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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to_______________
Commission file number 0-19725
PERRIGO COMPANY
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(Exact name of registrant as specified in its charter)
Michigan 38-2799573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
117 Water Street
Allegan, Michigan 49010
----------------------- -----------------
(Address of principal (Zip Code)
executive offices)
(616) 673-8451
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 19, 1996
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without par 76,310,611 shares
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PERRIGO COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 1996
and June 30, 1995 3
Condensed consolidated statements of income--Three months
ended March 31, 1996 and 1995; Nine months ended
March 31, 1996 and 1995. 4
Condensed consolidated statements of cash flows--Nine
months ended March 31, 1996 and 1995 5
Notes to condensed consolidated financial statements--
March 31, 1996 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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<PAGE> 3
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1995
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 193 $ 259
Accounts receivable, net of allowances of $2,962 and $3,040 90,330 85,018
Inventories 172,826 163,549
Prepaid expenses and other current assets 13,605 12,866
---------- ---------
Total current assets 276,954 261,692
Property and equipment, at cost 337,680 325,100
Less accumulated depreciation 95,628 78,853
---------- ---------
242,052 246,247
Cost in excess of net assets of acquired businesses, net of
accumulated amortization of $9,809 and $8,213 43,492 45,088
Other 2,574 2,706
---------- ---------
$ 565,072 $ 555,733
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 58,119 $ 57,034
Payrolls and related taxes 12,480 12,813
Accrued expenses 20,917 20,661
Income taxes 3,163 753
Current installments on long-term debt 300 300
---------- ---------
Total current liabilities 94,979 91,561
Deferred income taxes 26,415 24,415
Long-term debt, less current installments 67,840 99,140
Shareholders' equity
Preferred stock, without par value,
10,000 shares authorized, none issued - -
Common stock, without par value, 200,000 shares authorized,
issued and outstanding 76,308 shares and 76,019 shares 145,590 145,355
Retained earnings 230,248 195,262
---------- ---------
Total shareholders' equity 375,838 340,617
---------- ---------
$ 565,072 $ 555,733
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 196,326 $185,266 $602,464 $542,672
Cost of sales 144,924 136,555 441,318 390,170
---------- -------- -------- --------
Gross profit 51,402 48,711 161,146 152,502
---------- -------- -------- --------
Operating expenses
Distribution 6,846 5,606 19,097 15,079
Research and development 3,043 1,950 7,718 5,687
Selling and administrative 21,713 21,516 68,052 66,463
Restructuring 263 - 1,878 -
Unusual litigation costs 1,586 - 4,584 -
---------- -------- -------- --------
33,451 29,072 101,329 87,229
---------- -------- -------- --------
Operating income 17,951 19,639 59,817 65,273
Interest expense 1,317 1,616 4,731 3,629
---------- -------- -------- --------
Income before income taxes 16,634 18,023 55,086 61,644
Income taxes 6,000 6,600 20,100 22,600
---------- -------- -------- --------
Net income $ 10,634 $ 11,423 $ 34,986 $ 39,044
========== ======== ======== ========
Earnings per common share $ 0.14 $ 0.15 $ 0.45 $ 0.51
========== ======== ======== ========
Weighted average number of common
shares outstanding 77,215 77,186 77,205 77,194
========== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1996 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 34,986 $ 39,044
Depreciation and amortization 20,361 17,205
---------- --------
55,347 56,249
Accounts receivable (5,312) (10,040)
Inventories (9,277) (19,581)
Accounts payable 1,085 9,101
Other 3,595 (901)
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Net cash from operating activities 45,438 34,828
---------- --------
Cash Flows For Investing Activities:
Vi-Jon acquisition - (32,354)
Additions to property and equipment (14,460) (31,478)
Other 35 (193)
---------- --------
Net cash for investing activities (14,425) (64,025)
---------- --------
Cash Flows From Financing Activities:
Borrowings of long-term debt - 40,000
Repayments of long-term debt (31,300) (12,790)
Tax benefit of stock transactions - -
Issuance of common stock 221 64
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Net cash from (for) financing activities (31,079) 27,274
---------- --------
Net Decrease in Cash and Cash Equivalents (66) (1,923)
Cash, at beginning of period 259 2,157
---------- --------
Cash, at end of period $ 193 $ 234
========== ========
Supplemental disclosures of cash flow information:
Interest paid $ 4,552 $ 3,955
Income taxes paid $ 13,731 $ 19,419
</TABLE>
See notes to condensed consolidated financial statements.
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PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1996. The unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended June 30, 1995.
NOTE B -- INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Finished goods $ 85,247 $ 79,312
Work in process 61,267 55,958
Raw materials 26,312 28,279
--------- ---------
$172,826 $163,549
======== ========
</TABLE>
Inventories are stated at the lower of cost (first-in, first-out) or
market.
NOTE C -- RESTRUCTURING COSTS
For the nine months ended March 31, 1996, the condensed consolidated
statement of income includes $1,878 of restructuring costs expensed as incurred
related primarily to the consolidation of sales and marketing, graphic arts,
purchasing and accounting functions. In addition, $2,812 of costs were paid,
primarily related to severance and employee benefit costs, that had been
accrued in a previous period. As of March 31, 1996, $1,188 remains in accrued
liabilities.
Completion of the consolidation of distribution centers, originally
scheduled for the end of fiscal 1996, has been delayed. The delay relates to
further review of the logistic requirements of customers in order to optimize
the service level to those customers in a cost effective manner. As a result,
further restructuring costs, previously estimated to be approximately $1
million, are anticipated to be recognized in fiscal 1997, if recognized at all.
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NOTE D -- COMMITMENTS AND CONTINGENCIES
For the nine months ended March 31, 1996 the condensed consolidated
statement of income includes $4,584 of costs related to a purported class
action, a derivative action and a complaint related to the purchase of the
Company from its former owners, all as described in the Company's annual report
on Form 10-K for the year ended June 30, 1995. The Company believes the
actions and claims are without merit, or are covered by insurance, and intends
to vigorously defend these actions and claims.
NOTE E -- LONG TERM BORROWINGS AND CREDIT ARRANGEMENTS
In December 1995 the Company entered into unsecured credit facilities
with two financial institutions totalling $60 million. Both facilities are
uncommitted and can be terminated by either party at any time. The interest
rates associated with the credit facilities are based on bids submitted by the
financial institutions, for periods of 1 to 100 days. The Company's
restrictive loan covenants under these agreements are substantially the same as
those under its $150 million unsecured revolving credit facility.
NOTE F -- SHAREHOLDERS' EQUITY
On April 10, 1996 the Company's Board of Directors adopted a Preferred
Share Purchase Rights Plan and declared a dividend distribution to be made to
shareholders of record on April 22, 1996, of one Preferred Share Purchase Right
on each outstanding share of the Company's common stock. The Rights contain
provisions which are intended to protect the Company's stockholders in the
event of an unsolicited and unfair attempt to acquire the Company. The Company
is entitled to redeem the Rights at $.01 per Right at any time before a 20%
position has been acquired. The Rights will expire on April 10, 2006, unless
previously redeemed or exercised.
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<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
The Company's net sales increased by 6% to $196,326 for the third
quarter of fiscal 1996, from $185,266 during the same period in fiscal 1995.
The Company's net sales increased by 11% to $602,464 during the first nine
months of fiscal 1996 from $542,672 during the same period in fiscal 1995. The
growth in net sales for the third quarter was primarily attributable to
increased sales of cough and cold and liquid nutritional supplement products.
The growth in net sales for the nine months ended March 31, 1996 was primarily
attributable to greater unit sales of cough and cold, oral hygiene, liquid
nutritional supplement and vitamin products. Cough and cold product sales
increases are primarily due to a more severe cough and cold season than
experienced in the same periods last year and continuing emphasis on store
brand products by the Company's customers, resulting in increased market share
for cough and cold products. The increase in the oral hygiene sales was due to
the impact of the acquisition of certain assets of Vi-Jon Laboratories, Inc.
("Vi-Jon") in January 1995. The liquid nutritional supplement is a new product
category which the Company first began shipping in June 1995. Vitamin product
sales increases are due primarily to increased unit sales to new customers.
The Company's analgesic sales are comparable between periods reflecting the
softness of the total analgesic market. Comparative analgesic sales were also
impacted by significant promotional activity in the same periods in the prior
year. As anticipated, antacid sales have been negatively impacted by the
competitive launch of Pepcid(R) and Tagamet(R), two new antacid products, and
are comparable between periods. No store brand equivalent for these products
can be approved for sale prior to September 1998 due to exclusivity granted by
the U. S. Food and Drug Administration (the "FDA").
Gross profit increased 6% or $2,691 for the third quarter of fiscal
1996 compared to 1995. The gross profit percentage for the third quarter of
fiscal 1996 was 26.2%, compared to 26.3% for the same period in fiscal 1995.
Gross profit increased by 6% or $8,644 for the first nine months of fiscal 1996
compared to 1995. The gross profit percentage for the first nine months of
fiscal 1996 was 26.7% compared to 28.1% for the first nine months of fiscal
1995. The increased sales of lower margin nutritional and personal care
products and cost increases in certain material components, that were not
entirely passed on to its customers, resulted in the decline in gross profit
percentage between periods.
Operating expenses increased by 15% or $4,379 for the third quarter of
fiscal 1996 compared to the same period in fiscal 1995 and included $263 of
restructuring costs and $1,586 of unusual litigation costs. Operating expenses
as a percentage of net sales were 17.0% for the third quarter of the current
year compared to 15.7% for the prior year. Excluding the restructuring and
unusual litigation costs, operating expenses as a percent of sales were 16.1%
for the third quarter of fiscal 1996. Distribution expenses increased by
$1,240 or 22% from the third quarter of fiscal 1995 due primarily to increased
shipment volume and additional warehousing costs supporting higher inventory
levels and higher freight costs incurred in support of customers' delivery
requirements. Distribution expenses as a percentage of sales were 3.5% for the
third quarter of fiscal 1996, compared to 3.0%
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<PAGE> 9
for the third quarter of fiscal 1995. Research and development expenses
increased $1,093 or 56% from the third quarter of fiscal 1995 primarily due to
expenses related to new product development for which an approval from the FDA,
through its Abbreviated New Drug Application ("ANDA") process, is required.
Selling and administrative expenses increased $197 or 1% from the third quarter
of 1995. Selling and administrative expenses as a percentage of sales were
11.1% for the third quarter of fiscal 1996, compared to 11.6% for the third
quarter of fiscal 1995.
Operating expenses increased by 16% or $14,100 for the first nine
months of fiscal 1996 compared to the same period in fiscal 1995 and included
$1,878 of restructuring and $4,584 of unusual litigation costs. Operating
expenses as a percentage of net sales were 16.8% for the current year compared
to 16.1% for the same period last year. Excluding the restructuring and
unusual litigation costs, operating expenses as a percent of sales were 15.7%
for the first nine months of fiscal 1996. Distribution expenses increased by
$4,018 or 27% for the first nine months of fiscal 1996 compared to the same
period in fiscal 1995 due primarily to increased volume and additional
warehousing costs supporting higher inventory levels. Distribution expenses as
a percentage of sales were 3.2% for the first nine months of fiscal 1996
compared to 2.8% for the same period last year. Research and development
expenses increased $2,031 or 36% from the first nine months of fiscal 1995
primarily due to expenses related to new product development for which an
approval from the FDA through its ANDA process is required. Research and
development expenses as a percentage of sales for the first nine months of
fiscal 1996 were 1.3% compared to 1.0% for the same period in fiscal 1995.
Selling and administrative expenses increased $1,589 or 2% from the first nine
months of fiscal 1995. Selling and administrative expenses as a percentage of
sales were 11.3% for the first nine months of fiscal 1996 compared to 12.2% for
the first nine months of fiscal 1995. The decrease as a percent of sales is
due primarily to certain sales promotions in the first nine months of fiscal
1995 which were not repeated in fiscal 1996 and to benefits realized from the
restructuring process which the Company began in June 1995. The Company
anticipates incurring restructuring costs totaling approximately $2.5 million
and unusual litigation costs totaling approximately $6 million in fiscal 1996.
As indicated in Note C, the completion of the consolidation of distribution
centers, originally scheduled for the end of fiscal 1996, has been delayed. As
a result, further restructuring costs, previously estimated to be approximately
$1 million, are anticipated to be incurred in fiscal 1997, if recognized at
all.
Interest expense decreased 19% or $299 to $1,317 for the third quarter
of fiscal 1996 compared to $1,616 for the same period in fiscal 1995. The
decrease reflects lower interest rates and lower borrowing levels in the
current year period. Interest expense increased $1,102 during the first nine
months of fiscal 1996 compared to $3,629 for the same period in fiscal 1995.
The increase reflects higher borrowing levels due to the acquisition of certain
assets from Vi-Jon and higher interest rates during the current year period.
The effective income tax rate for the third quarter of fiscal 1996 was
36.1% compared to 36.6% for the same period in fiscal 1995 and reflects a
slight adjustment to the anticipated effective tax rate for the year due to
permanent differences.
The effective income tax rate for the first nine months of fiscal 1996
was 36.5% compared to 36.7% for the same period in fiscal 1995.
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<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business has continued to grow, liquidity
requirements have increased in order to fund working capital needs, primarily
accounts receivable and inventory, and capital expenditures for the purposes of
increasing manufacturing and distribution capacity. These requirements have
been satisfied by cash flow from operations.
During the first nine months of fiscal 1996 working capital increased
$11,844 and cash flow generated by operations exceeded cash flow used by
operations by $45,438. Accounts receivable increased $5,312 due primarily to
increased sales and inventories increased $9,277 in order to support the
increased sales volume.
The Company's capital expenditures for facilities and equipment were
$14,460 for the nine months ended March 31, 1996. The Company anticipates
capital expenditures of approximately $20,000 during fiscal year 1996,
principally for additional manufacturing and packaging equipment. Capital
expenditures in the first nine months were below the original plan as the
Company continually assesses its capital needs. Fiscal year 1996 capital
expenditures requirements have been lowered reflecting adequate manufacturing
and packaging capacity in most product categories. The Company will finance
these capital expenditures with cash flow from operations.
The Company's ratio of indebtedness for borrowed money to equity of
.2:1 at March 31, 1996 is down slightly from June 30, 1995. As indicated in
Note E, in December 1995, the Company entered into unsecured credit facilities
with two financial institutions totalling $60 million. The credit facilities
are short term in nature bearing interest rates based on bids submitted by the
financial institutions. The Company intends on utilizing the credit facilities
to fund working capital requirements, as required.
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<PAGE> 11
PART II. OTHER INFORMATION
Item 5. Other Information
In connection with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ from those that may have been or may be
projected in forward-looking statements by or on behalf of the Company from
time to time.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are enclosed herein:
<TABLE>
<CAPTION>
Exhibit Number Description
- - -------------- -----------
<S> <C>
5 Cautionary Statement
Identifying Important Factors
That Could Cause Results to
Differ
27 Financial Data Schedule
</TABLE>
(b) The Company filed no reports on Form 8-K during the three months
ended March 31, 1996.
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<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERRIGO COMPANY
----------------------------------
(Registrant)
Date: May 8, 1996 /s/Michael J. Jandernoa
----------------------------------
Michael J. Jandernoa
Chairman of the Board and Chief
Executive Officer
Date: May 8, 1996 /s/Steve M. Neil
----------------------------------
Steve M. Neil
Vice President--Finance, Treasurer
and Chief Financial Officer
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<PAGE> 1
EXHIBIT 5
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995;
CERTAIN CAUTIONARY STATEMENTS
The Company or its representatives from time to time may make or may
have made certain forward-looking statements, orally or in writing, including
without limitation any such statements made or to be made in the Management's
Discussion and Analysis contained in its various SEC filings. The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to ensure to the fullest extent possible the protections of
the safe harbor established in the Private Securities Litigation Reform Act of
1995. Accordingly, such statements are qualified in their entirety by
reference to and are accompanied by the following discussion of certain
important factors that could cause actual results to differ materially from
those projected in such forward-looking statements.
The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in a continually changing business
environment, and new risk factors emerge from time to time. Management cannot
predict such risk factors, nor can it assess the impact, if any, of such risk
factors on the Company's business or the extent to which any factors, or
combination of factors, may cause actual results to differ materially from
those projected in any forward-looking statements. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results.
Many of the important factors discussed below have been discussed
previously in the Company's SEC filings, including without limitation in the
Company's most recent Annual Report on Form 10-K dated June 30, 1995.
Store Brand Product Growth
The future growth of domestic store brand products will be influenced
by general economic conditions, which can influence consumers to switch to
store brand products, consumer perception and acceptance of the quality of the
products available, the development of new products, the market exclusivity
periods awarded on prescription to over-the-counter switch products and the
Company's ability to grow the store brand market share. The Company does not
advertise like the national brand companies and thus is dependent on retailer
promotional spending to help drive sales volume and increase market share.
Promotional spending is a significant element of selling and administrative
expenses and is directly influenced by retailer promotional decisions and is
thus very difficult to predict in future periods. Growth opportunities for the
products in which the Company currently has a significant store brand market
share (mouthwash, cough and cold remedies and analgesics) will be driven by the
ability to offer new products to existing domestic customers and the Company's
ability to service new customers internationally. Should store brand growth be
limited by any of these factors, there could be a significant impact on the
operating results of the Company.
Fluctuation in Quarterly Results
The Company's quarterly operating results depend on a variety of
factors including the severity and timing of the cough, cold and flu season,
the timing of new product introductions by the
<PAGE> 2
Company, its customers and its competitors, changes in the levels of
inventories maintained by the Company's customers and the timing of retailer
promotional programs. Accordingly, the Company may be subject to significant
and unanticipated quarter-to-quarter fluctuations.
Regulatory Environment
The Company's products are subject to regulation by a number of
federal and state governmental agencies. The cost of maintaining product
quality through Good Manufacturing Practices ("GMP") is increasing. Should the
Company fail to adequately conform to governmental regulations, there may be a
significant impact in the operating results of the Company.
The Company's ability to bring new products to market is limited by
certain patent and tradedress factors including, but not limited to, the
exclusivity periods awarded on products that have switched from prescription to
over-the-counter status. The cost and time to develop these switch products is
significantly greater than the rest of the new products that the Company seeks
to introduce.
The Federal Drug Administration ("FDA") will from time to time mandate
packaging or labeling changes. Such changes could be related to safety or
efficacy issues. With specific regard to safety, there have been instances
within the Company's product categories in which evidence of product tampering
has occurred resulting in a costly product recall. Significant costs could
also be incurred in complying with the required packaging and labeling changes.
Should the Company be involved in such an event, the associated costs could
have a material impact on the results of operations.
The Company believes that it has excellent relationships with these
agencies, which it intends to maintain. If these relationships should
deteriorate, however, the Company's ability to bring new and current products
to market could be impeded.
Research and Development
The Company's investment in research and development will continue to
exceed historical levels due to the high cost of developing and becoming a
qualified manufacturer of new products that are switching from prescription to
over-the-counter status. The ability to attract chemists proficient in
emerging delivery forms and/or contracting with a third party innovator in
order to generate new products of this type is a critical element of the
Company's long term plans. Should the Company fail to attract qualified
employees or enter into reasonable agreements with third party innovators, long
term sales growth and profit would be adversely impacted.
Dependence on Personnel
The Company's future success will depend in large part upon its
ability to attract and retain highly skilled research and development chemists
(as noted above), management information specialists, operations, sales,
marketing and managerial personnel. The Company does not have employment
contracts with any key personnel. Should the Company not be able to attract or
retain key qualified employees, future operating results may be adversely
impacted.
<PAGE> 3
International Operations
The Company sources certain key raw materials from foreign suppliers
and is increasing its sales outside the United States. Additionally, the
Company is investing significant amounts in the development of its
international business. Sales to customers outside the United States and
foreign raw material purchases expose the Company to a number of risks
including unexpected changes in regulatory requirements and tariffs, possible
difficulties in enforcing agreements, longer payment cycles, exchange rate
fluctuations, difficulties obtaining export or import licenses, and the
imposition of withholding or other taxes, embargoes, exchange controls or the
adoption of other restrictions on foreign trade. Should any of these risks
occur, they may have a material adverse impact on the operating results of the
Company.
Raw Material Availability
In the past, supplies of certain raw materials used by the Company
have become limited, or are available from one or only a few suppliers, and it
is possible that this will occur in the future. Should this situation occur,
it can result in increased prices, rationing and shortages. In response to
these problems the Company tries to identify alternative materials or suppliers
for such raw materials. Certain shortages could adversely affect financial
results.
Legal Exposure
From time to time the Company and/or its subsidiaries become involved
in lawsuits arising from various commercial matters, including, but not limited
to competitive issues, contract issues, intellectual property matters, workers'
compensation and product liability. Currently, the most significant pending
litigation relates to a purported class action, a derivative action and a
complaint related to the purchase of the Company from its former owners, all as
described in the Company's annual report on Form 10-K for the year ended June
30, 1995. Litigation tends to be unpredictable and costly. There is no
assurance that litigation will not have an adverse effect on the Company's
financial position or results of operations in the future.
The Company maintains property, cargo, auto, product, general
liability, and directors and officers liability insurance to protect itself
against potential loss exposures. To the extent that losses occur, there could
be an adverse effect on the Company's financial results depending on the nature
of the loss, and the level of insurance coverage maintained by the Company.
From time to time, the Company may reevaluate and change the types and levels
of insurance coverage that it purchases.
Competitive Issues
The market for store brand over-the-counter pharmaceutical, personal
care and nutritional products is highly competitive. Store brand competition
is based principally on price, quality of products, customer service and
marketing support. National brand companies could choose to compete more
directly by manufacturing store brand products or by lowering the prices of
national brand products. Due to the high degree of price competition, the
Company has not always been able to fully pass on future cost increases to its
customers. Additionally, from time to time in response to competitive
situations, the Company is required to adjust prices in order to maintain
existing business. The inability to pass on future cost increases, the impact
of direct store brand competitors, and the impact of national brand companies
lowering prices of their products or directly operating in the store brand
market could have a material adverse impact on financial results.
<PAGE> 4
Customer Issues
The impact of retailer consolidation is unknown but could have an
adverse impact on future sales growth. Should a large customer encounter
financial difficulties, the exposure on uncollectible receivables and unusable
inventory could have a material adverse impact on the Company's financial
position or results of operation.
The Company's largest customer, Wal-Mart, currently comprises
approximately 19% of total revenues. Should Wal-Mart's current relationship
with the Company change adversely, the resulting loss of business could have a
material unfavorable impact on the Company's operating results and financial
position.
Capital Requirements
The Company maintains a broad product line to function as a primary
supplier for its customers. Capital investments are driven by growth,
technological advancements and the need for manufacturing flexibility.
Estimation of future capital expenditures could vary materially due to the
uncertainty of these factors. If the Company fails to stay current with the
latest manufacturing and packaging technology it may be unable to competitively
support the launch of new product introductions. The Company also is
vertically integrated in the areas of preprinted componentry (labels and
cartons) and plastics (bottle blow molding). Should the Company fail to keep
up with current technology it could lose its cost competitive advantage in
these areas.
Interest Rate Implication
The Company's line of credit facilities are based on a variable
interest rate factor. The interest rates are established at the time of
borrowing based upon the prime rate, the LIBOR rate, plus a factor, or at a
rate based on interest rate bids. Accordingly, interest expense is subject to
variation due to the variability of these rates.
Tax Rate Implication
Income tax rate changes by governments and changes in the tax
jurisdictions in which the Company operates could influence the effective tax
rates that have been projected for future years. The anticipated growth of the
Company's international business increases the likelihood of fluctuation
occurring.
Liquidity and Capital Resources
The Company anticipates that cash flow from operations will
substantially fund working capital, restructuring and other unusual charges and
capital expenditures. Additionally, borrowing from the Company's line of
credit are available, if required. The Company has historically evaluated
acquisition opportunities and anticipates that acquisition opportunities will
continue to be identified and evaluated in the future. The historical growth
of sales and profits have been significantly influenced by acquisitions. There
is no assurance that future sales and profits will, or will not, be impacted by
acquisition activities. The Company's current capital structure, results of
operations and cash flow needs could be materially changed by acquisitions.
The Company has, and will continue to, evaluate the products and
product categories in which it does business. Future product line extensions,
or deletions, could have a material impact on the Company's financial position
or results of operations.
<PAGE> 5
Potential Volatility of Stock Price
The market price of the Company's Common Stock has been, and could be
subject to wide fluctuations in response to, among other things, quarterly
fluctuations in operating results, adverse circumstances affecting the
introduction or market acceptance of new products, failure to meet published
estimates of, or changes in earnings estimates by securities analysts,
announcements of new products or enhancements by competitors, sales of Common
Stock by existing holders, loss of key personnel, market conditions in the
industry, shortages of key components and general economic conditions.
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