THIS PROSPECTUS SUPPLEMENT RELATES TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, BUT IS NOT COMPLETE AND MAY BE CHANGED. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
File Pursuant To Rule 424(b)(3)
Registration No. 33-63855
SUBJECT TO COMPLETION, DATED DECEMBER 11, 2001
PRELIMINARY PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED DECEMBER 11, 2001
$150,000,000
[Ferro Logo]
% Senior Notes due 2008
------------------
The notes will mature on , 2008. We will pay interest on the notes
semiannually on and of each year, commencing on , 2002.
The notes will be our senior unsecured obligations and will rank equally with
all our other senior unsecured indebtedness. We may redeem some or all of the
notes at any time at a "make whole" price described in this prospectus
supplement under the heading "Description of the Notes -- Redemption at the
Option of the Company." There is no sinking fund for the notes.
<Table>
<Caption>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS FERRO
----------------- ----------------- -----------------
Per Note.................................. % % %
Total..................................... $ $ $
</Table>
Delivery of the notes, in book-entry system form, will be made on or about
December , 2001.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
CREDIT SUISSE FIRST BOSTON
NATCITY INVESTMENTS, INC.
TOKYO-MITSUBISHI INTERNATIONAL PLC
The date of this prospectus supplement is December , 2001.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<Table>
<Caption>
PAGE
----
CAUTIONARY STATEMENTS................ i
SUMMARY.............................. S-1
USE OF PROCEEDS...................... S-7
CAPITALIZATION....................... S-7
dmc(2) ACQUISITION................... S-8
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF INCOME...... S-10
SELECTED FINANCIAL DATA.............. S-13
</Table>
<Table>
<Caption>
PAGE
----
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... S-14
BUSINESS............................. S-21
DESCRIPTION OF THE NOTES............. S-28
UNDERWRITING......................... S-33
NOTICE TO CANADIAN RESIDENTS......... S-35
LEGAL MATTERS........................ S-36
</Table>
PROSPECTUS
<Table>
<Caption>
PAGE
----
AVAILABLE INFORMATION................ i
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE....................... 1
THE COMPANY.......................... 2
USE OF PROCEEDS...................... 2
</Table>
<Table>
<Caption>
PAGE
----
RATIO OF EARNINGS TO FIXED CHARGES... 2
DESCRIPTION OF DEBT SECURITIES....... 3
PLAN OF DISTRIBUTION................. 10
LEGAL MATTERS........................ 10
EXPERTS.............................. 11
</Table>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
CAUTIONARY STATEMENTS
This prospectus supplement (including information incorporated by reference
herein) contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements are not historical facts, but rather are
predictions and generally can be identified by use of statements that include
phrases such as "believe," "expect," "anticipate," "estimate," "intend," "plan,"
"foresee" or other words or phrases of similar import. Similarly, statements
that describe our future financial condition or results of operations,
objectives, plans, goals or future performance and business also are
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those currently anticipated. In light of these risks and uncertainties, the
forward-looking events might or might not occur. Important factors that could
cause actual results to differ materially from those suggested by these
forward-looking statements, and that could adversely affect our future financial
performance, are described in our documents incorporated by reference herein and
in the accompanying prospectus and include the following:
- The current and future economic conditions in the United States and
worldwide, including the effects of the September 11, 2001 terrorist
attacks on the United States;
- The continuing recessionary trends in all of our major markets, which are
expected to impact sales negatively in most of our businesses through at
least the fourth quarter and probably well into 2002;
- The outcome of our efforts to integrate the dmc(2) businesses we recently
acquired;
- The risks related to fluctuating currency rates, changing raw material
prices, changing legal, tax and regulatory requirements that affect our
businesses and changing social and political conditions in the many
countries in which we operate; and
- Access to capital, primarily in the U.S. capital markets, and any
restrictions placed on us by current or future financing arrangements.
The risks and uncertainties identified above are not the only risks we face.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial also may adversely affect us. Should any
known or unknown risks and uncertainties develop into actual events, these
developments could have material adverse effects on our business, financial
condition and results of operations.
i
SUMMARY
This summary highlights certain information appearing elsewhere in this
prospectus supplement. This summary is not complete and does not contain all of
the information that you should consider before purchasing the notes. For a more
complete understanding of this offering, we encourage you to read the entire
document and all documents incorporated by reference. Unless the context
requires otherwise, references to "Ferro", "we", "us", or "our" refer
collectively to Ferro Corporation and its consolidated subsidiaries, including
the electronic materials, performance pigments and colors, glass systems, and
Cerdec ceramics businesses (the "dmc(2) Businesses") of dmc(2) Degussa Metals
Catalysts Cerdec AG ("dmc(2)") that we acquired on September 7, 2001 (the
"dmc(2) Acquisition").
THE COMPANY
We are a leading global producer of a diverse array of performance
materials. We sell to a broad range of manufacturers in approximately 30 markets
throughout the world. Our products are classified as performance materials,
rather than commodities, because they are formulated to perform specific and
important functions both in the manufacturing processes and in the finished
products of our customers. Our performance materials require a high degree of
technical service on an individual customer basis. The value of these
performance materials stems from the results and performance they achieve in
actual use. We apply certain core scientific expertise in organic chemistry,
inorganic chemistry, polymer science and material science to develop coatings
for ceramics and metal; materials for passive electronic components; pigments;
enamels, pastes, and additives for the glass market; specialty plastic compounds
and colors; and polymer additives.
Our products are traditionally used in markets such as appliances,
automotive, building and renovation, electronics, household furnishings,
industrial products, pharmaceuticals, telecommunications and transportation. Our
leading customers include major chemical companies, producers of multi-layer
ceramic capacitors and manufacturers of tile, appliances and automobiles. Many
customers, particularly in the appliance and automotive markets, purchase
materials from more than one of our business units. Our customer base is also
well-diversified both geographically and by end-market.
The diversity of our products, customers, and end-markets serves to
stabilize our ongoing financial results. After giving effect to the dmc(2)
Acquisition, our pro forma revenues for the fiscal year ended 2000 and the nine
months ended September 30, 2001 would have been $1,993 million and $1,416
million, respectively.
THE dmc(2) ACQUISITION
On September 7, 2001, we purchased the dmc(2) Businesses for approximately
$525 million in cash. To finance the dmc(2) Acquisition, replace our existing
credit facilities and provide for ongoing working capital, we entered into new
unsecured credit facilities providing for an aggregate of $860 million in
commitments. The proceeds from this offering will be used to repay a portion of
that indebtedness.
The dmc(2) Businesses produce materials for passive electronic components;
organic and inorganic pigments and colors for ceramics, plastic, and glass;
enamels, pastes, and additives for the glass market; and ceramic coatings for
structural ceramics and sanitaryware. The dmc(2) Businesses products are
manufactured in 15 countries around the world and are used primarily in markets
we traditionally serve.
The dmc(2) Acquisition expands our geographic reach and enhances our
product capabilities in three core businesses:
- Electronic Materials -- The dmc(2) Acquisition more than doubles the
sales of our electronic materials business and adds critical metals
technology and manufacturing capabilities to this business, including
manufacturing facilities in Europe and Japan (the largest electronics
manufacturing market in the world);
S-1
- Specialty Colors -- The dmc(2) Acquisition strengthens our technology and
competitive presence in our high-margin specialty colors business; and
- Tile Coatings -- The dmc(2) Acquisition complements our manufacturing
capabilities in the tile business and broadens our presence in Asia and
Southern Europe.
In addition, the dmc(2) Acquisition provides an opportunity to realize
significant manufacturing and operating efficiencies and cost savings by
eliminating duplicate facilities, reducing overhead and capitalizing on raw
material sourcing synergies.
COMPETITIVE STRENGTHS
- Leading positions in markets served
We have leading market positions in businesses that accounted for
approximately 72% of our pro forma sales for the nine-month period ended
September 30, 2001. For example, we are among the world's largest
suppliers of ceramic glaze and color, porcelain enamel coatings, specialty
colorants, powder coatings, and glass additives. We are a worldwide leader
in the production of passive electronic materials, and we believe we are
currently the only merchant manufacturer of all the primary components
(electrodes, dielectrics, and termination pastes) of multi-layer
capacitors. We also hold a leading market position in North America for
PVC specialty additives and modifiers. Also, because of the diverse nature
of our product lines, we believe that none of our competitors competes
across all product lines in any one market segment.
- Diverse geographic and customer base
We have developed an extensive and geographically balanced manufacturing
and sales network, domestically and abroad. During 2000, taking into
account the dmc(2) Businesses, our sales to customers in the U.S. and
Canada, Europe, Asia and Latin America would have represented 51%, 32%, 9%
and 8%, respectively, of our sales. We sell our products to customers in
approximately 30 markets, including appliances, automotive, building and
renovation, electronics, household furnishings, industrial products,
pharmaceuticals, telecommunications and transportation. Our global network
gives us a key competitive advantage in meeting the technical service
needs of our customers.
- Broad technology portfolio
In addition to our wide range of capabilities in chemistry, glass, ceramic
and material sciences, we draw on a broad combination of core
technological competencies. Our global expertise in particle engineering,
formulation science, polymer technology, coatings technology, materials
characterization, and processing has enabled us to provide timely and
cost-effective solutions to our customers' materials needs, including, for
example:
- Ground-breaking applications of ink-jet technology for decorating tile;
- Sophisticated dielectric materials for microelectronic components; and
- Innovative plastics materials that provide low cost alternatives to
traditional engineering polymers.
- Strong senior management team with proven acquisition ability
Members of our senior management team have been involved in the specialty
chemicals industry for an average of 25 years. Our senior management team
successfully consummated and integrated six acquisitions over the last
four years, and led efforts that produced strong and sustainable cash
flows and improved overall financial performance. Driven by a cost
reduction and focused market strategy adopted by management in 1997,
EBITDA grew from $151 million in 1996 to $192 million in 2000. Over the
same period, cash flows from operations averaged $113 million per year.
Cash flows from operations were $116 million in the nine months ended
September 30, 2001.
As of September 30, 2001, our executive officers and directors
collectively owned approximately 3% of our common stock and together with
our employees owned approximately 15% of our common stock.
S-2
THE OFFERING
The following summary contains basic information about this offering. It
may not contain all the information that is important to you. For a more
complete understanding of this offering, we encourage you to read this entire
document and the documents incorporated by reference.
Issuer........................ Ferro Corporation
Notes Offered................. $150 million in aggregate principal amount of
% Senior Notes due 2008.
Maturity Date................. , 2008.
Interest...................... % per annum, payable semiannually in
arrears on and , commencing
, 2002.
Ranking....................... The notes will be our senior unsecured
obligations and will rank equally with our
other existing and future senior unsecured
debt.
Optional Redemption........... We may redeem any or all of the notes at any
time, in whole or in part, in cash at a "make
whole" price described in this prospectus
supplement, plus accrued and unpaid interest to
the date of redemption.
Denominations................. $1,000 and integral multiples thereof.
Form.......................... Notes will be issued in book-entry form and
will be represented by one or more global notes
in fully registered form. Beneficial interests
in global notes will be shown on, and transfers
thereof will be effected through, records
maintained by The Depository Trust Company and
its participants. Any such beneficial interests
may not be exchanged for notes in certificated
form, except in the limited circumstances
described in this prospectus supplement.
Settlement.................... Same-day -- immediately available funds.
Use of Proceeds............... We will use the net proceeds of the notes to
repay a portion of the capital markets term
facility issued to fund the purchase price for
the acquisition of the dmc(2) Businesses. See
"Use of Proceeds" in this prospectus
supplement.
No Limitations on
Indebtedness.................. The indenture governing the notes does not
limit the amount of debt we may issue or
provide holders any protection should we be
involved in a highly leveraged transaction.
Certain Covenants............. The indenture governing the notes contains
covenants that, among other things, will limit
our ability and the ability of certain of our
subsidiaries to:
- subject our principal properties to any
mortgage or other encumbrance securing
indebtedness unless the debt securities
issued under the indenture, including the
notes, are secured equally with such other
indebtedness;
- issue, assume or guarantee certain forms of
secured indebtedness; and
- engage in sale and lease-back transactions.
S-3
These covenants are subject to important
exceptions and qualifications, which are
described under the heading "Description of
Debt Securities" in the accompanying
prospectus.
Events of Default............. Each of the following is an event of default
under the indenture governing the notes:
- our failure to pay principal of the notes
when due;
- our failure for 30 days to pay interest on
the notes when due;
- our failure to perform other covenants or
warranties with respect to the notes for 90
days after receipt of notice of failure;
- the occurrence of a default in respect of our
debt or the debt of certain of our
subsidiaries totaling $10 million or more in
aggregate principal amount, resulting in the
acceleration of such debt or due to the
failure to pay such debt at maturity; and
- certain events of bankruptcy, insolvency or
reorganization.
If any event of default occurs and is
continuing, the trustee under the indenture or
holders of at least 25% in aggregate principal
amount of outstanding notes may declare the
principal thereof immediately due and payable.
See "Description of Debt Securities -- Events
of Default" in the accompanying prospectus.
ADDITIONAL INFORMATION
We are incorporated in the State of Ohio, and our executive offices are
located at 1000 Lakeside Avenue, Cleveland, Ohio 44114. Our telephone number is
(216) 641-8580.
S-4
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table displays our summary financial data for the periods
ended or as of the dates indicated. We derived certain of the historical data
for the years ended 1998, 1999 and 2000 from our audited consolidated financial
statements. We derived certain of the historical data for the nine-month periods
ended September 30, 2000 and 2001 from our unaudited consolidated financial
statements, which include all adjustments consisting of normal recurring
adjustments that management considers necessary for a fair presentation of the
financial position and results of operations for these periods. The historical
data for the results of operations for the nine months ended September 30, 2001
are not necessarily indicative of results that may be expected for any other
interim period or for the full year ending December 31, 2001. The summary
unaudited pro forma statement of operations data give effect to the dmc(2)
Acquisition, the borrowing of funds under our credit facilities, the issuance of
the notes, and the application of the net proceeds from this offering as
described under "Use of Proceeds" as if they occurred on January 1, 2000. See
"Unaudited Pro Forma Condensed Combined Statements of Income." The summary
financial data should be read in conjunction with "Use of Proceeds," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and our consolidated financial statements
incorporated by reference in this prospectus supplement. The pro forma results
are not necessarily indicative of the results that would have occurred if the
above transactions had been in effect on the dates indicated, or which may
result in the future, and do not include any cost savings or other effects of
our planned integration of the dmc(2) Businesses.
<Table>
<Caption>
HISTORICAL PRO FORMA
-------------------------------------------------------------- ----------------------------
NINE MONTHS ENDED NINE MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED ENDED
------------------------------------ ----------------------- DECEMBER 31, SEPTEMBER 30,
1998 1999 2000 2000 2001(1) 2000 2001
---------- ---------- ---------- ---------- ---------- ------------ -------------
(UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.................... $1,361,844 $1,355,283 $1,447,284 $1,086,125 $1,091,193 $1,992,876 $1,416,075
Cost of sales................ 997,583 976,877 1,053,220 788,122 822,773 1,451,443 1,057,216
Selling, administrative and
general expenses........... 235,155 241,830 254,595 190,004 206,502 378,650 296,148
Other charges (income):
Interest expense........... 15,284 18,343 24,925 17,885 24,016 71,674 52,603
Foreign currency
transactions............. (944) (1,561) (2,422) (2,124) (17,477) (2,422) (17,681)
Other
income/expense -- net.... 4,285 3,680 351 1,034 2,998 (1,670) 3,669
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes.......... 110,481 116,114 116,615 91,204 52,381 95,201 24,120
Income tax expense........... 41,199 43,099 43,476 34,462 19,151 33,582 8,720
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................... 69,282 73,015 73,139 56,742 33,230 61,619 15,400
Dividend on preferred stock,
net of tax................. 3,789 3,747 3,460 2,626 2,333 3,460 2,333
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income available to
common shareholders........ $ 65,493 $ 69,268 $ 69,679 $ 54,116 $ 30,897 $ 58,159 $ 13,067
========== ========== ========== ========== ========== ========== ==========
Diluted earnings per common
share...................... $ 1.67 $ 1.85 $ 1.92 $ 1.49 $ .88 $ 1.62 $ .38
========== ========== ========== ========== ========== ========== ==========
OTHER DATA:
EBITDA(2).................... $ 168,887 $ 182,958 $ 191,892 $ 146,435 $ 123,126 $ 242,825 $ 141,601
Depreciation and
amortization............... 43,122 48,501 50,352 37,346 46,729 75,950 64,878
</Table>
S-5
<Table>
<Caption>
HISTORICAL
----------------------
SEPTEMBER 30, 2001(1)
----------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 33,989
Total assets................................................ 1,749,931
Total debt (including short-term debt)...................... 891,545
Shareholders' equity........................................ 317,338
</Table>
- ---------------
(1) Includes the results of operations of the dmc(2) Businesses from September
1, 2001.
(2) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is not a measure of operating income, operating
performance or liquidity under generally accepted accounting principles
(GAAP) in the United States. We include EBITDA because we understand it is
used by some investors to determine a company's historical ability to
service indebtedness, and because certain covenants in our borrowing
arrangements are tied to similar measures. Nevertheless, this measure should
not be considered in isolation or as a substitute for operating income (as
determined in accordance with GAAP), as an indicator of our operating
performance, or of cash flows from operating activities (as determined in
accordance with GAAP), or as a measure of liquidity. In addition, it should
be noted that companies calculate EBITDA differently and, therefore, EBITDA
as presented for us may not be comparable to EBITDA reported by other
companies. See the audited consolidated financial statements and related
notes incorporated by reference in this prospectus supplement for the cash
used in and provided by operating activities.
S-6
USE OF PROCEEDS
We estimate that the net proceeds from this offering (after discounts to
the underwriters and other transaction fees and expenses payable by us) will be
approximately $148 million. We intend to use the net proceeds from this offering
to repay a portion of the capital markets term facility due March 5, 2002 under
our existing unsecured credit facilities. We have the right to extend this
facility for an additional six months. The capital markets term facility bears
interest, at our election, at a rate equal to (i) LIBOR plus 2% or (ii) the
greater of the prime rate established by National City Bank, Cleveland, Ohio and
the Federal funds effective rate plus 0.50%. The margins are subject to a 1%
increase for the first month following the earlier of a downgrade in our index
debt rating or the capital markets term facility actually remaining outstanding
past its initial maturity date, plus additional increases of 0.50% for each
additional month thereafter. The net proceeds from the capital markets term
facility were used to pay a portion of the purchase price for the dmc(2)
Businesses.
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2001 on an actual basis, including the dmc(2)
Acquisition, and as adjusted to give pro forma effect to this offering (after
deducting the underwriting discounts and estimated offering expenses) and the
application of the estimated proceeds as described under "Use of Proceeds"
above. The table should be read in conjunction with "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in this prospectus supplement and our consolidated
financial statements incorporated by reference in this prospectus supplement.
<Table>
<Caption>
SEPTEMBER 30, 2001
-----------------------
ACTUAL PRO FORMA
---------- ----------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Cash and cash equivalents.................................. $ 33,989 $ 32,489
========== ==========
Debt:
Revolving credit agreements.............................. $ 400,000 $ 400,000
Capital markets term facility............................ 300,000 150,000
7.125% Debentures due 2028............................... 54,443 54,443
7.625% Debentures due 2013............................... 24,831 24,831
8.00% Debentures due 2025................................ 49,451 49,451
7.375% Debentures due 2015............................... 24,949 24,949
Other debt............................................... 37,871 37,871
Notes offered hereby, net of unamortized discount........ -- 148,500
---------- ----------
Total debt (including short-term debt)................ 891,545 890,045
Total shareholders' equity................................. 317,338 317,338
---------- ----------
Total capitalization....................................... $1,208,883 $1,207,383
========== ==========
</Table>
S-7
dmc(2) ACQUISITION
On September 7, 2001, we acquired the electronic materials, performance
pigments and colors, glass systems and Cerdec ceramics businesses of dmc(2) from
OM Group, Inc., or OMG, which acquired all dmc(2) operations from Degussa AG on
August 10, 2001. We paid approximately $525 million in cash for the dmc(2)
Businesses.
The purchase price for the dmc(2) Acquisition is subject to certain
post-closing adjustments. The purchase price may be adjusted upward or downward
to reflect net working capital changes from December 31, 2000 to August 31, 2001
and for net external debt and cash of the dmc(2) Businesses as of August 31,
2001.
We are not a party to any of the agreements reached among OMG, Degussa and
dmc(2) in connection with the sale of the dmc(2) operations to OMG. Except under
exceptional circumstances, we do not have the right to bring claims directly
against Degussa or dmc(2) for liabilities associated with the dmc(2) Businesses.
OMG agreed, however, to share with us its rights and obligations under the
purchase agreement and all other agreements it entered into with Degussa to the
extent applicable to the businesses sold to us. We similarly agreed to comply
with any restrictions or limitations imposed by the purchase agreement and all
other agreements between OMG and Degussa with respect to the businesses sold to
us. OMG is required, at our request, to enforce its rights or secure benefits
under the purchase agreement with Degussa with respect to the businesses sold to
us. This would include, for example, enforcing OMG's rights to indemnification
from dmc(2) or Degussa for liabilities relating to the dmc(2) Businesses.
Pursuant to our agreement with OMG, we agreed to reimburse OMG for expenses it
incurred in taking these actions and to indemnify OMG for claims arising out of
the dmc(2) Businesses during the period following OMG's purchase thereof from
Degussa and our purchase thereof from OMG.
The purchase agreement among OMG, Degussa and dmc(2) contains customary
representations and warranties. However, OMG's ability to recover damages for
breaches of the representations and warranties is subject to a number of
limitations, including, but not limited to, the following:
- OMG can assert claims under the purchase agreement only if the total
amount of claims exceeds a minimum deductible of E10 million and, subject
to certain exceptions, the aggregate amount of such claims does not
exceed a cap of E300 million (which deductible and cap have each been
allocated evenly between us and OMG).
- If either OMG or Ferro makes indemnity claims in excess of E150 million,
the purchase agreement between us contains an escrow provision that
protects the other party's right to be reimbursed for its own indemnity
claims up to E150 million. At the expiration of the escrow, any excess
amounts will be distributed to the party that deposited such amounts,
unless it is determined that the other party is entitled to be reimbursed
for indemnifiable expenses from such deposits.
- Damages cannot be recovered to the extent addressed in an adjustment to
the purchase price, a specific reserve in dmc(2)'s balance sheet, by
payments received by a third party or a tax benefit, or, in the case of
damages arising out of environmental claims, if environmental clean-up is
not required by applicable environmental laws.
- OMG cannot receive consequential damages or damages for loss of profit.
- Most claims for indemnification (other than claims relating to taxes or
warranty of title) must be asserted by February 10, 2003.
- OMG is required to assert environmental claims on our behalf. However,
OMG can assert environmental claims only if the total amount of such
claims exceeds a separate E10 million threshold. Upon exceeding such
threshold, OMG is entitled to the entire claim amount, subject to a
cost-sharing formula. The cost-sharing formula requires OMG to share an
increasing percentage of costs over time, depending on when notice is
given; accordingly, OMG is entitled to be reimbursed for 90% of claims
asserted in the first year, 80% in the second year, 70% in the third
year, 60% in the fourth year, 50% in the fifth year, 40% in the sixth
year, 25% in the seventh year and 10% in
S-8
the eighth year. We and OMG would be responsible for 100% of the cost of claims
after year eight for our respective dmc(2) businesses. In respect of
environmental claims associated with our businesses, we may be reimbursed to the
extent of OMG's rights to indemnification, but would otherwise be
responsible for paying our share of the cost-sharing percentage amounts
listed above.
The exchange rate for euros was 0.8948 U.S. dollars per euro as of December 6,
2001.
For a period of two years from the date the dmc(2) Businesses were
transferred to us, we agreed not to hire any employees of the businesses
retained by OMG, and OMG agreed not to hire any employees of the dmc(2)
Businesses. For a period of five years after the closing date of the dmc(2)
Acquisition, we and OMG have agreed not to develop, produce, market or sell any
products of, or services substantially similar to those products and services
sold by, the other party as of the date of the closing.
S-9
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
The following unaudited pro forma condensed combined statements of income
have been prepared in accordance with U.S. GAAP. These financial statements give
effect to (1) the dmc(2) Acquisition and the borrowing of funds under our new
credit facilities to finance the dmc(2) Acquisition and meet our working capital
needs and (2) the sale of the notes and the application of proceeds as set forth
in "Use of Proceeds" (the "Refinancing"). The unaudited pro forma condensed
combined statements of income reflect adjustments as if the dmc(2) Acquisition
and the Refinancing had occurred on January 1, 2000. These unaudited pro forma
condensed combined statements of income should be read in conjunction with the
historical financial statements and related notes of Ferro and the dmc(2)
Businesses incorporated by reference into this prospectus supplement. The
unaudited pro forma condensed combined statements of income include preliminary
estimates with respect to the allocation of the purchase price and other
assumptions that management believes are reasonable. The pro forma results are
not necessarily indicative of the results that would have occurred if the above
transactions had been in effect on the dates indicated, or which may result in
the future, and do not include any cost savings or other effects of our planned
integration of the dmc(2) Businesses.
FERRO CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
PRO FORMA
FERRO DMC(2) ACQUISITION PRO FORMA REFINANCING FOR
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ADJUSTMENTS REFINANCING
---------- ---------- -------------- ---------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................... $1,447,284 $545,592 $ -- $1,992,876 $ -- $1,992,876
Cost of sales....................... 1,053,220 395,223 3,000 (a,b) 1,451,443 -- 1,451,443
Selling, administrative and general
expenses.......................... 254,595 132,555 (8,500 )(c) 378,650 -- 378,650
Other charges (income):
Interest expense.................. 24,925 9,403 36,646 (d,e) 70,974 700(g) 71,674
Foreign currency transactions..... (2,422) -- -- (2,422) -- (2,422)
Other income/expense -- net....... 351 (2,021) -- (1,670) -- (1,670)
---------- -------- -------- ---------- ------ ----------
Income (loss) before taxes.......... 116,615 10,432 (31,146 ) 95,901 (700) 95,201
Income tax expense (benefit)........ 43,476 4,756 (14,400 )(f) 33,832 (250)(h) 33,582
---------- -------- -------- ---------- ------ ----------
Net income (loss)................... 73,139 5,676 (16,746 ) 62,069 (450) 61,619
Dividend on preferred stock, net of
tax............................... 3,460 -- -- 3,460 -- 3,460
---------- -------- -------- ---------- ------ ----------
Net income (loss) available to
common shareholders............... $ 69,679 $ 5,676 $(16,746 ) $ 58,609 $ (450) $ 58,159
========== ======== ======== ========== ====== ==========
Weighted average number of common
shares outstanding................ 34,561 34,561 34,561
Net income per common share......... $ 2.02 $ 1.70 $(0.02) $ 1.68
========== ========== ====== ==========
Weighted average number of common
shares outstanding -- assuming
dilution.......................... 37,664 37,664 37,664
Net income per common share --
assuming dilution................. $ 1.92 $ 1.63 $(0.01) $ 1.62
========== ========== ====== ==========
</Table>
S-10
FERRO CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
PRO FORMA
FERRO DMC(2) ACQUISITION PRO FORMA REFINANCING FOR
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ADJUSTMENTS REFINANCING
---------- ---------- -------------- ---------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales............................ $1,091,193 $324,882 $ -- $1,416,075 $ -- $1,416,075
Cost of sales........................ 822,773 233,843 600 (a) 1,057,216 -- 1,057,216
Selling, administrative and general
expenses........................... 206,502 93,896 (4,250 )(c) 296,148 -- 296,148
Other charges (income):
Interest expense................... 24,016 5,111 20,478 (d,e) 49,605 2,998(g) 52,603
Foreign currency transactions...... (17,477) (204) -- (17,681) -- (17,681)
Other income/expense -- net........ 2,998 671 -- 3,669 -- 3,669
---------- -------- -------- ---------- ------- ----------
Income (loss) before taxes........... 52,381 (8,435) (16,828 ) 27,118 (2,998) 24,120
Income tax expense (benefit)......... 19,151 (427) (8,904 )(f) 9,820 (1,100)(h) 8,720
---------- -------- -------- ---------- ------- ----------
Net income (loss).................... 33,230 (8,008) (7,924 ) 17,298 (1,898) 15,400
Dividend on preferred stock, net of
tax................................ 2,333 -- -- 2,333 -- 2,333
---------- -------- -------- ---------- ------- ----------
Net income (loss) available to common
shareholders....................... $ 30,897 $ (8,008) $ (7,924 ) $ 14,965 $(1,898) $ 13,067
========== ======== ======== ========== ======= ==========
Weighted average number of common
shares outstanding................. 34,217 34,217 34,217
Net income per common share.......... $ 0.90 $ 0.44 $ (0.06) $ 0.38
========== ========== ======= ==========
Weighted average number of common
shares outstanding -- assuming
dilution........................... 37,081 34,564 34,564
Net income per common share --
assuming dilution.................. $ 0.88 $ 0.43 $ (0.05) $ 0.38
========== ========== ======= ==========
</Table>
S-11
FERRO CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
NOTE 1 -- BASIS OF PRESENTATION
The unaudited pro forma condensed combined statements of income for the
year ended December 31, 2000 and nine months ended September 30, 2001 have been
prepared assuming the dmc(2) Acquisition and the Refinancing had occurred on
January 1, 2000. The dmc(2) Acquisition is more fully described in Item 2 and
Exhibit 2 to our Current Report on Form 8-K previously filed with the SEC on
September 21, 2001.
The historical statements of the dmc(2) Businesses, which are contained in
Item 7(a) of our Current Report on Form 8-K/A-2 filed with the SEC on December
10, 2001, are denominated in German marks and have been prepared in accordance
with German GAAP. As explained in the notes to the historical financial
statements of the dmc(2) Businesses contained in the Current Report on Form
8-K/A-2 filed with the SEC on December 10, 2001, German GAAP varies in certain
significant respects from U.S. GAAP. The amounts shown for the dmc(2) Businesses
in the unaudited pro forma condensed combined statements of income have been
derived from the following statements of the dmc(2) Businesses (as adjusted to
give effect to the difference between German GAAP and U.S. GAAP): income
statement for the year ended December 31, 2000 and the unaudited income
statement for eight months ended August 31, 2001. The income statement of the
dmc(2) Businesses for the one month ended September 30, 2001 is included in the
Ferro historical period for the nine months ended September 30, 2001. In
addition, the amounts are presented in U.S. dollars using average exchange rates
of .4722 U.S. dollars per German mark for the year ended December 31, 2000, and
.4540 U.S. dollars per German mark for the eight months ended August 31, 2001.
NOTE 2 -- PRO FORMA ADJUSTMENTS
a. Adjustment results from an increase in the depreciation expense of $8 million
related to the estimated fair value adjustment for the properties, plants and
equipment acquired using the straight line method over an estimated average
remaining useful life of ten years. The estimated fair value adjustment
reflects preliminary estimates with respect to the allocation of the purchase
price and other assumptions which management believes are reasonable.
b. Adjustment results from a $2 million increase to recognize the fair value of
inventory at acquisition.
c. Adjustment eliminates amortization of goodwill in historical statements of
the dmc(2) Businesses under provisions of Financial Accounting Standards
Board Statement No. 142 "Goodwill and Other Intangible Assets."
d. Adjustment eliminates the interest expense related to debt not assumed in the
acquisition.
e. Adjustment recognizes additional interest expense on acquisition debt at
variable interest rates. The weighted average variable interest rates used on
the acquisition debt was 8.53% and 6.34% for the year-ended December 31, 2000
and nine-month period ended September 30, 2001, respectively.
f. Adjustment recognizes income tax effects on above adjustments at the
effective tax rate of the company in the case of item e and at the effective
tax rate of the dmc(2) Businesses in the case of items a, b and d. Item c is
not taxable for income tax purposes.
g. Adjustment recognizes additional interest expense related to the sale of the
notes offered hereby and eliminates interest expense related to the reduction
of the capital markets term facility.
h. Adjustment recognizes income tax effects on above adjustment item g at our
effective tax rate.
S-12
SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial data for
each of the years in the five-year period ended December 31, 2000 and for the
nine-month periods ended September 30, 2000 and 2001. We derived certain of our
selected historical financial data from our audited consolidated financial
statements for the years ended December 31, 1996, 1997, 1998, 1999 and 2000. We
derived certain of the selected historical financial data for the nine-month
periods ended September 30, 2000 and 2001 from our unaudited consolidated
financial statements, which include all adjustments consisting only of normal
recurring adjustments that management considers necessary for a fair
presentation of the financial position and results of operations for these
periods. The results of operations for the nine months ended September 30, 2001
are not necessarily indicative of results that may be expected for any other
interim period or for the full year ending December 31, 2001. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements incorporated by reference in this prospectus supplement. The
following selected historical data does not reflect the operations of the dmc(2)
Businesses except for the month of September 2001. For more information on the
pro forma effect of the dmc(2) Businesses on our prior operations, see
"Unaudited Pro Forma Condensed Combined Statements of Income."
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1996 1997 1998 1999 2000 2000 2001(4)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $1,355,685 $1,381,280 $1,361,844 $1,355,283 $1,447,284 $1,086,125 $1,091,193
Cost of sales.......................... 1,023,401 1,028,069 997,583 976,877 1,053,220 788,122 822,773
Selling, administrative and general
expenses............................. 226,518 233,674 235,155 241,830 254,595 190,004 206,502
Realignment charge..................... -- 152,790 -- -- -- -- --
Other charges (income):
Interest expense..................... 13,031 12,163 15,284 18,343 24,925 17,885 24,016
Foreign currency transactions........ (812) (2,246) (944) (1,561) (2,422) (2,124) (17,477)
Other income/expense -- net.......... 5,340 5,300 4,285 3,680 351 1,034 2,998
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before taxes............. 88,207 (48,470) 110,481 116,114 116,615 91,204 52,381
Income tax expense (benefit)........... 33,621 (11,193) 41,199 43,099 43,476 34,462 19,151
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...................... 54,586 (37,277) 69,282 73,015 73,139 56,742 33,230
Dividend on preferred stock, net of
tax.................................. 3,735 3,757 3,789 3,747 3,460 2,626 2,333
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) available to common
shareholders......................... $ 50,851 $ (41,034) $ 65,493 $ 69,268 $ 69,679 $ 54,116 $ 30,897
========== ========== ========== ========== ========== ========== ==========
RETURN ON AVERAGE SHAREHOLDERS'
EQUITY:.............................. 14.2% -- 24.9% 25.2% 24.1% 25.4% 14.1%
PER COMMON SHARE DATA:(1)
Diluted earnings (loss).............. $ 1.21 $ (1.08) $ 1.67 $ 1.85 $ 1.92 $ 1.49 $ 0.88
Cash dividends....................... 0.39 0.43 0.495 0.55 0.58 0.44 0.44
BALANCE SHEET DATA:
Current assets......................... 416,522 427,030 451,128 490,529 443,228 459,123 640,238
Current liabilities.................... 252,333 277,707 282,556 337,633 365,095 358,427 462,289(2)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Working capital...................... 164,189 149,323 168,572 152,896 78,133 100,696 177,949(2)
Net property, plant and equipment...... 307,383 240,180 272,735 330,393 425,728 383,551 583,548
Total assets........................... 870,468 785,679 849,165 971,750 1,127,005 1,034,193 1,749,931
Long-term debt, excluding current
portion.............................. 105,308 102,020 156,283 236,794 350,781 280,866 857,440(2)
Shareholders' equity................... 384,204 273,151 283,261 296,995 309,158 299,130 317,338
OTHER DATA:
Capital expenditures................... $ 46,655 $ 45,129 $ 60,274 $ 76,244 $ 65,405 $ 37,398 $ 34,959
Depreciation and amortization.......... 49,635 44,975 43,122 48,501 50,352 37,346 46,729
EBITDA(3).............................. 150,873 8,668 168,887 182,958 191,892 146,435 123,126
Cash flow from operations.............. 111,572 130,283 80,031 127,155 114,451 73,915 116,084
Ratio of earnings to fixed
charges(5)........................... 6.52x -- 6.85x 6.17x 5.13x 5.52x 2.95x
</Table>
- ---------------
(1) Diluted earnings per share are based on a weighted average of common shares
outstanding and reflect the potential dilution of earnings per share,
assuming that certain stock options whose exercise price is less than the
average market price for the stock are exercised and that convertible
preferred shares are converted into common shares. Book value is based on
outstanding common shares and net worth at the end of the year. Outstanding
common shares and per share data are adjusted to reflect the 3-for-2 stock
split in November 1997.
(2) The capital markets term facility is excluded from current liabilities and
working capital and included in long-term debt.
(3) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is not a measure of operating income, operating
performance or liquidity under GAAP. We include EBITDA because we understand
it is used by some investors to determine a company's historical ability to
service indebtedness, and because certain covenants in our borrowing
arrangements are tied to similar measures. Nevertheless, this measure should
not be considered in isolation or as a substitute for operating income (as
determined in accordance with GAAP), as an indicator of our operating
performance, or of cash flows from operating activities (as determined in
accordance with GAAP), or as a measure of liquidity. In addition, it should
be noted that companies calculate EBITDA differently and, therefore, EBITDA
as presented for us may not be comparable to EBITDA reported by other
companies. See the audited consolidated financial statements and related
notes incorporated by reference in this prospectus supplement for the cash
used in and provided by operating activities.
(4) Includes the results of operations of the dmc(2) Businesses from September
1, 2001.
(5) The ratio of earnings to fixed charges has been calculated by dividing (i)
income before income taxes plus fixed charges by (ii) fixed charges. Fixed
charges are equal to interest expense (including amortization of deferred
financing costs), plus the portion of rent expense estimated to represent
interest. Earnings were insufficient to cover fixed charges by $49 million
for the year ended December 31, 1997.
S-13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with the historical
audited consolidated financial statements and the related notes incorporated by
reference in this prospectus supplement.
OVERVIEW
In early 1999, management adopted strategies to create profitable growth
and expand on our market leadership positions. In the three-year period ending
in 2001, we completed six acquisitions and divested one business, and allocated
resources among the businesses with an emphasis on generating profitable growth.
An important element in executing these strategies was the acquisition of the
dmc(2) Businesses on September 7, 2001. We expect this transaction to contribute
significantly to repositioning our portfolio towards higher growth businesses,
solidifying our leading market position in core businesses and furthering our
geographic diversity.
With the completion of the dmc(2) Acquisition in 2001 and with weaker
economic conditions emerging throughout the year, all of our businesses have
focused on cost reduction and cash flow generation. As a result, cash flows
generated from operations have totaled $116 million in the nine months ended
September 30, 2001, an increase of 57.1% compared to the comparable 2000 period.
This has allowed us to reduce borrowings by approximately $45 million in 2001,
before considering the dmc(2) Acquisition, despite the weakening economic
conditions and the resulting reduction of earnings in the period.
In light of the ongoing macroeconomic conditions, we do not anticipate that
the markets for our products will recover to previous levels in the near future.
Accordingly, all of our businesses, including the dmc(2) Businesses, have
implemented - and are continuing to implement - aggressive cost containment
measures. However, due primarily to the events of September 11, 2001, we expect
insurance costs to increase, and due to the performance of the equity markets
over the past year, we expect costs associated with pension plans to increase as
well. Since the date of the acquisition, we have continued our efforts to
aggressively manage working capital and maximize cash flows to mitigate, in
part, the impact of economic conditions on results of operations. In the near
term, our primary focus will be to capitalize on the synergies available from
integrating the dmc(2) Businesses with their Ferro counterparts. We believe that
significant cost savings can be achieved through eliminating duplicate
facilities, reducing overhead and capitalizing on raw material sourcing
synergies. We expect that ongoing efforts to integrate the dmc(2) Businesses
will likely result in severance and plant consolidation charges over the next
several quarters.
Factors that could adversely affect our future financial performance
include deteriorating economic conditions over the near term and possible
delayed economic recovery, increasing raw material prices, unfavorable currency
rate fluctuations and unexpected problems in integrating the dmc(2) Businesses.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Sales for the nine months ended September 30, 2001 were $1,091 million
compared with $1,086 million for the nine months ended September 30, 2000. Sales
for the 2001 period were aided by acquisition growth, including the acquisition
of the dmc(2) Businesses in September 2001. Excluding acquisitions, sales would
have declined. Sales were adversely affected by widespread weakness in the
United States durable goods and construction markets, and in the worldwide
electronic materials markets as well as declines in certain currencies compared
to the U.S. dollar.
Gross margins as a percent of sales were 24.6% compared with 27.4% for the
2000 period. Lower gross margins were a result of sales declines in the United
States, an inventory reduction program that reduced capacity utilization, higher
energy costs, charges related to employment cost reduction programs, and
integration and inventory costs related to the dmc(2) Acquisition.
S-14
Selling, administrative and general expenses were $207 million, or 18.9% of
sales, compared with $190 million, or 17.5% of sales, for the 2000 period.
Selling, administrative and general costs associated with acquisitions made
during the past year, severance costs related to employment cost reduction
programs and integration costs resulted in higher expenses during the 2001
period.
Interest expense for the 2001 period increased as compared to the
corresponding 2000 period due to additional acquisition debt, partially offset
by declines in variable interest rates and by reductions in debt made during the
2001 period, before considering the impact of the dmc(2) Acquisition.
During the second quarter of 2001, forward contracts were initiated for
purposes of mitigating the effects of currency movements on the cash flow
requirements of the dmc(2) Acquisition. Subsequent strengthening of the euro
resulted in the realization of approximately $17 million in foreign currency
gains from the closing of the contracts during the third quarter of 2001.
Diluted earnings per share were $0.88 for the 2001 period, down from $1.49
for the 2000 period. The lower earnings per share reflect the weakening economic
conditions throughout 2001, particularly in the United States.
Segment Results. For the first nine months of 2001, sales in the Coatings
segment were $643 million, compared with sales of $664 million for the 2000
period, a decline of 3.3%. Growth from acquisitions was offset by lower volume
in North America and weakness early in the year of the euro versus the U.S.
dollar. Foreign currency translation reduced segment sales by $17 million in the
2001 period versus the corresponding 2000 period. Segment income was $53 million
compared with $77 million reported in the 2000 period. Lower segment earnings
were a result of lower volumes in the United States, weakening of the euro and
reduced capacity utilization in connection with our inventory reduction
programs.
Performance Chemicals sales were $449 million, up 6.3% from sales of $422
million for the 2000 period. Acquisitions completed in 2000 were the primary
driver of the higher sales for the 2001 period. Segment income was $31 million
compared with $43 million for the 2000 period. The decline in earnings reflects
lower capacity utilization and volumes in the United States durable goods and
construction markets.
Geographic Sales. Sales in the United States were $614 million for the
2001 period, compared with $644 million for the 2000 period, a decline of 4.7%.
The sales decline reflects the general slowing of the United States economy.
International sales were $477 million for the 2001 period, compared with $442
million for the 2000 period. International sales growth was aided by
acquisitions and volume growth in Europe and Asia, but was partially offset by
the negative impact of currency translation of $21 million.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Consolidated net sales of $1,447 million for 2000 increased 6.8% compared
with 1999 net sales. The increase in sales was led by strong volume improvement
of 11.2%. More than a third of the volume growth came from existing businesses
and the rest from acquisitions. This volume growth, combined with slightly
positive price and mix of products sold, was enough to offset the impact of
foreign currency translation and divestitures. The strengthening of the U.S.
dollar against foreign currencies reduced sales by 4.2% during 2000, or $56
million. Divestitures also reduced sales by 1.0%, which included the mid-year
sale of the Pyro-Chek(R) flame retardant business.
Gross margin as a percent of sales was 27.2% compared with 27.9% in 1999.
Increases in raw material and energy costs reduced margins during the year.
Petroleum-based raw materials, such as polypropylene and polystyrene, increased
significantly in 2000. Additionally, due to weaker European currencies, U.S.
dollar-based raw materials purchased in Europe increased costs in the region.
Selling, administrative and general expenses increased to $255 million
compared with $242 million in 1999, primarily due to acquisitions completed in
1999 and 2000. Selling, administrative and general expenses as a percentage of
sales declined to 17.6% compared with 17.8% in 1999.
S-15
The increase in interest expense from $18 million in 1999 to $25 million in
2000 is attributable to the funding of five acquisitions completed over the
prior two years.
Foreign currency gains, which vary depending on relative changes in
exchange rates, were $2 million in 2000. These represent gains on option
contracts used to offset the effect of changes in currency rates on the earnings
of selected foreign subsidiaries.
Other expense declined in the year 2000 due to gains on the sale of assets
and the Pyro-Chek(R) flame retardant business and lower other expenses.
Net income remained constant at $73 million in 2000 compared with 1999.
Diluted earnings per share increased by 3.8% to $1.92 compared with $1.85 in
1999 and was a record for the company at that time. The increase in earnings per
share in part reflects shares repurchased over the past two years.
Segment Results. Coatings segment sales were $879 million, an increase of
8.4% compared with 1999. Sales increased on volume improvement, driven by the
tile and electronic materials businesses, and from acquisitions. The segment
also recorded strong growth in international operations. Offsetting this growth
was the effect of a stronger U.S. dollar versus foreign currencies. Negative
foreign currency translation reduced sales by more than 5%, or $45 million, in
the Coatings segment. Coatings segment income increased 5.6% to $100 million
compared with $94 million in 1999. The improvement in segment income was driven
primarily by the electronic materials business, and was partially offset by
foreign currency translation, higher energy costs and the effect of U.S.
dollar-based raw material purchases in Europe.
Performance Chemicals sales were $569 million, 4.4% higher than in 1999.
Acquisitions made the most significant contribution to the sales improvement.
The Performance Chemicals segment made two acquisitions in 2000. The
contribution from acquisitions was partially offset by negative foreign currency
translation and the sale of the Pyro-Chek(R) flame retardant business.
Performance Chemicals segment income was $55 million compared with $59 million
in 1999. The decline in segment income was primarily due to the impact of higher
raw material costs in the plastics business. Higher energy costs also impacted
segment income.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Consolidated net sales of $1,335 million for 1999 were 0.5% lower than
1998. The increase in sales volume was led by strong improvement in the tile,
electronic materials and plastics businesses. Acquisitions made during 1999 also
contributed strongly to sales. Increased volumes and acquisitions combined added
5.5% to sales. Offsetting increased volumes was a decline in selling prices in
correlation with a decline in raw material costs. Additionally, the
strengthening of the U.S. dollar against foreign currencies reduced sales by
2.0% during 1999 while divestitures had a modest impact in reducing sales.
Gross margins improved from 26.7% in 1998 to 27.9% in 1999. The major
contributions to gross margin expansion came from a better mix of products sold
and manufacturing efficiencies from productivity improvement initiatives. Lower
raw material costs and acquisitions also contributed to margin improvement.
Selling, administrative and general expenses increased to $242 million, or
17.8% of sales, compared with $235 million, or 17.3% of sales, in 1998,
primarily due to acquisitions completed in 1999.
The increase in interest expense from $15 million in 1998 to $18 million in
1999 was primarily attributable to the funding of two acquisitions made in 1999.
Foreign currency gains, which vary depending on relative changes in
exchange rates, were $2 million in 1999 compared with $1 million in 1998.
Net income increased to $73 million compared with $69 million in 1998.
Diluted earnings per share increased by 10.8% to $1.85 compared with $1.67 in
1998. The increase in earnings per share in part reflects shares repurchased
over the prior two years.
S-16
Segment Results. Coatings segment sales were $810 million, 0.9% lower than
in 1998. Volume improvement for the segment was driven by increases in the tile
and electronic materials businesses. Acquisitions also made a strong
contribution to sales, in particular the TAM Ceramics Incorporated (TAM)
acquisition in electronic materials, which was completed in July 1999.
Offsetting these improvements were lower selling prices, which correlated with a
decline in the underlying price of major raw materials, and the effect of the
stronger U.S. dollar. The Coatings segment is our most international segment.
Negative foreign currency translation and price and mix of products sold
combined reduced sales by just over $50 million for the year. Coatings segment
income increased 5.5% compared with 1998, to $94 million. Significant gross
margin improvement, driven by a combination of manufacturing efficiencies and
improvement in the mix of products sold, was the main factor contributing to the
improvement in segment income. The electronic materials business was
particularly strong and included the contribution of the TAM acquisition. The
Coatings segment has benefited the most from plant consolidation and has
increased sales of higher-margin products by concentrating on new product
development.
Performance Chemicals segment sales were $545 million compared with $544
million in 1998. Solid overall volume improvement was driven primarily by the
acquisition of Advanced Polymer Compounding (APC) in March 1999 and by strong
volume improvements in the domestic plastic compounding business. This was
offset by negative foreign currency translation, lower selling prices related to
the decline in raw material prices and lower sales in the petroleum additives
business. Performance Chemicals segment income remained constant at $59 million
in 1999 compared to 1998. The increase in segment income was driven primarily by
the plastics business, which increased margins through a combination of new
products, improved manufacturing efficiencies, lower costs for raw materials and
the contribution of the APC acquisition. This was offset by the negative impact
of foreign currency translation and significantly reduced sales and profits in
the segment's petroleum additives business.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements include capital investments, working capital
requirements, acquisitions, and debt service. We expect to be able to meet our
working capital requirements, capital investment, and debt service requirements
from cash and cash equivalents, cash flow from operations and use of our credit
facilities or long-term borrowings. We have $560 million in revolving credit
facilities, of which $400 million was outstanding as of September 30, 2001. We
also have a universal shelf registration statement on file with the Securities
and Exchange Commission pursuant to which up to $245 million of various types of
debt or equity securities, to be reduced by the proceeds of this offering, may
be issued.
Net cash provided by operating activities for the nine months ended
September 30, 2001 was $116 million, compared to the $74 million for the nine
months ended September 30, 2000. The increase in cash flows reflects substantial
reductions in receivables and inventories during the 2001 period. Cash used for
investing activities was $541 million in the 2001 period (including $509 million
for acquisitions) and $151 million in the 2000 period (including $114 million
for acquisitions/divestitures). Net cash provided by financing activities was
$458 million in the 2001 period compared to $99 million in the 2000 period. The
increase in 2001 reflects the financing of the dmc(2) Acquisition.
Net cash provided by operating activities was $114 million in 2000 compared
with the $127 million recorded in 1999. The decrease in cash provided by
operating activities was due primarily to changes in current assets and current
liabilities. Net cash used for investing activities was $282 million in the 2000
period compared with $192 million in 1999. The increase in investing activities
was primarily due to net acquisition/divestiture activity in 2000. Net cash
provided by financing activities was $162 million in 2000 compared with $59
million provided in 1999. The change in net cash from financing activities was
principally due to an asset securitization completed during the last half of
2000.
In connection with the dmc(2) Acquisition, we entered into new unsecured
senior credit facilities to fund the acquisition, pay off certain borrowings
under our former revolving credit facility and provide for our ongoing working
capital and other financing requirements. The new credit facilities include (1)
a $373 million five-year revolving credit facility, (2) a $187 million 364-day
revolving credit facility and
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(3) a $300 million capital markets 180-day term loan facility. At our option,
the borrowings under the revolving credit facilities bear interest at a rate
equal to (1) the London Interbank Offered Rate adjusted for eurocurrency reserve
requirements ("LIBOR") or (2) the greater of the prime rate established by
National City Bank, Cleveland, Ohio and the Federal funds effective rate plus
0.50% (collectively referred to under the credit facilities as the "Prime
Rate"); plus, in each case, applicable margins based upon a combination of our
index debt rating and the ratio of our total debt to EBITDA (as defined in the
credit facilities). The capital markets term facility bears interest, at our
option, at a rate equal to (1) LIBOR plus 2% or (2) the Prime Rate.
Our obligations under the credit facilities are not secured and are
unconditionally guaranteed, jointly and severally, by Ferro Electronic
Materials, Inc. and Ferro Pfanstiehl Laboratories, Inc., both of which are
domestic wholly-owned subsidiaries. Although our credit facilities are
unsecured, if our debt ceases to be rated as investment grade by either Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Rating Group ("S&P"),
we and our material subsidiaries must grant security interests in our principal
manufacturing properties, pledge 100% of the stock of our domestic material
subsidiaries and pledge 65% of the stock of foreign material subsidiaries, in
each case, in favor of our lenders under such facilities. In that event, liens
on our principal domestic manufacturing properties and the stock of our domestic
subsidiaries will be shared with the holders of our senior notes (including the
notes offered in this prospectus supplement) and trust notes and trust
certificates issued under our asset defeasance program.
Our credit facilities contain customary operating covenants that limit our
ability to engage in certain activities, including acquisitions. Several of our
covenants contain additional restrictions based upon the ratio of our total debt
to EBITDA (as defined in the credit facilities) or in the event our debt ceases
to be rated investment grade by either Moody's or S&P. The credit facilities
also contain financial covenants relating to minimum fixed charge coverage
ratios over certain periods of time. Our ability to meet these covenants in the
future may be affected by events beyond our control, including prevailing
economic, financial and market conditions. A breach or failure to comply with
any of these covenants could result in a default under our credit facilities and
the indentures governing our notes.
Our level of debt and debt service requirements could have important
consequences for our businesses, including requiring us to dedicate a
substantial portion of our cash flow from operations to payments on our
indebtedness. This could reduce the availability of cash flow to fund working
capital, capital expenditures, research and development efforts, acquisitions
and other general corporate purposes. We are committed to reducing promptly the
indebtedness outstanding under our credit facilities with the proceeds of this
offering and possible asset sales, as well as use of cash flow from operations.
The capital markets term facility presently expires on March 5, 2002. We
currently plan to retire that facility prior to that date. At our option and so
long as no default or event of default has occurred or is continuing, at any
time after January 1, 2002 we may extend the capital markets term facility for
an additional 180 days. Upon thirty days prior written notice, we may also
extend the 364-day revolving facility for an additional one year, at which time
the principal amount outstanding would be converted to a term loan. The capital
markets term facility margins will be subject to a 1% increase for the first
month following the earlier of a downgrade in our index debt rating or the
capital markets term facility actually remaining outstanding past its initial
maturity date, plus additional increases of 0.50% for each additional month
thereafter.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risks is primarily limited to interest rate and
foreign currency fluctuation risks. Our exposure to interest rate risk relates
primarily to our debt portfolio. Our interest rate risk management objectives
are to limit the effect of interest rate changes on earnings, cash flows and
overall borrowing costs. To limit interest rate risk on borrowings, we maintain
a percentage of fixed and variable debt within defined parameters. In managing
the percentage of fixed versus variable rate debt, consideration is given to the
interest rate environment and our forecasted cash flows. This policy limits
exposure from rising interest rates and allows us to benefit during periods of
falling rates. Our interest rate
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exposure is generally limited to our revolving credit facilities and amounts
outstanding under our asset securitization program. Based on the amount of
variable-rate long-term debt outstanding at September 30, 2001, a 1% increase in
interest rates would result in additional interest expense of $4 million per
year. In addition, we have an asset securitization program and other programs
based on variable interest rates. A 1% increase in interest rates would result
in additional charges of approximately $1 million per year under those programs.
We manage exposures to changing foreign currency exchange rates principally
through the purchase of put options on currencies and forward foreign exchange
contracts. Put options are purchased to offset the exposure of foreign
currency-denominated earnings to a depreciation in the value of the local
currency to the U.S. dollar. Our primary foreign currency put option market
exposure is the euro. Foreign subsidiaries also mitigate the risk of currency
fluctuations on the cost of raw materials denominated in U.S. dollars through
the purchase of dollars to cover the future payable.
At September 30, 2001, $700 million remained outstanding under the credit
facilities at interest rates based on LIBOR. At December 31, 2000, we had $195
million outstanding under similar arrangements. The increase in variable rate
debt obligations increases our risk to changes in market interest rates. The
$700 million outstanding at September 30, 2001 carried an average interest rate
of 5.03% and matures as follows: $300 million in 2002, $142 million in 2003 and
$258 million in 2006.
In total, we have $154 million of fixed rate debt outstanding with an
average interest rate of 7.5%, all maturing after 2006. The fair value of these
debt securities approximated the carrying amount at September 30, 2001.
In addition, in September 2001, we completed the acquisition of the dmc(2)
Businesses. This acquisition increases our exposure to fluctuations in foreign
currencies versus the U.S. dollar, particularly in Europe and Asia. At September
30, 2001, we had forward contracts to sell euros for U.S. dollars in a
notational amount of $8 million at an average rate of $0.916/euro and
outstanding put options to sell euros for U.S. dollars having a notational
amount of $11 million and an average strike price of $0.89/euro. These forward
and futures contracts have a net fair value of approximately $135,000.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and
Other Intangible Assets." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized but, instead, tested for impairment at least
annually in accordance with the provisions of Statement 142. We have adopted
certain provisions of Statements 141 and 142 as discussed in Note 10 to the
condensed consolidated financial statements for the quarter ended September 30,
2001, incorporated by reference herein, and we are required to adopt the
remaining provisions of Statements 141 and 142 effective January 1, 2002.
At January 1, 2002, we expect to have unamortized goodwill of approximately
$435 million, which will be subject to the transition provisions of Statements
141 and 142. Amortization expense related to goodwill was approximately $6
million and $6 million for the year ended December 31, 2000, and the nine months
ended September 30, 2001, respectively. We are currently studying the effects of
adopting the remaining rules (which are effective January 1, 2002), including
whether any transitional adjustments will be required.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity capitalizes
the cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the remaining useful life of the related
asset. Upon settlement of the liability, the entity either settles the
obligation for the amount
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recorded or incurs a gain or loss. Statement 143 is effective for fiscal years
beginning after June 15, 2002. Management is evaluating the effect of this
statement on our results of operations and financial position.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective prospectively for fiscal
years beginning after December 15, 2001. Statement No. 144 supersedes Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of APB
No. 30 "Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions ("Opinion 30") for the disposal of a segment
of business (as previously defined under Opinion 30). The FASB issued Statement
144 to establish a single accounting model for long-lived assets to be disposed
of by sale. Statement 144 broadens the presentation of discontinued operations
in the income statement to include a component of an entity (rather than a
segment of a business). A component of an entity comprises operations and cash
flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of an entity. Statement 144 also requires that
discontinued operations be measured at the lower of the carrying amount or fair
value less cost to sell. We do not expect Statement 144 to have a material
impact on our financial position or results of operations.
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BUSINESS
OVERVIEW
We are a leading producer of a diverse array of performance materials sold
to a broad range of manufacturers in approximately 30 markets throughout the
world. Our products are classified as performance materials, rather than
commodities, because they are formulated to perform specific and important
functions both in the manufacturing processes and in the finished products of
our customers. Our performance materials require a high degree of technical
service on an individual customer basis. The value of these performance
materials stems from the results and performance they achieve in actual use. In
addition, our products are not sold in the high volume normally associated with
commodity businesses. We apply certain core scientific expertise in organic
chemistry, inorganic chemistry, polymer science and material science to develop
coatings for ceramics and metal; materials for passive electronic components;
pigments; enamels, pastes, and additives for the glass market; specialty plastic
compounds and colors; and polymer additives.
We have leading market positions in businesses that accounted for
approximately 72% of our pro forma sales for the nine-month period ended
September 30, 2001. For example, we are among the world's largest suppliers of
ceramic glaze and color, porcelain enamel coatings, specialty colorants, powder
coatings, and glass additives. We are a worldwide leader in the production of
passive electronic materials, and we believe we are currently the only merchant
manufacturer of all the primary components (electrodes, dielectrics, and
termination pastes) of multi-layer capacitors. We hold a leading market position
in North America for PVC specialty additives and modifiers.
Our products are traditionally used in markets such as appliances,
automotive, building and renovation, electronics, household furnishings,
industrial products, pharmaceuticals, telecommunications and transportation. Our
leading customers include major chemical companies, producers of multi-layer
ceramic capacitors and manufacturers of tile, appliances and automobiles. Many
customers, particularly in the appliance and automotive markets, purchase
materials from more than one of our business units. Our customer base is also
well-diversified both geographically and by end-market.
The diversity of our products, customers, and end-markets serves to
stabilize our ongoing financial results. After giving effect to the dmc(2)
Acquisition, our pro forma revenues for the fiscal year ended 2000 and nine
months ended September 30, 2001 would have been $1,993 million and $1,416
million, respectively.
ACQUISITION HISTORY
Over the last four years, we have completed seven acquisitions, six of
which have been fully integrated into our business. The acquired businesses have
been highly complementary of our existing businesses, allowing us to realize
synergies and generate strong cash flows from operations.
In May 1998, we acquired the assets of Ningbo Powder Coatings Company Ltd.,
located in the People's Republic of China, which established our first
manufacturing base in that country and allowed us to serve certain
multi-national customers on a global basis. In March 1999, we acquired Advanced
Polymer Compounding Company, a supplier of high-performance thermoplastic
elastomers and engineering plastic compounds. This transaction served to add a
niche, value-added product to our performance chemicals business. We then
acquired TAM Ceramics Incorporated in July 1999. TAM is a supplier of dielectric
powders for the electronics market and zircom-based ceramics powders for a
variety of uses. This acquisition complemented our manufacturing and technology
strengths in serving the passive electronic components market generally, and the
multi-layer capacitors segment in particular.
During the year 2000, we completed three acquisitions. In August 2000, we
purchased the polymer modifiers business and related manufacturing facilities of
Solutia Inc. The polymer modifiers business is a key global producer of
specialty plasticizers and other modifiers used in the production of a variety
of plastics. This acquisition was highly synergistic with our existing polymer
additive business and provided
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that business with two manufacturing facilities in Europe and the accompanying
distribution channel for all the business products in the European community. In
November 2000, we acquired Pfanstiehl Laboratories, which produces a broad range
of fine chemicals including advanced pharmaceutical intermediates, active
pharmaceutical ingredients, high potency compounds and dietary supplements, and
food and cosmetic additives. The Pfanstiehl acquisition complemented our
existing capabilities in fine chemicals and greatly strengthened our product
offering to the pharmaceutical market. In December 2000, we purchased EMCA-Remex
from National Starch and Chemical Company. EMCA-Remex specializes in the
production of thick film pastes for hybrid microelectronics and was highly
synergistic with our electronic materials business.
On September 7, 2001, we purchased the dmc(2) Businesses for approximately
$525 million in cash. To finance the dmc(2) Acquisition, replace our existing
credit facilities and provide for ongoing working capital, we entered into new
unsecured credit facilities providing for an aggregate of $860 million in
commitments. The proceeds from this offering will be used to repay a portion of
that indebtedness.
The dmc(2) Businesses produce materials for passive electronic components;
organic and inorganic pigments and colors for ceramics, plastic, and glass;
enamels, pastes, and additives for the glass market; and ceramic coatings for
structural ceramics and sanitaryware. The dmc(2) Businesses products are
manufactured in 15 countries around the world and are used primarily in markets
we traditionally serve.
The dmc(2) Acquisition expands our geographic reach and enhances our
product capabilities in three core businesses:
- Electronic Materials -- The dmc(2) Acquisition more than doubles the
sales of our electronic materials business and adds critical metals
technology and manufacturing capabilities to this business, including
manufacturing facilities in Europe and Japan (the largest electronics
manufacturing market in the world);
- Specialty Colors -- The dmc(2) Acquisition strengthens our technology and
competitive presence in our high-margin specialty colors business; and
- Tile Coatings -- The dmc(2) Acquisition complements our manufacturing
capabilities in the tile business and broadens our presence in Asia and
Southern Europe.
In addition, the dmc(2) Acquisition provides an opportunity to realize
significant manufacturing and operating efficiencies and cost savings by
eliminating duplicate facilities, reducing overhead and capitalizing on raw
material sourcing synergies.
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PRODUCTS AND MARKETS
Many end-product companies, interested in outsourcing the production of
complex, high-valued chemicals, turn to us for fast response and technical
skills in producing a variety of chemicals. We are able to meet these needs
through our diverse product offering, technical expertise, and global reach.
As described below, we have two financial reporting segments: Coatings and
Performance Chemicals.
COATINGS SEGMENT
The following table outlines the key business units in our Coatings
segment, its products, and key markets served.
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------
BUSINESS UNITS PRODUCTS KEY MARKETS
- -------------- -------- -----------
Tile Coatings Ceramic glaze coatings, ceramic Tile, sanitaryware, industrial
colors, decorative materials, and commercial machinery,
kiln furniture, grinding media, electronics, transportation
structural ceramics equipment, telecommunications
Specialty Colors Inorganic pigments, forehearth Paint and plastics, glass
color, glass decorating enamels, packaging, tableware, fine china,
specialty glazes roof tile, appliances,
automotive, architectural
Electronic Materials Electronic and specialty glasses, Electronics, telecommunications,
ceramic dielectric powders, thick computers, automotive, ophthalmic
film pastes and tapes, surface lenses/precision optics, military
finishing compounds and defense aerospace
Industrial Coatings Powder coatings, porcelain enamel Appliances, cookware,
coatings sanitaryware, architectural,
automotive, industrial
</Table>
- --------------------------------------------------------------------------------
Tile Coatings. We believe we are one of the world's leading suppliers of
ceramic glaze coatings to manufacturers of ceramics, from floor/wall tile to
sanitaryware, and we are also a major supplier of kiln furniture, grinding
media, and structural ceramics to more than 30 markets throughout the world. We
offer a complete line of frits, glazes and colors, including frits for single,
fast-fire and third-fire tile production.
As a leading worldwide resource in ceramics, we continuously develop new
products to meet customer needs. Not only can we provide products customers
need, we also offer technology, expertise and manufacturing know-how in the form
of customer support. Through our Ceramic Design and Development Center (located
in the world tile capitals of Spain and Italy), we pull together the resources
customers need. These experienced specialists work with customers at any point
in the initial design phase through actual tile production.
Specialty Colors. Our performance pigments and colors business makes and
markets worldwide a broad line of mixed metal oxide pigments for use in plastic
packaging, PVC products such as vinyl siding, engineering plastics for the
automotive and electronic markets and industrial paints and coatings for a wide
variety of end uses ranging from farm and industrial equipment to coil coating.
We have also developed a wide range of formulations for food packaging according
to Food & Drug Administration regulations, which only allow selected pigment
types to be used in food contact applications.
We are a global supplier of decorative colors, precious metals
preparations, highly fusible special coatings for ceramics surfaces, and
inorganic pigments for coloring plastic and ceramics. Specialty pigments and
colorants are produced for the dinnerware, paint, and plastic markets. Our
business is a global leader in products for ceramic decoration of tableware and
art ceramics, using lead- and cadmium-free technology, computer based color
separation systems, and UV curable color pastes. The pigments and special
coatings unit is a supplier of stains for tableware and art ceramics and a
supplier to the U.S. plastics/coatings market.
S-23
Our worldwide glass systems business supplies a complete portfolio of
products to the glass market for coloration both in (forehearth coloration) and
on (surface decoration) the glass. Our colors add value to a wide range of
consumer, technical and industrial glass products in the container, automotive
and flat glass market segments. Our products are tailored to meet the specific
demands of our customers in each market segment, including automotive,
appliance, architectural, tableware, giftware, lighting, and container
(cosmetic, food and beverage).
Electronic Materials. Our electronic materials business develops,
manufactures, and markets high purity powders, pastes, and tapes for many
electronic applications, including multi-layer ceramic capacitors, hybrid
microelectronics, polishing materials, surge protection and photovoltaic
materials. In the dmc(2) Acquisition, we acquired key metals technologies and
manufacturing facilities in Europe and Japan (the largest market for electronics
manufacturing in the world). We believe this added geographic diversity
significantly strengthens our manufacturing capabilities that were previously
highly concentrated in the United States.
Our electronic and specialty glass products are used in military,
aerospace, semiconductors, electronics, dental and biomedical, and other
technical applications. We also offer a broad line of dielectrics, terminations,
electrodes, and binders for multi-layer capacitors and other passive electronic
components. Our electronic ceramics and surface finishing materials include
oxides of aluminum, cerium, tin, and zirconium for grinding or polishing silicon
wafers and a wide range of glasses used in electronic applications, as well as
stone, plastic, and metal products. Our microcircuit and specialty thick film
materials are used in the production of a number of advanced electronic devices
and packages.
Our multi-layer materials product line provides dielectric and metal
powders and pastes to the growing multi-layer capacitor, or MLC, market. We are
a supplier of all three MLC components: conductive (inner electrode),
non-conductive (dielectrics) and termination powders and pastes. MLCs are
primarily designed for use where small physical size with comparatively large
electrical capacitance and high insulation resistance are required.
We have recently expanded our electrode paste manufacturing and have
developed a new line of metal pastes for the MLC market for use in base metal
electronics MLC's to reduce costs.
Industrial Coatings. Our industrial coatings group manufactures both
porcelain enamel and powder coatings. These materials are used in the appliance,
automotive and general industrial markets. With a strong position in both the
appliance and automotive markets, we are expanding into the general industrial
market as more metal product manufacturers convert to the use of powder coatings
for their finishing needs.
We are a leading supplier of porcelain enamel worldwide. Porcelain enamel
has long been used as an ultimate quality, highly durable and sanitary finish on
large and small appliances, cookware and grills, as well as sanitaryware, water
heaters, building panels, signage, and chemical storage vessels.
We are also one of the world's largest producers of thermoset powder
coatings. We believe we have one of the world's largest manufacturing facilities
and have been providing customer driven solutions for over 20 years. We believe
we have a strong position in all three market segments and we are expanding our
capability to provide quick color matches and small batch orders.
S-24
PERFORMANCE CHEMICALS SEGMENT
The following table outlines the key business units in our Performance
Chemicals segment, their products, and key markets served.
- --------------------------------------------------------------------------------
<Table>
<Caption>
BUSINESS UNITS PRODUCTS KEY MARKETS
- -------------- -------- -----------
Polymer Additives Heat and light stabilizers, Household furnishings,
plasticizers automotive, industrial,
architectural, construction
Performance and Fine Chemicals Pharmaceutical intermediates, Electronics, pharmaceutical,
active pharmaceutical agriculture, polymers
ingredients, high potency
compounds, dietary supplements,
food and cosmetic additives,
petroleum additives.
Plastic Colorants Color concentrates/masterbatch, Appliances, automotive,
gelcoats, liquid and paste color packaging, recreation, boats, RVs
dispersions and trucks, sanitaryware,
swimming pools, architectural,
industrial
Filled and Reinforced Plastics Filled and reinforced Appliances, automotive, household
thermoplastics, polyolefin furnishings, recreation,
alloys, thermoplastic industrial, lawn and garden
elastomers/process melt equipment
</Table>
- --------------------------------------------------------------------------------
Polymer Additives. Our polymer additives, which improve the
characteristics or processing of plastics, include heat and light stabilizers,
specialty and epoxy plasticizers, and plastics lubricants.
Performance and Fine Chemicals. Our performance and fine chemicals are
used in specialty resins, plasticizers, pharmaceutical and agricultural
chemicals, detergents and antioxidants. We also provide major chemical
manufacturers with custom synthesis for the production of complex, high-valued
chemicals.
Plastic Colorants. Our plastic color concentrates, gelcoats and liquid and
paste color dispersions are used to enhance the appearance of plastic parts and
components in appliances, automobiles, household furnishings, packaging
applications, and a host of recreational products from sports equipment to toys.
We provide solutions in material selection and formulation and assistance with
part and mold design, process molding, and mold flaws.
Filled and Reinforced Plastics. Our filled and reinforced plastics, which
are specially formulated compounds, consisting of polypropylene and other
resins, are used in a wide variety of applications in the automotive, appliance,
household furnishings, and leisure products markets.
RAW MATERIALS
Raw materials widely used in our businesses include resins, thermoplastic
polymers, cobalt oxide, zinc oxide, zircon sand, borates, porcelain, silica,
steric acid, tallow and titanium dioxide. Other important raw materials include
silver, copper and precious metals. Over the past two years, the prices of
silver and copper have been generally stable or declining. The price of precious
metals can fluctuate greatly. Precious metal cost fluctuations are generally
passed through to customers, however, we do have some exposure to cost
fluctuation for precious metals held in inventory.
We have a broad supplier base and, in most instances, alternative sources
of raw materials are available if problems arise with a particular supplier. We
maintain comprehensive supplier agreements for our strategic and critical raw
materials. In addition, the magnitude of our purchases provides for significant
leverage in negotiating favorable conditions for long-term supplier contracts.
S-25
EMPLOYEES
We employ approximately 10,000 full-time employees, and roughly half of
these employees work in our foreign subsidiaries and affiliates. Approximately
23% of our domestic workforce is covered by labor agreements.
RESEARCH AND DEVELOPMENT
A substantial number of our employees are involved in research and
development activities relating to new and existing products, services and
techniques required by the ever-changing markets of our customers. Laboratories
are located at each of our major subsidiaries around the world where technical
efforts are applied to meet customer and market needs of the particular
geographical area. In the United States, laboratories are maintained in each of
our divisions. In addition, corporate research and development activity is
located in the Cleveland area. Our research staff is organized by major business
group. We also operate central design and development labs in Italy and Spain to
serve the tile market worldwide.
Expenditures for research and development activities relating to the
development or significant improvement of new and/or existing products, services
and techniques for Ferro excluding the dmc(2) Businesses were approximately $30
million in 2000, $31 million in 1999 and $29 million in 1998. Expenditures for
individual customer requests for research and development were not material. We
do not anticipate research and development expenditures to increase
significantly with the integration of the dmc(2) Businesses.
LEGAL PROCEEDINGS
See Note 6 to our condensed consolidated financial statements for the
quarter ended September 30, 2001, incorporated by reference in this prospectus
supplement. In addition to the matters discussed therein, there are also pending
against us various other lawsuits and claims. In the opinion of management, the
ultimate liabilities resulting from such other lawsuits and claims will not
materially affect our consolidated financial position or results of operations
or liquidity.
ENVIRONMENTAL MATTERS
Our manufacturing facilities, like those of our market generally, are
subject to numerous laws and regulations implemented to protect the environment,
particularly with respect to plant wastes and emissions. We believe we are in
compliance with the environmental regulations to which our operations are
subject and that, to the extent we may not be in compliance with such
regulations, non-compliance has not had a materially adverse effect on our
operations. Our policy of compliance has required a continuous management effort
and significant expenditures.
We authorized $9 million in capital expenditures for environmental control
in 2000, and our best estimate of what we expected capital expenditures for
environmental control to be in 2001 and 2002, prior to the dmc(2) Acquisition,
was $6 million and $3 million, respectively. We are currently evaluating the
need for such expenditures in respect of the dmc(2) Businesses. We do not expect
such expenditures to be material.
For additional information on environmental matters, see Note 6 to our
condensed consolidated financial statements for the quarter ended September 30,
2001 incorporated by reference in this prospectus supplement.
FOREIGN OPERATIONS
Our products are produced and distributed in foreign as well as domestic
markets. We commenced our international operations in 1927. During 2000, taking
into account the dmc(2) Businesses, sales to customers outside of the U.S. and
Canada would have accounted for 49% of our sales. Financial information about
our domestic and foreign operations is set forth in Note 12 to our consolidated
financial
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statements for the year ended December 31, 2000 and Note 7 to our condensed
consolidated financial statements for the quarter ended September 30, 2001
incorporated by reference in this prospectus supplement.
Wholly-owned subsidiaries operate manufacturing facilities in Argentina,
Australia, Belgium, Brazil, the United Kingdom, France, Germany, the
Netherlands, Japan, Italy, Mexico, Portugal, Spain and Thailand. Partially-owned
subsidiaries manufacture in Argentina, China, Indonesia, Italy, Spain, South
Korea, Taiwan, Thailand, Turkey and Venezuela.
We received technical service fees and/or royalties from many of our
foreign subsidiaries. Historically, as a matter of corporate policy, the foreign
subsidiaries have been expected to remit a portion of their annual earnings to
the parent as dividends. To the extent earnings of foreign subsidiaries are not
remitted to us, those earnings are intended to be indefinitely re-invested in
those subsidiaries.
PROPERTIES
Our corporate headquarters offices are located at 1000 Lakeside Avenue,
Cleveland, Ohio. Other corporate facilities, located in Independence, Ohio, are
owned. The business segments in which manufacturing plants are used and the
locations of the principal manufacturing plants we own in the United States are
as follows:
Coatings -- Cleveland, Ohio; Nashville, Tennessee; Pittsburgh,
Pennsylvania; Washington, Pennsylvania, Toccoa, Georgia; Orrville, Ohio;
Shreve, Ohio; Penn Yan, New York; East Liverpool, Ohio; Crooksville, Ohio;
Niagara Falls, New York; and South Plainfield, New Jersey.
Performance Chemicals -- Walton Hills, Ohio; Hammond, Indiana; Baton Rouge,
Louisiana; Waukegan, Illinois; Bridgeport, New Jersey; Carpentersville,
Illinois; Plymouth, Indiana; Evansville, Indiana; Stryker, Ohio; Edison,
New Jersey and South Plainfield, New Jersey.
In addition, we lease manufacturing facilities in Cleveland, Ohio
(Performance Chemicals); Galion, Ohio (Coatings), Fort Worth, Texas (Performance
Chemicals); Vista, California (Coatings); Montgomeryville, Pennsylvania
(Coatings); and Carpentersville, Illinois (Performance Chemicals).
Outside the United States, we own manufacturing plants in Argentina,
Australia, Brazil, Belgium, France, Germany, Indonesia, Italy, Mexico, the
Netherlands, Spain, Taiwan, Thailand, Turkey and the United Kingdom. We or our
subsidiaries lease manufacturing plants in Brazil, China, Italy, Japan, Germany,
the Netherlands and Portugal. In many instances, the manufacturing facilities
outside of the United States are used in multiple business segments.
S-27
DESCRIPTION OF THE NOTES
GENERAL
We will issue the notes under an indenture, dated as of March 25, 1998 (as
supplemented, the "Indenture"), between the company and J.P. Morgan Trust
Company, National Association, the successor in interest to Chase Manhattan
Trust Company, National Association as trustee (the "Trustee"). The notes are
initially being offered in the principal amount of $150 million. We may, without
the consent of the holders, increase such principal amount in the future on the
same terms and conditions and with the same CUSIP numbers as the notes being
offered hereby. We will issue the notes only in fully registered form in
denominations of $1,000 and integral multiples thereof. The notes will be
represented by one or more global notes registered in the name of a nominee of
The Depository Trust Company and, except as described under "Book-Entry,
Delivery and Form," will not be issued in certificated form.
The notes will be our general unsecured obligations and will rank equally
and ratably with our other unsecured and unsubordinated indebtedness. However,
the notes will be effectively subordinated to all of our secured indebtedness.
As of September 30, 2001, after giving pro forma effect to the dmc(2)
Acquisition and the additional borrowings and application of the net proceeds of
the offering as described under "Use of Proceeds," we would have had less than
$30 million aggregate principal amount of secured indebtedness outstanding. As
described under "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Liquidity and Capital Resources," under certain
circumstances we will be obligated to secure our outstanding senior bank debt,
of which $700 million was outstanding as of September 30, 2001, and our other
senior debt (including the notes offered hereby).
The Indenture does not limit the amount of debt securities we may issue. We
may issue debt securities under the Indenture from time to time in one or more
series. The notes will constitute a separate series of debt securities under the
Indenture.
Since our operations are partially conducted through subsidiaries, the cash
flow and consequent ability to service debt, including our notes, are partially
dependent upon the earnings of our subsidiaries and the distribution of those
earnings to, or upon other payments of funds by those subsidiaries to, us. The
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay any amounts due on the notes or to make funds
available for such payments, whether by dividends, loans or other payments. In
addition, the payment of dividends and the making of loans and advances to us by
our subsidiaries may be subject to statutory and contractual restrictions, are
contingent upon the earnings of those subsidiaries, and are subject to various
business considerations.
Any right of Ferro to receive assets of any of its subsidiaries upon their
liquidation or reorganization (and the resulting right of the holders of the
notes to participate in those assets) will be effectively subordinated to the
claims of that subsidiary's creditors (including trade creditors), except to the
extent that Ferro is itself recognized as a creditor of such subsidiary, in
which case our claims would be subordinated to any security interests in the
assets of such subsidiary and any indebtedness of such subsidiary senior to that
held by us.
The Indenture does not contain covenants or other provisions designed to
afford holders of the notes protection in the event of a highly leveraged
transaction, change in credit rating or other similar occurrence.
We do not intend to apply for the listing of the notes on a national
securities exchange or quotation system.
We expect that interests in the global notes will trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in these interests
will therefore be required by DTC to settle in immediately available funds.
We have summarized selected provisions of the Indenture below. The summary
is not complete, and you should read the "Description of Debt Securities" in the
accompanying prospectus. Copies of the
S-28
Indenture are available to prospective purchasers of the notes upon request made
to the underwriters. You should read the Indenture for provisions that may be
important to you. Capitalized words that are not defined have the meanings
assigned to them in the Indenture.
The notes are subject to defeasance under the conditions described in the
accompanying prospectus and the Indenture.
INTEREST AND MATURITY
We will pay interest on the notes at the rate of % per year from
, 2001. Interest will be payable semi-annually on each and
(the "Interest Payment Dates"), beginning on , 2002, to the
persons in whose names the notes are registered at the close of business on
or (the "Record Dates"), as the case may be, before any
Interest Payment Date. Interest will be calculated on the basis of a 360-day
year of twelve 30-day months and will be payable at the corporate trust office
or agency of the Trustee in New York, New York or Cleveland, Ohio; provided
that, at our option, interest payments may be made by checks mailed to the
registered holders of the notes.
The notes will mature on , 2008 (the "Maturity Date"). The notes
will not be entitled to the benefit of any sinking fund or mandatory redemption
provisions. The principal of the notes will be payable on the Maturity Date at
the corporate trust office or agency of the Trustee in New York, New York or
Cleveland, Ohio.
Any interest or principal payment required to be made on a day that is not
a Business Day (as defined below) need not be made on such day, but may be made
on the following Business Day, and no additional interest will accrue as a
result of such delayed payment. "Business Day" means any day, other than a
Saturday or a Sunday, that is not a day on which banking institutions in New
York, New York and Cleveland, Ohio are authorized or obligated by law or
executive order to close.
REDEMPTION AT THE OPTION OF THE COMPANY
We may, at our option, redeem the notes in whole at any time or in part
from time to time on any date (a "Redemption Date"), at a redemption price equal
to the greater of the following amounts:
- 100% of the principal amount of the notes to be redeemed, and
- the sum of the present values of the remaining scheduled payments of
principal and interest on the notes (exclusive of interest accrued to
such Redemption Date) discounted to such Redemption Date on a semiannual
basis (assuming a 360-day year consisting of twelve 30-day months) at the
Treasury Rate plus basis points,
plus, in either case, accrued and unpaid interest on the principal amount being
redeemed to such Redemption Date. Notwithstanding the foregoing, installments of
interest on notes that are due and payable on an Interest Payment Date falling
on or prior to the relevant Redemption Date will be payable to the holders of
such notes, registered as such at the close of business on the relevant Regular
Record Date, according to the terms and the provisions of the Indenture.
"Treasury Rate" means, with respect to any Redemption Date for the notes,
(i) the yield, under the heading which represents the average for the
immediately preceding week, appearing in the most recently published statistical
release designated "H.15(519)" or any successor publication which is published
weekly by the Board of Governors of the Federal Reserve System and which
establishes yields on actively traded United States Treasury securities adjusted
to constant maturity under the caption "Treasury Constant Maturities," for the
maturity corresponding to the Comparable Treasury Issue (if no maturity is
within three months before or after the Maturity Date, yields for the two
published maturities most closely corresponding to the Comparable Treasury Issue
shall be determined and the Treasury Rate shall be interpolated or extrapolated
from such yields on a straight line basis, rounding to the nearest month) or
(ii) if such release (or any successor release) is not published during the week
preceding the calculation
S-29
date or does not contain such yields, the rate per annum equal to the
semi-annual equivalent yield to maturity of the Comparable Treasury Issue,
calculated using a price for the Comparable Treasury Issue (as expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for
such Redemption Date. The Treasury Rate shall be calculated on the third
Business Day preceding the Redemption Date.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Independent Investment Banker as having a maturity comparable to
the remaining term of the notes to be redeemed that would be utilized, at the
time of selection and in accordance with customary financial practice, in
pricing new issues of corporate notes of comparable maturity to the remaining
term of the notes.
"Comparable Treasury Price" means with respect to any Redemption Date for
the notes (i) the average of five Reference Treasury Dealer Quotations for such
Redemption Date, after excluding the highest and lowest such Reference Treasury
Dealer Quotations, or (ii) if the Trustee is provided with fewer than five such
Reference Treasury Dealer Quotations, the average of all such quotations.
"Independent Investment Banker" means Credit Suisse First Boston or, if
such firm is unwilling or unable to select the Comparable Treasury Issue, an
independent investment banking institution of national standing appointed by the
Trustee after consultation with the company.
"Reference Treasury Dealer" means: (i) Credit Suisse First Boston and its
successor; provided, however, that if the foregoing shall cease to be a primary
U.S. Government securities dealer in New York City (a "Primary Treasury
Dealer"), the company will substitute therefor another Primary Treasury Dealer,
and (ii) any other Primary Treasury Dealer selected by the Independent
Investment Banker after consultation with the company.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any Redemption Date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. New York
City time, on the third Business Day preceding such Redemption Date.
Notice of any redemption by us will be mailed at least 30 days but not more
than 60 days before any Redemption Date to each holder of notes to be redeemed.
If less than all the notes are to be redeemed at our option, the Trustee shall
select, in such manner as it deems fair and appropriate, the notes to be
redeemed in whole or in part. Unless we default in payment of the redemption
price, on or after any Redemption Date interest will cease to accrue on the
notes or portions thereof called for redemption.
CONCERNING THE TRUSTEE
The Trustee under the Indenture is J.P. Morgan Trust Company, National
Association, the successor in interest to Chase Manhattan Trust Company,
National Association. The Trustee may perform services for us in the ordinary
course of business. Under the Indenture, the Trustee is required to transmit
annual reports to all holders regarding its eligibility and qualifications as
Trustee under the Indenture and certain related matters.
GOVERNING LAW
The Indenture provides that it and the notes are to be governed by and
construed in accordance with the laws of the State of New York, except to the
extent the Trust Indenture Act otherwise applies.
BOOK-ENTRY, DELIVERY AND FORM
We will issue the notes offered under this prospectus supplement as "global
notes" in fully registered form. The global notes will be deposited on the issue
date with The Depository Trust Company ("DTC") and registered in the name of
Cede & Co., as nominee of DTC, or will remain in the custody of the trustee
pursuant to the FAST Balance Certificate Agreement between DTC and the trustee.
S-30
Except as set forth below, the global notes may be transferred in whole,
and not in part, solely to another nominee of DTC or a successor to DTC or its
nominee. All interests in the global notes may be subject to the procedures and
requirements of DTC.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The description of the operations and procedures of DTC set forth below are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to change by them from time to time. Neither we nor the underwriters takes any
responsibility for these operations or procedures, and investors are urged to
contact the relevant system or its participants directly to discuss these
matters.
DTC has advised us that it is (1) a limited purpose trust company organized
under the laws of the State of New York, (2) a "banking organization" within the
meaning of the New York Banking Law, (3) a member of the Federal Reserve System,
(4) a "clearing corporation" within the meaning of the Uniform Commercial Code,
as amended and (5) a "clearing agency" registered pursuant to Section 17A of the
Securities Exchange Act of 1934 (the "Exchange Act"). DTC was created to hold
securities for its participants and facilitates the clearance and settlement of
securities transactions between participants through electronic book-entry
changes to the accounts of its participants, thereby eliminating the need for
physical transfer and delivery of certificates. DTC's participants include
securities brokers and dealers, including the underwriters, banks and trust
companies, clearing corporations and certain other organizations. Indirect
access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies, referred to as "indirect participants,"
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly. Investors who are not participants may
beneficially own securities held by or on behalf of DTC only through
participants or indirect participants.
Pursuant to procedures established by DTC, upon deposit of each of the
global notes, DTC will credit the accounts of participants designated by the
underwriters with an interest in the global notes. Ownership of the notes will
be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC, with respect to the interests of
participants, and the records of participants and the indirect participants,
with respect to the interests of persons other than participants.
The laws of some jurisdictions may require that some types of purchasers of
notes take physical delivery of the notes in definitive form. Accordingly, the
ability to transfer interests in the notes represented by a global security to
these persons may be limited. In addition, because DTC can act only on behalf of
its participants, who in turn act on behalf of persons who hold interests
through participants, the ability of a person having an interest in notes
represented by a global security to pledge or transfer the interest to persons
or entities that do not participate in DTC's system, or to otherwise take
actions in respect of the interest, may be affected by the lack of a physical
definitive security in respect of the interest.
So long as DTC or its nominee is the registered owner of a global security,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the notes represented by the 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 notes represented by the global
security registered in their names, will not receive or be entitled to receive
physical delivery of certificated notes, and will not be considered the owners
or holders thereof under the Indenture for any purpose, including with respect
to the giving of any direction, instruction or approval to the trustee under the
Indenture. Accordingly, each holder owning a beneficial interest in a global
security must rely on the procedures of DTC and, if the holder is not a
participant or an indirect participant, on the procedures of the participant
through which the holder owns its interest, to exercise any rights of a holder
of notes under the indenture or the global security.
We understand that under existing market practice, in the event that we
request any action of holders of notes, or a holder that is an owner of a
beneficial interest in a global security desires to take any action
S-31
that DTC, as the holder of such global security, is entitled to take, DTC would
authorize the participants to take the action and the participants would
authorize holders owning through the participants to take the action or would
otherwise act upon the instruction of the holders. Neither we nor the Trustee
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of notes by DTC, or for maintaining, supervising
or reviewing any records of DTC relating to the notes.
Payments with respect to the principal of, and premium, if any, additional
interest, if any, and interest on, any notes represented by a global security
registered in the name of DTC or its nominee on the applicable record date will
be payable by the Trustee to or at the direction of DTC or its nominee in its
capacity as the registered holder of the global security representing the notes
under the indenture. Under the terms of the Indenture, we may treat, and the
Trustee may treat, the persons in whose names the notes, including the global
notes, are registered as the owners of the notes for the purpose of receiving
payment on the notes and for any and all other purposes whatsoever. Accordingly,
neither we nor the Trustee has or will have any responsibility or liability for
the payment of these amounts to owners of beneficial interests in the global
security, including principal, premium, if any, additional interest, if any, and
interest. Payments by the participants and the indirect participants to the
owners of beneficial interests in the global notes will be governed by standing
instructions and customary market practice and will be the responsibility of the
participants or the indirect participants and DTC.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the global notes among participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither we nor the Trustee will have
any responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
ISSUANCE OF CERTIFICATED NOTES
If (1) we notify the Trustee in writing that DTC is no longer willing or
able to act as a depositary or clearing system for the notes or DTC ceases to be
registered as a clearing agency under the Exchange Act, and a successor
depositary or clearing system is not appointed within 90 days of this notice or
cessation, (2) we, at our option, notify the Trustee in writing that we elect to
cause the issuance of notes in definitive form under the indenture or (3) upon
the occurrence and continuation of an event of default under the indenture,
then, upon surrender by DTC of the global notes, certificated notes will be
issued to each person that DTC identifies as the beneficial owner of the notes
represented by the global notes. Upon any such issuance, the Trustee is required
to register the certificated notes in the name of the person or persons or the
nominee of any of these persons and cause the same to be delivered to these
persons.
Neither we nor the Trustee shall be liable for any delay by DTC or any
participant or indirect participant in identifying the beneficial owners of the
related notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes, including with
respect to the registration and delivery, and the respective principal amounts,
of the notes to be issued.
S-32
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated December , 2001, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston is acting as representative,
the following respective principal amounts of the notes.
<Table>
<Caption>
PRINCIPAL
UNDERWRITER AMOUNT
----------- ------------
Credit Suisse First Boston Corporation...................... $ ,000,000
NatCity Investments, Inc. .................................. $ ,000,000
Tokyo-Mitsubishi International plc.......................... $ ,000,000
------------
Total....................................................... $150,000,000
============
</Table>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the notes if any are purchased. The underwriting agreement also
provides that if an underwriter defaults, the purchase commitments of the
non-defaulting underwriters may be increased or the offering of the notes may be
terminated.
All sales of the notes in the United States will be made through U.S.
registered broker/dealers.
The underwriters propose to offer the notes initially at the public
offering price on the cover page of this prospectus supplement and to selling
group members at that price less a selling concession of % of the principal
amount per note. The underwriters and selling group members may allow a discount
of % of the principal amount per note on sales to other broker/dealers. After
the initial public offering the underwriters may change the public offering
price and concession and discount to broker/dealers.
We estimate that our out of pocket expenses (excluding underwriting
discounts and commissions) for this offering will be approximately $ .
The notes are a new issue of securities with no established trading market.
One or more of the underwriters intends to make a secondary market for the
notes. However, they are not obligated to do so and may discontinue making a
secondary market for the notes at any time without notice. No assurance can be
given as to how liquid the trading market for the notes will be.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We intend to use the net proceeds from the sale of the notes to repay a
portion of the borrowings under the capital markets term facility under our
existing credit facilities entered into in connection with the dmc(2)
Acquisition. Credit Suisse First Boston, National City Bank (an affiliate of
NatCity Investments, Inc.) and The Bank of Tokyo-Mitsubishi, Ltd. (an affiliate
of Tokyo-Mitsubishi International plc) act as agents and lenders under our
existing credit facilities and will receive a portion of the net proceeds of the
offering. Credit Suisse First Boston, National City Bank and The Bank of
Tokyo-Mitsubishi, Ltd. received customary fees for the underwriting of new loans
and for serving as lenders under our existing facilities. The offering is being
made in compliance with the requirements of Rule 2710(c)(8) of the Conduct Rules
of the National Association of Securities Dealers, Inc. We are in compliance
with the terms of our existing credit facilities. The decision of the
underwriters to distribute the notes was not influenced by their respective
affiliates that act as agents and lenders under our existing credit facilities
and those affiliates had no involvement in determining whether or when to
distribute the notes under this offering or the terms of this offering. The
underwriters will not receive any benefit from this offering other than the
underwriting discounts and commissions as paid by us.
S-33
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of notes in excess of
the principal amount of the notes the underwriters are obligated to
purchase, which creates a syndicate short position.
- Syndicate covering transactions involve purchases of the notes in the
open market after the distribution has been completed in order to cover
syndicate short positions. A short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on
the price of the notes in the open market after pricing that could
adversely affect investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the notes originally sold by the syndicate
member are purchased in a stabilizing transaction or a syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of the notes or
preventing or retarding a decline in the market price of the notes. As a result,
the price of the notes may be higher than the price that might otherwise exist
in the open market. These transactions, if commenced, may be discontinued at any
time.
S-34
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the notes in Canada is being made only on a private
placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of notes are made. Any resale of the notes in Canada must be made under
applicable securities laws, which will vary depending on the relevant
jurisdiction, and which may require resales to be made under available statutory
exemptions or under a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the notes.
REPRESENTATIONS OF PURCHASERS
By purchasing notes in Canada and accepting a purchase confirmation, a
purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
(i) the purchaser is entitled under applicable provincial securities laws
to purchase the notes without the benefit of a prospectus qualified
under those securities laws,
(ii) where required by law, that the purchaser is purchasing as principal
and not as an agent, and
(iii) the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION -- ONTARIO PURCHASERS ONLY
Under Ontario securities legislation, a purchaser who purchases a security
offered by this prospectus supplement during the period of distribution will
have a statutory right of action for damages, or while still the owner of the
notes, for rescission against us in the event that this prospectus supplement
contains a misrepresentation. Such a purchaser will be deemed to have relied on
the misrepresentation. The right of action for damages is exercisable not later
than the earlier of 180 days from the date the purchaser first had knowledge of
the facts giving rise to the cause of action and three years from the date on
which payment is made for the notes. The right of action for rescission is
exercisable not later than 180 days from the date on which payment is made for
the notes. If such a purchaser elects to exercise the right of action for
rescission, the purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the price at which
the notes were offered to the purchaser and if the purchaser is shown to have
purchased the securities with knowledge of the misrepresentation, we will have
no liability. In the case of an action for damages, we will not be liable for
all or any portion of the damages that are proven to not represent the
depreciation in value of the notes as a result of the misrepresentation relied
upon. These rights are in addition to, and without derogation from, any other
rights or remedies available at law to an Ontario purchaser. The foregoing is a
summary of the rights available to an Ontario purchaser. Ontario purchasers
should refer to the complete text of the relevant statutory provisions.
ENFORCEMENT OF LEGAL RIGHTS
All of our directors and officers as well as the experts named herein may
be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon us or those
persons. All or a substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against us or those persons in Canada or to
enforce a judgment obtained in Canadian courts against us or those persons
outside of Canada.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of notes should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the notes in
their particular circumstances and about the eligibility of the notes for
investment by the purchaser under relevant Canadian legislation.
S-35
LEGAL MATTERS
Certain legal matters in connection with the notes offered hereby will be
passed upon for us by Squire, Sanders & Dempsey L.L.P., Cleveland, Ohio. Certain
legal matters in connection with the offering of the notes will be passed upon
for the underwriters by Mayer, Brown & Platt, Chicago, Illinois and New York,
New York.
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PROSPECTUS
$300,000,000
FERRO CORPORATION
Debt Securities
Ferro Corporation (the "Company") may offer from time to time unsecured
debt securities (the "Debt Securities") consisting of debentures, notes and/or
other evidences of indebtedness, which may be either senior or subordinated. The
Debt Securities may be offered, separately or together, in separate classes or
series, in amounts, at prices and on terms to be set forth in one or more
supplements to this Prospectus (each, a "Prospectus Supplement"). The general
terms and conditions of the Debt Securities are described under "Description of
Debt Securities" in this Prospectus.
The specific terms of the Debt Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable and without limitation, the
specific title, aggregate principal amount, currency, form (which may be
registered or bearer, or certificated or global), ranking as senior or
subordinated debt, authorized denominations, maturity, rate (or manner of
calculation thereof) and time of payment of interest, terms of redemption at the
option of the Company or repayment at the option of the holder, terms for
sinking fund payments, terms for conversion into Common Stock, Preferred Stock
or other Company securities, additional covenants and any initial public
offering price.
The Debt Securities may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company, or to or
through underwriters or dealers. If any agents or underwriters are involved in
the sale of any of the Debt Securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth, or will be calculable from the information set forth, in the
applicable Prospectus Supplement. See "Plan of Distribution." No Debt Securities
may be sold without delivery of the applicable Prospectus Supplement describing
the method and terms of the offering of such class or series of Debt Securities.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT TO WHICH IT RELATES IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December 11, 2001
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
accompanying Prospectus Supplement in connection with the offering described
herein and therein, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Company
or by any underwriter, dealer or agent. Neither this Prospectus nor any
Prospectus Supplement shall constitute an offer to sell or a solicitation of an
offer to buy any securities offered hereunder in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation or sale in such
jurisdiction. Neither the delivery of this Prospectus or any Prospectus
Supplement nor any sale made hereunder implies that there has been no change in
the affairs of the Company at any time subsequent to the date hereof or that the
information herein is correct as of any time subsequent to its date.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file with the
Securities and Exchange Commission ("SEC") at the SEC's public reference rooms
at the following locations:
<Table>
Public Reference Room Chicago Regional Office
450 Fifth Street, N.W Citicorp Center
Room 1024 500 West Madison Street, Suite 1400
Washington, D.C. 20549 Chicago, Illinois 60661-2511
</Table>
Please call the SEC at 1-800-SEC-0330 for further information on the
operations of the public reference rooms. Our SEC filings also are available to
the public at the SEC's web site at http://www.sec.gov and at the public
reference room of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005. Our common stock is listed on the New York Stock Exchange.
We have filed with the SEC a Registration Statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Debt Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
are omitted as permitted by the rules and regulations of the SEC. For further
information with respect to the Company and the Debt Securities, reference is
made to the Registration Statement. Statements contained therein concerning any
document filed as an exhibit to the Registration Statement are not necessarily
complete, and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement for a full statement of the
provisions thereof. Each such statement in the Prospectus is qualified in all
respects by such reference. The Registration Statement may be inspected, without
charge, at the SEC's principal office at 450 Fifth Street, N.W., Washington,
D.C. 20459, and copies thereof may also be obtained from the SEC upon the
payment of prescribed fees.
i
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We are "incorporating by reference" information into this Prospectus. This
means we are disclosing important information to you by referring you to another
document that we have filed separately with the SEC. The information
incorporated by reference is considered to be part of this Prospectus.
Any information we incorporate by reference that we filed prior to the date
of this Prospectus or the applicable Prospectus Supplement will be modified or
superceded for purposes of this Prospectus or the applicable Prospectus
Supplement to the extent that information contained in this Prospectus or the
applicable Prospectus Supplement (including information we subsequently file
with the SEC that we also incorporate by reference) modifies or supercedes such
information. Except to the extent modified or superceded, any such information
will not be considered part of this Prospectus or the applicable Prospectus
Supplement. Information that we file with the SEC after the date of this
Prospectus or the applicable Prospectus Supplement will automatically modify and
supersede the information included or incorporated by reference in this
Prospectus or the applicable Prospectus Supplement to the extent that the
subsequently filed information modifies or supersedes the existing information.
We incorporate by reference our future filings with the SEC under section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until we consummate
the offering of the Debt Securities. We also incorporate by reference our:
- Annual Report on Form 10-K for the fiscal year ended December 31, 2000;
- Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
2001, June 30, 2001 and September 30, 2001(as amended);
- Proxy Statement for the 2001 Annual Meeting of Shareholders;
- Current Report on Form 8-K filed September 21, 2001;
- Current Report on Form 8-K/A filed November 23, 2001; and
- Current Report on Form 8-K/A-2 filed December 10, 2001.
We maintain an Internet site at http://www.ferro.com. The information
contained at our Internet site is not incorporated by reference in this
Prospectus, and you should not consider it a part of this Prospectus.
Any statement made in this Prospectus or the applicable Prospectus
Supplement concerning the contents of any contract, agreement or other document
is only a summary of the actual document. You may obtain a copy of any document
summarized in this Prospectus or the applicable Prospectus Supplement at no cost
by writing to or telephoning us at the address and telephone number given below.
Each statement regarding a contract, agreement or other document is qualified in
its entirety by reference to the actual document.
For copies of the documents incorporated by reference into this Prospectus
or the applicable Prospectus Supplement, the indenture, or other agreements
referred to in this Prospectus or the applicable Prospectus Supplement, you
should direct your request to:
Director, Investor Relations
Ferro Corporation
1000 Lakeside Avenue
Cleveland, Ohio 44114
Telephone (216) 641-8580
1
THE COMPANY
We are a leading global producer of a diverse array of performance
materials sold to a broad range of manufacturers in approximately 30 markets
throughout the world. Our products are classified as performance materials,
rather than commodities, because they are formulated to perform specific and
important functions both in the manufacturing processes and in the finished
products of our customers. Our performance materials require a high degree of
technical service on an individual customer basis. The value of these
performance materials stems from the results and performance they achieve in
actual use. We apply certain core scientific expertise in organic chemistry,
inorganic chemistry, polymer science and material science to develop coatings
for ceramics and metal; materials for passive electronic components; pigments;
enamels, pastes, and additives for the glass market; specialty plastic compounds
and colors; and polymer additives.
Our products are traditionally used in markets such as appliances,
automotive, building and renovation, electronics, household furnishings,
industrial products, pharmaceuticals, telecommunications and transportation. Our
leading customers include major chemical companies, producers of multi-layer
ceramic capacitors and manufacturers of tile, appliances and automobiles. Many
customers, particularly in the appliance and automotive markets, purchase
materials from more than one of our business units. Our customer base is also
well-diversified both geographically and by end-market.
Our principal executive offices are located at 1000 Lakeside Avenue,
Cleveland, Ohio 44114, and our telephone number is (216) 641-8580.
USE OF PROCEEDS
Except as otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Debt Securities for
general corporate purposes, which may include capital expenditures, acquisitions
and reductions of other indebtedness of the Company. Funds not required
immediately for such purposes may be invested temporarily in short-term
marketable securities.
RATIO OF EARNINGS TO FIXED CHARGES
<Table>
<Caption>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- -------------
1996 1997 1998 1999 2000 2000 2001
---- ---- ----- ----- ----- ----- -----
Ratio of earnings to fixed charges(1)...... 6.52x -- 6.85x 6.17x 5.13x 5.52x 2.95x
</Table>
- ---------------
(1) The ratio of earnings to fixed charges has been calculated by dividing (i)
income before income taxes plus fixed charges by (ii) fixed charges. Fixed
charges are equal to interest expense (including amortization of deferred
financing costs), plus the portion of rent expense estimated to represent
interest. Earnings were insufficient to cover fixed charges by $49 million
for the year ended December 31, 1997.
2
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will be our general unsecured obligations and will
constitute either senior debt securities ("Senior Debt Securities") or
subordinated debt securities ("Subordinated Debt Securities"). The Debt
Securities will be issued under one or more indentures, each dated as of the
date of or a date prior to the issuance of the Debt Securities to which it
relates. Senior Debt Securities and Subordinated Debt Securities may be issued
under separate indentures (respectively, a "Senior Indenture" and a
"Subordinated Indenture"), in each case between the Company and a trustee
("Trustee"), in a form filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The Senior Indenture and the Subordinated
Indenture are sometimes hereinafter referred to collectively as the "Indentures"
or individually as an "Indenture". The Indentures relating to the Debt
Securities do not limit the amount of Debt Securities that may be issued
thereunder and provide that Debt Securities may be issued thereunder from time
to time in one or more series as from time to time authorized by the Company.
The particular terms of the Debt Securities offered by any Prospectus
Supplement (the "Offered Debt Securities") will be described in the Prospectus
Supplement relating to such Offered Debt Securities (the "applicable Prospectus
Supplement"). The following summaries under this heading relating to Debt
Securities and the Indentures are summaries of the anticipated provisions
thereof, do not purport to be complete and are qualified in their entirety by
reference to the Indentures, the Debt Securities and the applicable Prospectus
Supplement.
Capitalized terms used herein and not defined shall have the meanings
assigned to them in the Indentures.
GENERAL
Unless otherwise indicated in the applicable Prospectus Supplement,
principal of, premium, if any, and interest, if any, on the Debt Securities will
be payable, and the transfer of Debt Securities will be registrable, at the
office or agency to be maintained in Cleveland, Ohio and at any other office or
agency we maintained for such purpose. The Debt Securities will be issued only
in fully registered form without coupons and, unless otherwise indicated in the
applicable Prospectus Supplement, in denominations of $1,000 or integral
multiples thereof. No service charge will be made for any registration of
transfer or exchange of the Debt Securities, but we may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
The applicable Prospectus Supplement will describe the following terms of
the Offered Debt Securities: (1) the title of the Offered Debt Securities and
whether such Offered Debt Securities are to be Senior Debt Securities or
Subordinated Debt Securities; (2) any limit on the aggregate principal amount of
the Offered Debt Securities; (3) the price or prices (generally expressed as a
percentage of the aggregate principal amount thereof) at which the Offered Debt
Securities will be issued; (4) the Person to whom any interest on the Offered
Debt Securities shall be payable, if other than the Person in whose name that
Security (or one or more Predecessor Securities) is registered at the close of
business on the Regular Record Date for such interest; (5) the date or dates on
which the principal of the Offered Debt Securities is payable; (6) the rate or
rates at which the Offered Debt Securities shall bear interest, if any, the date
or dates from which any such interest shall accrue, the Interest Payment Dates
on which any such interest shall be payable and the Regular Record Date for the
interest payable on any Interest Payment Date; (7) the place or places where the
principal of and any premium and interest on the Offered Debt Securities shall
be payable; (8) the period or periods within which, the price or prices at
which, and the terms and conditions upon which the Offered Debt Securities may
be redeemed, in whole or in part, at the option of the Company; (9) the
obligation, if any, of the Company to redeem or purchase the Offered Debt
Securities pursuant to any sinking fund or analogous provisions or at the option
of a Holder thereof and the period or periods within which, the price or prices
at which and the terms and conditions upon which the Offered Debt Securities
shall be redeemed or purchased, in whole or in part, pursuant to such
obligation; (10) if other than denominations of $1,000 and any integral multiple
thereof, the denominations in which the Offered Debt Securities shall be
issuable; (11) the currency, currencies or
3
currency units in which payment of the principal of and any premium and interest
on any Offered Debt Securities shall be payable if other than the currency of
the United States of America; (12) if the amount of payments of principal of or
any premium or interest on any Offered Debt Securities may be determined with
reference to an index or formula, the manner in which such amounts shall be
determined; (13) if the principal of or any premium or interest on any Offered
Debt Securities is to be payable, at the election of the Company or a Holder
thereof, in one or more currencies or currency units other than that or those in
which the Securities are stated to be payable, the currency, currencies or
currency units in which payment of the principal of and any premium and interest
on the Offered Debt Securities as to which such election is made shall be
payable, and the periods within which and the terms and conditions upon which
such election is to be made; (14) if other than the principal amount thereof,
the portion of the principal amount of the Offered Debt Securities which shall
be payable upon declaration of acceleration of the Maturity thereof; (15) the
applicability of the provisions described under "Defeasance and Covenant
Defeasance"; (16) if the Offered Debt Securities will be issuable only in the
form of a Book-Entry Security as described under "Book-Entry Debt Securities,"
the Depository or its nominee with respect to the Offered Debt Securities and
the circumstances under which the Book-Entry Security may be registered for
transfer or exchange or authenticated and delivered in the name of a Person
other than the Depository or its nominee; and (17) any other terms of the
Offered Debt Securities.
The Debt Securities may be issued as Original Issue Discount Debt
Securities to be offered and sold at a substantial discount below their stated
principal amount. Federal income tax consequences and other special
considerations applicable to any such Original Issue Discount Debt Securities
will be described in the applicable Prospectus Supplement. "Original Issue
Discount Debt Securities" means any Debt Security which provides for an amount
less than the principal amount thereof to be due and payable upon the
declaration of acceleration of the Maturity thereof upon the occurrence of an
Event of Default and the continuation thereof. In addition, pursuant to
regulations issued under the Internal Revenue Code (the "Regulations"), Debt
Securities that have interest reset dates that would cause any accrual period to
be longer than one year would be subject to the original issue discount rules of
the Internal Revenue Code and the Regulations, whether or not such Debt
Securities are Original Issue Discount Debt Securities.
BOOK-ENTRY DEBT SECURITIES
The Debt Securities of a series may be issued in the form of one or more
Book-Entry Securities that will be deposited with a Depository or its nominee
identified in the applicable Prospectus Supplement. In such a case, one or more
Book-Entry Securities will be issued in a denomination or aggregate
denominations equal to the portion of the aggregate principal amount of
Outstanding Debt Securities of the series to be represented by such Book-Entry
Security or Securities. Unless and until it is exchanged in whole or in part for
Debt Securities in definitive registered form, a Book-Entry Security may not be
registered for transfer or exchange except as a whole by the Depository for such
Book-Entry Security to a nominee of such Depository and except in the
circumstances described in the Applicable Prospectus Supplement.
The specific terms of the depository arrangement with respect to any
portion of a series of Debt Securities to be represented by a Book-Entry
Security will be described in the applicable Prospectus Supplement.
CERTAIN COVENANTS OF THE COMPANY
Restrictions on Secured Debt and Limitations on Liens. If we or any
Domestic Subsidiary incurs, issues, assumes or guarantees any debt secured by a
Mortgage on any Principal Domestic Manufacturing Property or on any shares of
stock or Debt of any Domestic Subsidiary, we will secure, or cause such Domestic
Subsidiary to secure, the Debt Securities, and any of our other debt or debt of
such Domestic Subsidiary which may be then outstanding and entitled to the
benefit of a covenant similar in effect to this covenant, equally and ratably
with (or prior to) such secured debt, unless after giving effect thereto the
aggregate amount of all such secured debt together with all Attributable Debt of
ours and our Domestic Subsidiaries in respect of sale and leaseback transactions
involving Principal Domestic Manufacturing
4
Properties would not exceed 10% of our Consolidated Net Tangible Assets. For the
purpose of providing such equal and ratable security, the principal amount of
any series of Debt Securities issued with original issue discount shall be such
portion of the principal amount as specified in the terms of that series that
would be payable upon acceleration of the Maturity thereof at the time of such
determination. This restriction will not apply to, and there shall be excluded
in computing secured debt for the purpose of such restriction, debt secured by
(a) Mortgages on property of, or on any shares of stock or debt of, any
corporation existing at the time such corporation becomes a Domestic Subsidiary,
(b) Mortgages in favor of the Company or a Domestic Subsidiary, (c) Mortgages in
favor of governmental bodies of the United States or any State or Puerto Rico or
any other country or any political subdivision thereof to secure partial,
progress or advance payments pursuant to any contract or statute, (d) Mortgages
on property, shares of stock or debt, purchase money Mortgages and construction
Mortgages existing at or incurred within 120 days of the time of acquisition
thereof (including acquisition through merger or consolidation), (e) Mortgages
securing obligations issued by a State, territory or possession of the United
States, any political subdivision of any of the foregoing, or the District of
Columbia, or any instrumentality of the foregoing to finance the acquisition or
construction of property, and on which the interest is not includable in gross
income of the holder under the Internal Revenue Code, and (f) certain
extensions, renewals or replacements of Mortgages referred to in the foregoing
clauses (a) through (e) inclusive. The Indentures will not restrict the
incurrence of unsecured debt by the Company or its Subsidiaries.
Restrictions on Sale and Leaseback Transactions. Neither we nor any
Domestic Subsidiary may enter into any sale and leaseback transaction involving
any Principal Domestic Manufacturing Property which has been or is to be sold or
transferred, more than 120 days after the acquisition thereof or the completion
of construction and commencement of full operations thereof, unless (a) we or
such Domestic Subsidiary could create debt secured by a Mortgage on such
property as described above under "Restrictions on Secured Debt and Limitations
on Liens" in an amount equal to the Attributable Debt with respect to the sale
and leaseback transaction without equally and ratably securing the Debt
Securities or (b) we, within 120 days, apply to the retirement of its Funded
Debt which is pari passu (as defined in the Indentures) with the Debt Securities
an amount equal to the greater of (i) the net proceeds of the sale of the
Principal Domestic Manufacturing Property leased pursuant to such arrangement or
(ii) the fair market value of the Principal Domestic Manufacturing Property so
leased (subject to credits for certain voluntary retirements of Funded Debt).
This restriction will not apply to any sale and leaseback transaction (a)
between us and a Domestic Subsidiary, between Domestic Subsidiaries, or between
a Domestic Subsidiary and a Foreign Subsidiary, or (b) involving the taking back
of a lease for a period of three years or less.
CERTAIN DEFINITIONS
"Attributable Debt" means the total net amount of rent (discounted at the
rate of 1% per annum over the weighted average Yield to Maturity of the
outstanding Debt Securities compounded semi-annually) required to be paid during
the remaining term of any lease.
"Consolidated Net Tangible Assets" means the aggregate amount of all assets
(after deducting intangible assets and the amount of all current liabilities) of
the Company and its consolidated Subsidiaries.
"Domestic Subsidiary" means a Subsidiary substantially all the fixed assets
of which are located, or substantially all the business of which is carried on,
within the United States, or which owns or leases any Principal Domestic
Manufacturing Property, but such term excludes any Subsidiary the principal
business of which is the financing or ownership of the operations of the Company
or its Subsidiaries outside the United States (but such Subsidiary is excluded
only so long as it neither owns nor leases any Principal Domestic Manufacturing
Property).
"Funded Debt" means indebtedness for money borrowed having a maturity at or
being renewable or extendible to a date more than 12 months from the date of
determination.
5
"Mortgage" means any mortgage, pledge, lien, security interest, conditional
sale or other title retention agreement or similar encumbrance.
"Principal Domestic Manufacturing Property" means any facility (together
with the land on which it is erected and fixtures comprising a part thereof)
used primarily for manufacturing, processing or warehousing of the Company's
products and located in the United States, owned or leased by the Company or a
Subsidiary and having a gross book value in excess of 1% of Consolidated Net
Tangible Assets, other than any such facility or portion thereof (i) which is
financed by certain governmental obligations the interest on which is excludable
from gross income of the holder thereof pursuant to the provisions of Section
103(a) of the Internal Revenue Code or Section 745 of Title 48 of the United
States Code or (ii) which in the opinion of the Board of Directors of the
Company is not of material importance to the total business conducted by the
Company and its Subsidiaries as an entirety.
"Subsidiary" means a corporation more than 50% of the outstanding voting
Stock of which is owned directly or indirectly by the Company and/or one or more
Subsidiaries.
EVENTS OF DEFAULT
Any one of the following events constitutes an Event of Default under the
Indentures:
(i) failure to pay any interest on any Debt Security when due, continued
for 30 days;
(ii) failure to pay principal of or any premium on any Debt Security when
due;
(iii) failure to perform, or breach of any covenant or warranty of the
Company in the Indenture (other than a covenant included in the
Indenture solely for the benefit of a series of debt securities
thereunder other than the Debt Securities) continued for 90 days
after written notice as provided in the Indentures;
(iv) or default under indebtedness for money borrowed in an aggregate
principal amount exceeding $10,000,000 under an instrument to which
the Company or any Domestic Subsidiary is a party as an obligor or by
which either is bound, which default shall have resulted in such
indebtedness becoming due and payable prior to the date on which it
would otherwise be due and payable, without such default being cured
or such indebtedness having been discharged within ten days after
written notice as provided in the Indenture; or
(v) certain events in bankruptcy, insolvency or reorganization of the
Company.
If any Event of Default with respect to the Debt Securities occurs and is
continuing, either the Trustee or the holders of at least 25 percent in
aggregate principal amount of the outstanding Debt Securities may declare the
principal amount of all the Debt Securities to be due and payable immediately.
At any time after a declaration of acceleration with respect to the Debt
Securities has been made, but before a judgment or decree based on acceleration
has been obtained, the holders of a majority in aggregate principal amount of
outstanding Debt Securities may, under certain circumstances, rescind and annul
such acceleration. The Indentures provide that, subject to the duty of the
Trustee during default to act with the required standard of care, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indentures at the request or direction of any of the holders, unless such
holders shall have offered to the Trustee reasonable indemnity. Subject to such
provisions for the indemnification of the Trustee and to certain other
conditions, the holders of a majority in aggregate principal amount of the
outstanding Debt Securities will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, with respect to the Debt
Securities. No holder of Debt Securities will have any right to institute any
proceeding with respect to any Indenture or for any remedy thereunder, unless
such holder shall have previously given to the Trustee written notice of a
continuing Event of Default and unless the holders of at least 25 percent in
principal amount of the outstanding Debt Securities shall have made written
request, and offered reasonable indemnity, to the Trustee to institute such
proceeding as trustee, and the Trustee shall not have received from the holders
of a majority in aggregate principal amount of the outstanding
6
Debt Securities a direction inconsistent with such request and shall have failed
to institute such proceeding within 60 days. However, such limitations do not
apply to a suit instituted by a holder of a Debt Security for enforcement of
payment of the principal of and premium, if any, or interest, if any, on such
Debt Security on or after the respective due dates expressed in such Debt
Security. We are required to furnish to the Trustee annually a statement as to
the performance of certain of our obligations under the Indenture and as to any
default in such performance.
MODIFICATION AND WAIVER
We and the Trustee, with the consent of the holders of at least a majority
of the principal amount of the outstanding Debt Securities issued under the
Indentures, may execute supplemental indentures adding any provisions to or
changing or eliminating any of the provisions of the Indentures or modifying the
rights of the holders of the Debt Securities, except that no such supplemental
indenture may, without the consent of the holder of each outstanding security
affected by the supplemental indenture, among other things:
(i) change the stated maturity of the principal of, or any installment of
principal of or interest on, any Debt Security;
(ii) reduce the principal amount of, or the premium, if any, or interest
on, any Debt Security;
(iii) change the place or currency of payment of principal of, premium, if
any, or interest on, any Debt Security;
(iv) impair the right to institute suit for the enforcement of any payment
on any Debt Security on or after the stated maturity thereof (or in
the case of redemption, on or after the Redemption Date); or
(v) reduce the percentage in principal amount of outstanding Debt
Securities, the consent of whose holders is required for modification
or amendment of the Indentures or for waiver of compliance with
certain provisions of the Indentures or for waiver of certain
defaults.
The holders of at least a majority in aggregate principal amount of the
outstanding Debt Securities may, on behalf of all holders of that series, waive
compliance by the Company with certain restrictive provisions of the Indentures.
The holders of not less than a majority in aggregate principal amount of the
outstanding Debt Securities may, on behalf of all holders of Debt Securities,
waive any past default under the Indentures, except a default in the payment of
principal, premium or interest and in respect of a covenant or provision of the
Indentures that cannot be modified or amended without the consent of the holder
of each outstanding Debt Security affected thereby.
CONSOLIDATION, MERGER AND SALE OF ASSETS
We may not consolidate with or merge into any other Person or transfer or
lease our assets substantially as an entirety to any Person and may not permit
any Person to merge into or consolidate with us or transfer or lease its assets
substantially as an entirety to us, unless:
(i) any successor or purchaser is a corporation, partnership, or trust
organized under the laws of the United States of America, any State or
the District of Columbia, and any such successor or purchaser
expressly assumes our obligations on the notes under a supplemental
Indenture,
(ii) immediately after giving effect to the 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,
(iii) if our properties or assets become subject to a Mortgage not
permitted by the Indenture, we or such successor Person, as the case
may be, take such steps as shall be necessary effectively to secure
the notes equally and ratably with (or prior to) all indebtedness
secured thereby, and
(iv) we have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel stating compliance with these provisions.
7
DEFEASANCE AND COVENANT DEFEASANCE
The Indentures provide that we, at our option, (a) will be discharged from
any and all obligations in respect of the Debt Securities (except for certain
obligations to register the transfer of or exchange of Debt Securities, replace
stolen, lost or mutilated Debt Securities, maintain paying agencies and hold
moneys for payment in trust) or (b) need not comply with certain restrictive
covenants of the Indentures, including those described under "Certain Covenants
of the Company," and the occurrence of an event described in clause (iii) under
"Events of Default" shall no longer be an Event of Default, in each case, if we
deposit, in trust, with the Trustee money or U.S. government obligations, which
through the payment of interest thereon and principal thereof in accordance with
their terms will provide money, in an amount sufficient to pay all the principal
of (and premium, if any) and interest on the Debt Securities on the dates such
payments are due in accordance with the terms of the Debt Securities. Such a
trust may only be established if, among other things, (i) no Event of Default or
event which with the giving of notice or lapse of time, or both, would become an
Event of Default under the Indentures shall have occurred and be continuing on
the date of such deposit, (ii) such deposit will not cause the Trustee to have
any conflicting interest with respect to our other securities, and (iii) we have
delivered an opinion of counsel to the effect that the holders will not
recognize income, gain or loss for Federal income tax purposes as a result of
such deposit or defeasance and will be subject to Federal income tax in the same
manner as if such defeasance had not occurred. In the event we omit to comply
with our remaining obligations under the Indentures after a defeasance of the
Indentures with respect to the Debt Securities as described under clause (b)
above and the Debt Securities are declared due and payable because of the
occurrence of any Event of Default, the amount of money and U.S. government
obligations on deposit with the Trustee may be insufficient to pay amounts due
on the Debt Securities at the time of the acceleration resulting from such Event
of Default. However, we will remain liable in respect of such amounts.
PROVISIONS APPLICABLE TO SUBORDINATED DEBT SECURITIES
The Subordinated Debt Securities will be subordinate and junior in right of
payment, as set forth in the Subordinated Indenture, to the prior payment in
full of all our Senior Indebtedness. "Senior Indebtedness" is defined in the
Subordinated Indenture as the principal (including sinking fund payments) of,
and premium, if any, and interest on any indebtedness, whether outstanding at
the date of the Subordinated Indenture or thereafter created, incurred or
assumed, which is for (a) money borrowed by the Company, (b) indebtedness of the
Company evidenced by notes, debentures, bonds, securities or other instruments
of indebtedness for the payment of which the Company is responsible or liable,
by guarantees or otherwise, (c) obligations of the Company evidencing the
purchase price for acquisitions by the Company or a subsidiary other than in the
ordinary course of business, (d) money borrowed by others and assumed or
guaranteed by the Company, (e) capitalized lease obligations of the Company, and
(f) renewals, extensions, refundings, amendments and modifications of any
indebtedness, of the kind described in the foregoing clauses or of the
instruments creating or evidencing such indebtedness, unless, in each case, by
the terms of the instruments evidencing such indebtedness or such renewal,
extension, refunding, amendment or modification, it is provided that such
indebtedness is not senior in rights of payment to the Subordinated Debt
Securities.
In the event of any distribution of assets of the Company upon its
dissolution, winding up, liquidation or reorganization, the holders of Senior
Indebtedness shall first be paid in full in respect of principal, premium, if
any, and interest before any such payments are made on account of the
Subordinated Debt Securities. In addition, in the event that (a) Subordinated
Debt Securities or any other debt securities issued under the Subordinated
Indenture are declared due and payable because of an Event of Default (other
than the circumstances described in the preceding sentence) or (b) any default
by the Company has occurred and is continuing in the payment of principal,
premium, if any, sinking funds or interest on any Senior Indebtedness, then no
payment shall be made on account of principal, premium, if any, sinking funds or
interest on the Subordinated Debt Securities until all such payments due in
respect of such Senior Indebtedness shall have been paid in full.
8
By reason of such subordination, creditors of the Company who are holders
of Senior Indebtedness may, subject to any subordination provisions that may be
applicable to such creditors, recover more ratably than holders of the
Subordinated Debt Securities.
If this Prospectus is being delivered in connection with a series of
Subordinated Debt Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Indebtedness outstanding as of the most recent practicable date
and any limitation on the issuance of additional Senior Indebtedness.
CONCERNING THE TRUSTEE
The Trustee under each Indenture will be identified in the applicable
Prospectus Supplement. The Trustee may perform services for the Company in the
ordinary course of business.
Under the Indentures, the Trustee is required to transmit annual reports to
all holders regarding its eligibility and qualifications as Trustee under the
Indentures and certain related matters.
9
PLAN OF DISTRIBUTION
The Company may sell the Debt Securities to one or more underwriters for
public offering and sale by them or may sell the Debt Securities to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Debt Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Debt Securities at a fixed price or
prices, which may be changed, at prices related to the prevailing market prices
at the time of sale, or at negotiated prices. The Company also may, from time to
time, authorize underwriters acting as the Company's agents to offer and sell
the Debt Securities upon the terms and conditions as will be set forth in the
applicable Prospectus Supplement. In connection with the sale of the Debt
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of Debt Securities for whom they act as
agent. Underwriters may sell Debt Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions from the
underwriters and/or commissions from the purchasers for whom they act as agents.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Debt Securities and any discounts,
concessions or commissions allowed by underwriters to participating dealers will
be set forth in the applicable Prospectus Supplement. Underwriters, dealers and
agents participating in the distribution of Debt Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Debt Securities may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters, dealers or agents to solicit offers by certain
institutions to purchase Debt 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 future date. Institutions with
whom delayed delivery contracts may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions, but will in all cases be
subject to the approval of the Company. The applicable Prospectus Supplement
will set forth the commission payable for solicitation of such offers.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
LEGAL MATTERS
Certain legal matters in connection with the Debt Securities to be offered
hereby, including their legality, will be passed upon for the Company by Squire,
Sanders & Dempsey L.L.P., Cleveland, Ohio. Mary Ann Jorgenson, Esq., a partner
in such firm, is Secretary of the Company.
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EXPERTS
The consolidated financial statements and schedule of Ferro Corporation and
subsidiaries as of December 31, 2000 and 1999, and for each of the years in the
three-year period ended December 31, 2000, have been incorporated by reference
herein in reliance upon the reports of KPMG LLP, independent accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The combined financial statements of the dmc(2) Businesses as of December
31, 2000 and 1999 and September 30, 1999, and for the year ended December 31,
2000, the three months ended December 31, 1999, and the year ended September 30,
1999, have been incorporated by reference herein in reliance upon the report of
KPMG Deutsche Treuhand -- Gesellschaft Aktiengesellschaft
Wirtschaftspruefungsgesellschaft, independent accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
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