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<SEC-DOCUMENT>0000950137-97-003168.txt : 19970929
<SEC-HEADER>0000950137-97-003168.hdr.sgml : 19970929
ACCESSION NUMBER: 0000950137-97-003168
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19970630
FILED AS OF DATE: 19970926
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PERRIGO CO
CENTRAL INDEX KEY: 0000820096
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 382799573
STATE OF INCORPORATION: MI
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-19725
FILM NUMBER: 97686066
BUSINESS ADDRESS:
STREET 1: 117 WATER ST
CITY: ALLEGAN
STATE: MI
ZIP: 49010
BUSINESS PHONE: 6166738451
MAIL ADDRESS:
STREET 1: 117 WATER STREET
CITY: ALLEGAN
STATE: MI
ZIP: 49010
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K 405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] 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 incorporation (I.R.S. Employer
or organization) Identification No.)
117 Water Street 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
September 3, 1997 as reported on the Nasdaq National Market System, was
approximately $716,789,000. Shares of common stock held by each
executive officer and director and by each person who owns 5% of more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of September 3, 1997 the registrant had outstanding 76,153,995
shares of common stock.
Documents incorporated by reference: Registrant's Proxy Statement for its
Annual Meeting on November 6, 1997 is incorporated by reference into Part III.
<PAGE> 2
PART I.
Item 1. Business of the Company.
GENERAL
Perrigo Company (the "Company"), established in 1887, is the nation's
largest manufacturer of store brand over-the-counter (non-prescription)
pharmaceuticals, personal care and nutritional products. Store brand products
are sold under a retailer's own label and compete with nationally advertised
brand name products. The Company attributes its leadership position in the
store brand market to its comprehensive product assortment and to its
commitment to product quality, customer service, retailer marketing support and
low cost production.
The Company's customers are major national and regional retail drug,
supermarket and mass merchandise chains such as American Stores, CVS,
Kmart, Kroger, Target, Wal-Mart, and Walgreens and major wholesalers such
as Fleming, McKesson, Super Valu and Topco.
The Company markets a broad line of products that are comparable in
quality and effectiveness to national brand products. These products include
over-the-counter pharmaceuticals such as analgesics, cough and cold remedies,
antacids, laxatives, feminine hygiene and suppositories; personal care products
such as toothpaste, mouthwash, rubbing alcohol, hydrogen peroxide, baby care,
skin care, hair care and sun care; and nutritional products such as synthetic
and natural vitamins, nutritional drinks and diet aids. The cost to the
customer of a store brand product is significantly lower than that of a
nationally advertised brand name product. The customer therefore can price a
store brand product below the competing national brand product while still
realizing a higher profit margin. Generally, the retailers' dollar profit per
unit of store brand product sold is higher than the dollar profit per unit of
the comparable national brand product. The consumer benefits by receiving a
quality product at a price below a comparable national brand product.
To a lesser extent, the Company manufactures and markets its own brand
name products under the names Swan(R), Good Sense(R), Daily Source(R) and
Nature's Glo(R). The Company also manufactures products under contract for
marketers of national brand products.
The Company's principal executive offices are located at 117 Water Street,
Allegan, Michigan 49010 and its telephone number is (616) 673-8451. The
Company operates primarily through five wholly-owned domestic subsidiaries, L.
Perrigo Company, Perrigo Company of South Carolina, Inc., Perrigo Company of
Tennessee, Inc. (formerly Cumberland-Swan, Inc.), Perrigo Company of Missouri,
Inc. and Perrigo International, Inc., and its three wholly-owned foreign
subsidiaries Perrigo de Mexico S.A. de C.V., Nippon Perrigo, K.K. and Perrigo
Asia Ltd. As used herein, the "Company" means Perrigo Company, its
subsidiaries and all predecessors of Perrigo Company and its subsidiaries.
SIGNIFICANT DEVELOPMENTS DURING FISCAL YEAR 1997
The Company continued the business process redesign effort that was begun
in the latter half of fiscal year 1996 and will continue through fiscal year
1998. The redesign effort is focused on managing orders and products, and is
expected to result in delivering greater value to customers while lowering
costs. As part of the redesign effort, an integrated software package was
purchased in the third quarter of fiscal year 1997. This software package,
which is designed to enhance current management reporting and streamline
information flow, is anticipated to be installed early in fiscal year 1999.
<PAGE> 3
Throughout the year, the Company realized sales from several new
products including an analgesic comparable to the brand product Aleve(R). New
"super vitamin" products were introduced that contain more vitamins and
minerals than comparable national brands. The Company also realized a full
year of sales of Minoxidil, a hair growth stimulant comparable to Rogaine(R).
This is a new product category for the Company and is manufactured and supplied
to the Company through a third party agreement. This agreement demonstrates
the success of the Company's efforts to develop the store brand market for
products which it does not currently manufacture or for which it does not have
an approved Abbreviated New Drug Application ("ANDA").
The Company received ANDA approval from the United States Food and Drug
Administration ("the FDA") to manufacture products that are comparable to the
brand products Aleve(R), an analgesic, Unisom(R), a sleep aid, and Monistat
7(R), a feminine hygiene product.
The Company's commitment to customer service was recognized by three major
customers through "Vendor of the Year" awards. The awards were received from
Kroger, Smith's and Albertson's in recognition of the Company's superior
support, service and contribution to building the store brand business.
In the third quarter, the Company's line of credit was fully paid down.
The decrease in debt was primarily due to close monitoring and management of
working capital and capital expenditures.
In May the Company announced a common stock repurchase program. The
program calls for the repurchase of up to 7.5 million shares, subject to market
conditions. Purchases will be made in the open market during the 24 month
period following the announcement date. The repurchased stock will be retired.
BUSINESS STRATEGY
The Company attributes its sustained leadership position in the store
brand market to its implementation of several focused business strategies which
reflect the Company's commitment to its customers and employees. The strategy
is outlined below.
PRODUCT ASSORTMENT AND PRODUCT QUALITY
The Company offers a comprehensive product assortment in over-the-counter
pharmaceutical, personal care and nutritional products in order to fill
customers' needs while minimizing their product sourcing costs.
The Company is dedicated to developing and marketing new store brand
products before the competition. As a result, the Company has a research and
development staff that management believes is one of the most experienced in
the industry at developing national brand equivalent products using
state-of-the-art equipment. This staff also responds to changes in existing
national brand products by reformulating comparable existing Company products.
In the over-the-counter pharmaceutical market, many new products are the result
of changes in product status from "prescription only" to "over-the-counter"
(non-prescription). These products require approval by the FDA through its
ANDA process. In order to accelerate the approval process, the Company uses
both internal research and strategic product development agreements with
outside sources.
The Company is committed to providing a quality product to the customer.
All products are developed using ingredients, formulas and processes similar
to those of national brand products.
-2-
<PAGE> 4
Packaging is designed to make the product visually appealing to the consumer.
High quality standards are maintained throughout all phases of production,
warehousing and distribution.
CUSTOMER SERVICE AND MARKETING SUPPORT
The Company seeks to establish customer loyalty by providing superior
customer service and marketing support. This includes providing (1) a
comprehensive assortment of quality, value priced products, (2) timely
processing, shipment and delivery of orders, (3) assistance in managing
customer inventories, and (4) support in building the store brand business.
The Company's business process redesign effort is focused on managing
orders and products. The "manage orders" effort will significantly reduce the
time from order taking to delivery. This acceleration will decrease the
Company's and the customers' inventory levels and carrying costs, increase
inventory turns and improve customer service. The "manage products" effort is
intended to increase the effectiveness of the Company's product-related
decisions. A streamlined decision-making process will help to ensure that
products are brought to market quickly and promoted effectively.
The Company maintains regional distribution locations to react to
customers' needs on a timely basis. In connection with the business process
redesign effort, the Company will build new distribution centers in Allegan,
Michigan and LaVergne, Tennessee during fiscal year 1998. These
state-of-the-art facilities will replace multiple leased warehouses in Holland,
Michigan and LaVergne, Tennessee.
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 promotion of customers' store brand
products by performing consumer research, providing market information and
establishing individualized promotions and marketing programs.
LOW COST PRODUCTION
The Company continually strives to improve its manufacturing capabilities
and technology in order to provide the manufacturing flexibility necessary to
meet its customers' changing needs and maintain a low cost producer position.
Productivity and efficiency improvements are encouraged by sharing related
cost savings with employees through formalized employee gainsharing programs
which share productivity improvements with employees.
Education of the work force and a team approach provide employees with the
skills to generate and implement programs designed to increase the Company's
productivity and efficiency, to improve quality and to better serve customers.
Continuous improvement programs are utilized extensively to improve
efficiency by eliminating waste from all phases of Company operations. These
programs include cross-functional teams, internal and external audits and
on-the-job training.
-3-
<PAGE> 5
All levels of management are involved in the planning process in an effort
to forecast future manufacturing needs with sufficient lead time to reallocate
production resources.
BUSINESS SEGMENT
The Company operates in one business segment, store brand health and
beauty care, and does not maintain operating profit or fixed asset information
by its three major product categories. Since this information is not
available, disclosure of operating segment information by these product
categories, utilizing arbitrary allocations, would not be meaningful to
investors.
PRODUCTS
The Company currently markets approximately 960 store brand products to
approximately 900 customers. The Company includes as separate products
multiple sizes, flavors and product forms of certain products. The Company has
a leading market share in certain of its products in the store brand market.
During fiscal year 1997 approximately $49 million of the Company's net
sales were attributable to new products added to the Company's product lines
within the past two years.
The Company manufactures and markets certain products under its own brand
names Swan(R), Good Sense(R), Daily Source(R) and Nature's Glo(R). Net sales of
these products were approximately 5% to 7% of the Company's net sales for
fiscal years 1997, 1996 and 1995.
The following table, which does not include certain miscellaneous net
sales (primarily bulk tablet sales), illustrates growth in net sales for the
Company's three product lines from fiscal year 1993 through fiscal year 1997.
<TABLE>
<CAPTION>
NET SALES BY PRODUCT LINE
YEAR ENDED JUNE 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTC Pharmaceuticals .. $526,541 $474,551 $450,608 $433,624 $365,054
Personal Care ........ 206,480 212,234 197,784 175,822 159,280
Nutritional .......... 110,408 89,808 66,701 57,024 45,155
-------- -------- -------- -------- --------
$843,429 $776,593 $715,093 $666,470 $569,489
======== ======== ======== ======== ========
</TABLE>
Listed below are some of the products marketed by the Company under store
brand labels. Each retailer may have its own name for a store brand product.
Also listed are the names of certain of the national brands with which these
products compete.
-4-
<PAGE> 6
<TABLE>
<CAPTION>
Illustrative Competing
Company Products National Brands
- ---------------- ----------------------
<S> <C>
OVER-THE-COUNTER PHARMACEUTICALS
Analgesics
Ibuprofen Tablets & Caplets Advil(R) Tablets & Caplets
Pain Reliever Without Aspirin (Acetaminophen) Tylenol(R) Tablets, Caplets, Gelcaps & Geltabs
Children's Non-Aspirin Tablets & Caplets Children's Tylenol(R)
Children's Non-Aspirin Elixirs & Suspensions Children's Tylenol(R) Elixirs & Suspensions
Non-Aspirin Infant Drops Tylenol(R) Infant Drops
Aspirin Bayer(R)
Headache Formula Excedrin(R)
Children's Chewable Aspirin Bayer(R) Children's Aspirin
Naproxen Sodium Tablets & Caplets Aleve(R)
Pain Reliever & Sleep Aid Tablets, Caplets, Tylenol(R) PM
Gelcaps & Geltabs
Cough/Cold
Nite Time Cough Syrup NyQuil(R)
Nite Time Liquid Caps NyQuil(R) Liqui-Caps
Day Time Liquid Caps DayQuil(R) Liqui-Caps
Aphedrid Tablets Actifed(R)
Cold Capsules Contac(R)
Tussin Cough Syrups Robitussin(R)
Children's Non-Aspirin Cold/Cough Tablets, Tylenol(R) Cold Plus Cough
Liquid
Di-Bromm Tablets, Liquid Dimetapp(R)
Pseudoephedrine Tablets, Liquid Sudafed(R)
Diphedryl(R) Caplets, Tablets, Liquid Benadryl(R)
Effervescent Cold Relief Alka-Seltzer(R) Plus
Triacting Syrup and Expectorant Triaminic(R)
Flu & Cold Medicine Thera-Flu(R)
Nasal Spray Afrin(R)
Dayhist - 1 Tavist - 1(R)
Dayhist - D Tavist - D(R)
Non-Aspirin Sinus Tylenol(R) Sinus
Dixapedrine Tablets Drixoral(R)
Antacids
Stress Liquid & Caplets Pepto-Bismol(R)
Maldroxal(R) & M Plus Maalox(R)
Ma-santi(R) Mylanta(R)
Ma-santi(R) II Mylanta II(R)
Antacid Gelcaps Mylanta(R) Gel-Caps
Flavored Antacid Tablets Tums(R)
Effervescent Pain Relief Alka-Seltzer(R)
Laxatives
Natural Fiber Laxative Metamucil(R)
Women's Laxative Tablets Correctol(R)
</TABLE>
-5-
<PAGE> 7
<TABLE>
<CAPTION>
Illustrative Competing
Company Products National Brands
- ---------------- ----------------------
<S> <C>
OVER-THE-COUNTER PHARMACEUTICALS
Laxative Pills Ex-Lax(R)
Fiber Laxative Tablets Fibercon(R)
Milk of Magnesia Phillips(R) M.O.M.
Anti-diarrheal
Loperamide Hydrochloride Liquid Imodium A-D(R) Liquid
Loperamide Hydrochloride Caplets Imodium A-D(R) Caplets
Feminine Hygiene
Miconazole-7 Cream Monistat-7(R) Cream
Suppositories
Hemorrhoidal Suppositories Preparation H(R)
Adult & Infant Glycerin Suppositories Squibb(R)
Dermatologic
Minoxidil Rogaine(R)
Diagnostic Test Kits e.p.t.(R)
Pregnancy Test Kits
Sleep Aids
Sleep Aid Tablets Sominex(R)
Sleep Aid Liquid Caps Unisom(R)
PERSONAL CARE PRODUCTS
Oral Hygiene
Mint and Peppermint Mouthwash Scope(R)
Antiseptic Mouthwash Listerine(R)
Blue Mint Antiseptic Mouthwash Listerine(R)
Spring Mint Antiseptic Mouthwash Listerine(R)
Anti-Plaque Dental Rinse Plax(R)
Effervescent Denture Tablets Efferdent(R)
Mint Effervescent Denture Tablets Polident(R)
Tartar Control Toothpaste Crest(R) Tartar
Sodium Fluoride Toothpaste Crest(R)
Smoker's Toothpaste Topol(R)
Baking Soda Toothpaste Arm & Hammer(R)
Sensitive Teeth Toothpaste Sensodyne(R)
Whitening Toothpaste Rembrandt(R)
Coolfresh Toothpaste Colgate(R)
Skin Care
Beauty Lotion Oil of Olay(R)
Skin Care Lotion Vaseline(R) Intensive Care Lotion
Medicated Skin Cream Noxzema(R)
Therapeutic Dry Skin Lotion Lubriderm(R)
Skin Care Bath Oil Alpha-Keri(R) Bath Oil
Hydroxy Alpha-Hydrox(R)
</TABLE>
-6-
<PAGE> 8
<TABLE>
<CAPTION>
Illustrative Competing
Company Products National Brands
- ---------------- ----------------------
<S> <C>
Shower & Bath Powder Shower to Shower(R)
Body Wash Plus Moisturizer Oil of Olay(R)
Cold Cream Ponds(R)
Medicated Body Powder Gold Bond(R)
Cocoa Butter Lotion Ponds(R)
Sun Care
Sunless Tanning Cream Bain de Soleil(R)
Sunless Tanning Lotion Coppertone(R)
Moisturizing Sunblock Coppertone(R)
Active Sunblock Coppertone(R) Sport
Children's Sunblock Waterbabies(R)
Tropic Tanning Oil/Lotion Hawaiian Tropic(R)
Moisturizing Aloe Vera Gel Banana Boat(R)
Big Kids Sunblock Coppertone(R) Kids
Moisturizing Aloe Lotion Banana Boat(R)
Aloe Vera Gel Solarcane(R)
Hair Care
Dandruff Shampoo Head & Shoulders(R)
Shampoo Plus Conditioner Pert(R) Plus
Vitamin Shampoo/Conditioner Pantene(R)
Deodorants
Roll-On Deodorant Ban(R)
Baby Care
Baby Bath Mennen(R), Johnson & Johnson(R)
Baby Shampoo Johnson & Johnson(R)
Baby Lotion Johnson & Johnson(R)
Baby Oil Johnson & Johnson(R)
Baby Powder Johnson & Johnson(R)
Diaper Ointment Desitin(R)
Wets & Drys
Isopropyl Alcohol
Hydrogen Peroxide
Magnesium Citrate
Epsom Salt
Mineral Oil Squibb(R)
Castor Oil
Witch Hazel
Ipecac Syrup
Calamine Lotion
Clear Anti-Itch Lotion Caladryl(R) Clear
Medicated Calamine Lotion Caladryl(R)
Citrate
</TABLE>
-7-
<PAGE> 9
<TABLE>
<CAPTION>
Illustrative Competing
Company Products National Brands
- ---------------- ----------------------
<S> <C>
NUTRITIONAL PRODUCTS
Synthetic Vitamins
Multiple Vitamins One-A-Day(R) Maximum
Century Centrum(R)
Century Senior Centrum Silver(R)
Multiple Vitamin Essential One-A-Day(R) Essential
Century Kids Centrum Junior(R)
A-Shapes Chewables Flintstones(R)
Therapeutic M Theragran M(R)
Antioxidant with Zinc Ocuvite(R)
Prenatal Stuarts Prenatal(R)
B Vitamins
Oyster Shell Calcium Oscal(R)
Calcium Caltrate(R)
Calcium Citrate Citracal(R)
Stress Vitamin Stresstab(R)
"Super" Multiple Vitamins and Minerals
Natural Vitamins
Vitamin C
Vitamin E
Beta Carotene
Calcium
Magnesium
Selenium
Zinc
Herbals/Specialty Items
Ginseng Ginsana(R)
Odorless Garlic Garlique(R)
Garlic Oil Capsules
Ginkgo Biloba
Valerian Root
Golden Seal Root
Echinacea Root
Cranberry Soft Gels
Saw Palmetto
Echinacea Echinex(R)
Saw Palmetto Propalmex(R)
St Johns Wort
Shark Cartilage
Bilberry
Chromium Picolinate
Lecithin
Nutritional Drinks
Liquid Nutritional Supplement Ensure(R)
Liquid Nutritional Supplement Plus Ensure Plus(R)
Liquid Nutritional Supplement Light Ensure Light(R)
</TABLE>
-8-
<PAGE> 10
RESEARCH AND DEVELOPMENT
Research and development is a key component of the Company's business
strategy. The Company does not attempt primary research to develop new
products. Instead, the Company focuses on developing store brand products
comparable in formulation, quality and effectiveness to existing national brand
products. As part of the product development process, the Company reviews any
potential patent infringement and develops alternative formulations so as not
to infringe on any patent.
The Company has been granted FDA approval to manufacture and distribute
the following over-the-counter products:
<TABLE>
<CAPTION>
Perrigo Product Comparable National Brand Product(s)
--------------- ------------------------------------
<S> <C>
Doxylamine Succinate, a sleep aid Unisom(R)
Miconazole Nitrate Cream, a feminine Monistat-7(R)
hygiene treatment
Naproxen Sodium, a non-aspirin analgesic Aleve(R)
Ibuprofen, a non-aspirin analgesic Advil(R), Nuprin(R), Motrin(R)
Loperamide Hydrochloride, a drug used to Imodium A-D(R)
control and relieve acute, non-specific diarrhea
Clemastine Fumarate, an antihistamine Tavist-1(R)
</TABLE>
The Company has obtained the rights to distribute the following products
through use of strategic alliance agreements:
<TABLE>
<CAPTION>
Perrigo Product Comparable National Brand Product(s)
--------------- ------------------------------------
<S> <C>
Dayhist-D, an antihistamine and Tavist-D(R)
nasal decongestant
Minoxidil, a hair growth stimulant Rogaine(R)
DiBromm, a cough suppressant Dimetapp(R)
Dixaphedrine, an antihistamine and Drixoral(R)
nasal decongestant
Cold Capsules Contac(R)
</TABLE>
The Company estimates that products for which patent protection is
expiring through the year 2002, which include, among other products,
Tagamet(R), Zantac(R), Zovirax(R), Axid(R), Pepcid(R), Claritin(R), Claritin
D(R), Orudis(R), Femstat(R) and Questran(R), represent a substantial potential
market. The Company is actively pursuing all avenues to offer store brand
equivalents of these products. However, there can be no assurance that the
Company will be successful in obtaining approval to distribute additional
products.
The Company spent approximately $13.7 million, $10.4 million, and $8.7
million for research and development during the fiscal years 1997, 1996
and 1995, respectively. The Company anticipates that research and development
expenditures as a percent of net sales will continue to increase in the
foreseeable future.
During fiscal year 1996, the Company made an investment of $5.0 million
in Ireland-based Warner Chilcott plc, an affiliate of Elan Corporation, a
leading international drug technology development company. While this
investment does not directly involve Perrigo in the business of manufacturing
generic prescription products, it does allow the company to gain a better
understanding of the worldwide generic prescription industry, including its
customers and supply chain.
-9-
<PAGE> 11
SALES AND MARKETING
The Company employs its own sales force to service larger customers and
uses industry brokers for some smaller retailers. Sales and field marketing
employees are assigned to specific customers in order to understand and work
most effectively with the customer. They assist in the development of
in-store marketing programs (described below) and optimize communication of
customers' needs to the rest of the Company. Industry brokers provide a
distribution channel for some products, primarily those marketed under the
Company labels of Swan(TM) and Good Sense.
The Company has no long-term contracts with customers that are
considered material. Wal-Mart accounted for 22%, 19% and 18% of net sales for
fiscal years 1997, 1996 and 1995, respectively. Should Wal-Mart's current
relationship with the Company change adversely, the resulting loss of business
could have a material impact on the Company's operating results and financial
position. Such a change is not anticipated in the foreseeable future. No
other customer accounted for more than 10% of net sales.
In contrast to national brand manufacturers who incur considerable
advertising and marketing expenditures that are directly targeted to the end
consumer, the Company's primary marketing efforts channel through its
customers, the retailers and wholesalers, and reach the consumer through
in-store marketing programs. These programs are intended to increase
visibility of store brand products and to invite comparisons to national brand
products in order to communicate store brand value to the consumer.
Merchandising vehicles such as trial sizes, floor displays, bonus sizes,
coupons, rebates, store signs and promotional packs are incorporated into
customers' programs. The Company also provides educational training aids,
packaging displays and point of purchase materials to customers. Because the
profit margin for store brand products is generally higher than for national
brand products, the retailer and wholesaler can many times afford to commit
funds for additional promotions. The Company's marketing efforts are also
directed at new product introductions and conversions and providing market
research data. Market research is used to monitor trends for products and
categories. In fiscal year 1998, the Company launched a consumer marketing
campaign to communicate the benefits of store brands under the banner "We're
going to win you over!(TM)"
MANUFACTURING AND DISTRIBUTION
The Company has ten manufacturing facilities which occupied approximately
2.2 million square feet at June 30, 1997. During fiscal year 1997, the
Montague, Michigan facility was expanded in order to support growth in the
over-the-counter pharmaceutical and personal care product categories. The
Company has historically supplemented its production capabilities with the
purchase of product from outside sources and will continue to do so in the
future. During fiscal year 1997, the nutritional facilities generally operated
at between 90% and 100% of capacity, the over-the-counter pharmaceutical
facilities generally operated at between 70% and 90% of capacity and the
personal care facilities generally operated at between 60% and 70% of capacity.
The Company aggressively explores opportunities to utilize available
capacities.
The Company's manufacturing operations are designed to allow low cost
production of a wide variety of products of different quantities, sizes and
packaging while maintaining a high level of customer service and quality.
Flexible production line change-over capabilities and reduced cycle times allow
the Company to respond quickly to changes in manufacturing schedules. The
manufacturing resource planning (MRP II) system enables the Company to develop
realistic and attainable production schedules and related material and capacity
requirements.
-10-
<PAGE> 12
The Company manufactures the majority of the bottles utilized for personal
care products. By blow molding its own bottles, the Company is able to achieve
a cost advantage in products for which the bottle is a significant portion of
the total product cost.
The Company gains competitive advantage by producing many of the labels
and cartons for its products. The Company works closely with customers to
ensure accuracy and reliability of product labeling and packaging which
accelerates new product introductions.
The Company has six regional distribution locations across the United
States which occupied approximately 1.8 million square feet at June 30, 1997.
During fiscal year 1998, the Company will build new distribution facilities in
Allegan, Michigan and LaVergne, Tennessee to replace multiple leased facilities
in Holland, Michigan and LaVergne, Tennessee. These new distribution facilities
will be designed to take advantage of the Company's business process redesign
effort. Third party warehousing is also used to respond to seasonal
fluctuations. Both contract freight and common carriers are used to deliver
products. In fiscal year 1997, the Company closed its Cumberland Freight Line
("CFL") truck fleet operations. CFL was not considered material to Company
operations.
COMPETITION
The market for store brand over-the-counter pharmaceutical, personal
care and nutritional products is highly competitive. Competition is based
primarily on price, quality and assortment of products, customer service,
marketing support and availability of new products. The Company believes it
competes favorably in all of these areas.
The Company's direct competition consists primarily of independent,
privately owned companies and is highly fragmented in terms of both
geographical market coverage and product categories. The Company is the
nation's largest manufacturer of store brand over-the-counter pharmaceutical
and personal care products; however, the Company competes in the nutritional
area with companies with broader product lines and larger sales volumes.
The Company's products also compete with nationally advertised brand name
products. Most of the national brand companies have resources substantially
greater than those of the Company. National brand companies could in the
future seek to compete more directly in the store brand market by manufacturing
store brand products or by lowering prices of national brand products. The
Company believes that this is not likely in the foreseeable future because the
manufacturing methods used by national brand companies are not easily adapted
to the requirements of the store brand market. These requirements include the
ability to produce many different package designs and product sizes. In
addition, the marketing focus of national brand companies is directed towards
the consumer rather than toward the retailer.
MATERIALS SOURCING
Raw materials and packaging supplies are generally available from multiple
suppliers. Certain component and finished goods are purchased rather than
manufactured because of temporary production limitations, FDA restrictions or
economic or other factors. The Company has historically been able to rapidly
react to situations which require alternate sourcing. The Company has good,
cooperative working relationships with its suppliers and has historically been
able to capitalize on economies of scale in the purchase of materials and
supplies due to the volume of purchases.
-11-
<PAGE> 13
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 strength and timing of the cough/cold/flu season which generally runs from
September through March. Fiscal year 1997 was comparable to fiscal year 1996
for the first half of the season, but the fiscal year 1997 season lasted longer
than the fiscal year 1996 season.
PRODUCT LIABILITY
Over the last ten years the aggregate amount paid in settlement of
liability claims has not been material and the Company is unaware of any suits
which would exceed its insurance limits. The Company believes that its product
liability coverage is adequate to cover anticipated lawsuits.
ENVIRONMENTAL
The Company is subject to various Federal, state and local environmental
laws and regulations. The Company believes that the costs for complying with
such laws and regulations will not be material to the business of the Company.
The Company does not have any material remediation liabilities outstanding.
REGULATORY
The Company's products are subject to regulation by a number of Federal
and state governmental agencies. The FDA, in particular, regulates the
formulation, manufacture, packaging, labeling, storage and distribution of all
of the Company's products. The Company believes that its products comply in
all material respects with existing regulations.
The majority of the Company's pharmaceutical products are regulated as
"old drugs" subject to the requirements of certain FDA regulations. Such
products must comply with FDA regulations that specify, among other things,
required ingredients, dosage levels, label contents and permitted uses. These
products do not require prior approval from the FDA before they are marketed.
FDA regulations may change from time to time, in which case the Company may be
required to change the formulation packaging or labeling of any affected
product. Changes in FDA regulations normally have a delayed effective date, so
while the Company may incur costs to comply with such changes, disruption of
distribution is unlikely.
These products are approved using the ANDA process. The ANDA process
reduces the time and expense related to FDA approval since a comparable product
was approved by the FDA when it was originally introduced. The Company must
demonstrate that the submitted product is equivalent to a product that has
previously been approved by the FDA, and that manufacturing process and other
requirements meet FDA standards. This may require that bioequivalence studies
be performed using a small number of volunteers in a controlled clinical
environment. If the requirements of the ANDA process are met, the FDA will
approve the product without requiring additional clinical studies to prove
safety and effectiveness, since these studies were performed when the
comparable prescription product was approved by the FDA. Approval time is
generally one to three years from the date of submission of the application.
-12-
<PAGE> 14
Pharmaceutical products must also comply with FDA regulations known as
"Current Good Manufacturing Practices for Finished Pharmaceuticals." The
Company complies with these practices, which require strict quality control
standards at all stages of production, including raw material receipt and
storage, and product manufacturing and labeling, storage and distribution.
The Company's non-drug products, including vitamin and personal care
(cosmetic) products, comply with the applicable standards as required by the
Federal Food, Drug and Cosmetic Act of 1938, as amended. The FDA's most recent
inspection of the Company's manufacturing facilities found the Company in
compliance in all material respects with these standards.
The FDA has extensive enforcement powers, including the power to seize,
request a recall and prohibit the sale of non-complying products and to halt
the operations of non-complying manufacturers. Although certain of the
Company's products have been subject to recalls in the past, none of these
recalls have involved a product which was likely to cause permanent adverse
health consequences and none were material to the Company's operations.
Although the Company follows strict quality control procedures, there can be no
assurance, however, that any future recall or other FDA action would not be
material to the operations of the Company.
EMPLOYEES
As of June 30, 1997, the Company employed 4,122 permanent and temporary
employees, of whom 395 were engaged in executive, financial and administrative
capacities; 268 in marketing, sales and service; 3,163 in production,
warehousing and distribution; and 296 in research and development and quality
control functions. At June 30, 1997, approximately 264 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.
Item 2. Properties.
As of June 30, 1997, the Company owned or leased the following primary
facilities:
<TABLE>
<CAPTION>
Approximate
Location Type of Facility Square Feet Leased or Owned
-------- ---------------- ----------- ---------------
<S> <C> <C> <C>
Allegan, Michigan Corporate Offices and Manufacturing 1,232,000 Owned
Smyrna, Tennessee Manufacturing 820,000 Owned
Holland, Michigan Manufacturing 120,000 Owned
Greenville, South Carolina Manufacturing 112,000 Owned
Montague, Michigan Manufacturing 84,000 Owned
St. Louis, Missouri Manufacturing and Distribution 196,000 Owned
San Bernardino, California Manufacturing 69,000 Owned
Holland, Michigan Distribution 616,000 Leased (1)
LaVergne, Tennessee Distribution 599,000 Leased (1)
Cranbury, New Jersey Distribution 222,000 Leased
Fontana, California Distribution 200,000 Leased
Greenville, South Carolina Distribution 115,000 Leased
Smyrna, Tennessee Offices 40,000 Leased
Allegan, Michigan Offices and Company Store 19,000 Leased
</TABLE>
- --------------------
(1) Multiple leased facilities will be closed and operations transferred to
owned warehouses in Allegan, Michigan and LaVergne, Tennessee (to be
constructed during fiscal 1998).
-13-
<PAGE> 15
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 and two commercial bank
lenders to the Company were named in an action commenced in the U.S. District
Court for the Western District of Michigan on April 13, 1994 by Grow Group,
Inc. ("Grow"), the former owner of the Company, seeking unspecified damages
based upon various legal claims. The relief sought against the defendants,
jointly and severally, includes, among other things, rescission of the
management led purchase of the Company from Grow, an accounting by the
defendants (excluding the Company), money damages and punitive damages.
While the dollar amount of actual and punitive damages sought is material,
based upon the internal investigation that has been conducted by the Company
and its external legal counsel and its directors, the Company believes the
allegations are without merit and are defensible and will take whatever action
necessary to aggressively defend the case. Discovery is ongoing, and the case
is currently scheduled for trial in the Spring of 1998.
Certain shareholders have brought a class action lawsuit against the
Company, the Underwriters of the October 20, 1993 secondary offering of
outstanding shares of the Company's common stock and certain selling
shareholders (which include several past and present officers and/or directors
of the Company) who sold shares in the secondary offering. The complaint
alleges that the defendants violated Sections 11, 12(2) and 15 of the
Securities Act of 1933 and Sections 10(b) and 20 of the Securities Exchange Act
of 1934 with respect to the Company's common stock by making certain material
statements that were not true and by failing to provide certain material
information necessary to determine the truthfulness of certain material
statements made. The claims all relate to the class period from May 10, 1993
through May 10, 1994. The Company and all of the defendants moved to dismiss
the First Amended Complaint on the basis that it failed to state a claim as a
matter of law. On July 25, 1996 the Court entered an order granting in part
and denying in part the motions to dismiss. As part of the order, the Court
struck the majority of the claimed non-disclosures with prejudice on the basis
that they failed to state a claim as a matter of law.
Fact discovery has been completed. The Company and all of the defendants
deny that they have violated any provisions of the federal securities laws in
connection with the secondary offering or otherwise. The Company and all of
the present and former officers and directors who are defendants in this case
believe that the class action is without merit and continue to defend it
vigorously. The outcome is not currently determinable.
In a related matter, the Company received a letter from a shareholder in
May 1995, demanding that the Company (a) bring suit against the other
defendants in the purported class action described above in order to protect
the Company from any expense or liability arising out of that suit; (b)
invalidate the indemnification agreement between the Company and the
underwriter defendants; and (c) bring suit against each officer and director
who sold stock in the October 1993 public offering to recover any proceeds
unlawfully received by them as a result of their alleged breach of fiduciary
duties owed to the Company. In response to those demands, the Company directed
Peter Formanek, a member of its Board of Directors who was its designated
Independent Director under Michigan law, to investigate the demand and make a
binding determination under Michigan law as to whether maintenance of the
derivative claims is in the Company's best interests. Following his
investigation, the Independent Director determined that maintenance of the
derivative claims is not in the Company's best interests. The shareholder then
filed
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<PAGE> 16
a derivative action in December 1995. The Company has moved to dismiss the
suit pursuant to Section 495 of the Michigan Business Corporation Act (Mich.
Comp. Laws Ann. Section 450.1495) on the basis that the Company's Independent
Director has determined that maintenance of the derivative action is not in the
Company's best interests. The plaintiff filed an amended complaint on March
13, 1997 and the Company has filed a motion to dismiss the amended complaint.
This motion is still pending.
The Company believes that the derivative action is without merit and
intend to defend it vigorously. At this time, the outcome is not determinable.
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 1997.
Additional Item. Executive Officers of the Registrant.
The executive officers of the Company and their ages and positions as of
September 1, 1997 were:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James H. Bloem ......... 47 Executive Vice President
Craig G. Hammond ....... 53 Executive Vice President and Chief
Operations Officer
Michael J. Jandernoa.... 47 Chairman of the Board of Directors,
President and Chief Executive Officer
Steven M. Neil.......... 45 Vice President-Finance, Treasurer, Chief
Financial Officer and President of
Perrigo International
Mark P. Olesnavage...... 44 President, Customer Business Development
</TABLE>
(a) Effective September 30, 1997, Mr. Neil resigned as an Executive
officer of the Company to return to his home state of California, accepting an
executive position with another company.
Mr. Bloem was appointed Executive Vice President in August 1995. Prior to
that time he served as Vice President, Chief Financial Officer and Treasurer of
Herman Miller, Inc., a leading office furniture manufacturer, where he also
served in other positions of increasing responsibility since 1986. He is a
member of the Board of Directors of First Michigan Bank Corporation.
Mr. Hammond was appointed Executive Vice President and Chief Operations
Officer in October 1995. Prior to that time he served as a Senior Vice
President with Borden, a consumer dairy products company, where he also held
other positions of increasing responsibilities since January of 1994.
Previously Mr. Hammond was with Kraft General Foods from 1990 to 1994 where he
held various executive positions in Operations Management. When he left Kraft,
Mr. Hammond held the position of Vice President.
Mr. Jandernoa was elected a director in January 1981, Chief Executive
Officer in February 1986 and Chairman of the Board of Directors in October
1991. From January 1983 to October 1991, Mr. Jandernoa served as President of
the Company and was reelected President of the Company in September 1995.
Prior to January 1983, Mr. Jandernoa served in various executive capacities
with the Company since 1979. Mr. Jandernoa is a director of Old Kent Financial
Corporation and also serves on the Board of Advisors of the National
Association of Chain Drug Stores.
Mr. Neil has served as Vice President-Finance, Treasurer and Chief
Financial Officer since May 1995. He has also served as President of Perrigo
International, Inc. since July 1996. Mr. Neil served as Vice
President-Controller of the Company from January 1993 to May 1995. Prior to
that time he served as Controller and Chief Accounting Officer with Applied
Magnetics Corporation, where he also served in other positions of increasing
responsibility since 1983. He is a member of the Advisory Board of the East
Central Region of Allendale Insurance and also is a member of the Board of
Directors of Intelligent Solutions, Inc.
-15-
<PAGE> 17
Mr. Olesnavage was appointed Executive Vice President in January 1993 and
in June 1995 was appointed President of Customer Business Development. He
served as President of the over-the-counter pharmaceutical operations from
February 1994 to June 1995. He served as Vice President of Pharmaceutical
Business Development from July 1992 to January 1993 and as Vice
President-Marketing from June 1987 to July 1992. Previously he had been
Director of Marketing of the Company since 1981. He is a member of the Board
of Directors of the Generic Pharmaceutical Industry Association and also is a
member of the Board of Directors of the Non Prescription Drug Manufacturers
Association.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock was first quoted and began trading on the
Nasdaq National Market System on December 17, 1991 under the symbol "PRGO."
Set forth below are the high and low closing sales prices for the
Company's common stock as reported on the Nasdaq National Market System for the
last eight quarters:
<TABLE>
<CAPTION>
Fiscal Year
Ended June 30, 1997: High Low
- -------------------- ---- ---
<S> <C> <C>
First Quarter $11-1/2 $8-1/4
Second Quarter $10-5/8 $8-5/8
Third Quarter $12-7/8 $8-7/8
Fourth Quarter $13-1/8 $10
Fiscal Year
Ended June 30, 1996: High Low
- -------------------- ---- ---
First Quarter $13-7/8 $10-5/8
Second Quarter $13-5/8 $11-1/2
Third Quarter $14-1/2 $11-1/8
Fourth Quarter $13-5/8 $10-3/4
</TABLE>
The number of record holders of the Company's common stock as of June 30,
1997 was 2,462.
Historically, the Company has not paid dividends on its common stock and
has no present intention of paying dividends. The declaration and payment of
dividends and the amount paid, if any, is subject to the discretion of the
Company's Board of Directors and will necessarily be dependent on the earnings,
financial condition and capital and surplus requirements of the Company and any
other factors the Board of Directors may consider relevant. While the
Company's credit agreement does not prohibit the Company from paying dividends,
the future payment of dividends could be restricted by financial maintenance
covenants contained in the credit agreements.
In May 1997 the Company announced a common stock repurchase program.
The program calls for the repurchase of up to 7.5 million shares, subject to
market conditions. Purchases will be made in the open market during the 24
month period following the announcement date. The repurchased stock will be
retired.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included herein in Item 8. The consolidated
-16-
<PAGE> 18
statement of income data set forth below with respect to the fiscal
years ended June 30, 1997, 1996 and 1995 and the consolidated balance sheet
data at June 30, 1997 and 1996 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, 1994 and 1993, and
the consolidated balance sheet data for the Company at June 30, 1995, 1994 and
1993, are derived from audited consolidated financial statements of the
Company, not included herein.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
1997 1996 1995(1) 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts)
Statement of Income Data:
Net sales $844,591 $778,121 $717,077 $669,332 $570,768
Cost of sales 615,720 574,806 520,265 474,958 405,469
-------- -------- -------- -------- --------
Gross profit 228,871 203,315 196,812 194,374 165,299
Operating expenses:
Distribution 28,073 24,929 20,037 17,742 18,718
Research and development 13,651 10,445 8,679 6,233 5,034
Selling and administrative 103,104 88,629 86,602 80,150 68,094
Restructuring and redesign 5,503 4,491 4,904 -- --
Unusual litigation 6,367 6,600 1,043 -- --
-------- -------- -------- -------- --------
156,698 135,094 121,265 104,125 91,846
-------- -------- -------- -------- --------
Operating income 72,173 68,221 75,547 90,249 73,453
Interest expense 1,306 5,679 5,413 3,390 3,337
-------- -------- -------- -------- --------
Income before income taxes 70,867 62,542 70,134 86,859 70,116
Income taxes 25,875 22,700 25,700 32,100 25,500
-------- -------- -------- -------- --------
Net income $44,992 $39,842 $44,434 $54,759 $44,616
======== ======== ======== ======== ========
Earnings per common share(2) $.58 $.52 $.58 $.71 $.58
Weighted average number of common
and equivalent shares
outstanding(2) 77,432 77,200 77,189 77,585 77,378
YEAR ENDED JUNE 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands)
Balance Sheet Data:
Working capital $169,631 $166,929 $170,131 $139,834 $121,915
Goodwill 40,834 42,961 45,088 30,235 31,705
Total assets 568,377 549,395 555,733 474,989 413,716
Long-term debt(3) 1,840 49,140 99,440 73,230 76,003
Shareholders' equity 425,875 381,160 340,617 295,508 234,991
</TABLE>
________________
(1) The Company's net sales and results of operations were impacted by the
acquisition of certain assets of Vi-Jon Laboratories, Inc. in January 1995.
(2) Reflects 2-for-1 stock split effective August 1993.
(3) Includes current installments.
-17-
<PAGE> 19
Item 7. Management's Discussion and Analysis of Results of Operations,
Financial Condition and Outlook for 1998.
Dollar amounts in thousands
RESULTS OF OPERATIONS
The following table sets forth, for fiscal years 1997, 1996 and 1995,
certain items from the Company's consolidated statements of income expressed as
a percentage of net sales:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Year Ended June 30,
---------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 72.9 73.9 72.6
----------- ----------- -----------
Gross profit 27.1 26.1 27.4
----------- ----------- -----------
Operating expenses
Distribution 3.3 3.2 2.8
Research and development 1.6 1.3 1.2
Selling and administrative 12.2 11.4 12.1
Restructuring and redesign 0.7 0.6 0.7
Unusual litigation 0.8 0.8 0.1
----------- ----------- -----------
18.6 17.3 16.9
----------- ----------- -----------
Operating income 8.5 8.8 10.5
Interest expense 0.1 0.8 0.7
----------- ----------- -----------
Income before income taxes 8.4 8.0 9.8
Income taxes 3.1 2.9 3.6
----------- ----------- -----------
Net income 5.3% 5.1% 6.2%
=========== =========== ===========
---------------------------------------------------------------------
</TABLE>
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
The Company's net sales increased by $66,470 or 9% to $844,591 during
fiscal year 1997 from $778,121 in fiscal year 1996. The increase was primarily
due to new product sales and to increases in unit sales to existing customers
of vitamin, cough and cold, analgesic and dermatologic products and pregnancy
test kits, partially offset by decreases in feminine hygiene and personal care
products. New products included naproxen sodium (a non-aspirin analgesic
comparable to Aleve(R)), Minoxidil (a hair growth stimulant comparable to
Rogaine(R)) and pregnancy test kits. Sales of cough and cold products were
positively impacted by a longer cough/cold/flu season in fiscal year 1997 as
compared to fiscal year 1996. Sales of certain personal care products
decreased due to certain customers' reactions to price increases that were
initiated in fiscal year 1996 to cover raw material cost increases on related
products.
Gross profit increased $25,556 or 13% for fiscal year 1997 compared to
fiscal year 1996. The gross profit percentage for fiscal year 1997 was 27.1%
versus 26.1% in fiscal year 1996. The increase in gross profit percentage was
due to increased sales of higher margin products such as cough and cold and
certain new products and reductions in costs due to productivity improvements,
which were partially offset by decreased sales of higher margin feminine
hygiene products.
Operating expenses increased $21,604 or 16% for fiscal year 1997 compared
to fiscal year 1996. Operating expenses as a percentage of net sales were
18.6% for fiscal year 1997 versus 17.3% for the
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<PAGE> 20
same period in fiscal year 1996. Operating expenses consist of distribution,
research and development, selling and administration, restructuring and
redesign and unusual litigation costs. Distribution expense increased $3,144
to 3.3% of net sales during fiscal year 1997 from 3.2% of net sales in fiscal
year 1996. Research and development costs increased $3,206 to 1.6% of net
sales during fiscal year 1997 compared to 1.3% of net sales in fiscal year
1996, primarily due to new product development requiring FDA approval. The
Company anticipates that research and development expenses related to new
product introductions will continue to increase as certain prescription
products switch to over-the-counter status. Selling and administrative
expenses increased $14,475 to 12.2% of net sales for fiscal year 1997 versus
11.4% of net sales for fiscal year 1996. The increase was primarily due to
higher wages and costs to support higher sales and to incentive compensation
related to improved productivity and operating performance. Restructuring and
redesign costs increased $1,012 to 0.7% of net sales during fiscal year 1997
compared to 0.6% of net sales for the same period in 1996. Fiscal year 1997
restructuring and redesign charges primarily related to costs incurred in the
Company's business process redesign efforts and to costs incurred for the
closing of the Company's Cumberland Freight Line truck fleet operations. See
Note J to the Consolidated Financial Statements. Unusual litigation costs of
$6,367 and $6,600 for fiscal years 1997 and 1996, respectively, were primarily
associated with certain lawsuits pertaining to a purported shareholders' class
action, a related demand for a derivative action and a suit by the former
owners of the Company filed against the Company, certain officers and directors
and other defendants. The legal expenses recorded do not include estimates of
possible reimbursement from insurance coverage. The Company and its counsel
believe the allegations made in these lawsuits are totally without merit and
continue to oppose the actions vigorously. See Note F to the Consolidated
Financial Statements.
Interest expense decreased from $5,679 in fiscal year 1996 to $1,306 in
fiscal year 1997 due to lower borrowing levels and slightly lower interest
rates.
The effective income tax rate was 36.5% for fiscal year 1997 versus 36.3%
for fiscal year 1996.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
The Company's net sales increased by 9% to $778,121 during fiscal year
1996 from $717,077 in fiscal year 1995. This increase was primarily due to
increased unit sales of cough and cold remedies, oral hygiene and liquid
nutritional supplement products to existing customers. Increases in sales of
cough and cold benefitted from a more severe cough and cold season in fiscal
year 1996 than in fiscal year 1995. The increase in oral hygiene product sales
reflected a full year of sales from the acquisition of certain assets of Vi-Jon
Laboratories, Inc. in January 1995. Liquid nutritional supplements generated
sales following the introduction of the product category in June 1995. Sales
of analgesics, a significant product category, were comparable between fiscal
years 1996 and 1995, reflecting the softness of the total analgesic market and
continued competition from new national brand products. Analgesic sales in
fiscal year 1995 were also affected by significant promotional activity that
was not repeated in fiscal year 1996. Antacid sales were comparable between
periods but were negatively affected by the competitive launch of Pepcid(R),
Tagamet(R) and Zantac(R), new "H2 blocker" antacid products that switched to
over-the-counter status late in fiscal year 1995. No store brand equivalents
for these products can be approved for sale prior to June 1998 due to
exclusivity granted by the FDA.
Gross profit for fiscal year 1996 increased by 3% or $6,503 over 1995.
The gross profit percentage for fiscal year 1996 was 26.1% compared to 27.4%
for fiscal year 1995. Increased sales of lower margin nutritional and personal
care products, cost increases in certain material components that could not be
passed on entirely to customers and excess personal care production capacities
resulted in the decline in gross profit percentage between years.
-19-
<PAGE> 21
Operating expenses increased by 11% or $13,829 for fiscal year 1996 as
compared to fiscal year 1995. Operating expenses included $11,091 and $5,947
of restructuring and redesign and unusual litigation costs for fiscal years
1996 and 1995, respectively. Operating expenses as a percentage of net sales
were 17.3% for fiscal year 1996 versus 16.9% for fiscal year 1995. Excluding
the restructuring and redesign and unusual litigation costs, operating expenses
as a percent of net sales were 15.9% for fiscal year 1996 compared to 16.1% for
fiscal year 1995. Distribution expenses increased by $4,892 to 3.2% of net
sales for fiscal year 1996 compared to 2.8% for fiscal year 1995 due to smaller
and more frequent shipments to customers, higher average inventory levels and
increased sales volumes. Research and development expenses as a percentage of
net sales were 1.3% for fiscal year 1996, compared to 1.2% for fiscal year
1995. The $1,766 increase in research and development expenses was primarily
attributable to expenses related to the development of new products requiring
FDA approval. Selling and administrative expenses increased by $2,027 for
fiscal year 1996, and as a percentage of net sales were 11.4% compared to 12.1%
for fiscal year 1995. The decrease as a percent of net sales was due primarily
to certain sales promotions in fiscal year 1995 that were not repeated in
fiscal year 1996 and to benefits realized from the restructuring process which
the Company began in June 1995. Restructuring and redesign costs of $4,491
recorded in fiscal year 1996 related primarily to the consolidation of sales
and marketing, graphic arts, purchasing and accounting functions, business
process redesign, the discontinuance of the stick deodorant product category
and additional charges for the elimination of certain low volume products. See
Note J to the consolidated financial statements. Unusual litigation costs of
$6,600 and $1,043 during fiscal years 1996 and 1995, respectively, were
primarily associated with certain lawsuits as described in Note F to the
consolidated financial statements.
Interest expense increased by 5% or $266 during fiscal year 1996 as
compared to fiscal year 1995. The increase reflected slightly higher effective
interest rates during fiscal year 1996 and comparable average borrowing levels.
The effective income tax rates were 36.3% and 36.6% for fiscal years 1996
and 1995, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1997, working capital increased $2,702 and cash flow
from operating activities was $86,536. Accounts receivable, net of allowances,
increased $1,971 and inventories increased $4,497 to support the increased
sales volume. Accounts payable increased $7,146 primarily due to the timing of
materials and component purchases related to production increases. Accrued
payrolls and related taxes increased $4,217 primarily due to increased wages
and benefits associated with higher sales. Accrued expenses increased $8,515
primarily due to increases in customer and other costs associated with higher
sales.
Long-term debt decreased by $47,300 during fiscal year 1997 and as a
result the Company's line of credit was fully paid down. The decrease in debt
was primarily due to close monitoring and management of working capital and
capital expenditures. At June 30, 1997, the Company had $150,000 available
from the line of credit and $60,000 available from uncommitted credit
facilities with two financial institutions. See Note C to the consolidated
financial statements for a description of the credit facilities.
The Company's capital expenditures for facilities and equipment were
$23,046 for fiscal year 1997. The actual capital expenditures were less than
plan due to close monitoring of anticipated capacity needs and to the
purposeful delay of the Company's distribution system reconfiguration to
coincide with implementation of the business process redesign effort. During
fiscal year 1998, the Company will build
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<PAGE> 22
new distribution facilities in Allegan, Michigan and LaVergne, Tennessee
to replace multiple leased facilities. The Company completed various
capital projects in fiscal year 1997, the most significant projects being the
expansion of the Montague, Michigan manufacturing facility and the purchase of
an integrated software package.
In May, 1997 the Company announced a common stock repurchase program.
The program calls for the repurchase of up to 7.5 million shares, subject to
market conditions. Purchases will be made in the open market during the 24
month period following the announcement date. The repurchased stock will be
retired.
OUTLOOK - FISCAL YEAR 1998
During the year, the Company expects to achieve sales growth in its three
major product categories of over-the-counter pharmaceutical, personal care and
nutritional products. The primary sales growth is expected to result from
increased sales of current products and new product sales to existing
customers. In total, sales growth is anticipated to be at approximately the
same rate as in fiscal year 1997. The sales growth rate is expected to vary
for the three major product categories. Nutritional product sales should
produce the strongest sales growth at a rate in excess of ten percent.
Over-the-counter pharmaceutical product sales should produce moderate sales
growth and personal care products should produce modest growth for the year.
The Company plans to begin marketing an antacid product comparable to the name
brand product Tagamet(R) and a children's ibuprofen product comparable to the
name brands Children's Motrin(R) and Children's Advil(R) by the end of fiscal
year 1998. These products are not expected to materially impact sales for the
year. The Company's sales are subject to seasonality, especially with regard
to the strength and timing of the cough/cold/flu season.
Although the Company continues to experience competitive pricing
pressures, gross profit rates are expected to approximate last year's rates due
to a favorable sales mix and to cost reductions related to the business process
redesign effort and to employee initiated programs. With respect to operating
expenses, research and development expenses related to new product
introductions should continue to increase; distribution expenses are expected
to decrease as a percentage of net sales due to improved operational
efficiencies; and selling and administrative expenses as a percentage of net
sales are expected to be comparable to fiscal year 1997.
The Company expects to incur restructuring and redesign costs of $2,000 to
$3,000 in fiscal year 1998 related to the business process redesign effort.
This effort is proceeding on schedule and will continue through fiscal year
1998.
Unusual litigation costs related to existing lawsuits are expected to be
approximately $6,000 for fiscal year 1998, before consideration of possible
insurance reimbursement.
The Company intends to spend approximately $70,000 during the year for
capital additions and improvements. The increase in spending from fiscal year
1997 is primarily due to the purposeful delay in the construction of two new
distribution facilities until fiscal year 1998 so that the results of the
business process redesign effort could be incorporated into the construction
plans. A significant portion of the anticipated total cost of the distribution
facilities of $41,000 is included in the above fiscal year 1998 capital
additions and improvements plan. Other major expenditures include capital costs
related to an integrated software package that was purchased in fiscal year
1997 which is expected to be installed early in fiscal year 1999, and expansion
of manufacturing facilities for nutritional and over-the-counter pharmaceutical
products.
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<PAGE> 23
The Company will continue its stock repurchase program. The program calls
for the repurchase of up to 7.5 million shares, subject to market conditions,
within a 24 month period ending in May 1999.
On September 11, 1997 the Company acquired 87.8% of the shares of
Quimica y Farmacia, S.A. de C.V. for approximately $16,000. The purchase was
funded with cash generated by operations. Quimica y Farmacia, S.A. de C.V. is
a pharmaceutical manufacturer and distributor located in Mexico.
Cash flow from operations is expected to substantially fund working
capital, restructuring and other non-recurring charges and capital
expenditures. Additionally, borrowings from the Company's lines of credit are
available, as required.
Additional Item. Safe Harbor For 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 projected in such forward-looking statements.
The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in a continually changing business
environment, and new risk factors emerge from time to time. Management cannot
predict such risk factors, nor can it assess the impact, if any, of such risk
factors on the Company's business or the extent to which any factors, or
combination of factors, may cause actual results to differ materially from
those projected in any forward-looking statements. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results.
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 (mouthwash, cough and cold remedies and analgesics) will be driven
by the ability to offer new products to existing domestic customers and the
Company's ability to service new customers internationally. Should store brand
growth be limited by any of these factors, there could be a significant impact
on the operating results of the Company.
Fluctuation in Quarterly Results
The Company's quarterly operating results depend on a variety of factors
including the severity and timing of the cough/cold/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.
-22-
<PAGE> 24
Regulatory Environment
The Company's products are subject to regulation by a number of federal
and state governmental agencies. The cost of maintaining product quality
through Good Manufacturing Practices ("GMP") is increasing. Should the Company
fail to adequately conform to governmental regulations, there may be a
significant impact in the operating results of the Company.
The Company's ability to bring new products to market is limited by
certain patent and trade dress factors including, but not limited to, the
exclusivity periods awarded on products that have switched from prescription to
over-the-counter status. The cost and time to develop these switch products is
significantly greater than the rest of the new products that the Company seeks
to introduce.
The FDA will from time to time mandate packaging or labeling changes.
Such changes could be related to safety or effectiveness issues. With specific
regard to safety, there have been instances within the Company's product
categories in which evidence of product tampering has occurred resulting in a
costly product recall. Significant costs could also be incurred in complying
with the required packaging and labeling changes. Should the Company be
involved in such an event, the associated costs could have a material impact on
the results of operations.
The Company believes that it has excellent relationships with these
agencies, which it intends to maintain. If these relationships should
deteriorate, however, the Company's ability to bring new and current products
to market could be impeded.
Research and Development
The Company's investment in research and development will continue to
exceed historical levels due to the high cost of developing and becoming a
qualified manufacturer of new products that are switching from prescription to
over-the-counter status. The ability to attract chemists proficient in
emerging delivery forms and/or contracting with a third party innovator in
order to generate new products of this type is a critical element of the
Company's long term plans. Should the Company fail to attract qualified
employees or enter into reasonable agreements with third party innovators, long
term sales growth and profit would be adversely impacted.
Dependence on Personnel
The Company's future success will depend in large part upon its ability to
attract and retain highly skilled research and development chemists (as noted
above), management information specialists, operations, sales, marketing and
managerial personnel. The Company does not have employment contracts with any
key personnel. Should the Company not be able to attract or retain key
qualified employees, future operating results may be adversely impacted.
International Operations
The Company sources certain key raw materials from foreign suppliers and
is increasing its sales outside the United States. Additionally, the Company
is investing significant amounts in the development of its international
business. Sales to customers outside the United States and foreign raw
material purchases expose the Company to a number of risks including unexpected
changes in regulatory requirements and tariffs, possible difficulties in
enforcing agreements, longer payment cycles, exchange rate fluctuations,
difficulties obtaining export or import licenses, and the imposition of
withholding or other taxes, embargoes, exchange controls or the adoption of
other restrictions on foreign trade. Should any of these risks occur, they may
have a material adverse impact on the operating results of the Company.
-23-
<PAGE> 25
Raw Material Availability
In the past, supplies of certain raw materials used by the Company have
become limited, or are available from one or only a few suppliers, and it is
possible that this will occur in the future. Should this situation occur, it
can result in increased prices, rationing and shortages. In response to these
problems the Company tries to identify alternative materials or suppliers for
such raw materials. Certain shortages could adversely affect financial
results.
Legal Exposure
From time to time the Company and/or its subsidiaries become involved in
lawsuits arising from various commercial matters, including, but not limited to
competitive issues, contract issues, intellectual property matters, workers'
compensation and product liability. Currently, the most significant pending
litigation relates to a purported class action, a derivative action and a
complaint related to the purchase of the Company from its former owners (see
page 14 - Item 3, Legal Proceedings). Litigation tends to be unpredictable and
costly. There is no assurance that litigation will not have an adverse effect
on the Company's financial position or results of operations in the future.
The Company maintains property, cargo, auto, product, general liability,
and directors and officers liability insurance to protect itself against
potential loss exposures. To the extent that losses occur, there could be an
adverse effect on the Company's financial results depending on the nature of
the loss, and the level of insurance coverage maintained by the Company. From
time to time, the Company may reevaluate and change the types and levels of
insurance coverage that it purchases.
Competitive Issues
The market for store brand over-the-counter pharmaceutical, personal care
and nutritional products is highly competitive. Store brand competition is
based primarily on price, quality and assortment of products, customer service,
marketing support and availability of new products. National brand companies
could choose to compete more directly by manufacturing store brand products or
by lowering the prices of national brand products. Due to the high degree of
price competition, the Company has not always been able to fully pass on cost
increases to its customers. The inability to pass on future cost increases,
the impact of direct store brand competitors, and the impact of national brand
companies lowering prices of their products or directly operating in the store
brand market could have a material adverse impact on financial results.
Customer Issues
The impact of retailer consolidation is unknown but could have an adverse
impact on future sales growth. Should a large customer encounter financial
difficulties, the exposure on uncollectible receivables and unusable inventory
could have a material adverse impact on the Company's financial position or
results of operation.
The Company's largest customer, Wal-Mart, currently comprises
approximately 22% of total revenues. Should Wal-Mart's current relationship
with the Company change adversely, the resulting loss of business could have a
material adverse impact on the Company's operating results and financial
position.
Capital Requirements
The Company maintains a broad product line to function as a primary
supplier for its customers. Capital investments are driven by growth,
technological advancements and the need for manufacturing flexibility.
Estimation of future capital expenditures could vary materially due to the
uncertainty of these factors. If the Company fails to stay current with the
latest manufacturing and packaging technology it may be unable to competitively
support the launch of new product introductions. The Company also is
-24-
<PAGE> 26
vertically integrated in the areas of preprinted componentry (labels and
cartons) and plastics (bottle blow molding). Should the Company fail to keep
up with current technology it could lose its cost competitive advantage in
these areas.
Interest Rate Implication
The Company's line of credit facilities are based on variable interest
rate factors. The interest rates are established at the time of borrowing
based upon the prime rate, the LIBOR rate, plus a factor, or at a rate based on
interest rate bids. Accordingly, interest expense is subject to variation due
to the variability of these rates.
Tax Rate Implication
Income tax rate changes by governments and changes in the tax
jurisdictions in which the Company operates could influence the effective tax
rates for future years. The anticipated growth of the Company's international
business increases the likelihood of fluctuation occurring.
Liquidity and Capital Resources
The Company anticipates that cash flow from operations will substantially
fund working capital, restructuring, redesign and other unusual charges and
capital expenditures. Additionally, borrowings from the Company's line of
credit are available, if required. The Company has historically evaluated
acquisition opportunities and anticipates that acquisition opportunities will
continue to be identified and evaluated in the future. The historical growth
of sales and profits have been significantly influenced by acquisitions. There
is no assurance that future sales and profits will, or will not, be impacted by
acquisition activities. The Company's current capital structure, results of
operations and cash flow needs could be materially changed by acquisitions.
The Company has evaluated, and will continue to evaluate the products and
product categories in which it does business. Future product line extensions,
or deletions, could have a material impact on the Company's financial position
or results of operations.
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.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data for the Company are on the
following pages 26 through 40.
-25-
<PAGE> 27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants .................... 27
Consolidated Statements of Income for the years ended June 30, 1997,
1996 and 1995 ........................................................ 28
Consolidated Balance Sheets as of June 30, 1997 and 1996 .............. 29
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1997, 1996 and 1995 ......................................... 30
Consolidated Statements of Cash Flows for the years ended June 30, 1997
1996 and 1995 ........................................................ 31
Notes to Consolidated Financial Statements ............................ 32
</TABLE>
-26-
<PAGE> 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Perrigo Company
Allegan, Michigan
We have audited the accompanying consolidated balance sheets of Perrigo
Company and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Perrigo
Company and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
By: /s/BDO Seidman, LLP
-----------------------
BDO Seidman, LLP
Grand Rapids, Michigan
August 1, 1997, except for Note K which is as of September 11, 1997
-27-
<PAGE> 29
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 844,591 $ 778,121 $ 717,077
Cost of sales 615,720 574,806 520,265
---------- ---------- ----------
Gross profit 228,871 203,315 196,812
---------- ---------- ----------
Operating expenses
Distribution 28,073 24,929 20,037
Research and development 13,651 10,445 8,679
Selling and administrative 103,104 88,629 86,602
Restructuring and redesign 5,503 4,491 4,904
Unusual litigation 6,367 6,600 1,043
---------- ---------- ----------
156,698 135,094 121,265
---------- ---------- ----------
Operating income 72,173 68,221 75,547
Interest expense 1,306 5,679 5,413
---------- ---------- ----------
Income before income taxes 70,867 62,542 70,134
Income taxes 25,875 22,700 25,700
---------- ---------- ----------
Net income $ 44,992 $ 39,842 $ 44,434
========== ========== ==========
Earnings per common share $ 0.58 $ 0.52 $ 0.58
========== ========== ==========
Weighted average number of common and
equivalent shares outstanding 77,432 77,200 77,189
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-28-
<PAGE> 30
PERRIGO COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1997 1996
ASSETS ---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 14,356 $ 176
Accounts receivable, net of allowances of $3,026 and $2,975, respectively 93,367 91,396
Inventories 161,473 156,976
Prepaid expenses and other current assets 13,182 11,025
---------- ----------
Total current assets 282,378 259,573
Property and equipment
Land 12,230 12,220
Buildings 158,431 156,044
Machinery and equipment 188,252 171,444
---------- ----------
358,913 339,708
Less accumulated depreciation 123,053 100,716
---------- ----------
235,860 238,992
Goodwill, net 40,834 42,961
Other 9,305 7,869
---------- ----------
$ 568,377 $ 549,395
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 63,846 $ 56,700
Payrolls and related taxes 17,219 13,002
Accrued expenses 29,932 21,417
Income taxes 1,450 1,225
Current installments on long-term debt 300 300
---------- ----------
Total current liabilities 112,747 92,644
Deferred income taxes 28,215 26,751
Long-term debt, less current installments 1,540 48,840
Shareholders' equity
Preferred stock, without par value,
10,000 shares authorized, none issued - -
Common stock, without par value, 200,000 shares authorized,
76,516 and 76,327 issued, respectively 145,779 146,056
Retained earnings 280,096 235,104
---------- ----------
Total shareholders' equity 425,875 381,160
---------- ----------
$ 568,377 $ 549,395
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-29-
<PAGE> 31
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Issued
-------------------------- Retained
Shares Amount Earnings
------ ------ --------
<S> <C> <C> <C>
Balance June 30, 1994 75,826 $ 144,680 $ 150,828
Issuance of common stock under stock options 193 75 -
Tax benefit from stock transactions - 600 -
Net income - - 44,434
------ ---------- -----------
Balance June 30, 1995 76,019 145,355 195,262
Issuance of common stock under stock options 308 241 -
Tax benefit from stock transactions - 460 -
Net income - - 39,842
------ ---------- -----------
Balance June 30, 1996 76,327 146,056 235,104
Issuance of common stock under stock options 264 202 -
Tax benefit from stock transactions - 444 -
Purchases and retirements of common stock (75) (923) -
Net income - - 44,992
------ ---------- -----------
Balance June 30, 1997 76,516 $ 145,779 $ 280,096
====== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-30-
<PAGE> 32
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From (For) Operating Activities
Net income $ 44,992 $ 39,842 $ 44,434
Adjustments to derive cash flows
Depreciation 26,178 24,858 21,549
Amortization of intangibles 2,424 2,362 2,233
Deferred income taxes (1,139) 3,635 2,288
Provision for losses on accounts receivable 638 361 608
Changes in operating assets and liabilities, net of
amounts acquired from business acquisition
Accounts receivable (2,609) (6,739) (9,228)
Inventories (4,497) 6,573 (24,622)
Prepaid expenses and other current assets 446 203 (806)
Accounts payable 7,146 (334) 4,135
Payrolls and related taxes 4,217 189 (1,790)
Accrued expenses 8,515 1,754 4,079
Income taxes 225 211 (495)
---------- ----------- -----------
Net cash from operating activities 86,536 72,915 42,385
---------- ----------- -----------
Cash Flows (For) From Investing Activities
Additions to property and equipment (23,046) (17,603) (38,597)
Business acquisition - - (32,579)
Other (1,733) (5,796) 8
---------- ----------- -----------
Net cash for investing activities (24,779) (23,399) (71,168)
---------- ----------- -----------
Cash Flows (For) From Financing Activities
Borrowings of long-term debt - - 39,000
Repayments of long-term debt (47,300) (50,300) (12,790)
Tax benefit of stock transactions 444 460 600
Issuance of common stock 202 241 75
Repurchase of common stock (923) - -
---------- ----------- -----------
Net cash (for) from financing activities (47,577) (49,599) 26,885
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 14,180 (83) (1,898)
Cash and cash equivalents, at beginning of period 176 259 2,157
---------- ----------- -----------
Cash and cash equivalents, at end of period $ 14,356 $ 176 $ 259
========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 1,436 $ 5,556 $ 5,706
Income taxes $ 26,440 $ 17,078 $ 23,877
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 33
PERRIGO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Company is the nation's largest manufacturer of store brand
over-the-counter (non-prescription) pharmaceutical, personal care and
nutritional products. The Company's principal customers are major national and
regional retail drug, supermarket and mass merchandise chains and major
wholesalers located within the United States. All of the Company's
manufacturing facilities as of June 30, 1997 were located in the United States.
See Note K to these consolidated financial statements.
During the years ended June 30, 1997, 1996 and 1995, one customer
accounted for 22%, 19%, and 18% of revenues, respectively. None of the
Company's other customers account for more than 10% of its sales.
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 affiliates
which are not majority owned are reported 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.
REVENUES
Revenues from product sales are recognized when the goods are shipped to
the customer. A provision for estimated credit losses is recorded as revenues
are recognized.
FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, consisting of
cash and cash equivalents, accounts receivable, accounts payable and long-term
debt, approximates their fair value.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of demand deposits and other
securities with maturities of three months or less at the date of purchase.
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<PAGE> 34
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
LONG-LIVED ASSETS
Property and equipment are depreciated primarily using the straight-line
method over the estimated useful lives of the assets. Useful lives range from
5-10 years for machinery and equipment, and 10-40 years for buildings.
Accelerated depreciation methods are used for tax purposes when possible.
Maintenance and repair costs are charged to earnings while expenditures that
increase asset lives are capitalized.
Goodwill resulting from business acquisitions is amortized on a
straight-line basis over 25 years. Amortization of $2,127, $2,127 and $1,799
has been recorded during the years ended June 30, 1997, 1996 and 1995,
respectively. Accumulated amortization was $12,467 and $10,340 as of June 30,
1997 and 1996, respectively.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for Long-Lived Assets and Long-Lived Assets to be Disposed
Of," management periodically reviews long-lived assets for impairment based on
projected undiscounted cash flows. The Company's adoption of SFAS No. 121 had
no impact on the Company's financial position or results of operations for the
fiscal year ended June 30, 1997.
INCOME TAXES
Deferred income tax assets and liabilities are recorded based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted tax rates.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding during each
period. Earnings per share are computed using the treasury stock method, under
which the number of shares outstanding reflects the assumed repurchase of
shares of the Company's common stock with the proceeds from the assumed
exercise of dilutive outstanding stock options.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In February, 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings Per Share." The Statement simplifies the standards for
computing earnings per share (EPS) and makes them comparable to international
EPS standards. The Statement requires the presentation of both "basic" and
"diluted" EPS on the face of the income statement with a supplementary
reconciliation of the numerators and denominators used in the calculations.
The Statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. Had the Statement been required to be implemented for the fiscal
years ended June 30, 1997, 1996, and 1995, the effect on EPS would have been
insignificant.
In June, 1997 the FASB issued two new disclosure standards. Results of
operations and financial position will be unaffected by implementation of these
new standards.
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<PAGE> 35
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distribution to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
they may have on future financial statement disclosures.
NOTE B - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Finished goods ............... $ 77,953 $ 74,657
Work in process .............. 53,291 57,529
Raw materials ................ 30,229 24,790
-------- --------
$161,473 $156,976
======== ========
</TABLE>
NOTE C - LONG-TERM BORROWINGS AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
At June 30,
---------------
1997 1996
------ ------
<S> <C> <C>
Revolving line of credit ..... $ -- $25,000
Uncommitted lines of credit .. -- 22,000
Note payable, Industrial
Development Board of
Rutherford County, TN ...... 1,840 2,140
------ -------
Total ........................ 1,840 49,140
Less current installments .... 300 300
------ -------
Long-term debt ............... $1,540 $48,840
====== =======
</TABLE>
Long-term debt matures as follows: 1998--$300; 1999--$400; 2000--$400;
2001--$400; 2002--$340.
-34-
<PAGE> 36
In June 1996, the Company entered into a credit agreement with a group of
banks which provides a $150,000 unsecured revolving credit facility. The
agreement expires June 30, 2000, but contains an option whereby the agreement
may be extended for one-year periods each June 30. Repayment has been
guaranteed by the Company's subsidiaries. Restrictive loan covenants apply to,
among other things, minimum levels of tangible net worth, interest coverage and
funded debt ratio.
In December 1995, the Company entered into uncommitted credit facilities
with two financial institutions totaling $60,000. Both facilities can be
terminated by either party at any time. The Company's restrictive covenants
under these facilities are substantially the same as those under the $150,000
credit facility.
Interest rates on the revolving credit facility are established at the
time of borrowing through four different pricing options: the prime rate (8.50%
at June 30, 1997), a LIBOR rate plus a factor (.18% at June 30, 1997)
established quarterly based on the interest coverage ratio, a CD rate plus a
factor (.305% at June 30, 1997) established quarterly based on the interest
coverage ratio, or at a rate based on interest rate bids submitted by banks
within the bank group, for periods of 1 to 29 days. Interest rates associated
with the uncommitted credit facility loans are based on bids submitted by the
financial institutions for periods of 1 to 100 days.
The Company is obligated to the Industrial Development Board of Rutherford
County, Tennessee, under an agreement entered into to finance the acquisition
of certain machinery and equipment installed at the Smyrna, Tennessee plant.
The debt is subject to mandatory sinking fund redemption through final maturity
on October 1, 2001, bears interest at a variable rate (3.75% at June 30, 1997)
and is secured by a letter of credit and a security interest in the assets
financed.
As of June 30, 1997, the Company was in compliance with respect to all
covenants under existing credit facilities.
NOTE D - INCOME TAXES
A summary of income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal.......... $26,414 $17,545 $22,257
State............ 600 1,520 1,155
------- ------- -------
27,014 19,065 23,412
Deferred................ (1,139) 3,635 2,288
------- ------- -------
Total $25,875 $22,700 $25,700
======= ======= =======
</TABLE>
The tax effects of temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that give rise to the
net deferred income tax liability are as follows:
-35-
<PAGE> 37
<TABLE>
<CAPTION>
At June 30,
------------------------
1997 1996
------- -------
<S> <C> <C>
Accumulated depreciation............................ $27,993 $26,856
Inventory costs..................................... (2,325) (1,133)
Allowance for doubtful accounts..................... (1,061) (1,046)
Accrued expenses not yet deductible................. (4,457) (3,073)
Other, net.......................................... (268) (583)
------- -------
Net deferred income tax liability................... $19,882 $21,021
======= =======
The net deferred income tax liability is presented in the balance sheets as follows:
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------
1997 1996
------- -------
<S> <C> <C>
Current asset....................................... $ 8,333 $ 5,730
Long-term liability................................. 28,215 26,751
The effective income tax rate varied from the statutory Federal tax rate as follows:
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1997 1996 1995
----- ------ -----
<S> <C> <C> <C>
Federal statutory rate ............................. 35.0% 35.0% 35.0%
Expenses not deductible for tax purposes ........... 0.7 0.7 1.1
Other............................................... 0.8 0.6 0.5
----- ----- -----
Effective income tax rate .......................... 36.5% 36.3 % 36.6%
===== ===== =====
</TABLE>
NOTE E - RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
The Company has a qualified profit-sharing plan and three investment plans
under section 401(k) of the Internal Revenue Code, which cover substantially
all employees. Contributions to the qualified profit-sharing plan are at the
discretion of the Board of Directors. Under the investment plans, the Company
matches a percentage of employees' contributions. Under one of the plans, the
Company makes a contribution of 2% of base compensation paid to eligible
employees. The Company's contributions to the plans were $5,854, $5,322, and
$5,157 for the years ended June 30, 1997, 1996 and 1995, respectively.
The Company has postretirement plans that provide medical benefits for
retirees and their eligible dependents. Employees become eligible for these
benefits if they meet certain minimum age and service requirements. The
Company reserves the right to modify or terminate these plans. The plans are
not funded. The unfunded accumulated postretirement benefit obligation at June
30, 1997 and 1996 and the benefits expensed in fiscal years 1997, 1996 and 1995
are immaterial to the financial position and results of operations of the
Company.
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company leases certain assets, principally warehouse facilities and
data processing equipment, under agreements which expire at various dates
through August 2002. Certain leases contain provisions for renewal and
purchase options and require the Company to pay various related expenses.
-36-
<PAGE> 38
Future non-cancelable minimum operating lease commitments are as follows:
1998--$9,503; 1999--$4,645; 2000--$2,672; 2001--$396; and 2002--$110. Rent
expense under all leases was $12,850, $12,904, and $10,809 for the years ended
June 30, 1997, 1996, and 1995, respectively.
The Company has committed to spend up to $41,000 over fiscal years 1998
and 1999 to build new distribution facilities in Allegan, Michigan and
LaVergne, Tennessee. These facilities will replace multiple leased facilities
in Holland, Michigan and LaVergne, Tennessee.
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 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 1995, the Company received notice of a possible derivative class
action against the Company, as a nominal defendant, and certain of its officers
and directors, and their trusts. In November 1995, the related complaint was
filed. The complaint alleges possible violation of Michigan law, seeks to
protect the Company against any expense or liability arising out of the
aforementioned and purported class action lawsuit, and seeks to recover any
proceeds unlawfully received by named officers and directors and their trusts
in the October 1993 public offering.
The consolidated statements of income for the years ended June 30, 1997,
1996 and 1995 include $6,367, $6,600 and $1,043, respectively, of charges
primarily related to the three legal actions described above. While future
costs related to those matters are uncertain, the Company estimates that an
additional $6,000 could be incurred in fiscal year 1998. Actual amounts
incurred could materially differ from these estimates.
The Company has pending certain legal actions and claims incurred in the
normal course of business and is actively pursuing the defense thereof.
The Company believes the actions and claims cited above are without merit
or are covered by insurance and continues to vigorously defend against these
actions. The Company believes the resolution of all of these matters will not
have a material adverse effect on its financial condition and results of
operations as reported in the accompanying financial statements. However,
depending on the amount and timing of an unfavorable resolution of these
lawsuits, it is possible that the Company's future results of operations or
cash flow could be materially affected in a particular period.
NOTE G - SHAREHOLDERS' EQUITY
In May 1997, the Company announced a common stock repurchase program.
The program calls for the repurchase of up to 7,500 shares, subject to market
conditions. Purchases will be made in the open market during the 24 month period
following the announcement date. The repurchased stock will be retired.
On April 10, 1996, the Company's Board of Directors adopted a Preferred
Share Purchase Rights Plan and declared a dividend distribution to be made to
shareholders of record on April 22, 1996, of one Preferred Share Purchase Right
on each outstanding share of the Company's common stock. The Rights contain
provisions which are intended to protect the Company's stockholders in the
event of an unsolicited
-37-
<PAGE> 39
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's 1988 Employee Incentive Stock Option Plan grants key
management employees options to purchase shares of common stock. The options
vest and may be exercised from one to ten years after the date of grant based
on a vesting schedule. Proceeds from the exercise of stock options under the
Company's stock option plans and income tax benefits attributable to stock
options exercised are credited to common stock.
A summary of activity for the Company's employee stock option plan is
presented below:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- -------------------
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 3,248 $11.83 3,239 $11.07 2,836 $10.10
Granted 1,235 9.18 498 12.34 876 13.45
Exercised (264) (.74) (280) (.83) (193) (.39)
Terminated (482) (14.26) (209) (15.99) (280) (16.07)
------ ------- ------
Options outstanding at end of year 3,737 11.43 3,248 11.83 3,239 11.07
Options exercisable at end of year 1,104 10.96 1,062 8.67 824 6.27
Options available for grant at end of year 1,981 2,734 1,023
Price per share of options outstanding $.22 to $.22 to $.22 to
$31.25 $31.25 $31.25
</TABLE>
In July and August 1997, the Company granted options to certain
employees to purchase 982 shares at an exercise price of $12.97 and 9 shares at
an exercise price of $13.19.
The Company issues stock options to directors under a non-qualified stock
option plan. Options granted under the plan vest and may be exercised from one
to ten years after the date of grant based on a vesting schedule. As of June
30, 1997, options to purchase 84 shares at prices ranging from $.57 to $29.38
and at a weighted average price of $15.25 were outstanding, 20 of which were
exercisable at a weighted average price of $12.21. There were 8 options granted
at a weighted average exercise price of $9.50 and there were no options
exercised or canceled in the fiscal year ended June 30, 1997. There were 21
options available for grant at June 30, 1997.
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 and earnings per share would have been
reduced as follows:
<TABLE>
<CAPTION>
Fiscal Years
--------------
1997 1996
---- ----
<S> <C> <C>
Net Income $1,138 $413
Earnings per Share $.01 --
</TABLE>
-38-
<PAGE> 40
The effects on net income and earnings per share for fiscal years 1997 and
1996 may not be representative of future years because compensation cost is
allocated on a straight-line basis over the vesting periods of the grants,
which extend beyond the reported years.
The weighted average fair value per option at the date of grant for
options granted during fiscal years 1997 and 1996 was $2.73 and $3.70,
respectively. The fair value was estimated using the Black-Sholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Fiscal Years
---------------
1997 1996
------- ------
<S> <C> <C>
Dividend yield 0.0% 0.0%
Volatility, as a percent 30.0% 30.0%
Risk-free interest rate 6.3% 6.4%
Expected life in years after vest date 3.0 3.0
</TABLE>
Forfeitures are accounted for as they occur.
The following table summarizes information concerning options outstanding
under the Plans at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- -----------------------------
Weighted Average
Range of Number Remaining Weighted Number Weighted
Exercise Outstanding Contractual Term Average Exercisable Average
Prices at 6/30/97 (Years) Exercise Price at 6/30/97 Exercise Price
------ ---------- ------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$0.22 - $9.09 676 3.14 $ 1.17 449 $ 0.77
9.10 - 9.49 1,146 9.13 9.13 -- --
9.50 - 15.49 1,165 7.74 12.81 227 13.36
15.50 - 31.25 834 5.66 21.35 448 20.01
----- -----
3,821 1,124
===== =====
</TABLE>
NOTE H - ACQUISITION
On January 13, 1995, the Company acquired certain assets of Vi-Jon
Laboratories, Inc., a manufacturer and marketer of store brand personal care
products, located in St. Louis, Missouri, for the purchase price of
approximately $33,000, which included approximately $17,000 allocated to
goodwill. The purchase price was funded by additional line of credit
borrowings. Goodwill is being amortized over 25 years.
NOTE I - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997 September 30, December 31, March 31, June 30,
- -------------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Net sales ............................... $212,174 $221,665 $214,580 $196,172
Gross profit ............................ 55,294 62,648 57,920 53,009
Net income (see Note J) ................. 10,717 13,691 11,600 8,984
Earnings per common share ............... $ .14 $ .18 $ .15 $ .12
Weighted average number of common
and equivalent shares outstanding .... 77,185 77,215 77,387 77,469
</TABLE>
-39-
<PAGE> 41
<TABLE>
<CAPTION>
1996 September 30, December 31, March 31, June 30,
- ---- ------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Net sales ............................. $205,147 $200,991 $196,326 $175,657
Gross profit .......................... 55,376 54,368 51,402 42,169
Net income (see Note J) ............... 12,190 12,162 10,634 4,856
Earnings per common share ............. $ .16 $ .16 $ .14 $ .06
Weighted average number of common
and equivalent shares outstanding .. 77,191 77,208 77,215 77,188
</TABLE>
NOTE J - RESTRUCTURING AND REDESIGN COSTS
For the year ended June 30, 1997, the Company expensed $5,503 in
restructuring and redesign costs primarily related to the items as noted below.
During the year, $3,703 was expensed as incurred, $1,800 was accrued and
$2,029 of costs were paid that were accrued in the current and previous
periods. It is estimated that the Company will incur $2,000 to $3,000 in
additional restructuring and redesign costs for the fiscal year ending June 30,
1998 primarily due to implementation of business process redesign activities.
In March 1997, the Company announced the closing of its Cumberland
Freight Line (CFL) truck fleet operations effective immediately. The
operations of CFL were not significant to the operations of the Company.
Restructuring costs of $1,211 were recorded in the third quarter of fiscal year
1997.
The Company continued to incur costs related to the business process
redesign effort that was begun in fiscal year 1996 and that will continue
through fiscal year 1998. This effort is focused on managing orders and
products, and will result in delivering greater value to customers while
lowering costs.
During the fourth quarter of fiscal year 1996, the Company discontinued
the stick deodorant product category and intensified its efforts to eliminate
certain low volume products. The effort to eliminate low volume products
continued throughout fiscal year 1997.
For the year ended June 30, 1996, the Company expensed $4,491 of
restructuring and redesign costs primarily related to the consolidation of
sales and marketing, graphic arts, purchasing and accounting functions, and
costs related to the business process redesign effort, the discontinuance of
the stick deodorant product category and the elimination of certain low volume
products.
For the year ended June 30, 1995, the Company expensed $4,904 of
restructuring and redesign costs primarily related to severance and employee
benefit costs, consolidation of two distribution centers and costs associated
with the elimination of certain low volume products.
NOTE K - SUBSEQUENT EVENT
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. The
purchase was funded with cash generated by operations. Quimica y Farmacia,
S.A. de C.V. is a pharmaceutical manufacturer and distributor located in
Mexico.
-40-
<PAGE> 42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors of the Company.
See the Company's Proxy Statement, incorporated by reference as Part
III of this Form 10-K, under the heading "Election of Directors."
(b) Executive Officers of the Company.
See Part I, Item 4 of this Form 10-K at page 15.
Item 11. Executive Compensation.
See the Company's Proxy Statement, incorporated by reference as Part III
of this Form 10-K, under the headings "Compensation of Executive Officers"
and "Compensation of Directors."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
See the Company's Proxy Statement, incorporated by reference as Part III
of this Form 10-K, under the heading "Principal Securityholders."
Item 13. Certain Relationships and Related Transactions.
See the Company's Proxy Statement, incorporated by reference as Part III
of this Form 10-K, under the heading "Compensation of Directors."
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed or incorporated by reference as
part of this Form 10-K:
1. All financial statements. See Index to Consolidated Financial
Statements on page 26 of this Form 10-K.
2. Financial Schedules
Report of Independent Certified Public Accountants on Financial
Statement Schedule Schedule II -Valuation and Qualifying
Accounts
Schedules other than the one listed are omitted because they are
included in the footnotes, immaterial or not applicable.
-41-
<PAGE> 43
3. Exhibits:
3(a) - Amended and Restated Articles of Incorporation
of Registrant, incorporated by reference from
Amendment No. 2 to Registration Statement No.
33-43834 filed by the Registrant on September
23, 1993.
3(b) - Restated Bylaws of Registrant, dated April 10,
1996, incorporated by reference from the
Registrant's Form 8-K filed on April 10, 1996.
4(a) - Shareholders' Rights Plan, incorporated by
reference from the Registrant's Form 8-K filed
on April 10, 1996.
10(a) - Credit Agreement, dated June 30, 1996, between
the Registrant and NBD Bank, N.W., Sanwa Bank,
Comerica Bank-Detroit, PNC Bank, Westdeutsche
Landesbank Girozentrale and Old Kent Bank and
Trust Company, incorporated by reference from
the Registrant's 1996 Form 10-K filed on
September 25, 1996.
10(b) - Registrant's Management Incentive Plan,
incorporated by reference from the Registration
Statement No. 33-69324 filed by the Registrant
on September 23, 1993.
10(c) - Registrant's 1988 Employee Incentive Stock
Option Plan as amended, incorporated by
reference from Exhibit A of the Registrant's
1995 proxy statement.
10(d) - Registrant's 1989 Non-Qualified Stock Option
Plan for Directors, incorporated by reference
from the Registration Statement No. 33-43834
filed by the Registrant on November 8, 1991.
21 - Subsidiaries of the Registrant.
23 - Consent of BDO Seidman, LLP.
24 - Power of Attorney (see signature page).
27 - Financial Data Schedule.
(b) Exhibit and reports on Form 8-K.
The Company filed a report on Form 8-K during the three months ended
June 30, 1997 that announced the Company's common stock repurchase program.
The program calls for the repurchase of up to 7.5 million shares, subject to
market conditions. Purchases will be made in the open market during the 24
month period following the announcement date. The repurchased stock will be
retired.
-42-
<PAGE> 44
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 1, 1997, except for Note K which is as of September 11, 1997,
relating to the consolidated financial statements of Perrigo Company, which is
contained in Item 8 of this Form 10-K for the year ended June 30, 1997,
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 1, 1997
-43-
<PAGE> 45
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, 1995:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $2,801 $608 $369 $3,040
Year Ended June 30, 1996:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $3,040 $361 $426 $2,975
Year Ended June 30, 1997:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $2,975 $638 $587 $3,026
</TABLE>
(1) Uncollectible accounts charged off, net of recoveries.
-44-
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K for the fiscal year ended June 30, 1997 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Allegan, State of
Michigan on the 25th of September, 1997.
PERRIGO COMPANY
By: /s/ Michael J. Jandernoa
---------------------------
Michael J. Jandernoa
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Michael J.
Jandernoa and Steven M. Neil and each of them severally, acting alone and
without the other, his true and lawful attorney-in-fact with authority to
execute in the name of each such person, and to file with the Securities and
Exchange Commission, together with any exhibits thereto and other documents
therewith, any and all amendments to this Annual Report on Form 10-K for the
fiscal year ended June 30, 1997 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.
-45-
<PAGE> 47
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K for the fiscal year ended June 30, 1997 has been
signed by the following persons in the capacities indicated on the 25th of
September, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/Michael J. Jandernoa
--------------------------
Michael J. Jandernoa Chairman of the Board and Chief
Executive Officer and Director
(Principal Executive Officer)
/s/Steven M. Neil
--------------------------
Steven M. Neil Vice President - Finance,
Treasurer and Chief Financial
Officer (Principal Financial and
Accounting Officer)
/s/F. Folsom Bell
--------------------------
F. Folsom Bell Director
/s/Peter R. Formanek
--------------------------
Peter R. Formanek Director
/s/Larry D. Fredricks
--------------------------
Larry D. Fredricks Director
/s/Richard G. Hansen
--------------------------
Richard G. Hansen Director
/s/L.R. Jalenak, Jr.
--------------------------
L.R. Jalenak, Jr. Director
/s/John W. Spoelhof
--------------------------
John W. Spoelhof Director
/s/William C. Swaney
--------------------------
William C. Swaney Director
/s/Mary Alice Taylor
--------------------------
Mary Alice Taylor Director
</TABLE>
-46-
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<S> <C>
EXHIBIT DOCUMENT
- ------- --------
21 Subsidiaries of the Registrant
23 Consent of Independent
Certified Public Accountants
27 Financial Data Schedule
</TABLE>
-47-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>2
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State/Country of Percent Owned By
Name Incorporation Perrigo Company
---- ------------- ---------------
<S> <C> <C>
L. Perrigo Company Michigan 100%
Perrigo Company of Tennessee, Inc. Tennessee 100%
Perrigo Company of Missouri, Inc. Missouri 100%
Perrigo Company of Michigan 100%
South Carolina, Inc.
Perrigo Sales Company Michigan 100%
Perrigo (Barbados), L.T.D. Barbados 100%
Perrigo International, Inc. Michigan 100%
Perrigo de Mexico S.A. de C.V. Nuevo Leon (Mexico) 100% by Perrigo International, Inc.
Nippon Perrigo K.K. Japan 100% by Perrigo International, Inc.
Perrigo Asia Ltd. Michigan 100% by Perrigo International, Inc.
Sagmel U.S.A. Illinois 30% by Perrigo International, Inc.
Quimica y Farmacia S.A. de C.V. Mexico 87.8% by Perrigo International, Inc.
(effective September 11, 1997)
Shandex Sales Group Limited Canada 20% by Perrigo International, Inc.
</TABLE>
-1-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>3
<DESCRIPTION>CONSENT OF ACCOUNTANT
<TEXT>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference and use of our report
dated August 1, 1997, except for Note K which is as of September 11, 1997, on
the consolidated financial statements of Perrigo Company and subsidiaries which
appears on page 27 of this Form 10-K for the year ended June 30, 1997 in the
previously filed registration statements for that company's 1988 Employee
Incentive Stock Option Plan, as amended (Registration No. 33-46265), 1989
Non-qualified Stock Option Plan for Directors (Registration No. 33-46264),
Investment Plan and Trust (Registration No. 33-46262), Cumberland-Swan, Inc.
Retirement Income Savings Plan (Registration No. 33-46263) and Perrigo Company
Missouri, Inc. Investment Plan (Registration No. 33-90886).
By: /s/BDO Seidman, LLP
------------------------
BDO Seidman, LLP
Grand Rapids, Michigan
September 25, 1997
-1-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>FIANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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