted Bids.
If, as a result of the Auction Procedures described above, any Existing
Holder would be required to sell, or any Potential Holder would be required to
purchase, a fraction of a Share, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, (i) round up or down the number of
Shares being sold or purchased on such Auction Date so that the number of Shares
sold or purchased by each Existing Holder or Potential Holder shall be whole
Shares and (ii) allocate such whole Shares for purchase among Potential Holders
even if such allocation results in one or more of such Potential Holders not
purchasing Shares.
If the Company shall determine, as a result of a change in applicable law,
regulation or rule (or interpretation thereof by the Commission or its staff)
and based upon written advice of independent legal counsel of recognized
standing selected by the Company, that there is a significant possibility that
the Company would be required to register the Shares of any Series or shares of
any other series of the Company that may be outstanding from time to time
pursuant to the Exchange Act if there were five hundred or more different
beneficial owners of Shares of all Series and such other series considered
together, the Auction Procedures will be modified in the manner provided therein
so that no Auction will result in there being more than a total number of
different beneficial owners of Shares of all Series as such counsel shall
specify in such written advice; provided that in no event will the Auction
Procedures be modified in such a way that they would restrict the total number
of different beneficial owners for any Series to be less than 40.
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer that submitted an Order in an Auction of the Applicable Rate for
the next Dividend Period for the applicable Shares of such Series and, if the
Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted or
rejected, in
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whole or in part, by telephone by approximately 3:00 p.m., New York City time,
on the Auction Date. Each Broker-Dealer that submitted a Bid or Sell Order on
behalf of one or more Bidders will then advise each Bidder whether its Bid or
Sell Order was accepted or rejected, in whole or in part, will confirm purchases
and sales with each Bidder purchasing or selling Shares as a result of the
Auction and will advise each Bidder purchasing or selling Shares as a result of
the Auction to give instructions to its Agent Member to pay the purchase price
against delivery of such Shares by book-entry against payment therefor, as
appropriate. Each Broker-Dealer that submitted a Hold Order on behalf of an
Existing Holder will also advise such Existing Holder of the Applicable Rate for
the next Dividend Period. The Auction Agent will record on the registry of
Existing Holders to be maintained by the Auction Agent each transfer of
beneficial ownership of Shares pursuant to an Auction.
If any Existing Holder selling Shares in an Auction fails to deliver such
Shares (by authorized book-entry), a Broker-Dealer may deliver to the Potential
Holder on behalf of which is submitted a Bid that was accepted a number of such
Shares that is less than the number of such Shares that otherwise was to be
purchased by such Potential Holder. In such event, the number of such Shares to
be so delivered will be determined by such Broker-Dealer in its sole discretion;
provided, however, that such delivery will be of whole Shares only. Delivery of
such lesser number of Shares will constitute good delivery.
In accordance with the Securities Depository's normal procedures, on the
Business Day next succeeding the Auction Date, the transactions described above
will be executed through the Securities Depository and the accounts of the
respective Agent Members at the Securities Depository will be debited and
credited as necessary to effect the purchases and sales of Shares as determined
in the Auction. Purchasers will make payment to the Securities Depository
through their Agent Members in same-day funds and shall make payments regardless
of whether or not the Company shall have paid on such day or on any other day
the full amount of any dividends or any other amounts payable in respect of any
Shares of such Series. The Securities Depository will make payment in accordance
with its normal procedures, which now provide for payment in same day funds. If
the procedures of the Securities Depository applicable to the Shares shall be
changed to provide for payment in next-day funds, then purchasers may be
required to make payment in next-day funds. If the certificates for Shares are
not held by the Securities Depository or is nominee, payment will be made in
same-day funds to the Auction Agent against delivery of such certificates.
CONCERNING THE AUCTION AGENT
The Auction Agent will act as agent for the Company in connection with
Auctions. The Company will pay the Auction Agent compensation for its services
under an Auction Agent Agreement.
In the absence of bad faith or negligence on its part, the Auction Agent
will not be liable for any action taken, suffered or omitted in the performance
of its duties under the Auction Agent Agreement and will not be liable for any
error of judgment made reasonably and in good faith unless the Auction Agent has
been negligent in ascertaining (or failing to ascertain) the pertinent facts.
Pursuant to the Auction Agent Agreement, the Company is required to indemnify
the Auction Agent for certain losses and liabilities incurred by the Auction
Agent without negligence or bad faith on its part in connection with the
performance of its duties under such agreement.
The Company may terminate any Auction Agent Agreement upon written notice
to the Auction Agent. The Auction Agent may resign under the Auction Agent
Agreement upon written notice to the Company on the date specified in such
notice, which may be no earlier than six months following delivery of such
notice. No such termination by the Company or resignation by the Auction Agent
shall be effective until (i) the Company has entered into an agreement with a
successor Auction Agent containing substantially the same terms and conditions
as the Auction Agent Agreement and (ii) such successor Auction Agent has entered
into agreements with the Broker-Dealers containing substantially the same terms
and conditions as the Broker-Dealer Agreements. Upon receiving a resignation
notice from the Auction Agent, the Company will use its best efforts to enter
into an agreement with a successor Auction Agent containing substantially the
same terms and conditions as the Auction Agent Agreement.
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BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from funds
provided by the Company to each Broker-Dealer on the basis of the purchase price
of Shares placed by such Broker-Dealer at such Auction. The service charge (i)
for any Regular Dividend Period shall be determined from time to time by mutual
consent of the Company and any such Broker-Dealer or Broker Dealers and (ii) for
any Special Dividend Period shall be determined by mutual consent of the Company
and any such Broker-Dealer or Broker-Dealers and shall be based upon a selling
concession that would be applicable to an underwriting of fixed or variable rate
preferred shares with a similar final maturity or variable rate dividend period,
respectively, at the commencement of the Dividend Period with respect to such
Auction. For the purposes of the preceding sentence, Shares shall be considered
placed by a Broker-Dealer if such Shares were (i) the subject of Hold Orders
deemed to have been made by Existing Holders that were acquired by such Existing
Holders through such Broker-Dealer or (ii) the subject of the following Orders
submitted by such Broker-Dealer; (A) a Submitted Bid of an Existing Holder that
resulted in such Existing Holder purchasing such Shares as a result of the
Auction, (B) a Submitted Bid of a Potential Holder that resulted in such
Potential Holder purchasing such Shares as a result of the Auction or (C) a
Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer (other than an
affiliate of the Company) may submit Orders in Auctions for its own account,
unless the Company notifies all Broker-Dealers in writing that they may no
longer do so, in which case Broker-Dealers may continue to submit only Hold
Orders and Sell Orders for their own accounts. Any Broker-Dealer that is an
affiliate of the Company may submit Orders in Auctions but only if such Orders
are not for its own account, except that if such affiliated Broker-Dealer holds
Shares of any Series for its own account, it must submit a Sell Order in the
next Auction with respect to such Shares of such Series. If a Broker-Dealer
submits an Order for its own account in any Auction, it may have knowledge of
Orders placed through it in that Auction and therefore have an advantage over
other Bidders; such Broker-Dealer, however, would not have knowledge of Orders
submitted by other Broker-Dealers in that Auction. In the Broker-Dealer
Agreements, Broker-Dealers agree to handle customer orders in accordance with
their respective duties under applicable securities laws and rules.
Each Broker-Dealer Agreement provides that neither the Company nor
SmithKline Beecham, nor the Auction Agent, shall have any responsibility or
liability with respect to the failure of a Potential Holder, Existing Holder or
their respective Agent Members to deliver Shares or to pay for Shares of any
Series purchased or sold pursuant to an Auction or otherwise.
RATINGS
The Company expects that, on the Date of Original Issue for the Shares of
each Series offered hereby, such Shares will be rated "aa3" by Moody's and A by
S&P.
As recently described by Moody's, an issue of preferred stock rated "aa" is
considered to be a high-grade preferred stock and the rating indicates that
there is a reasonable assurance that earnings and asset protection will remain
relatively well maintained in the foreseeable future. The modifier "3" indicates
that the issue ranks in the lower end of the "aa" rating category. S&P has
recently described a preferred stock rating as an assessment of the capacity and
willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. An A rating is the third highest rating that may be
assigned by S&P to a preferred stock issue and, as described by S&P, indicates
that the preferred stock issue is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
Ratings are not recommendations to purchase, hold or sell Shares of any
Series, inasmuch as the ratings do not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to Moody's and S&P by the Company and obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information. Ratings do not address the likelihood that
any Auction will be successful or that an investor will be able to resell Shares
of any Series in any Auction or otherwise.
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DESCRIPTION OF SMITHKLINE BEECHAM SUPPORT
THE GUARANTEE
The following is a summary of the terms of the Guarantee. This summary does
not purport to be complete and is qualified in its entirety by reference to the
Guarantee. A copy of the Guarantee may be obtained upon request from the Company
or SmithKline Beecham.
Under the Guarantee, SmithKline Beecham will, for the benefit of the
holders of record from time to time of the Shares of each Series offered hereby,
unconditionally and irrevocably guarantee the due and punctual payment, in U.S.
dollars, of all dividends on such shares held by such holders, provided that
such dividends have been declared by the Company's Board of Directors out of
funds legally available therefor and remain unpaid. SmithKline Beecham will in
no event be required to make any payment pursuant to the Guarantee at any time
in an amount that would exceed the Adjusted Distributable Reserves of SmithKline
Beecham at such time. Any amounts payable under the Guarantee but not paid as a
result of the foregoing will be paid over pro rata to the holders of record of
Shares of each Series from time to time as Adjusted Distributable Reserves
become available. The rights of holders of Shares of any Series under the
Guarantee will be subordinated to the rights of other creditors of SmithKline
Beecham.
The obligations of SmithKline Beecham under the Guarantee in respect of any
dividends declared by the Company's Board of Directors and not paid by the
Company shall not be subject to the passage of any grace or cure period with
respect thereto.
The Guarantee provides that to the extent that the dividends received
deduction under section 243(a)(1) of the Code or any successor provision is not
available to a Qualifying Holder with respect to payments made by SmithKline
Beecham under the Guarantee in respect of any dividend on the Shares of any
Series, payments under the Guarantee will be increased so that such payments
result in the same after-federal income tax yield that Qualifying Holders would
have received had the dividend been paid by the Company. Such after-federal
income tax yield shall be determined on the basis of the highest generally
applicable marginal federal corporate income tax rate in effect at the time of
payment and on the assumption that any dividends received deduction that is
available to Qualifying Holders is that deduction which is available to holders
of less than 20% of the stock of the Company. The obligations of SmithKline
Beecham under the Guarantee are not affected by the particular tax position or
circumstances of any holder or Qualifying Holder of any Shares of any Series and
no holder or Qualifying Holder shall be required at any time to furnish to the
Company or SmithKline Beecham any information as to its particular tax position
or circumstances.
For purposes of the Guarantee and the Support Agreement, "Adjusted
Distributable Reserves" means at any time the amount of the Distributable
Reserves of SmithKline Beecham at such time (i) reduced by an amount equal to
the aggregate of the Sterling Equivalents of all Capital Increases made by
SmithKline Beecham or its affiliates in accordance with any of the Preferred
Share Dividend Support Agreements and of the Sterling Equivalents of all amounts
paid by SmithKline Beecham under any of the Preferred Share Dividend Guarantees
and (ii) increased by an amount equal to the aggregate of the Sterling
Equivalents of all Written-Down Amounts; "Distributable Reserves" is defined by
reference to the Companies Act 1985 of Great Britain, which provides, in effect,
that distributable reserves or profits of a company constitute its accumulated,
realized profits less its accumulated, realized losses, subject to certain
further restrictions, and is determined by reference to a company's latest
published audited annual financial statements; "Preferred Share Dividend
Guarantees" mean the Guarantees and any other guarantee granted by SmithKline
Beecham on terms substantially similar to the Guarantee, guaranteeing payment by
the Company or another subsidiary of SmithKline Beecham of declared dividends on
preferred shares issued by such company; "Preferred Share Dividend Support
Agreements" mean the Support Agreement and any other support agreement on terms
substantially similar to the Support Agreement, which SmithKline Beecham may
enter into with one of its subsidiaries in connection with an issuance of
preferred shares by such company; "Sterling Equivalent" means (i) in relation to
any Capital Increase or any payment made under the Guarantee in a currency other
than pounds sterling, the amount of such payment in such other currency
translated into pounds sterling at the Noon Buying Rate on the date upon which
such Capital Increase or payment is made and (ii) in relation to
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any Written-Down Amount in respect of which the write-down is taken in a
currency other than pounds sterling, the amount of such write-down in such other
currency translated into pounds sterling at the rate applicable to the payment
or Capital Increase in respect of which such write-down is made; and "Written-
Down Amount" means (i) in relation to any Capital Increase, the amount, if any,
which SmithKline Beecham or, as the case may be, the relevant affiliate writes
down as irrecoverable the investment in the Company representing such Capital
Increase and (ii) in relation to any payment made under the Guarantee, the
amount, if any, by which SmithKline Beecham writes down as irrecoverable the
amount representing the right against the Company to which it is subrogated as a
consequence of such payment. At December 31, 1995, the Adjusted Distributable
Reserves of SmithKline Beecham were L576 million ($893 million).
Any payments made by SmithKline Beecham under the Guarantee shall be made
without deduction or withholding for or on account of any present or future tax,
levy, duty or governmental charge assessed by the U.K. or any political
subdivision thereof or taxing authority therein, exclusive of any tax, levy,
duty or governmental charge which would not have been imposed or assessed but
for the existence of any present or former connection between the holder of
Shares of any Series or the beneficial owner of an interest in such Shares (or
between a fiduciary, settlor, beneficiary, member or shareholder of, or
possessor of a power over, such holder or beneficial owner, if such holder or
beneficial owner is an estate, a trust, a partnership or a corporation) and the
U.K., including, without limitation, such holder or beneficial owner (or such
fiduciary, settlor, beneficiary, member, shareholder or possessor) being or
having been present therein, or being or having been engaged in trade or
business therein, or having or having had a permanent establishment therein
(each such non-excluded tax being herein referred to as a "U.K. Tax"); provided,
however, that to the extent that SmithKline Beecham is required by applicable
law to withhold or deduct any U.K. Tax from any such payment under the
Guarantee, SmithKline Beecham shall make additional payments so that, after
giving effect to all such deductions and withholdings, the net amount paid to
each holder is not less than the amount which would have been payable but for
such withholding or deduction.
If an order is made or an effective resolution is passed for the winding up
of SmithKline Beecham, SmithKline Beecham shall, to the extent required to make
payment under the Guarantee, make payment under the Guarantee only of such
amounts as would have been payable if the holders of Shares then outstanding
had, on the day preceding the commencement of the winding up, become holders of
shares in SmithKline Beecham of a class having a preferential right in a winding
up over all other classes of shares in SmithKline Beecham, issued or to be
issued, to receive an amount equal to the amount expressed to be payable under
the Guarantee on the date upon which such holders would be so treated as having
become holders of shares in SmithKline Beecham.
No amendment, modification or abrogation of the Guarantee or the rights of
the holders or beneficial owners of Shares of any Series thereunder shall be
made by SmithKline Beecham without the consent of the holders of at least
two-thirds of the aggregate liquidation preference of all outstanding Shares of
all Series, voting as a single class. Any such amendment, modification or
abrogation made by SmithKline Beecham with such consent shall be binding on each
holder, regardless of whether or not such holder shall have consented thereto.
Any holder of record of Shares of any Series will have the right to enforce
its rights against SmithKline Beecham under the Guarantee without first making a
demand upon, or instituting a legal proceeding against, the Company. SmithKline
Beecham has agreed that the courts of England, and the U.S. federal and New York
State courts sitting in New York, New York, are to have non-exclusive
jurisdiction in any legal proceeding arising out of or in connection with the
Guarantee, and has irrevocably submitted to the jurisdiction of such U.S. and
New York State courts.
The Guarantee will be governed by English law.
THE SUPPORT AGREEMENT
The following is a summary of the terms of the Support Agreement. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Support Agreement. A copy of the Support Agreement may be
obtained upon request from the Company, SmithKline Beecham or the Underwriters.
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In order to facilitate the raising of funds by the Company by borrowing and
the issue of debt and equity securities, including Shares of one or more Series,
on favorable terms, SmithKline Beecham has entered into the Support Agreement
with the Company pursuant to which SmithKline Beecham has agreed that (a) if the
Debt of the Company exceeds the Equity of the Company, SmithKline Beecham will
within three Business Days make, or cause an affiliate to make, in U.S. dollars,
an addition to the capital of the Company by subscribing for additional shares
of Common Stock or preferred stock ranking junior to any other class of
preferred stock of the Company (a "Capital Increase") to the extent necessary to
cause the Equity of the Company to exceed the Debt of the Company and (b) if the
Equity of the Company (after deducting therefrom the sum of the aggregate
liquidation preference of the Shares of all Series then outstanding and pari
passu securities (excluding amounts in respect of accumulated and unpaid
dividends thereon)) would be less than $1, SmithKline Beecham will make, or
cause an affiliate to make, a Capital Increase to the extent necessary to
maintain the Equity of the Company (after such deduction) at a minimum of $1.
SmithKline Beecham shall in no event be obligated to make, or cause to be made,
such a Capital Increase at any time in an amount that would exceed the Adjusted
Distributable Reserves of SmithKline Beecham at such time. The amount of any
Capital Increase that is not made as a result of the foregoing will be made by
SmithKline Beecham to the Company from time to time as Adjusted Distributable
Reserves become available. The rights of the Company under the Support Agreement
will be subordinated to the rights of other creditors of SmithKline Beecham. In
addition, SmithKline Beecham's obligations under the Support Agreement at any
time will be limited initially to an aggregate amount equal to the sum of (i) $3
billion and (ii) two times the excess of the liquidation preference of the
Shares issued at such time, over $1,150,000,000, reduced by the amount of any
payments made under the SB Biologicals Support Agreement described below.
If an order is made or an effective resolution is passed for the winding up
of SmithKline Beecham, SmithKline Beecham shall, to the extent required to make
payment under the Support Agreement, make payment under the Support Agreement
only of such amounts as would have been payable if the Company had, on the day
preceding the commencement of the winding up, become a holder of shares in
SmithKline Beecham of a class having a preferential right in a winding up over
all other classes of shares in SmithKline Beecham, issued or to be issued, to
receive an amount equal to the amount expressed to be payable under the Support
Agreement on the date upon which the Company would be so treated as having
become a holder of shares in SmithKline Beecham.
For purposes of the Support Agreement, the following terms shall have the
meanings set forth below:
"Equity" means at any time the aggregate of (i) the consolidated
shareholders' equity of the Company and its subsidiaries in accordance with U.S.
GAAP as shown in the then latest audited balance sheet of the Company for a
financial year and making adjustments thereto to reflect any variation in the
paid-up share capital of the Company, any capital in excess of the par value of
any issued shares, the amount of contributed capital and any other capital
reserve but without deducting from such reserves the amount of goodwill shown as
an intangible asset in such audited balance sheet and (ii) the amount, if any,
shown in the then latest audited balance sheet for minority interests. The
Support Agreement provides that certain underwritten issues of shares that have
not been consummated on the date of the then latest audited balance sheet of the
Company for a financial year will also be included in any such determination.
"Debt" means at any time all indebtedness for borrowed money of the Company
in accordance with U.S. GAAP as the same would be shown on a balance sheet of
the Company, prepared as of such date without consolidation of the accounts of
any of its subsidiaries (such reference to a balance sheet, unlike the reference
under "Equity", not being intended to mean the latest audited balance sheet of
the Company), and shall be deemed to include except insofar as otherwise taken
into account: (i) the par value of any issued share capital and the principal
amount of any debentures or borrowed monies, the beneficial interest wherein or
the right to repayment whereof is not for the time being owned by the Company,
of any body whether corporate or unincorporated and the payment or repayment
whereof is the subject of a guarantee or indemnity by the Company; (ii) the
outstanding principal amount raised by bankers acceptances (not being
acceptances of trade bills in respect of the purchase or sale of goods in the
ordinary course); (iii) the principal amount of any debenture of the Company;
and (iv) any fixed or minimum premium payable on repayment of any borrowing or
deemed borrowing by the Company. The Support Agreement provides that "Debt"
shall be deemed not to
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include: (a) borrowings for the purposes of repaying borrowings by the Company
for the time being outstanding and so to be applied within six months of being
so borrowed, pending their application for such purpose within such period; and
(b) the aggregate value for the time being of all cash in hand or deposited with
banks or financial institutions, certificates of deposit, commercial paper and
other marketable debt securities of governments and companies and similar
instruments owned by the Company which are or represent amounts available for
repayment of any borrowing provided that such commercial paper is rated A-1 or
better by S&P and P-1 or better by Moody's and such other marketable debt
securities are so rated or are rated A+ or better by S&P or A-1 or better by
Moody's but excluding cash in hand or deposited, certificates of deposit,
commercial paper and other marketable debt securities and similar instruments
representing borrowings which are deemed not to be borrowings by virtue of the
operation of the provisions of (a) above.
Each of the Company and SmithKline Beecham has agreed that the courts of
England, and the U.S. federal and New York State courts sitting in New York, New
York, are to have non-exclusive jurisdiction in any legal proceeding arising out
of or in connection with the Support Agreement. SmithKline Beecham has
irrevocably submitted to the jurisdiction of such U.S. and New York State
courts, and the Company has irrevocably submitted to the jurisdiction of the
courts of England.
The Support Agreement will be governed by English law.
The Certificate of Designations provides that during any period in which a
Credit Rating Event shall exist, the holders of record of the Shares of all
Series will have the right to elect two additional directors, each of which
shall be entitled to such number of votes on all matters before the Board of
Directors of the Company as shall result in such two additional directors
together having a majority of the total voting power of all directors on the
Board of Directors of the Company; provided, however, that each additional
director shall be entitled to only one vote with respect to matters concerning
the redemption of Shares of any Series or liquidation, dissolution or winding-up
of the Company. See "Description of the Securities -- Voting Rights".
The Support Agreement is not, and should not be deemed to constitute, a
guarantee by SmithKline Beecham of any obligation, liability, or indebtedness of
the Company, including the Shares of any Series. SmithKline Beecham will not, by
virtue of the Support Agreement, have any obligation or liability to any holder
of Shares of any Series. The Support Agreement does not run to, and is not
enforceable directly by, any holder of Shares of any Series. However, the
Support Agreement is enforceable by the Company and, in determining the manner
and extent to which the Support Agreement is to be enforced by the Company, the
Company's Board of Directors will, under currently applicable Delaware law, be
subject to a requirement to act in a manner consistent with their fiduciary
duties to holders of Shares of all Series and to holders of all other shares of
the Company (including the holder or holders of the Company's Common Stock, all
of which is currently held indirectly by SmithKline Beecham).
OTHER SMITHKLINE BEECHAM POLICIES AND COMMITMENTS
SmithKline Beecham has committed not to dispose of any shares of Common
Stock of the Company so long as any Shares are outstanding. In addition,
SmithKline Beecham's policy will be that the Company will have sufficient
earnings and profits to pay dividends on the Shares, and sufficient assets to
perform its obligations in respect of the Shares. This policy does not
constitute a guarantee or other legal obligation, and SmithKline Beecham's sole
legal obligations with respect to the payment of dividends or performance of
other obligations in respect of the Shares are those arising under the
Guarantee.
DESCRIPTION OF OTHER CAPITAL STOCK
The Company is currently authorized by its Certificate of Incorporation to
issue 10,000 shares of Common Stock, no par value, and 50,000 shares of
Preferred Stock. As of June 26, 1996, 2,935.2 shares of Common Stock and 9.719
shares of junior preferred stock, no par value, liquidation preference
$1,000,000 per share ("Junior Preferred Stock"), were outstanding. SmithKline
Beecham is the indirect holder of all of the outstanding Common Stock and all of
the outstanding Junior Preferred Stock.
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Each share of Common Stock is entitled to one vote on all matters submitted
to a vote of stockholders and is entitled to receive such dividends as may be
paid to the holders of Common Stock when and if declared by the Board of
Directors out of funds legally available therefor. The Common Stock, as well as
the Shares, will have cumulative voting rights. The Common Stock has no
preemptive or similar rights. All outstanding shares of Common Stock are fully
paid and nonassessable. Upon liquidation, dissolution or winding up of the
affairs of the Company, the holders of the Common Stock are entitled to share
pro rata in all assets of the Company remaining available for distribution to
stockholders after payment of all liabilities and provision for the liquidation
of any shares of Preferred Stock at the time outstanding.
The outstanding shares of Junior Preferred Stock are held by SmithKline
Beecham International Co., SB Corp. and SBCL, Inc., all of which are members of
SmithKline Beecham Group. The outstanding shares of Junior Preferred Stock of
the Company have an aggregate liquidation preference of $9,719,000 and a fixed
cumulative dividend rate of 7 1/8% per annum. The Junior Preferred Stock has no
voting rights and is subordinate in right of payment to the Shares.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of Shares. The
discussion was prepared by Cleary, Gottlieb, Steen & Hamilton, special U.S.
counsel to the Company, and, to the extent indicated below, records opinions
that counsel will render to the Company prior to the closing. The discussion is
based on laws, regulations, rulings and decisions now in effect, all of which
are subject to change (which change could apply retroactively). The discussion
does not purport to deal with federal income tax consequences applicable to all
investors, some of which may be subject to special rules.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES IN LIGHT
OF THEIR PARTICULAR CIRCUMSTANCES.
Cleary, Gottlieb, Steen & Hamilton will advise the Company that, in its
opinion, the Shares will be treated as stock of the Company for federal income
tax purposes, and that distributions with respect to the Shares (other than
liquidating distributions and distributions in redemption of Shares that are
subject to section 302(b) of the Code) to the extent made from current or
accumulated earnings and profits of the Company, as determined under federal
income tax principles, will constitute dividends for federal income tax
purposes. (As used below, the term "dividends" means distributions that
constitute dividends for federal income tax purposes.) The discussion below
assumes the correctness of the foregoing opinion, which in turn is based on the
assumptions and factual representations by the Company therein specified. The
opinion of counsel is not binding on the IRS or the courts, and the IRS could
take contrary positions, as indicated below.
A holder that is a corporation generally entitled to the corporate
dividends received deduction under section 243(a)(1) of the Code (the "dividends
received deduction") will be allowed that deduction with respect to dividends
received on the Shares, provided that the holder satisfies the minimum holding
period and other requirements applicable to the deduction. Under current law,
the dividends received deduction is equal to 70% of the amount of dividends
received. The federal income tax rate generally applicable to corporations is
35%. Thus, in general, the maximum effective federal income tax rate on
dividends fully qualifying for the dividends received deduction is 10.5%.
Individuals, partnerships, trusts and certain corporations are not eligible for
the dividends received deduction. The Clinton Administration has proposed to
reduce the dividends received deduction from 70% to 50%. It is impossible to
predict whether and in what form this proposal will be enacted into law.
The existence of earnings and profits in an amount sufficient for
distributions on the Shares to be treated as dividends will depend, in part, on
the amount of dividend income that the Company receives from its non-U.S.
subsidiaries. The ability of a particular subsidiary to pay dividends will
depend on factors including the
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subsidiary's financial and tax position and the laws to which the subsidiary is
subject. The Company expects that it will receive an aggregate amount of
dividends from its subsidiaries and interest income from its investment of the
proceeds of the offering that will be sufficient to ensure that distributions on
the Shares constitute dividends for U.S. tax purposes. This expectation is
subject to a number of factors (including, in addition to the considerations
described above, the rate of interest received by the Company on its loans and
the dividend rates in effect from time to time on the Shares), many of which are
beyond the control of the Company.
To the extent, if any, that distributions made by the Company with respect
to the Shares exceed the Company's current and accumulated earnings and profits,
those distributions will not constitute dividends for federal income tax
purposes and, therefore, will not be eligible for the dividends received
deduction. Instead, any such distribution would be treated first as a tax-free
return of capital, and would reduce a holder's basis in its Shares (but not
below zero). This reduction in basis would increase any gain, or reduce any
loss, realized by the holder on the subsequent sale, redemption or other
disposition of its Shares. Distributions in excess of a holder's basis would be
treated as gain from the sale of those Shares. Provided that the Shares are held
as capital assets, gain on the sale of Shares will be capital gain. Thus, the
failure of a distribution to qualify as a dividend would result in an increase
in the maximum federal income tax rate to a corporate holder generally entitled
to the dividends received deduction from 10.5% of such amount to 35%.
Section 246(c) of the Code disallows the dividends received deduction in
its entirety if the Shares with respect to which the dividend is paid are held
by the taxpayer for less than 46 days, excluding any day that is more than 45
days after the ex-dividend date. (A 91-day minimum holding period applies to
certain dividend arrearages.) A holder generally may not count towards these
minimum holding periods any period in which it (a) has the option to sell, is
under a contractual obligation to sell, or has made (and not closed) a short
sale of Shares or substantially identical stock or securities, (b) is the
grantor of an option to buy Shares or substantially identical stock or
securities or (c) otherwise has diminished its risk of loss by holding one or
more other positions with respect to substantially similar or related property.
The regulations provide that a taxpayer has diminished its risk of loss on stock
by holding a position in substantially similar or related property if the
taxpayer is the beneficiary of a guarantee, surety agreement, or similar
arrangement that provides for payments that will substantially offset decreases
in the fair market value of the stock. In addition, section 246(c) of the Code
disallows the dividends received deduction if the recipient of a dividend is
obligated to make related payments with respect to positions in substantially
similar or related property. This disallowance applies even if the minimum
holding period has been met.
Under Clinton Administration proposals, a holder of preferred stock would
be entitled to the dividends received deduction only if it satisfied the minimum
holding period requirements described above by reference to the period
immediately surrounding each dividend payment date. It is impossible to predict
whether and in what form this proposal will be enacted into law.
There are no regulations, published rulings or judicial decisions involving
the characterization for federal income tax purposes of securities with terms
substantially the same as the Shares. Although the IRS determined in a 1990
revenue ruling that holders of auction rate preferred stock could qualify for
the dividends received deduction, the Shares will differ in some respects from
the instruments described in that ruling. Accordingly, the IRS could assert a
contrary position with respect to the tax consequences described above. In the
opinion of the Company's counsel, however, the IRS would be unlikely to prevail
if it asserted such a position in a proceeding in which the issues were properly
presented.
Prospective investors should also consider the effect of section 246A of
the Code, which reduces the dividends received deduction allowed with respect to
"debt-financed portfolio stock", and the potential implications of the corporate
alternative minimum tax. Among the items of tax preference included in the
income base to which this tax applies is 75% of the excess of the corporation's
adjusted current earnings (subject to certain adjustments) over its alternative
minimum taxable income (computed without regard to this provision and the
alternative minimum tax net operating loss). Thus, a corporate holder's
alternative minimum tax base would, in the absence of any offsetting
adjustments, include 75% of the dividends received
68
<PAGE> 71
deduction. Investors should consult their own tax advisers in determining the
application of these rules in light of their particular circumstances.
In addition to federal income taxes, holders may be liable for state and
local income taxes with respect to Shares. States and municipalities may not
allow any deduction analogous to the dividends received deduction. Investors
should consult their own tax advisers in determining the state and local income
tax consequences to them of the purchase, ownership and disposition of Shares.
PLAN OF DISTRIBUTION
The Company may sell the Shares to one or more underwriters for public
offering and sale by them or may sell the Shares to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Shares will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Shares at a fixed price or prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Shares upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of Shares, underwriters may
be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Shares for whom they may act as agent. Underwriters may sell
Shares to or through dealers, and such dealers may receive compensation in the
form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Shares, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable Prospectus Supplement. Underwriters, dealers and agents
participating in the distribution of the Shares may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Shares may be deemed to be underwriting
discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company and SmithKline Beecham, to indemnification against and
contribution toward certain civil liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Shares of each Series offered hereby will be passed on
for the Company by Cleary, Gottlieb, Steen & Hamilton, New York, New York,
special U.S. counsel for the Company and SmithKline Beecham, and for the
Underwriters by Brown & Wood LLP, New York, New York. Certain matters of English
law will be passed on for SmithKline Beecham by Linklaters & Paines, English
solicitors for SmithKline Beecham. Cleary, Gottlieb, Steen & Hamilton and Brown
& Wood LLP may rely upon Linklaters & Paines as to matters of English law.
69
<PAGE> 72
EXPERTS
The consolidated balance sheets of SmithKline Beecham as of December 31,
1995 and 1994 and the consolidated statements of income, retained earnings, and
cash flows for each of the three years in the period ended December 31, 1995,
incorporated by reference in this Prospectus, have been incorporated herein in
reliance on the report of Coopers & Lybrand (London) and Price Waterhouse
(London), independent accountants, given on the authority of those firms as
experts in accounting and auditing.
The combined balance sheets of the Company as of December 31, 1995 and 1994
and the combined statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1995, included in
this Prospectus, have been included herein in reliance on the report of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
70
<PAGE> 73
GLOSSARY
<TABLE>
<CAPTION>
DEFINED TERM PAGE ON WHICH TERM IS DEFINED
- ------------------------------------------------------------------- -----------------------------
<S> <C>
"AA" Composite Commercial Paper Rate............................... 56
Adjusted Distributable Reserves.................................... 63
Agent Member....................................................... 40
Alternate Treasury Bill Rate....................................... 56
Alternate Treasury Bond Rate....................................... 57
Alternate Treasury Note Rate....................................... 57
Applicable Rate.................................................... 44
Auction............................................................ Cover, 53
Auction Agent...................................................... 54
Auction Agent Agreement............................................ 53
Auction Date....................................................... 54
Auction Procedures................................................. 53
Available Shares................................................... 59
</TABLE>
<TABLE>
<S> <C>
Bid................................................................ 10, 55
Bidder............................................................. 55
Broker-Dealers..................................................... 54
Broker-Dealer Agreements........................................... 54
Business Day....................................................... 54
Capital Increase................................................... 65
Cede............................................................... 40
Certificate of Designations........................................ 40
Change of Control.................................................. 9, 47
Commercial Paper Dealers........................................... 56
Common Stock....................................................... Cover
Date of Original Issue............................................. Cover, 42
Debt............................................................... 65
Debt Limitation Provision.......................................... 11, 41
Default Directors.................................................. 12
Default Period..................................................... 12
Distributable Reserves............................................. 63
Dividend Non-Payment Period........................................ 45
Dividend Payment Date.............................................. 42
Dividend Period.................................................... 6
Dividend Period Days............................................... 42
Dividends Received Percentage...................................... 8, 46
Downgrade Director................................................. 13
Downgrade Period................................................... 12
Downgrade Voting Parity Shares..................................... 51
DRD Formula........................................................ 8, 47
DRD Gross-Up Provision............................................. 9, 47
DRP................................................................ 8, 47
DTC................................................................ 40
Existing Holder.................................................... 10, 53, 54
Equity............................................................. 65
Guarantee.......................................................... Cover
Hold Order......................................................... 10, 55
Initial Dividend Payment Date...................................... 42
Initial Dividend Period............................................ Cover
Initial Dividend Rate.............................................. 44
Interest Equivalent................................................ 56
</TABLE>
71
<PAGE> 74
<TABLE>
<CAPTION>
DEFINED TERM PAGE ON WHICH TERM IS DEFINED
- ------------ -----------------------------
<S> <C>
Junior Preferred Stock............................................. 66
Loan Guarantee Provision........................................... 11, 41
Mandatory Redemption Upon Change of Control Provision.............. 9, 47
Maximum Applicable Rate............................................ 7
Minimum Holding Period............................................. 42
Moody's............................................................ 11
Non-Call Period.................................................... 44
Non-Payment Period................................................. 46
Non-Payment Period Rate............................................ 45
Noon Buying Rate................................................... 3
Notice of Offer to Purchase........................................ 9
Notice of Redemption............................................... 48
Order.............................................................. 55
Parity Preferred................................................... 43
Period-End Dividend Payment Date................................... 7, 42
Potential Holder................................................... 10, 55
Preferred Share Dividend Guarantees................................ 63
Preferred Share Dividend Support Agreements........................ 63
Preferred Stock.................................................... 40
Preferred Stock Limitation Provision............................... 11, 41
Redemption Non-Payment Period...................................... 46
Reference Rate..................................................... 56
Regular Dividend Period............................................ 44
Repurchase Upon Change of Control Provision........................ 9
S&P................................................................ 11
Securities Depository.............................................. 54
Sell Order......................................................... 10, 55
Series............................................................. Cover
Shares............................................................. Cover, 10, 54
Special Dividend Period............................................ 44
Special Dividend Period Notice..................................... 44
Sterling Equivalent................................................ 63
Submission Deadline................................................ 58
Submitted Bid...................................................... 58
Submitted Hold Order............................................... 58
Submitted Order.................................................... 58
Submitted Sell Order............................................... 58
Subsequent Dividend Period......................................... 6
Substitute Rating Agency........................................... 57
Sufficient Clearing Bids........................................... 59
Support Agreement.................................................. 5
U.K. Tax........................................................... 64
U.S. Treasury Bill Rate............................................ 56
U.S. Treasury Bond Rate............................................ 57
U.S. Treasury Note Rate............................................ 57
Winning Bid Rate................................................... 59
Written-Down Amount................................................ 64
</TABLE>
72
<PAGE> 75
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
------------------------
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Accountants............................................... F-2
Combined Balance Sheets as of December 31, 1994 and 1995 and as of March 31,
1996 (unaudited).............................................................. F-3
Combined Statements of Operations for the years ended December 31, 1993, 1994
and 1995, and for the three months ended March 31, 1995 and 1996
(unaudited)................................................................... F-4
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)... F-5
Combined Statements of Shareholders' Equity for the years ended December 31,
1993, 1994 and 1995 and for the three months ended March 31, 1996
(unaudited)................................................................... F-6
Notes to Combined Financial Statements.......................................... F-7 to F-17
</TABLE>
F-1
<PAGE> 76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of SmithKline Beecham Holdings Corporation
We have audited the accompanying combined balance sheets of the predecessor
companies to SmithKline Beecham Holdings Corporation (collectively, the Company,
as described in Note 1) as of December 31, 1995 and 1994, and the related
combined statements of operations, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company as of
December 31, 1995 and 1994, and the combined results of their operations and
their combined cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 22, 1996, except for
the second paragraph of Note 14,
as to which the date is June 20, 1996.
F-2
<PAGE> 77
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 45 $ 120 $ 100
Trade receivables (net of allowance for doubtful accounts of
$14, $12 and $11, respectively).......................... 264 252 218
Inventories................................................. 175 195 177
Receivables from affiliates................................. 113 84 75
Loans receivable from affiliates............................ 373 1,144 799
Other current assets........................................ 47 55 49
------ ------ ------
Total current assets................................ 1,017 1,850 1,418
Property, plant and equipment, net............................ 251 190 183
Investments in affiliates..................................... 151 144 144
Deferred income taxes......................................... 3 15 15
Goodwill...................................................... 421 409 407
Other assets.................................................. 10 7 1
------ ------ ------
Total assets........................................ $1,853 $2,615 $ 2,168
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 61 $ 65 $ 68
Payables to affiliates...................................... 130 105 86
Loans payable to affiliates................................. 108 468 68
Accrued payroll and payroll taxes........................... 64 66 66
Income taxes payable........................................ 51 62 51
Accrued restructuring....................................... -- 35 34
Other current liabilities................................... 86 116 92
------ ------ ------
Total current liabilities........................... 500 917 465
Minority interests............................................ 160 188 192
Deferred income taxes......................................... 11 7 7
Other liabilities............................................. 60 70 59
------ ------ ------
Total liabilities................................... 731 1,182 723
------ ------ ------
Commitments and contingent liabilities
Shareholders' equity:
Cumulative foreign currency translation adjustment.......... (30) 23 3
SmithKline Beecham equity................................... 1,152 1,410 1,442
------ ------ ------
Total shareholders' equity.......................... 1,122 1,433 1,445
------ ------ ------
Total liabilities and shareholders' equity.......... $1,853 $2,615 $ 2,168
====== ====== ======
</TABLE>
See accompanying notes.
F-3
<PAGE> 78
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ---------------
1993 1994 1995 1995 1996
------ ------ ------ ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................................ $1,281 $1,490 $1,698 $418 $389
Operating costs and expenses:
Cost of sales.................................. 629 783 867 219 199
Marketing, administrative and general.......... 412 449 531 122 117
Research and development....................... 16 18 22 5 6
Restructuring.................................. -- -- 60 60 --
------ ------ ------ ---- ----
Operating income................................. 224 240 218 12 67
Non-operating income (expense):
Interest expense............................... (19) (13) (3) (1) (1)
Interest income................................ 33 20 33 7 6
Minority interests............................. (42) (45) (45) (6) (9)
Equity in net income of affiliates............. 20 9 21 9 4
Other, net..................................... (5) 19 (5) (1) (36)
------ ------ ------ ---- ----
Income before income taxes....................... 211 230 219 20 31
Provision for income taxes....................... 61 81 109 10 12
------ ------ ------ ---- ----
Net income....................................... $ 150 $ 149 $ 110 $ 10 $ 19
====== ====== ====== ==== ====
</TABLE>
See accompanying notes.
F-4
<PAGE> 79
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows provided by operating activities:
Net income........................................ $ 150 $ 149 $ 110 $ 10 $ 19
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 31 34 36 9 9
Gain on sale of fixed assets.................... -- (16) (5) -- --
Minority interests.............................. 42 45 45 6 9
Equity in net income of affiliates.............. (20) (9) (21) (9) (4)
Changes in assets and liabilities:
(Increase) decrease in trade receivables... (3) (45) 27 19 31
Decrease (increase) in receivables
from/payables to affiliates............. 30 (63) (1) (123) (8)
(Increase) decrease in inventories......... (17) (30) (20) 2 16
(Increase) decrease in other assets........ 10 (13) (4) (1) 13
(Increase) decrease in accounts payable,
other liabilities and income taxes...... (81) 47 60 37 (39)
----- ----- ----- ----- ----
Net cash (used in) provided by operating
activities...................................... 142 99 227 (50) 46
----- ----- ----- ----- ----
Cash flows (used in) provided by investing
activities:
Capital expenditures.............................. (55) (54) (26) (20) (3)
Proceeds from sale of fixed assets................ 10 41 86 80 2
----- ----- ----- ----- ----
Net cash (used in) provided by investing
activities...................................... (45) (13) 60 60 (1)
----- ----- ----- ----- ----
Cash flows (used in) provided by financing
activities:
(Increase) in intercompany loans.................. (83) (117) (411) (65) (62)
Net capitalization (to) from parent............... (26) 33 184 111 12
----- ----- ----- ----- ----
Net cash (used in) provided by financing
activities...................................... (109) (84) (227) 46 (50)
----- ----- ----- ----- ----
Effect of exchange rate changes on cash........... (3) 1 15 3 (15)
----- ----- ----- ----- ----
Change in cash and cash equivalents............... (15) 3 75 59 (20)
Cash and cash equivalents -- beginning of
period.......................................... 57 42 45 45 120
----- ----- ----- ----- ----
Cash and cash equivalents -- end of period........ $ 42 $ 45 $ 120 $ 104 $100
===== ===== ===== ===== ====
Supplemental cash flow information:
Cash paid for:
Income taxes................................. $ 69 $ 62 $ 118 $ 11 $ 25
Interest..................................... $ 18 $ 12 $ 3 $ 1 $ 1
</TABLE>
See accompanying notes.
F-5
<PAGE> 80
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN CURRENCY SMITHKLINE TOTAL
TRANSLATION BEECHAM SHAREHOLDERS'
ADJUSTMENT EQUITY EQUITY
---------------- ---------- -------------
<S> <C> <C> <C>
Balance at December 31, 1992......................... $(47) $ 838 $ 791
Translation adjustments.............................. (25) -- (25)
Net income........................................... -- 150 150
Net transfers to affiliates.......................... -- (22) (22)
---- ------ ------
Balance at December 31, 1993......................... (72) 966 894
Translation adjustments.............................. 42 -- 42
Net income........................................... -- 149 149
Net transfers from affiliates........................ -- 37 37
---- ------ ------
Balance at December 31, 1994......................... (30) 1,152 1,122
Translation adjustments.............................. 53 -- 53
Net income........................................... -- 110 110
Net transfers from affiliates........................ -- 148 148
---- ------ ------
Balance at December 31, 1995......................... 23 1,410 1,433
Translation adjustments (unaudited).................. (20) -- (20)
Net income (unaudited)............................... -- 19 19
Net transfers from affiliates (unaudited)............ -- 13 13
---- ------ ------
Balance at March 31, 1996 (unaudited)................ $ 3 $1,442 $ 1,445
==== ====== ======
</TABLE>
See accompanying notes.
F-6
<PAGE> 81
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(ALL AMOUNTS SHOWN IN MILLIONS EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In May 1996, SmithKline Beecham Holdings Corporation was formed with the
intent of holding the stock of certain indirectly owned subsidiaries of
SmithKline Beecham plc ("SmithKline Beecham") and its affiliates (collectively,
"SmithKline Beecham Group") in consideration for all of the common and junior
preferred shares of the Company. SmithKline Beecham is a public limited company
incorporated in 1989 under the laws of England.
The combined financial statements include the accounts of the following
SmithKline Beecham affiliates and their related subsidiaries:
Penn Chemicals Ltd
SmithKline Beecham Consumer Healthcare K.K.
SmithKline Beecham Animal Health, Inc.
Franklin Chemicals Limited
Smith Kline & French of Pakistan Ltd
Smith Kline & French B.V.
SmithKline Beecham International Ltd
SmithKline Beecham Laboratories (Australia) Ltd
Walnut Insurance Company Ltd
SmithKline Beecham Holdings S.A.
SmithKline Beecham Corporation (Panama)
Smith Kline & French Portugesa Productos Farmaceuticos Ltd
Compagnie Industrielle De Specialites S.A.
SmithKline Beecham Animal Health Ltd
Eskaylab Holdings Ltd
SBCL Holdings Ltd
Smith Kline & French (Far East) Co.
The combined entity as described above is referred to as the Company in the
accompanying combined financial statements.
This basis of presentation reflects the financial position, results of
operations and cash flows of the Company, including certain adjustments to
recognize certain SmithKline Beecham corporate expenses so as to reflect the
financial statements on the historical cost basis of SmithKline Beecham. Also,
certain transactions with SmithKline Beecham as well as the transfer of net
assets of SmithKline Beecham affiliates to and from the Company have been
reflected in the Company's equity.
All financial information at dates and for periods prior to the transfer of
ownership was prepared as if the Company had existed and operated as a separate
business. All significant intercompany accounts and transactions within the
Company have been eliminated. Such financial information reflects operating
expenses incurred by SmithKline Beecham that are specifically identifiable to
the Company and certain corporate overhead allocations which management believes
represents the amounts that would have been incurred by the Company on a stand
alone basis.
The Company had no significant third party borrowings and there has been no
allocation of SmithKline Beecham's borrowings and related interest expense.
Amounts included in the combined balance sheet as receivables or payables to
affiliates relate to amounts receivable or payable from various SmithKline
Beecham entities (which are not among the entities that comprise the Company)
for transactions entered into during the normal course of business.
F-7
<PAGE> 82
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's principal activities are the manufacture and marketing of
pharmaceuticals and over-the-counter ("OTC") medicines and health-related
consumer products operating in two principal industry segments of
pharmaceuticals and consumer healthcare. In addition, the company participates
in related party lending activity. Its principal markets are France, Brazil,
Japan, Belgium, Austria, Switzerland and Ireland, which together accounted for
66%, 63%, and 73% of sales for 1993, 1994, and 1995 respectively. Since the
operations of the Company are conducted in international markets, the combined
financial results of the Company are subject to exchange rate fluctuations
involving the United States dollar and a number of foreign currencies. The
Company operation's are fully integrated with those of SmithKline Beecham Group
and its overall performance is largely dependent upon the performance of other
units of SmithKline Beecham Group. Moreover, the Company is dependent upon
SmithKline Beecham with respect to new product development, the addition of new
products to the Company's product line and the expansion of the Company's
marketing and distribution activities.
The financial statements conform with generally accepted accounting
principles. Preparation under these principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Interim Financial Information
In management's opinion, all adjustments (consisting of normal recurring
accruals, except for the restructuring accrual in 1995) necessary for a fair
presentation are reflected in the interim financial statements as of and for the
three month periods ended March 31, 1995 and 1996. These financial statements
have not been audited or reviewed by an independent accountant. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
Foreign Currency Translation
The functional currency for substantially all of the Company's foreign
operations is the applicable local currency. The translation from the applicable
foreign currencies to U.S. dollars is performed for balance sheet accounts using
the rates of exchange at the balance sheet date and for revenue and expense
accounts using average rates of exchange for the period. The resulting
translation adjustments are accumulated as a separate component of shareholders'
equity.
The financial statements of foreign subsidiaries located in highly
inflationary economies are remeasured as if the functional currency were the
U.S. dollar. Adjustments resulting from the remeasurement of these entities are
included in the results of operations. Net exchange losses (gains) in 1993, 1994
and 1995, resulting from foreign currency transactions were $15, $24 and $(20),
respectively (including $24, $30 and $2 of translation losses related to
subsidiaries located in highly inflationary economies) and are included in
operating income. Transaction losses on intercompany loans were $34 for the
three months ended March 31, 1996.
Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Unless
otherwise disclosed, the fair value of financial instruments approximates its
recorded value.
F-8
<PAGE> 83
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents are considered to be all highly liquid
investments that have maturities of three months or less. The carrying amount of
cash and cash equivalents is a reasonable estimate of the fair value at December
31, 1994 and 1995.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
by the average cost and first-in, first-out methodologies.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and include interest on
funds borrowed to finance construction. The cost of additions and improvements
are capitalized, while maintenance and repairs are expensed as incurred.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets. Useful lives are estimated to be 20-50 years for buildings
and 2-20 years for machinery and equipment.
Investments in Affiliates
Investments in common stock of companies which are 20-50% owned by the
Company are accounted for using the equity method of accounting. Investments in
common stock of companies that are less than 20% owned by the Company for which
the remaining shares are owned by SmithKline Beecham or its other subsidiaries
are also accounted for using the equity method of accounting as they are
considered to be under common control. All other investments are accounted for
using the cost method.
Goodwill
Goodwill represents the excess of acquisition costs over the fair value of
net assets of purchased businesses and is amortized using the straight-line
method over 40 years.
In 1989, Beecham Group plc purchased SmithKline Beckman. The Company has
reflected goodwill of $400 related to the former operations of SmithKline
Beckman included in its financial statements. Management has included such
amount based on its evaluation of the respective businesses at the time of the
acquisition. Management's estimate of the allocated goodwill was based on a
number of factors primarily the proportion of the Company's sales of SmithKline
Beckman products to SmithKline Beecham sales of SmithKline Beckman products.
Recoverability of goodwill is evaluated based primarily on undiscounted cash
flows from operations.
Income Taxes
Income taxes were determined on a separate company basis in the combined
financial statements and reflect the application of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, for all periods
presented.
Withholding and U.S. income taxes have not been provided on unremitted
earnings of certain subsidiaries because management believes such earnings will
be indefinitely reinvested in operations.
(2) ACQUISITIONS
In October 1994 SmithKline Beecham purchased Sterling Winthrop Inc.
("Sterling") for cash and recorded goodwill arising from the acquisition. The
Company includes Sydney Ross S.A., a Sterling entity
F-9
<PAGE> 84
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
located in Brazil. No pro forma financial information is presented as the impact
on results of operations and financial position is insignificant.
(3) RELATED PARTY TRANSACTIONS
The Company is indirectly wholly owned by SmithKline Beecham and its
operations are integrated with SmithKline Beecham's other operations on a
worldwide basis.
The Company is involved in various transactions with SmithKline Beecham
affiliates as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Royalties paid to SmithKline Beecham affiliates............... $ 65 $ 67 $ 75
Royalties received from SmithKline Beecham affiliates......... $ 7 $ 11 $ 18
Sales to SmithKline Beecham affiliates........................ $350 $437 $318
Cost of sales to SmithKline Beecham affiliates................ $218 $302 $222
Purchases of raw materials and finished goods from SmithKline
Beecham affiliates.......................................... $358 $486 $589
Interest income attributable to SmithKline Beecham
affiliates.................................................. $ 30 $ 18 $ 33
Interest expense attributable to SmithKline Beecham
affiliates.................................................. $ 18 $ 12 $ 2
</TABLE>
The Company and SmithKline Beecham have entered into a number of supply and
license agreements, which are subject to termination on notice of 30 to 180
days.
(4) INVESTMENTS IN AFFILIATES
Upon the transfer of ownership described in Note 1, the Company will own
shares of the common and preferred stock of various affiliated entities. The
Company's preferred stock investments include a 50% voting interest in
SmithKline Beecham Biologicals S.A. ("SB Biologicals S.A".), a Belgian
affiliate. Investments in the preferred stock of affiliates are shown at cost in
the balance sheet. The following table provides information on the Company's
investments accounted for by the equity method. Ownership percentages represent
the Company's ownership of the common stock of the investee.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------------- ----------------------- -----------------------
OWNERSHIP INVESTMENT OWNERSHIP INVESTMENT OWNERSHIP INVESTMENT
PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SmithKline and French Laboratories
Ltd. ............................ 4.40% $ 99 4.40% $ 72 4.40% $ 71
SmithKline Beecham Overseas (No. 2)
Ltd. ............................ 40.00% 30 40.00% 33 40.00% 34
SmithKline Beecham Seiyaku K.K. ... 12.28% 18 12.28% 19 12.28% 18
---- ---- ----
$147 $124 $123
==== ==== ====
</TABLE>
F-10
<PAGE> 85
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information for the Company's equity investees and
their wholly and majority owned subsidiaries is shown below on a 100 percent
basis.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1994 1995 1996
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET:
Current assets........................................ $2,907 $2,386 $ 2,393
Noncurrent assets..................................... 328 358 318
------ ------ ------
Total assets........................................ $3,235 $2,744 $ 2,711
====== ====== ======
Current liabilities................................... $ 758 $ 868 $ 862
Noncurrent liabilities................................ 6 2 3
------ ------ ------
Total liabilities................................... $ 764 $ 870 $ 865
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ---------------
1993 1994 1995 1995 1996
------ ------ ------ ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales................................ $1,241 $1,233 $1,253 $294 $279
Operating income......................... 386 324 395 151 35
Income before income taxes............... 661 363 572 206 72
Net income............................... 489 195 386 196 64
</TABLE>
(5) FOREIGN FINANCIAL INSTRUMENTS AND INVESTMENT
The Company's foreign subsidiaries enter into foreign exchange contracts
with related parties to hedge against fluctuating exchange rates for certain
transactions (such as export sales, raw material purchases, and short term
intercompany financing) denominated in a currency other than their local
currency, primarily British Pound (BP), French Franc (FF), Belgian Franc (BF),
Irish Punt (IP) and Singapore Dollar (SD). At December 31, 1994 and 1995, the
Company had contracts outstanding totaling $135 and $648, respectively, which
mature primarily over a twelve-month period. Gains and losses on currency
transactions in other than the functional currency are included in income when
incurred. Cash flows from these contracts are classified in the same category as
the hedged transactions. The Company estimates the aggregate contract value to
be representative of the fair value of these instruments.
The company's principal foreign currency net investment exposures are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
---------------------- ---------------------- ----------------------
LOCAL U.S. DOLLAR LOCAL U.S. DOLLAR LOCAL U.S. DOLLAR
CURRENCY EQUIVALENT CURRENCY EQUIVALENT CURRENCY EQUIVALENT
-------- ----------- -------- ----------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
France.................... FF 1,630 $ 304 FF 1,988 $ 406 FF 2,009 $ 401
United Kingdom............ BP 85 $ 133 BP 67 $ 108 BP 70 $ 108
Switzerland............... SF 88 $ 67 SF 90 $ 78 SF 89 $ 75
Japan..................... JY 6,692 $ 67 JY 6,026 $ 59 JY 6,013 $ 56
Ireland................... IP 73 $ 112 IP 29 $ 46 IP 26 $ 41
Belgium................... BF 2,910 $ 91 BF 1,187 $ 40 BF 1,124 $ 37
Brazil.................... BR 36 $ 42 BR 42 $ 44 BR 49 $ 49
Singapore................. SD 80 $ 54 SD 60 $ 43 SD 56 $ 40
</TABLE>
F-11
<PAGE> 86
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INVENTORIES
Inventories consist of the following and are shown net of total inventory
reserves of $8, $9 and $8 at December 31, 1994 and 1995, and March 31, 1996,
respectively:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished products........................................ $ 77 $ 93 $ 89
Work in process.......................................... 45 35 39
Raw materials and supplies............................... 53 67 49
---- ---- ----
$175 $195 $ 177
==== ==== ====
</TABLE>
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land..................................................... $ 8 $ 8 $ 8
Buildings................................................ 101 95 95
Machinery and equipment.................................. 344 274 274
---- ---- ----
453 377 377
Less: accumulated depreciation........................... (202) (187) (194)
---- ---- ----
$251 $190 $ 183
==== ==== ====
</TABLE>
During 1995, in addition to other fixed asset sales, the Company sold fixed
assets with a book value of $74 to an affiliated entity for an amount that
approximated cost. Depreciation expense for the Company was approximately $19 in
1993, $23 in 1994, $23 in 1995 and $6 during the three month periods ended March
31, 1995 and 1996.
(8) GOODWILL
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill at cost......................................... $482 $483 $ 482
Less: accumulated amortization........................... (61) (74) (75)
---- ---- ----
$421 $409 $ 407
==== ==== ====
</TABLE>
Amortization expense was $12 in 1993, $11 in 1994 and $13 in 1995 and $2
during the three month period ended March 31, 1995 and 1996.
F-12
<PAGE> 87
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
-------------------- ---------------
1993 1994 1995 1995 1996
--- --- ---- --- ---
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total current non-U.S. tax expense.............. $66 $76 $124 $10 $12
Total deferred non-U.S. tax expense............. (5) 5 (15) -- --
--- --- ---- --- ---
$61 $81 $109 $10 $12
=== === ==== === ===
</TABLE>
The reconciliation between the U.S. federal statutory income tax rate and
the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
---------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
U.S. federal statutory income tax rate...... 35.0% 35.0% 35.0% 35.0% 35.0%
Tax exempt foreign income................... 2.6 (.3) 1.8 1.8 (1.2)
Tax rate differential....................... (6.1) (5.3) 2.3 2.3 (0.6)
Minority interest........................... 5.0 7.6 6.9 6.9 6.9
Net operating losses........................ (2.6) (2.4) -- -- --
Equity income in affiliates................. (3.1) (1.3) (3.1) (3.1) (3.1)
Incentive credits........................... -- (1.3) (.3) (.3) (.3)
French exceptional surcharge tax............ -- -- 2.1 2.1 --
Other....................................... (1.9) 3.2 5.1 5.1 2.0
---- ---- ---- ---- ----
28.9% 35.2% 49.8% 49.8% 38.7%
==== ==== ==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The following is a
summary of the significant components of the Company's deferred tax assets and
liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ MARCH 31,
1994 1995 1996
---- --- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses.................................... $ 10 $ 7 $ 7
Restructuring........................................... -- 6 6
Other accrued liabilities............................... 3 9 9
---- --- ---
13 22 22
Valuation allowance..................................... (10) (7) (7)
---- --- ---
3 15 15
Deferred tax liabilities:
Depreciation............................................ (11) (7) (7)
---- --- ---
Net deferred income tax asset (liability)................. $ (8) $ 8 $ 8
==== === ===
</TABLE>
F-13
<PAGE> 88
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(10) RETIREMENT PLANS
In accordance with local country practices, the Company contributes to
statutory retirement programs as required by law. Where retirement benefits are
not provided by the law, the Company may operate various types of retirement
plans, which include defined benefit plans. Contributions to the defined benefit
plans are determined in accordance with independent actuarial advice mainly
using the projected unit credit method. Assumptions used in actuarial
calculations vary by country and are based on local economic conditions. The
assets of the Company sponsored plans are generally held in separately
administered trusts or are insured. Retirement plan assets are managed by
independent professional investment managers. It is the Company's policy that
none of the assets of the funds are invested directly or indirectly in any
affiliated company. The Company's retirement plan assets and projected benefit
obligation are not material to the Company's financial position.
Total retirement plan expense for the Company was $1, $1, and $2 in 1993,
1994, and 1995, respectively. The total liability recorded for pension costs at
December 31, 1994 and 1995 was $9 and $11, respectively.
(11) COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain facilities, equipment and automobiles. Certain
of the leases provide for the payment of taxes, insurance and other charges by
the lessee. Rental expense was $13, $12 and $11 in 1993, 1994 and 1995,
respectively. Future minimum rental payments required under non-cancelable
operating leases that have initial or remaining terms of more than one year as
of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996................................................................... $ 9
1997................................................................... 7
1998................................................................... 6
1999................................................................... 5
2000 and thereafter.................................................... 17
---
Total minimum lease payments........................................... $44
===
</TABLE>
At December 31, 1995 the Company has approximately $62 in letters of credit
outstanding with the Toronto Dominion Bank. The letters are required by Canadian
taxation authorities with respect to pending litigation. The letters are
unconditionally guaranteed by SmithKline Beecham Corporation, a wholly owned
subsidiary of SmithKline Beecham. The company is required to pay a commitment
fee to the bank of .25% per annum. In the opinion of management, any liabilities
related to the pending tax litigation, in excess of those reflected in the
financial statements, would not be material to the Company's combined financial
position at December 31, 1995.
The Company believes that it is in compliance with all environmental laws
and regulations in the various countries of operation. The Company incurs
routine annual costs aimed at ensuring continued compliance, which were $5 in
1995, with similar amounts expensed in 1993 and 1994. In addition, the Company
makes annual capital expenditures to install or improve waste treatment
processes as considered necessary. Such expenditures in 1995 were $3, which also
approximates expenditures for 1993 and 1994.
The Company is involved in various legal and administrative proceedings
related to its business. Although the outcome of claims, legal proceedings and
other matters in which the Company is involved cannot be predicted with any
certainty, management does not expect the Company's ultimate liability for such
matters to have a material adverse effect on its financial condition.
F-14
<PAGE> 89
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(12) BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
Financial information about the Company's business segments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Net sales:
Pharmaceuticals........................................ $1,106 $1,285 $1,445
Consumer Healthcare.................................... 175 205 253
------ ------ ------
Total.......................................... $1,281 $1,490 $1,698
====== ====== ======
Operating income:
Pharmaceuticals........................................ $ 222 $ 225 $ 201
Consumer Healthcare.................................... 2 15 17
------ ------ ------
Total.......................................... $ 224 $ 240 $ 218
====== ====== ======
Identifiable assets at December 31:
Pharmaceuticals........................................ $1,505 $1,623 $2,456
Consumer Healthcare.................................... 127 230 159
------ ------ ------
Total.......................................... $1,632 $1,853 $2,615
====== ====== ======
Capital expenditures:
Pharmaceuticals........................................ $ 51 $ 52 $ 25
Consumer Healthcare.................................... 4 2 1
------ ------ ------
Total.......................................... $ 55 $ 54 $ 26
====== ====== ======
Depreciation:
Pharmaceuticals........................................ $ 17 $ 20 $ 21
Consumer Healthcare.................................... 2 3 2
------ ------ ------
Total.......................................... $ 19 $ 23 $ 23
====== ====== ======
</TABLE>
F-15
<PAGE> 90
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information about the Company's continuing operations in
different geographic areas is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Net sales to customers:
Europe................................................. $ 806 $1,064 $1,128
Latin America.......................................... 136 153 235
Asia................................................... 170 119 156
Rest of the world...................................... 169 154 179
------ ------ ------
Total.......................................... $1,281 $1,490 $1,698
====== ====== ======
Operating income:
Europe................................................. $ 157 $ 158 $ 112
Latin America.......................................... 9 27 50
Asia................................................... 24 20 23
Rest of the world...................................... 34 35 33
------ ------ ------
Total.......................................... $ 224 $ 240 $ 218
====== ====== ======
Identifiable assets at December 31:
Europe................................................. $1,329 $1,447 $2,146
Latin America.......................................... 30 135 187
Asia................................................... 173 194 207
Rest of the world...................................... 100 77 75
------ ------ ------
Total.......................................... $1,632 $1,853 $2,615
====== ====== ======
</TABLE>
(13) RESTRUCTURING
In the first quarter of 1995, the Company recorded a restructuring charge
of $60. This relates principally to the reorganization of the Company's supply
chain in Singapore ($30), the integration of Consumer Healthcare operations
($25), and the creation of shared services across all business operations in
finance, information resources, human resources and purchasing ($5).
The major components of the restructuring charges are $37 of employee
separation costs and $16 of non-cash charges to dispose of certain assets
through sale or abandonment. Through the year ended December 31, 1995 $25 of
restructuring charges were incurred, which included $22 of employee separation
costs and $1 of non-cash charges to dispose of assets.
The restructuring plan is expected to result in the termination of
approximately 475 employees. The reduction through December 31, 1995 was 222
employees.
(14) REORGANIZATION
In May 1996, the Company's directors authorized the Company to file a
registration statement with the Securities and Exchange Commission in connection
with an initial public offering of Flexible Auction Market Preferred Stock
(AMPS) and Flexible Money Market Cumulative Preferred Stock (MMPS). Both the
AMPS and MMPS have a non-call feature and the certificate of designation of
their shares will provide that the Company may not put itself into liquidation
without the prior approval of two-thirds of the holders of each Series.
F-16
<PAGE> 91
PREDECESSOR COMPANIES TO SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On June 20, 1996, the Company entered into a share exchange agreement with
SmithKline Beecham International Co., SmithKline Beecham Corporation and SBCL,
Inc. (the Transferors). Under this agreement, the Transferors shall record or
otherwise give legal effect to the transfer to SmithKline Beecham Holdings
Corporation shares of capital stock of specified subsidiaries (Subsidiary
Shares) with effect from the date of the agreement. As consideration for the
transfer of Subsidiary Shares, the Company shall issue to each of the
Transferors shares of its common stock (10,000 shares authorized, 2,935.2 shares
issued) and junior preferred stock (10 shares authorized, 9.719 shares issued).
F-17
<PAGE> 92
APPENDIX A
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix A constitutes a
representation by the Company that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix B hereto, as the case
may be.
I. On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Auction Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of any Existing Holder or Potential Holder of:
(A) the Applicable Rate fixed for the next succeeding Dividend Period;
(B) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(C) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
or a Sell Order on behalf of an Existing Holder, the number of Shares, if
any, to be sold by such Existing Holder;
(D) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Holder, the number of Shares, if any, to be
purchased by such Potential Holder;
(E) if the aggregate number of Shares to be sold by all Existing
Holder on whose behalf such Broker-Dealer submitted a Bid or a Sell Order
exceeds the aggregate number of Shares to be purchased by all Potential
Holders on whose behalf such Broker-Dealer submitted a Bid, the name or
names of one or more Buyer's Broker-Dealers (and the name of the Agent
Member, if any, of each such Buyer's Broker-Dealer) acting for one or more
purchasers of such excess number of Shares and the number of such Shares to
be purchased from one or more Existing Holder on whose behalf such
Broker-Dealer acted by one or more Potential Holders on whose behalf each
of such Buyer's Broker-Dealers acted;
(F) if the aggregate number of Shares to be purchased by all Potential
Holders on whose behalf such Broker-Dealer submitted a Bid exceeds the
aggregate number of Shares to be sold by all Existing Holders on whose
behalf such Broker-Dealer submitted a Bid or a Sell Order, the name or
names of one or more Seller's Broker-Dealers (and the name of the Agent
Member, if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess number of Shares and the number of such Shares to be
sold to one or more Potential Holder on whose behalf such Broker-Dealer
acted by one or more Existing Holders on whose behalf each of such Seller's
Broker-Dealers acted; and
(G) the Auction Date of the next succeeding Auction with respect to
the Shares.
II. On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Holder or Potential Holder shall:
(A) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Holder on whose behalf such Broker-Dealer submitted
a Bid that was accepted, in whole or in part, to instruct such Potential
Holder's Agent Member to pay to such Broker-Dealer (or its Agent Member)
through the Securities Depository the amount necessary to purchase the
number of Shares to be purchased pursuant to such Bid against receipt of
such Shares and advise such Potential Holder of the Applicable Rate for the
next succeeding Dividend Period;
(B) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Holder on whose behalf such Broker-Dealer submitted
a Sell Order that was accepted, in whole or in part, or a Bid that was
accepted, in whole or in part, to instruct such Existing Holder's Agent
Member to deliver to such Broker-Dealer (or its Agent Member) through the
Securities Depository the number of Shares to
A-1
<PAGE> 93
be sold pursuant to such Order against payment therefor and advise any such
Existing Holder that will continue to hold Shares of the Applicable Rate
for the next succeeding Dividend Period;
(C) advise each Existing Holder on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend Period;
(D) advise each Existing Holder on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(E) advise each Potential Holder on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, of the Auction Date
for the next succeeding Auction.
III. On the basis of the information provided to it pursuant to (I) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a Potential
Holder or an Existing Holder shall, in such manner and at such time or times as
in its sole discretion it may determine, allocate any funds received by it
pursuant to (II)(A) above and any Shares received by it pursuant to (II)(B)
above among the Potential Holders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Holders, if any, on whose behalf such Broker-Dealer
submitted Bids that were accepted or Sell Orders, and any Broker-Dealer or
Broker-Dealers identified to it by the Auction Agent pursuant to (I)(E) or
(I)(F) above.
IV. On each Auction Date:
(A) each Potential Holder and Existing Holder shall instruct its Agent
Member as provided in (II) (A) or (B) above, as the case may be;
(B) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (1) pay through
the Securities Depository to the Agent Member of the Existing Holder
delivering Shares to such Broker-Dealer pursuant to (II)(B) above the
amount necessary to purchase such Shares against receipt of such Shares,
and (2) deliver such Shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's
Broker-Dealer pursuant to (I)(E) above against payment therefor; and
(C) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (1) pay through
the Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (I) (F) above the amount necessary to purchase the
Shares to be purchased pursuant to (II)(A) above against receipt of such
Shares, and (2) deliver such Shares through the Securities Depository to
the Agent Member of the purchaser thereof against payment therefor.
V. On the day after the Auction Date:
(A) each Bidder's Agent Member referred to in (IV)(A) above shall
instruct the Securities Depository to execute the transactions described in
(II)(A) or (B) above, and the Securities Depository shall execute such
transactions;
(B) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (IV)(B)
above, and the Securities Depository shall execute such transactions; and
(C) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (IV)(C)
above, and the Securities Depository shall execute such transactions.
VI. If an Existing Holder selling Shares in an Auction fails to deliver
such Shares (by authorized book-entry), a Broker-Dealer may deliver to the
Potential Holder on behalf of which it submitted a Bid that was accepted a
number of whole Shares that is less than the number of Shares that otherwise was
to be purchased by such Potential Holder. In such event, the number of Shares to
be so delivered shall be determined solely by such Broker-Dealer. Delivery of
such lesser number of Shares shall constitute good delivery. Notwithstanding the
foregoing terms of this paragraph (VI), any delivery or non-delivery of Shares
which shall represent any
A-2
<PAGE> 94
departure from the results of an Auction, as determined by the Auction Agent,
shall be of no effect unless and until the Auction Agent shall have been
notified of such delivery or non-delivery in accordance with the provisions of
the Auction Agent Agreement and the Broker-Dealer Agreements.
A-3
<PAGE> 95
APPENDIX B
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Certificate
of Designations relating to the Shares of such Series, and will be incorporated
by reference in the Auction Agent Agreement and each Broker-Dealer Agreement.
The terms not defined below are defined in the forepart of this Prospectus.
Nothing contained in this Appendix B constitutes a representation by the Company
that in each Auction each party referred to herein actually will perform the
procedures described herein to be performed by such party.
PARAGRAPH 7(a) CERTAIN DEFINITIONS.
As used in this paragraph 7, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "Auction Date" means the first Business Day preceding the first
day of each Subsequent Dividend Period.
(ii) "Available Shares" has the meaning specified in paragraph
7(d)(i) below.
(iii) "Bid" has the meaning specified in paragraph 7(b)(i) below.
(iv) "Bidder" has the meaning specified in paragraph 7(b)(i) below.
(v) "Hold Order" has the meaning specified in paragraph 7(b)(i)
below.
(vi) "Maximum Applicable Rate" for any Subsequent Dividend Period
will be the Applicable Percentage of the Reference Rate. The "Applicable
Percentage" will be determined based on the lower of the credit rating or
ratings assigned on such date to such Shares by Moody's and S&P (or if
Moody's or S&P or both shall not make such rating available, the equivalent
of either or both of such ratings by a Substitute Rating Agency or two
Substitute Rating Agencies or, in the event that only one such rating shall
be available, such rating) as follows:
<TABLE>
<CAPTION>
CREDIT RATING APPLICABLE
- -------------------------------------- PERCENTAGE OF
MOODY'S S&P REFERENCE RATE
- --------------------- ------------- --------------
<S> <C> <C>
"aa3" or higher AA- or Higher 110%
"a3" to "a1" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
Below "baa3" Below BBB- 200%
</TABLE>
provided, however, that, if at 9:00 A.M., New York City time, on any
Auction Date, (i) the rating of any Shares by Moody's shall be on the
"Corporate Credit Watch List" of Moody's with a designation of "downgrade"
or "uncertain," (ii) the rating of any Shares by S&P shall be on the
"CreditWatch" of S&P with a designation of "negative implications" or
"developing" or (iii) if Moody's or S&P, or both, shall not make such a
rating available, the rating of any Shares by any Substitute Rating Agency
shall be on the substantial equivalent of clause (i) or (ii) above, then
the Maximum Applicable Rate for the Shares to which such Auction Date
relates will be determined pursuant to an Applicable Percentage based on
the credit rating that is one full level lower in the above table.
The Company shall take all reasonable action necessary to enable S&P and
Moody's (and, as appropriate, any Substitute Rating Agency or Substitute
Rating Agencies) to provide a rating for each Series of Shares. If either
S&P or Moody's shall not make such a rating available, or neither S&P nor
Moody's shall make such a rating available, the Company, after consultation
with the Broker-Dealers or their affiliates and successors, shall select a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating
Agency or Substitute Rating Agencies, as the case may be.
B-1
<PAGE> 96
(vii) "Order" has the meaning specified in paragraph 7(b)(i) below.
(viii) "Sell Order" has the meaning specified in paragraph 7(b)(i)
below.
(ix) "Shares" means the Shares subject to the related Auction
pursuant to this paragraph 7.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on
any Auction Date or such other time on the Auction Date as may be specified
by the Auction Agent from time to time as the time by which each
Broker-Dealer must submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph 7(d)(i)
below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
7(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph
7(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
7(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in
paragraph 7(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph
7(d)(i) below.
PARAGRAPH 7(b) ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS.
(i) Beneficial owners and potential beneficial owners may only participate
in Auctions through their Broker-Dealers. Broker-Dealers will submit the Orders
of their respective customers who are beneficial owners and potential beneficial
owners to the Auction Agent, designating themselves (unless otherwise permitted
by the Company) as Existing Holders in respect of Shares subject to Orders
submitted or deemed submitted to them by beneficial owners and as Potential
Holders in respect of Shares subject to Orders submitted to them by potential
beneficial owners. A Broker-Dealer may also hold Shares in its own account as a
beneficial owner or wish to purchase Shares for its own account as a potential
beneficial owner. A Broker-Dealer may thus submit Orders to the Auction Agent as
a beneficial owner or a potential beneficial owner and therefore participate in
an Auction as an Existing Holder or Potential Holder on behalf of both itself
and its customers.
Prior to the Submission Deadline on each Auction Date:
(A) each Existing Holder may submit to its Broker-Dealer information
by telephone or otherwise as to:
(1) the number of Outstanding Shares, if any, held by such Existing
Holder which such Existing Holder desires to continue to hold without
regard to the Applicable Rate for the next succeeding Subsequent
Dividend Period;
(2) the number of Outstanding Shares, if any, held by such Existing
Holder which such Existing Holder desires to continue to hold, provided
that the Applicable Rate for the next succeeding Subsequent Dividend
Period shall not be less than the rate per annum specified by such
Existing Holder; and/or
(3) the number of Outstanding Shares, if any, held by such Existing
Holder which such Existing Holder offers to sell without regard to the
Applicable Rate for the next succeeding Subsequent Dividend Period; and
(B) each Broker-Dealer will contact Potential Holders by telephone or
otherwise to determine whether such Potential Holders desire to submit Bids
in which such Potential Holders will indicate the number of Outstanding
Shares, if any, which each such Potential Holder offers to purchase,
provided that the Applicable Rate for the next succeeding Subsequent
Dividend Period shall not be less than the rate per annum specified by such
Holder.
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For the purposes hereof, the communication by an Existing Holder pursuant
to clause (A) above or by a Potential Holder pursuant to clause (B) above to a
Broker-Dealer, or the communication by a Broker-Dealer acting for its own
account to the Auction Agent, of information referred to in clause (A) or (B) of
this paragraph 7(b)(i) is hereinafter referred to as an "Order" and each
Existing Holder and each Potential Holder placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder"; an Order containing the information referred to in
clause (A)(1) of this paragraph 7(b)(i) is hereinafter referred to as a "Hold
Order"; an Order containing the information referred to in clause (A)(2) or (B)
of this paragraph 7(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this paragraph
7(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of Outstanding Shares specified in such Bid if the
Applicable Rate determined on such Auction Date shall be less than the
rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding Shares to be
determined as set forth in paragraph 7(e)(i)(D) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein; or
(3) a lesser number of Outstanding Shares to be determined as set
forth in paragraph 7(e)(ii)(C) if such specified rate per annum shall be
higher than the Maximum Applicable Rate and Sufficient Clearing Bids do
not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding Shares specified in such Sell Order;
or
(2) such number or a lesser number of Outstanding Shares to be
determined as set forth in paragraph 7(e)(ii)(C) if Sufficient Clearing
Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of Outstanding Shares specified in such Bid if the
Applicable Rate determined on such Auction Date shall be higher than the
rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding Shares to be
determined as set forth in paragraph 7(e)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein.
PARAGRAPH 7(c) SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's auction processing system to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer for the
Auction to be conducted on such Auction Date, designating itself (unless
otherwise permitted by the Company) as an Existing Holder or a Potential Holder
in respect of Shares subject to such Orders, and specifying with respect to each
Order:
(A) the name of the Bidder placing each Order (which shall be the
Broker-Dealer unless otherwise permitted by the Company);
(B) the aggregate number of Outstanding Shares that are the subject of
such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding Shares, if any, subject to any Hold
Order placed by such Existing Holder;
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(2) the number of Outstanding Shares, if any, subject to any Bid
placed by such Existing Holder and the rate per annum specified in such
Bid; and
(3) the number of Outstanding Shares, if any, subject to any Sell
Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering in the aggregate all of the
Outstanding Shares held by an Existing Holder are not submitted to the Auction
Agent prior to the Submission Deadline for any reason (including the failure of
a Broker-Dealer to contact any Existing Holder or to submit an Order covering
such Existing Holder's Order or Orders), the Auction Agent shall deem a Hold
Order (in the case of an Auction relating to a Regular Dividend Period) and a
Sell Order (in the case of an Auction relating to a Special Dividend Period) to
have been submitted on behalf of such Existing Holder covering the number of
Outstanding Shares held by such Existing Holder and not subject to Orders
submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of Outstanding Shares held by such Existing
Holder are submitted to the Auction Agent, such Order shall be considered valid
as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of Outstanding Shares
held by such Existing Holder; provided that if more than one Hold Order is
submitted on behalf of such Existing Holder and the number of Shares
subject to such Hold Orders exceeds the number of Outstanding Shares held
by such Existing Holder, the number of Shares subject to each of such Hold
Orders shall be reduced pro rata so that such Hold Orders, in the
aggregate, will cover exactly the number of Outstanding Shares held by such
Existing Holder;
(B) (I) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of Outstanding Shares held by
such Existing Holder over the number of Shares subject to any Hold Order
referred to in paragraph 7(c)(iv)(A) above; (II) if more than one Bid
submitted on behalf of such Existing Holder specifies the same rate per
annum and together they cover more than the remaining number of Shares that
can be the subject of valid Bids after application of paragraph 7(c)(iv)(A)
above and of subclause (I) of this paragraph 7(c)(iv)(B) to any Bid or Bids
specifying a lower rate or rates per annum, the number of Shares subject to
each of such Bids shall be reduced pro rata so that such Bids, in the
aggregate, cover exactly such remaining number of Shares; and (III) subject
to subclauses (I) and (II) above, if more than one Bid submitted on behalf
of such Existing Holder specifies different rates per annum, such Bids
shall be considered valid in the ascending order of their respective rates
per annum and in any such event the number of Shares, if any, subject to
Bids not valid under this paragraph 7(c)(iv)(B) shall be treated as the
subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding Shares held by such Existing Holder
over the number of Shares subject to Hold Orders referred to in paragraph
7(c)(iv)(A) and valid Bids referred to in paragraph 7(c)(iv)(B); provided
that if more than one Sell Order is submitted on behalf of any Existing
Holder and the number of Shares subject to such Sell Orders is greater than
such excess, the number of Shares subject to each of such Sell Orders shall
be reduced pro rata so that such Sell Orders, in the aggregate, cover
exactly the number of Shares equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number of
Shares specified.
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(vi) Any Order submitted by a Existing Holder or a Potential Holder to its
Broker-Dealer, and any Order submitted by a Broker-Dealer to the Auction Agent,
prior to the Submission Deadline on any Auction Date, shall be irrevocable.
PARAGRAPH 7(d) DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted by the
Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Holder
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding Shares over the
number of Outstanding Shares that are the subject of Submitted Hold Orders
(such excess being hereinafter referred to as the "Available Shares");
(B) from the Submitted Orders whether the number of Outstanding Shares
that are the subject of Submitted Bids by Potential Holders specifying one
or more rates per annum equal to or lower than the Maximum Applicable Rate
exceeds or is equal to the sum of:
(1) the number of Outstanding Shares that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding Shares that are subject to Submitted
Sell Orders (if such excess or such equality exists (other than because
the number of Outstanding Shares in clause (1) above and this clause (2)
are each zero because all of the Outstanding Shares are the subject of
Submitted Hold Orders), such Submitted Bids by Potential Holders being
hereinafter referred to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that, if:
(1) each Submitted Bid from Existing Holders specifying the Winning
Bid Rate and all other Submitted Bids from Existing Holders specifying
lower rates per annum were rejected, thus entitling such Existing
Holders to continue to hold the Shares that are the subject of such
Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential Holders to purchase the Shares that are the subject of such
Submitted Bids,
would result in the number of Shares subject to all Submitted Bids specifying
the Winning Bid Rate or a lower rate per annum being at least equal to the
Available Shares.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to paragraph 7(d)(i), the Auction Agent shall advise the Company of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Subsequent Dividend Period shall be equal to the
Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the Outstanding Shares are the subject of Submitted Hold Orders), that
the Subsequent Dividend Period next succeeding the Auction shall
automatically be a Regular Dividend Period and the Applicable Rate for such
next succeeding Subsequent Dividend Period shall be equal to the Maximum
Applicable Rate; or
(C) if all of the Outstanding Shares are the subject of Submitted Hold
Orders, that the Subsequent Dividend Period next succeeding the Auction
shall automatically be a Regular Dividend Period and the
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Applicable Rate for such next succeeding Subsequent Dividend Period shall
be equal to 59% of the Reference Rate in effect on the date of such
Auction.
PARAGRAPH 7(e) ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL
ORDERS AND ALLOCATION OF SHARES.
Based on the determinations made pursuant to paragraph 7(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 7(e)(iii) and paragraph 7(e)(iv), Submitted Bids and Submitted Sell
Orders shall be accepted or rejected in the following order of priority and all
other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the Outstanding Shares that are
the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding Shares that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding Shares that are the subject of such Submitted Bid, unless the
number of Outstanding Shares subject to all such Submitted Bids shall be
greater than the excess (the "Remaining Excess") of the Available Shares
over the number of Outstanding Shares subject to Submitted Bids described
in paragraph 7(e)(i)(B) and paragraph 7(e)(i)(C), in which event the
Submitted Bids of each such Existing Holder shall be accepted, and each
such Existing Holder shall be required to sell Outstanding Shares, but only
in an amount equal to the difference between (1) the number of Outstanding
Shares then held by such Existing Holder subject to such Submitted Bid and
(2) the number of Shares obtained by multiplying (x) the number of
Remaining Excess by (y) a fraction the numerator of which shall be the
number of Outstanding Shares held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the sum of the number
of Outstanding Shares subject to such Submitted Bids made by all such
Existing Holders that specified a rate per annum equal to the Winning Bid
Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted but
only in an amount equal to the number of Outstanding Shares obtained by
multiplying (x) the difference between the Available Shares and the number
of Outstanding Shares subject to Submitted Bids described in paragraph
7(e)(i)(B), paragraph 7(e)(i)(C) and paragraph 7(e)(i)(D) by (y) a fraction
the numerator of which shall be the number of Outstanding Shares subject to
such Submitted Bid and the denominator of which shall be the sum of the
number of Outstanding Shares subject to such Submitted Bids made by all
such Potential Holders that specified rates per annum equal to the Winning
Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the Outstanding Shares are subject to Submitted Hold Orders), subject to the
provisions of paragraph 7(e)(iii), Submitted Orders
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shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
Outstanding Shares that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus requiring such Potential Holder to purchase the Outstanding
Shares that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and
the Submitted Sell Orders of each Existing Holder shall be accepted, in
both cases only in an amount equal to the difference between (1) the number
of Outstanding Shares then held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and (2) the number of Shares obtained
by multiplying (x) the difference between the Available Shares and the
aggregate number of Outstanding Shares subject to Submitted Bids described
in paragraph 7(e)(ii)(A) and paragraph 7(e)(ii)(B) by (y) a fraction the
numerator of which shall be the number of Outstanding Shares held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the number of Outstanding Shares subject
to all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph 7(e)(i) or
paragraph 7(e)(ii), any Existing Holder would be entitled or required to sell,
or any Potential Holder would be entitled or required to purchase, a fraction of
a Share on any Auction Date, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, round up or down the number of Shares to be
purchased or sold by any Existing Holder or Potential Holder on such Auction
Date so that each Outstanding Share purchased or sold by each Existing Holder or
Potential Holder on such Auction Date shall be a whole Share.
(iv) If, as a result of the procedures described in paragraph 7(e)(i), any
Potential Holder would be entitled or required to purchase less than a whole
Share on any Auction Date, the Auction Agent shall, in such manner as in its
sole discretion it shall determine, allocate Shares for purchase among Potential
Holders so that only whole Shares are purchased on such Auction Date by any
Potential Holder, even if such allocation results in one or more of such
Potential Holders not purchasing any Shares on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of
Outstanding Shares to be purchased and the aggregate number of the Outstanding
Shares to be sold by such Potential Holders and Existing Holders and, to the
extent that such aggregate number of Outstanding Shares to be purchased and such
aggregate number of Outstanding Shares to be sold differ, the Auction Agent
shall determine to which other Broker-Dealer or Broker-Dealers acting for one or
more purchasers such Broker-Dealer shall deliver, or from which other
Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, Outstanding Shares.
PARAGRAPH 7(f) SUSPENSION OF AUCTION DURING NON-PAYMENT PERIOD.
Upon occurrence and during the continuance of a Non-Payment Period with
respect to Shares of any Series that has not been duly cured by the Company
pursuant to paragraph 2(c)(i), Auctions of such Shares shall be suspended and
shall not resume in each case until (A) in the case of a Dividend Non-Payment
Period, all accumulated and unpaid dividends on such Shares for all past
Dividend Periods shall have been paid to the Auction Agent, or (B) in the case
of a Redemption Non-Payment Period in connection with an Optional Redemption or
Repurchase of less than all of the Shares of any Series, all amounts payable
upon such Optional Redemption or Repurchase of such Shares shall have been paid
to the Auction Agent, in each case by 12:00 noon, New York City time, on the
relevant Auction Date with respect to such Shares, provided that, at least two
Business Days but no more than 30 days prior to such Auction Date, the Company
shall have given
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the Auction Agent, the Securities Depository and the applicable holders of
record written notice of such deposit or availability.
PARAGRAPH 7(g) REGISTRATION UNDER SECURITIES EXCHANGE ACT.
If the Company shall determine, as a result of a change in applicable law,
regulation or rule (or interpretation thereof by the Securities and Exchange
Commission or its staff) and based upon written advice of independent legal
counsel of recognized standing selected by the Company, that there is a
significant possibility that the Company would be required to register Shares of
any Series that may be outstanding from time to time pursuant to the Securities
Exchange Act if there were 500 or more different beneficial owners of Shares of
all Series, the Auction Procedures will be modified so that no Auction will
result in there being more than a total number of different beneficial owners of
Shares of all Series as such counsel shall specify in such written advice;
provided that in no event shall the Auction Procedures be modified in such a way
that they would restrict the total number of different beneficial owners for
Shares of any Series to be less than 40.
PARAGRAPH 7(h) MISCELLANEOUS.
The Company may interpret the provisions of this paragraph 7 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change or
modification that does not substantially adversely affect the rights of Existing
Holders of Shares. An Existing Holder (A) may sell, transfer or otherwise
dispose of Shares only pursuant to a Bid or Sell Order in accordance with the
procedures described in this paragraph 7 through a Broker-Dealer, except that
transfers of Shares may also be effected through means other than pursuant to
Auctions provided that each such transfer shall be valid and accepted by the
Auction Agent only if such Existing Holder or its Broker-Dealer or Agent Member,
as applicable, shall have advised the Auction Agent in writing of such transfer
by 3:00 P.M. on the Business Day next preceding the Auction Date with respect to
such Shares, and (B) except as otherwise required by law, shall have the
ownership of the Shares held by it maintained in book entry form by the
Securities Depository in the account of its Agent Member, which in turn will
maintain records of such Existing Holder's beneficial ownership. Neither the
Company nor any Affiliate shall submit an Order in any Auction. Any Existing
Holder that is an Affiliate shall not sell, transfer or otherwise dispose of
Shares to any Person other than the Company. All of the Outstanding Shares of a
Series shall be represented by one or more certificates registered in the name
of the nominee of the Securities Depository unless otherwise required by law or
unless there is no Securities Depository. If there is no Securities Depository,
at the Company's option and upon its receipt of such documents as it deems
appropriate, such Shares may be registered in the stock register in the name of
the Existing Holder thereof and such Existing Holder thereupon will be entitled
to receive certificates therefor and required to deliver certificates therefor
upon transfer or exchange thereof.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY AGENT OR UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR
ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Underwriting................................ S-2
PROSPECTUS
Available Information....................... 2
Incorporation of Certain Information by
Reference................................. 2
Enforceability of Civil Liabilities Against
Foreign Persons........................... 3
Exchange Rate Information................... 3
Prospectus Summary.......................... 4
Risk Factors................................ 18
The Company and SmithKline Beecham.......... 21
Use of Proceeds............................. 21
Selected Combined Financial Data of the
Company................................... 22
Selected Consolidated Financial Data of
SmithKline Beecham........................ 23
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................. 25
Business.................................... 30
Arrangements with SmithKline Beecham
Group..................................... 36
Management.................................. 38
Executive Compensation...................... 39
Security Ownership of Directors and
Executive Officers........................ 39
Description of Securities................... 40
Description of SmithKline Beecham Support... 63
Description of Other Capital Stock.......... 66
Certain Federal Income Tax Considerations... 67
Plan of Distribution........................ 69
Legal Matters............................... 69
Experts..................................... 70
Glossary.................................... 71
Index to Combined Financial Statements...... F-1
</TABLE>
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800 SHARES
SMITHKLINE BEECHAM
HOLDINGS CORPORATION
FLEXIBLE MONEY MARKET
CUMULATIVE PREFERRED STOCK (MMP(R)), SERIES I
LIQUIDATION PREFERENCE $100,000 PER SHARE
WITH A LIMITED GUARANTEE OF DECLARED
AND UNPAID DIVIDENDS BY
SMITHKLINE BEECHAM PLC
---------------------------------------------
PROSPECTUS SUPPLEMENT
JULY 29, 1996
---------------------------------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
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