<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K 405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19725
PERRIGO COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-2799573
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
515 Eastern Avenue 49010
Allegan, Michigan (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (616) 673-8451
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (without par value)
(Title of Class)
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 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. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the common stock on
September 28, 1998 as reported on the NASDAQ National Market System, was
approximately $369,729,030. Shares of common stock held by each executive
officer and director and by each person who owns 5% of more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of September 28, 1998 the registrant had outstanding 73,221,245 shares
of common stock.
Documents incorporated by reference: Registrant's Proxy Statement for its
Annual Meeting on November 5, 1998 is incorporated by reference into Part III.
<PAGE> 2
PART I.
Item 1. Business of the Company. (Dollar amounts in thousands)
GENERAL
Perrigo Company (the "Company"), established in 1887, is the nation's
largest manufacturer of store brand over-the-counter ("OTC")(non-prescription)
pharmaceutical, personal care and nutritional products. Store brand products are
sold under a retailer's own label and compete with nationally advertised brand
name products. The Company attributes its leadership position in the store brand
market to its comprehensive product assortment and to its commitment to product
quality, customer service, retailer marketing support and low cost production.
The Company's customers are major national and regional retail drug,
supermarket and mass merchandise chains such as Albertson's, CVS, Kmart, Kroger,
Target, Wal-Mart, and Walgreens and major wholesalers such as Fleming, McKesson,
Super Valu and Topco.
The Company markets a broad line of products that are comparable in
quality and effectiveness to national brand products. These products include
over-the-counter pharmaceuticals such as analgesics, cough and cold remedies,
antacids, laxatives, feminine hygiene and suppositories; personal care products
such as toothpaste, mouthwash, rubbing alcohol, hydrogen peroxide, baby care,
skin care, hair care and sun care; and nutritional products such as synthetic
and natural vitamins, herbals, nutritional drinks and diet aids. The cost to the
customer of a store brand product is significantly lower than that of a
nationally advertised brand name product. The customer therefore can price a
store brand product below the competing national brand product while still
realizing a higher profit margin. Generally, the retailers' dollar profit per
unit of store brand product sold is higher than the dollar profit per unit of
the comparable national brand product. The consumer benefits by receiving a
quality product at a price below a comparable national brand product.
To a lesser extent, the Company manufactures and markets its own brand
name products under the names Swan(R), Good Sense(R), Daily Source(R), Herbal
Source(R), Nature's Glo(TM), KidMed(TM) and Nueva Salud(R). The Company also
manufactures products under contract for marketers of national brand products.
The Company's principal executive offices are located at 515 Eastern
Avenue, Allegan, Michigan 49010 and its telephone number is (616) 673-8451. The
Company operates primarily through five wholly-owned domestic subsidiaries, L.
Perrigo Company, Perrigo Company of South Carolina, Inc., Perrigo Company of
Tennessee, Inc. (formerly Cumberland-Swan, Inc.), Perrigo Company of Missouri,
Inc. and Perrigo International, Inc.; three wholly-owned foreign subsidiaries,
Perrigo de Mexico S.A. de C.V., Nippon Perrigo, K.K. and Perrigo Asia Ltd; and
one majority owned foreign subsidiary, Quimica y Farmacia, S.A. de C.V. As used
herein, the "Company" means Perrigo Company, its subsidiaries and all
predecessors of Perrigo Company and its subsidiaries.
SIGNIFICANT DEVELOPMENTS DURING FISCAL YEAR 1998
On June 29, 1998, the Company announced a major restructuring plan
designed to lower costs and improve operating efficiencies and financial
performance. The restructuring involves the closing of manufacturing facilities
in California and Missouri and the intention to divest the Company's personal
care business. The Company recorded a nonrecurring pre-tax charge of $121,966 in
the fourth quarter of fiscal year 1998 for the estimated costs associated with
the closures, consolidation of manufacturing operations, write-down of assets
and other restructuring expenses. The restructuring charge is based on
management's current estimate of the fair market value of the assets and
business to be sold and is subject to change. See Item 7 for a further
discussion of the 1998 restructuring.
In June 1998 the United States District Court for the Western District
of Michigan dismissed, at the
<PAGE> 3
close of the plaintiff's case, the action filed by Grow Group, Inc. against the
Company and certain of its present and former officers and directors. The
plaintiffs have filed an appeal.
In June 1998 the United States District Court for the Western District
of Michigan granted the Company's motion of a summary judgment in a complaint
purporting to be a class action lawsuit on behalf of shareholders who purchased
Perrigo common stock between May 11, 1993 and May 10, 1994. Subsequent to fiscal
year-end 1998 the class action lawsuit was dismissed. Subsequently, the
plaintiffs requested that the Court reconsider its previous order dismissing the
case. The Court has not yet ruled on plaintiffs' request for reconsideration.
The Company continued its business process redesign effort, which is
expected to result in delivering greater value to customers while lowering
costs. As part of the redesign effort, an integrated software package was
purchased in the third quarter of fiscal year 1997. This software package - SAP
- - is designed to enhance current management reporting and streamline information
flow and was installed in September 1998.
The Company is building distribution centers in Allegan, Michigan and
LaVergne, Tennessee to replace multiple leased facilities. The LaVergne
distribution center was fully operational in July 1998. The Allegan facility
will be fully operational by the end of the second quarter of fiscal year 1999.
These state-of-the-art facilities are intended to reduce the Company's overall
distribution costs and improve customer service. The LaVergne, Tennessee
facility is part of the intended personal care divestiture.
The Company realized a full year of sales from several new products
including an analgesic comparable to the brand product Aleve(R) and "super"
vitamin products that contain more vitamins and minerals than comparable
national brands. Other significant new product launches included maximum
strength non-aspirin allergy/sinus caplets, severe cold pain relief caplets and
certain oral hygiene products. In June 1998 the Company began shipping
Cimetidine, an antacid product comparable to the national brand Tagamet HB(R).
This is a new product for the Company and is manufactured and supplied through a
third party agreement.
The Company continued to invest in research and development with a
focus on OTC pharmaceutical products that are switching from "prescription only"
to "over-the-counter" status. These products require approval by the United
States Food and Drug Administration (the "FDA") through its Abbreviated New Drug
Application ("ANDA") process. In November 1997, legislation, known as the Food
and Drug Administration's Modernization Act of 1997, was passed by Congress and
signed by the President. Also, in fiscal year 1998 the FDA changed its policy
regarding market exclusivity for products switching from "prescription only" to
"over-the-counter" status. In general, the effect of this legislation and the
FDA policy change is to extend in certain instances the exclusivity granted to
certain "Rx switch" products. Whereas previously the ANDA process took up to
three years, in the future it may take up to four years before the Company will
be able to sell these "switch" products. This will have the effect of deferring
in certain instances the timing of sales for the Company for these types of
products.
The Company received ANDA approval from the FDA to manufacture a
feminine hygiene product that is comparable to the brand Monistat-7(R). The
Company received tentative ANDA approval to manufacture a children's ibuprofen
oral suspension product comparable to the brand Motrin(R). The Company began
distribution of an antacid product comparable to the OTC brand Tagamet HB(R).
On September 11, 1997, the Company acquired 87.8% of the outstanding
shares of Quimica y Farmacia, S.A. de C.V. for approximately $16,000. Quimica y
Farmacia, S.A. de C.V. is a pharmaceutical manufacturer and distributor located
in Mexico.
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<PAGE> 4
BUSINESS STRATEGY
The Company attributes its sustained leadership position in the store
brand market to its implementation of several focused business strategies that
reflect the Company's commitment to its customers and employees. The strategy is
outlined below. As discussed more fully in Item 7, in June 1998 the Company
announced its intention to divest its personal care business. The Company
intends to focus its efforts on the significant opportunities that exist in the
higher growth, higher margin OTC pharmaceutical and nutritional products.
PRODUCT ASSORTMENT AND PRODUCT QUALITY
The Company offers a comprehensive product assortment in order to fill
customers' needs while minimizing their product sourcing costs.
The Company is dedicated to developing and marketing new store brand
products before the competition. As a result, the Company has a research and
development staff that management believes is one of the most experienced in the
industry at developing national brand equivalent products using state-of-the-art
equipment. This staff also responds to changes in existing national brand
products by reformulating comparable existing Company products. In the
over-the-counter pharmaceutical market, many new products are the result of
changes in product status from "prescription only" to "over-the-counter"
(non-prescription). These products require approval by the FDA through its ANDA
process. In order to accelerate the approval process, the Company uses both
internal research and strategic product development agreements with outside
sources.
The Company is committed to providing a high-quality product to the
customer. All products are developed using ingredients, formulas and processes
comparable to those of national brand products. Packaging is designed to make
the product visually appealing to the consumer. High quality standards are
maintained throughout all phases of production, warehousing and distribution.
CUSTOMER SERVICE AND MARKETING SUPPORT
The Company seeks to establish customer loyalty by providing superior
customer service and marketing support. This includes providing (1) a
comprehensive assortment of quality, value priced products, (2) timely
processing, shipment and delivery of orders, (3) assistance in managing customer
inventories, and (4) support in building the store brand business.
The Company's business process redesign effort is focused on managing
orders and products. The "manage orders" effort will significantly reduce the
time from order taking to delivery. This acceleration is intended to decrease
the Company's and the customers' inventory levels and carrying costs, increase
inventory turns and improve customer service. The "manage products" effort is
intended to increase the effectiveness of the Company's product-related
decisions. A streamlined decision-making process will help to ensure that
products are brought to market quickly and promoted effectively.
The Company provides marketing support that is directed at developing
customized marketing programs for the customers' store brand products. The
primary objective of this store brand management approach is to enable customers
to increase sales of their own brand name products by communicating store brand
quality and value to the consumer. The Company's marketing personnel assist in
the development and introduction of new store brand products and promotion of
customers' ongoing store brand products by performing consumer research,
providing market information and establishing individualized promotions and
marketing programs.
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<PAGE> 5
LOW COST PRODUCTION
The Company continually strives to improve its manufacturing
capabilities and technology in order to provide the manufacturing flexibility
necessary to meet its customers' changing needs and maintain a low cost producer
position.
Productivity and efficiency improvements are encouraged by sharing
related cost savings with employees through formalized employee gain-sharing
programs that share productivity improvements with employees.
Education of the work force and a team approach provide employees with
the skills to generate and implement programs designed to increase the Company's
productivity and efficiency, to improve quality and to better serve customers.
Continuous improvement programs are utilized extensively to improve
efficiency by eliminating waste from all phases of Company operations. These
programs include cross-functional teams, internal and external audits and
on-the-job training.
All levels of management are involved in the planning process in an
effort to forecast future manufacturing needs with sufficient lead-time to
reallocate production resources.
BUSINESS SEGMENT
The Company operates in one business segment, store brand health and
beauty care, and does not maintain specific operating profit or fixed asset
information by its three major product categories. Since this information is not
available, disclosure of operating segment information by these product
categories, utilizing arbitrary allocations, would not be meaningful to
investors.
PRODUCTS
The Company currently markets approximately 1,300 store brand products
to approximately 835 customers. The Company includes as separate products
multiple sizes, flavors and product forms of certain products. The Company has a
leading market share in certain of its products in the store brand market.
During fiscal year 1998 approximately $66 million of the Company's net
sales were attributable to new products added to the Company's product lines
within the past two years.
The Company manufactures and markets certain products under its own
brand names Swan(R), Good Sense(R), Daily Source(R), Herbal Source(R), Nature's
Glo(R), KidMed(TM) and Nueva Salud(TM). Net sales of these products were
approximately 5.0% to 5.7% of the Company's net sales for fiscal years 1998,
1997 and 1996.
The following table illustrates growth in net sales for the Company's
three product lines from fiscal year 1994 through fiscal year 1998. Net sales do
not include miscellaneous sales.
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<PAGE> 6
<TABLE>
<CAPTION>
NET SALES BY PRODUCT LINE
YEAR ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
OTC Pharmaceuticals ............................. $536,328 $526,541 $474,551 $450,608 $433,624
Personal Care ................................... 212,261 206,480 212,234 197,784 175,822
Nutritional ..................................... 151,709 110,408 89,808 66,701 57,024
-------- -------- -------- -------- --------
$900,298 $843,429 $776,593 $715,093 $666,470
======== ======== ======== ======== ========
</TABLE>
Listed below are some of the products marketed by the Company under
store brand labels. Each retailer may have its own name for a store brand
product. Also listed are the names of certain of the national brands with which
these products compete.
<TABLE>
<CAPTION>
Illustrative Competing
Company Products National Brands
- ---------------- ----------------------
OVER-THE-COUNTER PHARMACEUTICALS
Analgesics
- ----------
<S> <C>
Ibuprofen Tablets & Caplets Advil(R), Motrin(R) Tablets & Caplets
Pain Reliever Without Aspirin (Acetaminophen) Tylenol(R) Tablets, Caplets, Gelcaps & Geltabs
Children's Non-Aspirin Tablets & Caplets Children's Tylenol(R)
Children's Non-Aspirin Elixirs & Suspensions Children's Tylenol(R) Elixirs & Suspensions
Children's Non-Aspirin Quick Dissolving Tablets
Non-Aspirin Infant Drops Tylenol(R) Infant Drops
Aspirin Bayer(R)
Headache Formula Excedrin(R)
Children's Chewable Aspirin Bayer(R) Children's Aspirin
Naproxen Sodium Tablets & Caplets Aleve(R)
Pain Reliever & Sleep Aid Tablets, Caplets, Tylenol(R) PM
Gelcaps & Geltabs
Cough/Cold
- ----------
Nite Time Cough Syrup NyQuil(R)
Nite Time Liquid Caps NyQuil(R) Liqui-Caps
Day Time Liquid Caps DayQuil(R) Liqui-Caps
Aphedrid Tablets Actifed(R)
Tussin Cough Syrups Robitussin(R)
Children's Non-Aspirin Cold/Cough Tablets, Liquid Tylenol(R) Cold Plus Cough
Di-Bromm Tablets, Liquid Dimetapp(R)
Pseudoephedrine Tablets, Liquid Sudafed(R)
Diphedryl(R) Caplets, Tablets, Liquid Benadryl(R)
Effervescent Cold Relief Alka-Seltzer(R) Plus
Triacting Syrup and Expectorant Triaminic(R)
Flu & Cold Medicine Thera-Flu(R)
Nasal Spray Afrin(R)
Dayhist - 1 Tavist - 1(R)
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C>
Dayhist - D Tavist - D(R)
Non-Aspirin Sinus Tylenol(R) Sinus
Antacids
- --------
Stress Liquid & Caplets Pepto-Bismol(R)
Maldroxal(R) & M Plus Maalox(R)
Ma-santi(R) Mylanta(R)
Ma-santi(R) II Mylanta II(R)
Flavored Antacid Tablets Tums(R)
Effervescent Pain Relief Alka-Seltzer(R)
Cimetidine Acid Blocker Tablets Tagamet HB(R)
Laxatives
- ---------
Natural Fiber Laxative Metamucil(R)
Women's Laxative Tablets Correctol(R)
Laxative Pills Ex-Lax(R)
Fiber Laxative Tablets Fibercon(R)
Milk of Magnesia Phillips(R) M.O.M.
Anti-diarrheal
- --------------
Loperamide Hydrochloride Liquid Imodium A-D(R) Liquid
Loperamide Hydrochloride Caplets Imodium A-D(R) Caplets
Feminine Hygiene
- ----------------
Miconazole-7 Cream Monistat-7(R) Cream
Miconazole-7 Suppositories Monistat-7(R) Suppositories
Suppositories
- -------------
Hemorrhoidal Suppositories Preparation H(R)
Adult & Infant Glycerin Suppositories Squibb(R)
Dermatologic
- ------------
Minoxidil 2% Rogaine(R) 2%
Diagnostic Test Kits
- --------------------
Pregnancy Test Kits e.p.t.(R)
Sleep Aids
- ----------
Sleep Aid Tablets Sominex(R)
Sleep Aid Liquid Caps Unisom(R)
PERSONAL CARE PRODUCTS
Oral Hygiene
- ------------
Mint and Peppermint Mouthwash Scope(R)
Antiseptic Mouthwash Listerine(R)
Blue Mint Antiseptic Mouthwash Listerine(R)
Anti-Plaque Dental Rinse Plax(R)
Mint Effervescent Denture Tablets Polident(R)
Effervescent Denture Tablets Efferdent(R)
</TABLE>
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<PAGE> 8
<TABLE>
<S> <C>
Tartar Control Toothpaste Crest(R) Tartar
Sodium Fluoride Toothpaste Crest(R)
Baking Soda Toothpaste Arm & Hammer(R)
Coolfresh Toothpaste Colgate(R)
Skin Care
- ---------
Beauty Lotion, Facial Wash and Body Wash Oil of Olay(R)
Skin Care Lotion Vaseline(R) Intensive Care Lotion
Medicated Skin Cream Noxzema(R)
Therapeutic Dry Skin Lotion Lubriderm(R)
Shower & Bath Powder Shower to Shower(R)
Body Wash Plus Moisturizer Oil of Olay(R)
Cold Cream Ponds(R)
Skin Cleanser Cetaphil(R)
Sun Care
- --------
Sunless Tanning Lotion Coppertone(R)
Active Sunblock Coppertone(R) Sport
Children's Sunblock Waterbabies(R)
Tropic Tanning Oil/Lotion Hawaiian Tropic(R)
Big Kids Sunblock Coppertone(R) Kids
Hair Care
- ---------
Dandruff Shampoo Head & Shoulders(R)
Green Shampoo Plus Conditioner Pert(R) Plus
Vitamin Shampoo/Conditioner Pantene(R) Pro-V(R)
Herbal Shampoo/Conditioner Clairol(R) Herbal Essences(R)
Deodorants
- ----------
Roll-On Deodorant Ban(R)
Baby Care
- ---------
Baby Bath and Baby Wash Johnson's(R)
Baby Shampoo Johnson's(R)
Baby Lotion Johnson's(R)
Baby Oil and Baby Oil Gel Johnson's(R)
Baby Powder Johnson's(R)
Wets & Drys
- -----------
Isopropyl Alcohol
Hydrogen Peroxide
Magnesium Citrate
Epsom Salt
Calamine Lotion
Clear Anti-Itch Lotion Caladryl(R) Clear
Medicated Calamine Lotion Caladryl(R)
</TABLE>
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<PAGE> 9
NUTRITIONAL PRODUCTS
<TABLE>
<S> <C>
Synthetic Vitamins
- ------------------
Multiple Vitamins One-A-Day(R) Maximum
Century Centrum(R)
Century Senior Centrum Silver(R)
Multiple Vitamin Essential One-A-Day(R) Essential
Century Kids Centrum Junior(R)
A-Shapes Chewables Flintstones(R)
Therapeutic M Theragran M(R)
Antioxidant with Zinc Ocuvite(R)
Prenatal Stuarts Prenatal(R)
B Vitamins
Oyster Shell Calcium Oscal(R)
Calcium Caltrate(R)
Calcium Citrate Citracal(R)
Stress Vitamin Stresstab(R)
"Super" Multiple Vitamins and Minerals
Mens/Womens High Potency Multiple Vitamins
Natural Vitamins
- ----------------
Vitamin C
Vitamin E
Beta Carotene
Calcium
Magnesium
Selenium
Zinc
Herbals/Specialty Items
- -----------------------
Ginseng Ginsana(R)
Vitamins with Ginseng Vitasana(R)
Garlic Tablets Garlique(R)
Garlic Oil Capsules
Ginkgo Biloba Ginkoba(R)
Valerian Root
Goldenseal Root
Cranberry Soft Gels
Echinacea Echinex(R)
Saw Palmetto ProPalmex(R)
St. John's Wort Kira(R)
Shark Cartilage
Bilberry
Chromium Picolinate
Lecithin
Nutritional Drinks
- ------------------
Liquid Nutritional Supplement Ensure(R)
Liquid Nutritional Supplement Plus Ensure(R) Plus
</TABLE>
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<PAGE> 10
RESEARCH AND DEVELOPMENT
Research and development is a key component of the Company's business
strategy. The Company does not attempt primary research to develop new products.
Instead, the Company focuses on developing store brand products comparable in
formulation, quality and effectiveness to existing national brand products. As
part of the product development process, the Company reviews any potential
patent infringement and develops alternative formulations so as not to infringe
on any patent.
The Company has been granted FDA approval to manufacture and distribute
the following over-the-counter products:
<TABLE>
<CAPTION>
Perrigo Product Comparable National Brand Product(s)
--------------- ------------------------------------
<S> <C>
Doxylamine Succinate, a sleep aid Unisom(R)
Miconazole Nitrate Cream, a feminine Monistat-7(R)
hygiene treatment
Miconazole Nitrate Suppositories, a Monistat-7(R)
feminine hygiene treatment
Naproxen Sodium, a non-aspirin analgesic Aleve(R)
Ibuprofen, a non-aspirin analgesic Advil(R), Motrin(R)
Loperamide Hydrochloride, a drug used to Imodium A-D(R)
control and relieve acute, non-specific diarrhea
Clemastine Fumarate, an antihistamine Tavist-1(R)
</TABLE>
The Company has been granted tentative FDA approval to manufacture and
distribute the following over-the-counter product:
<TABLE>
<CAPTION>
Perrigo Product Comparable National Brand Product(s)
--------------- ------------------------------------
<S> <C>
Children's Ibuprofen Oral Suspension Motrin(R)
</TABLE>
The Company has obtained the rights to distribute the following
products through use of strategic alliance agreements:
<TABLE>
<CAPTION>
Perrigo Product Comparable National Brand Product(s)
--------------- ------------------------------------
<S> <C>
Dayhist-D, an antihistamine and Tavist-D(R)
nasal decongestant
Minoxidil, a hair growth stimulant Rogaine(R)
DiBromm, a cough suppressant Dimetapp(R)
Cimetidine 200 mg. tablets, an Tagamet HB(R)
antacid product
</TABLE>
The Company estimates that products for which marketing exclusivity is
expiring through the year 2002, which include, among other products, Zantac(R),
Axid(R), Pepcid(R), Claritin(R), Claritin D(R), Orudis(R), Femstat(R) and
Questran(R), represent a substantial potential market. The Company is actively
pursuing all avenues to offer store brand equivalents of these products.
However, there can be no assurance that the Company will be successful in
obtaining approval to distribute additional products.
The Company spent $15.9 million, $13.7 million, and $10.4 million for
research and development during fiscal years 1998, 1997 and 1996,
respectively. The Company anticipates that research and development expenditures
as a percent of net sales will continue to increase in the foreseeable future,
especially when the Company completes the intended divestiture of its personal
care operations.
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<PAGE> 11
During fiscal year 1996, the Company made an investment of $5.0 million
in Ireland-based Warner Chilcott plc. While this investment does not directly
involve the Company in the business of manufacturing generic prescription
products, it does allow the Company to gain a better understanding of the
worldwide generic prescription industry, including its customers and supply
chain.
SALES AND MARKETING
The Company employs its own sales force to service larger customers and
uses industry brokers for some smaller retailers. Sales and field marketing
employees are assigned to specific customers in order to understand and work
most effectively with the customer. They assist in the development of in-store
marketing programs (described below) and optimize communication of customers'
needs to the rest of the Company. Industry brokers provide a distribution
channel for some products, primarily those marketed under the Company labels of
Swan(R) and Good Sense(R).
The Company has no long-term contracts with customers that are
considered material. Wal-Mart accounted for 24%, 22% and 19% of net sales for
fiscal years 1998, 1997 and 1996, respectively. Should Wal-Mart's current
relationship with the Company change adversely, the resulting loss of business
could have a material impact on the Company's operating results and financial
position. Such a change is not anticipated in the foreseeable future. No other
customer accounted for more than 10% of net sales.
In contrast to national brand manufacturers who incur considerable
advertising and marketing expenditures that are directly targeted to the end
consumer, the Company's primary marketing efforts channel through its customers,
the retailers and wholesalers, and reach the consumer through in-store marketing
programs. These programs are intended to increase visibility of store brand
products and to invite comparisons to national brand products in order to
communicate store brand value to the consumer. Merchandising vehicles such as
trial sizes, floor displays, bonus sizes, coupons, rebates, store signs and
promotional packs are incorporated into customers' programs. The Company also
provides educational training aids, packaging displays and point of purchase
materials to customers. Because the retailer profit margin for store brand
products is generally higher than for national brand products, retailers and
wholesalers often commit funds for additional promotions. The Company's
marketing efforts are also directed at new product introductions and conversions
and providing market research data. Market research is used to monitor trends
for products and categories. In fiscal year 1998, the Company launched a
consumer marketing campaign to communicate the benefits of store brands under
the banner "We're going to win you over!(TM)". This marketing campaign is one
example of the Company's efforts to increase store brand market share through
innovative retailer - consumer marketing programs.
MANUFACTURING AND DISTRIBUTION
The Company has eleven manufacturing facilities which occupied
approximately 2.6 million square feet at June 30, 1998. Three of these
manufacturing facilities which occupied approximately 1.1 million square feet,
are included in assets held for sale due to the 1998 restructuring. During
fiscal year 1998, the Greenville, South Carolina facility was expanded in order
to support growth in the nutritional product category. A second phase of
expansion is currently underway. The Company has historically supplemented its
production capabilities with the purchase of product from outside sources and
will continue to do so in the future. During fiscal year 1998, the nutritional
facilities generally operated at between 90% and 100% of capacity, the
over-the-counter pharmaceutical facilities generally operated at between 70% and
90% of capacity and the personal care facilities generally operated at between
65% and 75% of capacity. The Company aggressively explores opportunities to
utilize available capacities.
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<PAGE> 12
The Company's manufacturing operations are designed to allow low cost
production of a wide variety of products of different quantities, sizes and
packaging while maintaining a high level of customer service and quality.
Flexible production line change-over capabilities and reduced cycle times allow
the Company to respond quickly to changes in manufacturing schedules. The
manufacturing resource planning (MRP II) system enables the Company to develop
realistic and attainable production schedules and related material and capacity
requirements.
The Company gains competitive advantage by producing many of the labels
and cartons for its products. The Company works closely with customers to ensure
accuracy and reliability of product labeling and packaging which accelerates new
product introductions.
The Company has six regional distribution locations across the United
States and two distribution locations in Mexico that occupied approximately 1.8
million square feet at June 30, 1998. During fiscal year 1998, the Company began
building new distribution centers in Allegan, Michigan and LaVergne, Tennessee
to replace multiple leased facilities in Holland, Michigan and LaVergne,
Tennessee. These new distribution centers are intended to reduce the Company's
overall distribution costs and improve customer service. The LaVergne, Tennessee
distribution center was fully operational in July 1998. The Allegan, Michigan
distribution center will be fully operational by the end of the second quarter
of fiscal year 1999. The LaVergne, Tennessee distribution center is part of the
intended personal care divestiture. Both contract freight and common carriers
are used to deliver products.
COMPETITION
The market for store brand over-the-counter pharmaceutical, personal
care and nutritional products is highly competitive. Competition is based
primarily on price, quality and assortment of products, customer service,
marketing support, and availability of new products. The Company believes it
competes favorably in all of these areas.
The Company's direct competition in store brand products consists
primarily of independent, privately owned companies and is highly fragmented in
terms of both geographical market coverage and product categories. The Company
is the nation's largest manufacturer of store brand over-the-counter
pharmaceutical and personal care products; however, the Company competes in the
nutritional area with companies with broader product lines and larger sales
volumes.
The Company's products also compete with nationally advertised brand
name products. Most of the national brand companies have resources substantially
greater than those of the Company. National brand companies could in the future
seek to compete more directly in the store brand market by manufacturing store
brand products or by lowering prices of national brand products. The Company
believes that this is not likely in the foreseeable future because the
manufacturing methods used by national brand companies are not easily adapted to
the requirements of the store brand market. These requirements include the
ability to produce many different package designs and product sizes. In
addition, the marketing focus of national brand companies is directed towards
the consumer rather than toward the retailer.
MATERIALS SOURCING
Raw materials and packaging supplies are generally available from
multiple suppliers. Certain component and finished goods are purchased rather
than manufactured because of temporary production limitations, FDA restrictions
or economic or other factors. The Company has historically been able to rapidly
react to situations which require alternate sourcing. The Company has good,
cooperative working relationships with its suppliers and has historically been
able to capitalize on economies of scale in the
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<PAGE> 13
purchase of materials and supplies due to the volume of purchases.
TRADEMARKS AND PATENTS
The Company owns certain trademarks and patents; however, its business
as a whole is not materially dependent upon its ownership of any one trademark
or patent, or group of trademarks or patents.
SEASONALITY
The Company's sales are subject to seasonality, primarily with regard
to the timing of the cough/cold/flu season which generally runs from September
through March. In addition, historically, the Company's sales of cough/cold/flu
products have varied from year to year based in large part on the strength and
length of the cough/cold/flu season. Contrary to the Company's prior experience,
total retail sales for cough/cold/flu products (both national brands and store
brands) were less in fiscal year 1998 than in fiscal year 1997, despite the fact
that the fiscal 1998 cough/cold/flu season was more severe than the fiscal year
1997 season. While the Company believes that the severity and length of the
cough/cold/flu season will continue to impact its sales of cough/cold/flu
products, there can be no assurance that the Company's future sales of those
products will necessarily follow historical patterns.
PRODUCT LIABILITY
Over the last ten years the aggregate amount paid in settlement of
liability claims has not been material and the Company is unaware of any suits
which would exceed its insurance limits. The Company believes that its product
liability coverage is adequate to cover anticipated lawsuits.
ENVIRONMENTAL
The Company is subject to various Federal, state and local
environmental laws and regulations. The Company believes that the costs for
complying with such laws and regulations will not be material to the business of
the Company. The Company does not have any material remediation liabilities
outstanding.
REGULATORY
The Company's products are subject to regulation by a number of Federal
and state governmental agencies. The FDA, in particular, regulates the
formulation, manufacture, packaging, labeling, storage and distribution of all
of the Company's products. The Company believes that its products comply in all
material respects with existing regulations.
The majority of the Company's pharmaceutical products are regulated as
"old drugs" subject to the requirements of certain FDA regulations. Such
products must comply with FDA regulations that specify, among other things,
required ingredients, dosage levels, label contents and permitted uses. These
products do not require prior approval from the FDA before they are marketed.
FDA regulations may change from time to time, in which case the Company may be
required to change the formulation, packaging or labeling of any affected
product. Changes in FDA regulations normally have a delayed effective date, so
while the Company may incur costs to comply with such changes, disruption of
distribution is unlikely.
Several store brand pharmaceutical products introduced by the Company
are approved using the ANDA process. The ANDA process reduces the time and
expense related to FDA approval since a comparable product was approved by the
FDA when it was originally introduced. The Company must demonstrate that the
submitted product is equivalent to a product that has previously been approved
by the FDA, and that the
-12-
<PAGE> 14
manufacturing process and other requirements meet FDA standards. This may
require that bioequivalence and/or efficacy studies be performed using a small
number of volunteers in a controlled clinical environment. If the requirements
of the ANDA process are met, the FDA will approve the product without requiring
additional clinical studies to prove safety, since these studies were performed
when the comparable prescription product was approved by the FDA. Approval time
is generally one to four years from the date of submission of the application.
In November 1997, legislation, known as the Food and Drug
Administration's Modernization Act of 1997, was passed by Congress and signed by
the President. Also, in fiscal year 1998 the FDA changed its policy regarding
market exclusivity for products switching from "prescription only" to
"over-the-counter" status. In general, the effect of this legislation and the
FDA policy change is to extend in certain instances the exclusivity granted to
certain "Rx switch" products. Whereas previously the ANDA process took up to
three years, in the future it may take up to four years before the Company will
be able to sell these "switch" products. This will have the effect of deferring
in certain instances the timing of sales for the Company for these types of
products.
Pharmaceutical products must also comply with FDA regulations known as
"Current Good Manufacturing Practices for Finished Pharmaceuticals." The Company
complies with these practices, which require strict quality control standards at
all stages of production, including raw material receipt and storage, and
product manufacturing and labeling, storage and distribution.
The Company's non-drug products, including vitamin and personal care
(cosmetic) products, comply with the applicable standards as required by the
Federal Food, Drug and Cosmetic Act of 1938, as amended. The FDA's most recent
inspection of the Company's manufacturing facilities found the Company in
compliance with these standards.
The FDA has extensive enforcement powers, including the power to seize,
request a recall and prohibit the sale of non-complying products and to halt the
operations of non-complying manufacturers. Although certain of the Company's
products have been subject to recalls in the past, none of these recalls have
involved a product which was likely to cause permanent adverse health
consequences and none were material to the Company's operations. Although the
Company follows strict quality control procedures, there can be no assurance
that any future recall or other FDA action would not be material to the
operations of the Company.
EMPLOYEES
As of June 30, 1998, the Company employed 4,868 permanent and temporary
employees, of whom 442 were engaged in executive, financial and administrative
capacities; 387 in marketing, sales and service; 3,683 in production,
warehousing and distribution; and 356 in research and development and quality
control functions. At June 30, 1998, approximately 394 persons were employed on
a temporary or seasonal basis. Management considers its relations with its
employees to be good. The Company has not been a party to a collective
bargaining agreement in the United States. There are 510 employees in Mexico, of
which 200 are covered by a collective bargaining agreement.
Item 2. Properties.
As of June 30, 1998, the Company owned or leased the following primary
facilities:
<TABLE>
<CAPTION>
Approximate
Location Type of Facility Square Feet Leased or Owned
-------- ---------------- ----------- ---------------
<S> <C> <C> <C>
Allegan, Michigan Corporate Offices and Manufacturing 1,232,000 Owned
Smyrna, Tennessee Manufacturing 820,000 Owned (1)
Monterrey, Mexico Manufacturing 333,000 Owned
Holland, Michigan Manufacturing 120,000 Owned
Greenville, South Carolina Manufacturing 147,300 Owned
Montague, Michigan Manufacturing 84,000 Owned
St. Louis, Missouri Manufacturing and Distribution 196,000 Owned (1)
San Bernardino, California Manufacturing 69,000 Owned (1)
Holland, Michigan Distribution 616,000 Leased(2)
</TABLE>
-13-
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
LaVergne, Tennessee Distribution 521,000 Owned (1)
Cranbury, New Jersey Distribution 222,000 Leased
Fontana, California Distribution 200,000 Leased
Greenville, South Carolina Distribution 115,000 Leased
Mexico City, Mexico Distribution 51,500 Leased
Guadalajara, Mexico Distribution 20,200 Leased
St. Louis, Missouri Distribution 20,000 Leased(1)
Smyrna, Tennessee Offices 40,000 Leased(1)
Monterrey, Mexico Offices 30,400 Leased
Allegan, Michigan Offices and Company Store 19,000 Leased
</TABLE>
(1) These facilities are part of the intended personal care divestiture.
(2) Multiple leased facilities will be closed in fiscal 1999 and operations
transferred to an owned distribution center in Allegan, Michigan which is
under construction at June 30, 1998.
Item 3. Legal Proceedings.
The Company is not a party to any litigation, other than routine
litigation incidental to the business of the Company, except for the litigation
described below. The Company believes that none of the routine litigation,
individually or in the aggregate, will be material to the business of the
Company.
The Company, certain officers and directors (the "officer and director
defendants") and two commercial bank lenders to the Company were named in an
action commenced in the U.S. District Court for the Western District of Michigan
on April 13, 1994 by Grow Group, Inc. ("Grow"), the former owner of the Company,
seeking unspecified damages based upon various legal claims. The relief sought
against the defendants, jointly and severally, includes, among other things,
rescission of the management led purchase of the Company from Grow, an
accounting by the defendants (excluding the Company), money damages and punitive
damages.
Discovery was completed in the fall of 1997. On March 24, 1998, the
U.S. District Court for the Western District of Michigan granted the motions for
summary judgment filed by the two commercial bank lenders and entered judgment
in favor of the commercial bank lenders. On April 13, 1998, the District Court
granted, in part, the motion for summary judgment filed by the Company and the
officer and director defendants, dismissing Grow's claim of breach of joint
venture and Grow's claim for punitive damages. The case proceeded to trial in
June 1998 on Grow's remaining claims against the Company and the individual
defendants. On June 19, 1998, after the close of Grow's case-in-chief, the U.S.
District Court for the Western District of Michigan granted defendants' motion
for judgment as a matter of law and dismissed all of Grow's remaining claims
against the Company and the individual defendants. On July 17, 1998, Grow filed
a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit.
The Notice of Appeal states that Grow appeals from both the March 24, 1998 Order
dismissing Grow's claims against the two commercial bank lenders and the June
19, 1998 Order dismissing Grow's claims against the Company and the individual
defendants.
The Company and the officer and director defendants continue to believe
that Grow's allegations are without merit and will take whatever action
necessary to aggressively defend the case.
Certain shareholders have brought a class action against the Company,
the Selling Shareholders (which include several past and present officers and/or
directors of the Company) and the Underwriters of the October 20, 1993 secondary
offering of outstanding shares of the Company's common stock. The First Amended
Complaint alleged that defendants violated Sections 11, 12(2) and 15 of the
Securities Act of 1933 and Sections 10(b) and 20 of the Securities Exchange Act
of 1934 with respect to the Company's common stock by making untrue statements
of material fact and omitting to state material facts necessary to make the
statements
-14-
<PAGE> 16
made not misleading during the class period from May 11, 1993 through May 10,
1994. The Company and all of the defendants moved to dismiss the First Amended
Complaint on the basis that it failed to state a claim as a matter of law. On
July 25, 1996, the Court entered an order granting in part and denying in part
the motions to dismiss. As part of the order, the Court struck the majority of
claimed non-disclosures with prejudice on the basis that they failed to state a
claim as a matter of law. Discovery on the First Amended Complaint was completed
in September 1997. In October 1997, all of the defendants moved for summary
judgment on the remaining claims of the First Amended Complaint. On June 15,
1998, the Court issued an opinion and order, granting defendants' motions for
summary judgment. Subsequent to fiscal year-end 1998, the Court dismissed the
class action lawsuit against all defendants and entered an order (the "Order")
requiring plaintiffs' attorneys to respond to a motion for sanctions filed by
the Company and certain other defendants within 30 days. Subsequently, the
plaintiffs requested that the Court reconsider the Order and also requested that
the Court temporarily vacate the judgment while it considers defendants' request
for sanctions. The Court then issued a second order vacating the judgment "in
order to avoid piecemeal appeals on the merits and this Court's ruling on
Defendants' request for sanctions." The Court has not yet ruled on plaintiffs'
request to reconsider the Order or defendants' request for sanctions. If the
Court denies plaintiffs' request to reconsider, the plaintiffs will have the
option to appeal the dismissal of their case. In the event that the plaintiffs
appeal this suit, the Company intends to continue to defend the case vigorously
as it believes the suit is without merit.
In a related matter, the Company received a letter from a shareholder
in May 1995, demanding that the Company (a) bring suit against the other
defendants in the purported class action previously filed in order to protect
the Company from any expense or liability arising out of that suit; (b)
invalidate the indemnification agreement between the Company and the other
defendants; and (c) bring suit against each officer and director, and their
trusts, who sold stock in the October 1993 public offering to recover any
proceeds unlawfully received by them as a result of any alleged breach of
fiduciary duties owed to the Company. In response to that demand, the Company
directed a member of its Board of Directors, who is its designated Independent
Director under Michigan law, to investigate the demand and make a binding
determination under Michigan law as to whether maintenance of the derivative
claims is in the Company's best interests. Following his investigation, the
Independent Director determined that maintenance of the derivative claims is not
in the Company's best interests. The shareholder filed a derivative action in
December 1995. The Company has moved to dismiss the suit pursuant to Section 495
of the Michigan Business Corporation Act (Mich. Comp. Laws Ann. Section
450.1495) on the basis that the Company's Independent Director has determined
that maintenance of the derivative action is not in the Company's best
interests. The plaintiff filed an amended complaint on March 13, 1997 and the
Company has filed a motion to dismiss the amended complaint. The motion has not
been ruled on by the Court. On January 23, 1998, the Court entered an order
staying the derivative action pending resolution of the related class action.
The Court's order provides that the parties are to submit a joint status report
setting forth their positions regarding discovery within 30 days after a final
judgment is entered in the related class action case.
The Company believes that the derivative action is without merit and
intends to defend it vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the vote of security holders during the
fourth quarter of fiscal year 1998.
Additional Item. Executive Officers of the Registrant.
The executive officers of the Company and their ages and positions as
of September 1, 1998 were:
<TABLE>
<CAPTION>
NAME AGE POSITION
----- --- --------
<S> <C> <C>
James H. Bloem.................. 48 President of Personal Care Operations
</TABLE>
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<PAGE> 17
<TABLE>
<S> <C> <C>
Craig G. Hammond................ 54 Executive Vice President and Chief Operations Officer
Michael J. Jandernoa............ 48 Chairman of the Board of Directors, President and
Chief Executive Officer
Mark P. Olesnavage.............. 45 President, Customer Business Development
Thomas J. Ross.................. 40 Vice President, Finance
</TABLE>
In June 1998 Mr. Bloem was appointed President of the Company's
personal care operations. It is currently contemplated that Mr. Bloem will lead
a team of executives who are expected to manage the personal care company
subsequent to its divestiture. From August 1995 to June 1998 Mr. Bloem served as
Executive Vice President of the Company. Prior to that time he served as Vice
President, Chief Financial Officer and Treasurer of Herman Miller, Inc., a
leading office furniture manufacturer, where he also served in other positions
of increasing responsibility since 1986. He is a member of the Board of
Directors of Warner Chilcott plc.
Mr. Hammond was appointed Executive Vice President and Chief Operations
Officer in October 1995. Prior to that time he served as a Senior Vice President
with Borden, a consumer dairy products company, where he also held other
positions of increasing responsibility since January of 1994. Previously Mr.
Hammond was with Kraft General Foods from 1990 to 1994 where he held various
executive positions in Operations Management. When he left Kraft, Mr. Hammond
held the position of Vice President.
Mr. Jandernoa was elected a director in January 1981, Chief Executive
Officer in February 1986 and Chairman of the Board of Directors in October 1991.
From January 1983 to October 1991, Mr. Jandernoa served as President of the
Company and was reelected President of the Company in September 1995. Prior to
January 1983, Mr. Jandernoa served in various executive capacities with the
Company since 1979. Mr. Jandernoa is a director of Old Kent Financial
Corporation and also serves on the Board of Advisors of the National Association
of Chain Drugstores.
Mr. Olesnavage was appointed Executive Vice President in January 1993
and in June 1995 was appointed President of Customer Business Development. He
served as President of the over-the-counter pharmaceutical operations from
February 1994 to June 1995. He served as Vice President of Pharmaceutical
Business Development from July 1992 to January 1993 and as Vice
President-Marketing from June 1987 to July 1992. Previously he had been Director
of Marketing of the Company since 1981. He is a member of the Board of Directors
of the Generic Pharmaceutical Industry Association and also is a member of the
Board of Directors of the Non Prescription Drug Manufacturers Association.
Mr. Ross was hired as Director of Investor Relations in June 1992,
promoted to Vice President of Investor Relations and Reporting in July 1996 and
appointed Vice President of Finance in September 1997. Prior to 1992, Mr. Ross
served as Assistant Treasurer at Arbor Drugs, Inc. where he was responsible for
treasury, finance, SEC reporting and investor relations.
-16-
<PAGE> 18
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock was first quoted and began trading on the NASDAQ
National Market System on December 17, 1991 under the symbol "PRGO."
Set forth below are the high and low closing sales prices for the Company's
common stock as reported on the NASDAQ National Market System for the last eight
quarters:
Fiscal Year Ended June 30, 1998: High Low
- -------------------------------- ---- ---
First Quarter $ 17-1/4 $ 12-3/8
Second Quarter $ 17 $ 12-3/4
Third Quarter $ 14-1/4 $ 9-5/16
Fourth Quarter $ 13-5/16 $ 9-5/8
Fiscal Year Ended June 30, 1997: High Low
- -------------------------------- ---- ---
First Quarter $ 11-1/2 $ 8-1/4
Second Quarter $ 10-5/8 $ 8-5/8
Third Quarter $ 12-7/8 $ 8-7/8
Fourth Quarter $ 13-1/8 $ 10
The number of record holders of the Company's common stock as of June 30,
1998 was 2,119.
Historically, the Company has not paid dividends on its common stock and
has no present intention of paying dividends. The declaration and payment of
dividends and the amount paid, if any, is subject to the discretion of the
Company's Board of Directors and will necessarily be dependent on the earnings,
financial condition and capital and surplus requirements of the Company and any
other factors the Board of Directors may consider relevant. While the Company's
credit agreement does not prohibit the Company from paying dividends, the future
payment of dividends could be restricted by financial maintenance covenants
contained in the credit agreements.
In May 1997 the Company announced a common stock repurchase program. The
program calls for the repurchase of up to 7.5 million shares subject to market
conditions. Purchases are made in the open market. The repurchased stock is
retired. Through September 15, 1998, the Company has repurchased 3.7 million
shares.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included herein in Item 8. The consolidated statement of income data set forth
below with respect to the fiscal years ended June 30, 1998, 1997 and 1996 and
the consolidated balance sheet data at June 30, 1998 and 1997 are derived from,
and are qualified by reference to, the audited consolidated financial statements
included in Item 8 of this report and should be read in conjunction with those
financial statements and notes thereto. The consolidated statement of income
data for the Company set forth below with respect to the fiscal years ended June
30, 1995 and 1994, and the consolidated balance sheet data for the Company at
June 30, 1996, 1995 and 1994, are derived from audited consolidated financial
statements of the Company, not included herein.
-17-
<PAGE> 19
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------
1998(1) 1997 1996 1995(2) 1994
--------- --------- --------- --------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $ 902,637 $ 844,591 $ 778,121 $ 717,077 $ 669,332
Cost of sales 670,775 615,720 574,806 520,265 474,958
--------- --------- --------- --------- ---------
Gross profit 231,862 228,871 203,315 196,812 194,374
Operating expenses
Distribution 31,995 28,073 24,929 20,037 17,742
Research and development 15,942 13,651 10,445 8,679 6,233
Selling and administrative 113,584 103,104 88,629 86,602 80,150
Restructuring and redesign 122,529 5,503 4,491 4,904 -
Unusual litigation 9,585 6,367 6,600 1,043 -
--------- --------- --------- --------- ---------
293,635 156,698 135,094 121,265 104,125
--------- --------- --------- --------- ---------
Operating (loss) income (61,773) 72,173 68,221 75,547 90,249
Interest and other expense 4,219 1,306 5,679 5,413 3,390
--------- --------- --------- --------- ---------
(Loss) income before income taxes (65,992) 70,867 62,542 70,134 86,859
Income tax (benefit) expense (14,356) 25,875 22,700 25,700 32,100
--------- --------- --------- --------- ---------
Net (loss) income $ (51,636) $ 44,992 $ 39,842 $ 44,434 $ 54,759
========= ========= ========= ========= =========
Basic (loss) earnings per share $ (.69) $ .59 $ .52 $ .59 $ .73
Diluted (loss) earnings per share (.69) .58 .52 .58 .71
Weighted average shares outstanding for the
period - used for "basic" EPS calculation 75,302 76,522 76,224 75,934 75,214
Weighted average shares outstanding for the
period - used for "diluted" EPS calculation 75,302 77,274 77,200 77,190 77,586
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1998(1) 1997 1996 1995 1994
----------- ------- -------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $230,934 $169,631 $166,929 $170,131 $139,834
Goodwill, net 20,741 40,834 42,961 45,088 30,235
Total assets 595,861 568,377 549,395 555,733 474,989
Long-term debt(3) 81,619 1,840 49,140 99,440 73,230
Shareholders' equity 345,078 425,875 381,160 340,617 295,508
</TABLE>
- ----------------
(1) Includes the financial impact of the June 1998 restructuring discussed in
more detail at Item 7. The pre-tax charge was $121,966, which amounted to
$86,894, or $1.16 per share on an after-tax basis. Excluding the effects of
the restructuring charge, net income would have been $35,258 or $.47 per
share.
(2) The Company's net sales and results of operations were impacted by the
acquisition of certain assets of Vi-Jon Laboratories, Inc. in January 1995.
(3) Includes current installments.
-18-
<PAGE> 20
Item 7. Management's Discussion and Analysis of Results of Operations,
Financial Condition and Outlook for 1998.
Dollar amounts in thousands
RESULTS OF OPERATIONS
The following table sets forth, for fiscal years 1998, 1997 and 1996,
certain items from the Company's consolidated statements of income expressed as
a percentage of net sales:
-------------------------------------------------------------------------
Year Ended June 30,
-------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.3 72.9 73.9
---------- ---------- ----------
Gross profit 25.7 27.1 26.1
---------- ---------- ----------
Operating expenses:
Distribution 3.5 3.3 3.2
Research and development 1.8 1.6 1.3
Selling and administrative 12.6 12.2 11.4
Restructuring and redesign 13.6 0.7 0.6
Unusual litigation 1.0 0.8 0.8
---------- ---------- ----------
32.5 18.6 17.3
---------- ---------- ----------
Operating (loss) income (6.8) 8.5 8.8
Interest and other expense 0.5 0.1 0.8
---------- ---------- ----------
(Loss) income before income taxes (7.3) 8.4 8.0
Income tax (benefit) expense (1.6) 3.1 2.9
---------- ---------- ----------
Net (loss) income (5.7)% 5.3% 5.1%
========== ========== ==========
- -------------------------------------------------------------------------------
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
RESTRUCTURING
In June 1998 the Company announced a major restructuring plan which
involves the closing of certain personal care manufacturing facilities and the
intention to divest the personal care business. Although personal care products
have historically delivered lower profit margins than OTC pharmaceutical and
nutritional products, the Company had believed that this performance could be
improved to acceptable levels. In the latter half of fiscal year 1998, personal
care profit margins deteriorated due to competition and cost increases,
resulting in the Company's decision to divest the personal care business and
concentrate on OTC pharmaceutical products, nutritional products and its
international business. The Company believes that focusing on these core
businesses will provide the greatest value to its shareholders. A pre-tax
charge of $121,966, which included $109,707 for impairment of assets and a
reserve of $12,259 for anticipated incremental cash expenditures, recorded in
accordance with Emerging Issues Task Force ("EITF") 94-3, was recorded in June
1998 related to this restructuring. The components of the charge and related
reserve are discussed below. The restructuring charge is based on management's
current estimate of the fair market value of the assets and business to be sold
and is subject to change. The impairment of long-lived assets was determined by
comparing the carrying value of the related assets to their fair value less cost
to sell. Assets held for sale of $66,398 are no longer being depreciated or
amortized and are included in the current assets section of the consolidated
balance sheet at June 30, 1998. The restructuring plan is intended to be
completed
-19-
<PAGE> 21
in fiscal year 1999 and the Company anticipates that it will begin to
realize benefits primarily in the second half of fiscal year 1999. Costs that
will be expensed as incurred in fiscal year 1999 in accordance with EITF 94-3
are approximately $2,000 for net operating losses and $2,000 for plant
inefficiencies.
In order to improve the operating efficiency of the personal care
business and to maximize its sale value, the Company decided to close
manufacturing facilities in California and Missouri. A pre-tax charge of $22,836
was recorded in connection with these closures. The components of the charge are
$20,556 for impairment of assets, $1,625 for termination benefits for 165
employees primarily in the manufacturing employee group and $655 for other
facilities closing costs. A reserve of $2,280 was recorded for the anticipated
incremental cash expenditures related to the termination benefits and other
facilities closing costs.
The decision to divest the personal care business was reached after
extensive review of its operations and expected profitability. Although personal
care estimated cash flows in previous years were sufficient to recoup the
Company's investment in the personal care business, the Company decided to
divest the personal care business and reallocate resources to its more
profitable OTC pharmaceutical and nutritional business and to international
opportunities. A pre-tax charge of $99,130 was recorded for this intended
divestiture. The components of the charge are $89,151 for impairment of assets
and $9,979 for other anticipated incremental transition costs. A reserve of
$9,979 was recorded for anticipated incremental cash expenditures related to the
transition costs. Net sales for the personal care business were $212,261,
$206,480 and $212,234 for fiscal years 1998, 1997 and 1996, respectively. The
Company does not maintain operating income information by its three main product
categories (OTC pharmaceutical, nutritional and personal care products),
however, based on the incremental approach, the Company estimates that the
pre-tax operating losses for the personal care business were approximately
$8,000, $2,000 and $5,000 for fiscal years 1998, 1997 and 1996, respectively.
The Company estimates that it will realize operating income improvement of
approximately $6,000 to $7,000 for fiscal year 1999 and approximately $7,000 to
$10,000 on an annualized basis in future years related to this divestiture.
During the year, the Company incurred restructuring and redesign charges of
$563 related to its business process redesign effort which were expensed as
incurred. The Company also incurred $647 related to its 1995 restructuring and
$172 related to the closing of its truck fleet operations, which were charged
against reserves established in previous years.
RESULTS OF OPERATIONS
FISCAL YEAR 1998
The Company's net sales increased by $58,046 or 7% to $902,637 during
fiscal year 1998 from $844,591 in fiscal year 1997. The increase was primarily
due to an increase of 37% or $41,301 in sales to existing customers of
nutritional products, which consist primarily of vitamins and nutritional
supplements. The sales increase was also due to an increase in international
sales, primarily related to a Mexican subsidiary purchased in September 1997,
and increases in unit sales to existing customers of hair care products,
partially offset by decreases in certain OTC pharmaceutical products, primarily
dermatologic products, laxatives and cough and cold products.
Gross profit increased $2,991 or 1% for fiscal year 1998 compared to
fiscal year 1997. The gross profit percent to net sales for fiscal year 1998 was
25.7% compared to 27.1% for fiscal year 1997. The decrease in gross profit
percentage was primarily due to decreases in sales of higher margin OTC
products, increases in sales of lower margin personal care and vitamin products,
competitive pricing pressures and outsourcing costs incurred to meet customer
needs.
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Operating expenses consist of distribution, research and development,
selling and administration, restructuring and redesign and unusual litigation
costs. Excluding restructuring and redesign and unusual litigation costs,
operating expenses were 17.9% of net sales for fiscal year 1998 compared to
17.1% for fiscal year 1997.
Distribution expenses increased $3,922 or 14% during fiscal year 1998
to $31,995 primarily due to increased warehousing costs associated with higher
inventory levels and increased freight costs due to customer service
requirements. Distribution expenses were 3.5% of net sales for fiscal year 1998
compared to 3.3% for fiscal year 1997.
Research and development expenses increased $2,291 or 17% to $15,942
for fiscal year 1998 due to planned increases in new product development
activity. These new products, which are primarily OTC pharmaceutical products
switching from "prescription only" to "over-the-counter" status, are approved
through the FDA's ANDA process. Research and development expenses were 1.8% of
net sales for fiscal year 1998 compared to 1.6% for the prior fiscal year.
Selling and administrative expenses increased $10,480 or 10% for fiscal
year 1998 to $113,584 primarily due to increased marketing and sales promotion
activity, offset by a decrease in administrative expenses, primarily incentive
compensation. Selling and administrative expenses were 12.6% of net sales for
fiscal year 1998 compared to 12.2% for fiscal year 1997.
Restructuring and redesign expenses were $122,529 for fiscal year 1998
compared to $5,503 for fiscal year 1997. The fiscal year 1998 expense consisted
of $121,966 for the 1998 restructuring as described above and $563 for the
Company's business process redesign effort. The fiscal year 1997 expense was
primarily due to the business process redesign effort and the closing of the
Company's truck fleet operations.
Unusual litigation costs of $9,585 for fiscal year 1998, compared to
$6,367 for the prior fiscal year, were primarily due to certain lawsuits
pertaining to a purported shareholders' class action, a related demand for a
derivative action and a suit by the former owners of the Company filed against
the Company, certain officers and directors and other defendants. In the fourth
quarter of fiscal year 1998, the action filed by the former owners of the
Company, Grow Group, Inc., against the Company and certain of its present and
former officers and directors, was dismissed. Subsequent to fiscal year-end 1998
the Court dismissed the class action lawsuit. The legal expenses recorded do not
include estimates of possible reimbursement from insurance coverage. See Note F
to the consolidated financial statements for a further discussion of unusual
litigation.
Interest expense increased $843 to $2,149 for fiscal year 1998
primarily due to higher borrowing levels.
Other expense increased from zero for fiscal year 1997 to $2,070 for
fiscal year 1998 primarily due to a charge taken of $1,250 for the Company's
Russian investment. See the Outlook section for a further discussion of
anticipated charges from this Russian investment.
The effective tax rate was 21.8% for fiscal year 1998 compared to 36.5%
for fiscal year 1997. The lower effective rate for fiscal year 1998 is primarily
due to the write-off of goodwill included in the restructuring charge.
FOURTH QUARTER - FISCAL YEAR 1998
Excluding the 1998 restructuring charge of $121,966, the Company
incurred a net loss of $1,867 for the quarter compared to net income of $8,984
for the same period last year. The loss was unusual for the
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Company and the factors related to this loss are discussed below. The Company
anticipates that this trend will not continue in fiscal year 1999 for normal
operations due to the 1998 restructuring and other factors. The Company may,
however, incur an unusual charge of up to $14,000 in the first quarter of fiscal
year 1999 for the write-off of accounts receivable, inventory and a note
receivable related to its Russian investment. See the Outlook section for a
further discussion of this potential charge.
The Company's net sales increased $18,278 or 9% to $214,450 for the
quarter primarily due to an increase in unit sales to existing customers of
nutritional products and an increase in international sales, partially offset by
a decrease in certain OTC pharmaceutical products.
Gross profit decreased $3,112 for the quarter. The gross profit percent
to net sales for the quarter was 23.3% compared to 27.0% for the same period
last year. The decrease was primarily due to lower margins for personal care
products, decreases in sales of higher margin OTC products, increases in sales
of lower margin personal care and vitamin products, competitive pricing
pressures and outsourcing costs incurred to meet customer demands.
Operating expenses excluding restructuring and redesign and unusual
litigation costs increased $9,647 to $46,132 for the quarter. Operating expenses
excluding restructuring and redesign and unusual litigation costs were 21.5% of
net sales for the quarter versus 18.6% of net sales for the same period last
year.
Distribution expenses increased $1,760 to $8,348 for the quarter
primarily due to increased warehousing costs associated with higher inventory
levels and increased freight costs due to customer service requirements.
Distribution expenses were 3.9% of net sales for the quarter compared to 3.4% of
net sales for the same period last year.
Research and development expenses increased $2,965 to $6,599 for the
quarter primarily due to planned increases in new product development activity.
Research and development expenses were 3.1% of net sales for the quarter
compared to 1.8% of net sales for the same period last year.
Selling and administrative expenses increased $4,922 to $31,185 for the
quarter primarily due to increased marketing and sales promotion activity.
Selling and administrative expenses were 14.5% of net sales for the quarter
compared to 13.4% of net sales for the same period last year.
Restructuring and redesign expenses were $121,936 for the quarter
primarily due to the restructuring as described above.
Unusual litigation costs increased $2,662 to $4,230 for the quarter,
primarily due to certain lawsuits as described above. See Note F to the
consolidated financial statements for a further discussion of unusual
litigation.
Interest expense was $715 for the quarter compared to zero for the same
quarter last year due to higher borrowing levels. Other expense was $1,752 for
the quarter versus other income of $139 for the same period last year. In the
fourth quarter, the Company recorded a $1,250 reserve against its Russian
investment.
The effective tax rate was 28.9% for the quarter versus 36.6% for the
same period last year. The lower rate for the fourth quarter in fiscal year 1998
is primarily due to the write-off of goodwill included in the restructuring
charge.
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FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
The Company's net sales increased by $66,470 or 9% to $844,591 during
fiscal year 1997 from $778,121 in fiscal year 1996. The increase was primarily
due to new product sales and to increases in unit sales to existing customers of
vitamin, cough and cold, analgesic and dermatologic products and pregnancy test
kits, partially offset by decreases in feminine hygiene and personal care
products. New products included naproxen sodium (a non-aspirin analgesic
comparable to Aleve(R)), Minoxidil (a hair growth stimulant comparable to
Rogaine(R) and pregnancy test kits. Sales of cough and cold products were
positively impacted by a longer cough/cold/flu season in fiscal year 1997 as
compared to fiscal year 1996. Sales of certain personal care products decreased
due to certain customers' reactions to price increases that were initiated in
fiscal year 1996 to cover raw material cost increases on related products.
Gross profit increased $25,556 or 13% for fiscal year 1997 compared to
fiscal year 1996. The gross profit percentage for fiscal year 1997 was 27.1%
versus 26.1% in fiscal year 1996. The increase in gross profit percentage was
due to increased sales of higher margin products such as cough and cold and
certain new products and reductions in costs due to productivity improvements,
which were partially offset by decreased sales of higher margin feminine hygiene
products.
Operating expenses increased $21,604 or 16% for fiscal year 1997
compared to fiscal year 1996. Operating expenses as a percentage of net sales
were 18.6% for fiscal year 1997 versus 17.3% for the same period in fiscal year
1996. Distribution expense increased $3,144 to 3.3% of net sales during fiscal
year 1997 from 3.2% of net sales in fiscal year 1996. Research and development
costs increased $3,206 to 1.6% of net sales during fiscal year 1997 compared to
1.3% of net sales in fiscal year 1996, primarily due to new product development
requiring FDA approval. Selling and administrative expenses increased $14,475 to
12.2% of net sales for fiscal year 1997 versus 11.4% of net sales for fiscal
year 1996. The increase was primarily due to higher wages and costs to support
higher sales and to incentive compensation related to improved productivity and
operating performance. Restructuring and redesign costs increased $1,012 to 0.7%
of net sales during fiscal year 1997 compared to 0.6% of net sales for the same
period in 1996. Fiscal year 1997 restructuring and redesign charges primarily
related to costs incurred in the Company's business process redesign efforts and
to costs incurred for the closing of the Company's Cumberland Freight Line truck
fleet operations. See Note J to the consolidated financial statements. Unusual
litigation costs of $6,367 and $6,600 for fiscal years 1997 and 1996,
respectively, were primarily associated with certain lawsuits pertaining to a
purported shareholders' class action, a related demand for a derivative action
and a suit by the former owners of the Company filed against the Company,
certain officers and directors and other defendants. The legal expenses recorded
do not include estimates of possible reimbursement from insurance coverage. See
Note F to the consolidated financial statements.
Interest expense decreased from $5,679 in fiscal year 1996 to $1,306 in
fiscal year 1997 due to lower borrowing levels and slightly lower interest
rates.
The effective income tax rate was 36.5% for fiscal year 1997 versus
36.3% for fiscal year 1996.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1998, working capital increased $25,516 and cash
flow from operating activities was $22,341. Changes in working capital are net
of the effects of the business acquisition as described below and exclude the
effects of the 1998 restructuring as described in the Results of Operations.
Accounts receivable, net of allowances, increased $5,464 due to sales increases
and inventories increased $63,221 to support customer service requirements and
in preparation for the intended conversion of the Company's software system
early in fiscal year 1999. Accounts payable increased $30,440 primarily due to
increased
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purchasing activity related to production increases. Accrued payroll and related
taxes decreased $4,598, accrued expenses decreased $1,889 and income taxes
increased $1,843.
The Company invested in a number of projects during the year in order
to support the business process redesign effort and ongoing growth in sales.
Capital expenditures for facilities and equipment were $70,699 for fiscal year
1998, primarily for construction of two distribution centers, expansion of the
manufacturing facility for nutritional products, and capital costs related to
the implementation of an integrated software package.
In September 1997, the Company acquired 87.8% of the outstanding shares
of Quimica y Farmacia, S.A. de C.V. for approximately $16,000. Quimica y
Farmacia, S.A. de C.V. is a pharmaceutical manufacturer and distributor located
in Mexico. The assets, liabilities, sales and profits of this acquisition, which
are not considered material to the Company, are included in the consolidated
financial statements since the acquisition date.
During fiscal year 1998 the Company funded its Russian investment
$4,735 through a note receivable. At fiscal year-end 1998, the Company recorded
a $1,250 charge to reserve against its potential exposure related to this
Russian investment. See the Outlook section for a potential fiscal year 1999
write-off of up to $14,000 related to this Russian investment.
During fiscal year 1998, the Company purchased 2,116 shares of common
stock for $30,195 under its common stock repurchase program. The common stock
was retired.
Long-term debt increased $81,619 during fiscal year 1998 as the Company
drew on its $150,000 line of credit and its $55,000 uncommitted lines of credit
to fund, primarily, planned capital expenditures, the Company's stock repurchase
program, the acquisition of Quimica y Farmacia, S.A. de C.V. and increased
production levels. At June 30, 1998 the Company had $110,000 available on the
line of credit and $13,381 available from uncommitted credit facilities with two
financial institutions. See Note C to the consolidated financial statements for
a description of the credit facilities.
As previously discussed, the Company intends to divest its personal
care business in fiscal year 1999. The Company anticipates that it will use the
proceeds from the divestiture to fund acquisitions which will further expand the
OTC pharmaceutical, nutritional and international business, new drug
technologies and its common stock repurchase program.
YEAR 2000 COMPLIANCE
In 1997, the Company purchased a new integrated software package which
is intended to improve the Company's data systems and which will assist the
Company in achieving its business process redesign goals. This software package,
which was originally intended to be completed near the end of calendar year
1998, was implemented within that timeframe. The vendors of the new software
package and the software system being replaced have indicated that these systems
are year 2000 compliant. The new software package will replace a significant
portion of the Company's current software systems. During fiscal year 1998, the
Company developed a plan to review all of the computer-based systems that will
remain after conversion to the new integrated software package in order to
determine modifications needed to those systems for the year 2000. The plan
includes a review of remaining software, infrastructure systems, manufacturing
systems, security systems and office equipment. The Company has completed its
identification of the systems that need to be reviewed and is beginning the
process of reviewing each system and area of the Company. The Company expects
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 bringing those
areas into compliance before the year 2000. These action plans will include a
timetable for remediation and testing of systems, as well as contingency plans
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<PAGE> 26
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, if incurred, 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.
During fiscal year 1998, the Company put into action a plan to review
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.
During fiscal year 1998, the Company developed a plan to determine the
year 2000 compliance status of its key suppliers and customers. 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 did not have a contingency plan in place
related to those key suppliers or customers because the Company was unaware of
the noncompliance, the Company's results of operations and financial condition
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.
OUTLOOK - FISCAL YEAR 1999
The Company intends to continue its mission to provide high-quality,
cost effective health care solutions worldwide at a profitable growth rate. The
Company believes that the decision to divest the personal care business and
concentrate on its core businesses of OTC pharmaceuticals and nutritional
products, and to expand these businesses internationally, will provide the
greatest value to shareholders in fiscal year 1999 and beyond. The Company
anticipates that it will divest its personal care business no later than the
second half of fiscal year 1999. It is expected that the fiscal year 1999
results of operations for the Company will include approximately one half year
of the results of operations for the personal care business. As such, the
Company does not expect to realize fully the benefits of this divestiture in
fiscal year 1999; however, it is anticipated that operating income will increase
by approximately $6,000 to $7,000 in fiscal year 1999 as a result of the
divestiture. Net operating losses of approximately $2,000 and restructuring
expenses of approximately $2,000 are expected to be expensed as incurred in
fiscal year 1999 in accordance with accepted accounting pronouncements.
The Company will continue to invest in research and development with a
focus on OTC pharmaceutical products that are switching from "prescription only"
to "over-the-counter" status. These products require approval by the FDA through
its ANDA process. In November 1997, legislation, known as the Food and Drug
Administration's Modernization Act of 1997, was passed by Congress and signed by
the President. In general, the effect of this legislation is to extend in
certain instances the exclusivity granted to certain "prescription only"
products. Whereas previously the ANDA process took approximately up to three
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years, in the future it may take up to four years before the Company will be
able to sell these "switch" products. This will have the effect of deferring in
certain instances the timing of sales for the Company for these types of
products.
Total Company net sales in fiscal year 1999 are expected to be close to
fiscal year 1998 levels, with strong sales from continuing businesses nearly
offsetting the negative net sales impact of the intended personal care
divestiture in the last half of fiscal year 1999. Net sales for the OTC
pharmaceuticals business are expected to be strong in fiscal year 1999,
primarily due to the introduction of new ANDA approved products such as the
store brand equivalents of Tagamet(R) HB and Children's Motrin(R) Suspension. It
is anticipated that net sales of nutritional products will continue to be strong
in fiscal year 1999 as the Company realizes a full year's sales of certain
"super" vitamins that were introduced last year. The Company also anticipates
that other new product introductions and increases in unit sales of current
products to existing customers will contribute to overall sales increases in
both product categories. International sales are expected to be strong in Mexico
and Canada, countries where the Company currently conducts business.
International sales from the Company's Russian investment in Russia/Ukraine are
expected to be soft due to the collapse of the Russian economy in August 1998.
The Company anticipates that both gross profit and gross profit as a
percent of net sales will increase in fiscal year 1999, primarily due to reduced
sales of lower margin personal care products and increased sales of higher
margin OTC pharmaceutical and nutritional products. The Company continues to
experience competitive pricing pressures; however, it is anticipated that the
business process redesign effort and employee initiated task force programs will
somewhat reduce this negative margin impact on the continuing business. With
respect to operating expenses, research and development expenses related to new
product introductions should continue to increase; distribution expenses are
expected to decrease as a percentage of net sales due to improved operational
efficiencies; and selling and administrative expenses as a percentage of net
sales are expected to increase from fiscal year 1998.
As noted above, the Company conducts business in the Russia/Ukraine
through its Russian investment. Due to the collapse of the Russian economy in
August 1998, the Company anticipates that it may take an unusual charge of up to
$14,000 in the first quarter of fiscal year 1999 for the write-off of accounts
receivable, inventories and a note receivable related to this Russian
investment.
Interest expense will be higher in fiscal year 1999, however the
Company anticipates that borrowing levels will be reduced throughout the year
and that the fiscal year-end 1999 borrowing level will be lower than at fiscal
year-end 1998 assuming no material acquisitions. Cash flows from operations and
the intended divestiture of the personal care business are expected to
substantially fund working capital and capital expenditures. The Company may,
however, draw from its available credit facilities, as required.
Unusual litigation costs related to existing lawsuits are expected to
be approximately $4,000 for fiscal year 1999, before consideration of possible
insurance reimbursement.
The Company intends to spend approximately $60,000 during the year for
capital additions and improvements, primarily for completion of a distribution
facility, expansion of the manufacturing facility for nutritional products and
equipment for OTC and nutritional products.
The Company will continue its stock repurchase program, purchasing
shares in the open market, subject to market conditions.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk.
Not applicable.
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Additional Item. Cautionary Note Regarding Forward-Looking 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 anticipated in
such forward-looking statements.
Personal Care Divestiture
In June 1998 the Company announced its intention to divest of its
personal care business. The resulting write-down of assets and tax effects are
based on management's current estimate of the fair market value of the personal
care net assets, less cost to sell. If the actual net sales price for the
personal care business is significantly different from this estimate, the
results of operations and financial position of the Company could be materially
affected.
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 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 estimate in future periods. Growth opportunities for the
products in which the Company currently has a significant store brand market
share (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/flu season, the
timing of new product introductions by the Company 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 trade dress 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.
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The FDA will from time to time mandate packaging or labeling changes.
Such changes could be related to safety or effectiveness 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 the FDA,
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.
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. The Company's primary markets to date have been Mexico, Canada and
Russia/Ukraine. The Company's international sales are not material. 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.
Product Availability
In the past, supplies of certain raw materials, bulk tablets and
finished goods purchased 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, bulk tablets
and finished goods. 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
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property matters, workers' compensation and product liability. Currently, the
most significant litigation relates to a purported class action, a derivative
action and a complaint related to the purchase of the Company from its former
owners. The class action was dismissed by the courts; however, the Court
temporarily vacated the judgment while it considers the defendants' request for
sanctions. The derivative action has been stayed pending resolution of the class
action. The complaint by the former owners was dismissed, however the plaintiffs
have appealed the decision. See Item 3, Legal Proceedings for a further
discussion of litigation. 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 primarily on price, quality and assortment of products, customer service,
marketing support and availability of new products. 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 cost
increases to its customers. 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.
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 24% of total revenues. Should Wal-Mart's current relationship with
the Company change adversely, the resulting loss of business could have a
material adverse 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 variable interest
rate factors. 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.
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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 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, redesign and other unusual
charges and capital expenditures. Additionally, borrowings 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 evaluated, 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.
Year 2000 Issues
The Company has developed a plan to attempt to determine the year 2000
compliance status of its key suppliers and customers. The Company is developing
a contingency plan to deal with those key suppliers and customers that the
Company determines will be noncompliant as of the year 2000. The Company cannot
however, guarantee the compliance of its key suppliers and customers. In the
event that certain key suppliers or customers are not year 2000 compliant and
the Company does not have a contingency plan in place to deal with those
suppliers or customers, the Company's results of operations and financial
condition could be significantly negatively impacted.
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.
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.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data for the Company are on the
following pages 32 through 50.
-30-
<PAGE> 32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants................................................... 33
Consolidated Statements of Income for the years ended June 30, 1998,
1997 and 1996...................................................................................... 34
Consolidated Balance Sheets as of June 30, 1998 and 1997............................................. 35
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1998, 1997 and 1996....................................................................... 36
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1997 and 1996...................................................................................... 37
Notes to Consolidated Financial Statements........................................................... 38
</TABLE>
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<PAGE> 33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Perrigo Company
Allegan, Michigan
We have audited the accompanying consolidated balance sheets of Perrigo
Company and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Perrigo
Company and subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
By: /s/BDO Seidman, LLP
---------------------------
BDO Seidman, LLP
Grand Rapids, Michigan
August 26, 1998
-32-
<PAGE> 34
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 902,637 $ 844,591 $ 778,121
Cost of sales 670,775 615,720 574,806
---------- ---------- ----------
Gross profit 231,862 228,871 203,315
---------- ---------- ----------
Operating expenses
Distribution 31,995 28,073 24,929
Research and development 15,942 13,651 10,445
Selling and administrative 113,584 103,104 88,629
Restructuring and redesign 122,529 5,503 4,491
Unusual litigation 9,585 6,367 6,600
---------- ---------- ----------
293,635 156,698 135,094
---------- ---------- ----------
Operating (loss) income (61,773) 72,173 68,221
Interest and other expense 4,219 1,306 5,679
---------- ---------- ----------
(Loss) income before income taxes (65,992) 70,867 62,542
Income tax (benefit) expense (14,356) 25,875 22,700
---------- ---------- ----------
Net (loss) income $ (51,636) $ 44,992 $ 39,842
========== ========== ==========
Basic (loss) earnings per share $ (0.69) $ 0.59 $ 0.52
========== ========== ==========
Diluted (loss) earnings per share $ (0.69) $ 0.58 $ 0.52
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-33-
<PAGE> 35
PERRIGO COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30,
ASSETS 1998 1997
---- ----
Current assets
<S> <C> <C>
Cash and cash equivalents $ 1,496 $ 14,356
Accounts receivable, net of allowances of $2,691 and
$3,026, respectively 74,601 93,367
Inventories 181,467 161,473
Prepaid expenses and other current assets 5,817 4,849
Current deferred income taxes 42,675 8,333
Assets held for sale 66,398 -
---------- -----------
Total current assets 372,454 282,378
Property and equipment
Land 11,052 12,230
Buildings 137,071 158,431
Machinery and equipment 154,915 188,252
---------- -----------
303,038 358,913
Less accumulated depreciation 112,394 123,053
---------- -----------
190,644 235,860
Goodwill, net 20,741 40,834
Other 12,022 9,305
---------- -----------
$ 595,861 $ 568,377
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 78,791 $ 63,846
Notes payable 5,379 -
Payrolls and related taxes 13,266 17,219
Accrued expenses 40,791 29,932
Income taxes 3,293 1,450
Current installments on long-term debt - 300
---------- -----------
Total current liabilities 141,520 112,747
Deferred income taxes 27,264 28,215
Long-term debt, less current installments 81,619 1,540
Minority interest 380 -
Shareholders' equity
Preferred stock, without par value,
10,000 shares authorized, none issued - -
Common stock, without par value, 200,000 shares authorized,
74,692 and 76,516 issued, respectively 116,660 145,779
Unearned compensation (42) -
Retained earnings 228,460 280,096
---------- -----------
Total shareholders' equity 345,078 425,875
---------- -----------
$ 595,861 $ 568,377
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-34-
<PAGE> 36
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Issued
-------------------
Unearned Retained
Shares Amount Compensation Earnings
------ ------ ------------ --------
<S> <C> <C> <C> <C>
Balance June 30, 1995 76,019 $ 145,355 $ - $ 195,262
Issuance of common stock under stock
options 308 241 - -
Tax benefit from stock transactions - 460 - -
Net income - - - 39,842
------- ---------- ------------ -----------
Balance June 30, 1996 76,327 146,056 - 235,104
Issuance of common stock under stock
options 264 202 - -
Tax benefit from stock transactions - 444 - -
Purchases and retirements of common
stock (75) (923) - -
Net income - - - 44,992
------- ---------- ------------ -----------
Balance June 30, 1997 76,516 145,779 - 280,096
Issuance of common stock under stock
options 287 554 - -
Issuance of common stock under restricted
stock plan 5 70 (70) -
Earned compensation for restricted stock - - 28 -
Tax benefit from stock transactions - 452 - -
Purchases and retirements of common stock (2,116) (30,195) - -
Net (loss) - - - (51,636)
------- ---------- ------------ -----------
Balance June 30, 1998 74,692 $ 116,660 $ (42) $ 228,460
======= ========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-35-
<PAGE> 37
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows (For) From Operating Activities
Net (loss) income $ (51,636) $ 44,992 $ 39,842
Adjustments to derive cash flows
Restructuring, net of cash 121,468 - -
Depreciation 26,733 26,178 24,858
Amortization of intangibles 2,740 2,424 2,362
Deferred income taxes (34,754) (1,139) 3,635
Provision for losses on accounts receivable 580 638 361
Minority interest 192 - -
Change in unearned compensation 28 - -
Changes in operating assets and liabilities, net of
restructuring and amounts acquired from
business acquisition
Accounts receivable (5,464) (2,609) (6,739)
Inventories (63,221) (4,497) 6,573
Prepaid expenses and other current assets (121) 446 203
Accounts payable 30,440 7,146 (334)
Payrolls and related taxes (4,598) 4,217 189
Accrued expenses (1,889) 8,515 1,754
Income taxes 1,843 225 211
--------- --------- ---------
Net cash from operating activities 22,341 86,536 72,915
--------- --------- ---------
Cash Flows (For) From Investing Activities
Additions to property and equipment (70,699) (23,046) (17,603)
Business acquisitions, net of cash (14,716) - -
Other (3,077) (1,733) (5,796)
--------- --------- ---------
Net cash for investing activities (88,492) (24,779) (23,399)
--------- --------- ---------
Cash Flows (For) From Financing Activities
Borrowings of short-term debt 861 - -
Borrowings of long-term debt 81,619 - -
Repayments of long-term debt - (47,300) (50,300)
Tax benefit of stock transactions 452 444 460
Issuance of common stock 554 202 241
Repurchase of common stock (30,195) (923) -
--------- --------- ---------
Net cash from (for) financing activities 53,291 (47,577) (49,599)
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents (12,860) 14,180 (83)
Cash and cash equivalents, at beginning of period 14,356 176 259
--------- --------- ---------
Cash and cash equivalents, at end of period $ 1,496 $ 14,356 $ 176
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 3,577 $ 1,436 $ 5,556
Income taxes $ 20,736 $ 26,440 $ 17,078
</TABLE>
See accompanying notes to consolidated financial statements.
-36-
<PAGE> 38
PERRIGO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Company is the nation's largest manufacturer of store brand
over-the-counter (non-prescription) pharmaceutical, personal care and
nutritional products. The Company's principal customers are major national and
regional retail supermarket, drugstore and mass merchandise chains and major
wholesalers located within the United States. All of the Company's manufacturing
facilities as of June 30, 1998 were located in the United States except for a
majority-owned pharmaceutical manufacturing site located in Mexico. The Company
is currently expanding its sales base internationally, primarily in Mexico,
Russia/Ukraine and Canada. International sales were immaterial for fiscal years
1998, 1997 and 1996, respectively.
During the years ended June 30, 1998, 1997 and 1996, one customer
accounted for 24%, 22% and 19% of revenues, respectively. None of the Company's
other customers account for more than 10% of its sales.
BASIS OF PRESENTATION
In June 1998 the Company announced its decision to divest of its
personal care business. The personal care net assets were written down to their
estimated fair value less cost to sell and are included in assets held for sale
in the consolidated balance sheet at June 30, 1998. The net fair market value of
assets and business to be sold of $66,398 is based on management's current
estimate and is subject to change. The fiscal year 1998 consolidated cash flow
statement reflects the changes in the balance sheet prior to the effects of the
1998 restructuring. The consolidated income statement includes the results of
operations of the personal care business for all years presented. The asset and
liability amounts included in the fiscal year 1998 footnotes exclude amounts
related to personal care. See Note J to these consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all majority owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation. Investments in
companies in which the Company's interest is between 20 percent and 50 percent
are accounted for using the equity method and are recorded in other noncurrent
assets. As of June 30, 1998 the Company had a note receivable in the amount of
$4,735 from the Company's Russian investment which is accounted for using the
equity method. This note receivable is included in other assets. See Note F to
these consolidated financial statements for a further discussion of this Russian
investment.
INTERNATIONAL OPERATIONS
Foreign currency-denominated assets and liabilities are translated into
U.S. dollars at the exchange rates existing at the balance sheet date except for
nonmonetary assets and liabilities, and related income and expense accounts,
which are translated at the historical rates. Remaining income and expense items
are translated at the average exchange rates during the respective periods.
Translation adjustments resulting from fluctuations in the exchange rates are
recorded in the income statement because the Company's foreign
-37-
<PAGE> 39
subsidiary that is denominated in a foreign currency operates in a highly
inflationary economy. Gains and losses resulting from exchange rate fluctuations
on transactions denominated in currencies other than the functional currency are
not material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the reported earnings, financial position and various
disclosures. Actual results could differ from those estimates.
REVENUES
Revenues from product sales are recognized when the goods are shipped
to the customer. A provision is recorded as revenues are recognized for
estimated losses on credit sales due to customer claims for discounts, price
discrepancies and other items.
FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, consisting
of cash and cash equivalents, accounts receivable, notes receivable, accounts
payable, notes payable and long-term debt, approximates their fair value.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of demand deposits and
other securities with maturities of three months or less at the date of
purchase.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined primarily using the first-in, first-out (FIFO) method.
LONG-LIVED ASSETS
Property and equipment are recorded at cost and are depreciated
primarily using straight-line methods for financial reporting and accelerated
methods for tax reporting. Cost includes an amount of interest associated with
significant capital projects. Useful lives for financial reporting range from
5-10 years for machinery and equipment, and 10-40 years for buildings.
Maintenance and repair costs are charged to earnings while expenditures that
increase asset lives are capitalized.
Goodwill resulting from business acquisitions is amortized on a
straight-line basis over 25 years. Amortization of $2,523, $2,127 and $2,127 was
recorded during the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. Accumulated amortization was $9,094 and $12,467 as of June 30,
1998 and 1997, respectively. Net goodwill of $27,551 was written off in fiscal
year 1998 as part of the 1998 restructuring. See Note J for a further discussion
of the 1998 restructuring.
The Company periodically reviews long-lived assets not held for sale
for impairment by comparing the carrying value of the assets to their estimated
future undiscounted cash flows. For the fiscal years ended June 30, 1998 and
1997, there were no adjustments to the carrying value of long-lived assets not
held for sale as a result of this review.
-38-
<PAGE> 40
INCOME TAXES
Deferred income tax assets and liabilities are recorded based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted tax rates.
EARNINGS PER SHARE
In February, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings
Per Share." The Statement simplifies the standards for computing earnings per
share ("EPS") and makes them comparable to international EPS standards. The
Statement requires the presentation of both "basic" and "diluted" EPS on the
face of the income statement with a supplementary reconciliation of the
numerators and denominators used in the calculations. The Statement is effective
for financial statements issued for periods after December 15, 1997, including
interim periods.
A reconciliation of the numerators and denominators used in the "basic"
and "diluted" EPS calculations follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Numerator:
Net (loss) income used for both "basic"
and "diluted" EPS calculation $(51,636) $ 44,992 $ 39,842
======== ======== ========
Denominator:
Weighted average shares outstanding
for the period - used for "basic"
EPS calculation 75,302 76,522 76,224
Dilutive effect of stock options - 752 976
-------- -------- --------
Weighted average shares outstanding
for the period - used for "diluted"
EPS calculation 75,302 77,274 77,200
======== ======== ========
</TABLE>
The effect of stock options of 866 shares was not included at June 30,
1998 because to do so would have been antidilutive.
Earnings per share for the fiscal years ended June 30, 1997 and 1996
have been restated to conform to SFAS No. 128.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997 the 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 will
be unaffected by implementation of these new standards.
SFAS No. 130, AReporting 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 distribution to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under
-39-
<PAGE> 41
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 fiscal years ended June 30, 1998, 1997 and 1996,
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 operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
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. Management is
evaluating the impact, if any, that this statement will have on future financial
statement disclosures.
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 1,
1999 to affect its financial statements.
NOTE B - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Finished goods $ 70,206 $ 77,953
Work in process 76,015 53,291
Raw materials 35,246 30,229
-------- --------
$181,467 $161,473
======== ========
</TABLE>
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<PAGE> 42
NOTE C - LONG-TERM BORROWINGS AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
At June 30,
------------------------
1998 1997
------- -------
<S> <C> <C>
Revolving line of credit........ $40,000 $ -
Uncommitted lines of credit..... 41,619 -
Note payable, Industrial
Development Board of
Rutherford County, TN....... - 1,840
------- -------
Total ...................81,619 1,840
Less current installments....... - 300
------- -------
Long-term debt.................. $81,619 $ 1,540
======= =======
</TABLE>
In June 1996, the Company entered into a credit agreement with a group
of banks which provides a $150,000 unsecured revolving credit facility. The
agreement expires June 30, 2000, but contains an option whereby the agreement
may be extended for one-year periods each June 30. Repayment has been guaranteed
by the Company's subsidiaries. Restrictive loan covenants apply to, among other
things, minimum levels of tangible net worth, interest coverage and funded debt
ratio.
During 1998, the Company replaced its two uncommitted credit facilities
which totaled $60,000 with two new uncommitted credit facilities totaling
$55,000. Both facilities can be terminated by either party at any time. The
Company's restrictive covenants under these facilities are substantially the
same as those under the $150,000 credit facility.
Interest rates on the revolving credit facility are established at the
time of borrowing through four different pricing options: the prime rate (8.50%
at June 30, 1998), a LIBOR rate plus a factor (.18% at June 30, 1998)
established quarterly based on the interest coverage ratio, a CD rate plus a
factor (.305% at June 30, 1998) established quarterly based on the interest
coverage ratio, or at a rate based on interest rate bids submitted by banks
within the bank group, for periods of 1 to 29 days. Interest rates associated
with the uncommitted credit facility loans are based on bids submitted by the
financial institutions for periods of 1 to 90 days.
The Company is obligated to the Industrial Development Board of
Rutherford County, Tennessee, under an agreement entered into to finance the
acquisition of certain machinery and equipment installed at the Smyrna,
Tennessee plant. The debt is subject to mandatory sinking fund redemption
through final maturity on October 1, 2001, bears interest at a variable rate
(3.60% at June 30, 1998) and is secured by a letter of credit and a security
interest in the assets financed. The debt of $1,540 at June 30, 1998, is
associated with the personal care business; thus it is netted against assets
held for sale.
In conjunction with the decision to divest the personal care business,
management met with the group of banks which provide financing under the $150
million unsecured revolving credit facility to modify its terms so that the
Company would be in compliance with its debt covenants. Management obtain
modifications retroactive to June 30, 1998.
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<PAGE> 43
NOTE D - INCOME TAXES
A summary of income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal ........................ $ 19,768 $ 26,414 $ 17,545
State .......................... 630 600 1,520
-------- -------- --------
20,398 27,014 19,065
Deferred ........................... (34,754) (1,139) 3,635
-------- -------- --------
Total ............................ $(14,356) $ 25,875 $ 22,700
======== ======== ========
</TABLE>
The tax effects of temporary differences between the financial
statement carrying amounts and tax bases of assets and liabilities that give
rise to the net deferred income tax liability are as follows:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Allowance for impaired assets and related
reserve for restructuring ..................................... $ 35,072 $ -
Accumulated depreciation ........................................ (28,225) (27,993)
Inventory costs ................................................. 2,275 2,325
Allowance for doubtful accounts ................................. 1,287 1,061
Accrued expenses not yet deductible ............................. 5,372 4,457
Other, net ...................................................... (370) 268
-------- --------
Net deferred income tax asset (liability) ....................... $ 15,411 $(19,882)
======== ========
</TABLE>
The net deferred income tax liability is presented in the balance
sheets as follows:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------
1998 1997
---------- ---------
<S> <C> <C>
Current asset ........................................... $42,675 $ 8,333
Long-term liability ..................................... 27,264 28,215
</TABLE>
The effective income tax rate varied from the statutory Federal tax
rate as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Federal statutory rate ....................................... (35.0)% 35.0% 35.0%
Expenses not deductible for tax purposes:
Restructuring charges, primarily related to goodwill
write-off ................................................ 11.2 - -
Goodwill amortization ...................................... 0.8 2.3 2.6
Other ...................................................... 1.2 (0.8) (1.3)
---- ---- ----
Effective income tax rate .................................... (21.8)% 36.5% 36.3%
==== ==== ====
</TABLE>
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<PAGE> 44
NOTE E - RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
The Company has a qualified profit-sharing plan and three investment
plans under section 401(k) of the Internal Revenue Code, which cover
substantially all employees. Contributions to the qualified profit-sharing plan
are at the discretion of the Board of Directors. Under the investment plans, the
Company matches a percentage of employees' contributions. Under one of the
plans, the Company makes a contribution of 2% of base compensation paid to
eligible employees. The Company's contributions to the plans were $6,609,
$5,854 and $5,322 for the years ended June 30, 1998, 1997 and 1996,
respectively.
The Company has postretirement plans that provide medical benefits for
retirees and their eligible dependents. Employees become eligible for these
benefits if they meet certain minimum age and service requirements. The Company
reserves the right to modify or terminate these plans. The plans are not funded.
The unfunded accumulated postretirement benefit obligation at June 30, 1998 and
1997 and the benefits expensed in fiscal years 1998, 1997 and 1996 are
immaterial to the financial position and results of operations of the Company.
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company leases certain assets, principally warehouse facilities and
data processing equipment, under agreements which expire at various dates
through October 2004. Certain leases contain provisions for renewal and purchase
options and require the Company to pay various related expenses. Future
non-cancelable minimum operating lease commitments are as follows:
1999--$10,615; 2000--$5,681; 2001--$2,525; 2002--$1,144; 2003--$508; and
thereafter--$98. Rent expense under all leases was $14,367, $12,850 and $12,904
for the years ended June 30, 1998, 1997 and 1996, respectively.
The Company has committed to spend up to $41,000 over fiscal years 1998
and 1999 to build new distribution facilities in Allegan, Michigan and LaVergne,
Tennessee. During fiscal year 1998, the Company spent $29,000 related to these
new distribution facilities. These facilities will replace multiple leased
facilities in Holland, Michigan and LaVergne, Tennessee. The LaVergne, Tennessee
facility is part of the intended personal care divestiture.
The Company conducts business in the Russia/Ukraine through its Russian
investment. Due to the collapse of the Russian economy in August 1998, the
Company anticipates that it may take an unusual charge of up to $14,000 in the
first quarter of fiscal year 1999 for the write-off of accounts receivable,
inventories and a note receivable related to this Russian investment.
-43-
<PAGE> 45
In July 1994, the Company was served a "summons with notice" alleging
breach of fiduciary duties by its officers in connection with their purchase of
the Company from the former owner in April 1988. In February 1995, a complaint
was filed seeking unspecified damages. In June 1998 the United States District
Court for the Western District of Michigan dismissed, at the close of the
plaintiff's case, the action filed by the former owner. In July 1998 the former
owner filed an appeal. In March 1995, the Company was served with a complaint
purporting to be a class action lawsuit on behalf of shareholders who purchased
Perrigo common stock between May 11, 1993 and May 10, 1994. The complaint
alleges various violations of federal securities laws and seeks unspecified
damages. In June 1998, the Court granted defendant's motion of a summary
judgement in this case. In June 1998, the plaintiffs filed a motion to file a
proposed second amended complaint. Subsequent to fiscal year-end 1998, the Court
dismissed the class action lawsuit against all defendants and entered an order
(the "Order") requiring plaintiffs' attorneys to respond to a motion for
sanctions filed by the Company and certain other defendants within 30 days.
Subsequently, the plaintiffs requested that the Court reconsider the Order and
also requested that the Court temporarily vacate the judgment while it considers
defendants' request for sanctions. The Court then issued a second order vacating
the judgment "in order to avoid piecemeal appeals on the merits and this Court's
ruling on Defendants' request for sanctions." The Court has not yet ruled on
plaintiffs' request to reconsider the Order or defendants' request for
sanctions. If the Court denies plaintiffs' request to reconsider, the plaintiffs
will have the option to appeal the dismissal of their case. In the event that
the plaintiffs appeal this suit, the Company intends to continue to defend the
case vigorously as it believes the suit is without merit.
In June 1995, the Company received notice of a possible derivative
class action against the Company, as a nominal defendant, and certain of its
officers and directors, and their trusts. In November 1995, the related
complaint was filed. The complaint alleges possible violation of Michigan law,
seeks to protect the Company against any expense or liability arising out of the
aforementioned and purported class action lawsuit, and seeks to recover any
proceeds unlawfully received by named officers and directors and their trusts in
the October 1993 public offering. In January 1998, the Court entered an order
staying the derivative action pending the resolution of the related class action
case.
The consolidated statements of income for the years ended June 30,
1998, 1997 and 1996 include $9,585, $6,367 and $6,600, respectively, of charges
primarily related to the three legal actions described above. While future costs
related to those matters are uncertain, the Company estimates that an additional
$4,000 could be incurred in fiscal year 1999. Actual amounts incurred could
materially differ from these estimates.
The Company has pending certain legal actions and claims incurred in
the normal course of business and is actively pursuing the defense thereof.
The Company believes the actions and claims cited above are without
merit or are covered by insurance and continues to vigorously defend against
these actions. The Company believes the resolution of all of these matters will
not have a material adverse effect on its financial condition and results of
operations as reported in the accompanying financial statements. However,
depending on the amount and timing of an unfavorable resolution of these
lawsuits, it is possible that the Company's future results of operations or cash
flow could be materially affected in a particular period.
NOTE G - SHAREHOLDERS' EQUITY
In May 1997, the Company announced a common stock repurchase program.
The program calls for the repurchase of up to 7,500 shares, subject to market
conditions. Purchases are made in the open market. During fiscal year 1998 the
Company purchased 2,116 shares of common stock for $30,195 under this
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<PAGE> 46
common stock repurchase program. During fiscal year 1997, the Company purchased
75 shares of common stock for $923. The common stock repurchased for both years
was retired.
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.
In November 1997 the Company established a restricted stock plan for
directors, which is intended to attract and retain the services of experienced
and knowledgeable non-employee directors. The Company reserved 25 common shares
for issuance under the plan. The terms of the plan call for the granting of $10
worth of restricted shares to each Director on the date of the Annual Board
Meeting. The number of shares issued is based on the fair market value of the
shares on the date of the Annual Board Meeting. The restricted shares become
vested on the date of the next Annual Board Meeting on which the Director's
existing term as a Board member is set to expire (director terms are generally
three years). The holder of restricted shares has all rights of a shareholder
except that the shares are restricted as to sale or transfer for the vesting
period and the shares are forfeited upon termination in certain circumstances.
The Company accounts for these restricted shares as unearned compensation, which
is ratably charged to expense over the vesting period. In fiscal year 1998 the
Company granted 5 shares at $70 and charged $28 to expense. The unearned
compensation included in stockholder's equity at June 30, 1998 was $42.
The Company's 1988 Employee Incentive Stock Option Plan, as amended in
November 1997, grants key management employees options to purchase shares of
common stock. The options vest and may be exercised from one to ten years after
the date of grant based on a vesting schedule. Proceeds from the exercise of
stock options under the Company's stock option plans and income tax benefits
attributable to stock options exercised are credited to common stock.
A summary of activity for the Company's employee stock option plan is
presented below:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
1998 1997 1996
-------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Options outstanding at beginning of year .......... 3,737 $11.43 3,248 $11.83 3,239 $11.07
Granted ........................................... 1,022 12.94 1,235 9.18 498 12.34
Exercised ......................................... (287) (1.93) (264) (.74) (280) (.83)
Terminated ........................................ (329) (14.08) (482) (14.26) (209) (15.99)
----- ----- ------
Options outstanding at end of year ................ 4,143 12.25 3,737 11.43 3,248 11.83
Options exercisable at end of year ................ 1,333 12.28 1,104 10.96 1,062 8.67
Options available for grant at end of year ........ 1,608 1,981 2,734
Price per share of options outstanding ............ $.22 to $.22 to $.22 to
$31.25 $31.25 $31.25
</TABLE>
In September 1998, the Company granted options to certain employees to
purchase 936 shares at an exercise price of $8.5625.
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<PAGE> 47
The Company issues stock options to directors under a non-qualified
stock option plan. Options granted under the plan vest and may be exercised from
one to ten years after the date of grant based on a vesting schedule. As of June
30, 1998, options to purchase 98 shares at prices ranging from $.57 to $29.38
and at a weighted average price of $15.13 were outstanding, 41 of which were
exercisable at a weighted average price of $15.56. There were 19 options granted
at a weighted average exercise price of $14.68. There were no options exercised
and there were five options terminated at a weighted average price of $14.60 in
the fiscal year ended June 30, 1998. There were 34 options available for grant
at June 30, 1998.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized. Had compensation cost been determined and recorded based upon the
fair value at the grant date for awards under these plans consistent with the
methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net (loss) income and (loss) earnings per share
would have been reduced (loss increased in fiscal year 1998) as follows:
<TABLE>
<CAPTION>
Fiscal Year
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Decrease in net income
or increase in net loss $2,558 $1,642 $613
Basic earnings per share $ .03 $ .01 $.01
Diluted earnings per share $ .03 $ .02 $.01
</TABLE>
The effects on net (loss) income and (loss) earnings per share for
fiscal years 1998, 1997 and 1996 may not be representative of future years
because compensation cost is allocated on a straight-line basis over the vesting
periods of the grants, which extend beyond the reported years.
The weighted average fair value per option at the date of grant for
options granted during fiscal years 1998, 1997 and 1996 was $5.79, $4.04 and
$5.44, respectively. The fair value was estimated using the Black-Sholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Fiscal Year
--------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Volatility, as a percent 31.3% 30.0% 30.0%
Risk-free interest rate 6.1% 6.3% 6.4%
Expected life in years after vest date 3.0 3.0 3.0
</TABLE>
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<PAGE> 48
Forfeitures are accounted for as they occur.
The following table summarizes information concerning options
outstanding under the Plans at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------ ---------------------------------
Weighted
Average Weighted
Range of Number Remaining Weighted Number Average
Exercise Outstanding Contractual Average Exercisable Exercise
Prices at 6/30/98 Term (Years) Exercise Price at 6/30/98 Price
------ ---------- ------------ -------------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
$0.22 - $9.06 419 2.48 $1.39 405 $1.12
9.07 - 11.09 1,105 8.16 9.18 91 9.16
11.10 - 12.97 1,372 8.52 12.75 144 12.30
12.98 - 31.25 1,345 5.36 17.86 734 19.00
----- -----
4,241 1,374
===== =====
</TABLE>
NOTE H - ACQUISITION
On September 11, 1997, the Company acquired 87.8% of the outstanding
shares of Quimica y Farmacia, S.A. de C.V. for approximately $16,000. Quimica y
Farmacia, S.A. de C.V. is a pharmaceutical manufacturer and distributor located
in Mexico. The assets, liabilities, sales and profits of this acquisition, which
are not considered material to the Company, are included in the consolidated
financial statements since the acquisition date.
NOTE I - QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
1998 September 30, December 31, March 31, June 30,(1)
- ------------------------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net sales ................................................. $ 223,773 $ 240,738 $ 223,676 $ 214,450
Gross profit .............................................. 59,466 66,291 56,208 49,897
Net income (loss) ......................................... 13,205 14,445 9,475 (88,761)
Basic earnings (loss) per share ........................... $ .17 $ .19 $ .13 $ (1.19)
Diluted earnings (loss) per share ......................... .17 .19 .13 (1.19)
Weighted average shares outstanding
Basic ........................................... 76,213 75,573 74,622 74,661
Diluted(2) ...................................... 77,370 76,778 75,321 74,661
</TABLE>
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<PAGE> 49
<TABLE>
<CAPTION>
1997 September 30, December 31, March 31, June 30,
- ------------------------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net sales .................................................. $212,174 $221,665 $214,580 $196,172
Gross profit ............................................... 55,294 62,648 57,920 53,009
Net income ................................................. 10,717 13,691 11,600 8,984
Basic earnings per share ................................... $ .14 $ .18 $ .15 $ .12
Diluted earnings per share ................................. .14 .18 .15 .12
Weighted average shares outstanding
Basic ............................................ 76,414 76,526 76,549 76,512
Diluted .......................................... 77,166 77,215 77,365 77,378
</TABLE>
(1) Includes a pre-tax restructuring charge of $121,966, which amounted to
$86,894 or $1.16 per share on an after-tax basis. Excluding the effects of
the restructuring charge, net loss would have been $1,867 or $.03 per
share. See Note J to these consolidated financial statements.
(2) In the fourth quarter the effect of stock options of 628 shares was not
included because to do so would have been antidilutive.
NOTE J - RESTRUCTURING AND REDESIGN COSTS
For fiscal years 1998, 1997 and 1996, the Company incurred
restructuring and redesign charges primarily related to an intended divestiture,
facilities closings, business process redesign efforts and streamlining
operations. The total restructuring and redesign charges were $122,529, $5,503
and $4,491 for fiscal years 1998, 1997 and 1996, respectively. The total
restructuring reserve balance was $12,259, $819 and $1,648 at June 30, 1998,
1997 and 1996, respectively.
1998 RESTRUCTURING
In June 1998 the Company announced a major restructuring plan which
involves the closing of certain personal care manufacturing facilities and the
intention to divest the personal care business. Although personal care products
have historically delivered lower profit margins than OTC pharmaceutical and
nutritional products, the Company believed that this performance could be
improved to acceptable levels. In the latter half of fiscal year 1998, personal
care profit margins deteriorated due to competition and cost increases,
resulting in the Company's decision to divest the personal care business and
concentrate on OTC pharmaceutical products, nutritional products and its
international business. The Company believes that focusing on these core
businesses will provide the greatest value to its shareholders. A pre-tax charge
of $121,966, which included $109,707 for impairment of assets and a reserve of
$12,259 for anticipated incremental cash expenditures, recorded in accordance
with Emerging Issues Task Force ("EITF") 94-3, was recorded in June 1998 related
to this restructuring. The components of the charge and related reserve are
discussed below. The restructuring charge is based on management's current
estimate of the fair market value of the assets and business to be sold and is
subject to change. The impairment of long-lived assets was determined by
comparing the carrying value of the related assets to their fair value less cost
to sell. Assets held for sale of $66,398 are no longer being depreciated or
amortized and are included in the current assets section of the consolidated
balance sheet at June 30, 1998. The restructuring plan is intended to be
completed in fiscal year 1999 and the Company anticipates that it will realize
benefits primarily in the second half of fiscal year 1999. Costs that will be
expensed as incurred in fiscal year 1999 in accordance with EITF 94-3 are
approximately $2,000 for net operating losses and $2,000 for plant
inefficiencies.
In order to improve the operating efficiency of the personal care
business and to maximize its sale value, the Company decided to close
manufacturing facilities in California and Missouri. A pre-tax charge of $22,836
was recorded related to these closures. The components of the charge are $20,556
for impairment of
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<PAGE> 50
assets, $1,625 for termination benefits for 165 employees primarily in the
manufacturing employee group and $655 for other facilities closing costs. A
reserve of $2,280 was recorded for the anticipated incremental cash
expenditures related to the termination benefits and other facilities closing
costs.
The decision to divest the personal care business was reached after
extensive review of its operations and expected profitability. Although personal
care estimated cash flows in previous years were sufficient to recoup the
Company's investment in the personal care business, the Company decided to
divest the personal care business and reallocate resources to its more
profitable OTC pharmaceutical, nutritional and international business. A pre-tax
charge of $99,130 was recorded for this intended divestiture. The components for
the charge are $89,151 for impairment of assets and $9,979 for other anticipated
incremental transition costs. A reserve of $9,979 was recorded for the
anticipated incremental cash expenditures related to the transition costs. Net
sales for the personal care business were $212,261, $206,480 and $212,234 for
fiscal years 1998, 1997 and 1996, respectively. The Company does not maintain
operating income information by its three main product categories (OTC
pharmaceutical, nutritional and personal care products), however, based on the
incremental approach, the Company estimates that the pre-tax operating losses
for the personal care business were approximately $8,000, $2,000 and $5,000 for
fiscal years 1998, 1997 and 1996, respectively.
1996 - 1997 RESTRUCTURING AND REDESIGN
In fiscal year 1995, the Company announced a restructuring of
operations designed to better serve its customers and improve operational
efficiencies. The restructuring plan included consolidating the sales and
marketing functions across all product lines, eliminating multiple sales efforts
and increasing resources in marketing. The plan called for the termination of
106 employees, primarily in the selling and administrative employee groups
within the following twelve months. In fiscal year 1996, 87 employees were
actually terminated. The restructuring also included the elimination of certain
low volume products and the consolidation of two distribution centers. The
termination benefits, warehouse consolidation costs and low volume product costs
were accrued while $1,883 costs were expensed as incurred.
In fiscal year 1996, the Company initiated a business process redesign
effort, which is focused primarily on how the Company manages its processes for
customer orders and new product development. These costs are expensed as
incurred.
In fiscal year 1997, the Company recorded a restructuring charge for
the closing of its truck fleet operations. Restructuring costs included
termination benefits for 50 employees in the distribution employee group. The
closing was substantially completed in fiscal year 1997 and 50 employees were
actually terminated.
The restructuring and redesign charges as described above and the
related reserves are detailed in the following table:
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<PAGE> 51
<TABLE>
<CAPTION>
1995 Restructuring Plan
----------------------------------------------------------
Low Streamline Business Closing of
Volume SKU Warehouse Of Process Truck Fleet
Reduction Consolidation Operations Total Redesign Operations
---------- ------------- ----------- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Restructuring Reserves
Balance at 6/30/95 $ 700 $ 700 $ 2,600 $ 4,000 $ - $ -
Additions 1,400 - - 1,400 - -
Charges (1,055) (284) (2,413) (3,752) - -
--------- --------- ----------- ----------- ----------- --------
Balance at 6/30/96 1,045 416 187 1,648 - -
--------- --------- ----------- ----------- ----------- --------
Additions - - - - - 1,211
Charges (696) (118) (187) (1,001) - (1,039)
-------- -------- ----------- ----------- ----------- --------
Balance at 6/30/97 349 298 - 647 - 172
-------- --------- ----------- ----------- ----------- --------
Additions - - - - - -
Charges (349) (298) - (647) - (172)
-------- ---------- ----------- ---------- ----------- --------
Balance at 6/30/98 $ - $ - $ - $ - $ - $ -
========= ========== =========== =========== =========== ========
Restructuring and Redesign Expenses
1996 $ 1,400 $ - $ 1,883 $ 3,283 $ 1,208 $ -
1997 - - 95 95 4,197 1,211
1998 - - - - 563 -
</TABLE>
The additions to the "Restructuring Reserves" table represent those costs
which met the criteria of EITF 94-3 to be expensed in conjunction with and at
the time of the restructuring plan. The "Restructuring and Redesign Expenses"
table presents total costs recognized during each fiscal year, including those
costs which were expensed as incurred as they did not meet the criteria to be
accrued at the time of the restructuring plan.
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<PAGE> 52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors of the Company.
See the Company's Proxy Statement, incorporated by reference as
Part III of this Form 10-K, under the heading "Election of
Directors."
(b) Executive Officers of the Company.
See Part I, Additional Item of this Form 10-K on page 16.
Item 11. Executive Compensation.
See the Company's Proxy Statement, incorporated by reference as Part
III of this Form 10-K, under the headings "Compensation of Executive
Officers" and "Compensation of Directors."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
See the Company's Proxy Statement, incorporated by reference as Part
III of this Form 10-K, under the heading "Principal Securityholders."
Item 13. Certain Relationships and Related Transactions.
See the Company's Proxy Statement, incorporated by reference as Part
III of this Form 10-K, under the heading "Compensation of Directors."
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed or incorporated by reference
as part of this Form 10-K:
1. ALL financial statements. See Index to Consolidated
Financial Statements on page 32 of this Form 10-K.
2. Financial Schedules
Report of Independent Certified Public Accountants on
Financial Statement Schedule
Schedule II -Valuation and Qualifying Accounts
Schedules other than the one listed are omitted because they
are included in the footnotes, immaterial or not applicable.
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<PAGE> 53
<TABLE>
<CAPTION>
3. Exhibits:
<S> <C>
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 the 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 from 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
10(f) - Credit Agreement, dated March 25, 1998, between Registrant and Wachovia Bank, N.A.
10(g) - Registrant's Restricted Stock Plan for Directors, dated November 6, 1997
21 - Subsidiaries of the Registrant.
23 - Consent of BDO Seidman, LLP.
24 - Power of Attorney (see signature page).
27 - Financial Data Schedule.
</TABLE>
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<PAGE> 54
(b) Exhibit and reports on Form 8-K.
(i) The Company filed a report on Form 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 of manufacturing facilities in
California and Missouri and the intention to divest the Company's
personal care business.
The Company estimated that the closures, consolidation of
manufacturing operations and the write-down of assets 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
will finalize a review of the charges prior to issuing year-end results
in August.
The Company has retained J. P. Morgan Securities, Inc., to
explore strategic options to maximize the sale value of the personal
care business.
The Company noted that the nonrecurring charges will result in
a net loss for both the fourth quarter and the fiscal year ending June
30, 1998. Fourth quarter fiscal 1998 earnings, excluding nonrecurring
charges, are anticipated to be below expectations as a result of
continued margin pressure due to declining profitability of personal
care products, weak demand in higher margin OTC pharmaceutical
products, increased expenses due to higher research and development
costs, expenses related to new product launches, and greater than
anticipated litigation charges.
(ii) The Company filed a report on Form 8-K on April 28, 1998
that announced Christopher J. Coughlin resigned as a member of the
Board of Directors. Mr. Coughlin tendered his resignation due to
potential business conflicts resulting from a change in employment. On
February 17, 1998, Mr. Coughlin was named Executive Vice President and
Chief Financial Officer of Pharmacia & Upjohn, Inc. Mr. Coughlin had
been President of Nabisco International and had been a Perrigo director
since November 6, 1997.
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<PAGE> 55
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Board of Directors
Perrigo Company
Allegan, Michigan
The audits referred to in our report to Perrigo Company and
Subsidiaries dated August 26, 1998, relating to the consolidated financial
statements of Perrigo Company, which is contained in Item 8 of this Form 10-K
for the year ended June 30, 1998, included the audit of Schedule II - Valuation
and Qualifying Accounts. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in
all material respects, the information set forth therein.
By: /s/BDO Seidman, LLP
------------------------
BDO Seidman, LLP
Grand Rapids, Michigan
August 26, 1998
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<PAGE> 56
SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS
PERRIGO COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
----------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Year Ended June 30, 1996:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts $3,040 $ 361 $ 426 $2,975
Year Ended June 30, 1997:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $2,975 $ 638 $ 587 $3,026
Year Ended June 30, 1998:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $3,026 $ 581 $ 915 $2,691
</TABLE>
(1) Uncollectible accounts charged off, net of recoveries and the effect of
the 1998 restructuring.
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<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K for the fiscal year ended June 30, 1998 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Allegan, State of Michigan
on the 6th of October, 1998.
PERRIGO COMPANY
By: /s/Michael J. Jandernoa
-----------------------------------
Michael J. Jandernoa
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Michael J.
Jandernoa and Thomas J. Ross and each of them severally, acting alone and
without the other, his true and lawful attorney-in-fact with authority to
execute in the name of each such person, and to file with the Securities and
Exchange Commission, together with any exhibits thereto and other documents
therewith, any and all amendments to this Annual Report on Form 10-K for the
fiscal year ended June 30, 1998 necessary or advisable to enable Perrigo Company
to comply with the Securities Exchange Act of 1934, any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, which
amendments may make such other changes in the report as the aforesaid
attorney-in-fact executing the same deems appropriate.
-56-
<PAGE> 58
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K for the fiscal year ended June 30, 1998 has been
signed by the following persons in the capacities indicated on the 6th of
October, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/Michael J. Jandernoa Chairman of the Board and Chief
-------------------- Executive Officer and Director
Michael J. Jandernoa (Principal Executive Officer)
/s/Thomas J. Ross Vice President - Finance,
----------------------- Principal Accounting and
Thomas J. Ross Financial Officer
/s/F. Folsom Bell Director
-----------------------
F. Folsom Bell
/s/Peter R. Formanek Director
-----------------------
Peter R. Formanek
/s/Larry D. Fredricks Director
-----------------------
Larry D. Fredricks
/s/Richard G. Hansen Director
-----------------------
Richard G. Hansen
/s/L.R. Jalenak, Jr. Director
-----------------------
L.R. Jalenak, Jr.
/s/John W. Spoelhof Director
-----------------------
John W. Spoelhof
/s/Mary Alice Taylor Director
-----------------------
Mary Alice Taylor
</TABLE>
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<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
- ------- --------
<S> <C>
10(e) First Amendment to Registrant's Credit Agreement, dated June 29, 1998
10(f) Credit Agreement, dated March 25, 1998, between Registrant and Wachovia Bank, N.A.
10(g) Registrant's Restricted Stock Plan for Directors, dated November 6, 1997
21 Subsidiaries of the Registrant
23 Consent of Independent
Certified Public Accountants
27 Financial Data Schedule
</TABLE>
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<PAGE> 1
EXHIBIT 10(e)
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of June 29, 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 (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 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 (i) 0.25 to 1.0 as of the last day of the
fiscal quarter of the Company and its Subsidiaries ending
September 30, 1998, (ii) 1.0 to 1.0 as of the last day of either
fiscal quarter of the Company and its Subsidiaries ending December
31, 1998 or March 31, 1999, or (iii) 3.0 to 1.0 as of the last day
of each fiscal quarter of the Company and its Subsidiaries ending
thereafter; 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 to be taken in the fiscal quarter
ending June 30, 1998 shall be disregarded in calculating the
Interest Coverage Ratio."
1.2 Section 6.2(g) is amended by adding the following clause (C)
after the first clause (B) contained in such section:
"and (C) the sale, in addition to the sales allowed pursuant to
<PAGE> 2
the foregoing clauses (A) and (B), of the personal care business
of the Company, which business consists of the Company's
operations and assets currently in California, Missouri and
Tennessee, including the operations and assets of PTN in Tennessee
(and it is acknowledged and agreed that, notwithstanding anything
herein to the contrary, that in connection with any such sale, if
no Default exists or would be caused thereby, PTN shall be
released from its Guaranty and shall no longer be a Guarantor
hereunder)".
1.3 Section 6.2(g) is further amended by (i) deleting the reference in
clause (D) contained in the proviso of such section to "25%" and substituting
"40%" in place thereof and (ii) by restating clause (E) contained in the proviso
of such section as follows: "(E) the Company is in compliance with all financial
and other covenants contained in this Agreement on a pro forma basis acceptable
to the Agent both before and after giving effect to such Acquisition."
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 date 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.
FIRST AMENDMENT TO CREDIT AGREEMENT Page 2
<PAGE> 3
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 $50,000.
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.
FIRST AMENDMENT TO CREDIT AGREEMENT Page 3
<PAGE> 4
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/ WILLIAM C. GRODHUE
--------------------------------
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
-----------------------
FIRST AMENDMENT TO CREDIT AGREEMENT Page 4
<PAGE> 5
WESTDEUTSCHE LANDESBANK
GIROZENTRALE
By: /s/ CYNTHIA NIESEN
--------------------------------
Its: VICE PRESIDENT
-----------------------
OLD KENT BANK AND
TRUST COMPANY
By: /s/ RICHARD K. RUSSO
--------------------------------
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
-----------------------
FIRST AMENDMENT TO CREDIT AGREEMENT Page 5
<PAGE> 6
PERRIGO COMPANY
OF SOUTH CAROLINA, INC.
By: /s/JAMES R. ONDERSMA
--------------------------------
Its: TREASURER
-----------------------
PERRIGO COMPANY OF TENNESSEE, INC.
By: /s/JAMES R. ONDERSMA
--------------------------------
Its: TREASURER
-----------------------
FIRST AMENDMENT TO CREDIT AGREEMENT Page 6
<PAGE> 1
Exhibit 10(f)
LOAN AGREEMENT
Perrigo Company Date: March 25, 1998
117 Water Street
Allegan, MI 49010
Gentlemen:
We are pleased to make available to you an uncommitted credit
facility for general corporate purposes on the terms set forth in this letter.
1. We agree to consider from time to time, in our sole discretion, your
requests that we make Advances (as hereinafter defined) to you, on a
discount basis in an aggregate Stated Amount (as hereinafter defined)
not to exceed at any one time outstanding the amount set forth on
Schedule I hereto as the "Facility Amount," on the terms and conditions
set forth below. This letter is not a commitment to lend but rather
sets forth the procedures to be used in connection with your requests
for our making of Advances to you from time to time on or prior to the
termination hereof pursuant to Paragraph 11 hereof and, in the event
that we make Advances to you hereunder, your obligations to us with
respect thereto. The Advances shall be evidenced by the "grid"
promissory note executed by you in an amount equal to the amount set
forth on Schedule I hereto as the "Facility Amount", such promissory
note to be in substantially the form of the promissory note attached
hereto (the "Note").
2. As used herein, the following terms shall have the following meanings
(terms defined in the singular to have the corresponding meanings when
used in the plural, and vice versa):
"Advance" means any advance that we shall make to you hereunder
pursuant to your request as provided herein. Unless otherwise
required by the context, any reference herein or in the Note to
the account of an Advance shall be construed to refer to the
Discounted Proceeds thereof actually remitted to you or to your
account as proved herein.
"Discounted Amount" of any Advance means the amount by which the
Stated Amount of such Advance exceeds the Discounted Proceeds of
such Advance.
"Discounted Proceeds" of any Advance means the net proceeds of
such Advance transferred or wired to you or to your account in
accordance with the last sentence of Paragraph 3 hereof.
"Stated Amount" of any Advance means the full stated or face
amount of such Advance, which in all circumstances shall be equal
to the sum of (x) the Discounted Proceeds of such Advance plus (y)
the Discount Amount of such Advance.
3. The Stated Amount of each Advance shall be equal to the amount set
forth on Schedule I hereto as the "Minimum Stated Amount" or any
integral multiple of $1,000 in excess thereof. Each Advance shall be
made upon (a) your request to us by telephone, telecopy or letter,
given by any of the persons listed on Exhibit A hereto or otherwise
designated by you in writing ("Designated Persons") that you wish to
borrow money on a specified date, in a specific amount and for a
specified term (which shall, in no event, be longer than the number of
days set forth on Schedule I hereto as the "Maximum Term"), and (b) our
mutual agreement as to such date and as to the term, the Discount
Amount and Stated Amount applicable to any such Advance. On the date of
any such Advance, we will make such Advance available to you in same
day funds by directing our administrative agent to transfer or wire the
net proceeds of such Advance to the account designated by you in item
(C) of Schedule I attached hereto or to such other account as may be
designated from time to time by a Designated Person pursuant to written
notice to us.
<PAGE> 2
4. Our agreement and acceptance of this letter, together with your
furnishing us certified copies of resolutions of your board of
directors authorizing Designated Person(s) to execute this letter and
any documents delivered pursuant hereto and to request Advances,
together with specimen signatures of such Designated Persons, shall
constitute a representation and warranty by you that (a) the execution,
delivery and performance of this letter has been duly authorized by
all necessary corporate action and does not contravene any law, or any
contractual or legal restriction, applicable to you and (b) no
authorization or approval or other action by, and no notice to or
filing with, any government authority or regulatory body is required
for such execution, delivery and performance or for the making of any
Advance.
5. Each request by you for an Advance shall constitute a representation
and warranty by you, as of the making of such Advance and giving effect
to the application of the proceeds therefrom, that (a) no payment
default has occurred and is continuing under any agreement or
instrument relating to any of your indebtedness, (b) such Advance when
made will constitute your legal, valid and binding obligation, (c) such
Advance is being incurred, and will be repaid at maturity in its full
Stated Amount, in the ordinary course of your business out of the cash
flow generated in the normal day-to-day conduct and operations of your
business (to include refinancings), and (d) no event has occurred and
no circumstance exists as a result of which the information which you
have provided to us in connection herewith would include an untrue
statement of a material fact or omit to state any material fact or any
fact necessary to make the statements contained therein, in light of
the circumstances under which they were made, not misleading. In no
event shall an Advance be made if any of your representations in
Paragraph 4 hereof or in this Paragraph 5 shall fail to be true and
correct in all respects on the date of such Advance.
6. You shall repay the full Stated Amount of each Advance in accordance
with the terms hereof and of the Note. You shall have no right to
prepay all or any portion of any Advance or the Stated Amount thereof
prior to its stated maturity.
7. You shall make each payment hereunder and under the Notes on or before
12:00 noon (New York City time) on the day when due in lawful money of
the United States of America to our account, The Centric Capital
Corporation Commercial Paper Account at The First National Bank of
Chicago, One First National Plaza, Chicago, Illinois, 60670 in same day
funds. All computations of interest shall be made on the basis of a
year of 360 days, for the actual number of days (including the first
day but excluding the last day) elapsed.
8. Whenever any payment to be made hereunder shall be otherwise due on a
Saturday, a Sunday or other day of the year on which banks are required
or authorized to close in New York City, New York, Winston Salem, North
Carolina or Chicago, Illinois (any other day being a "Business Day"),
such payment shall be made on the next succeeding Business Day.
9. You agree that you will not apply the proceeds of any Advance to
purchase or carry margin stock within the meaning of Regulation G
issued by the Board of Governors of the Federal Reserve System.
10. We shall incur no liability to you in acting upon any telephone,
telecopy, telex or letter request or communication which we believe in
good faith to have been given by a Designated Person or in otherwise
acting in good faith under this letter. Further, all documents required
to be executed in conjunction with Advances under this letter may be
signed by any Designated Person.
11. This letter shall remain in effect until terminated by either you or us
by giving prior written notice of termination hereof to the other party
hereto, but no such termination shall affect your obligations with
respect to the Advances hereunder outstanding at the time of such
termination.
12. All communications hereunder shall be in writing (other than the
communication provided for in the second sentence of Paragraph 15
hereof) and mailed, telecopied or delivered to the address specified on
Schedule I hereto for you and for us, or as to each party, to such
other address as may be designated by such party in a written notice to
the other party. Written communication shall be effective upon receipt
2
<PAGE> 3
unless such communication is mailed in which case it shall be effective
three Business Days after deposit in first class mail.
13. We may assign to one or more banks or other entities all or any part
of, or may grant participations to one or more banks or other entities
in or to all or any part of, any Advance or Advances hereunder and
under the Note. You may not assign your rights or obligations hereunder
or any interest herein.
14. You agree to pay on demand all costs, expenses, including, but not
limited to, legal fees and losses, if any, incurred by us in connection
with the enforcement of this letter or the Note.
15. You agree to furnish us with such financial statements or other
information as we may reasonably request. You shall immediately notify
us of any change in the short term or long term ratings assigned by any
statistical rating organization to any of your outstanding
indebtedness.
16. If any of the following events shall occur and be continuing:
(a) you shall fail to pay any amount due hereunder or under the Note
when the same becomes due and payable; or
(b) any representation or warranty made by you (or any of your
officers) in connection with any Advance or otherwise in connection
with the Note shall prove to have been incorrect in any material
respect when made; or
(c) you shall, without our prior written consent, merge or consolidate
with or into any entity under circumstances in which you are not in
control of the surviving entity or convey, transfer, lease or dispose
of (whether in one transaction or in a series of transactions) all or
substantially all of your assets to, any person or entity; or
(d) you shall fail to perform or observe any other material term,
covenant or agreement in connection with any Advance or otherwise in
connection with the Note on your part to be performed or observed; or
(e) you shall fail to pay any principal of or premium or interest on
any indebtedness, which we deem to be material (excluding indebtedness
evidenced by the Note), when the same becomes due and payable (whether
by scheduled maturity, required prepayments, acceleration, demand or
otherwise), and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to
such indebtedness; or any other event shall occur or condition shall
exist under any agreement or instrument relating to such indebtedness
and shall continue after the applicable grace period, if any, specified
in such agreement or instrument, if the effect of such event or
condition is to accelerate, or to permit the acceleration of, the
maturity of such indebtedness; or any such indebtedness shall be
declared to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), prior to the stated
maturity thereof; or
(f) you shall generally not pay your debts as such debts become due, or
shall admit in writing your inability to pay your debts generally, or
shall make a general assignment for the benefit of creditors; or any
proceeding shall be instituted by or against you seeking to adjudicate
you as bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or
composition of you or your debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the entry
of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for you or any substantial part of
your property; or you shall take any corporate action to authorize any
of the actions set forth above in this subparagraph (f);
then, and in any such event, we may declare the Note and all amounts
payable thereunder to be forthwith due and payable, whereupon the Note
and all such amounts shall become and be forthwith due and payable,
without presentment, demand, protest, or further notice of any kind all
of which you hereby expressly waive; provided however, that in the
event of an actual or deemed entry of an order for relief
3
<PAGE> 4
with respect to you under the Federal Bankruptcy Code, the Note and all
such other amounts shall automatically become and be due and payable,
without presentment, demand, protest or any notice of any kind, all of
which are hereby expressly waived by you.
17. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF GEORGIA.
18. You agree that you will not institute against or join any other
person in instituting against us any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceeding, or other proceeding
under any federal or state bankruptcy or similar law, for one year and
a day after the latest maturing commercial paper note issued by us is
paid in full.
19. At our option, we may, upon notice that either Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., or
Moody's Investors Service, Inc. has (i) lowered or downgraded its
short term commercial paper or corporate bond or other short term
ratings of you, or (ii) placed your securities on a watch list of
securities singled out for surveillance, with either negative or
developing implications in a Rating Category, amend Schedule I hereof
to provide for an amended "Facility Amount" and amended "Maximum Term."
20. As long as you shall have any Advances outstanding, you agree that
you will maintain a separate line of credit with a commercial bank, in
an unutilized aggregate amount equal to the aggregate Stated Amount of
all such outstanding Advances.
21. The obligations under this Agreement are solely our corporate
obligations. No recourse shall be had for the payment of any amount
owing by us hereunder or any other obligation or claim of or against us
arising out of or based upon this Agreement against any of our
stockholders, employees, officers, directors or incorporators.
22. You irrevocably agree that any legal action, suit or proceeding
against us arising out of this Agreement may be brought in the United
States District Court for the Northern District of Georgia, or in the
courts of the State of Georgia and hereby irrevocably accept and submit
to the non-exclusive jurisdiction of each of the aforesaid courts in
personam, generally and unconditionally with respect to any action,
suit or proceeding for you and in respect of your properties, assets
and revenues. You further irrevocably agree to the service of any legal
process, summons, notices and documents out of any of the aforesaid
courts by mailing copies thereof by registered or certified air mail,
postage prepaid, to you at your address designated pursuant to this
Agreement. Nothing herein shall in any way be deemed to limit our
ability to serve any such legal process, summons, notices and documents
in any other manner, as may be permitted by applicable law or to obtain
jurisdiction over you, or bring action, suits or proceedings against
you in such other jurisdictions, and in such manner, as may be
permitted by applicable law.
4
<PAGE> 5
If the terms of this letter are satisfactory to you, please indicate your
agreement and acceptance thereof by signing a counterpart of this letter and
returning it to us.
Very truly yours,
CENTRIC CAPITAL CORPORATION
By: William F. Hamlet
--------------------------------
William F. Hamlet
Senior Vice President
Wachovia Bank, N.A.
Agreed and Accepted:
PERRIGO COMPANY
By: James R. Ondersma
----------------------------------------
Name & Title: James R. Ondersma, Treasurer
------------------------------
5
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EXHIBIT A
to
the Loan Agreement
For the purpose of Paragraph 3 of this Loan Agreement, the "Designated
Persons" are:
Name TITLE
---- -----
James H. Bloem Executive Vice President
James R. Ondersma Treasurer
Craig G. Hammond Executive Vice President
Tammy R. LaMore Treasury Assistant
8
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GRID
----
Date of Stated Maturity of Rate of Discounted Discounted Date Payment
Advance Amount Advance Discount Proceeds Amount Received
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<PAGE> 8
PROMISSORY NOTE
DATE: March 25, 1998 $ 25,000,000
FOR VALUE RECEIVED, the undersigned (hereinafter called the "Borrower"), HEREBY
PROMISES TO PAY to the order of Centric Capital Corporation (hereinafter called
the "Lender") the entire Stated Amount (as such term is defined in the Loan
Agreement hereinafter referred to) of each Advance (as defined below) on the
date mutually agreed to by the Lender and the Borrower at the time of such
Advance as the maturity date thereof. Any overdue amount hereunder and any
overdue amount of fees or other amounts payable under the Loan Agreement
referred to below shall bear interest, payable on demand, at a fluctuating
interest rate per annum equal to the Prime Rate plus 2%. As used herein, "Prime
Rate" shall mean the prime rate of U.S. money center commercial banks as
published in the Wall Street Journal. Changes in the Prime Rate shall be
effective as of the day of each such change.
The Borrower shall have no right to prepay all or any portion of any
Advance or the Stated Amount thereof.
The Borrower shall make each payment of principal and interest hereunder
prior to 12:00 noon (New York City time) on the day when due in lawful money of
the United States of America to the Lender's account, The Centric Capital
Corporation Commercial Paper Account, at The First National Bank of Chicago,
One First National Plaza, Chicago, Illinois, 60670 in same day funds.
Whenever any payment to be made hereunder shall be otherwise due on a day other
than a Business Day (as defined in the Loan Agreement) such payment shall be
made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of payment of interest.
The Borrower hereby authorizes the Lender to endorse on the grid attached
hereto the date and Stated Amount of each Advance made by the Lender to the
Borrower hereunder, the maturity date thereof, the rate of discount applicable
thereto, the Discounted Proceeds and the Discount Amount (as such terms are
defined in the Loan Agreement referred to below) thereof, and all payments made
on account thereof, provided that the failure to do so shall not affect the
obligation of the Borrower to the lender.
The Borrower also agrees to pay on demand all costs and expenses
(including fees and expenses of counsel) incurred by the Lender in enforcing
this Promissory Note.
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF GEORGIA.
This Promissory Note is the "grid" promissory note referred to in, and is
entitled to the benefits of, the Loan Agreement dated March 25, 1998 (the "Loan
Agreement"), between the Borrower and the Lender, which Loan Agreement, among
other things, sets forth procedures to be used in connection with the
Borrower's periodic requests that the Lender make advances on a discounted
basis (the "Advances") to the Borrower from time to time in an aggregate Stated
Amount not to exceed at any time outstanding the amount first above mentioned.
IN WITNESS WHEREOF, the Borrower has signed this Note by its undersigned
officer duly authorized to do so, the day and year first above written.
By: JAMES R. ONDERSMA
------------------------------------
Name & Title: James R. Ondersma, Treasurer
------------------------------------
<PAGE> 9
AMENDED SCHEDULE I
Dated March 25, 1998
to
Loan Agreement dated as of March 25, 1998
between Centric Capital Corporation and Perrigo Company
(i) For the purposes of Section 1 and 2 of this Loan Agreement:
The "Facility Amount" is $25,000,000
The "Minimum Advance Amount" is $5,000,000
The "Maximum Term" is 90 days.
(ii) For the purpose of Section 11 of this Loan Agreement:
The address for written communications to you is:
Perrigo Company
117 Water Street
Allegan, MI 49010
Attention: James R. Ondersma
Telephone Number: 616-673-7936
Fax Number: 616-673-1234
The address for written communications to us is:
Wachovia Bank, N.A.
191 Peachtree Street, N.E.
Atlanta, GA 30303
Attention: Katie S. Proctor
Mail Code: GA-370
Telephone Number: 404-332-4036
Fax Number: 404-332-6898
(iii) For the purposes of this Loan Agreement, instructions for wire transfer
of funds to you are:
Name of Bank: Old Kent Bank & Trust
Bank ABA Number: 072400052
Account Name: Perrigo Company, Acct # 2311027
Reference, if any: Perrigo Company
BORROWER ACKNOWLEDGEMENT: JAMES R. ONDERSMA
----------------------------------------
James R. Ondersma, Treasurer
----------------------------------------
(Print Name and Title)
<PAGE> 10
<TABLE>
<CAPTION>
<S><C>
WACHOVIA
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ACCEPTANCE CREDIT AGREEMENT
From time to time, we (or persons designated in writing by us to you) shall either (i) deliver, or cause to be delivered to you,
drafts, or (ii) by telephone authorize you to complete or cause to be completed pre-signed drafts previously delivered to you, or
(iii) by telephone authorize you to complete or cause to be completed drafts which shall be executed by you on our behalf and as
our agent, drawn on you by us at a maximum maturity of six (6) months (each draft for acceptance by you pursuant to the provisions
of this agreement being herein called a "Draft"), for your acceptance at your option.
We hereby request you to accept and discount each Draft in your discretion in each instance and in consideration of your doing so,
we hereby agree as follows:
1. We shall pay to you in United States currency in immediately available funds at your accepting office, or such other office as
you may designate, the face amount of each Draft no later than the maturity date of such Draft. In addition, in the event we
fail to pay the face amount of a Draft at maturity, we shall pay to you, on demand: (a) interest on the face amount of such
Draft from maturity until payment by us of such face amount at a rate per annum equal to 2% above the rate applicable prior to
the due date, not to exceed the maximum rate permitted by applicable law, and (b) all liabilities, charges, and reasonable
expenses (including reasonable attorneys' fees and legal expenses) paid or incurred by you in connection with such Draft or this
agreement or the enforcement of either of them.
2. Rates for discounting each Draft will be determined and offered by you in your sole discretion. All discount and interest
charges pursuant to this agreement shall be based on a year consisting of 360 days and shall be computed for the actual number
of days until maturity for discount charges or actual number of days elapsed in all other cases.
3. Promptly following each acceptance by you of each Draft hereunder, we agree to confirm to you in writing or by telephone (a)
the face amount of the Draft; (b) the value date; (c) the maturity date; and (d) the payment instructions for any discounted
proceeds. Furthermore, we shall furnish you such other information as you may from time to time require concerning a Draft and
the transaction(s) to which such Draft relates.
4. We agree that in the event of any extension of the maturity or time from presentation of Drafts, acceptances, or documents, or
any other modification of the terms of any transaction hereunder at our request, this agreement shall be binding upon us with
regard to any transactions hereunder so modified, to Drafts, documents and property covered thereby and to any action taken by
you in accordance with such extension or other such modification.
5. In the event of the happening of any one or more of the following events: (a) our non-payment of any of the above described
indebtedness when due; (b) our default in or nonperformance of any financial obligation in an aggregate amount of more than
$20,000,000 (or its equivalence in another currency), causing an acceleration of the maturity of such obligation; (c) our
failure to perform or observe any other covenant or agreement with you, or if any representation or warranty made by us in this
agreement shall prove to have been untrue when made; or (d) if we or any of our property shall become subject to order of any
court or any other legal process or restraint or to any adverse legal claim that you shall deem material, then any and all of
your court or any other legal process or restraint or to any adverse legal claim that you shall deem material, then any and all
of your obligations to extend further credit to us under this agreement or any Draft shall terminate and all indebtedness
hereunder shall, at your option, immediately mature and become payable without presentment, demand, protest, or notice of any
kind, which are hereby expressly waived, and you may, at your sole discretion and without notice to us, exercise any and all
rights and remedies available to you hereunder or under applicable law.
6. This agreement shall be binding upon us, our heirs, executors, administrators, successors, and assigns and shall inure to the
benefit of, and be enforceable by, you, your successors, transferees, and assigns. We shall not, however, transfer or assign any
rights or duties under this agreement without your prior written consent. If this agreement should be terminated or revoked by
operation of law as to us or any of us, we will indemnify and save you harmless from any loss which may be suffered or incurred
by you in acting hereunder prior to the receipt by you, or your transferees or assigns, of notice in writing of such termination
or revocation.
7. This agreement may not be amended or modified except in writing signed by the parties hereto. This agreement shall continue in
effect until such date as may be specified in a written notice from either party to this agreement of discontinuance hereof;
provided, however, that the date so specified by us shall be at least thirty (30) days after your receipt of such notice; and
provided further that notwithstanding any discontinuance or termination of this agreement, this agreement shall continue to
apply to any Drafts accepted by you prior to the effective date of such discontinuance or termination and to all other
obligations of us to you existing at such date.
8. If this agreement is signed by two or more parties, it shall be the joint and several agreement of such parties and whenever
used herein, the singular numbers shall include the plural, and the plural the singular. This agreement shall be governed by and
construed in accordance with the laws of the State of Georgia where "you" refers to Wachovia Bank, N.A.
IN WITNESS WHEREOF, We have executed this agreement under seal this date March 25, 1998.
Attest John R. Nichols Perrigo Company
---------------------------- -----------------------------------------
Title Secretary By [SIG]
----------------------------- ---------------------------------------
Title Treasurer
------------------------------------
</TABLE>
[Corporate Seal]
<PAGE> 1
EXHIBIT 10(8)
PERRIGO COMPANY
RESTRICTED STOCK PLAN FOR DIRECTORS
(Effective November 6, 1997)
<PAGE> 2
PERRIGO COMPANY
RESTRICTED STOCK PLAN FOR DIRECTORS
SECTION 1. PURPOSE
Perrigo Company (the "Company") has established the Perrigo
Company Restricted Stock Plan For Directors (the "Plan"). The Plan is intended
to attract and retain the services of experienced and knowledgeable
non-employee directors to serve on the Board of Directors of the Company and to
provide additional incentive for such directors to work for the best interest of
the Company and its shareholders through ownership of its Common Stock.
SECTION 2. DEFINITIONS
Award: Any grant of Restricted Shares made pursuant to the
terms of the Plan.
Board: The Board of Directors of the Company or, in the context
of Plan administrative matters, any committee designated by such Board of
Directors to administer the Plan pursuant to Section 3.
Change in Control: A Change in Control shall be deemed to have
occurred as of the date on which any Person (as that term is defined in
Section 2(2) of the Securities Act of 1933 and Section 13(d)(3) of the
Securities Exchange Act of 1934, as hereafter amended from time to time) who is
not a shareholder of the Company on the date of adoption of the Plan, acquires
or otherwise becomes the owner of voting stock of the Company, which, together
with all other voting stock of the Company then owned by such Person,
represents fifty percent (50%) or more of the then issued and outstanding
voting stock of the Company or (ii) the composition of the Board is changed
such that a majority of the members of the Board is comprised of individuals
who are neither incumbent members on the date of adoption of the Plan nor
nominated or appointed by a majority of such incumbent members or their
nominees.
Code: The Internal Revenue code of 1986, as amended.
Common Stock: The Common Stock of the Company, $.10 par value,
or such other class of shares or other securities as may be applicable pursuant
to the provisions of Section 7.
Company: Perrigo Company, and any successor thereto.
Disability or Disabled: Permanently and totally disabled as
defined in code Section 22(e)(3), and as determined in each instance by the
Board.
Fair Market Value: The average of the highest price and the
lowest price at which the Common Stock is traded on the most recent date on
which the Common Stock is traded prior to the date of determination, as
reported on the NASDAQ National Market.
<PAGE> 3
Participant: Each non-employee member of the Board to whom
Restricted Shares are granted under the Plan.
Plan: Perrigo Company Restricted Stock Plan For Directors, as
amended from time to time.
Restricted Shares: Shares of Common Stock issued subject to the
restrictions set forth in Section 5.
SECTIONS 3. ADMINISTRATION
The Plan shall be administered by the Board or by a committee of
the Board designated to administer the Plan by the entire Board. Any committee
of the Board designated to administer the Plan shall consist of not less than
three directors of the Company. To the extent required to comply with Rule
16b-3 under the Securities Exchange Act of 1934, each member of any such
committee shall qualify as a "non-employee director," as defined therein. As
used herein in the context of Plan administrative matters, "Board" shall mean
and include the Board of Directors of the Company and any committee designated
by the Board to administer the Plan. The Board shall have the authority to
construe and interpret the Plan and the establish, amend or waive rules and
regulations for its administration. Subject to the provisions of the Plan,
Awards may be subject to such provisions as the Board shall deem advisable, and
may be amended by the Board from time to time, provided that no such amendment
may adversely affect the rights of the holder of an Award without such holder's
consent.
The interpretation and construction by the Board of any
provisions of the Plan of any Restricted Shares granted under the Plan shall be
final. No member of the Board or officer of the Company shall be liable for
any action or determination made in good faith with respect to the Plan. All
actions taken by the Board with respect to any Restricted Shares granted
pursuant to the Plan shall be conclusively binding on the Company and Plan
Participants.
SECTION 4. COMMON STOCK SUBJECT TO PLAN
Subject to Section 7, the aggregate shares of Common Stock that
my be issued under the Plan shall not exceed 25,000. In the event of a lapse,
expiration, termination, forfeiture or cancellation of any Award granted under
the Plan without the issuance of unrestricted shares, the Common Stock subject
to or reserved for such Award may be used again for a new Award hereunder;
provided that in no event may the number of shares of Common Stock issued
hereunder exceed the total number of shares reserved for issuance. Any shares
of Common Stock withheld or surrendered to pay withholding taxes pursuant to
Section 10(e) shall be added to the aggregate shares of Common Stock available
for issuance.
-2-
<PAGE> 4
SECTION 5. RESTRICTED SHARE AWARDS
(a) Grant of Restricted Shares. Restricted Shares under the
Plan are grants of Common Stock which, subject to the terms of this Section 5
and the discretion of the Board to vary the terms of Restricted Shares granted
to any Participant, will be granted and vest in accordance with the following
conditions:
(i) As of the date of each annual meeting of the
Board (beginning with the meeting held on November 6, 1997), each
Participant shall be granted Ten Thousand Dollars ($10,000) worth
of Restricted Shares, based on the Fair Market Value of the
Common Stock on such date, rounded to the nearest whole number of
Restricted Shares.
(ii) Subject to Sections 6 and 9, the Restricted Shares
granted to each Participant shall become vested (i.e., the
restrictions shall lapse) on the date of the next annual meeting
of the Board (after the meeting on which the Restricted Shares
are granted) on which the Participant's existing term as a Board
member is set to expire.
(b) Other Terms and Conditions of Restricted Shares.
Restricted Shares granted under the Plan shall be subject to the following
additional terms and conditions:
(i) Restricted Shares may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as provided
in Section 10(f), until the lapse of the restriction period
described in subsection (a)(ii) above. Except for such
restrictions, the Participant, as owner of such shares, shall
have all the rights of a shareholder, including, but not limited
to, the right to vote such shares and, except as otherwise
provided by the Board, the right to receive all dividends paid on
such shares.
(ii) Each certificate issued relating to Awards of
Restricted Shares granted under the Plan shall be registered in
the name of the Participant and, at the discretion of the Board,
each such certificate may be deposited in a bank designated by
the Board. Each such certificate shall bear the following (or a
similar) legend:
"The transferability of this certificate and the
shares of stock represented hereby are subject
to the terms and conditions (including
forfeiture) contained in the Perrigo Company
Restricted Stock Plan For Directors and an
agreement entered into between the registered
owner and Perrigo Company. A copy of such Plan
and agreement is on file in the office of the
Secretary of Perrigo Company, 515 Eastern,
Allegan, Michigan 49010."
(iii) Subject to the limitations of the Plan, at the
end of restriction period set forth in subsection(a)(ii) above,
such Restricted Shares may be transferred free
-3-
<PAGE> 5
of all restrictions to the Participant (or his or her legal
representative, beneficiary or heir).
SECTION 6. TERMINATION OF BOARD MEMBERSHIP
If the Participant's Board membership ceases prior to the end of
the restriction period set forth in Section 5(a)(ii), all unvested Restricted
Shares shall be forfeited, unless such termination occurs upon the
Participant's Disability or death, or upon his or her involuntary termination
(other than for "cause," as determined by the Board), in which cases all
unvested Restricted Shares shall become fully vested.
SECTION 7. ADJUSTMENT PROVISIONS
In the event of a stock split, stock dividend, recapitalization,
reclassification or combination of shares, merger, sale of assets or similar
event, the Board shall adjust equitably the number and class of shares or other
securities that are reserved for issuance under the Plan, and the number and
class of shares or other securities that have not been issued under outstanding
Awards.
SECTION 8. TERM
The Plan shall be deemed adopted and shall become effective on
November 6, 1997, and shall continue until terminated by the Board or until no
Common Stock remains available for issuance under Section 4, whichever occurs
first.
SECTION 9. CHANGE IN CONTROL
In the event of a Change in Control, all Awards shall vest
immediately in each Participant.
SECTION 10. GENERAL PROVISIONS
(a) Board Membership. Nothing in the Plan nor in any
instrument executed pursuant hereto shall confer upon any outside director any
right to continue as a director of the Company or shall affect the right of the
shareholders of the Company to vote against the reelection of an outside
director or of the Board to remove an outside director in the manner permitted
by the By-laws of the Company.
(b) Legality of Issuance of Shares. No Common Stock shall be
issued pursuant to an Award unless and until all legal requirements applicable
to such issuance have been satisfied.
(c) Ownership of Common Stock Allocated to Plan. No
Participant (individually or as a member of a group), and no beneficiary or
other person claiming under or through such Participant, shall have any right,
title or interest in or to any Common Stock allocated or reserved for purposes
of the Plan or subject to any Award, except as to shares of Common Stock, if
any, as shall have been issued to such individual.
-4-
<PAGE> 6
(d) Governing Law. The Plan, and all agreements hereunder,
shall be construed in accordance with and governed by the laws of the State of
Michigan.
(e) Withholding of Taxes. The Company may withhold, or allow
an Award holder to remit to the Company, any Federal, state or local taxes
applicable to any grant, vesting, or other event giving rise to income tax
liability with respect to an Award. An Award holder may elect to surrender
previously acquired Common Stock or to have the Company withhold Common Stock
relating to such Award, the number of shares of such withheld or surrendered
Common Stock to be sufficient to satisfy all or a portion of the income tax
liability that arises upon the grant, vesting or other event giving rise to
income tax liability with respect to such Award.
(f) Exception to Non-transferability of Awards. Under such
rules and procedures as the Board may establish, the holder of an Award may
transfer such Award to members of the holder's immediate family (i.e.,
children, grandchildren and spouse) or to one or more trusts for the benefit of
such family members or to partnerships in which such family members are the
only partners, provided that (i) the agreement, if any, with respect to such
Awards, expressly so permits or is amended to so permit, (ii) the holder does
not receive any consideration for such transfer, and (iii) the holder provides
such documentation or information concerning any such transfer or transferee as
the Board may reasonably request. Any Awards held by any transferees shall be
subject to the same terms and conditions that applied immediately prior to
their transfer. The Board may also amend the agreements applicable to any
outstanding Awards to permit such transfers. Any Award not granted pursuant to
any agreement expressly permitting its transfer or amended expressly to permit
its transfer shall not be transferable.
(g) Forfeiture of Awards. Except for an Award that becomes
vested pursuant to a Change in Control, as described in Section 10, the Board
may immediately forfeit an Award whether vested or unvested, if the holder
competes with the Company or engages in conduct that, in the opinion of the
Board, adversely affects the Company.
(h) Agreement. The specific terms of each Award shall be set
forth in an agreement signed by the Participant and an authorized representative
of the Company.
(i) Acceptance of Awards. The acceptance of an Award by a
Participant shall be deemed to indicate the acceptance by the Participant and
ratification of, and consent to, any action taken under the Plan by the Company
or the Board.
SECTION 11. AMENDMENT OR DISCONTINUANCE OF THE PLAN
The Plan may be amended or discontinued by the Board from time
to time, provided that no such amendment or discontinuance of the Plan shall
adversely affect any Award theretofore granted without the consent of the holder
thereof.
-5-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State/Country of Percent Owned By
Name Incorporation Perrigo Company
---- ------------- ---------------
<S> <C> <C>
L. Perrigo Company Michigan 100%
Perrigo Company of Tennessee, Inc. Tennessee 100%
Perrigo Company of Missouri, Inc. Missouri 100%
Perrigo Company of Michigan 100%
South Carolina, Inc.
Perrigo Sales Company Michigan 100%
Perrigo (Barbados), L.T.D. Barbados 100%
Perrigo International, Inc. Michigan 100%
Perrigo de Mexico S.A. de C.V. Nuevo Leon (Mexico) 100% by Perrigo International, Inc.
Nippon Perrigo K.K. Japan 100% by Perrigo International, Inc.
Perrigo Asia Ltd. Michigan 100% by Perrigo International, Inc.
Sagmel U.S.A. Illinois 30% by Perrigo International, Inc.
Quimica y Farmacia S.A. de C.V. Mexico 87.8% by Perrigo International, Inc.
(effective September 11, 1997)
Shandex Sales Group Limited Canada 20% by Perrigo International, Inc.
</TABLE>
-1-
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference and use of our report
dated August 26, 1998 on the consolidated financial statements of Perrigo
Company and subsidiaries which appears on page 33 of this Form 10-K for the
year ended June 30, 1998 in the previously filed registration statements for
that company's 1988 Employee Incentive Stock Option Plan, as amended
(Registration No. 33-46265), 1989 Non-qualified Stock Option Plan for Directors
as amended (Registration No. 33-46264), Investment Plan and Trust (Registration
No. 33-46262), Cumberland-Swan, Inc. Retirement Income Savings Plan
(Registration No. 33-46263) and Perrigo Company Missouri, Inc. Investment Plan
(Registration No. 33-90886).
By: /s/BDO Seidman, LLP
----------------------------
BDO Seidman, LLP
Grand Rapids, Michigan
October 6, 1998
-1-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,496
<SECURITIES> 0
<RECEIVABLES> 74,601
<ALLOWANCES> 2,691
<INVENTORY> 181,467
<CURRENT-ASSETS> 372,454
<PP&E> 303,038
<DEPRECIATION> 112,394
<TOTAL-ASSETS> 595,861
<CURRENT-LIABILITIES> 141,520
<BONDS> 81,619
0
0
<COMMON> 116,660
<OTHER-SE> 228,418
<TOTAL-LIABILITY-AND-EQUITY> 595,861
<SALES> 902,637
<TOTAL-REVENUES> 902,637
<CGS> 670,775
<TOTAL-COSTS> 670,775
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 580
<INTEREST-EXPENSE> 2,149
<INCOME-PRETAX> (65,992)
<INCOME-TAX> (14,356)
<INCOME-CONTINUING> (51,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,636)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
