SCHERER R P CORP /DE/, 424B1, 1994-12-06

SCHERER R P CORP /DE/
424B1, 1994-12-06
PHARMACEUTICAL PREPARATIONS

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Pursuant to Rule 424(b)(1)
Reg. No. 33-56507

PROSPECTUS
6,500,000 SHARES

[R.P. Scherer LOGO]

COMMON STOCK
------------------------

All of the 6,500,000 shares of Common Stock, $.01 par value per share (the
"Common Stock") of R.P. Scherer Corporation ("Scherer" or the "Company") are
being offered by the Selling Stockholders (as defined herein). Of such shares,
5,200,000 shares are being offered hereby initially in the United States and
Canada by the U.S. Underwriters (as defined herein) (the "United States
Offering") and 1,300,000 shares are being offered initially outside the United
States and Canada in a concurrent international offering by the International
Managers (as defined herein) (the "International Offering"). Such offerings are
collectively referred to as the "Offerings." The offering price and underwriting
discounts and commissions for the United States Offering and the International
Offering will be identical. The Company will not receive any of the proceeds
from the sale of the shares offered hereby. See "Selling Stockholders" and
"Underwriting."

The Common Stock is listed on the New York Stock Exchange under the trading
symbol SHR. On December 5, 1994, the reported closing price of the Common Stock
as on the New York Stock Exchange was $40.25 per share. See "Price Range of
Common Stock and Dividend Policy."
------------------

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.

<TABLE><CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS(1) STOCKHOLDERS(2)
<S> <C> <C> <C>
Per Share........................ $40.00 $1.28 $38.72
Total(3)......................... $260,000,000 $8,320,000 $251,680,000
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."

(2) Before deducting expenses payable by the Selling Stockholders estimated at
approximately $450,000.

(3) Certain of the Selling Stockholders have granted the U.S. Underwriters a
30-day option to purchase up to 419,498 additional shares of Common Stock on
the same terms and conditions as set forth above solely to cover over-
allotments, if any. The International Managers have been granted a similar
option to purchase up to 104,875 additional shares solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, and Proceeds to
Selling Stockholders will be $280,974,920, $8,991,197 and $271,983,723,
respectively. See "Underwriting."
------------------------

The shares of Common Stock offered by this Prospectus are offered by the
U.S. Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
U.S. Underwriters and to certain further conditions. It is expected that
delivery of the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., in New York, New York on or about December 12, 1994.

------------------------

LEHMAN BROTHERS

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

OPPENHEIMER & CO., INC.

WERTHEIM SCHRODER & CO.
INCORPORATED
ROBERT W. BAIRD & CO.
INCORPORATED

December 5, 1994

<PAGE>
IN CONNECTION WITH THE OFFERINGS, THE U.S. UNDERWRITERS AND THE
INTERNATIONAL MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR
MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

OFFERS AND SALES OF THE COMMON STOCK IN THE UNITED KINGDOM, AND
ADVERTISEMENTS THEREIN IN CONNECTION THEREWITH, ARE SUBJECT TO CERTAIN
RESTRICTIONS. SEE "UNDERWRITING."

-------------------

The Company's principal executive offices are located at 2075 West Big
Beaver Road, Troy, Michigan 48084; the telephone number is (810) 649-0900.
Unless otherwise indicated by the context, the "Company" and "Scherer" mean R.P.
Scherer Corporation and its direct and indirect subsidiaries.

-------------------

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files report and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at the offices of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Room 3190, Citicorp
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511; and 13th
Floor, Seven World Trade Center, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Common Stock is listed on the New York Stock Exchange, and reports
and other information concerning the Company and can also be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.

This Prospectus constitutes a part of the Registration Statement on Form S-3
(the "Registration Statement") with respect to the shares of Common Stock to be
sold in the Offerings filed by the Company with the Commission under Securities
Act of 1933 (the "Securities Act"). This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement and to the exhibits relating thereto for
further information with respect to the Company and the Common Stock. Any
statement contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Company hereby incorporates by reference in this Prospectus its Annual
Report on Form 10-K for the fiscal year ended March 31, 1994, as filed with the
Commission (which incorporates by reference certain portions of the Company's
Proxy Statement relating to the 1994 Annual Meeting of Stockholders, as filed
with the Commission). The Company also hereby incorporates by reference in this
Prospectus its Quarterly Reports on Form 10-Q for the quarters ended June 30,
1994, as filed on August 13, 1994 with the Commission, and September 30, 1994,
as filed on November 14, 1994 with the Commission, its report on Form 8-K as
filed with the Commission on May 18, 1994 and the description of the Company's
Common Stock contained in the Company's Registration Statement on Form 8-A,
dated September 26, 1991 filed with the Commission. All documents filed by the
Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this

2
<PAGE>
Prospectus and prior to the termination of the offering of securities made
hereby shall be deemed to be incorporated by reference in this Prospectus and
made 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
herein 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
document subsequently filed with the Commission which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

The Company hereby undertakes to provide without charge to each person to
whom this Prospectus is delivered, upon the written or oral request of such
person, a copy of any or all of the documents incorporated by reference herein
(not including the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to: R.P. Scherer Corporation, 2075 West Big Beaver
Road, Troy, Michigan 48084, Attention: Corporate Secretary, telephone: (810)
649-0900.

3
<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included
elsewhere or in documents incorporated by reference in this Prospectus.
References in this Prospectus to fiscal years are to the Company's fiscal years
ended March 31. References to the "Company" include the Company's only direct
subsidiary, R.P. Scherer International Corporation ("Scherer International" and
formerly R.P. Scherer Corporation) and Scherer International's direct and
indirect subsidiaries.

THE COMPANY

R.P. Scherer Corporation is an international developer and manufacturer of
advanced drug delivery systems and is the world's largest producer of soft
gelatin capsules ("softgels"). The Company's proprietary drug delivery systems,
including the ScherersolTM, Zydis(R) and Pulsincap(R) technologies, improve the
efficacy of drugs by regulating their dosage, rate of absorption and place of
release. Scherer produces over 4,000 products in softgel form, which accounted
for approximately 90% of the Company's fiscal 1994 sales. Softgels are used for
a wide range of drug, vitamin, cosmetic and recreational products.

The Company has a broad domestic and international customer base consisting
of manufacturers and wholesalers of pharmaceutical, health and nutritional,
cosmetic and recreational products, with over half of its total sales made to
the pharmaceutical industry. To meet the needs of its multinational customers
and to serve new markets, the Company operates nineteen softgel manufacturing
facilities in eleven countries throughout the world and also manufactures empty,
two-piece hardshell capsules in three of these countries. Approximately 73% of
the Company's fiscal 1994 sales and 79% of the Company's fiscal 1994 operating
income were derived from operations outside the United States.

The Company works closely with its customers in the development of new
softgel products. Using its expertise in softgel technology, the Company has
developed its ScherersolTM systems to broaden the range of pharmaceutical
products which may be encapsulated in softgel form. ScherersolTM systems, most
of which are patented, often enable pharmaceutical companies to combine the
advantages of drugs in liquid solution with the convenience and dosage accuracy
of softgels. Additionally, ScherersolTM technologies, by providing a unique,
patented dosage delivery system, can often help protect a pharmaceutical
compound against competition from generic drugs throughout the life of the
ScherersolTM patents.

In 1991, the Company formed a separate division, Scherer DDS, to focus on
the development of advanced drug delivery systems, including the Zydis(R) and
Pulsincap(R) technologies. Zydis(R) is an oral dosage form which dissolves
instantaneously on the tongue and does not require water to aid swallowing.
Pulsincap(R) is an oral drug delivery device which is designed to release a drug
at either a predetermined time following ingestion or a predetermined site in
the gastrointestinal tract. Through Scherer DDS, the Company is engaged in the
search for other advanced drug delivery systems which would complement the
Company's existing technologies. In January 1994, the Company acquired the
rights to a novel ophthalmic drug delivery system from Zeneca Limited. The
system, which is in the early stages of development, is intended to enable
accurate, sensation-free application of drugs to the eye. In March 1994, the
Company entered into an agreement with a United Kingdom-based drug research firm
to fund feasibility studies for a unique patent-pending dry powder inhaler
device and a patented controlled-release tablet product.

4
<PAGE>
The Company believes that changes currently affecting worldwide
pharmaceutical markets will enhance the commercial value of products which can
demonstrate therapeutic and cost benefits over existing therapies. To capitalize
on these trends, in September 1993 the Company formed the Advanced Therapeutic
Products Group ("ATP") to manage the development and registration of new
pharmaceutical products which are based on the reformulation of off-patent
compounds and which utilize the Company's proprietary drug delivery
technologies. The Company expects that expenses associated with the ATP
initiative will aggregate $30-40 million over the next three to four years.
Revenues from ATP product sales and royalties are expected to begin no earlier
than fiscal 1997, assuming the development and commercialization of such
products is successful.

THE OFFERINGS

<TABLE>
<S> <C>
Common Stock offered by the Selling
Stockholders(1):

United States Offering..................... 5,200,000 shares

International Offering..................... 1,300,000 shares
Total.................................... 6,500,000 shares

Common Stock outstanding before and after the
Offerings.................................... 23,299,417 shares

Use of proceeds.............................. The Company will not receive any proceeds
from the sale of stock offered hereby.

NYSE symbol.................................. SHR

Dividends.................................... The Company is currently restricted in its
ability to pay dividends and the Company does
not intend to declare dividends in the near
future. See "Description of Capital
Stock--Restriction on Dividends."
</TABLE>

- ------------

(1) Assumes no exercise of the underwriters' over-allotment option.

5
<PAGE>
SUMMARY FINANCIAL DATA

The following summary financial information should be read in conjunction
with, and is qualified in its entirety by reference to, the consolidated
financial statements and other financial information included elsewhere or
incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED SEPTEMBER 30, YEAR ENDED MARCH 31,
-------------------- --------------------------------------------
1994 1993 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Net sales.................... $254,250 $213,633 $449,297 $398,011 $337,786 $298,638
Gross profit................. 93,381 76,172 161,908 155,903 135,795 115,200
Special operating
charges(2)................... -- -- 4,478 -- 13,060 --
Operating income(2).......... 50,056 41,226 82,913 88,097 63,977 62,984
Net income (loss) from
continuing operations
attributable to common
shares(2)(3)................. 20,568 15,153 30,914 28,960 (7,596) (12,154)
Per common share:
Net income (loss) from
continuing operations(2)(3).. $ 0.84 $ 0.63 $ 1.27 $ 1.20 $ (0.50) $ (1.37)
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital(4)....................................................... $104,771
Total assets............................................................. 646,274
Long-term debt, including current portion................................ 191,429
Minority interests in subsidiaries....................................... 36,206
Shareholders' equity..................................................... 244,077
</TABLE>

- ------------
(1) Excludes the results of discontinued operations.

(2) The fiscal year ended March 31, 1994, includes a special pretax charge of
$4,478,000, or $0.13 per common share on an after tax basis, for the
settlement of Paco Development Partners II litigation and the write-down of
buildings and property related to the relocation of operations in Australia.
The fiscal year ended March 31, 1992 includes a special non-cash charge of
$12,345,000, or $0.81 per share on an after tax basis, for stock
compensation expense relating to the Company's initial public offering of
its Common Stock in October 1991.

(3) Excludes losses from discontinued operations, extraordinary losses due to
refinancings and the cumulative effects of accounting changes.

(4) Includes notes payable but does not include current portion of long-term
debt.

6
<PAGE>
SELLING STOCKHOLDERS

The selling stockholders include certain merchant banking partnerships
affiliated with Lehman Brothers Holdings Inc. ("Lehman Brothers Holdings")
(collectively, the "Selling Stockholders"). A subsidiary of Lehman Brothers
Holdings is the general partner of each of such merchant banking partnerships
and, consequently, Lehman Brothers Holdings may be deemed to be the beneficial
owner of shares held by such merchant banking partnerships. The following table
sets forth information with respect to the Selling Stockholders and the shares
being sold.

<TABLE>
<CAPTION>
SHARES OWNED
SHARES OWNED AFTER
BEFORE THE THE
OFFERINGS OFFERINGS(1)
------------------ ---------------
% OF SHARES BEING % OF
NAME NUMBER CLASS SOLD(1) NUMBER CLASS
- ----------------------------------------------- --------- ----- ------------ ------ -----
<S> <C> <C> <C> <C> <C>
Lehman Brothers Merchant Banking Portfolio
Partnership, L.P. ............................. 2,547,334 10.9 % 2,547,334 0 0%
Lehman Brothers Offshore Investment
Partnership--Japan L.P. ....................... 2,061,555 8.8 % 2,061,555 0 0%
Lehman Brothers Capital Partners II L.P. ...... 1,730,169 7.4 % 1,730,169 0 0%
Lehman Brothers Offshore Investment
Partnership, L.P. ........................... 685,315 2.9 % 685,315 0 0%
Selling Stockholders as a group ............... 7,024,373 30.1 % 7,024,373 0 0%
</TABLE>

- ------------

(1) Assumes the underwriters' over-allotment option is exercised in full.

Lehman Brothers Holdings and the Selling Stockholders are referred to
collectively in this Prospectus as "Lehman."

In 1989, Lehman acquired Scherer in connection with the acquisition by the
Company of Scherer International (the "Acquisition"). The aggregate
consideration paid by Lehman in the Acquisition to the then existing
stockholders consisted of approximately $303.3 million in cash and 1,223,200
shares of exchangeable preferred stock having a liquidation preference of
approximately $38.8 million. In 1991, the Company completed an initial public
offering of 11,500,000 shares of its Common Stock from which a portion of the
proceeds were used to reduce bank indebtedness and to retire the Company's
outstanding exchangeable preferred stock. In 1992, the Selling Stockholders
completed a public offering of 3,500,000 shares of Common Stock from which the
Selling Stockholders received $105 million.

BENEFITS RECEIVED OR TO BE RECEIVED BY SELLING STOCKHOLDERS AND AFFILIATED
PARTIES

Lehman has received compensation from the Company in connection with public
offerings of the Company's securities. During the year ended March 31, 1994,
Lehman received $0.6 million in underwriting discounts and commissions in
connection with the offering in January 1994 of senior notes of Scherer
International. During the year ended March 31, 1992, Lehman received $3.5
million in underwriting discounts and commissions in connection with the
Company's October 1991 initial public offering of its Common Stock. In
connection with its August 1992 initial public offering of common stock, Paco
Pharmaceutical Services, Inc. ("Paco"), formerly a wholly-owned subsidiary of
the Company, paid Lehman approximately $1.3 million in underwriting discounts
and commissions.

7
<PAGE>
USE OF PROCEEDS

The Company will not receive any proceeds from the sale of shares of Common
Stock made pursuant to the Offerings.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The following table sets forth, for the calendar quarters indicated, the
high and low sale prices of the Common Stock as reported on the New York Stock
Exchange Composite Tape.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1992
First Quarter............................................................ $30.75 $24.13
Second Quarter........................................................... 29.38 22.13
Third Quarter............................................................ 34.13 23.75
Fourth Quarter........................................................... 38.50 28.88
1993
First Quarter............................................................ 38.88 23.88
Second Quarter........................................................... 31.25 25.00
Third Quarter............................................................ 33.50 26.13
Fourth Quarter........................................................... 37.75 31.38
1994
First Quarter............................................................ 40.50 35.50
Second Quarter........................................................... 37.75 31.75
Third Quarter............................................................ 41.75 32.25
Fourth Quarter to December 5............................................. 44.63 39.75
</TABLE>

The closing price of the Common Stock as reported on the New York Stock
Exchange Composite Tape on December 5, 1994 was $40.25 per share.

The Company has not paid any dividends on the Common Stock and does not
anticipate paying dividends in the foreseeable future. Various restrictions
contained in certain of the Company's debt agreements limit the ability of the
Company to pay cash dividends. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Financial
Condition" and "Description of Capital Stock--Restrictions on Dividends."

8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION

GENERAL

The following discussion and analysis of financial results and condition
covers the six month periods ended September 30, 1994 and 1993 and the fiscal
years ended March 31, 1994, 1993, and 1992.

A majority of the Company's sales, income and cash flows is derived from its
international operations. With the exception of operations in highly
inflationary economies, which are measured in U.S. dollars, the financial
position and the results of operations of the Company's foreign operations are
measured using the local currencies of the countries in which they operate, and
are translated into U.S. dollars. Although the effects of foreign currency
fluctuations are mitigated by the fact that expenses of foreign subsidiaries are
generally incurred in the same currencies in which sales are generated, the
reported results of operations of the Company's foreign subsidiaries will be
higher or lower depending upon a weakening or strengthening of the U.S. dollar.
In addition, a substantial portion of the Company's net assets are based in its
foreign operations, and are translated into U.S. dollars at foreign currency
exchange rates in effect as of the end of each period. Accordingly, the
Company's consolidated shareholders' equity will fluctuate depending upon the
strengthening or weakening of the U.S. dollar.

In August 1991, the Company adopted a plan to sell its wholly-owned
subsidiary Paco, a provider of design, engineering and contract packaging and
manufacturing services to U.S. pharmaceutical and consumer products companies.
In August 1992, Paco was disposed of through a public offering of Paco's common
stock. The assets, liabilities, and results of operations of Paco have been
reported as a discontinued operation in the consolidated financial statements
for all periods presented. The following discussion and analysis refers only to
continuing operations.

RESULTS OF OPERATIONS

Six Months Ended September 30, 1994 and 1993

Sales for the six month period ended September 30, 1994 were $254.3 million,
representing a 19% increase compared to sales of $213.6 million in the same
period of the prior fiscal year. Sales gains were achieved in all of the
Company's geographic segments, especially Europe. The effects of a weaker U.S.
dollar relative to most foreign currencies increased reported sales only
slightly during the current year period. On a constant foreign exchange rate
basis, the sales increase would have been 18% for the six months ended September
30, 1994, as compared to the same period of the prior fiscal year.

The following table sets forth operating results for each of the Company's
geographic segments for the six months ended September 30, 1994 and 1993:
<TABLE>
<CAPTION>
OPERATING
SALES OPERATING INCOME MARGIN
--------------------- ------------------- -------------
1994 1993 1994 1993 1994 1993
-------- -------- ------- ------- ---- ----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
United States................... $ 60,524 $ 55,803 $14,798 $14,367 24.4% 25.7%
Europe.......................... 142,486 111,476 31,043 19,606 21.8 17.6
Other International............. 51,240 46,354 10,186 9,929 19.9 21.4
Unallocated(1).................. -- -- (5,971) (2,676) -- --
-------- -------- ------- ------- ---- ----
$254,250 $213,633 $50,056 $41,226 19.7% 19.3%
-------- -------- ------- ------- ---- ----
-------- -------- ------- ------- ---- ----
</TABLE>

- ------------

(1) Includes general corporate expenses and, in 1994, approximately $2.0 million
of expenses associated with ATP.

The Company's United States operations achieved an 8% sales gain for the six
months ended September 30, 1994. Sales of over-the-counter ("OTC")
pharmaceutical softgels were particularly

9
<PAGE>
strong, as planned customer launches of several cough/cold and other OTC
softgels led to a 30% sales gain in this product line. Major branded products
launched during the first six months of fiscal 1995 include Alka-Seltzer Plus
from Miles Laboratories and Drixoral from Schering-Plough. Sales of nutritional
softgels slowed during the first six months of fiscal 1995, dropping nearly 10%
from the level of sales in the same period in the prior fiscal year. All of this
decline is attributable to reductions in sales of Vitamin E, resulting from a
general decline in demand which began in the fourth quarter of fiscal 1994, and
a temporary delay in orders by the Company's largest nutritional customer in the
United States. The decrease in nutritional softgel sales had little effect on
operating income as a result of the relatively low margins related to Vitamin E
products due to their high material cost content and commodity nature. Overall,
United States operating income improved slightly, increasing by 3% to $14.8
million for the six months ended September 30, 1994, as the incremental profits
from sales of pharmaceutical and other softgels were mostly offset by the costs
of increased marketing staffs, promotional expenses and development resources to
meet the increasing demand for the Company's products.

Sales in Europe increased 28% for the six months ended September 30, 1994 as
compared to the same period of the prior fiscal year. The most significant sales
increase was achieved in Germany, where the Company's sales continued to recover
from the effects of government healthcare reforms instituted in January 1993.
Sales elsewhere in Europe also increased at double digit rates, aided in large
part by the acquisition of Pharmagel on July 1, 1993. Primarily as a result of
the recent strength in the German pharmaceutical market, operating income grew
58% to $31.0 million for the six months ended September 30, 1994, with a related
improvement in operating margin for the period. As the adverse business
environment in Germany began to improve in the second half of fiscal 1994, the
Company expects that the rate of growth in sales and operating income will slow
somewhat in the second half of fiscal 1995 compared with that experienced in the
first half of the current fiscal year.

The Company's Other International segment contributed a $4.9 million, or
11%, increase in sales for the six months ended September 30, 1994 due to the
continued strength of softgel operations in Japan, Canada and South America, as
well as those of the Company's Pharmaphil hardshell operation in Canada.
Operating income, however, grew a modest 3% as a less favorable product sales
mix in the Australian nutritionals market dampened the income growth of the
Other International segment operations.

The Company's 12-month sales order backlog rose to $141.8 million at
September 30, 1994, a 26% increase from backlog at September 30, 1993. Sales
backlog increased 24% as measured using constant exchange rates. The increase in
backlog reflects continuing strong orders for the Company's products, most
notably for pharmaceutical softgels in Germany and North America and nutritional
softgels in the United Kingdom.

The Company earned operating income of $50.1 million for the six months
ended September 30, 1994, a 21% gain from the $41.2 million earned in the same
period of the prior fiscal year. On a constant exchange rate basis, operating
income rose 20% between these two periods. Operating margin improved to 19.7% of
sales for the September 30, 1994 period from 19.3% for the same period of the
prior fiscal year. Such improvement includes significant profit gains in Germany
(as discussed above), as well as a sales mix shift toward higher margin
pharmaceutical softgels. Sales of pharmaceutical softgels rose 23%, while health
and nutritional softgel sales increased only 10% between the six month periods
ended September 30, 1994 and 1993. The improvement in operating income was
achieved in spite of increased administrative expenses attributable in large
part to additional investments in marketing staffs and related costs in Germany
and the United States and the inclusion of Pharmagel (acquired July 1, 1993) for
the full six months ended September 30, 1994.

An intensification of research and development efforts further reduced
reported operating income and margin growth for the six months ended September
30, 1994. Excluding research and development expenses, operating margin grew to
23.2% of sales for the six months ended September 30, 1994,

10
<PAGE>
compared to 22.2% for the same period of the prior fiscal year. Research and
development costs were $9.0 million for the six months ended September 30, 1994,
representing a 45% increase from the $6.2 million incurred during the first six
months of the prior fiscal year. A substantial majority of this increase relates
to ATP, which was formed in fiscal 1994 to engage in the reformulation of
off-patent or soon to become off-patent drug compounds utilizing the Company's
advanced drug delivery technologies. The Company expects that spending for ATP
activities will continue to increase at a significant rate for the foreseeable
future.

Net income for the first six months of fiscal 1995 reached $20.6 million, or
$0.84 per share, compared to $15.2 million, or $0.63 per share, for the same
period of the prior fiscal year. In addition to the operating income improvement
discussed above, the Company realized the benefit of a $4.5 million reduction in
interest expense, primarily associated with the January 1994 refinancing through
defeasance of $125 million of 14% senior subordinated debentures with a
combination of $100 million of 6 3/4% senior notes and bank debt. The Company's
effective income tax rate rose to 35.4% for the six months ended September 30,
1994 compared to 33.0% for the same period of the prior fiscal year. The higher
effective income tax rate is the result of changes in the geographic mix of
pretax income and increases in income tax rates in certain countries. For the
six months ended September 30, 1994 minority interests in income increased by
$2.3 million as a result of a substantial improvement in earnings of the
Company's 51%-owned German operation.

Fiscal Years Ended March 31, 1994 and 1993

Sales for fiscal 1994 reached a record high $449.3 million, representing a
13% increase from the $398.0 million achieved in fiscal 1993. Pharmagel
operations, which were acquired July 1, 1993 (see Note 3 to the consolidated
financial statements as of March 31, 1994) contributed $15.5 million to the
fiscal 1994 sales gain. A significantly stronger U.S. dollar in fiscal 1994
compared to fiscal 1993 had the effect of depressing the reported growth in
sales by approximately $25 million. The sales increase between the two periods
was 19% based upon constant foreign exchange rates.

The following table sets forth operating results for each of the Company's
geographic segments for the fiscal years ended March 31, 1994 and 1993:
<TABLE>
<CAPTION>
OPERATING
SALES OPERATING INCOME MARGIN
--------------------- ------------------- -------------
1994 1993 1994 1993 1994 1993
-------- -------- ------- ------- ---- ----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
United States................... $120,687 $ 86,687 $28,241 $23,327 23.4% 26.9%
Europe.......................... 233,716 229,937 46,249 53,941 19.8 23.5
Other International............. 94,894 81,387 19,238 13,450 20.3 16.5
Unallocated(1).................. -- -- (10,815) (2,621) -- --
-------- -------- ------- ------- ---- ----
$449,297 $398,011 $82,913 $88,097 18.5% 22.1%
-------- -------- ------- ------- ---- ----
-------- -------- ------- ------- ---- ----
</TABLE>

- ------------

(1) Includes principally general corporate expenses and, in 1994, $4.5 million
related to the special charges for the litigation settlement and plant
revaluation.

The Company's United States operations achieved sales of $120.7 million in
fiscal 1994, or a 39% gain from sales of $86.7 million in fiscal 1993. A
substantial majority of the fiscal 1994 improvement resulted from a 60% increase
in sales of lower margin nutritional softgels, primarily Vitamin E and other
anti-oxidants, in large part due to publicized recognition in the medical
community of the potential health benefits of these products. The rate of growth
in nutritional softgels slowed somewhat in the fiscal 1994 fourth quarter, which
the Company believes was attributable in part to more recent studies questioning
the health benefits of anti-oxidants. A 75% rise in sales of OTC pharmaceutical
softgels also contributed to the United States sales improvement. Demand for the
Company's cough/cold products, such as A.H. Robins' Robitussin and
Burroughs-Wellcome's Sudafed line of

11
<PAGE>
softgels, remained strong in fiscal 1994. Launches of additional cough/cold and
other OTC branded softgels will occur in fiscal 1995 and are anticipated to
provide further growth in sales of pharmaceutical softgels for the coming year.

Sales in Europe increased by 1.6%, from $229.9 million in fiscal 1993 to
$233.7 million in fiscal 1994. Without the $15.5 million in additional sales
provided by Pharmagel in fiscal 1994, European sales declined 5%, primarily due
to the stronger U.S. dollar in fiscal 1994. Measured on a constant exchange rate
basis, European sales would have increased by 6% in fiscal 1994, excluding the
impact of Pharmagel. Sales growth in fiscal 1994 was also adversely affected by,
among other things, government health care reforms implemented in Germany during
calendar year 1993. These reforms reduced or eliminated government reimbursement
for a wide range of pharmaceutical products. The effects of these reforms were
reflected primarily in the results for the last quarter of fiscal 1993 and the
first half of fiscal 1994. Deutschemark sales in Germany increased by 20% in the
fourth quarter of fiscal 1994 as compared to the fourth quarter of fiscal 1993.
Sales growth was strong elsewhere in Europe, most notably in the United Kingdom,
which generated increased sales of specialty nutritional softgels.

The Company's Other International geographic segment posted a 17% sales gain
between the two fiscal years, with sales of $94.9 million in fiscal 1994
compared to $81.4 million in fiscal 1993. Significant sales gains of nutritional
and pharmaceutical softgels were achieved by the Company's subsidiaries in
Australia and Japan. Both of these subsidiaries set new record sales levels in
fiscal 1994.

Gross margin increased by $6.0 million to $161.9 million in fiscal 1994
compared to $155.9 million in fiscal 1993. Gross margin as a percentage of
sales, however, declined in fiscal 1994 to 36.0% from 39.2% in fiscal 1993. This
decline reflects a significant shift in the Company's product mix towards
nutritional softgels during fiscal 1994. Nutritional softgels generally have a
higher material cost content relative to their sales value compared to other
types of softgels and consequently provide lower margins. In addition,
particularly in the United States, certain of the Company's nutritional softgel
products are subject to greater competition, which restricts margin potential.
The economic and pharmaceutical industry situation in Germany also had a
negative impact on gross margin rates in fiscal 1994.

The Company recorded a combined $4.5 million charge against operating income
in fiscal 1994 to account for the settlement of litigation relating to Paco
Development Partners II and to write down the Company's existing production
facility in Australia to its estimated net realizable value prior to the
relocation of the Company's Australian manufacturing operations (see Notes 2 and
14 to the consolidated financial statements as of March 31, 1994). Excluding
this special charge, operating income was $87.4 million for fiscal 1994,
essentially unchanged from fiscal 1993's operating income of $88.1 million. On a
constant currency basis, however, operating income increased 3% in fiscal 1994
as compared to fiscal 1993. Selling and administrative expenses rose $5.0
million to $61.4 million, an increase of 9%. Almost one-half of this increase
was due to the addition of Pharmagel during fiscal 1994. Before the inclusion of
Pharmagel, selling and administrative expenses declined to 13.1% of sales in
fiscal 1994 from 14.2% of sales in fiscal 1993, reflecting the Company's
continued emphasis on containing overhead costs.

The Company increased its investment in research and development to $13.1
million in fiscal 1994, a 15% increase from the $11.4 million expensed in the
prior fiscal year. These increased expenditures reflect increased pharmaceutical
softgel development work, as well as research and development activities related
to ATP and the Pulsincap(R) drug delivery device.

Income from continuing operations reached a record $30.9 million, or $1.27
per share, in fiscal 1994 despite the $4.5 million special charge described
above. Before the effects of the special charge, income from continuing
operations for fiscal 1994 was $1.40 per share, representing a 17% improvement
from the $1.20 per share reported in fiscal 1993. A significant reduction in the
Company's effective income tax rate accounted for a majority of the income
improvement for fiscal 1994. The income tax provision was $18.7 million (30.1%
of pretax income) in fiscal 1994, compared to $24.1 million (36.3% of pretax
income) in fiscal 1993. The lower effective income tax rate in fiscal 1994
resulted from a shift

12
<PAGE>
in pretax income towards lower tax rate countries (primarily the United States)
and reduced statutory corporate income tax rates in Germany and Australia.
Minority interests in income declined to $12.7 million in fiscal 1994, a
reduction of $0.6 million from the $13.3 million in fiscal 1993. Such decline
resulted primarily from reduced income of the Company's 51% owned German
subsidiary. The earnings improvement also resulted from a $1.2 million reduction
in net interest expense resulting from the debt refinancing described below,
offset by interest expense on bank debt used to fund the Pharmagel acquisition.

In January 1994, the Company successfully refinanced, through defeasance,
the outstanding 14% senior subordinated debentures of Scherer International. The
Company recorded an extraordinary loss of $15.5 million, or $0.64 per share,
related to the defeasance transaction, as well as a $0.3 million extraordinary
loss, or $0.01 per share, related to the replacement of its former bank credit
facility.

Fiscal Years Ended March 31, 1993 and 1992

Sales for fiscal 1993 were $398.0 million, exceeding by 18% the sales of
$337.8 million recognized in fiscal 1992. Strong sales growth was experienced in
all of the Company's major operations, favorably impacted by a strengthening of
certain foreign currency exchange rates relative to the U.S. dollar. Sales
growth as measured on a constant currency basis would have been 16% for fiscal
1993 compared to fiscal 1992.

The following table sets forth operating results for each of the Company's
geographic segments for the fiscal years ended March 31, 1993 and 1992:
<TABLE>
<CAPTION>
OPERATING
SALES OPERATING INCOME MARGIN
-------------------- ------------------ ------------
1993 1992 1993 1992 1993 1992
-------- -------- ------- ------- ---- ----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
United States....................... $ 86,687 $ 66,802 $23,327 $18,147 26.9% 27.2%
Europe.............................. 229,937 198,445 53,941 48,896 23.5 24.6
Other International................. 81,387 72,539 13,450 13,070 16.5 18.0
Unallocated(1)...................... -- -- (2,621) (16,136) -- --
-------- -------- ------- ------- ---- ----
$398,011 $337,786 $88,097 $63,977 22.1% 18.9%
-------- -------- ------- ------- ---- ----
-------- -------- ------- ------- ---- ----
</TABLE>

- ------------

(1) Includes principally general corporate expenses and, in 1992, the stock
compensation expense related to the Company's October 1991 sale of Common
Stock.

Sales of the Company's United States operations in fiscal 1993 increased to
$86.7 million, or 30%, as compared to sales of $66.8 million recorded in fiscal
1992. The United States results reflect significant increases in sales of
pharmaceutical softgels, particularly generic nifedipine and OTC cough/cold
medications. Additionally, favorable studies and media reports confirming the
health benefits of anti-oxidant vitamins and a stronger marketing focus by the
Company resulted in substantial increases in sales of certain nutritional
softgels, especially Vitamin E. Sales in Europe rose by 16% to $229.9 million in
fiscal 1993 as compared to $198.4 million in fiscal 1992. All European
subsidiaries reported sales gains in fiscal 1993, with volume growth in both
pharmaceutical and nutritional softgel product sales. Sales growth of the
Company's largest subsidiary, located in Germany, slowed during the latter half
of fiscal 1993 as a result of difficult economic conditions and the health care
reforms instituted in January 1993. Other International operations recognized
sales of $81.4 million in fiscal 1993, representing a 12% increase over fiscal
1992 sales of $72.5 million. A majority of such sales increase was achieved by
the Company's subsidiaries in Japan, with continued growth in sales of
pharmaceutical softgels, and Canada, primarily as a result of the increased
demand for anti-oxidant softgels.

The Company's gross margin increased by $20.1 million to $155.9 million in
fiscal 1993 compared to $135.8 million in fiscal 1992. Gross margin expressed as
a percentage of sales declined to 39.2% in

13
<PAGE>
fiscal 1993 from 40.2% in fiscal 1992. Such decrease in the margin rate reflects
an increase in the sales mix toward nutritional softgels in fiscal 1993, which
generally have a higher material cost content relative to their sales value, and
increases in costs of raw materials (primarily vitamins), which were not fully
offset by price increases for the Company's products. The economic and
regulatory situation in Germany also had an unfavorable effect on the fiscal
1993 gross margin rate.

Operating income reached $88.1 million for fiscal 1993, representing a 16%
increase from $76.3 million recorded for fiscal 1992, before a $12.3 million
non-recurring charge for stock compensation (see Note 4 to the consolidated
financial statements as of March 31, 1994). On a constant foreign currency
exchange rate basis the increase would have amounted to 14%. The operating
income improvement stems primarily from the increases in sales described above,
offset in part by a $6.1 million, or 12%, increase in selling and administrative
expenses and a $2.9 million, or 35%, increase in net research and development
expenses. Selling and administrative expenses for fiscal 1993, which declined as
a percentage of sales, reflect additional investments in marketing staffs and
activities, increased incentive compensation related to the income improvements,
general inflationary factors and the higher foreign currency exchange rates. A
majority of the increase in research and development expenses is attributable to
pharmaceutical softgel product development activities in the U.S. and the United
Kingdom, and continued development of the Company's Pulsincap(R) drug delivery
device.

Income from continuing operations was $29.0 million, or $1.20 per share, for
fiscal 1993, an increase of $30.2 million from a loss of $1.2 million, or $0.50
per share, in fiscal 1992. In addition to the higher operating income in fiscal
1993, a $9.9 million reduction in interest expense contributed to such
improvement. The lower interest expense resulted primarily from a full year's
interest savings in fiscal 1993 due to the approximate $124.0 million reduction
in bank debt through the application of proceeds from the Company's October 1991
initial public offering of its Common Stock, and, to a lesser extent, the
Company's repurchase of approximately $42.5 million face value of its 14% senior
subordinated debentures during the third quarter of fiscal 1993 (see Notes 4 and
9 to the consolidated financial statements as of March 31, 1994). In addition,
the prior year results included a $12.3 million charge for stock compensation
expense. On a pro-forma basis, assuming the October 1991 initial public offering
and related transactions had occurred as of April 1, 1991, income from
continuing operations would have been $22.0 million, or $0.92 per share, for
fiscal 1992 (see Note 4 to the consolidated financial statements as of March 31,
1994).

The Company's income tax provisions were $24.1 million (36.3% of pretax
income) in fiscal 1993 and $22.3 million (69.5% of pretax income) in fiscal
1992. The reduction in the consolidated tax rate to a more normal level in
fiscal 1993 reflects improved United States operating results and income,
including the reduction in interest expense and the $12.3 million stock
compensation expense recorded in the prior year. A significant portion of
expenses in the prior fiscal year could not be tax benefited as the realization
of such benefit could not be assured. A significantly lower tax provision rate
is associated with such incremental income due to the Company's United States
tax position and the utilization of available foreign tax credits. Minority
interests in net income of subsidiaries increased by 21% to $13.3 million in
fiscal 1993 from $11.0 million in fiscal 1992 due primarily to increased
earnings of the Company's partially-owned subsidiaries in Germany, France and
Japan.

The Company earned net income of $20.9 million, or $0.86 per share, in
fiscal 1993 after reflecting an $8.4 million net extraordinary loss from the
repurchase of the senior subordinated debentures described above, a $0.6 million
loss from the disposal of the Company's discontinued operation (Paco) and $1.0
million of income from the cumulative effect of a change in accounting for
income taxes in accordance with SFAS 109 (see Note 6 to the consolidated
financial statements as of March 31, 1994). The Company reported a net loss
attributable to common shares of $31.1 million, or $2.05 per share, in fiscal
1992, which included a $16.5 million estimated loss on disposal of Paco, a $4.9
million charge related to a change in accounting for postretirement medical and
other benefits in accordance with SFAS 106 (see Note 11 to the consolidated
financial statements as of March 31, 1994) and a $2.1 million extraordinary loss
from the early retirement of bank debt described above.

14
<PAGE>
CASH FLOWS

Six Months Ended September 30, 1994 and 1993

Cash and cash equivalents increased by $5.7 million for the six month period
ended September 30, 1994, as compared with a decrease of $3.4 million in the
same period of the prior fiscal year. Operating activities provided cash of
$32.8 million and $17.6 million for the current and prior fiscal year periods,
respectively. For the period ended September 30, 1994, cash generated from
continued strong earnings was partially offset by a $9.3 million increase in net
working capital. Such increase is related primarily to the timing of payments
for value added taxes in certain European subsidiaries, as well as increases in
raw materials inventories related to higher order levels, offset by reductions
in receivables largely due to the timing of collections from certain major
customers. For the prior fiscal year period, cash generated from operating
earnings was offset by a $13.3 million increase in net working capital.
Increases in receivables and inventories associated with increased sales levels,
offset by decreases in current liabilities primarily related to the timing of
value added tax payments in Europe, contributed to the prior year net working
capital increase.

Capital expenditures for the six month period ended September 30, 1994
amounted to $19.0 million, compared to capital expenditures of $16.5 million in
the prior year period. Current period capital spending consisted primarily of
expenditures in North America related to the completion of a new satellite
softgel production facility for nutritional products, in the United Kingdom
related to the continuing expansion of the Zydis(R) production facility and in
Australia for the construction of a replacement manufacturing facility, as well
as general facility and equipment additions and improvements. In the prior
fiscal year, capital expenditures were related primarily to the construction in
the United Kingdom of the Zydis(R) production and Pulsincap(R) development
facilities, and other general facility and equipment additions and improvements.
For the six months ended September 30, 1993, $33.8 million was used for the
acquisition of the capital stock of Pharmagel and of certain softgel assets of
Gayoso Wellcome (as discussed in Note 5 to the consolidated financial statements
as of September 30, 1994).

Financing activities for the six month period ended September 30, 1994
include primarily $7.1 million of dividends paid to minority shareholders of
subsidiaries. In the prior year period, financing activities reflect primarily
$24.5 million of net borrowings under the Company's bank credit facility to fund
the acquisition of Pharmagel, as well as a net $9.3 million of other borrowings
under the bank credit facility to fund working capital needs and capital
expenditures.

Fiscal Years Ended March 31, 1994, 1993 and 1992

Cash and cash equivalents decreased by $13.8 million for fiscal 1994 as
compared with a decrease of $14.4 million for the same period in 1993 and an
increase of $15.3 million in 1992. Operating activities provided net cash of
$47.7 million, $46.0 million, and $36.5 million during fiscal years 1994, 1993,
and 1992, respectively. In 1994, cash generated from continuing growth in the
Company's after-tax earnings was offset by a $22.5 million increase in net
working capital. This working capital increase reflected increases in
inventories and receivables associated with the 13% sales growth previously
discussed as well as the previously discussed shift in sales mix to nutritional
products customers who are generally provided longer payment terms. The working
capital increase further reflects the approximate $6 million decrease in accrued
interest payable resulting from the Company's refinancing activities as
discussed under "Liquidity and Financial Condition" below. In 1993, increased
cash from the Company's after-tax earnings was offset by a $20.6 million
increase in net working capital. Such working capital increase included an
aggregate 17% increase in inventories and receivables associated with the sales
gains previously discussed. For fiscal 1992, the cash from operating earnings
was partially offset by an $8.7 million increase in working capital, primarily
related to increases in accounts receivable, as well as net value added taxes
receivable at the Company's German subsidiary.

15
<PAGE>
Net cash used by investing activities was $74.7 million, $3.7 million and
$20.3 million for the 1994, 1993 and 1992 fiscal years, respectively. Fiscal
1994 reflects the $33.8 million use of cash for the acquisitions of the capital
stock of Pharmagel and certain softgel assets of Gayoso Wellcome (as discussed
in Note 3 to the consolidated financial statements as of March 31, 1994), as
well as cash used for capital expenditures of $39.5 million. Such capital
expenditures consisted primarily of expenditures in the United Kingdom related
to the new Zydis(R) production facility and in Australia for the construction of
a replacement manufacturing facility, as well as general facility and equipment
additions and improvements. Capital expenditures of $33.2 million and $20.9
million were incurred in fiscal years 1993 and 1992, respectively, consisting
primarily of facility and equipment upgrades in the Company's German subsidiary,
expansion in the United Kingdom related primarily to Zydis(R) production and
Pulsincap(R) development facilities, and softgel manufacturing equipment and
other facility upgrades and improvements worldwide. Fiscal 1993 also reflects
the disposal of Paco, which provided $28.0 million of cash.

Financing activities for fiscal 1994 reflect the defeasance (as described
below) of the Company's 14% senior subordinated debentures, which used cash of
$141.5 million. Such defeasance was funded primarily through the issuance of 6
3/4% senior notes, which provided cash of $99.3 million, as well as through
borrowings under the Company's bank credit facility. Other significant financing
sources included $99.7 million of proceeds from the Company's bank credit
facility (primarily to fund the defeasance and the acquisition of Pharmagel),
$7.0 million for the refinancing of an existing capitalized lease obligation,
and $2.4 million of proceeds from industrial revenue bonds to finance a facility
upgrade and expansion. Other significant financing uses included $35.9 million
repayments on the Company's bank credit facility and the retirement of the
aforementioned capital lease obligation. Financing activities for fiscal 1993
reflect primarily the third quarter repurchase of $42.5 million principal amount
of the 14% senior subordinated debentures for approximately $49.3 million,
funded primarily by cash on hand and borrowings under the Company's bank credit
facility. Other financing sources included $2.2 million of proceeds from
industrial revenue bonds and $4.8 million of other borrowings. Other significant
financing uses included $29.6 million of repayments on the Company's bank credit
facility. In the 1992 fiscal year, financing activities included the $195.5
million of proceeds from the Company's October 1991 initial public offering of
its Common Stock, net of cash used for related purchases of exchangeable
preferred stock and repayments of long-term bank debt (see Note 4 to the
consolidated financial statements as of March 31, 1994).

LIQUIDITY AND FINANCIAL CONDITION

During the next several years, a significant portion of the Company's cash
flow will be used to fund capital expenditures, increased investments in
research and development, and to service and reduce indebtedness. Capital
expenditures are estimated at $50 million for each of fiscal years 1995 and
1996, and are expected to decline to the $30-40 million level per year
thereafter. Such expenditures will be used to continue the expansion of softgel
production capacity to meet anticipated customer demand, as well as to ensure
continuing compliance with pharmaceutical Good Manufacturing Practices (GMP)
standards for the Company's facilities. In addition, such expenditures include
the expansion of production facilities for Zydis(R) and the construction of
equipment and facilities for the Company's other advanced drug delivery systems.
As of September 30, 1994, the Company had approximately $10.5 million of
commitments for future capital expenditures.

The Company will also continue to invest a significant portion of its cash
flow in research and development activities for its advanced drug delivery
systems, including the ScherersolTM, Zydis(R) and Pulsincap(R) technologies, as
well as to develop new drug delivery technologies and to fund the Company's ATP
initiative. The Company believes that changes currently affecting worldwide
pharmaceutical markets will enhance the commercial value of products which can
demonstrate therapeutic and cost benefits over existing therapies, and through
ATP intends to capitalize upon these trends by creating new products which
reformulate compounds and utilize the Company's proprietary drug delivery

16
<PAGE>
technologies. The Company expects that expenses associated with ATP will
aggregate $30-40 million over the next three to four years. Revenues from ATP
product sales and royalties are expected to begin no earlier than fiscal 1997,
assuming the development and commercialization of such products is successful.

The Company actively reviews drug delivery systems businesses and
technologies for potential investment, consistent with its strategic objectives.
Examples are the Company's fiscal 1994 acquisition of an ophthalmic drug
delivery technology from Zeneca Limited, and an agreement to fund feasibility
studies for a dry powder inhaler device and a controlled-release tablet product
with a UK-based drug research firm. Generally, such investments are not expected
to involve significant initial funding or funding commitments on the part of the
Company. Management intends that any acquisition which would require significant
funding would be financed largely through the issuance of Common Stock,
depending upon market conditions, so as not to materially increase the Company's
debt to equity ratio.

At September 30, 1994, the Company's outstanding long-term indebtedness
consisted of approximately $99.3 million of 6 3/4% senior notes (net of a $0.7
million discount), $67.4 million of borrowings under the Company's bank credit
facility, $13.1 million of industrial development revenue bonds, and
approximately $11.6 million of other indebtedness.

In January 1994, Scherer International completed the refinancing of a
significant portion of its outstanding debt. Using the net proceeds from the
offering of the senior notes and additional proceeds from borrowing under the
Company's bank credit facility, the Company defeased its 14% senior subordinated
debentures. The senior notes bear interest at 6 3/4 % of face value, payable
semi-annually, and mature in full in February 2004. The 6 3/4% senior notes are
noncallable and unsecured, ranking pari passu with all other unsecured and
senior indebtedness of Scherer International. Annual interest expense on the
senior notes outstanding is approximately $6.8 million (excluding amortization
of the original issue discount and deferred financing fees), payable
semi-annually. The indenture under which the senior notes were issued restricts
the Company's ability to incur additional liens, enter into sale-leaseback
transactions, engage in certain transactions with affiliates, and engage in
certain business combinations.

In March 1994, the Company entered into a new bank credit facility as a
replacement for the Company's previous bank credit agreement. This credit
facility allows for revolving credit borrowings up to an aggregate of $175.0
million in various currencies, and expires April 1, 1999. Interest is payable
quarterly at LIBOR plus .575%, with a reduction anticipated later in the term of
the facility based on certain financial performance criteria, or at the bank's
prime rate. Unused borrowing availability is subject to annual commitment fees
of 1/4%. Borrowings under this facility are unsecured, and rank pari passu with
all other unsecured and senior indebtedness.

The bank credit facility requires the Company to satisfy various annual and
quarterly financial tests, including maintenance on a consolidated basis of
specified levels of tangible net worth and cash flow coverage, leverage, and
fixed charge ratios. The agreement also restricts the Company's ability to incur
additional indebtedness or liens, make investments and loans, dispose of assets,
or consummate a business combination, and limits the ability of the Company to
pay dividends.

Pursuant to other revolving credit arrangements, the Company and certain of
its subsidiaries may borrow up to $12.9 million. As of September 30, 1994, the
Company had outstanding approximately $3.6 million under these revolving credit
arrangements.

The Company believes that its future cash flows from operations, together
with cash and short-term investments aggregating $26.7 million at September 30,
1994 and amounts available under bank credit facilities will be adequate to meet
anticipated capital investment, operating, and debt service requirements.

17
<PAGE>
INFLATION AND ACCOUNTING POLICIES

In the view of management, the effects of inflation and changing prices on
the Company's net results of operations and financial condition were not
significant.

In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112, Employer's Accounting for
Postemployment Benefits, which must be adopted for the Company's 1995 fiscal
year. This statement requires the use of the accrual method to recognize
liabilities for postemployment benefits. The Company has determined that the
adoption of this statement will not significantly affect the Company's future
financial results or position.

In October 1994, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments, which also must be adopted
for the Company's 1995 fiscal year. This statement requires expanded disclosures
about the amounts, nature and purpose, and terms of derivative financial
instruments.

18
<PAGE>
BUSINESS

GENERAL

R.P. Scherer Corporation is an international developer and manufacturer of
advanced drug delivery systems and is the world's largest producer of softgels.
The Company's proprietary drug delivery systems, including the ScherersolTM,
Zydis(R) and Pulsincap(R) technologies, improve the efficacy of drugs by
regulating their dosage, rate of absorption and place of release. Scherer
produces over 4,000 products in softgel form, which accounted for approximately
90% of the Company's fiscal 1994 sales. Softgels are used for a wide range of
drug, vitamin, cosmetic and recreational products.

The Company works closely with its customers in the development of new
softgel products. Using its expertise in softgel technology, the Company has
developed its Scherersol systems to broaden the range of pharmaceutical products
which may be encapsulated in softgel form. ScherersolTM systems, most of which
are patented, often enable pharmaceutical companies to combine the advantages of
drugs in liquid solution with the convenience and dosage accuracy of softgels.
Additionally, Scherersol technologies, by providing a unique, patented dosage
delivery system, can often help protect a pharmaceutical compound against
competition from generic drugs throughout the life of the ScherersolTM patents.

The Company believes that changes currently affecting worldwide
pharmaceutical markets will enhance the commercial value of products which can
demonstrate therapeutic and cost benefits over existing therapies. To capitalize
on these trends, in September 1993 the Company formed ATP to manage the
development and registration of new pharmaceutical products which are based on
the reformulation of off-patent compounds and which utilize the Company's
proprietary drug delivery technologies. The Company expects that expenses
associated with the ATP initiative will aggregate $30-40 million over the next
three to four years. Revenues from ATP product sales and royalties are expected
to begin no earlier than fiscal 1997 assuming the development and
commercialization of such products is successful.

SOLID ORAL DELIVERY SYSTEMS

Softgel products accounted for approximately 90% of the Company's sales in
fiscal 1994. The following discussion describes the primary solid oral delivery
systems with which softgels compete.

19
<PAGE>
Pharmaceutical and health and nutritional products companies manufacture and
sell billions of unit dosages for solid oral ingestion ("oral dosages") each
year. These oral dosages contain pharmaceutical compounds or health and
nutritional ingredients and substantially all are sold in one of three dosage
forms: tablets, hardshell capsules or softgels.

Tablets. The most widely used of the solid oral dosage forms sold worldwide
is the tablet. Tablets are inexpensive and easy to produce, product throughput
is extremely high and production processes are relatively easy to control.
Tablets are an adequate dosage form for most pharmaceutical and health and
nutritional products and most manufacturers produce their own.

Hardshell Capsules. The second most widely used solid oral dosage form is
the hardshell capsule. Pharmaceutical manufacturers generally purchase empty
hardshell capsules from a hardshell manufacturer and fill the capsules
themselves. While hardshells are more difficult and more expensive to
manufacture than tablets, for time release capsules and certain compounds the
hardshell capsule is a better delivery system. Approximately 7% of the Company's
fiscal 1994 sales were from hardshell capsules.

Softgel Capsules. The third most widely used solid oral dosage form is the
softgel capsule. The Company believes that softgels represent approximately 3%
of the solid oral delivery market. The softgel process is the only widely
accepted process which facilitates the encapsulation of oils, other liquids and
solids in suspension in an oral dose. Certain products can only be manufactured
in liquid form while certain other products are more effective in liquid or
suspension than in other forms. Because the therapeutically active ingredients
of a drug are in a suspended or liquid state when encapsulated in softgels, in
certain circumstances the rapid dissolution or disintegration characteristics of
this dosage form can provide improved bioavailability and efficacy.

Other advantages of softgels include precise dosage control, minimal
ingredient loss in the manufacturing process, ease of swallowing and the ability
to more clearly evidence tampering. Moreover, the encapsulation of certain
liquids facilitates the administration of unpleasant tasting ingredients and
often improves the stability of ingredients, resulting in a longer shelf life.

SOFTGEL PRODUCTS AND MARKETS

The various softgel markets around the world were developed primarily by the
Company working in conjunction with its customers. The technical and commercial
staff of the Company work in close collaboration with the technical and
marketing staff of its customers to identify requirements and develop commercial
products.

Softgel capsules are used in the following three markets: (i) pharmaceutical
(both prescription and over-the-counter products); (ii) health and nutritional;
and (iii) other (cosmetics and recreational).

Pharmaceutical. The pharmaceutical markets in each country are relatively
similar due to the high degree of manufacturing regulation worldwide, together
with the globalization of the pharmaceutical industry. Scherer performs
especially well in a highly regulated environment where the customers' main
focus is on quality and service as opposed to price. Approximately 49% of the
Company's softgel sales were derived from the sale of pharmaceutical products
for the six months ended September 30, 1994.

The Company assists pharmaceutical companies in the formulation of liquids
and solids in suspension to be used in softgels. The Company's development of
its ScherersolTM systems broadens the range of pharmaceutical products which may
be encapsulated in softgel form. ScherersolTM softgel systems are liquid
formulation technologies which are designed to improve bioavailability of
pharmaceutical compounds that are inconsistently, incompletely or too slowly
absorbed from traditional oral dosage forms. ScherersolTM systems, most of which
are patented, often enable pharmaceutical companies to extend patent protection
and combine the advantages of active molecules in a solution with the
convenience and dosage accuracy of softgels.

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To date, the most significant product which has been reformulated using the
ScherersolTM systems is Sandimmun(R), a product developed and marketed by Sandoz
Pharma AG. Sandimmun(R) (cyclosporin A) is an immuno-suppressant which typically
is administered daily to organ transplant patients throughout their lives in
order to prevent post-operative organ rejection. By reformulating the drug into
softgel form, Scherer was able to mask Sandimmun's(R) unpleasant taste and
regulate the dosage size. Sandoz Pharma AG's annual worldwide sales of
Sandimmun(R) are currently estimated at $1 billion. To date, the Company
believes that a substantial portion of Sandimmun(R) sales continue to be in
non-softgel forms. Sandimmun represented approximately 2% of the Company's
fiscal 1994 softgel sales.

In addition, Neoral(R), a new formulation of cyclosporin A, has been
recently developed and patented by the Company and Sandoz Pharma AG. Neoral(R)
provides a significant improvement in bioavailability of cyclosporin A and is
intended to be used for additional indications. Neoral(R) has recently received
approval in Europe for the treatment of psoriasis, and applications are pending
in the U.S. for both psoriasis and rheumatoid arthritis.

The Company continues to develop new products for the OTC market. The
market's favorable response to softgel formulations of A.H. Robins' Dimetapp and
Robitussin and Burroughs Wellcome's Sudafed has resulted in similar product line
extension strategies for Schering-Plough's Drixoral, Bristol-Myers' Maximum
Strength Comtrex and Pfizer's Unisom SleepGels.

Health and Nutritional. Health and nutritional products consist primarily of
vitamins, minerals, supplements, and plant and fish oils. Some of the Company's
products involve relatively simple encapsulation of oils, such as vitamin E and
cod liver oil, while others are specifically formulated to the requirements of
customers and are developed with such customer's involvement. Some health and
nutritional products can only be formulated in softgel form, and other products
are formulated in softgel form for convenience and quality product line image.
Health and nutritional products represented approximately 38% of the Company's
softgel sales for the six months ended September 30, 1994.

Other--Cosmetics and Recreational. Other products represented approximately
13% of the Company's softgel sales for the six months ended September 30, 1994,
with approximately 6% attributed to cosmetics and 7% to recreational products.

The Company's products for the cosmetic market consist of: (i) specially
shaped softgels containing various topical oils and creams; and (ii) bath pearls
or bath capsules containing various oils and fragrances. The Company's largest
cosmetics customer, Elizabeth Arden Co., introduced Ceramide facial and eye
cream products using special twist-off softgel capsules to provide unit dosing
and prevent oxidation of the products before use. More recently,
Chesebrough-Ponds introduced its Dramatic Results Skin Smoothing Capsules
product, which also utilizes the Company's unit dose softgel formulation
technology. The Company continues to develop and market new products for the
growing cosmetic market. An example is a fragrance softgel Truscent(R), which
represents an economical, biodegradeable twist-off sampler providing a unit dose
of the actual perfume.

The Company manufactures paintball softgels for use in recreational
"paintball games." Various colors of water-soluble paint are encapsulated in
softgels and sold by the Company to qualified distributors. Originally
established in the United States, this sport is now also growing in popularity
internationally.

SCHERER DDS

In 1991, the Company formed a separate division, Scherer DDS, to focus on
the development of advanced drug delivery systems. Scherer DDS represents a
broadening of Scherer's existing business within its existing infrastructure,
and reflects the Company's commitment to this rapidly growing market segment.
The rationale for broadening its range of specialized technologies is based on
Scherer's established reputation within the pharmaceutical industry for
formulating innovative solutions to drug delivery problems and its longstanding
relationships with its pharmaceutical customers. The Company

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believes that demand for advanced drug delivery systems has grown because the
pharmaceutical industry is recognizing limitations to improving drug efficacy
and tolerance with conventional dosage form technologies. In addition, novel and
patentable formulation technologies can often help extend the product life cycle
of major drugs for many years, thus maximizing income streams from the
customers' significant research and development investments.

Scherer DDS, largely based in the United Kingdom, is responsible for the
development, manufacture and marketing of the Company's new advanced drug
delivery systems, including the Zydis(R) and Pulsincap(R) technologies.
Additionally, Scherer DDS is engaged in the search for other advanced drug
delivery systems which might complement the Company's existing technologies. In
January 1994, the Company acquired the rights to a novel ophthalmic drug
delivery system from Zeneca Limited. The system, which is in the early stages of
development, is intended to enable accurate, sensation-free application of drugs
to the eye. In March 1994, the Company entered into an agreement with
Coordinated Drug Development Limited, a United Kingdom-based drug research
concern, to fund feasibility studies for a unique patent-pending dry powder
inhaler device and a patented controlled-release tablet product.

Zydis(R). Zydis(R) is a freeze-dried, porous wafer containing a drug
substance which dissolves instantaneously on the tongue and does not require
water to aid swallowing. This feature of Zydis(R) is expected to improve patient
compliance, particularly among children and the elderly who frequently
experience difficulties in swallowing conventional dosage forms. The Zydis(R)
system has been patented in major markets extending through the year 2002, with
such patent protection extending to the active ingredients being delivered using
Zydis(R). Products incorporating Zydis(R) technology have received approvals for
use in eighteen countries.

The Company currently produces five Zydis(R) products: Pfizer's Feldene Melt
and Feldene Fast (piroxicam), Merck's Pepcidin Rapitab (famotidine), Janssen's
Imodium Lingual (loperamide), and two tranquilizer products containing lorazepam
and oxazepam for Wyeth-Ayerst International. At present, such products are sold
in Europe and Latin America. There are currently ten major products encompassing
Zydis(R) technology in different stages of development and regulatory approval,
including Glaxo's Zofran (ondansetron). Because patents covering active
compounds in these products have expired or will expire within the next few
years, the manufacturers of such products in many cases have been seeking
alternative patent-protected dosage forms. Conventional dosage forms of the
active compounds in these products are marketed by large multinational
pharmaceutical companies, and these products had aggregate annual sales
exceeding $5.0 billion in calendar 1993. In general, agreements with customers
call for customers to pay option fees to the Company for product class and/or
other forms of exclusivity as well as to pay certain of the costs for
development, clinical testing, obtaining regulatory approvals and
commercialization of the products. The Company will receive royalties, as well
as manufacturing revenues, assuming such products are successfully
commercialized. The Company recognized revenues of approximately $8.0 million in
fiscal 1994 related to Zydis(R) products.

Pulsincap(R). Pulsincap(R) is an oral drug delivery device which is designed
to release the drug in pulsed fashion at a predetermined time in the
gastrointestinal tract or at a predetermined site in the body. This dosage form
consists of a capsule composed of a water insoluble body and a water soluble
cap. The drug formulation is contained within the capsule body and is sealed in
by a hydrogel plug. At a specified time after ingestion, the drug is released
into the small intestine or colon for absorption into the blood stream.

The Company anticipates that the Pulsincap(R) system will have a broad range
of applications. Three major areas targeted are nocturnal (time-controlled)
delivery, colonic (site-specific) delivery, and reduced dosing frequency.

Nocturnal (Time-Controlled) Delivery. It is now increasingly recognized
that there are circadian patterns in the manifestations of many disease
states and that pharmacological treatment should reflect such rhythms.
Examples of such day/night variations are ischemic heart disease,

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asthma, arthritis and sleep disorders. The Pulsincap(R) dosage form provides
a delivery system that allows a dose of drug to be released in the body
after a predetermined time period, and has particular applications in those
diseases where a peak blood drug level is required during the night or
immediately after waking.

Colonic (Site-Specific) Delivery. In recent years, there has been a
rapidly growing interest in the study of the delivery of drugs to the lower
ileum or colon, particularly for the optimal treatment of local disorders
such as ulcerative colitis or Crohn's disease. The Pulsincap(R) technology
offers a system that can target the delivery of drugs to the colon without
the use of injections and could have applications in inflammatory bowel
disease (e.g., ulcerative colitis) and other disorders.

Reduced Dosing Frequency. The Pulsincap(R) design can enable it to
provide reduced dosing frequency for certain types of drug compounds. This
can be accomplished by placing one dose of the drug in the cap of the
device, and a second dose of the drug in the body of the device, which would
be released on a delayed basis. In this configuration, for example, a four
times per day dosing regime could be reduced to two times per day.

The Pulsincap(R) technology is covered by patents in major markets extending
through at least 2010. The Company has completed toxicology studies on the
hydrogel plug, and anticipates that several customer-funded feasibility studies
will be initiated in the next several months. The Company further expects that
several years of continued development and testing will be required before any
material commercial sales of Pulsincap(R) products are realized.

ADVANCED THERAPEUTIC PRODUCTS GROUP

The Company believes that changes currently affecting worldwide
pharmaceutical markets will enhance the commercial value of differentiated
products which can demonstrate therapeutic and cost benefits over existing
therapies. To capitalize on these market trends, in September 1993 the Company
formed ATP to manage the development and registration of new pharmaceutical
products which are based on the reformulation of off-patent compounds and which
utilize the Company's proprietary drug delivery technologies.

Unlike the development work it currently performs on behalf of its
customers, the Company intends to plan and execute the clinical development of
ATP products and take these products through the regulatory process in the
various markets for its own account. The Company believes that engaging in the
development of products using its technologies is a logical extension of the
Company's expertise in the drug delivery business, and is complementary to its
on-going customer-sponsored drug delivery activities. The Company has hired key
executive and technical personnel with extensive expertise in pharmaceutical
development, clinical testing and regulatory affairs to manage the activities of
ATP. The Company does not intend to build a sales and marketing infrastructure
for ATP products, but rather will license marketing rights to pharmaceutical
companies with well-developed distribution capabilities. The Company believes
that license fees, royalties and/or profit sharing resulting from the
development of ATP products could be significantly greater than those that can
be obtained on customer-directed work.

The Company expects that expenses associated with the ATP initiative will
aggregate $30-40 million over the next three to four years. Revenues from ATP
product sales and royalties are expected to begin no earlier than fiscal 1997,
assuming the development and commercialization of such products is successful.

ATP products involve the reformulation of existing compounds whose patent
protection has expired or is near expiration. Seven generic products are
currently under development or planned for development by ATP using ScheresolTM,
Zydis(R) and Pulsincap(R) drug delivery systems. These products are:

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Selegiline Zydis(R), Diclofenac Pulsincap(R), Dihydrorgotamine (DHE)
ScherersolTM, Progesterone/Estradiol ScheresolTM, Progesterone ScheresolTM,
Salbutamol Pulsincap(R), and Prednisolone Pulsincap(R). The Company anticipates
that the development, clinical testing and regulatory approval process for ATP
products will involve a shorter time period than that normally associated with a
new chemical entity, as the drugs used in the ATP formulation will already have
established records for safety, toxicity and tolerability.

INTERNATIONAL OPERATIONS

Approximately 73% of the Company's fiscal 1994 sales and 79% of its fiscal
1994 operating income were derived from its operations outside of the United
States. To serve new markets and to meet the needs of its multinational
customers, the Company operates nineteen softgel manufacturing facilities in
eleven countries throughout the world and also manufactures empty, two-piece
hardshell capsules in three of these countries. In addition, the Company has the
flexibility to transfer some of its production from one plant to another within
its worldwide network.

Currently, the Company is not subject to any significant government
restrictions as to the availability of any material cash flows from its foreign
subsidiaries; however, transfer of profits from certain foreign subsidiaries
could be subject to foreign exchange controls and to regulations of foreign
governments which may be in effect from time to time. In addition, the reported
consolidated results of the Company's operations are affected by foreign
currency fluctuations. Laws or regulations have been proposed or enacted in
various foreign countries which, among other things, specify the number of
national directors and restrict borrowing by foreign-owned companies.

The Company is also subject to certain restrictions pursuant to which R.P.
Scherer GmbH, the Company's 51% owned German subsidiary, has the exclusive right
to sell or manufacture softgels and hardshell capsules in eastern Europe and
certain countries in western Europe and Asia. These restrictions do not apply to
the Company's advanced drug delivery systems marketed by Scherer DDS.

MARKETING

The Company has focused its sales and marketing efforts to attract new
customers and expand the range of products provided to existing customers. The
following steps have been undertaken as part of the Company's focused marketing
approach: (i) the Company's marketing staffs have been increased significantly
worldwide; (ii) the Company segmented its marketing and technical departments
into distinct market segments (prescription pharmaceutical, over-the-counter
pharmaceutical, health and nutritional, cosmetics and others) to ensure that
qualified representatives are serving customers in each segment; (iii) each
subsidiary must submit specific annual marketing plans, which are reviewed in
detail by segment with the senior management of the Company; (iv) greater
sharing of ideas is encouraged through annual worldwide sales and marketing
meetings as well as more frequent informal communications; (v) a marketing
training program has been implemented; and (vi) the Company has made new product
development a collaborative effort with its customers.

The research and development departments of the Company's larger
subsidiaries are generally segmented by market. The Company's three major
research and development centers are located in the United States, Germany and
the United Kingdom, with smaller development resources at each of the other
facilities. Much of the new product development work is done jointly with the
Company's customers.

One of the goals of the marketing staff is to find new softgel applications
for pharmaceutical compounds currently sold in tablet or hardshell form. The
Company continuously examines commercial compounds that it considers candidates
for the softgel dosage form using the ScherersolTM technologies, focusing
primarily on compounds that are incompletely, slowly or inconsistently absorbed
in their current dosage form and are therefore strong candidates for improvement
by formulating them in softgels.

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In the health and nutritional market, the Company is continuing to work with
its well-known customers, such as Seven Seas Ltd. in the United Kingdom, on
product line extensions in softgel form. In the cosmetic market, after the
successful launch of Elizabeth Arden Co.'s Ceramide Time Complex Capsules in
fiscal 1992, the Company continued to work closely with Elizabeth Arden Co. to
develop a second product, Ceramide Eyes, which was launched in fiscal 1993. More
recently, Chesebrough-Ponds introduced its Dramatic Results Skin Smoothing
Capsules product, which also utilizes the Company's unit dose softgel
formulation technology.

The Company continues to market similar unit dose concepts to the cosmetic
industry. The newest innovation, Truscent(R), was launched in August 1994.
Truscent(R) is a softgel fragrance sampler which provides a unit dose of perfume
to the retail customer at a lower cost than glass vials. Truscent(R) provides
the additional advantages of preventing oxidation, portability, convenience,
unique shapes, and biodegradable packaging.

COMPETITION

The greatest competition to the Company's softgel dosage form for
pharmaceuticals, its major softgel market, historically has come from the
manufacturers of tablets and hardshell capsules in instances where technological
barriers to their usage did not exist. The Company believes that the most
significant disadvantages of softgel capsules compared to tablets or hardshell
capsules for pharmaceutical and health and nutritional product manufacturers
have been the relatively higher cost of softgels and the lack of control by such
manufacturers over the softgel manufacturing process. Because a relatively high
unit volume is necessary to manufacture softgels economically, no significant
pharmaceutical manufacturer and only one significant health and nutritional
product manufacturer produces its own softgels.

The Company is the world's largest manufacturer of softgels. The Company
believes it has a competitive advantage in the softgel business due to its
greater experience and advanced technology, its expertise in formulation of
difficult to encapsulate compounds, its extensive participation in customer
product development and its geographic breadth. The Company's principal softgel
competitors are several privately held manufacturers with substantially smaller
softgel operations generally geographically confined.

The largest producers of hardshell capsules are two multinational
pharmaceutical manufacturers which have substantially greater assets and sales
than the Company. In addition, the Company competes in various countries with
smaller hardshell manufacturers.

PRODUCT INFORMATION

The Company's business is not dependent upon a single product or a few
products. Softgels containing both natural and synthetic Vitamin E represented
approximately 11% of the Company's fiscal 1994 sales and 7% of sales for the six
months ended September 30, 1994; no other product represents 10% or more of the
Company's sales.

CUSTOMERS

No material part of the Company's business is considered to be dependent
upon a single customer or a few customers, and no single customer represents 10%
or more of the Company's sales.

SOURCES OF MATERIALS

The principal raw material used in the manufacture of softgels and hardshell
capsules is gelatin. Gelatin is obtained primarily regionally and in most
instances is available from multiple sources (and is generally purchased based
on a coordinated worldwide basis by the Company to obtain favorable

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terms.) The Company has never experienced any significant shortage of gelatin or
other significant raw materials.

PATENTS

The Company has a number of active patents on its specialized machinery,
processes, packaging, products and drug delivery systems. In addition, a number
of patent applications are pending and numerous trademarks are held. In the
opinion of management, the Company's businesses are not dependent upon any one
patent or trademark.

GOVERNMENT REGULATION

The Company's products and manufacturing processes and services are subject
to the applicable Good Manufacturing Practice standards for the pharmaceutical
industry and to other regulation by governmental agencies or departments in each
of the countries in which it operates. In the United States, the Company's
encapsulation products and manufacturing and packaging services are subject to
the Federal Food, Drug and Cosmetic Act, the Comprehensive Drug Abuse Prevention
and Control Act of 1970 and various rules and regulations of the Bureau of
Alcohol, Tobacco and Firearms of the United States Department of Treasury, the
Bureau of Narcotics of the United States Department of Justice and state
narcotic regulatory agencies. In other countries, the Company's products and
services are subject to analogous regulation.

The Company is regularly subjected to testing and inspection of its products
and facilities by representatives of various Federal agencies and in addition,
the Company comes under the regulation of various state, municipal and foreign
health agencies.

The Company is also required to obtain United States Food and Drug
Administration approval for sales in the United States as well as approval of
the appropriate agencies in other jurisdictions, prior to commencing the sale of
many of the proprietary products under development.

The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. Compliance with Federal, state
and local provisions relating to the protection of the environment has had no
material effect upon the capital expenditures, earnings or competitive position
of the Company and its subsidiaries. The Company was informed in August 1992
that soil at a manufacturing facility in North Carolina owned and operated by
the Company from 1975 to 1985 contained levels of certain substances which
exceeded environmental standards. The Company voluntarily initiated a remedial
investigation, and initial remedial and removal actions have been completed by
the Company and the current owner of the facility for the known soil
contamination at such site. The Company continues to perform additional studies
and remediation in the area, including testing and removal of groundwater, which
have indicated the necessity for additional remedial and removal actions. On the
basis of the results of investigations performed to date, the Company does not
believe that potential future costs associated with either the investigation or
any future remedial or removal action will ultimately have an materially adverse
impact on the Company's business or financial condition. Based on current
information, no other significant expenditures for environmental compliance are
contemplated in the foreseeable future.

EMPLOYEES

At March 31, 1994, the Company employed approximately 3,100 full-time
employees in its continuing operations. The Company considers its relations with
its employees to be good.

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DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company is 50,500,000 shares, of which
500,000 are preferred shares, par value $.01 per share (the "Preferred Stock"),
none of which are outstanding, and 50,000,000 are common shares, par value $.01
per share.

The following statements relating to the capital stock of the Company are
summaries and do not purport to be complete. Reference is made to the more
detailed provisions of, and such statements are qualified in their entirety by
reference to, the Restated Certificate of Incorporation, as amended (the
"Restated Certificate of Incorporation"), a copy of which has been previously
filed with the Commission.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share with respect to
all matters that are required by law to be submitted to stockholders of the
Company. The holders of Common Stock have the sole right to vote except as
otherwise provided by law or by the Restated Certificate of Incorporation of the
Company. The Common Stock does not have cumulative voting rights. The par value
of the Common Stock is $.01 per share.

Subject to the prior rights of holders of preferred stock of the Company, if
any, holders of the Common Stock are entitled to receive such dividends as may
be lawfully declared by the Board of Directors of the Company. Upon any
dissolution, liquidation or winding-up of the Company, whether voluntary or
involuntary, holders of the Common Stock are entitled to share ratably in all
assets remaining after the liquidation payments have been made on all
outstanding shares, if any, of preferred stock.

The shares of Common Stock are fully paid and nonassessable. The Common
Stock does not have any preemptive, subscription or conversion rights.
Additional shares of Common Stock may be issued without stockholder approval.

PREFERRED STOCK

The Board of Directors, without further action by the stockholders, is
authorized to issue 500,000 shares of Preferred Stock in one or more series and
to fix as to any series the dividend rate, redemption prices, preferences in
liquidation or dissolution, sinking fund terms, if any, conversion rights,
voting rights and any other preference or special rights and qualifications. The
issuance of Preferred Stock in certain circumstances may have the effect of
delaying, deferring or preventing a change of control of the Company, may
discourage bids for the Company's Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of and other
rights of the holders of Common Stock. The Company has no present plans to issue
any shares of Preferred Stock.

TRANSFER AGENT AND REGISTRAR

Society National Bank acts as the Transfer Agent and Registrar for the
Common Stock.

RESTRICTIONS ON DIVIDENDS

Restrictions contained in certain of the Company's long-term debt agreements
limit the payment of dividends on the capital stock of the Company.

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CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any person
who is, for United States federal income tax purposes, a foreign corporation, a
non-resident alien individual, a foreign partnership or a foreign estate or
trust. This discussion does not address all aspects of United States federal
income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to such Non-U.S. Holders in light of their
personal circumstances. Furthermore, this discussion is based on provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change. EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES
THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING
JURISDICTION.

DIVIDENDS

Dividends paid to a Non-U.S. Holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. However,
dividends that are effectively connected with the conduct of a trade or business
by the Non-U.S. Holder within the United States are not subject to the
withholding tax, but instead are subject to United States federal income tax on
a net income basis at applicable graduated individual or corporate rates. Any
such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.

Dividends paid to an address outside the United States are presumed to be
paid to a resident of such country (unless the payer has knowledge to the
contrary) for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. Under proposed United States
Treasury regulations not currently in effect, however, a Non-U.S. Holder of
Common Stock who wishes to claim the benefit of an applicable treaty rate would
be required to satisfy applicable certification and other requirements. Certain
certification and disclosure requirements must be complied with in order to be
exempt from withholding under the effectively connected income exemption
discussed above.

A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder will generally not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States, (ii) in the case of a
Non-U.S. Holder who is an individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other conditions are
met, or (iii) the Company is or has been a "U.S. real property holding
corporation" for United States federal income tax purposes.

The Company is not and does not anticipate becoming a "U.S. real property
holding corporation" for United States federal income tax purposes.

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FEDERAL ESTATE TAX

Common Stock held by an individual Non-U.S. Holder at the time of death will
be included in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.

Backup withholding (which generally is a withholding tax imposed at the rate
of 31% on certain payments to persons that fail to furnish certain information
under the United States information reporting requirements) generally will not
apply to dividends paid to a Non-U.S. Holder at an address outside the United
States (unless the payer has knowledge that the payee is a U.S. person).

Payment of the proceeds of a sale of Common Stock by or through a United
States office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a non-U.S. Holder, or otherwise establishes an exemption. In general,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a broker.
If, however, such broker is, for United States federal income tax purposes a
U.S. person, a controlled foreign corporation, or a foreign person that derives
50% or more of its gross income for certain periods from the conduct of a trade
or business in the United States, such payments will be subject to information
reporting, but not backup withholding, unless(1) such broker has documentary
evidence in its records that the beneficial owner is a Non-U.S. Holder and
certain other conditions are met, or (2) the beneficial owner otherwise
establishes an exemption.

Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.

The backup withholding and information reporting rules are currently under
review by the Treasury Department and their application to the Common Stock
could be changed by future regulations.

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UNDERWRITING

The underwriters of the offering of the Common Stock in the United States
and Canada named below (the "U.S. Underwriters") for whom Lehman Brothers Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc.,
Wertheim Schroder & Co. Incorporated and Robert W. Baird & Co. Incorporated are
acting as representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions of the U.S. Underwriting Agreement (the form
of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part) to purchase from the Selling Stockholders, and the
Selling Stockholders have agreed to sell to each U.S. Underwriter, the aggregate
number of shares of Common Stock set forth opposite their respective names
below:

NUMBER
U.S. UNDERWRITERS OF SHARES
- ---------------------------------------------------------------- ---------
Lehman Brothers Inc............................................. 1,040,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 1,040,000
Oppenheimer & Co., Inc. ........................................ 1,040,000
Wertheim Schroder & Co. Incorporated............................ 1,040,000
Robert W. Baird & Co. Incorporated.............................. 1,040,000
---------
Total....................................................... 5,200,000
---------
---------

The managers of the offering of Common Stock outside the United States and
Canada (the "International Managers") for whom Lehman Brothers International
(Europe), Donaldson, Lufkin & Jenrette Securities Corporation, Oppenheimer &
Co., Inc., J. Henry Schroder Wagg & Co. Limited and Robert W. Baird & Co.
Incorporated are acting as lead managers (the "Lead Managers") have severally
agreed, subject to the terms and conditions of the International Underwriting
Agreement (the form of which is filed as an exhibit to the Registration
Statement) to purchase from the Selling Stockholders, and the Selling
Stockholders have agreed to sell to each International Manager, the aggregate
number of shares of Common Stock set forth opposite their respective names
below:

NUMBER
INTERNATIONAL MANAGERS OF SHARES
- ---------------------------------------------------------------- ---------
Lehman Brothers International (Europe).......................... 200,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 200,000
Oppenheimer & Co., Inc. ........................................ 200,000
J. Henry Schroder Wagg & Co. Limited............................ 200,000
Robert W. Baird & Co. Incorporated.............................. 200,000
ABN AMRO Bank N.V. ............................................. 37,500
Banque Paribas.................................................. 37,500
Deutsche Bank Aktiengesellschaft................................ 37,500
Nikko Europe Plc................................................ 37,500
Societe Generale................................................ 37,500
UBS Limited..................................................... 37,500
VEREINS- UND WESTBANK Aktiengesellschaft........................ 37,500
S.G. Warburg Securities Ltd..................................... 37,500
---------
Total....................................................... 1,300,000
---------
---------

The U.S. Underwriting Agreement and the International Underwriting Agreement
(collectively, the "Underwriting Agreements") provide that the obligations of
the U.S. Underwriters and the International Managers to purchase shares of
Common Stock are subject to certain conditions, and that if any of the foregoing
shares are purchased by the U.S. Underwriters pursuant to the U.S. Underwriting
Agreement or by the International Managers pursuant to the International
Underwriting Agreement, all the shares of Common Stock agreed to be purchased by
either the U.S. Underwriters or the

30
<PAGE>
International Managers, as the case may be, pursuant to their respective
Underwriting Agreements must be so purchased. The offering price and
underwriting discounts and commissions for the United States Offering and the
International Offering are identical. The closing of the United States Offering
is a condition to the closing of the International Offering.

The Company and the Selling Stockholders have been advised that the U.S.
Underwriters and International Managers propose to offer shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus, and to certain selected dealers (who may include the U.S.
Underwriters and International Managers) at such public offering price less a
selling concession not in excess of $.76 per share to certain brokers and
dealers. The selected dealers may reallow a concession not in excess of $.10 per
share to certain brokers and dealers. After the public offering, the public
offering price, the concession to selected dealers and the reallowance may be
changed by the Representatives and Lead Managers.

Certain of the Selling Stockholders have granted to the U.S. Underwriters
and the International Managers options to purchase up to an additional 419,498
and 104,875 shares of Common Stock, respectively, at the initial public offering
price less the underwriting discounts and commissions shown on the cover page of
this Prospectus, solely to cover over-allotments, if any. Either or both options
may be exercised at any time up to 30 days after the date of this Prospectus. To
the extent that the U.S. Underwriters or International Managers exercise such
options, each of the U.S. Underwriters or International Managers, as the case
may be, will be committed, subject to certain conditions, to purchase a number
of option shares proportionate to such U.S. Underwriter's or International
Manager's initial commitment.

The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers pursuant to which
each U.S. Underwriter has agreed that, as part of the distribution of the shares
(plus any of the shares to cover over-allotments) of Common Stock offered in the
United States Offering, (a) it is not purchasing any of such shares for the
account of anyone other than a U.S. or Canadian Person (as defined below) and
(b) it has not offered or sold, and will not offer, sell, resell or deliver,
directly or indirectly, any of such shares or distribute any prospectus relating
to the United States Offering to anyone other than a U.S. or Canadian Person. In
addition, pursuant to this same Agreement, each International Manager has agreed
that, as part of the distribution of the shares plus any of the shares to cover
over-allotments of Common Stock offered in the International Offering, (a) it is
not purchasing any of such shares for the account of any U.S. or Canadian Person
and (b) it has not offered or sold, and will not offer, sell, resell or deliver,
directly or indirectly, any of such shares or distribute any prospectus relating
to the International Offering to any U.S. or Canadian Person. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions specified in the Underwriting Agreements and the Agreement Between
U.S. Underwriters and International Managers, including: (i) certain purchases
and sales between the U.S. Underwriters and the International Managers; (ii)
certain offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investment discretion; (iii)
purchases, offers or sales by a U.S. Underwriter who is also acting as an
International Manager or by an International Manager who is also acting as a
U.S. Underwriter; and (iv) other transactions specifically approved by the U.S.
Underwriters and the International Managers. As used herein, "U.S. or Canadian
Person" means any resident or citizen of the United States or Canada, any
corporation or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States federal or Canadian income taxation regardless of the source of
its income. The term "United States" means the United States of America
(including the District of Columbia) and its territories, its possessions and
other areas subject to its jurisdiction.

Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the International
Managers of such number of shares of Common Stock as may be mutually agreed. The
price of any shares so sold shall be the public offering price as then in effect
for Common Stock being sold by the U.S. Underwriters and the International

31
<PAGE>
Managers, less the selling concession unless otherwise determined by mutual
agreement. To the extent that there are sales between the U.S. Underwriters and
the International Managers pursuant to the Agreement Between U.S. Underwriters
and International Managers, the number of shares initially available for sale by
the U.S. Underwriters or by the International Managers may be more or less than
the amount specified on the cover page of this Prospectus.

Each U.S. Underwriter and International Manager has represented and agreed
that: (i) it has not offered or sold, and will not offer or sell, in the United
Kingdom, by means of any document, any shares of Common Stock other than to
persons whose ordinary business it is to buy or sell shares or debentures,
whether as principal or agent (except under circumstances which do not
constitute an offer to the public within the meaning of the Companies Act 1985);
(ii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Common Stock in, from or otherwise involving the United Kingdom; and (iii)
it has only issued or passed on, and will only issue or pass on to any person in
the United Kingdom, any document received by it in connection with the issue of
the Common Stock if that person is of a kind described in Article 9(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988
or is a person to whom the document may otherwise be lawfully issued or passed
on.

The shares of Common Stock have not been registered under the Securities and
Exchange Law of Japan and are not being offered and may not be offered or sold
directly or indirectly in Japan or to residents of Japan, except pursuant to
applicable Japanese laws and regulations.

Purchasers of the shares offered pursuant to the Offerings may be required
to pay stamp taxes and other charges in accordance with the laws and practices
of the country of purchase in addition to the offering price set forth on the
cover page hereof.

Certain of the U.S. Underwriters and International Managers have from time
to time provided investment banking, financial advisory and other services to
the Company, for which services such U.S. Underwriters and International
Managers have received and will receive customary fees and commissions. Two
officers of Lehman serve as directors of the Company and one such officer is an
officer of the Company. Pursuant to contract, another director of the Company
assists Lehman in managing its investment portfolio companies, including the
Company.

The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the U.S. Underwriters and the International Managers may be required to
make in respect thereof.

Prior to the Offerings, Lehman beneficially owned in the aggregate
approximately 30% of the outstanding Common Stock on a fully diluted basis.
Under Schedule E ("Schedule E") of the National Association of Securities
Dealers, Inc. ("NASD") by-laws, Lehman Brothers Inc. and Lehman Brothers
International Limited are affiliates of the Company. Therefore, the underwriting
arrangements for the Offerings will comply with the applicable requirements of
Schedule E to the By-laws of the NASD regarding an NASD member firm's
participation in distributing its affiliate's securities.

All proceeds from the sale of shares of Common Stock hereunder will be
received by the Selling Stockholders.

LEGAL MATTERS

The legality of the shares of the Common Stock offered pursuant to the
Offerings will be passed upon for the Company and the Selling Stockholders by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York, and for the U.S. Underwriters and
International Managers by Davis Polk & Wardwell, New York, New York.

32
<PAGE>
EXPERTS

The audited consolidated financial statements and schedules of the Company
and its subsidiaries included or incorporated by reference in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports. Reference is made to said reports, which include an
explanatory paragraph with respect to the change in the methods of accounting
for income taxes for the year ended March 31, 1993, and for postretirement
benefits other than pensions for the year ended March 31, 1992, as discussed in
Notes 6 and 11, respectively, to the audited consolidated financial statements
as of March 31, 1994.

33
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1994 (UNAUDITED):
Consolidated Statement of Operations for the three and six months ended
September 30, 1994 and 1993........................................................ F-2
Consolidated Statement of Financial Position as of September 30 and March 31, 1994... F-3
Consolidated Statement of Cash Flows for the six months ended
September 30, 1994 and 1993........................................................ F-4
Notes to Consolidated Financial Statements........................................... F-5

FINANCIAL STATEMENTS AS OF MARCH 31, 1994:
Consolidated Statements of Operations for the years ended
March 31, ]1994, 1993 and 1992..................................................... F-8
Consolidated Statement of Financial Position as of March 31, 1994 and 1993........... F-9
Consolidated Statement of Cash Flows for the years ended
March 31, 1994, 1993 and 1992...................................................... F-10
Consolidated Statement of Shareholders' Equity for the years ended
March 31, 1994, 1993 and 1992...................................................... F-11
Notes to Consolidated Financial Statements........................................... F-12
Report of Independent Public Accountants............................................. F-31
</TABLE>

F-1
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales........................................ $121,312 $105,179 $254,250 $213,633
Cost of sales.................................... 77,113 69,715 160,869 137,461
Selling and administrative expenses.............. 16,815 14,402 34,343 28,734
Research and development expenses, net........... 4,591 3,104 8,982 6,212
-------- -------- -------- --------
Operating income................................. 22,793 17,958 50,056 41,226
Interest expense................................. 3,674 6,027 7,220 11,727
Interest earned and other........................ (293) (364) (702) (954)
-------- -------- -------- --------
Income from continuing operations before income
taxes and minority interests..................... 19,412 12,295 43,538 30,453
Income taxes..................................... 6,890 3,602 15,430 10,050
Minority interests............................... 3,379 2,136 7,540 5,250
-------- -------- -------- --------
Net income....................................... $ 9,143 $ 6,557 $ 20,568 $ 15,153
-------- -------- -------- --------
-------- -------- -------- --------

Per Common and Common Equivalent Share:
Net income..................................... $0.37 $0.27 $0.84 $0.63

Average number of common and common equivalent
shares........................................... 24,446 24,208 24,421 24,191
</TABLE>

The accompanying notes are an integral part of this statement.

F-2
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1994 1994
------------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 22,281 $ 16,576
Short-term investments............................................. 4,412 6,041
Receivables, less reserves of:
September 30, 1994--$3.5 million; March 31, 1994--$2.9 million... 97,128 98,775
Inventories........................................................ 66,134 56,492
Other current assets............................................... 6,592 5,260
------------- ---------
196,547 183,144
------------- ---------
PROPERTY:
Property, plant and equipment, at cost............................. 318,092 284,992
Accumulated depreciation........................................... (76,927) (63,277)
------------- ---------
241,165 221,715
------------- ---------
OTHER ASSETS:
Intangibles, net of amortization................................... 189,754 188,396
Deferred financing fees, net of amortization....................... 1,805 1,658
Other assets....................................................... 17,003 18,501
------------- ---------
208,562 208,555
------------- ---------
$ 646,274 $ 613,414
------------- ---------
------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Notes payable and current portion of long-term debt................ $ 4,545 $ 3,936
Accounts payable................................................... 36,111 52,086
Accrued liabilities................................................ 43,304 36,802
Accrued income taxes............................................... 8,731 1,967
------------- ---------
92,691 94,791
------------- ---------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt..................................................... 190,514 187,949
Other long-term liabilities........................................ 52,253 49,865
Deferred income taxes.............................................. 30,533 30,745
Minority interests in subsidiaries................................. 36,206 35,354
------------- ---------
309,506 303,913
------------- ---------
COMMITMENTS AND CONTINGENCIES (Note 4)

SHAREHOLDERS' EQUITY:
Preferred stock, 500,000 shares authorized, none issued............ -- --
Common stock, $.01 par value, 50,000,000 shares authorized, shares
issued: September 30, 1994--23,299,417; March 31, 1994--23,287,043... 233 233
Additional paid-in capital......................................... 234,409 234,157
Retained earnings (deficit)........................................ 10,711 (9,857)
Currency translation adjustment.................................... (1,276) (9,823)
------------- ---------
244,077 214,710
------------- ---------
$ 646,274 $ 613,414
------------- ---------
------------- ---------
</TABLE>

The accompanying notes are an integral part of this statement.

F-3
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER
30,
------------------
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................. $20,568 $15,153
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation......................................................... 10,784 8,582
Amortization of intangible assets.................................... 2,892 2,383
Amortization of deferred financing costs and debt discount........... 464 735
Minority interests in net income..................................... 7,540 5,250
Deferred tax provision and other..................................... (142) (1,192)
(Increase) decrease in receivables................................... 5,613 (4,825)
Increase in inventories and other current assets..................... (6,931) (3,613)
Decrease in accounts payable and accrued expenses.................... (8,008) (4,879)
------- -------
Net cash provided by operating activities................................ 32,780 17,594
------- -------
INVESTING ACTIVITIES:
Purchases of plant and equipment....................................... (19,022) (16,469)
Acquisitions of businesses, net of cash acquired (Note 5).............. -- (33,761)
Proceeds from sales of plant and equipment............................. 373 155
Other.................................................................. (3,047) (3,049)
------- -------
Net cash used by investing activities.................................... (21,696) (53,124)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings..................................... 45,259 44,150
Long-term debt retirements and payments................................ (45,486) (10,389)
Short-term borrowings, net............................................. 915 (240)
Cash dividends paid to minority shareholders of subsidiaries........... (7,073) (1,203)
------- -------
Net cash provided (used) by financing activities......................... (6,385) 32,318
------- -------
Effect of currency translation on cash and cash equivalents.............. 1,006 (160)
------- -------
Net increase (decrease) in cash and cash equivalents..................... 5,705 (3,372)
Cash and cash equivalents, beginning of period........................... 16,576 30,389
------- -------
Cash and cash equivalents, end of period................................. $22,281 $27,017
------- -------
------- -------
</TABLE>

The accompanying notes are an integral part of this statement.

F-4
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the
accounts of R.P. Scherer Corporation (the "Company"), a Delaware corporation,
and its wholly-owned subsidiary, R.P. Scherer International Corporation
("Scherer International"). The Company's only operating asset is the common
stock of Scherer International. In the opinion of management, the accompanying
unaudited consolidated financial statements include all adjustments (consisting
only of normal recurring items) necessary for the fair presentation of financial
position and results of operations. These consolidated financial statements and
related notes have been prepared pursuant to the Rules and Regulations set forth
by the Securities and Exchange Commission and should be read in conjunction with
the financial statements and notes included in the Company's Annual Report on
Form 10-K for the year ended March 31, 1994, as filed with the Securities and
Exchange Commission. Certain items in the prior years' financial statements have
been reclassified to conform with the current year presentation.

2. INCOME TAXES

The Company records income tax expense for interim periods based on an
estimated consolidated effective income tax rate for the fiscal year. The
effective income tax rate in 1994 is higher than the U.S. Federal income tax
rate due to higher foreign income tax rates and goodwill amortization not
deductible for income tax purposes. For 1993, the effective rate is lower than
the U.S. Federal income tax rate primarily due to the recognition of foreign
income tax credits generated in the current year for U.S. tax purposes, offset
by goodwill amortization not deductible for income tax purposes.

3. INVENTORIES

The components of inventories are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1994 1994
------------- ---------
<S> <C> <C>
(IN THOUSANDS)
Raw materials and supplies.......................... $35,146 $26,760
Work in process..................................... 11,593 10,289
Finished goods...................................... 19,395 19,443
------------- ---------
$66,134 $56,492
------------- ---------
------------- ---------
</TABLE>

4. CONTINGENCIES

Three separate actions, which sought damages for, among other things,
alleged violations of state securities laws, fraud, misrepresentation, breach of
contract, conversion and negligence in connection with the 1986 private
placement sale of limited partnership interests and warrants of Paco Development
Partners II, a research and development partnership of which a former subsidiary
of the Company serves as general partner, have been settled in a class action
settlement. These actions include two New Jersey State court actions which were
consolidated (Nelson v. Dean Witter Reynolds, Inc., and Barrios et al. v. Paco
Pharmaceutical Services, Inc., et al.) and a New Jersey federal court action
(Nelson v. Ian Ferrier). The Company recognized during the fourth quarter of
fiscal 1994 a special charge of approximately $3.2 million representing the
anticipated amount of all settlement-related costs in excess of previously
provided reserves.

F-5
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. CONTINGENCIES--(CONTINUED)
On March 30, 1992, OCAP Acquisition Corp. ("OCAP") commenced an action in
the Supreme Court of the State of New York, County of New York, against Paco,
certain of its subsidiaries, the Company and Scherer International
(collectively, the "defendants"), arising out of the termination of an Asset
Purchase Agreement dated February 21, 1992 (the "Purchase Agreement") between
OCAP and the defendants providing for the purchase of substantially all the
assets of Paco. On May 15, 1992, OCAP served an amended verified complaint (the
"Amended Complaint"), asserting causes of action for breach of contract and
breach of the implied covenant of good faith and fair dealing, arising out of
defendants' March 25, 1992 termination of the Purchase Agreement, as well as two
additional causes of action that were subsequently dismissed by order of the
court. The Amended Complaint seeks $75 million in actual damages, $100 million
in punitive damages, as well as OCAP's attorney fees and other litigation
expenses, costs and disbursements incurred in bringing this action. Pre-trial
discovery with respect to the action is presently under way. Based upon the
investigation conducted by the Company to date, the Company believes that this
action lacks merit and intends to defend against it vigorously. In the opinion
of management, the ultimate outcome of this litigation will not have a material
adverse effect on the Company's business or financial condition.

The Company was informed in August 1992 that soil at a manufacturing
facility in North Carolina owned and operated by the Company from 1975 to 1985
contained levels of tetrachlorethene and other substances which exceeded
environmental standards. The Company voluntarily initiated a remedial
investigation, and initial remedial and removal actions have been completed by
the Company and the current owner of the facility for the known soil
contamination at such site. The Company continues to perform additional studies
and remediation of the area, including testing and removal of groundwater, which
may also indicate the necessity for additional remedial and removal actions. On
the basis of the results of investigations performed to date, the Company does
not believe that potential future costs associated with either the investigation
or any potential remedial or removal action will ultimately have a materially
adverse impact on the Company's business or financial condition.

The Company is a party to various other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources.

5. BUSINESS ACQUISITION

F-6
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. BUSINESS ACQUISITION--(CONTINUED)
The allocation of the purchase price to the assets and liabilities of
Pharmagel was based upon various valuations and studies. The adjustments to the
historical net assets of Pharmagel are summarized as follows (amounts in
thousands):

Historical net assets of Pharmagel at July 1, 1993............... $ 5,242
Adjustments of assets and liabilities:
Current assets................................................. (675)
Plant and equipment............................................ 1,321
Covenant not to compete........................................ 3,000
Goodwill....................................................... 27,200
Current liabilities............................................ (3,764)
Long-term liabilities.......................................... (2,324)
-------
$30,000
-------
-------

The cost of the covenant not to compete is being amortized over the life of
the agreement. Goodwill is being amortized on a straight-line basis over forty
years.

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1993
------------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Net sales............................................. $220,770
Net income............................................ $ 15,006
Net income per share.................................. $ 0.62
</TABLE>

As of September 1, 1993, the Company also acquired certain tangible and
intangible assets of Gayoso Wellcome S.A., a softgel manufacturer in Spain, for
a purchase price of approximately $9.5 million. Gayoso Wellcome's operations
were not material in relation to the Company's consolidated financial
statements, and pro forma information for this acquisition is therefore not
presented.

F-7
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales................................................... $449,297 $398,011 $337,786
Cost of sales............................................... 287,389 242,108 201,991
Selling and administrative expenses......................... 61,427 56,413 50,305
Litigation settlement and other (Notes 2, 14)............... 4,478 -- --
Stock and other compensation expense (Note 4)............... -- -- 13,060
Research and development expenses, net...................... 13,090 11,393 8,453
-------- -------- --------
Operating income............................................ 82,913 88,097 63,977
Interest expense............................................ 22,480 25,436 35,348
Interest earned and other................................... (1,911) (3,630) (3,390)
-------- -------- --------
Income from continuing operations before income taxes,
minority interests, and extraordinary loss.................. 62,344 66,291 32,019
Income taxes................................................ 18,737 24,056 22,269
Minority interests.......................................... 12,693 13,275 10,974
-------- -------- --------
Income (loss) from continuing operations before
extraordinary loss and accounting change.................. 30,914 28,960 (1,224)
Loss from discontinued operation, net of income taxes (Note
5)........................................................ -- (647) (16,538)
-------- -------- --------
Income (loss) before extraordinary loss and accounting
change...................................................... 30,914 28,313 (17,762)
Extraordinary loss from debt extinguishments (Note 9)....... (15,820) (8,392) (2,067)
Cumulative effect of accounting change (Notes 6, 11)........ -- 974 (4,917)
-------- -------- --------
Net income (loss)........................................... 15,094 20,895 (24,746)
Preferred stock dividends................................... -- -- 6,372
-------- -------- --------
Net income (loss) attributable to common shares (Note 4).... $ 15,094 $ 20,895 $(31,118)
-------- -------- --------
-------- -------- --------
Per Common Share Data:
Income (loss) from continuing operations.................. $ 1.27 $ 1.20 $ (0.50)
Loss from discontinued operations......................... -- (0.03) (1.09)
Extraordinary loss........................................ (0.65) (0.35) (0.14)
Accounting change......................................... -- 0.04 (0.32)
-------- -------- --------
Net income (loss) per common share (Note 4)........... $ 0.62 $ 0.86 $ (2.05)
-------- -------- --------
-------- -------- --------
</TABLE>

The accompanying notes are an integral part of this statement.

F-8
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------
1994 1993
-------- --------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 16,576 $ 30,389
Short-term investments............................................... 6,041 3,476
Receivables, less reserves of: 1994 - $2,900,000; 1993 -
$2,300,000............................................................. 98,775 80,537
Inventories.......................................................... 56,492 48,310
Other current assets................................................. 5,260 4,573
-------- --------
183,144 167,285
-------- --------
PROPERTY:
Property, plant and equipment, at cost............................... 284,992 243,538
Accumulated depreciation............................................. (63,277) (48,987)
-------- --------
221,715 194,551
-------- --------
OTHER ASSETS:
Intangibles, net of amortization..................................... 188,396 155,595
Deferred financing fees, net of amortization......................... 1,658 4,407
Other assets......................................................... 18,501 10,346
-------- --------
208,555 170,348
-------- --------
$613,414 $532,184
-------- --------
-------- --------
<CAPTION>

LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt.................. $ 3,936 $ 2,465
Accounts payable..................................................... 52,086 41,557
Accrued liabilities.................................................. 36,802 34,410
Accrued income taxes................................................. 1,967 7,336
-------- --------
94,791 85,768
-------- --------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt....................................................... 187,949 141,151
Other long-term liabilities.......................................... 49,865 38,812
Deferred income taxes................................................ 30,745 31,083
Minority interests in subsidiaries................................... 35,354 32,369
-------- --------
303,913 243,415
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 14)

SHAREHOLDERS' EQUITY (Note 4):
Preferred stock, 500,000 shares authorized, none issued (Note 2)..... -- --
Common stock, $.01 par value, 50,000,000 shares authorized, shares
issued: 1994 - 23,287,043; 1993 - 23,261,436........................... 233 233
Additional paid-in capital........................................... 234,157 233,511
Retained deficit..................................................... (9,857) (24,951)
Currency translation adjustment...................................... (9,823) (5,792)
-------- --------
214,710 203,001
-------- --------
$613,414 $532,184
-------- --------
-------- --------
</TABLE>

The accompanying notes are an integral part of this statement.

F-9
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
----------------------------------
1994 1993 1992
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 15,094 $ 20,895 $ (24,746)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 17,121 16,530 13,629
Amortization of intangible assets...................... 5,519 4,325 4,304
Amortization of deferred financing costs and debt
discount............................................. 1,330 1,823 2,007
Minority interests in net income....................... 12,693 13,275 10,974
Deferred tax provision and other....................... 2,631 1,682 2,359
Extraordinary loss from debt extinguishments (Note
9)......................................................... 15,820 8,392 2,067
Loss from discontinued operation (Note 5).............. -- 647 16,657
Stock option and other compensation expense (Note 4)... -- -- 13,060
Cumulative effect of accounting change................. -- (974) 4,917
Increase in receivables................................ (12,458) (16,160) (14,187)
Increase in inventories and other current assets....... (8,056) (6,161) (5,881)
Increase (decrease) in accounts payable and accrued
expenses................................................... (1,972) 1,699 11,374
--------- -------- ---------
Net cash provided by operating activities.................. 47,722 45,973 36,534
--------- -------- ---------
INVESTING ACTIVITIES:
Purchases of plant and equipment......................... (39,503) (33,192) (20,947)
Acquisition of businesses, net of cash acquired (Note
3)......................................................... (33,761) -- --
Proceeds from sales of plant and equipment............... 1,859 187 564
Proceeds from disposition of subsidiary.................. -- 28,047 --
Other.................................................... (3,279) 1,221 85
--------- -------- ---------
Net cash used by investing activities...................... (74,684) (3,737) (20,298)
--------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock................... -- -- 195,471
Purchases of exchangeable preferred stock................ -- -- (58,686)
Proceeds from issuance of 6 3/4% Senior Notes (Note 9)... 99,268 -- --
Defeasance of 14% Senior Subordinated Debentures (Note
9)......................................................... (141,546) -- --
Proceeds from other long-term borrowings................. 109,788 34,609 9,082
Other long-term debt retirements and payments............ (47,608) (80,177) (127,167)
Short-term borrowings, net............................... 642 (726) (11,897)
Cash dividends paid to minority shareholders of
subsidiaries............................................... (7,022) (9,979) (8,022)
--------- -------- ---------
Net cash provided (used) by financing activities........... 13,522 (56,273) (1,219)
--------- -------- ---------
Effect of currency translation on cash and cash
equivalents................................................ (373) (335) 317
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents....... (13,813) (14,372) 15,334
Cash and cash equivalents, beginning of period............. 30,389 44,761 29,427
--------- -------- ---------
Cash and cash equivalents, end of period................... $ 16,576 $ 30,389 $ 44,761
--------- -------- ---------
--------- -------- ---------
</TABLE>

The accompanying notes are an integral part of this statement.

F-10
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
COMMON STOCK (Note 4):
Balance at beginning of period............................ $ 233 $ 232 $ 20
Stock split............................................... -- -- 69
Issuance of common stock, including stock options
exercised................................................... -- 1 115
Conversions of preferred stock............................ -- -- 28
-------- -------- --------
Balance at end of period.............................. $ 233 $ 233 $ 232
-------- -------- --------
-------- -------- --------
SERIES B PREFERRED STOCK (Note 4):
Balance at beginning of period............................ -- -- $ 40,858
Conversions to common stock............................... -- -- (40,858)
-------- -------- --------
Balance at end of period.............................. $ -- $ -- $ --
-------- -------- --------
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL (Note 4):
Balance at beginning of period............................ $233,511 $232,935 $ 12,834
Stock options exercised, net of related tax effects....... 140 576 --
Issuance of common stock, net of expenses................. -- -- 194,123
Stock split............................................... -- -- (69)
Conversions of preferred stock............................ -- -- 49,830
Compensation related to stock options..................... 506 -- 12,343
17% Senior cumulative exchangeable preferred stock:
Stock redeemed.......................................... -- -- (29,754)
Stock dividends......................................... -- -- (5,336)
Accretion............................................... -- -- (1,036)
-------- -------- --------
Balance at end of period.............................. $234,157 $233,511 $232,935
-------- -------- --------
-------- -------- --------
RETAINED DEFICIT:
Balance at beginning of period............................ $(24,951) $(45,846) $(21,100)
Net income (loss)......................................... 15,094 20,895 (24,746)
-------- -------- --------
Balance at end of period.............................. $ (9,857) $(24,951) $(45,846)
-------- -------- --------
-------- -------- --------
CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period............................ $ (5,792) $ 4,313 $ 2,970
Adjustment for the period................................. (4,031) (10,105) 1,343
-------- -------- --------
Balance at end of period.............................. $ (9,823) $ (5,792) $ 4,313
-------- -------- --------
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. $214,710 $203,001 $191,634
-------- -------- --------
-------- -------- --------
</TABLE>

The accompanying notes are an integral part of this statement.

F-11
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated statement of financial position as of March 31, 1994 and
1993, and the consolidated statements of operations, shareholders' equity and
cash flows for the years ended March 31, 1994, 1993, and 1992 include the
accounts of R.P. Scherer Corporation (the "Company" and formerly RPS
Corporation), a Delaware corporation, and its wholly-owned subsidiary, R.P.
Scherer International Corporation ("Scherer International" and formerly R.P.
Scherer Corporation). The Company's only operating asset is the common stock of
Scherer International.

2. ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed by
the Company in preparing the consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and all of its direct and indirect domestic and foreign subsidiaries, some of
which are less than wholly-owned. All intercompany accounts and transactions
have been eliminated.

Revenue Recognition and Concentration of Credit Risk

Revenues from sales of the Company's products to its customers are
recognized primarily upon shipment of such products. The majority of the
Company's customers are concentrated in the pharmaceutical, health and
nutritional, and cosmetic markets.

Translation of Foreign Currencies

With the exception of operations in highly inflationary economies, which are
measured in U.S. dollars, the financial position and the results of operations
of the Company's foreign operations are measured using the local currencies of
the countries in which they operate and are translated into U.S. dollars in
conformity with Statement of Financial Accounting Standards No. 52, Foreign
Currency Translation. Accordingly, the reported sales and net income of the
Company's foreign subsidiaries are affected by changes in foreign currency
exchange rates, and as compared to prior periods are reported at higher or lower
amounts depending upon a weakening or strengthening of the U.S. dollar.
Aggregate sales of operations in highly inflationary economies represented less
than 5% of consolidated sales for each period presented in the consolidated
statement of operations.

Borrowings under any long-term foreign currency loans are used to hedge
against declines in the value of net investments in certain foreign
subsidiaries. The Company also periodically enters into foreign exchange
contracts to hedge certain exposures related to foreign currency transactions,
and does not engage in speculation. Gains and losses on the forward contracts
are recognized concurrently with the gains or losses from the underlying
transactions. At March 31, 1994, the Company was party to foreign currency
forward exchange sales contracts of approximately $10.9 million (notional
amount) denominated in European currencies. The contracts generally mature in
less than one year and are intended to hedge various foreign currency
commitments due from foreign subsidiaries. The Company is exposed to credit loss
in the event of nonperformance by the counterparties of these agreements, but
does not anticipate any such nonperformance.

Foreign currency exchange and translation adjustments (reflecting primarily
the translation of net assets at historical exchange rates for operations in
highly inflationary economies) included in net income resulted in net decreases
in income of $7.1 million, $3.5 million, and $1.4 million for the years ended
March 31, 1994, 1993 and 1992, respectively.

F-12
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. ACCOUNTING POLICIES--(CONTINUED)
Litigation Settlement and Other

In the fourth quarter of fiscal year 1994, the Company recognized a pretax
charge in the amount of $4.5 million as a result of the accrual of a potential
settlement for pending Paco Development Partners II ("PDP II") litigation (see
Note 14 for discussion) and a decision made by the Company to relocate its
Australian production operations. The Company has purchased a new facility in
Australia, and recognized a charge to operations of approximately $1.3 million
representing the anticipated costs of disposal related to the existing facility
and land.

Cash and Cash Equivalents and Short-Term Investments

The carrying value of cash and cash equivalents and short-term investments
approximates fair value due to the short maturities of these instruments. For
purposes of reporting cash flows, all highly liquid investments which are
readily convertible to known amounts of cash and have an original maturity of
three months or less when purchased are considered cash equivalents.

Inventories

Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out basis for substantially all inventories. Market is the
lower of replacement cost or estimated net realizable value. Finished goods and
work-in-process inventories include material, labor and manufacturing overhead
costs. The components of inventories are as follows:

1994 1993
------- -------
(IN THOUSANDS)
Raw materials and supplies.............................. $26,760 $23,881
Work in process......................................... 10,289 7,365
Finished goods.......................................... 19,443 17,064
------- -------
$56,492 $48,310
------- -------
------- -------

Property, Plant & Equipment

Property, plant and equipment is recorded at cost and is depreciated over
related estimated useful lives primarily using the straight-line method for
financial reporting and accelerated methods for tax reporting. Maintenance and
repair costs are expensed as incurred. Upon sale or retirement, property cost
and related depreciation is eliminated, and resulting gains or losses are
reflected in income. Interest cost capitalized as part of the construction cost
of capital assets amounted to $0.9 million in fiscal 1994, and was not
significant in fiscal 1993 and 1992. A summary of property follows:

1994 1993
-------- --------
(IN THOUSANDS)
Land and improvements................................. $ 16,844 $ 16,932
Building and equipment................................ 68,767 61,302
Machinery and equipment............................... 174,203 151,828
Construction in progress.............................. 25,178 13,476
-------- --------
$284,992 $243,538
-------- --------
-------- --------

F-13
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. ACCOUNTING POLICIES--(CONTINUED)
Intangibles and Deferred Financing Fees

Intangibles include principally goodwill (consisting of purchase price and
related acquisition costs in excess of the fair value of identifiable net assets
of businesses acquired, primarily related to the acquisition of the Company in
June 1989 and the acquisition of Pharmagel on July 1, 1993) as well as other
intangible amortization of intangibles is $21.5 million and $15.9 million as of
March 31, 1994 and 1993, respectively. Deferred financing fees are amortized
over the life of the related obligations using the effective interest method.
The accumulated amortization of deferred financing fees is $0.1 million and $9.7
million as of March 31, 1994 and 1993, respectively.

Research and Development Costs

Costs incurred in connection with the development of new products and
manufacturing methods are charged to income as incurred. Customer reimbursements
in the amount of $2.9 million, $1.1 million and $3.1 million were received for
the fiscal years ended March 31, 1994, 1993, and 1992, respectively. The amounts
reflected in the consolidated statement of operations are net of such
reimbursements.

Income Taxes

Deferred U.S. and foreign income taxes are provided on earnings of
subsidiary companies which are intended to be remitted to the parent company in
the future, based on enacted tax laws and rates. Unremitted earnings on which
deferred taxes have not been provided would, if remitted, be taxed at
substantially reduced effective rates due to the utilization of available
foreign tax credits.

Earnings Per Share

The computation of earnings per share is based on net income or loss less
preferred stock dividends and accretion between the fair value at the date of
issuance and the stated value of preferred stock (Note 4) divided by the
weighted average number of shares of common stock and dilutive common stock
equivalents (consisting solely of stock options) outstanding of 24,387,791,
24,223,059 and 15,202,793 for the years ended March 31, 1994, 1993, and 1992.
For fiscal year 1992, such amounts are restated to give effect to a 4.35:1 stock
split in October 1991 (Note 4). In addition, common stock equivalents were
anti-dilutive for the 1992 fiscal year, and were therefore excluded from the
computation.

Preferred Stock

The Company is authorized to issue 500,000 shares of preferred stock in one
or more series, and to fix as to any series the dividend rate, redemption
prices, preferences in liquidation or dissolution, sinking fund terms, if any,
conversion rights, voting rights and any other preference or special rights and
qualifications. The issuance of preferred stock in certain circumstances may
have the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Company's common stock at a premium over
the market price of the common stock, and may adversely affect the market price
of and other rights of the holders of common stock. The Company has no present
plans to issue any shares of preferred stock.

Reclassifications

Certain items in the prior years' financial statements and notes thereto
have been reclassified to conform with the current year presentation.

F-14
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. ACQUISITIONS

On July 1, 1993, the Company acquired all outstanding capital stock of
Pharmagel S.p.A. (Italy) and Pharmagel S.A. (France) (jointly "Pharmagel"), a
manufacturer of softgels which had been privately held. The Company accounted
for the acquisition as a purchase for financial reporting purposes, and has
included the net assets and results of operations of Pharmagel in the Company's
consolidated financial statements beginning July 1, 1993. The aggregate purchase
price, which approximated $30 million, was allocated to assets and liabilities
based on estimates of their fair values as of the date of acquisition, as well
as to a $3.0 million non-compete agreement with the former owners of Pharmagel.
The purchase was funded primarily by borrowings under the Company's bank credit
facility, plus an additional amount payable to the sellers during the next six
years not to exceed $4.5 million plus interest. Approximately $28.2 million of
estimated tangible assets were acquired, and approximately $24.4 million of
estimated liabilities were assumed. The purchase price exceeded the preliminary
estimated fair value of the net assets acquired by approximately $26.2 million,
which is classified as goodwill in the accompanying statement of financial
position and is being amortized on a straight-line basis over forty years. A
final allocation of the purchase price will be determined during fiscal 1995
when appraisals and other studies are completed.

The following unaudited pro forma summary presents the consolidated results
of operations of the Company and Pharmagel as if the acquisition had occurred at
the beginning of the periods presented after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense on
acquisition borrowings, and related income tax effects. The pro forma
information is not necessarily indicative of what would have occurred had the
acquisition been made as of those dates, and is not intended to be a projection
of future results or trends.
FOR THE YEAR ENDED
MARCH 31,
--------------------
1994 1993
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
Net sales............................................. $456,434 $426,498
Income from continuing operations..................... 30,767 27,972
Net income............................................ 14,947 19,907
Earnings per share from continuing operations......... 1.26 1.16
Net income per share.................................. 0.61 0.82

As of September 1, 1993, the Company also acquired certain tangible and
intangible assets of Gayoso Wellcome S.A., a softgel manufacturer in Spain, for
a purchase price of approximately $9.5 million. Gayoso Wellcome's operations are
not material in relation to the Company's consolidated financial statements, and
pro forma information for this acquisition is therefore not presented.

4. SALE OF COMMON STOCK AND RELATED TRANSACTIONS

October 1992 Offering

In October 1992, the Company completed a secondary offering of 3.5 million
shares of its common stock. The shares were sold by Shearson Lehman Brothers
Holdings Inc. and certain affiliated merchant banking partnerships (collectively
"Lehman"). The offering did not result in any additional shares outstanding of
the Company's common stock, and the Company did not receive any proceeds from
the

F-15
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. SALE OF COMMON STOCK AND RELATED TRANSACTIONS--(CONTINUED)
sale. Subsequent to completion of the offering, Lehman's beneficial ownership
amounted to approximately 30% of common shares outstanding (see Note 13).

October 1991 Offering

In October 1991, the Company completed a public sale of 11.5 million shares
of its common stock, representing approximately 47% of the Company's common
equity on a fully diluted basis. Net proceeds realized were approximately $195.5
million, of which approximately $124.0 million was used in October 1991 to
repurchase long-term debt under the Company's former senior bank credit
agreement and $58.7 million was used in November 1991 to redeem all outstanding
shares of the Company's 17% Exchangeable Preferred Stock. Remaining funds were
used for general corporate purposes. In connection with and upon consummation of
the common stock sale, all shares of the Company's Series B and Series C
preferred stocks were converted into common stock at the ratio of five (5)
common shares for nine (9) preferred shares (based upon the ratio of the
liquidation value of preferred shares to the initial public offering price) and
previously existing common shares were converted at the ratio of 4.35:1.

The Exchangeable Preferred Stock was reflected in the consolidated statement
of shareholders' equity at fair value as of the date of issuance plus stock
dividends and accretions computed using the effective interest rate method. The
difference between the carrying value of the Exchangeable Preferred Stock and
its redemption costs was reflected as a charge to additional paid-in capital.
During calendar year 1992, the Securities and Exchange Commission staff
implemented a policy which would have required the difference between the
redemption price and carrying value of the Exchangeable Preferred Stock,
amounting to $29.8 million, to be reflected as an increase to net loss
attributable to common shares. If such policy had been applied in connection
with the November 1991 redemption of Exchangeable Preferred Stock, net loss
attributable to common shares for the year ended March 31, 1992 would have
increased to $(60.9) million, or $(4.01) per common share, from the reported
$(31.1) million, or $(2.05) per common share.

Also in connection with the common stock sale, the vesting periods for
certain management stock options were accelerated. Additionally, notes
receivable aggregating $400,000 from certain officers were canceled upon
completion of the common stock sale (Note 13). The year ended March 31, 1992
reflects a one-time $12.3 million non-cash charge for compensation expense
relating to these items. The Company also recorded an extraordinary loss in the
amount of $2.1 million for the year ended March 31, 1992 relating to the early
retirement of the long-term debt, representing a write-off of unamortized
deferred financing costs associated with the debt.

5. DISCONTINUED OPERATION

In August 1991, the Company's Board of Directors reached a decision to
dispose of Paco Pharmaceutical Services, Inc. ("Paco"), through an active
program to sell the stock or substantially all assets of Paco. Accordingly, the
operating results of Paco have been classified as discontinued operations in the
accompanying consolidated financial statements and notes thereto for all years
presented. During the fiscal year ended March 31, 1992, an estimated loss from
disposal of $16.7 million, which represented a write-down of Paco's goodwill,
was recorded by the Company. No income tax benefit was recorded during fiscal
1992, as its realization could not be assured.

On August 26, 1992, Paco completed an initial public offering of its common
stock as a result of which the Company's ownership of Paco's common stock was
reduced to less than 1% of the outstanding

F-16
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. DISCONTINUED OPERATION--(CONTINUED)
stock. In the offering, Paco sold 4,000,000 shares of its common stock for
aggregate net proceeds of approximately $36.5 million. With the proceeds of such
offering, Paco paid $28.0 million to the Company in connection with the
satisfaction of an intercompany promissory note. In connection with the
offering, the Company agreed to indemnify Paco for any liabilities and costs
incurred subsequent to March 31, 1992, related to the litigation involving Paco
specifically described in Note 14. In addition, the Company has indemnified Paco
for any additional U. S. Federal and state income tax liabilities arising from
the date of the Company's acquisition of Paco through the date of completion of
the offering. The Company recorded an additional $0.6 million loss in connection
with the final accounting for the disposition of Paco, representing the
after-tax difference between net proceeds received and the Company's carrying
value of Paco as of August 26, 1992.

For the fiscal year beginning April 1, 1992 through August 26, 1992 (the
"date of disposal"), Paco recognized net sales of $30.2 million, interest
expense (allocated portion of consolidated interest expense based on debt
attributable to Paco) of $1.1 million, income tax expense of $1.0 million, and
no net income. For the fiscal year ended March 31, 1992, Paco recognized net
sales of $69.9 million, interest expense (as derived above) of $4.0 million,
income taxes of $0.5 million, and net income of $0.1 million.

Net current assets of $3.2 million and net non-current assets of $25.5
million were disposed of through the sale of Paco. The consolidated statement of
cash flows excludes Paco's net cash provided (used) of ($0.6) million and $0.8
million for the fiscal years ended March 31, 1993 and 1992, respectively.

6. INCOME TAXES

Effective April 1, 1992, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
SFAS 109 requires that deferred income taxes reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities and
the financial reporting amounts. Prior to fiscal year 1992, provisions were made
for deferred income taxes where differences existed between the time that
transactions affected taxable income and the time that these transactions
entered into the determination of income for financial reporting purposes. As of
April 1, 1992, the Company recorded income of approximately $1.0 million, or
$0.04 per share, which represented the net decrease in deferred tax liabilities
resulting from the adoption of SFAS 109. Such amount was reflected in the
consolidated statement of operations as the cumulative effect of an accounting
change. Prior years' financial statements have not been restated to apply the
provisions of SFAS 109.

A summary of income (loss) from continuing operations before income taxes,
minority interests and extraordinary items is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
------------------------------
1994 1993 1992
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) from continuing operations before income taxes,
minority interest and extraordinary items:
United States............................................... $ 1,505 $ 3,194 $(26,408)
Foreign..................................................... 60,839 63,097 58,427
------- ------- --------
$62,344 $66,291 $ 32,019
------- ------- --------
------- ------- --------
</TABLE>

F-17
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. INCOME TAXES--(CONTINUED)
Such income is exclusive of various intercorporate income/expense items,
such as royalties, interest, dividends and similar items, which are
taxable/deductible in the respective locations. Therefore, the relationship of
domestic and foreign taxes to reported domestic and foreign income is not
representative of actual tax rates.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision (credit) for currently payable income taxes:
United States................................................ $ 1,120 $ 1,570 $ (127)
Foreign...................................................... 17,453 21,442 20,924
------- ------- -------
18,573 23,012 20,797
------- ------- -------
Provision (credit) for deferred income taxes:
United States................................................ (21) (125) --
Foreign...................................................... 185 1,169 1,472
------- ------- -------
164 1,044 1,472
------- ------- -------
Total taxes.............................................. $18,737 $24,056 $22,269
------- ------- -------
------- ------- -------
</TABLE>

The deferred tax provision for fiscal year 1994 includes a credit of $1.7
million from net reductions in enacted statutory tax rates in certain countries,
as well as a $0.8 million charge resulting from an increase in deferred tax
valuation allowances during the period. The deferred tax provision for fiscal
year 1993 includes a charge of $4.5 million resulting from increases in deferred
tax valuation allowances during the period. In fiscal year 1992, the primary
sources and tax effects of the deferred tax timing differences were depreciation
and property retirements ($1.2 million) and interest ($0.3 million).

The components of deferred taxes as of March 31, 1994 and 1993 are as
follows:

<TABLE>
<CAPTION>
1994 1993
---------------------------- ----------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Property, plant and equipment.............. $ 852 $ 35,974 $ -- $ 35,611
Foreign tax credit carryforwards........... 9,050 -- 10,542 --
Capital loss carryforwards................. 6,379 -- 5,953 --
Pensions and other postretirement
benefits................................... 5,782 1,299 5,501 1,500
Stock options.............................. 3,665 -- 3,679 --
Defeasance of debt (Note 9)................ 4,758 -- -- --
Miscellaneous other........................ 8,678 790 6,168 702
------------ ------------ ------------ ------------
Subtotal............................. 39,164 38,063 31,843 37,813
Valuation allowances....................... (25,390) -- (23,777) --
------------ ------------ ------------ ------------
Total deferred taxes................. $ 13,774 $ 38,063 $ 8,066 $ 37,813
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

At March 31, 1994, net current future tax benefits of $1.8 million were
included in other current assets, while $0.1 million of net current deferred tax
liabilities were included in accrued liabilities in the accompanying
consolidated statement of financial position. In addition, $4.8 million of net
long-term future tax benefits were included in other assets, and $30.7 million
of net long-term deferred tax

F-18
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. INCOME TAXES--(CONTINUED)
liabilities are reflected in that statement. At March 31, 1993, net current
future tax benefits of $1.5 million were included in other current assets, while
$0.1 million of net current deferred tax liabilities were included in accrued
liabilities in the accompanying consolidated statement of financial position. In
addition, $31.1 million of net long-term deferred tax liabilities are included
in deferred income taxes in that statement.

The difference between consolidated income taxes as computed at the United
States statutory rate and as reported in the consolidated statement of
operations is summarized as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
United States statutory tax.................................... $21,820 $22,539 $10,886
Increases (reductions) in taxes due to:
Difference in effective foreign tax rates.................... (2,467) 1,590 4,840
Foreign tax credit carryforwards (utilized) generated........ (1,803) 2,388 --
Stock option compensation.................................... 115 124 4,290
Domestic losses.............................................. -- -- 799
Goodwill amortization........................................ 1,490 1,252 1,291
Translation losses........................................... (595) (1,752) 407
Changes in valuation allowances and other items, net......... 177 (2,085) (244)
------- ------- -------
Consolidated income taxes................................ $18,737 $24,056 $22,269
------- ------- -------
------- ------- -------
</TABLE>

The capital loss carryforwards noted above expire in 1998. The foreign tax
credit carryforwards noted above expire through 1998. At March 31, 1994, foreign
earnings of approximately $69.7 million have been retained indefinitely by
subsidiaries for reinvestment, and accordingly no provision is made for income
taxes that would be payable upon the distribution of such earnings. It is not
practicable to determine the amount of the related unrecognized deferred income
tax liability, if any.

The Company's U.S., Australian, and certain German income tax returns are
undergoing routine reviews encompassing several fiscal years. Various open
issues involving the U.S. tax returns are awaiting final resolution with the
Internal Revenue Service, however, the Company believes that the impact of the
resolution of such issues will not be material to its financial position. While
the Company has not received any formal notification from either the Australian
or German tax authorities, preliminary communications indicate the Company's
positions on deductibility of certain expenses may be challenged. Based upon
review of these issues by management and legal and tax advisors, the Company
does not believe the ultimate outcome of these matters will have a material
adverse impact on its business or financial position.

Income tax payments, net of refunds, were $18.9 million, $22.5 million and
$12.3 million for the years ended March 31, 1994, 1993 and 1992.

F-19
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. ACCRUED AND OTHER LONG-TERM LIABILITIES

Accrued and other long-term liabilities consist of the following as of March
31, 1994 and 1993:

<TABLE>
<CAPTION>
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued Liabilities:
Salaries, wages and bonuses............................................ $11,606 $ 8,994
Interest............................................................... 1,695 7,780
Other.................................................................. 23,501 17,636
------- -------
$36,802 $34,410
------- -------
------- -------
Other Long-Term Liabilities:
Pension and welfare benefits (Note 11)................................. $28,808 $27,836
Postretirement benefits (Note 11)...................................... 5,968 5,534
Other.................................................................. 15,089 5,442
------- -------
$49,865 $38,812
------- -------
------- -------
</TABLE>

8. SHORT-TERM BORROWINGS AND LINES OF CREDIT

The Company has short-term line of credit arrangements with foreign banking
institutions whereunder, at March 31, 1994, the Company and its subsidiaries may
borrow up to approximately $15.5 million subject to limitations imposed by the
bank credit facility (Note 9). There are no compensating balance requirements
related to these lines of credit. The total indebtedness outstanding under such
arrangements was $2.6 million and $1.1 million at March 31, 1994 and 1993,
respectively.

Short-term borrowings, based on the amounts outstanding at the end of each
month, were as follows:

<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------
1994 1993 1992
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount outstanding...................................... $2,607 $1,551 $10,374
Average amount outstanding...................................... 2,052 1,163 5,212
Weighted average interest rate during the year.................. 9.0% 7.9% 10.3%
Weighted average interest rate at March 31...................... 8.5% 7.5% 9.3%
</TABLE>

F-20
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. LONG-TERM DEBT

Long-term debt consists of the following as of March 31, 1994 and 1993:

1994 1993
-------- --------
(IN THOUSANDS)
Senior notes (net of discount of $723 in 1994)........ $ 99,277 $ --
Borrowings under bank credit agreement................ 65,842 2,270
Senior subordinated debentures (net of discount of
$5,482 in 1993)..................................... -- 119,656
Capitalized lease obligations (Note 10)............... 1,398 10,485
Industrial development revenue bonds.................. 10,922 8,561
Other................................................. 11,838 1,536
-------- --------
189,277 142,508
Less--current portion................................. (1,328) (1,357)
-------- --------
$187,949 $141,151
-------- --------
-------- --------

In January 1994, Scherer International completed a public offering of $100
million aggregate principal amount of its 6 3/4% Senior Notes ("Senior Notes")
due February 1, 2004 ("Offering"). The Senior Notes are noncallable and are
unsecured obligations, ranking pari passu with all other unsecured and senior
indebtedness of Scherer International. Interest on the Senior Notes is payable
February 1 and August 1, commencing August 1, 1994. The indenture under which
the Senior Notes were issued contains certain covenants which, among other
things, limit the ability of the Company and its subsidiaries to incur liens, to
enter into sale and lease-back transactions, to engage in certain transactions
with affiliates, and to merge or consolidate with, or transfer all or
substantially all, of its assets to another person. The proceeds of the Offering
to the Company were $99.3 million.

On January 28, 1994, with the net proceeds from the Offering and additional
proceeds from borrowings under the Company's bank credit facility, the Company
defeased its 14% Senior Subordinated Debentures ("Subordinated Debentures"),
which have an outstanding principal amount of $125.1 million. The Company
deposited into an irrevocable trust account for the benefit of the holders of
the Subordinated Debentures an amount of United States government obligations
sufficient to pay, with respect to the Subordinated Debentures, all interest
thereon through the November 1, 1994 call date ("Call Date"), the call premium
thereon and the outstanding principal thereof when due upon redemption
("Defeasance"). The Company remains obligated to pay interest and principal on
the Subordinated Debentures when due but, subject to certain exceptions, is no
longer subject to the terms, agreements and covenants related to the
Subordinated Debentures.

As a result of the Defeasance, the Company recognized an extraordinary loss
of $15.5 million ($0.64 per share) in the quarter ended December 31, 1993,
reflecting the estimated after-tax difference between the recorded value of the
Subordinated Debentures and their face value, the call premium, the prepayment
of net interest through the Call Date, and the write-off of unamortized deferred
financing costs related to the Subordinated Debentures. The Company also
recognized future tax benefits of approximately $4.8 million related to the
Defeasance.

In March 1994, the Company entered into a new bank credit facility as a
replacement for the Company's previous bank credit agreement. The new credit
facility allows for revolving credit borrowings up to an aggregate of $175.0
million, in various currencies, and expires April 1, 1999. Interest is payable
quarterly at LIBOR plus .675% currently, with further reductions possible based
on certain financial performance criteria, or at the bank's prime rate. Unused
borrowing availability is subject to

F-21
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. LONG-TERM DEBT--(CONTINUED)
annual commitment fees of . Borrowings under this agreement are unsecured, and
rank pari passu with all other unsecured and senior indebtedness of Scherer
International. In connection with the new credit facility, the Company
recognized a $0.3 million extraordinary loss, reflecting the write-off of
unamortized deferred financing costs related to the former credit agreement, net
of $0.1 million tax effects.

The bank credit facility requires the Company to satisfy various annual and
quarterly financial tests, including maintenance on a consolidated basis of a
specified minimum or maximum current level of tangible net worth and cash flow
coverage, leverage, and fixed charge ratios. The agreement also restricts the
Company's ability to incur additional indebtedness or liens, make investments
and loans, dispose of assets, or engage in certain business combinations, and
limits the ability of the Company to pay dividends. The indenture under which
the Senior Notes were issued also restricts the Company's ability to incur
additional liens, enter into sale-leaseback transactions, engage in certain
transactions with affiliates, and engage in certain business combinations. As of
March 31, 1994, the Company does not currently have plans to declare or pay any
cash dividends.

The Company has variable interest rate industrial development revenue bonds
aggregating $10.9 million due through fiscal years ending in 2015. The interest
rates in effect at March 31, 1994, ranged from 4.6% to 4.8%.

The annual maturities of long-term debt, excluding amounts payable under
capitalized lease obligations, for the five succeeding fiscal years are:
1995--$1.3 million; 1996--$1.3 million; 1997--$2.1 million; 1998--$0.8 million;
and 1999--$0.6 million. Interest paid was $28.1 million, $23.7 million, and
$45.0 million for the years ended March 31, 1994, 1993, and 1992, respectively.

The fair value of the Senior Notes, estimated based on quoted market prices
as of March 31, 1994, was approximately $88.5 million. Fair values of other
long-term debt, determined based on interest rates that are currently available
to the Company for similar types of borrowings, approximate carrying value.

F-22
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. LEASES

Total rental expense under operating leases was $7.1 million, $7.6 million,
and $7.5 million for the years ended March 31, 1994, 1993, and 1992,
respectively. The present value of capitalized lease obligations is classified
as long-term debt and the related assets are classified as land, buildings and
equipment. As of March 31, 1994, the minimum rental commitments under long-term
operating and capitalized leases are as follows:

CAPITAL OPERATING
LEASES LEASES
-------- ---------
(IN THOUSANDS)
1995.................................................... $ 229 $ 6,019
1996.................................................... 174 5,913
1997.................................................... 174 5,606
1998.................................................... 174 5,109
1999.................................................... 174 4,890
2000 and thereafter..................................... 1,529 36,145
-------- ---------
2,454 $63,682
---------
---------
Less--amount representing interest...................... (1,056)
--------
Present value of net minimum lease payments............. $ 1,398
--------
--------

11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Pensions

The Company has several pension plans covering substantially all salaried
and hourly employees. In general, the Company's domestic plans provide defined
pension benefits based on years of service and the level of compensation.
Foreign subsidiaries provide for pension benefits in accordance with local
customs or law. The Company funds its pension plans at amounts required by the
applicable regulations. Pension expense included the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH
31,
----------------------------
1994 1993 1992
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost of benefits earned during year...................... $3,255 $ 2,474 $ 1,965
Interest cost on projected benefit obligation.................... 4,191 3,665 3,217
Actual return on plan assets..................................... (3,602) (2,633) (2,475)
Net amortization and deferral.................................... 774 705 338
------ ------- -------
$4,618 $ 4,211 $ 3,045
------ ------- -------
------ ------- -------
</TABLE>

F-23
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
The following table shows the status of the various plans and amounts
included in the Company's consolidated statement of financial position as of
March 31, 1994 and 1993:

<TABLE>
<CAPTION>
1994 1993
-------------------------------- --------------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
-------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation........ $ 4,723 $ 41,507 $ 4,479 $ 31,865
Non-vested benefit obligation.... 293 4,331 122 4,509
------- -------------- ------- --------------
Accumulated benefit
obligation......................... 5,016 45,838 4,601 36,374
Effects of anticipated future
compensation increases............. 987 8,228 1,168 7,350
------- -------------- ------- --------------
Projected benefit obligation... 6,003 54,066 5,769 43,724
Plan assets at fair value.......... 9,504 18,576 8,660 12,773
------- -------------- ------- --------------
Projected benefit obligation in
excess of (less than) plan
assets............................. (3,501) 35,490 (2,891) 30,951
Unamortized net gain (loss)........ 44 (5,794) (858) (2,576)
Unrecognized prior service cost.... (152) (386) (180) (430)
------- -------------- ------- --------------
Accrued pension (asset) liability
recorded in the consolidated
statement of financial position.... $ (3,609) $ 29,310 $ (3,929) $ 27,945
------- -------------- ------- --------------
------- -------------- ------- --------------
</TABLE>

Plan assets consist primarily of annuities, marketable securities and
mortgage notes receivable.

The average of the assumptions used as of March 31, 1994, 1993 and 1992 in
determining the pension expense and benefit obligation information shown above
were as follows:

<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................ 7.4 % 8.0 % 8.4%
Rate of compensation increase............................ 5.0 5.0 5.0
Long-term rate of return on plan assets.................. 9.9 9.9 10.5
</TABLE>

Postretirement and Other Benefits

In fiscal year 1992, the Company adopted Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS 106") effective as of April 1, 1991. SFAS 106 requires that the
expected cost of postretirement benefits be charged to expense during the years
that eligible employees render service. Upon adoption of SFAS 106, the Company
charged the cumulative effect of the unfunded obligation of $4.9 million against
earnings during 1992.

F-24
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
The following table reconciles the status of the accrued postretirement
liability as of March 31 (based on January 1 measurement dates):

1994 1993
------ ------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees................................................ $2,940 $4,408
Active employees........................................ 1,171 910
------ ------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... 4,111 5,318
Unrecognized net gain (loss).............................. 2,057 416
------ ------
Accrued postretirement benefit liability (including $200
in current liabilities)................................. $6,168 $5,734
------ ------
------ ------

Net postretirement benefits cost for the years ended March 31, 1994, 1993
and 1992 included:

1994 1993 1992
---- ---- ----
(IN THOUSANDS)
Service cost........................................... $173 $129 $ 96
Interest cost on accumulated postretirement benefit
obligation............................................. 441 468 447
---- ---- ----
Net postretirement benefit cost........................ $614 $597 $543
---- ---- ----
---- ---- ----

For measurement purposes, an 11% annual rate of increase in the per capita
costs of covered health care claims was assumed for 1994, and 12% for 1993 and
1992. The rate was assumed to decrease by 1% in fiscal 1995 and each year
thereafter to a rate of 6% beyond 1999. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
the measurement date of January 1, 1994, by $514,500 and the aggregate of the
service and interest cost components of net postretirement cost for fiscal 1994
by $87,000. The discount rate used in determining the accumulated postretirement
benefit obligation was 7.5% for fiscal 1994 and 8.25% for fiscal 1993.

In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits, which must be adopted for the Company's 1995 fiscal
year. This statement requires the use of the accrual method to recognize
liabilities for postemployment benefits. The Company has determined that the
adoption of this statement will not significantly affect the Company's future
financial results or position.

12. STOCK COMPENSATION PLANS

1992 Stock Option Plan

In February 1992, the Board of Directors approved a new management stock
option plan designed to provide key management personnel stock options for
maximizing shareholder value through improved Company financial performance.
Under such plan, management participants are required to purchase options for
common stock at a cost equal to 10% of an average market value per share at the
beginning of the fiscal year. The exercise price of such options is set at the
average beginning of the year common

F-25
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. STOCK COMPENSATION PLANS--(CONTINUED)
stock market value per share, net of the purchase cost, increased by a 10%
annual rate compounded over five years. The number of stock options a
participant is required to purchase is based upon a financial performance
formula established by the Compensation Committee of the Board of Directors.

As an added incentive to increase shareholder value, participants are
provided one standard stock option for each purchased stock option. Each
standard stock option is exercisable at an average market value per share at the
beginning of the fiscal year, and may only be exercised when the purchased
option is exercised. Both types of options vest after three years from the date
of grant, and expire four years after the date of vesting.

A total of 334,877 stock options were granted for fiscal 1994. For such
grants, the purchased options, costing $2.77 each, will be exercisable at $40.07
per share, and the standard options will be exercisable at $27.65 per share.
Compensation expense of $0.3 million was recorded for fiscal 1994 in connection
with the 1992 Stock Option Plan.

A total of 325,981 stock options were granted for fiscal 1993. For fiscal
1993 grants, the purchased options, costing $2.74 each, will be exercisable at
$39.67 per share, and the standard options will be exercisable at $27.38 per
share. No compensation expense was recorded for fiscal 1993 in connection with
this plan.

A total of 381,452 stock options were granted for fiscal 1992. For fiscal
1992 grants, the purchased options, costing $1.80 each, will be exercisable at
$26.09 per share, and the standard options will be exercisable at $18.00 per
share. Compensation expense of $0.7 million was recorded for fiscal 1992 in
connection with this plan.

During 1994, none of the 1992 Plan options were exercised. As of March 31,
1994, a total of 157,690 options for common shares remain available for grant
for up to the next two fiscal years.

Director Stock Options

In fiscal 1992, a total of 36,000 options were granted to the Company's
three outside directors. These options are exercisable at $18.00 per share, vest
after three years from the date of grant, and expire seven years after the date
of vesting. None of these options were exercised in 1993 or 1994.

1990 Stock Option Plans

In November 1990 the Company implemented three stock option plans under
which a total of an adjusted 1,239,612 options for shares of the Company's
common stock were authorized for issuance to key management personnel. As a
result of the Company's sale of common stock in October 1991, all options
granted under such plans became fully vested (Note 4). Information on the number
of shares under option for the 1990 Plan, exercisable at $5.49 per share, is as
follows:

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Number of shares under stock options--1990 Plan:
Outstanding at beginning of year........................ 1,099,272 1,204,225 1,159,111
Granted during year..................................... -- -- 45,114
Exercised............................................... (25,607) (104,953) --
--------- --------- ---------
Outstanding at end of year............................ 1,073,665 1,099,272 1,204,225
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-26
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. STOCK COMPENSATION PLANS--(CONTINUED)
The amounts set forth above are adjusted to reflect the 4.35:1 common stock
split and conversion of Series B Preferred Stock described in Note 4.

13. RELATED PARTY TRANSACTIONS

Certain foreign subsidiaries purchase gelatin materials and Scherer
International's German subsidiary leases plant facilities, purchases other
services and receives loans from time-to-time from a German company which is
also the minority shareholder of the Company's German and certain other European
subsidiaries.

Gelatin purchases, at prices comparable to estimated market prices, amounted
to $18.7 million, $19.6 million, and $17.7 million for the years ended March 31,
1994, 1993, and 1992, respectively. Rental payments amounted to $4.7 million,
$4.7 million, and $4.4 million and purchased services amounted to $4.6 million,
$5.4 million, and $5.5 million for each of the respective years.

Lehman and certain of its affiliates have received fees for services in
connection with public offerings of the Company's securities and other matters.
During the year ended March 31, 1994, the Company paid $0.7 million for
underwriting fees to Lehman in connection with the January 1994 Senior Notes
offering (Note 9). During the year ended March 31, 1992, the Company paid $3.5
million for underwriting fees in connection with the October 1991 initial public
offering (Note 4). No fees were paid by the Company to Lehman or its affiliates
during the year ended March 31, 1993.

On October 30, 1990, the Company loaned to Messrs. Cashman and Erdeljan
$400,000, which loan was to mature October 26, 1992 and did not bear interest.
In connection with the October 1991 stock offering, the Company forgave the loan
and paid the related income taxes (Note 4).

14. COMMITMENTS AND CONTINGENCIES

The Company's former subsidiary Paco Pharmaceutical Services, Inc. ("Paco"),
certain of Paco's subsidiaries, the Company and other defendants are parties to
a group of actions commenced, beginning in April 1990, in Federal and state
courts in New Jersey and in Federal courts in New York and Massachusetts by
limited partners of Paco Development Partners II ("PDP II"), a research and
development partnership in which a subsidiary of Paco serves as the general
partner. The defendants were granted summary judgment for dismissal with respect
to the New York actions on March 29, 1993, and the time to appeal this decision
has expired. In the New Jersey state court action (Nelson v. Dean Witter
Reynolds, Inc., MRS-L-5014-90), a class consisting of the 14 investors who
reside in New Jersey has been certified. On October 23, 1992, the Company, Paco
and its affiliates moved for summary judgment as to three counts of the
complaint. This motion was denied on January 6, 1993. A second action commenced
in New Jersey Federal court (Nelson v. Ian Ferrier, Civil Action 91-5334(JWB)),
has been stayed pending resolution of the New Jersey state court action. No
class has been certified in this federal action.

Plaintiffs in each of these actions seek damages of an unspecified amount
for, among other things, alleged violations of state securities law, fraud,
misrepresentation, breach of contract, conversion and negligence in connection
with the $25 million private placement sale of PDP II limited partnership
interests and warrants in 1986. Plaintiffs in the state court action also seek
damages, derivatively, on behalf of PDP II, for alleged breaches of fiduciary
duty and breach of contract in connection with the management of PDP II. On
October 19, 1993, the plaintiffs in the New York federal court action described
above (in which the defendants were granted summary judgment) filed a new
complaint in

F-27
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

14. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
state court in New Jersey. This complaint alleges state law causes of action for
fraud, negligent misrepresentation, breach of fiduciary duty and breach of
contract.

Subsequent to year end, the Company reached an agreement in principle with
the plaintiffs in the PDP II litigation, and is in the process of formalizing
that agreement and seeking all necessary approvals. The Company recognized
during the fourth quarter of fiscal 1994 a special charge of approximately $3.2
million representing the anticipated amount of all settlement-related costs in
excess of previously provided reserves.

On March 30, 1992, OCAP Acquisition Corp. ("OCAP") commenced an action in
the Supreme Court of the State of New York, County of New York, against Paco,
certain of its subsidiaries, the Company and Scherer International
(collectively, the "defendants"), arising out of the termination of an Asset
Purchase Agreement dated February 21, 1992 (the "Purchase Agreement") between
OCAP and the defendants providing for the purchase of substantially all the
assets of Paco. On May 15, 1992, OCAP served an amended verified complaint (the
"Amended Complaint"), asserting causes of action for breach of contract and
breach of the implied covenant of good faith and fair dealing, arising out of
defendants' March 25, 1992 termination of the Purchase Agreement, as well as two
additional causes of action that were subsequently dismissed by order of the
court. The Amended Complaint seeks $75 million in actual damages, $100 million
in punitive damages, as well as OCAP's attorney fees and other litigation
expenses, costs and disbursements incurred in bringing this action. Discovery
with respect to the action has commenced; however, discovery was temporarily
stayed by OCAP's filing of a motion for partial summary judgment, and the
Company's subsequent cross-motion for dismissal. The Court recently denied both
motions and the Company anticipates that discovery will resume or the Court's
decision will be appealed. Based upon the investigation conducted by the Company
to date, the Company believes that this action lacks merit and intends to defend
against it vigorously. In the opinion of management, the ultimate outcome of
this litigation will not have a material adverse effect on the Company's
business or financial condition.

The Company was informed in August 1992 that soil at a manufacturing
facility in North Carolina owned and operated by the Company from 1975 to 1985
contained levels of tetrachlorethene and other substances which exceeded
environmental standards. The Company voluntarily initiated a remedial
investigation, and initial remedial and removal actions have been completed by
the Company and the current owner of the facility for the known soil
contamination at such site. The Company continues to perform additional studies
and remediation of the area, including testing and removal of groundwater, which
have indicated the necessity for additional remedial and removal actions. On the
basis of the results of investigations performed to date, the Company does not
believe that potential future costs associated with either the investigation or
any potential remedial or removal action will ultimately have a materially
adverse impact on the Company's business or financial condition.

As of March 31, 1994, the Company has capital expenditure commitments
related primarily to plant expansions amounting to approximately $5.9 million.

F-28
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

15. SEGMENT DATA

The Company is engaged principally in the production of softgels, hardshells
and other drug delivery systems for the pharmaceutical, health and nutritional
and cosmetic products industries. The Company's operations are divided into
three geographical areas: United States, Europe and Other International. Europe
represents operations in the United Kingdom, France, Italy and Germany. Other
International consists of operations in Canada, the Pacific and Latin America.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
United States............................................. $120,687 $ 86,687 $ 66,802
Europe.................................................... 233,716 229,937 198,445
Other international....................................... 94,894 81,387 72,539
-------- -------- --------
Net sales(1).......................................... $449,297 $398,011 $337,786
-------- -------- --------
-------- -------- --------
Operating Income:
United States............................................. $ 28,241 $ 23,327 $ 18,147
Europe.................................................... 46,249 53,941 48,896
Other International....................................... 19,238 13,450 13,070
Unallocated(2)............................................ (10,815) (2,621) (16,136)
-------- -------- --------
Operating income...................................... $ 82,913 $ 88,097 $ 63,977
-------- -------- --------
-------- -------- --------
Identifiable assets:
United States............................................. $ 86,410 $ 74,886 $ 64,997
Europe.................................................... 316,623 263,099 255,345
Other International....................................... 121,318 106,372 105,474
Unallocated(3)............................................ 89,063 87,827 100,161
-------- -------- --------
Total assets.......................................... $613,414 $532,184 $525,977
-------- -------- --------
-------- -------- --------
Capital expenditures:
Drug Delivery Systems..................................... $ 39,294 $ 33,132 $ 20,780
Unallocated(4)............................................ 209 60 167
-------- -------- --------
Total capital expenditures............................ $ 39,503 $ 33,192 $ 20,947
-------- -------- --------
-------- -------- --------
Depreciation and amortization:
Drug Delivery Systems..................................... $ 21,008 $ 19,589 $ 16,771
Unallocated(4)............................................ 2,962 3,089 3,169
-------- -------- --------
Total depreciation and amortization................... $ 23,970 $ 22,678 $ 19,940
-------- -------- --------
-------- -------- --------
</TABLE>

- ------------

(1) No single customer or product represents 10% or more of sales, and
intersegment sales are not significant.

(2) Unallocated operating income includes principally general corporate
expenses, including in 1992 the stock compensation expense related to the
Company's October 1991 sale of common stock (Note 4), and in 1994 $4.5
million related to the special charges for the litigation settlement and
plant revaluation (Note 2).

(3) Unallocated identifiable assets are principally cash, cash equivalents,
short-term investments, other assets and net assets of discontinued
operations.

(4) Unallocated capital expenditures and depreciation and amortization represent
primarily corporate amounts.

F-29
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

15. SEGMENT DATA--(CONTINUED)

The net assets of foreign subsidiaries were $216.5 million at March 31,
1994, $216.6 million at March 31, 1993, and $190.7 million at March 31, 1992.
The Company's share of foreign net income was $34.6 million for the year ended
March 31, 1994, $27.9 million for the year ended March 31, 1993, and $26.4
million for the year ended March 31, 1992, after deducting minority interests,
income taxes on unremitted earnings and various charges billed by the parent
company.

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------- ------------------ ------------------ ------------------
1994 1993(1) 1994 1993(2) 1994(4) 1993(3) 1994(4) 1993
-------- -------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $108,454 $103,353 $105,179 $97,671 $114,820 $97,966 $120,844 $99,021
Gross profit....................... 40,708 43,080 35,464 37,387 39,972 37,426 45,764 38,010
Income from continuing operations
before extraordinary loss and
accounting change.................. 8,596 8,388 6,557 6,059 8,904 7,103 6,857 7,410
Net income (loss).................. $ 8,596 $ 9,362 $ 6,557 $ 5,412 $ (6,596) $(1,289) $ 6,537 $ 7,410
-------- -------- -------- ------- -------- ------- -------- -------
-------- -------- -------- ------- -------- ------- -------- -------
Income from continuing operations
before extraordinary loss and
accounting change per common
share.............................. $ 0.36 $ 0.35 $ 0.27 $ 0.25 $ 0.37 $ 0.29 $ 0.28 $ 0.31
-------- -------- -------- ------- -------- ------- -------- -------
-------- -------- -------- ------- -------- ------- -------- -------
Net income (loss) per common
share.............................. $ 0.36 $ 0.39 $ 0.27 $ 0.22 $ (0.27) $ (0.05) $ 0.27 $ 0.31
-------- -------- -------- ------- -------- ------- -------- -------
-------- -------- -------- ------- -------- ------- -------- -------
</TABLE>

- ------------
(1) Net income includes the $974,000 ($0.04 per share) cumulative effect of
accounting change for income taxes, SFAS 109.

(2) Net income includes loss on disposal of discontinued operation of $647,000
($0.03 per share).

(3) Net income includes extraordinary loss of $8,392,000 ($0.35 per share)
related to the early retirement of debt (see Note 9).

(4) Net income includes extraordinary loss of $15,500,000 ($0.64 per share) and
$320,000 ($0.01 per share) related to debt extinguishment in the third and
fourth quarters of fiscal 1994, respectively.

F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO R.P. SCHERER CORPORATION:

We have audited the accompanying consolidated statement of financial
position of R.P. SCHERER CORPORATION (a Delaware Corporation), and subsidiary as
of March 31, 1994 and 1993, and the related consolidated statements of
operations, cash flows and shareholders' equity for the years ended March 31,
1994, 1993 and 1992. 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 financial position of the Company as of March 31,
1994 and 1993, and the results of its operations and cash flows for the years
ended March 31, 1994, 1993 and 1992, in conformity with generally accepted
accounting principles.

As explained in Note 6 to the consolidated financial statements, effective
April 1, 1992, the Company changed its method of accounting for income taxes. As
explained in Note 11 to the consolidated financial statements, effective April
1, 1991, the Company changed its method of accounting for postretirement
benefits other than pensions.

ARTHUR ANDERSEN LLP

Detroit, Michigan,
April 26, 1994.

F-31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

No dealer, salesperson or any other person has been authorized to give any
information or make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or any of the U.S. Underwriters.
This Prospectus does 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 nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct
as of any time subsequent to the date hereof or that there has been no change
in the affairs of the Company since such date.

---------------------

TABLE OF CONTENTS

Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 4
Selling Stockholders.................. 7
Use of Proceeds....................... 8
Price Range of Common Stock and
Dividend Policy....................... 8
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. 9
Business.............................. 19
Description of Capital Stock.......... 27
Certain U.S. Tax Consequences
to Non-U.S. Holders................. 28
Underwriting.......................... 30

Legal Matters......................... 32
Experts............................... 33
Index to Consolidated Financial
Statements.......................... F-1

6,500,000 SHARES

[R.P. SCHERER CORPORATION LOGO]

COMMON STOCK

-------------------
PROSPECTUS
DECEMBER 5, 1994
-------------------

LEHMAN BROTHERS

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

OPPENHEIMER & CO., INC.

WERTHEIM SCHRODER & CO.
INCORPORATED

ROBERT W. BAIRD & CO.
INCORPORATED

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS

PROSPECTUS
6,500,000 SHARES

[R.P. Scherer LOGO]

COMMON STOCK
------------------------

All of the 6,500,000 shares of Common Stock, $.01 par value per share (the
"Common Stock") of R.P. Scherer Corporation ("Scherer" or the "Company") are
being offered by the Selling Stockholders (as defined herein). Of such shares,
1,300,000 shares are being offered hereby initially outside the United States
and Canada by the International Managers (as defined herein) (the "International
Offering") and 5,200,000 shares are being offered initially in a concurrent
offering in the United States and Canada by the U.S. Underwriters (as defined
herein) (the "United States Offering"). Such offerings are collectively referred
to as the "Offerings." The offering price and underwriting discounts and
commissions for the International Offering and the United States Offering will
be identical. The Company will not receive any of the proceeds from the sale of
the shares offered hereby. See "Selling Stockholders" and "Underwriting."

<TABLE><CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS(1) STOCKHOLDERS(2)
<S> <C> <C> <C>
Per Share.............................. $40.00 $1.28 $38.72
Total(3)............................... $260,000,000 $8,320,000 $251,680,000
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
International Managers and the U.S. Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Selling Stockholders estimated at
approximately $450,000.

(3) Certain of the Selling Stockholders have granted the International Managers
a 30-day option to purchase up to 104,875 additional shares of Common Stock
on the same terms and conditions as set forth above solely to cover
over-allotments, if any. The U.S. Underwriters have been granted a similar
option to purchase up to 419,498 additional shares solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, and Proceeds to
Selling Stockholders will be $280,974,920, $8,991,197 and $271,983,723,
respectively. See "Underwriting."
------------------------

The shares of Common Stock offered by this Prospectus are offered by the
International Managers subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
International Managers and to certain further conditions. It is expected that
delivery of the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., in New York, New York on or about December 12, 1994.

------------------------
LEHMAN BROTHERS

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

OPPENHEIMER & CO., INC.

SCHRODERS

ROBERT W. BAIRD & CO.
INCORPORATED

ABN AMRO BANK N.V. DEUTSCHE BANK NIKKO EUROPE PLC PARIBAS CAPITAL
AKTIENGESELLSCHAFT MARKETS

SOCIETE GENERALE UBS LIMITED VEREINS- UND WESTBANK S.G.WARBURG
AKTIENGESELLSCHAFT SECURITIES

December 5, 1994

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

No dealer, salesperson or any other person has been authorized to give any
information or make any representation not contained in this Prospectus and, if
given or made, such information or representation must not be relied upon as
having been authorized by the Company or any of the International Managers.
This Prospectus does 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 nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct
as of any time subsequent to the date hereof or that there has been no change
in the affairs of the Company since such date.

---------------------

TABLE OF CONTENTS

Legal Matters......................... 32
Experts............................... 33
Index to Consolidated Financial
Statements.......................... F-1

6,500,000 SHARES

[R.P. SCHERER CORPORATION LOGO]

COMMON STOCK

-------------------
PROSPECTUS
DECEMBER 5, 1994
-------------------

LEHMAN BROTHERS

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

OPPENHEIMER & CO., INC.

SCHRODERS

ROBERT W. BAIRD & CO.
INCORPORATED

ABN AMRO BANK N.V.

PARIBAS CAPITAL MARKETS

DEUTSCHE BANK
AKTIENGESELLSCHAFT

NIKKO EUROPE PLC

SOCIETE GENERALE

UBS LIMITED

VEREINS- UND WESTBANK
AKTIENGESELLSCHAFT

S.G.WARBURG SECURITIES

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------