-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WSUAdmuJf1xaIMlhNRnXWnqhMZIuwQ75hKo8hZR4C+uk1AOKpn/hCbWVwDPQP14s NvlIhpkurFTG+Q3xcxzBlg== 0001047469-98-023786.txt : 19980612 0001047469-98-023786.hdr.sgml : 19980612 ACCESSION NUMBER: 0001047469-98-023786 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980611 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHERER R P CORP /DE/ CENTRAL INDEX KEY: 0000855106 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133523163 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-30999 FILM NUMBER: 98646329 BUSINESS ADDRESS: STREET 1: 2075 W BIG BEAVER RD STREET 2: SUITE 700 CITY: TROY STATE: MI ZIP: 48084 BUSINESS PHONE: 3136490900 FORMER COMPANY: FORMER CONFORMED NAME: RPS CORP DATE OF NAME CHANGE: 19920218 10-K405 1 10-K405 As filed with the Securities and Exchange Commission on June 11, 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 33-30999 ------------------- R.P. SCHERER CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 13-3523163 (State of Incorporation) (I.R.S. Employer Identification Number) 2301 WEST BIG BEAVER ROAD, TROY, MICHIGAN 48084 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 649-0900 ------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE 6 3/4% SENIOR NOTES DUE 2004 NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None ------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES /X/ NO / / The aggregate market value of all shares of common stock held by non-affiliates of the Registrant as of June 5, 1998 was approximately $1,742,000,000 (based on closing price of $82.00 per share as of June 5, 1998). Number of shares outstanding of each class of the Registrant's common stock as of June 5 1998: 23,994,076 shares of common stock, par value $.01. ------------------- DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's proxy statement relating to the 1998 annual meeting of shareholders to be held on September 10, 1998, are incorporated by reference in Part III of this Annual Report on Form 10-K or by filing Form 10-K/A no later than 120 days after the end of the Registrant's fiscal year. PART I ITEM 1 BUSINESS GENERAL The R.P. Scherer Corporation (the "Company") is a leading international manufacturer and developer of drug delivery systems. The Company is the world's largest producer of softgels for the pharmaceutical and nutritional supplements markets and holds, or is developing, several other innovative drug delivery technologies. The Company's two most significant drug delivery systems center around RP SCHERERSOL-TM- and ZYDIS-Registered Trademark- technologies. The Company's proprietary drug delivery systems are designed to improve the therapeutic effectiveness of drugs by controlling the rate, time and place of release of the drug in the body. `On May 17, 1998, the Company signed a definitive merger agreement with Cardinal Health, Inc., an Ohio corporation ("Cardinal"), a distributor of pharmaceuticals and provider of pharmaceutical-related services, headquartered in Dublin, Ohio. The merger agreement, which has been approved by the Boards of Directors of the Company and of Cardinal, provides for the Company to become a wholly owned subsidiary of Cardinal. Under the terms of the proposed merger, stockholders of the Company would receive 0.95 of a Cardinal Common Share in exchange for each outstanding share of the Company's Common Stock. Cardinal would issue approximately 23 million Common Shares in the transaction and would assume the Company's long-term debt which was approximately $168.7 million at March 31, 1998. The merger has been structured as a tax-free transaction and would be accounted for as a pooling of interests for financial reporting purposes. The merger is currently expected to be completed during the second quarter of fiscal 1999, subject to the satisfaction of certain conditions, including approvals by the Company's and Cardinal's shareholders (to the extent required by applicable law and the rules of the New York Stock Exchange), and the receipt of certain regulatory approvals. The Company produces several thousand products in softgel form. Softgel products are used in a wide variety of pharmaceutical, vitamin, cosmetic and recreational products. R.P. Scherer has a broad domestic and international base of softgel customers, including manufacturers and wholesalers of pharmaceutical, health and nutritional, cosmetic and recreational products, with approximately one-half of the Company's sales made to the pharmaceutical industry. To meet the needs of its multinational customers and to serve new markets, the Company operates 19 softgel manufacturing facilities in 12 countries throughout the world and manufactures hardshell capsules in three of these countries. Approximately two-thirds of the Company's fiscal 1998 sales and operating income were derived from operations outside the United States. The Company's Scherer DDS division focuses on the development of advanced drug delivery systems including ZYDIS-Registered Trademark- and PASSCAL-TM-technologies. ZYDIS-Registered Trademark- is an oral dosage form which dissolves instantaneously on the tongue and does not require water to aid swallowing. PASSCAL-TM- is a dry powder inhalation formulation technology designed to improve the performance of dry powder inhaler devices. The technology is being applied in feasibility studies related to dry powder inhaler devices, generic pharmaceutical products, synthetic new chemical entities ("NCEs") and large molecule peptides and proteins. The Company is actively searching for promising new drug delivery systems which complement the Company's existing technologies. The Company's Advanced Therapeutic Products Group ("ATP") manages the development and registration of new pharmaceutical products by applying the Company's drug delivery technologies to off-patent compounds. The Company expects that ATP will help it service the growing global demand for therapeutically improved, cost-effective pharmaceutical products. SOFTGEL PRODUCTS AND MARKETS Softgel products accounted for 86% of the Company's fiscal 1998 sales. Softgel capsules are one-piece soft elastic gelatin capsules typically containing water or oil soluble liquids, pastes or solids in solution or suspension. Softgel products are used in a wide range of pharmaceutical, nutritional, cosmetic and recreational products. 1 First developed by Robert Pauli Scherer in 1933, softgel technology is the only widely accepted process for encapsulating oils, liquids or suspended solids in an oral dosage form. Importantly, the rapid dissolution or disintegration characteristics of softgel capsules often result in improved bioavailability and efficacy versus tablets or hardshell capsule formulations. Other advantages of softgels include ease of use, precise dosage control, minimal ingredient loss during manufacturing, effective taste masking, improved product stability, tamper resistance and longer shelf life. The Company produces softgel capsules for the following markets: (i) prescription and over-the-counter ("OTC") pharmaceuticals; (ii) health and nutritional; and (iii) other, primarily cosmetics and recreational. PHARMACEUTICAL. The world's various pharmaceutical markets are relatively similar due to the high degree of regulation worldwide and the global nature of the pharmaceutical industry. The Company has historically performed especially well in highly regulated environments where the customers' emphasis is on quality and service rather than price. In fiscal 1998, roughly one-half of the Company's softgel sales were derived from the sale of pharmaceutical products. The Company works closely with its customers to identify product opportunities and to develop and commercialize new softgel products. The Company's RP SCHERERSOL-TM- softgel systems consist of various liquid formulation technologies which improve the bioavailability of pharmaceutical compounds which are inconsistently, incompletely or too slowly absorbed from traditional oral dosage forms. These proprietary systems also broaden the range of pharmaceutical products to which softgel technology may be effectively applied. The technology, most of which is patented, often enables pharmaceutical companies to combine the advantages of drugs in liquid solution with the convenience and dosage accuracy of oral softgels. Importantly, RP SCHERERSOL-TM- technologies' unique, patented dosage delivery system can help protect pharmaceutical compounds against generic drug competition throughout the life of the RP SCHERERSOL-TM- patents. To date, the most significant product reformulated using RP SCHERERSOL-TM-systems are Novartis Ltd.'s NEORAL-Registered Trademark- and SANDIMMUNE-Registered Trademark- softgel products. These cyclosporin-A products are immunosuppressants which are administered daily to organ transplant patients throughout their lives to prevent post-operative organ rejection. The Company's softgel formulation of these drugs improves patient compliance by increasing ease of use, masking cyclosporin-A's unpleasant taste and better regulating dosage. NEORAL-Registered Trademark-, a new formulation of cyclosporin-A developed and patented by the Company and Novartis Ltd., provides a significant improvement in the bioavailability of cyclosporin-A providing more consistent and reliable dosing for organ transplant patients. NEORAL-Registered Trademark-also expanded the use of cyclosporin-A to additional indications, including rheumatoid arthritis and psoriasis during fiscal 1998. Novartis Ltd.'s annual worldwide sales of SANDIMMUNE-Registered Trademark- and NEORAL-Registered Trademark- are currently estimated to exceed $1.2 billion. The Company believes that a majority of SANDIMMUNE-Registered Trademark- and NEORAL-Registered Trademark- sales are in softgel form. SANDIMMUNE-Registered Trademark- and NEORAL-Registered Trademark- combined represented 3% of the Company's fiscal 1998 softgel sales. The Company currently anticipates that its customers will launch several important new pharmaceutical softgel products over the next three years, although the Company cautions that such forward-looking estimates as to probability and timing of successful product launches by its customers are subject to numerous risks, the most relevant of which are outlined on page 8, "Forward Looking Information". The Company's softgel technologies have proven successful in the formulation of the new anti-HIV protease inhibitors. The first of these protease inhibitors, Hoffmann-La Roche's FORTOVASE-TM-, was launched in November 1997. Hoffmann-La Roche has indicated that, at the dosage used in clinical trials, the new FORTOVASE-TM- softgel formulation provides eight-to-nine times the drug exposure of the existing formulation. The Company currently anticipates that three of the top five protease inhibitors will be marketed in Scherer softgels within the next year. The improved bioavailability of the softgel form of these products may substantially reduce the number of times that patients must take these products each day, thereby enhancing patient compliance and potentially minimizing adverse side effects. 2 At least four significant additional launches of softgel pharmaceutical products are anticipated over the next six to 24 months, including: American Home Products' ADVIL-Registered Trademark- ibuprofen softgel, the two additional protease inhibitors mentioned previously and PROMETRIUM-Registered Trademark- a hormone replacement therapy softgel which Schering Plough recently licenced to Solvay in the United States. British Biotech's promising new anti-cancer agent MARIMASTAT is currently in phase III trials. British Biotech believes that the drug may potentially exceed $2 billion per year in sales. Subject to successful development and regulatory approvals, MARIMASTAT may begin providing product revenue as early as fiscal 2000 and may provide significant future revenues three to four years thereafter. The Company continues to develop new softgel products for the OTC market. In addition to the launch of American Home Products' ADVIL-Registered Trademark-ibuprofen pain reliever in softgel form in August 1998, the Company anticipates the launch of additional ibuprofen cough-cold combination softgels in fiscal 2000. The market's favorable response to softgel formulations of A.H. Robins' DIMETAPP-Registered Trademark- and ROBITUSSIN-Registered Trademark- and Burroughs Wellcome's SUDAFED-Registered Trademark- has resulted in similar product line extension strategies for Schering-Plough's DRIXORAL-Registered Trademark-, Miles Laboratories' ALKA-SELTZER PLUS-Registered Trademark- and Pfizer's Unisom SLEEPGELS-Registered Trademark-, among others. HEALTH AND NUTRITIONAL. Health and nutritional softgel products consist primarily of vitamins, minerals, herbal supplements, and plant and fish oils and extracts. Some of the Company's products involve relatively simple encapsulation of oils, such as vitamin E and cod liver oil, while many more complex formulations are specifically formulated to customer requirements. Some health and nutritional products can only be formulated in softgel form and other products are formulated in softgel form for convenience and quality product line image. Health and nutritional products represented 42% of the Company's fiscal 1998 softgel sales. OTHER-COSMETICS AND RECREATIONAL. Other softgel products, consisting primarily of cosmetic and recreational softgel products, comprised 9% of fiscal 1998 softgel sales, with 4% of softgel sales attributable to cosmetics and 5% of softgel sales to recreational products. The Company's cosmetics softgel products consist principally of specially shaped softgels containing topical oils and creams, and bath pearls or capsules containing oils and fragrances. Additionally, the Company's cosmetics customers have introduced facial products using special twist-off softgel capsules which provide unit dosing and prevent oxidation of the products before use. The Company continues to develop and market new products for the growing cosmetic market. Examples include the fragrance softgel TRUSCENT-Registered Trademark-, which represents an economical, biodegradable twist-off sampler providing a unit dose of perfume and new skin care capsules containing a combination of vitamin C and retinol, a form of vitamin A. The Company also manufactures paintball softgels for use in recreational "paintball games." Various colors of water-soluble paint are encapsulated in softgels and sold by the Company to qualified distributors. Originally established in the United States, this sport is now also growing in popularity internationally. The Company is the world's leading producer of recreational paintball softgels. SCHERER DDS Formed as a separate division of the Company in 1991, Scherer DDS focuses on the development and commercialization of advanced drug delivery systems. Scherer DDS represents a broadening of the Company's business and reflects the Company's commitment to the rapidly growing drug delivery market segment. The Company believes that demand for advanced drug delivery systems will continue to grow as the pharmaceutical industry recognizes limitations to improving drug efficacy and tolerance with conventional dosage forms. In addition, novel and patented formulation and delivery technologies can often extend the product life cycle of major drugs for many years, thereby maximizing return on the customers' significant investment. The Company's Scherer DDS division focuses on the development of advanced drug delivery systems including ZYDIS-Registered Trademark- and PASSCAL-TM-technologies. ZYDIS-Registered Trademark- is an oral dosage form which dissolves instantaneously on the tongue and does not require water to aid swallowing. PASSCAL-TM- is a dry powder inhalation formulation 3 technology designed to improve the performance of dry powder inhaler devices. Recent in-vitro development work has confirmed the ability of PASSCAL-TM-to improve overall inhalation performance and reproducibility using a variety of dry powder inhalers. The technology is being applied in feasibility studies related to dry powder inhaler devices, generic pharmaceutical products, synthetic new chemical entities and large molecule peptides and proteins. The Company is actively searching for promising new drug delivery systems which complement the Company's existing technologies. ZYDIS-Registered Trademark- is a freeze-dried, porous wafer containing a drug substance which dissolves instantaneously on the tongue making the product particularly suitable for improving compliance among groups such as children and the elderly who frequently experience difficulties in swallowing conventional dosage forms. The ZYDIS-Registered Trademark- system has been patented in major markets with such patent protection extending to the active ingredients being delivered using ZYDIS-Registered Trademark-. Products incorporating ZYDIS-Registered Trademark- technology have received approvals for use in 25 countries. The Company's customers have received U.S. Food and Drug Administration ("FDA") approval and launched two ZYDIS-Registered Trademark- products in the United States, including American Home Product's DIMETAPP-Registered Trademark- Cold and Allergy children's product and Schering-Plough Corporation's CLARITIN-Registered Trademark- REDITABS-TM- launched in Spring 1997. Three additional ZYDIS-Registered Trademark- products have been filed with the FDA in ZYDIS-Registered Trademark- format, Merck's MAXALT-Registered Trademark-(rizatriptan) anti-migraine drug, Merck's VASOTEC-Registered Trademark-(enalapril) cardiovascular product and Glaxo Welcome's ZOFRAN-Registered Trademark- (ondansetron) anti-emetic product. In addition to DIMETAPP-Registered Trademark- and CLARITIN-Registered Trademark- REDITABS-TM-, the Company currently produces eight other ZYDIS-Registered Trademark- products, including: Pfizer's FELDENE MELT-Registered Trademark- and FELDENE FAST-Registered Trademark- (piroxicam), Merck's PEPCIDIN RAPITAB-Registered Trademark- (famotidine), Janssen's IMODIUM LINGUAL-Registered Trademark-(loperamide), Merck's MAXALT-Registered Trademark- and VASOTEC-Registered Trademark- products and two tranquilizer products containing lorazepam and oxazepam for Wyeth-Ayerst International. At present, such products are sold in Europe Scandinavia and Latin America. There are currently nine additional major products encompassing ZYDIS-Registered Trademark- technology in different stages of development and regulatory approval including products for Pfizer and Sankyo. Because patents covering active compounds in many of these products have expired or will expire within the next few years, the manufacturers of such products in many cases have been seeking alternative patent-protected dosage forms. In general, agreements with customers call for customers to pay license fees to the Company for product class and/or other forms of exclusivity as well as to pay certain of the costs for development, clinical testing, obtaining regulatory approvals and commercialization of the products. The Company will receive royalties, as well as manufacturing revenues, assuming such products are successfully commercialized. The Company recognized fiscal 1998 revenues of $38.7 million related to ZYDIS-Registered Trademark- products. OTHER TECHNOLOGIES. In July 1997, the Company sold technology rights and interests in its novel ophthalmic drug delivery device, OPTIDYNE, to Pharmacia Upjohn. PULSINCAP technology enables the contents of a capsule to be released at a predetermined time in contact with a liquid. In 1997, Oxoid Limited licensed the exclusive worldwide use of patented PULSINCAP technology in test kits for the detection of specific bacterial contamination in foods. The use of the PULSINCAP capsules in the Oxoid test kits reduces the time required to test foods for bacterial contamination by up to one-half, thereby resulting in considerable cost savings for food manufacturers All these technologies are the subject of numerous patents and patent applications around the globe. Discussions are proceeding with potential licensing partners with proven marketing skills and expertise in the respective areas. Current development plans, however, indicate that, with the exception of PULSINCAP, the earliest commercialization date for these technologies would be no earlier than the year 2000. ADVANCED THERAPEUTIC PRODUCTS GROUP The Company believes that changes currently affecting worldwide pharmaceutical markets will enhance the commercial value of pharmaceutical products which demonstrate therapeutic and cost benefits over existing therapies. To capitalize on these market trends, the Company formed ATP within its Scherer DDS subsidiary to manage the development and registration of new pharmaceutical products which are based on the reformulation of off-patent compounds and which utilize the Company's proprietary drug delivery technologies. ATP products involve the reformulation of existing compounds whose patent protection has 4 expired or is near expiration. Five products are currently under development by ATP using RP SCHERERSOL-Registered Trademark- or ZYDIS-Registered Trademark-drug delivery systems. The Company anticipates that the development, clinical testing and regulatory approval process for ATP products will involve a shorter time period than that normally associated with a new chemical entity, as the drugs used in the ATP formulation will already have established records for safety, toxicity and tolerability. Initial revenue related to ATP developed products began in fiscal 1997 resulting from the licensing of rights to ZYDIS-Registered Trademark- selegiline to Athena Neurosciences, Inc., a unit of Elan. Revenues related to other ATP products are expected to begin no earlier than fiscal 1999, assuming the development and commercialization of such products is successful. Research and development expenses associated with ATP increased $3.8 million to $11.8 million in fiscal 1998 and, due to costs related to certain clinical trials, are expected to again increase in fiscal 1999, after which ATP related costs are currently anticipated to decrease. The Company anticipates that ATP product sales and royalty revenues will exceed ATP group expenses no earlier than fiscal 2000, assuming that the development and commercialization of such ATP products is successful. INTERNATIONAL OPERATIONS To serve new markets and to meet the needs of its multinational customers, the Company operates softgel manufacturing facilities in 12 countries throughout the world and manufactures hardshell capsules in three of these countries. For financial purposes, the Company's operations are divided into three geographical areas: United States, Europe and Other International. Europe represents operations in the United Kingdom, France, Italy and Germany. Other International consists of operations in Canada, Australia, Japan, Brazil and Argentina. The Company has the flexibility to transfer some of its production from one plant to another within its worldwide network. See Note 13 to the consolidated financial statements for financial information concerning the Company's geographic segments. Currently, the Company is not subject to significant government restrictions as to the availability of material cash flows from its foreign subsidiaries. However, transfer of profits from foreign subsidiaries could be subject to foreign exchange controls and to regulations of foreign governments which may be in effect from time to time. In addition, the consolidated results of the Company's operations are affected by foreign currency fluctuations. Laws or regulations have been proposed or enacted in various foreign countries which, among other things, specify the number of national directors and restrict borrowing by foreign-owned companies. COMPETITION The Company's various drug delivery technologies compete with a growing number of new drug delivery technologies and with continued refinements to existing delivery technologies. Major pharmaceutical companies have become increasingly interested in the development and commercialization of both existing and newly developed pharmaceutical products incorporating advanced drug delivery systems. In recent years, a number of companies have been formed to develop new drug formulations, products and drug delivery systems, many of which compete, either directly of indirectly, with the Company's products or technologies. The greatest competition to the Company's pharmaceutical softgel dosage form is from the manufacturers of tablets and hardshell capsules. The Company believes that the most significant competitive disadvantages of softgel capsules versus tablets or hardshell capsules are the higher cost of softgels and the lack of direct control by the originating manufacturers over the softgel manufacturing process. However, because a relatively high unit volume is necessary to manufacture softgels economically, no significant pharmaceutical manufacturer and only one significant health and nutritional product manufacturer produce softgels internally. The Company is the world's largest manufacturer of softgels. The Company believes it has a competitive advantage in the softgel business due to its greater experience in the manufacture of softgels, its advanced formulation technologies and expertise, its extensive participation in customer product development, its strong acceptance by customers and its geographic breadth. The Company's principal softgel competitors are several manufacturers with substantially smaller softgel operations. Although the Company faces varying degrees of 5 competition in each of its geographic markets, it believes it has a leading market position in each of its major softgel markets. The Company is committed to continual investment in people, plant and technology to further strengthen its competitive position. Competition in hardshell capsules is comprised primarily of two multinational pharmaceutical manufacturers each of which have substantially greater assets and sales than the Company. In addition, the Company competes in various countries with smaller hardshell manufacturers. Competition to the Company's ZYDIS-Registered Trademark- quick dissolve drug delivery systems centers on five drug delivery manufacturers, none of which has successfully received regulatory approval for or commercialized a prescription pharmaceutical product. The Company believes that its ZYDIS-Registered Trademark- technology and proven pharmaceutical manufacturing capacity places it in a leading position in the quick dissolve drug delivery segment. PRODUCT INFORMATION The Company's business is not dependent upon a single product or a few products. No product represents 10% or more of the Company's sales. CUSTOMERS No material part of the Company's business is considered to be dependent upon a single customer or a few customers and no single customer represents 10% or more of the Company's sales. SOURCES OF MATERIALS The principal raw material used in the manufacture of softgels and hardshell capsules is gelatin. Gelatin is obtained primarily regionally and in most instances is available from multiple sources (and is generally purchased on a coordinated worldwide basis by the Company to obtain favorable terms as to pricing and quantities). The Company has never experienced any significant shortage of gelatin or other significant raw materials. Various regulatory agencies in the United States and elsewhere have been reviewing the risk of human exposure to a group of diseases known as transmissible spongiform encephalopathies ("TSEs") from a variety of food products derived from animals, including certain types of gelatin. Most of the attention on this matter to date has been focused on gelatin manufactured from parts of cattle imported from countries that have reported cases of one form of TSE; bovine spongiform encephalopathy ("BSE"), commonly referred to as "mad cow disease". There is no evidence whatsoever that gelatin could contain the BSE agent, or if it did, that the human consumption of such gelatin products could result in transmission of the disease. In April 1997, an FDA advisory panel recommended that the FDA reinstate a restriction on the use of gelatin manufactured from bovine materials from certain countries that are known to have cases of BSE. The FDA is not obligated to follow recommendations of the advisory panel and has not yet expressed its position on, or otherwise acted upon, such recommendation. Other regulatory bodies, including the World Health Organization and the European Community Commission have undertaken similar reviews and implemented various measures regulating the production, export, and use of gelatin and its source materials. While the Company believes that a substantial majority of the gelatin it uses will not be affected by these regulatory measures, it is possible that the supply of certain types of gelatin could become limited, which may result in an increase in the cost of gelatin. PATENTS The Company has a number of active patents on its specialized machinery, processes, products and drug delivery systems. In addition, a number of patent applications are pending and numerous trademarks are held. In the opinion of management, the Company's businesses are not dependent upon any one patent or trademark. 6 SEASONAL BUSINESS No material portion of the Company's business is seasonal. However, second fiscal quarter operating results are generally below the results of other quarters due to the regularly scheduled vacation and annual summer maintenance shutdown of substantially all northern hemisphere softgel facilities. BACKLOG The backlog of unfilled orders was approximately $161.2 million at March 31, 1998, as compared to approximately $157.1 million at March 31, 1997. The Company believes that such backlog of orders at March 31, 1998 is firm and will be filled within the next 12 months. The increase in the backlog primarily reflects the strengthening of softgel demand in the United States. GOVERNMENT REGULATION The Company's products and manufacturing processes and services are subject to the applicable Good Manufacturing Practice standards for the pharmaceutical industry and to other regulations by governmental agencies or departments in each of the countries in which it operates. In the United States, the Company's encapsulation products and manufacturing and packaging services are subject to the Federal Food, Drug and Cosmetic Act, the Comprehensive Drug Abuse Prevention and Control Act of 1970 and various rules and regulations of the Bureau of Alcohol, Tobacco and Firearms of the United States Department of Treasury, the Bureau of Narcotics of the United States Department of Justice and state narcotic regulatory agencies. In other countries, the Company's products and services are subject to analogous regulation. The Company is regularly subjected to testing and inspection of its products and facilities by representatives of various Federal agencies and in addition, the Company comes under the regulation of various state, municipal and foreign health agencies. The Company is also generally required to obtain FDA approval for sales in the United States, as well as approval of the appropriate agencies in other jurisdictions, prior to commencing the sale of many of the proprietary products under development. The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. Compliance with federal, state and local provisions relating to the protection of the environment has had no material effect upon the capital expenditures, earnings or competitive position of the Company and its subsidiaries. The Company was informed in August 1992 that soil at a manufacturing facility in North Carolina owned and operated by the Company from 1975 to 1985 contained levels of tetrachlorethene and other substances which exceeded environmental standards. The Company and the current owner of the facility voluntarily conducted a remedial investigation and remedial and removal actions. The Company will continue to perform additional studies and monitor the area, including testing and removal of groundwater, which may indicate the necessity for additional remedial and removal actions in the future. On the basis of the results of investigations performed to date, the Company does not believe that potential future costs associated with either the investigation or any potential remedial or removal action will ultimately have a materially adverse impact on the Company's business or financial condition. Based on current information, no other significant expenditures for environmental compliance are contemplated in the foreseeable future. RESEARCH AND DEVELOPMENT Costs incurred in connection with the development of new products and manufacturing methods, including both Company and customer-sponsored expenditures, amounted to $38.4 million, $27.8 million and $28.1 million in fiscal 1998, 1997 and 1996, respectively. 7 EMPLOYEES At March 31, 1998, the Company employed approximately 3,600 full-time employees. The Company considers its relations with its employees to be good. FORWARD LOOKING INFORMATION The Company's Annual Report to Shareholders and Annual Report on Form 10-K contain various forward looking statements including statements regarding its market position, results of product development activities of the Company and its customers, financial position and results of operations. These forward looking statements are based on current expectations. Certain important factors could cause the Company's actual results to differ materially from expected and historical results, including those projected or implied by such forward looking statements, including, but not limited to, the following: finalization of the proposed merger with Cardinal Health, Inc., the relative strength of key nutritional products markets; generic competition to key customer pharmaceutical products; successful formulation, scale-up, development and commercialization of customer and company products within the time frame outlined; global economic factors; regulatory matters related to product testing and approvals for the Company and its customers; competitive products and pricing; and product and drug delivery system development and other technological issues. 8 EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The name, age and employment history, including all positions held concurrently or successively in the past five years, of each of the Company's executive officers and directors are as follows (information provided as of June 1, 1998):
PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1) 48 Chairman and Chief Executive of the Company since Aleksandar March 1996. President of the Company since August Erdeljan 1991 and Director of the Company since June 1990. President and Director of R.P. Scherer International Corporation from 1989 to February 1995. President of Pharmaphil Group, Inc. from January 1987 to June 1989. Director of Corporate Development of the Company from June 1985 to January 1987. George L. 44 President and Chief Operating Officer, and Director of Fotiades the Company since January 1998. Group President, Americas and Asia Pacific of the Company from June 1996 to January 1998. President, Warner Wellcome Consumer Heathcare division of the Warner-Lambert Company from January 1994 to December 1995 and President Consumer Health Products Group from November 1992 to December 1993. President Consumer Products- Japan division of Bristol-Myers Squibb Company from January 1992 to November 1992 and Senior Vice President, General Manager of the Clairol U.S. Retail Products division from January 1991 to January 1992. Nicole S. 53 Executive Vice President, Finance, Chief Financial Williams Officer and Secretary of the Company since January 1992 and for R.P. Scherer International Corporation from January 1992 through February 1995. Treasurer of the Company from June 1993 through May 1996 and of R.P. Scherer International Corporation from June 1993 through February 1995. Executive Vice President - Worldwide Operations, SPSS, Inc. from December 1990 to January 1992. Thomas J. 37 Senior Vice President, Corporate Planning and Stuart Development since April 1996. Vice President and Controller of the Company from June 1994 to April 1996 and of R.P. Scherer International Corporation from June 1994 to February 1995. Controller of the Company from August 1991 to June 1994 and of R.P. Scherer International Corporation from May 1990 through February 1995. Manager, Detroit office of Arthur Andersen LLP from June 1987 to May 1990. Dennis R. 45 Treasurer of the Company since May, 1996. Director of McGregor Tax Operations of the Company since August 1993 and of R.P. Scherer International Corporation from August 1993 through February 1995. Assistant Treasurer of the Company from August 1993 through May 1996 and of R.P. Scherer International Corporation from August 1993 through February 1995. Manager of Tax Audit and Planning, Allied-Lyons North America from December 1991 to August 1993. International Tax Manager for Great Lakes Chemical from September 1990 to November 1991. Joseph E. 44 General Counsel and Assistant Secretary of the Company Mitchell since April 1996. Associate General Counsel for Hiram Walker & Sons, Inc. from September 1994 to February, 1996 and Senior Commercial and Corporate Counsel from April 1991 to September 1994. Ronald E. 37 Corporate Controller of the Company since June 1996. Pauli Assistant Treasurer of Kmart Corporation from January 1996 to June 1996, Assistant Controller Financial Planning of Kmart Corporation from January 1995 to January 1996, Assistant Director Investor Relations of Kmart Corporation from March 1994 to January 1995 and Assistant Controller Corporate Reporting of Kmart Corporation from November 1990 to January 1994.
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PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1) Frederick 66 Director of the Company since June 1990 and of R.P. Frank Scherer International Corporation from August 1988 through February 1995. Vice Chairman of Lehman Brothers. Also a director of Pharmaceutical Product Development, Inc., Physicians Computer Network and Diagnostic Products, Inc. James A. Stern 47 Director of the Company since June 1990 and of R.P. Scherer International from June 1990 to February 1995. Chairman of The Cypress Group LLC, since its founding in April 1994. Managing director of Lehman and head of its Merchant Banking Group from 1989 to 1994. Also a director of AMTROL Inc., Cinemark USA, Inc., Frank's Nursery & Crafts, Inc., Lear Corporation, Noel Group, Inc., Genesis ElderCare Corp, WESCO Distribution, Inc., and a trustee of Tuft's University. Lori G. 39 Director of the Company since September 1989 and of Koffman R.P. Scherer International from September 1989 through February 1995. Assistant Secretary of the Company from December 1989 to May 1996. Managing Director, CIBC Capital Partners since April 1995. Senior Vice President, Lehman from 1990 to December 1994. Also a director of LifeCell Corporation. Louis Lasagna, 75 Director of the Company since September 1991 and of M.D. R.P. Scherer International Corporation from June 1992 through February 1995. Dean for Scientific Affairs, Tufts University School of Medicine, since 1995. Dean, Sackler School of Graduate Biomedical Sciences, Tufts University; Professor of Psychiatry and Professor of Pharmacology, Tufts University, in each case since 1984. Independent consultant since 1965. Director of Tufts University Center for the Study of Drug Development since 1975. Chairman of the Board of Astra USA. Member of the Board of Trustees of International Life Sciences Institute/Nutrition Foundation since 1980 and Chairman since 1991. Director of the Foundation for Nutritional Advancement since 1980. Robert H. Rock 48 Director of the Company since September 1991 and of R.P. Scherer International Corporation from June 1992 through February 1995. Chairman of Metroweek Corporation since December 1988. President of MLR Holdings LLC since October 1987. Chairman and Chief Executive Officer of the Hay Group from October 1986 to October 1987. Also a director of the Penn Mutual Life Insurance Company, Hunt Manufacturing Company, Alberto-Culver Company, Quaker Chemical Corporation and the Wistar Institute. John E. Avery 69 Director of the Company since January 1995. Former Chairman of the Americas Society and Council of the Americas from 1993 to 1996. Assistant to the Chairman of Johnson & Johnson from 1992 to 1993. Company Group Chairman, Johnson & Johnson, from 1979 to 1992. Member of the University Council at the Yale University School of Medicine, the operating board of TCW/Latin America Partners, LLC, and the Council on Foreign Relations. Kenneth L. Way 58 Director of the Company since January 1997. Chairman and Chief Executive Officer of Lear Corporation since 1988. Also a director of Comerica Bank.
(1) Where no starting date is given for a principal occupation or employment, such occupation or employment commenced prior to 1992. All directors of the Company serve terms of one year and remain in office until the election of their respective successors. Officers serve at the pleasure of the Board of Directors. There are three committees of the Board of Directors of the Company: the Executive Committee, the Compensation Committee and the Audit Committee. 10 ITEM 2 PROPERTIES The Company develops and manufactures its products at 19 principal worldwide locations with an aggregate floor space of approximately 1.7 million square feet. Fifteen of these facilities are owned in fee by the Company and four facilities, with an aggregate floor space of 552,000 square feet, are leased. The U.S. softgel manufacturing facilities total three, of which two totaling approximately 118,000 square feet, are leased. The 16 foreign manufacturing facilities include 15 owned facilities with an aggregate floor space of 1,029,000 square feet and one leased facility with 434,000 square feet aggregate floor space. Approximately 90% of the foreign facilities primarily manufacture softgels and other dosage delivery systems, while 10% of the foreign facilities produce hardshell capsules. The foreign facilities are located in Argentina, Australia, Brazil, Canada, France, Germany (three facilities), Italy (two facilities), Japan (two facilities), South Korea and the United Kingdom (three facilities). Portions of these facilities are also used for related research and development, administration and warehousing activities. The Company's primary leased facility, a German manufacturing facility of approximately 394,000 square feet in size, has a lease term (including renewal options) extending through December 2008. The Company also leases a production facility in Italy of approximately 40,000 square feet, with a lease term extending through May 2000. Additionally the Company leases its executive offices in Troy, Michigan and sales offices, research facilities and warehouses at a variety of locations in the U.S. and abroad. All leases generally provide for payment of taxes, utilities, insurance and maintenance by the Company and have terms extending for periods from one to fifteen years, including renewal options. In the opinion of the Company, its principal properties, whether owned or leased, are well-maintained and in satisfactory condition, are adequately insured and are suitable and have capacities adequate for the purposes for which they are used. ITEM 3 LEGAL PROCEEDINGS During fiscal 1998, the Company was named as a defendant in a lawsuit pertaining to the Company's acquisition of Pharmagel in 1993. The lawsuit seeks $10 million in damages related to allegations that the plaintiffs had an ownership interest in the French subsidiary of Pharmagel prior to the sale of Pharmagel to the Company. The Company and Pharmagel's former owner find the lawsuit to be without merit. In addition, the Company has in its possession an Escrow from which payments have been suspended pending a resolution of this claim. Such Escrow Agreement was established at the time of the acquisition of Pharmagel to cover any claim the Company might have had against the former owner for breech of representation and warranties related to assets at the time of the acquisition. The Company does not believe resolution of this matter will have a material impact on the Company business or financial condition. The Company was informed in August 1992 that soil at a manufacturing facility in North Carolina owned and operated by the Company from 1975 to 1985 contained levels of tetrachlorethene and other substances which exceeded environmental standards. The Company and the current owner of the facility voluntarily conducted a remedial investigation and remedial and removal actions. The Company will continue to perform additional studies and monitor the area, including testing and removal of groundwater, which may indicate the necessity for additional remedial and removal actions in the future. On the basis of the results of investigations performed to date, the Company does not believe that potential future costs associated with either the investigation or any potential remedial or removal action will ultimately have a materially adverse impact on the Company's business or financial condition. The Company is a party to various legal proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's financial position, results of operations, liquidity or capital resources. 11 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended March 31, 1998. 12 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market for the Company's common shares is the New York Stock Exchange. The following table indicates the high and low sales prices of the Company's common stock as reported on the composite tape of the New York Stock Exchange:
MARKET PRICE ------------ HIGH LOW ---- --- Year ended March 31, 1998: First Quarter $56.50 $44.50 Second Quarter $63.19 $50.25 Third Quarter $65.50 $55.19 Fourth Quarter $68.00 $57.06 Year ended March 31, 1997: First Quarter $45.00 $39.00 Second Quarter $50.63 $39.50 Third Quarter $51.13 $43.38 Fourth Quarter $62.00 $49.50
The Company had 104 common shareholders of record at June 5 1998. The Company did not declare any dividends in the two year period ended March 31, 1998. Restrictions contained in certain of the Company's long-term debt agreements limit the payment of dividends. The Company does not have any present plans to declare or pay cash dividends. 13 ITEM 6 SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31, -------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA : Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $620,716 $588,699 $571,710 $536,682 $449,297 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 409,162 391,648 375,088 339,923 287,389 Selling and administrative expenses . . . . . . . . . . . . 78,187 72,752 72,485 71,661 61,427 Research and development expenses . . . . . . . . . . . . . 25,386 19,979 23,387 21,276 13,090 Restructuring and other charges (1) . . . . . . . . . . . . -- -- 33,804 -- 4,478 Operating income (1). . . . . . . . . . . . . . . . . . . . 107,981 104,320 66,946 103,822 82,913 Interest expense. . . . . . . . . . . . . . . . . . . . . . 9,263 11,693 12,595 13,758 22,480 Net income from continuing operations . . . . . . . . . . . 69,746 56,968 30,703 44,859 30,914 Net income (2) . . . . . . . . . . . . . . . . . . . . . . 69,746 56,968 30,703 44,859 15,094 Depreciation and amortization (3) . . . . . . . . . . . . . 27,414 31,153 29,944 27,449 25,314 Capital additions . . . . . . . . . . . . . . . . . . . . . 87,921 69,887 56,195 54,076 39,503 PER COMMON SHARE (4): Basic earnings from continuing operations . . . . . . . . . $2.89 $2.42 $1.31 $1.93 $1.33 Basic earnings. . . . . . . . . . . . . . . . . . . . . . . 2.89 2.42 1.31 1.93 0.65 Diluted earnings from continuing operations (1). . . . . . . . . . . . . . . . . . . . . . $2.81 $2.31 $1.25 $1.83 $1.27 Diluted earnings. . . . . . . . . . . . . . . . . . . . . . 2.81 2.31 1.25 1.83 0.62 BALANCE SHEET DATA (AT END OF PERIOD): Working capital (5) . . . . . . . . . . . . . . . . . . . . $127,338 $113,854 $110,794 $113,656 $89,681 Total assets. . . . . . . . . . . . . . . . . . . . . . . . 821,597 728,245 707,381 711,373 613,414 Long-term debt, including current portion . . . . . . . . . 168,654 142,630 169,000 185,410 189,277 Minority interests. . . . . . . . . . . . . . . . . . . . . 25,157 35,762 37,268 42,706 35,354 Shareholders' equity. . . . . . . . . . . . . . . . . . . . 398,877 353,029 300,360 273,646 214,710
NOTES TO SELECTED FINANCIAL DATA (1) For the year ended March 31, 1996, includes restructuring and other charges totaling $33.8 million before tax effects ($0.94 per diluted share after tax effects). Those charges include approximately $17.1 million of cash expenses, primarily for severance and other termination benefits and approximately $16.7 million for fixed asset write-downs and other non-cash costs primarily in connection with certain facility closures. For the year ended March 31, 1994, includes charges totaling $4.5 million for the accrual of a settlement of Paco Development Partners (PDP II) litigation, which had been outstanding since 1990 and the write-down of buildings and property related to the relocation of operations in Australia. (2) Includes extraordinary loss of $15.8 million from debt extinguishment for the year ended March 31, 1994. (3) Includes amortization of deferred financing costs and debt discount of $0.4 million, $0.3 million, $0.4 million, $0.5 million and $1.3 million for the years ended March 31, 1998, 1997, 1996, 1995 and 1994, respectively. (4) Basic and diluted earnings per common share has replaced primary and fully diluted earnings per common share, respectively in accordance with Statement of Accounting Standards No. 128, "Earnings per Share". (5) Includes notes payable but does not include current portion of long-term debt. 14 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The following discussion and analysis of financial results and condition covers the fiscal years ended March 31, 1998, 1997 and 1996. A majority of the Company's sales, income and cash flows is derived from its international operations. The financial position and the results of operations of the Company's foreign operations are measured using the local currencies of the countries in which they operate and are translated into U.S. dollars. Although the effects of foreign currency fluctuations are mitigated by the fact that expenses of foreign subsidiaries are generally incurred in the same currencies in which sales are generated, the reported results of operations of the Company's foreign subsidiaries are affected by changes in foreign currency exchange rates and as compared to prior periods will be higher or lower depending upon a weakening or strengthening of the U.S. dollar. In addition, a substantial portion of the Company's net assets are based in its foreign operations and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period. Accordingly, the Company's consolidated shareholders' equity will fluctuate depending upon the strengthening or weakening of the U.S. dollar. A summary of the Company's sales, operating income and identifiable assets by geographic segment is included in Note 13 to the consolidated financial statements. The relationships between operating results and assets of the segments are not comparable due to a variety of factors. These factors include: differing product sales mix, operating and capital costs associated with local regulatory requirements, the age of the Company's manufacturing facilities, whether capital assets are owned or leased, working capital needs, fluctuations in exchange rates and other reasons specific to each country in which the Company operates. On May 17, 1998, the Company signed a definitive merger agreement with Cardinal Health, Inc., an Ohio corporation ("Cardinal"), a distributor of pharmaceuticals and provider of pharmaceutical-related services, headquartered in Dublin, Ohio. The merger agreement, which has been approved by the Boards of Directors of the Company and of Cardinal, provides for the Company to become a wholly owned subsidiary of Cardinal. Under the terms of the proposed merger, stockholders of the Company would receive 0.95 of a Cardinal Common Share in exchange for each outstanding share of the Company's Common Stock. Cardinal would issue approximately 23 million Common Shares in the transaction and would assume the Company's long-term debt which was approximately $168.7 million at March 31, 1998. The merger has been structured as a tax-free transaction and would be accounted for as a pooling of interests for financial reporting purposes. The merger is currently expected to be completed during the second quarter of fiscal 1999, subject to the satisfaction of certain conditions, including approvals by the Company's and Cardinal's shareholders (to the extent required by applicable law and the rules of the New York Stock Exchange), and the receipt of certain regulatory approvals. RESULTS OF OPERATIONS FISCAL YEARS ENDED MARCH 31, 1998 AND 1997 SALES for the fiscal year ended March 31, 1998 were $620.7 million, a 5% increase over the $588.7 million reported in the prior fiscal year. Measured using constant foreign exchange rates, fiscal 1998 sales increased 11%. The current year constant dollar sales gains resulted from: a 15% increase in sales of over-the-counter pharmaceutical ("OTC") softgel products resulting from the strength of demand for generic OTC products in the United States and strong German OTC export volumes; the third fiscal quarter launch of Hoffman-La Roche's new FORTOVASE-Registered Trademark- protease inhibitor softgel product; a 22% increase in sales of Novartis' NEORAL-Registered Trademark- cyclosporin A softgel product and a 40% increase in sales of Vitamin E softgels. The above sales gains were partially offset by local, economic related, weakness in markets in Europe, Asia/Pacific and South America. Revenue from ZYDIS-Registered Trademark-, the Company's quick dissolve tablet technology, grew 15 68% to $38.7 million in fiscal 1998 as a result of a 59% increase in production revenue and milestone payments resulting from agreements with certain customers. GROSS MARGIN was $211.6 million, or 34.1% of sales, in fiscal 1998 versus $197.1 million, or 33.5% of sales in the prior fiscal year. The fiscal 1998 gross margin improvement resulted primarily from increased ZYDIS-Registered Trademark-revenue and strong sales of FORTOVASE-Registered Trademark- and NEORAL-Registered Trademark- pharmaceutical softgels, partially offset by the increase in sales of lower margin vitamin E softgels, albeit at substantially better than historical margins. SELLING AND ADMINISTRATIVE EXPENSES ("SG&A") were $78.2 million, or 12.6% of sales, in fiscal 1998 compared to the $72.8 million, or 12.4% of sales, reported in the prior fiscal year. In the fiscal 1998 fourth quarter the Company incurred $1.6 million, equating to $0.05 per diluted share, in severance expense and other costs as a result of management changes in the Company's Scherer DDS division and Corporate Technical Services areas. Exclusive of severance expense and other costs, fiscal 1998 SG&A expense increased 5%, in-line with sales, representing 12.3% of fiscal 1998 sales versus 12.4% of sales in the prior year. The 5%, or $3.8 million increase in SG&A expense in fiscal 1998 was primarily attributable to increased staffing and information technology costs combined with volume related cost increases in North America and Germany. RESEARCH AND DEVELOPMENT EXPENSE ("R&D"), net of customer reimbursement, was $25.4 million in fiscal 1998, an increase of $5.4 million, or $0.16 per diluted share, from fiscal 1997 expenditures of $20.0 million. Spending on recurring softgel R&D before customer reimbursement increased 34% to 26.6 million in fiscal 1998; customer reimbursement of pharmaceutical softgel development services increased $5.2 million, to $13.0 million. Fiscal 1998 R&D expense related to the Company's Advanced Therapeutic Products ("ATP") group increased $3.8 million to $11.8 million, or $0.34 per diluted share, as a result of expenditures for ongoing clinical trials. ATP is engaged in the development of pharmaceutical products incorporating off-patent drugs in the Company's proprietary drug delivery technologies. OPERATING INCOME for the year ended March 31, 1998 increased 4% to $108.0 million. On a constant exchange rate basis, and exclusive of $1.6 million of severance and other charges, fiscal 1998 operating income increased 12%. The improvement in fiscal 1998 operating income comparisons reflected increased ZYDIS-Registered Trademark- revenue, partially offset by the $5.4 million increase in net R&D spending. NET INTEREST EXPENSE was $7.4 million in fiscal 1998 versus the $8.8 million reported in the prior fiscal year. The $1.4 million decline in net interest expense in fiscal 1998 reflected the Company's ability to fund $87.9 million in fiscal 1998 capital investment and the repurchase of $25.4 million of its common stock, primarily, with internally generated cash flow. INCOME TAX EXPENSE was $16.0 million in fiscal 1998 as compared with $26.3 million in the prior fiscal year. Exclusive of the $11.7 million benefit of the change in tax status of the Company's 51% owned German subsidiary, discussed below, the consolidated effective tax rate was 28% in both fiscal years. In December 1997, the Company finalized part of its long-term tax planning strategy by, together with its joint venture partner, converting the legal ownership structure of the Company's 51% owned subsidiary in Germany, R.P. Scherer GmbH, and a subsidiary thereof, from a corporation to a partnership. As a result of this change in tax status, the Company's tax basis in R.P. Scherer GmbH was adjusted, resulting in a one-time tax refund of approximately $4.6 million, as well as a reduction in cash taxes to be paid in current and future years. Combined, these factors reduced fiscal 1998 income tax expense by $11.7 million and increased reported diluted earnings per share by $0.47. MINORITY INTERESTS in the earnings of less than wholly owned subsidiaries was $14.9 million in fiscal 1998 as compared to $12.3 million in fiscal 1997. The $2.6 million increase in expense related to minority interests was due to a combination of increased profitability at the Company's majority owned German subsidiary and the fact that the German tax conversion effectively resulted in the recording of Germany minority interest expense on a pretax basis beginning in fiscal 1998. NET INCOME was $69.7 million, or $2.81 per diluted share, for the year ended March 31, 1998 as compared 16 to net income of $57.0 million, or $2.31 per diluted share, in fiscal 1997. Fiscal 1998 results were favorably impacted by the change in the tax status of the Company's 51% owned German subsidiary. Exclusive of the one-time benefit and severance charges, fiscal 1998 net earnings were $2.39 per diluted share. Additionally, the strength of the U.S. dollar had the effect of reducing reported fiscal 1998 net income by $0.16 per diluted share. FISCAL YEARS ENDED MARCH 31, 1997 AND 1996 SALES for the fiscal year ended March 31, 1997 were $588.7 million, a 3% increase versus the $571.7 million reported in the prior year. The stronger U.S. dollar relative to most foreign currencies reduced fiscal 1997 sales as compared to the prior fiscal year. Measured using constant foreign exchange rates, fiscal 1997 sales increased 6%. The fiscal 1997 sales increase resulted primarily from a 40% increase in ZYDIS-Registered Trademark- revenues and strong gains in Vitamin E and health and nutritional ("H&N") softgel sales in the United States, the United Kingdom and Australia, partially offset by weak demand for all types of softgel products in continental Europe, a 46% decline in world-wide sales of nifedipine and flat SANDIMMUNE-Registered Trademark- / NEORAL-Registered Trademark- volume as compared to fiscal 1996 which included pipeline loading related to the U.S. launch of NEORAL-Registered Trademark-. GROSS MARGIN was $197.1 million, or 33.5% of sales, in fiscal 1997 versus $196.6 million, or 34.4% of sales in the prior fiscal year. The lower gross margin rate in fiscal 1997 was due to a higher proportion of lower margin H&N product in the sales mix, including a 46% increase in sales of Vitamin E softgels, and to a decline in sales of higher-margin pharmaceutical softgels in Europe resulting primarily from the continuing weakness of key economies and from budgetary measures aimed at reducing government pharmaceutical spending. SELLING AND ADMINISTRATIVE EXPENSES were $72.8 million, or 12.4% of sales, in fiscal 1997 compared to the $72.5 million, or 12.7% of sales, reported in the prior fiscal year. The improvement in the SG&A ratio was largely attributable to cost savings resulting from the fiscal 1997 closing of two softgel facilities and the elimination of certain administrative, marketing and development staff positions at other locations, partially offset by increased spending in North America and France. In January 1996, the Company announced a restructuring plan designed to reduce and rationale manufacturing and overhead structures which were serving non-pharmaceutical markets. The restructuring plan included the closure of softgel manufacturing plants in Windsor, Canada and Neuvic, France, as well as the consolidation and elimination of administrative, marketing and development staff positions in several other locations. As a result of the restructuring plan and other special charges (see Note 3 to the consolidated financial statements), the Company recorded a pre-tax provision of $33.8 million in fiscal 1996, comprised of $17.1 million in cash expenses primarily for severance and other employee termination benefits and $16.7 million for fixed asset writedowns and other non-cash expenses. The after tax cost of the restructuring plan and other special charges was $23.1 million, or $0.94 per diluted share. The restructuring was completed in fiscal 1997 with the final cost of the program approximating the Company's original estimate. NET RESEARCH AND DEVELOPMENT EXPENSE was $20.0 million in fiscal 1997, a decrease of $3.4 million from fiscal 1996 expenditures of $23.4 million. While gross recurring softgel R&D expenses exceeded prior year levels, reduced PULSINCAP-TM- expenditures and a $3.1 million increase in customer reimbursement resulted in lower net recurring R&D expense versus fiscal 1996. R&D expense related to ATP was $8.0 million and $8.5 million in fiscal 1997 and 1996, respectively. OPERATING INCOME was $104.3 million for fiscal 1997 as compared to the $100.8 million, exclusive of restructuring and other special charges, reported in the prior fiscal year. On this same basis, fiscal 1997 operating income increased 4%, and increased 6% on a constant exchange rate basis. Fiscal 1997 operating income comparisons primarily reflected the benefit of cost reduction efforts and increased customer reimbursement of softgel R&D expense, partially offset by lower gross profit margins. NET INTEREST EXPENSE was $8.8 million in fiscal 1997 versus the $10.3 million reported in the prior fiscal 17 year. The $1.5 million decline in net interest expense in fiscal 1997 resulted primarily from favorable short-term interest rates and lower average debt levels during fiscal 1997, reflecting the Company's ability to fund capital investment with internally generated funds. INCOME TAX EXPENSE was $26.3 million with an effective rate of 28% in fiscal 1997 as compared with $11.7 million with an effective rate of 21% in fiscal 1996. The fiscal 1996 effective income tax rate benefited from a favorable income tax adjustment of $3.8 million resulting primarily from resolution of an Australian tax issue and also included certain tax benefits resulting from the restructuring. Exclusive of such items, the Company's consolidated effective income tax rate in fiscal 1996 approximated 29%. On this comparable basis, the slightly lower effective income tax rate in fiscal 1997 reflected changes in the geographic mix of pretax income and the utilization of foreign tax credits and other tax benefits. MINORITY INTERESTS in the earnings of less than wholly-owned subsidiaries was $12.3 million in fiscal 1997 as compared to $14.3 million in fiscal 1996. The reduction in minority interests was due primarily to a decline in earnings of the Company's less-than-wholly-owned subsidiary in Germany. NET INCOME was $57.0 million, or $2.31 per diluted share, for the year ended March 31, 1997 as compared to net income of $50.2 million, or $2.04 per diluted share, in fiscal 1996, before the effects of the fiscal 1996 restructuring and other special items. Such 13% increase in net income resulted primarily from increased sales and resulting gross margin, increased customer reimbursement of softgel R&D expense, lower net interest expense and a reduction in minority interests. The strengthening of the U.S. dollar had the effect of reducing net income by $0.07 per diluted share in the year ended March 31, 1997, as compared to the prior fiscal year. After the effects of the restructuring and other special items, fiscal 1996 net income was $30.7 million, or $1.25 per diluted share. FINANCIAL OUTLOOK The Company's business strategy is focused on strengthening its presence and capabilities in the pharmaceutical industry. Execution of this strategy will continue to require significant outlays for development and manufacturing resources, including new staff and state-of-the-art pharmaceutical development and production facilities. These costs will, to a large extent, precede the related revenues from anticipated pharmaceutical product sales and, therefore, will continue to impact the Company's operating results for fiscal year 1999 and thereafter. In addition to the substantial incremental infrastructure costs supporting the Company's pharmaceutical strategy, a number of other factors are expected to influence sales and earnings growth in fiscal 1999. These factors include the recent strength of the U.S. dollar as compared to that experienced in prior year, the weak pharmaceutical and economic environments in certain markets as well as the precise timing of new product launches, the conclusion of certain ATP licensing agreements and the timing and extent of ATP clinical trial expenditures. 18 GEOGRAPHIC SEGMENT INFORMATION
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31, ------------------------------------------------------------------------- % % 1998 CHANGE 1997 CHANGE 1996(1) ------------------------------------------------------------------------- Sales: United States $210,241 20.2 $174,903 24.0 $141,100 Europe 305,938 (0.6) 307,793 (3.7) 319,540 Other International 104,537 (1.4) 106,003 (4.6) 111,070 -------- -------- -------- Net sales $620,716 5.4 $588,699 3.0 $571,710 -------- -------- -------- -------- -------- -------- Operating Income: United States $47,894 30.6 $36,667 7.1 $34,239 Europe 63,324 5.9 59,812 (4.6) 62,677 Other International 18,094 (12.8) 20,743 2.6 20,221 Unallocated (21,331) (65.3) (12,902) 21.3 (16,387) -------- -------- -------- Operating income $107,981 3.5 $104,320 3.5 $100,750 -------- -------- -------- -------- -------- --------
(1) FISCAL 1996 OPERATING INCOME EXCLUDES RESTRUCTURING AND OTHER CHARGES. UNITED STATES OPERATIONS consist of three softgel manufacturing facilities in St. Petersburg, Florida, including a main plant focused on pharmaceutical and OTC softgel products and separate softgel production facilities dedicated to the production of H&N softgel products and to recreational paintball and cosmetic products. The Company's United States operations generated a 20% sales gain in fiscal 1998 due to strong sales of prescription and OTC pharmaceutical softgel products and natural Vitamin E, combined with enhanced productivity at the St. Petersburg facilities and increased sourcing from other Company subsidiaries. United States prescription pharmaceutical sales increased 9% in fiscal 1998 due primarily to strong first-half demand for valproic acid, Abbott's HYTRIN-Registered Trademark- and other prescription softgel products. Fiscal 1998 sales of OTC pharmaceutical softgels increased 22%, primarily as a result of increased penetration into private label markets. The Company's United States operations generated a 24% sales gain in fiscal 1997, reflecting in part increased production of softgels for the Canadian market as a result of the spring 1996 closing of the Windsor, Canada softgel facility. However, the majority of the fiscal 1997 change resulted from a 42% increase in nutritional softgel sales, driven primarily by increased sales of Vitamin E softgel products resulting from favorable publicity regarding this product's health benefits. Total U.S. pharmaceutical softgel sales increased 3% in fiscal 1997, as an 11% increase in OTC pharmaceutical softgel sales resulting from fiscal 1997 OTC launches and a full year of sales for the several OTC products launched in the prior year were partially offset by reduced sales of nifedipine due to declining demand for that product. Fiscal 1998 operating income from United States operations grew by 31%, or $11.2 million, yielding a 22.8% operating margin as compared with 21.0% in the prior fiscal year. The improvement in fiscal 1998 operating margin resulted primarily from sales leverage on fixed costs and improved H&N margins resulting from a managed shift to the production of higher margin H&N products. Fiscal 1997 operating income for the region increased 7%, or $2.4 million, yielding a 21.0% operating margin as compared with 24.3% in fiscal 1996, exclusive of fiscal 1996 restructuring and other charges. The fiscal 1997 increase resulted primarily from the strength of H&N softgel sales although operating margin was impacted by these products' lower margin. EUROPEAN OPERATIONS consist of softgel manufacturing facilities in France, Italy and Germany, of softgel and ZYDIS-Registered Trademark- production facilities in the United Kingdom and a hardcapsule manufacturing facility in Germany. The region's softgel operations are coordinated through a European headquarters located in Baar, Switzerland. Sales in Europe decreased 1% in fiscal 1998 as reported European sales growth was adversely impacted by the strength of the U.S. dollar versus key European currencies, primarily the German deutsche mark. On a constant dollar basis, fiscal 1998 sales in Europe increased 8% as a result of increased ZYDIS-Registered Trademark- revenue, revenue from the sale of OPTIDYNE technology rights and interests, the November 1997 launch of Hoffman-La Roche's FORTOVASE-Registered Trademark- protease inhibitor softgel product, a 22% increase in sales of Novartis' NEORAL-Registered Trademark- softgels and increased export of other pharmaceutical softgel products from Germany and France. These sales gains were partially offset by weak local demand for both pharmaceutical and 19 non-pharmaceutical softgel products throughout Europe during the fiscal year. Sales of the Company's European segment declined 4% in fiscal 1997, and were flat on a constant dollar basis, as strong United Kingdom H&N sales gains were offset by weak sales throughout continental Europe. Fiscal 1997 sales of the Company's German operations were adversely influenced by lower sales of nifedipine, by comparison against the prior year first-half launch of NEORAL-Registered Trademark- in the United States, and by weak first-half OTC pharmaceutical softgel sales. Additionally, economic weakness throughout continental Europe contributed to an 18% decrease in sales of cosmetic and H&N softgel products in the region. European operating profit increased 6% in fiscal 1998, 16% on a constant dollar basis, while operating margin increased to 20.7% of sales versus 19.4% of sales in the prior year. The improved profitability in Europe was primarily attributable to a more profitable sales mix in Germany, sale of OPTIDYNE technology rights and interests and increased ZYDIS-Registered Trademark- profit contribution, partially offset by increased manufacturing infrastructure costs incurred in anticipation of new pharmaceutical product launches. With respect to fiscal 1997, primarily as a result of the weak fiscal 1997 sales described above, European operating income fell 5%, was flat in constant dollars, and the operating margin fell to 19.4% of sales versus 19.6% of sales in fiscal 1996. OTHER INTERNATIONAL OPERATIONS represent softgel business units operating in Japan, Korea, Australia, Brazil and Argentina and hardcapsule facilities in Canada and Brazil. Other International operations sales declined 1% in fiscal 1998 but increased 7% in constant dollars. The constant dollar increase resulted primarily from H&N sales gains in Australia and Japan. Fiscal 1997 sales of the Company's Other International segment declined 5% versus the prior fiscal year due primarily to the transfer of Canadian softgel production to the United States and the weakness of the Japanese yen versus the U.S. dollar, partially offset by strong H&N sales in Australia and Japan. Excluding the effect of Canadian softgels, Other International sales on a constant dollar basis increased 8% in fiscal 1997 due primarily to the strengthening of H&N softgel markets in Australia and Japan and strong demand for the Company's hardshell capsules. Operating income in the Other International group fell 13% in fiscal 1998 due to the adverse impact of foreign exchange rates and economic related weakness in Asia which also impacted business in South America in late fiscal 1998. The Other International group's fiscal 1997 operating margin increased to 19.6% of sales versus 18.2% of sales in fiscal 1996 due to improved profitability in Australia, Japan and the hardshell business as well as the spring 1996 closing of the less profitable Canadian softgel facility. CASH FLOWS CASH AND CASH EQUIVALENTS increased by $8.4 million in fiscal 1998 and $3.9 million in fiscal 1997 as compared to a decrease of $12.7 million in fiscal 1996. NET CASH PROVIDED BY OPERATIONS totaled $103.7 million, $106.7 million and $75.5 million during fiscal years 1998, 1997, and 1996, respectively. The fiscal 1998 change in cash provided by operations primarily reflected increased net income, offset by higher inventory levels resulting largely from the timing of shipments and increased trade and tax receivables resulting from transactions completed in the latter half of the fiscal year. The $31.2 million improvement in operating cash flow in fiscal 1997 resulted primarily from increased income, a reduction in taxes receivable and modest growth in working capital requirements as working capital freed by the closing of two facilities was shifted to faster growing segments of the business. NET CASH USED BY INVESTING ACTIVITIES was $92.6 million, $67.4 million and $59.1 million for fiscal 1998, 1997 and 1996, respectively. In all periods presented, net cash used by investing activities was comprised primarily of capital expenditures for expansion or improvement of dedicated, "best-in-class" pharmaceutical softgel facilities and for the ZYDIS-Registered Trademark-production facility in the United Kingdom as well as for general facility and equipment upgrades and renovations. Fiscal 1998 capital expenditures consisted primarily of costs related to the continued expansion of the ZYDIS-Registered Trademark- production facility in the United Kingdom and softgel production facilities in France, the United States, and Japan. Fiscal 1997 expenditures focused on the expansion and upgrade of softgel production facilities in France and Japan and 20 the addition of ZYDIS-Registered Trademark- production capacity. Fiscal 1996 softgel expenditures included outlays resulting from the modernization initiative in France and the major upgrade and renovation of the German softgel facility. NET CASH USED BY FINANCING ACTIVITIES was $1.1 million, $34.2 million, and $27.3 million in fiscal 1998, 1997, and 1996, respectively. The Company's financing activities primarily include net borrowings under the Company's bank credit facilities and dividends paid to minority shareholders and subsidiaries. Net borrowing under the Company's bank credit facilities totaled $23.9 million in fiscal 1998, in contrast to net repayments of $23.2 million and $13.3 million in fiscal 1997 and 1996, respectively. In fiscal 1998, the Company repurchased 436,900 of its common shares for $25.4 million and received cash totaling $13.7 million as a result of employee stock option exercises. Dividends paid to holders of minority interests in subsidiaries were $16.7 million, $8.2 million and $13.5 million in fiscal 1998, 1997, and 1996, respectively. The increase in dividends paid to holders of minority interests in fiscal 1998 was due to increased profitability at the Company's majority owned German subsidiary. The fiscal 1997 decline in dividends paid to holders of minority interests in fiscal 1997 was primarily a result of lower profitability in Germany during fiscal 1996. LIQUIDITY AND FINANCIAL CONDITION During the next several years, before giving effect to any implications resulting from the proposed merger transaction with Cardinal, a significant portion of the Company's cash flow will be used to fund capital expenditures, to fund research and development and acquisitions, to service indebtedness and, depending on market conditions, to repurchase up to 5% of the Company's outstanding common stock. The Company believes that future cash flow from operations, together with cash and short-term investments aggregating $36.0 million at March 31, 1998 and amounts available under existing bank credit facilities totaling $174.2 million at March 31, 1998 will be adequate to meet anticipated capital investment, working capital, stock repurchase and debt service requirements. The Company does not currently have plans to declare or pay cash dividends. At March 31, 1998 the Company's debt-to-equity ratio was 33%. The Company has as one of its long-term financial objectives maintenance of a debt-to-equity ratio within the range of 35% to 40%. Capital expenditures are currently anticipated to approximate $90 million in each of fiscal 1999 and fiscal 2000 and to decline to a lower level per year thereafter. Such expenditures will be used to upgrade and expand the "best-in-class" pharmaceutical softgel production facilities in France, Japan, Germany and the United States to meet anticipated customer demand and to ensure compliance with increasingly stringent pharmaceutical Good Manufacturing Practices ("GMP") standards worldwide. In addition, capital spending will include the further expansion of production facilities for the ZYDIS-Registered Trademark- advanced drug delivery system. As of March 31, 1998, the Company had approximately $37.6 million of commitments for future capital expenditures. The Company will also continue to increase its spending for research and development activities for its advanced drug delivery systems, as well as to develop new drug delivery technologies and to fund the Company's ATP initiative. The Company believes that changes currently affecting worldwide pharmaceutical markets will enhance the commercial value of products which demonstrate therapeutic and cost benefits over existing therapies. Expenses associated with ATP increased $3.8 million to $11.8 million in fiscal 1998, and due to costs related to certain clinical trials are expected to again increase in fiscal 1999, after which these costs are expected to decrease. The Company anticipates that ATP group expenses will represent a significant portion of the Company's total R&D spending over the next few years. The Company further anticipates that ATP product sales and royalty revenues will exceed ATP group expenses no earlier than fiscal 2000, assuming that the development and commercialization of such ATP products is successful. The Company periodically reviews drug delivery technologies and other businesses for potential investment, consistent with its strategic objectives. Such investments will not necessarily involve significant initial funding or funding commitments by the Company. Management intends that any acquisition which would require significant funding would be financed using a combination of available cash and short-term investments and, depending upon market conditions and the completion of the merger transaction with Cardinal, the issuance of common stock. Management further intends that the Company's 21 financing of any such acquisition would not materially increase the Company's debt-to-equity ratio over its stated long-term objective of 35% to 40%. In September 1997, the Company entered into a development agreement with Quadrant Healthcare PLC ("Quadrant"). Under the agreement, Scherer acquired exclusive rights to Quadrant's technology as it pertains to fast-dissolving dosage forms. This technology has a broad range of potential applications, including the possible development of controlled release versions of ZYDIS-Registered Trademark-. In addition to the development agreement, Scherer invested approximately $5.7 million in Quadrant in return for $0.8 million of Quadrant's common stock and $4.9 million in the form of a loan note which was convertible into shares of common stock upon the occurrence of certain events, or at the election of the Company. In February 1998, Quadrant initiated an admission of their capital to the "Official List" of the London Stock Exchange, akin to an initial public offering, thereby triggering the conversion of the Company's $4.9 million loan note into shares of Quadrant's common stock. At March 31, 1998, the Company's investment in Quadrant's common stock was carried at $5.8 million, which approximates fair value based on the quoted market price at fiscal year end. At March 31, 1998, the Company's outstanding long-term indebtedness consisted of approximately $99.6 million of 6 3/4% senior notes (net of a $0.4 million discount) due in February 2004, $51.3 million of borrowings under the Company's bank credit facility, $6.4 million of industrial development revenue bonds and approximately $11.4 million of other indebtedness. The Company's bank credit facility provides access to revolving credit borrowings, in various currencies, totaling $175.0 million and expires October 29, 2002. At March 31, 1998, the Company had $51.3 million outstanding under the bank credit facility. In September 1997, the Company extended the term of its existing credit facility by five years and amended certain provisions within the agreement. Under the amended agreement, interest is payable at LIBOR plus 0.350%, or at the bank's prime rate, and includes an annual facility fee of 0.125% of the total credit facility. Pursuant to other revolving credit arrangements, the Company may borrow up to $29.1 million. As of March 31, 1998, the Company had outstanding $0.8 million under these revolving credit arrangements. See Notes 2 and 15 to the consolidated financial statements for information regarding the use of financial instruments and derivatives thereof, including foreign currency hedging instruments. As a matter of policy, the Company does not engage in "speculative" transactions involving derivative financial instruments. INFLATION, NEW ACCOUNTING STANDARDS AND YEAR 2000 ISSUES In the view of management, the effects of inflation and changing prices on the Company's net results of operations and financial condition were not significant. During fiscal 1998, the FASB issued three accounting standards that are effective for fiscal years beginning after December 15, 1997: Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131") and Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" ("FAS 132"). FAS 130 requires that certain transactions, including certain foreign currency and security gains and losses, be prominently disclosed as a component of comprehensive income in the financial statements. FAS 131 establishes annual and interim reporting and disclosure standards for an enterprise's operating segments. FAS 132 adds several new disclosure requirements, such as a reconciliation of obligations and plan assets, including the amount of contributions by employers and plan participants, and the expected return on plan assets. However, FAS 132 does not change the existing method of expense recognition. The Company expects the adoption of these statements will impact the form and content of the Company's financial disclosure but will not materially impact the Company's consolidated financial position, results of operations or cash flows. The Company will adopt these statements in fiscal 1999. The Company relies on computer technology throughout its business in carrying out its day-to-day operations. The Company is currently assessing all of its computer systems and related equipment which may rely on computer technologies to ensure that they are "Year 2000" compliant. As a result of this 22 assessment, the Company expects to both replace some systems and to upgrade others which are not yet Year 2000 compliant. The Company expects its Year 2000 project to be completed on a timely basis. However, there can be no assurance that the systems of other companies or organizations upon which the Company may rely will also be converted on a timely basis or that such failure to convert by another company or organization would not have an adverse effect on the Company's systems. To date, the Company has spent approximately $0.1 million on the Year 2000 project. Costs related to this project will continue through calendar 1999, and are currently estimated to range from $1.0 million to $4.0 million. Future costs related to the Year 2000 project are difficult to estimate accurately and may not be entirely incremental. Actual results could differ materially from the Company's expectations due to unanticipated technological difficulties, project vendor delays and project vendor cost overruns. The Company's stated expectations regarding its Year 2000 project constitute forward-looking statements. 23 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA R.P. SCHERER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED MARCH 31, ------------------------------------- 1998 1997 1996 -------- -------- -------- Net sales $620,716 $588,699 $571,710 Cost of sales 409,162 391,648 375,088 Selling and administrative expenses 78,187 72,752 72,485 Restructuring and other charges (Note 3) -- -- 33,804 Research and development expenses, net 25,386 19,979 23,387 -------- -------- -------- Operating income 107,981 104,320 66,946 -------- -------- -------- Interest expense 9,263 11,693 12,595 Interest earned and other (1,883) (2,885) (2,281) -------- -------- -------- Income before income taxes and minority interests 100,601 95,512 56,632 Income taxes 15,972 26,275 11,655 Minority interests 14,883 12,269 14,274 -------- -------- -------- Net income $69,746 $56,968 $30,703 -------- -------- -------- -------- -------- -------- Basic earnings per common share $2.89 $2.42 $1.31 -------- -------- -------- -------- -------- -------- Diluted earnings per common share $2.81 $2.31 $1.25 -------- -------- -------- -------- -------- -------- Average common shares outstanding - Basic 24,113 23,506 23,362 Average common shares outstanding - Diluted 24,858 24,668 24,535
The accompanying notes are an integral part of this statement. 24 R.P. SCHERER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS) AS OF MARCH 31, --------------- 1998 1997 ------ ----- ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 33,312 $ 24,955 Short-term investments 2,662 3,262 Receivables, less reserves of: 1998 - $3,200,000 1997 - $3,500,000 163,384 127,717 Inventories 68,857 59,280 Other current assets 8,229 8,620 ------- ------- 276,444 223,834 ------- ------- PROPERTY: Property, plant and equipment, at cost 497,970 439,069 Accumulated depreciation and reserves (130,436) (119,895) ------- ------- 367,534 319,174 ------- ------- OTHER ASSETS: Goodwill and intangibles, net of amortization 160,476 168,772 Other assets 17,143 16,465 ------- ------- 177,619 185,237 ------- ------- $821,597 $728,245 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 1,294 $ 1,499 Accounts payable 91,716 61,026 Accrued liabilities 43,634 37,329 Accrued income taxes 12,953 10,934 ------- ------- 149,597 110,788 ------- ------- LONG-TERM LIABILITIES AND OTHER: Long-term debt 168,163 141,822 Other long-term liabilities 51,899 50,758 Deferred income taxes 27,904 36,086 Minority interests in subsidiaries 25,157 35,762 ------- ------- 273,123 264,428 ------- ------- COMMITMENTS AND CONTINGENCIES (Note 12) SHAREHOLDERS' EQUITY: Preferred stock, 500,000 shares authorized, none issued -- -- Common stock, $.01 par value, 50,000,000 shares authorized, shares issued: 1998 -23,996,469; 1997 - 23,568,255 240 236 Additional paid-in capital 233,202 242,500 Retained earnings 192,419 122,673 Currency translation adjustment (26,984) (12,380) ------- ------- 398,877 353,029 ------- ------- $821,597 $728,245 ------- ------- ------- -------
The accompanying notes are an integral part of this statement. 25 R.P. SCHERER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31, ----------------------------- 1998 1997 1996 ------ ------ ------ OPERATING ACTIVITIES: Net income $69,746 $56,968 $30,703 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 21,468 25,131 23,586 Amortization of intangible assets and debt discount 5,946 6,022 6,358 Non-cash restructuring and other charges (Note 3) -- -- 16,690 Minority interests in net income 14,883 12,269 14,274 Deferred tax provision and other 7,838 7,130 (10,942) Increase in receivables (42,477) (3,823) (13,865) (Increase) decrease in inventories and other current assets (13,060) (2,306) 4,763 Increase in accounts payable and accrued liabilities 39,382 5,347 3,948 ------- ------- ------- Net cash provided by operating activities 103,726 106,738 75,515 ------- ------- ------- INVESTING ACTIVITIES: Purchases of plant and equipment (87,921) (69,887) (56,195) Other (4,678) 2,488 (2,906) ------- ------- ------- Net cash used by investing activities (92,599) (67,399) (59,101) ------- ------- ------- FINANCING ACTIVITIES: Proceeds from long-term borrowings 33,268 32,363 29,585 Other long-term debt retirements and payments (5,826) (57,628) (42,649) Short-term borrowings, net (263) (729) (721) Stock options exercised 13,708 -- -- Common stock repurchased (25,353) -- -- Cash dividends paid to minority shareholders of subsidiaries (16,677) (8,214) (13,504) ------- ------- ------- Net cash used by financing activities (1,143) (34,208) (27,289) ------- ------- ------- Effect of currency translation on cash and cash equivalents (1,627) (1,183) (1,833) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 8,357 3,948 (12,708) Cash and cash equivalents, beginning of year 24,955 21,007 33,715 ------- ------- ------- Cash and cash equivalents, end of year $33,312 $24,955 $21,007 ------- ------- ------- ------- ------- ------- The accompanying notes are an integral part of this statement.
26 R.P. SCHERER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31, ------------------------------------------- 1998 1997 1996 ---------- ------------ ------------- COMMON STOCK: Balance at beginning of year $236 $235 $233 Issuance of common stock for stock options exercised 8 1 2 Common stock repurchased (4) - - ---------- ----------- ------------- Balance at end of year $240 $236 $235 ---------- ----------- ------------- ---------- ----------- ------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year $242,500 $239,705 $235,383 Stock options exercised, net of related tax effects 16,051 2,795 4,322 Common stock repurchased (25,349) - - ---------- ----------- ------------- Balance at end of year $233,202 $242,500 $239,705 ---------- ----------- ------------- ---------- ----------- ------------- RETAINED EARNINGS: Balance at beginning of year $122,673 $65,705 $35,002 Net income 69,746 56,968 30,703 ---------- ----------- ------------- Balance at end of year $192,419 $122,673 $65,705 ---------- ----------- ------------- ---------- ----------- ------------- CURRENCY TRANSLATION ADJUSTMENT: Balance at beginning of year $(12,380) $(5,285) $3,028 Adjustment for the year (14,604) (7,095) (8,313) ---------- ----------- ------------- Balance at end of year $(26,984) $(12,380) $(5,285) ---------- ----------- ------------- ---------- ----------- ------------- TOTAL SHAREHOLDERS' EQUITY $398,877 $353,029 $300,360 ---------- ----------- ------------- ---------- ----------- ------------- FOR THE YEARS ENDED MARCH 31, ----------------------------------------- COMMON SHARES OUTSTANDING: 1998 1997 1996 ---------- ---------- ---------- Common shares outstanding at beginning of year 23,568,255 23,460,453 23,316,674 Issued under stock option plans 865,114 107,802 143,779 Repurchased (436,900) - - ---------- ----------- ------------- Common shares outstanding at end of year 23,996,469 23,568,255 23,460,453 ------------ ----------- ------------ ------------ ----------- ------------ The accompanying notes are an integral part of this statement.
27 R.P. SCHERER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS R.P. Scherer Corporation, a Delaware corporation (the "Company"), is a leading international developer and manufacturer of drug delivery systems. The Company's proprietary advanced drug delivery systems improve the efficacy of drugs by regulating their dosage, rate of absorption and place of release. Customers for the Company's products include global and regional manufacturers of prescription and over-the-counter pharmaceutical products, nutritional supplements, cosmetics and recreational products. 2. SUMMARY OF ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and all of its domestic and foreign subsidiaries, some of which are less than wholly owned. All intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION - Revenues from sales of the Company's products to its customers are recognized primarily upon shipment. Non-product revenues related to option, milestone and exclusivity fees are recognized when earned and all obligations of performance have been completed. TRANSLATION OF FOREIGN CURRENCIES - A majority of the Company's sales, income and cash flows is derived from its international operations. The financial position and the results of operations of the Company's foreign operations are measured using the local currencies of the countries in which they operate and are translated into U.S. dollars. Although the effects of foreign currency fluctuations are mitigated by the fact that expenses of foreign subsidiaries are generally incurred in the same currencies in which sales are generated, the reported results of operations of the Company's foreign subsidiaries are affected by changes in foreign currency exchange rates and, as compared to prior periods, will be higher or lower depending upon a weakening or strengthening of the U.S. dollar. In addition, a substantial portion of the Company's net assets are based in its foreign subsidiaries and are translated into U.S. dollars at the foreign currency exchange rates in effect at the end of each period. Accordingly, the Company's consolidated shareholders' equity will fluctuate depending upon the strengthening or weakening of the U.S. dollar. FOREIGN CURRENCY HEDGING - Borrowings under long-term foreign currency loans are used to partially hedge against declines in the value of net investments in certain foreign subsidiaries. The Company also periodically enters into foreign currency exchange contracts to hedge certain exposures related to selected transactions that are relatively certain as to both timing and amount (see Note 15 for further discussion). RESEARCH AND DEVELOPMENT COSTS - Costs incurred in connection with the development of new products and manufacturing methods are charged to income as incurred. Customer reimbursements in the amount of $13.0 million, $8.0 million and $4.7 million were received for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. Research and development expenses reflected in the consolidated statement of income are net of such reimbursements. INCOME TAXES - Deferred U.S. and foreign income taxes are provided based on enacted tax laws and rates on earnings of the parent and earnings of subsidiary companies which are intended to be remitted to the parent company in the future. Unremitted earnings of subsidiary companies on which deferred taxes have not been provided would, if remitted, be taxed at substantially reduced effective rates due to the utilization of foreign or other tax credits. 28 EARNINGS PER COMMON SHARE - The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), in December 1997. Under FAS 128, basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income by the sum of the weighted average number of common shares and the number of equivalent shares assumed outstanding under the Company's stock option plans during the period. Earnings per common share information has been restated for all periods presented. Basic and diluted earnings per common share were computed as follows:
FOR THE YEARS ENDED MARCH 31, ----------------------------- (in thousands, except per share data) 1998 1997 1996 --------- --------- ------- Net income $69,746 $56,968 $30,703 --------- --------- ------- --------- --------- ------- Weighted average common shares outstanding - basic 24,113 23,506 23,362 Effect of options assumed exercised 745 1,162 1,173 --------- --------- ------- Weighted average common shares outstanding - diluted 24,858 24,668 24,535 --------- --------- ------- --------- --------- ------- Basic earnings per common share $2.89 $2.42 $1.31 --------- --------- ------- --------- --------- ------- Diluted earnings per common share $2.81 $2.31 $1.25 --------- --------- ------- --------- --------- -------
CASH EQUIVALENTS - For purposes of reporting cash flows, all highly liquid investments which are readily convertible to known amounts of cash and which have a maturity of three months or less when purchased are considered cash equivalents. INVENTORIES - Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out basis for substantially all inventories. Market is the lower of replacement cost or estimated net realizable value. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. The components of inventories are as follows:
AS OF MARCH 31, ------------------ (IN THOUSANDS) 1998 1997 -------- ------- Raw materials and supplies $36,671 $32,886 Work in process 8,809 8,604 Finished goods 23,377 17,790 --------- -------- Total inventories $68,857 $59,280 --------- -------- --------- --------
PROPERTY, PLANT & EQUIPMENT - Property, plant and equipment are recorded at cost and are depreciated over their related estimated useful lives primarily using the straight-line method for financial reporting and accelerated methods for tax reporting. Maintenance and repair costs are expensed as incurred. Interest cost capitalized as part of the construction cost of capital assets amounted to $3.6 million, $2.1 million and $3.1 million in fiscal years 1998, 1997 and 1996, respectively. A summary of property, plant and equipment follows:
AS OF MARCH 31, ------------------------ (IN THOUSANDS) 1998 1997 ---------- ---------- Land and improvements $17,404 $17,772 Building and equipment 117,065 99,011 Machinery and equipment 298,607 277,310 Construction in progress 64,894 44,976 ---------- ---------- Total property, plant and equipment $497,970 $439,069 ---------- ---------- ---------- ----------
29 LONG-TERM ASSETS - In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of", the Company re-evaluates the carrying values of its long-term assets, including goodwill and certain identifiable intangibles, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation takes into account all estimated future cash flows expected to result from the use of the asset and its eventual disposition, with an impairment loss being recognized if the evaluation indicates that the estimated future cash flows, undiscounted and without interest charges, will be less than the carrying value. No such impairment loss was recognized in fiscal 1998 or fiscal 1997. GOODWILL AND INTANGIBLES - Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired, primarily related to the acquisition of the Company in June 1989 and the acquisition of Pharmagel in July 1993. Goodwill is amortized using the straight-line method, generally over forty years. Other intangible assets include deferred financing fees, patents, licenses and trademarks. Deferred financing fees are amortized over the life of the related obligations using the effective interest method. Other intangible assets, totaling $1.8 million and $2.5 million net of accumulated amortization as of March 31, 1998 and 1997, respectively, are recorded at cost and amortized over their expected useful lives using the straight-line method. The accumulated amortization of goodwill and other intangibles is $53.9 million and $43.6 million as of March 31, 1998 and 1997, respectively. PREFERRED STOCK - The Company is authorized to issue 500,000 shares of preferred stock in one or more series and to fix as to any series the dividend rate, redemption prices, preferences in liquidation or dissolution, sinking fund terms, if any, conversion rights, voting rights and any other preference or special rights and qualifications. The issuance of preferred stock in certain circumstances may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Company's common stock at a premium over the market price of the common stock and may adversely affect the market price of and other rights of the holders of common stock. The Company has no present plans to issue any shares of preferred stock. USE OF ESTIMATES - The financial statements are prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management's best estimates and judgments, as of the respective financial statement dates. RECENTLY ISSUED ACCOUNTING STANDARDS - During fiscal 1998, the FASB issued three accounting standards that are effective for fiscal years beginning after December 15, 1997: Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131") and Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" ("FAS 132"). FAS 130 requires that certain transactions, including certain foreign currency and security gains and losses, be prominently disclosed as a component of comprehensive income in the financial statements. FAS 131 establishes annual and interim reporting and disclosure standards for an enterprise's operating segments. FAS 132 adds several new disclosure requirements, such as a reconciliation of obligations and plan assets, including the amount of contributions by employers and plan participants, and the expected return on plan assets. However, FAS 132 does not change the existing method of expense recognition. The Company expects the adoption of these statements will impact the form and content of the Company's financial disclosure but will not materially impact the Company's consolidated financial position, results of operations or cash flows. The Company will adopt these statements in fiscal 1999. 3. RESTRUCTURING AND OTHER CHARGES In the fourth quarter of fiscal 1996, the Company announced a restructuring plan designed to enhance the Company's long-term profitability by reducing and rationalizing manufacturing and overhead structures which were primarily servicing non-pharmaceutical markets (the "Restructuring"). The Restructuring included the closure of softgel manufacturing plants in Windsor, Canada and Neuvic, France, as well as the 30 consolidation and elimination of certain administrative, marketing and development staff positions in several other locations and was completed by mid-fiscal 1997. In the fourth quarter of fiscal 1996, the Company recorded special provisions totaling $33.8 million before income tax effects related to the Restructuring and other charges, including $1.5 million related to retirement or severance costs for employees not included in the Restructuring, $1.9 million related to a long-term asset write-off resulting from a pension plan termination and a $2.8 million write-off of an intangible asset for which recoverability was determined to be impaired. On an after-tax basis, the cost of the Restructuring and other charges was approximately $23.1 million, or $0.94 per common share. Of this amount, approximately $17.1 million represented cash charges and $16.7 million represents non-cash charges. The Restructuring was completed in fiscal 1997 with the final cost of the program approximating the Company's original estimate. 4. INCOME TAXES In December 1997, the Company finalized part of its long-term tax planning strategy by converting, with its joint venture partner, the legal ownership structure of the Company's 51% owned subsidiary in Germany, R.P. Scherer GmbH, and a subsidiary thereof, from a corporation to a partnership ("Conversion"). As a result of this change in tax status, the Company's tax basis in R.P. Scherer GmbH was adjusted, resulting in a one-time tax refund of approximately $4.6 million, as well as a reduction in cash taxes to be paid in current and future years. Combined, these factors reduced fiscal 1998 income tax expense by $11.7 million and increased reported diluted earnings per share by $0.47. A summary of income from continuing operations before income taxes, minority interests and extraordinary items is reflected below. Such income is exclusive of various intercompany income/expense items, such as royalties, interest, dividends and similar items, which are taxable/deductible in the respective locations. Therefore, the relationship of domestic and foreign taxes to reported domestic and foreign income is not representative of actual tax rates.
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31, ----------------------------- 1998 1997 1996 -------- -------- --------- Income before income taxes and minority interests: United States $40,342 $32,623 $21,300 Foreign 60,259 62,889 35,332 -------- -------- -------- $100,601 $95,512 $56,632 -------- -------- -------- -------- -------- -------- Provision for currently payable income taxes: United States $5,349 $1,697 $4,516 Foreign 14,132 17,884 17,374 -------- -------- -------- 19,481 19,581 21,890 -------- -------- -------- Provision (credit) for deferred income taxes: United States 2,903 6,319 (8,772) Foreign (6,412) 375 (1,463) -------- -------- -------- (3,509) 6,694 (10,235) -------- -------- -------- Total income taxes $15,972 $26,275 $11,655 -------- -------- -------- -------- -------- --------
31 The deferred tax provision for fiscal 1998 included a net $7.0 million credit resulting from a decrease in deferred tax valuation allowances, reflecting the realization of future tax benefits which were previously fully reserved. The fiscal 1998 deferred tax provision also reflects a $0.7 million credit resulting from changes in enacted statutory tax rates in certain countries. The deferred tax provision for fiscal 1997 included a net $3.7 million credit resulting from a decrease in deferred tax valuation allowances, as well as a $0.2 million charge resulting from changes in enacted statutory tax rates in certain countries. The deferred tax provision for fiscal 1996 included a net $5.6 million credit resulting from a decrease in deferred tax valuation allowances. The components of deferred taxes as of March 31, 1998 and 1997 were as follows:
(IN THOUSANDS) 1998 1997 ------------------------------ ------------------------------- DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES ASSETS LIABILITIES ------------ ------------ ------------ ------------ Property, plant and equipment $6,640 $49,101 $2,690 $48,351 Foreign and other tax credit carryforwards 8,856 - 8,732 - Capital loss carryforwards 6,266 - 6,379 - Pensions and other postretirement benefits 5,611 750 6,341 803 Stock options 2,001 - 3,610 - Defeasance of debt 1,195 - 1,524 - Miscellaneous other 9,686 29 6,466 63 --------- --------- --------- --------- Subtotal 40,255 49,880 35,742 49,217 Valuation allowances (15,317) - (16,322) - --------- --------- --------- --------- Total deferred taxes $24,938 $49,880 $19,420 $49,217 --------- --------- --------- --------- --------- --------- --------- ---------
At March 31, 1998, net current future tax benefits of $3.0 million were included in other current assets and $27.9 million of net long-term deferred income tax liabilities were reflected in the accompanying consolidated statement of financial position. The March 31, 1998 valuation allowances included approximately $6.0 million related to tax credit carryforwards recognized for financial reporting purposes. When such carryforwards are used, the reduction in the valuation allowance will increase additional paid-in capital. At March 31, 1997, net current future tax benefits of $2.8 million were included in other current assets, $3.5 million of net long-term future tax benefits were included in other assets and $36.1 million of net long-term deferred income tax liabilities were reflected in the accompanying consolidated statement of financial position. The capital loss carryforwards noted above expire in 2001 and the foreign tax credit carryforwards noted above expire through 2002. At March 31, 1998, foreign earnings of approximately $117.8 million had been retained indefinitely by subsidiaries for reinvestment and accordingly no provision has been made for income taxes that would be payable upon the distribution of such earnings. The difference between consolidated income taxes as computed at the United States statutory rate and as reported in the consolidated statement of income is summarized as follows:
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31, ------------------------------- 1998 1997 1996 -------- ------- ------- United States statutory tax $35,210 $33,429 $19,821 Increases (reductions) in taxes due to: Effect of Conversion (11,700) - - Difference in effective foreign tax rates (1,670) (1,032) (1,883) Foreign tax credit carryforwards utilized (2,851) (3,416) (1,452) Other tax credit generation (utilization) 1,595 1,200 (1,148) Goodwill amortization 1,374 1,481 1,532 Translation losses (1,364) (581) (12) Changes in valuation allowances and other items, net (4,622) (4,806) (5,203) --------- --------- --------- Consolidated income taxes $15,972 $26,275 $11,655 --------- --------- --------- --------- --------- ---------
Income tax payments, net of refunds, were $29.5 million, $3.1 million and $24.6 million for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. 32 5. SHORT-TERM BORROWINGS AND LINES OF CREDIT At March 31, 1998, the Company had short-term line of credit arrangements with foreign banking institutions under which the Company and its subsidiaries may borrow up to $29.1 million, subject to limitations imposed by the bank credit facility (Note 7). There are no compensating balance requirements related to these lines of credit. The total indebtedness outstanding under such arrangements was $0.8 million and $0.7 million at March 31, 1998 and 1997, respectively. The weighted average interest rates on the short-term borrowings outstanding at March 31, 1998 and 1997 were 7.1% and 10.8%, respectively. 6. ACCRUED AND OTHER LONG-TERM LIABILITIES Accrued and other long-term liabilities consisted of the following as of March 31, 1998 and 1997:
(IN THOUSANDS) 1998 1997 ------- ------- Accrued Liabilities: Salaries, wages and bonuses $16,598 $13,721 Interest 1,692 1,528 Other 25,344 22,080 ------- ------- Total accrued liabilities $43,634 $37,329 ------- ------- ------- ------- Other Long-Term Liabilities: Pension benefits (Note 9) 33,447 $34,194 Other postretirement benefits (Note 9) 6,840 6,568 Other 11,612 9,996 ------- ------- Total other long-term liabilities $51,899 $50,758 ------- ------- ------- -------
7. LONG-TERM DEBT Long-term debt consisted of the following as of March 31, 1998 and 1997:
(IN THOUSANDS) 1998 1997 -------- -------- 6 3/4% Senior Notes due 2004 (net of discount of $432 and $504 in fiscal 1998 and 1997, respectively) $99,568 $99,496 Borrowings under bank credit agreement 51,306 28,504 Industrial development revenue bonds 6,350 6,350 Other 11,430 8,280 -------- -------- Total long-term debt 168,654 142,630 Less - current portion (491) (808) -------- -------- Long-term portion $168,163 $141,822 -------- -------- -------- --------
The 6 3/4% Senior Notes ("Senior Notes") due February 1, 2004 are noncallable and are unsecured obligations, ranking PARI PASSU with all other unsecured and senior indebtedness of the Company. Interest on the Senior Notes is payable February 1 and August 1. The indenture under which the Senior Notes were issued contains certain covenants which, among other things, limit the ability of the Company and its subsidiaries to incur liens, to enter into sale and lease-back transactions, to engage in certain transactions with affiliates and to merge or consolidate with, or transfer all or substantially all, of its assets to another person. During the quarter ended December 31, 1997, the Company extended the term of its existing bank credit facility by five years and amended certain provisions within the agreement. The amended credit facility: expires October 29, 2002; maintains the previous aggregate borrowing limit of up to $175.0 million in various currencies; sets interest rates on outstanding borrowings at LIBOR plus 0.350%, or the bank's prime rate; and includes an annual facility fee of 0.125% of the total credit facility. Borrowings under this agreement are unsecured and rank PARI PASSU with all other unsecured and senior indebtedness of the Company. The bank credit facility requires that the Company satisfy various annual and quarterly financial tests, including maintenance on a consolidated basis of a specified minimum or maximum current level of tangible net worth and cash flow coverage, leverage and fixed charge ratios. The agreement also restricts the Company's ability to incur additional indebtedness or liens, make investments and loans, dispose of 33 assets, or engage in certain business combinations and limits the ability of the Company to pay dividends. As of March 31, 1998, the Company does not have plans to declare or pay any cash dividends. At March 31, 1998 the Company had variable interest rate industrial development revenue bonds aggregating $6.4 million due in 2015. The interest rate in effect at March 31, 1998, was 3.7%. The weighted average interest rates on long-term debt outstanding at March 31, 1998 and 1997 were 6.5% and 6.9%, respectively. The annual maturities of long-term debt, excluding amounts payable under capitalized lease obligations, for the five succeeding fiscal years were: 1999 - $0.5 million; 2000 - $47.4 million; 2001 - $1.0 million; 2002 - $1.0 million; 2003 - $0.9 million and thereafter - $117.8 million. Interest paid was $12.3 million, $13.8 million and $15.1 million for the years ended March 31, 1998, 1997 and 1996, respectively. 8. LEASES Total rental expense under operating leases was $7.6 million, $7.9 million and $9.2 million for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. The annual minimum rental commitments under long-term operating leases for the five succeeding fiscal years are: 1999 - $6.0 million; 2000 - $5.9 million; 2001 - $5.0 million; 2002 - $4.2 million; 2003 - $4.6 million; and 2004 and thereafter - $20.1 million. Future capitalized lease commitments are not significant. 9. PENSIONS AND OTHER POSTRETIREMENT BENEFITS PENSIONS - The Company has several pension plans covering substantially all salaried and hourly employees. In general, the Company's domestic plans provide defined pension benefits based on years of service and level of compensation. Foreign subsidiaries provide for pension benefits in accordance with local customs or law. The Company funds its pension plans at amounts required by the applicable regulations. Pension expense included the following:
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31, ----------------------------- 1998 1997 1996 ------ ------ ------ Service cost of benefits earned during year $4,906 $4,499 $3,994 Interest cost on projected benefit obligation 5,383 5,166 4,800 Actual return on plan assets (5,040) (4,074) (4,536) Net amortization and deferral 1,069 1,028 1,889 ------ ------ ------ Total pension expense $6,318 $6,619 $6,147 ------ ------ ------ ------ ------ ------
34 The following table shows the status of the various plans and amounts included in the Company's consolidated statement of financial position as of March 31, 1998 and 1997:
(IN THOUSANDS) 1998 1997 ----------------------------- ------------------------------ PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS ------------- ------------- ------------- ------------- Actuarial present value of: Vested benefit obligation $1,108 $ 71,348 $23,947 $35,071 Non-vested benefit obligation 103 4,482 125 5,250 ------ -------- ------- ------- Accumulated benefit obligation 1,211 75,830 24,072 40,321 Effects of anticipated future compensation increases 53 9,559 985 7,586 ------ -------- ------- ------- Projected benefit obligation 1,264 85,389 25,057 47,907 Plan assets at fair value 1,595 40,626 25,612 8,927 ------ -------- ------- ------- Projected benefit obligation in excess of (less than) plan assets (331) 44,763 (555) 38,980 Unamortized net loss (1,513) (11,187) (549) (4,844) Unrecognized prior service cost - (129) (202) 58 ------ -------- ------- ------- Accrued pension (asset) liability recorded in the consolidated statement of financial position $(1,844) $ 33,447 $(1,306) $34,194 ------ -------- ------- ------- ------ -------- ------- -------
Plan assets consist primarily of marketable securities, equity securities, cash equivalents, U.S. and foreign government securities and corporate bonds. The average of the assumptions used as of March 31, 1998, 1997 and 1996 in determining the pension expense and benefit obligation information shown above were as follows:
1998 1997 1996 ---- ---- ---- Discount rate 7.5% 7.5% 7.4% Rate of compensation increase 4.6 4.3 4.5 Long-term rate of return on plan assets 10.1 10.0 9.8
In addition to the pension plans, the Company provides eligible U.S. employees the opportunity to participate in a savings plan that permits contributions on a pretax basis. Generally, all employees are eligible to participate as of the first of the month following completion of six months of employment with the Company. Contributions by employees, and the portion matched by the Company, may be applied to various investment alternatives. The Company's contributions amounted to $0.3 million, $0.2 million and $0.2 million in fiscal 1998, 1997 and 1996. OTHER POSTRETIREMENT BENEFITS - The Company charges the expected cost of postretirement benefits to expense during the years that eligible employees render service. The following table reconciles the status of the accrued postretirement liability as of March 31 (based on January 1 measurement dates):
(IN THOUSANDS) 1998 1997 ------ ------ Accumulated postretirement benefit obligation: Retirees $1,927 $1,816 Active employees 2,607 1,826 ------ ------ Accumulated postretirement benefit obligation in excess of plan assets 4,534 3,642 Unrecognized net gain 2,506 3,126 ------ ------ Accrued postretirement benefit liability (including $200 in current liabilities) $7,040 $6,768 ------ ------ ------ ------
Net postretirement benefits cost for the years ended March 31, 1998, 1997 and 1996 included:
(IN THOUSANDS) 1998 1997 1996 ---- ---- ---- Service cost $201 $210 $136 Interest cost on accumulated postretirement benefit obligation 138 204 186 ---- ---- ---- Net postretirement benefit cost $339 $414 $322 ---- ---- ---- ---- ---- ----
35 For measurement purposes, annual rates of increase in the per capita costs of covered health care claims of 7%, 8% and 9% were assumed for 1998, 1997 and 1996, respectively. The rate was assumed to decrease by 1% in fiscal 1999 to a rate of 6% beyond 2002. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of the measurement date of January 1, 1998, by $0.8 million and the aggregate of the service and interest cost components of net postretirement cost for fiscal 1998 by $0.1 million. The discount rate used in determining the accumulated postretirement benefit obligation was 7.00% and 7.75% for fiscal years 1998 and 1997, respectively. 10. STOCK COMPENSATION PLANS The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock. 1992 AND 1997 STOCK OPTION PLANS - The Company's management stock option plans are designed to provide key management personnel incentive to maximize shareholder value through improved Company financial performance. The 1997 Stock Option Plan replaced the 1992 Stock Option Plan, under which no shares remained available for grant. Under the 1997 Stock Option Plan, the exercise price of such options is established by the Compensation Committee of the Board and typically are set at the higher of the fair market value at the beginning of the fiscal year increased at a 5% annual rate compounded over five years or the fair market value at the date of grant. The number of stock options a participant is granted is established by the Compensation Committee of the Board and is typically based upon a financial performance formula. Options granted under the 1992 and 1997 Stock Option Plans generally vest after three years from the date of grant and expire four years after the date of vesting. The following summarizes stock option activity over the past three years under the 1992 and 1997 Stock Option Plans:
1998 1997 1996 ---------------------- ---------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- --------- --------- Balance at beginning of year 1,917,805 $42.69 1,648,385 $38.92 1,515,783 $35.11 Option activity for the year: Granted for fiscal year 587,947 $77.93 368,172 $53.85 222,239 $59.81 Exercised (364,025) $30.10 (98,752) $27.33 (89,637) $26.33 Canceled (157,937) $28.13 - - --------- --------- --------- Balance at end of year 1,983,790 $56.55 1,917,805 $42.69 1,648,385 $38.92 --------- --------- --------- --------- --------- ---------
Under APB 25, no compensation expense was recognized for fiscal 1998, 1997 or 1996 in connection with the 1992 and 1997 Stock Option Plans. As of March 31, 1998, 302,535 options for common shares were available under the 1997 Stock Option Plan. DIRECTOR STOCK OPTIONS - In fiscal 1998, no options were granted to outside directors. In fiscal 1997, 12,000 options, exercisable at $50.25 per share, were granted to an outside director of the Company. In fiscal 1995, 48,000 options, exercisable at $45.38 per share, were granted to four outside directors of the Company. In fiscal 1992, 36,000 options, exercisable at $18.00 per share, were granted to three outside directors of the Company. Director options vest three years from the date of grant and expire seven years after the date of vesting. During fiscal 1996 and 1995, respectively, 4,000 and 12,000 fiscal 1992 granted options were exercised. 1990 STOCK OPTION PLANS - In November 1990, the Company implemented three stock option plans under which a total of 1,239,612 options for shares of the Company's common stock were authorized for issuance to key management personnel. As a result of the Company's sale of common stock in October 1991, all 36 options granted under such plans became fully vested. From time-to-time additional grants are made under the 1990 Stock Option Plans. Additional grants typically vest over the three years following the date of grant. All such options expire ten years from the date of grant. Information on the number of shares under option for the 1990 Plan, exercisable at $5.49 per share follows:
1998 1997 1996 --------- --------- --------- Balance at beginning of year 1,036,256 1,034,841 1,084,983 Granted during year 5,116 10,465 - Exercised (501,049) (9,050) (50,142) Canceled (7,525) - - --------- --------- --------- Balance at end of year 532,798 1,036,256 1,034,841 --------- --------- --------- --------- --------- ---------
In accordance with APB 25, the Company recognized compensation expense related to these grants of $0.1 million in each of fiscal 1998 and 1997. Subject to certain exceptions, pursuant to the terms of the Company's stock option plans, unvested stock options automatically vest upon change in control. Options exercisable under the Company's stock option plans at each of March 31, 1998 and March 31, 1997, totaled 989,893 and 1,534,742, respectively. A summary of stock options outstanding at March 31, 1998, follows:
Options Outstanding at March 31, 1998 Options Exercisable at March 31, 1998 - --------------------------------------------------------- ------------------------------------- Weighted Weighted Average Average Range of Remaining Life Exercise Weighted Average Exercise Prices Options (Yrs.) Price Options Exercise Price - ---------------- --------- ---------------- --------- ------- ---------------- $5.49 to $18.00 552,798 3.0 $5.94 542,034 $5.95 $22.05 to $33.52 92,084 1.2 $22.05 92,084 $22.05 $33.53 to $59.82 1,453,759 5.1 $48.32 355,775 $35.28 $59.83 to $81.56 497,947 7.2 $81.56 - - --------- ------- 2,596,588 4.7 $44.49 989,893 $17.99 --------- ------- --------- -------
PRO FORMA STOCK OPTION DATA - The Company measures stock compensation expense in accordance with APB 25 and related interpretations. Had compensation cost been determined using the fair market value-based accounting method for options granted in fiscal 1998, 1997 and 1996, pro forma net income for fiscal 1998, 1997 and 1996 would have been $64.3 million, $55.3 million and $29.9 million, respectively, and pro forma net income per diluted share for fiscal 1998, 1997 and 1996 would have been $2.59, $2.24 and $1.22, respectively. The fair value of these options was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for fiscal 1998, 1997 and 1996, respectively: risk free interest rates of 5.5%, 6.5% and 6.3%; dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 0.29, 0.27 and 0.28; and a weighted average expected life of the options of five years. The weighted average fair value of stock options granted, as calculated using the Black-Scholes option valuation model was $28.44 per diluted share, $12.68 per diluted share and $13.79 per diluted share in fiscal 1998, 1997 and 1996, respectively. For the pro forma disclosures, the options' estimated fair value was amortized over their expected life. These pro forma disclosures are not indicative of anticipated future disclosures because FAS 123 does not apply to grants made prior to 1995. The pro forma disclosures include only the first year of vesting for fiscal 1998 awards, the second year of vesting for fiscal 1997 awards and the third year of vesting for fiscal 1996 awards. Additionally, the fair value of these options was estimated as of the date of grant using an option pricing model which was designed to estimate the fair value of options which, unlike employee stock options, can be traded at any time and are fully transferable. The model requires the input of several highly subjective assumptions including the expected future volatility of the stock price. 37 11. RELATED PARTY TRANSACTIONS Certain foreign subsidiaries purchase gelatin materials and the Company's German subsidiary leases plant facilities, purchases other services and receives loans from time-to-time from a German company which is also the minority partner of the Company's German and certain other European subsidiaries. Gelatin purchases, at prices comparable to estimated market prices, amounted to $25.0 million, $24.6 million and $23.9 million for the years ended March 31, 1998, 1997 and 1996, respectively. Rental payments amounted to $4.8 million, $5.4 million and $5.8 million and purchased services amounted to $5.2 million, $5.5 million and $5.9 million for each of the respective fiscal years. 12. COMMITMENTS AND CONTINGENCIES The Company was informed in August 1992 that soil at a manufacturing facility in North Carolina owned and operated by the Company from 1975 to 1985 contained levels of tetrachlorethene and other substances which exceeded environmental standards. The Company and the current owner of the facility voluntarily conducted a remedial investigation and remedial and removal actions. The Company will continue to perform additional studies and monitor the area, including testing and removal of groundwater, which may indicate the necessity for additional remedial and removal actions in the future. On the basis of the results of investigations performed to date, the Company does not believe that potential future costs associated with either the investigation or any potential remedial or removal action will ultimately have a materially adverse impact on the Company's business or financial condition. The Company is a party to various other legal proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's financial position, results of operations, liquidity or capital resources. As of March 31, 1998, the Company has capital expenditure commitments related primarily to plant expansions amounting to approximately $37.6 million. 38 13. SEGMENT DATA The Company is engaged principally in the production of softgels, hardcapsules and other drug delivery systems for the pharmaceutical, health and nutritional and cosmetic products industries. The Company's operations are divided into three geographical areas: United States, Europe and Other International. Europe represents operations in the United Kingdom, France, Italy and Germany. Other International consists of operations in Canada, the Pacific and Latin America.
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- Sales: United States $210,241 $174,903 $141,100 Europe 305,938 307,793 319,540 Other International 104,537 106,003 111,070 -------- -------- -------- Net sales (1) $620,716 $588,699 $571,710 -------- -------- -------- -------- -------- -------- Operating Income: United States $47,894 $36,667 $33,453 Europe 63,324 59,812 39,330 Other International 18,094 20,743 12,960 Unallocated (2) (21,331) (12,902) (18,797) -------- -------- -------- Total operating income $107,981 $104,320 $66,946 -------- -------- -------- -------- -------- -------- Identifiable assets: United States $140,476 $104,750 $100,298 Europe 489,919 389,447 375,873 Other International 143,464 133,488 134,102 Unallocated (3) 47,738 100,560 97,108 -------- -------- -------- Total assets $821,597 $728,245 $707,381 -------- -------- -------- -------- -------- --------
(1) NO SINGLE CUSTOMER OR PRODUCT REPRESENTS 10% OR MORE OF SALES AND INTERSEGMENT SALES ARE NOT SIGNIFICANT. (2) UNALLOCATED OPERATING INCOME INCLUDES $11.8 MILLION, $8.0 MILLION AND $8.8 MILLION OF RESEARCH AND DEVELOPMENT EXPENSES ASSOCIATED WITH THE COMPANY'S ADVANCED THERAPEUTIC PRODUCTS GROUP IN FISCAL YEARS 1998, 1997 AND 1996, RESPECTIVELY. (3) UNALLOCATED IDENTIFIABLE ASSETS ARE PRINCIPALLY CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND OTHER ASSETS. The net assets of foreign subsidiaries were $220.4 million, $217.0 million and $216.3 million at March 31, 1998, 1997 and 1996, respectively. The Company's share of foreign net income was $56.2 million, $36.5 million and $18.3 million for the years ended March 31, 1998, 1997 and 1996, respectively, after deducting minority interests, income taxes on unremitted earnings and various charges billed by the parent company. 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER -------------------- -------------------- -------------------- -------------------- PER SHARE DATA) 1998 1997 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- ---- ---- Net sales $149,091 $145,297 $144,506 $143,454 $155,768 $149,874 $171,351 $150,074 Gross profit 49,206 48,809 48,137 44,253 50,062 50,923 64,149 53,066 Net income 14,216 13,593 13,942 11,466 24,633 15,084 16,955 16,825 Basic earnings per common share $0.59 $0.58 $0.57 $0.49 $1.02 $0.64 $0.70 $0.71 Diluted earnings per common share 0.58 0.56 0.56 0.47 0.98 0.61 0.69 0.68
39 15. FINANCIAL INSTRUMENTS Summarized below are the carrying and estimated fair values for certain of the Company's financial instruments as of March 31, 1998 and 1997. The carrying values of all other financial instruments in the consolidated statement of financial position approximated fair values. The fair value of short-term investments approximated their carrying value, given the relatively short period to maturity of such instruments. The fair value of the Senior Notes was estimated based upon the quoted market price for such securities, which are publicly traded on the New York Stock Exchange. Fair values of other long-term debt, determined based on quoted interest rates for similar types of borrowings, approximate carrying value. The fair value of the forward foreign exchange contracts reflected the estimated amount that the Company would receive or (pay) to terminate the contracts at the reporting date, thereby taking into account unrealized gains or losses on open contracts.
AS OF MARCH 31, ------------------------------------------------- (IN THOUSANDS) 1998 1997 ----------------------- ----------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value -------- ---------- -------- ---------- Short-term investments $2,662 $2,729 $3,262 $3,333 Long-term debt (including current and long-term portions and notes payable) 169,457 169,155 143,321 137,481 Derivative financial instruments: Forward foreign currency exchange contracts - (361) - 597
Certain investments in marketable debt and equity securities are required to be recorded at fair value if held for trading purposes or otherwise available-for-sale, or at cost if held-to-maturity. In September 1997, the Company entered into a development agreement with Quadrant Healthcare PLC ("Quadrant"). Under the agreement, Scherer acquired exclusive rights to Quadrant's technology as it pertains to fast-dissolving dosage forms. This technology has a broad range of potential applications, including the possible development of controlled release versions of ZYDIS-Registered Trademark-. In addition to the development agreement, Scherer invested approximately $5.7 million in Quadrant in return for $0.8 million of Quadrant's common stock and $4.9 million in the form of a loan note which was convertible into shares of common stock upon the occurrence of certain events, or at the election of the Company. In February 1998, Quadrant initiated an admission of their capital to the "Official List" of the London Stock Exchange, akin to an initial public offering, thereby triggering the conversion of the Company's $4.9 million loan note into shares of Quadrant's common stock. At March 31, 1998, the Company's investment in Quadrant's common stock was carried at $5.8 million, which approximates fair value based on the quoted market price at fiscal year end. All other investments were classified as held-to-maturity and were therefore carried at cost. The Company periodically enters into forward foreign currency exchange contracts to hedge certain exposures related to identifiable foreign currency transactions that are relatively certain as to both timing and amount and does not engage in speculation. Gains and losses on the forward contracts are recognized concurrently with the gains or losses from the underlying transactions. At March 31, 1998 and 1997, the Company was party to forward foreign currency exchange contracts of $35.6 million and $65.4 million (notional amounts), respectively, denominated in various European currencies. The contracts outstanding at March 31, 1998 mature in April 1998 and are intended to hedge various foreign currency commitments . The Company is exposed to credit loss in the event of nonperformance by the counterparties to these contracts, but does not anticipate any such nonperformance given the financial soundness of such counterparties. 16. SUBSEQUENT EVENT On May 17, 1998, the Company signed a definitive merger agreement with Cardinal Health, Inc., an Ohio corporation ("Cardinal"), a distributor of pharmaceuticals and provider of pharmaceutical-related services, headquartered in Dublin, Ohio. The merger agreement, which has been approved by the Boards of Directors of the Company and of Cardinal, provides for the Company to become a wholly owned subsidiary of Cardinal. Under the terms of the proposed merger, stockholders of the Company would receive 0.95 of a Cardinal Common Share in exchange for each outstanding share of the Company's Common Stock. Cardinal would issue approximately 23 million Common Shares in the transaction and would assume the Company's long-term debt, which was approximately $168.7 million at March 31, 1998. 40 The merger has been structured as a tax-free transaction and would be accounted for as a pooling of interests for financial reporting purposes. The merger is currently expected to be completed during the second quarter of fiscal 1999, subject to the satisfaction of certain conditions, including approvals by the Company's stockholders and Cardinal's shareholders (to the extent required by applicable law and the rules of the New York Stock Exchange), and the receipt of certain regulatory approvals. 41 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To R.P. Scherer Corporation: We have audited the accompanying consolidated statement of financial position of R.P. SCHERER CORPORATION (a Delaware corporation) and subsidiaries as of March 31, 1998 and 1997 and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended March 31, 1998. These financial statements and the schedule referred to below are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and this schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of R.P. Scherer Corporation and subsidiaries as of March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of valuation allowances included herein is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ------------------------------ ARTHUR ANDERSEN LLP Detroit, Michigan, April 27, 1998 (except with respect to the matter discussed in Note 16, as to which the date is May 17, 1998). ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has not been any change of accountants or any disagreements on any matter of accounting practice or financial disclosure in the period for which this report is filed. 43 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY ITEM 11 EXECUTIVE COMPENSATION ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Items 10 through 13 will be included in the R.P. Scherer Corporation Proxy Statement for 1998, or in a Form 10-K/A amendment, which will be filed not later than 120 days after the close of the Company's fiscal year ended March 31, 1998, and is hereby incorporated by reference to such proxy statement. Information with respect to Item 10 above is included on pages 9 and 10 of this Annual Report on Form 10-K. 44 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS - the consolidated financial statements of R.P. Scherer Corporation and Subsidiaries and the related report of independent public accountants are included in Item 8 of this Annual Report on Form 10-K. 2. FINANCIAL STATEMENT SCHEDULES - the financial statement schedule "Schedule II - Valuation Allowances" for R.P. Scherer Corporation is included herein. 3. EXHIBITS - The following exhibits are filed as part of this Annual Report on Form 10-K or, where indicated, were heretofore filed and are hereby incorporated by reference: EXHIBIT NUMBER DESCRIPTION -------------- ----------- 3.1 Restated Certificate of Incorporation of the Company dated May 15, 1990. Incorporated by reference to Exhibit 3.1 filed with the Company's Registration Statement on Form S-4, No. 33-30999. 3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated August 21, 1991. Incorporated by reference to Exhibit 3.4 filed with the Company's Registration Statement on Form S-1, No. 33-42392. 3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated October 11, 1991. Incorporated by reference to Exhibit 3.5 filed with the Company's Registration Statement on Form S-1, No. 33-42392. 3.4 Certificate of Correction of Restated Certificate of Incorporation of the Company dated November 25, 1991. Incorporated by reference to Exhibit 3.3 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1991. 3.5 Certificate of Ownership merging Scherer International into the Company, dated February 27, 1995. Incorporated by reference to Exhibit 4.3 filed with the Company's Current Report on Form 8-K dated March 6, 1995. 3.6 By-Laws of the Company. Incorporated by reference to Exhibit 3.2 filed with the Company's Registration Statement on Form S-4, No. 33-30999. 4.1 Indenture dated as of January 1, 1994, between Scherer International and Comerica Bank, Trustee. Incorporated by reference to Exhibit 2.1 filed with Scherer International's Registration Statement on Form 8-A, dated May 2, 1994 4.2 First Supplemental Indenture dated as of February 28, 1995, between Scherer International, the Company and Comerica Bank, Trustee. Incorporated by reference to Exhibit 4.1 filed with the Company's Current Report on Form 8-K, dated March 6, 1995. 4.3 Stock Option Plan of the Company, Amended and Restated July, 1993. Incorporated by reference to Exhibit B.2 filed with the Company's Proxy Statement dated August 24, 1993. 4.4 First Amendment to Stock Option Plan of the Company, dated July 28, 1994. Incorporated by reference to Exhibit A filed with the Company's Proxy Statement dated August 26, 1994. 45 EXHIBIT NUMBER DESCRIPTION -------------- ----------- 4.5 Form of the Company's 1990 Nonqualified Stock Option Plan, 1990 Nonqualified Performance Stock Option Plan A and 1990 Nonqualified Performance Stock Option Plan B. Incorporated by reference to Exhibits 10.6 through 10.8 filed with the Company's Post-Effective Amendment No. 2 to Form S-1 dated February 11, 1991. 4.6 Amendments to 1990 Nonqualified Stock Option Plans, dated February 18, 1994 and September 1, 1994. Incorporated by reference to Exhibit B filed with the Company's Proxy Statement dated August 26, 1994. 4.7 Form of Outside Director Stock Option Agreements. Incorporated by reference to Exhibit 4.7 filed with the Company's Registration Statement on Form S-8 dated February 1, 1995, No. 33-57555. 4.8 Amended and Restated $175,000,000 Credit Agreement, dated as of March 30, 1994, among Scherer International, certain of its subsidiaries, Comerica Bank, NBD Bank, N.A., Societe Generale, The Bank of Nova Scotia and ABN AMRO Bank N.V.. Incorporated by reference to Exhibit 10.1 filed with R.P. Scherer International Corporation's Annual Report on Form 10-K for the year ended March 31, 1994. 4.9 Assumption Agreement, dated as of February 28, 1995, among the Company, Comerica Bank, NBD Bank, N.A., Societe Generale, The Bank of Nova Scotia and ABN AMRO Bank N.V. Incorporated by reference to Exhibit 4.2 filed with the Company's Current Report on Form 8-K dated March 6, 1995. 10.1 Management Incentive Compensation Plan of the Company, Amended and Restated July, 1993. Incorporated by reference to Exhibit A.2 filed with the Company's Proxy Statement dated August 24, 1993. 10.2 Employees' Retirement Income Plan of the Company effective August 6, 1986. Incorporated by reference to Exhibit 10.33 of the Company's Registration Statement on Form S-1, No. 33- 30362. 10.3 Employment Agreement, dated June 1, 1994, between the Company and John P. Cashman. Incorporated by reference to Exhibit 10.7 of Scherer International's Annual Report on Form 10-K as of March 31, 1994. 10.4 Employment Agreement, dated June 1, 1994, between the Company and Aleksandar Erdeljan. Incorporated by reference to Exhibit 10.8 of Scherer International's Annual Report on Form 10-K as of March 31, 1994. 10.5 Employment Agreement, dated June 1, 1994, between the Company and Nicole S. Williams. Incorporated by reference to Exhibit 10.9 of Scherer International's Annual Report on Form 10-K as of March 31, 1994. 10.6 Supplemental Retirement Plan for Key Employees of the Company, dated December 16, 1994. Incorporated by reference to Exhibit 10.6 of R.P. Scherer Corporation's Annual Report on Form 10-K as of March 31, 1995. 10.7 Deferred Compensation Plan for Outside Directors, dated December 6, 1995. Incorporated by reference to Exhibit 10 of R.P. Scherer Corporation's Quarterly Report on Form 10-Q as of December 31, 1996. 10.8 The Company's 1997 Stock Option Plan, July 1997. Incorporated by reference to Exhibit A filed with the Company's Proxy Statement dated July 16, 1997. 10.9 Employment Agreement dated January 15, 1998 between the Company and George L. Fotiades. Filed herewith. 11.0 Agreement and Plan of Merger, dated as of May 17, 1998 among Cardinal Health, Inc., GEL Acquisition Corp. and R.P. Scherer Corporation. Filed herewith. 46 EXHIBIT NUMBER DESCRIPTION -------------- ----------- 21 Subsidiaries of the registrant. Filed herewith. 23 Consent of Arthur Andersen LLP. Filed herewith. 27 Financial Data Schedule. Filed herewith. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, R.P. Scherer Corporation has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on June 9, 1998. R.P. SCHERER CORPORATION By: /s/ Aleksandar Erdeljan ------------------------------------------- Aleksandar Erdeljan Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, as amended, this Report has been signed below by the following persons on behalf of R.P. Scherer Corporation in the capacities indicated on June 9, 1998: SIGNATURES TITLE /s/ Aleksandar Erdeljan Chairman and Chief - ----------------------------- Executive Officer Aleksandar Erdeljan /s/ George L. Fotiades President and Chief Operating Officer - ----------------------------- George L. Fotiades /s/ Nicole S. Williams Executive Vice President, Finance, - ----------------------------- Chief Financial Officer, and Secretary Nicole S. Williams /s/ Ronald E. Pauli Corporate Controller - ----------------------------- (Principal Accounting Officer) Ronald E. Pauli /s/ John E. Avery Director - ----------------------------- John E. Avery /s/ Frederick Frank Director - ----------------------------- Frederick Frank /s/ Lori G. Koffman Director - ----------------------------- Lori G. Koffman /s/ Louis Lasagna Director - ----------------------------- Louis Lasagna /s/ Robert H. Rock Director - ----------------------------- Robert H. Rock /s/ James A. Stern Director - ----------------------------- James A. Stern Director - ----------------------------- Kenneth L. Way 48 R.P. SCHERER CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION ALLOWANCES
(IN THOUSANDS) Balance at Charged to Other Balance at Beginning Costs and Changes Add End of Description of Period Expenses (Deduct) (a) Deductions Period - ----------- --------- ---------- ------------ ---------- ---------- FOR THE YEAR ENDED MARCH 31, 1998: Valuation accounts deducted from related assets - Reserve for doubtful accounts $ 3,532 $ 1,019 $(245) $(1,106) $3,200 Reserve for unmerchantable inventories 2,326 1,434 (114) (806) 2,840 FOR THE YEAR ENDED MARCH 31, 1997: Valuation accounts deducted from related assets - Reserve for doubtful accounts $ 4,824 $ 511 $(170) $(1,633) $3,532 Reserve for unmerchantable inventories 2,469 1,749 (87) (1,805) 2,326 FOR THE YEAR ENDED MARCH 31, 1996: Valuation accounts deducted from related assets - Reserve for doubtful accounts $ 3,934 $1,521 $(570) $(61) $4,824 Reserve for unmerchantable inventories 1,748 1,971 34 (1,284) 2,469
(a) Includes changes due to fluctuations in foreign currency exchange rates. 49 INDEX TO EXHIBITS EXHIBIT DESCRIPTION - ------------------- Exhibit 10.9 - Employment Agreement Exhibit 11 - Merger Agreement Exhibit 21 - Subsidiaries Exhibit 23 - Consent of Arthur Andersen LLP Exhibit 27 - Financial Data Schedule 50 EX-10.9 2 EXHIBIT 10.9 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of January 15, 1998, between GEORGE L. FOTIADES (the "Employee") and R.P. SCHERER CORPORATION, a Delaware corporation (the "Company"). WHEREAS, the Company desires to assure itself of the benefit of the Employee's services and experience for a period of time and the Employee is willing to enter into an agreement to that end upon the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and covenants herein contained, the parties hereto agree as follows: 1. TERM OF AGREEMENT. Subject to the terms and conditions hereof, the term of employment of the Employee under this Agreement shall be for the period of one year commencing from the date set forth above. Thereafter, so long as Employee is capable of performing his duties hereunder and provided this Agreement is not terminated pursuant to Section 4, this Agreement shall be automatically renewed for successive periods of one year, unless, prior to 30 days before the termination date of any one-year period, either party notifies the other of an intention to terminate this Agreement on such termination date in which event the Agreement shall be terminated on such date. Such term of employment, as renewed, is hereinafter referred to as the "Employment Period." 2. SERVICES TO BE RENDERED. (a) During the term of employment of the Employee under this Agreement (and any renewals thereof) the Employee shall serve the Company as its President and Chief Operating Officer. (b) The Employee agrees that he will, during the term of employment under this Agreement (and any renewals thereof) devote his time, attention and ability to the -1- business of the Company and its subsidiaries as the Company's President and Chief Operating Officer and shall well and faithfully serve the Company and its subsidiaries and shall exercise the powers and authorities and fulfill the responsibilities hereby conferred upon him honestly, diligently, in good faith and in the best interest of the Company and its subsidiaries and use his best efforts to promote their interests. The Employee may, however, serve as an outside director of any other corporation provided Employee obtains the consent of the Company, which shall not be unreasonably withheld. 3. COMPENSATION. (a) In full payment for services rendered to the Company under this Agreement, the Company shall pay the Employee a salary of Four Hundred Thousand and 00/100 Dollars ($400,000) per year during the first year of the Employment Period ("Base Salary"). The Compensation Committee of the Board of Directors of the Company shall determine the salary to be paid to the Employee during subsequent years of the Employment Period. (b) In addition to the compensation otherwise provided for in this Section 3, during the term of his employment hereunder, the Employee also shall be entitled to: (i) participate in the Company's stock option plans, in accordance with the terms thereof, as from time to time may be in effect; (ii) by resolution of the Compensation Committee, participate in the Company's incentive compensation plans, in accordance with the terms thereof, as from time to time may be in effect; (iii) participate in the Company's retirement plans, in accordance with the terms thereof, as from time to time may be in effect; (iv) participate in such group life, disability, accident, hospital and medical insurance plans ("Welfare Plans") in accordance with the terms thereof, as from time to time may be in effect; provided, that any such participation is generally appropriate to Employee's responsibilities hereunder; and provided, further, that benefits and terms of participation under the Welfare Plans may be changed by the Company -2- from time to time in its sole discretion; and (v) the Executive is granted options on 70,000 shares of R. P. Scherer Common Stock at an exercise price of $57.750/share which was the closing price of the Company's Common Stock on NYSE on January 15, 1998, as reported in the Wall Street Journal on January 16, 1998. The vesting dates of the options granted will be as follows: 1/4 on the first anniversary of this agreement; 1/4 on the second anniversary of this agreement; 1/4 on the third anniversary of this agreement; and, 1/4 on the fourth anniversary of this agreement. Notwithstanding the language contained in Section 3(b) hereof, in the event that the Employee leaves the employ of the Company for any reason voluntary or involuntary prior to any of the four anniversary dates, there will be no partial vesting of these stock options for the portion of the year completed. To the extent stock options are to be granted in accordance with a Company stock option plan for the Company fiscal year ending within the year Employee's employment agreement terminates, Employee is entitled to such options in accordance with the plan's terms. (c) The Employee shall be entitled, during the Employment Period, to vacations and fringe benefits consistent with the practices of the Company. (d) The Company shall provide the Employee, during the Employment Period, with the use of a Company-owned or leased automobile, and will pay all taxes and insurance on said vehicle. (e) The Company will reimburse the Employee for the costs associated with relocation, pursuant to the standard relocation program in effect at the time of relocation. 4. DISABILITY, DEATH AND TERMINATION. (a) In the event of the Employee's inability to perform the principal duties of his job at the Company due to physical or mental condition, as determined by a physician ("Permanent Incapacitating Disability") for any consecutive period of at least one year with or without accommodation, the Company may, at its election, terminate the Employee's employment hereunder. The date of Permanent Incapacitating Disability shall be on the last day -3- of such period. In the event of any such termination, the Company shall be obligated (i) for compensation earned by the Employee hereunder, but not yet paid, prior to such termination, and (ii) to pay the Employee each month, for twenty-four consecutive months, an amount equal to the monthly Termination Benefit (the "Disability Benefit"); provided, however, that the amount of the Disability Benefit shall be reduced by any amounts received by the Employee in respect of the Employee's disability from any employee benefit or disability plans maintained by the Company. (b) The obligations of the Company under this Agreement shall terminate upon the death of the Employee. (c) If any of the following events should occur: (1) the Employee voluntarily terminates employment with the Company without Good Reason before retirement (which for purposes of this Agreement shall be determined at or over the age of 55 or at any earlier date approved by the Company), or (2) the Company terminates the Employee's employment for Cause, the Company's obligations hereunder shall terminate and no further payments of any kind (other than in respect of compensation earned by the Employee as determined hereunder prior to such termination) shall thereafter be made by the Company to the Employee hereunder. For purposes of the foregoing, "Cause" means: (i) any act or acts of the Employee constituting a felony (or its equivalent) under the laws of the United States, any state thereof or any foreign jurisdiction; (ii) any material breach by the Employee of any employment agreement with the Company or the policies of the Company or any of its subsidiaries or the willful and persistent (after written notice to the Employee) failure or refusal of the Employee to perform his duties of employment or comply with any lawful directives of the Board of Directors of the Company; (iii) a course of conduct amounting to gross neglect, willful misconduct or dishonesty; or -4- (iv) any misappropriation of material property of the Company by the Employee or any misappropriation of a corporate or business opportunity of the Company by the Employee. For purposes of the foregoing, "Good Reason" means: (i) any material reduction by the Company of such Employee's duties, responsibilities or titles; (ii) any involuntary removal of such Employee from any position previously held (except in connection with a promotion or a termination for Cause, death or disability, or the voluntary termination by the Employee other than for Good Reason); (iii) within six months after a Change in Control; or (iv) such other reasons (including nonemployment-related reasons) as may be approved by the Company, in its sole discretion, from time to time. (d) If the Company terminates the Employee's employment without Cause, if the Employee voluntarily terminates employment with the Company for Good Reason, or if the Company notifies the Employee of its intention to terminate this Employment Agreement pursuant to Section 1 hereof, the Company shall: (1) pay the Employee a monthly amount, for twenty-four consecutive months after termination, equal to one twelfth of the Employee's annual average Base Salary as computed by the Company for the prior twenty-four consecutive months, or if the Employee has not been employed for twenty-four consecutive months, for the number of consecutive months employed, preceding the date of termination (the "Termination Benefit") until the Termination Benefit is paid in full; and (2) provide Employee with benefits in accordance with Section 3(b)(iv) and Section 3(d) for a period of twenty-four consecutive months after termination. 5. CONFIDENTIALITY. For purposes of this Agreement, "proprietary information" shall mean any information relating to the business of the Company or any of its subsidiaries that has not previously been publicly released by duly authorized representatives of the Company and shall include (but shall not be limited to) Company information encompassed -5- in all research, product development, designs, plans, formulations and formulating techniques, proposals, marketing and sales plans, financial information, costs, pricing information, strategic business plans, customer information, and all methods, concepts, or ideas in or reasonably related to the business of the Company. The Employee agrees to regard and preserve as confidential all proprietary information pertaining to the Company's business that has been or may be obtained by the Employee in the course of his employment with the Company, whether he has such information in his memory or in writing or other physical form. The Employee will not, without prior written authority from the Company to do so, use for his benefit or purposes, or disclose to any other person, firm, partnership, corporation or other entity, either during the term of his employment hereunder or thereafter, any proprietary information connected with the business or developments of the Company, except as required in connection with the performance by the Employee of his duties and responsibilities as an employee of the Company. This provision shall not apply after the proprietary information has been voluntarily disclosed to the public, independently developed and disclosed by others, or otherwise enters the public domain through lawful means. 6. REMOVAL OF DOCUMENTS OR OBJECTS. The Employee agrees not to remove from the premises of the Company, except as an employee of the Company in pursuit of the business of the Company or any of its subsidiaries, or except as specifically permitted in writing by the Company, any document (regardless of the medium on which it is recorded), object, computer program, computer source code, object code or data (the "Documents") containing or reflecting any proprietary information of the Company. The Employee recognizes that all such Documents, whether developed by him or by someone else, are the exclusive property of the Company. -6- 7. NON-COMPETITION. The Employee agrees that during the term of his employment hereunder and for a period of two years after such term of employment terminates or is terminated, he will not in any way, directly or indirectly, manage, operate, control, solicit officers or employees of the Company, accept employment, a directorship or a consulting position with or otherwise advise or assist or be connected with or own or have any other interest in or right with respect to (other than through ownership of not more than one percent of the outstanding shares of a corporation's stock which is listed on a national securities exchange) any enterprise which competes or shall compete with the Company, by engaging in or otherwise carrying on the research, development, manufacture or sale of any product of any type developed, manufactured or sold by the Company or any subsidiary thereof, whether now or hereafter (to the extent that any such product is under consideration by the Board of Directors of the Company at the time the Employee's employment terminates or is terminated). 8. CORPORATE OPPORTUNITIES. The Employee agrees that during the Employment Period he will not take any action which might divert from the Company or any subsidiary of the Company any opportunity which would be within the scope of any of the present or future businesses of the Company or any of its subsidiaries (which future businesses are then under consideration by the Board of Directors of the Company), the loss of which has or would have had, in the reasonable judgment of the Board of Directors of the Company, an adverse effect upon the Company, unless the Board of Directors of the Company has given prior written approval. 9. RELIEF. It is understood and agreed by and between the parties hereto that the service to be rendered by the Employee hereunder, and the rights and privileges granted to the Company by the Employee hereunder, are of a special, unique, extraordinary and intellectual character, which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law, and that a breach by the Employee of any of the provisions contained in this Agreement will cause the Company great irreparable -7- injury and damage. The Employee hereby expressly agrees that the Company shall be entitled to the remedies of injunction, specific performance and other equitable relief to prevent a breach of this Agreement by the Employee. The Employee further expressly agrees that in the event the Employee breaches the non-competition provisions of Section 7 of this Agreement or the confidentiality provisions of Section 5 of this Agreement, the balance of any payments due under this Agreement shall be forfeited by the Employee. The provisions of this Section 9 shall not, however, be construed as a waiver of any of the rights which the Company may have for damages or otherwise. 10. WARRANTY. The Employee hereby warrants that he is free to enter into this Agreement and to render his services pursuant hereto. 11. NON-ASSIGNABILITY. Except as otherwise provided herein, this Agreement may not be assigned by either the Company or the Employee. 12. MERGER OR CONSOLIDATION. In the event (a) the Company merges with or into, or consolidates with, another entity; (b) the Company sells, exchanges or otherwise disposes of all or substantially all of the assets of the Company; (c) 50% or more of the Company's then outstanding shares of voting stock is acquired by another corporation, person or entity; (d) the Company liquidates or dissolves; or (e) the Company recapitalizes or enters into any similar transaction, and as a result of which the Common Stock either (i) is no longer a voting equity security of the Company or (ii) is no longer listed on a national securities exchange or authorized for quotation on an inter-dealer quotation system of a national securities association (referred to collectively as a "Change in Control"), this Agreement may be assigned and transferred to such successor in interest as an asset of the Company upon such assignee assuming the Company's obligations hereunder, in which event the Employee agrees to continue to perform his duties and obligations according to the terms and conditions hereof for such assignee or transferee of this -8- Agreement subject to Employee's right to terminate for Good Reason in accordance with Section 4(c)(iii). 13. WITHHOLDING. The Company shall have the right to withhold the amount of taxes, which in the determination of the Company, are required to be withheld under law with respect to any amount due or paid under this Agreement. 14. NOTICES. All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid: (a) If to the Company, to it at: R.P. Scherer Corporation 2301 West Big Beaver Road Troy, Michigan 48084 Attention: Secretary (b) If to the Employee, to him at such address as set forth in the signature page hereof or as he shall otherwise have specified by notice in writing to the Company. 15. GOVERNMENTAL REGULATION. Nothing contained in this Agreement shall be construed so as to require the commission of any act contrary to law and wherever there is any conflict between any provision of this Agreement and any statute, law, ordinance, order or regulation, the latter shall prevail, but in such event any such provision of this Agreement shall be curtailed and limited only to the extent necessary to bring it within the legal requirements. 16. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. Any suit, action or proceeding against the Employee with respect to this Agreement, or any judgment entered by any court in respect of any thereof, may be brought in any court of competent jurisdiction in the State of -9- Michigan and the Employee hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. The Employee hereby irrevocably waives any objections which he may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Michigan, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. No suit, action or proceeding against the Company with respect to this Agreement may be brought in any court, domestic or foreign, or before any similar domestic or foreign authority other than in a court of competent jurisdiction in the State of Michigan, and the Employee hereby irrevocably waives any right which he may otherwise have had to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. The Company hereby submits to the jurisdiction of such courts for the purpose of any such suit, action or proceeding. The Employee irrevocably waives his right to trial by jury with regard to any suit, action, or proceeding with respect to this Agreement; provided, however, that if such waiver of the right to jury trial shall be held unenforceable, the invalidity or unenforceability of this provision shall not impair the validity or enforceability of any other provision of this Agreement. 17. ENTIRE AGREEMENT; AMENDMENT. This Agreement sets forth the entire understanding of the parties in respect of the subject matter contained herein and supersedes all prior agreement, arrangements and understandings relating to the subject matter and may only be amended by a written agreement signed by both parties hereto or their duly authorized representatives. -10- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. R.P. SCHERER CORPORATION By: /s/ Aleksandar Erdeljan ----------------------- Title: Chairman and Chief Executive Officer /s/ George L. Fotiades ------------------------- George L. Fotiades 281 Summit Avenue Summit, New Jersey 07901 -11- EX-11 3 EXHIBIT 11 MERGER AGREEMENT AGREEMENT AND PLAN OF MERGER DATED AS OF MAY 17, 1998 AMONG CARDINAL HEALTH, INC. GEL ACQUISITION CORP. and R.P. SCHERER CORPORATION TABLE OF CONTENTS Page ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Effects of the Merger . . . . . . . . . . . . . . . . . . . . . 2 1.5 Certificate of Incorporation. . . . . . . . . . . . . . . . . . 2 1.6 By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.7 Officers and Directors of Surviving Corporation . . . . . . . . 3 1.8 Effect on Capital Stock . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II EXCHANGE OF CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1 Exchange Fund . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 Exchange Procedures . . . . . . . . . . . . . . . . . . . . . . 4 2.3 Distributions with Respect to Unexchanged Shares. . . . . . . . 4 2.4 No Further Ownership Rights in Target Common Stock. . . . . . . 5 2.5 No Fractional Parent Common Shares. . . . . . . . . . . . . . . 5 2.7 No Liability. . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.8 Investment of the Exchange Fund . . . . . . . . . . . . . . . . 6 2.9 Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . 6 2.10 Withholding Rights. . . . . . . . . . . . . . . . . . . . . . . 6 2.11 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . 6 2.12 Stock Transfer Books. . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . 7 3.1 Representations and Warranties of Target. . . . . . . . . . . . 7 (a) Organization, Standing and Power . . . . . . . . . . . . . 7 (b) Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 7 (c) Capital Structure. . . . . . . . . . . . . . . . . . . . . 7 (d) Authority; No Conflicts. . . . . . . . . . . . . . . . . . 8 (e) Reports and Financial Statements . . . . . . . . . . . . . 10 (f) Compliance with Law; Permits . . . . . . . . . . . . . . . 10 (g) Intellectual Property. . . . . . . . . . . . . . . . . . . 11 (h) Litigation . . . . . . . . . . . . . . . . . . . . . . . . 11 i Page (i) Information Supplied . . . . . . . . . . . . . . . . . . . 11 (j) Absence of Certain Changes or Events; Operations . . . . . 12 (k) Accounting Matters . . . . . . . . . . . . . . . . . . . . 12 (l) Board Approval . . . . . . . . . . . . . . . . . . . . . . 12 (m) Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 12 (n) Labor Matters. . . . . . . . . . . . . . . . . . . . . . . 12 (o) Undisclosed Liabilities. . . . . . . . . . . . . . . . . . 12 (p) Environmental Matters. . . . . . . . . . . . . . . . . . . 13 (q) Employee Benefit Matters . . . . . . . . . . . . . . . . . 13 (r) Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 (s) Vote Required. . . . . . . . . . . . . . . . . . . . . . . 16 (t) Brokers or Finders . . . . . . . . . . . . . . . . . . . . 16 (u) Opinions of Financial Advisors . . . . . . . . . . . . . . 17 (v) DGCL Section 203 . . . . . . . . . . . . . . . . . . . . . 17 3.2 Representations and Warranties of Parent. . . . . . . . . . . . 17 (a) Organization, Standing and Power . . . . . . . . . . . . . 17 (b) Capital Structure. . . . . . . . . . . . . . . . . . . . . 17 (c) Authority; No Conflicts. . . . . . . . . . . . . . . . . . 18 (d) Reports and Financial Statements . . . . . . . . . . . . . 18 (e) Information Supplied . . . . . . . . . . . . . . . . . . . 19 (f) Absence of Certain Changes or Events . . . . . . . . . . . 19 (g) Accounting Matters . . . . . . . . . . . . . . . . . . . . 20 (h) Board Approval . . . . . . . . . . . . . . . . . . . . . . 20 (i) Vote Required. . . . . . . . . . . . . . . . . . . . . . . 20 (j) Brokers or Finders . . . . . . . . . . . . . . . . . . . . 20 3.3 Representations and Warranties of Parent and Merger Su. . . . . 20 (a) Organization and Corporate Power . . . . . . . . . . . . . 20 (b) Corporate Authorization. . . . . . . . . . . . . . . . . . 20 (c) Non-Contravention. . . . . . . . . . . . . . . . . . . . . 21 (d) No Business Activities . . . . . . . . . . . . . . . . . . 21 ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . 21 4.1 Covenants of Target . . . . . . . . . . . . . . . . . . . . . . 21 4.2 Covenants of Parent . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE V ADDITIONAL AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.1 Preparation of Proxy Statement; Target Stockholders Meeting . . 24 5.2 Parent Board of Directors . . . . . . . . . . . . . . . . . . . 25 5.3 Access to Information . . . . . . . . . . . . . . . . . . . . . 25 ii Page 5.4 Reasonable Efforts. . . . . . . . . . . . . . . . . . . . . . . 25 5.5 Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . 27 5.6 Stock Options and Other Stock Plans; Employee Benefits Matters. 29 5.7 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 30 5.8 Directors' and Officers' Indemnification and Insurance. . . . . 31 5.9 Public Announcements. . . . . . . . . . . . . . . . . . . . . . 31 5.10 Listing of Parent Common Shares . . . . . . . . . . . . . . . . 31 5.11 Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE VI CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6.1 Conditions to Each Party's Obligation to Effect the Merger. . . 32 (a) Stockholder Approval . . . . . . . . . . . . . . . . . . . 32 (b) No Injunctions or Restraints, Illegality, Actions. . . . . 32 (c) HSR Act. . . . . . . . . . . . . . . . . . . . . . . . . . 32 (d) German Antitrust . . . . . . . . . . . . . . . . . . . . . 32 (e) NYSE Listing . . . . . . . . . . . . . . . . . . . . . . . 32 (f) Effectiveness of the Form S-4. . . . . . . . . . . . . . . 32 6.2 Additional Conditions to Obligations of Parent and Merger Sub . 33 (a) Representations and Warranties . . . . . . . . . . . . . . 33 (b) Performance of Obligations of Target . . . . . . . . . . . 33 6.3 Additional Conditions to Obligations of Target. . . . . . . . . 33 (a) Representations and Warranties . . . . . . . . . . . . . . 33 (b) Performance of Obligations of Parent . . . . . . . . . . . 34 (c) Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . 34 (d) Closing Tax Opinion. . . . . . . . . . . . . . . . . . . . 34 (e) Change of Control of Parent. . . . . . . . . . . . . . . . 34 ARTICLE VII TERMINATION AND AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . 34 7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 34 7.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . 35 7.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 7.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE VIII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.1 Non-Survival of Representations, Warranties and Agreements. . . 37 8.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.3 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . 38 iii Page 8.4 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 38 8.5 Entire Agreement; No Third Party Beneficiaries. . . . . . . . . 38 8.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 38 8.7 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . 38 8.8 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . 39 8.9 Submission to Jurisdiction; Waivers . . . . . . . . . . . . . . 39 8.10 Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . 39 8.11 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 40 iv AGREEMENT AND PLAN OF MERGER, dated as of May 17, 1998 (this "AGREEMENT"), among Cardinal Health, Inc., an Ohio corporation ("PARENT"), GEL Acquisition Corp., a Delaware corporation and a direct wholly owned subsidiary of Parent ("MERGER SUB"), and R.P. Scherer Corporation, a Delaware corporation ("TARGET"). W I T N E S S E T H : WHEREAS, Parent desires to combine its businesses with the businesses operated by Target through the merger of Merger Sub with and into Target (the "MERGER"), pursuant to which each share of common stock, par value $.01 per share of Target ("TARGET COMMON STOCK") issued and outstanding immediately prior to the Effective Time (as defined in SECTION 1.3) other than shares owned or held directly or indirectly by Parent or Merger Sub or directly by Target will be converted into the right to receive common shares, without par value, of Parent ("PARENT COMMON SHARES") as more fully provided herein; WHEREAS, the Board of Directors (as defined in Section 8.11(b)) of Target has determined that the Merger is consistent with and in furtherance of the long-term business strategy of Target and Target desires to combine its businesses with the businesses operated by Parent and for the holders of shares of Target Common Stock to have a continuing equity interest in the combined Parent/Target businesses through the ownership of Parent Common Shares; WHEREAS, the respective Boards of Directors of Parent, Merger Sub and Target have each determined that the Merger is in the best interests of their respective stockholders or shareholders, as the case may be, and such Boards of Directors have approved the Merger, upon the terms and subject to the conditions set forth in this Agreement; WHEREAS, Parent, Merger Sub and Target desire to make certain representations, warranties, covenants and agreements in connection with the transactions contemplated hereby and also to prescribe various conditions to the transactions contemplated hereby; WHEREAS, Parent, Merger Sub and Target intend, by approving resolutions authorizing this Agreement, to adopt this Agreement as a plan of reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "CODE"), and the regulations promulgated thereunder; and WHEREAS, Parent, Merger Sub and Target intend that the Merger be accounted for as a pooling-of-interests for financial reporting purposes. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I THE MERGER 1.1 THE MERGER. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the provisions of Section 251 of the Delaware General Corporation Law (the "DGCL"), Merger Sub shall be merged with and into Target at the Effective Time. Following the Merger, the separate corporate existence of Merger Sub shall cease and Target shall continue its existence under the laws of the State of Delaware as the surviving corporation (the "SURVIVING CORPORATION") under the name "R.P. Scherer Corporation". 1.2 CLOSING. The closing of the Merger (the "CLOSING") will take place on the tenth Business Day (as defined in Section 8.11(c)) after the satisfaction or waiver (subject to Applicable Laws) of the conditions (excluding conditions that, by their terms, cannot be satisfied until the Closing) set forth in ARTICLE VI (the "CLOSING DATE") or such other time or date as is agreed to in writing by the parties hereto. The Closing shall be held at the offices of Parent, 5555 Glendon Court, Dublin, Ohio 43016 unless another place is agreed to in writing by the parties hereto. For all Tax purposes, the Closing shall be effective at the end of the day on the Closing Date. 1.3 EFFECTIVE TIME. As soon as practicable following the Closing, the parties shall (i) file a certificate of merger (the "DELAWARE CERTIFICATE OF MERGER") in such form as is required by and executed in accordance with the relevant provisions of the DGCL and (ii) make all other filings or recordings required under the DGCL. The Merger shall become effective at such time as the Delaware Certificate of Merger is duly filed with the Delaware Secretary of State or at such subsequent time as Parent and Target shall agree and is specified in the Delaware Certificate of Merger (the date and time the Merger becomes effective being the "EFFECTIVE TIME"). 1.4 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger will have the effects set forth in Sections 259 and 261 of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of Target and Merger Sub shall be vested in the Surviving Corporation, and all debts, liabilities and duties of Target and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. 1.5 CERTIFICATE OF INCORPORATION. The certificate of incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the certificate of incorporation of the Surviving Corporation, until thereafter changed or amended as provided therein or by applicable law, except that Article I of the certificate of incorporation of the Surviving Corporation shall be amended to read in its entirety as follows: "The name of the Corporation (which is hereinafter referred to as the "Corporation") is 'R.P. Scherer Corporation'." 1.6 BY-LAWS. The by-laws of Merger Sub, as in effect immediately prior to 2 the Effective Time, shall be the by-laws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. 1.7 OFFICERS AND DIRECTORS OF SURVIVING CORPORATION. The officers of Target as of the Effective Time shall be the officers of the Surviving Corporation, until the earlier of their resignation or removal or otherwise ceasing to be an officer or until their respective successors are duly elected and qualified, as the case may be. The directors of Merger Sub as of the Effective Time shall be the directors of the Surviving Corporation until the earlier of their resignation or removal or otherwise ceasing to be a director or until their respective successors are duly elected and qualified. On or prior to the Closing Date, Target shall deliver to Parent evidence satisfactory to Parent of the resignations of the directors of Target, such resignations to be effective as of the Effective Time. 1.8 EFFECT ON CAPITAL STOCK. (a) At the Effective Time by virtue of the Merger and without any action on the part of the holder thereof, each share of Target Common Stock issued and outstanding immediately prior to the Effective Time (other than shares of Target Common Stock owned or held by Parent, Merger Sub or Target, all of which shall be canceled as provided in SECTION 1.8(c)) shall be converted into the right to receive 0.950 (the "EXCHANGE RATIO") Parent Common Shares (the "MERGER CONSIDERATION"). In the event that prior to the Effective Time Parent shall declare a stock dividend or other distribution payable in Parent Common Shares or securities convertible into Parent Common Shares, or effect a stock split, reclassification, combination or other change with respect to Parent Common Shares, the Exchange Ratio shall be adjusted to reflect such dividend, distribution, stock split, reclassification, combination or other change. (b) As a result of the Merger and without any action on the part of the holders thereof, at the Effective Time, all shares of Target Common Stock shall cease to be outstanding and shall be canceled and retired and shall cease to exist, and each holder of a certificate which immediately prior to the Effective Time represented any such shares of Target Common Stock (a "CERTIFICATE") (other than Merger Sub, Parent and Target) shall thereafter cease to have any rights with respect to such shares of Target Common Stock, except the right to receive the applicable Merger Consideration in accordance with ARTICLE II upon the surrender of such certificate. (c) Each share of Target Common Stock issued and owned or held by Parent, Merger Sub or Target at the Effective Time shall, by virtue of the Merger, cease to be outstanding and shall be canceled and retired and no stock of Parent or other consideration shall be delivered in exchange therefor. (d) Each share of common stock, par value $.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, par value $.01 per share, of the Surviving Corporation as of the Effective Time. ARTICLE II 3 EXCHANGE OF CERTIFICATES 2.1 EXCHANGE FUND. Prior to the Effective Time, Parent shall appoint ChaseMellon Shareholder Services, Inc., or another party reasonably acceptable to Target, to act as exchange agent hereunder for the purpose of exchanging Certificates for the Merger Consideration (the "EXCHANGE AGENT"). At or promptly after the Effective Time, Parent shall deposit with the Exchange Agent, in trust for the benefit of holders of shares of Target Common Stock, certificates representing the Parent Common Shares issuable pursuant to SECTION 1.8 in exchange for outstanding shares of Target Common Stock. Parent agrees to make available to the Exchange Agent from time to time as needed, cash sufficient to pay cash in lieu of fractional shares pursuant to SECTION 2.5 and any dividends and other distributions pursuant to SECTION 2.3. Any cash and certificates of Parent Common Shares deposited with the Exchange Agent shall hereinafter be referred to as the "EXCHANGE FUND." 2.2 EXCHANGE PROCEDURES. As soon as reasonably practicable after the Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail to each holder of a Certificate (i) a letter of transmittal which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, and which letter shall be in customary form and have such other provisions as Parent may reasonably specify and (ii) instructions for effecting the surrender of such Certificates in exchange for the applicable Merger Consideration. Upon surrender of a Certificate to the Exchange Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor (A) one or more Parent Common Shares representing, in the aggregate, the whole number of shares that such holder has the right to receive pursuant to SECTION 1.8 (after taking into account all shares of Target Common Stock then held by such holder) and (B) a check in the amount equal to the cash that such holder has the right to receive pursuant to the provisions of this Article II, including cash in lieu of any fractional Parent Common Shares pursuant to SECTION 2.5, and the Certificate so surrendered shall forthwith be canceled. No interest will be paid or will accrue on any cash payable pursuant to SECTION 2.3 or SECTION 2.5. In the event of a transfer of ownership of Target Common Stock which is not registered in the transfer records of Target, one or more Parent Common Shares evidencing, in the aggregate, the proper number of Parent Common Shares, a check in the proper amount of cash in lieu of any fractional Parent Common Shares pursuant to SECTION 2.5 and any dividends or other distributions to which such holder is entitled pursuant to SECTION 2.3, may be issued with respect to such Target Common Stock to such a transferee if the Certificate representing such shares of Target Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. 2.3 DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. Notwithstanding any other provisions of this Agreement, no dividends or other distributions declared or made after the Effective Time with respect to Parent Common Shares having a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate, and no cash payment in lieu of fractional shares shall be paid to any such holder, until the holder shall 4 surrender such Certificate as provided in this Article II. Subject to the effect of Applicable Laws (as defined in Section 3.1(f)(i)), following surrender of any such Certificate there shall be paid to the holder of Certificates representing whole Parent Common Shares issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such whole Parent Common Shares and not paid and (ii) at the appropriate payment date subsequent to surrender, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole Parent Common Shares. 2.4 NO FURTHER OWNERSHIP RIGHTS IN TARGET COMMON STOCK. All Parent Common Shares issued upon surrender of Certificates in accordance with the terms hereof (including any cash paid pursuant to SECTION 2.3 or 2.5) shall be deemed to have been issued or paid in full satisfaction of all rights pertaining to the shares of Target Common Stock represented thereby, and there shall be no further registration of transfers on the stock transfer books of Target of shares of Target Common Stock outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article II. Certificates surrendered for exchange by any person constituting an "affiliate" of Target for purposes of Rule 145(c) under the Securities Act (as defined in Section 3.1(c)(iii)) shall not be exchanged until Parent has received Target Affiliate Letters (as defined in Section 5.11) from such persons. 2.5 NO FRACTIONAL PARENT COMMON SHARES. (a) No certificates or scrip or Parent Common Shares representing fractional Parent Common Shares shall be issued upon the surrender for exchange of Certificates and such fractional share interests will not entitle the owner thereof to vote or to have any rights of a shareholder of Parent or a holder of Parent Common Shares. (b) Notwithstanding any other provision of this Agreement, each holder of shares of Target Common Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a Parent Common Share (after taking into account all Certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to the product of (i) such fractional part of a Parent Common Share multiplied by (ii) the closing price (as reported on the New York Stock Exchange ("NYSE") Composite Tape) of a Parent Common Share on the last complete trading day immediately prior to the Closing Date. As promptly as practicable after the determination of the amount of cash, if any, to be paid to holders of fractional interests, the Exchange Agent shall so notify Parent, and Parent shall cause the Surviving Corporation to deposit such amount with the Exchange Agent and shall cause the Exchange Agent to forward payments to such holders of fractional interests subject to and in accordance with the terms hereof. 2.6 TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which remains undistributed to the holders of Certificates for six months after the Effective Time shall be delivered to Parent or otherwise on the instruction of Parent, and any holders of the Certificates who have not theretofore complied with this ARTICLE II shall thereafter look 5 only to Parent for the Merger Consideration with respect to the shares of Target Common Stock formerly represented thereby to which such holders are entitled pursuant to SECTION 1.8 and SECTION 2.2, any cash in lieu of fractional Parent Common Shares to which such holders are entitled pursuant to SECTION 2.5 and any dividends or distributions with respect to Parent Common Shares to which such holders are entitled pursuant to SECTION 2.3. Any such portion of the Exchange Fund remaining unclaimed by holders of shares of Target Common Stock five years after the Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity (as defined in SECTION 3.1(d)(iii))) shall, to the extent permitted by law, become the property of Parent free and clear of any claims or interest of any Person (as defined in Section 8.11(g)) previously entitled thereto. 2.7 NO LIABILITY. None of Parent, Merger Sub, Target, the Surviving Corporation or the Exchange Agent shall be liable to any Person in respect of any Merger Consideration (or dividends or distributions with respect thereto) from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 2.8 INVESTMENT OF THE EXCHANGE FUND. The Exchange Agent shall invest any cash included in the Exchange Fund as directed by Parent on a daily basis. Any interest and other income resulting from such investments shall promptly be paid to Parent. 2.9 LOST CERTIFICATES. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by Parent, the posting by such Person of a bond in such reasonable amount as Parent may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will deliver in exchange for such lost, stolen or destroyed Certificate the applicable Merger Consideration with respect to the shares of Target Common Stock formerly represented thereby, any cash in lieu of fractional Parent Common Shares, and unpaid dividends and distributions on Parent Common Shares deliverable in respect thereof, pursuant to Article II of this Agreement. 2.10 WITHHOLDING RIGHTS. Each of the Surviving Corporation and Parent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Target Common Stock such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code and the rules and regulations promulgated thereunder, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Surviving Corporation or Parent, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Target Common Stock in respect of which such deduction and withholding was made by the Surviving Corporation or Parent, as the case may be. 2.11 FURTHER ASSURANCES. At and after the Effective Time, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of Target or Merger Sub, any deeds, bills of sale, assignments or assurances and 6 to take and do, in the name and on behalf of Target or Merger Sub, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. 2.12 STOCK TRANSFER BOOKS. At the close of business, New York City time, on the day the Effective Time occurs, the stock transfer books of Target shall be closed and there shall be no further registration of transfers of shares of Target Common Stock thereafter on the records of Target. From and after the Effective Time, the holders of Certificates shall cease to have any rights with respect to such shares of Target Common Stock formerly represented thereby, except as otherwise provided herein or by law. On or after the Effective Time, any Certificates presented to the Exchange Agent or Parent for any reason shall be converted into the Merger Consideration with respect to the shares of Target Common Stock formerly represented thereby, any cash in lieu of fractional Parent Common Shares to which the holders thereof are entitled pursuant to SECTION 2.5 and any dividends or other distributions to which the holders thereof are entitled pursuant to SECTION 2.3. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATIONS AND WARRANTIES OF TARGET. Target represents and warrants to Parent as follows: (a) ORGANIZATION, STANDING AND POWER. Each of Target and each of its Subsidiaries (as defined in Section 8.11(i)) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has all requisite power and authority to own, lease, use and operate its properties and to carry on its business as now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary other than in such jurisdictions where the failure to so qualify would not, either individually or in the aggregate, have a Material Adverse Effect (as defined in SECTION 8.11(e)) on Target. The copies of the certificate of incorporation and by-laws of Target which were previously furnished to Parent are true, complete and correct copies of such documents as in effect on the date of this Agreement. (b) SUBSIDIARIES. Target does not own, directly or indirectly, any equity or other ownership interest in any corporation, partnership, joint venture or other entity or enterprise, except for the Subsidiaries and other entities set forth in the Target SEC Reports (as defined in Section 3.1(g)), documents provided by Target to Parent prior to the date of this Agreement or which are not material to Target. Except as set forth in the Target SEC Reports or in documents provided by Target to Parent prior to the date of this Agreement, Target is not subject to any obligation or requirement to provide a material amount of funds to or make any material investment (in the form of a loan, 7 capital contribution or otherwise) in any such entity that is not wholly owned by Target. Except as would not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Target, each of the outstanding shares of capital stock (or other ownership interests having by their terms ordinary voting power to elect a majority of directors or others performing similar functions with respect to such Subsidiary) owned by Target of each of Target's Subsidiaries is duly authorized, validly issued, fully paid and nonassessable, and is owned directly or indirectly by Target free and clear of all liens, pledges, security interests, claims or other encumbrances. (c) CAPITAL STRUCTURE. (i) As of May 12, 1998 the authorized capital stock of Target consisted of (A) 50,000,000 shares of Target Common Stock, par value $.01, of which 23,508,155 shares were outstanding and 60,100 were held in treasury and (B) 500,000 shares of authorized preferred stock, par value $.01, of which no shares were outstanding. Since May 12, 1998 to the date of this Agreement, there have been no issuances of shares of the capital stock of Target or any other securities of Target other than issuances of shares pursuant to options outstanding under the Target Stock Plans (as defined in SECTION 5.6(a)). All issued and outstanding shares of the capital stock of Target are duly authorized, validly issued, fully paid and nonassessable, and no class of capital stock is entitled to preemptive rights and no such shares have been issued in violation of any preemptive or similar rights. There were outstanding as of May 12, 1998 no options, warrants or other rights to acquire capital stock from Target other than options to acquire 2,098,257 shares of Target Common Stock under the Target Stock Plans. Other than issuances of options pursuant to the Target Stock Plans permitted under the terms of this Agreement, no options or warrants or other rights to acquire capital stock from Target have been issued or granted since May 12, 1998. (ii) No bonds, debentures, notes or other indebtedness of Target having the right to vote on any matters on which stockholders may vote ("TARGET VOTING DEBT") are issued or outstanding. (iii) Except as otherwise set forth in this SECTION 3.1(c), there are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which Target or any of its Subsidiaries is a party or by which any of them is bound obligating Target or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of Target or any of its Subsidiaries or obligating Target or any of its Subsidiaries to issue, grant, extend or enter into any such security, subscription, option, warrant, call, right, commitment, agreement, arrangement, understanding or undertaking. There are no outstanding obligations of Target or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of Target or any of its Subsidiaries. Target has previously furnished to Parent a schedule showing the names of and number of shares of Target Common Stock (including the number of shares issuable upon exercise of options granted under the Target Benefit Plans (as defined in Section 8.11(k)) and the exercise price and vesting schedule with respect thereto) and the number of options held by all holders of options to purchase Target 8 Common Stock. Target has no agreement, arrangement or understanding to register any securities of Target or any of its Subsidiaries under the Securities Act, or any state securities law and has not granted registration rights to any person or entity. (d) AUTHORITY; NO CONFLICTS. (i) Target has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, subject in the case of the consummation of the Merger to the adoption of this Agreement by the Required Target Vote (as defined in SECTION 3.1(s)). The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Target, subject in the case of the consummation of the Merger to the adoption of this Agreement by the Required Target Vote. This Agreement has been duly executed and delivered by Target and constitutes a valid and binding agreement of Target, enforceable against it in accordance with its terms. (ii) The execution and delivery of this Agreement does not or will not, as the case may be, and the consummation of the Merger and the other transactions contemplated hereby will not at the Effective Time, conflict with, or result in any violation of, or constitute a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, amendment, cancellation or acceleration of any obligation or the loss of a material benefit under, or the creation of a lien, pledge, security interest, charge or other encumbrance on any assets (any such conflict, violation, default, right of termination, amendment, cancellation or acceleration, loss or creation, a "VIOLATION") pursuant to: (A) any provision of the certificate of incorporation or by-laws or other governing documents of Target or any Subsidiary of Target, or (B) except as would not reasonably be expected to have a Material Adverse Effect on Target, and subject to obtaining or making the consents, approvals, orders, authorizations, registrations, declarations and filings referred to in paragraph (iii) below, any loan or credit agreement (other than the Amended and Restated $175,000,000 Credit Agreement, dated as of October 29, 1997 among Target, NDB Bank, N.A. and Comerica Bank, as agents, and subject to the execution and delivery of a supplemental indenture to the Indenture, dated as of January 1, 1994, between Target and Comerica Bank, as trustee in form reasonably acceptable to the trustee), note, mortgage, bond, indenture, lease, benefit plan or other agreement, obligation, contract, undertaking, instrument, permit, concession, franchise, license, judgment, order, writ, injunction, decree, statute, law, ordinance, rule or regulation applicable to Target or any Subsidiary of Target or their respective properties or assets. (iii) No consent, approval, order or authorization of, or registration, declaration or filing with, or review by any supranational, national, state, municipal or local government, any instrumentality, subdivision, court, administrative agency or commission or other authority thereof; or any quasi-governmental or private body exercising any regulatory, taxing, importing or other governmental or quasi-governmental authority (a "GOVERNMENTAL ENTITY") is required by or with respect to Target or any Subsidiary of Target in connection with the execution and delivery of this Agreement by Target or the consummation of the Merger and the other 9 transactions contemplated hereby, except for those required under or in relation to (A) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), (B) state securities or "blue sky" laws (the "BLUE SKY LAWS"), (C) the Securities Act), (D) the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), (E) the DGCL with respect to the filing of the Delaware Certificate of Merger, (F) rules and regulations of the NYSE, (G) antitrust or other competition laws of other jurisdictions and (H) such consents, approvals, orders, authorizations, registrations, declarations and filings or reviews the failure of which to make or obtain would not reasonably be expected to have a Material Adverse Effect on Target. Consents, approvals, orders, authorizations, registrations, declarations, filings and reviews required under or in relation to any of the foregoing clauses (A) through (G) are hereinafter referred to as "REQUIRED CONSENTS." (iv) No consent, approval or authorization of any limited or general partner of R.P. Scherer GmbH & Co. ("KG") or KG itself or any shareholder of R.P. Scherer VerWaltungs GmbH ("VERWALTUNGS") or VerWaltungs itself is required in connection with the execution of this Agreement, the Merger or the consummation of the other transactions contemplated hereby. The execution of this Agreement, the Merger or the consummation or the other transactions contemplated hereby will not trigger the right of Deutsche Gelatine-Fabriken Stoess AG ("DGF") to acquire the interests in KG held by, or sell its interests in KG to, F&F Holding GmbH. (e) REPORTS AND FINANCIAL STATEMENTS. Target has timely filed all required reports, schedules, forms, statements and other documents required to be filed by it with the Securities and Exchange Commission (the "SEC") since March 31, 1995 (collectively, including all exhibits, financial statements and schedules thereto, the "TARGET SEC REPORTS"). No Subsidiary of Target is required to file any form, report or other document with the SEC. None of the Target SEC Reports, as of their respective dates (and, if amended or superseded by a filing prior to the date of this Agreement or, solely with respect to Target SEC Reports filed after the date hereof, prior to the Closing Date, then on the date of such filing), contained or will contain any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of the financial statements (including the related notes) included in the Target SEC Reports complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto and presents fairly the consolidated financial position and consolidated results of operations and cash flows of Target and its Subsidiaries as of the respective dates or for the respective periods set forth therein, all in conformity with United States generally accepted accounting principles ("U.S. GAAP") consistently applied during the periods involved except as otherwise noted therein, and subject, in the case of the unaudited interim financial statements, to normal and recurring year-end adjustments that have not been and are not expected to be material in amount. All of such Target SEC Reports, as of their respective dates (and as of the date of any amendment to the respective Target SEC Report), complied as to form in all material respects with the applicable requirements 10 of the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder. (f) COMPLIANCE WITH LAW; PERMITS. (i) Target and its Subsidiaries are in compliance with all applicable laws, statutes, orders, rules and regulations promulgated, or judgments, decisions or orders entered by any Governmental Entity (collectively, "APPLICABLE LAWS") relating to Target, its Subsidiaries or their business or properties, except where the failure to be in compliance therewith, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on Target. No investigation or review by any Governmental Entity with respect to Target or its Subsidiaries is pending or, to the knowledge of Target, threatened, other than those the outcome of which would not reasonably be expected to have a Material Adverse Effect on Target. (ii) Target and its Subsidiaries are in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "TARGET PERMITS"), except for Target Permits the failure of which to possess would not have a Material Adverse Effect on Target. Target and its Subsidiaries are not in conflict with, or in default or violation of any of the Target Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on Target. (g) INTELLECTUAL PROPERTY. Target and its Subsidiaries own, or have the defensible right to use, the Intellectual Property (as defined in Section 8.11(d)), other than where the failure to own or have the defensible right to use the Intellectual Property would not reasonably be expected to have a Material Adverse Effect on Target. To the knowledge of Target, as of the date of this Agreement, no person or entity has asserted, with respect to the Intellectual Property, a claim of invalidity or that Target or any Subsidiary thereof or a licensee of Target or any Subsidiary thereof is infringing or has infringed any domestic or foreign patent, trademark, service mark, tradename, or copyright or design right, or has misappropriated or improperly used or disclosed any trade secret, confidential information or know-how. (h) LITIGATION. Except as specifically identified in the Target SEC Reports filed prior to the date of this Agreement, there is no action, suit, claim, proceeding or investigation (an "ACTION") pending or, to the knowledge of Target, threatened against Target or any of its Subsidiaries or any executive officer or director of Target or any of its Subsidiaries which, individually or in the aggregate, if adversely determined, would reasonably be expected to have a Material Adverse Effect on Target. 11 (i) INFORMATION SUPPLIED. (i) None of the information supplied or to be supplied by Target for inclusion or incorporation by reference in (A) the registration statement on Form S-4 (as defined in SECTION 5.1) to be filed with the SEC by Parent in connection with the issuance of the Parent Common Shares in the Merger will, at the time the Form S-4 is filed with the SEC, at any time it is amended or supplemented or at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (B) the Proxy Statement/Prospectus (as defined in SECTION 5.1) included in the Form S-4 related to the Target Stockholders Meeting and, if applicable, the Parent Shareholders Meeting (each, as defined in SECTION 5.1) and the Parent Common Shares to be issued in the Merger will, on the date it is first mailed to Target stockholders or Parent Stockholders, if applicable, or at the time of the Target Stockholders Meeting or the Parent Shareholders Meeting, if applicable, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (ii) Notwithstanding the foregoing provisions of this SECTION 3.1(j), no representation or warranty is made by Target with respect to statements made or incorporated by reference in the Form S-4 or the Proxy Statement/Prospectus based on information supplied by Parent for inclusion or incorporation by reference therein. (j) ABSENCE OF CERTAIN CHANGES OR EVENTS; OPERATIONS. Except as disclosed in the Target SEC Reports filed prior to the date of this Agreement, since December 31, 1997 Target and its Subsidiaries have not incurred any material liability, except in the ordinary course of business consistent with past practice, nor has there been any event, occurrence or development or any change in the business, financial condition or results of operations of Target or any of its Subsidiaries which, individually or in the aggregate, has had, or is reasonably likely to have, a Material Adverse Effect on Target or a material adverse effect on Target's ability to consummate the transactions contemplated hereby. (k) ACCOUNTING MATTERS. Neither Target nor, to the best of its knowledge, any of its affiliates has, through the date of this Agreement taken or agreed to take any action that (without giving effect to any actions taken or agreed to be taken by Parent or any of its affiliates other than in connection with this Agreement) would prevent Parent from accounting for the Merger as a pooling-of-interests for financial reporting purposes. (l) BOARD APPROVAL. The Board of Directors of Target, by resolutions adopted at a meeting duly called and held and not subsequently rescinded or modified (the "TARGET BOARD APPROVAL"), has (i) determined that this Agreement, the Merger and the other transactions contemplated hereby are fair to and in the best interests of Target and its stockholders, (ii) approved this Agreement, the Merger and the other transactions contemplated hereby and (iii) recommended that the stockholders of Target 12 approve this Agreement and the Merger and the other transactions contemplated hereby. (m) CONTRACTS. None of Target or any of its Subsidiaries nor, to the knowledge of Target, any other party thereto is in violation of or in default in respect of, nor has there occurred an event or condition which with the passage of time or giving of notice (or both) would constitute a default under or permit the termination of any contract, agreement, guarantee, lease or executory commitment that is material to the business or operations of Target or its Subsidiaries to which Target or a Subsidiary thereof is a party, except as is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on Target, and except with respect to the Credit Agreement and the Indenture of Target referenced in Section 3.1(d)(ii) hereof. (n) LABOR MATTERS. Neither Target nor any of its Subsidiaries is a party to any collective bargaining agreements covering U.S. employees. Since March 31, 1996, to the date of this Agreement, there has been no labor strike or stoppage pending or, to the knowledge of Parent, threatened against Target or any of its Subsidiaries. (o) UNDISCLOSED LIABILITIES. Except (i) as and to the extent disclosed or reserved against on the balance sheet of Target as of December 31, 1997 included in the Target SEC Documents or (ii) as incurred after the date thereof in the ordinary course of business consistent with past practice and not prohibited by this Agreement, Target and its Subsidiaries do not have any liabilities or obligations of any nature, whether known or unknown, absolute, accrued, contingent or otherwise and whether due or to become due, that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on Target. (p) ENVIRONMENTAL MATTERS. As used herein, the term "Environmental Laws" means all federal, state, local and foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or industrial, toxic or hazardous substances or wastes (collectively, "HAZARDOUS MATERIALS") into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder. Except as would not individually or in the aggregate reasonably be expected to have a Material Adverse Effect on Target, there are, with respect to Target, its Subsidiaries or any predecessor of the foregoing, no past or present violations of Environmental Laws, releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental liability or any liability under the 13 Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and none of Target and its Subsidiaries has received any notice with respect to any of the foregoing, nor is any Action pending or, to the knowledge of Target, threatened in connection with any of the foregoing. (q) EMPLOYEE BENEFIT MATTERS. (i) With respect to each Target Benefit Plan maintained primarily for the benefit of individuals employed in the United States and each employment agreement with an employee of Target or its Subsidiaries employed in the United States providing for annual compensation of at least $200,000, Target has provided, and with respect to each material Target Benefit Plan maintained primarily for the benefit of individuals employed outside the United States and each employment agreement with an employee of Target or its Subsidiaries employed outside the United States providing for annual compensation of at least $200,000, Target will provide as promptly as practicable after the date of this Agreement, to Parent, a true, correct and complete copy of the following (where applicable): (A) each writing constituting a part of such plan or agreement, including without limitation all plan documents, trust agreements, and insurance contracts and other funding vehicles; (B) the most recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (C) the current summary plan description, if any; (D) the most recent annual financial report, if any; and (E) the most recent determination letter from the Internal Revenue Service, if any. (ii) The Internal Revenue Service has issued a favorable determination letter with respect to each Target Benefit Plan that is intended to be a "qualified plan" within the meaning of Section 401(a) of the Code (a "QUALIFIED PLAN") and there are no existing circumstances nor any events that have occurred that could reasonably be expected to adversely affect the qualified status of any Qualified Plan or the related trust. (iii) All premiums due or payable with respect to material insurance policies funding any Target Benefit Plan have been made or paid in full on or before the final due date thereof, and all such premiums due or payable through the Closing Date will be made or paid in full on or before the final due date thereof. (iv)Target and its Subsidiaries have complied, and are now in compliance, in all material respects, with all provisions of ERISA, the Code and all other domestic or foreign laws and regulations and all contractual obligations applicable to the Target Benefit Plans. Each Target Benefit Plan has been operated in material compliance with its terms. There is not now, and there are no existing circumstances that would give rise to, any requirement for the posting of security with respect to a Plan or the imposition of any lien on the assets of Target or any of its Subsidiaries under ERISA or the Code. (v) All Target Benefit Plans subject to the laws of any jurisdiction outside of the United States have been maintained in accordance with all applicable requirements 14 and, if they are intended to be funded and/or book-reserved, are fully funded and/or book reserved, as appropriate, based upon reasonable actuarial assumptions. (vi) No Plan is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA (a "MULTIEMPLOYER PLAN") or a plan that has two or more contributing sponsors at least two of whom are not under common control, within the meaning of Section 4063 of ERISA (a "MULTIPLE EMPLOYER PLAN"). None of Target and its Subsidiaries or any of their respective ERISA Affiliates has incurred any Withdrawal Liability that has not been satisfied in full. (vii) There does not now exist, and there are no currently existing circumstances that would result in, any material Controlled Group Liability that would be a liability of Target or any of its Subsidiaries following the Closing. Without limiting the generality of the foregoing, neither Target nor any of its Subsidiaries nor any of their respective ERISA Affiliates has engaged in any transaction described in Section 4069 or Section 4204 of ERISA. (viii) Except for health continuation coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA or other applicable law or as set forth in Target SEC Reports, neither Target nor any of its Subsidiaries has any material liability for life, health, medical or other welfare benefits to former employees or beneficiaries or dependents thereof. (ix) Except as required by applicable law and except as disclosed in the Target SEC Reports or in Target Benefit Plans delivered to Parent, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will result in, cause the accelerated vesting or delivery of, or materially increase the amount or value of, any payment or benefit to any employee, officer, director or consultant of Target or any of its Subsidiaries. (x) There are no pending or, to the knowledge of Target, threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations which have been asserted or instituted against the Target Benefit Plans, any fiduciaries thereof with respect to their duties to the Target Benefit Plans or the assets of any of the trusts under any of the Target Benefit Plans which would result in any material liability of Target or any of its Subsidiaries to the Pension Benefit Guaranty Corporation, the Department of Treasury, the Department of Labor, any Multiemployer Plan, or any foreign governmental authority. (r) TAXES. Except for such matters that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Target: (i) Target and its Subsidiaries (a) have duly filed all Tax Returns (as defined in Section 3.1(r)(v)) (including, but not limited to, those filed on a consolidated, combined or unitary basis) required to have been filed by Target or its Subsidiaries prior to the date of this Agreement, all of which foregoing Tax Returns are true and 15 correct; (b) have within the time and manner prescribed by Applicable Law paid or, prior to the Effective Time, will pay all Taxes, interest and penalties required to be paid in respect of the periods covered by such returns or reports or otherwise due to any federal, state, foreign, local or other taxing authority; (c) have adequate reserves (to the extent required by U.S. GAAP) on their financial statements for any Taxes in excess of the amounts so paid; (d) are not delinquent in the payment of any Tax and have not requested or filed any document having the effect of causing any extension of time within which to file any Tax Returns in respect of any fiscal year which have not since been filed; and (e) have not received written notice of any deficiencies for any Tax from any taxing authority, against Target or any of its Subsidiaries for which there are not adequate reserves (to the extent required by U.S. GAAP). Neither Target nor any of its Subsidiaries is the subject of any currently ongoing Tax audit. As of the date of this Agreement, there are no pending requests for waivers of the time to assess any Tax, other than those made in the ordinary course and for which payment has been made or there are adequate reserves (to the extent required by U.S. GAAP). With respect to any taxable period ended prior to December 31, 1991, all U.S. federal and material foreign income Tax Returns including Target or any of its Subsidiaries have been audited by the Internal Revenue Service or applicable local authorities or are closed by the applicable statute of limitations. Neither Target nor any of its Subsidiaries has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. There are no liens with respect to Taxes upon any of the properties or assets, real or personal, tangible or intangible, of Target or any of its Subsidiaries (other than liens for Taxes not yet due). To Target's knowledge, no claim has ever been made in writing by an authority in a jurisdiction where none of Target and its Subsidiaries files Tax Returns that Target or any of its Subsidiaries is or may be subject to taxation by that jurisdiction. Target has not filed an election under Section 341(f) of the Code to be treated as a consenting corporation. (ii) Neither Target nor any of its Subsidiaries is obligated by any contract, agreement or other arrangement to indemnify any other person with respect to Taxes. Neither Target nor any of its Subsidiaries is now or has ever been a party to or bound by any agreement or arrangement (whether or not written and including, without limitation, any arrangement required or permitted by law) binding Target or any of its Subsidiaries which (a) requires Target or any of its Subsidiaries to make any Tax payment to or for the account of any other person, (b) affords any other person the benefit of any net operating loss, net capital loss, investment Tax credit, foreign Tax credit, charitable deduction or any other credit or Tax attribute which could reduce Taxes (including, without limitation, deductions and credits related to alternative minimum Taxes) of Target or any of its Subsidiaries, or (c) requires or permits the transfer or assignment of income, revenues, receipts or gains to Target or any of its Subsidiaries, from any other person. (iii) Target and its Subsidiaries have withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party. 16 (iv) Target and its Subsidiaries have withheld and paid all Taxes required to have been paid to any foreign jurisdiction in connection with the payment of interest, dividends, royalties, technical service fees or other payments or property transfers subject to withholding made to related or unrelated parties. (v) "TAX RETURNS" means returns, reports and forms required to be filed with any Governmental Entity of the United States or any other jurisdiction responsible for the imposition or collection of Taxes. (vi) "TAXES" means all Taxes (whether federal, state, local or foreign) based upon or measured by income and any other Tax whatsoever, including, without limitation, gross receipts, profits, sales, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll, employment, excise, or property Taxes, together with any interest or penalties imposed with respect thereto. (s) VOTE REQUIRED. The affirmative vote of the holders of a majority of the outstanding shares of Target Common Stock to approve the Merger (the "REQUIRED TARGET VOTE") is the only vote of the holders of any class or series of Target capital stock necessary to adopt this Agreement and approve the transactions contemplated hereby. (t) BROKERS OR FINDERS. No agent, broker, investment banker, financial advisor or other firm or Person is or will be entitled to any broker's or finder's fee from Target or its Subsidiaries or any other similar commission or fee will be incurred by or on behalf of Target in connection with any of the transactions contemplated by this Agreement, except Lehman Brothers Inc. (the "TARGET FINANCIAL ADVISOR"), whose fees and expenses will be paid by Target in accordance with Target's agreement with such firm, based upon arrangements made by or on behalf of Target and a copy of which arrangements have been provided to Parent. (u) OPINIONS OF FINANCIAL ADVISOR. Target has received the opinion of the Target Financial Advisor, dated the date of this Agreement, to the effect that, as of such date, the Merger Consideration is fair, from a financial point of view, to the holders of Target Common Stock (the "FAIRNESS OPINION"), a copy of which opinion has been made available to Parent. (v) DGCL SECTION 203. Prior to the time this Agreement was executed, the Board of Directors of Target has taken all action necessary to exempt under or make not subject to Section 203 of the General Corporation Law of the State of Delaware: (i) the execution of this Agreement, (ii) the Merger and (iii) the transactions contemplated hereby. 3.2 REPRESENTATIONS AND WARRANTIES OF PARENT. Parent represents and warrants to Target as follows: (a) ORGANIZATION, STANDING AND POWER. Parent is a corporation duly 17 organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all requisite power and authority to own, use, lease and operate its properties and to carry on its business as now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary other than in such jurisdictions where the failure so to qualify or to be in good standing would not, either individually or in the aggregate, have a Material Adverse Effect on Parent. The copies of the articles of incorporation, as amended and restated (the "PARENT ARTICLES"), and the Code of Regulations, as amended and restated (the "PARENT CODE"), of Parent which were previously furnished to Target are true, complete and correct copies of such documents as in effect on the date of this Agreement. (b) CAPITAL STRUCTURE. (i) As of April 30, 1998, the authorized capital stock of Parent consisted of (A) 300,000,000 Parent Common Shares of which 110,507,970 shares were outstanding and 267,867 were held in treasury, (B) 5,000,000 Class B Common Shares, without par value, none of which was outstanding or held in treasury and (C) 500,000 Non-Voting Preferred Shares, without par value, none of which was outstanding or held in treasury. As of April 30, 1998, 5,112,753 Parent Common Shares were reserved for issuance upon the exercise or conversion of options, warrants or convertible securities granted or issuable by Parent. All issued and outstanding shares of the capital stock of Parent are duly authorized, validly issued, fully paid and nonassessable, and no shares of capital stock have been issued in violation of preemptive or similar rights. (ii) No bonds, debentures, notes or other indebtedness of Parent having the right to vote on any matters on which stockholders may vote ("PARENT VOTING DEBT") are issued or outstanding. (iii) Except as otherwise set forth in Section 3.2(b)(i), as of April 30, 1998, there are no securities, subscriptions, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which Parent or any of its Subsidiaries is a party or by which any of them is bound obligating Parent or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of Parent or any of its Subsidiaries or obligating Parent or any of its Subsidiaries to issue, grant, extend or enter into any such security, subscription, option, warrant, call, right, commitment, agreement, arrangement or undertaking. As of the date of this Agreement, there are no outstanding obligations of Parent to repurchase, redeem or otherwise acquire any shares of capital stock of Parent. (c) AUTHORITY; NO CONFLICTS. (i) Parent has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, subject to the approval by the shareholders of Parent of the Agreement and the issuance of Parent Common Shares in connection with the Merger (collectively the "SHARE ISSUANCE") by the Required Parent Vote (as defined in SECTION 3.2(i)), if required by Applicable Law or the rules of the NYSE. The execution and delivery of 18 this Agreement, the Merger and the consummation of the other transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent, subject to the approval, if any, by the shareholders of Parent of the Share Issuance. This Agreement has been duly executed and delivered by Parent and constitutes a valid and binding agreement of Parent, enforceable against it in accordance with its terms. (ii) The execution and delivery of this Agreement does not or will not, as the case may be, and the consummation of the Merger and the other transactions contemplated hereby will not, conflict with, or result in a Violation pursuant to: (A) any provision of the Parent Articles or the Parent Code or the certificate of incorporation or by-laws of any Subsidiary of Parent, (B) except as would not have a Material Adverse Effect on Parent and, subject to obtaining or making the consents, approvals, orders, authorizations, registrations, declarations and filings referred to in paragraph (iii) below, any loan or credit agreement, note, mortgage, bond, indenture, lease, benefit plan or other agreement, obligation, contract, undertaking, instrument, permit, concession, franchise, license, judgment, order, writ, injunction, decree, statute, law, ordinance, rule or regulation applicable to Parent or any Subsidiary of Parent or their respective properties or assets. (iii) No consent, approval, order or authorization of, or registration, declaration or filing with, or review by any Governmental Entity is required by or with respect to Parent or any Subsidiary of Parent in connection with the execution and delivery of this Agreement by Parent or the consummation of the Merger and the other transactions contemplated hereby, except for the Required Consents and such consents, approvals, orders, authorizations, registrations, declarations, filings and reviews the failure of which to make or obtain would not reasonably be expected to have a Material Adverse Effect on Parent. (d) REPORTS AND FINANCIAL STATEMENTS. Parent has timely filed all required reports, schedules, forms, statements and other documents required to be filed by it with the SEC since June 30, 1995 (collectively, including all exhibits, financial statements and schedules thereto, the "PARENT SEC REPORTS"). No Subsidiary of Parent is required to file any form, report or other document with the SEC. None of the Parent SEC Reports, as of their respective dates (and, if amended or superseded by a filing prior to the date of this Agreement or, solely with respect to Parent SEC Reports filed after the date hereof, prior to the Closing Date, then on the date of such filing), contained or will contain any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of the financial statements (including the related notes) included in the Parent SEC Reports complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto and presents fairly the consolidated financial position and consolidated results of operations and cash flows of Parent and its Subsidiaries as of the respective dates or for the respective periods set forth therein, all in conformity with U.S. GAAP 19 consistently applied during the periods involved except as otherwise noted therein, and subject, in the case of the unaudited interim financial statements, to normal and recurring year-end adjustments that have not been and are not expected to be material in amount. All of such Parent SEC Reports, as of their respective dates (and as of the date of any amendment to the respective Parent SEC Report), complied as to form in all material respects with the applicable requirements of the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder. (e) INFORMATION SUPPLIED. (i) None of the information supplied or to be supplied by Parent for inclusion or incorporation by reference in (A) the Form S-4 will, at the time the Form S-4 is filed with the SEC, at any time it is amended or supplemented or at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) the Proxy Statement/Prospectus will, on the date it is first mailed to Target stockholders or Parent Stockholders, if applicable, or at the time of the Target Stockholders Meeting or the Parent Shareholders Meeting, if applicable, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (ii) Notwithstanding the foregoing provisions of this SECTION 3.2(e), no representation or warranty is made by Parent with respect to statements made or incorporated by reference in the Form S-4 or the Proxy Statement/Statement based on information supplied by Target for inclusion or incorporation by reference therein. (f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Parent SEC Reports filed prior to the date of this Agreement, since March 31, 1998, Parent and its Subsidiaries have not incurred any material liability, except in the ordinary course of business consistent with past practice, nor has there been any event, occurrence or development or any change in the business, financial condition or results of operations of Parent or any of its Subsidiaries which has had, or is reasonably likely to have, a Material Adverse Effect on Parent or a material adverse effect on Parent's ability to consummate the transactions contemplated hereby. (g) ACCOUNTING MATTERS. Neither Parent nor, to the best of its knowledge, any of its affiliates has, through the date of this Agreement taken or agreed to take any action that (without giving effect to any actions taken or agreed to be taken by Target or any of its affiliates) would prevent Parent from accounting for the Merger as a pooling-of-interests for financial reporting purposes. (h) BOARD APPROVAL. The Board of Directors of Parent, by resolutions adopted at a meeting duly called and held and not subsequently rescinded or modified (the "PARENT BOARD APPROVAL"), has (i) determined that this Agreement, the Merger and the other transactions contemplated hereby are fair to and in the best interests of Parent and its shareholders, (ii) approved this Agreement and the Merger and the other 20 transactions contemplated hereby and (iii) recommended that the shareholders of Parent approve the Share Issuance if required by Applicable Law or the rules of NYSE. (i) VOTE REQUIRED. If the proposed transaction between Parent and Bergen Brunswig Corporation ("BBC") is not consummated prior to the Effective Time, the affirmative vote of holders of Parent Common Shares representing a majority of the Parent Common Shares outstanding and entitled to vote thereon (the "REQUIRED PARENT VOTE"), is the only vote of the holders of any class or series of Parent capital stock necessary to approve the Share Issuance. If the proposed transaction between Parent and BBC is consummated prior to the Effective Time, no vote of the holders of any class or series of Parent capital stock is necessary to approve the Share Issuance. (j) BROKERS OR FINDERS. No agent, broker, investment banker, financial advisor or other firm or Person is or will be entitled to any broker's or finder's fee from Parent or its affiliates or any other similar commission or fee will be incurred by or on behalf of Parent in connection with any of the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent, except Donaldson Lufkin & Jenrette Securities Corporation and certain of its affiliates and related parties (the "PARENT FINANCIAL ADVISOR"), whose fees and expenses will be paid by Parent in accordance with Parent's agreement (if any) with such firm based upon arrangements made by or on behalf of Parent. 3.3 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB. Parent and Merger Sub represent and warrant to Target as follows: (a) ORGANIZATION AND CORPORATE POWER. Merger Sub is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware. Merger Sub is a direct wholly-owned subsidiary of Parent. (b) CORPORATE AUTHORIZATION. Merger Sub has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by Merger Sub of this Agreement and the consummation by Merger Sub of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Merger Sub. This Agreement has been duly executed and delivered by Merger Sub and constitutes a valid and binding agreement of Merger Sub, enforceable against it in accordance with its terms. (c) NON-CONTRAVENTION. The execution, delivery and performance by Merger Sub of this Agreement and the consummation by Merger Sub of the transactions contemplated hereby do not and will not contravene or conflict with the certificate of incorporation or by-laws of Merger Sub. (d) NO BUSINESS ACTIVITIES. Merger Sub has not conducted any activities other than in connection with the organization of Merger Sub, the negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby. Merger Sub has no Subsidiaries. 21 ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS 4.1 COVENANTS OF TARGET. During the period from the date of this Agreement and continuing until the Effective Time, Target agrees as to itself and its Subsidiaries (except as expressly contemplated or permitted by this Agreement or to the extent that Parent shall otherwise consent in writing) to conduct its operations in the ordinary course, consistent with past practice, and to use all reasonable efforts to maintain and preserve its business organization and its material rights and franchises and to retain the services of its officers and key employees and maintain relationships with customers, suppliers, lessees, licensees and other third parties, to the end that their goodwill and ongoing business shall not be impaired in any material respect. Without limiting the generality of the foregoing, during the period from the date of this Agreement and continuing until the Effective Time, Target shall not (except as expressly contemplated or permitted by this Agreement and the transactions contemplated hereby or to the extent that Parent shall otherwise consent in writing): (a) do or effect any of the following actions with respect to its securities: (i) adjust, split, combine or reclassify its capital stock, (ii) make, declare or pay any dividend or distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, other than dividends, distributions, redemptions, purchases or other acquisitions of shares between Target and a wholly owned Subsidiary of Target and dividends by majority-owned Subsidiaries of Target in the ordinary course of business consistent with past practice (including increases in such amounts consistent with past practice), (iii) grant any person any right or option to acquire any shares of its capital stock; provided that Target may grant options under the Target's 1997 Stock Option Plan with a fair market value exercise price to purchase shares of Target Common Stock consistent with the terms of the preestablished formula under Target's 1997 Stock Option Plan with respect to Target's fiscal 1998 performance to employees of Target in the ordinary course of business consistent with past practice, (iv) issue, deliver or sell or agree to issue, deliver or sell any additional shares of its capital stock, Target Voting Debt or any securities or obligations convertible into or exchangeable or exercisable for any shares of its capital stock or such securities (except (A) pursuant to the exercise of options which are outstanding as of the date of this Agreement in accordance with their existing terms or (B) as and to the extent provided for in clause (iii) of this sentence), or (v) enter into any agreement, understanding or arrangement with respect to the sale, purchase or voting of its capital stock (except as and to the extent provided for in clause (iii) of this sentence); (b) directly or indirectly sell, transfer, lease, pledge, mortgage, encumber or otherwise dispose of any of its material property or assets, other than the sale of inventory and the disposition of obsolete or worn-out equipment in the ordinary course 22 of business consistent with past practice; (c) make or propose any changes in Target's Certificate of Incorporation or By-laws; (d) merge or consolidate with any other person or acquire a material amount of assets or capital stock of any other person, create any subsidiary outside the ordinary course of business or enter into any confidentiality agreement with any person outside the ordinary course of business; (e) incur, create, assume or otherwise become liable for any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual, corporation or other entity, other than in the ordinary course of business, consistent with past practice; (f) except as disclosed in a schedule previously provided by Target to Parent, enter into or modify any employment, severance, termination or similar agreements or arrangements with, or grant any bonuses, salary increases, severance or termination pay to, any officer, director, consultant or employee other than salary increases granted in the ordinary course of business consistent with past practice, other than, without the consent of Parent, to employees who are officers or directors of Target, or otherwise increase the compensation or benefits provided to any officer, director, consultant or employee except as may be required by Applicable Law or a binding written contract in effect on the date of this Agreement; (g) enter into, adopt or amend any employee benefit or similar plan; (h) change any method or principle of accounting in a manner that is inconsistent with past practice, except to the extent required by U.S. GAAP as advised by Target's regular independent accountants; (i) settle any Actions, whether now pending or hereafter made or brought involving an amount in excess of $500,000; (j) write up, write down or write off the book value of any assets, individually or in the aggregate, in excess of $500,000, except for depreciation and amortization in accordance with U.S. GAAP consistently applied; (k) incur or commit to any capital expenditures, other than capital expenditures provided for in Target's Profit Plan for fiscal 1999 previously provided to Parent; (l) take any action, or permit any of its Subsidiaries to take any action, that would prevent the Merger from qualifying as a reorganization under Section 368 of the Code; (m) take any action that would reasonably be expected to result in any of the 23 representations and warranties set forth in Section 3.1 becoming false or inaccurate in any material respect; (n) permit or cause any Subsidiary to do any of the foregoing or agree or commit to do any of the foregoing; or (o) agree in writing or otherwise to take any of the foregoing actions. 4.2 COVENANTS OF PARENT. During the period from the date of this Agreement and continuing until the Effective Time, Parent shall not (except as expressly contemplated or permitted by this Agreement or to the extent that Target shall otherwise consent in writing): (a) except to the extent required to comply with their respective obligations hereunder, required by law or required by the rules and regulations of NYSE, make any amendment to the Parent Articles that would adversely affect in any material respect the rights and preferences of the holders of Parent Common Shares or make any changes in the certificate of incorporation of Merger Sub; (b) change any method or principle of accounting in a manner that is inconsistent with past practice except to the extent required by U.S. GAAP as advised by Parent's regular independent counsel; (c) take any action, or permit any of its Subsidiaries to take any action, that would prevent the Merger from qualifying as a reorganization under Section 368 of the Code; (d) make, declare or pay any extraordinary cash dividend, other than dividends between Parent and a Subsidiary of Parent; (e) permit or cause any Subsidiaries to do any of the foregoing or agree or commit to do any of the foregoing; or (f) agree in writing or otherwise to take any of the foregoing actions. ARTICLE V ADDITIONAL AGREEMENTS 5.1 PREPARATION OF PROXY STATEMENT; TARGET STOCKHOLDERS MEETING. (a) As promptly as practicable following the date of this Agreement, Parent shall, in cooperation with Target, prepare and file with the SEC preliminary proxy materials on a confidential basis which shall constitute the Proxy Statement/Prospectus and, if the Required Parent Vote is required to be obtained with respect to the Share Issuance pursuant to Applicable Law or the rules of the NYSE, the joint proxy statement/prospectus (such joint proxy statement/prospectus, and any amendments or supplements thereto, the "PROXY 24 STATEMENT/PROSPECTUS") and, following completion of a review by the SEC (if any), a registration statement on Form S-4 with respect to the issuance of Parent Common Shares in the Merger (the "FORM S-4"). The Proxy Statement/Prospectus will be included in the Form S-4 as Parent's prospectus. The Form S-4 and the Proxy Statement/Prospectus shall comply as to form in all material respects with the applicable provisions of the Securities Act and the Exchange Act and the rules and regulations thereunder. Each of Parent and Target shall use all reasonable efforts to have the preliminary proxy materials cleared by the SEC as promptly as practicable after filing with the SEC and to keep the Form S-4 effective as long as is necessary to consummate the Merger. Parent shall, as promptly as practicable after receipt thereof, provide copies of any written comments received from the SEC with respect to the Proxy Statement/Prospectus to Target and advise Target of any oral comments with respect to the Proxy Statement/Prospectus received from the SEC. Parent agrees that none of the information supplied or to be supplied by Parent for inclusion or incorporation by reference in the Proxy Statement/Prospectus and each amendment or supplement thereto, at the time of mailing thereof and at the time of the Target Stockholders Meeting or the Parent Shareholders Meeting, if applicable, will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Target agrees that none of the information supplied or to be supplied by Target for inclusion or incorporation by reference in the Proxy Statement/Prospectus and each amendment or supplement thereto, at the time of mailing thereof and at the time of the Target Stockholders Meeting or the Parent Shareholders Meeting, if applicable, will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. For purposes of the foregoing, it is understood and agreed that information concerning or related to Parent and the Parent Shareholders Meeting, if applicable, will be deemed to have been supplied by Parent and information concerning or related to Target and the Target Stockholders Meeting shall be deemed to have been supplied by Target. Parent will provide Target with a reasonable opportunity to review and comment on any amendment or supplement to the Proxy Statement/Prospectus prior to filing such with the SEC, and will provide Target with a copy of all such filings made with the SEC. No amendment or supplement to the information supplied by Target for inclusion in the Proxy Statement/Prospectus shall be made without the approval of Target, which approval shall not be unreasonably withheld or delayed. (b) Target shall, as promptly as practicable following the execution of this Agreement, duly call, give notice of, convene and hold a meeting of its stockholders (the "TARGET STOCKHOLDERS MEETING") for the purpose of obtaining the Required Target Vote with respect to the transactions contemplated by this Agreement, shall take all lawful action to solicit the adoption of this Agreement by the Required Target Vote and the Board of Directors of Target shall recommend adoption of this Agreement by the stockholders of Target. (c) Parent shall, if required by Applicable Law or the rules of the NYSE, as promptly as practicable following the execution of this Agreement, duly call, give notice of, convene and hold a meeting of its shareholders (the "PARENT SHAREHOLDERS MEETING") for the purpose of obtaining the Required Parent Vote, shall take all lawful action to solicit the 25 approval of the Share Issuance by the Required Parent Vote, and the Board of Directors of Parent shall recommend approval of the Share Issuance by the shareholders of Parent. 5.2 PARENT BOARD OF DIRECTORS. At or immediately after the Effective Time, the Board of Directors of Parent will take all necessary action to elect Aleksandar Erdeljan as a member of the Board of Directors of Parent. 5.3 ACCESS TO INFORMATION. Upon reasonable notice, each party shall (and shall cause its Subsidiaries to) afford to the officers, employees, accountants, counsel, financial advisors and other representatives of the other party reasonable access during normal business hours, during the period prior to the Effective Time, to all its relevant properties, books, contracts, commitments and records and, during such period, such party shall (and shall cause its Subsidiaries to) furnish promptly to the other party, consistent with its legal obligations, all other relevant information concerning its business, properties and personnel as such other party may reasonably request. The parties will hold any such information which is non-public in confidence to the extent required by, and in accordance with, the provisions of the letter dated April 17, 1998 between Target and Parent (the "CONFIDENTIALITY AGREEMENT"). Any investigation by Parent or Target shall not affect the representations and warranties of Target or Parent or Merger Sub, as the case may be. 5.4 REASONABLE EFFORTS. (a) Subject to the terms and conditions of this Agreement, each party will use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under Applicable Laws and regulations to consummate the Merger and the other transactions contemplated by this Agreement as soon as practicable after the date of this Agreement. In furtherance and not in limitation of the foregoing, each party hereto agrees to make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated hereby as promptly as practicable and in any event within five Business Days after the date of this Agreement and to supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR Act and to use all reasonable efforts to take all other actions necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act as soon as practicable. (b) Each of Parent and Target shall, in connection with the efforts referenced in SECTION 5.4(a) to obtain all requisite approvals and authorizations for the transactions contemplated by this Merger Agreement under the HSR Act or any other Regulatory Law (as defined below), use all reasonable efforts to (i) cooperate in all respects with each other in connection with any filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private party, (ii) promptly inform the other party of any communication received by such party from, or given by such party to, the Antitrust Division of the Department of Justice (the "DOJ") or any other Governmental Entity and of any material communication received or given in connection with any proceeding by a private party, in each case regarding any of the transactions contemplated hereby, and (iii) permit the other party to review any communication given by it to, and make all reasonable efforts to consult with each other in advance of any meeting or conference with, the DOJ or any such other Governmental Entity or, in connection with any proceeding by a private party, 26 with any other Person, and to the extent permitted by the DOJ or such other applicable Governmental Entity or other Person, give the other party the opportunity to attend and participate in such meetings and conferences, in each case relating solely to the transactions contemplated by this Agreement. For purposes of this Agreement, "REGULATORY LAW" means the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act and all other federal, state and foreign, if any, statutes, rules, regulations, orders, decrees, administrative and judicial doctrines and other laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or lessening of competition through merger or acquisition. (c) In furtherance and not in limitation of the covenants of the parties contained in SECTIONS 5.4(a) and 5.4(b), if any administrative or judicial action or proceeding, including any proceeding by a private party, is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as violative of any Regulatory Law, each of Parent and Target shall cooperate in all respects with each other and use all reasonable efforts to contest and resist any such action or proceeding and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by this Agreement. Notwithstanding the foregoing or any other provision of this Agreement, nothing in this SECTION 5.4 shall limit a party's right to terminate this Agreement pursuant to SECTION 7.1(b) so long as such party has up to then complied in all respects with its obligations under this SECTION 5.4. (d) If any objections are asserted with respect to the transactions contemplated hereby under any Regulatory Law or if any suit is instituted by any Governmental Entity or any private party challenging any of the transactions contemplated hereby as violative of any Regulatory Law, each of Parent and Target shall use all reasonable efforts to resolve any such objections or challenge as such Governmental Entity or private party may have to such transactions under such Regulatory Law so as to permit consummation of the transactions contemplated by this Agreement. (e) Notwithstanding anything to the contrary in this Agreement, neither Parent nor Target shall be required to (i) hold separate (including by trust or otherwise) or divest any businesses or assets or (ii) take or agree to take any other action or agree to any limitation that would reasonably be expected to have a Material Adverse Effect on Parent or Target, or would reasonably be expected to substantially impair the overall benefits expected, as of the date of this Agreement, to be realized from the consummation of the Merger. (f) Each of Parent, Merger Sub and Target shall use its best efforts to cause the Merger to qualify, and will not (both before and after consummation of the Merger) take any actions which to its knowledge could reasonably be expected to prevent the Merger from qualifying as a reorganization under the provisions of Section 368 of the Code. (g) Each of the parties agrees that it shall not, and shall not permit any of its Subsidiaries to, take any actions which would, or would be reasonably likely to, prevent Parent from accounting, and shall use its best efforts (including, without limitation, providing 27 appropriate representation letters to Parent's accountants) to allow Parent to account for the Merger in accordance with the pooling-of-interests method of accounting under the requirements of Opinion No. 16 "Business Combinations" of the Accounting Principles Board of the American Institute of Certified Public Accountants, as amended by applicable pronouncements by the Financial Accounting Standards Board, and all related published rules, regulations and policies of the SEC ("APB NO. 16"), and to obtain a letter, in form and substance reasonably satisfactory to Parent, from Deloitte & Touche LLP dated the date of the Effective Time and, if requested by Parent, dated the date of the Proxy Statement/Prospectus stating that they concur with management's conclusion that the Merger will qualify as a transaction to be accounted for by Parent in accordance with the pooling of interests method of accounting under the requirements of APB No. 16. 5.5 ACQUISITION PROPOSALS. (a) Target agrees that neither it nor any of its Subsidiaries nor any of the officers and directors of it or its Subsidiaries shall, and that it shall direct and use its best efforts to cause its and its Subsidiaries' employees, agents and representatives (including any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, initiate, solicit, encourage or knowingly facilitate (including by way of furnishing information) any inquiries or the making of any proposal or offer with respect to a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving, or any purchase or sale of all or any significant portion of the assets or 10% or more of the equity securities of, it or any of its Subsidiaries (any such proposal or offer being hereinafter referred to as an "ACQUISITION PROPOSAL"). Target further agrees that neither it nor any of its Subsidiaries nor any of the officers and directors of it or its Subsidiaries shall, and that it shall direct and use its best efforts to cause its and its Subsidiaries' employees, agents and representatives (including any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, have any discussion with or provide any confidential information or data to any Person relating to an Acquisition Proposal, or engage in any negotiations concerning an Acquisition Proposal, or knowingly facilitate any effort or attempt to make or implement an Acquisition Proposal or accept an Acquisition Proposal. Notwithstanding the foregoing, at any time prior to the Target Stockholders Meeting, Target or its Board of Directors shall be permitted to engage in any discussions or negotiations with, or provide any information to, any Person in response to an unsolicited bona fide written Acquisition Proposal by any such Person if (i) the Board of Directors of Target concludes in good faith by a majority vote, after consulting with a nationally recognized investment banking firm, that such Acquisition Proposal would, if consummated, constitute a Superior Proposal, (ii) prior to providing any information or data to any Person in connection with an Acquisition Proposal by any such Person, the Target Board of Directors receives from such Person an executed confidentiality agreement on terms substantially similar to those contained in the Confidentiality Agreement and (iii) prior to providing any information or data to any Person, the Board of Directors of Target notifies Parent promptly of such inquiries, proposals or offers received by, any such information requested from, or any such discussions or negotiations sought to be initiated or continued with, any of its representatives indicating, in connection with such notice, the name of such Person and all of the material terms and conditions of any proposals or offers. Target agrees that it will keep Parent fully informed, on a current basis, of the status and terms of any such proposals or offers and the status of any such discussions 28 or negotiations. Notwithstanding any other provision of this SECTION 5.5(a), in the event that the Board of Directors of Target determines in good faith by a majority vote, after consulting with a nationally recognized investment banking firm, that an Acquisition Proposal would, if consummated, constitute a Superior Proposal, the Board of Directors of Target may withdraw, modify or change, in a manner adverse to Parent, the Target Board Approval and, to the extent applicable, comply with Rule 14e-2 promulgated under the Exchange Act with respect to an Acquisition Proposal by disclosing such withdrawn, modified or changed Target Board Approval in connection with a tender or exchange offer for Target Common Stock, provided that it uses all reasonable efforts to give Parent two days prior written notice of its intention to do so (provided that the foregoing shall in no way limit or otherwise affect Parent's right to terminate this Agreement pursuant to SECTION 7.1 at such time as the requirements of SECTION 7.1 have been met). The Target Board of Directors shall not, in connection with any such withdrawal, modification or change of the Target Board Approval, take any action to change the approval of the Board of Directors of Target for purposes of causing any state takeover statute or other state law to become applicable to the Merger or inapplicable to any Acquisition Proposal or transaction contemplated thereby (until such time as this Agreement has been terminated in accordance with the requirements of SECTION 7.1). Target agrees that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal. Target agrees that it will take the necessary steps to promptly inform the individuals or entities referred to in the first sentence of this SECTION 5.5 of the obligations undertaken in this SECTION 5.5. (b) TERMINATION RIGHT. If prior to the approval of the Merger at the Target Stockholders Meeting: (x) the Board of Directors of Target shall determine in good faith, after consultation with its financial advisors, with respect to any written proposal from a third party for an Acquisition Proposal received after the date hereof that was not initiated, solicited, encouraged or knowingly facilitated by Target or any of its Subsidiaries or their affiliates or agents in violation of this Agreement, that such Acquisition Proposal would, if consummated, constitute a Superior Proposal (after taking into account any adjustment to the terms and conditions of the Merger offered in writing by Parent in response to such Acquisition Proposal) and (y) Target has received from a nationally recognized investment banking firm a written opinion (a copy of which is delivered to Parent) that the Acquisition Proposal would, if consummated, constitute a Superior Proposal (after taking into account any adjustment to the terms and conditions of such transaction offered in writing by Parent), Target may terminate this Agreement and enter into a letter of intent, agreement-in-principle, acquisition agreement or other similar agreement (each, an "ACQUISITION AGREEMENT") with respect to such Acquisition Proposal PROVIDED that, prior to any such termination, (i) Target has provided Parent written notice that it intends to terminate this Agreement pursuant to this SECTION 5.5(b) and SECTION 7.1(f), identifying the Acquisition Proposal then determined to be a Superior Proposal and delivering the information with respect to such Acquisition Proposal required by SECTION 5.5(a), and (ii) at least three full Business Days after Target has provided the notice referred to in clause (i) above (provided that the advice and opinion referred to in clauses (x) and (y) above shall continue in effect without revocation, revision or modification), (A) Target delivers to Parent a written notice of termination of this Agreement pursuant to this SECTION 5.5(b), (B) Parent receives from Target a wire transfer in the aggregate amount of (I) Parent's 29 Expenses (as defined in SECTION 5.7) as the same may have been estimated by Parent in good faith prior to the date of such delivery (subject to an adjustment payment, if any, between the parties upon Parent's definitive determination of such Expenses), plus (II) the Termination Fee (less the amount of any Parent Expenses paid pursuant to clause I) as provided in SECTION 7.2, and (C) Parent receives a written acknowledgment from Target and from the other party to the Acquisition Proposal that Target and such other party have irrevocably waived any right to contest such payment. (c) EFFECTS OF SECTION 5.5. Nothing in this SECTION 5.5 shall (x) permit either Parent or Target to terminate this Agreement (except as specifically provided in ARTICLE VII hereof) or (y) affect any other obligation of Target or Parent under this Agreement, provided that any withdrawal, modification or change of the Target Board Approval implemented in accordance with this SECTION 5.5 (and not in response to an Acquisition Proposal that was initiated, solicited, encouraged or facilitated in violation of this SECTION 5.5) shall not constitute a breach of this Agreement by Target for any purpose hereunder. 5.6 STOCK OPTIONS AND OTHER STOCK PLANS; EMPLOYEE BENEFITS MATTERS. (a) Prior to the Effective Time of the Merger, Parent and Target shall take all such actions as may be necessary to cause each unexpired and unexercised option to purchase Target Common Stock (a "TARGET STOCK OPTION") issued pursuant to Target's 1990 Nonqualified Stock Option Plan, Target's 1990 Nonqualified Performance Stock Option Plan A, Target's 1990 Nonqualified Performance Stock Option Plan B, Target's 1992 Stock Option Plan, Target's 1997 Stock Option Plan and each of Target's agreements with its directors existing on the date hereof relating to the grant of stock options to such directors and disclosed in the Target SEC Reports or previously provided to Parent by Target (collectively, the "TARGET STOCK PLANS") in effect on the date of this Agreement which has been granted to current or former directors, officers or employees of Target by Target, to be converted at the Effective Time into an option (a "CONVERTED OPTION") to purchase that number of Parent Common Shares equal to the number of shares of Target Common Stock issuable immediately prior to the Effective Time upon exercise of the Target Stock Option multiplied by the Exchange Ratio, with an exercise price equal to the exercise price which existed under the corresponding Target Stock Option divided by the Exchange Ratio, and with other terms and conditions that are the same as the terms and conditions of such Target Stock Option immediately prior to the Effective Time (taking into account any acceleration of vesting, if any, that would result from the Merger under the terms of the Target Stock Plans as in effect on the date hereof); provided, that with respect to any Target Stock Option that is an "incentive stock option" within the meaning of Section 422 of the Code, the foregoing conversion shall be carried out in a manner satisfying the requirements of Section 424(a) of the Code. In connection with the issuance of Parent Common Shares, Parent shall (i) reserve for issuance the number of Parent Common Shares that will become subject to the Target Stock Options pursuant to this SECTION 5.6 and (ii) from and after the Effective Time, upon exercise of Converted Options, make available for issuance all Parent Common Shares covered thereby, subject to the terms and conditions applicable thereto. Target agrees to issue treasury shares of Target, to the extent available and reasonably practicable to do so, upon the exercise of Target Stock Options prior to the Effective Time. 30 (b) EMPLOYEE BENEFITS. (i) OBLIGATIONS OF PARENT; COMPARABILITY OF BENEFITS. For a period of one year following the Effective Time, Parent shall, or shall cause the Surviving Corporation to, provide benefits to continuing or former employees of Target and its Subsidiaries ("TARGET EMPLOYEES") that, in the aggregate, are no less favorable than the benefits provided, in the aggregate, under such Benefit Plans to the Target Employees immediately prior to the Effective Time. Notwithstanding the foregoing, nothing herein shall require (A) the continuation of any particular Target Benefit Plan or prevent the amendment or termination thereof (subject to the maintenance, in the aggregate, of the benefits as provided in the preceding sentence) or (B) Parent or the Surviving Corporation to continue or maintain any stock purchase or other equity plan related to the equity of Target or the Surviving Corporation. (ii) PRE-EXISTING LIMITATIONS; DEDUCTIBLE; SERVICE CREDIT. With respect to any Benefit Plans of Parent or its Subsidiaries in which the Target Employees participate effective as of the Closing Date, Parent shall, or shall cause the Surviving Corporation to: (A) waive any limitations as to pre-existing conditions, exclusions and waiting periods with respect to participation and coverage requirements applicable to the Target Employees under which any welfare Benefit Plan in which such employees may be eligible to participate after the Effective Time (provided, however, that no such waiver shall apply to a pre-existing condition of any Target Employee who was, as of the Effective Time, excluded from participation in a Target Benefit Plan by nature of such pre-existing condition), (B) provide each Target Employee with credit for any co-payments and deductibles paid prior to the Effective Time in satisfying any applicable deductible or out-of-pocket requirements under any welfare Benefit Plan in which such employees may be eligible to participate after the Effective Time, and (C) recognize all service of the Target Employees with Target for all purposes (including, without limitation, purposes of eligibility to participate, vesting credit, entitlement for benefits, and benefit accrual) in any Benefit Plan in which such employees may be eligible to participate after the Effective Time, except to the extent such treatment would result in duplicative accrual on or after the Closing Date of benefits for the same period of service. 5.7 FEES AND EXPENSES. Whether or not the Merger is consummated, all Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such Expenses, except (a) if the Merger is consummated, the Surviving Corporation shall pay, or cause to be paid, any and all property or transfer taxes imposed on Target or its Subsidiaries and any real property transfer tax imposed on any holder of shares of capital stock of Target resulting from the Merger, (b) Expenses incurred in connection with the filing, printing and mailing of the Proxy Statement/Prospectus, which shall be shared equally by Parent and Target and (c) as provided in SECTION 7.2. As used in this Agreement, "EXPENSES" includes all out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and the transactions contemplated hereby, including the preparation, printing, filing and mailing of the Proxy Statement/Prospectus and the solicitation of stockholder approvals and all 31 other matters related to the transactions contemplated hereby. 5.8 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. For a period of six years from and after the Effective Time, Parent shall cause (including, to the extent required, providing sufficient funding to enable the Surviving Corporation to satisfy all of its obligations under this Section 5.8) the Surviving Corporation to indemnify, defend and hold harmless the present and former officers and directors of Target in respect of acts or omissions occurring prior to the Effective Time to the fullest extent permitted or provided under Target's certificate of incorporation and by-laws in effect on the date of this Agreement. The Surviving Corporation shall, for a period of six years, maintain the current policies of directors' and officers' liability insurance and fiduciary liability insurance maintained by Target (provided that the Surviving Corporation may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are, in the aggregate, no less advantageous to the insured) with respect to claims arising from facts or events that occurred at or before the Effective Time; PROVIDED, HOWEVER, that in no event shall the Surviving Corporation be required to expend in any one year an amount in excess of 100% of the annual premium currently paid by Target for such insurance; and, PROVIDED, FURTHER, that if the premiums of such insurance coverage exceed such amount, the Surviving Corporation shall be obligated to obtain a policy with the greatest coverage available for a cost not exceeding such amount. 5.9 PUBLIC ANNOUNCEMENTS. Target and Parent shall use all reasonable efforts, unless otherwise required by Applicable Law or by obligations pursuant to any listing agreement with or rules of any securities exchange, to consult with each other before issuing any press release or making any other public statement with respect to this Agreement or the transactions contemplated hereby. 5.10 LISTING OF PARENT COMMON SHARES. Parent shall use all reasonable efforts to cause the Parent Common Shares to be issued in the Merger and the Parent Common Shares to be reserved for issuance upon exercise of the Converted Options to be approved for listing, upon official notice of issuance, on the NYSE. 5.11 AFFILIATES. Target shall cause each such Person who may be at the Effective Time or was on the date of this Agreement an "affiliate" of Target for purposes of Rule 145 under the Securities Act or applicable accounting releases of the SEC with respect to pooling of interests accounting treatment, to execute and deliver to Parent no less than 30 days prior to the date of the Target Stockholders Meeting, the written undertakings in the form attached hereto as Exhibit A-1 (the "TARGET AFFILIATE LETTER"). No later than 45 days prior to the date of the Target Stockholders Meeting, Target, after consultation with its outside counsel, shall provide Parent with a letter (reasonably satisfactory to outside counsel to Parent) specifying all of the Persons or entities who, in Target's opinion, may be deemed to be "affiliates" of Target under the preceding sentence. The foregoing notwithstanding, Parent shall be entitled to place legends as specified in the Target Affiliate Letter on the certificates evidencing any of the Parent Common Shares to be received by (i) any such "affiliate" of Target specified in such letter or (ii) any person Parent reasonably identified (by written notice to Target) as being a Person who may be deemed an "affiliate" for purposes of Rule 145 under the Securities Act or applicable accounting releases of the SEC with respect to pooling of 32 interests accounting treatment, pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for the Parent Common Shares, consistent with the terms of the Target Affiliate Letter, regardless of whether such Person has executed the Target Affiliate Letter and regardless of whether such Person's name appears on the letter to be delivered pursuant to the preceding sentence. ARTICLE VI CONDITIONS PRECEDENT 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The obligations of Target, Parent and Merger Sub to effect the Merger are subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) STOCKHOLDER APPROVAL. (i) Target shall have obtained the Required Target Vote in connection with the adoption of this Agreement by the stockholders of Target and (ii) Parent shall have obtained the Required Parent Vote, if required by Applicable Law or the rules of the NYSE, in connection with the approval of the Share Issuance by the shareholders of Parent. (b) NO INJUNCTIONS OR RESTRAINTS, ILLEGALITY, ACTIONS. No laws shall have been adopted or promulgated, and no temporary restraining order, preliminary or permanent injunction or other order issued by a court or other Governmental Entity of competent jurisdiction shall be in effect, having the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger. No Actions shall be instituted by any Governmental Entity which seeks to prevent consummation of the Merger or seeking material damages in connection with the transactions contemplated hereby which continues to be outstanding. (c) HSR ACT. The waiting period (and any extension thereof) applicable to the Merger under the HSR Act shall have been terminated or shall have expired. (d) GERMAN ANTITRUST. There shall have been received all required consents, authorizations, clearances and/or approvals from German competition and any similar German authorities necessary to consummate the Merger and the transactions contemplated hereby to the extent required by German law. (e) NYSE LISTING. The Parent Common Shares to be issued in the Merger and such other shares to be reserved for issuance in connection with the Merger shall have been approved upon official notice of issuance for listing on the NYSE. (f) EFFECTIVENESS OF THE FORM S-4. The Form S-4 shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Form S-4 shall have been issued by the SEC and no proceedings for that purpose shall have been initiated or threatened by the SEC. 33 (g) POOLING. Parent shall have received a letter, in form and substance reasonably satisfactory to Parent, from Deloitte & Touche LLP dated the Closing Date stating that they concur with the conclusion of Parent's management that the Merger will qualify as a transaction to be accounted for by Parent in accordance with the pooling of interests method of accounting under the requirements of APB No. 16. 6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The obligations of Parent and Merger Sub to effect the Merger are subject to the satisfaction of, or waiver by Parent, on or prior to the Closing Date of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. (i) Each of the representations and warranties of Target set forth in this Agreement, other than the representations and warranties of Target set forth in Section 3.1(c), shall have been true and correct on the date of this Agreement and shall be true and correct on and as of the Closing Date as though made on and as of the Closing Date (except for such representations and warranties made as of a specified date, the accuracy of which will be determined as of the specified date), except where any such failure of such representations and warranties in the aggregate to be true and correct in all respects would not reasonably be expected to have a Material Adverse Effect on Target (disregarding, for purposes of this provision, the Material Adverse Effect qualification in any single representation and warranty), and (ii) the representations and warranties of Target set forth in Section 3.1(c) shall have been true and correct in all material respects on the date of this Agreement and shall be true and correct in all material respects on the Closing Date as though made as of the Closing Date (except for such representations and warranties made as of a specified date, the accuracy of which will be determined as of the specified date), and Parent shall have received a certificate of the chief executive officer or president and the chief financial officer of Target to such effect. (b) PERFORMANCE OF OBLIGATIONS OF TARGET. Target shall have performed or complied with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date that are qualified as to materiality and shall have performed or complied in all material respects with all other agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date that are not so qualified as to materiality, and Parent shall have received a certificate of the chief executive officer or president and the chief financial officer of Target to such effect. 6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF TARGET. The obligations of Target to effect the Merger are subject to the satisfaction of, or waiver by, Target, on or prior to the Closing Date of the following additional conditions: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of Parent and Merger Sub set forth in this Agreement shall have been true and correct on the date of this Agreement and shall be true and correct on and as of the Closing Date as though made on and as of the Closing Date (except for such representations and warranties made as of a specified date, the accuracy of which will 34 be determined as of the specified date), except where any such failure of the representations and warranties in the aggregate to be true and correct in all respects would not reasonably be expected to have a Material Adverse Effect on Parent (disregarding, for purposes of this provision, the Material Adverse Effect qualification in any single representation and warranty), and Target shall have received a certificate of the chief executive officer or president and the chief financial officer of Parent to such effect. (b) PERFORMANCE OF OBLIGATIONS OF PARENT. Parent shall have performed or complied with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date that are qualified as to materiality and shall have performed or complied in all material respects with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date that are not so qualified as to materiality, and Target shall have received a certificate of the chief executive officer or president and the chief financial officer of Parent to such effect. (c) TAX OPINION. The opinion, dated on or about the date of and referred to in the Proxy Statement/Prospectus, based on appropriate representations of Target and Parent, of Simpson Thacher & Bartlett, counsel to Target, to Target to the effect that (i) the Merger will be treated for U.S. Federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and (ii) Parent, Merger Sub and Target will each be a party to the reorganization within the meaning of Section 368(b) of the Code, shall have been rendered. (d) CLOSING TAX OPINION. An opinion, dated as of the Closing Date, based on appropriate representations of Target and Parent, of Simpson Thacher & Bartlett, counsel to Target, substantially identical to the opinion referred to in SECTION 6.3(c), shall have been rendered. (e) CHANGE OF CONTROL OF PARENT. On or after the date of this Agreement, Parent shall not have undergone a change of control. ARTICLE VII TERMINATION AND AMENDMENT 7.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, by action taken or authorized by the Board of Directors of the terminating party or parties and, except as provided below, whether before or after any required approval of the matters presented in connection with the Merger by the stockholders of Target or the shareholders of Parent: (a) By mutual written consent of Parent and Target, by action of their respective Boards of Directors; 35 (b) By either Target or Parent if the Effective Time shall not have occurred on or before November 30, 1998 (the "TERMINATION DATE"); PROVIDED, HOWEVER, that the right to terminate this Agreement under this SECTION 7.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement (including without limitation SECTION 5.4) has been the cause of, or resulted in, the failure of the Effective Time to occur on or before the Termination Date; (c) By either Target or Parent if any Governmental Entity (i) shall have issued an order, decree or ruling or taken any other action (which the parties shall have used all reasonable efforts to resist, resolve or lift, as applicable, in accordance with SECTION 5.4) permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable or (ii) shall have failed to issue an order, decree or ruling or to take any other action (which order, decree, ruling or other action the parties shall have used all reasonable efforts to obtain, in accordance with SECTION 5.4), in each case (i) and (ii) which is necessary to fulfill the conditions set forth in subsections 6.1(c) and (d), as applicable, and such denial of a request to issue such order, decree, ruling or take such other action shall have become final and nonappealable. (d) By either Target or Parent if (i) the approval by the stockholders of Target required for the consummation of the Merger shall not have been obtained by reason of the failure to obtain the Required Target Vote or (ii) the approval by the shareholders of Parent required for the Share Issuance, if required by Applicable Law or the rules of the NYSE, shall not have been obtained by reason of the failure to obtain the Required Parent Vote, in each case upon the taking of such vote at a duly held meeting of stockholders of Target or shareholders of Parent, as the case may be, or at any adjournment thereof; (e) By Parent if the Board of Directors of Target (i) shall withdraw or modify in any adverse manner the Target Board Approval, (ii) shall approve or recommend any Acquisition Proposal or (iii) shall resolve to take any of the actions specified in clauses (i) or (ii) above; (f) By Target pursuant to SECTION 5.5(b); or (g) By Target if the Board of Directors of Parent (i) shall withdraw or modify in any adverse manner the Parent Board Approval or (ii) shall resolve to take the action specified in clause (i) above. 7.2 EFFECT OF TERMINATION. (a) In the event of termination of this Agreement by either Target or Parent as provided in SECTION 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent or Target or their respective officers, directors or stockholders except with respect to the second sentence of SECTION 5.3, SECTION 5.7, this SECTION 7.2 and ARTICLE VIII. Notwithstanding the foregoing, nothing in this SECTION 7.2 shall relieve any party to this Agreement of liability for 36 a material breach of any provision of this Agreement, and if it shall be judicially determined that termination of this Agreement was caused by an intentional breach of this Agreement, then, in addition to other remedies at law or equity for breach of this Agreement, the party so found to have intentionally breached this Agreement shall indemnify and hold harmless the other parties for their respective Expenses. (b) Parent and Target agree that (i) if Target shall terminate this Agreement pursuant to SECTION 5.5(b) and SECTION 7.1(f), (ii) if Parent shall terminate this Agreement pursuant to SECTION 7.1(e) or (iii) if (x) Target or Parent shall terminate this Agreement pursuant to SECTION 7.1(d)(i), (y) at any time prior to such termination there shall have been made to Target or publicly disclosed an Acquisition Proposal with respect to Target and (z) within twelve months of the termination of this Agreement, Target enters into an Acquisition Agreement with respect to a Business Combination or a Business Consummation is consummated, then Target shall pay to Parent (A) an amount in cash equal to the aggregate amount of Parent's Expenses incurred in connection with pursuing the transactions contemplated by this Agreement, up to but not in excess of an amount equal to $4 million in the aggregate and (B) a termination fee in an amount equal to $75 million (such amounts collectively, the "TERMINATION FEE"). For the purposes of this SECTION 7.2, "BUSINESS COMBINATION" means (i) a merger, consolidation, share exchange, business combination or similar transaction involving Target as a result of which the Target stockholders prior to such transaction in the aggregate cease to own at least 60% of the voting securities of the entity surviving or resulting from such transaction (or the ultimate parent entity thereof), (ii) a sale, lease, exchange, transfer or other disposition of at least 50% of the assets of Target and its Subsidiaries, taken as a whole, in a single transaction or a series of related transactions, or (iii) the acquisition, by a person (other than Parent or any affiliate thereof) or group (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of 25% or more of the Target Common Stock whether by tender or exchange offer or otherwise. (c) The Termination Fee required to be paid pursuant to SECTION 7.2(b)(i) shall be paid prior to termination of this Agreement pursuant to SECTION 7.1(f). The Termination Fee required to be paid pursuant to SECTION 7.2(b)(ii) shall be paid to Parent within two Business Days after the termination of this Agreement pursuant to SECTION 7.1(e). Any other payment required to be made pursuant to SECTION 7.2(b) shall be made to Parent prior to the entering into of an Acquisition Agreement with respect to, or the consummation of, an Acquisition Proposal described therein, as applicable. All payments under this SECTION 7.2 shall be made by wire transfer of immediately available funds to an account designated by the party entitled to receive payment. 7.3 AMENDMENT. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of Target and the shareholders of Parent, but, after any such approval, no amendment shall be made which by law or in accordance with the rules of any relevant stock exchange requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 37 7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. ARTICLE VIII GENERAL PROVISIONS 8.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of the representations, warranties, covenants and other agreements in this Agreement or in any instrument delivered pursuant to this Agreement, including any rights arising out of any breach of such representations, warranties, covenants and other agreements, shall survive the Effective Time, except for those covenants and agreements contained herein and therein that by their terms apply or are to be performed in whole or in part after the Effective Time and this ARTICLE VIII. Nothing in this SECTION 8.1 shall relieve any party for any breach of any representation, warranty, covenant or other agreement in this Agreement occurring prior to termination. 8.2 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed duly given (a) on the date of delivery if delivered personally, or by telecopy or telefacsimile, upon confirmation of receipt, (b) on the first Business Day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the tenth Business Day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice: (a) if to Parent or Merger Sub, to Cardinal Health, Inc. 5555 Glendon Court Dublin, Ohio 43016 Attention: Robert D. Walter Facsimile No.: 614-717-8919 with a copy to Wachtell, Lipton, Rosen & Katz 38 51 West 52nd Street New York, New York 10019 Attention: David A. Katz, Esq. Facsimile No.: 212-403-2000 (b) if to Target, to R.P. Scherer Corporation P.O. Box 7060 Troy, MI 48084 Attention: Tom Stuart Facsimile No.: 248-649-2079 with a copy to Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: Philip T. Ruegger III, Esq. Facsimile No.: 212-455-2502 8.3 INTERPRETATION. When a reference is made in this Agreement to Sections or Exhibits, such reference shall be to a Section of or Exhibit to this Agreement unless otherwise indicated. The table of contents, glossary of defined terms and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 8.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that both parties need not sign the same counterpart. 8.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. (a) This Agreement (including the documents and instruments referenced herein) and the Confidentiality Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and thereof. (b) This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, other than SECTION 5.8 (which is intended to be for the benefit of the Persons covered thereby and may be enforced by such Persons). 8.6 GOVERNING LAW. This Agreement shall be governed and construed in 39 accordance with the laws of the State of Delaware. 8.7 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. 8.8 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other party, and any attempt to make any such assignment without such consent shall be null and void, except that Merger Sub may assign, in its sole discretion, any or all of its rights, interests and obligations under this Agreement to any direct wholly owned Subsidiary of Parent without the consent of Target, but no such assignment shall relieve Merger Sub of any of its obligations under this Agreement. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. 8.9 SUBMISSION TO JURISDICTION; WAIVERS. Each of Parent and Target irrevocably agrees that any legal action or proceeding with respect to this Agreement or for recognition and enforcement of any judgment in respect hereof brought by the other party hereto or its successors or assigns may be brought and determined in the Chancery or other Courts of the State of Delaware or the United States District Court for the District of Delaware, and each of Parent and Target hereby irrevocably submits with regard to any such action or proceeding for itself and in respect to its property, generally and unconditionally, to the nonexclusive jurisdiction of the aforesaid courts. Each of Parent and Target hereby irrevocably waives, and agrees not to assert, by way of motion, as a defense, counterclaim or otherwise, in any action or proceeding with respect to this Agreement, (a) any claim that it is not personally subject to the jurisdiction of the above-named courts for any reason other than the failure to serve process in accordance with this SECTION 8.9, (b) that it or its property is exempt or immune from jurisdiction of any such court or from any legal process commenced in such courts (whether through service of notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise), and (c) to the fullest extent permitted by applicable law, that (i) the suit, action or proceeding in any such court is brought in an inconvenient forum, (ii) the venue of such suit, action or proceeding is improper and (iii) this Agreement, or the subject matter hereof, may not be enforced in or by such courts. 8.10 ENFORCEMENT. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to specific performance of the terms hereof; this being in addition to any other remedy to which they are 40 entitled at law or in equity. 8.11 DEFINITIONS. As used in this Agreement: (a) "BENEFIT PLAN" means, with respect to any Person, each employee benefit plan, program, arrangement and contract (including, without limitation, any "employee benefit plan," as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and any bonus, deferred compensation, stock bonus, stock purchase, restricted stock, stock option, employment, termination, stay agreement or bonus, change in control and severance plan, program, arrangement and contract) to which such Person or its Subsidiary is a party, which is maintained or contributed to by such Person, or with respect to which such Person could incur material liability under Section 4069, 4201 or 4212(c) of ERISA or otherwise. (b) "BOARD OF DIRECTORS" means the Board of Directors of any specified Person and any committees thereof. (c) "BUSINESS DAY" means any day on which banks are not required or authorized to close in the City of New York. (d) "CONTROLLED GROUP LIABILITY" means any and all liabilities under (i) Title IV of ERISA, (ii) section 302 of ERISA, (iii) sections 412 and 4971 of the Code, (iv) the continuation coverage requirements of section 601 et seq. of ERISA and section 4980B of the Code, and (v) corresponding or similar provisions of foreign laws or regulations, in each case other than pursuant to the Benefit Plans. (e) "ERISA AFFILIATES" means, with respect to any entity, trade or business, any other entity, trade or business that is a member of a group described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes the first entity, trade or business, or that is a member of the same controlled group as the first entity, trade or business pursuant to Section 4001(a)(14) of ERISA. (f) "INTELLECTUAL PROPERTY" means all industrial and intellectual property rights, including Proprietary Technology, patents, patent applications, trademarks, trademark applications and registrations, service marks, service mark applications and registrations, copyrights, know-how, licenses, trade secrets, proprietary processes, formulae and customer lists used by Target in their respective businesses. (g) "MATERIAL ADVERSE EFFECT" means, with respect to any entity, any adverse event, change, circumstance or effect that, individually or in the aggregate with all other adverse events, changes, circumstances and effects, is or is reasonably likely to be materially adverse to the business, financial condition or results of operations of such entity and its Subsidiaries taken as a whole, other than (i) any change, circumstance or effect relating to the economy, foreign exchange rates or securities markets in general or the industries generally in which Parent and its Subsidiaries or Target and its Subsidiaries operate and not specifically relating to Parent or Target and (ii) solely with respect to Parent, such matters set 41 forth in a schedule previously provided by Parent to Target. (h) "THE OTHER PARTY" means, with respect to Target, Parent and means, with respect to Parent, Target. (i) "PERSON" means an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization, other entity or group (as defined in the Exchange Act). (j) "PROPRIETARY TECHNOLOGY" means all proprietary processes, formulae, inventions, trade secrets, know-how, development tools and other proprietary rights used by Target and its Subsidiaries pertaining to any product, software or service manufactured, marketed, licensed or sold by Target and its Subsidiaries in the conduct of their businesses or used, employed or exploited in the development, license, sale, marketing, distribution or maintenance thereof by Target or its Subsidiaries, and all documentation and media constituting, describing or relating to the above, including manuals, memoranda, know-how, notebooks, software, records and disclosures. (k) "SUBSIDIARY" when used (A) with respect to any party means any corporation or other organization, whether incorporated or unincorporated, (i) of which such party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which held by such party or any Subsidiary of such party do not have a majority of the voting interests in such partnership) or (ii) at least a majority of the securities or other interests of which having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries and (B) with respect to Parent, shall include R.P. Scherer Verwaltungs GmbH, R.P. Scherer GmbH, R.P. Scherer GmbH & Co. KG, R.P. Scherer S.p.A., R.P. Scherer S.A., R.P. Scherer Production S.A., Allcaps Weichgelatinekapseln GmbH and R.P. Scherer K.K. (l) "SUPERIOR PROPOSAL" means a BONA FIDE written Acquisition Proposal which the Board of Directors of Target concludes in good faith (after consultation with its financial advisors and legal counsel), taking into account all legal, financial, regulatory, fiduciary and other aspects of the proposal and the Person making the proposal, (i) would, if consummated, result in a transaction that is more favorable to Target's stockholders (in their capacities as stockholders), from a financial point of view, than the transactions contemplated by this Agreement and (ii) is reasonably capable of being completed (PROVIDED that for purposes of this definition the term Acquisition Proposal shall have the meaning assigned to such term in SECTION 5.5 except that the reference to "10%" in the definition of "Acquisition Proposal" shall be deemed to be a reference to "80%" and "Acquisition Proposal" shall only be deemed to refer to a transaction involving Target, or with respect to assets (including the shares of any Subsidiary of Target) of Target and its Subsidiaries, taken as a whole, and not any of its Subsidiaries alone). (m) "TARGET BENEFIT PLAN" means any Benefit Plan with respect to Target. 42 (n) "WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as those terms are defined in Part I, Subtitle E of Title IV of ERISA. 43 IN WITNESS WHEREOF, Parent, Target and Merger Sub have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of May 17, 1998. CARDINAL HEALTH, INC. By: /s/ Robert D. Walter --------------------------------------- Name: Robert D. Walter Title: Chairman and Chief Executive Officer GEL ACQUISITION CORP. By: /s/ Robert D. Walter --------------------------------------- Name: Robert D. Walter Title: Chairman and Chief Executive Officer R.P. SCHERER CORPORATION By: /s/ Aleksandar Erdeljan --------------------------------------- Name: Aleksandar Erdeljan Title: Chairman and Chief Executive Officer 44 GLOSSARY OF DEFINED TERMS Definition Location of Definition - ---------- ---------------------- Acquisition Agreement . . . . . . . . . . . . . . Section 5.5(b) Acquisition Proposal. . . . . . . . . . . . . . . Section 5.5(a) Action. . . . . . . . . . . . . . . . . . . . . . Section 3.1(h) Agreement . . . . . . . . . . . . . . . . . . . . Preamble APB No. 16. . . . . . . . . . . . . . . . . . . . Section 5.4(g) Applicable Laws . . . . . . . . . . . . . . . . . Section 3.1(f)(i) BBC . . . . . . . . . . . . . . . . . . . . . . . Section 3.2(i) Benefit Plan. . . . . . . . . . . . . . . . . . . Section 8.11(a) Blue Sky Laws . . . . . . . . . . . . . . . . . . Section 3.1 (d)(iii) Board of Directors. . . . . . . . . . . . . . . . Section 8.11(b) Business Combination. . . . . . . . . . . . . . . Section 7.2(b) Business Day. . . . . . . . . . . . . . . . . . . Section 8.11(c) Certificate . . . . . . . . . . . . . . . . . . . Section 1.8(b) Closing . . . . . . . . . . . . . . . . . . . . . Section 1.2 Closing Date. . . . . . . . . . . . . . . . . . . Section 1.2 Code. . . . . . . . . . . . . . . . . . . . . . . Recitals Confidentiality Agreement . . . . . . . . . . . . Section 5.3 Converted Option. . . . . . . . . . . . . . . . . Section 5.6(a) Delaware Certificate of Merger. . . . . . . . . . Section 1.3 DGCL. . . . . . . . . . . . . . . . . . . . . . . Section 1.1 DOJ . . . . . . . . . . . . . . . . . . . . . . . Section 5.4(b) Effective Time. . . . . . . . . . . . . . . . . . Section 1.3 Environmental Laws. . . . . . . . . . . . . . . . Section 3.1(p) ERISA . . . . . . . . . . . . . . . . . . . . . . Section 8.11(a) Exchange Act. . . . . . . . . . . . . . . . . . . Section 3.1(d)(iii) Exchange Agent. . . . . . . . . . . . . . . . . . Section 2.1 Exchange Fund . . . . . . . . . . . . . . . . . . Section 2.1 Exchange Ratio. . . . . . . . . . . . . . . . . . Section 1.8(a) Expenses. . . . . . . . . . . . . . . . . . . . . Section 5.7 Fairness Opinion. . . . . . . . . . . . . . . . . Section 3.1(u) Form S-4. . . . . . . . . . . . . . . . . . . . . Section 5.1(a) Governmental Entity . . . . . . . . . . . . . . . Section 3.1(d)(iii) Hazardous Materials . . . . . . . . . . . . . . . Section 3.1(p) HSR Act . . . . . . . . . . . . . . . . . . . . . Section 3.l(d)(iii) Intellectual Property . . . . . . . . . . . . . . Section 8.11(d) KG. . . . . . . . . . . . . . . . . . . . . . . . Section 3.1(d)(iv) Material Adverse Effect . . . . . . . . . . . . . Section 8.11(e) Merger. . . . . . . . . . . . . . . . . . . . . . Recitals Merger Consideration. . . . . . . . . . . . . . . Section 1.8(a) Merger Sub. . . . . . . . . . . . . . . . . . . . Preamble i Definition Location of Definition - ---------- ---------------------- Multiemployer Plan. . . . . . . . . . . . . . . . Section 3.1(q)(v) Multiple Employer Plan. . . . . . . . . . . . . . Section 3.1(q)(v) NYSE. . . . . . . . . . . . . . . . . . . . . . . Section 2.5(b) Parent. . . . . . . . . . . . . . . . . . . . . . Preamble Parent Articles . . . . . . . . . . . . . . . . . Section 3.2(a) Parent Board Approval . . . . . . . . . . . . . . Section 3.2(h) Parent Code . . . . . . . . . . . . . . . . . . . Section 3.2(a) Parent Common Shares. . . . . . . . . . . . . . . Recitals Parent Financial Advisor. . . . . . . . . . . . . Section 3.2(j) Parent SEC Reports. . . . . . . . . . . . . . . . Section 3.2(d) Parent Shareholders Meeting . . . . . . . . . . . Section 5.1(c) Parent Voting Debt. . . . . . . . . . . . . . . . Section 3.2(b)(ii) Person. . . . . . . . . . . . . . . . . . . . . . Section 8.11(g) Proprietary Technology. . . . . . . . . . . . . . Section 8.11(h) Proxy Statement/Prospectus. . . . . . . . . . . . Section 5.1(a) Qualified Plan. . . . . . . . . . . . . . . . . . Section 3.1(q)(ii) Regulatory Law. . . . . . . . . . . . . . . . . . Section 5.4(b) Required Consents . . . . . . . . . . . . . . . . Section 3.1(d)(iii) Required Parent Vote. . . . . . . . . . . . . . . Section 3.2(i) Required Target Vote. . . . . . . . . . . . . . . Section 3.1(s) SEC . . . . . . . . . . . . . . . . . . . . . . . Section 3.1(e) Securities Act. . . . . . . . . . . . . . . . . . Section 3.1(c)(iii) Share Issuance. . . . . . . . . . . . . . . . . . Section 3.2(c)(i) Subsidiary. . . . . . . . . . . . . . . . . . . . Section 8.11(i) Superior Proposal . . . . . . . . . . . . . . . . Section 8.11(j) Surviving Corporation . . . . . . . . . . . . . . Section 1.1 Target. . . . . . . . . . . . . . . . . . . . . . Preamble Target Affiliate Letter . . . . . . . . . . . . . Section 5.11 Target Benefit Plan . . . . . . . . . . . . . . . Section 8.11(k) Target Board Approval . . . . . . . . . . . . . . Section 3.1(l) Target Common Stock . . . . . . . . . . . . . . . Recitals Target Employees. . . . . . . . . . . . . . . . . Section 5.6(b)(i) Target Financial Advisor. . . . . . . . . . . . . Section 3.1(t) Target Permits. . . . . . . . . . . . . . . . . . Section 3.1(f)(ii) Target SEC Reports. . . . . . . . . . . . . . . . Section 3.1(e) Target Stockholders Meeting . . . . . . . . . . . Section 5.1(b) Target Stock Option . . . . . . . . . . . . . . . Section 5.6(a) Target Stock Plans. . . . . . . . . . . . . . . . Section 5.6(a) Target Voting Debt. . . . . . . . . . . . . . . . Section 3.1(c)(ii) Tax Returns . . . . . . . . . . . . . . . . . . . Section 3.1(r)(v) Taxes . . . . . . . . . . . . . . . . . . . . . . Section 3.1(r)(vi) Termination Date. . . . . . . . . . . . . . . . . Section 7.1(b) ii Definition Location of Definition - ---------- ---------------------- Termination Fee . . . . . . . . . . . . . . . . . Section 7.2(b) the other party . . . . . . . . . . . . . . . . . Section 8.11(f) U.S. GAAP . . . . . . . . . . . . . . . . . . . . Section 3.1(e) VerWaltungs . . . . . . . . . . . . . . . . . . . Section 3.1(d)(iv) Violation . . . . . . . . . . . . . . . . . . . . Section 3.1(d)(ii) Withdrawal Liability. . . . . . . . . . . . . . . Section 8.11(l) iii Exhibit A-1 ________________, 1998 Cardinal Health, Inc. 5555 Glendon Court Dublin, Ohio 43016 Gentlemen: The undersigned acknowledges that as of the date hereof the undersigned may be deemed to be an "affiliate" of R.P. Scherer Corporation, a Delaware corporation ("Target"), as the term "affiliate" is used in and for purposes of Accounting Series Releases 130 and 135, as amended, and Staff Accounting Bulletins 65 and 76 of the Securities and Exchange Commission (the "Commission") and paragraphs (c) and (d) of Rule 145 ("Rule 145") promulgated by the Commission under the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to the terms and subject to the conditions of the Agreement and Plan of Merger dated as of May 17, 1998 (the "Agreement"), among Target, Cardinal Health, Inc., an Ohio corporation ("Parent"), and GEL Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), Merger Sub will be merged with and into Target (the "Merger"), all of the outstanding shares of common stock of Target, par value $0.01 per share ("Target Common Stock"), will be converted into common shares, without par value, of Parent ("Parent Common Shares"), and all unexpired and unexercised employee options to purchase capital stock of Target ("Target Options") will become options to purchase Parent Common Shares ("Parent Options"). In, or as a result of, the Merger, the undersigned will (i) receive Parent Common Shares in exchange for all of the shares of Target Common Stock owned by the undersigned immediately prior to the time of the effectiveness of the Merger (the "Effective Time"), and/or (ii) receive Parent Options. The undersigned hereby acknowledges and agrees with Parent that, within the 30 days prior to the Effective Time, the undersigned will not sell, transfer or otherwise dispose of, or direct or cause the sale, transfer or other disposition of, any shares of Target Common Stock or Parent Common Shares or Target Options beneficially owned by the undersigned, whether owned on the date hereof or hereafter acquired. The undersigned further acknowledges and agrees with Parent that the undersigned will not sell, transfer or otherwise dispose of, or direct or cause the sale, transfer or other disposition of, any Parent Common Shares or Parent Options (or shares issuable upon exercise thereof) beneficially owned by the undersigned whether prior to or after the Effective Time until after such time as Parent shall have publicly released a report in the form of a quarterly earnings report, registration statement filed with the Commission, a report filed with the Commission on Form 10-K, 10-Q or 8-K or any other public filing, statement or announcement which includes the combined financial results (including combined sales and net income) of Parent and Target for a period of at least 30 days of combined operations of Parent and Target following the Effective Time. The undersigned acknowledges that if the undersigned is an affiliate under the 2 Securities Act, the undersigned's ability to sell, assign or transfer Parent Common Shares and Parent Options beneficially owned by the undersigned as a result of the Merger may be restricted unless such transaction is registered under the Securities Act or an exemption from such registration is available. The undersigned understands that such exemptions are limited and the undersigned has obtained advice of counsel as to the nature and conditions of such exemptions, including information with respect to the applicability to the sale, assignment or transfer of such securities of Rule 144 and 145(d) promulgated under the Securities Act. The undersigned further acknowledges and agrees with Parent that the undersigned will not offer to sell, sell, transfer or otherwise dispose of any of the Parent Common Shares or Parent Options (or shares issuable upon exercise thereof) beneficially owned by the undersigned as a result of the Merger except (a) in compliance with the applicable provisions of Rule 145 or (b) pursuant to a registration statement under the Securities Act or (c) in a transaction which, in the opinion of independent counsel reasonably satisfactory to Parent or as described in a "no-action" or interpretive letter from the Staff of the Commission, is not required to be registered under the Securities Act; PROVIDED, HOWEVER, that, for so long as the undersigned holds any Parent Common Shares as to which the undersigned is subject to the limitations of Rule 145, Parent will use its reasonable efforts to file all reports required to be filed by it pursuant to the Securities Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, as the same shall be in effect at the time, so as to satisfy the requirements of paragraph (c) of Rule 144 under the Securities Act that there be available current public information with respect to Parent, and to that extent to make available to the undersigned the exemption afforded by Rule 145 with respect to the sale, transfer or other disposition of the Parent Common Shares. For purposes of this letter agreement, the exercise of a Parent Option shall not constitute a "disposition" of such Parent Option. The undersigned also represents and warrants that it has no current plan or intention to sell, exchange or otherwise dispose of more than fifty percent (50%) of the Parent Common Shares beneficially owned by the undersigned as a result of the Merger. In the event of a sale or other disposition by the undersigned of Parent Common Shares or Parent Options pursuant to Rule 145, the undersigned will supply Parent with evidence of compliance with such Rule, in the form of a letter in the form of Annex I hereto. The undersigned understands that Parent may instruct its transfer agent to withhold the transfer of any Parent Common Shares or Parent Options owned by the undersigned, but that upon receipt of such evidence of compliance or the availability of an exemption from registration under the Securities Act, the transfer agent shall effectuate the transfer of Parent Common Shares or Parent Options sold as indicated in the letter. The undersigned acknowledges and agrees that appropriate legends will be placed on certificates representing Parent Common Shares received by the undersigned in the Merger or held by a transferee thereof or upon exercise of a Parent Option, which legends will 3 be removed by delivery of substitute certificates upon receipt of an opinion in form and substance reasonably satisfactory to Parent from independent counsel reasonably satisfactory to Parent to the effect that such legends are no longer required for purposes of the Securities Act. Notwithstanding the foregoing, any such legends will be removed by delivery of substitute certificates upon written request of the undersigned if at the time of making such request the undersigned would otherwise be permitted to dispose of the Parent Common Shares represented by such certificates pursuant to Rule 145(d)(2). The undersigned acknowledges that (i) the undersigned has carefully read this letter and understands the requirements hereof and the limitations imposed upon the distribution, sale, transfer or other disposition of Parent Common Shares, Target Common Stock, Target Options and Parent Options and (ii) the receipt by Parent of this letter agreement is an inducement and a condition to Parent's obligations to consummate the Merger. This letter agreement shall expire and be of no force or effect upon termination of the Agreement prior to the Effective Time. Very truly yours, _______________________________ [Name] Accepted and agreed this ___ day of ___________, 1998 CARDINAL HEALTH, INC. By:______________________________ Name: ________________________ Title: _________________________ Annex I to Exhibit A ________________ __, 199_ Cardinal Health, Inc. 5555 Glendon Court Dublin, Ohio 43016 Attention: Corporate Secretary On ______ __, 199_, the undersigned sold the securities ("Securities") of Cardinal Health, Inc. ("Parent") described below in the space provided for that purpose (the "Securities"). The Securities were acquired by the undersigned in connection with the merger of GEL Acquisition Corp. with and into Target. Based upon the most recent report or statement filed by Parent with the Securities and Exchange Commission, the Securities sold by the undersigned were within the prescribed limitations set forth in paragraph (e) of Rule 144 promulgated under the Securities Act of 1933, as amended (the "Act"). The undersigned hereby represents to Parent that the Securities were sold in "brokers' transactions" within the meaning of Section 4(4) of the Act or in transactions directly with a "market maker" as that term is defined in Section 3(a)(38) of the Securities Exchange Act of 1934, as amended. The undersigned further represents to Parent that the undersigned has not solicited or arranged for the solicitation of orders to buy the Securities, and that the undersigned has not made any payment in connection with the offer or sale of the Securities to any person other than to the broker who executed the order in respect of such sale. Very truly yours, DESCRIPTION OF SECURITIES SOLD: EX-21 4 EXHIBIT 21 EXHIBIT 21 R. P. SCHERER CORPORATION AND SUBSIDIARIES The following is a list of all of the directly and indirectly owned subsidiaries of R.P. Scherer Corporation, their jurisdiction of incorporation and the percentage of their outstanding capital stock owned by R.P. Scherer Corporation or another subsidiary of R.P. Scherer Corporation.
EFFECTIVE PERCENTAGE JURISDICTION OF OWNERSHIP BY NAME OF SUBSIDIARY INCORPORATION R. P. SCHERER CORPORATION ------------------ --------------- -------------------- R. P. Scherer Pharmaceutical, Inc.* New Jersey 100% R. P. Scherer Hardcapsule (West)* Utah 100% Gelatin Products International Delaware 100% RPS Technical Services, Inc.* Delaware 100% The LVC Corporation* Missouri 100% R. P. Scherer Argentina S.A.I.C. Argentina 100% Vivax Interamericana S.A. Argentina 99% (1) R. P. Scherer do Brasil Encapsulacoes, Ltda. Brazil 100% R. P. Scherer Canada Inc. Ontario, Canada 100% R. P. Scherer (Europe) AG Switzerland 100% (2) F&F Holding GmbH Germany 100% R. P. Scherer GmbH & Co. KG Germany 51% (3) R. P. Scherer Verwaltungs GmbH Germany 51% (3) Allcaps Weichgelatinkapseln GmbH & Co. KG Germany 51% (4) Allcaps Weichgelatinkapseln Verwaltungs GmbH Germany 51% (4) R. P. Scherer S.A. France 70% (5) R. P. Scherer Production S.A. France 100% R. P. Scherer S.p.A. Italy 95% (6) R. P. Scherer Holdings Pty. Ltd. Australia 100% R. P. Scherer Pty. Limited Australia 100% (7) R. P. Scherer Holdings Ltd. England 100% R. P. Scherer Limited England 100% (8) Scherer DDS Limited England 100% (8) R. P. Scherer K.K. Japan 60% R. P. Scherer Korea Limited Korea 50% R. P. Scherer Egypt Egypt 10% R. P. Scherer DDS Holdings B.V. Holland 100% R. P. Scherer DDS B.V. Holland 100% R. P. Scherer International (FSC), Ltd. Barbados 100%
(1) The Company owns 1.875% directly and R. P. Scherer Argentina S.A.I.C. owns an additional 98.125%. (2) The Company owns 75% directly and F&F Holding GmbH owns an additional 25%. (3) This corporation is 51% owned by F&F Holding GmbH. (3) This corporation is 100% owned directly by R. P. Scherer GmbH & Co. KG (of which F&F Holding GmbH owns 51%). (5) The Company owns 50.01% directly and R. P. Scherer GmbH & Co. KG (of which F&F Holding GmbH owns 51%) owns an additional 39.975%. (6) The Company owns 90% directly and R. P. Scherer GmbH & Co. KG (of which F&F Holding GmbH owns 51%) owns an additional 10%. (7) This corporation is 100% owned by R. P. Scherer Holdings Pty. Ltd. (8) This corporation is 100% owned by R. P. Scherer Holdings Ltd. * Inactive 51 EX-23 5 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statements, File Numbers 33-47056, 33-51231, 33-51920, 33-56507 and 33-57555. ARTHUR ANDERSEN LLP Detroit, Michigan, June 10, 1998. EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM R. P. SCHERER CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FILING. 1,000 12-MOS MAR-31-1998 MAR-31-1998 33,312 2,662 166,584 3,200 68,857 276,444 497,970 130,436 821,597 149,597 168,163 0 0 240 398,637 821,597 620,716 620,716 409,162 512,735 0 0 9,263 100,601 15,972 69,746 0 0 0 69,746 2.89 2.81
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