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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
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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
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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.
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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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):
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<CAPTION>
PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
<S> <C> <C>
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.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY (1)
<S> <C> <C>
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.
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
MARKET PRICE
------------
HIGH LOW
---- ---
<S> <C> <C>
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
</TABLE>
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
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
GEOGRAPHIC SEGMENT INFORMATION
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
-------------------------------------------------------------------------
% %
1998 CHANGE 1997 CHANGE 1996(1)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
-------- -------- --------
-------- -------- --------
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED MARCH 31,
-------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of this statement.
24
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(IN THOUSANDS)
AS OF MARCH 31,
---------------
1998 1997
------ -----
<S> <C> <C>
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
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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.
</TABLE>
26
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
-------------------------------------------
1998 1997 1996
---------- ------------ -------------
<S> <C> <C> <C>
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.
</TABLE>
27
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
(in thousands, except per share data) 1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
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
--------- --------- -------
--------- --------- -------
</TABLE>
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:
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------
(IN THOUSANDS) 1998 1997
-------- -------
<S> <C> <C>
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
--------- --------
--------- --------
</TABLE>
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:
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------
(IN THOUSANDS) 1998 1997
---------- ----------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
29
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
-----------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
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
-------- -------- --------
-------- -------- --------
</TABLE>
31
<PAGE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------------------------------ -------------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
-------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------- -------
<S> <C> <C>
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
------- -------
------- -------
</TABLE>
7. LONG-TERM DEBT
Long-term debt consisted of the following as of March 31, 1998 and 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
-------- --------
<S> <C> <C>
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
-------- --------
-------- --------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
-----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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
------ ------ ------
------ ------ ------
</TABLE>
34
<PAGE>
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:
<TABLE>
<CAPTION>
(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
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
------ -------- ------- -------
------ -------- ------- -------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
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):
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------ ------
<S> <C> <C>
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
------ ------
------ ------
</TABLE>
Net postretirement benefits cost for the years ended March 31, 1998, 1997
and 1996 included:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $201 $210 $136
Interest cost on accumulated postretirement
benefit obligation 138 204 186
---- ---- ----
Net postretirement benefit cost $339 $414 $322
---- ---- ----
---- ---- ----
</TABLE>
35
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
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:
<TABLE>
<CAPTION>
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
- ---------------- --------- ---------------- --------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$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
--------- -------
--------- -------
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED MARCH 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
-------- -------- --------
-------- -------- --------
</TABLE>
(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)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
-------------------- -------------------- -------------------- --------------------
PER SHARE DATA) 1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
39
<PAGE>
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.
<TABLE>
<CAPTION>
AS OF MARCH 31,
-------------------------------------------------
(IN THOUSANDS) 1998 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To R.P. Scherer Corporation:
We have audited the accompanying consolidated statement of financial position
of R.P. SCHERER CORPORATION (a Delaware corporation) and 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).
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
R.P. SCHERER CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION ALLOWANCES
<TABLE>
<CAPTION>
(IN THOUSANDS) Balance at Charged to Other Balance at
Beginning Costs and Changes Add End of
Description of Period Expenses (Deduct) (a) Deductions Period
- ----------- --------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(a) Includes changes due to fluctuations in foreign currency exchange rates.
49
<PAGE>
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
<PAGE>
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-
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 17, 1998
AMONG
CARDINAL HEALTH, INC.
GEL ACQUISITION CORP.
and
R.P. SCHERER CORPORATION
<PAGE>
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
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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
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<PAGE>
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>
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
<PAGE>
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:
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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
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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
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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
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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
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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
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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,
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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
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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
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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
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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.
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(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
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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
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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
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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
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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.
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(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
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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
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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
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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
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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.
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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
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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
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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
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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
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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,
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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
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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
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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
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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.
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(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
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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
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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.
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(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
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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;
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(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
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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.
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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
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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
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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
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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
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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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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: _________________________
<PAGE>
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:
<PAGE>
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.
<TABLE>
<CAPTION>
EFFECTIVE PERCENTAGE
JURISDICTION OF OWNERSHIP BY
NAME OF SUBSIDIARY INCORPORATION R. P. SCHERER
CORPORATION
------------------ --------------- --------------------
<S> <C> <C>
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%
</TABLE>
(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
<PAGE>
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 33,312
<SECURITIES> 2,662
<RECEIVABLES> 166,584
<ALLOWANCES> 3,200
<INVENTORY> 68,857
<CURRENT-ASSETS> 276,444
<PP&E> 497,970
<DEPRECIATION> 130,436
<TOTAL-ASSETS> 821,597
<CURRENT-LIABILITIES> 149,597
<BONDS> 168,163
0
0
<COMMON> 240
<OTHER-SE> 398,637
<TOTAL-LIABILITY-AND-EQUITY> 821,597
<SALES> 620,716
<TOTAL-REVENUES> 620,716
<CGS> 409,162
<TOTAL-COSTS> 512,735
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,263
<INCOME-PRETAX> 100,601
<INCOME-TAX> 15,972
<INCOME-CONTINUING> 69,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,746
<EPS-PRIMARY> 2.89
<EPS-DILUTED> 2.81
</TABLE>