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Filed Pursuant to 424(b)(2)
Registration No. 33-51231
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 17, 1994)
$100,000,000
[LOGO] INTERNATIONAL CORPORATION
6 3/4% SENIOR NOTES DUE 2004
---------------------------
INTEREST PAYABLE FEBRUARY 1 AND AUGUST 1
---------------------------
THE SENIOR NOTES WILL NOT BE REDEEMABLE PRIOR TO MATURITY AND DO NOT PROVIDE FOR
A SINKING FUND.
---------------------------
R.P. Scherer International Corporation (the "Company") is offering
$100,000,000 aggregate principal amount of its 6 3/4% Senior Notes due 2004 (the
"Senior Notes"). The Senior Notes will mature February 1, 2004. Interest on the
Senior Notes will be payable each February 1 and August 1, commencing August 1,
1994. The Senior Notes will be represented by one or more Global Securities (as
defined in the accompanying Prospectus) registered in the name of the nominee of
the Depositary (as defined herein). Beneficial interests in the Global
Securities will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary and its participants. Except as
described herein, Senior Notes in definitive form will not be issued. The Senior
Notes will be unsecured obligations of the Company, ranking pari passu with all
other unsecured and senior indebtedness of the Company, and senior to all future
subordinated indebtedness of the Company. The Company conducts a substantial
portion of its operations through subsidiaries, and the Senior Notes will be
effectively subordinated to all existing and future indebtedness and other
liabilities of its subsidiaries. The outstanding indebtedness of the Company's
subsidiaries at September 30, 1993 was approximately $62.5 million.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- ------------------------------------------------------------------------------------------------------
PER SENIOR NOTE........................ 99.268% 1.125% 98.143%
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TOTAL.................................. $99,268,000 $1,125,000 $98,143,000
- ------------------------------------------------------------------------------------------------------
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(1) Plus accrued interest, if any, from January 27, 1994.
(2) The Company has agreed to indemnify the Underwriters and certain other
persons against certain liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(3) Before deducting expenses payable by the Company estimated at $300,000.
---------------------------
The Senior Notes offered by this Prospectus Supplement are offered by the
Underwriters subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the Underwriters and
to certain future conditions. It is expected that delivery of the Senior Notes
in book-entry form will be made on or about January 27, 1994 through the
facilities of The Depository Trust Company.
---------------------------
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
WERTHEIM SCHRODER & CO.
INCORPORATED
ROBERT W. BAIRD & CO.
INCORPORATED
January 20, 1994
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SECURITIES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUPPLEMENT 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
Supplement or in the accompanying Prospectus. References in this Prospectus
Supplement to fiscal years are to the Company's fiscal years ended March 31 of
each year (i.e. references to "fiscal 1993" are to the Company's fiscal year
ended March 31, 1993). Unless otherwise indicated by the context, the "Company"
and "Scherer" mean R.P. Scherer International Corporation and its direct and
indirect subsidiaries.
THE COMPANY
The Company, an international developer and manufacturer of oral drug
delivery systems, is the world's largest producer of softgels. The Company is
also currently developing and commercializing advanced drug delivery systems,
including the Scherersol(R), Zydis(R) and Pulsincap(TM) technologies. The
Company's proprietary drug delivery systems improve the efficacy of drugs by
regulating their dosage, rate of absorption and place of release.
The Company produces over 4,000 products in softgel form, and softgel
products accounted for approximately 90% of the Company's fiscal 1993 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 more than 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 softgel manufacturing facilities
in eleven countries throughout the world and manufactures hardshell capsules in
three of these countries. Approximately 78% of the Company's fiscal 1993 sales
and 76% of the Company's fiscal 1993 operating income were derived from
operations outside the United States.
The Company is a wholly-owned subsidiary of R.P. Scherer Corporation, a
public company with common shares traded on the New York Stock Exchange under
the symbol "SHR." R.P. Scherer Corporation's only asset is the common stock of
the Company, and it essentially has no other operations. The Company was
incorporated in Michigan in 1944 and reincorporated in Delaware in 1969.
THE OFFERING
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Securities Offered........................ $100,000,000 principal amount of 6 3/4% Senior
Notes due 2004.
Maturity Date............................. February 1, 2004.
Interest Payment Dates.................... February 1 and August 1, commencing August 1,
1994.
Optional Redemption....................... None.
Mandatory Redemption...................... None.
Ranking................................... The Senior Notes will be unsecured obligations
of the Company, ranking pari passu with all
other unsecured and senior indebtedness of the
Company, and senior to all future subordinated
indebtedness of the Company. The Company
conducts a substantial portion of its operations
through subsidiaries, and the Senior Notes will
be effectively subordinated to all existing and
future indebtedness and other liabilities of its
subsidiaries. The outstanding indebtedness of
the Company's subsidiaries at September 30, 1993
was approximately $62.5 million.
Certain Covenants......................... The Indenture (as defined herein) will contain
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.
Use of Proceeds........................... To effect the Defeasance (as defined herein) of
the Company's 14% Senior Subordinated Debentures
("Subordinated Debentures"). See "Use of
Proceeds".
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For more complete information regarding the Senior Notes, see "Description of
the Senior Notes".
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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 into this Prospectus Supplement or in the accompanying Prospectus.
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<CAPTION>
COMPANY PREDECESSOR(8)
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NINE THREE
SIX MONTHS MONTHS MONTHS YEAR
ENDED SEPTEMBER 30, YEAR ENDED MARCH 31, ENDED ENDED ENDED
---------------------- -------------------------------- MARCH 31, JUNE 30, MARCH 31,
1993 1992 1993 1992 1991 1990 1989 1989
-------- -------- -------- -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT RATIOS)
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OPERATING DATA(1):
Net sales..................... $213,633 $201,024 $398,011 $337,786 $298,638 $191,451 $ 62,991 $236,944
Cost of sales................. 137,461 120,557 242,108 201,991 183,438 123,725 39,811 151,698
Selling, administrative and
other expense............... 34,946 33,226 67,806 58,758 52,216 33,041 18,313 50,979
Stock and other compensation
expense(2).................. -- -- -- 13,060 -- -- -- --
Operating income(2)(3)........ 41,226 47,241 88,097 63,977 62,984 34,685 4,867 34,267
Interest expense(5)........... 11,727 14,104 25,436 35,348 45,045 35,352 765 2,986
Income (loss) from continuing
operations(4)(5)(6)......... 15,153 15,421 28,960 (1,224) (6,425) (12,126 ) (9,270) 8,401
Ratio of earnings to fixed
charges(7).................. 3.4x 3.3x 3.4x 1.4x 1.2x 3.2x
Deficiency in earnings
available to cover fixed
charges..................... $ 364 $ 4,095
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<CAPTION>
SEPTEMBER 30, 1993
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Working capital(9)................................................................................ $ 95,191
Total assets...................................................................................... 591,780
Long-term debt, including current portion......................................................... 182,269
Minority interests in subsidiaries................................................................ 36,461
Shareholder's equity.............................................................................. 215,593
</TABLE>
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(1) Excludes the discontinued operations of Southern Optical Company, The Lorvic
Corporation, Franz Pohl GmbH, Scientific Associates, Inc., and Paco
Pharmaceutical Services, Inc. ("Paco").
(2) Includes a one-time $12.3 million non-cash charge for stock and other
compensation expense relating to R.P. Scherer Corporation's common stock
sale in October 1991 for the year ended March 31, 1992.
(3) Includes provision for restructuring of operations of $5.4 million for the
period ended June 30, 1989.
(4) Includes $974,000 gain from cumulative effect of accounting change for the
six months ended September 30, 1992; also includes $8.4 million and $9.0
million in non-operating expenses for the periods ended June 30, 1989 and
March 31, 1989, respectively, associated with a proxy contest, negotiated
severance agreements and the sale of the Predecessor.
(5) Assuming the Defeasance (as defined herein) had been consummated on April 1,
1993, pro forma interest expense and income from continuing operations for
the six months ended September 30, 1993 would have been $6.9 million and
$19.0 million, respectively. Assuming the Defeasance had been consummated on
April 1, 1992, pro forma interest expense and income from continuing
operations for the fiscal year ended March 31, 1993 would have been $15.8
million and $37.7 million, respectively. Such pro forma calculations assume
the effective interest rate on the Senior Notes and a 5% interest rate for
borrowings under the Company's bank credit facility for both the six months
ended September 30, 1993, and the fiscal year ended March 31, 1993. Each
one-eighth percentage point change in the interest rate for the Company's
bank credit facility would change pro forma interest expense by $54,000
annually. The pro forma information does not purport to represent what the
results would actually have been or to project future amounts.
(6) As a result of the Defeasance, the Company will recognize an extraordinary
loss estimated at approximately $15.1 million, consisting of the 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 (as defined herein) and the write-off of unamortized deferred
financing costs related to the Subordinated Debentures. See "Use of
Proceeds".
(7) For the purpose of computing the ratio of earnings to fixed charges,
earnings have been calculated by adding the amount of fixed charges to
income (loss) from continuing operations before income taxes, minority
interests, extraordinary items and cumulative effect of changes in
accounting principle. Fixed charges consist of interest on debt and a
portion of net rental expense deemed to represent interest. In fiscal 1992
and prior years, fixed charges also included dividend requirements on
preferred stock. The pro forma ratio of earnings to fixed charges would have
been 5.3x for the six months ended September 30, 1993, and 5.1x for the
fiscal year ended March 31, 1993, assuming the Defeasance occurred at the
beginning of each period.
(8) In June 1989, R.P. Scherer Corporation acquired the common stock of the
Company pursuant to a tender offer. For financial reporting purposes, the
acquisition was deemed effective as of July 1, 1989. The acquisition and the
related application of purchase accounting resulted in significant changes
to the capital structure of the Company and the historical bases of various
assets and liabilities. The effect of such changes significantly impairs
comparability of the selected financial data before and after the
acquisition. Accordingly, the data prior to July 1, 1989, are entitled
"Predecessor."
(9) Includes notes payable but does not include current portion of long-term
debt.
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THE COMPANY
GENERAL
R.P. Scherer International Corporation (the "Company"), an international
developer and manufacturer of oral drug delivery systems, is the world's largest
producer of softgels. The Company is also currently developing and
commercializing advanced drug delivery systems, including the Scherersol(R),
Zydis(R) and Pulsincap(TM) technologies. The Company's proprietary drug delivery
systems improve the efficacy of drugs by regulating their dosage, rate of
absorption and place of release.
The Company produces over 4,000 products in softgel form, which accounted
for approximately 90% of the Company's fiscal 1993 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 more than 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 softgel manufacturing facilities
in eleven countries throughout the world and manufactures hardshell capsules in
three of these countries. Approximately 78% of the Company's fiscal 1993 sales
and 76% of the Company's fiscal 1993 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 Scherersol(R) systems to broaden the range of pharmaceutical
products which may be encapsulated in softgel form. Scherersol(R) 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(R) technologies, by providing a unique,
patented dosage delivery system, can protect a pharmaceutical compound against
competition from generic drugs throughout the life of the Scherersol(R) 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(TM) technologies. Zydis(R) is an oral dosage form which dissolves
instantaneously on the tongue and does not require water to aid swallowing.
Pulsincap(TM) 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. In September 1993, the Company formed the
Advanced Therapeutic Products Group, based in the United Kingdom. This division
was formed to manage the development and registration of pharmaceutical products
using the Company's drug delivery technologies and existing off-patent drug
compounds.
The Company is a wholly-owned subsidiary of R.P. Scherer Corporation, a
public company with common shares traded on the New York Stock Exchange under
the symbol "SHR." R.P. Scherer Corporation's only asset is the common stock of
the Company, and it essentially has no other operations. The Company was
incorporated in Michigan in 1944 and reincorporated in Delaware in 1969. The
principal executive offices of R.P. Scherer Corporation and its wholly-owned
subsidiary R.P. Scherer International Corporation are located at 2075 West Big
Beaver Road, Troy, Michigan 48084; the telephone number is (810) 649-0900.
SOLID ORAL DELIVERY SYSTEMS
Softgel products accounted for approximately 90% of the Company's fiscal
1993 sales. The following discussion describes the primary solid oral delivery
systems with which softgels compete.
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
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easy to control. Tablets are an adequate dosage form for most pharmaceutical and
health and nutritional products, and most manufacturers produce their own. The
Company does not manufacture tablets.
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, the hardshell capsule is a better delivery system for
time release capsules and certain compounds. Approximately 8% of the Company's
fiscal 1993 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. The Company performs
especially well in a highly regulated environment where the customers' main
focus is on quality and service as opposed to price. The Company has established
long-standing relationships with many customers in the pharmaceutical markets,
which the Company believes is the result of the Company's reputation for quality
and service in pharmaceutical markets throughout the world. In fiscal 1993, 53%
of the Company's softgel sales were derived from the sale of pharmaceutical
products.
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 Scherersol(R) systems broadens the range of pharmaceutical products which
may be encapsulated in softgel form. Scherersol(R) 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. Scherersol(R) 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.
To date, the most significant product which has been reformulated using the
Scherersol(R) 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. Additionally, it has
recently received approval in Europe for treatment of psoriasis, and
applications are pending in the U.S. for both psoriasis and rheumatoid
arthritis. By reformulating the drug into softgel form, the Company 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
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estimated at $700 million. To date, the Company believes that a substantial
portion of Sandimmun(R) sales continue to be in non-softgel forms. Sandimmun(R)
represents approximately 3% of the Company's softgel sales.
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
37% of the Company's fiscal 1993 softgel sales.
Other-Cosmetics and Recreational. Other products represented approximately
10% of the Company's softgel sales in fiscal 1993, with approximately 7%
attributable to cosmetics and 3% 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 dosaging
and prevent oxidation of the products before use.
The Company manufactures paintball softgels for use in recreational
"paintball games." Various colors of water-washable 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.
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, over-the-counter pharmaceutical,
health and nutritional and other) 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 was implemented; and (vi) the
Company has made new product development a collaborative effort with its
customers.
In most countries, the research and development departments now report to
the local director of marketing. 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. In fiscal 1993, a formulation laboratory in Japan was established to
expand softgel development for a number of new Japanese drug compounds.
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 Scherersol(R) 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.
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 has 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 their Dramatic Results Skin
Smoothing Capsules product, which also utilizes the Company's softgel
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formulation technology. The Company continues to market similar unit dose
concepts to other cosmetics companies.
SCHERER DDS
In 1991, the Company formed a separate division, Scherer DDS, to focus on
the development of advanced drug delivery systems. This represents a broadening
of the Company'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 the
Company's established reputation within the pharmaceutical industry for
formulating innovative solutions to drug delivery problems and its long-standing
relationships with its pharmaceutical customers. The Company 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 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(TM) technologies.
Additionally, Scherer DDS is engaged in the search for other advanced drug
delivery systems which might complement the Company's existing technologies.
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 Zydis(R) products containing the lorazepam
and oxazepam tranquilizers for Wyeth-Ayerst International, as well as Pfizer's
Feldene Melt anti-arthritic product. At present, such products are only sold in
Europe. There are currently eleven major products encompassing Zydis(R)
technology in different stages of development and regulatory approval. Because
patents covering active compounds in these products have expired or will expire
within the next few years, the manufacturers of such products have been seeking
alternative 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
1992. In general, agreements with customers call for customers to pay option
fees to the Company 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 $4.7 million in fiscal 1993 related to Zydis(R) products.
Pulsincap(TM). Pulsincap(TM) is an oral drug delivery device which is
designed to release the drug in a 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(TM) system will have a broad
range of applications. Two major areas targeted are nocturnal (time-controlled)
delivery and colonic (site-specific) delivery.
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, asthma, arthritis and sleep
disorders. The Pulsincap(TM) 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.
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Colonic (Site-Specific) Delivery. In recent years, there has been a rapidly
growing interest in the study of the delivery of drugs to the colon,
particularly for the optimal treatment of local disorders such as ulcerative
colitis or Crohn's disease. Additionally, with the proliferation of new peptide
and protein products under development in the biotechnology industry, there has
been increasing interest in utilizing the colon as a site for drug absorption.
The Pulsincap(TM) 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 peptide delivery
(e.g., insulin).
The Pulsincap(TM) technology is covered by patents in Europe, and has
patents pending in all other major markets. The Company has completed toxicology
studies on the hydrogel plug, and anticipates that significant customer-funded
feasibility studies will begin in fiscal 1994. The Company further expects that
several years of continued development and testing will be required before any
material commercial sales of Pulsincap(TM) products are realized.
ADVANCED THERAPEUTIC PRODUCTS GROUP
In September 1993, the Company formed the Advanced Therapeutic Products
Group, to be based in the United Kingdom. This division was formed to directly
plan and execute the development and registration of pharmaceutical products
using the Company's proprietary drug delivery technologies and incorporating
off-patent compounds. The Group's objective is to reformulate existing compounds
using the Company's proprietary drug delivery technologies to create new
products with demonstrably improved therapeutic and cost benefits over existing
treatments.
INTERNATIONAL OPERATIONS
To serve new markets and to meet the needs of its multinational customers,
the Company operates softgel manufacturing facilities in eleven countries
throughout the world and manufactures 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.
The following summarizes the Company's sales and operating income by
geographic segment for fiscal years 1993, 1992, and 1991:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------
1993 1992 1991
---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Sales:
United States.......................... $ 86,687 22% $ 66,802 20% $ 50,377 17%
Europe................................. 229,937 58% 198,445 59% 184,631 62%
Other International.................... 81,387 20% 72,539 21% 63,630 21%
-------- ---- -------- ---- -------- ----
Net sales......................... $398,011 100% $337,786 100% $298,638 100%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
Operating Income:
United States.......................... $ 23,327 27% $ 18,147 28% $ 10,883 17%
Europe................................. 53,941 61% 48,896 76% 41,375 66%
Other International.................... 13,450 15% 13,070 20% 11,511 18%
Unallocated(1)......................... (2,621) (3%) (16,136) (24%) (785) (1%)
-------- ---- -------- ---- -------- ----
Operating income.................. $ 88,097 100% $ 63,977 100% $ 62,984 100%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
</TABLE>
- -------------------------
(1) Unallocated operating income includes principally general corporate
expenses, including in 1992 the stock compensation expense related to R.P.
Scherer Corporation's October 1991 sale of common stock (see Note 3 to the
consolidated financial statements as of March 31, 1993).
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
S-9
<PAGE> 10
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.
In recent years, a large number of pharmaceutical companies have become
increasingly interested in the development and commercialization of both
existing and newly developed pharmaceutical products incorporating advanced drug
delivery systems. A number of companies have been formed to develop new drug
formulations, products, and drug delivery systems.
The Company is the world's largest manufacturer of softgels, with an
estimated worldwide market share approximating 75% based on management
estimates. The Company believes it has a competitive advantage in the softgel
business due to its greater experience in the manufacture of softgels, its
advanced technology, its extensive participation in customer product
development, its strong acceptance by customers and its geographic breadth. The
Company's principal softgel competitors are several manufacturers with
substantially smaller softgel operations. Although the Company faces varying
degrees of competition in each of its geographic markets, it believes it has a
leading market share in each of its major markets.
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 considered to be dependent upon a single
product or a few products. No single 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 5%
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
terms). The Company has never experienced any significant shortage of gelatin.
PATENTS
The Company has a number of active patents on its specialized machinery,
processes, 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.
SEASONAL BUSINESS
No material portion of the Company's business is seasonal. However, second
quarter operating results are generally below the results of other quarters due
to the regularly scheduled vacation and annual summer maintenance shutdown of
substantially all northern hemisphere softgel facilities.
S-10
<PAGE> 11
BACKLOG
The backlog of unfilled orders was approximately $112.4 million at
September 30, 1993, as compared to approximately $119.6 million at September 30,
1992. The Company believes that such backlog of orders at September 30, 1993 is
firm and will be filled within the next 12 months.
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 regulations 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 generally 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 tetrachlorethene 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
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 future remedial or removal action will ultimately have a materially
adverse impact on the Company's business or financial condition.
RESEARCH AND DEVELOPMENT
Costs incurred in connection with the development of new products and
manufacturing methods, including both Company and customer-sponsored
expenditures, amounted to $12.4 million in fiscal 1993, $11.6 million in fiscal
1992, and $9.0 million in fiscal 1991.
EMPLOYEES
At September 30, 1993, the Company employed approximately 2,700 full-time
employees. The Company considers its relations with its employees to be good.
S-11
<PAGE> 12
USE OF PROCEEDS
The net proceeds from the sale of the Senior Notes are estimated to be
$97.8 million. The Company intends to use the proceeds, together with proceeds
from borrowings under the Company's bank credit facility, to defease certain of
its obligations with respect to the outstanding Subordinated Debentures (which
have an aggregate outstanding principal amount of $125.1 million), and to pay
costs and expenses associated with such transaction.
The Subordinated Debentures bear interest at a rate of 14% per annum and
are due on November 1, 1999, and are redeemable beginning November 1, 1994
("Call Date"). The Company will terminate certain of its obligations with
respect to the Subordinated Debentures by depositing into an irrevocable trust
account for the benefit of the holders of the Subordinated Debentures an amount
of United States government obligations sufficient to pay, with respect to the
Subordinated Debentures, all interest thereon through the Call Date, the call
premium thereon and the outstanding principal thereof when due upon redemption
("Defeasance"). Amounts deposited in this trust account will then be used to
fund the interest costs and all costs of retiring the Subordinated Debentures.
The Defeasance will occur as soon as practicable following the Offering. As
a result of the Defeasance, the Company will recognize an extraordinary loss
estimated at approximately $15.1 million, consisting of the 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. Following the Defeasance, the Company will remain obligated to pay
interest and principal on the Subordinated Debentures when due but, subject to
certain exceptions, will no longer be subject to the terms, agreements and
covenants contained in the indenture under which the Subordinated Debentures
were issued. The Company expects that amounts deposited in the trust account
referred to above will be sufficient to pay, with respect to the Subordinated
Debentures, all interest thereon through the Call Date, the call premium thereon
and the principal thereof when due upon redemption, without taking into account
any reinvestment of income on the United States government obligations deposited
in the trust account.
S-12
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1993 and as adjusted to reflect (a) the sale of the Senior Notes
offered hereby, (b) the borrowing by the Company of approximately $43.1 million
under the Company's bank credit facility and (c) the Defeasance of the Company's
Subordinated Debentures.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
--------------------------
AS REPORTED AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt and notes payable................... $ 4,955 $ 4,955
----------- -----------
Long-Term Debt:
Bank credit facility................................................ 34,349 77,449
6 3/4% Senior Notes due 2004, net of discount....................... -- 99,268
14% Senior Subordinated Debentures, net of discount................. 119,910 --
Other indebtedness.................................................. 26,188 26,188
----------- -----------
Total long-term debt........................................... 180,447 202,905
----------- -----------
Minority interests.................................................... 36,461 36,461
----------- -----------
Shareholder's equity:
Common stock, $.33 1/3 par value.................................... 1 1
Additional paid-in capital.......................................... 234,021 234,021
Retained deficit(1)................................................. (9,797) (24,897)
Currency translation adjustment..................................... (8,632) (8,632)
----------- -----------
Total shareholder's equity..................................... 215,593 200,493
----------- -----------
Total capitalization........................................... $ 437,456 $ 444,814
----------- -----------
----------- -----------
</TABLE>
- -------------------------
(1) As a result of the Defeasance, the Company will recognize an extraordinary
loss estimated at approximately $15.1 million, consisting of the 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.
S-13
<PAGE> 14
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data as of and
for the periods indicated. The historical financial information has been
excerpted or derived from the financial statements included elsewhere in this
Prospectus Supplement or in the accompanying Prospectus. 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 into this
Prospectus Supplement or in the accompanying Prospectus. The financial
information for the Company and the Predecessor are not comparable in certain
respects.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR(8)
------------------------------------------------------------------ --------------------
THREE
SIX MONTHS YEAR ENDED NINE MONTHS MONTHS YEAR
ENDED SEPTEMBER 30, MARCH 31, ENDED ENDED ENDED
------------------- ------------------------------ MARCH 31, JUNE 30, MARCH 31,
1993 1992 1993 1992 1991 1990 1989 1989
-------- -------- -------- -------- -------- ----------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Net sales................... $213,633 $201,024 $398,011 $337,786 $298,638 $ 191,451 $ 62,991 $236,944
Cost of sales............... 137,461 120,557 242,108 201,991 183,438 123,725 39,811 151,698
Selling, administrative and
other expense............. 34,946 33,226 67,806 58,758 52,216 33,041 18,313 50,979
Stock and other compensation
expense(2)................ -- -- -- 13,060 -- -- -- --
Operating income(2)(3)...... 41,226 47,241 88,097 63,977 62,984 34,685 4,867 34,267
Interest expense............ 11,727 14,104 25,436 35,348 45,045 35,352 765 2,986
Income (loss) from
continuing
operations(4)............. 15,153 15,421 28,960 (1,224) (6,425) (12,126) (9,270) 8,401
Income (loss) from
continuing operations
attributable to common
shares(5)................. 15,153 15,421 28,960 (7,596) (12,154) (13,972) (9,275) 6,217
Net income (loss)
attributable to common
shares(5)(6).............. 15,153 14,774 20,895 (31,118) (12,471) (16,204) (8,706) 7,865
Depreciation and
amortization(7)........... 11,215 11,618 22,678 19,940 19,774 17,922 3,686 11,910
Capital additions........... 16,469 14,038 33,192 20,947 11,993 9,038 1,998 13,014
BALANCE SHEET DATA
(AT END OF PERIOD)(1):
Working capital(9).......... 95,191 82,874 79,248 47,624 61,226 79,569 87,252
Total assets................ 591,780 532,184 525,977 501,859 493,189 293,729 281,864
Long-term debt, including
current portion........... 182,269 142,508 178,639 298,746 313,916 57,161 56,076
Minority interests.......... 36,461 32,369 28,357 24,609 20,249 19,068 18,068
Shareholder's equity........ 215,593 203,001 191,634 35,582 45,981 136,876 149,165
</TABLE>
S-14
<PAGE> 15
Notes to Selected Historical Financial Data
1. Excludes the discontinued operations of Southern Optical Company, The Lorvic
Corporation, Franz Pohl GmbH, Scientific Associates, Inc., and Paco.
2. Includes a one-time $12.3 million non-cash charge for stock and other
compensation expense relating to R.P. Scherer Corporation's common stock sale
in October 1991 for the year ended March 31, 1992.
3. Includes provision for restructuring of operations of $5.4 million for the
period ended June 30, 1989.
4. Includes $974,000 gain from cumulative effect of accounting change for the
six months ended September 30, 1992; also includes $8.4 million and $9.0
million in non-operating expenses for the periods ended June 30, 1989 and
March 31, 1989, respectively, associated with a proxy contest, negotiated
severance agreements and the sale of the Predecessor.
5. After allowing for preferred stock dividends and accretion between the fair
value at the date of issuance and the stated value of preferred stock for
fiscal years 1992 and prior.
6. Includes loss of $8.4 million from early retirement of debt, a $647,000 loss
from the sale of Paco, and $974,000 gain from cumulative effect of accounting
change for year ended March 31, 1993, and an estimated loss of $16.7 million
from disposal of Paco, an extraordinary loss of $2.1 million on the early
retirement of debt, and a $4.9 million charge for an accounting change for
postretirement benefits for the year ended March 31, 1992, and an
extraordinary credit of $932,000 for the year ended March 31, 1989.
7. Includes amortization of deferred financing costs and debt discount of
$735,000 and $907,000 for the six month periods ended September 30, 1993 and
1992, respectively; $1.8 million, $2.0 million, $3.3 million, and $6.4
million for the years ended March 31, 1993, 1992, and 1991, and the nine
months ended March 31, 1990, respectively.
8. In June 1989, R.P. Scherer Corporation acquired the common stock of the
Company pursuant to a tender offer. For financial reporting purposes, the
acquisition was deemed effective as of July 1, 1989. The acquisition and the
related application of purchase accounting resulted in significant changes to
the capital structure of the Company and the historical bases of various
assets and liabilities. The effect of such changes significantly impairs
comparability of the selected financial data before and after the
acquisition. Accordingly, the data prior to July 1, 1989, are entitled
"Predecessor."
9. Includes notes payable but does not include current portion of long-term
debt.
S-15
<PAGE> 16
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, 1993 and 1992 and the fiscal
years ended March 31, 1993, 1992 and 1991. The discussion and analysis relating
to fiscal year 1992 also addresses the effects of the application of proceeds
that R.P. Scherer Corporation's October 1991 sale of 11.5 million shares of its
common stock had on the Company's results of operations and financial condition
in the 1992 fiscal year (see Note 3 to the consolidated financial statements as
of March 31, 1993).
In August 1991, the Company adopted a plan to sell its wholly-owned
subsidiary Paco, a provider of design, engineering 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.
A majority of the Company's sales, income and cash flows is derived from
its international operations. With the exception of Brazil, the financial
position and the results of operations of the Company's foreign subsidiaries are
measured using the local currency of the countries in which they operate and are
translated into U.S. dollars. Although the effects of foreign currency
fluctuations are mitigated by the fact that expenses of foreign subsidiaries are
generally incurred in the same currencies in which sales are generated, the
reported income of foreign subsidiaries will be higher or lower depending upon a
weakening or strengthening of the U.S. dollar. In addition, a substantial amount
of the Company's net assets are based in its foreign operations, and are
translated into U.S. dollars primarily at foreign currency exchange rates in
effect as of the end of each period. Accordingly, the Company's consolidated
shareholder's equity will fluctuate depending upon the strengthening or
weakening of the U.S. dollar.
RESULTS OF OPERATIONS
Six Months Ended September 30, 1993 and 1992
Sales for the six months ended September 30, 1993 were $213.6 million,
amounting to a 6% increase over sales of $201.0 million for the same six months
last year. Strong sales growth was achieved in the Company's U.S. and Other
International operations, offset by the sluggishness of the German
pharmaceutical market and the effects of a stronger U.S. dollar relative to most
foreign currencies. The sales increase between the two periods would have been
14% as measured using constant exchange rates.
Operating income amounted to $41.2 million for the six months ended
September 30, 1993, representing a decrease of 13% (8% measured at constant
exchange rates) from the $47.2 million earned in the prior year six month
period. The Company contained selling and administrative expenses to $28.7
million in the current year six months, declining to 13.4% of sales from 13.9%
recorded in the same period last year. The Company increased net research and
development spending by $900,000, or 16% (26% in constant exchange rates) in the
six months ended September 30, 1993, primarily for pharmaceutical softgel
development activities and continued development of the Company's Pulsincap(TM)
drug delivery device.
The Company recognized income from continuing operations of $15.2 million
for the six months ended September 30, 1993, a 5% improvement as compared to
$14.4 million for the same period last year. Interest expense fell $2.4 million
for the six months ended September 30, 1993, primarily as a result of the
Company's October 1992 repurchase of $42.5 million face value of its
Subordinated Debentures, offset by $700,000 of interest expense on debt used to
fund the Pharmagel acquisition (as discussed in Note 6 to the consolidated
financial statements as of September 30, 1993). Interest earned and other
declined $1.3 million in the current year six months due to reduced levels of
cash and temporary investments and losses related to translation of the
financial statements of the Company's Brazilian subsidiary. Income tax
provisions were $10.1 million (33.0% of pretax income) and $13.8 million (39.1%
of pretax income) for the six months ended Septem-
S-16
<PAGE> 17
ber 30, 1993 and 1992, respectively. The lower tax provision in the current year
period reflects a shift in pretax income towards lower tax rate countries and
reduced corporate income tax rates in Germany and Australia. Such reductions in
interest expense and income taxes more than offset the lower operating income in
the current year six months. Additionally, minority interests in income of
subsidiaries declined $1.9 million as a result of significantly lower earnings
of the Company's 51% owned operation in Germany, offset by income improvements
in partially-owned subsidiaries in France and Japan.
The following table shows the operating results of the Company's geographic
segments for the six months ended September 30, 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....................... $ 55,803 $ 41,215 $ 14,367 $12,717 25.7% 30.9%
Europe.............................. 111,476 120,355 19,606 28,938 17.6 24.0
Other International................. 46,354 39,454 9,929 7,466 21.4 18.9
Unallocated......................... -- -- (2,676) (1,880) -- --
-------- -------- -------- ------- ---- ----
$213,633 $201,024 $ 41,226 $47,241 19.3% 23.5%
-------- -------- -------- ------- ---- ----
-------- -------- -------- ------- ---- ----
</TABLE>
Sales of U.S. operations increased 35% for the six months ended September
30, 1993, reflecting the strong demand for Vitamin E and other anti-oxidant
vitamin softgels, as well as significant growth in sales of branded OTC
cough/cold medications. Operating income in the U.S. increased by 13% in
September 30, 1993 six month period due to the additional sales volumes.
Operating margins, however, declined significantly as most of this sales
increase was derived from nutritional softgels, which in the U.S. generally have
a higher material cost content relative to their sales value compared to other
types of softgels.
The Company experienced an $8.9 million or 7% decline in sales of its
European operations for the six months ended September 30, 1993. Sales in
Germany declined $10.7 million due primarily to the difficult economic and
industry factors discussed above and the effects of the comparatively stronger
U.S. dollar in the first six months of this year. The Company's other operations
in Europe registered local currency sales gains over the prior year period,
including $4.9 million in sales attributable to Pharmagel. Operating income in
Europe declined $9.3 million, or 32%, due to a $6.2 million decrease in German
operating income as well as the weaker foreign currency exchange rates, lower
prescription pharmaceutical sales resulting from the conditions in Germany, a
shift in product mix and higher research and development expenses all
contributed to the 6.4 percentage point decrease in the European operating
margin rate for the September 30, 1993 period.
In Other International operations, sales increased $6.9 million, or 17%,
for the six months ended September 30, 1993 compared to the same period a year
ago. Such sales gain was achieved primarily due to growth in nutritional softgel
sales in Australia and Japan. The sales volume growth resulted in a $2.5
million, or 33%, increase in operating income and the related improvement in
operating margin.
Fiscal Years Ended March 31, 1993 and 1992
Sales for fiscal 1993 amounted to a new record high of $398.0 million,
exceeding by 18% the previous record 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.
S-17
<PAGE> 18
The following table shows the operating results of the Company's geographic
segments for the fiscal years ended March 31, 1993 and 1992:
<TABLE>
<CAPTION>
SALES OPERATING INCOME OPERATING 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) Unallocated operating income includes principally general corporate
expenses, including in 1992 the stock compensation expense related to R.P.
Scherer Corporation's October 1991 sale of common stock (see Note 3 to the
consolidated financial statements as of March 31, 1993).
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 over-the-counter
cough/cold medications. Additionally, favorable studies and media reports
confirming the health benefits from anti-oxidant vitamins and a stronger
marketing focus by the Company have resulted in substantially increased 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
recently introduced health care reforms which, among other things, restrict
government reimbursements for certain pharmaceutical products. 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 12-month sales order backlog was $110.2 million as of March
31, 1993, comparable to backlog at the same time last year, as measured both in
U.S. dollars and in local currencies.
The Company's gross margin increased by $20.1 million to $155.9 million in
fiscal 1993, compared to $135.8 million last fiscal year. Gross margin expressed
as a percentage of sales declined to 39.2% in fiscal 1993 from 40.2% in fiscal
1992. Such decrease in the margin rate reflects an increase in the current
year's sales mix toward nutritional softgels, which generally have a higher
material cost content relative to their sales value, and increases in costs of
raw materials (primarily vitamins) not yet 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 a record $88.1 million for fiscal 1993,
representing a 16% increase from $76.3 million recorded for fiscal 1992, before
the $12.3 million non-recurring charge for stock compensation (see Note 3 to the
consolidated financial statements as of March 31, 1993). 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 percent 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(TM) drug delivery device.
S-18
<PAGE> 19
Income from continuing operations was $29.0 million for fiscal 1993, an
increase of $30.2 million from a loss of $1.2 million 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 October 1991 common stock sale, and, to a lesser extent, the
Company's repurchase of approximately $42.5 million face value of its
Subordinated Debentures during the third quarter of fiscal 1993 (see Notes 3 and
8 to the consolidated financial statements as of March 31, 1993). In addition,
the prior year results included the $12.3 million charge for stock compensation
expense. On a pro forma basis, assuming the October 1991 common stock sale and
related transactions had occurred as of April 1, 1991, income from continuing
operations would have been $22.0 million for fiscal 1992 (see Note 3 to the
consolidated financial statements as of March 31, 1993).
The Company's income tax provisions were $24.1 million (36.3% of pre-tax
income) in fiscal 1993 and $22.3 million (69.5% of pre-tax income) in fiscal
1992. The reduction in the consolidated tax rate to a more normal level in
fiscal 1993 reflects improved U.S. 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 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 U.S. 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 in fiscal 1993 after
reflecting an $8.4 million net extraordinary loss from the repurchase of the
senior subordinated debentures described above, a $647,000 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 2 to the consolidated financial statements as
of March 31, 1993). The Company reported a net loss attributable to common
shares of $31.1 million 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 10 to the consolidated financial statements as of March 31, 1993)
and a $2.1 million extraordinary loss from the early retirement of bank debt
described above.
Fiscal Years Ended March 31, 1992 and 1991
The Company achieved a then record high $337.8 million of sales for fiscal
1992, representing a 13% increase over the $298.6 million of sales in fiscal
1991. Sales growth was obtained in all of the Company's geographic segments, in
spite of a general weakening of average foreign currency exchange rates relative
to the U.S. dollar. Sales growth as measured on a constant currency exchange
rate basis would have been nearly 18% for fiscal 1992.
The Company's United States operations led the consolidated sales
improvement, generating $66.8 million of sales in fiscal 1992 as compared to
$50.4 million in fiscal 1991. This increase, amounting to nearly 33%, resulted
from exceptional demand for the Company's cosmetic, pharmaceutical and
recreational paintball softgel products and large orders in connection with
product launches by certain cosmetic and pharmaceutical customers. The Company's
Europe and Other International segments posted respective 7% and 14% sales gains
between the two fiscal years. The sales growth in Europe, which would have been
much higher if not for the weaker foreign currency exchange rates, resulted
primarily from increased sales volumes of nutritional supplements and
pharmaceutical products by the Company's German and United Kingdom operations.
Sales in Germany for fiscal 1992 also benefited from the Company's recent
acquisition of a hardshell manufacturing operation in former East Germany. Sales
of the Company's Other International operations increased mainly due to
continued high demand for hardshell capsules produced by the Company's
Pharmaphil division in Canada and record health and nutritional softgel sales in
both Australia and Japan.
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The Company's 12 month sales order backlog rose to $111.7 million as of
March 31, 1992, a 27% increase from sales backlog of $88.1 million at the same
date last year. This increase in backlog reflected continuing strong sales order
levels in all of the Company's major operations.
Gross margin as a percentage of sales was 40.2% and 38.6% for the years
ended March 31, 1992 and 1991, respectively. The margin rate for fiscal 1992
increased both as a result of production efficiencies associated with the higher
sales volumes and a more favorable product sales mix. A majority of the margin
gain is attributable to the United States operation's relatively larger
proportion of pharmaceutical and cosmetic softgel sales in fiscal 1992.
(Pharmaceutical and cosmetic softgel products, being more complex to formulate
and manufacture, generally have higher margins than most other products.) The
margin rate in Europe improved somewhat in fiscal 1992 primarily as a result of
the increased sales volumes in Germany. Gross margin of the Other International
operations remained relatively comparable between fiscal 1992 and 1991, as the
benefits of higher sales volumes were mostly offset by increased raw material
and other costs.
Operating income reached a record $76.3 million for fiscal 1992, before a
one-time $12.3 million non-cash charge for compensation expense recorded in
connection with the October 1991 public stock offering (see Note 3 to the
consolidated financial statements as of March 31, 1993). Such operating income
represents a 21% increase from the $63.0 million reported for the prior year.
The improvement stems primarily from the sales and gross margin rate increases
described above, partially offset by increases of $5.5 million, or 12%, of
selling and administrative expenses and $1.1 million, or 15%, of net research
and development expenses, respectively. The selling and administrative expense
increase is mainly due to additional investments in marketing staffs and
activities, incentive compensation related to the strong financial results and
legal, banking and other costs associated with the replacement of the Company's
senior bank credit facility (discussed below). Research and development expense
for fiscal 1992 includes expenditures for continued development of the Company's
Zydis(R) and Pulsincap(TM) drug delivery devices and development of numerous
softgel products using the Company's Scherersol(R) and other technologies. On a
constant foreign currency exchange rate basis, operating income before the
one-time $12.3 million charge for compensation expense would have increased by
26% between fiscal years 1992 and 1991.
Income from continuing operations, before income taxes, minority interests
and the one-time charge for compensation expense more than doubled to $44.4
million for fiscal 1992, as compared to $20.2 million in 1991. This increase
results from the operating income improvements and a $9.7 million decrease in
net interest expense stemming primarily from a $124 million reduction in bank
debt through the application of a portion of the stock sale proceeds in October,
1991. Income tax provisions of $22.3 million and $18.2 million were recorded for
fiscal years 1992 and 1991, respectively, consisting principally for both years
of taxes on earnings of the Company's foreign subsidiaries. The Company was
unable to recognize any Federal income tax benefit on its U.S. losses in fiscal
1992 (resulting from interest expense and the $12.3 million compensation charge)
as the future realization of such benefits was not assured. Minority interests
in net income of subsidiaries rose 28% to $11.0 million in fiscal 1992 from $8.5
million in the prior year mostly as a result of the improved financial
performance of the Company's 51% owned subsidiary in Germany.
The results for the year ended March 31, 1992 include a $2.1 million
extraordinary non-cash loss for the write-down of unamortized deferred financing
fees associated with the early retirement of bank debt discussed above. In
addition, the Company elected to adopt early Statement of Financial Accounting
Standards No. 106, "Accounting for Postretirement Benefits other than Pensions"
in fiscal 1992. The cumulative effect of such adoption resulted in a one-time
$4.9 million charge. After these items, losses recorded for the discontinued
operation and preferred stock dividends, the Company recorded net losses
attributable to common shares of $31.1 million and $12.5 million for fiscal
years 1992 and 1991, respectively (see Note 11 of the consolidated financial
statements as of March 31, 1993).
The application of proceeds from the October 1991 sale of common stock to
retire the Company's debt resulted in a significant reduction in interest
expense. Additionally, a portion of the stock sale proceeds were used for the
early redemption of R.P. Scherer Corporation's "pay-in-kind" 17% Exchangeable
Preferred Stock resulting in the elimination of dividends thereon. On a pro
forma basis, assuming the common stock sale and
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related transactions had occurred as of the beginning of fiscal years 1992 and
1991, net income from continuing operations would have been $22.0 million and
$15.5 million, respectively.
CASH FLOWS
Six Months Ended September 30, 1993 and 1992
Cash and cash equivalents decreased by $3.4 million for the six months
ended September 30, 1993, as compared with an increase of $35.2 million in the
same period in 1992. Operating activities provided cash of $17.1 and $19.3
million for the current and prior year periods, respectively. For the period
ended September 30, 1993, cash generated from continued strong earnings was
offset by a $13.3 million increase in net working capital. Such increase
resulted primarily from an increase in accounts receivable due to increased
sales and shifts in sales mix towards nutritional products customers which are
generally provided longer payment terms. Working capital was further impacted by
a decrease in current liabilities relating primarily to the timing of value
added tax payments for certain of the Company's European subsidiaries. For the
prior year period, cash generated from operating earnings was offset by a $13.6
million increase in net working capital. Increases in inventory levels and
decreases in current liabilities primarily related to the timing of value added
tax payments contributed to the prior year net working capital increase.
Capital expenditures for the current year six months amounted to $16.5
million, compared to the prior year period's capital expenditures of $14.0
million. Current quarter capital spending consisted of expenditures in the
United Kingdom related to the new Zydis(R) production and Pulsincap(TM)
development facilities as well as general facility and equipment additions and
improvements worldwide. In the prior year, capital expenditures were related
primarily to facility upgrades of the Company's German softgel operation,
expansion in the United Kingdom related to the Zydis(R) production facility, and
general facility and equipment additions and improvements. For the six months
ended September 30, 1993, $33.8 million was used for the acquisitions of the
capital stock of Pharmagel and certain softgel assets of Gayoso Wellcome (as
discussed in Note 6 to the consolidated financial statements as of September 30,
1993). For the same period last year, cash of $28.0 million was provided
resulting from the disposition of Paco (as discussed in Note 2 to the
consolidated financial statements as of September 30, 1993).
Financing activities for the six months ended September 30, 1993, reflect
primarily $24.5 million of borrowings under the Company's bank credit facility
to fund the acquisition of Pharmagel, as well as a net $9.3 million of other
borrowings to fund capital expenditure and working capital needs. In the prior
year period, the Company had net retirements of long-term debt of approximately
$700,000.
Fiscal Years Ended March 31, 1993 and 1992
Cash and cash equivalents decreased by $14.4 million for the fiscal year
ended March 31, 1993, as compared with an increase of $15.3 million for the same
period in 1992 and a decrease of $1.2 million in 1991. Operating activities
provided net cash of $46.0 million, $36.5 million, and $24.6 million during
fiscal years 1993, 1992, and 1991 respectively. In 1993, cash generated from
continued growth in 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 value added
taxes receivable at the Company's German subsidiary. For fiscal 1991, net
decreases in working capital contributed $3.1 million to operating cash flows,
resulting primarily from increases in accounts payable.
Cash used by investing was $3.7 million, $20.3 million and $5.0 million for
the 1993, 1992 and 1991 fiscal years, respectively. The increase in 1993 is
primarily due to the disposal of Paco, which provided $28.0 million of cash in
1993. Capital expenditures amounted to $33.2 million in 1993, consisting
primarily of costs associated with facility and equipment upgrades in the
Company's German subsidiary, expansion in the United Kingdom related primarily
to the new Zydis(R) production and Pulsincap(TM) development facilities, and
general facility and equipment additions and improvements. Capital expenditures
of $20.9 million and $12.0
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million were incurred in fiscal years 1992 and 1991, respectively, consisting
primarily of new softgel manufacturing equipment, facility upgrades, and, in the
1992 fiscal year, the purchase of a facility in the United Kingdom to house
Pulsincap(TM) development facilities. In fiscal 1991, other investing activities
included $4.5 million in proceeds from the sale of an interest in the Company's
Japanese subsidiary and from divestitures of other subsidiaries.
Financing activities for the year ended March 31, 1993, reflect primarily
the third quarter repurchase of $42.5 million principal amount of the Company's
Subordinated Debentures for approximately $49.3 million, funded primarily by
cash on hand and, to a lesser extent, borrowings under the Company's bank credit
facility (see Note 8 to the consolidated financial statements as of March 31,
1993). Other financing sources include $2.2 million of proceeds from industrial
revenue bonds used to finance a facility upgrade and expansion and $4.8 million
of other borrowings, primarily under the bank credit facility. Other significant
financing uses include $29.6 million of repayments on the bank credit facility.
In the 1992 fiscal year, financing activities include the $195.5 million of
proceeds from R.P. Scherer Corporation's 1991 sale of common stock, net of cash
used for related purchases of exchangeable preferred stock and repayments of
long-term bank debt (see Note 3 to the consolidated financial statements as of
March 31, 1993). During fiscal 1991, the Company made principal payments of
approximately $29.4 million on its long-term debt, including early repayment of
a Deutchemark denominated note payable at the U.S. dollar equivalent of $4.8
million, and an aggregate repayment of approximately $22.7 million on the former
senior bank credit agreement.
LIQUIDITY AND FINANCIAL CONDITION
Reference is made to "Use of Proceeds" and other information contained in
this Prospectus Supplement for a discussion concerning the impact of the
Offering.
During the next several years, a significant portion of the Company's cash
flow will be used to service indebtedness and fund capital expenditures and
working capital needs. The Company believes that its future cash flows from
operations, together with cash and short-term investments, aggregating $31.9
million at September 30, 1993, and amounts available under bank credit
facilities will be adequate to meet anticipated debt service and operating cash
requirements.
The Company actively reviews drug delivery systems businesses and
technologies for potential acquisition, consistent with its stated strategic
objectives. Management anticipates that most such acquisitions would not involve
material initial cost. Management intends that any acquisition requiring
significant funding would be financed largely through the issuance of common
stock, depending upon market conditions, so as not to adversely impact the
Company's capital structure.
At September 30, 1993, the Company's outstanding long-term indebtedness
consisted of approximately $119.9 million of Subordinated Debentures (net of a
$5.2 million discount) and approximately $34.3 million under the Company's bank
credit facility. Other indebtedness includes capital lease obligations of $9.8
million, $9.3 million of industrial revenue bonds, and $7.1 million of other
instruments.
The Company's bank credit facility provides that the Company may borrow up
to an aggregate of $120.0 million, in various currencies, and expires March, 31,
1995. Borrowings under this facility were collateralized by a first lien on a
significant portion of the Company's and certain subsidiaries' present and
future assets. In January 1994, the Company executed an amendment to the credit
facility which removed all such collateral requirements. Borrowings under the
facility remain guaranteed by cross-guarantees among the Company and such
subsidiaries.
Pursuant to other local credit arrangements, the Company and certain of its
subsidiaries may borrow up to $12.5 million, subject to certain limitations
imposed by the Company's bank credit facility. Approximately $0.9 million was
outstanding under these arrangements as of September 30, 1993.
Capital expenditures in fiscal 1994 are expected to approximate $40 to $45
million and will include facilities expansions or replacement in Europe, Latin
America and Australia, continuing facility and equipment expenditures for the
manufacture of Zydis(R) fast dissolving dosage products, and general facility
and equipment upgrade and replacement costs. As of September 30, 1993, the
Company has approximately
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$6.2 million of commitments for future capital expenditures. The Company expects
to fund such capital expenditures primarily from operating cash flows.
The Company's bank credit facility and the indenture governing the
Subordinated Debentures contain covenants which, among other things, restrict
the Company's ability to incur additional indebtedness or contingent
obligations, make investments and loans, dispose of assets, consummate a
business combination and declare or pay cash dividends. The bank credit facility
allows increasing levels of cash dividends based upon future income. The Company
does not currently have any plans to declare or pay dividends.
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 would require accounting for other postemployment benefits
similar to that currently required for postretirement benefits (see Note 10 to
the consolidated financial statements as of March 31, 1993). Upon adoption, the
standard requires the recognition of a cumulative adjustment to the results of
operations. The determination of the impact from adoption of this statement on
the Company's financial statements has not yet been completed, however, the
Company believes that it will not significantly affect the Company's future
financial results or position.
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DESCRIPTION OF THE SENIOR NOTES
The following description of the particular terms of the Senior Notes
supplements and, to the extent inconsistent therewith, replaces the description
of the general terms of the Securities set forth under the heading "Description
of Securities and Indenture" in the accompanying Prospectus, to which
description reference is hereby made. The Senior Notes will be issued under an
Indenture (as the same may be amended or supplemented from time to time, the
"Indenture"), dated as of January 1, 1994, between the Company and Comerica
Bank, as Trustee (in such capacity, the "Trustee"). The Senior Notes are
referred to in the accompanying Prospectus as "Securities."
GENERAL
The Senior Notes are limited to $100,000,000 aggregate principal amount and
will mature on February 1, 2004. As more fully described in the accompanying
Prospectus under the caption "Global Securities," the Senior Notes will be
issued in the form of one or more fully registered Global Securities registered
in the name of The Depository Trust Company (the "Depositary") or a nominee
thereof. The Senior Notes will be issued in book-entry form only.
The Senior Notes will bear interest at the rate of 6 3/4% per annum,
payable semiannually on February 1 and August 1 of each year, commencing August
1, 1994. Interest payable on any Senior Note will be paid to the person whose
name such Senior Note is registered at the close of business on the January 15
or July 15, as the case may be, preceding such interest payment date.
The Company conducts a substantial portion of its operations through
subsidiaries, and the Senior Notes will be effectively subordinated to all
existing and future indebtedness and other liabilities of its subsidiaries. The
outstanding indebtedness of the Company's subsidiaries at September 30, 1993 was
approximately $62.5 million.
The terms of the Senior Notes include those stated in the Indenture and
those made a part of the Indenture by reference to the Trust Indenture Act of
1939 as in effect on the date of the Indenture. The Senior Notes are subject to
all such terms and prospective purchasers are referred to the Indenture for a
statement thereof.
The following statements relating to the Senior Notes and Indenture are
summaries and do not purport to be complete. Such summaries may make use of
certain terms defined in the Indenture and are qualified in their entirety by
express reference to the Indenture. A copy of the Indenture is filed with the
Securities and Exchange Commission.
The Company does not intend to apply for listing of the Senior Notes on any
stock exchange.
REDEMPTION
The Senior Notes may not be redeemed prior to maturity on February 1, 2004.
The Senior Notes will not provide for any mandatory sinking fund.
CERTAIN COVENANTS
Pursuant to the Indenture, the Company has covenanted and agreed to the
following with respect to the Senior Notes (as more fully described in the
Prospectus and the Indenture):
Limitation on Liens
The Company will not, and will not permit any Subsidiary (as defined
below), directly or indirectly, to create, incur, assume or permit to exist any
Lien (as defined in the Indenture) on or with respect to any property or assets
of the Company or any Subsidiary or any interest therein or any income or
profits therefrom, unless the Senior Notes are secured equally and ratably with
(or prior to) any and all other indebtedness secured by such Lien, except for
(i) any Lien securing indebtedness incurred to finance the purchase price or
cost of construction of property (or additions, substantial repairs, alterations
or substantial improvements thereto), provided that such Lien and the
indebtedness secured thereby are incurred within twelve months of the later of
acquisition or completion of construction (or addition, repair, alteration or
improvement) and full operation thereof, and provided, further, that such Lien
does not relate to any property acquired or constructed by the Company or a
Subsidiary pursuant to clause (iii)(B) of "-- Limitation on Sale and Lease-Back
Transactions"; (ii) any Lien arising in the ordinary course of business, other
than in connection with indebtedness for borrowed money; (iii) any Lien on
property or assets acquired by the Company or any
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Subsidiary after the date of issuance of the Senior Notes, provided that such
Lien existed on the date such property or assets were acquired, and provided,
further that, except as provided in clause (i) above, such Lien was incurred
prior to, and not in anticipation of, such acquisition; (iv) any Lien on the
property or assets of, or on the shares of stock of, any corporation or entity
existing at the time such corporation or entity first becomes a Subsidiary,
provided that such Lien was incurred prior to, and not in anticipation of, such
corporation or entity becoming a Subsidiary; (v) any Lien existing on the date
of the Indenture; (vi) any Lien arising out of judgments or awards against the
Company or any Subsidiary with respect to which the Company or such Subsidiary
shall in good faith be prosecuting an appeal or proceedings for review, or Liens
which are discharged within 60 days of entry of judgment or Liens (including,
without limitation, appellate bonds) incurred by the Company or a Subsidiary for
the purpose of obtaining a stay or discharge in the course of any ongoing legal
proceeding to which the Company or such Subsidiary is a party; (vii) any Lien
for taxes not yet due and payable by the Company or any Subsidiary or which the
Company or such Subsidiary is contesting in good faith; (viii) any Lien in favor
of the Company or a Subsidiary; (ix) any Lien (other than a Lien permitted under
any of clauses (i) through (viii) of this paragraph) securing indebtedness of
the Company or any Subsidiary, provided that the total outstanding indebtedness
(including the fair value of all Sale and Lease-Back Transactions permitted
under clause (i) of "-- Limitation on Sale and Lease-Back Transactions" but
excluding any obligations associated with such Sale and Lease-Back Transactions)
that may be secured under this clause (ix) may not exceed 15% of the
Consolidated Net Tangible Assets of the Company (as defined in the Indenture)
and its Subsidiaries at the end of the most recent fiscal quarter; (x) any Lien
extending, renewing or replacing any Lien permitted by clauses (i) through (ix)
above; and (xi) any Lien securing indebtedness the proceeds of which are
deposited, promptly upon receipt, with the Trustee solely for the purpose of
effecting a legal defeasance or covenant defeasance as set forth in the
Indenture.
In the case of Liens permitted under clauses (i), (iii) and (iv), such
Liens may not relate to any property or assets of the Company or a Subsidiary
other than the property so acquired, constructed, added, repaired, altered or
improved, as the case may be. In the case of Liens permitted under clause (x),
such Liens (A) may not relate to any property or assets of the Company or a
Subsidiary other than the property or assets to which the Lien being extended,
renewed or replaced relates to, and (B) may not secure indebtedness in excess of
that secured by the Lien being extended, renewed or replaced. In addition, if
any Lien permitted under clause (ix) is extended, renewed or replaced pursuant
to clause (x), then the aggregate amount of indebtedness secured by all such
extended, renewed or replaced Liens (originally permitted under clause (ix))
shall be included thereafter in all calculations of Liens permitted under clause
(ix).
As used in this Prospectus Supplement, the term "Subsidiary" means a
corporation or other entity 50% or more of the outstanding voting stock or other
voting interest of which is owned, directly or indirectly, by the Company or by
one or more other Subsidiaries, or by the Company and one or more other
Subsidiaries.
Limitation on Sale and Lease-Back Transactions
The Company will not, nor will it permit any Subsidiary, directly or
indirectly, to enter into, assume, guarantee, or otherwise become liable with
respect to any Sale and Lease-Back Transaction (as defined below); provided,
however, that the Company or any Subsidiary may enter into (i) a Sale and
Lease-Back Transaction that, had such Sale and Lease-Back Transaction been
structured as a mortgage rather than as a Sale and Lease-Back Transaction, the
Company or such Subsidiary would have been permitted to enter into such
transaction without at least equally and ratably securing (or granting priority
to) the Senior Notes pursuant to the terms of the Indenture described under the
caption "Limitation on Liens;" (ii) a Sale and Lease-Back Transaction between or
among the Company and any of its Subsidiaries or between or among Subsidiaries;
and (iii) a Sale and Lease-Back Transaction, provided that, the proceeds of the
sale of the property or assets to be leased are at least equal to the fair value
(the fair value of such proceeds, if other than cash, to be determined by the
chief financial officer of the Company) and an amount equal to such net proceeds
is applied within 180 days of the effective date of such Sale and Lease-Back
Transaction to (A) the retirement (other than any mandatory retirement and other
than any prohibited retirement of securities) of indebtedness for borrowed money
(including the Senior Notes) incurred or assumed by the Company or any
Subsidiary (other than indebtedness for borrowed money owed to the Company or
any Subsidiary) which by its terms matures on, or is extendible or renewable at
the option of the obligor to, a date more than 12 months
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after the date of the creation of such indebtedness and, in the case of such
indebtedness of the Company, which ranks on a parity with, or senior in right of
payment to, the Senior Notes or (B) the purchase or construction of other
property, provided, that, upon the completion of such purchase or construction,
such property is owned by the Company or a Subsidiary free and clear of all
Liens. For the purposes of this paragraph, a Sale and Lease-Back Transaction
means any arrangement with any person or entity providing for the leasing to the
Company or a Subsidiary for a period of more than three years of any property
which has been or is to be sold or transferred by the Company or such Subsidiary
to such person or entity or to any other person or entity to which funds have
been or are to be advanced by such person or entity on the security of the
leased property.
Limitation on Transactions with Affiliates
The Company will not and will not permit any of its Subsidiaries, directly
or indirectly, to enter into or suffer to exist any transaction or series of
related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate of the
Company unless (i) any such transaction or series of related transactions is on
terms that are not less favorable to the Company or such Subsidiary than would
be available in a comparable transaction made on an arm's length basis with an
unrelated third party and (ii) with respect to a transaction or series of
related transactions during any fiscal year involving aggregate consideration in
excess of $10 million, such transaction or series of related transactions is
approved by the Board of Directors of the Company. The provisions described in
this paragraph shall not apply to (i) any transaction between the Company and
one or more of its Subsidiaries, or between Subsidiaries of the Company, (ii)
any transaction in the ordinary course of the Company's business and consistent
with past practice, (iii) transactions, agreements and arrangements with
Affiliates in existence on the date of the Indenture as well as any subsequent
renewals, extensions, modifications, amendments or replacements to such
agreements which are not detrimental to the Company and its Subsidiaries, taken
as a whole, (iv) any employment agreement or any employee compensation or
employee benefit agreement, plan or arrangement entered into by the Company or
any of its Subsidiaries in the ordinary course of business of the Company or the
relevant Subsidiary, and (v) payments of reasonable directors' fees and
expenses.
REPORTS BY THE COMPANY
If the Company is not required to file information, documents or reports
pursuant to either Section 13 or Section 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), then it will file with the Trustee and the Securities
and Exchange Commission (the "Commission"), in accordance with rules and
regulations prescribed from time to time by the Commission, such of the
supplementary and periodic information, documents and reports which may be
required pursuant to Section 13 of the Exchange Act in respect of a security
listed and registered on a national securities exchange as may be prescribed
from time to time in such rules and regulations.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with or merge into any other person or
entity, and the Company may not, directly or indirectly, sell, convey, transfer
or lease all or substantially all of its properties and assets to, any person or
entity, unless (a) the person or entity formed by or surviving such
consolidation or merger or the person or entity which acquires or leases all or
substantially all of the properties and assets of the Company (i) is organized
and existing under the laws of any United States jurisdiction and (ii) expressly
assumes, by supplemental indenture in a form reasonably satisfactory to the
Trustee, all of the Company's obligations on the Senior Notes and under the
Indenture, and (b) after giving effect to such transaction no Event of Default,
and no event which, after notice or lapse of time or both, would become an Event
of Default, shall have occurred and be continuing.
DEFEASANCE
The Company may omit to comply with certain designated covenants in the
Indenture and any such omission with respect to such covenants shall not be an
event of default under the Indenture if the Company deposits or causes to be
deposited in a trust fund certain monies as more fully described in the
Indenture and in the accompanying Prospectus under "Defeasance of Certain
Obligations" and "Satisfaction and Discharge."
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<PAGE> 27
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement (the form of
which is filed as an exhibit to the Registration Statement of which the
accompanying Prospectus forms a part) among the Company and the Underwriters, to
purchase from the Company, and the Company has agreed to sell to the
Underwriters, the respective principal amount of Senior Notes set forth opposite
their respective names below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF SENIOR NOTES
----------------
<S> <C>
Lehman Brothers Inc....................................... $ 60,000,000
PaineWebber Incorporated.................................. 15,000,000
Wertheim Schroder & Co. Incorporated...................... 15,000,000
Robert W. Baird & Co. Incorporated........................ 10,000,000
----------------
Total.............................................. $100,000,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Senior Notes are subject to the approval of certain
legal matters by counsel and certain conditions, and that if any of the Senior
Notes are purchased by the Underwriters pursuant to the Underwriting Agreement,
all of the Senior Notes agreed to be purchased by the Underwriters pursuant to
the Underwriting Agreement must so be purchased.
The Company has been advised by the Underwriters that they propose to offer
part of the Senior Notes initially at the public offering price set forth on the
cover page of this Prospectus Supplement plus accrued interest, if any, and part
of the Senior Notes to certain selected dealers (who may include the
Underwriters) at such public offering price plus accrued interest, if any, less
a selling concession not to exceed 0.50% of the principal amount of the Senior
Notes. The Underwriters or such selected dealers may reallow a concession to
certain other dealers not to exceed 0.25% of the principal amount of the Senior
Notes. After the initial public offering of the Senior Notes, the public
offering price, the concession to selected dealers and the reallowance to other
dealers may be changed by the Underwriters.
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriters against certain liabilities which may be incurred in connection
with the offering of the Senior Notes, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments that the
Underwriters may be required to make in respect thereof.
There is no public market for the Senior Notes, and the Company does not
intend to list the Senior Notes on any securities exchange. The Company has been
advised by each Underwriter that it presently plans to make a market in the
Senior Notes, although the Underwriters are under no obligation to do so and may
discontinue any market-making activity at any time. No assurance can be given as
to the liquidity of the trading market for the Senior Notes or that an active
market for the Senior Notes will develop. If an active public market does not
develop, the market price and liquidity of the Senior Notes may be adversely
affected.
Lehman Brothers Inc. ("Lehman") and certain of its affiliates, collectively
own approximately 30% on a fully diluted basis of the outstanding common stock
of R.P. Scherer Corporation, the parent corporation of the Company. Under
Schedule E ("Schedule E") to the by-laws of the National Association of
Securities Dealers, Inc. ("NASD"), Lehman is an affiliate of the Company.
Therefore the underwriting arrangements for this offering will comply with the
requirements of Schedule E regarding a NASD member firm's participation in
distributing its affiliate's securities.
Lehman has from time to time provided investment banking, financial
advisory and other services to the Company, for which services Lehman has
received fees and reimbursement of its out-of-pocket expenses. Three officers of
Lehman are directors of the Company and one such officer is an officer of R.P.
Scherer Corporation, the parent corporation of the Company.
S-27
<PAGE> 28
VALIDITY OF THE SENIOR NOTES
The validity of the Senior Notes will be passed upon for the Company by
Clark, Klein & Beaumont, Detroit, Michigan, and for the Underwriters by Simpson
Thacher & Bartlett (a partnership which includes professional corporations), New
York, New York.
EXPERTS
The audited consolidated financial statements and schedules of the Company
and its subsidiaries included in this Prospectus Supplement have been audited by
Arthur Andersen & Co., independent public accountants as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report. Reference is made to said report, which includes 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 5 and 10,
respectively, to the audited consolidated financial statements as of March 31,
1993.
S-28
<PAGE> 29
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS AS OF SEPTEMBER
30, 1993 (UNAUDITED):
Consolidated Statement of Operations
for the three and six months ended
September 30, 1993
and 1992........................... F-2
Consolidated Statement of Financial
Position as of September 30 and
March 31, 1993..................... F-3
Consolidated Statement of Cash Flows
for the six months ended September
30, 1993 and 1992.................. F-4
Notes to Consolidated Financial
Statements......................... F-5
FINANCIAL STATEMENTS AS OF MARCH 31,
1993:
Consolidated Statement of Operations
for the years ended March 31, 1993,
1992, and 1991..................... F-8
Consolidated Statement of Financial
Position as of March 31, 1993 and
1992............................... F-9
Consolidated Statement of Cash Flows
for the years ended March 31, 1993,
1992 and 1991...................... F-10
Consolidated Statement of
Shareholder's Equity for the years
ended March 31, 1993, 1992
and 1991........................... F-11
Notes to Consolidated Financial
Statements......................... F-12
Report of Independent Public
Accountants........................ F-29
</TABLE>
F-1
<PAGE> 30
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX MONTHS
MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1993 1992 1993 1992
-------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............................................ $105,179 $97,671 $213,633 $201,024
Cost of sales........................................ 69,715 60,284 137,461 120,557
Selling and administrative expenses.................. 14,402 13,552 28,734 27,865
Research and development expenses, net............... 3,104 2,985 6,212 5,361
-------- ------- -------- --------
Operating income..................................... 17,958 20,850 41,226 47,241
Interest expense..................................... 6,027 7,372 11,727 14,104
Interest earned and other............................ (364) (1,250) (954) (2,241)
-------- ------- -------- --------
Income from continuing operations before income
taxes, minority interests and accounting change.... 12,295 14,728 30,453 35,378
Income taxes......................................... 3,602 5,848 10,050 13,822
Minority interests................................... 2,136 2,821 5,250 7,109
-------- ------- -------- --------
Income from continuing operations before accounting
change............................................. 6,557 6,059 15,153 14,447
Loss from discontinued operation (Note 2)............ -- (647) -- (647)
Cumulative effect of accounting change (Note 3)...... -- -- -- 974
-------- ------- -------- --------
Net income...................................... $ 6,557 $ 5,412 $ 15,153 $ 14,774
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
F-2
<PAGE> 31
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1993 1993
------------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 27,017 $ 30,389
Short-term investments.............................................. 4,932 3,476
Receivables, less reserves of:
September 30, 1993 -- $2,900,000;
March 31, 1993 -- $2,300,000..................................... 88,005 80,537
Inventories......................................................... 53,560 48,310
Other current assets................................................ 5,376 4,573
------------- ---------
178,890 167,285
------------- ---------
PROPERTY:
Property, plant and equipment, at cost.............................. 268,454 243,538
Accumulated depreciation............................................ (59,472) (48,987)
------------- ---------
208,982 194,551
OTHER ASSETS:
Intangibles, net of amortization.................................... 183,526 155,595
Deferred financing fees, net of amortization........................ 4,204 4,407
Other assets........................................................ 16,178 10,346
------------- ---------
203,908 170,348
------------- ---------
$ 591,780 $ 532,184
------------- ---------
------------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt................. $ 4,955 $ 2,465
Accounts payable.................................................... 36,699 41,557
Accrued liabilities................................................. 36,841 34,410
Accrued income taxes................................................ 7,026 7,336
------------- ---------
85,521 85,768
------------- ---------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt...................................................... 180,447 141,151
Other long-term liabilities......................................... 45,743 38,812
Deferred income taxes............................................... 28,015 31,083
Minority interests in subsidiaries.................................. 36,461 32,369
------------- ---------
290,666 243,415
------------- ---------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDER'S EQUITY:
Common stock, $.33 1/3 par value, 1,000 shares authorized and
outstanding...................................................... 1 1
Additional paid-in capital.......................................... 234,021 233,743
Retained deficit.................................................... (9,797) (24,951)
Currency translation adjustment..................................... (8,632) (5,792)
------------- ---------
215,593 203,001
------------- ---------
$ 591,780 $ 532,184
------------- ---------
------------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 32
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
SEPTEMBER 30,
----------------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................... $ 15,153 $ 14,774
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................ 8,582 8,536
Amortization of intangible assets........................... 1,898 2,175
Amortization of deferred financing costs and debt
discount................................................... 735 907
Minority interests in net income............................ 5,250 7,109
Deferred tax provision and other............................ (1,192) (257)
Loss from discontinued operation............................ -- 647
Cumulative effect of accounting change...................... -- (974)
Increase in receivables..................................... (4,825) (119)
Increase in inventories and other current assets............ (3,613) (7,339)
Decrease in accounts payable and accrued expenses........... (4,879) (6,168)
-------- --------
Net cash provided by operating activities.......................... 17,109 19,291
-------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment................................. (16,469) (14,038)
Acquisition of businesses, net of cash acquired (Note 6)......... (33,761) --
Proceeds from sales of plant and equipment....................... 155 79
Proceeds from disposition of subsidiary.......................... -- 28,047
Other............................................................ (2,564) 1,332
-------- --------
Net cash provided (used) by investing activities................... (52,639) 15,420
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings............................... 44,150 1,040
Long-term debt retirements and payments.......................... (10,389) (1,729)
Short-term borrowings, net....................................... (240) (555)
Cash dividends paid to minority shareholders of subsidiaries..... (1,203) (1,698)
-------- --------
Net cash provided (used) by financing activities................... 32,318 (2,942)
-------- --------
Effect of currency translation on cash and cash equivalents........ (160) 3,474
-------- --------
Net increase (decrease) in cash and cash equivalents............... (3,372) 35,243
-------- --------
Cash and cash equivalents, beginning of period..................... 30,389 44,761
-------- --------
Cash and cash equivalents, end of period........................... $ 27,017 $ 80,004
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 33
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of R.P. Scherer International Corporation ("Scherer International"), a
Delaware corporation, and its subsidiaries, some of which are less than
wholly-owned. Scherer International is a wholly-owned subsidiary of R.P. Scherer
Corporation. R.P. Scherer Corporation's only operating asset is its investment
in Scherer International. Unless otherwise stated herein, the term "Company"
refers to either or both of Scherer International and R.P. Scherer Corporation.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring items) necessary for the fair presentation of financial position and
results of operations. These consolidated financial statements and related notes
have been prepared pursuant to the Rules and Regulations set forth by the
Securities and Exchange Commission and should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K for the year ended March 31, 1993, as filed with the Securities and
Exchange Commission.
2. DISCONTINUED OPERATION
In fiscal 1992, the Company reached a decision to dispose of its former
subsidiary, Paco Pharmaceutical Services, Inc. ("Paco"). Accordingly, the net
operating results of Paco and the loss from Paco's disposal are reported as a
discontinued operation in the consolidated statement of operations. In August
1992, the Company disposed of Paco through an initial public offering of Paco's
common stock, and realized net proceeds of $28.0 million. In connection with the
offering, the Company agreed to indemnify Paco for any liabilities and costs
incurred subsequent to March 31, 1992, related to the litigation involving Paco
specifically described in Note 5. In addition, the Company has indemnified Paco
for any additional U.S. federal and certain state tax liabilities arising from
the date of the Company's acquisition of Paco through the date of completion of
the offering.
For the quarter ended September 30, 1992 (through the date of disposal),
Paco had net sales of $11.1 million, interest expense of $0.5 million (including
an allocation of consolidated interest expense for debt attributable to Paco),
income taxes of $0.2 million, and no net income. For the six month period ended
September 30, 1992, Paco had net sales of $30.2 million, interest expense of
$1.1 million (including an allocation of consolidated interest expense for debt
attributable to Paco), income taxes of $1.0 million, and no net income. The
consolidated statement of cash flows excludes Paco's net cash used of $0.1
million for the six month period ended September 30, 1992.
3. INCOME TAXES
The Company records income tax expense based on an estimated consolidated
effective income tax rate for the fiscal year. The effective income tax rate in
1993 is lower than the U.S. Federal income tax rate primarily due to the
recognition of foreign income tax credits generated in the current fiscal year
for U.S. tax purposes, offset by goodwill amortization not deductible for income
tax purposes. In 1992, the effective tax rate was higher than the U.S. Federal
income tax rate primarily due to higher foreign income tax rates, goodwill
amortization not deductible for income tax purposes, and restrictions as to the
recognition of foreign income tax credits for U.S. tax purposes.
Effective April 1, 1992, the Company adopted the provisions of the
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109"). As a result, the Company recorded income of approximately
$974,000, which represented the net decrease in deferred tax liabilities
resulting from the adoption of SFAS 109 as of that date. Such amount has been
reflected in the consolidated statement of operations as the cumulative effect
of an accounting change for the six months ended September 30, 1992.
F-5
<PAGE> 34
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1993 1993
------------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies............................................ $27,382 $23,881
Work in process....................................................... 10,848 7,365
Finished goods........................................................ 15,330 17,064
------------- ---------
$53,560 $48,310
------------- ---------
------------- ---------
</TABLE>
5. CONTINGENCIES
The Company's former subsidiary, Paco, certain of Paco's subsidiaries, the
Company and other defendants are parties to a group of actions commenced,
beginning in April 1990, in Federal and state courts in New Jersey and in
Federal courts in New York and Massachusetts by limited partners of Paco
Development Partners II ("PDP II"), a research and development partnership in
which a subsidiary of Paco serves as the general partner. The defendants were
granted summary 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, has been
stayed pending resolution of the New Jersey state court action (Nelson v. Ian
Ferrier, Civil Action 91-5334(JWB)). No class has been certified in this federal
action.
Plaintiffs in each of these actions seek damages of an unspecified amount
for, among other things, alleged violations of state securities law, fraud,
misrepresentation, breach of contract, conversion and negligence in connection
with the $25 million private placement sale of PDP II limited partnership
interests and warrants in 1986. Plaintiffs in the state court action also seek
damages, derivatively, on behalf of PDP II, for alleged breaches of fiduciary
duty and breach of contract in connection with the management of PDP II. On
October 19, 1993, the plaintiffs in the New York federal court action described
above (in which the defendants were granted summary judgment) filed a new
complaint in state court in New Jersey. This complaint alleges state law causes
of action for fraud, negligent misrepresentation, breach of fiduciary duty and
breach of contract. The Company believes that it has meritorious defenses to
these actions and intends to defend against them vigorously. In the opinion of
management, the ultimate outcome of this litigation will not have a material
adverse effect on the Company's business or financial condition.
On March 30, 1992, OCAP Acquisition Corp. ("OCAP") commenced an action in
the Supreme Court of the State of New York, County of New York, against Paco,
certain of its subsidiaries, the Company and Scherer International
(collectively, the "defendants"), arising out of the termination of an Asset
Purchase Agreement dated February 21, 1992 (the "Purchase Agreement") between
OCAP and the defendants providing for the purchase of substantially all the
assets of Paco. On May 15, 1992, OCAP served an amended verified complaint (the
"Amended Complaint"), asserting causes of action for breach of contract and
breach of the implied covenant of good faith and fair dealing, arising out of
defendants' March 25, 1992 termination of the Purchase Agreement, as well as two
additional causes of action that were subsequently dismissed by order of the
court. The Amended Complaint seeks $75 million in actual damages, $100 million
in punitive damages, as well as OCAP's attorney fees and other litigation
expenses, costs and disbursements incurred in bringing this action. Discovery
with respect to the action has commenced; however, discovery has been
temporarily stayed by OCAP's filing of a motion for partial summary judgment.
The Company has filed a cross-motion for dismissal based on discovery to date
and is awaiting the decision of the Court. Based upon the investigation
conducted by the Company to date, the Company believes that this action lacks
merit and
F-6
<PAGE> 35
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 which exceeded environmental standards. The
Company voluntarily initiated a remedial investigation, and initial remedial and
removal actions have been completed by the Company and the current owner of the
facility for the known soil contamination at such site. The Company continues to
perform additional studies and remediation of the area, including testing and
removal of groundwater, which may also indicate the necessity for additional
remedial and removal actions. On the basis of the results of investigations
performed to date, the Company does not believe that potential future costs
associated with either the investigation or any potential remedial or removal
action will ultimately have a materially adverse impact on the Company's
business or financial condition.
The Company is a party to various other legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources.
6. BUSINESS ACQUISITION
On July 1, 1993, the Company acquired all outstanding capital stock of
Pharmagel S.p.A. (Italy) and Pharmagel S.A. (France) (jointly "Pharmagel"), and
has accounted for such acquisition as a purchase for financial reporting
purposes. Pharmagel is a manufacturer of softgels, and had been privately held.
The net assets and results of operations of Pharmagel are included in the
Company's consolidated financial statements beginning July 1, 1993. The
aggregate purchase price, which approximates $30 million, was allocated to
assets and liabilities based on preliminary estimates of their fair values as of
the date of acquisition. The purchase was funded primarily by borrowings under
the Company's bank credit facility, plus an additional amount not to exceed $4.5
million payable to the sellers during the next six years. The purchase price
exceeds the fair value of the net assets acquired by a currently estimated $18
million, which is classified as goodwill in the statement of financial position
and is being amortized on a straight-line basis over forty years.
The following unaudited pro forma summary presents the consolidated results
of operations of the Company and Pharmagel as if the acquisition had occurred at
the beginning of the periods presented after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense on
acquisition borrowings, and related income tax effects. The pro forma
information is not necessarily indicative of what would have occurred had the
acquisition been made as of those dates, and is not intended to be a projection
of future results or trends.
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ----------------------
1992 1993 1992
--------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales............................................. $ 104,872 $220,770 $216,589
Income from continuing operations..................... 6,112 15,006 14,422
Net income............................................ 5,465 15,006 14,769
</TABLE>
As of September 1, 1993, the Company also acquired certain tangible and
intangible assets of Gayoso Wellcome S.A., a softgel manufacturer in Spain, for
a purchase price of approximately $9.4 million. Gayoso Wellcome's operations are
not material in relation to the Company's consolidated financial statements, and
pro forma information for this acquisition is therefore not presented.
F-7
<PAGE> 36
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales..................................................... $398,011 $337,786 $298,638
Cost of sales................................................. 242,108 201,991 183,438
Selling and administrative expenses........................... 56,413 50,305 44,834
Stock and other compensation expense (Note 3)................. -- 13,060 --
Research and development expenses, net........................ 11,393 8,453 7,382
-------- -------- --------
Operating income.............................................. 88,097 63,977 62,984
Interest expense.............................................. 25,436 35,348 45,045
Interest earned and other..................................... (3,630) (3,390) (2,358)
-------- -------- --------
Income from continuing operations before income taxes,
minority interests, and extraordinary loss.................. 66,291 32,019 20,297
Income taxes.................................................. 24,056 22,269 18,158
Minority interests............................................ 13,275 10,974 8,564
-------- -------- --------
Income (loss) from continuing operations before extraordinary
loss and accounting change.................................. 28,960 (1,224) (6,425)
Loss from discontinued operation, net of income taxes (Note
4).......................................................... (647) (16,538) (317)
-------- -------- --------
Income (loss) before extraordinary loss and accounting
change...................................................... 28,313 (17,762) (6,742)
Extraordinary loss on early retirement of debt (Note 8)....... (8,392) (2,067) --
Cumulative effect of accounting change (Notes 2, 10).......... 974 (4,917) --
-------- -------- --------
Net income (loss)............................................. 20,895 (24,746) (6,742)
Preferred stock dividends..................................... -- 6,372 5,729
-------- -------- --------
Net income (loss) attributable to common shares (Note 11)..... $ 20,895 $(31,118) $(12,471)
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE> 37
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 30,389 $ 44,761
Short-term investments................................................ 3,476 5,288
Receivables, less reserves of:
1993 -- $2,300,000; 1992 -- $2,100,000............................. 80,537 67,535
Inventories........................................................... 48,310 42,385
Current assets of discontinued operation, net (Note 4)................ -- 3,457
Other current assets.................................................. 4,573 2,690
-------- --------
167,285 166,116
-------- --------
PROPERTY:
Property, plant and equipment, at cost................................ 243,538 190,957
Accumulated depreciation.............................................. (48,987) (33,328)
-------- --------
194,551 157,629
-------- --------
OTHER ASSETS:
Intangibles, net of amortization...................................... 155,595 160,695
Deferred financing fees, net of amortization.......................... 4,407 5,886
Long-term assets of discontinued operation, net (Note 4).............. -- 25,129
Other assets.......................................................... 10,346 10,522
-------- --------
170,348 202,232
-------- --------
$532,184 $525,977
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt................... $ 2,465 $ 1,839
Accounts payable...................................................... 41,557 36,394
Accrued liabilities................................................... 34,410 37,193
Accrued income taxes.................................................. 7,336 11,928
-------- --------
85,768 87,354
-------- --------
LONG-TERM LIABILITIES AND OTHER:
Long-term debt........................................................ 141,151 178,153
Other long-term liabilities........................................... 38,812 36,947
Deferred income taxes................................................. 31,083 3,532
Minority interests in subsidiaries.................................... 32,369 28,357
-------- --------
243,415 246,989
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDER'S EQUITY (Notes 3 and 11):
Common stock, $.33 1/3 par value, 1,000 shares authorized and
outstanding........................................................ 1 1
Additional paid-in capital............................................ 233,743 233,166
Retained deficit...................................................... (24,951) (45,846)
Currency translation adjustment....................................... (5,792) 4,313
-------- --------
203,001 191,634
-------- --------
$532,184 $525,977
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE> 38
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
---------------------------------
1993 1992 1991
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................... $ 20,895 $ (24,746) $ (6,742)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 16,530 13,629 12,188
Amortization of intangible assets....................... 4,325 4,304 4,313
Amortization of deferred financing costs and debt
discount.............................................. 1,823 2,007 3,273
Minority interests in net income........................ 13,275 10,974 8,564
Deferred tax provision and other........................ 1,682 2,359 (87)
Extraordinary loss on early retirement of debt (Note
8).................................................... 8,392 2,067 --
Loss from discontinued operation (Note 4)............... 647 16,657 --
Stock option and other compensation expense (Note 3).... -- 13,060 --
Cumulative effect of accounting change.................. (974) 4,917 --
Increase in receivables................................. (16,160) (14,187) (2,729)
Increase in inventories and other current assets........ (6,161) (5,881) (3,660)
Increase in accounts payable and accrued expenses....... 1,699 11,374 9,522
-------- --------- --------
Net cash provided by operating activities.................... 45,973 36,534 24,642
-------- --------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment........................... (33,192) (20,947) (11,993)
Proceeds from sales of plant and equipment................. 187 564 1,740
Proceeds from disposition of subsidiary.................... 28,047 -- 4,472
Other...................................................... 1,221 85 757
-------- --------- --------
Net cash used by investing activities........................ (3,737) (20,298) (5,024)
-------- --------- --------
FINANCING ACTIVITIES:
Contribution of proceeds from issuance of parent common
stock................................................... -- 136,785 --
Proceeds from long-term borrowings......................... 34,609 9,082 4,976
Long-term debt retirements and payments (Note 8)........... (80,177) (127,167) (28,625)
Short-term borrowings, net................................. (726) (11,897) 8,980
Cash dividends paid to minority shareholders of
subsidiaries............................................ (9,979) (8,022) (7,237)
-------- --------- --------
Net cash provided (used) by financing activities............. (56,273) (1,219) (21,906)
-------- --------- --------
Effect of currency translation on cash and cash
equivalents................................................ (335) 317 1,111
-------- --------- --------
Net increase (decrease) in cash and cash equivalents......... (14,372) 15,334 (1,177)
Cash and cash equivalents, beginning of period............... 44,761 29,427 30,604
-------- --------- --------
Cash and cash equivalents, end of period (Note 4)............ $ 30,389 $ 44,761 $ 29,427
-------- --------- --------
-------- --------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
F-10
<PAGE> 39
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
COMMON STOCK (Note 3):
Balance at beginning of period.............................. $ 1 $ 1 $ 1
Common stock activity....................................... -- -- --
-------- -------- --------
Balance at end of period................................. $ 1 $ 1 $ 1
-------- -------- --------
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL (Note 3):
Balance at beginning of period.............................. $233,166 $ 53,711 $ 59,440
Contribution from parent stock options exercised............ 577 -- --
Contribution from issuance of parent common stock, net...... -- 135,552 --
Compensation expense related to stock options............... -- 12,343 --
Redemptions of parent preferred stock....................... -- 37,932
17% Senior cumulative exchangeable preferred stock of
parent:
Stock dividends.......................................... -- (5,336) (4,370)
Accretion................................................ -- (1,036) (1,359)
-------- -------- --------
Balance at end of period................................. $233,743 $233,166 $ 53,711
-------- -------- --------
-------- -------- --------
RETAINED DEFICIT:
Balance at beginning of period.............................. $(45,846) $(21,100) $(14,358)
Net income (loss)........................................... 20,895 (24,746) (6,742)
-------- -------- --------
Balance at end of period................................. $(24,951) $(45,846) $(21,100)
-------- -------- --------
-------- -------- --------
CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period.............................. $ 4,313 $ 2,970 $ 898
Adjustment for the period................................... (10,105) 1,343 2,072
-------- -------- --------
Balance at end of period................................. $ (5,792) $ 4,313 $ 2,970
-------- -------- --------
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY.................................... $203,001 $191,634 $ 35,582
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
F-11
<PAGE> 40
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated statement of financial position as of March 31, 1993 and
1992, and the consolidated statements of operations, shareholder's equity and
cash flows for the years ended March 31, 1993, 1992, and 1991 include the
accounts of R.P. Scherer International Corporation ("Scherer International" and
formerly R.P. Scherer Corporation), a Delaware corporation, and its
subsidiaries, some of which are less than wholly-owned. Scherer International is
a wholly-owned subsidiary of R.P. Scherer Corporation (formerly RPS
Corporation). R.P. Scherer Corporation's only operating asset is its investment
in Scherer International. Unless otherwise stated herein, the term "Company"
refers to either or both of Scherer International and R.P. Scherer Corporation.
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
The Company recognizes revenues from sales of its products to its customers
primarily upon shipment of such products. The majority of the Company's
customers are concentrated in the following markets: pharmaceutical, health and
nutritional, and cosmetic.
Translation of Foreign Currencies
With the exception of subsidiaries in Brazil and Argentina, which are
measured in U.S. dollars, the financial position and the results of operations
of all of the Company's foreign operations are measured using the local currency
of the countries in which they operate as the functional currency 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 the Company's subsidiaries
in Brazil and Argentina represented less than 5% of consolidated sales for each
period presented in the consolidated statement of operations.
It is the policy of the Company to utilize borrowings under any long-term
foreign currency loans to hedge against declines in the value of its net
investment 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, 1993, the Company was party to foreign
currency forward exchange sales contracts of approximately $9.3 million
(notional amount) principally denominated in European currencies. The contracts
generally mature in less than one year and are to hedge various foreign currency
commitments due from its 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 subsidiaries in
Brazil and Argentina) included in net income resulted in net
F-12
<PAGE> 41
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
decreases in income of $3,541,000, $1,418,000, and $1,724,000 for the years
ended March 31, 1993, 1992 and 1991, respectively.
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, the Company considers 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 to be "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:
<TABLE>
<CAPTION>
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies............................. $23,881 $17,750
Work in process........................................ 7,365 6,385
Finished goods......................................... 17,064 18,250
------- -------
$48,310 $42,385
------- -------
------- -------
</TABLE>
Property
The cost of additions and improvements including interest during
construction is capitalized, while maintenance and repairs are charged to income
when incurred. The cost of assets sold or otherwise retired, and the related
accumulated depreciation, are eliminated from the accounts in the year of
disposal and resulting gains or losses are reflected in income. Property is
depreciated primarily using the straight-line method. A summary of property
follows:
<TABLE>
<CAPTION>
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements................................ $ 16,932 $ 17,881
Building and equipment............................... 61,302 52,963
Machinery and equipment.............................. 151,828 112,988
Construction in progress............................. 13,476 7,125
-------- --------
$243,538 $190,957
-------- --------
-------- --------
</TABLE>
Intangibles and Deferred Financing Fees
Intangibles include primarily goodwill, consisting of purchase price and
related acquisition costs in excess of the fair value of identifiable net assets
of businesses acquired, principally related to the leveraged buy-out of the
Company in June 1989. Goodwill is being amortized on a straight-line basis over
40 years. The accumulated amortization of intangibles is $15,925,000 and
$11,646,000 as of March 31, 1993 and 1992, 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
$9,719,000 and $7,139,000 as of March 31, 1993 and 1992, respectively.
F-13
<PAGE> 42
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Research and Development Costs
Costs incurred in connection with the development of new products and
manufacturing methods are charged to income as incurred. Research and
development expenditures (excluding customer reimbursements) amounted to
approximately $12,451,000, $11,575,000, and $8,955,000 for the years ended March
31, 1993, 1992 and 1991, respectively. Such costs are reported net of customer
reimbursements in the consolidated statement of operations.
Income Taxes
It is the policy of the Company to provide deferred United States and
foreign income taxes on earnings of subsidiary companies which are intended to
be remitted to the parent company in the future. 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.
In the fourth quarter, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes", effective beginning April 1, 1992. The Statement 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 the adoption of this Statement, 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 $974,000, which represents the net
decrease in deferred tax liabilities resulting from the adoption of SFAS 109 as
of that date. Such amount has been reflected in the consolidated statement of
operations as the cumulative effect of an accounting change. The effect of
adopting SFAS 109 was otherwise not significant to the Company's results of
operations for fiscal 1993 and is not expected to have a significant ongoing
impact.
Reclassifications
Certain items in the prior years' financial statements and notes thereto
have been reclassified to conform with the current year presentation.
3. SALE OF R.P. SCHERER CORPORATION COMMON STOCK AND RELATED TRANSACTIONS
October 1992 Offering
In October 1992, R.P. Scherer Corporation 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 R.P. Scherer Corporation's common stock, and R.P. Scherer
Corporation did not receive any proceeds from the sale. Subsequent to completion
of the offering, Lehman's beneficial ownership amounted to approximately 30% of
R.P. Scherer Corporation's common shares outstanding (see Note 13).
October 1991 Offering
In October 1991, R.P. Scherer Corporation completed a public sale of 11.5
million shares of its common stock, representing approximately 47% of its common
equity on a fully diluted basis. Net proceeds realized from the common stock
sale were approximately $195.5 million. Of such amount, approximately $124.0
million was used in October 1991 to repurchase long-term debt under Scherer
International's senior bank credit agreement. Prior to June 1992, all
outstanding obligations under the former bank credit arrangement were paid
through a contribution of capital by R.P. Scherer Corporation to Scherer
International. In addition, $58.7 million was used in November 1991 to redeem
all outstanding shares of R.P. Scherer Corporation's 17% Exchangeable Preferred
Stock (Note 11). Remaining funds were used for general corporate purposes.
F-14
<PAGE> 43
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In connection with and upon consummation of the common stock sale, all
shares of R.P. Scherer Corporation'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.
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 this debt.
The reduction of debt and redemption of the 17% Exchangeable Preferred
Stock resulted in a significant decrease in the Company's interest expense and
the elimination of preferred stock dividends. On a pro forma basis, assuming the
common stock sale and related transactions had occurred as of the beginning of
the year ended March 31, 1992, net income from continuing operations would have
been $22,003,000. No income tax adjustment is associated with the interest
expense reduction as available ongoing foreign tax credits would have been
utilized to offset income taxes otherwise payable. Pro forma net income also
excludes the $12.3 million of compensation expense described above. The pro
forma information does not purport to represent what the Company's results would
have actually been if the transactions had indeed taken place on such dates or
to project the Company's results for any future period.
4. 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
net assets and 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 $16,657,000, 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 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 $647,000 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.
F-15
<PAGE> 44
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of Paco's results (exclusive of the loss from disposal) is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1993(1) 1992 1991
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales........................................................ $30,199 $69,920 $51,748
Interest expense(2).............................................. 1,112 3,953 5,571
Income taxes..................................................... 997 495 226
Net income (loss)................................................ -- 119 (317)
</TABLE>
- -------------------------
(1) Through August 26, 1992 date of disposal.
(2) Interest expense reflected in the results of Paco included an allocation of
consolidated interest expense based on debt attributable to Paco.
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, $0.8
million, and $0.5 million for the fiscal years ended March 31, 1993, 1992, and
1991, respectively.
5. INCOME TAXES
As discussed in Note 2, the Company adopted SFAS 109 as of April 1, 1992,
and the cumulative effect of this change is reported in the 1993 consolidated
statement of operations. 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,
-------------------------------
1993 1992 1991
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) from continuing operations before income taxes,
minority interest and extraordinary items:
United States............................................. $ 3,194 $(26,408) $(24,492)
Foreign................................................... 63,097 58,427 44,789
------- -------- --------
$66,291 $ 32,019 $ 20,297
------- -------- --------
------- -------- --------
</TABLE>
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
F-16
<PAGE> 45
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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,
-------------------------------
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision (credit) for currently payable income taxes:
United States................................................ $ 1,570 $ (127) $ (82)
Foreign...................................................... 21,442 20,924 17,383
------- ------- -------
23,012 20,797 17,301
------- ------- -------
Provision (credit) for deferred income taxes:
United States................................................ (125) -- 174
Foreign...................................................... 1,169 1,472 683
------- ------- -------
1,044 1,472 857
------- ------- -------
Total taxes............................................... $24,056 $22,269 $18,158
------- ------- -------
------- ------- -------
</TABLE>
The significant components of the deferred tax provision in fiscal year
1993 were as follows:
<TABLE>
<S> <C>
Deferred tax provision, exclusive of the components listed below................... $(3,416)
Valuation allowance change......................................................... 4,460
-------
$ 1,044
-------
-------
</TABLE>
The sources and effects of timing differences for fiscal years ended March
31, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
1992 1991
------ ------
(IN THOUSANDS)
<S> <C> <C>
Depreciation and property retirements....................................... $1,249 $1,424
Pension and other benefits.................................................. 16 (428)
Interest.................................................................... 274 17
Other items, net............................................................ (67) (156)
------ ------
$1,472 $ 857
------ ------
------ ------
</TABLE>
The components of deferred taxes as of March 31, 1993 are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Property, plant and equipment........................................ $ -- $ 35,611
Foreign tax credit carryforwards..................................... 10,542 --
Capital loss carryforwards........................................... 5,953 --
Pensions and other postretirement benefits........................... 5,501 1,500
Stock options........................................................ 3,679 --
Miscellaneous other.................................................. 6,168 702
------------ ------------
Subtotal...................................................... 31,843 37,813
Valuation allowances................................................. (23,777) --
------------ ------------
Total deferred taxes.......................................... $ 8,066 $ 37,813
------------ ------------
------------ ------------
</TABLE>
F-17
<PAGE> 46
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At March 31, 1993, net current future tax benefits of $1,484,000 are
included in other current assets, while $149,000 of net current deferred tax
liabilities are included in accrued liabilities in the accompanying consolidated
statement of financial position. In addition, $31,083,000 of net long-term
deferred tax liabilities are included in deferred income taxes in that
statement. At March 31, 1992, net current deferred tax liabilities of $85,000
are included in accrued liabilities, and net long-term deferred tax liabilities
of $3,532,000 are included in deferred income taxes therein.
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,
-----------------------------
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
United States statutory tax...................................... $22,539 $10,886 $ 6,901
Increases (reductions) in taxes due to:
Higher effective foreign tax rates............................. 1,590 4,840 3,341
Foreign tax credits not utilized............................... 2,388 -- 4,432
Stock option compensation...................................... 124 4,290 --
Domestic losses................................................ -- 799 527
Goodwill amortization.......................................... 1,252 1,291 1,738
Translation losses............................................. (1,752) 407 479
Miscellaneous other items, net................................. (2,085) (244) 740
------- ------- -------
Consolidated income taxes................................. $24,056 $22,269 $18,158
------- ------- -------
------- ------- -------
</TABLE>
The capital loss carryforwards noted above expire in 1998. The foreign tax
credit carryforwards noted above expire through 1998. At March 31, 1993, foreign
earnings of approximately $63.6 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.
Income tax payments, net of refunds, were $22,527,000, $12,263,000 and
$11,634,000 for the years ended March 31, 1993, 1992 and 1991.
6. ACCRUED AND OTHER LONG-TERM LIABILITIES
Accrued and other long-term liabilities consist of the following as of
March 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued Liabilities:
Salaries, wages and bonuses.......................................... $ 8,994 $ 9,327
Interest............................................................. 7,780 10,283
Other................................................................ 17,636 17,583
------- -------
$34,410 $37,193
------- -------
------- -------
Other Long-Term Liabilities:
Pension and welfare benefits (Note 10)............................... $27,836 $25,716
Postretirement benefits (Note 10).................................... 5,534 5,061
Other................................................................ 5,442 6,170
------- -------
$38,812 $36,947
------- -------
------- -------
</TABLE>
F-18
<PAGE> 47
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. SHORT-TERM BORROWINGS AND LINES OF CREDIT
The Company has short-term line of credit arrangements with foreign banking
institutions whereunder, at March 31, 1993, the Company and its subsidiaries may
borrow up to approximately $12.7 million subject to limitations imposed by the
Credit Agreement (Note 8). There are no compensating balance requirements
related to these lines of credit. The total indebtedness outstanding under such
arrangements was $1,108,000 and $1,353,000 at March 31, 1993 and 1992,
respectively.
Short-term borrowings, based on the amounts outstanding at the end of each
month, were as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------------
1993 1992 1991
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount outstanding................................... $1,551 $10,374 $10,090
Average amount outstanding................................... 1,163 5,212 5,186
Weighted average interest rate during the year............... 7.9% 10.3% 10.4%
Weighted average interest rate at March 31................... 7.5% 9.3% 9.4%
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior subordinated debentures (net of discount of $5,482,000 in 1993
and $8,027,000 in 1992)............................................ $119,656 $161,082
Capitalized lease obligations (Note 9)............................... 10,485 9,445
Industrial development revenue bonds................................. 8,561 6,350
Borrowings under bank credit agreement............................... 2,270 --
Other................................................................ 1,536 1,762
-------- --------
142,508 178,639
Less -- current portion.............................................. (1,357) (486)
-------- --------
$141,151 $178,153
-------- --------
-------- --------
</TABLE>
The Senior Subordinated Debentures (the "Debentures") are unsecured and
mature November 1999. Interest is payable semiannually on May 1 and November 1
at a rate of 14%, with an effective yield of 15.05%. The difference between the
14% stated rate and the effective yield reflects the original issue discount
which is being amortized over the term of the Debentures utilizing the effective
interest method. The Company may redeem the Debentures, at the Company's option,
beginning in November 1994, and a sinking fund payment of $39.4 million is
required in November 1998.
During the third quarter of 1993, the Company repurchased approximately
$42.5 million principal amount of the Debentures for an aggregate purchase price
of approximately $49.3 million, plus accrued interest. As a result of these
repurchases, the Company recognized an extraordinary charge of $10.3 million,
less related income tax benefits of $1.9 million, including the write-off of
unamortized bond discount and deferred financing costs. Annual interest expense
on the Debentures repurchased was approximately $6.4 million. Sources of funds
for the repurchases consisted primarily of cash on hand and, to a lesser extent,
borrowings under the Company's bank credit facility.
In June 1992, the Company entered into a new secured bank credit agreement
as a replacement for the Company's previous senior secured bank revolving credit
facility. The new credit agreement allows for revolving credit borrowings up to
an aggregate of $120.0 million, in various currencies, and expires March 31,
F-19
<PAGE> 48
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1995. Interest is payable quarterly at LIBOR plus 1 1/2% or at the bank's prime
rate plus 1/4%. Unused borrowing availability is subject to annual commitment
fees ranging from 1/4 to 1/2%. Borrowings under this agreement were
collateralized by a first lien on substantially all present and future assets
and capital stock of Scherer International and certain of its subsidiaries. Such
collateral obligations were removed by amendment in January 1994.
The Credit Agreement requires the Company to satisfy various annual and
quarterly financial tests, including maintenance on a consolidated basis of a
specified minimum or maximum current asset ratio, leverage ratio, fixed charge
ratio and level of tangible net worth. The agreement also restricts the
Company's ability to incur additional indebtedness, exceed specified levels of
capital expenditures, make investments and loans, dispose of assets, or
consummate a business combination, and limits the ability of the Company to pay
dividends. As of March 31, 1993, the Company does not currently have plans to
declare or pay any dividends.
The Company has variable interest rate industrial development revenue bonds
aggregating $8,561,000 due through fiscal years ending in 2015. The interest
rates in effect at March 31, 1993, ranged from 4.4% to 4.8%.
The annual maturities of long-term debt, excluding amounts payable under
capitalized lease obligations, for the five succeeding fiscal years are: 1994 --
$104,000; 1995 -- $2,652,000; 1996 -- $332,000; 1997 -- $185,000; and 1998 --
$120,000. Interest paid was $23,736,000, $45,043,000, and $45,523,000 for the
years ended March 31, 1993, 1992, and 1991, respectively.
The fair value of the Debentures, estimated based on quoted market prices
for the debentures as of March 31, 1993, was approximately $140.5 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.
9. LEASES
Total rental expense under operating leases was $7,589,000, $7,495,000, and
$7,429,000 for the years ended March 31, 1993, 1992, and 1991, 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. The only
significant capital lease entered into during the years presented was in fiscal
1991, and was a lease with a net present value of $3.1 million involving a
facility expansion. As of March 31, 1993, the minimum rental commitments under
long-term operating and capitalized leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1994....................................................... $ 1,331 $ 5,472
1995....................................................... 1,319 5,280
1996....................................................... 1,311 5,140
1997....................................................... 1,306 5,077
1998....................................................... 1,310 4,802
1999 and thereafter........................................ 10,701 40,508
------- ---------
17,278 $66,279
---------
---------
Less -- amount representing interest....................... (6,793)
-------
Present value of net minimum lease payments................ $10,485
-------
-------
</TABLE>
F-20
<PAGE> 49
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. 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. It is the policy of the Company to fund its pension plans at
amounts required by the applicable regulations. Pension expense included the
following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost of benefits earned during year...................... $ 2,474 $ 1,965 $ 2,066
Interest cost on projected benefit obligation.................... 3,665 3,217 3,162
Actual return on plan assets..................................... (2,633) (2,475) 412
Net amortization and deferral.................................... 705 338 (2,322)
------- ------- -------
$ 4,211 $ 3,045 $ 3,318
------- ------- -------
------- ------- -------
</TABLE>
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, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
------------------------------ ------------------------------
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................ $ 4,479 $31,865 $12,342 $19,590
Non-vested benefit obligation............ 122 4,509 69 3,934
------------- ------------- ------------- -------------
Accumulated benefit obligation...... 4,601 36,374 12,411 23,524
Effects of anticipated future compensation
increases................................ 1,168 7,350 2,431 6,094
------------- ------------- ------------- -------------
Projected benefit obligation........ 5,769 43,724 14,842 29,618
Plan assets at fair value.................. 8,660 12,773 17,897 2,748
------------- ------------- ------------- -------------
Projected benefit obligation in
excess of (less than) plan
assets........................... (2,891) 30,951 (3,055) 26,870
Unamortized net gain (loss)................ (858) (2,576) 2,097 (3,225)
Unrecognized prior service cost............ (180) (430) (454) (282)
------------- ------------- ------------- -------------
Accrued pension (asset) liability recorded
in the consolidated statement of
financial position....................... $(3,929) $27,945 $(1,412) $23,363
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Plan assets consist primarily of annuities, marketable securities and
mortgage notes receivable.
F-21
<PAGE> 50
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The average of the assumptions used as of March 31, 1993, 1992 and 1991 in
determining the pension expense and benefit obligation information shown above
were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Discount rate........................................................ 8.0 % 8.4% 8.6%
Rate of compensation increase........................................ 4.5 5.0 4.8
Long-term rate of return on plan assets.............................. 9.9 10.5 10.4
</TABLE>
In addition to providing pension benefits, the Company provides life
insurance benefits for certain retired, hourly and salaried employees.
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 $4,917,000 against
earnings during 1992. Prior to fiscal 1992, the Company recognized
postretirement health care costs in the year that the benefits were paid. The
amount paid for these benefits was $339,000 for the year ended March 31, 1991.
The following table reconciles the status of the accrued postretirement
liability as of March 31 (based on January 1 measurement dates):
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................... $4,408 $4,367
Active employees....................................................... 910 1,180
------ ------
Accumulated postretirement benefit obligation in excess of plan assets... 5,318 5,547
Unrecognized net gain (loss)............................................. 416 (286)
------ ------
Accrued postretirement benefit liability (including $200 in current
liabilities)........................................................... $5,734 $5,261
------ ------
------ ------
</TABLE>
Net postretirement benefits cost for the years ended March 31, 1993 and
1992 included:
<TABLE>
<CAPTION>
1993 1992
---- ----
(IN THOUSANDS)
<S> <C> <C>
Service cost................................................................ $129 $ 96
Interest cost on accumulated postretirement benefit obligation.............. 468 447
---- ----
Net postretirement benefit cost........................................... $597 $543
---- ----
---- ----
</TABLE>
For measurement purposes, a 12% annual rate of increase in the per capita
costs of covered health care claims was assumed for 1993 and 1992. The rate was
assumed to decrease by 1% in 1994 and each year thereafter to a rate of 7.0%
beyond 1998. 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, 1993,
by $596,000 and the aggregate of the service and interest cost components of net
postretirement cost for fiscal 1993 by $85,000. The discount rate used in
determining the accumulated postretirement benefit obligation was 8.25% at the
end of 1993.
F-22
<PAGE> 51
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112, "Employer's Accounting for
Postemployment Benefits", which must be adopted for the Company's 1995 fiscal
year. This statement would require accounting for other postemployment benefits
similar to that required for postretirement benefits as discussed above. The
determination of the impact of the adoption of this statement on the Company's
financial statements has not yet been completed, however, the Company believes
that it will not significantly affect the Company's future financial results or
position.
11. R.P. SCHERER CORPORATION (PARENT) REDEEMABLE PREFERRED STOCK
The only operating asset of R.P. Scherer Corporation is its investment in
Scherer International, and R.P. Scherer Corporation has no other operations. Due
to the nature of this relationship, disclosures with regard to the mandatory
redeemable preferred stock of R.P. Scherer Corporation have been included
herein.
In connection with and as a result of the October 1991 public sale of R.P.
Scherer Corporation's common stock (Note 3), all shares of R.P. Scherer
Corporation's Exchangeable Preferred Stock were redeemed for cash, and all
shares of Series B Redeemable Preferred Stock and Series C Redeemable Preferred
Stock were converted into common stock.
The Series B Redeemable Preferred Stock and the Series C Preferred Stock
(together, the "Preferred Stock") were non-cumulative and had a liquidation
preference of $10.00 per share. The Series B Redeemable Preferred Stock ranked
junior to all liabilities of the Company and to the Exchangeable Preferred
Stock, and on a parity with the Series C Redeemable Preferred Stock. Holders of
the Preferred Stock were entitled to share equally, share for share, in
dividends declared on common stock. The Preferred Stock was redeemable at the
option of the Company at a purchase price of $10.00 per share. Subject to
dividend restrictions imposed by the Credit Agreement, holders of the Series C
Preferred Stock had the right to require the Company to purchase all or a
portion of their shares. The Company was not required or able to purchase shares
of the Series C Preferred Stock for the period it was outstanding.
In connection with the Acquisition, R.P. Scherer Corporation issued
approximately 1,223,200 shares of its 17% Senior Cumulative Exchangeable
Preferred Stock with a liquidation preference of $31.75 per share, plus accrued
and unpaid dividends. The Exchangeable Preferred Stock ranked junior to all
liabilities of the Company and bore cumulative quarterly dividends, paid in
additional shares of Exchangeable Preferred Stock. Exchangeable Preferred Stock
was exchangeable for 17% Subordinated Exchangeable Debentures of the Company due
2002. The Exchangeable Preferred Stock was subject to mandatory redemption on
October 5, 2002. As of March 31, 1991, 1,566,295 of the 5,000,000 authorized
shares of the Exchangeable Preferred Stock, par value $.01, were issued and
outstanding.
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
R.P. Scherer Corporation 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 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.
F-23
<PAGE> 52
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Both types of options vest after three years from the date of grant, and expire
two years after the date of vesting.
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 $715,000 was recorded for fiscal 1992 in
connection with this 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
the 1992 Stock Option Plan. During 1993, none of the 1992 Plan options were
exercised. As of March 31, 1993, a total of 492,567 options for common shares
remain available for grant for up to the next three 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.
1990 Stock Option Plans
In November 1990 R.P. Scherer Corporation implemented three stock option
plans under which a total of an adjusted 1,239,612 options for shares of its
common stock were authorized for issuance to key management personnel. As a
result of the sale of common stock in October 1991, all options granted under
such plans became fully vested (Note 3).
Information on the number of shares under option for the 1990 Plan,
exercisable at $5.49 per share, is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Number of shares under stock options -- 1990 Plan:
Outstanding at beginning of year................. 1,204,225 1,159,111 --
Granted during year.............................. -- 45,114 1,159,111
Exercised........................................ 104,953 -- --
--------- --------- ---------
Outstanding at end of year.................... 1,099,272 1,204,225 1,159,111
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 3.
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 $19,596,000, $17,701,000, and $15,639,000 for the years ended March
31, 1993, 1992, and 1991, respectively. Rental payments amounted to $4,705,000,
$4,376,000, and $4,439,000 and purchased services amounted to $5,437,000,
$5,501,000, and $5,574,000 for each of the respective years.
The investment of the minority shareholder in the Company's German
subsidiary is partially structured as a loan under German law, under which the
minority shareholder receives periodic payments based on
F-24
<PAGE> 53
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
earnings of the subsidiary. Prior to fiscal 1993, the Company had reported these
payments as interest expense and the related 14.7 million Deutchemark
denominated loan as long-term debt. The Company has currently included the loan
in the "minority interests in subsidiaries" caption in the accompanying
consolidated statement of financial position, and the related payments of $2.6
million, $2.7 million, and $2.1 million for fiscal 1993, 1992, and 1991,
respectively, have been presented in the "minority interests" caption in the
accompanying consolidated statement of operations.
Lehman and certain of its affiliates have received fees for services in
connection with the October 1991 public offering (Notes 3 and 11) and other
matters. During the year ended March 31, 1992, the Company paid $3,542,000 for
underwriting fees in connection with the October 1991 public offering. No fees
were paid by the Company to Lehman or its affiliates during the years ended
March 31, 1993 and 1991.
In connection with the amendments to the Company's former Credit Agreement
entered into in October 1990, Messrs. Cashman and Erdeljan entered into a
separate subscription agreement with the Company whereby they agreed, under
certain circumstances, to purchase an additional equity interest in the Company,
at a price to be negotiated at the time of such contribution. In connection with
the Offerings, the Company waived the obligations of Messrs. Cashman and
Erdeljan under such subscription agreement.
In 1989, the Company loaned (the "Loan") Messrs. Cashman and Erdeljan
approximately $2,300,000, payable on demand and bearing an interest rate
equivalent to the rate provided in the Credit Agreement. The Loan had been
secured by a pledge of the outstanding capital stock of PCM Corporation, an
Illinois corporation ("PCM"), all of which was owned directly or indirectly by
Messrs. Cashman and Erdeljan. The principal balance of the Loan, together with
all interest accrued to date, was paid in full on October 30, 1990 and the
Company released the shares of PCM from the pledge.
On October 30, 1990, Paco purchased indirectly from Messrs. Cashman and
Erdeljan all of the issued and outstanding shares of capital stock of PCM for
$1,800,000. Sales and operating income of PCM during its 1990 fiscal year were
$5,867,000 and $344,000, respectively.
On October 30, 1990, prior to the purchase by Paco indirectly from Messrs.
Cashman and Erdeljan of all of the issued and outstanding shares of capital
stock of PCM, Paco loaned to PCM an amount equal to approximately $346,000. This
sum was used by PCM to repay an outstanding obligation in the same amount owed
indirectly to Messrs. Cashman and Erdeljan.
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 3).
14. COMMITMENTS AND CONTINGENCIES
The Company's former subsidiary, Paco Pharmaceutical Services, Inc.
("Paco"), along with certain other parties, was a defendant in a purported class
action suit filed on November 1, 1988 in the Court of Chancery of the State of
Delaware (Norman v. Paco Pharmaceuticals, Civil Action #10417) by an investor in
Paco's 6 1/2% Convertible Subordinated Debentures due March 1, 2007
("Convertible Subordinated Debentures"). On October 21, 1992, the Delaware Court
of Chancery issued an opinion and order granting defendants' motion for summary
judgment and denying plaintiffs' cross-motion for summary judgment. The
plaintiffs appealed this opinion, but by an order dated April 21, 1993, the
Delaware Supreme Court affirmed the order of the Court of Chancery and denied
the appeal. This order became final on May 6, 1993.
Paco, certain of its 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. In the New Jersey state
F-25
<PAGE> 54
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
court action (Nelson v. Dean Witter Reynolds, Inc., MRS-L-5014-90), a class
consisting of the 14 investors who reside in New Jersey has been certified. On
October 23, 1992, the Company, Paco and its affiliates moved for summary
judgment as to three counts of the complaint. This motion was denied on January
6, 1993. A second action commenced in New Jersey Federal court, has been stayed
pending resolution of the New Jersey state court action (Nelson v. Ian Ferrier,
Civil Action 91-5334(JWB)). No class has been certified in this federal action.
Plaintiffs in each of these actions seek damages of an unspecified amount for,
among other things, alleged violations of state securities law, fraud,
misrepresentation, breach of contract, conversion and negligence in connection
with the $25 million private placement sale of PDP II limited partnership
interests and warrants in 1986. Plaintiffs in the state court action also seek
damages, derivatively, on behalf of PDP II, for alleged breaches of fiduciary
duty and breach of contract in connection with the management of PDP II. The
Company believes that it has meritorious defenses to these actions and intends
to defend against them vigorously. In the opinion of management, the ultimate
outcome of this litigation will not have a material adverse effect on the
Company's business or financial condition.
The New York actions, Angelina Barrios et al., v. Paco Pharmaceutical
Services Inc. (No. 90-Civ. 2404) and Guilliam Nel, et al. v. Paco Pharmaceutical
Services Inc. (No. 90-Civ. 7916) (collectively "Barrios") were consolidated in
Federal court in the Southern District of New York. On January 3, 1992, the
defendants filed a motion for summary judgment on these claims, which was
granted by the Federal court in an amended opinion dated March 29, 1993. The
time in which to appeal this decision has expired.
On May 14, 1993, the Company was served with a Complaint that had been
filed in the Federal court for the District of Massachusetts on January 29, 1993
(Tuzik v. Paco Pharmaceutical Services, Inc. et al.). Except for the name of the
plaintiff, the Complaint is virtually identical to the Barrios complaint
referred to above. As was the case with Barrios, the Company believes that it
has meritorious defenses to these allegations and intends to defend against them
vigorously. In the opinion of management, the ultimate outcome of this
litigation will not have a material adverse effect on the Company's business or
financial condition.
Certain limited partners of PDP II had defaulted on their payment
obligations due under investor notes entered into pursuant to the partnership
agreement of PDP II. The general partner of PDP II had instituted lawsuits
against certain of those limited partners to obtain the defaulted amounts, and
counter-claims had been asserted by the limited partners who were defendants
alleging substantially similar claims to those in the Nelson actions. These
cases were settled in April 1993 at no cost to the Company.
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's fees and other litigation
expenses, costs and disbursements incurred in bringing this action. Discovery
with respect to the action has commenced. 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 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
F-26
<PAGE> 55
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
As of March 31, 1993, the Company has capital expenditure commitments
related primarily to plant expansions amounting to approximately $4.4 million.
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,
--------------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
United States............................................... $ 86,687 $ 66,802 $ 50,377
Europe...................................................... 229,937 198,445 184,631
Other international......................................... 81,387 72,539 63,630
-------- -------- --------
Net sales(1)........................................... $398,011 $337,786 $298,638
-------- -------- --------
-------- -------- --------
Operating Income:
United States............................................... $ 23,327 $ 18,147 $ 10,883
Europe...................................................... 53,941 48,896 41,375
Other International......................................... 13,450 13,070 11,511
Unallocated(2).............................................. (2,621) (16,136) (785)
-------- -------- --------
Operating income....................................... $ 88,097 $ 63,977 $ 62,984
-------- -------- --------
-------- -------- --------
Identifiable assets:
United States............................................... $ 74,886 $ 64,997 $ 61,423
Europe...................................................... 263,099 255,345 237,005
Other International......................................... 106,372 105,474 102,586
Unallocated(3).............................................. 87,827 100,161 100,845
-------- -------- --------
Total assets........................................... $532,184 $525,977 $501,859
-------- -------- --------
-------- -------- --------
</TABLE>
F-27
<PAGE> 56
R.P. SCHERER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital expenditures:
Drug Delivery Systems.......................................... $33,132 $20,780 $11,920
Unallocated(4)................................................. 60 167 73
------- ------- -------
Total capital expenditures................................ $33,192 $20,947 $11,993
------- ------- -------
------- ------- -------
Depreciation and amortization:
Drug Delivery Systems.......................................... $19,589 $16,771 $15,244
Unallocated(4)................................................. 3,089 3,169 4,530
------- ------- -------
Total depreciation and amortization....................... $22,678 $19,940 $19,774
------- ------- -------
------- ------- -------
</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 3).
(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.
The net assets of foreign subsidiaries were $238,537,000 at March 31, 1993,
$210,365,000 at March 31, 1992, and $203,573,000 at March 31, 1991. The
Company's share of foreign net income was $27,856,000 for the year ended March
31, 1993, $26,413,806 for the year ended March 31, 1992, and $10,724,000 for the
year ended March 31, 1991, 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
---------------------- --------------------- ---------------------- ------------------
1993(1)(4) 1992(5) 1993(2)(4) 1992 1993(3)(4) 1992(6) 1993 1992
---------- -------- ---------- ------- ---------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $103,353 $ 84,367 $ 97,671 $78,181 $ 97,966 $ 85,015 $99,021 $90,223
Gross profit................... 43,080 33,754 37,387 29,807 37,426 33,910 38,010 38,324
Income (loss) from continuing
operations before
extraordinary loss and
accounting change............ 8,388 1,911 6,059 (307) 7,103 (7,954) 7,410 5,126
Net income (loss).............. 9,362 (19,544) 5,412 (307) (1,289) (10,021) 7,410 5,126
</TABLE>
- -------------------------
(1) Net income includes the $974,000 cumulative effect of accounting change for
income taxes, SFAS 109.
(2) Net income includes loss on disposal of discontinued operation of $647,000.
(3) Net income includes extraordinary loss of $8,392,000 related to the early
retirement of debt (see Note 8).
(4) Income amounts for the first, second and third quarters have been restated
to reflect the effect of the adoption of SFAS 109 (see Notes 2 and 5). The
effect of this change was to increase net income in the first quarter by
$1,030,000, and was not significant in the second and third quarters.
(5) Net income includes estimated loss on disposal of discontinued operation of
$16,657,000 and $4,917,000 cumulative effect of accounting change for other
postretirement benefits.
(6) Income from continuing operations includes a one-time $12.3 million non-cash
charge for compensation expense relating to the completion of the October
1991 common stock sale.
F-28
<PAGE> 57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To R.P. Scherer International Corporation:
We have audited the accompanying consolidated statement of financial
position of R.P. SCHERER INTERNATIONAL CORPORATION (formerly R.P. Scherer
Corporation) (a Delaware Corporation), and subsidiaries as of March 31, 1993 and
1992, and the related consolidated statements of operations, cash flows and
shareholder's equity for the years ended March 31, 1993, 1992 and 1991. 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,
1993 and 1992, and the results of its operations and cash flows for the years
ended March 31, 1993, 1992 and 1991, in conformity with generally accepted
accounting principles.
As explained in Note 5 to the consolidated financial statements, effective
April 1, 1992, the Company changed its method of accounting for income taxes. As
explained in Note 10 to the consolidated financial statements, effective April
1, 1991, the Company changed its method of accounting for postretirement
benefits other than pensions.
Detroit, Michigan,
April 16, 1993 (except with respect to
the matters discussed in Note 14 to
the consolidated financial statements
as to which the date is May 14, 1993).
ARTHUR ANDERSEN & CO.
F-29
<PAGE> 58
PROSPECTUS
R.P. SCHERER INTERNATIONAL
CORPORATION
$175,000,000
DEBT SECURITIES
---------------------------
R. P. Scherer International Corporation (the "Company") may offer from time
to time in one or more series its debt securities (the "Securities") up to an
aggregate principal amount of $175,000,000, (or (i) the equivalent thereof in
one or more foreign currencies or currency units, including European Currency
Units ("ECU"), based on the rate of exchange at the time of offering, or (ii)
such greater amount, if Securities are issued at an original issue discount, as
shall result in aggregate gross proceeds to the Company of $175,000,000), each
series of which will be offered on terms to be determined at the time of sale.
The Securities may be sold in U.S. dollars or one or more foreign currencies or
currency units, and the principal of, and premium, if any, and any interest on
the Securities may likewise be payable in U.S. dollars or one or more foreign
currencies or currency units. The Securities will be general unsecured
indebtedness of the Company and will rank pari passu with all other unsecured
and senior indebtedness of the Company. The Securities will effectively be
subordinated to certain indebtedness of the Company's subsidiaries. The terms of
the Securities, including, where applicable, the specific designation, aggregate
principal amount, currency, denominations, maturity, premium, rate (which may be
fixed or floating) and time of payment of interest, terms for redemption at the
option of the Company or the holder, terms for sinking fund payments, if any,
the initial public offering price and other terms in connection with the
offering and sale of the Securities in respect of which this Prospectus is being
delivered are set forth in the accompanying Prospectus Supplement (the
"Prospectus Supplement").
Securities of a series may be issuable in registered form without coupons
("Registered Securities"), in bearer form with coupons attached ("Bearer
Securities") or in the form of one or more global securities (each a "Global
Security"). Bearer Securities, subject to certain exceptions, will not be
offered or sold to persons who are within the United States or to United States
persons. See "Limitations on Issuance of Bearer Securities."
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Securities may be sold through underwriting syndicates represented by
managing underwriters, by underwriters without a syndicate, through agents
designated from time to time, or directly by the Company to purchasers. The
names of any such managing underwriters, underwriters or agents of the Company
involved in the sale of the Securities in respect of which this Prospectus is
being delivered and any applicable commissions or discounts are set forth in the
Prospectus Supplement. The net proceeds to the Company from such sale are also
set forth in the Prospectus Supplement.
January 17, 1994.
<PAGE> 59
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SECURITIES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") on Form
S-3 under the Securities Act of 1933, as amended, with respect to the Securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Securities offered hereby,
reference is made to the Registration Statement, including, the exhibits and
schedules thereto. All of these documents may be inspected without charge at the
office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
may be obtained from the Commission at prescribed rates. Statements contained in
this Prospectus as to the contents of any document are qualified in all respects
by reference to the exhibit for a complete statement of the provisions thereof.
The Company and R.P. Scherer Corporation, the parent company of the
Company, are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, file reports and other information with the Commission, which may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's Regional Offices at Seven World Trade Center,
New York, New York 10048, and Northwestern Atrium Center, 500 West Madison,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained by
mail from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fees.
Reports and information concerning R.P. Scherer Corporation may also be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, NY 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed pursuant to the Exchange
Act, are incorporated herein and shall be deemed to be a part hereof:
(a) the Company's Annual Report on Form 10-K for the year ended March
31, 1993 (the "1993 10-K");
(b) the Company's Quarterly Reports on Form 10-Q for the quarters
ended June 30, 1993 and September 30, 1993; and
(c) R.P. Scherer Corporation's Annual Report on Form 10-K for the year
ended March 31, 1993, as amended by the Form 10-K/A, filed with the
Commission on July 22, 1993.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act and all Annual Reports on Form 10-K filed by R.P.
Scherer Corporation pursuant to the Exchange Act (including any documents
incorporated by reference therein) after the date hereof and prior to the
termination of the offering of Securities 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 in this Prospectus shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein or in the accompanying Prospectus
Supplement 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 will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the documents incorporated herein by reference (other than exhibits to such
documents that are not specifically incorporated by reference in such
documents). Written or oral requests should be directed to R.P. Scherer
International Corporation, 2075 W. Big Beaver Road, P.O. Box 7060, Troy,
Michigan 48007-7060, Attention: Aleksandar Erdeljan, telephone (810) 649-0900.
2
<PAGE> 60
THE COMPANY
The Company, an international developer and manufacturer of oral drug
delivery systems, is the world's largest producer of softgels. The Company has
also developed and is commercializing advanced drug delivery systems, including
the Scherersol(R), Zydis(R) and Pulsincap(TM) technologies. The Company's
proprietary drug delivery systems improve the efficacy of drugs by regulating
their dosage, rate of absorption and place of release.
The Company produces over 4,000 products in softgel form, and softgel
products accounted for approximately 90% of the Company's fiscal 1993 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 more than half of its total fiscal 1993
sales made to the pharmaceutical industry. To meet the needs of its
multinational customers and to serve new markets, the Company operates softgel
manufacturing facilities in eleven countries throughout the world, and also
manufactures two-piece hardshell capsules in three of these countries.
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(R) systems to broaden the range of pharmaceutical
products which may be encapsulated in softgel form. Scherersol(R) 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(R) technologies, by providing a unique,
patented dosage delivery system, can protect a pharmaceutical compound against
competition from generic drugs throughout the life of the Scherersol(R) 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(TM) technologies. Zydis(R) is an oral dosage form which dissolves
instantaneously on the tongue and does not require water to aid swallowing.
Pulsincap(TM) 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.
The Company is a wholly-owned subsidiary of R.P. Scherer Corporation, a
public company traded on the New York Stock Exchange under the symbol "SHR."
R.P. Scherer Corporation's only asset is the common stock of the Company, and it
essentially has no other operations. The Company was incorporated in Michigan in
1944 and reincorporated in Delaware in 1969.
The Company's principal executive offices are located at 2075 West Big
Beaver Road, Troy, Michigan 48084.
USE OF PROCEEDS
Unless otherwise stated in the related Prospectus Supplement, the net
proceeds from the sale of the Securities will be applied to the general funds of
the Company and used for general corporate purposes. Any specific allocations of
the proceeds to a particular purpose that has been made at the date of any
Prospectus Supplement will be described therein.
3
<PAGE> 61
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges (unaudited) for the six months ended
September 30, 1993 and 1992, and for each of the past five fiscal years ended
March 31 is as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------------------------------------------- -------------------------
SIX MONTHS ENDED FOR THE YEAR ENDED NINE MONTHS THREE MONTHS YEAR
SEPTEMBER 30, MARCH 31, ENDED ENDED ENDED
-------------------- -------------------- MARCH 31, JUNE 30, MARCH 31,
1993 1992 1993 1992 1991 1990 1989 1989
-------- -------- ---- ---- ---- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges........ 3.4x 3.3x 3.4x 1.4x 1.2x (1) (1) 3.2x
</TABLE>
- -------------------------
(1) Earnings were insufficient to cover fixed charges for the nine months ended
March 31, 1990 and the three months ended June 30, 1989, by $364,000 and
$4,095,000, respectively.
The ratio of earnings to fixed charges has been computed by dividing (i)
income before taxes and fixed charges, exclusive of interest capitalized during
the year by (ii) fixed charges. Fixed charges include interest expense,
amortization of debt expense and discount/premium relating to indebtedness, and
the amount of lease and rental expenses deemed representative of the interest
portion thereof.
DESCRIPTION OF SECURITIES AND INDENTURE
The following describes certain provisions of the Securities and the
Indenture (as defined below). It does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Securities and
the Indenture. Where particular provisions or terms used in the Indenture are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference. The Prospectus Supplement for each series of
Securities will describe any provisions of the Indenture relating to such series
of Securities which materially differ from the description thereof in this
Prospectus.
The Securities are to be issued in one or more series under an indenture to
be dated as of January 1, 1994 (as the same may be supplemented by a
supplemental indenture described in any Prospectus Supplement for any series of
Securities, the "Indenture"), between the Company and Comerica Bank as trustee
(the "Trustee"). A copy of the form of the Indenture is filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. The following
summaries of certain provisions of the Indenture and the Securities are not
complete and are qualified in their entirety by reference to the provisions of
the Indenture. Numerical references in parentheses are to sections in the
Indenture and unless otherwise indicated capitalized terms have the meanings
given them in the Indenture.
GENERAL
The Securities are unsecured and senior obligations of the Company and will
rank pari passu with all other unsecured and senior indebtedness of the Company.
The Company conducts a substantial portion of its operations through its
subsidiaries. The Securities will be effectively subordinated to indebtedness
and other liabilities of the Company's subsidiaries. The Company's rights and
the rights of its creditors, including Holders of the Securities, to participate
in the distribution of assets of any subsidiary upon such subsidiary's
liquidation or reorganization will be subject to prior claims of the
subsidiary's creditors, including trade creditors, except to the extent that the
Company may itself be a creditor with recognized claims against such subsidiary
(in which case the claims of the Company would still be subject to the prior
claims of any secured creditor of such subsidiary and any holder of indebtedness
of such subsidiary that is senior to that held by the Company).
The Indenture does not limit the amount of debt which the Company or its
subsidiaries may incur under the Indenture or otherwise, or limit the amount of
dividends or other distributions which the Company may declare or pay.
4
<PAGE> 62
Reference is made to the Prospectus Supplement relating to the particular
series of Securities offered for a description of the terms of the Securities in
respect of which this Prospectus and such Prospectus Supplement are being
delivered, including, where applicable: (i) the designation, aggregate principal
amount and authorized denominations of such series of Securities; (ii) any limit
on the aggregate principal amount of such series of Securities; (iii) if other
than 100%, the price (expressed as a percentage of the aggregate principal
amount thereof) at which such series of Securities will be issued; (iv) the rate
per annum at which the Securities of such series will bear interest, if any, or
the method of determining such rate and the date or dates from which such
interest will accrue; (v) the dates on which such interest, if any, will be
payable (or the manner of determining the same) and the Regular Record Dates for
the Interest Payment Dates for Securities which are Registered Securities; (vi)
the date (or the manner of determining the date or dates) on which the
Securities of such series will mature; (vii) if other than the principal amount
thereof, the portion of the principal amount of Securities of such series which
will be payable upon a declaration of the maturities thereof; (viii) the place
or places where the principal of (and premium, if any) and interest, if any, on
the Securities of the series will be payable and each office or agency where the
Securities may be presented for transfer or exchange; (ix) any index used to
determine the amount of payments of principal of (and premium, if any) or
interest, if any, on the Securities; (x) if the amounts of payments of principal
of, premium, if any, or interest, if any, on the Securities of the series may
be, at the election of the Company or a Holder thereof, determined with
reference to an index based on a currency (including a composite currency) other
than that in which the Securities of the series are stated to be payable, the
manner in which such amounts are to be determined; (xi) any provisions for
payment of additional amounts for taxes and any provision for redemption, in the
event the Company must comply with reporting requirements in respect of any
Security or must pay such additional amounts in respect of any Security; (xii)
the terms and conditions, if any, on which each Security of such series may be
redeemed or prepaid by the Company; (xiii) the obligation, if any, of the
Company to redeem, repay or purchase any of the Securities of such series
pursuant to any sinking fund or at the option of a Holder thereof, and the terms
and conditions on which such Securities shall be redeemed, repaid or purchased
pursuant to such obligation or option, as the case may be; (xiv) the terms for
defeasance, if any; (xv) the currency or currencies (including ECU) in which
such Securities may be purchased, and the currency or currencies (including ECU)
in which the principal of and premium, if any, and any interest on such
Securities may be payable; (xvi) if the currency for which such series of
Securities may be purchased or in which the principal of and premium, if any,
and any interest on such Securities may be payable is at the Holder's election,
the manner of such election; (xvii) whether such Securities are to be issuable
as Registered Securities, Bearer Securities or both and the terms upon which any
Bearer Securities of such series may be exchanged for Registered Securities of
such series; (xviii) any additional Events of Default (as defined herein),
remedies or covenants provided for with respect to such Securities; and (xix)
any other terms of such Securities not inconsistent with the Indenture,
including any terms which may be required by, or advisable under, United States
laws or regulations.
One or more series of Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
which at the time of issuance is below market rates. One or more series of
Securities may be floating rate debt securities, exchangeable for fixed rate
debt securities. Federal income tax consequences and special considerations
applicable to any such series will be described in the Prospectus Supplement
relating thereto.
The Securities may be issuable as Registered Securities, Bearer Securities
or both. Bearer Securities, subject to certain exceptions, will not be offered
or sold to persons who are within the United States or to United States persons.
See "Limitations on Issuance of Bearer Securities." Securities of a series may
be issuable in whole or in part in the form of one or more global securities
("Global Securities"), as described below under "Global Securities." Unless the
Prospectus Supplement relating thereto specifies otherwise, Registered
Securities denominated in U.S. dollars will be issued only in denominations of
$1,000 or an integral multiple thereof, and Bearer Securities denominated in
U.S. dollars will be issued only in denominations of $5,000. The Pricing
Supplement or Prospectus Supplement relating to a series of Securities
denominated in a foreign currency or currency unit will specify the
denominations thereof. If Global Securities are issued, one or more Global
Securities will be issued in a denomination or aggregate denominations equal to
the aggregate principal amount of Outstanding Securities of the series to be
represented by such Global Security or
5
<PAGE> 63
Securities. The Prospectus Supplement relating to a series of Securities
denominated in a foreign or composite currency will specify the denomination
thereof. No service charge will be made for any transfer or exchange of
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith (Indenture,
Sections 301 and 305).
In connection with its sale during the "restricted period" as defined in
Section 1.163-5(c)(2)(i)(D)(7) of the United States Treasury regulations
(generally, the first 40 days after the closing date and with respect to unsold
allotments, until sold), no Bearer Security shall be mailed or otherwise
delivered to any location in the United States (as defined below under
"Limitations on Issuance of Bearer Securities") and any such Bearer Security
(other than a temporary Global Security in bearer form) may be delivered only if
the person entitled to receive such Bearer Security furnishes written
certification, in the form required by the Indenture, to the effect that such
Bearer Security is not being acquired by or on behalf of a United States person
(as defined below under "Limitations on Issuance of Bearer Securities") or, if a
beneficial interest in such Bearer Security is being acquired by or on behalf of
a United States person, that such United States person is a person described in
Section 1.163-5(c)(2)(i)(D)(6) of the United States Treasury regulations or is a
financial institution who has purchased such Bearer Security for resale during
the restricted period and who certifies that it has not acquired such Bearer
Security for purposes of resale directly or indirectly to a United States person
or to a person within the United States or its possessions. See "Global
Securities" and "Limitations on Issuance of Bearer Securities."
At the option of the Holder upon request confirmed in writing, and subject
to the terms of the Indenture, Bearer Securities (with all unmatured coupons,
except as provided below) of any series will be exchangeable into an aggregate
principal amount of Registered Securities (if the Securities of such series are
issuable as Registered Securities) or Bearer Securities of the same series (with
the same interest rate and maturity date) and Registered Securities of any
series (other than a Global Security) will be exchangeable into an equal
aggregate principal amount of Registered Securities of the same series (with the
same interest rate and maturity date) of different authorized denominations. If
a Holder surrenders Bearer Securities in exchange for Registered Securities
between a regular Record Date or, in certain circumstances, a Special Record
Date, and the relevant interest payment date, such Holder will not be required
to surrender the coupon relating to such interest payment date. Registered
Securities may not be exchanged for Bearer Securities (Indenture, Section 305).
Securities may be presented for exchange, and Registered Securities (other
than a Global Security) may be presented for transfer (with the form of transfer
endorsed thereon duly executed) at the office of any transfer agent or at the
office of the Security Registrar, without service charge and upon payment of any
taxes and other governmental charges as described in the Indenture. Such
transfer or exchange will be effected by the transfer agent or the Security
Registrar, as the case may be, being satisfied with the documents of title and
identity of the person making the request (Indenture, Section 305). Bearer
Securities will be transferable by delivery.
PAYMENT AND PAYING AGENTS
Payment of principal of and premium, if any, on Registered Securities will
be made in the designated currency against surrender of such Registered
Securities at the Corporate Trust Office of the Trustee with respect thereto in
Detroit, Michigan. Unless otherwise indicated in the related Prospectus
Supplement, payment of any installment of interest on a Registered Security will
be made to the person in whose name such Security is registered at the close of
business on the Regular Record Date for such interest. Unless otherwise
indicated in the related Prospectus Supplement, payments of such interest will
be made at the Corporate Trust Office of the Trustee for such Security in
Detroit, Michigan or, at the Company's option, by a check in the designated
currency mailed to the Holder at such Holder's registered address or by transfer
to an account in the designated currency maintained by the payee (Indenture,
Sections 307 and 1001).
Payment of principal of and premium, if any, and interest on Bearer
Securities will be payable in the currency designated in the applicable Pricing
Supplement or related Prospectus Supplement, subject to any applicable laws and
regulations, at such paying agencies outside the United States as the Company
may
6
<PAGE> 64
appoint from time to time. Such payment may be made, at the option of the
Holder, by a check in the designated currency or by transfer to an account in
the designated currency maintained by the payee with a bank located outside the
United States. No payment of interest on a Bearer Security will be made unless
on the earlier of the date of the first such payment by the Company or the date
of delivery by the Company of a definitive Bearer Security, including a
permanent Global Security, a written certificate, in the form required by the
Indenture, is provided to the Company stating that on such date the Bearer
Security is not owned by or on behalf of a United States person or, if a
beneficial interest in such Bearer Security is owned by or on behalf of a United
States person, that such United States person is a person described in Section
1.163-5(c)(2)(i)(D)(6) of the United States Treasury regulations or is a
financial institution who has purchased such Bearer Security for resale during
the restricted period and who certifies that it has not acquired such Bearer
Security for purposes of resale directly or indirectly to a United States person
or to a person within the United States or its possessions. No payment with
respect to any Bearer Security will be made at the Corporate Trust Office of the
Trustee or any other paying agency maintained by the Company in the United
States nor will any such payment be made by transfer to an account or by mail to
an address in the United States. Notwithstanding the foregoing, payments of
principal of and premium, if any, and interest on Bearer Securities denominated
and payable in U.S. dollars will be made at the Corporate Trust Office of the
Trustee with respect thereto in Detroit, Michigan if payment of the full amount
thereof in U.S. dollars at all paying agencies outside the United States is
illegal or effectively precluded by exchange controls or other similar
restrictions (Indenture, Section 1002).
The Paying Agents outside the United States initially appointed by the
Company for a series of Securities will be named in the related Prospectus
Supplement. The Company may terminate the appointment of any of the Paying
Agents from time to time, except that the Company will maintain at least one
Paying Agent in The City of New York for payments with respect to Registered
Securities and at least one Paying Agent in a city in Europe so long as any
Bearer Securities are outstanding where Bearer Securities may be presented for
payment and may be surrendered for exchange, provided that so long as any series
of Securities is listed on the Luxembourg Stock Exchange or any other stock
exchange located outside the United States and such stock exchange shall so
require, the Company will maintain a Paying Agent in Luxembourg or any other
required city located outside the United States, as the case may be, for such
series of Securities (Indenture, Section 1002).
All monies paid by the Company to a Paying Agent for the payment of
principal of or premium, if any, or interest on any Security that remain
unclaimed at the end of two years after such principal, premium or interest
shall have become due and payable will be repaid to the Company and the Holder
of such Security or any coupon appertaining thereto will thereafter look only to
the Company for payment thereof (Indenture, Section 1003).
GLOBAL SECURITIES
The Securities of a series may be issued in whole or in part in the form of
one or more Global Securities that will be deposited with, or on behalf of, a
depositary (the "Depositary") identified in the Prospectus Supplement relating
to such series. Global Securities may be issued in either registered or bearer
form and in either temporary or permanent form. Permanent Global Securities will
be issued in definitive form. Unless and until exchanged in whole or in part for
other Securities in definitive form, a Global Security may not be transferred
except as a whole by the Depositary for such Global Security to a nominee of
such Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any such nominee to a
successor of such Depositary or a nominee of such successor (Indenture, Sections
201, 203, 303, 304 and 305).
The specific terms of the depositary arrangement with respect to a series
of Securities will be described in the Prospectus Supplement relating to such
series. The Company anticipates that the following provisions will apply to all
depositary arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security will credit, on its book-entry registration and transfer system, the
respective principal amounts of the Securities represented by such
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Global Security to the accounts of institutions that have accounts with such
Depositary ("participants"). The accounts to be credited shall be designated by
the underwriters or agents of such Securities or by the Company if such
Securities are offered and sold directly by the Company. Ownership of beneficial
interest in a Global Security will be limited to participants or persons that
may hold interest through participants, however, the Company has no obligations
to any persons that hold interests through participants. Ownership of beneficial
interests in such Global Security will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the Depositary
for such Global Security or by participants or persons that hold through
participants. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
So long as the Depositary for a Global Security, or nominee, is the owner
of such Global Security, such Depositary or such nominee, as the case may be,
will be considered the sole owner or holder of the Securities represented by
such Global Security for all purposes under the Indenture. Except as provided
below, owners of beneficial interests in a Global Security will not be entitled
to have Securities of the series represented by such Global Security registered
in their names, will not receive or be entitled to receive physical delivery of
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture. Accordingly, each person owning a
beneficial interest in a Global Security must rely on the procedures of the
Depositary for such Global Security and, if such person is not a participant, on
the procedures of the participant through which such person owns its interest,
to exercise any rights of a Holder under the Indenture. The Company understands
that under existing industry practices, if the Company requests any action of
Holders or if any owner of a beneficial interest in a Global Security desires to
give or take any action which a Holder is entitled to give or take under the
Indenture, the Depositary for such Global Security would authorize the
participants holding the relevant beneficial interests to give or take such
action, and such participants would authorize beneficial owners owning through
such participants to give or take such action or would otherwise act upon the
instruction of beneficial owners holding through them.
Subject to the restriction discussed above under "Payment and Paying
Agents," principal of, and premium, if any, and interest on, Securities
registered in the name of or held by a Depositary or its nominee will be made to
the Depositary or its nominee, as the case may be, as the registered owner or
the holder of the Global Security representing such Securities. None of the
Company, the Trustee, any Paying Agent or the Security Registrar will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Global
Security for such Securities or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Company expects that the Depositary for a series of Securities, upon
receipt of any payment of principal, premium or interest in respect of a
permanent Global Security, will credit immediately participants' accounts with
payments in amounts proportionate to their respective beneficial interest in the
principal amount of such Global Security as shown on the records of such
Depositary. The Company also expects that payments by participants to owners of
beneficial interests in such Global Security held through such participants will
be governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of such participants. Receipt
by owners of beneficial interests in a temporary Global Security of payments in
respect of such temporary Global Security will be subject, in the case of a
Global Security representing Bearer Securities, to the furnishing of the
certificate described above under "Payment and Paying Agents." However, the
Company has no control over the practices of the Depositary and/or the
participants and there can be no assurance that these practices will not change.
If a Depositary for a series of Securities is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days, the Company will issue Securities of such series in
definitive form in exchange for the Global Security representing the Securities
of such series. In addition, the Company may at any time and in its sole
discretion determine not to have any Securities of a series represented by one
or more Global Securities and, in such event, will issue Securities of such
series in definitive form in exchange for the Global Security or Securities
representing such Securities. Further, if the Company so specifies with respect
to the Securities of a series, an owner of a beneficial interest in a Global
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Security representing Securities of such series may, on terms acceptable to the
Company and the Depositary for such Global Security, receive Securities of such
series in definitive form. In any such instance, an owner of a beneficial
interest in a Global Security will be entitled to physical delivery in
definitive form of Securities of the series represented by such Global Security
equal in principal amount to such beneficial interest and to have such
Securities registered in its name (if the Securities of such series are issuable
as Registered Securities). Securities of such series so issued in definitive
form will be issued (a) as Registered Securities in denominations, unless
otherwise specified by the Company, of $1,000 and integral multiples thereof if
the Securities of such series are issuable as Registered Securities and are
denominated in U.S. dollars, (b) as Bearer Securities in denominations, unless
otherwise specified by the Company, of $5,000 and integral multiples thereof if
the Securities of such series are issuable as Bearer Securities and are
denominated in U.S. dollars or (c) as either Registered or Bearer Securities, if
the Securities of such series are issuable in either form (Indenture, Sections
302, 304 and 305). See, however, "Limitations on Issuance of Bearer Securities"
below for a description of certain restrictions on the issuance of a Bearer
Security in definitive form in exchange for an interest in a temporary Global
Security.
CERTAIN COVENANTS
General
The Indenture requires the Company to covenant to the following with
respect to each series of Securities: (i) to pay duly and punctually the
principal of (and premium, if any) and interest on such series of Securities and
comply with all other terms, agreements and conditions contained therein, or
made in the Indenture for the benefit of the Securities of each series; (ii) to
maintain an office or agency in each place where Securities may be presented,
surrendered for payment, transferred or exchanged and where notices upon the
Company may by served; (iii) if the Company shall act as its own Paying Agent
for any series of Securities, to segregate and hold in trust for the benefit of
the persons entitled thereto a sum sufficient to pay the principal (and premium,
if any) and/or interest so becoming due; (iv) to deliver to the Trustee, within
120 days after the end of each fiscal year a written statement to the effect
that the Company has fulfilled all of its obligations under the Indenture
throughout such year; and (v) to preserve its corporate existence (Indenture,
Sections 1001, 1002, 1003, 1004, and 1005).
Payment of Additional Amounts
If and to the extent specified in the related Prospectus Supplement, the
Company will, subject to the exceptions and limitations set forth below, pay to
the Holder of any Security or coupon who is a United States Alien (as defined
below) such additional amounts as may be necessary in order that every net
payment on such Security or coupon, after withholding by the Company or any of
its Paying Agents for or on account of any present or future tax, assessment or
other governmental charge imposed upon or as a result of such payment by the
United States (or any political subdivision or taxing authority thereof or
therein) will not be less than the amount provided for in such Security or in
such coupon to be then due and payable. However, the Company will not be
required to make any payment of additional amounts for or on account of:
(1) any tax, assessment or other governmental charge that would not
have been so imposed but for (i) the existence of any present or former
connection between such Holder (or between a fiduciary, settlor or
beneficiary of, or a person holding a power over, such Holder, if such
Holder is an estate or trust, or a member or shareholder of such Holder, if
such Holder is a partnership or corporation) and the United States,
including without limitation such Holder (or such fiduciary, settlor,
beneficiary, person holding a power, member or shareholder) being or having
been a citizen, resident or treated as a resident thereof or being or
having been engaged in a trade or business or present therein or having or
having had a permanent establishment therein, or (ii) such Holder's present
or former status as a personal holding company, foreign personal holding
company, controlled foreign corporation or passive foreign investment
company with respect to the United States federal income tax;
(2) any tax, assessment or other governmental charge which would not
have been so imposed but for the presentation by the Holder of such
Security or coupon for payment on a date more than 10 days
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after the date on which such payment became due and payable or the date on
which payment thereof is duly provided for, whichever occurs later;
(3) any estate, inheritance, gift, sales, transfer, personal property
tax or any similar tax, assessment or other governmental charge;
(4) any tax, assessment or other governmental charge that is payable
otherwise than by withholding from a payment on a Security or coupon;
(5) any tax, assessment or other governmental charge imposed on a
Holder of a Security or coupon that actually or constructively owns 10% or
more of the total combined voting power of all classes of stock of the
Company entitled to vote within the meaning of Section 871(h)(3) of the
Internal Revenue Code of 1986, as amended (the "Code"), or that is a
controlled foreign corporation related to the Company through stock
ownership;
(6) any tax, assessment or other governmental charge imposed as a
result of the failure to comply with applicable certification, information,
documentation or other reporting requirements concerning the nationality,
residence, identity or connection with the United States of the Holder or
beneficial owner of the Security or coupon, if such compliance is required
by statute or by regulation of the United States as a precondition to
relief or exemption from such tax, assessment or other governmental charge;
(7) any tax, assessment or other governmental charge required to be
withheld by any Paying Agent from any payment on a Security or coupon if
such payment can be made without such withholding by at least one other
Paying Agent;
(8) any tax, assessment or other governmental charge imposed with
respect to payments on any Registered Security by reason of the failure of
the Holder to fulfill the statement requirement of Sections 871(h) or
881(c) of the Code; or
(9) any combination of items (1), (2), (3), (4), (5), (6), (7) and
(8);
nor will additional amounts be paid with respect to any payment on a Security or
coupon to a Holder who is a fiduciary or partnership or other than the sole
beneficial owner of such payment to the extent such payment would be required by
the laws of the United States (or any political subdivision thereof) to be
included in the income for federal income tax purposes of a beneficiary or
settlor with respect to such fiduciary or a member of such partnership or a
beneficial owner who would not have been entitled to payment of the additional
amounts had such beneficiary, settlor, member or beneficial owner been the
Holder of such Security or coupon.
As used herein, "United States Alien" means any person who, for United
States federal income tax purposes, is a foreign corporation, a nonresident
alien individual, a nonresident alien fiduciary of a foreign estate or trust, or
a foreign partnership one or more of the members of which is, for United States
federal income tax purposes, a foreign corporation, a nonresident alien
individual or a nonresident alien fiduciary of a foreign estate or trust.
Limitation on Liens
The Company will not, and will not permit any Subsidiary (as defined
below), directly or indirectly, to create, incur, assume or permit to exist any
Lien (as defined in the Indenture) on or with respect to any property or assets
of the Company or any Subsidiary or any interest therein or any income or
profits therefrom, unless the Securities are secured equally and ratably with
(or prior to) any and all other indebtedness secured by such Lien, except for
(i) any Lien securing indebtedness incurred to finance the purchase price or
cost of construction of property (or additions, substantial repairs, alterations
or substantial improvements thereto), provided that such Lien and the
indebtedness secured thereby are incurred within twelve months of the later of
acquisition or completion of construction (or addition, repair, alteration or
improvement) and full operation thereof, and provided, further, that such Lien
does not relate to any property acquired or constructed by the Company or a
Subsidiary pursuant to clause (iii)(B) of "-- Limitation on Sale and Lease-Back
Transactions"; (ii) any Lien arising in the ordinary course of business, other
than in connection with indebtedness for borrowed money; (iii) any Lien on
property or assets acquired by the Company or any Subsidiary after the
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date of issuance of the Securities, provided that such Lien existed on the date
such property or assets were acquired, and provided, further that, except as
provided in clause (i) above, such Lien was incurred prior to, and not in
anticipation of, such acquisition; (iv) any Lien on the property or assets of,
or on the shares of stock of, any corporation or entity existing at the time
such corporation or entity first becomes a Subsidiary, provided that such Lien
was incurred prior to, and not in anticipation of, such corporation or entity
becoming a Subsidiary; (v) any Lien existing on the date of the Indenture; (vi)
any Lien arising out of judgments or awards against the Company or any
Subsidiary with respect to which the Company or such Subsidiary shall in good
faith be prosecuting an appeal or proceedings for review, or Liens which are
discharged within 60 days of entry of judgment or Liens (including, without
limitation, appellate bonds) incurred by the Company or a Subsidiary for the
purpose of obtaining a stay or discharge in the course of any ongoing legal
proceeding to which the Company or such Subsidiary is a party; (vii) any Lien
for taxes not yet due and payable by the Company or any Subsidiary or which the
Company or such Subsidiary is contesting in good faith; (viii) any Lien in favor
of the Company or a Subsidiary; (ix) any Lien (other than a Lien permitted under
any of clauses (i) through (viii) of this paragraph) securing indebtedness of
the Company or any Subsidiary, provided that the total outstanding indebtedness
(including the fair value of all Sale and Lease-Back Transactions permitted
under clause (i) of "-- Limitation on Sale and Lease-Back Transactions" but
excluding any obligations associated with such Sale and Lease-Back Transactions)
that may be secured under this clause (ix) may not exceed 15% of the
Consolidated Net Tangible Assets of the Company (as defined in the Indenture)
and its Subsidiaries at the end of the most recent fiscal quarter; (x) any Lien
extending, renewing or replacing any Lien permitted by clauses (i) through (ix)
above; and (xi) any Lien securing indebtedness the proceeds of which are
deposited, promptly upon receipt, with the Trustee solely for the purpose of
effecting a legal defeasance or covenant defeasance as set forth under "--
Satisfaction and Discharge" and "-- Defeasance of Certain Obligations".
In the case of Liens permitted under clauses (i), (iii) and (iv), such
Liens may not relate to any property or assets of the Company or a Subsidiary
other than the property so acquired, constructed, added, repaired, altered or
improved, as the case may be. In the case of Liens permitted under clause (x),
such Liens (A) may not relate to any property or assets of the Company or a
Subsidiary other than the property or assets to which the Lien being extended,
renewed or replaced relates to, and (B) may not secure indebtedness in excess of
that secured by the Lien being extended, renewed or replaced. In addition, if
any Lien permitted under clause (ix) is extended, renewed or replaced pursuant
to clause (x), then the aggregate amount of indebtedness secured by all such
extended, renewed or replaced Liens (originally permitted under clause (ix))
shall be included thereafter in all calculations of Liens permitted under clause
(ix).
As used in this Prospectus, the term "Subsidiary" means a corporation or
other entity 50% or more of the outstanding voting stock or other voting
interest of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries, or by the Company and one or more other Subsidiaries.
Limitation on Sale and Lease-Back Transactions
The Company will not, nor will it permit any Subsidiary, directly or
indirectly, to enter into, assume, guarantee, or otherwise become liable with
respect to any Sale and Lease-Back Transaction (as defined below); provided,
however, that the Company or any Subsidiary may enter into (i) a Sale and
Lease-Back Transaction that, had such Sale and Lease-Back Transaction been
structured as a mortgage rather than as a Sale and Lease-Back Transaction, the
Company or such Subsidiary would have been permitted to enter into such
transaction without at least equally and ratably securing (or granting priority
to) the Securities of all series pursuant to the terms of the Indenture
described under the caption "Limitation on Liens;" (ii) a Sale and Lease-Back
Transaction between or among the Company and any of its Subsidiaries or between
or among Subsidiaries; and (iii) a Sale and Lease-Back Transaction, provided
that, the proceeds of the sale of the property or assets to be leased are at
least equal to the fair value (the fair value of such proceeds, if other than
cash, to be determined by the chief financial officer of the Company) and an
amount equal to such net proceeds is applied within 180 days of the effective
date of such Sale and Lease-Back Transaction to (A) the retirement (other than
any mandatory retirement and other than any prohibited retirement of securities)
of indebtedness for borrowed money (including the Securities) incurred or
assumed by the Company or any
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Subsidiary (other than indebtedness for borrowed money owed to the Company or
any Subsidiary) which by its terms matures on, or is extendible or renewable at
the option of the obligor to, a date more than 12 months after the date of the
creation of such indebtedness and, in the case of such indebtedness of the
Company, which ranks on a parity with, or senior in right of payment to, the
Securities or (B) the purchase or construction of other property, provided,
that, upon the completion of such purchase or construction, such property is
owned by the Company or a Subsidiary free and clear of all Liens. For the
purposes of this paragraph, a Sale and Lease-Back Transaction means any
arrangement with any person or entity providing for the leasing to the Company
or a Subsidiary for a period of more than three years of any property which has
been or is to be sold or transferred by the Company or such Subsidiary to such
person or entity or to any other person or entity to which funds have been or
are to be advanced by such person or entity on the security of the leased
property.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with or merge into any other person or
entity, and the Company may not, directly or indirectly, sell, convey, transfer
or lease all or substantially all of its properties and assets to, any person or
entity, unless (a) the person or entity formed by or surviving such
consolidation or merger or the person or entity which acquires or leases all or
substantially all of the properties and assets of the Company (i) is organized
and existing under the laws of any United States jurisdiction; and (ii)
expressly assumes, by supplemental indenture in a form reasonably satisfactory
to the Trustee, all of the Company's obligations on the Securities and under the
Indenture, and (b) after giving effect to such transaction no Event of Default,
and no event which, after notice or lapse of time or both, would become an Event
of Default, shall have occurred and be continuing.
EVENTS OF DEFAULT
The following are defined in the Indenture as Events of Default with
respect to each series of Securities: (a) failure to pay principal or premium,
if any, when due, whether at maturity or otherwise; (b) failure to pay any
interest within 30 days of the date when due; (c) failure to make or satisfy any
sinking or purchase fund payment when due; (d) failure to observe or perform any
other covenant contained in the Indenture for the benefit of such series,
continued for 60 days after written notice from the Trustee or the Holders of at
least 25% in principal amount of the Outstanding Securities of such series; (e)
a default under any evidence of indebtedness for money borrowed (other than the
Securities) by the Company or any Subsidiary or under any mortgage, indenture or
instrument (other than the Indenture or the Securities), which default shall
constitute a failure to pay any portion of the principal of such indebtedness in
an amount exceeding $20,000,000 when due and payable after the expiration of any
applicable grace period with respect thereto or shall have resulted in such
indebtedness in an aggregate amount exceeding $20,000,000 becoming or being
declared due and payable prior to the date on which it would otherwise have
become due and payable, without such indebtedness having been discharged, or
such acceleration having been rescinded or annulled, within a period of 10 days
after the date on which payment is due or the date of such acceleration; and (f)
certain events of bankruptcy, insolvency or reorganization. No Event of Default
with respect to a particular series of Securities issued under the Indenture
necessarily constitutes an Event of Default with respect to any other series of
Securities issued thereunder. Additional Events of Default may be established
for particular series of Securities.
If, an Event of Default described in the preceding paragraph in clauses
(a), (b), (c), or (d), (if the Event of Default under such clause (d) is with
respect to less than all series of Securities then Outstanding) occurs and is
continuing with respect to any series of Securities, the Trustee or the Holders
of not less than 25% in principal amount of the Securities of such series then
Outstanding (each series acting as a separate class) may declare the principal
amount of all the Securities of such series, and the interest accrued thereon,
to be due and payable immediately. If an Event of Default described in clause
(d) (if the Event of Default under such clause (d) is with respect to all series
of Securities then Outstanding) or (e) occurs and is continuing, the Trustee or
the Holders of not less than 25% in principal amount of all Securities then
Outstanding (treated as one class) may declare the principal amount of all
Securities then Outstanding, and
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the interest accrued thereon, to be due and payable immediately. If a default of
the type described in clause (f) shall occur and be continuing, the principal
amount of all series of Securities then Outstanding, and the interest accrued
thereon, if any, shall immediately become due and payable. However, at any time
after a declaration of acceleration with respect to any series of Securities has
been made, but before a judgment or decree based on such declaration has been
obtained, the Holders of a majority in principal amount of the outstanding
Securities of that series may under certain circumstances rescind and annul such
acceleration. Holders of Securities may not enforce the Indenture or the
Securities, except as provided in the Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the Securities.
Subject to certain limitations, Holders of a majority in principal amount of the
outstanding Securities of a particular series may direct the Trustee in its
exercise of any trust or power.
The Company will furnish the Trustee with an annual certificate of certain
of its officers certifying, to the best of its knowledge, whether the Company is
in default and specifying the nature and status of any such default. The Trustee
may withhold from Holders of Securities notice of any continuing default (except
a default in payment) if it determines in good faith that the withholding of
such notice is in the interest of such Holders.
A judgment for money damages by courts in the United States, including a
money judgment based on an obligation expressed in a foreign currency,
ordinarily will be rendered only in U.S. dollars. If, for the purpose of
obtaining a judgment in any court with respect to any obligation of the Company
under the Indenture, any Security, or any related coupon, as the case may be, it
becomes necessary to convert into any other currency or currency unit any amount
in the currency or currency unit due under the Indenture, such Security or
coupon, as the case may be, the conversion will be made by the Currency
Determination Agent appointed pursuant to the Indenture with respect to such
Security at the Market Exchange Rate in effect on the date of entry of the
judgment (the "Judgment Date"). If pursuant to any such judgment, conversion is
made on a date (the "Substitute Date") other than the Judgment Date and a change
has occurred between the Market Exchange Rate in effect on the Judgment Date and
the Market Exchange Rate in effect on the Substitute Date, the Indenture
requires the Company to pay such additional amounts (if any) as may be necessary
to ensure that the amount paid is equal to the amount in such other currency or
currency unit which, when converted at the Market Exchange Rate in effect on the
Judgment Date, is the amount then due under the Indenture, such Security or
coupon, as the case may be. The Company will not, however, be required to pay
more in the currency or currency unit due under the Indenture, such Security or
coupon, as the case may be, at the Market Exchange Rate in effect on the
Judgment Date than the amount of currency or currency unit stated to be due
under the Indenture, such Security or coupon, as the case may be, and the
Company will be entitled to withhold (or be reimbursed for, as the case may be),
any excess of the amount actually realized upon any such conversion on the
Substitute Date over the amount due and payable on the Judgment Date.
Directors, officers, employees or shareholders of the Company will not have
any liability for any obligations of the Company under the Securities or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Securities, by accepting a
Security, waives and releases all such liability. The waiver and the release are
part of the consideration for the issue of the Securities.
SATISFACTION AND DISCHARGE
Except as may otherwise be set forth in the Prospectus Supplement relating
to a series of Securities, the Indenture provides that the Company shall be
discharged from its obligations under the Securities of such series (with
certain exceptions) at any time prior to the Stated Maturity or redemption of
the Securities of such series when (a) the Company has irrevocably deposited in
a trust fund pursuant to the terms of the Indenture, (i) sufficient funds in the
currency, currencies, currency unit or units in which the Securities of such
series are payable to pay the principal of (and premium, if any) and interest,
if any, to Stated Maturity (or redemption) on the Securities of such series; or
(ii) such amount of direct obligations of, or obligations the principal of (and
premium, if any) and interest, if any, on which are fully guaranteed by the
government which issued the currency, and are payable in the currency in which
the Securities of such series are payable, and which are not subject to
prepayment, redemption or call, as will, together with the predetermined and
certain
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income to accrue thereon without consideration of any reinvestment thereof, be
sufficient to pay and discharge when due the principal of (and premium, if any)
and interest, if any, to Stated Maturity (or redemption) on, the Securities of
such series; or, (iii) such amount equal to the amount referred to in clause (i)
or (ii) in any combination of currency or currency unit or government
obligations; (b) the Company has paid all other sums payable with respect to the
Securities of such series; (c) unless otherwise set forth in such Prospectus
Supplement, the Company has delivered to the Trustee an opinion of counsel to
the effect that (i) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling, or (ii) since the date of the
Indenture there has been a change in applicable United States federal income tax
law, in either case to the effect that, and based upon which such opinion of
counsel shall confirm that, the Holders of Securities of such series will not
recognize income, gain or loss for United States federal income tax purposes as
a result of such discharge and will be subject to United States federal income
tax on the same amount and in the same manner and at the same time as would have
been the case if such discharge had not occurred and (d) certain other
conditions are met. Upon such discharge, the Holders of the Securities of such
series shall no longer be entitled to the benefits of the Indenture, except for
certain rights, including registration of transfer and exchange of the
Securities of such series and replacement of mutilated, destroyed, lost or
stolen Securities, and shall look only to such deposited funds or obligations.
DEFEASANCE OF CERTAIN OBLIGATIONS
If the terms of the Securities of any series so provide, the Company may
omit to comply with certain designated covenants in the Indenture and any such
omission with respect to such covenants shall not be an Event of Default with
respect to the Securities of such series, if (a) the Company deposits or causes
to be deposited in a trust fund pursuant to the terms of the Indenture an amount
of (i) cash in the currency or currency unit in which the Securities of such
series are payable (except as otherwise specified with respect to the Securities
of such series); (ii) government obligations of the type referred to above under
"Satisfaction and Discharge;" or (iii) a combination of such cash and government
obligations, which amount, in the case of (ii) or (iii), together with the
predetermined and certain income to accrue on any such government obligations
when due (without the consideration of any reinvestment thereof), is sufficient
to pay and discharge when due the entire indebtedness on all such Outstanding
Securities of such series and any related coupons for unpaid principal (and
premium, if any) and interest, if any, to the Stated Maturity or any Redemption
Date, as the case may be and (b) certain other conditions are met. The
obligations of the Company under the Indenture with respect to the Securities of
such series other than with respect to the covenants referred to above shall
remain in full force and effect.
MODIFICATION AND WAIVER; MEETINGS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of more than 50% in principal
amount of the Outstanding Securities of each series issued under the Indenture
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
Outstanding Security affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of principal of or interest, if any, on any
Security; (b) reduce the principal amount of or rate of interest, if any, on any
Security, or any premium payable upon the redemption thereof; (c) reduce the
amount of principal of an Original Issue Discount Security payable upon
acceleration of the Maturity thereof; (d) change the Place of Payment; (e)
change the currency or currency unit of payment of principal of (or premium, if
any) or interest, if any, on any Security; (f) impair the right to institute
suit for the enforcement of any payment on or with respect to any Security on or
after the Stated Maturity thereof (or, in the case of redemption, on or after
the Redemption Date); or (g) reduce the percentage in principal amount of
Outstanding Securities of any series, the consent of the Holders of which is
required for modification or amendment of the applicable Indenture or for waiver
of compliance with certain provisions of the Indenture or for waiver of certain
defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series may on behalf of the Holders of all
Securities of that series waive, insofar as that series is concerned, compliance
by the Company with certain restrictive provisions of the Indenture. The Holders
of not less than a
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majority in principal amount of the Outstanding Securities of any series may on
behalf of the Holders of all Securities of that series and any coupons
appertaining thereto waive any past default under the Indenture with respect to
that series, except a default in the payment of the principal of (or premium, if
any) and interest, if any, on any Security of that series or in respect of a
provision which under the Indenture cannot be modified or amended without the
consent of the Holder of each Outstanding Security of that series affected. The
Indenture and the Securities may be amended or supplemented, without the consent
of any Holder of Securities to cure any ambiguity or inconsistency or to make
any change that does not have a materially adverse effect on the right of any
Holder of Securities.
The Indenture contains provisions for convening meetings of the Holders of
Securities of a series if Securities of that series are issuable as Bearer
Securities. A meeting may be called at any time by the Trustee and also upon
request by the Company or the holders of at least 10% in principal amount of the
Outstanding Securities of such series, in any such case upon notice given in
with "Notices" below. Any resolution passed or decision taken at any meeting of
holders of Securities of any series duly held in accordance with the Indenture
will be binding on all holders of Securities of that series and the related
coupons. The quorum at any meeting called to adopt a resolution, and at any
reconvened meeting, will be persons holding or representing a majority in
principal amount of the Outstanding Securities of a series.
NOTICES
Except as may otherwise be set forth in the Prospectus Supplement relating
to a series of Securities, notices to Holders of Bearer Securities will be given
by publication in a daily newspaper in the English language of general
circulation in The City of New York and in London, and so long as such Bearer
Securities are listed on the Luxembourg Stock Exchange and the Luxembourg Stock
Exchange shall so require, in a daily newspaper of general circulation in
Luxembourg or, if not practical, elsewhere in Western Europe. Such publication
may be made in The Wall Street Journal, The Financial Times and The Luxemburger
Wort. Notices to Holders of Registered Securities will be given by mail to the
addresses of such Holders as they appear in the Security Register.
TITLE
Title to Bearer Securities and any coupons appertaining thereto will pass
by delivery. The Company, the Trustee and any agent of the Company or the
Trustee may treat the bearer of any Bearer Security and the bearer of any coupon
and the registered owner of any Registered Security as the absolute owner
thereof (whether or not such Security or coupon shall be overdue and
notwithstanding any notice to the contrary) for the purpose of making payment
and for all other purposes.
GOVERNING LAW
The Securities and the Indenture will be governed by and construed in
accordance with the laws of the State of Michigan.
CONCERNING THE TRUSTEE
Unless otherwise set forth in the Prospectus Supplement for a particular
series of Securities, Comerica Bank is the Trustee under the Indenture and will
act as the Trustee under any Supplemental Indenture. Comerica Bank has extended
lines of credit to the Company, and, as either principal or fiduciary, also owns
or may own debt of the Company. The Company has other customary banking
relationships with Comerica Bank in the ordinary course of business. If a bank
or trust company other than Comerica Bank is to act as Trustee for a particular
series of Securities, information concerning such other Trustee may be set forth
in the Prospectus Supplement relating to such Securities.
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LIMITATIONS ON ISSUANCE OF BEARER SECURITIES
In compliance with United States federal tax laws and regulations, Bearer
Securities may not be offered or sold during the restricted period (as defined
under "Description of Securities and Indenture") or delivered in connection with
their sale during the restricted period in the United States or its possessions
or to United States persons (each as defined below) except to the extent
permitted under Section 1.163-5(c)(2)(i)(D) of the United States Treasury
regulations (the "D Rules"), and any underwriters, agents and dealers
participating in the offering of Securities must agree that they will not offer
for sale or resale, or sell, Bearer Securities in the United States or its
possessions or to United States persons, except to the extent permitted under
the D Rules, nor deliver Bearer Securities within the United States.
Bearer Securities and any coupons appertaining thereto will bear a legend
substantially to the following effect: "Any United States person who holds this
obligation will be subject to limitations under the United States income tax
laws, including the limitations provided in Sections 165(j) and 1287(a) of the
Internal Revenue Code." Under Sections 165(j) and 1287(a) of the Code, and the
regulations thereunder, Holders of Bearer Securities that are United States
persons, with certain exceptions, will not be allowed to deduct any loss
sustained on the sale, exchange, redemption or other disposition of such Bearer
Security, and will be taxed at ordinary income rates on any gain (which might
otherwise be characterized as capital gain) recognized on such sale, exchange or
disposition. In addition, interest on Bearer Securities will be payable only
outside the United States.
As used herein, "United States" means the United States of America
(including the States and the District of Columbia), and its "possessions,"
including Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake
Island and the Northern Mariana Islands, and "United States person" means an
individual who is a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or any estate or trust the
income of which is subject to United States federal income taxation regardless
of its source.
PLAN OF DISTRIBUTION
The Company may sell all or part of the Securities from time to time on
terms determined at the time such Securities are offered for sale. The
Securities may be sold (i) through underwriters or dealers; (ii) through agents;
(iii) directly to one or more purchasers; or (iv) through a combination of any
such methods of sale. The Prospectus Supplement relating to the particular
series of the Securities offered thereby, will set forth the terms of the
offering of such series of the Securities, including the name or names of any
underwriters, dealers or agents, the purchase price of such Securities, the
proceeds to the Company from such sale, any underwriting discounts and other
items constituting underwriters' or agents' compensation, any initial public
offering price, any discounts or sales agent's commissions or concessions
allowed or reallowed or paid to dealers and any securities exchanges on which
the Securities of such series may be listed.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If underwriters are used in the sale, the Securities will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price, or at varying prices determined at the time of sale. The
Securities may be offered to the public through underwriting syndicates
represented by managing underwriters or by underwriters without a syndicate.
Unless otherwise set forth in the related Prospectus Supplement or the
applicable Pricing Supplement, the obligations of the underwriters to purchase
Securities will be subject to certain conditions precedent and the underwriters
will be obligated to purchase all the Securities of a series, if any are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
The Securities may be sold directly by the Company or through agents
designated by the Company from time to time. Any agent involved in the offer or
sale of the Securities in respect of which this Prospectus is
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<PAGE> 74
delivered will be named, and any commissions payable by the Company to such
agent will be set forth, in the related Prospectus Supplement. Unless otherwise
indicated in the related Prospectus Supplement, any such agent will be acting on
a best efforts basis for the period of its appointment.
If so indicated in the related Prospectus Supplement, the Company will
authorize agents, underwriters or dealers to solicit offers by certain specified
entities to purchase Securities from the Company at the public offering price
set forth in such Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date. Such contracts will be
subject only to those conditions set forth in the Prospectus Supplement. Such
Prospectus Supplement will set forth the commissions payable for solicitation of
such contracts.
Agents and underwriters may from time to time purchase and sell Securities
in the secondary market, but are not obligated to do so, and there can be no
assurance that there will be a secondary market for the Securities or liquidity
in the secondary market if one develops. From time to time, agents and
underwriters may make a market in the Securities.
Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil liabilities,
including liabilities under the Securities Act of 1933, or to contribution with
respect to payments which the agents or underwriters may be required to make in
respect thereof. Agents and underwriters may be customers of, engage in
transactions with or perform services for, the Company or its affiliates in the
ordinary course of business.
LEGAL OPINIONS
The validity of the Securities will be passed upon for the Company by
Clark, Klein & Beaumont, 1600 First Federal Building, Detroit, Michigan 48226
and for any underwriters or agents by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), 425 Lexington Avenue, New York, New
York 10017.
EXPERTS
The audited consolidated financial statements and schedules of the Company
and its Subsidiaries incorporated by reference in this Prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen & Co.,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report. Reference is made to
said report, which includes 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 5 and 10, respectively, to the audited consolidated
financial statements.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY AGENT OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.......... S-3
The Company............................ S-5
Use of Proceeds........................ S-12
Capitalization......................... S-13
Selected Historical Financial Data..... S-14
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................ S-16
Description of the Senior Notes........ S-24
Underwriting........................... S-27
Validity of the Senior Notes........... S-28
Experts................................ S-28
Index to Consolidated Financial
Statements........................... F-1
PROSPECTUS
Available Information.................. 2
Incorporation of Certain Documents by
Reference............................ 2
The Company............................ 3
Use of Proceeds........................ 3
Ratio of Earnings to Fixed Charges..... 4
Description of Securities and
Indenture............................ 4
Limitations on Issuance of Bearer
Securities........................... 16
Plan of Distribution................... 16
Legal Opinions......................... 17
Experts................................ 17
</TABLE>
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$100,000,000
[LOGO]
INTERNATIONAL
CORPORATION
6 3/4% SENIOR NOTES DUE 2004
---------------------------
PROSPECTUS SUPPLEMENT
JANUARY 20, 1994
---------------------------
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
WERTHEIM SCHRODER & CO.
INCORPORATED
ROBERT W. BAIRD & CO.
INCORPORATED
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