-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FU/Cant6WNUNf1vW+qxKrM7u8PTqvNh8eFQXs3zb2M4sMZplKHgXrVxU/Z4ONvSC neHO3aCcxV4w3nnZvko8jA== 0000950124-00-000459.txt : 20000210 0000950124-00-000459.hdr.sgml : 20000210 ACCESSION NUMBER: 0000950124-00-000459 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000209 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-Q SEC ACT: SEC FILE NUMBER: 000-19725 FILM NUMBER: 528575 BUSINESS ADDRESS: STREET 1: 515 EASTERN AVENUE CITY: ALLEGAN STATE: MI ZIP: 49010 BUSINESS PHONE: 6166738451 MAIL ADDRESS: STREET 1: 515 EASTERN AVENUE CITY: ALLEGAN STATE: MI ZIP: 49010 10-Q 1 FORM 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JANUARY 1, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 0-19725 PERRIGO COMPANY ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MICHIGAN 38-2799573 ----------------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 515 EASTERN AVENUE ALLEGAN, MICHIGAN 49010 ------------------ ----- (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES) (616) 673-8451 ---------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE ---------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. OUTSTANDING AT CLASS OF COMMON STOCK FEBRUARY 04, 2000 --------------------- ----------------- WITHOUT PAR 73,368,180 SHARES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PERRIGO COMPANY AND SUBSIDIARIES FORM 10-Q INDEX PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated statements of income-- For the quarter and year-to-date ended January 1, 2000 and January 2, 1999 3 Condensed consolidated balance sheets-- January 1, 2000 and July 3, 1999 4 Condensed consolidated statements of cash flows-- For the year-to-date ended January 1, 2000 and January 2, 1999 5 Notes to condensed consolidated financial statements-- January 1, 2000 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risks 14 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 18 -2- 3 PERRIGO COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (Unaudited)
Second Quarter Year-To-Date ------------------------ ------------------------ January 1, January 2, January 1, January 2, 2000 1999 2000 1999 Net sales $ 197,246 $ 226,121 $ 406,611 $ 438,419 Cost of sales 148,802 171,826 307,971 348,819 --------- --------- --------- --------- Gross profit 48,444 54,295 98,640 89,600 --------- --------- --------- --------- Operating expenses Distribution 3,539 8,939 8,537 16,718 Research and development 3,876 3,851 7,393 7,457 Selling and administrative 22,002 28,001 45,869 65,008 Unusual litigation - 686 - 1,674 --------- --------- --------- --------- 29,417 41,477 61,799 90,857 --------- --------- --------- --------- Operating income (loss) 19,027 12,818 36,841 (1,257) Interest and other expense 2,049 2,820 4,511 6,037 --------- --------- --------- --------- Income (loss) before income taxes 16,978 9,998 32,330 (7,294) Income tax expense (benefit) 6,014 2,875 11,341 (2,041) --------- --------- --------- --------- Net income (loss) $ 10,964 $ 7,123 $ 20,989 $ (5,253) ========= ========= ========= ========= Basic earnings (loss) per share $ 0.15 $ 0.10 $ 0.29 $ (0.07) ========= ========= ========= ========= Diluted earnings (loss) per share $ 0.15 $ 0.10 $ 0.29 $ (0.07) ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. -3- 4 PERRIGO COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
January 1, July 3, 2000 1999 ----------- --------- ASSETS (Unaudited) Current assets Cash and cash equivalents $ 3,731 $ 1,695 Accounts receivable, net of allowances of $3,690 and $3,281, respectively 123,536 89,123 Inventories 170,697 197,437 Prepaid expenses and other current assets 6,977 7,811 Current deferred income taxes 27,000 33,476 Assets held for sale 19,430 53,045 ----------- --------- Total current assets 351,371 382,587 Property and equipment 333,174 325,444 Less accumulated depreciation 136,267 125,782 ----------- --------- 196,907 199,662 Goodwill, net of accumulated amortization of $10,688 and $10,121, respectively 18,766 19,334 Other 14,700 14,275 ----------- --------- $ 581,744 $ 615,858 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 58,433 $ 68,240 Notes payable 6,885 6,694 Payrolls and related taxes 12,520 18,166 Accrued expenses 35,271 34,787 Income taxes 9,560 4,983 Current installments on long-term debt -- 300 ----------- --------- Total current liabilities 122,669 133,170 Deferred income taxes 14,270 14,674 Long-term debt, less current installments 90,000 135,026 Minority interest 743 569 Shareholders' equity Preferred stock, without par value, 10,000 shares authorized, none issued - - Common stock, without par value, 200,000 shares authorized, 73,250 and 73,301 issued, respectively 102,148 102,030 Unearned compensation (83) (53) Accumulated other comprehensive income 1,002 436 Retained earnings 250,995 230,006 ----------- --------- Total shareholders' equity 354,062 332,419 ----------- --------- $ 581,744 $ 615,858 =========== =========
See accompanying notes to condensed consolidated financial statements. -4- 5 PERRIGO COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Year-To-Date ------------------------- January 1, January 2, 2000 1999 ---- ---- Cash Flows From (For) Operating Activities: Net (loss) income $ 20,989 $ (5,253) Depreciation and amortization 11,016 11,641 Write-off of Russian investment -- 14,177 -------- -------- 32,005 20,565 Accounts receivable (34,515) (75,838) Inventories 26,740 (31,604) Current and deferred income taxes 10,649 (1,106) Assets held for sale 2,429 581 Accounts payable (9,807) 41,894 Other (4,011) (5,314) -------- -------- Net cash from (for) operating activities 23,490 (50,822) -------- -------- Cash Flows From (For) Investing Activities: Additions to property and equipment (7,643) (22,178) Proceeds from sale of assets held for sale 31,186 -- Other -- (5,086) -------- -------- Net cash from (for) investing activities 23,543 (27,264) -------- -------- Cash Flows From (For) Financing Activities: Net (Repayments) Borrowings of long-term debt (45,026) 92,075 Net (Repayments) Borrowings of short-term debt (109) 128 Issuance of common stock 118 59 Repurchase of common stock -- (14,820) Other 20 -- -------- -------- Net cash (for) from financing activities (44,997) 77,442 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 2,036 (644) Cash and Cash Equivalents, at Beginning of Period 1,695 1,496 -------- -------- Cash and Cash Equivalents, at End of Period $ 3,731 $ 852 ======== ======== Supplemental Disclosures of Cash Flow Information: Interest paid $ 3,768 $ 4,393 Income taxes paid $ 510 $ 299
See accompanying notes to condensed consolidated financial statements. -5- 6 PERRIGO COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JANUARY 1, 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included. The Company changed its fiscal year end from June 30 to the 52 or 53-week period that ends on the Saturday closest to June 30, effective for fiscal year 1999. After the transition year of fiscal year 1999, the Company's quarters will each be comprised of 13 weeks and end on a Saturday, except in certain years when the Company will have one quarter comprised of 14 weeks. During fiscal year 1999, the first quarter included the period from July 1 through October 3, 1998. The second through fourth quarters were comprised of 13 weeks ending on January 2, April 3, and July 3, 1999, respectively. Operating results for the quarter and year-to-date ended January 1, 2000 are not necessarily indicative of the results that may be expected for the year ending July 1, 2000. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended July 3, 1999. See Note D regarding the inclusion of personal care operations for the periods presented. -6- 7 EARNINGS PER SHARE A reconciliation of the numerators and denominators used in the "basic" and "diluted" Earnings per Share ("EPS") calculations follows:
Second Quarter Year-To-Date ------------------------- -------------------------- January 1, January 2, January 1, January 2, 2000 1999 2000 1999 ---- ---- ---- ---- Numerator: Net income (loss) used for both "basic" and "diluted" EPS calculation $ 10,964 $ 7,123 $ 20,989 $ (5,253) ======== ======== ======== ======== Denominator: Weighted average shares outstanding for the period - used for "basic" EPS calculation 73,348 73,219 73,337 74,114 Dilutive effect of stock options 177 270 190 - -------- -------- -------- -------- Weighted average shares outstanding for the period - used for "diluted" EPS calculation 73,525 73,489 73,527 74,114 ======== ======== ======== ========
The effect of 312 stock options was not included for the period from July 1, 1998 through January 2, 1999 because to do so would have been antidilutive. COMPREHENSIVE INCOME Comprehensive income is comprised of all changes in shareholders' equity during the period other than from transactions with shareholders. Comprehensive income consists of the following:
Second Quarter Year-To-Date ------------------------- -------------------------- January 1, January 2, January 1, January 2, 2000 1999 2000 1999 ---- ---- ---- ---- Net income (loss) $ 10,964 $ 7,123 $ 20,989 $ (5,253) Other comprehensive income: Foreign currency translation adjustments (65) - (48) - Unrealized gain on investments 465 - 614 - -------- -------- -------- -------- Comprehensive income (loss) $ 11,364 $ 7,123 $ 21,555 $ (5,253) ======== ======== ======== ========
No activity is included for foreign currency translation for the periods included for fiscal year 1999. For the first half of fiscal year 1999 the Company treated the Mexican economy as highly inflationary. Accordingly, the translation impacts were reported as a component of income and losses during these periods. Subsequent to January 2, 1999, the Mexican economy was not considered highly inflationary. Accordingly, the translation impacts are included, net of taxes, as a component of comprehensive income. -7- 8 NOTE B - INVENTORIES The components of inventories consist of the following:
January 1, July 3, 2000 1999 ---- ---- Finished goods $ 73,258 $ 85,267 Work in process 67,611 79,104 Raw materials 29,828 33,066 --------- -------- $ 170,697 $197,437 ========= ========
NOTE C - LONG-TERM BORROWING AND CREDIT ARRANGEMENTS In connection with the sale of the personal care business, the Company paid off its obligation of $1,440 to the Industrial Development Board of Rutherford County, Tennessee in the first quarter of fiscal year 2000. NOTE D - RESTRUCTURING AND REDESIGN COSTS The personal care business was sold in August 1999. Proceeds from the sale were $32,200 including funds held in escrow, and are subject to post-closing adjustment. No gain or loss was recorded for this sale in the first half of fiscal year 2000. The first half of fiscal year 2000 reflects one month of the personal care business. Net sales for the personal care business were $17,778 and $93,084 for the first half of fiscal year 2000 and 1999, respectively. The Company does not maintain operating income information by its main product lines; however, based on the incremental approach, the Company estimates that the pre-tax operating income of personal care for the first half of fiscal year 2000 was $1,000 and pre-tax operating loss including plant inefficiencies was $3,000 for the first half of fiscal year 1999. The effect of suspending personal care depreciation was $700 and $3,640 for the first half of fiscal year 2000 and 1999, respectively. For the first half of fiscal year 2000, $1,807 was paid primarily related to professional fees and transitional costs associated with the sale of the personal care business. These costs were charged against a reserve established in fiscal year 1998. The 1998 restructuring reserve balance was $363 and $2,170 at January 1, 2000 and July 3, 1999, respectively. Assets held for sale decreased to $19,430 at January 1, 2000 primarily due to the sale of the personal care business and the change in the underlying assets during the first half of fiscal year 2000. Assets held for sale at January 1, 2000 is comprised of the LaVergne, Tennessee logistics facility. While the Company continues to operate the LaVergne, Tennessee logistics facility, the Company has the ability to remove the facility from its operations with no effect on continuing operations. The buyer of the personal care business is operating out of this facility under a two-year lease agreement. The Company intends to sell this facility in fiscal year 2000 and has been actively seeking a buyer since the close of fiscal year 1998. As a part of the 1998 restructuring, in fiscal year 1998 the Company wrote the assets down to their estimated fair value less cost to sell and included the net assets in the assets held for sale classification on the balance -8- 9 sheet. The effect of suspending depreciation on this facility was $430 and $360 for the first half of fiscal year 2000 and fiscal 1999, respectively. For the first half of fiscal year 2000, $1,100 was paid primarily for severance and outplacement costs related to the 1999 restructuring. These costs were charged against a reserve established in fiscal year 1999. The 1999 restructuring reserve balance was $1,355 and $2,455 at January 1, 2000 and July 3, 1999, respectively. The restructuring charges as described above are detailed in the following table: 1998 Restructuring 1999 Restructuring Professional Fees Severance and And Transitional Costs Outplacement Balance at July 3, 1999 $2,170 $2,455 Reductions/Charges 1,807 1,100 ------ ------ Balance at January 1, 2000 $ 363 $1,355 ====== ====== NOTE E - COMMITMENTS AND CONTINGENCIES In July 1994 the Company was served a "summons with notice" alleging breach of fiduciary duties by its officers in connection with their purchase of the Company from the former owner in April 1988. In February 1995 a complaint was filed seeking unspecified damages. In June 1998 the United States District Court for the Western District of Michigan dismissed, at the close of the plaintiff's case, the action filed by the former owner. In July 1998 the former owner filed an appeal. As of this date, the court has not ruled on the appeal. On August 4, 1999, the Company filed a civil antitrust lawsuit in the U.S. District Court for the Western District of Michigan against a group of vitamin raw material suppliers alleging the defendants conspired to fix the prices of vitamin raw materials sold to the Company. The relief sought includes money damages and a permanent injunction enjoining defendants from future violations of antitrust laws. -9- 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER AND FIRST HALF OF FISCAL YEARS 2000 AND 1999 RESULTS OF OPERATIONS SECOND QUARTER OF FISCAL YEARS 2000 AND 1999 RESULTS OF OPERATIONS The Company's net sales decreased by $28,875 or 12.8% to $197,246 during the second quarter of fiscal year 2000, from $226,121 during the second quarter of fiscal year 1999. The decrease was primarily due to the sale of the personal care business. Excluding the effect of the personal care business, net sales increased by $15,748 or 8.7% during the second quarter of fiscal year 2000 to $197,246 from $181,498 during the second quarter of fiscal year 1999. The increase was primarily due to an increase in sales to existing customers of vitamins and sales to existing customers of new products such as the nicotine transdermal system patch for smoking cessation, an OTC pharmaceutical product. Gross profit decreased $5,851 during the second quarter of fiscal year 2000 compared to the same period of fiscal year 1999. The gross profit percent to net sales was 24.6% for the second quarter of fiscal year 2000 compared to 24.0% for the same period of fiscal year 1999. Excluding the personal care business, gross profit increased $1,091 during the second quarter of fiscal year 2000 compared to the same period of fiscal year 1999 and gross profit percent to net sales decreased to 24.6% for the second quarter of fiscal year 2000 compared to 26.1% for the same period of fiscal year 1999. This decrease was primarily due to an increase in write-offs for inventory obsolescence. During fiscal year 1999, reserves were established for anticipated inventory obsolescence related to the Company's conversion to a new software system. These reserves were established based on certain sell-through assumptions. Fiscal year 2000 actual sell-through of this inventory fell short of the assumptions resulting in an increase in inventory obsolescence. The Company believes the valuation of its inventory adequately covers obsolescence related to inventory on hand at January 1, 2000. Operating expenses decreased $12,060 or 29.1% during the second quarter of fiscal year 2000 compared to the same period in fiscal year 1999. Operating expenses as a percentage of net sales were 14.9% for the second quarter of fiscal year 2000 compared to 18.3% for the same period of fiscal year 1999. Operating expenses consist of distribution, research and development, selling and administrative and unusual litigation expenses. Distribution expenses decreased $5,400 or 60.4% from the second quarter of fiscal year 1999 primarily due to the sale of the personal care business. Distribution expenses were also favorably impacted in the second quarter of fiscal year 2000 by fewer expedited shipments and lower warehousing costs as the Company benefited from its shift from leased warehouses to its owned warehouse in Allegan, Michigan. Research and development expenses were 2.0% of net sales for the second quarter of fiscal year 2000 compared to 1.7% for the same period of fiscal year 1999. Research and development expenses for fiscal year 2000 are anticipated to increase due to the Company's commitment to introductions of products switching from Rx to over-the-counter. Selling and administrative expenses decreased $5,999 or 21.4% from the second quarter of fiscal year 1999 primarily due to -10- 11 the sale of the personal care business. Selling and administrative expense as a percentage of net sales was 11.2% in the second quarter of fiscal year 2000 compared to 12.4% of net sales for the same period in fiscal year 1999. Unusual litigation costs were zero and $686 for the second quarter of fiscal year 2000 and 1999, respectively. Interest and other expense decreased $771 from the second quarter of fiscal year 1999. Interest expense decreased $457 to $2,420 during the second quarter of fiscal year 2000 compared to $2,877 for the same period in fiscal year 1999 due primarily to lower levels of borrowing. Other income was $371 for the second quarter of fiscal year 2000 compared to other income of $57 for the same period in fiscal year 1999. The effective tax rate was 35.4% for the second quarter of fiscal year 2000 compared to 28.8% for the same period in fiscal year 1999. Permanent difference adjustments affected the effective tax rate for the second quarter of fiscal year 1999. FIRST HALF OF FISCAL YEARS 2000 AND 1999 RESTRUCTURING UPDATE The personal care business was sold in August 1999. Proceeds from the sale were $32,200 including funds held in escrow, and are subject to post-closing adjustment. No gain or loss was recorded for this sale in the first half of fiscal year 2000. The first half of fiscal year 2000 reflects one month of the personal care business. Net sales for the personal care business were $17,778 and $93,084 for the first half of fiscal year 2000 and 1999, respectively. The Company does not maintain operating income information by its main product lines; however, based on the incremental approach, the Company estimates that the pre-tax operating income of personal care for the first half of fiscal year 2000 was $1,000 and pre-tax operating loss including plant inefficiencies was $3,000 for the first half of fiscal year 1999. The effect of suspending personal care depreciation was $700 and $3,640 for the first half of fiscal year 2000 and 1999, respectively. For the first half of fiscal year 2000, $1,807 was paid primarily related to professional fees and transitional costs associated with the sale of the personal care business. These costs were charged against a reserve established in fiscal year 1998. The 1998 restructuring reserve balance was $363 and $2,170 at January 1, 2000 and July 3, 1999, respectively. Assets held for sale decreased to $19,430 at January 1, 2000 primarily due to the sale of the personal care business and the change in the underlying assets during the first half of fiscal year 2000. Assets held for sale at January 1, 2000 is comprised of the LaVergne, Tennessee logistics. While the Company continues to operate the LaVergne, Tennessee logistics facility, the Company has the ability to remove the facility from its operations with no effect on continuing operations. The buyer of the personal care business is operating out of this facility under a two-year lease agreement. The Company intends to sell this facility in fiscal year 2000 and has been actively seeking a buyer since the close of fiscal year 1998. As a part of the 1998 restructuring, in fiscal year 1998 the Company wrote the assets down to their estimated fair value less cost to sell and included the net assets in the assets held for sale classification on the balance sheet. The effect of suspending depreciation on this facility $430 and $360 for the first half of -11- 12 fiscal year 2000 and fiscal 1999, respectively. For the first half of fiscal year 2000, $1,100 was paid primarily for severance and outplacement costs related to the 1999 restructuring. These costs were charged against a reserve established in fiscal year 1999. The 1999 restructuring reserve balance was $1,355 and $2,455 at January 1, 2000 and July 3, 1999, respectively. RESULTS OF OPERATIONS The Company's net sales decreased $31,808 or 7.3% to $406,611 for the first half of fiscal year 2000, from $438,419 for the first half of fiscal year 1999. The decrease was primarily due to the sale of the personal care business. Excluding the effect of personal care, net sales increased $43,498 or 12.6% to $388,833 during the first half of fiscal year 2000 compared to $345,335 for the same period of fiscal year 1999. The increase was primarily due to an increase in sales to existing customers of vitamins and cough/cold products and sales to existing customers of new products such as the nicotine transdermal system patch for smoking cessation, an OTC pharmaceutical product. During the first quarter of fiscal year 1999, the Company wrote off inventory of $1,663, accounts and notes receivable of $10,874 and the balance of its Russian investment of $1,640 for a total of $14,177 due to the collapse of the Russian economy. The inventory amount is included in cost of sales; the accounts and notes receivable amount is included in selling and administrative expense; and the investment amount is included in other income and expense. The discussion below related to gross profit, operating expenses and interest and other expenses excludes the effect of these charges. Gross profit increased $7,377 or 8.1% for the first half of fiscal year 2000 compared to the first half of fiscal year 1999. The gross profit percentage for the first half of fiscal year 2000 was 24.3% compared to 20.8% for the first half of fiscal year 1999. Excluding the effect of the personal care business, the gross profit percent to net sales was 24.7% and 23.0% for fiscal years 2000 and 1999, respectively. Improvement over last year in gross profit as a percent of net sales was primarily due to the reduction of software conversion inefficiencies, partially offset by increased obsolescence expenses. Operating expenses decreased $18,184 for the first half of fiscal year 2000 compared to the first half of fiscal year 1999. Operating expenses, as a percentage of net sales, were 15.2% for the first half of fiscal year 2000 compared to 18.2% for the first half of fiscal year 1999. Operating expenses consist of distribution, research and development, selling and administrative and unusual litigation expenses. Distribution expenses decreased $8,181 or 48.9% from the first half of fiscal year 1999 due primarily to the sale of the personal care business. Distribution expense, as a percentage of net sales, was 2.1% for the first half of fiscal year 2000 compared to 3.8% for the first half of fiscal year 1999. Distribution expenses were also favorably impacted in the first half of fiscal year 2000 by fewer expedited shipments and lower warehousing costs as the Company benefits from its shift from a leased warehouse to its owned warehouse in Allegan, Michigan. Research and development expense, as a percentage of net sales, was 1.8% for the first half of fiscal year 2000 compared to 1.7% for the first half of fiscal year 1999. Selling and administrative expense decreased $8,265 or 15.3% from the first half of fiscal year 2000, -12- 13 primarily due to the sale of the personal care business. Selling and administrative expense was 11.3% of net sales for the first half of fiscal year 2000 compared to 12.3% of net sales for the first half of fiscal year 1999. Unusual litigation costs were zero and $1,674 for the first half of fiscal year 2000 and 1999, respectively. Interest and other expense increased $114 from the first half of fiscal year 1999. Interest expense decreased $158 to $4,815 for the first half of fiscal year 2000 compared to $4,973 for the first half of fiscal year 1999. Other income was $304 for the first half of fiscal year 2000 compared to other income of $576 for the first half of fiscal year 1999. The effective tax rate was 35.1% for the first half of fiscal year 2000 compared to 28.0% for the first half of fiscal year 1999. The lower effective tax rate in fiscal year 1999 was primarily due to the nondeductible write-off of the Company's Russian investment. LIQUIDITY AND CAPITAL RESOURCES During the first half of fiscal year 2000, working capital decreased $20,715 and cash flow from operating activities was $23,490. Accounts receivable increased $34,515 primarily due to seasonal sales increases, inventories decreased $26,740 primarily due to inventory reduction initiatives and accounts payable decreased $9,807 due to lower purchases in the second quarter of fiscal year 2000 compared to the same period of fiscal year 1999. Capital expenditures were $7,643 for the first half of fiscal year 2000. Capital expenditures for fiscal year 2000 are anticipated to be approximately $15,000 to 20,000 primarily for normal equipment replacement and productivity enhancements to equipment. The personal care business was sold during the first quarter of fiscal year 2000. The proceeds received from the sale during the first quarter were $31,186 and were used to fund operations and reduce debt as noted below. Long-term debt decreased $45,026 during the first half of fiscal year 2000 as the Company paid down on its $200,000 unsecured revolving credit facility. At January 1, 2000 the Company had $110,000 available on this facility. YEAR 2000 READINESS DISCLOSURE The Company implemented the plan set forth in the Year 2000 Compliance section of the MDA in its annual report on Form 10-K for the year ended July 3, 1999. The plan involved (1) becoming Year 2000 compliant in all of its critical software systems, infrastructure systems, manufacturing systems, security systems and office equipment, (2) developing contingency plans for all critical systems, (3) reviewing insurance, regulatory and legal implications as they relate to the year 2000 and (4) determining the year 2000 compliance status of the Company's key suppliers and customers. Costs to address Y2K issues have approximated $1,000. As of the date of this filing, the Company has not incurred any significant business interruptions as a result of Y2K issues. No key suppliers or customers have reported any issues related to year 2000 that might cause an adverse affect on business operations. -13- 14 Though the Company is unaware of any Y2K issues, the Company cannot make assurances that such issues will not arise, subsequent to this filing date, which may have a significant negative impact on results of operations and financial condition. However, in the event of a Y2K failure of a critical system, contingency plans developed prior to year 2000 will be implemented to reduce and manage the risk to our business and customers. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, please see Perrigo Company's Form 10-K for the fiscal year ended July 3, 1999, under the heading "Cautionary Note Regarding Forward-Looking Statements" for a discussion of certain important factors as they relate to forward-looking statements contained in this quarterly report. Item 3. Quantitative and Qualitative Disclosures About Market Risks The Company has evaluated possible disclosures required under this item and has determined that no market, interest rate or foreign currency risk exists that would require disclosure. -14- 15 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Stockholders' Meeting held on December 7, 1999, the Company's stockholders voted on the following matters: 1. Election of two directors of the Company; 2. The ratification of selection of independent accountants; and 3. Such other business as may properly come before the meeting (none). The tabulation of votes provided by the Inspector of Election was as follows: Proposal Voting Tabulation -------- ----------------- 1. ELECTION OF DIRECTORS Nominee For Withhold/Against ------- --- ---------------- Peter R. Formanek 64,530,385 536,540 Herman Morris, Jr. 64,514,235 552,690 OTHER DIRECTORS WHOSE TERM OF OFFICE CONTINUES F. Folsom Bell Larry D. Fredricks Richard G. Hansen L. R. Jalenak, Jr. Michael J. Jandernoa For Against Abstain --- ------- ------- 2. RATIFICATION OF SELECTION OF BDO SEIDMAN, LLP 64,808,871 121,635 136,419 Item 5. Other Information On December 7, 1999, the Company entered into a one-year consulting agreement to provide strategic and other business services with F. Folsom Bell, a director. The contract is effective January 1, 2000 through December 31, 2000. Under the terms of the contract, the anticipated annual consulting fee is $240, payable monthly. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Description -------------- ----------- 2(a) Asset Purchase Agreement, dated August 25, 1999, among -15- 16 Perrigo Company of Tennessee as Sellers; and Cumberland Swan Holdings, Inc. as Buyer, incorporated by reference from the Registrant's Form 10-K filed on October 1, 1999. 3(a) Amended and Restated Articles of Incorporation of Registrant, incorporated by reference from Amendment No. 2 to Registration Statement No. 33-43834 filed by the Registrant on September 23, 1993. 3(b) Restated Bylaws of Registrant, dated April 10, 1996, 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) Registrant's Management Incentive Plan, incorporated by reference from Registration Statement No. 33-69324 filed by the Registrant on September 23, 1993. 10(b) Registrant's 1988 Employee Incentive Stock Option Plan as amended, incorporated by reference to Exhibit A of the Registrant's 1997 proxy statement. 10(c) Registrant's 1989 Non-Qualified Stock Option Plan for Directors, as amended, incorporated by reference from Exhibit B of the Registrant's 1997 Proxy Statement as amended at the Annual Meeting of Shareholders on November 6, 1997. 10(d) Registrant's Restricted Stock Plan for Directors, dated November 6, 1997, incorporated by reference from Registrant's Form 10-K filed on October 6, 1998. 10(e) Credit Agreement, dated September 23, 1999, between Registrant and Bank One, Michigan, incorporated by reference from the Registrant's Form 10-K filed on October 1, 1999. 10(f) Guaranty Agreement, dated September 23, 1999, between L. Perrigo Company and Perrigo Company of South Carolina, Inc., incorporated by reference from the Registrant's Form 10-K filed on October 1, 1999. 10(g) Consulting Agreement, dated December 7, 1999, between Registrant and F. Folsom Bell. -16- 17 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed a form 8-K on November 2, 1999 that announced the following organization changes at the executive officer level: Richard G. Hansen, President and Chief Operating Officer, retired effective November 1, 1999. Hansen came out of retirement to aid the Company's transition to a new enterprise software system. He will remain on the Company's Board of Directors. John T. Hendrickson was named Executive Vice President and Chief Operations Officer. He is responsible for domestic manufacturing and packaging, engineering, distribution, materials management, customer service and human resources. The responsibilities of Mark P. Olesnavage, President of Customer Business Development, were expanded to include the Company's international business while continuing to manage domestic sales, marketing, business development and technical affairs functions. The Company filed a form 8-K on December 16, 1999 that announced the election by shareholders of Herman Morris, Jr. as a new director of the Company for a three-year term expiring on the date of the Annual Meeting in 2002. Morris is President and Chief Executive Officer of Memphis Light, Gas and Water Division. -17- 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PERRIGO COMPANY ------------------------- (Registrant) Date: February 9, 2000 /s/Michael J. Jandernoa ------------------- ------------------------ Michael J. Jandernoa Chairman of the Board, President and Chief Executive Officer Date: February 9, 2000 /s/Douglas R. Schrank -------------------- ---------------------- Douglas R. Schrank Executive Vice President and Chief Financial Officer -18- EX-10.(G) 2 CONSULTING AGREEMENT, DATED 12/7/99 1 EXHIBIT 10 (G) CONSULTING SERVICES AGREEMENT THIS AGREEMENT entered into as of the 7th day of December, 1999, by and between PERRIGO COMPANY, a Michigan corporation with principal offices at 117 Water Street, Allegan, Michigan 49010 (herein "Perrigo"), and F. FOLSOM BELL, of 5528 Nakoma Drive, Dallas Texas 75209 (herein "Bell"); WITNESSETH: WHEREAS the Company desires to retain the services of Bell to assist them in analyzing, evaluating, and negotiating certain designated merger and acquisition transactions and to provide such other consulting services as may be requested by the Company from time to time and Bell has agreed to provide such services during the term, for the fees, and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants set forth below and subject to the conditions contained herein, Perrigo and Bell agree as follows: 1. Term. The term of this Agreement shall be one (1) year commencing on January 1, 2000, and terminating on December 31, 2000. Thereafter this Agreement shall continue in full force and effect until terminated in writing by either party which in the case of Bell shall require thirty (30) days notice to be given to Perrigo and in the case of Perrigo, shall require six (6) months notice to be given to Bell. 2. Consulting Services. During the term of this Agreement, Bell agrees to devote such time, up to substantially all of his working time, as may be required, to 1 2 provide consulting services on matters relating to acquisitions and mergers and on such other corporate and operational matters, including, but not limited to, general financial matters, strategic issues, and international operations, as his services may be requested. Bell shall report to the Chief Executive Officer ("CEO") of Perrigo during the term of this Agreement and all requests for Bell's services shall be initiated by the CEO. Perrigo agrees to provide to Bell sufficient consulting assignments to guarantee to Bell a minimum of 100 hours of consulting services each month during the term of this Agreement or, in lieu thereof, to pay him the minimum monthly consulting fee provided for in Section 3 below. The consulting services contemplated by this Agreement shall be performed at such locations, including Perrigo's corporate offices in Allegan, Michigan, as Perrigo may designate from time to time. During Bell's presence at Perrigo's corporate offices he will be provided, at no cost to him, appropriate office space and administrative support (including specifically administrative and secretarial assistance) as may be required to enable him to successfully complete his assigned work. 3. Consulting Fees and Expenses. For his consulting services hereunder, Perrigo shall pay Bell on a monthly basis the greater of (i) that amount determined by multiplying the total number of hours of service performed by Bell during the month by Two Hundred Dollars ($200.00) or (ii) Twenty Thousand Dollars ($20,000.00). Notwithstanding the preceding, if Bell fails to perform at least one -2- 3 hundred (100) hours of services in any month because he declines to perform any services assigned to him or is unavailable to do so (whether because of sickness or absence on vacation or for any other reason) then, for such month, he shall only be paid the amount determined pursuant to (i) above. Bell shall also be reimbursed for all reasonable expenses incurred by him in connection with his performance of consulting services hereunder. Such expenses shall include travel, hotel, and meal (dinner only) expenses and other direct out-of-pocket expenses incurred by Bell but shall not include office or administrative expenses (including any administrative assistant that he may elect to retain) incurred by Bell in connection with a separate office maintained by Bell in Dallas, Texas, or elsewhere. The consulting fees and expenses shall be paid and reimbursed to Bell within fifteen (15) days from the date of receipt by Perrigo of Bell's invoice. 4. Early Termination. This Agreement may or shall be, as the case may be, terminated prior to the normal expiration date as follows: (a.) By Bell on thirty (30) days prior written notice to Perrigo. (b.) By Perrigo in the event of the continued refusal by Bell to perform services reasonably assigned to him by the CEO that are of the type described in Section 2 above. A termination by Perrigo under this subsection (b.) may not take place unless and until written notice is given to Bell specifying the basis for the proposed termination and Bell is provided a period of ten (10) -3- 4 days in which to commence performance of the services that are the subject of the proposed termination. (c.) By either party on written notice to the other party in the event of action taken or the conduct of one of the parties that materially damages the business reputation of the party terminating the Agreement. (d.) By either party by written notice to the other party in the event of the filing of a voluntary petition in bankruptcy by the other party or the filing by a third party of a petition in bankruptcy against such other party that is not dismissed within sixty (60) days from the date of filing. (e.) The death or physical or mental disability of Bell (which shall be defined as the inability of Bell to perform any services under this Agreement for a period of sixty (60) days because of injury or physical or mental illness as determined by the Board of Directors of Perrigo). In the event of an early termination of this Agreement pursuant to this Section 4, the rights and duties of the parties hereto shall cease as of the date of such termination and neither party shall have any further obligation to the other party hereunder from and after such date. -4- 5 5. Relationship of the Parties. The relationship between Perrigo and Bell will be that of principal and agent; provided, however, that except as otherwise provided by Perrigo in writing, Bell is not granted authority to assume or create any obligation or responsibility, express or implied, on behalf of or in the name of Perrigo, or to bind Perrigo in any manner whatsoever. As a consultant, Bell will not participate in any of the employee benefit plans offered by Perrigo and Perrigo shall not withhold any local, state, or federal taxes from the payments made to Bell under this Agreement, all tax liability in respect of Bell's receipt of compensation hereunder being the sole and exclusive responsibility of Bell. 6. Indemnification. In consideration for Bell's agreement to provide consulting services to Perrigo under this Agreement, Perrigo agrees to and has on the date hereof entered into an Indemnification Agreement with Bell in the form of the Agreement attached hereto as Exhibit 1, under and pursuant to which Perrigo agrees to indemnify Bell and to provide to him in advance all amounts reasonably incurred by him in the manner contemplated thereunder. The obligation of Perrigo under this Section 5 shall survive the termination of this Agreement. 7. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been given if delivered or mailed postage prepaid: (a) If to Bell: F. Folsom Bell 5528 Nakoma Drive Dallas, Texas 75209 -5- 6 (b) If to Perrigo: Perrigo Company 117 Water Street Allegan, Michigan 49010 Attention: Chief Executive Officer 8. Entire Agreement. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof. It may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 9. Governing Law. This Agreement shall be governed by the laws of the state of Michigan. THIS AGREEMENT EXECUTED as of the day and year first above written. PERRIGO COMPANY By ------------------------------------ Its ----------------------------------- -------------------------------------- F. Folsom Bell -6- 7 EXHIBIT 1 INDEMNITY AGREEMENT AGREEMENT made as of the 7th day of December, 1999, by and among PERRIGO COMPANY, a Michigan corporation ("Perrigo") and F. FOLSOM BELL ("Indemnitee") with respect to the following: W I T N E S S E T H : WHEREAS Perrigo desires to retain Indemnitee as a consultant to provide assistance to Perrigo in connection with merger and acquisition matters and in connection with such other matters, including, but not limited to, general financial matters, strategic issues, and international operations as Perrigo may request from time to time; and WHEREAS Indemnitee has agreed to provide to Perrigo the consulting services requested of him provided that, in part, Perrigo agrees to indemnify him to the extent and in the manner provided in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. Definitions. As used herein, the following terms are defined as follows: (a) Expenses. Attorneys' and accountants' fees and all the other costs, expenses and obligations actually and reasonably paid or incurred by or on behalf of Indemnitee in connection with investigating, defending, participating or being a witness in, or preparing to defend, participate or be a witness in any Proceeding or appeal therefrom. (b) Proceeding. Any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation, whether civil, criminal, administrative or investigative and whether formal or informal in which Indemnitee may hereafter become involved as a party, a witness, or otherwise, by reason of the fact that Indemnitee provides or will be providing consulting services to Perrigo under the Consulting Agreement. 2. Indemnification. Subject to the terms and conditions of this Agreement, Perrigo hereby agrees that in the event Indemnitee is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in a Proceeding, Perrigo shall indemnify Indemnitee to the fullest extent permitted by law and as provided in this Agreement, pursuant to the authorization of the Michigan Business Corporation Act, against any and all Expenses incurred with respect to such Proceeding and any judgments, fines, or 1-1 8 penalties awarded or assessed in the final adjudications of such Proceedings or any amounts paid in settlement of such ("Indemnified Amounts"). Perrigo shall reimburse Indemnitee as soon as practicable, but in any event not later than thirty (30) days after written demand is presented to Perrigo for any Indemnified Amounts paid or payable by Indemnitee. 3. Condition Precedent to Indemnification. Indemnitee, as a condition precedent to indemnification under this Agreement, shall tender written notice to Perrigo as soon as practicable of any claims made against him for which indemnification will or likely will be sought under the terms of this Agreement. Notice to Perrigo shall be directed to the attention of the Chairman of the Board or General Counsel of Perrigo at its corporate offices in Allegan, Michigan. In addition, Indemnitee shall give Perrigo such information and provide such cooperation as may be reasonably necessary and requested by Perrigo. 4. Consent of Perrigo. No settlement of a claim in any Proceeding shall be agreed to and no amounts payable in a settlement of a claim in any Proceeding for which indemnifications will be sought hereunder shall be paid by Indemnitee without Perrigo's written consent, which consent shall not be unreasonably withheld. 5. Limitations on Indemnity. Perrigo shall not be liable under this Agreement to make any payment in connection with any Proceeding: (a) for which payment is made to or on behalf of Indemnitee under a valid and collectible insurance policy, except for any excess beyond the amount of payment under such insurance policy; (b) for which Indemnitee is indemnified by Perrigo otherwise than pursuant to this Agreement; (c) based upon or attributable to any intentional misconduct or a knowing violation of law by Indemnitee; (d) with respect to which a final judgment or other final adjudication of a court of competent jurisdiction establishes or determines that Indemnitee's actions or conduct was in bad faith and in opposition to the best interest of Perrigo or its shareholders; (e) with respect to which a final decision of a court of competent jurisdiction determines that indemnification of Indemnitee is not lawful under the circumstances. (f) for which payment of indemnification by Perrigo is otherwise prohibited by applicable law. 1-2 9 6. Payment of Costs and Expenses in Advance. If requested by Indemnitee, and notwithstanding anything in this Agreement expressed or implied to the contrary, Perrigo shall pay (within fifteen (15) days of such written request) any and all Expenses incurred by Indemnitee in defending or investigating any claim in any Proceeding, in advance of the final disposition of such claim, upon the receipt of a written undertaking by Indemnitee to repay any such amounts if it is ultimately determined that Indemnitee is not entitled to indemnification by Perrigo. 7. Partial Indemnification. In the event Indemnitee is entitled to indemnification hereunder for a portion of the Expenses, or any Indemnified Amounts incurred by him in the investigation, defense, appeal or settlement of any claim in any Proceeding but not, however, for all of the total amount thereof, Perrigo shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. 8. Subrogation. In the event of payment under this Agreement, Perrigo shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Perrigo effectively to bring suit or enforce such rights. 9. No Presumption. For purposes of this Agreement, the termination of any action, suit or proceeding by judgment order or settlement (whether with or without court approval), shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 10. Specific Determination of Entitlement to Indemnification. In the event Indemnitee is found liable to Perrigo as a result of any claim brought by or in the right of Perrigo in any Proceeding, whether and the extent to which Indemnitee is nevertheless entitled to indemnification under this Agreement shall be predicated on a determination that indemnification is appropriate in light of the circumstances of the case and applicable legal standards, which determination shall be made, at the option of Indemnitee, by: (a) majority vote of a committee of two (2) or more disinterested directors appointed by the Board of Directors; (b) independent legal counsel in a written opinion; or (c) the court in which the Proceeding was brought. 11. Liability Insurance. To the extent Perrigo maintains an insurance policy or policies providing liability insurance for directors and officers, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage permitted to be extended to any consultant to Perrigo. 1-3 10 12. Scope of Agreement. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under any provision of Perrigo's Articles of Incorporation, Bylaws or the laws of the state of Michigan. 13. Amendment, Termination and Waiver. This Agreement may be amended, modified or terminated and any of the terms and conditions herein may be waived only by the written consent of the parties hereto. The failure of any party at any time or times to require performance of any provisions contained herein shall in no manner affect the right of such party at any later time to enforce the same. 14. Binding Effect and Assignment. This Agreement shall be binding upon and inure to the benefit of the Indemnitee and his personal representatives, heirs and assigns, and Perrigo and its successors and assigns, including any direct or indirect successor of Perrigo by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of Perrigo provided, however, that no assignment of any rights or delegation of obligations provided for herein may be made by either party without the express written consent of the other party. This Agreement shall continue in effect so long as Indemnitee is providing services to Perrigo under the Consulting Agreement and shall continue thereafter for a period terminating two (2) years following the duration of any applicable period of limitations for commencing any Proceeding. 15. Severability. Any provision of this Agreement which may be prohibited by law, or otherwise held invalid by a court of competent jurisdiction, shall be ineffective only to the extent of such prohibition or invalidity and shall not invalidate or otherwise render ineffective the remaining provisions of this Agreement. 16. Governing Law. The parties hereto acknowledge and agree that this Agreement shall be governed by, construed and enforced in accordance with the laws, and in the courts, of the state of Michigan. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. PERRIGO COMPANY By _____________________________ Its _________________________ INDEMNITEE -------------------------------- F. Folsom Bell 1-4 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUL-01-2000 JUL-04-1999 JAN-01-2000 3,731 0 123,536 3,690 170,697 351,371 333,174 136,627 581,744 122,669 90,000 0 0 102,148 251,914 581,744 406,611 406,611 307,971 307,971 0 102 4,815 32,330 11,341 20,989 0 0 0 20,989 0.29 0.29
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