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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 July 1, 2000
[ ] 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 of (I.R.S. Employer Identification No.)
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. X
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 August
28, 2000 as reported on the NASDAQ National Market System, was approximately
$374,157,096. 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 August 28, 2000 the registrant had outstanding 73,508,095 shares of
common stock.
Documents incorporated by reference: Portions of the Registrant's Proxy
Statement for its Annual Meeting on October 31, 2000 are incorporated by
reference into Part III.
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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 products and also manufactures store brand 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, Walgreens and Wal-Mart and major wholesalers such as Fleming, McKesson
and Super Valu.
The Company operates in one reportable business segment, store brand
health care, and markets a broad line of products that are comparable in quality
and effectiveness to national brand products. These products include OTC
pharmaceuticals such as analgesics, cough and cold remedies, antacids,
laxatives, feminine hygiene, suppositories and smoking cessation; 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.
The Company currently manufactures and markets certain products under
its own brand names Good Sense(R), Daily Source(R) and Herbal Source(R) and also
markets products under the brand name Swan(R) through a license agreement. 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 three wholly-owned domestic subsidiaries, L.
Perrigo Company, Perrigo Company of South Carolina, Inc., and Perrigo
International, Inc.; three wholly-owned foreign subsidiaries, Perrigo de Mexico
S.A. de C.V., Nippon Perrigo, K.K. and Perrigo do Brasil Ltda.; 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 2000
During fiscal year 2000, several changes were made in the executive
management of the Company. David T. Gibbons, a former Rubbermaid and 3M
executive, was elected President, Chief Executive Officer and a director of the
Company. Michael J. Jandernoa, who served as Chief Executive Officer since 1986,
remained Chairman of the Board. Douglas R. Schrank was named Executive Vice
President and Chief Financial Officer. Mr. Schrank joined the Company from M. A.
Hanna Company where he was most recently President of its Hanna Color
subsidiary. John T. Hendrickson was named Executive Vice President, Operations.
Mr. Hendrickson was most recently the Company's Vice President of Operations.
Effective September 1, 2000, F. Folsom Bell joined the Company as Executive Vice
President, Business Development. Mr. Bell most recently served in a consulting
capacity to the Company and has been a member of the Board of Directors since
1981.
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In fiscal year 1998, the Company announced its intention to divest the
personal care business. The personal care business was sold in August 1999.
Proceeds from the sale were $32,200, including funds held in escrow. The
LaVergne, Tennessee logistics facility was not included in this sale and is
reported as an asset held for sale at July 1, 2000. See Item 7 for a further
discussion of the 1998 restructuring.
A significant lawsuit was settled in favor of the Company during the
year. The lawsuit was originally filed in 1994 by the Company's former owner and
related to the purchase of the Company in 1988. The lawsuit was dismissed in
June 1998. The former owner filed an appeal in July 1998. Pursuant to a
settlement agreement entered into in March 2000, the lawsuit was dismissed and
all pending appeals were withdrawn. The effect of the settlement was to leave in
place the Court's original order dismissing the plaintiff's case.
The Company entered into settlement agreements with certain defendants
in relation to a civil antitrust lawsuit against a group of vitamin raw material
suppliers. Pursuant to the settlement agreements, the Company received an
aggregate payment of $4,154, net of attorney fees and expenses that were
withheld prior to the disbursement of the funds to the Company. See Item 3 for a
further discussion of legal proceedings.
The Company realized sales from several new products including an OTC
nicotine transdermal system patch for adult use as an aid to smoking cessation.
This is a new category for the Company with the product manufactured and
supplied through a third party agreement. Other significant new product launches
included an antacid comparable to the branded product Zantac 75(R), extra
strength calcium antacid tablets, tussin honey cough syrup, gelatin powder and
glucosamine complex tablets.
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.
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 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.
PRODUCT QUALITY AND PRODUCT ASSORTMENT
The Company offers a comprehensive product assortment in order to fill
customers' needs while minimizing their product sourcing costs.
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The Company is committed to providing a high-quality product to the
customer. Substantially, 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.
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. This staff also
responds to changes in existing national brand products by reformulating
comparable existing Company products. In the OTC pharmaceutical market, many new
products are the result of changes in product status from "prescription only"
(Rx) to "over-the-counter" (non-prescription). These "Rx switch" products
require approval by the Federal Drug Administration ("FDA") through its
abbreviated New Drug Application ("ANDA") process. In order to accelerate the
approval process, the Company uses both internal research and strategic product
development agreements with outside sources.
LOW COST SUPPLIER
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 supplier
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 operating 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 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 had three operating segments in fiscal year 2000 as defined
by the accounting pronouncement Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information". These segments were OTC pharmaceuticals, nutritional and personal
care products. The personal care business was sold in August 1999 and
information related to its assets, sales and operating income is found in the
Restructuring section of Item 7. The OTC pharmaceuticals and nutritional product
segments have been aggregated into one reportable segment because their
operating processes, types of customers, distribution methods, regulatory
environment and expected long-term financial performance are very similar. See
Note A to the consolidated financial statements included in Item 8 for further
information related to business segments.
PRODUCTS
The Company currently markets approximately 1,200 store brand products
to approximately 370 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.
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During fiscal year 2000, approximately $55 million of the Company's net
sales were attributable to new products added to the Company's product lines
within the past two fiscal years.
The Company manufactures and markets certain products under its own
brand names Good Sense(R), Daily Source(R) and Herbal Source(R) and also markets
products under the brand name Swan(R) through a license agreement. Net sales of
these products were approximately 3% to 5% of the Company's net sales for fiscal
years 2000, 1999 and 1998.
The following table illustrates net sales for the Company's two product
lines from fiscal year 1996 through fiscal year 2000. The personal care
business, which was sold in August 1999, is excluded from this table. See Note K
to the consolidated financial statements.
<TABLE>
<CAPTION>
NET SALES BY PRODUCT LINE
FISCAL YEAR
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTC Pharmaceuticals..... $585,193 $553,471 $536,328 $526,541 $474,551
Nutritional ............ 135,584 133,693 151,709 110,408 89,808
-------- -------- -------- -------- --------
$720,777 $687,164 $688,037 $636,949 $564,359
======== ======== ======== ======== ========
</TABLE>
Listed below are the major product categories under which the Company
markets products for store brand labels. Also listed are the names of certain
national brands against which the Company's products compete.
<TABLE>
<CAPTION>
PRODUCT CATEGORIES COMPARABLE NATIONAL BRANDS
------------------ --------------------------
<S> <C>
Cough/Cold Afrin(R), Benadryl(R), Dimetapp(R), NyQuil(R), PediaCare(R),
Robitussin(R), Sudafed(R), Tavist(R), Triaminic(R), Tylenol(R)
Analgesics Advil(R), Aleve(R), Bayer(R), Excedrin(R), Motrin(R), Tylenol(R)
Antacids Alka-Seltzer(R), Imodium A-D(R), Maalox(R), Mylanta(R),
Pepto Bismol(R), Tagamet HB(R), Tums(R), Zantac 75(R)
Feminine Hygiene/Test Kits/Sleep Aids/ Monistat(R) 3, Monistat(R) 7, e.p.t.(R), Unisom(R),
Hemorrhoidal Remedies/ Hair Restoration/ Preparation H(R), Rogaine(R)
Smoking Cessation
Laxatives Correctol(R), Ex-Lax(R), Fibercon(R), Metamucil(R), Phillips(R),
Senokot(R)
Vitamins/Nutritional Supplements Centrum(R), Flintstones(R), One-A-Day(R), Caltrate(R),
Citracal(R), Garlique(R), Ginkoba(R), Ginsana(R)
Nutritional Drinks Ensure(R)
</TABLE>
RESEARCH AND DEVELOPMENT
Research and development is a key component of the Company's business
strategy. The Company focuses on developing store brand products comparable in
formulation, quality and
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effectiveness to existing national brand products. As part of the product
development process, the Company reviews for 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
products such as children's ibuprofen oral suspension and drops, loperamide
hydrochloride, minoxidil and pseudoephedrine hydrochloride extended-release,
products comparable to the national brands Children's Motrin(R), Imodium A-D(R),
Rogaine(R) and Sudafed(R) 12 Hour, respectively.
The Company has obtained the rights to distribute, through use of
strategic alliance agreements, products such as Dayhist-D and DiBromm, products
comparable to the national brands Tavist-D(R) and Dimetapp(R), respectively.
The Company estimates that products for which marketing exclusivity is
expiring through the year 2003 represent a substantial potential market. The
Company actively pursues all avenues to offer store brand equivalents of these
products; however, there can be no assurance that it will be successful in
obtaining approval to distribute additional products.
The Company spent $16.3 million, $14.9 million and $15.9 million for
research and development during fiscal years 2000, 1999 and 1998, respectively.
The Company anticipates that research and development expenditures as a percent
of net sales will increase in the foreseeable future.
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 labels of Good
Sense(R) and Swan(R).
The Company has no material long-term contracts with customers.
Wal-Mart accounted for 26%, 24% and 24% of net sales for fiscal years 2000, 1999
and 1998, respectively. 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. 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.
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MANUFACTURING AND DISTRIBUTION
The Company has nine manufacturing facilities, which occupied
approximately 1.5 million square feet at July 1, 2000. The Company sold its
Smyrna, Tennessee manufacturing facility in August 1999 as part of the sale of
the personal care business. The Company supplements its production capabilities
with the purchase of product from outside sources and will continue to do so in
the future. During fiscal year 2000, the nutritional facility generally operated
at between 60% and 90% of capacity and the OTC pharmaceutical facilities
generally operated at between 70% and 90% of capacity. The Company aggressively
explores opportunities to utilize available capacities, such as contract
manufacturing for national brands.
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 changeover capabilities and reduced cycle times allow
the Company to respond quickly to changes in manufacturing schedules.
The Company has five regional logistics facilities across the United
States and two logistics facilities in Mexico that occupied approximately 1.5
million square feet at July 1, 2000. The LaVergne, Tennessee logistics facility
primarily serves the personal care business and is intended to be sold in fiscal
year 2001. The buyer of the personal care business is currently operating out of
this facility under a lease that expires in August 2001. Both contract freight
and common carriers are used to deliver products.
COMPETITION
The market for store brand OTC pharmaceutical 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 geographic market coverage and product categories. The Company is
the nation's largest manufacturer of store brand OTC pharmaceutical products.
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 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 react
rapidly to situations that 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 purchase of materials and
supplies due to the volume of purchases.
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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. Total retail sales for cough/cold/flu
products (both national brands and store brands) in fiscal year 2000 were lower
than fiscal year 1999, due to a sharp fall-off from the peak cough/cold/flu
season occurring in January. 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
that 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.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling,
testing, advertising and sale of the Company's products are subject to
regulation by one or more United States agencies, including the Food and Drug
Administration ("FDA"), the Federal Trade Commission ("FTC"), the Drug
Enforcement Administration ("DEA") and the Consumer Product Safety Commission
("CPSC"), as well as by foreign agencies. Various agencies of the states and
localities in which the Company's products are sold also regulate these
activities. In addition, the Company manufactures and markets certain of its
products in accordance with the guidelines promulgated by voluntary standard
organizations, such as the United States Pharmacopoeia Convention, Inc. ("USP").
The Company believes that its policies, operations and products comply in all
material respects with existing regulations.
Food and Drug Administration
The FDA exercises authority over three aspects of the Company's
business: (i) the labeling and marketing of monograph OTC, abbreviated New Drug
Application ("ANDA"), and monograph OTC pharmaceutical drug products, (ii) the
labeling and marketing of dietary supplements, and (iii) the operation of its
manufacturing, testing and packaging facilities.
OTC Pharmaceuticals
The majority of the Company's OTC pharmaceuticals are regulated under
the OTC Monograph System with respect to their recognized safety and
effectiveness profiles and are subject to certain FDA regulations. FDA
regulations cover well-known ingredients and specify, among other things,
permitted
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claims, required warnings and precautions, allowable combinations of
ingredients and dosage levels. Products governed by these regulations require no
prior approval of the FDA before they are marketed, only compliance with the
applicable regulation. Regulations may change from time to time, requiring
formulation, packaging or labeling changes for an affected product. While these
changes may cause the Company to incur costs to comply with them, changes
generally have a delayed effective date, and disruption of distribution or
material obsolescence of inventory due to any changes is not likely.
The Company also markets products that have switched from prescription
to over-the-counter status. These Rx-to-OTC switch products require approval by
the FDA through its ANDA process before they can be distributed. Based on
current FDA regulations, all chemistry, manufacturing and control issues,
bioequivalency and labeling related to these products are controlled by the
information included in the ANDAs. The ANDA process generally reduces the time
and expense related to FDA approval since a comparable product was approved when
it was originally introduced as a prescription product. For approval, the
Company must demonstrate that the product is equivalent to a product that has
previously been approved by the FDA and that the manufacturing process and other
requirements meet FDA standards. This approval process may require that
bioequivalence and/or efficacy studies be performed using a small number of
volunteers in a controlled clinical environment. Approval time is generally one
to four years from the date of submission of the application. Changes to the
approved ANDAs and, therefore, changes to these products, are governed by
specific regulations and guidelines that determine when changes, if approved by
the FDA, can be implemented.
The Drug Price Competition and Patent Term Restoration Act of 1984 (the
Hatch-Waxman Amendments to the Federal Food, Drug and Cosmetic Act) can give a
three-year period of marketing exclusivity to a company that obtains FDA
approval of an Rx-to-OTC switch product. Unless the Company establishes
relationships with the companies having exclusive marketing rights, the
Company's ability to market Rx-to-OTC switch products and offer its customers
products comparable to the national brand products would be delayed until the
expiration of the exclusivity granted to the company initiating the switch.
There can be no assurance that, in the event that the Company applies for FDA
approvals, the Company will obtain the approvals to market Rx-to-OTC switch
products or, alternatively, that the Company would be able to obtain these
products from other manufacturers.
Under the FDA Modernization Act of 1997, the FDA changed its policy
regarding market exclusivity for Rx-to-OTC switch products for use in the
pediatric population. In general, this legislation and the FDA policy change may
extend the patent and/or exclusivity terms granted to certain products up to 1
year. This policy change will, in certain instances, defer sales by the Company
of these products.
If the Company is first to file its ANDA, the FDA may grant a 180-day
exclusivity for that product. During the ANDA approval process, patent
certification is required and may result in legal action. The legal action would
not result in material damages. The Company would, however, incur the cost of
defending the legal action, and that action could delay those products from the
marketplace for up to 30 months. If the Company is not first to file its ANDA,
the FDA may grant a 180-day exclusivity to another company, therefore
effectively delaying launch of the Company's product.
The Company is also subject to the requirements of the Comprehensive
Methamphetamine Control Act of 1996, a law designed to allow the DEA to monitor
transactions involving chemicals that may be used illegally in the production of
methamphetamine. The Comprehensive Methamphetamine Control Act of 1996
establishes certain registration and recordkeeping requirements for
manufacturers of OTC cold, allergy, asthma and diet medicines that contain
ephedrine, pseudoephedrine or phenylpropanolamine. While certain of the
Company's OTC pharmaceutical products contain pseudoephedrine and
phenylpropanolamine, none of the Company's products contain ephedrine, a
chemical compound that is distinct from pseudoephedrine. Pseudoephedrine and
phenylpropanolamine are common ingredients in decongestant products manufactured
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by the Company and other pharmaceutical companies. The Company believes that its
products are in compliance with all applicable DEA requirements.
Dietary Supplements
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was
enacted on October 25, 1994 and amends the Federal Food, Drug and Cosmetic Act
to (i) define dietary supplements, (ii) expand the number of new dietary
supplement ingredients, (iii) permit "structure/function" statements for all
vitamin, mineral and natural products, including herbal products and other
nutritional supplements, and (iv) permit the use of certain published literature
in the sale of vitamin products. Dietary supplements are regulated as food
products under DSHEA, and the FDA is prohibited from regulating the dietary
ingredients in supplements as food additives, or the supplements as drugs,
unless the FDA interprets these claims as drug claims.
DSHEA provides for specific nutritional labeling requirements for
dietary supplements. The latest FDA labeling regulations were effective March
23, 1999. DSHEA permits substantiated, truthful and non-misleading statements of
nutritional support to be made in labeling. In addition, DSHEA authorizes the
FDA to promulgate current good manufacturing practices ("cGMP") specific to the
manufacture of dietary supplements, to be modeled after cGMP for food. The FDA
has proposed amendments to the cGMP for dietary supplements. Although the
Company cannot predict the final cGMP, it believes the changes will have minimal
impact on its business.
On January 6, 2000, the FDA published a Final Rule regarding statements
made in dietary supplement labeling. These statements cannot state expressly or
implicitly that a dietary supplement has any effect on a disease. Since the
passage of DSHEA, the FDA has wavered on its definition of disease. This Final
Rule clarifies the FDA's definition of a disease. In addition, the Final Rule
opens up statements from several OTC drug monographs for use on dietary
supplements (e.g., relief of occasional sleeplessness). This gives the industry
a new level of freedom in marketing dietary supplements and providing
information to consumers about the use of dietary supplements. Effective January
31, 2000, the Center for Food Safety and Applied Nutrition ("CFSAN") combined
the former Office of Food Labeling and the former Office of Special Nutritionals
into a single entity now known as the Office of Nutritional Products, Labeling
and Dietary Supplements. The merger of the two offices will maximize the
resources that, in many cases, were previously working on overlapping issues.
The Company cannot determine what effect the FDA's future regulations,
when and if promulgated, will have on its business. Future regulations could,
however, among other things, require expanded documentation of the properties of
certain products, or scientific substantiation regarding ingredients, product
claims or safety. In addition, the Company cannot predict whether new
legislation regulating the Company's activities will be enacted, or what effect
any legislation would have on the Company's business.
Manufacturing and Packaging
All facilities where dietary supplements and pharmaceuticals are
manufactured, tested, packed, warehoused, or sold must comply with the FDA
manufacturing standards applicable to the type of product. All of the Company's
products are manufactured, tested, packaged and distributed according to the
cGMP. The FDA performs periodic audits to ensure that the Company's facilities
remain in compliance with the cGMP regulations. The failure of a facility to be
in compliance may lead to a breach of representations made to private label
customers or to regulatory action against the products made in that facility,
including seizure, injunction or recall.
The Company has received a Warning Letter from the FDA relating to
manufacturing issues identified during FDA inspections of the Company's Allegan,
Michigan facilities. The Company has met with the FDA to discuss these issues
and is implementing remedial actions at the facilities. Until the issues
-9-
<PAGE> 11
identified in the Warning Letter are resolved to the satisfaction of the FDA,
the Company's pending ANDA approvals may be subject to delay. The Company cannot
predict when its remedial actions will resolve the FDA's concerns or whether the
FDA will take any further action. However, the Company believes that it will be
able to correct the cited deficiencies within a time period that will avoid any
material impact from a delay in obtaining the approvals on its pending ANDAs.
Consumer Product Safety Commission
The CPSC has authority, under the Poison Prevention Packaging Act, to
designate those products, including vitamin products and OTC pharmaceuticals
that require child resistant closures to help reduce the incidence of
poisonings. The CPSC has adopted regulations requiring numerous OTC
pharmaceuticals and iron-containing dietary supplements to have these closures,
and has adopted rules on the testing of these closures by both children and
adults. The Company, working with its packaging suppliers, believes that it is
in compliance with all CPSC requirements.
Federal Trade Commission
The FTC exercises primary jurisdiction over the advertising and other
promotional practices of dietary supplements and OTC pharmaceuticals marketers,
and works with the FDA regarding the advertising and promotional practices of
marketers of dietary supplements. The FTC has historically applied a different
standard to health-related claims than the FDA. The FTC enforcement policy uses
FDA regulations as a baseline and permits nutrient content descriptions that are
reasonable synonyms of FDA-permitted terms as well as qualified health claims
not approved by FDA where adequate substantiation exists.
State Regulation
All states regulate foods and drugs under local laws that parallel
federal statutes. Because the Nutritional Labeling Education Act ("NLEA") gives
states the authority to enforce many labeling prohibitions of the Federal Food,
Drug, and Cosmetic Act after notification to the FDA, the Company and other
dietary supplement manufacturers may be subject to increasing state scrutiny for
NLEA compliance, as well as increasing FDA review. The Company is also subject
to California Proposition 65 and other state consumer health and safety
regulations that could have a potential impact on the Company's business if any
of the Company's products were ever found not in compliance. The Company is not
engaged in any governmental enforcement or other regulatory actions and is not
aware of any products that are not in compliance with California Proposition 65
and other similar state regulations.
United States Pharmacopoeia Convention
The USP is a non-governmental, voluntary standard-setting organization.
Its drug standards are incorporated by reference into the Federal Food, Drug,
and Cosmetic Act as the standards that must be met for the listed drugs, unless
compliance with those standards is specifically disclaimed. USP standards exist
for most OTC pharmaceuticals. The FDA requires USP compliance as part of cGMP.
The USP has adopted standards for vitamin and mineral dietary
supplements that are codified in the USP Monographs and the USP Manufacturing
Practices. These standards cover composition (nutrient ingredient potency and
combinations), disintegration, dissolution, manufacturing practices and testing
requirements. While USP standards for vitamin and mineral dietary supplements
are voluntary, and not incorporated into federal law, customers of the Company
may demand that products supplied to them meet these standards. Label claims of
compliance with the USP may expose a company to FDA scrutiny for those claims.
In addition, the FDA may in the future require compliance, or such a requirement
may be included in new dietary supplement legislation. All of the Company's
vitamin products (excluding certain nutritional supplements products for which
no USP standards have been adopted) are formulated to comply with existing USP
standards and are so labeled.
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<PAGE> 12
Foreign Regulation
The Company manufacturers, packages and distributes generic Rx
pharmaceuticals, OTC pharmaceuticals and nutritional products in Mexico. The
manufacturing, processing, formulation, packaging, labeling, advertising and
sale of these products are subject to regulation by one or more Mexican
agencies, including the Health Ministry, the Commercial and Industrial
Secretariat, the Federal Work's Secretariat, the Environmental Natural Resources
and Fishing Secretariat, the Federal Environmental Protection Ministry and the
Treasury and Public Credit Secretariat and its Customs Government department.
The Company exports OTC pharmaceutical and nutritional products to
foreign countries including Mexico and Canada. Government regulations for
exporting these products are covered under the U.S. FDA Export Law as well as
each individual country's requirement for importation of such products. Each
country requires approval of such products through a registration process by
that country's Minister of Health. These registrations govern the process,
formula, packaging, testing, labeling, advertising and sale of the Company's
products and regulate what is required and what may be represented to the public
on labeling and promotional material. Foreign Ministers of Health approval for
the sale of the Company's products may be subject to delays despite the
Company's best efforts.
EMPLOYEES
As of July 1, 2000, the Company employed 3,542 permanent and temporary
employees, of whom 858 were engaged in executive or administrative positions;
and 2,684 were engaged in production, warehousing and distribution. At July 1,
2000, approximately 181 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 664 employees in Mexico, of which 246 are covered by a collective
bargaining agreement.
Item 2. Properties.
As of July 1, 2000, 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 Manufacturing (4 locations) 986,400 Owned
Greenville, South Carolina Manufacturing 169,600 Owned
Holland, Michigan Manufacturing 120,000 Owned
Ramos Arizpe, Mexico Manufacturing (2 locations) 111,800 Owned
Montague, Michigan Manufacturing 84,000 Owned
Allegan, Michigan Logistics 517,000 Owned
LaVergne, Tennessee Logistics 517,000 Owned (1)
Cranbury, New Jersey Logistics 60,000 Leased
Fontana, California Logistics 207,000 Leased
Greenville, South Carolina Logistics 145,000 Leased
Mexico City, Mexico Logistics 27,000 Leased
Puebla, Mexico Logistics 2,600 Leased
Guadalajara, Mexico Logistics 9,700 Leased
Allegan, Michigan Offices and Company Store 246,000 Leased
Monterrey, Mexico Offices 9,700 Leased
Ramos Arizpe, Mexico Offices (2 locations) 15,600 Owned
</TABLE>
(1) This facility primarily serves the personal care business and is intended
to be sold in fiscal year 2001. The buyer of the personal care business is
currently operating out of this logistics facility under a lease that
expires in August 2001.
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<PAGE> 13
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.
In March 2000, the Company entered into a settlement agreement with the
plaintiff dismissing the lawsuit and withdrawing all pending appeals thus ending
any further action against the Company. No payment or financial compensation was
required of either party. The effect of the settlement was to leave in place the
Court's original order dismissing the plaintiff's case.
On August 4, 1999, the Company filed a civil antitrust lawsuit in the
U.S. District Court for the Western District of Michigan against a group of
vitamin raw material suppliers alleging the defendants conspired to fix the
prices of vitamin raw materials sold to the Company. The relief sought includes
money damages and a permanent injunction enjoining defendants from future
violation of antitrust laws. The case is proceeding to trial and discovery has
commenced. The Company entered into settlement agreements with certain
defendants resulting in an aggregate payment to the Company of $4,154, net of
attorney fees and expenses that were withheld prior to the disbursement of the
funds to the Company. The Company can make no prediction as to the outcome of
the litigation with the remaining defendants.
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 2000.
Additional Item. Executive Officers of the Registrant.
The executive officers of the Company and their ages and positions as
of August 28, 2000 were:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
F. Folsom Bell.................. 58 Executive Vice President, Business Development
(Effective September 1, 2000)
David T. Gibbons................ 56 President and Chief Executive Officer
John T. Hendrickson............. 37 Executive Vice President, Operations
Mark P. Olesnavage.............. 47 Executive Vice President, Sales, Marketing and
Scientific Affairs
Douglas R. Schrank.............. 52 Executive Vice President and Chief Financial Officer
</TABLE>
Mr. Bell was named Executive Vice President, Business Development,
effective September 1, 2000. He has served in a consulting capacity to the
Company since January 2000. Mr. Bell has been a member of the Board of Directors
since 1981. He was the Chairman, President and Chief Executive Officer of
Thermo-Serv, Inc., from July 1989 to September 1999.
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<PAGE> 14
Mr. Gibbons was elected President, Chief Executive Officer and a
director of the Company in April 2000. Previously, Mr. Gibbons served as
President of Rubbermaid Europe from 1997 to 1999 and President of Rubbermaid
Home Products from 1995 to 1997. Prior to joining Rubbermaid, he served in
various management, sales and marketing capacities with 3M Company from 1968 to
1995.
Mr. Hendrickson was named Executive Vice President, Operations, in
October 1999. He served as Vice President of Operations from October 1997 to
October 1999 and Vice President of Customer Service from October 1996 to October
1997. Previously, he had been Director of Engineering of the Company since 1993.
Prior to 1989, Mr. Hendrickson was in research management for five years at
Procter & Gamble Company.
Mr. Olesnavage was named Executive Vice President, Sales, Marketing and
Scientific Affairs in August 2000. He served as President of Customer Business
Development from June 1995 to August 2000. He served as President of the OTC
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 Consumer Healthcare Products
Association.
Mr. Schrank was named Executive Vice President and Chief Financial
Officer in January 2000. Mr. Schrank was President of M. A. Hanna Company's
Hanna Color subsidiary from 1998 to 1999, Senior Vice President of the Plastics
Division from 1995 to 1998 and Vice President and Chief Financial Officer from
1993 to 1995. From 1977 to 1993, Mr. Schrank served in senior-level financial,
administrative and sales positions at Sealy Corporation, Eyelab, Inc., and
Pillsbury Company.
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 prices for the Company's common
stock as reported on the Nasdaq National Market System for the last eight
quarters:
<TABLE>
<CAPTION>
Fiscal Year Ended July 1, 2000: High Low
------------------------------ ---- ---
<S> <C> <C>
First Quarter $9 $7-3/8
Second Quarter $8-13/16 $7-1/16
Third Quarter $9-7/16 $6-25/32
Fourth Quarter $7-9/16 $5
Fiscal Year Ended July 3, 1999: High Low
------------------------------ ---- ---
First Quarter $10-1/4 $7-27/32
Second Quarter $10-1/8 $7-3/16
Third Quarter $9-7/8 $7
Fourth Quarter $9-11/16 $7-1/8
</TABLE>
The number of record holders of the Company's common stock as of August
28, 2000 was 1,685.
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<PAGE> 15
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 depend on the earnings, financial
condition and capital and surplus requirements of the Company and 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 agreement.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to these
statements included in Item 8 of this report. The consolidated statement of
income data set forth below with respect to the fiscal years ended July 1, 2000,
July 3, 1999 and June 30, 1998 and the consolidated balance sheet data at July
1, 2000 and July 3, 1999 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, 1997 and 1996 and the
consolidated balance sheet data for the Company at June 30, 1998, 1997 and 1996
are derived from audited consolidated financial statements of the Company not
included in this report. The statement of income data reflects one month of
personal care operations for fiscal year 2000 and an entire year of operations
for the remaining fiscal years.
-14-
<PAGE> 16
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------
2000(1) 1999(1) 1998(2) 1997 1996
--------- --------- --------- --------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $ 738,555 $ 877,587 $ 902,637 $ 844,591 $ 778,121
Cost of sales 583,314 691,893 670,775 615,720 574,806
--------- --------- --------- --------- ---------
Gross profit 155,241 185,694 231,862 228,871 203,315
Operating expenses
Distribution 16,878 32,964 31,995 28,073 24,929
Research and development 16,314 14,867 15,942 13,651 10,445
Selling and administrative 89,676 117,623 113,584 103,104 88,629
Restructuring and redesign 1,048 6,160 122,529 5,503 4,491
Unusual litigation (4,154) (3,952) 9,585 6,367 6,600
--------- --------- --------- --------- ---------
119,762 167,662 293,635 156,698 135,094
--------- --------- --------- --------- ---------
Operating income (loss) 35,479 18,032 (61,773) 72,173 68,221
Interest and other, net 4,994 14,018 4,219 1,306 5,679
--------- --------- --------- --------- ---------
Income (loss) before income taxes 30,485 4,014 (65,992) 70,867 62,542
Income tax expense (benefit) 11,187 2,468 (14,356) 25,875 22,700
--------- --------- --------- --------- ---------
Net income (loss) $ 19,298 $ 1,546 $ (51,636) $ 44,992 $ 39,842
========= ========= ========= ========= =========
Basic earnings (loss) per share $ 0.26 $ 0.02 $ (0.69) $ 0.59 $ 0.52
Diluted earnings (loss) per share 0.26 0.02 (0.69) 0.58 0.52
Weighted average shares outstanding for the
period - used for "basic" EPS calculation 73,370 73,707 75,302 76,522 76,224
Weighted average shares outstanding for the
period - used for "diluted" EPS calculation 73,593 73,984 75,302 77,274 77,200
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
JULY 1, JULY 3, -----------------------------------
2000(1) 1999(1) 1998(2) 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (end of period):
Working capital $154,725 $249,417 $230,934 $169,631 $166,929
Property, plant and equipment, net 193,580 199,662 190,644 235,860 238,992
Goodwill, net 18,199 19,334 20,741 40,834 42,961
Total assets 486,064 615,858 595,861 568,377 549,395
Long-term debt(3) -- 135,326 81,619 1,840 49,140
Shareholders' equity 351,760 332,419 345,078 425,875 381,160
</TABLE>
----------------
(1) Includes the impact of a number of non-recurring items, which are more fully
discussed in Note J to the consolidated financial statements included in
Item 8.
(2) Includes the financial impact of the June 1998 restructuring discussed in
more detail in 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.
(3) Includes current installments.
-15-
<PAGE> 17
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
GENERAL
The major categories in which the Company markets its products are
analgesics, cough/cold, antacids and vitamins. According to Information
Resources, Inc., a leader in providing syndicated data, the annual retail market
for these categories is approximately $11 billion. The store brand industry
commands approximately 24% of the retail market for these products. The Company
estimates its share of the store brand industry to be approximately 50%.
The Company's customers are major national and regional retail drug,
supermarket and mass merchandise chains such as Albertson's, CVS, Kmart, Kroger,
Target, Walgreens, and Wal-Mart and major wholesalers such as Fleming, McKesson
and Super Valu. In recent years, the retail industry has experienced several
major consolidations. These consolidations have changed the competitive
landscape in which the Company operates and increased pressure on customer
pricing and gross profit.
RESULTS OF OPERATIONS
Dollar amounts in thousands
The following table sets forth, for fiscal years 2000, 1999 and 1998,
certain items from the Company's consolidated statements of income expressed as
a percentage of net sales:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Fiscal Year
---------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.0 78.8 74.3
------ ------ ------
Gross profit 21.0 21.2 25.7
------ ------ ------
Operating expenses:
Distribution 2.3 3.8 3.5
Research and development 2.2 1.7 1.8
Selling and administrative 12.2 13.4 12.6
Restructuring and redesign 0.1 0.7 13.6
Unusual litigation (0.6) (0.5) 1.0
------- ------- -------
16.2 19.1 32.5
------- ------- ------
Operating income (loss) 4.8 2.1 (6.8)
Interest and other, net 0.7 1.6 0.5
------- ------- -------
Income (loss) before income taxes 4.1 0.5 (7.3)
Income tax expense (benefit) 1.5 0.3 (1.6)
------- ------- -------
Net income (loss) 2.6% 0.2% (5.7)%
======= ======= =======
----------------------------------------------------------------------------------------------------
</TABLE>
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
RESTRUCTURING
For fiscal years 2000, 1999 and 1998, the Company incurred
restructuring and redesign charges primarily related to an intended divestiture,
facilities closings and streamlining operations. Total restructuring charges
were $1,048, $6,160 and $122,529 for fiscal years 2000, 1999 and 1998,
respectively. The total restructuring reserve balance was $0, and $4,625 at July
1, 2000 and July 3, 1999, respectively. Assets held for sale related to the 1998
restructuring were $18,382 and $53,045 at July 1, 2000 and July 3, 1999,
respectively.
-16-
<PAGE> 18
UPDATE ON 1999 RESTRUCTURING
In the fourth quarter of fiscal year 1999 the Company announced a
workforce reduction plan that resulted from the Company's decision to divest its
personal care business (see below) and efficiencies created by implementation of
a new enterprise software system in the first quarter of fiscal year 1999. The
plan included a combination of early retirements, normal attrition,
redeployments and job eliminations, primarily for professional, managerial,
administrative and support staff personnel located in the Company's corporate
offices. A pre-tax charge and reserve of $2,615, which related to severance,
postretirement and outplacement costs, were recorded in accordance with Emerging
Issues Task Force ("EITF") 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)". In the fourth quarter of fiscal year 1999,
23 people elected early retirement and 34 people were terminated. For fiscal
year 2000, $2,455 was paid primarily for severance and outplacement costs
related to the 1999 restructuring. These costs were charged against the reserve
established in fiscal year 1999. The 1999 restructuring reserve balance was $0
and $2,455 at July 1, 2000 and July 3, 1999, respectively.
UPDATE ON 1998 RESTRUCTURING
In June 1998 the Company announced a major restructuring plan which
involved the closing of certain personal care manufacturing facilities and the
intention to divest the personal care business. A pre-tax charge of $121,966 was
recorded in the fourth quarter of fiscal year 1998. This charge included
$109,707 for impairment of assets and a reserve of $12,259 for anticipated
incremental cash expenditures recorded in accordance with EITF 94-3.
In the first half of fiscal year 1999 the Company closed personal care
manufacturing facilities in California and Missouri and in the second half of
the year these facilities were sold. Proceeds from the sales were $9,000. No
gains or losses were recorded in the fiscal year 1999 consolidated income
statement related to these sales as the facilities had previously been adjusted
to their estimated fair market values.
In the fourth quarter of fiscal year 1999 the Company entered into an
agreement in principle to sell the personal care business. In conjunction with
that agreement, the Company recorded an additional net restructuring charge of
$3,248. Also during fiscal year 1999, the Company expensed, as incurred, $297 of
other restructuring costs in accordance with EITF 94-3.
The Company completed the sale of the personal care business in fiscal
year 2000. Proceeds from the sale were $32,200, including funds held in escrow.
No gain or loss was recorded in fiscal year 2000 related to this sale. Fiscal
year 2000 earnings reflect one month of the personal care business. Net sales
for the personal care business were $17,778, $192,409 and $212,261 for fiscal
years 2000, 1999 and 1998, respectively. The Company does not maintain operating
income information by its main product lines, however, based on the incremental
approach, the Company estimates that pre-tax operating income was approximately
$1,000 for each of fiscal years 2000 and 1999 and pre-tax operating loss was
$8,000 for fiscal year 1998 for the personal care business. Included in pre-tax
operating income was the effect of suspending depreciation of approximately $700
and $7,200 for fiscal years 2000 and 1999, respectively.
For fiscal year 2000, $2,170 was paid primarily related to professional
fees and transitional costs associated with the sale of the personal care
business. These costs were charged against a reserve established in fiscal year
1998. The 1998 restructuring balance was $0 and $2,170 at July 1, 2000 and July
3, 1999, respectively.
Assets held for sale decreased to $18,382 at July 1, 2000 primarily due
to the sale of the personal
-17-
<PAGE> 19
care business during fiscal year 2000. Assets held for sale at July 1, 2000 is
comprised of the LaVergne, Tennessee logistics facility. In the fourth quarter
of fiscal year 2000, the Company recorded a net restructuring charge of $1,048
to reflect its current net realizable value. The Company intends to sell this
facility in fiscal year 2001. The effect of suspending depreciation on this
facility was $850 and $830 for fiscal year 2000 and 1999, respectively.
RESULTS OF OPERATIONS
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
The Company's net sales decreased $139,032 or 15.8% to $738,555 for
fiscal year 2000, from $877,587 for fiscal year 1999. The decrease was primarily
due to the sale of the personal care business. Excluding the effect of personal
care, net sales increased $33,613 or 4.9% to $720,777 for fiscal year 2000
compared to $687,164 for fiscal year 1999. The increase was primarily due to an
increase in sales to existing customers of new products such as the nicotine
transdermal system patch for smoking cessation, an OTC pharmaceutical product,
an increase in sales of existing vitamin products to existing customers as well
as an increase in international sales.
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 related to gross profit, operating expenses and interest and
other, net excludes the effect of these charges.
Gross profit decreased $32,116 or 17.1% for fiscal year 2000 compared
to fiscal year 1999. The gross profit percentage was 21.0% for fiscal year 2000
compared to 21.3% for fiscal year 1999. Excluding the effect of the personal
care business, gross profit decreased $7,605 and the gross profit percent to net
sales was 21.2% and 23.3% for fiscal years 2000 and 1999, respectively. Fiscal
year 2000 gross profit was negatively impacted by higher than normal inventory
obsolescence expense of $15,000, primarily related to inventory built both
before and after the Company's conversion to its new software system in the
first quarter of fiscal year 1999. The Company built inventory prior to the
systems conversion in order to try to meet customer service requirements in the
event of systems failure. The Company also built excesses of certain products
after the systems conversion due to forecasting problems related to the new
software system. In fiscal year 1999, the Company increased its inventory
obsolescence reserves based on estimates of future sales to customers of
products in inventory as of July 3, 1999. In fiscal year 2000, customer sales
fell short of these estimates and the inventory expired, requiring the above
noted charge for obsolescence expense. Gross margin was also negatively impacted
by lower than normal production levels as the Company reduced inventory
resulting in fixed production cost charges of $7,000 and increased costs to
comply with FDA regulations. Fiscal year 1999 gross profit was negatively
impacted by inefficiencies and high obsolescence resulting from the Company's
conversion to the new software system and outsourcing costs incurred to meet
customer service requirements. Gross profit in fiscal year 2001 is expected to
be negatively impacted by retailer consolidations and increased regulatory
compliance costs. The unusual obsolescence expenses and fixed production cost
charges in fiscal year 2000 are not expected to recur.
Operating expenses decreased $37,026 for fiscal year 2000 compared to
fiscal year 1999. Operating expenses, as a percentage of net sales, were 16.2%
for fiscal year 2000 compared to 17.9% for fiscal year 1999. Operating expenses
consist of distribution, research and development, selling and administrative,
restructuring and unusual litigation expenses. Distribution expenses decreased
$16,086 or 48.8% for fiscal year 2000 due primarily to the sale of the personal
care business. Distribution expense was also favorably impacted by fewer
expedited shipments and lower warehousing costs as the Company
-18-
<PAGE> 20
benefits from its shift from leased warehouses to its owned warehouse in
Allegan, Michigan. Distribution expense, as a percentage of net sales, was 2.3%
for fiscal year 2000 compared to 3.8% for fiscal year 1999. Research and
development expense, as a percentage of net sales, was 2.2% for fiscal year 2000
compared to 1.7% for fiscal year 1999. Research and development expenses
increased due to the timing of expenses related to the development of new
products and to the development of new internal manufacturing processes that are
intended to streamline operations and reduce costs. Selling and administrative
expense decreased $17,073 or 16.0% for fiscal year 2000, primarily due to the
sale of the personal care business, lower salaries and wages and lower
promotional expenses, partially offset by an increase in bad debt expense.
Selling and administrative expense was 12.2% of net sales for fiscal year 2000
compared to 12.2% of net sales for fiscal year 1999. Restructuring and redesign
expense was $1,048 and $6,160 for fiscal years 2000 and 1999, respectively. The
Company recorded a charge of $1,048 in fiscal year 2000 to reflect the current
net realizable value of the LaVergne, Tennessee logistics facility, which is
intended to be sold in fiscal year 2001. The fiscal year 1999 expense consisted
of $2,615 for the 1999 restructuring and $3,545 of additional write-offs and
expenses related to the 1998 restructuring plan. See Note K to the consolidated
financial statements. Unusual litigation income was $4,154 and $3,952 for fiscal
year 2000 and 1999, respectively. Fiscal year 2000 includes a settlement payment
of $4,154 related to a civil antitrust lawsuit. Fiscal year 1999 reflects an
insurance reimbursement of $8,000, partially offset by $4,048 of charges related
to certain unusual litigation. See Note I to the consolidated financial
statements.
Interest and other, net decreased $7,384 for fiscal year 2000. Interest
expense decreased $3,341 to $7,141 for fiscal year 2000 compared to $10,482 for
fiscal year 1999 primarily due to lower borrowing levels. Other income was
$2,147 for fiscal year 2000 compared to other expense of $1,896 for fiscal year
1999. In fiscal year 2000, the Company recorded a gain of $1,300 on the sale of
an investment classified as available-for-sale. In fiscal year 1999, the Company
recorded a permanent impairment write-down of an investment in the amount of
$2,621.
The effective tax rate was 36.7% for fiscal year 2000 compared to 61.5%
for fiscal year 1999. The fiscal year 1999 effective tax rate was negatively
impacted by an investment impairment write-down discussed above, which is
considered nondeductible for tax purposes.
FOURTH QUARTER - FISCAL YEAR 2000
The Company's net sales decreased $37,292 or 19.9% to $150,450 during
the fourth quarter of fiscal year 2000, from $187,742 during the fourth quarter
of fiscal year 1999. The decrease was primarily due to the sale of the personal
care business. Excluding the effect of the personal care business, net sales
increased by $9,511 or 6.7% during the fourth quarter of fiscal year 2000 to
$150,450 from $140,939 during the fourth quarter of fiscal year 1999. The
increase in sales in the fourth quarter of fiscal year 2000 was primarily due to
an increase in sales of existing analgesic and antacid products to existing
customers, partially offset by a decrease in sales of vitamins and nicotine
transdermal system patch. In the fourth quarter of fiscal year 1999, the
nicotine transdermal system patch was launched as a new product resulting in
higher sales due to initial stocking of the product at the retailer.
Gross profit decreased $18,426 during the fourth quarter of fiscal year
2000 compared to the same period of fiscal year 1999. The gross profit percent
to net sales was 13.2% and 20.4% for the fourth quarter of fiscal year 2000 and
1999, respectively. Excluding the personal care business, gross profit decreased
$14,831 during the fourth quarter of fiscal year 2000 compared to the same
period of fiscal year 1999 and the gross profit percent to net sales was 13.2%
and 24.6% for the fourth quarter of fiscal year 2000 and 1999, respectively.
Gross profit for the fourth quarter of fiscal year 2000 was negatively impacted
by higher than normal inventory write-offs of $3,000 related to goods produced
during the quarter, $2,000 of unusual obsolescence primarily related to the
Company's conversion to its new software system as noted previously, inventory
valuation charges of $5,500 to adjust inventory to a first-in first-out basis
(whereby most recent
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<PAGE> 21
costs are reflected in inventory) and a charge of $1,848 related to recent
reduction in sales projections for a long-term licensing agreement. Gross profit
for the fourth quarter of fiscal year 1999 was favorably impacted by $7,500 of
inventory valuation adjustments to adjust inventory to a first-in first-out
basis and $1,300 related to higher than normal production levels, partially
offset by the negative impact of write-downs and provisions of $6,600 for
inventory obsolescence.
Operating expenses decreased $5,139 during the fourth quarter of fiscal
year 2000 compared to the same period in fiscal year 1999. Operating expenses as
a percentage of net sales were 20.7% for the fourth quarter of fiscal year 2000
compared to 19.3% for the same period of fiscal year 1999. Distribution expenses
decreased $2,334 or 35.4% from the fourth quarter of fiscal year 1999 primarily
due to the sale of the personal care business. Research and development expenses
were 4.1% of net sales for the fourth quarter of fiscal year 2000 compared to
2.1% for the same period of fiscal year 1999. Research and development expenses
increased due primarily to the timing of expenses related to the development of
new products and to the development of new internal manufacturing processes that
are intended to streamline operations and reduce costs. Selling and
administrative expenses decreased $3,356 or 12.3% from the fourth quarter of
fiscal year 1999. The decrease was due primarily to the sale of the personal
care business, lower promotional expenses and lower salaries and wages,
partially offset by an increase in bad debt expense of $2,500. Restructuring and
redesign expenses were $1,048 and $6,160 for fiscal years 2000 and 1999,
respectively. The Company recorded a charge of $1,048 to reflect the current net
realizable value of the LaVergne, Tennessee logistics facility, which is
intended to be sold in fiscal year 2001. The fiscal year 1999 expense consisted
of $2,615 for the 1999 restructuring and $3,545 of additional write-offs and
expenses related to the 1998 restructuring plan. Unusual litigation income was
$4,154 and $7,580 for the fourth quarter of fiscal year 2000 and 1999,
respectively. Fiscal year 2000 includes a settlement payment of $4,154 related
to a civil antitrust lawsuit. Fiscal year 1999 reflects an insurance
reimbursement of $8,000 partially offset by $420 of charges related to certain
unusual litigation. See Note I to the consolidated financial statements.
Interest and other, net decreased $4,507 from the fourth quarter of
fiscal year 1999. Interest expense decreased $2,776 to $650 during the fourth
quarter of fiscal year 2000 compared to $3,426 for the same period in fiscal
year 1999 due primarily to lower levels of borrowing. Other income was $177 for
the fourth quarter of fiscal year 2000 compared to other expense of $1,554 for
the same period in fiscal year 1999. Other expense for the fourth quarter of
fiscal year 1999 included a permanent impairment write-down of an investment in
the amount of $2,621.
The effective tax rate was 31.8% benefit for the fourth quarter of
fiscal year 2000 compared to 4.2% benefit for the same period in fiscal year
1999. The effective tax rate for the fourth quarter of fiscal year 1999 was
negatively impacted by the nondeductible investment impairment write-down
previously discussed.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
The Company's net sales decreased by $25,050 or 2.8% to $877,587 for
fiscal year 1999 from $902,637 for fiscal year 1998. The decrease was primarily
due to decreases in sales of nutritional and personal care products partially
offset by a modest increase in OTC and international pharmaceutical products.
Sales for the Company's major product lines did not meet expectations primarily
due to production and shipping inefficiencies created by the Company's
conversion to a new enterprise software system in the first quarter of fiscal
year 1999. Customer service was improved significantly during the second half of
the year and the Company believes that there was no permanent loss of
significant business due to this systems conversion. Also during fiscal year
1999, to improve customer service, the Company suspended production for smaller
customers and lower volume products resulting in certain lost sales. This,
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<PAGE> 22
in addition to the shipping inefficiencies created by the Company's conversion
to the new software system as described above, resulted in lost sales of
approximately $50,000 in fiscal year 1999.
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 expense. In the fourth
quarter of fiscal year 1998 the Company recorded a reserve against its Russian
investment and charged Other expense in the amount of $1,250. The discussions
below related to gross profit, operating expenses and other expense exclude the
effects of these charges.
In the fourth quarter of fiscal year 1998, the Company recorded a
restructuring charge in the amount of $121,966 related to its intention to
divest its personal care business as noted above in the Restructuring section.
In the fourth quarter of fiscal year 1999 the Company recorded an additional net
restructuring charge of $3,248 related to these assets. Also during the fiscal
year 1999, the Company expensed $297 of other restructuring costs in accordance
with EITF 94-3. The discussion below related to operating expenses excludes the
effects of these charges.
Gross profit decreased $44,505 or 19.2% for fiscal year 1999 compared
to fiscal year 1998. The gross profit percent to net sales for fiscal year 1999
was 21.3% compared to 25.7% for fiscal year 1998. The decrease in gross profit
percentage was primarily due to inefficiencies related to the Company's
conversion to its new software system and outsourcing costs incurred to meet
customer service requirements.
Operating expenses were 17.5% of net sales for fiscal year 1999
compared to 19.0% for fiscal year 1998. Distribution expenses increased $969 or
3% to $32,964 for fiscal year 1999 primarily due to increased expedited shipment
costs related to the Company's conversion to a new software system partially
offset by lower warehousing costs as the Company began to see benefits from its
shift from leased warehouses to its owned warehouses in Allegan, Michigan and
LaVergne, Tennessee. Distribution expenses were 3.8% of net sales for fiscal
year 1999 compared to 3.5% for fiscal year 1998. Research and development
expenses decreased $1,075 or 7% to $14,867 for fiscal year 1999 primarily due to
the timing of expenses for the development of new products. Research and
development expenses were 1.7% of net sales for fiscal year 1999 compared to
1.8% of net sales for fiscal year 1998. Selling and administrative expenses
decreased $6,835 or 6% for fiscal year 1999 primarily due to reductions in
sales, marketing and promotional expenses partially offset by an increase in MIS
expenses related to the Company's new integrated software package. Selling and
administrative expense was 12.2% of net sales for fiscal year 1999 compared to
12.6% of net sales for fiscal year 1998. Restructuring and redesign expenses
were $6,160 for fiscal year 1999 compared to $122,529 for fiscal year 1998. The
fiscal year 1999 expense consisted of $2,615 for the 1999 restructuring as
described above and $3,545 of additional write-offs and expenses related to the
1998 restructuring plan to divest the personal care business. 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. Unusual litigation
expenses decreased by $13,537 in fiscal year 1999 due to an insurance
reimbursement of $8,000 and decreased litigation costs of $5,537 related to the
litigation as described in Note I to the consolidated financial statements.
Interest and other, net expense increased $9,409 to $12,378 for fiscal
year 1999. Interest expense increased $8,333 to $10,482 for fiscal year 1999
from $2,149 for fiscal year 1998, primarily due to higher borrowing levels.
Other expense increased from $820 in fiscal year 1998 to $1,896 in fiscal year
1999, primarily due to a permanent impairment write-down of an investment in the
amount of $2,621 in the fourth quarter of fiscal year 1999. Excluding this
charge, the Company had other income of $725 in fiscal year 1999, primarily due
to a gain on the sale of certain assets unrelated to the 1998 restructuring.
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<PAGE> 23
The effective tax rate was 61.5% in fiscal year 1999 compared to 21.8%
benefit in fiscal year 1998. The fiscal year 1999 effective rate was negatively
impacted by the investment impairment write-down discussed above, which is
considered to be nondeductible for tax purposes. The fiscal year 1998 effective
rate was negatively impacted by the nondeductible write-off of goodwill in the
1998 restructuring charge.
FOURTH QUARTER - FISCAL YEAR 1999
Excluding the 1998 restructuring charges of $3,248 in fiscal year 1999
and $121,966 in fiscal year 1998, the Company incurred a pretax loss of $206 in
the fourth quarter of fiscal year 1999 compared to a pre-tax loss of $2,902 for
the same period in fiscal year 1998.
Net sales decreased $26,708 or 12% to $187,742 for the quarter
primarily due to customer inventory building of OTC products in the 1999 third
quarter, a decrease in vitamin sales compared to strong sales in the same
quarter last year and a decrease in sales of personal care products.
Gross profit decreased $11,666 or 23% for the quarter. The gross profit
percent to net sales for the quarter was 20.4% compared to 23.3% for the same
period last year. The decrease is primarily due to increases in write-offs and
provisions for inventory obsolescence. These inventory adjustments were made in
the fourth quarter after sales fell short of expectations, resulting in obsolete
and excess inventory.
Operating expenses excluding the 1998 restructuring charges incurred in
fiscal years 1999 and 1998 decreased $17,287 or 34% from the same period last
year. Operating expenses were 17.6% of net sales for the quarter compared to
23.5% for the same period last year. Distribution expenses decreased $1,760 or
21% to $6,588 for fiscal year 1999 primarily due to lower warehousing costs as
the Company began to see benefits from its shift from leased warehouses to its
owned warehouses in Allegan, Michigan and LaVergne, Tennessee and lower freight
costs. Distribution expenses were 3.5% of net sales for the quarter compared to
3.9% for the same quarter last year. Research and development expenses decreased
$2,714 or 41% to $3,885 for the quarter primarily due to the timing of expenses
for the development of new products. Research and development expenses were 2.1%
of net sales for the quarter compared to 3.1% of net sales for the same period
last year. Selling and administrative expenses decreased $3,945 or 13% for the
quarter primarily due to reductions in sales, marketing and promotional
expenses. Selling and administrative expense was 14.5% of net sales for both
quarters. Fourth quarter restructuring and redesign expenses were $6,160 in
fiscal year 1999 compared to $121,966 for fiscal year 1998. The fiscal year 1999
expense consisted of $2,615 for the 1999 restructuring as described above and
$3,545 of additional write-offs and expenses relating to the 1998 restructuring
plan to divest of the personal care business. The fourth quarter fiscal year
1998 expense primarily related to the planned divestiture of the personal care
business. Unusual litigation expenses decreased by $11,810 in fiscal year 1999
due to an insurance reimbursement of $8,000 and decreased litigation costs of
$3,810 related to the litigation as described in Note I to the consolidated
financial statements.
Interest and other, net expense increased $2,513 to $4,980 for the
quarter. Interest expense increased $2,630 to $3,426 for the quarter from $796
for the same period last year primarily due to higher borrowing levels. Other
expense increased $1,047 to $939 for the quarter primarily due to a permanent
impairment write-down of an investment in the amount of $2,621 in the quarter.
Excluding this charge, other income was $1,574 for the quarter compared to $108
for the same period last year.
The effective tax rate was 4.2% benefit for the quarter compared to
28.9% benefit for the same period last year. The effective tax rate for the
fiscal year 1999 fourth quarter was negatively impacted by the nondeductible
investment impairment write-down previously discussed. The lower rate for the
fourth
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<PAGE> 24
quarter of fiscal year 1998 is primarily due to the nondeductible
write-off of goodwill included in the restructuring charge.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 2000, working capital decreased $94,692 as the
Company focused on reducing inventories and liquidating non-productive assets to
reduce debt and strengthen the Company's net asset position. The decrease in
assets held for sale of $34,663 and the related deferred income taxes of $18,960
was due to the divestiture of the personal care business. Inventory decreased
$70,502 and accounts payable decreased $5,068 primarily due to the Company's
inventory reduction initiatives. Accrued expenses decreased $10,682 due
primarily to reductions in the restructuring reserves for actual payments made
during the year. Income taxes decreased $12,624, primarily due to the sale of
the personal care business.
Cash flow from operating activities was $117,813. Net income was
$19,298 and depreciation and amortization was $22,245. As noted above,
inventories decreased $70,502, deferred taxes related to the personal care
divestiture decreased $18,960, other deferred taxes decreased $8,181 and income
taxes decreased $12,624 during the year.
Cash flows from operations are expected to fund the Company's working
capital requirements and capital expenditures in fiscal year 2001. Additionally,
borrowings from the Company's line of credit are available, if required. The
Company has historically evaluated acquisition opportunities and anticipates
that such opportunities will continue to be identified and evaluated in fiscal
year 2001.
Capital expenditures for facilities and equipment were $14,364 for
fiscal year 2000. These expenditures were primarily for normal equipment
replacement and productivity enhancements to equipment. Capital expenditures are
anticipated to be $25,000 to $30,000 in fiscal year 2001.
Long-term debt decreased $135,326 during fiscal year 2000 as the
Company paid off its unsecured revolving credit facility. The Company had no
long-term debt at July 1, 2000 and had $175,000 available on its unsecured
credit facility. See Note C to the consolidated financial statements for a
description of the credit facility.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk.
The Company has evaluated possible disclosures required under this item
and has determined that no significant market, interest rate or foreign currency
risk exists that would require disclosure.
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.
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
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<PAGE> 25
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.
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
Several United States and foreign agencies regulate the manufacturing,
processing, formulation, packaging, labeling, advertising and sale of the
Company's products. Various state and local agencies also regulate these
activities. In addition, the Company manufactures and markets certain of its
products in accordance with the guidelines established by voluntary standard
organizations. Should the Company fail to adequately conform to these
regulations and guidelines, there may be a significant impact on the operating
results of the Company. In particular, packaging or labeling changes mandated by
the FDA can have a material impact on the results of operations of the Company.
Required 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. 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. See "Government Regulation."
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.
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.
Competitive Issues
The market for store brand OTC pharmaceutical 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
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<PAGE> 26
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. In addition, since the
Company sells its nutritional products through retail drug, supermarket and mass
merchandise chains, it may experience increased competition in its nutritional
products business through alternative channels such as health food stores,
direct mail and direct sales as more consumers obtain products through these
channels. 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.
Customer Issues
The Company's largest customer, Wal-Mart, currently comprises
approximately 26% of total net sales. 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.
The impact of retailer consolidation 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.
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.
Patent and Trade Dress Issues
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. Moreover, the Company's packaging of certain of its branded
products could be the subject of legal actions regarding infringement. Although
the Company designs its packaging to avoid infringing upon any proprietary
rights of national brand marketers, there can be no assurance that the Company
will not be subject to such legal actions in the future.
Effect of Research and Publicity on Nutritional Product Business
The Company believes the growth experienced in the last several years
by the nutritional products business is based largely on national media
attention regarding recent scientific research suggesting potential health
benefits from regular consumption of certain vitamin and other nutritional
products. There can be no assurance of future favorable scientific results and
media attention, or the absence of unfavorable or inconsistent findings. In the
event of future unfavorable scientific results or media attention, the Company's
sales of nutritional products could be materially adversely affected.
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,
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<PAGE> 27
sales, marketing and managerial personnel. The Company does not have employment
contracts with any key personnel other than David Gibbons, President and Chief
Executive Officer. Should the Company not be able to attract or retain key
qualified employees, future operating results may be adversely impacted.
Availability of Raw Materials
In the past, supplies of certain raw materials, bulk tablets and
finished goods purchased by the Company have become limited, or were 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 property matters, workers'
compensation, product liability and regulatory issues such as Proposition 65 in
California. See Item 3, Legal Proceedings for a 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.
Capital Requirements and Liquidity
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 anticipates that cash flow from operations will
substantially fund working capital 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
impacted by acquisitions.
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 in the development of its international business. The Company's
primary markets currently are Mexico and Canada. The Company may have difficulty
entering new international markets due to, for example, greater regulatory
barriers, the necessity of adapting to new regulatory systems and problems
related to entering new markets with different cultural bases and political
systems. 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, the imposition of withholding or other
taxes,
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<PAGE> 28
economic collapse, political instability, 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.
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.
Interest Rate Implication
The interest on the Company's line of credit facility is based on
variable interest rate factors. The interest rates are established at the time
of borrowing based upon the prime rate or the LIBOR rate, plus a factor, or at a
rate based on an interest rate agreed upon between the Company and the Agent at
the time the loan is made. Accordingly, interest expense is subject to variation
due to the variability of these rates.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data for the Company are on the
following pages 28 through 47.
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<PAGE> 29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants................................................... 29
Consolidated Statements of Income for fiscal years 2000,
1999 and 1998...................................................................................... 30
Consolidated Balance Sheets as of July 1, 2000 and July 3, 1999...................................... 31
Consolidated Statements of Shareholders' Equity for fiscal years
2000, 1999 and 1998 .............................................................................. 32
Consolidated Statements of Cash Flows for fiscal years 2000,
1999 and 1998....................................................................................... 33
Notes to Consolidated Financial Statements........................................................... 34
</TABLE>
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<PAGE> 30
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 July 1, 2000 and July 3, 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended July 1, 2000. 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 July 1, 2000 and July 3, 1999 and the results of
their operations and their cash flows for each of the three years in the period
ended July 1, 2000 in conformity with generally accepted accounting principles.
By: /s/ BDO Seidman, LLP
-----------------------------
BDO Seidman, LLP
Grand Rapids, Michigan
August 4, 2000
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<PAGE> 31
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
------------------------------------
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Net sales $ 738,555 $877,587 $ 902,637
Cost of sales 583,314 691,893 670,775
--------- -------- ---------
Gross profit 155,241 185,694 231,862
--------- -------- ---------
Operating expenses
Distribution 16,878 32,964 31,995
Research and development 16,314 14,867 15,942
Selling and administrative 89,676 117,623 113,584
Restructuring and redesign 1,048 6,160 122,529
Unusual litigation (4,154) (3,952) 9,585
--------- -------- ---------
119,762 167,662 293,635
--------- -------- ---------
Operating income (loss) 35,479 18,032 (61,773)
Interest and other, net 4,994 14,018 4,219
--------- -------- ---------
Income (loss) before income taxes 30,485 4,014 (65,992)
Income tax expense (benefit) 11,187 2,468 (14,356)
--------- -------- ---------
Net income (loss) $ 19,298 $ 1,546 $ (51,636)
========= ======== =========
Basic earnings (loss) per share $ 0.26 $ 0.02 $ (0.69)
========= ======== =========
Diluted earnings (loss) per share $ 0.26 $ 0.02 $ (0.69)
========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 32
PERRIGO COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
July 1, July 3,
ASSETS 2000 1999
---------- --------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 7,055 $ 1,695
Accounts receivable, net of allowances
of $5,997 and $3,281, respectively 88,217 89,123
Inventories 126,935 197,437
Refundable income taxes 10,413 --
Prepaid expenses and other current assets 6,520 7,811
Current deferred income taxes 11,123 33,476
Assets held for sale 18,382 53,045
---------- --------
Total current assets 268,645 382,587
Property and equipment
Land 12,018 12,004
Buildings 157,661 153,062
Machinery and equipment 168,768 160,378
---------- --------
338,447 325,444
Less accumulated depreciation 144,867 125,782
---------- --------
193,580 199,662
Goodwill, net 18,199 19,334
Other 5,640 14,275
---------- --------
$ 486,064 $615,858
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 63,172 $ 68,240
Notes payable 8,884 6,694
Payrolls and related taxes 14,987 18,166
Accrued expenses 24,105 34,787
Income taxes 2,772 4,983
Current installments on long-term debt -- 300
---------- --------
Total current liabilities 113,920 133,170
Deferred income taxes 19,462 14,674
Long-term debt, less current installments -- 135,026
Minority interest 922 569
Shareholders' equity
Preferred stock, without par value,
10,000 shares authorized, none issued -- --
Common stock, without par value, 200,000 shares
authorized, 73,489 and 73,301 issued, respectively 102,750 102,030
Unearned compensation (543) (53)
Accumulated other comprehensive income 249 436
Retained earnings 249,304 230,006
---------- --------
Total shareholders' equity 351,760 332,419
---------- --------
$ 486,064 $615,858
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 33
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Issued Other
------------------- Unearned Comprehensive Comprehensive Retained
Shares Amount Compensation Income Income Earnings
------ --------- ------------ ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 76,516 $ 145,779 $ -- $ -- $ -- $ 280,096
Net loss -- -- -- -- (51,636) (51,636)
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) -- -- -- --
------ --------- --------- --------- --------- ---------
Balance at June 30, 1998 74,692 116,660 (42) -- $ (51,636) 228,460
=========
Net income -- -- -- -- $ 1,546 1,546
Currency translation adjustments -- -- -- 436 436 --
Issuance of common stock under
stock options 151 89 -- -- -- --
Issuance of common stock under
restricted stock plan 8 70 (70) -- -- --
Earned compensation for
restricted stock -- -- 59 -- -- --
Tax benefit from stock transactions -- 31 -- -- -- --
Purchases and retirements of
common stock (1,550) (14,820) -- -- -- --
------ --------- --------- --------- --------- ---------
Balance at July 3, 1999 73,301 102,030 (53) 436 $ 1,982 230,006
=========
Net income -- -- -- -- $ 19,298 19,298
Currency translation adjustments -- -- -- (187) (187) --
Issuance of common stock under
stock options 85 105 -- -- -- --
Issuance of common stock under
restricted stock plan and agreement 103 563 (563) -- -- --
Earned compensation for
restricted stock -- -- 73 -- -- --
Tax benefit from stock transactions -- 52 -- -- -- --
------ --------- --------- --------- --------- ---------
Balance at July 1, 2000 73,489 $ 102,750 $ (543) $ 249 $ 19,111 $ 249,304
====== ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 34
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------
2000 1999 1998
--------- --------- -----------
<S> <C> <C> <C>
Cash Flows From (For) Operating Activities
Net income (loss) $ 19,298 $ 1,546 $ (51,636)
Adjustments to derive cash flows
Restructuring, net of cash 3,477 5,863 121,468
Depreciation and amortization 22,245 21,156 29,473
Write-off of Russian investment and related
receivables and inventory -- 14,177 --
Write-down of investment due to permanent impairment -- 2,621 --
Deferred income taxes 27,141 (3,391) (34,754)
Changes in operating assets and liabilities, net of
restructuring and amounts acquired from
business acquisition
Accounts receivable, net 906 (17,846) (4,884)
Inventories 70,502 (17,408) (63,221)
Change in long-term licensing agreements 5,741 (8,700) --
Accounts payable (5,068) (10,551) 30,440
Payrolls and related taxes (3,179) 4,900 (4,598)
Accrued expenses (10,682) (8,619) (1,889)
Income taxes (12,624) 1,690 1,843
Other 56 (837) 99
--------- --------- ---------
Net cash from (for) operating activities 117,813 (15,399) 22,341
--------- --------- ---------
Cash Flows For (From) Investing Activities
Additions to property and equipment (14,364) (32,272) (70,699)
Proceeds from sale of assets held for sale 31,186 9,000 --
Business acquisitions, net of cash -- -- (14,716)
Other 3,704 (1,452) (3,077)
--------- --------- ---------
Net cash for (from) investing activities 20,526 (24,724) (88,492)
--------- --------- ---------
Cash Flows (For) From Financing Activities
Borrowings of short-term debt 2,190 1,315 861
Borrowings of long-term debt -- 53,707 81,619
Repayments of long-term debt (135,326) -- --
Tax benefit of stock transactions 52 31 452
Issuance of common stock 105 89 554
Repurchase of common stock -- (14,820) (30,195)
--------- --------- ---------
Net cash (for) from financing activities (132,979) 40,322 53,291
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 5,360 199 (12,860)
Cash and cash equivalents, at beginning of period 1,695 1,496 14,356
--------- --------- ---------
Cash and cash equivalents, at end of period $ 7,055 $ 1,695 $ 1,496
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 5,259 $ 9,382 $ 3,577
Income taxes $ 789 $ 3,299 $ 20,736
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 35
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 products and also
manufactures nutritional products.
The Company's principal customers are major national and regional
retail supermarket, drug store and mass merchandise chains and major wholesalers
located within the United States. During the fiscal years 2000, 1999 and 1998,
one customer accounted for 26%, 24% and 24% of revenues, respectively. None of
the Company's other customers individually account for more than 10% of its
sales. The Company expanded its sales base internationally, primarily in Mexico.
International net sales for fiscal years 2000, 1999 and 1998 were $43,272,
$38,233 and $32,919, respectively.
All of the Company's manufacturing facilities as of July 1, 2000 were
located in the United States except for a majority-owned pharmaceutical
manufacturing site and a wholly-owned packaging plant, both located in Mexico.
As of July 1, 2000 and July 3, 1999 the net book value of property and equipment
located in Mexico was $5,876 and $3,262, respectively. Property and equipment
located in other foreign countries are not material.
The Company has two operating segments, OTC pharmaceutical products and
nutritional products. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information", the segments have been aggregated into one reportable
segment because the two segments have very similar operating processes, types of
customers, distribution methods, regulatory environment and expected long-term
financial performance.
BASIS OF PRESENTATION
The Company changed its fiscal year end effective for fiscal year 1999.
After the transition year of fiscal year 1999, the Company's quarters are
comprised of 13 weeks and end on a Saturday. Each quarter of fiscal year 2000
was comprised of 13 weeks ending on October 2, January 1, April 1, and July 1.
During fiscal year 1999, the first quarter included the period from July 1
through October 3, 1998. The second through fourth quarters were each 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.
In fiscal year 1998, the Company announced its intention to divest of
the personal care business. The personal care net assets were written down to
their estimated fair value less cost to sell and were included in assets held
for sale in the consolidated balance sheet at July 3, 1999. The Company sold its
personal care business in fiscal year 2000. The LaVergne, Tennessee logistics
facility was not included in this sale and remains in assets held for sale on
July 1, 2000. For fiscal years 2000 and 1999, the consolidated cash flow
statement reflects the changes in the balance sheet after the effects of the
1998 restructuring. 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 reflects one month of personal
care operations for fiscal year ended July 1, 2000 and an entire year of
operations for fiscal years 1999 and 1998. The asset and liability amounts
included in the footnotes for fiscal year 2000 and 1999 exclude amounts related
to personal care. See
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<PAGE> 36
Note K to these consolidated financial statements for a further discussion of
the 1998 restructuring.
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.
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.
INTERNATIONAL OPERATIONS
Since January 1999, the Company has translated its Mexican operation's
foreign currency denominated assets and liabilities into U.S. dollars at current
rates of exchange as of the balance sheet date, and income and expense items at
the average exchange rate for the reporting period. Prior to January 1999, the
Mexican economy was considered "highly inflationary" under the provisions of
SFAS No. 52, "Foreign Currency Translation". Accordingly, a combination of
current and historical exchange rates was used in remeasuring the local currency
financial statements of the Company's Mexican operations, and resulting exchange
adjustments were included in income. The one-time translation adjustment
associated with this change was a translation gain of $371. The gain was
recorded in fiscal year 1999 as an increase in the cumulative translation
adjustment account. Translation adjustments resulting from exchange rate
fluctuations are recorded in the cumulative translation account, a component of
comprehensive income. The balance in the cumulative translation account was $249
and $436 as of July 1, 2000 and July 3, 1999, respectively. Translation
adjustments resulting from exchange rate fluctuations on transactions
denominated in currencies other than the functional currency are not material.
Prior to the first quarter of fiscal year 1999, the Company had a
Russian investment that was accounted for using the equity method. In the first
quarter of fiscal 1999, 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. The net investment amount is included in other expense;
the inventory amount is included in cost of sales; and the accounts and notes
receivable amount is included in selling and administrative expense in the
fiscal year 1999 consolidated statements of income.
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, accounts payable, notes
payable and long-term debt, approximates their fair value.
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<PAGE> 37
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 $1,135, $1,027 and $2,523 was
recorded during fiscal years ended 2000, 1999 and 1998, respectively.
Accumulated amortization was $11,256, $10,121 and $9,094 as of July 1, 2000,
July 3, 1999 and June 30, 1998, respectively. Net goodwill of $27,551 was
written off in fiscal year 1998 as part of the 1998 restructuring. See Note K
for a further discussion of the 1998 restructuring.
The Company periodically reviews long-lived assets that are 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 July 1,
2000 and July 3, 1999, there were no material adjustments to the carrying value
of long-lived assets not held for sale as a result of this review.
INVESTMENT
In the third quarter of fiscal year 2000, the Company recorded a gain
of $1,300 in Other income on the sale of an investment that was classified as
available-for-sale for the purpose of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". In the fourth quarter of fiscal year
1999, the Company recorded an estimated permanent impairment loss of $2,621 in
Other expense related to this investment based on the fair market value of the
investment at the time. The net investment balance of $2,419 was included in
Other assets in the consolidated balance sheet at July 3, 1999.
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.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("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
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<PAGE> 38
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, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Historically, the Company has not
entered into derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, adoption of the new standard on July 2, 2000
did not affect the Company's consolidated financial statements.
During fiscal year 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" and SOP
98-5, "Reporting the Costs of Start-up Activities". Both SOP's are effective
beginning in fiscal year 2000. SOP 98-1 requires capitalization of certain costs
incurred in the development of internal-use software, including external direct
material and service costs, employee payroll and payroll-related costs, and
capitalized interest. SOP 98-5 requires that start-up costs capitalized prior to
July 4, 1999 be written off and any future start-up costs be expensed as
incurred. Because the Company's accounting policy already complied with these
SOP's, there was no impact on earnings of adopting the SOP's.
In March 2000, the FASB issued FASB Interpretation No. (FIN) 44,
"Accounting for Certain Transactions Involving Stock Compensation", which
addresses certain practice issues related to APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Among other issues, FIN 44 clarifies the definition
of an employee, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting for various modifications to the terms of
previously granted fixed stock options or awards and the accounting for an
exchange of stock compensation awards in a business combination. Except for
certain of its provisions that did not affect the Company, FIN 44 was effective
July 1, 2000, and had no effect on the Company's consolidated financial
statements at date of adoption.
NOTE B - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
July 1, July 3,
2000 1999
-------- --------
<S> <C> <C>
Finished goods ......................................... $ 53,399 $ 85,267
Work in process ........................................ 47,920 79,104
Raw materials .......................................... 25,616 33,066
-------- --------
$126,935 $197,437
======== ========
</TABLE>
NOTE C - LONG-TERM BORROWINGS AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 1, July 3,
2000 1999
------------- -----------
<S> <C> <C>
Revolving line of credit............ $ -- $ 110,000
Uncommitted lines of credit......... -- 24,186
Note payable, Industrial
Development Board of
Rutherford County, TN........... -- 1,140
------------- -----------
Total ........................... -- 135,326
Less current installments........... -- 300
------------- -----------
Long-term debt...................... $ -- $ 135,026
============= ===========
</TABLE>
Effective September 23, 1999, the Company entered into a revolving
credit agreement with a group of banks, which provides a $175,000 unsecured
revolving credit facility. This credit agreement replaced a
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<PAGE> 39
$150,000 revolving credit agreement and two uncommitted credit facilities
totaling $55,000 as described below. The agreement expires in September 2004.
Repayment has been guaranteed by the Company's subsidiaries. Restrictive loan
covenants apply to, among other things, minimum levels of net worth, interest
coverage and funded debt leverage.
Interest rates on the new revolving credit facility are established at
the time of borrowing through three options, the prime rate or a LIBOR rate plus
a factor established quarterly based on funded debt leverage, or a rate agreed
upon between the Company and its Agent at the time the loan is made. The rate
factor at July 1, 2000 was .525%.
In June 1996, the Company entered into a credit agreement with a group
of banks, which provided a $150,000 unsecured revolving credit facility.
Repayment was guaranteed by the Company's subsidiaries. Restrictive loan
covenants applied to, among other things, minimum levels of tangible net worth,
interest coverage and funded debt ratio.
Prior to September 23, 1999, the Company also had available borrowings
through two uncommitted credit facilities totaling $55,000. Both facilities
could be terminated by either party at any time. The Company's restrictive
covenants under these facilities were substantially the same as those under the
$150,000 credit facility.
The Company's Mexican subsidiary has uncommitted credit facilities with
two banks in Mexico, totaling 115 million pesos ($11,600 at July 1, 2000). The
outstanding borrowings under the facilities, which mature December 1, 2000 are
$8,884, and $6,694 at July 1, 2000 and July 3, 1999, respectively, and are
included in Notes payable. The facilities will be renewed and are guaranteed by
the Company. Interest rates are based on bids submitted by the banks for periods
of 1 to 90 days. The effective interest rate on outstanding borrowings at July
1, 2000 was 18.4%.
In connection with the sale of the personal care business, the Company
paid off its obligation of $1,440 to the Industrial Development Board of
Rutherford County, Tennessee in fiscal year 2000.
NOTE D - SHAREHOLDERS' EQUITY
On April 10, 1996, the Company's Board of Directors adopted a Preferred
Share Purchase Rights Plan and declared a dividend distribution to be made to
shareholders of record on April 22, 1996, of one Preferred Share Purchase Right
on each outstanding share of the Company's common stock. The Rights contain
provisions, which are intended to protect the Company's stockholders in the
event of an unsolicited and unfair attempt to acquire the Company. The Company
is entitled to redeem the Rights at $.01 per Right at any time before a 20%
position has been acquired. The Rights will expire on April 10, 2006, unless
previously redeemed or exercised.
The Company has restricted stock plans and agreements as described
below. 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 restricted shares as unearned compensation, which is ratably
charged to expense over the vesting period. The unearned compensation included
in shareholder's equity at July 1, 2000 and July 3, 1999 was $543 and $53,
respectively.
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
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<PAGE> 40
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). In fiscal years 2000
and 1999, respectively, the Company granted 7 and 8 shares at $60 and $70, and
charged $60 and $59 to expense.
In May 2000, the Company granted 96 shares of restricted stock at $503
to David T. Gibbons, its President and Chief Executive Officer, pursuant to
restricted stock agreements. Assuming certain conditions are met, the restricted
shares become vested in June 2003. The expense for these shares was $13 for
fiscal year 2000.
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>
Fiscal Year
---------------------------------------------------------------
2000 1999 1998
----------------- ------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 4,852 $11.68 4,143 $12.25 3,737 $11.43
Granted 2,496 6.40 1,061 8.49 1,022 12.94
Exercised (85) 1.74 (139) (.69) (287) (1.93)
Terminated (403) 10.71 (213) (14.37) (326) (14.08)
----- ----- -----
Options outstanding at end of year 6,860 9.92 4,852 11.68 4,143 12.25
Options exercisable at end of year 2,330 13.23 1,869 12.70 1,333 12.28
Options available for grant at end of year 1,346 3,439 4,287
Price per share of options outstanding $1.00 to $.57 to $.22 to
$31.25 $31.25 $31.25
</TABLE>
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 July
1, 2000, options to purchase 91 shares at prices ranging from $8.38 to $29.38
per share and at a weighted average price of $15.77 per share were outstanding,
56 of which were exercisable at a weighted average price of $19.32 per share.
There were 15 options granted at a weighted average exercise price of $8.66 per
share during fiscal year 2000. There were no options exercised and there were 24
options terminated in fiscal year 2000. There were 102 options available for
grant at July 1, 2000.
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 income (loss) and earnings (loss) per share
would have been reduced (loss increased in fiscal year 1998) as follows:
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<PAGE> 41
<TABLE>
<CAPTION>
Fiscal Year
------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Decrease in net income
or increase in net loss $2,662 $3,178 $2,558
Basic earnings per share $.04 $.04 $.03
Diluted earnings per share $.04 $.04 $.03
</TABLE>
The effects on net income (loss) and earnings (loss) per share for
fiscal years 2000, 1999 and 1998 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 share at the date of grant for
options granted during fiscal years 2000, 1999 and 1998 was $2.91, $3.69 and
$5.79, respectively. The fair value was estimated using the Black-Sholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Fiscal Year
------------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Volatility, as a percent 36.0% 35.1% 31.3%
Risk-free interest rate 6.5% 4.9% 6.1%
Expected life in years after vest date 3.0 3.0 3.0
</TABLE>
Forfeitures are accounted for as they occur.
The following table summarizes information concerning options
outstanding under the Plans at July 1, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------- ----------------------------------
Weighted
Average
Range of Number Remaining Weighted Number
Exercise Outstanding Contractual Average Exercisable Weighted Average
Prices at 7/1/00 Term (Years) Exercise Price at 7/1/00 Exercise Price
-------- ---------- ------------ -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 - 6.16 1,972 9.09 $5.39 176 $1.44
7.95 - 9.13 2,502 6.75 8.62 576 9.00
9.50 - 13.50 1,785 4.90 12.88 949 12.89
14.69 - 31.25 692 2.40 20.71 685 20.76
----- -----
6,951 2,386
===== =====
</TABLE>
In May 1997, the Company announced a common stock repurchase program.
The program called for the repurchase of up to 7,500 shares, subject to market
conditions. Purchases were made in the open market. The Company purchased 1,550
shares for $14,820 in fiscal year 1999 and 2,116 shares at $30,195 in fiscal
year 1998. The common stock repurchased for all years was retired. The program
was terminated in fiscal year 1999.
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<PAGE> 42
NOTE E - RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
The Company has a qualified profit-sharing plan and an investment plan
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 plan, the Company
matches a portion of employees' contributions. The Company's contributions to
the plans were $5,667, $6,727 and $6,609 for the years ended July 1, 2000, July
3, 1999 and June 30, 1998, respectively.
In connection with the sale of the personal care business, the Company
terminated the Perrigo Company of Tennessee Retirement Income Savings Plan on
August 24, 1999.
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 July 1, 2000 and
July 3, 1999 and the benefits expensed in fiscal years 2000, 1999 and 1998 are
immaterial to the financial position and results of operations of the Company.
NOTE F - INCOME TAXES
A summary of income taxes is as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------
2000 1999 1998
-------- ------- --------
<S> <C> <C> <C>
Current:
Federal.................................... $(17,490) $ 5,108 $ 19,011
Foreign.................................... 1,322 771 757
State...................................... 214 (20) 630
-------- ------- --------
(15,954) 5,859 20,398
Deferred .......................................... 27,141 (3,391) (34,754)
-------- ------- --------
Total $ 11,187 $ 2,468 $(14,356)
======== ======= ========
</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) asset are as follows:
<TABLE>
<CAPTION>
July 1, July 3,
2000 1999
-------- --------
<S> <C> <C>
Allowance for impaired assets and related
reserve for restructuring ............................................ $ 8,450 $ 34,765
Accumulated depreciation ............................................... (27,468) (29,313)
Inventory costs ........................................................ 6,286 7,359
Allowance for doubtful accounts ........................................ 1,652 1,140
Accrued expenses not yet deductible .................................... 3,792 5,222
Other, net ............................................................. (1,051) (371)
-------- --------
Net deferred income tax (liability) asset .............................. $ (8,339) $ 18,802
======== ========
</TABLE>
The net deferred income tax liability as of July 1, 2000 and the net
deferred income tax asset as of July 3, 1999 are presented in the balance sheets
as follows:
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<PAGE> 43
July 1, July 3,
2000 1999
------- --------
Current asset .......................................... $11,123 $33,476
Long-term liability .................................... 19,462 14,674
The effective income tax rate varied from the statutory Federal tax
rate as follows:
<TABLE>
<CAPTION>
Fiscal Year
------------------------------
2000 1999 1998
------ ------ --------
<S> <C> <C> <C>
Federal statutory rate ...................................... 35.0% 35.0% (35.0)%
Expenses not deductible for tax purposes:
Loss on permanent impairment of capital investment ........ (1.5) 22.8 --
Restructuring charges, primarily related to goodwill
write-off ............................................... -- -- 11.2
Goodwill amortization ....................................... 2.9 6.3 (0.8)
Product contributions ....................................... -- (6.3) 0.6
Other ....................................................... 0.3 3.7 2.2
---- ---- ----
Effective income tax rate ................................... 36.7% 61.5% (21.8)%
==== ==== ====
</TABLE>
NOTE G - COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes in shareholders'
equity during the period other than from transactions with shareholders.
Comprehensive income consists of the following:
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------
2000 1999 1998
-------- ------ --------
<S> <C> <C> <C>
Net income $19,298 $1,546 $(51,636)
Other comprehensive income:
Unrealized holding gains (losses) on securities 1,286 -- --
Reclassification adjustment for gains realized in net income (1,286) -- --
------ ------ --------
Net unrealized gains (losses) on investments -- -- --
Foreign currency translation adjustments (187) 436 --
------- ------ --------
Comprehensive income (loss) $19,111 $1,982 $(51,636)
======= ====== ========
</TABLE>
Prior to January 1999, the Company treated the Mexican economy as
highly inflationary. Accordingly, the translation effects were reported as a
component of income and losses during those periods. Subsequent to January 1999,
the Mexican economy was not considered highly inflationary. Accordingly, all
subsequent translation effects are included as a component of other
comprehensive income.
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<PAGE> 44
NOTE H - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the "basic"
and "diluted" earnings per share calculation follows:
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------
2000 1999 1998
------- -------- ---------
<S> <C> <C> <C>
Numerator:
Net income (loss) used for both "basic"
and "diluted" EPS calculation $19,298 $ 1,546 $(51,636)
======= ======= ========
Denominator:
Weighted average shares outstanding
for the period - used for "basic"
EPS calculation 73,370 73,707 75,302
Dilutive effect of stock options 223 277 --
------- ------- -------
Weighted average shares outstanding
for the period - used for "diluted"
EPS calculation 73,593 73,984 75,302
======= ======= =======
</TABLE>
The effect of stock options of 866 shares was not included at June 30,
1998 because to do so would have been antidilutive.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases certain assets, principally warehouse facilities and
data processing equipment, under agreements that expire at various dates through
June 2011. 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: 2001--$5,857; 2002--$4,176;
2003--$2,295; 2004--$1,186; 2005-- $712; and thereafter--$1,013. Rent expense
under all leases was $10,592, $14,007 and $14,367 for fiscal years 2000, 1999
and 1998, respectively.
As described more fully in Note K, the Company sold its personal care
business in August 1999. In conjunction with this sale, the Company entered into
an agreement with the buyer to lease to the buyer the Company's LaVergne,
Tennessee logistics facility through August 2001. The Company also entered into
an agreement with the buyer of the personal care business to provide certain
logistics support services, MIS support services and accounting services.
Certain logistics support services were provided through June 30, 2000 and
certain MIS support services will be provided through June 30, 2001. The
accounting services primarily related to accounts receivable collection through
June 30, 2000 and accounts payable services through November 1999. The Company
also entered into an agreement to sell certain products to the buyer and
purchase certain other products from the buyer through August 2002.
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 2000, the Company entered into a settlement
agreement with the former owner that resulted in the dismissal of the lawsuit
and the withdrawal of all pending appeals thus ending any further action against
the Company. No payment or financial compensation was required of either party.
The effect of the settlement was to leave in place the Court's original order
dismissing the plaintiff's case.
-43-
<PAGE> 45
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. In October 1998, the class action lawsuit was dismissed against all
defendants. In November 1998, the plaintiffs appealed the dismissal of their
case. In April 1999, the plaintiffs withdrew their appeal. The dismissal of the
appeal and the subsequent entering of the final judgment ends any further action
against the Company. Under the agreement reached with the plaintiffs, no money
or other compensation will be paid to the plaintiffs or their attorneys.
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 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. In April 1999, the plaintiffs agreed to dismiss this suit based upon the
dismissal of the class action.
In the fourth quarter of fiscal year 1999, the Company received
reimbursement of $8,000 under provisions of its liability coverage for a
significant portion of the legal fees and expenses incurred for the class action
lawsuit and the related derivative lawsuit. The payment is included in Unusual
litigation in the fiscal year 1999 consolidated statement of income.
The consolidated statements of income for fiscal years 2000, 1999 and
1998 include $0, $4,048 and $9,585, respectively, of charges primarily related
to the three legal actions described above.
On August 4, 1999, the Company filed a civil antitrust lawsuit in the
U.S. District Court for the Western District of Michigan against a group of
vitamin raw material suppliers alleging the defendants conspired to fix the
prices of vitamin raw materials sold to the Company. The relief sought includes
money damages and a permanent injunction enjoining defendants from future
violations of antitrust laws. The case is proceeding to trial and discovery
activities have commenced. The Company entered into settlement agreements with
certain defendants resulting in an aggregate payment to the Company of $4,154,
net of attorney fees and expenses that were withheld prior to the disbursement
of the funds to the Company. This payment is included in Unusual litigation in
the fiscal year 2000 consolidated statement of income. The Company can make no
prediction as to the outcome of the litigation with the remaining defendants.
The Company has pending certain legal actions and claims incurred in
the normal course of business. The Company believes that these actions are
without merit or are covered by insurance and is actively pursuing the defense
thereof. 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 consolidated 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.
-44-
<PAGE> 46
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly financial data reflects one month of personal care
operations for fiscal year 2000 and an entire year of operations for fiscal year
1999.
<TABLE>
<CAPTION>
2000 October 2, January 1, April 1,(1) July 1,(2)
--------------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 209,365 $ 197,246 $ 181,494 $ 150,450
Gross profit .................................. 50,196 48,444 36,796 19,805
Net income (loss) ............................. 10,025 10,964 6,375 (8,066)
Basic earnings (loss) per share ............... $ 0.14 $ 0.15 $ 0.09 $ (0.11)
Diluted earnings (loss) per share(3) .......... 0.14 0.15 0.09 (0.11)
Weighted average shares outstanding
Basic ............................... 73,327 73,348 73,367 73,436
Diluted ............................. 73,528 73,525 73,537 73,436
</TABLE>
<TABLE>
<CAPTION>
1999 October 3,(4) January 2, April 3, July 3,(5)
--------------------- ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 212,298 $ 226,121 $ 251,426 $ 187,742
Gross profit .................................. 35,305 54,295 57,863 38,231
Net (loss) income ............................. (12,376) 7,123 9,712 (2,913)
Basic (loss) earnings per share ............... $ (0.17) $ .10 $ .13 $ (0.04)
Diluted (loss) earnings per share(6) .......... (0.17) .10 .13 (0.04)
Weighted average shares outstanding
Basic ............................... 73,429 73,219 73,265 73,320
Diluted ............................. 73,429 73,489 73,519 73,320
</TABLE>
(1) Includes a pre-tax charge of $7,000 for higher than normal inventory
obsolescence expense related to the Company's conversion to a new software
system in fiscal year 1999. Includes a pre-tax charge of $4,000 related to
fixed production costs expensed due to lower than normal production levels
as the Company reduced inventory.
(2) Includes pre-tax charges of $3,000 related to write-offs of goods produced
during the quarter, $2,000 of unusual obsolescence primarily related to the
Company's conversion to a new software system, $5,500 to adjust inventory
to a first-in first-out basis (whereby most recent costs are reflected in
inventory) and $1,848 related to recent reductions in sales projections for
a long-term licensing agreement. Includes a pre-tax charge of $2,500
related to increased bad debts expense. Includes a pre-tax charge of $1,048
related the LaVergne, Tennessee logistics facility. See Note K. Includes
pre-tax income of $4,154 for a settlement payment related to a civil
antitrust lawsuit. See Note I.
(3) The effect of stock options of 225 shares was not included in the fourth
quarter of fiscal year 2000 because to do so would have been antidilutive.
(4) Includes a pre-tax write-off of $14,177 related to the Company's equity
investment in Russia. See the International Operations section of Note A.
(5) Includes a total pre-tax charge of $6,600 for increases in inventory
write-offs and inventory obsolescence provisions. These inventory
adjustments were made in the fourth quarter after sales fell short of
expectations, resulting in obsolete and excess inventory. Includes the
favorable impact of $7,500 for inventory valuation adjustments to adjust
inventory to a first-in, first-out basis and $1,300 related to higher than
normal production levels. Includes a pre-tax charge of $2,615 for the 1999
restructuring and $3,545 for the 1998 restructuring. See Note K. Includes
pre-tax income of $8,000 for proceeds received in an insurance settlement
for litigation expenses associated with a class action lawsuit and a
related derivative lawsuit. See Note I. Includes a pre-tax charge of $2,621
related to a permanent impairment write-down of an investment. See the
Investment section of Note A.
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<PAGE> 47
(6) The effect of stock options of 333 shares and 231 shares was not included
in the first and fourth quarter of fiscal year 1999, respectively, because
to do so would have been antidilutive.
NOTE K - RESTRUCTURING COSTS
For fiscal years 2000, 1999 and 1998, the Company incurred restructuring
and redesign charges primarily related to an intended divestiture, facilities
closings and streamlining operations. Total restructuring charges were $1,048,
$6,160 and $122,529 for fiscal years 2000, 1999 and 1998, respectively. The
total restructuring reserve balance was $0, and $4,625 at July 1, 2000 and July
3, 1999, respectively. Assets held for sale related to the 1998 restructuring
were $18,382 and $53,045 at July 1, 2000 and July 3, 1999, respectively.
UPDATE ON 1999 RESTRUCTURING
In the fourth quarter of fiscal year 1999 the Company announced a
workforce reduction plan that resulted from the Company's decision to divest its
personal care business (see below) and efficiencies created by implementation of
a new enterprise software system in the first quarter of fiscal year 1999. The
plan included a combination of early retirements, normal attrition,
redeployments and job eliminations, primarily for professional, managerial,
administrative and support staff personnel located in the Company's corporate
offices. A pre-tax charge and reserve of $2,615, which related to severance,
postretirement and outplacement costs, were recorded in accordance with EITF
94-3. In the fourth quarter of fiscal year 1999, 23 people elected early
retirement and 34 people were terminated. For fiscal year 2000, $2,455 was paid
primarily for severance and outplacement costs related to the 1999
restructuring. These costs were charged against the reserve established in
fiscal year 1999. The 1999 restructuring reserve balance was $0 and $2,455 at
July 1, 2000 and July 3, 1999, respectively.
UPDATE ON 1998 RESTRUCTURING
In June 1998 the Company announced a major restructuring plan which
involved the closing of certain personal care manufacturing facilities and the
intention to divest the personal care business. A pre-tax charge of $121,966 was
recorded in the fourth quarter of fiscal year 1998. This charge included
$109,707 for impairment of assets and a reserve of $12,259 for anticipated
incremental cash expenditures recorded in accordance with EITF 94-3.
In the first half of fiscal year 1999 the Company closed personal care
manufacturing facilities in California and Missouri and in the second half of
the year these facilities were sold. Proceeds from the sales were $9,000. No
gains or losses were recorded in the fiscal year 1999 consolidated income
statement related to these sales as the facilities had previously been adjusted
to their estimated fair market values.
In the fourth quarter of fiscal year 1999 the Company entered into an
agreement in principle to sell the personal care business. In conjunction with
that agreement, the Company recorded an additional net restructuring charge of
$3,248. Also during fiscal year 1999, the Company expensed as incurred $297 of
other restructuring costs in accordance with EITF 94-3.
The Company completed the sale of the personal care business in fiscal
year 2000. Proceeds from the sale were $32,200, including funds held in escrow.
No gain or loss was recorded in fiscal year 2000 related to this sale. Fiscal
year 2000 earnings reflect one month of the personal care business. Net sales
for the personal care business were $17,778, $192,409 and $212,261 for fiscal
years 2000, 1999 and 1998, respectively. The Company does not maintain operating
income information by its main product lines, however, based on the incremental
approach, the Company estimates that pre-tax operating income was approximately
$1,000 for each of fiscal years 2000 and 1999 and pre-tax operating loss was
$8,000 for fiscal year 1998 for the personal care
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<PAGE> 48
business. Included in pre-tax operating income was the effect of suspending
depreciation of approximately $700 and $7,200 for fiscal years 2000 and 1999,
respectively.
For fiscal year 2000, $2,170 was paid primarily related to professional
fees and transitional costs associated with the sale of the personal care
business. These costs were charged against a reserve established in fiscal year
1998. The 1998 restructuring balance was $0 and $2,170 at July 1, 2000 and July
3, 1999, respectively.
Assets held for sale decreased to $18,382 at July 1, 2000 primarily due to
the sale of the personal care business during fiscal year 2000. Assets held for
sale at July 1, 2000 is comprised of the LaVergne, Tennessee logistics facility.
In the fourth quarter of fiscal year 2000, the Company recorded a net
restructuring charge of $1,048 to reflect its current net realizable value. The
Company intends to sell this facility in fiscal year 2001. The effect of
suspending depreciation on this facility was $850 and $830 for fiscal year 2000
and 1999, respectively.
The restructuring charges as described above are detailed in the
following table:
<TABLE>
<CAPTION>
1998 Restructuring 1999 Restructuring
Professional Fees Severance and
And Transitional Costs Outplacement
---------------------- ------------------
<S> <C> <C>
Balance at June 30, 1998 $ 12,259 $ --
Additions -- 2,455
Reductions/Charges (10,089) --
-------- -----------
Balance at July 3, 1999 2,170 2,455
Reductions/Charges (2,170) (2,455)
-------- -----------
Balance at July 1, 2000 $ -- $ --
======== ===========
</TABLE>
NOTE L - 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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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<PAGE> 49
PART III.
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors of the Company.
Information concerning directors of the Company is incorporated
herein by reference to the Company's Proxy Statement for the
2000 Annual Meeting under the heading "Election of Directors".
(b) Executive Officers of the Company.
See Part I, Additional Item of this Form 10-K on page 12.
(c) Compliance with Section 16(a) of the Exchange Act.
Information concerning compliance with Section 16(a) of the
Exchange Act is incorporated herein by reference to the
Company's Proxy Statement for the 2000 Annual Meeting under the
heading "Section 16(a) Beneficial Ownership Reporting
Compliance".
Item 11. Executive Compensation.
Information concerning executive officer and director compensation is
incorporated herein by reference to the Company's Proxy Statement for
the 2000 Annual Meeting under the headings "Executive Compensation" and
"Director Compensation".
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information concerning security ownership of certain beneficial owners
and management is incorporated by reference herein by reference to the
Company's Proxy Statement for the 2000 Annual Meeting under the heading
"Ownership of Perrigo Common Stock".
Item 13. Certain Relationships and Related Transactions.
Information concerning certain relationships and related transactions
is incorporated herein by reference to the Company's Proxy Statement
for the 2000 Annual Meeting under the heading "Director Compensation".
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 28 of this Form 10-K.
2. Financial Schedules
Report of Independent Certified Public Accountants on
Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts
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<PAGE> 50
Schedules other than the one listed are
omitted because they are included in the footnotes,
immaterial or not applicable.
3. Exhibits:
2(a) - Asset Purchase Agreement, dated August 25, 1999,
among Perrigo Company and Perrigo Company of
Tennessee as Sellers; and Cumberland Swan Holdings,
Inc., as Buyer, incorporated by reference from the
Registrant's Form 10-K filed on October 1, 1999.
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,
as amended on June 23, 2000 and August 25, 2000.
4(a) - Shareholders' Rights Plan, incorporated by reference
from the Registrant"s Form 8-K filed on April 10,
1996.
10(a)* - Registrant's Management Incentive Plan, incorporated
by reference from the Registration Statement No.
33-69324 filed by the Registrant on September 23,
1993.
10(b)* - Registrant's 1988 Employee Incentive Stock Option
Plan as amended, incorporated by reference from
Exhibit A of the Registrant's 1997 proxy statement.
10(c)* - 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(d)* - Registrant's Restricted Stock Plan for Directors,
dated November 6, 1997, incorporated by reference
from Registrant's 1998 Form 10-K filed on October 6,
1998.
10(e) - Credit Agreement, dated September 23, 1999, between
Registrant and Bank One, Michigan, incorporated by
reference from the Registrant's Form 10-K filed on
October 1, 1999.
10(f) - Guaranty Agreement, dated September 23, 1999,
executed by L. Perrigo Company and Perrigo Company
of South Carolina, Inc., in favor of the Agent and
each Lender, incorporated by reference from the
Registrant's Form 10-K filed on October 1, 1999.
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<PAGE> 51
10(g)* - Consulting Agreement, dated December 7, 1999,
between Registrant and F. Folsom Bell, incorporated
by reference from the Registrant's Form 10-Q filed
on February 9, 2000.
10(h)* - Employment Agreement, Restricted Stock Agreement,
Contingent Restricted Stock Agreement, and
Noncompetition and Nondisclosure Agreement, dated
April 19, 2000, between Registrant and David T.
Gibbons, incorporated by reference from the
Registrant's Form 10-Q filed on April 26, 2000.
10(i)* - Consulting Agreement, Noncompetition and
Nondisclosure Agreement and Indemnity Agreement,
dated June 2, 2000, between Registrant and Michael
J. Jandernoa.
21 - Subsidiaries of the Registrant.
23 - Consent of BDO Seidman, LLP.
24 - Power of Attorney (see signature page).
27 - Financial Data Schedule.
* Denotes management contract or compensatory plan or arrangement.
(b) Exhibit and reports on Form 8-K.
(i) The Company filed a report on Form 8-K on April 27, 2000
that announced the appointment of David T. Gibbons, a former Rubbermaid
and 3M executive, as President and Chief Executive Officer. He also
became a director of the Company. Michael J. Jandernoa, who served as
Chief Executive Officer since 1986, remained as Chairman of the Board.
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<PAGE> 52
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 4, 2000, relating to the consolidated financial
statements of Perrigo Company, which is contained in Item 8 of this Form 10-K
for the year ended July 1, 2000, 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 4, 2000
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<PAGE> 53
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, 1998:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $3,026 $ 580 $ 915 $2,691
Year Ended July 3, 1999:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $2,691 $ 334 $ (256) $3,281
Year Ended July 1, 2000:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $3,281 $ 2,821 $ 105 $5,997
</TABLE>
(1) Uncollectible accounts charged off, net of recoveries and the effect of the
1998 restructuring.
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<PAGE> 54
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 July 1, 2000 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Allegan, State of Michigan
on the 6th of September, 2000.
PERRIGO COMPANY
By: /s/ David T. Gibbons
--------------------------
David T. Gibbons
President and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints David T.
Gibbons and Douglas R. Schrank 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 July 1, 2000 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.
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<PAGE> 55
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K for the fiscal year ended July 1, 2000 has been
signed by the following persons in the capacities indicated on the 6th of
September, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ David T. Gibbons President, Chief Executive Officer and Director
------------------------------------- (Principal Executive Officer)
David T. Gibbons
/s/ Douglas R. Schrank Executive Vice President and Chief Financial Officer
------------------------------------- (Principal Accounting and Financial Officer)
Douglas R. Schrank
/s/ F. Folsom Bell Executive Vice President, Business Development
------------------------------------- and 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/ Michael J. Jandernoa Chairman of the Board
-------------------------------------
Michael J. Jandernoa
/s/ Herman Morris, Jr. Director
-------------------------------------
Herman Morris, Jr.
</TABLE>
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<PAGE> 56
EXHIBIT INDEX
EXHIBIT DOCUMENT
------- --------
3(b) Restated Bylaws of Registrant, dated April 10, 1996, as amended,
on June 23, 2000 and August 25, 2000.
10(i) Consulting Agreement, Noncompetition and Nondisclosure Agreement
and Indemnity Agreement, dated June 2, 2000, between Registrant
and Michael J. Jandernoa.
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
-55-
