<PAGE> 1
================================================================================
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: OCTOBER 3, 1998
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
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-2799573
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
515 EASTERN AVENUE 49010
ALLEGAN, MICHIGAN -----------------
--------------------- (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
(616) 673-8451
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
----------------------------------------------------
(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
----- -----
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 NOVEMBER 13, 1998
--------------------- -----------------
WITHOUT PAR 73,231,445 SHARES
================================================================================
<PAGE> 2
PERRIGO COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of income--For the period
from July 1 through October 3, 1998 and for the three months
ended September 30, 1997 3
Condensed consolidated balance sheets--October 3, 1998
and June 30, 1998 4
Condensed consolidated statements of cash flows--For the period
from July 1 through October 3, 1998 and for the three months ended
September 30, 1997 5
Notes to condensed consolidated financial statements--
October 3, 1998 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 13
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 16
- ----------
</TABLE>
2
<PAGE> 3
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM JULY 1 THREE MONTHS
THROUGH ENDED
OCTOBER 3, SEPTEMBER 30,
1998 1997
------------------ -------------
<S> <C> <C>
Net sales $ 212,298 $ 223,773
Cost of sales 176,993 164,307
---------- ---------
Gross profit 35,305 59,466
---------- ---------
Operating expenses
Distribution 7,779 7,667
Research and development 3,606 2,942
Selling and administrative 37,007 25,689
Restructuring and redesign - 364
Unusual litigation 988 1,682
---------- ---------
49,380 38,344
---------- ---------
Operating (loss) income (14,075) 21,122
Interest and other expense 3,217 327
---------- ---------
(Loss) income before income taxes (17,292) 20,795
Income tax (benefit) expense (4,916) 7,590
---------- ---------
Net (loss) income $ (12,376) $ 13,205
========== =========
Basic (loss) earnings per share $ (0.17) $ 0.17
========== =========
Diluted (loss) earnings per share $ (0.17) $ 0.17
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE> 4
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
OCTOBER 3, JUNE 30,
1998 1998
------------ -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,770 $ 1,496
Accounts receivable, net of allowances of $3,329 and
$2,691, respectively 83,055 74,601
Inventories 206,262 181,467
Prepaid expenses and other current assets 7,084 5,817
Refundable income taxes 3,512 -
Current deferred income taxes 41,675 42,675
Assets held for sale 60,981 66,398
---------- ----------
Total current assets 405,339 372,454
Property and equipment 318,311 303,038
Less accumulated depreciation 117,731 112,394
---------- ----------
200,580 190,644
Goodwill, net of accumulated amortization of $9,281 and
$9,094, respectively 20,554 20,741
Other 7,629 12,022
---------- ----------
$ 634,102 $ 595,861
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 96,531 $ 78,791
Notes payable 4,659 5,379
Payrolls and related taxes 11,589 13,266
Accrued expenses 39,781 40,791
Income taxes - 3,293
---------- ----------
Total current liabilities 152,560 141,520
Deferred income taxes 29,204 27,264
Long-term debt, less current installments 134,000 81,619
Minority interest 406 380
Shareholders' equity
Preferred stock, without par value, 10,000 shares authorized,
none issued - -
Common stock, without par value, 200,000 shares authorized,
73,221 and 74,692 issued, respectively 101,884 116,660
Unearned compensation (36) (42)
Retained earnings 216,084 228,460
---------- ----------
Total shareholders' equity 317,932 345,078
---------- ----------
$ 634,102 $ 595,861
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE> 5
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Period from July 1 Three Months
Through Ended
October 3, September 30,
1998 1997
------------------- -------------
<S> <C> <C>
Cash Flows (For) From Operating Activities:
Net (loss) income $ (12,376) $ 13,205
Depreciation and amortization 5,624 7,321
Write-off of Russian investment 14,177 -
---------- ----------
7,425 20,526
Accounts receivable (11,778) (26,517)
Inventories (26,233) (9,583)
Current and deferred income taxes (3,865) 7,470
Assets held for sale 5,417 -
Accounts payable 17,740 12,607
Other (3,922) (327)
---------- ----------
Net cash for operating activities (15,216) 4,176
---------- ----------
Cash Flows For Investing Activities:
Additions to property and equipment (15,273) (11,946)
Business acquisitions, net of cash acquired - (15,827)
Other (5,122) (580)
---------- ----------
Net cash for investing activities (20,395) (28,353)
---------- ----------
Cash Flows From (For) Financing Activities:
Borrowings of long-term debt 52,381 16,706
Repayments of short-term debt (720) -
Issuance of common stock 44 159
Repurchase of common stock (14,820) (5,129)
---------- ----------
Net cash from financing activities 36,885 11,736
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 1,274 (12,441)
Cash and Cash Equivalents, at Beginning of Period 1,496 14,356
---------- ----------
Cash and Cash Equivalents, at End of Period $ 2,770 $ 1,915
========== ==========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,677 $ 129
Income taxes paid $ 282 $ 120
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE> 6
PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998
(In thousands)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and other adjustments) considered
necessary for a fair presentation have been included.
The Company changed its fiscal year end from June 30 to the 52 or 53-week
period that ends on the Saturday closest to June 30, effective for fiscal year
1999. After the transition year of fiscal year 1999, the Company's quarters
will each be comprised of 13 weeks and end on a Saturday, except in certain
years when the Company will have one quarter comprised of 14 weeks. During
fiscal year 1999, the first quarter includes the period from July 1 through
October 3, 1998. The second through fourth quarters will each be comprised of
13 weeks ending on January 1, April 3, and July 3, 1999, respectively. Prior
to fiscal year 1999, the Company's quarters were comprised of three calendar
months ending on September 30, December 31, March 31 and June 30.
Operating results for the period from July 1 through October 3, 1998 are
not necessarily indicative of the results that may be expected for the year
ending July 3, 1999. 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, 1998.
INTERNATIONAL INVESTMENT
The Company has a Russian investment that is accounted for using the
equity method. Due to the collapse of the Russian economy, the Company wrote
off its net investment of $1,640 and also wrote off inventory of $1,663 and
accounts and notes receivable of $10,874 related to this Russian investment for
a total of $14,177 in the first quarter of fiscal year 1999. The net
investment amount is included in other income and expense; the inventory amount
is included in cost of goods sold; and the accounts and notes receivable amount
is included in selling and administrative expense.
EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the "basic"
and "diluted" Earnings per Share ("EPS") calculations follows:
-6-
<PAGE> 7
<TABLE>
<CAPTION>
Period from July 1 Three Months
Through Ended
October 3, September 30,
1998 1997
---- ----
<S> <C> <C>
Numerator:
Net (loss) income used for both "basic"
and "diluted" EPS calculation $(12,376) $13,205
======== =======
Denominator:
Weighted average shares outstanding
for the period - used for "basic"
EPS calculation 73,429 76,213
Dilutive effect of stock options - 1,157
-------- -------
Weighted average shares outstanding
for the period - used for "diluted"
EPS calculation 73,429 77,370
======== =======
</TABLE>
The effect of stock options of 333 shares was not included for the period
from July 1 through October 3, 1998 because to do so would have been
antidilutive.
Earnings per share for the three months ended September 30, 1997 have been
restated to conform to Statement of Financial Accounting Standards ("SFAS") No.
128.
NEW ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board ("FASB") issued two
new disclosure standards. Both of these new standards are effective for
financial statements for fiscal years beginning after December 15, 1997 and
require comparative information for earlier years to be restated. Results of
operations and financial position are unaffected by implementation of these new
standards. The standards are summarized below.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. For the period from
July 1, 1998 through October 3, 1998 and for the three months ended September
30, 1997, the Company had no items of other comprehensive income.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about
-7-
<PAGE> 8
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and components
of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company has reviewed this
Statement and determined that it has one reportable segment - store brand
health and beauty care. Accordingly, the adoption of SFAS No. 131 will not
significantly impact the Company's current disclosures with respect to
products, services, geographic areas and major customers.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Historically, the Company has not
entered into derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption of the
new standard on July 4, 1999 to affect its financial statements.
NOTE B - INVENTORIES
The components of inventories consist of the following:
October 3, June 30,
1998 1998
---- ----
Finished goods $ 73,899 $ 70,206
Work in process 90,747 76,015
Raw materials 41,616 35,246
-------- --------
$206,262 $181,467
======== ========
NOTE C - LONG-TERM DEBT
Due to the net loss for the first quarter of fiscal year 1999, management
met with the group of banks which provide financing under the $150,000
unsecured revolving credit facility to modify its terms so that the Company
would be in compliance with its debt covenants. Management obtained
modifications retroactive to October 3, 1998.
NOTE D - RESTRUCTURING AND REDESIGN COSTS
During the fourth quarter of fiscal year 1998, the Company announced the
decision to divest its personal care business in order to reallocate resources
to its more profitable OTC pharmaceutical, nutritional and international
business. This action is more fully described in the Company's annual report
on Form 10-K for the year ended June 30, 1998, under the caption "1998
Restructuring". The Company is still in the process of completing the
divestiture and
-8-
<PAGE> 9
expects to have the sale completed by calendar year end 1998 or early in
calendar year 1999. There have been no changes in the net assets held for sale
that have resulted in any gains or losses during the quarter ended October 3,
1998. Net sales for the personal care business were $48,461 and $51,299 for
the quarters ended October 3, 1998 and September 30, 1997, respectively. The
Company does not maintain operating income information by its three main
product lines, however, based on the incremental approach, the Company
estimates that the pre-tax operating losses and plant inefficiencies for the
personal care business were approximately $2,000 and $200 for the quarters
ended October 3, 1998 and September 30, 1997, respectively. The Company
estimates that it will incur approximately $4,000 in fiscal year 1999 related
to net operating losses and plant inefficiencies for the closing of plant
facilities and the intention to divest the personal care business. During the
first quarter of fiscal year 1999, $770 was paid for costs primarily related to
severance for the 1998 Restructuring. Thirty-two employees were terminated
during the period. The costs incurred were charged against a reserve of
$1,625, which was established in fiscal year 1998. As of October 3, 1998, a
total restructuring reserve balance of $11,489 remains in accrued liabilities.
NOTE E - COMMITMENTS AND CONTINGENCIES
For the period from July 1 through October 3, 1998, the condensed
consolidated statement of income includes $988 of unusual litigation costs
related to a purported class action and other legal matters as described in the
Company's annual report on Form 10-K for the year ended June 30, 1998. The
Company believes the actions and claims are without merit or are covered by
insurance and continues to vigorously defend against these actions. In October
1998 the class action lawsuit was dismissed against all defendants. The
plaintiffs have the option to appeal the dismissal of their case but have not
done so as of the date of this filing. The Court is still considering the
Company's request for sanctions.
-9-
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER OF FISCAL YEARS 1999 AND 1998
(In thousands)
RESULTS OF OPERATIONS
FIRST QUARTER OF FISCAL YEARS 1999 AND 1998
The Company's net sales decreased by $11,475 or 5.1% to $212,298 for the
first quarter of fiscal year 1999, from $223,773 during the first quarter of
fiscal year 1998. The decrease was due to decreases in shipments because of
the implementation of a new software system in September 1998. In September
1998 the Company converted to a new integrated software package to improve the
Company's data systems and assist the Company in achieving its business process
redesign goals. The Company's speed of recovery from this changeover has been
slower than expected resulting in a decrease in shipments from the first
quarter of fiscal year 1998. The Company continues to make progress and
anticipates that the second through fourth quarters of fiscal year 1999 will
not be as significantly negatively impacted by this changeover. At this time
it is uncertain whether sales lost in September 1998 will be recovered in
future periods.
During the first quarter of fiscal year 1999, the Company wrote off
inventory of $1,663, accounts and notes receivable of $10,874 and the balance
of its Russian investment of $1,640 for a total of $14,177 due to the collapse
of the Russia economy. The inventory amount is included in cost of sales; the
accounts and notes receivable amount is included in selling and administrative
expense; and the investment amount is included in other income and expense.
The discussion below excludes the effects of these charges.
Gross profit decreased $22,498 or 37.8% for the first quarter of fiscal
year 1999 compared to the first quarter of fiscal year 1998. The gross profit
percentage for the first quarter of fiscal year 1999 was 17.4% compared to
26.6% for the first quarter of fiscal year 1998. The decrease in gross profit
percentage was primarily due to the reduced sales and inefficiencies resulting
from the Company's conversion to its new software system in September 1998.
Operating expenses increased $162 for the first quarter of fiscal year
1999 compared to the first quarter of fiscal year 1998. Operating expenses, as
a percentage of net sales, were 18.1% for the first quarter of fiscal year 1999
compared to 17.1% for the first quarter of fiscal year 1998. Operating expenses
consist of distribution, research and development, selling and administrative,
restructuring and redesign and unusual litigation costs. Excluding
restructuring and redesign and unusual litigation costs, operating expenses
were 17.7% of net sales for the first quarter of fiscal year 1999 compared to
16.2% of net sales for the first quarter of fiscal year 1998. Distribution
expenses increased $112 or 1.5% from the first quarter of fiscal year 1998
primarily due to higher warehousing costs to meet customer service
requirements. Distribution expense, as a percentage of net sales, was 3.7% of
net sales for the first quarter of fiscal year 1999 compared to 3.4% of net
sales for the first quarter of fiscal year 1998. Research and development
expenses increased $664 or 22.6% from the first quarter of fiscal year 1998
primarily due to costs associated with the development of new products which
are approved through the Food and Drug Administration's ("FDA") Abbreviated New
Drug Application
-10-
<PAGE> 11
("ANDA") process. Research and development expenses for fiscal year 1999 are
expected to be higher than the fiscal year 1998 expenses. Research and
development expense, as a percentage of net sales, was 1.7% for the first
quarter of fiscal year 1999 compared to 1.3% for the first quarter of fiscal
year 1998. Selling and administrative expenses increased $444 or 1.7% from the
first quarter of fiscal year 1998. Restructuring and redesign and unusual
litigation costs decreased $1,058 from the first quarter of fiscal year 1998.
See Notes D and E to the condensed consolidated financial statements.
Interest and other expense increased $1,250 from the first quarter of
fiscal year 1998. Interest expense increased $1,959 to $2,096 for the first
quarter of fiscal year 1999 compared to $137 for the first quarter of fiscal
Cyear 1998 primarily due to higher borrowing levels.
The effective tax rate was 28.4% for the first quarter of fiscal year 1999
compared to 36.5% for the first quarter of fiscal year 1998. The lower
effective rate is primarily due to certain non-deductible goodwill related to
the personal care divestiture, expensed for book purposes in the first quarter
of fiscal year 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal year 1999, working capital increased
$21,845 and cash flow for operating activities was $15,216. Accounts
receivable increased $8,454, inventories increased $24,795 and accounts payable
increased $17,740. These increases were primarily due to seasonal increases as
the Company moves into its peak selling period and decreased transactional
processing due to the Company's conversion to a new software system in
September, 1998.
Capital expenditures for facilities and equipment were $15,273 for the
first quarter of fiscal year 1999. A significant portion of these expenditures
was for the construction of a new distribution facility in Allegan, Michigan
and expansion of the manufacturing facility for nutritional products. Capital
expenditures, originally planned at approximately $60,000 for fiscal year 1999,
will be reviewed and may decrease to $50,000 - $55,000. Planned capital
expenditures are primarily for the expenditures as noted above and additional
manufacturing and packaging equipment required to support the over-the-counter
pharmaceutical and nutritional product categories.
The Company has a Russian investment that is accounted for using the
equity method. Due to the collapse of the Russian economy, the Company wrote
off its net investment of $1,640 and also wrote off inventory of $1,663 and
accounts receivable and notes receivable of $10,874 related to this Russian
investment for a total of $14,177 in the first quarter of fiscal year 1999.
During the first quarter of fiscal year 1999, the Company purchased 1,550
shares of common stock for $14,820 under its common stock repurchase program.
The common stock was retired.
Long-term debt increased $52,381 during the first quarter of fiscal year
1999 as the Company drew on its $150,000 line of credit and its $55,000
uncommitted lines of credit to fund, primarily, capital expenditures, the
common stock repurchase program and working capital requirements. At October
3, 1998 the Company had $40,000 available on the line of credit and $31,000
available from uncommitted credit facilities with two financial institutions.
Due to the
-11-
<PAGE> 12
net loss for the first quarter of fiscal year 1999, management met with the
group of banks that provide financing under the $150,000 unsecured revolving
credit facility to modify its terms so that the Company would be in compliance
with its debt covenants. Management obtained modifications retroactive to
October 3, 1998.
YEAR 2000 READINESS DISCLOSURE
The Company continues to implement the plans set forth in the Year 2000
Compliance section of the MDA in its annual report on Form 10-K for the year
ended June 30, 1998. The plans involve (1) becoming Year 2000 compliant in all
of its software systems, infrastructure systems, manufacturing systems,
security systems and office equipment, (2) reviewing insurance, regulatory and
legal implications as they relate to the year 2000 and (3) determining the year
2000 compliance status of the Company's key suppliers and customers. The plans
have not changed substantially from June 30, 1998 and their statuses are
summarized below. The Company is within its timeline for having these plans
completed prior to the year 2000.
The Company completed the identification of systems that need to be
reviewed for Year 2000 compliance and is in the process of reviewing each system
and area of the Company. The Company continues to expect the review to be
completed by the end of calendar year 1998. The next steps will be to determine
areas of noncompliance and set action plans for remediation and testing of
systems, as well as contingency plans if readiness cannot be delivered. While
the Company is still reviewing the extent of the remediation that will be
necessary, based on the information received to date, the Company does not
expect the cost of its year 2000 compliance program to be material to its
financial condition or results of operations. There can be no assurance that
the Company will be able to identify and correct all aspects of the year 2000
problem that affect it in sufficient time, and if it cannot, the failure would
have a material negative impact on the Company's business, operations or
financial condition. The Company, however, does not currently expect that the
year 2000 problem as it relates to its internal systems will have a material
negative impact on the Company.
The Company is in the process of reviewing the insurance, regulatory and
legal implications as they relate to the year 2000. The Company at this time
does not anticipate that the costs associated with this review will be material
to the Company's financial condition or results of operations.
The Company's plan to determine the year 2000 compliance status of its key
suppliers and customers is in progress. The plan involves soliciting
information from suppliers and customers through use of surveys, and follow-up
discussions and testing where needed. The Company has sent out surveys to all
of its key suppliers and certain key customers and received back a majority of
these surveys. While the Company cannot guarantee year 2000 compliance by its
key suppliers and customers, and in many cases will be relying on statements
from outside vendors without independent verification, preliminary surveys
indicate that key suppliers and customers are aware of the issues and are
working on a solution to achieve compliance on or before the year 2000. The
Company is also in the process of developing a contingency plan to deal with
those key suppliers and customers who may not be year 2000 compliant prior to
the year 2000. If certain key suppliers or customers were not year 2000
compliant and the Company was unaware of the noncompliance, the Company's
results of operations and financial condition
-12-
<PAGE> 13
could be significantly negatively impacted. However, at this time the Company
is not aware of any key suppliers or customers who will not be year 2000
compliant by the year 2000. The Company's next steps will be to complete the
solicitation of key customers, obtain more detailed information from certain key
suppliers and customers, follow-up with those companies who did not respond to
the original surveys and testing of systems.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
In accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, please see Perrigo Company's Form 10-K for the
fiscal year ended June 30, 1998, under the heading ""Cautionary Note Regarding
Forward-Looking Statements," for a discussion of certain important factors as
they relate to forward-looking statements contained in this quarterly report.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Not currently applicable to the Company.
-13-
<PAGE> 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <S>
3(a) Amended and Restated Articles of Incorporation of
Registrant, incorporated by reference from Amendment No. 2 to
Registration Statement No. 33-43834 filed by the Registrant on
September 23, 1993.
3(b) Restated Bylaws of Registrant, dated April 10, 1996,
incorporated by reference from the Registrant's Form 8-K
filed on April 10, 1996.
4(a) Shareholders' Rights Plan, incorporated by reference
from the Registrant's Form 8-K filed on April 10, 1996.
10(a) Credit Agreement, dated June 30, 1996, between the
Registrant and NBD Bank, N.W., Sanwa Bank, Comerica
Bank-Detroit, PNC Bank, Westdeutsche Landesbank Girozentrale
and Old Kent Bank and Trust Company, incorporated by reference
from the Registrant's 1996 Form 10-K filed on September 25, 1996.
10(b) Registrant's Management Incentive Plan, incorporated by
reference from Registration Statement No. 33-69324 filed
by the Registrant on September 23, 1993.
10(c) Registrant's 1988 Employee Incentive Stock Option
Plan as amended, incorporated by reference to Exhibit A of the
Registrant's 1997 proxy statement.
10(d) Registrant's 1989 Non-Qualified Stock Option Plan for Directors,
as amended, incorporated by reference from Exhibit B of the
Registrant's 1997 Proxy Statement as amended at the Annual
Meeting of Shareholders on November 6, 1997.
10(e) First Amendment to Registrant's Credit Agreement, dated June
29, 1998, incorporated by reference from the Registrant's
Form 10-K filed on October 6, 1998.
10(f) Credit Agreement, dated March 25, 1998, between
Registrant and Wachovia Bank, N.A., Incorporated by
</TABLE>
-14-
<PAGE> 15
<TABLE>
<CAPTION>
<S> <C>
reference from the Registrant's Form 10-K filed on
October 6, 1998.
10(g) Registrant's Restricted Stock Plan for Directors,
dated November 6, 1997, incorporated by reference from
Registrant's Form 10-K filed on October 6, 1998.
10(h) Second Amendment to Registrant's Credit Agreement,
dated November 20, 1998.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed an 8-K on July 7, 1998 that announced a major
restructuring plan designed to lower costs and improve operating
efficiencies and financial performance. The restructuring involves closing
manufacturing facilities in California and Missouri and the intention to
divest the personal care business. The Company estimated that the
restructuring would result in nonrecurring pre-tax charges of approximately
$100 - 125 million in the fiscal year ending June 30, 1998, and an
additional $5 - 10 million for operating losses and restructuring related
expenses over the next 12 months. The restructuring is estimated to
realize an ongoing benefit to operating income of approximately $7-10
million annually.
The Company filed an 8-K on September 30, 1998 that announced a change
in the Company's fiscal year from June 30 to the 52 or 53-week period
ending on the Saturday closest to June 30, effective for fiscal year 1999.
Accordingly, the Company's quarters will each be comprised of 13 weeks and
end on a Saturday, except in certain years when one quarter will be
comprised of 14 weeks. Previously, the Company's quarters were comprised
of three calendar months ending on September 30, December 31, March 31 and
June 30. As a result, the first quarter of the Company's fiscal year 1999
will end on October 3, 1998 and its fiscal year will end on July 3, 1999.
-15-
<PAGE> 16
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: November 23, 1998 /s/ Michael J. Jandernoa
----------------------- -------------------------------
Michael J. Jandernoa
Chairman of the Board and Chief
Executive Officer
Date: November 23, 1998 /s/ Thomas J. Ross
----------------------- -------------------------------
Thomas J. Ross
Vice President Finance -
Principal Accounting and
Financial Officer
-16-
<PAGE> 1
EXHIBIT 10(h)
SECOND AMENDMENT TO REGISTRANT'S AGREEMENT,
DATED NOVEMBER 20, 1998
Page 1
<PAGE> 2
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of November 20, 1998
(this "Amendment"), is among PERRIGO COMPANY, a Michigan corporation (the
"Company"), the lenders set forth on the signature pages hereof (collectively,
the "Lenders"), and NBD BANK, as agent for the Lenders (in such capacity, the
"Agent").
RECITALS
A. The Company, the Lenders, and the Agent are parties to a Credit
Agreement, dated as of June 30, 1996, as amended (the "Credit Agreement").
B. The Company, the Lenders, and the Agent desire to amend the Credit
Agreement as set forth herein.
TERMS
In consideration of the premises and of the mutual agreements herein
contained, the parties agree as follows:
ARTICLE I. AMENDMENTS. Upon fulfillment of the conditions set forth in
Article III hereof, the Credit Agreement shall be amended as follows:
1.1 The definition of "Applicable Margin" contained in Section 1.1
is changed to fix the Applicable Margin amounts until June 30,
1999, to specify how the Applicable Margin will be determined
after June 30, 1999, and to include the Facility Fee rates under
the Applicable Margin definition, and thus is restated as
follows:
"Applicable Margin" means, (a) on or before the date the
Applicable Margin is adjusted based on the Interest Coverage Ratio as of June
30, 1999 as described below, .55% with respect to the Eurocurrency Rate, .675%
with respect to the CD Rate and L/C Fee, and .20% with respect to the Facility
Fee under Section 2.5, and (b) thereafter, the percentage per annum set forth
below in accordance with the then-applicable Interest Coverage Ratio
(calculated as set forth in Section 6.2(d) of this Agreement):
<TABLE>
<CAPTION>
INTEREST COVERAGE RATIO EUROCURRENCY CD RATE L/C FEE FACILITY FEE
------------ ------- ------- ------------
RATE UNDER SECTION 2.5
---- -----------------
<S> <C> <C> <C> <C>
Less than 3.5 to 1.0 .35% .475% .475% .20%
Greater than or equal to 3.5 to 1.0 .30% .425% .425% .15%
and less than 5.0 to 1.0
</TABLE>
Page 2
<PAGE> 3
Greater than or equal to 10.0 to 1.0 .20% .325% .325% .11%
and less than 15.0 to 1.0
Greater than or equal to 15.0 to 1.0 .18%% .305% .305% .09%
The applicable Interest Coverage Ratio shall be determined as of the last
day of each fiscal quarter of the Company, commencing with the fiscal quarter
ending June 30, 1999 based on information provided by the Company on or before
the 28th day after the close of such quarter pursuant to Section 6.1(d)(ii). Any
change in the Applicable Margin resulting from a change in the Interest Coverage
Ratio shall be effective on the first day of the month following receipt of the
information referenced above provided by the Company on or before the 28th day
after the close of each fiscal quarter of the Company but shall be subject to
adjustment in accordance with and as of the date of the computation subsequently
furnished to the Lenders with quarterly financial statements of the Company and
the Subsidiaries pursuant to Section 6.1(d)(ii)(B).
1.2 A new definition of "EBIT" is added to Section 1.1 as follows:
"EBIT" of any person means, for any period, the net income of such person,
determined before Interest Charges and taxes, including without limitation the
Michigan Single Business Tax, and in accordance with generally accepted
accounting principles.
1.3 The definition of "Interest Coverage Ratio" contained in Section
1.1 is restate as follows:
"Interest Coverage Ratio" means, for any period, (a) for purposes of
calculating the Applicable Margin, the ratio of (i) the Consolidated EBITDA of
the Company and its Subsidiaries minus the Consolidated Capital Expenditures
(excluding any expenditures under any acquisition governed by Section 6.2(i)
which may be considered a Capital Expenditure) of the Company and its
Subsidiaries, to (ii) Consolidated Interest Charges of the Company and its
Subsidiaries, and (b) for purposes of calculating the Company's compliance with
the covenants herein, the ratio of (i) the Consolidated EBIT of the Company and
its Subsidiaries to (ii) Consolidated Interest Charges of the Company and its
Subsidiaries.
1.4 Section 2.5 is restated as follows:
2.5 Facility Fee. The Company agrees to pay to the Agent for the pro rata
benefit of the Lenders a facility fee on the daily average amount of the
Commitments, for the period from the Effective Date to but excluding the
Termination Date, at the Applicable Margin. Accrued facility fees shall be
payable, in arrears, on the 12th day of each January, April, July and October
occurring after the date hereof, commencing July 12, 1996, which payment then
due shall be for all facility fees accrued through the end of the preceding
month, and on the Termination Date, which payment then due shall be for all
facility fees accrued through the Termination Date.
SECOND AMENDMENT TO CREDIT AGREEMENT Page 3
<PAGE> 4
1.5 Section 6.2(b) is restated as follows:
(b) Interest Coverage Ratio. Permit or suffer the Consolidated
Interest Coverage Ratio of the Company and its Subsidiaries, as calculated for
the four fiscal quarters of the Company then ending, to be less than 3.0 to 1.0
as of the last day of each fiscal quarter of the Company and its Subsidiaries
ending on or after September 30, 1998; provided, however, for purposes of this
Section 6.2(b) only and not for any other purpose, the one time non-recurring
pre-tax charge of $122,529,000 taken in the fiscal quarter ending June 30, 1998,
and the one time non-recurring pre-tax charge of $15,139,000 taken in the fiscal
quarter ending October 3, 1998, shall be disregarded in calculating the Interest
Coverage Ratio.
1.6 A new Section 6.2(h) is added as follows:
(h) Capital Expenditures. Acquire or contract to acquire any fixed
asset or make any other Capital Expenditures if the aggregate purchase price and
other acquisition costs of all such Capital Expenditures made by the Company or
any of its Subsidiaries, as calculated for the four fiscal quarters of the
Company then ending, would exceed $78,000,000 as of the last day of each fiscal
quarter.
ARTICLE II. REPRESENTATIONS. The Company represents and warrants to the
Agent and the Lenders that:
2.1 The execution, delivery and performance of this Amendment are
within its powers, have been duly authorized and are not in contravention of any
law or regulation, of the terms of its Articles of Incorporation or By-laws, or
any undertaking to which it is a party or by which it is bound.
2.2 This Amendment is the legal, valid and binding obligation of the
Company enforceable against it in accordance with the terms hereof and thereof.
2.3 After giving effect to the amendments herein contained, the
representations and warranties contained in Article V of the Credit Agreement
are true on and as of the date hereof with the same force and effect as if made
on and as of the hereof.
2.4 No Event of Default or Default exists or has occurred and is
continuing on the date hereof.
2.5 The Consent and Agreement hereto executed by each Guarantor has
been duly authorized by each Guarantor and is not in contravention of any law or
regulation, of the terms of their Articles of Incorporation or By-laws or any
undertaking to which any of them is a party or to which they may be bound, and
is their legal, valid and binding obligation, enforceable against each Guarantor
in accordance with the terms thereof.
2.6 Other than the Guarantors executing the Consent and Agreement
hereto to which it is a party, there are no other Material Subsidiaries of the
Company.
SECOND AMENDMENT TO CREDIT AGREEMENT Page 4
<PAGE> 5
ARTICLE III. CONDITIONS OF EFFECTIVENESS. This Amendment shall not
become effective until each of the following has been satisfied:
3.1 Copies of resolutions adopted by the Boards of Directors of the
Company and each Guarantor, certified by an officer of the Company and each
Guarantor, as the case may be, as being true and correct and in full force and
effect without amendment as of the date hereof, authorizing the Company and
each Guarantor to enter into this Amendment, and the Consent and Agreement
hereto, shall have been delivered to the Agent and the Lenders.
3.2 The Company shall have paid to the Agent, for the pro rata benefit
of the Lenders, an amendment fee of $150,000.
3.3 This Amendment shall be signed by the Company and the Majority
Lenders, and each Guarantor shall have executed the Consent and Agreement at
the end of this Amendment.
ARTICLE IV. MISCELLANEOUS.
4.1 References in the Credit Agreement, any Guaranty or in any note,
certificate, instrument or other document to the Credit Agreement shall be
deemed to be references to the Credit Agreement as amended hereby and as
further amended from time to time.
4.2 The Company agrees to pay and to save the Agent harmless for the
payment of all costs and expenses arising in connection with this Amendment,
including the reasonable fees of counsel to the Agent in connection with
preparing this Amendment and the related documents.
4.3 Except as expressly amended hereby, the Company agrees that the
Credit Agreement, the Notes and all other documents and agreements executed by
the Company in connection with the Credit Agreement in favor of the Agent or
the Lenders are ratified and confirmed and shall remain in full force and
effect and that it has no set off, counterclaim, defense or other claim or
dispute with respect to any of the foregoing. Terms used but not defined herein
shall have the respective meanings ascribed thereto in the Credit Agreement.
4.4 This Amendment may be signed upon any number of counterparts with
the same effect as if the signatures thereto and hereto were upon the same
instrument.
SECOND AMENDMENT TO CREDIT AGREEMENT Page 5
<PAGE> 6
IN WITNESS WHEREOF, the parties signing this Amendment have caused this
Amendment to be executed and delivered as of the day and year first above
written.
PERRIGO COMPANY
By: /s/ James R. Ondersma
-------------------------------------
Its: Treasurer
-------------------------------
NBD BANK, as Agent and as a Lender
By: /s/ Randy R. Balluff
-------------------------------------
Its: Vice President
-------------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ James De Vries
-------------------------------------
Its: Vice President
-------------------------------
COMERICA BANK-DETROIT
By: /s/ Robert M. Porterfield
-------------------------------------
Its: Vice President
-------------------------------
SANWA BANK, LIMITED
By: /s/ Richard H. Ault
-------------------------------------
Its: Vice President
-------------------------------
SECOND AMENDMENT TO CREDIT AGREEMENT Page 6
<PAGE> 7
WESTDEUTSCHE LANDESBANK
GIROZENTRALE
By: /s/ Anthony J. Allessandro
------------------------------
Its: Vice President
------------------------
By: /s/ Cynthia M. Nelson
------------------------------
Its: Managing Director
------------------------
OLD KENT BANK AND
TRUST COMPANY
By: Seth W. Watson III
------------------------------
Its: Vice President
------------------------
CONSENT AND AGREEMENT
As of the date and year first above written, each of the undersigned
hereby:
(a) fully consents to the terms and provisions of the above Amendment
and the consummation of the transactions contemplated hereby and agrees to all
terms and provisions of the above Amendment applicable to it or any of the
Documents (as defined below);
(b) agrees that each Guaranty and all other agreements executed by any
of the undersigned in connection with the Credit Agreement or otherwise in
favor of the Agent or the Lenders (collectively, the "Documents") are hereby
ratified and confirmed and shall remain in full force and effect, and each of
the undersigned acknowledges that it has no setoff, counterclaim, defense or
other claim or dispute with respect to any Document; and
(c) acknowledges that its consent and agreement hereto is a condition
to the Agent's and the Lenders' obligation under this Amendment and it is in
its interest and to its financial benefit to execute this consent and
agreement.
L. PERRIGO COMPANY
By: /s/ James R. Ondersma
--------------------------------
Its: Treasurer
--------------------------
PERRIGO COMPANY
OF SOUTH CAROLINA, INC.
By: /s/ James R. Ondersma
--------------------------------
Its: Treasurer
--------------------------
SECOND AMENDMENT TO CREDIT AGREEMENT Page 7
<PAGE> 8
PERRIGO COMPANY OF TENNESSEE,
INC.
By: James R. Ondersma
--------------------------
Its: Treasurer
--------------------
SECOND AMENDMENT TO CREDIT AGREEMENT Page 8
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> OCT-03-1998
<CASH> 2,770
<SECURITIES> 0
<RECEIVABLES> 83,055
<ALLOWANCES> 3,329
<INVENTORY> 206,262
<CURRENT-ASSETS> 405,339
<PP&E> 318,311
<DEPRECIATION> 117,731
<TOTAL-ASSETS> 634,102
<CURRENT-LIABILITIES> 286,560
<BONDS> 134,000
0
0
<COMMON> 101,884
<OTHER-SE> 216,048
<TOTAL-LIABILITY-AND-EQUITY> 634,102
<SALES> 212,298
<TOTAL-REVENUES> 212,298
<CGS> 176,993
<TOTAL-COSTS> 176,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 126
<INTEREST-EXPENSE> 2,096
<INCOME-PRETAX> (17,292)
<INCOME-TAX> (4,916)
<INCOME-CONTINUING> (12,376)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,376)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
