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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JANUARY 2, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-19725
PERRIGO COMPANY
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-2799573
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
515 EASTERN AVENUE
ALLEGAN, MICHIGAN 49010
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(616) 673-8451
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF COMMON STOCK JANUARY 22, 1999
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WITHOUT PAR 73,256,740 SHARES
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PERRIGO COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of income--For the thirteen-week
period ended January 2, 1999, the period from July 1, 1998 through
January 2, 1999 and for the three and six months ended
December 31, 1997 3
Condensed consolidated balance sheets--January 2, 1999
and June 30, 1998 4
Condensed consolidated statements of cash flows--For the period from
July 1, 1998 through January 2, 1999 and for the six months ended
December 31, 1997 5
Notes to condensed consolidated financial statements--
January 2, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 18
</TABLE>
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PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Year-To-Date
------------------------------------ --------------------------------
Period From
Thirteen-Week Three Months July 1, 1998 Six Months
Period Ended Ended Through Ended
January 2, December 31, January 2, December 31,
1999 1997 1999 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $226,121 $240,738 $438,419 $464,511
Cost of sales 171,826 174,447 348,819 338,754
-------- -------- -------- --------
Gross profit 54,295 66,291 89,600 125,757
-------- -------- -------- --------
Operating expenses
Distribution 8,939 7,824 16,718 15,491
Research and development 3,851 2,999 7,457 5,941
Selling and administrative 28,001 29,804 65,008 55,493
Restructuring and redesign - 119 - 483
Unusual litigation 686 2,053 1,674 3,735
-------- -------- -------- --------
41,477 42,799 90,857 81,143
-------- -------- -------- --------
Operating income (loss) 12,818 23,492 (1,257) 44,614
Interest and other expense 2,820 737 6,037 1,064
-------- -------- -------- --------
Income (loss) before income taxes 9,998 22,755 (7,294) 43,550
Income tax expense (benefit) 2,875 8,310 (2,041) 15,900
-------- -------- -------- --------
Net income (loss) $ 7,123 $ 14,445 $ (5,253) $ 27,650
======== ======== ======== ========
Basic earnings (loss) per share $ 0.10 $ 0.19 $ (0.07) $ 0.37
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.10 $ 0.19 $ (0.07) $ 0.36
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
January 2, June 30,
1999 1998
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ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 852 $ 1,496
Accounts receivable, net of allowances of $3,358 and
$2,691, respectively 147,115 74,601
Inventories 211,633 181,467
Prepaid expenses and other current assets 12,985 5,817
Refundable income taxes 743 -
Current deferred income taxes 41,627 42,675
Assets held for sale 65,817 66,398
-------- --------
Total current assets 480,772 372,454
Property and equipment 325,216 303,038
Less accumulated depreciation 123,467 112,394
-------- --------
201,749 190,644
Goodwill, net of accumulated amortization of $9,604 and
$9,094, respectively 20,231 20,741
Other 7,635 12,022
-------- --------
$710,387 $595,861
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $120,685 $ 78,791
Notes payable 5,507 5,379
Payrolls and related taxes 13,970 13,266
Accrued expenses 41,885 40,791
Income taxes - 3,293
-------- --------
Total current liabilities 182,047 141,520
Deferred income taxes 29,146 27,264
Long-term debt 173,694 81,619
Minority interest 411 380
Shareholders' equity
Preferred stock, without par value, 10,000 shares authorized,
none issued - -
Common stock, without par value, 200,000 shares authorized,
73,250 and 74,692 issued, respectively 101,938 116,660
Unearned compensation (56) (42)
Retained earnings 223,207 228,460
-------- --------
Total shareholders' equity 325,089 345,078
-------- --------
$710,387 $595,861
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Period From Six
July 1, 1998 Months
Through Ended
January 2, December 31,
1999 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income $ (5,253) $ 27,650
Depreciation and amortization 11,641 14,835
Write-off of Russian investment 14,177 -
-------- --------
20,565 42,485
Accounts receivable (75,838) (22,190)
Inventories (31,604) (18,828)
Current and deferred income taxes (1,106) 2,827
Assets held for sale 581 -
Accounts payable 41,894 6,970
Other (5,314) 598
-------- --------
Net cash (for) from operating activities (50,822) 11,862
-------- --------
Cash Flows For Investing Activities:
Additions to property and equipment (22,178) (32,986)
Business acquisitions, net of cash acquired - (15,827)
Other (5,086) (930)
-------- --------
Net cash for investing activities (27,264) (49,743)
-------- --------
Cash Flows From (For) Financing Activities:
Borrowings of long-term debt, net 92,075 55,107
Borrowings of short-term debt, net 128 -
Issuance of common stock 59 478
Repurchase of common stock (14,820) (29,875)
-------- --------
Net cash from financing activities 77,442 25,710
-------- --------
Net Decrease in Cash and Cash Equivalents (644) (12,171)
Cash and Cash Equivalents, at Beginning of Period 1,496 14,356
-------- --------
Cash and Cash Equivalents, at End of Period $ 852 $ 2,185
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 4,393 $ 882
Income taxes paid $ 299 $ 14,392
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and other adjustments) considered necessary for a
fair presentation have been included.
The Company changed its fiscal year end from June 30 to the 52 or
53-week period that ends on the Saturday closest to June 30, effective for
fiscal year 1999. After the transition year of fiscal year 1999, the Company's
quarters will each be comprised of 13 weeks and end on a Saturday, except in
certain years when the Company will have one quarter comprised of 14 weeks.
During fiscal year 1999, the first quarter includes the period from July 1
through October 3, 1998. The second through fourth quarters will each be
comprised of 13 weeks ending on January 2, April 3, and July 3, 1999,
respectively. Prior to fiscal year 1999, the Company's quarters were comprised
of three calendar months ending on September 30, December 31, March 31 and June
30.
Operating results for the period from July 1, 1998 through January 2,
1999 are not necessarily indicative of the results that may be expected for the
year ending July 3, 1999. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended June 30, 1998.
INTERNATIONAL INVESTMENT
The Company has a Russian investment that is accounted for using the
equity method. Due to the collapse of the Russian economy, the Company wrote off
its net investment of $1,640 and also wrote off inventory of $1,663 and accounts
and notes receivable of $10,874 related to this Russian investment for a total
of $14,177 in the first quarter of fiscal year 1999. The net investment amount
is included in other income and expense; the inventory amount is included in
cost of goods sold; and the accounts and notes receivable amount is included in
selling and administrative expense.
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EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the "basic"
and "diluted" Earnings per Share ("EPS") calculations follows:
<TABLE>
<CAPTION>
Second Quarter Year-To-Date
---------------------------------- ---------------------------------
Period From
Thirteen-Week Three Months July 1, 1998 Six Months
Period Ended Ended Through Ended
January 2, December 31, January 2, December 31,
1999 1997 1999 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) used for both "basic"
and "diluted" EPS calculation $ 7,123 $ 14,445 $ (5,253) $ 27,650
=============== =============== =============== ===============
Denominator:
Weighted average shares outstanding
for the period - used for "basic"
EPS calculation 73,219 75,573 74,114 75,333
Dilutive effect of stock options 270 1,205 - 1,181
--------------- --------------- --------------- ---------------
Weighted average shares outstanding
for the period - used for "diluted"
EPS calculation 73,489 76,778 74,114 76,514
=============== =============== =============== ===============
</TABLE>
The effect of 312 stock options was not included for the period from
July 1, 1998 through January 2, 1999 because to do so would have been
antidilutive.
NEW ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board ("FASB") issued
two new disclosure standards. Both of these new standards are effective for
financial statements for fiscal years beginning after December 15, 1997 and
require comparative information for earlier years to be restated. Results of
operations and financial position are unaffected by implementation of these new
standards. The standards are summarized below.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. For the period from July 1,
1998 through January 2, 1999 and for the six months ended December 31, 1997, the
Company had no items of other comprehensive income.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise,"
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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 components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company has reviewed this Statement and determined that it has
one reportable segment - store brand health and beauty care. Accordingly, the
adoption of SFAS No. 131 will not significantly impact the Company's current
disclosures with respect to products, services, geographic areas and major
customers.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Historically, the Company has not entered into
derivative contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard on July 4,
1999 to affect its financial statements.
NOTE B - INVENTORIES
The components of inventories consist of the following:
January 2, June 30,
1999 1998
---- ----
Finished goods $ 79,890 $ 70,206
Work in process 88,085 76,015
Raw materials 43,658 35,246
--------- ---------
$ 211,633 $ 181,467
========= =========
NOTE C - RESTRUCTURING AND REDESIGN COSTS
During the fourth quarter of fiscal year 1998, the Company announced
the decision to divest its personal care business in order to reallocate
resources to its more profitable OTC pharmaceutical and nutritional business and
to international opportunities. This action is more fully described in the
Company's annual report on Form 10-K for the year ended June 30, 1998, under the
caption "1998 Restructuring". The Company is still in the process of completing
the divestiture and expects to have the sale completed in the first half of
calendar year 1999. There have been no changes in the net assets held for sale
that have resulted in any gains or losses during the period from July 1, 1998
through January 2, 1999. Net sales for the personal care business were $93,084
and $98,874 for the period from July 1, 1998 through January 2, 1999 and
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the six months ended December 31, 1997, respectively. The Company does not
maintain operating income information by its three main product lines, however,
based on the incremental approach, the Company estimates that the pre-tax
operating losses and plant inefficiencies for the personal care business were
approximately $3,000 and $3,000 for the period from July 1, 1998 through January
2, 1999 and the six months ended December 31, 1997, respectively. The effect of
suspending depreciation was $4,000 and $2,000 for the first half of fiscal year
1999 and for the thirteen-week period ended January 2, 1999, respectively. The
Company estimates that it will incur approximately $4,000 in fiscal year 1999
related to net operating losses and plant inefficiencies for the closing of
plant facilities and the intention to divest the personal care business. During
the first half of fiscal year 1999, $2,953 was paid for costs primarily related
to severance costs, relocation costs and professional fees for the 1998
restructuring. Thirty-two employees were terminated during the period. The costs
incurred were charged against a reserve of $12,259, which was established in
fiscal year 1998. As of October 3, 1998, a total restructuring reserve balance
of $9,306 remains in accrued liabilities.
NOTE D - COMMITMENTS AND CONTINGENCIES
For the period from July 1 through January 2, 1999, the condensed
consolidated statement of income includes $1,674 of unusual litigation costs
related to a purported class action and other legal matters as described in the
Company's annual report on Form 10-K for the year ended June 30, 1998. The
Company believes the actions and claims are without merit and may be covered by
insurance and continues to vigorously defend against these actions. In October
1998, the class action lawsuit was dismissed against all defendants. In November
1998, the plaintiffs appealed the dismissal of their case.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER AND FIRST HALF OF FISCAL YEARS 1999 AND 1998
RESULTS OF OPERATIONS
SECOND QUARTER OF FISCAL YEARS 1999 AND 1998
The Company's net sales decreased by $14,617 or 6.1% to $226,121 for
the second quarter of fiscal year 1999, from $240,738 during the second quarter
of fiscal year 1998. The decrease was primarily due to decreases in shipments
because of the implementation of a new software system in September 1998. In
September 1998 the Company converted to a new integrated software package to
improve the Company's data systems and assist the Company in achieving its
business process redesign goals. The Company's speed of recovery from this
changeover was slower than expected resulting in a decrease in shipments from
the second quarter of fiscal year 1998. The Company anticipates that the third
and fourth quarters of fiscal year 1999 will not be as significantly negatively
impacted by this changeover.
Gross profit decreased $11,996 or 18.1% for the second quarter of
fiscal year 1999 compared to the second quarter of fiscal year 1998. The gross
profit percentage for the second quarter of fiscal year 1999 was 24.0% compared
to 27.5% for the second quarter of fiscal year 1998. The decrease in gross
profit percentage was primarily due to inefficiencies resulting from the
Company's conversion to its new software system in September 1998 and
outsourcing costs incurred to meet customer service requirements.
Operating expenses decreased $1,322 or 3.1% for the second quarter of
fiscal year 1999 compared to the second quarter of fiscal year 1998. Operating
expenses, as a percentage of net sales, were 18.3% for the second quarter of
fiscal year 1999 compared to 17.8% for the second quarter of fiscal year 1998.
Operating expenses consist of distribution, research and development, selling
and administrative, restructuring and redesign and unusual litigation costs.
Excluding restructuring and redesign and unusual litigation costs, operating
expenses were 18.0% of net sales for the second quarter of fiscal year 1999
compared to 16.9% of net sales for the second quarter of fiscal year 1998.
Distribution expenses increased $1,115 or 14.3% from the second quarter of
fiscal year 1998 primarily due to expediting shipments incurred to meet customer
service requirements. Distribution expense, as a percentage of net sales, was
4.0% of net sales for the second quarter of fiscal year 1999 compared to 3.3% of
net sales for the second quarter of fiscal year 1998. Research and development
expenses increased $852 or 28.4% from the second quarter of fiscal year 1998
primarily due to costs associated with the development of new products which are
approved through the Food and Drug Administration's ("FDA") Abbreviated New Drug
Application ("ANDA") process. Research and development expenses for fiscal year
1999 are expected to be higher than the fiscal year 1998 expenses. Research and
development expense, as a percentage of net sales, was 1.7% for the second
quarter of fiscal year 1999 compared to 1.2% for the second quarter of fiscal
year 1998. Selling and administrative expense decreased $1,803 or 6.0% from the
second quarter of fiscal year 1998 primarily due to reductions in promotional
expenses, travel expenses and business taxes partially offset by an increase in
MIS expenses related to the Company's new integrated software package.
Restructuring and redesign and unusual litigation costs decreased $1,486 from
the second quarter
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of fiscal year 1998. See Notes C and D to the condensed consolidated financial
statements.
Interest and other expense increased $2,083 from the second quarter of
fiscal year 1998. Interest expense increased $2,453 to $2,877 for the second
quarter of fiscal year 1999 compared to $424 for the second quarter of fiscal
year 1998 primarily due to higher borrowing levels.
The effective tax rate was 28.8% for the second quarter of fiscal year
1999, compared to 36.5% for the second quarter of fiscal year 1998. Permanent
difference adjustments affected the effective tax rate for the quarter.
FIRST HALF OF FISCAL YEARS 1999 AND 1998
The Company's net sales decreased $26,092 or 5.6% to $438,419 for the
first half of fiscal year 1999, from $464,511 for the first half of fiscal year
1998. The decrease was primarily due to decreases in shipments because of
implementation of a new software system in September 1998. As described
previously in the Second Quarter section of these Results of Operations, the
Company's speed of recovery from this changeover was slower than expected
resulting in a decrease in shipments from the first half of fiscal year 1998.
The Company anticipates that the second half of fiscal year 1999 will not be as
negatively impacted by this changeover.
During the first quarter of fiscal year 1999, the Company wrote off
inventory of $1,663, accounts and notes receivable of $10,874 and the balance of
its Russian investment of $1,640 for a total of $14,177 due to the collapse of
the Russian economy. The inventory amount is included in cost of sales; the
accounts and notes receivable amount is included in selling and administrative
expense; and the investment amount is included in other income and expense. The
discussion below excludes the effect of these charges.
Gross profit decreased $34,494 or 27.4% for the first half of fiscal
year 1999 compared to the first half of fiscal year 1998. The gross profit
percentage for the first half of fiscal year 1999 was 20.8% compared to 27.1%
for the first half of fiscal year 1998. The decrease in gross profit percentage
was primarily due to inefficiencies resulting from the Company's conversion to
its new software system and outsourcing costs incurred to meet customer service
requirements.
Operating expenses decreased $1,160 for the first half of fiscal year
1999 compared to the first half of fiscal year 1998. Operating expenses, as a
percentage of net sales, were 18.2% for the first half of fiscal year 1999
compared to 17.5% for the first half of fiscal year 1998. Excluding
restructuring and redesign and unusual litigation costs, operating expenses were
17.9% of net sales for the first half of fiscal year 1999 compared to 16.6% for
the first half of fiscal year 1998. Distribution expenses increased $1,227 or
7.9% from the first half of fiscal year 1998 primarily due to expedited shipment
costs and higher warehousing costs incurred to meet customer service
requirements. Distribution expense, as a percentage of net sales, was 3.8% for
the first half of fiscal year 1999 compared to 3.3% for the first half of fiscal
year 1998. Research and development expenses increased $1,516 or 25.5% from the
first half of fiscal year 1998 primarily due to costs associated with the
development of new products, which are approved through the FDA's ANDA process.
Research and development expense, as a percentage of net sales, was 1.7% for the
first half of fiscal year 1999 compared to 1.3% for the first half of fiscal
year 1998. Selling and administrative expense decreased $1,359 or 2.4% from the
first half of
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<PAGE> 12
fiscal year 1998, primarily due to reductions in promotional expenses and
business taxes, partially offset by an increase in MIS expenses related to the
Company's new integrated software package. Selling and administrative expense
was 12.3% of net sales for the first half of fiscal year 1999 compared to 11.9%
of net sales for the first half of fiscal year 1998. Restructuring and redesign
and unusual litigation costs decreased $2,544 from the first half of fiscal year
1998. See Notes C and D to the condensed consolidated financial statements.
Interest and other expense increased $3,333 from the first half of
fiscal year 1998. Interest expense increased $4,412 to $4,973 for the first half
of fiscal year 1999 compared to $561 for the first half of fiscal year 1998
primarily due to higher borrowing levels. Other income was $576 for the first
half of fiscal year 1999 compared to other expense of $503 for the first half of
fiscal year 1998.
The effective tax rate was 28.0% for the first half of fiscal year 1999
compared to 36.5% for the first half of fiscal year 1998. The decrease in the
effective rate was primarily due to the nondeductible write-off of the Company's
Russian investment.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of fiscal year 1999, working capital increased
$67,791 and cash flow for operating activities was $50,822. Accounts receivable
increased $75,838, inventories increased $31,604 and accounts payable increased
$41,894. These increases were primarily due to seasonal increases, customer
service requirements and inefficiencies caused by the Company's conversion to a
new software system in September 1998.
Capital expenditures for facilities and equipment were $22,178 for the
first half of fiscal year 1999. A significant portion of these expenditures was
for the construction of a new distribution facility in Allegan, Michigan and
expansion of the manufacturing facility for nutritional products. Capital
expenditures originally planned at approximately $60,000 for fiscal year 1999,
will be reviewed and may decrease to approximately $50,000. Planned capital
expenditures are primarily for the expenditures as noted above and additional
manufacturing and packaging equipment required to support the over-the-counter
pharmaceutical and nutritional product categories.
The Company has a Russian investment that is accounted for using the
equity method. Due to the collapse of the Russian economy, the Company wrote off
its net investment of $1,640 and also wrote off inventory of $1,663 and accounts
receivable and notes receivable of $10,874 related to this Russian investment in
the first quarter of fiscal year 1999.
During the first half of fiscal year 1999, the Company purchased 1,550
shares of common stock for $14,820 under its common stock repurchase program.
The common stock was retired.
Long-term debt increased $92,075 during the first half of fiscal year
1999 as the Company drew on its $150,000 line of credit and its $55,000
uncommitted lines of credit to fund, primarily working capital requirements,
the common stock repurchase program and capital expenditures. At January 2,
1999 the Company had $31,306 available from uncommitted credit facilities with
two financial institutions.
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<PAGE> 13
YEAR 2000 READINESS DISCLOSURE
The Company continues to implement the plan set forth in the Year 2000
Compliance section of the MDA in its annual report on Form 10-K for the year
ended June 30, 1998. The plan involves (1) becoming year 2000 compliant in all
of its critical software systems, infrastructure systems, manufacturing systems,
security systems and office equipment, (2) reviewing insurance, regulatory and
legal implications as they relate to the year 2000 and (3) determining the year
2000 compliance status of the Company's key suppliers and customers. The plan
has not changed substantially from June 30, 1998 and its status is summarized
below. The Company is within its timeline for having the plan completed prior to
the year 2000.
The Company believes it has completed the identification of systems
that need to be reviewed for year 2000 compliance and has categorized each
system as "critical", "important" or "non-critical". The following procedures
will be followed for all systems in order to gain assurance that they are year
2000 compliant: (1) Obtain the year 2000 compliance status from the
manufacturer. If the system is not considered year 2000 compliant by the
manufacturer it will be updated, replaced or eliminated; (2) Test each system to
determine year 2000 compliance; (3) Remediate and retest noncompliant systems
until year 2000 compliance is obtained. Critical systems are the highest
priority and testing to determine year 2000 compliance for these systems is
anticipated to be completed in the first quarter of calendar year 1999. The
Company expects to prepare contingency plans for all critical systems prior to
the year 2000. Important systems will be tested after critical systems and
non-critical systems will be tested as time permits. While the Company is still
reviewing the extent of replacement, remediation and testing that will be
necessary, based on the information received to date, the Company currently
anticipates the cost of its year 2000 compliance program to be approximately
$1,500 to $2,000 for calendar year 1999. There can be no assurance that the
Company will be able to identify and correct all aspects of the year 2000
problem that affect it in sufficient time, and if it cannot, the failure would
have a material negative impact on the Company's business, operations or
financial condition. The Company, however, does not currently expect that the
year 2000 problem as it relates to its internal systems will have a material
negative impact on the Company.
The Company is in the process of reviewing the insurance, regulatory
and legal implications as they relate to the year 2000. The Company at this time
does not anticipate that the costs associated with this review will be material
to the Company's financial condition or results of operations.
The Company's plan to determine the year 2000 compliance status of its
key suppliers and customers is in progress. The plan involves soliciting
information from suppliers and customers through use of surveys and follow-up
discussions and testing where needed. The Company has sent out surveys to all of
its current key suppliers and 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 current 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
-13-
<PAGE> 14
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 be
significantly hampered from conducting normal business operations because of
internal year 2000 problems. The Company's next steps will be to rate the
responses to the surveys, obtain more detailed information from certain key
suppliers and customers, follow-up with those companies who did not respond
satisfactorily to the survey and test systems where needed.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report are forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended and are subject to the safe harbor created thereby. Please
refer to pages 27-31 of the Company's Form 10-K for the year ended June 30, 1998
for a discussion of certain important factors that relate to forward looking
statements contained in this quarterly report. Although the Company believes
that the expectations reflected in any such forward looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct.
The Company converted to a new integrated software package in the first
quarter of fiscal year 1999. The Company's recovery from this software
conversion was slower than expected, resulting in unacceptable customer service
levels during the first half of fiscal year 1999. It is uncertain as to the
impact lower customer service levels could have on future sales. Should the
Company's future sales be adversely affected by this software conversion, there
could be a material impact on the Company's results of operations or financial
position.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Not currently applicable to the Company.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Stockholders' Meeting held on November 5, 1998,
the Company's stockholders voted on the following matters:
1. Election of three directors of the Company;
2. The ratification of selection of independent accounts; and
3. Such other business as may properly come before the meeting (none).
The tabulation of votes provided by the Inspector of Election was as
follows:
Proposal Voting Tabulation
-------- -----------------
1. ELECTION OF DIRECTORS
Nominee For Withhold/Against
------- --- ----------------
Larry D. Fredricks 60,187,115 723,277
Michael J. Jandernoa 60,173,962 736,430
L. R. Jalenak, Jr. 60,189,907 720,485
OTHER DIRECTORS WHOSE TERM
OF OFFICE CONTINUES
F. Folsom Bell
Peter R. Formanek
Richard G. Hansen
John W. Spoelhof
Mary Alice Taylor
For Against Abstain
--- ------- -------
2. RATIFICATION OF SELECTION OF
BDO SEIDMAN, LLP 60,671,391 149,061 89,940
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
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.
-15-
<PAGE> 16
3(b) Restated Bylaws of Registrant, dated April
10, 1996, incorporated by reference from the
Registrant's Form 8-K filed on April 10,
1996.
4(a) Shareholders' Rights Plan, incorporated by
reference from the Registrant's Form 8-K
filed on April 10, 1996.
10(a) Credit Agreement, dated June 30, 1996,
between the Registrant and NBD Bank, N.W.,
Sanwa Bank, Comerica Bank-Detroit, PNC Bank,
Westdeutsche Landesbank Girozentrale and Old
Kent Bank and Trust Company, incorporated by
reference from the Registrant's 1996 Form
10-K filed on September 25, 1996.
10(b) Registrant's Management Incentive Plan,
incorporated by reference from Registration
Statement No. 33-69324 filed by the
Registrant on September 23, 1993.
10(c) Registrant's 1988 Employee Incentive Stock
Option Plan as amended, incorporated by
reference to Exhibit A of the Registrant's
1997 proxy statement.
10(d) Registrant's 1989 Non-Qualified Stock Option
Plan for Directors, as amended, incorporated
by reference from Exhibit B of the
Registrant's 1997 Proxy Statement as amended
at the Annual Meeting of Shareholders on
November 6, 1997.
10(e) First Amendment to Registrant's Credit
Agreement, dated June 29, 1998, incorporated
by reference from the Registrant's Form 10-K
filed on October 6, 1998.
10(f) Registrant's Restricted Stock Plan for
Directors, dated November 6, 1997,
incorporated by reference from Registrant's
Form 10-K filed on October 6, 1998.
10(g) Second Amendment to Registrant's Credit
Agreement, dated November 20, 1998,
incorporated by reference from Registrant's
Form 10-Q filed on November 23, 1998.
10(h) Credit Agreement, dated December 8, 1998,
between Registrant and National City Bank.
27 Financial Data Schedule
-16-
<PAGE> 17
(b) Reports on Form 8-K
The Company filed an 8-K on October 14, 1998 that announced
the following organization changes at the executive officer level:
Domestic Business - Mark Olesnavage was named President of
L. Perrigo Company. He is responsible for all domestic
over-the-counter pharmaceutical and nutritional business
including sales, marketing, scientific affairs, production
operations and related departments. Mr. Olesnavage had been
President - Customer Business Development.
International Business - Craig Hammond was named President
of Perrigo International. He is responsible for developing
Perrigo's presence outside the United States, including all
international business development, sales, marketing and
production operations, as well as the Company's business in
Mexico, Quimica y Farmacia. He will continue to be
responsible for logistics, MIS, software implementation
(SAP) and Human Resources. Mr. Hammond had been Chief
Operations Officer.
The Company filed an 8-K on November 17, 1998 that announced that
Richard G. Hansen had been named President and Chief Operating
Officer, effective November 11, 1998.
Mr. Hansen, 53, has been a member of the Board of Directors
of the Perrigo Company since 1995. He was President and
Chief Operating Officer of Perrigo from 1991 until his
retirement in 1995. Mr. Hansen was Executive Vice President
and Chief Operating Officer of Perrigo from 1989 to 1991.
From 1979 to 1989, he served in various executive capacities
and led the implementation of our MIMS (Minimum Inventory
Maximum Service) program that integrated consumer demand
with operations.
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERRIGO COMPANY
-----------------------------------
(Registrant)
Date: February 11, 1999 /s/Michael J. Jandernoa
----------------------- -----------------------------------
Michael J. Jandernoa
Chairman of the Board and Chief
Executive Officer
Date: February 11, 1999 /s/Thomas J. Ross
----------------------- -----------------------------------
Thomas J. Ross
Vice President Finance -
Principal Accounting and Financial Officer
-18-
<PAGE> 1
EXHIBIT 10(h)
GRID NOTE: SHORT-TERM LOANS
(Money-Market Rate or Prime Rate)
$25,000,000.00 Birmingham, Michigan December 8, 1998
FOR VALUE RECEIVED, the undersigned, PERRIGO COMPANY (Borrower),
hereby promises to pay to the order of NATIONAL CITY BANK (Payee) at the office
of National City Bank at 1900 East Ninth Street, Cleveland, Ohio 44114-3484, and
in lawful money of the United States of America, Twenty-Five Million and
No/100ths Dollars (25,000,000.00) or such lesser amount as may be endorsed on
this note (or any allonge thereto), together with interest, all as provided
below. All interest shall accrue on the basis of a 360-day year and actual days
elapsed. In no event shall interest accrue at a greater rate than the maximum
rate (if any is established by law) permitted by law.
1. This note represents an arrangement whereby, for Borrower's
convenience, Borrower may, without giving Payee a separate note each time,
obtain loans, each (a subject loan) to be designated a PR loan or a fixed-rate
loan. Regardless of any fee or other consideration received by Payee, Borrower
agrees that Payee may terminate or change the arrangement at any time (a)
without prior notice should there occur a default of any kind or anything else
deemed by Payee, in its sole discretion, to materially affect Borrower's
financial situation or (b) by giving Borrower not less than ten (10) days' prior
written notice of the effective date of the termination or change; provided,
that this sentence does not give Payee any right to accelerate the maturity of
any subject loan prior to the occurrence of any default of any kind.
2. Whenever Borrower obtains a subject loan, Payee shall (a) make an
appropriate entry into a loan account maintained in Payee's books and records or
endorse an appropriate entry on this note, or both, each such entry to be prima
facie evidence of the information so entered, and (b) disburse the proceeds (in
the absence of Borrower's written instructions to the contrary) to the credit of
Borrower's general checking account with Payee. Payee shall not transfer this
note or seek judgment thereon or file proof of claim thereon without first
endorsing on this note the then actual principal balance of this note.
3. Each PR loan shall be payable on ten (10) days notice to Borrower
and shall bear interest at a fluctuating rate which shall, prior to maturity, be
equal to Payee's prime rate from time to time in effect and after maturity
(whether occurring as aforesaid or by acceleration), be equal to two percent
(2%) per annum above Payee's prime rate from time to time in effect, with each
change in the prime rate automatically and immediately changing the rate
thereafter applicable to the PR loan, except that in no event shall any PR loan
bear interest after maturity at a lesser rate than that actually applicable
thereto immediately after maturity, all of which interest shall be payable in
arrears on the first day of each March, June, September and December and at
maturity.
1
<PAGE> 2
4. Each fixed-rate loan shall bear interest prior to maturity at a
fixed rate (the contract rate) and be payable on a stated maturity date, the
rate and the maturity date each to be agreed upon by Borrower and Payee if and
when the fixed-rate loan is made. The interest on each fixed-rate loan shall be
payable in arrears at maturity and (if it matures more than ninety (90) days
after the date thereof) shall also be payable on the first day of each March,
June, September and December. After maturity (whether by lapse of time or
acceleration), each fixed-rate loan shall bear interest at a rate per annum
equal to two percent (2%) per annum plus either the contract rate or the prime
rate, whichever from day to day is the higher. Borrower agrees to indemnify
Payee against any loss relating in any way to its funding of any fixed-rate loan
paid before its stated maturity (whether a prepayment or a payment following any
acceleration of maturity) and to pay Payee, as liquidated damages for any such
loss, an amount (discounted to the present value in accordance with standard
financial practice at a rate equal to the treasury yield) equal to interest
computed on the principal payment from the payment date to the respective stated
maturities thereof at a rate equal to the difference of the contract rate less
the treasury yield, all as determined by Payee in its reasonable discretion.
5. By accepting this note Payee agrees that at each maturity of any
fixed-rate loan Payee will, so long as no default of any kind shall have begun
to exist, grant Borrower such extensions of any then outstanding fixed-rate loan
as Borrower may from time to time request, each extension to be in the form of
either a fixed-rate loan or a PR loan, (b) if, in the case of any requested
extension in the form of a fixed-rate loan, Borrower and Payee shall be unable
to agree as to the contract rate or stated maturity date (or both) to be
applicable thereto, the extension shall be in the form of a PR loan and (c)
Borrower shall have no right to obtain any extension if, prior to Borrower's
request therefor, there shall have occurred any default of any kind or Borrower
shall have received a notice in accordance with clause (b) of the second
sentence of section 1.
6. As used in this note, except where the context clearly requires
otherwise,
Borrower means Perrigo Company, a Michigan corporation;
Contract rate is defined in section 4;
Fixed-rate loan is defined in section 1;
PR loan is defined in section 1;
Prime rate means the fluctuation rate, as in effect at the time in
question, which from time to time is announced by Payee in Cleveland,
Ohio, as being its prime rate thereafter in effect;
Treasury yield means the annual yield on direct obligations of the
United States having a principal amount and maturity similar to that of
the principal being paid.
2
<PAGE> 3
7. This note shall be governed by internal Ohio law. Notice shall be
deemed to have been duly delivered to Borrower if delivered at Borrower's
address set forth below by registered or certified mail, whether or not the
notice is actually received; but no other method of giving notice is hereby
precluded.
ADDRESS: PERRIGO COMPANY
515 Eastern Avenue
Allegan, Michigan 49010 By: James R. Ondersma
-----------------
Title: Treasurer
---------
3
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<S> <C>
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<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JAN-02-1999
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<RECEIVABLES> 147,115
<ALLOWANCES> 3,358
<INVENTORY> 211,633
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0
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<COMMON> 101,938
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<TOTAL-LIABILITY-AND-EQUITY> 710,387
<SALES> 438,419
<TOTAL-REVENUES> 438,419
<CGS> 348,819
<TOTAL-COSTS> 348,819
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<INTEREST-EXPENSE> 4,973
<INCOME-PRETAX> (7,294)
<INCOME-TAX> (2,041)
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