-----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, THT4CA5/ysc1JOWR8WtrOhiwasSxMTsUuFqELEiWPWg3uDimcqwslwIelqx3oCQi /f67cV9ZzJuddsFKk37tBQ== /in/edgar/work/20000906/0000950137-00-003994/0000950137-00-003994.txt : 20000922 0000950137-00-003994.hdr.sgml : 20000922 ACCESSION NUMBER: 0000950137-00-003994 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000701 FILED AS OF DATE: 20000906 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERRIGO CO CENTRAL INDEX KEY: 0000820096 STANDARD INDUSTRIAL CLASSIFICATION: [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: 717641 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-K405 1 c57316e10-k405.txt FORM 10-K405 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 July 1, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-19725 PERRIGO COMPANY (Exact name of registrant as specified in its charter) Michigan 38-2799573 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 515 Eastern Avenue 49010 Allegan, Michigan (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (616) 673-8451 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock (without par value) (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on August 28, 2000 as reported on the NASDAQ National Market System, was approximately $374,157,096. Shares of common stock held by each executive officer and director and by each person who owns 5% of more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of August 28, 2000 the registrant had outstanding 73,508,095 shares of common stock. Documents incorporated by reference: Portions of the Registrant's Proxy Statement for its Annual Meeting on October 31, 2000 are incorporated by reference into Part III. 2 PART I. Item 1. Business of the Company. (Dollar amounts in thousands) GENERAL Perrigo Company (the "Company"), established in 1887, is the nation's largest manufacturer of store brand over-the-counter ("OTC")(non-prescription) pharmaceutical products and also manufactures store brand nutritional products. Store brand products are sold under a retailer's own label and compete with nationally advertised brand name products. The Company attributes its leadership position in the store brand market to its comprehensive product assortment and to its commitment to product quality, customer service, retailer marketing support and low cost production. The Company's customers are major national and regional retail drug, supermarket and mass merchandise chains such as Albertson's, CVS, Kmart, Kroger, Target, Walgreens and Wal-Mart and major wholesalers such as Fleming, McKesson and Super Valu. The Company operates in one reportable business segment, store brand health care, and markets a broad line of products that are comparable in quality and effectiveness to national brand products. These products include OTC pharmaceuticals such as analgesics, cough and cold remedies, antacids, laxatives, feminine hygiene, suppositories and smoking cessation; and nutritional products such as synthetic and natural vitamins, herbals, nutritional drinks and diet aids. The cost to the customer of a store brand product is significantly lower than that of a nationally advertised brand name product. The customer therefore can price a store brand product below the competing national brand product while still realizing a higher profit margin. Generally, the retailers') dollar profit per unit of store brand product sold is higher than the dollar profit per unit of the comparable national brand product. The consumer benefits by receiving a quality product at a price below a comparable national brand product. The Company currently manufactures and markets certain products under its own brand names Good Sense(R), Daily Source(R) and Herbal Source(R) and also markets products under the brand name Swan(R) through a license agreement. The Company also manufactures products under contract for marketers of national brand products. The Company's principal executive offices are located at 515 Eastern Avenue, Allegan, Michigan 49010 and its telephone number is (616) 673-8451. The Company operates primarily through three wholly-owned domestic subsidiaries, L. Perrigo Company, Perrigo Company of South Carolina, Inc., and Perrigo International, Inc.; three wholly-owned foreign subsidiaries, Perrigo de Mexico S.A. de C.V., Nippon Perrigo, K.K. and Perrigo do Brasil Ltda.; and one majority-owned foreign subsidiary, Quimica y Farmacia, S.A. de C.V. As used herein, the "Company" means Perrigo Company, its subsidiaries and all predecessors of Perrigo Company and its subsidiaries. SIGNIFICANT DEVELOPMENTS DURING FISCAL YEAR 2000 During fiscal year 2000, several changes were made in the executive management of the Company. David T. Gibbons, a former Rubbermaid and 3M executive, was elected President, Chief Executive Officer and a director of the Company. Michael J. Jandernoa, who served as Chief Executive Officer since 1986, remained Chairman of the Board. Douglas R. Schrank was named Executive Vice President and Chief Financial Officer. Mr. Schrank joined the Company from M. A. Hanna Company where he was most recently President of its Hanna Color subsidiary. John T. Hendrickson was named Executive Vice President, Operations. Mr. Hendrickson was most recently the Company's Vice President of Operations. Effective September 1, 2000, F. Folsom Bell joined the Company as Executive Vice President, Business Development. Mr. Bell most recently served in a consulting capacity to the Company and has been a member of the Board of Directors since 1981. -1- 3 In fiscal year 1998, the Company announced its intention to divest the personal care business. The personal care business was sold in August 1999. Proceeds from the sale were $32,200, including funds held in escrow. The LaVergne, Tennessee logistics facility was not included in this sale and is reported as an asset held for sale at July 1, 2000. See Item 7 for a further discussion of the 1998 restructuring. A significant lawsuit was settled in favor of the Company during the year. The lawsuit was originally filed in 1994 by the Company's former owner and related to the purchase of the Company in 1988. The lawsuit was dismissed in June 1998. The former owner filed an appeal in July 1998. Pursuant to a settlement agreement entered into in March 2000, the lawsuit was dismissed and all pending appeals were withdrawn. The effect of the settlement was to leave in place the Court's original order dismissing the plaintiff's case. The Company entered into settlement agreements with certain defendants in relation to a civil antitrust lawsuit against a group of vitamin raw material suppliers. Pursuant to the settlement agreements, the Company received an aggregate payment of $4,154, net of attorney fees and expenses that were withheld prior to the disbursement of the funds to the Company. See Item 3 for a further discussion of legal proceedings. The Company realized sales from several new products including an OTC nicotine transdermal system patch for adult use as an aid to smoking cessation. This is a new category for the Company with the product manufactured and supplied through a third party agreement. Other significant new product launches included an antacid comparable to the branded product Zantac 75(R), extra strength calcium antacid tablets, tussin honey cough syrup, gelatin powder and glucosamine complex tablets. BUSINESS STRATEGY The Company attributes its sustained leadership position in the store brand market to its implementation of several focused business strategies that reflect the Company's commitment to its customers and employees. The strategy is outlined below. CUSTOMER SERVICE AND MARKETING SUPPORT The Company seeks to establish customer loyalty by providing superior customer service and marketing support. This includes providing (1) a comprehensive assortment of quality, value priced products, (2) timely processing, shipment and delivery of orders, (3) assistance in managing customer inventories and (4) support in building the store brand business. The Company provides marketing support that is directed at developing customized marketing programs for the customers' store brand products. The primary objective of this store brand management approach is to enable customers to increase sales of their own brand name products by communicating store brand quality and value to the consumer. The Company's marketing personnel assist in the development and introduction of new store brand products and promotion of customers' ongoing store brand products by performing consumer research, providing market information and establishing individualized promotions and marketing programs. PRODUCT QUALITY AND PRODUCT ASSORTMENT The Company offers a comprehensive product assortment in order to fill customers' needs while minimizing their product sourcing costs. -2- 4 The Company is committed to providing a high-quality product to the customer. Substantially, all products are developed using ingredients, formulas and processes comparable to those of national brand products. Packaging is designed to make the product visually appealing to the consumer. High quality standards are maintained throughout all phases of production, warehousing and distribution. The Company is dedicated to developing and marketing new store brand products before the competition. As a result, the Company has a research and development staff that management believes is one of the most experienced in the industry at developing national brand equivalent products. This staff also responds to changes in existing national brand products by reformulating comparable existing Company products. In the OTC pharmaceutical market, many new products are the result of changes in product status from "prescription only" (Rx) to "over-the-counter" (non-prescription). These "Rx switch" products require approval by the Federal Drug Administration ("FDA") through its abbreviated New Drug Application ("ANDA") process. In order to accelerate the approval process, the Company uses both internal research and strategic product development agreements with outside sources. LOW COST SUPPLIER The Company continually strives to improve its manufacturing capabilities and technology in order to provide the manufacturing flexibility necessary to meet its customers' changing needs and maintain a low cost supplier position. Productivity and efficiency improvements are encouraged by sharing related cost savings with employees through formalized employee gain-sharing programs that share productivity improvements with operating employees. Education of the work force and a team approach provide employees with the skills to generate and implement programs designed to increase the Company's productivity and efficiency, to improve quality and to better serve customers. Continuous improvement programs are utilized to improve efficiency by eliminating waste from all phases of Company operations. These programs include cross-functional teams, internal and external audits and on-the-job training. All levels of management are involved in the planning process in an effort to forecast future manufacturing needs with sufficient lead-time to reallocate production resources. BUSINESS SEGMENT The Company had three operating segments in fiscal year 2000 as defined by the accounting pronouncement Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information". These segments were OTC pharmaceuticals, nutritional and personal care products. The personal care business was sold in August 1999 and information related to its assets, sales and operating income is found in the Restructuring section of Item 7. The OTC pharmaceuticals and nutritional product segments have been aggregated into one reportable segment because their operating processes, types of customers, distribution methods, regulatory environment and expected long-term financial performance are very similar. See Note A to the consolidated financial statements included in Item 8 for further information related to business segments. PRODUCTS The Company currently markets approximately 1,200 store brand products to approximately 370 customers. The Company includes as separate products multiple sizes, flavors and product forms of certain products. The Company has a leading market share in certain of its products in the store brand market. -3- 5 During fiscal year 2000, approximately $55 million of the Company's net sales were attributable to new products added to the Company's product lines within the past two fiscal years. The Company manufactures and markets certain products under its own brand names Good Sense(R), Daily Source(R) and Herbal Source(R) and also markets products under the brand name Swan(R) through a license agreement. Net sales of these products were approximately 3% to 5% of the Company's net sales for fiscal years 2000, 1999 and 1998. The following table illustrates net sales for the Company's two product lines from fiscal year 1996 through fiscal year 2000. The personal care business, which was sold in August 1999, is excluded from this table. See Note K to the consolidated financial statements.
NET SALES BY PRODUCT LINE FISCAL YEAR ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- OTC Pharmaceuticals..... $585,193 $553,471 $536,328 $526,541 $474,551 Nutritional ............ 135,584 133,693 151,709 110,408 89,808 -------- -------- -------- -------- -------- $720,777 $687,164 $688,037 $636,949 $564,359 ======== ======== ======== ======== ========
Listed below are the major product categories under which the Company markets products for store brand labels. Also listed are the names of certain national brands against which the Company's products compete.
PRODUCT CATEGORIES COMPARABLE NATIONAL BRANDS - ------------------ -------------------------- Cough/Cold Afrin(R), Benadryl(R), Dimetapp(R), NyQuil(R), PediaCare(R), Robitussin(R), Sudafed(R), Tavist(R), Triaminic(R), Tylenol(R) Analgesics Advil(R), Aleve(R), Bayer(R), Excedrin(R), Motrin(R), Tylenol(R) Antacids Alka-Seltzer(R), Imodium A-D(R), Maalox(R), Mylanta(R), Pepto Bismol(R), Tagamet HB(R), Tums(R), Zantac 75(R) Feminine Hygiene/Test Kits/Sleep Aids/ Monistat(R) 3, Monistat(R) 7, e.p.t.(R), Unisom(R), Hemorrhoidal Remedies/ Hair Restoration/ Preparation H(R), Rogaine(R) Smoking Cessation Laxatives Correctol(R), Ex-Lax(R), Fibercon(R), Metamucil(R), Phillips(R), Senokot(R) Vitamins/Nutritional Supplements Centrum(R), Flintstones(R), One-A-Day(R), Caltrate(R), Citracal(R), Garlique(R), Ginkoba(R), Ginsana(R) Nutritional Drinks Ensure(R)
RESEARCH AND DEVELOPMENT Research and development is a key component of the Company's business strategy. The Company focuses on developing store brand products comparable in formulation, quality and -4- 6 effectiveness to existing national brand products. As part of the product development process, the Company reviews for any potential patent infringement and develops alternative formulations so as not to infringe on any patent. The Company has been granted FDA approval to manufacture and distribute products such as children's ibuprofen oral suspension and drops, loperamide hydrochloride, minoxidil and pseudoephedrine hydrochloride extended-release, products comparable to the national brands Children's Motrin(R), Imodium A-D(R), Rogaine(R) and Sudafed(R) 12 Hour, respectively. The Company has obtained the rights to distribute, through use of strategic alliance agreements, products such as Dayhist-D and DiBromm, products comparable to the national brands Tavist-D(R) and Dimetapp(R), respectively. The Company estimates that products for which marketing exclusivity is expiring through the year 2003 represent a substantial potential market. The Company actively pursues all avenues to offer store brand equivalents of these products; however, there can be no assurance that it will be successful in obtaining approval to distribute additional products. The Company spent $16.3 million, $14.9 million and $15.9 million for research and development during fiscal years 2000, 1999 and 1998, respectively. The Company anticipates that research and development expenditures as a percent of net sales will increase in the foreseeable future. SALES AND MARKETING The Company employs its own sales force to service larger customers and uses industry brokers for some smaller retailers. Sales and field marketing employees are assigned to specific customers in order to understand and work most effectively with the customer. They assist in the development of in-store marketing programs (described below) and optimize communication of customers" needs to the rest of the Company. Industry brokers provide a distribution channel for some products, primarily those marketed under the labels of Good Sense(R) and Swan(R). The Company has no material long-term contracts with customers. Wal-Mart accounted for 26%, 24% and 24% of net sales for fiscal years 2000, 1999 and 1998, respectively. Should Wal-Mart's current relationship with the Company change adversely, the resulting loss of business could have a material adverse impact on the Company's operating results and financial position. Such a change is not anticipated in the foreseeable future. No other customer accounted for more than 10% of net sales. In contrast to national brand manufacturers who incur considerable advertising and marketing expenditures that are directly targeted to the end consumer, the Company's primary marketing efforts channel through its customers, the retailers and wholesalers, and reach the consumer through in-store marketing programs. These programs are intended to increase visibility of store brand products and to invite comparisons to national brand products in order to communicate store brand value to the consumer. Merchandising vehicles such as trial sizes, floor displays, bonus sizes, coupons, rebates, store signs and promotional packs are incorporated into customers' programs. The Company also provides educational training aids, packaging displays and point of purchase materials to customers. Because the retailer profit margin for store brand products is generally higher than for national brand products, retailers and wholesalers often commit funds for additional promotions. The Company's marketing efforts are also directed at new product introductions and conversions and providing market research data. Market research is used to monitor trends for products and categories. -5- 7 MANUFACTURING AND DISTRIBUTION The Company has nine manufacturing facilities, which occupied approximately 1.5 million square feet at July 1, 2000. The Company sold its Smyrna, Tennessee manufacturing facility in August 1999 as part of the sale of the personal care business. The Company supplements its production capabilities with the purchase of product from outside sources and will continue to do so in the future. During fiscal year 2000, the nutritional facility generally operated at between 60% and 90% of capacity and the OTC pharmaceutical facilities generally operated at between 70% and 90% of capacity. The Company aggressively explores opportunities to utilize available capacities, such as contract manufacturing for national brands. The Company's manufacturing operations are designed to allow low cost production of a wide variety of products of different quantities, sizes and packaging while maintaining a high level of customer service and quality. Flexible production line changeover capabilities and reduced cycle times allow the Company to respond quickly to changes in manufacturing schedules. The Company has five regional logistics facilities across the United States and two logistics facilities in Mexico that occupied approximately 1.5 million square feet at July 1, 2000. The LaVergne, Tennessee logistics facility primarily serves the personal care business and is intended to be sold in fiscal year 2001. The buyer of the personal care business is currently operating out of this facility under a lease that expires in August 2001. Both contract freight and common carriers are used to deliver products. COMPETITION The market for store brand OTC pharmaceutical and nutritional products is highly competitive. Competition is based primarily on price, quality and assortment of products, customer service, marketing support and availability of new products. The Company believes it competes favorably in all of these areas. The Company's direct competition in store brand products consists primarily of independent, privately owned companies and is highly fragmented in terms of both geographic market coverage and product categories. The Company is the nation's largest manufacturer of store brand OTC pharmaceutical products. The Company competes in the nutritional area with companies with broader product lines and larger sales volumes. The Company's products also compete with nationally advertised brand name products. Most of the national brand companies have resources substantially greater than those of the Company. National brand companies could in the future seek to compete more directly in the store brand market by manufacturing store brand products or by lowering prices of national brand products. The Company believes that the manufacturing methods used by national brand companies are not easily adapted to the requirements of the store brand market. These requirements include the ability to produce many different package designs and product sizes. In addition, the marketing focus of national brand companies is directed towards the consumer rather than toward the retailer. MATERIALS SOURCING Raw materials and packaging supplies are generally available from multiple suppliers. Certain component and finished goods are purchased rather than manufactured because of temporary production limitations, FDA restrictions or economic or other factors. The Company has historically been able to react rapidly to situations that require alternate sourcing. The Company has good, cooperative working relationships with its suppliers and has historically been able to capitalize on economies of scale in the purchase of materials and supplies due to the volume of purchases. -6- 8 TRADEMARKS AND PATENTS The Company owns certain trademarks and patents; however, its business as a whole is not materially dependent upon its ownership of any one trademark or patent, or group of trademarks or patents. SEASONALITY The Company's sales are subject to seasonality, primarily with regard to the timing of the cough/cold/flu season, which generally runs from September through March. In addition, historically, the Company's sales of cough/cold/flu products have varied from year to year based in large part on the strength and length of the cough/cold/flu season. Total retail sales for cough/cold/flu products (both national brands and store brands) in fiscal year 2000 were lower than fiscal year 1999, due to a sharp fall-off from the peak cough/cold/flu season occurring in January. While the Company believes that the severity and length of the cough/cold/flu season will continue to impact its sales of cough/cold/flu products, there can be no assurance that the Company's future sales of those products will necessarily follow historical patterns. PRODUCT LIABILITY Over the last ten years the aggregate amount paid in settlement of liability claims has not been material, and the Company is unaware of any suits that would exceed its insurance limits. The Company believes that its product liability coverage is adequate to cover anticipated lawsuits. ENVIRONMENTAL The Company is subject to various Federal, state and local environmental laws and regulations. The Company believes that the costs for complying with such laws and regulations will not be material to the business of the Company. The Company does not have any material remediation liabilities outstanding. GOVERNMENT REGULATION The manufacturing, processing, formulation, packaging, labeling, testing, advertising and sale of the Company's products are subject to regulation by one or more United States agencies, including the Food and Drug Administration ("FDA"), the Federal Trade Commission ("FTC"), the Drug Enforcement Administration ("DEA") and the Consumer Product Safety Commission ("CPSC"), as well as by foreign agencies. Various agencies of the states and localities in which the Company's products are sold also regulate these activities. In addition, the Company manufactures and markets certain of its products in accordance with the guidelines promulgated by voluntary standard organizations, such as the United States Pharmacopoeia Convention, Inc. ("USP"). The Company believes that its policies, operations and products comply in all material respects with existing regulations. Food and Drug Administration The FDA exercises authority over three aspects of the Company's business: (i) the labeling and marketing of monograph OTC, abbreviated New Drug Application ("ANDA"), and monograph OTC pharmaceutical drug products, (ii) the labeling and marketing of dietary supplements, and (iii) the operation of its manufacturing, testing and packaging facilities. OTC Pharmaceuticals The majority of the Company's OTC pharmaceuticals are regulated under the OTC Monograph System with respect to their recognized safety and effectiveness profiles and are subject to certain FDA regulations. FDA regulations cover well-known ingredients and specify, among other things, permitted -7- 9 claims, required warnings and precautions, allowable combinations of ingredients and dosage levels. Products governed by these regulations require no prior approval of the FDA before they are marketed, only compliance with the applicable regulation. Regulations may change from time to time, requiring formulation, packaging or labeling changes for an affected product. While these changes may cause the Company to incur costs to comply with them, changes generally have a delayed effective date, and disruption of distribution or material obsolescence of inventory due to any changes is not likely. The Company also markets products that have switched from prescription to over-the-counter status. These Rx-to-OTC switch products require approval by the FDA through its ANDA process before they can be distributed. Based on current FDA regulations, all chemistry, manufacturing and control issues, bioequivalency and labeling related to these products are controlled by the information included in the ANDAs. The ANDA process generally reduces the time and expense related to FDA approval since a comparable product was approved when it was originally introduced as a prescription product. For approval, the Company must demonstrate that the product is equivalent to a product that has previously been approved by the FDA and that the manufacturing process and other requirements meet FDA standards. This approval process may require that bioequivalence and/or efficacy studies be performed using a small number of volunteers in a controlled clinical environment. Approval time is generally one to four years from the date of submission of the application. Changes to the approved ANDAs and, therefore, changes to these products, are governed by specific regulations and guidelines that determine when changes, if approved by the FDA, can be implemented. The Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Amendments to the Federal Food, Drug and Cosmetic Act) can give a three-year period of marketing exclusivity to a company that obtains FDA approval of an Rx-to-OTC switch product. Unless the Company establishes relationships with the companies having exclusive marketing rights, the Company's ability to market Rx-to-OTC switch products and offer its customers products comparable to the national brand products would be delayed until the expiration of the exclusivity granted to the company initiating the switch. There can be no assurance that, in the event that the Company applies for FDA approvals, the Company will obtain the approvals to market Rx-to-OTC switch products or, alternatively, that the Company would be able to obtain these products from other manufacturers. Under the FDA Modernization Act of 1997, the FDA changed its policy regarding market exclusivity for Rx-to-OTC switch products for use in the pediatric population. In general, this legislation and the FDA policy change may extend the patent and/or exclusivity terms granted to certain products up to 1 year. This policy change will, in certain instances, defer sales by the Company of these products. If the Company is first to file its ANDA, the FDA may grant a 180-day exclusivity for that product. During the ANDA approval process, patent certification is required and may result in legal action. The legal action would not result in material damages. The Company would, however, incur the cost of defending the legal action, and that action could delay those products from the marketplace for up to 30 months. If the Company is not first to file its ANDA, the FDA may grant a 180-day exclusivity to another company, therefore effectively delaying launch of the Company's product. The Company is also subject to the requirements of the Comprehensive Methamphetamine Control Act of 1996, a law designed to allow the DEA to monitor transactions involving chemicals that may be used illegally in the production of methamphetamine. The Comprehensive Methamphetamine Control Act of 1996 establishes certain registration and recordkeeping requirements for manufacturers of OTC cold, allergy, asthma and diet medicines that contain ephedrine, pseudoephedrine or phenylpropanolamine. While certain of the Company's OTC pharmaceutical products contain pseudoephedrine and phenylpropanolamine, none of the Company's products contain ephedrine, a chemical compound that is distinct from pseudoephedrine. Pseudoephedrine and phenylpropanolamine are common ingredients in decongestant products manufactured -8- 10 by the Company and other pharmaceutical companies. The Company believes that its products are in compliance with all applicable DEA requirements. Dietary Supplements The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on October 25, 1994 and amends the Federal Food, Drug and Cosmetic Act to (i) define dietary supplements, (ii) expand the number of new dietary supplement ingredients, (iii) permit "structure/function" statements for all vitamin, mineral and natural products, including herbal products and other nutritional supplements, and (iv) permit the use of certain published literature in the sale of vitamin products. Dietary supplements are regulated as food products under DSHEA, and the FDA is prohibited from regulating the dietary ingredients in supplements as food additives, or the supplements as drugs, unless the FDA interprets these claims as drug claims. DSHEA provides for specific nutritional labeling requirements for dietary supplements. The latest FDA labeling regulations were effective March 23, 1999. DSHEA permits substantiated, truthful and non-misleading statements of nutritional support to be made in labeling. In addition, DSHEA authorizes the FDA to promulgate current good manufacturing practices ("cGMP") specific to the manufacture of dietary supplements, to be modeled after cGMP for food. The FDA has proposed amendments to the cGMP for dietary supplements. Although the Company cannot predict the final cGMP, it believes the changes will have minimal impact on its business. On January 6, 2000, the FDA published a Final Rule regarding statements made in dietary supplement labeling. These statements cannot state expressly or implicitly that a dietary supplement has any effect on a disease. Since the passage of DSHEA, the FDA has wavered on its definition of disease. This Final Rule clarifies the FDA's definition of a disease. In addition, the Final Rule opens up statements from several OTC drug monographs for use on dietary supplements (e.g., relief of occasional sleeplessness). This gives the industry a new level of freedom in marketing dietary supplements and providing information to consumers about the use of dietary supplements. Effective January 31, 2000, the Center for Food Safety and Applied Nutrition ("CFSAN") combined the former Office of Food Labeling and the former Office of Special Nutritionals into a single entity now known as the Office of Nutritional Products, Labeling and Dietary Supplements. The merger of the two offices will maximize the resources that, in many cases, were previously working on overlapping issues. The Company cannot determine what effect the FDA's future regulations, when and if promulgated, will have on its business. Future regulations could, however, among other things, require expanded documentation of the properties of certain products, or scientific substantiation regarding ingredients, product claims or safety. In addition, the Company cannot predict whether new legislation regulating the Company's activities will be enacted, or what effect any legislation would have on the Company's business. Manufacturing and Packaging All facilities where dietary supplements and pharmaceuticals are manufactured, tested, packed, warehoused, or sold must comply with the FDA manufacturing standards applicable to the type of product. All of the Company's products are manufactured, tested, packaged and distributed according to the cGMP. The FDA performs periodic audits to ensure that the Company's facilities remain in compliance with the cGMP regulations. The failure of a facility to be in compliance may lead to a breach of representations made to private label customers or to regulatory action against the products made in that facility, including seizure, injunction or recall. The Company has received a Warning Letter from the FDA relating to manufacturing issues identified during FDA inspections of the Company's Allegan, Michigan facilities. The Company has met with the FDA to discuss these issues and is implementing remedial actions at the facilities. Until the issues -9- 11 identified in the Warning Letter are resolved to the satisfaction of the FDA, the Company's pending ANDA approvals may be subject to delay. The Company cannot predict when its remedial actions will resolve the FDA's concerns or whether the FDA will take any further action. However, the Company believes that it will be able to correct the cited deficiencies within a time period that will avoid any material impact from a delay in obtaining the approvals on its pending ANDAs. Consumer Product Safety Commission The CPSC has authority, under the Poison Prevention Packaging Act, to designate those products, including vitamin products and OTC pharmaceuticals that require child resistant closures to help reduce the incidence of poisonings. The CPSC has adopted regulations requiring numerous OTC pharmaceuticals and iron-containing dietary supplements to have these closures, and has adopted rules on the testing of these closures by both children and adults. The Company, working with its packaging suppliers, believes that it is in compliance with all CPSC requirements. Federal Trade Commission The FTC exercises primary jurisdiction over the advertising and other promotional practices of dietary supplements and OTC pharmaceuticals marketers, and works with the FDA regarding the advertising and promotional practices of marketers of dietary supplements. The FTC has historically applied a different standard to health-related claims than the FDA. The FTC enforcement policy uses FDA regulations as a baseline and permits nutrient content descriptions that are reasonable synonyms of FDA-permitted terms as well as qualified health claims not approved by FDA where adequate substantiation exists. State Regulation All states regulate foods and drugs under local laws that parallel federal statutes. Because the Nutritional Labeling Education Act ("NLEA") gives states the authority to enforce many labeling prohibitions of the Federal Food, Drug, and Cosmetic Act after notification to the FDA, the Company and other dietary supplement manufacturers may be subject to increasing state scrutiny for NLEA compliance, as well as increasing FDA review. The Company is also subject to California Proposition 65 and other state consumer health and safety regulations that could have a potential impact on the Company's business if any of the Company's products were ever found not in compliance. The Company is not engaged in any governmental enforcement or other regulatory actions and is not aware of any products that are not in compliance with California Proposition 65 and other similar state regulations. United States Pharmacopoeia Convention The USP is a non-governmental, voluntary standard-setting organization. Its drug standards are incorporated by reference into the Federal Food, Drug, and Cosmetic Act as the standards that must be met for the listed drugs, unless compliance with those standards is specifically disclaimed. USP standards exist for most OTC pharmaceuticals. The FDA requires USP compliance as part of cGMP. The USP has adopted standards for vitamin and mineral dietary supplements that are codified in the USP Monographs and the USP Manufacturing Practices. These standards cover composition (nutrient ingredient potency and combinations), disintegration, dissolution, manufacturing practices and testing requirements. While USP standards for vitamin and mineral dietary supplements are voluntary, and not incorporated into federal law, customers of the Company may demand that products supplied to them meet these standards. Label claims of compliance with the USP may expose a company to FDA scrutiny for those claims. In addition, the FDA may in the future require compliance, or such a requirement may be included in new dietary supplement legislation. All of the Company's vitamin products (excluding certain nutritional supplements products for which no USP standards have been adopted) are formulated to comply with existing USP standards and are so labeled. -10- 12 Foreign Regulation The Company manufacturers, packages and distributes generic Rx pharmaceuticals, OTC pharmaceuticals and nutritional products in Mexico. The manufacturing, processing, formulation, packaging, labeling, advertising and sale of these products are subject to regulation by one or more Mexican agencies, including the Health Ministry, the Commercial and Industrial Secretariat, the Federal Work's Secretariat, the Environmental Natural Resources and Fishing Secretariat, the Federal Environmental Protection Ministry and the Treasury and Public Credit Secretariat and its Customs Government department. The Company exports OTC pharmaceutical and nutritional products to foreign countries including Mexico and Canada. Government regulations for exporting these products are covered under the U.S. FDA Export Law as well as each individual country's requirement for importation of such products. Each country requires approval of such products through a registration process by that country's Minister of Health. These registrations govern the process, formula, packaging, testing, labeling, advertising and sale of the Company's products and regulate what is required and what may be represented to the public on labeling and promotional material. Foreign Ministers of Health approval for the sale of the Company's products may be subject to delays despite the Company's best efforts. EMPLOYEES As of July 1, 2000, the Company employed 3,542 permanent and temporary employees, of whom 858 were engaged in executive or administrative positions; and 2,684 were engaged in production, warehousing and distribution. At July 1, 2000, approximately 181 persons were employed on a temporary or seasonal basis. Management considers its relations with its employees to be good. The Company has not been a party to a collective bargaining agreement in the United States. There are 664 employees in Mexico, of which 246 are covered by a collective bargaining agreement. Item 2. Properties. As of July 1, 2000, the Company owned or leased the following primary facilities:
Approximate Location Type of Facility Square Feet Leased or Owned -------- ---------------- ----------- --------------- Allegan, Michigan Manufacturing (4 locations) 986,400 Owned Greenville, South Carolina Manufacturing 169,600 Owned Holland, Michigan Manufacturing 120,000 Owned Ramos Arizpe, Mexico Manufacturing (2 locations) 111,800 Owned Montague, Michigan Manufacturing 84,000 Owned Allegan, Michigan Logistics 517,000 Owned LaVergne, Tennessee Logistics 517,000 Owned (1) Cranbury, New Jersey Logistics 60,000 Leased Fontana, California Logistics 207,000 Leased Greenville, South Carolina Logistics 145,000 Leased Mexico City, Mexico Logistics 27,000 Leased Puebla, Mexico Logistics 2,600 Leased Guadalajara, Mexico Logistics 9,700 Leased Allegan, Michigan Offices and Company Store 246,000 Leased Monterrey, Mexico Offices 9,700 Leased Ramos Arizpe, Mexico Offices (2 locations) 15,600 Owned
(1) This facility primarily serves the personal care business and is intended to be sold in fiscal year 2001. The buyer of the personal care business is currently operating out of this logistics facility under a lease that expires in August 2001. -11- 13 Item 3. Legal Proceedings. The Company is not a party to any litigation, other than routine litigation incidental to the business of the Company, except for the litigation described below. The Company believes that none of the routine litigation, individually or in the aggregate, will be material to the business of the Company. The Company, certain officers and directors (the "officer and director defendants") and two commercial bank lenders to the Company were named in an action commenced in the U.S. District Court for the Western District of Michigan on April 13, 1994 by Grow Group, Inc. ("Grow"), the former owner of the Company, seeking unspecified damages based upon various legal claims. In March 2000, the Company entered into a settlement agreement with the plaintiff dismissing the lawsuit and withdrawing all pending appeals thus ending any further action against the Company. No payment or financial compensation was required of either party. The effect of the settlement was to leave in place the Court's original order dismissing the plaintiff's case. On August 4, 1999, the Company filed a civil antitrust lawsuit in the U.S. District Court for the Western District of Michigan against a group of vitamin raw material suppliers alleging the defendants conspired to fix the prices of vitamin raw materials sold to the Company. The relief sought includes money damages and a permanent injunction enjoining defendants from future violation of antitrust laws. The case is proceeding to trial and discovery has commenced. The Company entered into settlement agreements with certain defendants resulting in an aggregate payment to the Company of $4,154, net of attorney fees and expenses that were withheld prior to the disbursement of the funds to the Company. The Company can make no prediction as to the outcome of the litigation with the remaining defendants. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to the vote of security holders during the fourth quarter of fiscal year 2000. Additional Item. Executive Officers of the Registrant. The executive officers of the Company and their ages and positions as of August 28, 2000 were:
NAME AGE POSITION ---- --- -------- F. Folsom Bell.................. 58 Executive Vice President, Business Development (Effective September 1, 2000) David T. Gibbons................ 56 President and Chief Executive Officer John T. Hendrickson............. 37 Executive Vice President, Operations Mark P. Olesnavage.............. 47 Executive Vice President, Sales, Marketing and Scientific Affairs Douglas R. Schrank.............. 52 Executive Vice President and Chief Financial Officer
Mr. Bell was named Executive Vice President, Business Development, effective September 1, 2000. He has served in a consulting capacity to the Company since January 2000. Mr. Bell has been a member of the Board of Directors since 1981. He was the Chairman, President and Chief Executive Officer of Thermo-Serv, Inc., from July 1989 to September 1999. -12- 14 Mr. Gibbons was elected President, Chief Executive Officer and a director of the Company in April 2000. Previously, Mr. Gibbons served as President of Rubbermaid Europe from 1997 to 1999 and President of Rubbermaid Home Products from 1995 to 1997. Prior to joining Rubbermaid, he served in various management, sales and marketing capacities with 3M Company from 1968 to 1995. Mr. Hendrickson was named Executive Vice President, Operations, in October 1999. He served as Vice President of Operations from October 1997 to October 1999 and Vice President of Customer Service from October 1996 to October 1997. Previously, he had been Director of Engineering of the Company since 1993. Prior to 1989, Mr. Hendrickson was in research management for five years at Procter & Gamble Company. Mr. Olesnavage was named Executive Vice President, Sales, Marketing and Scientific Affairs in August 2000. He served as President of Customer Business Development from June 1995 to August 2000. He served as President of the OTC pharmaceutical operations from February 1994 to June 1995. He served as Vice President of Pharmaceutical Business Development from July 1992 to January 1993 and as Vice President-Marketing from June 1987 to July 1992. Previously he had been Director of Marketing of the Company since 1981. He is a member of the Board of Directors of the Generic Pharmaceutical Industry Association and also is a member of the Board of Directors of the Consumer Healthcare Products Association. Mr. Schrank was named Executive Vice President and Chief Financial Officer in January 2000. Mr. Schrank was President of M. A. Hanna Company's Hanna Color subsidiary from 1998 to 1999, Senior Vice President of the Plastics Division from 1995 to 1998 and Vice President and Chief Financial Officer from 1993 to 1995. From 1977 to 1993, Mr. Schrank served in senior-level financial, administrative and sales positions at Sealy Corporation, Eyelab, Inc., and Pillsbury Company. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock was first quoted and began trading on the Nasdaq National Market System on December 17, 1991 under the symbol "PRGO". Set forth below are the high and low prices for the Company's common stock as reported on the Nasdaq National Market System for the last eight quarters:
Fiscal Year Ended July 1, 2000: High Low - ------------------------------ ---- --- First Quarter $9 $7-3/8 Second Quarter $8-13/16 $7-1/16 Third Quarter $9-7/16 $6-25/32 Fourth Quarter $7-9/16 $5 Fiscal Year Ended July 3, 1999: High Low - ------------------------------ ---- --- First Quarter $10-1/4 $7-27/32 Second Quarter $10-1/8 $7-3/16 Third Quarter $9-7/8 $7 Fourth Quarter $9-11/16 $7-1/8
The number of record holders of the Company's common stock as of August 28, 2000 was 1,685. -13- 15 Historically, the Company has not paid dividends on its common stock and has no present intention of paying dividends. The declaration and payment of dividends and the amount paid, if any, is subject to the discretion of the Company's Board of Directors and will depend on the earnings, financial condition and capital and surplus requirements of the Company and other factors the Board of Directors may consider relevant. While the Company's credit agreement does not prohibit the Company from paying dividends, the future payment of dividends could be restricted by financial maintenance covenants contained in the credit agreement. Item 6. Selected Financial Data The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes to these statements included in Item 8 of this report. The consolidated statement of income data set forth below with respect to the fiscal years ended July 1, 2000, July 3, 1999 and June 30, 1998 and the consolidated balance sheet data at July 1, 2000 and July 3, 1999 are derived from, and are qualified by reference to, the audited consolidated financial statements included in Item 8 of this report and should be read in conjunction with those financial statements and notes thereto. The consolidated statement of income data for the Company set forth below with respect to the fiscal years ended June 30, 1997 and 1996 and the consolidated balance sheet data for the Company at June 30, 1998, 1997 and 1996 are derived from audited consolidated financial statements of the Company not included in this report. The statement of income data reflects one month of personal care operations for fiscal year 2000 and an entire year of operations for the remaining fiscal years. -14- 16
FISCAL YEAR ------------------------------------------------------------ 2000(1) 1999(1) 1998(2) 1997 1996 --------- --------- --------- --------- --------- (In thousands except per share amounts) Statement of Income Data: Net sales $ 738,555 $ 877,587 $ 902,637 $ 844,591 $ 778,121 Cost of sales 583,314 691,893 670,775 615,720 574,806 --------- --------- --------- --------- --------- Gross profit 155,241 185,694 231,862 228,871 203,315 Operating expenses Distribution 16,878 32,964 31,995 28,073 24,929 Research and development 16,314 14,867 15,942 13,651 10,445 Selling and administrative 89,676 117,623 113,584 103,104 88,629 Restructuring and redesign 1,048 6,160 122,529 5,503 4,491 Unusual litigation (4,154) (3,952) 9,585 6,367 6,600 --------- --------- --------- --------- --------- 119,762 167,662 293,635 156,698 135,094 --------- --------- --------- --------- --------- Operating income (loss) 35,479 18,032 (61,773) 72,173 68,221 Interest and other, net 4,994 14,018 4,219 1,306 5,679 --------- --------- --------- --------- --------- Income (loss) before income taxes 30,485 4,014 (65,992) 70,867 62,542 Income tax expense (benefit) 11,187 2,468 (14,356) 25,875 22,700 --------- --------- --------- --------- --------- Net income (loss) $ 19,298 $ 1,546 $ (51,636) $ 44,992 $ 39,842 ========= ========= ========= ========= ========= Basic earnings (loss) per share $ 0.26 $ 0.02 $ (0.69) $ 0.59 $ 0.52 Diluted earnings (loss) per share 0.26 0.02 (0.69) 0.58 0.52 Weighted average shares outstanding for the period - used for "basic" EPS calculation 73,370 73,707 75,302 76,522 76,224 Weighted average shares outstanding for the period - used for "diluted" EPS calculation 73,593 73,984 75,302 77,274 77,200
JUNE 30, JULY 1, JULY 3, ----------------------------------- 2000(1) 1999(1) 1998(2) 1997 1996 -------- -------- -------- -------- -------- (In thousands) Balance Sheet Data (end of period): Working capital $154,725 $249,417 $230,934 $169,631 $166,929 Property, plant and equipment, net 193,580 199,662 190,644 235,860 238,992 Goodwill, net 18,199 19,334 20,741 40,834 42,961 Total assets 486,064 615,858 595,861 568,377 549,395 Long-term debt(3) -- 135,326 81,619 1,840 49,140 Shareholders' equity 351,760 332,419 345,078 425,875 381,160
- ---------------- (1) Includes the impact of a number of non-recurring items, which are more fully discussed in Note J to the consolidated financial statements included in Item 8. (2) Includes the financial impact of the June 1998 restructuring discussed in more detail in Item 7. The pre-tax charge was $121,966, which amounted to $86,894 or $1.16 per share on an after-tax basis. Excluding the effects of the restructuring charge, net income would have been $35,258 or $.47 per share. (3) Includes current installments. -15- 17 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. GENERAL The major categories in which the Company markets its products are analgesics, cough/cold, antacids and vitamins. According to Information Resources, Inc., a leader in providing syndicated data, the annual retail market for these categories is approximately $11 billion. The store brand industry commands approximately 24% of the retail market for these products. The Company estimates its share of the store brand industry to be approximately 50%. The Company's customers are major national and regional retail drug, supermarket and mass merchandise chains such as Albertson's, CVS, Kmart, Kroger, Target, Walgreens, and Wal-Mart and major wholesalers such as Fleming, McKesson and Super Valu. In recent years, the retail industry has experienced several major consolidations. These consolidations have changed the competitive landscape in which the Company operates and increased pressure on customer pricing and gross profit. RESULTS OF OPERATIONS Dollar amounts in thousands The following table sets forth, for fiscal years 2000, 1999 and 1998, certain items from the Company's consolidated statements of income expressed as a percentage of net sales:
---------------------------------------------------------------------------------------------------- Fiscal Year --------------------------------------- 2000 1999 1998 ---------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 79.0 78.8 74.3 ------ ------ ------ Gross profit 21.0 21.2 25.7 ------ ------ ------ Operating expenses: Distribution 2.3 3.8 3.5 Research and development 2.2 1.7 1.8 Selling and administrative 12.2 13.4 12.6 Restructuring and redesign 0.1 0.7 13.6 Unusual litigation (0.6) (0.5) 1.0 ------- ------- ------- 16.2 19.1 32.5 ------- ------- ------ Operating income (loss) 4.8 2.1 (6.8) Interest and other, net 0.7 1.6 0.5 ------- ------- ------- Income (loss) before income taxes 4.1 0.5 (7.3) Income tax expense (benefit) 1.5 0.3 (1.6) ------- ------- ------- Net income (loss) 2.6% 0.2% (5.7)% ======= ======= ======= ----------------------------------------------------------------------------------------------------
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999 RESTRUCTURING For fiscal years 2000, 1999 and 1998, the Company incurred restructuring and redesign charges primarily related to an intended divestiture, facilities closings and streamlining operations. Total restructuring charges were $1,048, $6,160 and $122,529 for fiscal years 2000, 1999 and 1998, respectively. The total restructuring reserve balance was $0, and $4,625 at July 1, 2000 and July 3, 1999, respectively. Assets held for sale related to the 1998 restructuring were $18,382 and $53,045 at July 1, 2000 and July 3, 1999, respectively. -16- 18 UPDATE ON 1999 RESTRUCTURING In the fourth quarter of fiscal year 1999 the Company announced a workforce reduction plan that resulted from the Company's decision to divest its personal care business (see below) and efficiencies created by implementation of a new enterprise software system in the first quarter of fiscal year 1999. The plan included a combination of early retirements, normal attrition, redeployments and job eliminations, primarily for professional, managerial, administrative and support staff personnel located in the Company's corporate offices. A pre-tax charge and reserve of $2,615, which related to severance, postretirement and outplacement costs, were recorded in accordance with Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)". In the fourth quarter of fiscal year 1999, 23 people elected early retirement and 34 people were terminated. For fiscal year 2000, $2,455 was paid primarily for severance and outplacement costs related to the 1999 restructuring. These costs were charged against the reserve established in fiscal year 1999. The 1999 restructuring reserve balance was $0 and $2,455 at July 1, 2000 and July 3, 1999, respectively. UPDATE ON 1998 RESTRUCTURING In June 1998 the Company announced a major restructuring plan which involved the closing of certain personal care manufacturing facilities and the intention to divest the personal care business. A pre-tax charge of $121,966 was recorded in the fourth quarter of fiscal year 1998. This charge included $109,707 for impairment of assets and a reserve of $12,259 for anticipated incremental cash expenditures recorded in accordance with EITF 94-3. In the first half of fiscal year 1999 the Company closed personal care manufacturing facilities in California and Missouri and in the second half of the year these facilities were sold. Proceeds from the sales were $9,000. No gains or losses were recorded in the fiscal year 1999 consolidated income statement related to these sales as the facilities had previously been adjusted to their estimated fair market values. In the fourth quarter of fiscal year 1999 the Company entered into an agreement in principle to sell the personal care business. In conjunction with that agreement, the Company recorded an additional net restructuring charge of $3,248. Also during fiscal year 1999, the Company expensed, as incurred, $297 of other restructuring costs in accordance with EITF 94-3. The Company completed the sale of the personal care business in fiscal year 2000. Proceeds from the sale were $32,200, including funds held in escrow. No gain or loss was recorded in fiscal year 2000 related to this sale. Fiscal year 2000 earnings reflect one month of the personal care business. Net sales for the personal care business were $17,778, $192,409 and $212,261 for fiscal years 2000, 1999 and 1998, respectively. The Company does not maintain operating income information by its main product lines, however, based on the incremental approach, the Company estimates that pre-tax operating income was approximately $1,000 for each of fiscal years 2000 and 1999 and pre-tax operating loss was $8,000 for fiscal year 1998 for the personal care business. Included in pre-tax operating income was the effect of suspending depreciation of approximately $700 and $7,200 for fiscal years 2000 and 1999, respectively. For fiscal year 2000, $2,170 was paid primarily related to professional fees and transitional costs associated with the sale of the personal care business. These costs were charged against a reserve established in fiscal year 1998. The 1998 restructuring balance was $0 and $2,170 at July 1, 2000 and July 3, 1999, respectively. Assets held for sale decreased to $18,382 at July 1, 2000 primarily due to the sale of the personal -17- 19 care business during fiscal year 2000. Assets held for sale at July 1, 2000 is comprised of the LaVergne, Tennessee logistics facility. In the fourth quarter of fiscal year 2000, the Company recorded a net restructuring charge of $1,048 to reflect its current net realizable value. The Company intends to sell this facility in fiscal year 2001. The effect of suspending depreciation on this facility was $850 and $830 for fiscal year 2000 and 1999, respectively. RESULTS OF OPERATIONS FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999 The Company's net sales decreased $139,032 or 15.8% to $738,555 for fiscal year 2000, from $877,587 for fiscal year 1999. The decrease was primarily due to the sale of the personal care business. Excluding the effect of personal care, net sales increased $33,613 or 4.9% to $720,777 for fiscal year 2000 compared to $687,164 for fiscal year 1999. The increase was primarily due to an increase in sales to existing customers of new products such as the nicotine transdermal system patch for smoking cessation, an OTC pharmaceutical product, an increase in sales of existing vitamin products to existing customers as well as an increase in international sales. During the first quarter of fiscal year 1999, the Company wrote off inventory of $1,663, accounts and notes receivable of $10,874 and the balance of its Russian investment of $1,640 for a total of $14,177 due to the collapse of the Russian economy. The inventory amount is included in cost of sales; the accounts and notes receivable amount is included in selling and administrative expense; and the investment amount is included in other income and expense. The discussion below related to gross profit, operating expenses and interest and other, net excludes the effect of these charges. Gross profit decreased $32,116 or 17.1% for fiscal year 2000 compared to fiscal year 1999. The gross profit percentage was 21.0% for fiscal year 2000 compared to 21.3% for fiscal year 1999. Excluding the effect of the personal care business, gross profit decreased $7,605 and the gross profit percent to net sales was 21.2% and 23.3% for fiscal years 2000 and 1999, respectively. Fiscal year 2000 gross profit was negatively impacted by higher than normal inventory obsolescence expense of $15,000, primarily related to inventory built both before and after the Company's conversion to its new software system in the first quarter of fiscal year 1999. The Company built inventory prior to the systems conversion in order to try to meet customer service requirements in the event of systems failure. The Company also built excesses of certain products after the systems conversion due to forecasting problems related to the new software system. In fiscal year 1999, the Company increased its inventory obsolescence reserves based on estimates of future sales to customers of products in inventory as of July 3, 1999. In fiscal year 2000, customer sales fell short of these estimates and the inventory expired, requiring the above noted charge for obsolescence expense. Gross margin was also negatively impacted by lower than normal production levels as the Company reduced inventory resulting in fixed production cost charges of $7,000 and increased costs to comply with FDA regulations. Fiscal year 1999 gross profit was negatively impacted by inefficiencies and high obsolescence resulting from the Company's conversion to the new software system and outsourcing costs incurred to meet customer service requirements. Gross profit in fiscal year 2001 is expected to be negatively impacted by retailer consolidations and increased regulatory compliance costs. The unusual obsolescence expenses and fixed production cost charges in fiscal year 2000 are not expected to recur. Operating expenses decreased $37,026 for fiscal year 2000 compared to fiscal year 1999. Operating expenses, as a percentage of net sales, were 16.2% for fiscal year 2000 compared to 17.9% for fiscal year 1999. Operating expenses consist of distribution, research and development, selling and administrative, restructuring and unusual litigation expenses. Distribution expenses decreased $16,086 or 48.8% for fiscal year 2000 due primarily to the sale of the personal care business. Distribution expense was also favorably impacted by fewer expedited shipments and lower warehousing costs as the Company -18- 20 benefits from its shift from leased warehouses to its owned warehouse in Allegan, Michigan. Distribution expense, as a percentage of net sales, was 2.3% for fiscal year 2000 compared to 3.8% for fiscal year 1999. Research and development expense, as a percentage of net sales, was 2.2% for fiscal year 2000 compared to 1.7% for fiscal year 1999. Research and development expenses increased due to the timing of expenses related to the development of new products and to the development of new internal manufacturing processes that are intended to streamline operations and reduce costs. Selling and administrative expense decreased $17,073 or 16.0% for fiscal year 2000, primarily due to the sale of the personal care business, lower salaries and wages and lower promotional expenses, partially offset by an increase in bad debt expense. Selling and administrative expense was 12.2% of net sales for fiscal year 2000 compared to 12.2% of net sales for fiscal year 1999. Restructuring and redesign expense was $1,048 and $6,160 for fiscal years 2000 and 1999, respectively. The Company recorded a charge of $1,048 in fiscal year 2000 to reflect the current net realizable value of the LaVergne, Tennessee logistics facility, which is intended to be sold in fiscal year 2001. The fiscal year 1999 expense consisted of $2,615 for the 1999 restructuring and $3,545 of additional write-offs and expenses related to the 1998 restructuring plan. See Note K to the consolidated financial statements. Unusual litigation income was $4,154 and $3,952 for fiscal year 2000 and 1999, respectively. Fiscal year 2000 includes a settlement payment of $4,154 related to a civil antitrust lawsuit. Fiscal year 1999 reflects an insurance reimbursement of $8,000, partially offset by $4,048 of charges related to certain unusual litigation. See Note I to the consolidated financial statements. Interest and other, net decreased $7,384 for fiscal year 2000. Interest expense decreased $3,341 to $7,141 for fiscal year 2000 compared to $10,482 for fiscal year 1999 primarily due to lower borrowing levels. Other income was $2,147 for fiscal year 2000 compared to other expense of $1,896 for fiscal year 1999. In fiscal year 2000, the Company recorded a gain of $1,300 on the sale of an investment classified as available-for-sale. In fiscal year 1999, the Company recorded a permanent impairment write-down of an investment in the amount of $2,621. The effective tax rate was 36.7% for fiscal year 2000 compared to 61.5% for fiscal year 1999. The fiscal year 1999 effective tax rate was negatively impacted by an investment impairment write-down discussed above, which is considered nondeductible for tax purposes. FOURTH QUARTER - FISCAL YEAR 2000 The Company's net sales decreased $37,292 or 19.9% to $150,450 during the fourth quarter of fiscal year 2000, from $187,742 during the fourth quarter of fiscal year 1999. The decrease was primarily due to the sale of the personal care business. Excluding the effect of the personal care business, net sales increased by $9,511 or 6.7% during the fourth quarter of fiscal year 2000 to $150,450 from $140,939 during the fourth quarter of fiscal year 1999. The increase in sales in the fourth quarter of fiscal year 2000 was primarily due to an increase in sales of existing analgesic and antacid products to existing customers, partially offset by a decrease in sales of vitamins and nicotine transdermal system patch. In the fourth quarter of fiscal year 1999, the nicotine transdermal system patch was launched as a new product resulting in higher sales due to initial stocking of the product at the retailer. Gross profit decreased $18,426 during the fourth quarter of fiscal year 2000 compared to the same period of fiscal year 1999. The gross profit percent to net sales was 13.2% and 20.4% for the fourth quarter of fiscal year 2000 and 1999, respectively. Excluding the personal care business, gross profit decreased $14,831 during the fourth quarter of fiscal year 2000 compared to the same period of fiscal year 1999 and the gross profit percent to net sales was 13.2% and 24.6% for the fourth quarter of fiscal year 2000 and 1999, respectively. Gross profit for the fourth quarter of fiscal year 2000 was negatively impacted by higher than normal inventory write-offs of $3,000 related to goods produced during the quarter, $2,000 of unusual obsolescence primarily related to the Company's conversion to its new software system as noted previously, inventory valuation charges of $5,500 to adjust inventory to a first-in first-out basis (whereby most recent -19- 21 costs are reflected in inventory) and a charge of $1,848 related to recent reduction in sales projections for a long-term licensing agreement. Gross profit for the fourth quarter of fiscal year 1999 was favorably impacted by $7,500 of inventory valuation adjustments to adjust inventory to a first-in first-out basis and $1,300 related to higher than normal production levels, partially offset by the negative impact of write-downs and provisions of $6,600 for inventory obsolescence. Operating expenses decreased $5,139 during the fourth quarter of fiscal year 2000 compared to the same period in fiscal year 1999. Operating expenses as a percentage of net sales were 20.7% for the fourth quarter of fiscal year 2000 compared to 19.3% for the same period of fiscal year 1999. Distribution expenses decreased $2,334 or 35.4% from the fourth quarter of fiscal year 1999 primarily due to the sale of the personal care business. Research and development expenses were 4.1% of net sales for the fourth quarter of fiscal year 2000 compared to 2.1% for the same period of fiscal year 1999. Research and development expenses increased due primarily to the timing of expenses related to the development of new products and to the development of new internal manufacturing processes that are intended to streamline operations and reduce costs. Selling and administrative expenses decreased $3,356 or 12.3% from the fourth quarter of fiscal year 1999. The decrease was due primarily to the sale of the personal care business, lower promotional expenses and lower salaries and wages, partially offset by an increase in bad debt expense of $2,500. Restructuring and redesign expenses were $1,048 and $6,160 for fiscal years 2000 and 1999, respectively. The Company recorded a charge of $1,048 to reflect the current net realizable value of the LaVergne, Tennessee logistics facility, which is intended to be sold in fiscal year 2001. The fiscal year 1999 expense consisted of $2,615 for the 1999 restructuring and $3,545 of additional write-offs and expenses related to the 1998 restructuring plan. Unusual litigation income was $4,154 and $7,580 for the fourth quarter of fiscal year 2000 and 1999, respectively. Fiscal year 2000 includes a settlement payment of $4,154 related to a civil antitrust lawsuit. Fiscal year 1999 reflects an insurance reimbursement of $8,000 partially offset by $420 of charges related to certain unusual litigation. See Note I to the consolidated financial statements. Interest and other, net decreased $4,507 from the fourth quarter of fiscal year 1999. Interest expense decreased $2,776 to $650 during the fourth quarter of fiscal year 2000 compared to $3,426 for the same period in fiscal year 1999 due primarily to lower levels of borrowing. Other income was $177 for the fourth quarter of fiscal year 2000 compared to other expense of $1,554 for the same period in fiscal year 1999. Other expense for the fourth quarter of fiscal year 1999 included a permanent impairment write-down of an investment in the amount of $2,621. The effective tax rate was 31.8% benefit for the fourth quarter of fiscal year 2000 compared to 4.2% benefit for the same period in fiscal year 1999. The effective tax rate for the fourth quarter of fiscal year 1999 was negatively impacted by the nondeductible investment impairment write-down previously discussed. FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998 The Company's net sales decreased by $25,050 or 2.8% to $877,587 for fiscal year 1999 from $902,637 for fiscal year 1998. The decrease was primarily due to decreases in sales of nutritional and personal care products partially offset by a modest increase in OTC and international pharmaceutical products. Sales for the Company's major product lines did not meet expectations primarily due to production and shipping inefficiencies created by the Company's conversion to a new enterprise software system in the first quarter of fiscal year 1999. Customer service was improved significantly during the second half of the year and the Company believes that there was no permanent loss of significant business due to this systems conversion. Also during fiscal year 1999, to improve customer service, the Company suspended production for smaller customers and lower volume products resulting in certain lost sales. This, -20- 22 in addition to the shipping inefficiencies created by the Company's conversion to the new software system as described above, resulted in lost sales of approximately $50,000 in fiscal year 1999. During the first quarter of fiscal year 1999, the Company wrote off inventory of $1,663, accounts and notes receivable of $10,874 and the balance of its Russian investment of $1,640 for a total of $14,177 due to the collapse of the Russian economy. The inventory amount is included in Cost of sales; the accounts and notes receivable amount is included in Selling and administrative expense; and the investment amount is included in Other expense. In the fourth quarter of fiscal year 1998 the Company recorded a reserve against its Russian investment and charged Other expense in the amount of $1,250. The discussions below related to gross profit, operating expenses and other expense exclude the effects of these charges. In the fourth quarter of fiscal year 1998, the Company recorded a restructuring charge in the amount of $121,966 related to its intention to divest its personal care business as noted above in the Restructuring section. In the fourth quarter of fiscal year 1999 the Company recorded an additional net restructuring charge of $3,248 related to these assets. Also during the fiscal year 1999, the Company expensed $297 of other restructuring costs in accordance with EITF 94-3. The discussion below related to operating expenses excludes the effects of these charges. Gross profit decreased $44,505 or 19.2% for fiscal year 1999 compared to fiscal year 1998. The gross profit percent to net sales for fiscal year 1999 was 21.3% compared to 25.7% for fiscal year 1998. The decrease in gross profit percentage was primarily due to inefficiencies related to the Company's conversion to its new software system and outsourcing costs incurred to meet customer service requirements. Operating expenses were 17.5% of net sales for fiscal year 1999 compared to 19.0% for fiscal year 1998. Distribution expenses increased $969 or 3% to $32,964 for fiscal year 1999 primarily due to increased expedited shipment costs related to the Company's conversion to a new software system partially offset by lower warehousing costs as the Company began to see benefits from its shift from leased warehouses to its owned warehouses in Allegan, Michigan and LaVergne, Tennessee. Distribution expenses were 3.8% of net sales for fiscal year 1999 compared to 3.5% for fiscal year 1998. Research and development expenses decreased $1,075 or 7% to $14,867 for fiscal year 1999 primarily due to the timing of expenses for the development of new products. Research and development expenses were 1.7% of net sales for fiscal year 1999 compared to 1.8% of net sales for fiscal year 1998. Selling and administrative expenses decreased $6,835 or 6% for fiscal year 1999 primarily due to reductions in sales, marketing and promotional expenses partially offset by an increase in MIS expenses related to the Company's new integrated software package. Selling and administrative expense was 12.2% of net sales for fiscal year 1999 compared to 12.6% of net sales for fiscal year 1998. Restructuring and redesign expenses were $6,160 for fiscal year 1999 compared to $122,529 for fiscal year 1998. The fiscal year 1999 expense consisted of $2,615 for the 1999 restructuring as described above and $3,545 of additional write-offs and expenses related to the 1998 restructuring plan to divest the personal care business. The fiscal year 1998 expense consisted of $121,966 for the 1998 restructuring as described above and $563 for the Company's business process redesign effort. Unusual litigation expenses decreased by $13,537 in fiscal year 1999 due to an insurance reimbursement of $8,000 and decreased litigation costs of $5,537 related to the litigation as described in Note I to the consolidated financial statements. Interest and other, net expense increased $9,409 to $12,378 for fiscal year 1999. Interest expense increased $8,333 to $10,482 for fiscal year 1999 from $2,149 for fiscal year 1998, primarily due to higher borrowing levels. Other expense increased from $820 in fiscal year 1998 to $1,896 in fiscal year 1999, primarily due to a permanent impairment write-down of an investment in the amount of $2,621 in the fourth quarter of fiscal year 1999. Excluding this charge, the Company had other income of $725 in fiscal year 1999, primarily due to a gain on the sale of certain assets unrelated to the 1998 restructuring. -21- 23 The effective tax rate was 61.5% in fiscal year 1999 compared to 21.8% benefit in fiscal year 1998. The fiscal year 1999 effective rate was negatively impacted by the investment impairment write-down discussed above, which is considered to be nondeductible for tax purposes. The fiscal year 1998 effective rate was negatively impacted by the nondeductible write-off of goodwill in the 1998 restructuring charge. FOURTH QUARTER - FISCAL YEAR 1999 Excluding the 1998 restructuring charges of $3,248 in fiscal year 1999 and $121,966 in fiscal year 1998, the Company incurred a pretax loss of $206 in the fourth quarter of fiscal year 1999 compared to a pre-tax loss of $2,902 for the same period in fiscal year 1998. Net sales decreased $26,708 or 12% to $187,742 for the quarter primarily due to customer inventory building of OTC products in the 1999 third quarter, a decrease in vitamin sales compared to strong sales in the same quarter last year and a decrease in sales of personal care products. Gross profit decreased $11,666 or 23% for the quarter. The gross profit percent to net sales for the quarter was 20.4% compared to 23.3% for the same period last year. The decrease is primarily due to increases in write-offs and provisions for inventory obsolescence. These inventory adjustments were made in the fourth quarter after sales fell short of expectations, resulting in obsolete and excess inventory. Operating expenses excluding the 1998 restructuring charges incurred in fiscal years 1999 and 1998 decreased $17,287 or 34% from the same period last year. Operating expenses were 17.6% of net sales for the quarter compared to 23.5% for the same period last year. Distribution expenses decreased $1,760 or 21% to $6,588 for fiscal year 1999 primarily due to lower warehousing costs as the Company began to see benefits from its shift from leased warehouses to its owned warehouses in Allegan, Michigan and LaVergne, Tennessee and lower freight costs. Distribution expenses were 3.5% of net sales for the quarter compared to 3.9% for the same quarter last year. Research and development expenses decreased $2,714 or 41% to $3,885 for the quarter primarily due to the timing of expenses for the development of new products. Research and development expenses were 2.1% of net sales for the quarter compared to 3.1% of net sales for the same period last year. Selling and administrative expenses decreased $3,945 or 13% for the quarter primarily due to reductions in sales, marketing and promotional expenses. Selling and administrative expense was 14.5% of net sales for both quarters. Fourth quarter restructuring and redesign expenses were $6,160 in fiscal year 1999 compared to $121,966 for fiscal year 1998. The fiscal year 1999 expense consisted of $2,615 for the 1999 restructuring as described above and $3,545 of additional write-offs and expenses relating to the 1998 restructuring plan to divest of the personal care business. The fourth quarter fiscal year 1998 expense primarily related to the planned divestiture of the personal care business. Unusual litigation expenses decreased by $11,810 in fiscal year 1999 due to an insurance reimbursement of $8,000 and decreased litigation costs of $3,810 related to the litigation as described in Note I to the consolidated financial statements. Interest and other, net expense increased $2,513 to $4,980 for the quarter. Interest expense increased $2,630 to $3,426 for the quarter from $796 for the same period last year primarily due to higher borrowing levels. Other expense increased $1,047 to $939 for the quarter primarily due to a permanent impairment write-down of an investment in the amount of $2,621 in the quarter. Excluding this charge, other income was $1,574 for the quarter compared to $108 for the same period last year. The effective tax rate was 4.2% benefit for the quarter compared to 28.9% benefit for the same period last year. The effective tax rate for the fiscal year 1999 fourth quarter was negatively impacted by the nondeductible investment impairment write-down previously discussed. The lower rate for the fourth -22- 24 quarter of fiscal year 1998 is primarily due to the nondeductible write-off of goodwill included in the restructuring charge. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES During fiscal year 2000, working capital decreased $94,692 as the Company focused on reducing inventories and liquidating non-productive assets to reduce debt and strengthen the Company's net asset position. The decrease in assets held for sale of $34,663 and the related deferred income taxes of $18,960 was due to the divestiture of the personal care business. Inventory decreased $70,502 and accounts payable decreased $5,068 primarily due to the Company's inventory reduction initiatives. Accrued expenses decreased $10,682 due primarily to reductions in the restructuring reserves for actual payments made during the year. Income taxes decreased $12,624, primarily due to the sale of the personal care business. Cash flow from operating activities was $117,813. Net income was $19,298 and depreciation and amortization was $22,245. As noted above, inventories decreased $70,502, deferred taxes related to the personal care divestiture decreased $18,960, other deferred taxes decreased $8,181 and income taxes decreased $12,624 during the year. Cash flows from operations are expected to fund the Company's working capital requirements and capital expenditures in fiscal year 2001. Additionally, borrowings from the Company's line of credit are available, if required. The Company has historically evaluated acquisition opportunities and anticipates that such opportunities will continue to be identified and evaluated in fiscal year 2001. Capital expenditures for facilities and equipment were $14,364 for fiscal year 2000. These expenditures were primarily for normal equipment replacement and productivity enhancements to equipment. Capital expenditures are anticipated to be $25,000 to $30,000 in fiscal year 2001. Long-term debt decreased $135,326 during fiscal year 2000 as the Company paid off its unsecured revolving credit facility. The Company had no long-term debt at July 1, 2000 and had $175,000 available on its unsecured credit facility. See Note C to the consolidated financial statements for a description of the credit facility. Item 7A. Quantitative And Qualitative Disclosures About Market Risk. The Company has evaluated possible disclosures required under this item and has determined that no significant market, interest rate or foreign currency risk exists that would require disclosure. Additional Item. Cautionary Note Regarding Forward-Looking Statements. The Company or its representatives from time to time may make or may have made certain forward-looking statements, orally or in writing, including without limitation any such statements made or to be made in the Management's Discussion and Analysis contained in its various SEC filings. The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. Accordingly, such statements are qualified in their entirety by reference to and are accompanied by the following discussion of certain important factors that could cause actual results to differ materially from those anticipated in such forward-looking statements. The Company cautions the reader that this list of factors may not be exhaustive. The Company operates in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such risk factors, nor can it assess the impact, if any, of such risk factors on the -23- 25 Company's business or the extent to which any factors, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Fluctuation in Quarterly Results The Company's quarterly operating results depend on a variety of factors including the severity and timing of the cough/cold/flu season, the timing of new product introductions by the Company and its competitors, changes in the levels of inventories maintained by the Company's customers and the timing of retailer promotional programs. Accordingly, the Company may be subject to significant and unanticipated quarter-to-quarter fluctuations. Regulatory Environment Several United States and foreign agencies regulate the manufacturing, processing, formulation, packaging, labeling, advertising and sale of the Company's products. Various state and local agencies also regulate these activities. In addition, the Company manufactures and markets certain of its products in accordance with the guidelines established by voluntary standard organizations. Should the Company fail to adequately conform to these regulations and guidelines, there may be a significant impact on the operating results of the Company. In particular, packaging or labeling changes mandated by the FDA can have a material impact on the results of operations of the Company. Required changes could be related to safety or effectiveness issues. With specific regard to safety, there have been instances within the Company's product categories in which evidence of product tampering has occurred resulting in a costly product recall. The Company believes that it has excellent relationships with the FDA, which it intends to maintain. If these relationships should deteriorate, however, the Company's ability to bring new and current products to market could be impeded. See "Government Regulation." Potential Volatility of Stock Price The market price of the Company's Common Stock has been, and could be, subject to wide fluctuations in response to, among other things, quarterly fluctuations in operating results, adverse circumstances affecting the introduction or market acceptance of new products, failure to meet published estimates of or changes in earnings estimates by securities analysts, announcements of new products or enhancements by competitors, sales of Common Stock by existing holders, loss of key personnel, market conditions in the industry, shortages of key components and general economic conditions. Store Brand Product Growth The future growth of domestic store brand products will be influenced by general economic conditions, which can influence consumers to switch to store brand products, consumer perception and acceptance of the quality of the products available, the development of new products, the market exclusivity periods awarded on prescription to over-the-counter switch products and the Company's ability to grow the store brand market share. The Company does not advertise like the national brand companies and thus is dependent on retailer promotional spending to drive sales volume and increase market share. Promotional spending is a significant element of selling and administrative expenses and is directly influenced by retailer promotional decisions and is thus very difficult to estimate in future periods. Growth opportunities for the products in which the Company currently has a significant store brand market share (cough and cold remedies and analgesics) will be driven by the ability to offer new products to existing domestic customers and the Company's ability to service new customers internationally. Should store brand growth be limited by any of these factors, there could be a significant impact on the operating results of the Company. Competitive Issues The market for store brand OTC pharmaceutical and nutritional products is highly competitive. Store brand competition is based primarily on price, quality and assortment of products, customer service, marketing support and availability of new products. National brand companies could choose to compete -24- 26 more directly by manufacturing store brand products or by lowering the prices of national brand products. Due to the high degree of price competition, the Company has not always been able to fully pass on cost increases to its customers. The inability to pass on future cost increases, the impact of direct store brand competitors, and the impact of national brand companies lowering prices of their products or directly operating in the store brand market could have a material adverse impact on financial results. In addition, since the Company sells its nutritional products through retail drug, supermarket and mass merchandise chains, it may experience increased competition in its nutritional products business through alternative channels such as health food stores, direct mail and direct sales as more consumers obtain products through these channels. The Company has evaluated, and will continue to evaluate, the products and product categories in which it does business. Future product line extensions, or deletions, could have a material impact on the Company's financial position or results of operations. Customer Issues The Company's largest customer, Wal-Mart, currently comprises approximately 26% of total net sales. Should Wal-Mart's current relationship with the Company change adversely, the resulting loss of business could have a material adverse impact on the Company's operating results and financial position. The impact of retailer consolidation could have an adverse impact on future sales growth. Should a large customer encounter financial difficulties, the exposure on uncollectible receivables and unusable inventory could have a material adverse impact on the Company's financial position or results of operation. Research and Development The Company's investment in research and development will continue to exceed historical levels due to the high cost of developing and becoming a qualified manufacturer of new products that are switching from prescription to over-the-counter status. The ability to attract chemists proficient in emerging delivery forms and/or contracting with a third party innovator in order to generate new products of this type is a critical element of the Company's long term plans. Should the Company fail to attract qualified employees or enter into reasonable agreements with third party innovators, long term sales growth and profit would be adversely impacted. Patent and Trade Dress Issues The Company's ability to bring new products to market is limited by certain patent and trade dress factors including, but not limited to, the exclusivity periods awarded on products that have switched from prescription to over-the-counter status. The cost and time to develop these switch products is significantly greater than the rest of the new products that the Company seeks to introduce. Moreover, the Company's packaging of certain of its branded products could be the subject of legal actions regarding infringement. Although the Company designs its packaging to avoid infringing upon any proprietary rights of national brand marketers, there can be no assurance that the Company will not be subject to such legal actions in the future. Effect of Research and Publicity on Nutritional Product Business The Company believes the growth experienced in the last several years by the nutritional products business is based largely on national media attention regarding recent scientific research suggesting potential health benefits from regular consumption of certain vitamin and other nutritional products. There can be no assurance of future favorable scientific results and media attention, or the absence of unfavorable or inconsistent findings. In the event of future unfavorable scientific results or media attention, the Company's sales of nutritional products could be materially adversely affected. Dependence on Personnel The Company's future success will depend in large part upon its ability to attract and retain highly skilled research and development chemists (as noted above), management information specialists, operations, -25- 27 sales, marketing and managerial personnel. The Company does not have employment contracts with any key personnel other than David Gibbons, President and Chief Executive Officer. Should the Company not be able to attract or retain key qualified employees, future operating results may be adversely impacted. Availability of Raw Materials In the past, supplies of certain raw materials, bulk tablets and finished goods purchased by the Company have become limited, or were available from one or only a few suppliers, and it is possible that this will occur in the future. Should this situation occur, it can result in increased prices, rationing and shortages. In response to these problems the Company tries to identify alternative materials or suppliers for such raw materials, bulk tablets and finished goods. Certain shortages could adversely affect financial results. Legal Exposure From time to time the Company and/or its subsidiaries become involved in lawsuits arising from various commercial matters, including, but not limited to competitive issues, contract issues, intellectual property matters, workers' compensation, product liability and regulatory issues such as Proposition 65 in California. See Item 3, Legal Proceedings for a discussion of litigation. Litigation tends to be unpredictable and costly. There is no assurance that litigation will not have an adverse effect on the Company's financial position or results of operations in the future. The Company maintains property, cargo, auto, product, general liability, and directors and officers liability insurance to protect itself against potential loss exposures. To the extent that losses occur, there could be an adverse effect on the Company's financial results depending on the nature of the loss, and the level of insurance coverage maintained by the Company. From time to time, the Company may reevaluate and change the types and levels of insurance coverage that it purchases. Capital Requirements and Liquidity The Company maintains a broad product line to function as a primary supplier for its customers. Capital investments are driven by growth, technological advancements and the need for manufacturing flexibility. Estimation of future capital expenditures could vary materially due to the uncertainty of these factors. If the Company fails to stay current with the latest manufacturing and packaging technology it may be unable to competitively support the launch of new product introductions. The Company anticipates that cash flow from operations will substantially fund working capital and capital expenditures. Additionally, borrowings from the Company's line of credit are available, if required. The Company has historically evaluated acquisition opportunities and anticipates that acquisition opportunities will continue to be identified and evaluated in the future. The historical growth of sales and profits have been significantly influenced by acquisitions. There is no assurance that future sales and profits will, or will not, be impacted by acquisition activities. The Company's current capital structure, results of operations and cash flow needs could be materially impacted by acquisitions. International Operations The Company sources certain key raw materials from foreign suppliers and is increasing its sales outside the United States. Additionally, the Company is investing in the development of its international business. The Company's primary markets currently are Mexico and Canada. The Company may have difficulty entering new international markets due to, for example, greater regulatory barriers, the necessity of adapting to new regulatory systems and problems related to entering new markets with different cultural bases and political systems. Sales to customers outside the United States and foreign raw material purchases expose the Company to a number of risks including unexpected changes in regulatory requirements and tariffs, possible difficulties in enforcing agreements, longer payment cycles, exchange rate fluctuations, difficulties obtaining export or import licenses, the imposition of withholding or other taxes, -26- 28 economic collapse, political instability, embargoes, exchange controls or the adoption of other restrictions on foreign trade. Should any of these risks occur, they may have a material adverse impact on the operating results of the Company. Tax Rate Implication Income tax rate changes by governments and changes in the tax jurisdictions in which the Company operates could influence the effective tax rates for future years. The anticipated growth of the Company's international business increases the likelihood of fluctuation occurring. Interest Rate Implication The interest on the Company's line of credit facility is based on variable interest rate factors. The interest rates are established at the time of borrowing based upon the prime rate or the LIBOR rate, plus a factor, or at a rate based on an interest rate agreed upon between the Company and the Agent at the time the loan is made. Accordingly, interest expense is subject to variation due to the variability of these rates. Item 8. Financial Statements and Supplementary Data. Financial statements and supplementary data for the Company are on the following pages 28 through 47. -27- 29 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Certified Public Accountants................................................... 29 Consolidated Statements of Income for fiscal years 2000, 1999 and 1998...................................................................................... 30 Consolidated Balance Sheets as of July 1, 2000 and July 3, 1999...................................... 31 Consolidated Statements of Shareholders' Equity for fiscal years 2000, 1999 and 1998 .............................................................................. 32 Consolidated Statements of Cash Flows for fiscal years 2000, 1999 and 1998....................................................................................... 33 Notes to Consolidated Financial Statements........................................................... 34
-28- 30 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Perrigo Company Allegan, Michigan We have audited the accompanying consolidated balance sheets of Perrigo Company and subsidiaries as of July 1, 2000 and July 3, 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended July 1, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Perrigo Company and subsidiaries as of July 1, 2000 and July 3, 1999 and the results of their operations and their cash flows for each of the three years in the period ended July 1, 2000 in conformity with generally accepted accounting principles. By: /s/ BDO Seidman, LLP ----------------------------- BDO Seidman, LLP Grand Rapids, Michigan August 4, 2000 -29- 31 PERRIGO COMPANY CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Year Ended ------------------------------------ 2000 1999 1998 --------- -------- --------- Net sales $ 738,555 $877,587 $ 902,637 Cost of sales 583,314 691,893 670,775 --------- -------- --------- Gross profit 155,241 185,694 231,862 --------- -------- --------- Operating expenses Distribution 16,878 32,964 31,995 Research and development 16,314 14,867 15,942 Selling and administrative 89,676 117,623 113,584 Restructuring and redesign 1,048 6,160 122,529 Unusual litigation (4,154) (3,952) 9,585 --------- -------- --------- 119,762 167,662 293,635 --------- -------- --------- Operating income (loss) 35,479 18,032 (61,773) Interest and other, net 4,994 14,018 4,219 --------- -------- --------- Income (loss) before income taxes 30,485 4,014 (65,992) Income tax expense (benefit) 11,187 2,468 (14,356) --------- -------- --------- Net income (loss) $ 19,298 $ 1,546 $ (51,636) ========= ======== ========= Basic earnings (loss) per share $ 0.26 $ 0.02 $ (0.69) ========= ======== ========= Diluted earnings (loss) per share $ 0.26 $ 0.02 $ (0.69) ========= ======== =========
See accompanying notes to consolidated financial statements. -30- 32 PERRIGO COMPANY CONSOLIDATED BALANCE SHEETS (in thousands)
July 1, July 3, ASSETS 2000 1999 ---------- -------- Current assets Cash and cash equivalents $ 7,055 $ 1,695 Accounts receivable, net of allowances of $5,997 and $3,281, respectively 88,217 89,123 Inventories 126,935 197,437 Refundable income taxes 10,413 -- Prepaid expenses and other current assets 6,520 7,811 Current deferred income taxes 11,123 33,476 Assets held for sale 18,382 53,045 ---------- -------- Total current assets 268,645 382,587 Property and equipment Land 12,018 12,004 Buildings 157,661 153,062 Machinery and equipment 168,768 160,378 ---------- -------- 338,447 325,444 Less accumulated depreciation 144,867 125,782 ---------- -------- 193,580 199,662 Goodwill, net 18,199 19,334 Other 5,640 14,275 ---------- -------- $ 486,064 $615,858 ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 63,172 $ 68,240 Notes payable 8,884 6,694 Payrolls and related taxes 14,987 18,166 Accrued expenses 24,105 34,787 Income taxes 2,772 4,983 Current installments on long-term debt -- 300 ---------- -------- Total current liabilities 113,920 133,170 Deferred income taxes 19,462 14,674 Long-term debt, less current installments -- 135,026 Minority interest 922 569 Shareholders' equity Preferred stock, without par value, 10,000 shares authorized, none issued -- -- Common stock, without par value, 200,000 shares authorized, 73,489 and 73,301 issued, respectively 102,750 102,030 Unearned compensation (543) (53) Accumulated other comprehensive income 249 436 Retained earnings 249,304 230,006 ---------- -------- Total shareholders' equity 351,760 332,419 ---------- -------- $ 486,064 $615,858 ========== ========
See accompanying notes to consolidated financial statements. -31- 33 PERRIGO COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Accumulated Common Stock Issued Other ------------------- Unearned Comprehensive Comprehensive Retained Shares Amount Compensation Income Income Earnings ------ --------- ------------ ------------- ------------- --------- Balance at June 30, 1997 76,516 $ 145,779 $ -- $ -- $ -- $ 280,096 Net loss -- -- -- -- (51,636) (51,636) Issuance of common stock under stock options 287 554 -- -- -- -- Issuance of common stock under restricted stock plan 5 70 (70) -- -- -- Earned compensation for restricted stock -- -- 28 -- -- -- Tax benefit from stock transactions -- 452 -- -- -- -- Purchases and retirements of common stock (2,116) (30,195) -- -- -- -- ------ --------- --------- --------- --------- --------- Balance at June 30, 1998 74,692 116,660 (42) -- $ (51,636) 228,460 ========= Net income -- -- -- -- $ 1,546 1,546 Currency translation adjustments -- -- -- 436 436 -- Issuance of common stock under stock options 151 89 -- -- -- -- Issuance of common stock under restricted stock plan 8 70 (70) -- -- -- Earned compensation for restricted stock -- -- 59 -- -- -- Tax benefit from stock transactions -- 31 -- -- -- -- Purchases and retirements of common stock (1,550) (14,820) -- -- -- -- ------ --------- --------- --------- --------- --------- Balance at July 3, 1999 73,301 102,030 (53) 436 $ 1,982 230,006 ========= Net income -- -- -- -- $ 19,298 19,298 Currency translation adjustments -- -- -- (187) (187) -- Issuance of common stock under stock options 85 105 -- -- -- -- Issuance of common stock under restricted stock plan and agreement 103 563 (563) -- -- -- Earned compensation for restricted stock -- -- 73 -- -- -- Tax benefit from stock transactions -- 52 -- -- -- -- ------ --------- --------- --------- --------- --------- Balance at July 1, 2000 73,489 $ 102,750 $ (543) $ 249 $ 19,111 $ 249,304 ====== ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. -32- 34 PERRIGO COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Year ------------------------------------- 2000 1999 1998 --------- --------- ----------- Cash Flows From (For) Operating Activities Net income (loss) $ 19,298 $ 1,546 $ (51,636) Adjustments to derive cash flows Restructuring, net of cash 3,477 5,863 121,468 Depreciation and amortization 22,245 21,156 29,473 Write-off of Russian investment and related receivables and inventory -- 14,177 -- Write-down of investment due to permanent impairment -- 2,621 -- Deferred income taxes 27,141 (3,391) (34,754) Changes in operating assets and liabilities, net of restructuring and amounts acquired from business acquisition Accounts receivable, net 906 (17,846) (4,884) Inventories 70,502 (17,408) (63,221) Change in long-term licensing agreements 5,741 (8,700) -- Accounts payable (5,068) (10,551) 30,440 Payrolls and related taxes (3,179) 4,900 (4,598) Accrued expenses (10,682) (8,619) (1,889) Income taxes (12,624) 1,690 1,843 Other 56 (837) 99 --------- --------- --------- Net cash from (for) operating activities 117,813 (15,399) 22,341 --------- --------- --------- Cash Flows For (From) Investing Activities Additions to property and equipment (14,364) (32,272) (70,699) Proceeds from sale of assets held for sale 31,186 9,000 -- Business acquisitions, net of cash -- -- (14,716) Other 3,704 (1,452) (3,077) --------- --------- --------- Net cash for (from) investing activities 20,526 (24,724) (88,492) --------- --------- --------- Cash Flows (For) From Financing Activities Borrowings of short-term debt 2,190 1,315 861 Borrowings of long-term debt -- 53,707 81,619 Repayments of long-term debt (135,326) -- -- Tax benefit of stock transactions 52 31 452 Issuance of common stock 105 89 554 Repurchase of common stock -- (14,820) (30,195) --------- --------- --------- Net cash (for) from financing activities (132,979) 40,322 53,291 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 5,360 199 (12,860) Cash and cash equivalents, at beginning of period 1,695 1,496 14,356 --------- --------- --------- Cash and cash equivalents, at end of period $ 7,055 $ 1,695 $ 1,496 ========= ========= ========= Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest $ 5,259 $ 9,382 $ 3,577 Income taxes $ 789 $ 3,299 $ 20,736
See accompanying notes to consolidated financial statements. -33- 35 PERRIGO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY The Company is the nation's largest manufacturer of store brand over-the-counter (non-prescription) pharmaceutical products and also manufactures nutritional products. The Company's principal customers are major national and regional retail supermarket, drug store and mass merchandise chains and major wholesalers located within the United States. During the fiscal years 2000, 1999 and 1998, one customer accounted for 26%, 24% and 24% of revenues, respectively. None of the Company's other customers individually account for more than 10% of its sales. The Company expanded its sales base internationally, primarily in Mexico. International net sales for fiscal years 2000, 1999 and 1998 were $43,272, $38,233 and $32,919, respectively. All of the Company's manufacturing facilities as of July 1, 2000 were located in the United States except for a majority-owned pharmaceutical manufacturing site and a wholly-owned packaging plant, both located in Mexico. As of July 1, 2000 and July 3, 1999 the net book value of property and equipment located in Mexico was $5,876 and $3,262, respectively. Property and equipment located in other foreign countries are not material. The Company has two operating segments, OTC pharmaceutical products and nutritional products. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information", the segments have been aggregated into one reportable segment because the two segments have very similar operating processes, types of customers, distribution methods, regulatory environment and expected long-term financial performance. BASIS OF PRESENTATION The Company changed its fiscal year end effective for fiscal year 1999. After the transition year of fiscal year 1999, the Company's quarters are comprised of 13 weeks and end on a Saturday. Each quarter of fiscal year 2000 was comprised of 13 weeks ending on October 2, January 1, April 1, and July 1. During fiscal year 1999, the first quarter included the period from July 1 through October 3, 1998. The second through fourth quarters were each comprised of 13 weeks ending on January 2, April 3 and July 3, 1999, respectively. Prior to fiscal year 1999, the Company's quarters were comprised of three calendar months ending on September 30, December 31, March 31 and June 30. In fiscal year 1998, the Company announced its intention to divest of the personal care business. The personal care net assets were written down to their estimated fair value less cost to sell and were included in assets held for sale in the consolidated balance sheet at July 3, 1999. The Company sold its personal care business in fiscal year 2000. The LaVergne, Tennessee logistics facility was not included in this sale and remains in assets held for sale on July 1, 2000. For fiscal years 2000 and 1999, the consolidated cash flow statement reflects the changes in the balance sheet after the effects of the 1998 restructuring. The fiscal year 1998 consolidated cash flow statement reflects the changes in the balance sheet prior to the effects of the 1998 restructuring. The consolidated income statement reflects one month of personal care operations for fiscal year ended July 1, 2000 and an entire year of operations for fiscal years 1999 and 1998. The asset and liability amounts included in the footnotes for fiscal year 2000 and 1999 exclude amounts related to personal care. See -34- 36 Note K to these consolidated financial statements for a further discussion of the 1998 restructuring. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all majority owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Investments in companies in which the Company's interest is between 20 percent and 50 percent are accounted for using the equity method and are recorded in other noncurrent assets. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, which affect the reported earnings, financial position and various disclosures. Actual results could differ from those estimates. INTERNATIONAL OPERATIONS Since January 1999, the Company has translated its Mexican operation's foreign currency denominated assets and liabilities into U.S. dollars at current rates of exchange as of the balance sheet date, and income and expense items at the average exchange rate for the reporting period. Prior to January 1999, the Mexican economy was considered "highly inflationary" under the provisions of SFAS No. 52, "Foreign Currency Translation". Accordingly, a combination of current and historical exchange rates was used in remeasuring the local currency financial statements of the Company's Mexican operations, and resulting exchange adjustments were included in income. The one-time translation adjustment associated with this change was a translation gain of $371. The gain was recorded in fiscal year 1999 as an increase in the cumulative translation adjustment account. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of comprehensive income. The balance in the cumulative translation account was $249 and $436 as of July 1, 2000 and July 3, 1999, respectively. Translation adjustments resulting from exchange rate fluctuations on transactions denominated in currencies other than the functional currency are not material. Prior to the first quarter of fiscal year 1999, the Company had a Russian investment that was accounted for using the equity method. In the first quarter of fiscal 1999, due to the collapse of the Russian economy, the Company wrote off its net investment of $1,640 and also wrote off inventory of $1,663 and accounts and notes receivable of $10,874 related to this Russian investment for a total of $14,177. The net investment amount is included in other expense; the inventory amount is included in cost of sales; and the accounts and notes receivable amount is included in selling and administrative expense in the fiscal year 1999 consolidated statements of income. REVENUES Revenues from product sales are recognized when the goods are shipped to the customer. A provision is recorded as revenues are recognized for estimated losses on credit sales due to customer claims for discounts, price discrepancies and other items. FINANCIAL INSTRUMENTS The carrying amount of the Company's financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, notes payable and long-term debt, approximates their fair value. -35- 37 CASH AND CASH EQUIVALENTS Cash and cash equivalents consist primarily of demand deposits and other securities with maturities of three months or less at the date of purchase. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined primarily using the first-in first-out (FIFO) method. LONG-LIVED ASSETS Property and equipment are recorded at cost and are depreciated primarily using straight-line methods for financial reporting and accelerated methods for tax reporting. Cost includes an amount of interest associated with significant capital projects. Useful lives for financial reporting range from 5-10 years for machinery and equipment, and 10-40 years for buildings. Maintenance and repair costs are charged to earnings while expenditures that increase asset lives are capitalized. Goodwill resulting from business acquisitions is amortized on a straight-line basis over 25 years. Amortization of $1,135, $1,027 and $2,523 was recorded during fiscal years ended 2000, 1999 and 1998, respectively. Accumulated amortization was $11,256, $10,121 and $9,094 as of July 1, 2000, July 3, 1999 and June 30, 1998, respectively. Net goodwill of $27,551 was written off in fiscal year 1998 as part of the 1998 restructuring. See Note K for a further discussion of the 1998 restructuring. The Company periodically reviews long-lived assets that are not held for sale for impairment by comparing the carrying value of the assets to their estimated future undiscounted cash flows. For the fiscal years ended July 1, 2000 and July 3, 1999, there were no material adjustments to the carrying value of long-lived assets not held for sale as a result of this review. INVESTMENT In the third quarter of fiscal year 2000, the Company recorded a gain of $1,300 in Other income on the sale of an investment that was classified as available-for-sale for the purpose of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In the fourth quarter of fiscal year 1999, the Company recorded an estimated permanent impairment loss of $2,621 in Other expense related to this investment based on the fair market value of the investment at the time. The net investment balance of $2,419 was included in Other assets in the consolidated balance sheet at July 3, 1999. INCOME TAXES Deferred income tax assets and liabilities are recorded based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted tax rates. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of -36- 38 the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, adoption of the new standard on July 2, 2000 did not affect the Company's consolidated financial statements. During fiscal year 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and SOP 98-5, "Reporting the Costs of Start-up Activities". Both SOP's are effective beginning in fiscal year 2000. SOP 98-1 requires capitalization of certain costs incurred in the development of internal-use software, including external direct material and service costs, employee payroll and payroll-related costs, and capitalized interest. SOP 98-5 requires that start-up costs capitalized prior to July 4, 1999 be written off and any future start-up costs be expensed as incurred. Because the Company's accounting policy already complied with these SOP's, there was no impact on earnings of adopting the SOP's. In March 2000, the FASB issued FASB Interpretation No. (FIN) 44, "Accounting for Certain Transactions Involving Stock Compensation", which addresses certain practice issues related to APB Opinion No. 25, "Accounting for Stock Issued to Employees". Among other issues, FIN 44 clarifies the definition of an employee, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting for various modifications to the terms of previously granted fixed stock options or awards and the accounting for an exchange of stock compensation awards in a business combination. Except for certain of its provisions that did not affect the Company, FIN 44 was effective July 1, 2000, and had no effect on the Company's consolidated financial statements at date of adoption. NOTE B - INVENTORIES Inventories are summarized as follows:
July 1, July 3, 2000 1999 -------- -------- Finished goods ......................................... $ 53,399 $ 85,267 Work in process ........................................ 47,920 79,104 Raw materials .......................................... 25,616 33,066 -------- -------- $126,935 $197,437 ======== ========
NOTE C - LONG-TERM BORROWINGS AND CREDIT ARRANGEMENTS Long-term debt consists of the following:
July 1, July 3, 2000 1999 ------------- ----------- Revolving line of credit............ $ -- $ 110,000 Uncommitted lines of credit......... -- 24,186 Note payable, Industrial Development Board of Rutherford County, TN........... -- 1,140 ------------- ----------- Total ........................... -- 135,326 Less current installments........... -- 300 ------------- ----------- Long-term debt...................... $ -- $ 135,026 ============= ===========
Effective September 23, 1999, the Company entered into a revolving credit agreement with a group of banks, which provides a $175,000 unsecured revolving credit facility. This credit agreement replaced a -37- 39 $150,000 revolving credit agreement and two uncommitted credit facilities totaling $55,000 as described below. The agreement expires in September 2004. Repayment has been guaranteed by the Company's subsidiaries. Restrictive loan covenants apply to, among other things, minimum levels of net worth, interest coverage and funded debt leverage. Interest rates on the new revolving credit facility are established at the time of borrowing through three options, the prime rate or a LIBOR rate plus a factor established quarterly based on funded debt leverage, or a rate agreed upon between the Company and its Agent at the time the loan is made. The rate factor at July 1, 2000 was .525%. In June 1996, the Company entered into a credit agreement with a group of banks, which provided a $150,000 unsecured revolving credit facility. Repayment was guaranteed by the Company's subsidiaries. Restrictive loan covenants applied to, among other things, minimum levels of tangible net worth, interest coverage and funded debt ratio. Prior to September 23, 1999, the Company also had available borrowings through two uncommitted credit facilities totaling $55,000. Both facilities could be terminated by either party at any time. The Company's restrictive covenants under these facilities were substantially the same as those under the $150,000 credit facility. The Company's Mexican subsidiary has uncommitted credit facilities with two banks in Mexico, totaling 115 million pesos ($11,600 at July 1, 2000). The outstanding borrowings under the facilities, which mature December 1, 2000 are $8,884, and $6,694 at July 1, 2000 and July 3, 1999, respectively, and are included in Notes payable. The facilities will be renewed and are guaranteed by the Company. Interest rates are based on bids submitted by the banks for periods of 1 to 90 days. The effective interest rate on outstanding borrowings at July 1, 2000 was 18.4%. In connection with the sale of the personal care business, the Company paid off its obligation of $1,440 to the Industrial Development Board of Rutherford County, Tennessee in fiscal year 2000. NOTE D - SHAREHOLDERS' EQUITY On April 10, 1996, the Company's Board of Directors adopted a Preferred Share Purchase Rights Plan and declared a dividend distribution to be made to shareholders of record on April 22, 1996, of one Preferred Share Purchase Right on each outstanding share of the Company's common stock. The Rights contain provisions, which are intended to protect the Company's stockholders in the event of an unsolicited and unfair attempt to acquire the Company. The Company is entitled to redeem the Rights at $.01 per Right at any time before a 20% position has been acquired. The Rights will expire on April 10, 2006, unless previously redeemed or exercised. The Company has restricted stock plans and agreements as described below. The holder of restricted shares has all rights of a shareholder except that the shares are restricted as to sale or transfer for the vesting period and the shares are forfeited upon termination in certain circumstances. The Company accounts for restricted shares as unearned compensation, which is ratably charged to expense over the vesting period. The unearned compensation included in shareholder's equity at July 1, 2000 and July 3, 1999 was $543 and $53, respectively. In November 1997, the Company established a restricted stock plan for directors, which is intended to attract and retain the services of experienced and knowledgeable non-employee directors. The Company reserved 25 common shares for issuance under the plan. The terms of the plan call for the granting of $10 worth of restricted shares to each Director on the date of the Annual Board Meeting. The number of shares -38- 40 issued is based on the fair market value of the shares on the date of the Annual Board Meeting. The restricted shares become vested on the date of the next Annual Board Meeting on which the Director's existing term as a Board member is set to expire (director terms are generally three years). In fiscal years 2000 and 1999, respectively, the Company granted 7 and 8 shares at $60 and $70, and charged $60 and $59 to expense. In May 2000, the Company granted 96 shares of restricted stock at $503 to David T. Gibbons, its President and Chief Executive Officer, pursuant to restricted stock agreements. Assuming certain conditions are met, the restricted shares become vested in June 2003. The expense for these shares was $13 for fiscal year 2000. The Company's 1988 Employee Incentive Stock Option Plan, as amended in November 1997, grants key management employees options to purchase shares of common stock. The options vest and may be exercised from one to ten years after the date of grant based on a vesting schedule. Proceeds from the exercise of stock options under the Company's stock option plans and income tax benefits attributable to stock options exercised are credited to common stock. A summary of activity for the Company's employee stock option plan is presented below:
Fiscal Year --------------------------------------------------------------- 2000 1999 1998 ----------------- ------------------ ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Options outstanding at beginning of year 4,852 $11.68 4,143 $12.25 3,737 $11.43 Granted 2,496 6.40 1,061 8.49 1,022 12.94 Exercised (85) 1.74 (139) (.69) (287) (1.93) Terminated (403) 10.71 (213) (14.37) (326) (14.08) ----- ----- ----- Options outstanding at end of year 6,860 9.92 4,852 11.68 4,143 12.25 Options exercisable at end of year 2,330 13.23 1,869 12.70 1,333 12.28 Options available for grant at end of year 1,346 3,439 4,287 Price per share of options outstanding $1.00 to $.57 to $.22 to $31.25 $31.25 $31.25
The Company issues stock options to directors under a non-qualified stock option plan. Options granted under the plan vest and may be exercised from one to ten years after the date of grant based on a vesting schedule. As of July 1, 2000, options to purchase 91 shares at prices ranging from $8.38 to $29.38 per share and at a weighted average price of $15.77 per share were outstanding, 56 of which were exercisable at a weighted average price of $19.32 per share. There were 15 options granted at a weighted average exercise price of $8.66 per share during fiscal year 2000. There were no options exercised and there were 24 options terminated in fiscal year 2000. There were 102 options available for grant at July 1, 2000. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized. Had compensation cost been determined and recorded based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income (loss) and earnings (loss) per share would have been reduced (loss increased in fiscal year 1998) as follows: -39- 41
Fiscal Year ------------------------------ 2000 1999 1998 ------ ------ ------ Decrease in net income or increase in net loss $2,662 $3,178 $2,558 Basic earnings per share $.04 $.04 $.03 Diluted earnings per share $.04 $.04 $.03
The effects on net income (loss) and earnings (loss) per share for fiscal years 2000, 1999 and 1998 may not be representative of future years because compensation cost is allocated on a straight-line basis over the vesting periods of the grants, which extend beyond the reported years. The weighted average fair value per share at the date of grant for options granted during fiscal years 2000, 1999 and 1998 was $2.91, $3.69 and $5.79, respectively. The fair value was estimated using the Black-Sholes option pricing model with the following weighted average assumptions:
Fiscal Year ------------------------------ 2000 1999 1998 ----- ----- ----- Dividend yield 0.0% 0.0% 0.0% Volatility, as a percent 36.0% 35.1% 31.3% Risk-free interest rate 6.5% 4.9% 6.1% Expected life in years after vest date 3.0 3.0 3.0
Forfeitures are accounted for as they occur. The following table summarizes information concerning options outstanding under the Plans at July 1, 2000:
Options Outstanding Options Exercisable ----------------------------------------------------------------------- ---------------------------------- Weighted Average Range of Number Remaining Weighted Number Exercise Outstanding Contractual Average Exercisable Weighted Average Prices at 7/1/00 Term (Years) Exercise Price at 7/1/00 Exercise Price -------- ---------- ------------ -------------- ---------- ---------------- $1.00 - 6.16 1,972 9.09 $5.39 176 $1.44 7.95 - 9.13 2,502 6.75 8.62 576 9.00 9.50 - 13.50 1,785 4.90 12.88 949 12.89 14.69 - 31.25 692 2.40 20.71 685 20.76 ----- ----- 6,951 2,386 ===== =====
In May 1997, the Company announced a common stock repurchase program. The program called for the repurchase of up to 7,500 shares, subject to market conditions. Purchases were made in the open market. The Company purchased 1,550 shares for $14,820 in fiscal year 1999 and 2,116 shares at $30,195 in fiscal year 1998. The common stock repurchased for all years was retired. The program was terminated in fiscal year 1999. -40- 42 NOTE E - RETIREMENT PLANS AND POSTRETIREMENT BENEFITS The Company has a qualified profit-sharing plan and an investment plan under section 401(k) of the Internal Revenue Code, which cover substantially all employees. Contributions to the qualified profit-sharing plan are at the discretion of the Board of Directors. Under the investment plan, the Company matches a portion of employees' contributions. The Company's contributions to the plans were $5,667, $6,727 and $6,609 for the years ended July 1, 2000, July 3, 1999 and June 30, 1998, respectively. In connection with the sale of the personal care business, the Company terminated the Perrigo Company of Tennessee Retirement Income Savings Plan on August 24, 1999. The Company has postretirement plans that provide medical benefits for retirees and their eligible dependents. Employees become eligible for these benefits if they meet certain minimum age and service requirements. The Company reserves the right to modify or terminate these plans. The plans are not funded. The unfunded accumulated postretirement benefit obligation at July 1, 2000 and July 3, 1999 and the benefits expensed in fiscal years 2000, 1999 and 1998 are immaterial to the financial position and results of operations of the Company. NOTE F - INCOME TAXES A summary of income taxes is as follows:
Fiscal Year ----------------------------------------- 2000 1999 1998 -------- ------- -------- Current: Federal.................................... $(17,490) $ 5,108 $ 19,011 Foreign.................................... 1,322 771 757 State...................................... 214 (20) 630 -------- ------- -------- (15,954) 5,859 20,398 Deferred .......................................... 27,141 (3,391) (34,754) -------- ------- -------- Total $ 11,187 $ 2,468 $(14,356) ======== ======= ========
The tax effects of temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to the net deferred income tax (liability) asset are as follows:
July 1, July 3, 2000 1999 -------- -------- Allowance for impaired assets and related reserve for restructuring ............................................ $ 8,450 $ 34,765 Accumulated depreciation ............................................... (27,468) (29,313) Inventory costs ........................................................ 6,286 7,359 Allowance for doubtful accounts ........................................ 1,652 1,140 Accrued expenses not yet deductible .................................... 3,792 5,222 Other, net ............................................................. (1,051) (371) -------- -------- Net deferred income tax (liability) asset .............................. $ (8,339) $ 18,802 ======== ========
The net deferred income tax liability as of July 1, 2000 and the net deferred income tax asset as of July 3, 1999 are presented in the balance sheets as follows: -41- 43 July 1, July 3, 2000 1999 ------- -------- Current asset .......................................... $11,123 $33,476 Long-term liability .................................... 19,462 14,674 The effective income tax rate varied from the statutory Federal tax rate as follows:
Fiscal Year ------------------------------ 2000 1999 1998 ------ ------ -------- Federal statutory rate ...................................... 35.0% 35.0% (35.0)% Expenses not deductible for tax purposes: Loss on permanent impairment of capital investment ........ (1.5) 22.8 -- Restructuring charges, primarily related to goodwill write-off ............................................... -- -- 11.2 Goodwill amortization ....................................... 2.9 6.3 (0.8) Product contributions ....................................... -- (6.3) 0.6 Other ....................................................... 0.3 3.7 2.2 ---- ---- ---- Effective income tax rate ................................... 36.7% 61.5% (21.8)% ==== ==== ====
NOTE G - COMPREHENSIVE INCOME Comprehensive income is comprised of all changes in shareholders' equity during the period other than from transactions with shareholders. Comprehensive income consists of the following:
Fiscal Year ------------------------------------ 2000 1999 1998 -------- ------ -------- Net income $19,298 $1,546 $(51,636) Other comprehensive income: Unrealized holding gains (losses) on securities 1,286 -- -- Reclassification adjustment for gains realized in net income (1,286) -- -- ------ ------ -------- Net unrealized gains (losses) on investments -- -- -- Foreign currency translation adjustments (187) 436 -- ------- ------ -------- Comprehensive income (loss) $19,111 $1,982 $(51,636) ======= ====== ========
Prior to January 1999, the Company treated the Mexican economy as highly inflationary. Accordingly, the translation effects were reported as a component of income and losses during those periods. Subsequent to January 1999, the Mexican economy was not considered highly inflationary. Accordingly, all subsequent translation effects are included as a component of other comprehensive income. -42- 44 NOTE H - EARNINGS PER SHARE A reconciliation of the numerators and denominators used in the "basic" and "diluted" earnings per share calculation follows:
Fiscal Year -------------------------------------------- 2000 1999 1998 ------- -------- --------- Numerator: Net income (loss) used for both "basic" and "diluted" EPS calculation $19,298 $ 1,546 $(51,636) ======= ======= ======== Denominator: Weighted average shares outstanding for the period - used for "basic" EPS calculation 73,370 73,707 75,302 Dilutive effect of stock options 223 277 -- ------- ------- ------- Weighted average shares outstanding for the period - used for "diluted" EPS calculation 73,593 73,984 75,302 ======= ======= =======
The effect of stock options of 866 shares was not included at June 30, 1998 because to do so would have been antidilutive. NOTE I - COMMITMENTS AND CONTINGENCIES The Company leases certain assets, principally warehouse facilities and data processing equipment, under agreements that expire at various dates through June 2011. Certain leases contain provisions for renewal and purchase options and require the Company to pay various related expenses. Future non-cancelable minimum operating lease commitments are as follows: 2001--$5,857; 2002--$4,176; 2003--$2,295; 2004--$1,186; 2005-- $712; and thereafter--$1,013. Rent expense under all leases was $10,592, $14,007 and $14,367 for fiscal years 2000, 1999 and 1998, respectively. As described more fully in Note K, the Company sold its personal care business in August 1999. In conjunction with this sale, the Company entered into an agreement with the buyer to lease to the buyer the Company's LaVergne, Tennessee logistics facility through August 2001. The Company also entered into an agreement with the buyer of the personal care business to provide certain logistics support services, MIS support services and accounting services. Certain logistics support services were provided through June 30, 2000 and certain MIS support services will be provided through June 30, 2001. The accounting services primarily related to accounts receivable collection through June 30, 2000 and accounts payable services through November 1999. The Company also entered into an agreement to sell certain products to the buyer and purchase certain other products from the buyer through August 2002. In July 1994, the Company was served a "summons with notice" alleging breach of fiduciary duties by its officers in connection with their purchase of the Company from the former owner in April 1988. In February 1995, a complaint was filed seeking unspecified damages. In June 1998, the United States District Court for the Western District of Michigan dismissed, at the close of the plaintiff's case, the action filed by the former owner. In July 1998, the former owner filed an appeal. In March 2000, the Company entered into a settlement agreement with the former owner that resulted in the dismissal of the lawsuit and the withdrawal of all pending appeals thus ending any further action against the Company. No payment or financial compensation was required of either party. The effect of the settlement was to leave in place the Court's original order dismissing the plaintiff's case. -43- 45 In March 1995, the Company was served with a complaint purporting to be a class action lawsuit on behalf of shareholders who purchased Perrigo common stock between May 11, 1993 and May 10, 1994. The complaint alleges various violations of federal securities laws and seeks unspecified damages. In June 1998, the Court granted defendant's motion of a summary judgement in this case. In June 1998, the plaintiffs filed a motion to file a proposed second amended complaint. In October 1998, the class action lawsuit was dismissed against all defendants. In November 1998, the plaintiffs appealed the dismissal of their case. In April 1999, the plaintiffs withdrew their appeal. The dismissal of the appeal and the subsequent entering of the final judgment ends any further action against the Company. Under the agreement reached with the plaintiffs, no money or other compensation will be paid to the plaintiffs or their attorneys. In June 1995, the Company received notice of a possible derivative class action against the Company, as a nominal defendant, and certain of its officers and directors, and their trusts. In November 1995, the related complaint was filed. The complaint alleges possible violation of Michigan law, seeks to protect the Company against any expense or liability arising out of the aforementioned and purported class action lawsuit and to recover any proceeds unlawfully received by named officers and directors and their trusts in the October 1993 public offering. In January 1998, the Court entered an order staying the derivative action pending the resolution of the related class action case. In April 1999, the plaintiffs agreed to dismiss this suit based upon the dismissal of the class action. In the fourth quarter of fiscal year 1999, the Company received reimbursement of $8,000 under provisions of its liability coverage for a significant portion of the legal fees and expenses incurred for the class action lawsuit and the related derivative lawsuit. The payment is included in Unusual litigation in the fiscal year 1999 consolidated statement of income. The consolidated statements of income for fiscal years 2000, 1999 and 1998 include $0, $4,048 and $9,585, respectively, of charges primarily related to the three legal actions described above. On August 4, 1999, the Company filed a civil antitrust lawsuit in the U.S. District Court for the Western District of Michigan against a group of vitamin raw material suppliers alleging the defendants conspired to fix the prices of vitamin raw materials sold to the Company. The relief sought includes money damages and a permanent injunction enjoining defendants from future violations of antitrust laws. The case is proceeding to trial and discovery activities have commenced. The Company entered into settlement agreements with certain defendants resulting in an aggregate payment to the Company of $4,154, net of attorney fees and expenses that were withheld prior to the disbursement of the funds to the Company. This payment is included in Unusual litigation in the fiscal year 2000 consolidated statement of income. The Company can make no prediction as to the outcome of the litigation with the remaining defendants. The Company has pending certain legal actions and claims incurred in the normal course of business. The Company believes that these actions are without merit or are covered by insurance and is actively pursuing the defense thereof. The Company believes the resolution of all of these matters will not have a material adverse effect on its financial condition and results of operations as reported in the accompanying consolidated financial statements. However, depending on the amount and timing of an unfavorable resolution of these lawsuits, it is possible that the Company's future results of operations or cash flow could be materially affected in a particular period. -44- 46 NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED) The quarterly financial data reflects one month of personal care operations for fiscal year 2000 and an entire year of operations for fiscal year 1999.
2000 October 2, January 1, April 1,(1) July 1,(2) - --------------------- ---------- ---------- ----------- ---------- Net sales ..................................... $ 209,365 $ 197,246 $ 181,494 $ 150,450 Gross profit .................................. 50,196 48,444 36,796 19,805 Net income (loss) ............................. 10,025 10,964 6,375 (8,066) Basic earnings (loss) per share ............... $ 0.14 $ 0.15 $ 0.09 $ (0.11) Diluted earnings (loss) per share(3) .......... 0.14 0.15 0.09 (0.11) Weighted average shares outstanding Basic ............................... 73,327 73,348 73,367 73,436 Diluted ............................. 73,528 73,525 73,537 73,436
1999 October 3,(4) January 2, April 3, July 3,(5) - --------------------- ------------- ---------- ----------- ---------- Net sales ..................................... $ 212,298 $ 226,121 $ 251,426 $ 187,742 Gross profit .................................. 35,305 54,295 57,863 38,231 Net (loss) income ............................. (12,376) 7,123 9,712 (2,913) Basic (loss) earnings per share ............... $ (0.17) $ .10 $ .13 $ (0.04) Diluted (loss) earnings per share(6) .......... (0.17) .10 .13 (0.04) Weighted average shares outstanding Basic ............................... 73,429 73,219 73,265 73,320 Diluted ............................. 73,429 73,489 73,519 73,320
(1) Includes a pre-tax charge of $7,000 for higher than normal inventory obsolescence expense related to the Company's conversion to a new software system in fiscal year 1999. Includes a pre-tax charge of $4,000 related to fixed production costs expensed due to lower than normal production levels as the Company reduced inventory. (2) Includes pre-tax charges of $3,000 related to write-offs of goods produced during the quarter, $2,000 of unusual obsolescence primarily related to the Company's conversion to a new software system, $5,500 to adjust inventory to a first-in first-out basis (whereby most recent costs are reflected in inventory) and $1,848 related to recent reductions in sales projections for a long-term licensing agreement. Includes a pre-tax charge of $2,500 related to increased bad debts expense. Includes a pre-tax charge of $1,048 related the LaVergne, Tennessee logistics facility. See Note K. Includes pre-tax income of $4,154 for a settlement payment related to a civil antitrust lawsuit. See Note I. (3) The effect of stock options of 225 shares was not included in the fourth quarter of fiscal year 2000 because to do so would have been antidilutive. (4) Includes a pre-tax write-off of $14,177 related to the Company's equity investment in Russia. See the International Operations section of Note A. (5) Includes a total pre-tax charge of $6,600 for increases in inventory write-offs and inventory obsolescence provisions. These inventory adjustments were made in the fourth quarter after sales fell short of expectations, resulting in obsolete and excess inventory. Includes the favorable impact of $7,500 for inventory valuation adjustments to adjust inventory to a first-in, first-out basis and $1,300 related to higher than normal production levels. Includes a pre-tax charge of $2,615 for the 1999 restructuring and $3,545 for the 1998 restructuring. See Note K. Includes pre-tax income of $8,000 for proceeds received in an insurance settlement for litigation expenses associated with a class action lawsuit and a related derivative lawsuit. See Note I. Includes a pre-tax charge of $2,621 related to a permanent impairment write-down of an investment. See the Investment section of Note A. -45- 47 (6) The effect of stock options of 333 shares and 231 shares was not included in the first and fourth quarter of fiscal year 1999, respectively, because to do so would have been antidilutive. NOTE K - RESTRUCTURING COSTS For fiscal years 2000, 1999 and 1998, the Company incurred restructuring and redesign charges primarily related to an intended divestiture, facilities closings and streamlining operations. Total restructuring charges were $1,048, $6,160 and $122,529 for fiscal years 2000, 1999 and 1998, respectively. The total restructuring reserve balance was $0, and $4,625 at July 1, 2000 and July 3, 1999, respectively. Assets held for sale related to the 1998 restructuring were $18,382 and $53,045 at July 1, 2000 and July 3, 1999, respectively. UPDATE ON 1999 RESTRUCTURING In the fourth quarter of fiscal year 1999 the Company announced a workforce reduction plan that resulted from the Company's decision to divest its personal care business (see below) and efficiencies created by implementation of a new enterprise software system in the first quarter of fiscal year 1999. The plan included a combination of early retirements, normal attrition, redeployments and job eliminations, primarily for professional, managerial, administrative and support staff personnel located in the Company's corporate offices. A pre-tax charge and reserve of $2,615, which related to severance, postretirement and outplacement costs, were recorded in accordance with EITF 94-3. In the fourth quarter of fiscal year 1999, 23 people elected early retirement and 34 people were terminated. For fiscal year 2000, $2,455 was paid primarily for severance and outplacement costs related to the 1999 restructuring. These costs were charged against the reserve established in fiscal year 1999. The 1999 restructuring reserve balance was $0 and $2,455 at July 1, 2000 and July 3, 1999, respectively. UPDATE ON 1998 RESTRUCTURING In June 1998 the Company announced a major restructuring plan which involved the closing of certain personal care manufacturing facilities and the intention to divest the personal care business. A pre-tax charge of $121,966 was recorded in the fourth quarter of fiscal year 1998. This charge included $109,707 for impairment of assets and a reserve of $12,259 for anticipated incremental cash expenditures recorded in accordance with EITF 94-3. In the first half of fiscal year 1999 the Company closed personal care manufacturing facilities in California and Missouri and in the second half of the year these facilities were sold. Proceeds from the sales were $9,000. No gains or losses were recorded in the fiscal year 1999 consolidated income statement related to these sales as the facilities had previously been adjusted to their estimated fair market values. In the fourth quarter of fiscal year 1999 the Company entered into an agreement in principle to sell the personal care business. In conjunction with that agreement, the Company recorded an additional net restructuring charge of $3,248. Also during fiscal year 1999, the Company expensed as incurred $297 of other restructuring costs in accordance with EITF 94-3. The Company completed the sale of the personal care business in fiscal year 2000. Proceeds from the sale were $32,200, including funds held in escrow. No gain or loss was recorded in fiscal year 2000 related to this sale. Fiscal year 2000 earnings reflect one month of the personal care business. Net sales for the personal care business were $17,778, $192,409 and $212,261 for fiscal years 2000, 1999 and 1998, respectively. The Company does not maintain operating income information by its main product lines, however, based on the incremental approach, the Company estimates that pre-tax operating income was approximately $1,000 for each of fiscal years 2000 and 1999 and pre-tax operating loss was $8,000 for fiscal year 1998 for the personal care -46- 48 business. Included in pre-tax operating income was the effect of suspending depreciation of approximately $700 and $7,200 for fiscal years 2000 and 1999, respectively. For fiscal year 2000, $2,170 was paid primarily related to professional fees and transitional costs associated with the sale of the personal care business. These costs were charged against a reserve established in fiscal year 1998. The 1998 restructuring balance was $0 and $2,170 at July 1, 2000 and July 3, 1999, respectively. Assets held for sale decreased to $18,382 at July 1, 2000 primarily due to the sale of the personal care business during fiscal year 2000. Assets held for sale at July 1, 2000 is comprised of the LaVergne, Tennessee logistics facility. In the fourth quarter of fiscal year 2000, the Company recorded a net restructuring charge of $1,048 to reflect its current net realizable value. The Company intends to sell this facility in fiscal year 2001. The effect of suspending depreciation on this facility was $850 and $830 for fiscal year 2000 and 1999, respectively. The restructuring charges as described above are detailed in the following table:
1998 Restructuring 1999 Restructuring Professional Fees Severance and And Transitional Costs Outplacement ---------------------- ------------------ Balance at June 30, 1998 $ 12,259 $ -- Additions -- 2,455 Reductions/Charges (10,089) -- -------- ----------- Balance at July 3, 1999 2,170 2,455 Reductions/Charges (2,170) (2,455) -------- ----------- Balance at July 1, 2000 $ -- $ -- ======== ===========
NOTE L - ACQUISITION On September 11, 1997, the Company acquired 87.8% of the outstanding shares of Quimica y Farmacia, S.A. de C.V. for approximately $16,000. Quimica y Farmacia, S.A. de C.V. is a pharmaceutical manufacturer and distributor located in Mexico. The assets, liabilities, sales and profits of this acquisition, which are not considered material to the Company, are included in the consolidated financial statements since the acquisition date. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. -47- 49 PART III. Item 10. Directors and Executive Officers of the Registrant. (a) Directors of the Company. Information concerning directors of the Company is incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting under the heading "Election of Directors". (b) Executive Officers of the Company. See Part I, Additional Item of this Form 10-K on page 12. (c) Compliance with Section 16(a) of the Exchange Act. Information concerning compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting under the heading "Section 16(a) Beneficial Ownership Reporting Compliance". Item 11. Executive Compensation. Information concerning executive officer and director compensation is incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting under the headings "Executive Compensation" and "Director Compensation". Item 12. Security Ownership of Certain Beneficial Owners and Management. Information concerning security ownership of certain beneficial owners and management is incorporated by reference herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting under the heading "Ownership of Perrigo Common Stock". Item 13. Certain Relationships and Related Transactions. Information concerning certain relationships and related transactions is incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting under the heading "Director Compensation". PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed or incorporated by reference as part of this Form 10-K: 1. All financial statements. See Index to Consolidated Financial Statements on page 28 of this Form 10-K. 2. Financial Schedules Report of Independent Certified Public Accountants on Financial Statement Schedule Schedule II-Valuation and Qualifying Accounts -48- 50 Schedules other than the one listed are omitted because they are included in the footnotes, immaterial or not applicable. 3. Exhibits: 2(a) - Asset Purchase Agreement, dated August 25, 1999, among Perrigo Company and Perrigo Company of Tennessee as Sellers; and Cumberland Swan Holdings, Inc., as Buyer, incorporated by reference from the Registrant's Form 10-K filed on October 1, 1999. 3(a) - Amended and Restated Articles of Incorporation of Registrant, incorporated by reference from Amendment No. 2 to Registration Statement No.33-43834 filed by the Registrant on September 23, 1993. 3(b) - Restated Bylaws of Registrant, dated April 10, 1996, as amended on June 23, 2000 and August 25, 2000. 4(a) - Shareholders' Rights Plan, incorporated by reference from the Registrant"s Form 8-K filed on April 10, 1996. 10(a)* - Registrant's Management Incentive Plan, incorporated by reference from the Registration Statement No. 33-69324 filed by the Registrant on September 23, 1993. 10(b)* - Registrant's 1988 Employee Incentive Stock Option Plan as amended, incorporated by reference from Exhibit A of the Registrant's 1997 proxy statement. 10(c)* - Registrant's 1989 Non-Qualified Stock Option Plan for Directors as amended, incorporated by reference from Exhibit B of the Registrant's 1997 Proxy Statement as amended at the Annual Meeting of Shareholders on November 6, 1997. 10(d)* - Registrant's Restricted Stock Plan for Directors, dated November 6, 1997, incorporated by reference from Registrant's 1998 Form 10-K filed on October 6, 1998. 10(e) - Credit Agreement, dated September 23, 1999, between Registrant and Bank One, Michigan, incorporated by reference from the Registrant's Form 10-K filed on October 1, 1999. 10(f) - Guaranty Agreement, dated September 23, 1999, executed by L. Perrigo Company and Perrigo Company of South Carolina, Inc., in favor of the Agent and each Lender, incorporated by reference from the Registrant's Form 10-K filed on October 1, 1999. -49- 51 10(g)* - Consulting Agreement, dated December 7, 1999, between Registrant and F. Folsom Bell, incorporated by reference from the Registrant's Form 10-Q filed on February 9, 2000. 10(h)* - Employment Agreement, Restricted Stock Agreement, Contingent Restricted Stock Agreement, and Noncompetition and Nondisclosure Agreement, dated April 19, 2000, between Registrant and David T. Gibbons, incorporated by reference from the Registrant's Form 10-Q filed on April 26, 2000. 10(i)* - Consulting Agreement, Noncompetition and Nondisclosure Agreement and Indemnity Agreement, dated June 2, 2000, between Registrant and Michael J. Jandernoa. 21 - Subsidiaries of the Registrant. 23 - Consent of BDO Seidman, LLP. 24 - Power of Attorney (see signature page). 27 - Financial Data Schedule. * Denotes management contract or compensatory plan or arrangement. (b) Exhibit and reports on Form 8-K. (i) The Company filed a report on Form 8-K on April 27, 2000 that announced the appointment of David T. Gibbons, a former Rubbermaid and 3M executive, as President and Chief Executive Officer. He also became a director of the Company. Michael J. Jandernoa, who served as Chief Executive Officer since 1986, remained as Chairman of the Board. -50- 52 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Board of Directors Perrigo Company Allegan, Michigan The audits referred to in our report to Perrigo Company and Subsidiaries dated August 4, 2000, relating to the consolidated financial statements of Perrigo Company, which is contained in Item 8 of this Form 10-K for the year ended July 1, 2000, included the audit of Schedule II - Valuation and Qualifying Accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. By: /s/ BDO Seidman, LLP --------------------------- BDO Seidman, LLP Grand Rapids, Michigan August 4, 2000 -51- 53 SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS PERRIGO COMPANY (In thousands)
BALANCE CHARGED TO BALANCE AT BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD ----------- ------------ ---------- ------------- --------- Year Ended June 30, 1998: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $3,026 $ 580 $ 915 $2,691 Year Ended July 3, 1999: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $2,691 $ 334 $ (256) $3,281 Year Ended July 1, 2000: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $3,281 $ 2,821 $ 105 $5,997
(1) Uncollectible accounts charged off, net of recoveries and the effect of the 1998 restructuring. -52- 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K for the fiscal year ended July 1, 2000 to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Allegan, State of Michigan on the 6th of September, 2000. PERRIGO COMPANY By: /s/ David T. Gibbons -------------------------- David T. Gibbons President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby appoints David T. Gibbons and Douglas R. Schrank and each of them severally, acting alone and without the other, his true and lawful attorney-in-fact with authority to execute in the name of each such person, and to file with the Securities and Exchange Commission, together with any exhibits thereto and other documents therewith, any and all amendments to this Annual Report on Form 10-K for the fiscal year ended July 1, 2000 necessary or advisable to enable Perrigo Company to comply with the Securities Exchange Act of 1934, any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such other changes in the report as the aforesaid attorney-in-fact executing the same deems appropriate. -53- 55 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K for the fiscal year ended July 1, 2000 has been signed by the following persons in the capacities indicated on the 6th of September, 2000.
Signature Title --------- ----- /s/ David T. Gibbons President, Chief Executive Officer and Director - ------------------------------------- (Principal Executive Officer) David T. Gibbons /s/ Douglas R. Schrank Executive Vice President and Chief Financial Officer - ------------------------------------- (Principal Accounting and Financial Officer) Douglas R. Schrank /s/ F. Folsom Bell Executive Vice President, Business Development - ------------------------------------- and Director F. Folsom Bell /s/ Peter R. Formanek Director - ------------------------------------- Peter R. Formanek /s/ Larry D. Fredricks Director - ------------------------------------- Larry D. Fredricks /s/ Richard G. Hansen Director - ------------------------------------- Richard G. Hansen /s/ L. R. Jalenak, Jr. Director - ------------------------------------- L. R. Jalenak, Jr. /s/ Michael J. Jandernoa Chairman of the Board - ------------------------------------- Michael J. Jandernoa /s/ Herman Morris, Jr. Director - ------------------------------------- Herman Morris, Jr.
-54- 56 EXHIBIT INDEX EXHIBIT DOCUMENT - ------- -------- 3(b) Restated Bylaws of Registrant, dated April 10, 1996, as amended, on June 23, 2000 and August 25, 2000. 10(i) Consulting Agreement, Noncompetition and Nondisclosure Agreement and Indemnity Agreement, dated June 2, 2000, between Registrant and Michael J. Jandernoa. 21 Subsidiaries of the Registrant 23 Consent of BDO Seidman, LLP 27 Financial Data Schedule -55- EX-3.(B) 2 c57316ex3-b.txt RESTATED BYLAWS OF REGISTRANT 1 Exhibit 3(b) RESTATED BYLAWS of PERRIGO COMPANY Restated as of April 10, 1996 Amended as of June 23, 2000 and August 25, 2000 2 RESTATED BYLAWS of PERRIGO COMPANY ARTICLE I. Offices The registered office of the Corporation shall be in the City of Allegan, County of Allegan, State of Michigan. The Corporation may also have offices at such other places within or without the State of Michigan as the Board of Directors may from time to time determine. ARTICLE II. Shareholders Section 1. - Place of Meeting Except as otherwise provided by applicable law, the Board of Directors may designate any place, either within or without the State of Michigan, as the place of meeting for any annual meeting of shareholders or for any special meeting of shareholders. If no designation is made the place of meeting shall be the registered office of the Corporation in the State of Michigan. Section 2. - Annual Meeting The annual meeting of shareholders shall be held on such date and at such time and place as shall be selected by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting. Section 3. - Special Meeting A special meeting of shareholders may be called at any time by the Chairman of the Board, the President or a majority of the total number of directors which the Corporation would have if there were no vacancies (the "Whole Board of Directors"). Section 4. - Notice of Meeting Written notice of the place, date, hour and purposes of each meeting of shareholders shall be given to the holders of record of the shares of capital stock of the Corporation entitled to vote at the meeting by mailing, postage prepaid, or delivering in person such notice not later than 10 nor more than 60 days before the date of such meeting to each such holder at the address designated by him or her for that purpose or, if none is designated, at his or her last known address. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the shareholder at his or her address as it appears on the stock transfer books of the Corporation. Only such business shall be conducted at a special 1 3 meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Meetings may be held without notice if all shareholders entitled to vote are present, or if notice is waived by those not present in accordance with Article VI of these Bylaws. Any previously scheduled meeting of shareholders may be postponed, and except as otherwise provided by applicable law, any special meeting of shareholders may be cancelled by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of shareholders. If a meeting of shareholders is adjourned to another time or place, it shall not be necessary to give notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken and only such business is transacted at the adjourned meeting as might have been transacted at the original meeting; provided that, if after the adjournment the Board of Directors fixes a new record date for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record on the new record date. Section 5. - Quorum; Adjournment At all meetings of shareholders there shall be present in person or by proxy holders of a majority of the shares entitled to vote at the meeting in order to constitute a quorum. From time to time and whether or not there is such a quorum, the Chairman of the meeting or the holders of a majority of the shares entitled to vote at the meeting present in person or by proxy, without notice other than announcement at the meeting of the time and place to which the meeting is adjourned, may adjourn the meeting to such time and place, subject, however, to the provisions of the proviso last set forth in Section 4 of this Article II of these Bylaws. The shareholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. The Chairman of any meeting of shareholders shall be the Chairman of the Board, unless the Board of Directors shall by resolution prior to such meeting designate another person as Chairman of such meeting. Section 6. - Voting At each meeting of shareholders, each shareholder present in person or represented by a valid proxy that satisfies the requirements of Section 8 of this Article II of these Bylaws shall be entitled to one vote for each share of common stock registered in his or her name on the books of the Corporation at the record date determined in accordance with Section 5 of Article V of these Bylaws. The voting rights, if any, of preferred stock will be established by the Board of Directors in the designation of the preferred stock. To the extent that voting rights are granted to any series of preferred stock outstanding, the holders of shares of such series of preferred stock on the books of the Corporation at the record date determined in accordance with Section 5 of Article V of these Bylaws shall be entitled to vote at the meeting of shareholders in accordance with their voting rights set forth in the designation. 2 4 Election of directors at all meetings of the shareholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any series of preferred stock to elect directors under specified circumstances, a plurality of the votes cast thereat shall elect directors. In all matters other than the election of directors, when an action is to be taken by vote of the shareholders, it shall be authorized by a majority of the votes cast by the holders of shares entitled to vote thereon, unless a greater plurality is required by the Articles of Incorporation or by applicable law. No shareholder may participate in a meeting of shareholders by a conference telephone or by other similar communications equipment, and any shareholder attempting to so participate in any meeting of shareholders shall be deemed not to be present in person at such a meeting. Section 7. - Inspection of Shareholders List The Corporation shall keep at the office of its transfer agent, within or without the State of Michigan, records containing the names and addresses of all shareholders, the number of shares held by each, and the dates when they respectively became holders of record thereof. A person who is a shareholder of record of the Corporation, upon at least ten days' written demand, may examine for any proper purpose, in person or by agent or attorney, during usual business hours, the record of shareholders and make extracts therefrom, at such place, within or without the State of Michigan, as such records are kept. The officer or agent of the Corporation having charge of the stock transfer books for shares of the Corporation shall make and certify a complete list of the shareholders entitled to vote at a shareholders' meeting or any adjournment thereof. Such list shall be produced at the time and place of the meeting and shall be subject to inspection by any shareholder during the whole time of the meeting. Section 8. - Proxies Any shareholder entitled to vote at a meeting of shareholders may authorize other persons to act for him or her by proxy; but no proxy shall be exercised after three years from its date unless otherwise specifically provided in the proxy. Without limiting the manner in which a shareholder may authorize another person or persons to act for him or her as proxy pursuant to these Bylaws, the following methods constitute a valid means by which a shareholder may grant authority to another person to act as proxy: (A) The execution of a writing authorizing another person or persons to act for the shareholder as proxy. Execution may be accomplished by the shareholder or by an authorized officer, director, employee, or agent signing the writing or causing his or her signature to be affixed to the writing by any reasonable means including, but not limited to, facsimile signature. (B) Transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will hold the proxy or to a proxy solicitation 3 5 firm, proxy support service organization, or similar agent fully authorized by the person who will hold the proxy to receive that transmission. Any telegram, cablegram, or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram, or other electronic transmission was authorized by the shareholder. If a telegram, cablegram, or other electronic transmission is determined to be valid by the inspectors, they or, if there are no inspectors, the persons making the determination shall specify the information upon which they relied. (C) A copy, facsimile telecommunication, or other reliable reproduction of the writing or transmission created pursuant to this Section 8 may be substituted or used in lieu of the original writing or transmission for any purpose for which the original writing or transmission could be used, if the copy, facsimile telecommunication, or other reproduction is a complete reproduction of the entire original writing or transmission. Proxies shall be delivered or directed to the attention of the Secretary of the Corporation before the meeting at which such proxies are intended to be voted. Section 9. - Inspectors of Election; Opening and Closing the Polls The Board of Directors, in advance of a shareholders' meeting, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the Chairman of such meeting may, and on request of a shareholder entitled to vote thereat shall, appoint one or more inspectors. In case a person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the Chairman of such meeting. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, or ballots, hear and determine challenges and questions arising in connection with the right to vote, count and tabulate votes, or ballots, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the Chairman of the meeting or a shareholder entitled to vote thereat, the inspectors shall make and execute a written report to the Chairman of the meeting of any of the facts found by them and matters determined by them. The report is prima facie evidence of the facts stated and of the vote as certified by the inspectors. The Chairman of the meeting (or his or her designee) shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting. Section 10. - Notice of Shareholder Business and Nominations (A) Annual Meetings of Shareholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the shareholders may be made at an 4 6 annual meeting of shareholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any shareholder of the Corporation who was a shareholder of record at the time of giving of notice provided for in this Section 10 of this Article II of these Bylaws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 10(A) of this Article II of these Bylaws. (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to Section 10(A)(1)(c) of this Article II of these Bylaws, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 70th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 70th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of Section 10(A)(2) of this Article II of these Bylaws to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section 10(A) of this Article II of these Bylaws shall also be considered timely, but only with 5 7 respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Shareholders. Except as otherwise provided by applicable law, only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section 10(B) of this Article II of these Bylaws, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 10(B) of this Article II of these Bylaws. In the event the Corporation calls a special meeting of shareholders for the purpose of electing one or more directors to the Board of Directors, any such shareholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if such shareholder shall deliver the notice required by Section 10(A)(2) of this Article II of these Bylaws to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 70th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a shareholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 10 of this Article II of these Bylaws shall be eligible to be elected at a meeting of shareholders to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 10 of this Article II of these Bylaws. Except as otherwise provided by applicable law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 10 of this Article II of these Bylaws and, if any proposed nomination or business is not in compliance with this Section 10 of this Article II of these Bylaws, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Section 10 of this Article II of these Bylaws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly 6 8 filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 10 of this Article II of these Bylaws, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 10 of this Article II of these Bylaws. Nothing in this Section 10 of this Article II of these Bylaws shall be deemed to affect any rights (i) of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of preferred stock to elect directors under specified circumstances. Section 11. - No Shareholder Action by Written Consent Subject to the rights of the holders of any series of preferred stock with respect to such series of preferred stock, any action required or permitted to be taken by the shareholders of the Corporation must be effected at an annual or special meeting of shareholders of the Corporation and may not be effected by any consent in writing by such shareholders. ARTICLE III. Board of Directors Section 1. - Number; Method of Election; Terms of Office; Qualification and Removal The business and affairs of the Corporation shall be managed by the Board of Directors. The number of directors of the Corporation shall be not less than one (1) nor more than nine (9), the exact number to be determined from time to time by resolution of the Board of Directors adopted by a majority of the directors then in office. The Board of Directors shall be divided into three classes as nearly equal in number as possible with staggered three-year terms, the term in office of the members of one class to expire at each annual meeting of shareholders of the Corporation. During the intervals between annual meetings of shareholders, any vacancy in the Board of Directors caused by resignation, removal, death, or other incapacity may be filled by a majority vote of the directors then in office, though less than a quorum of the Board. A directorship to be filled because of a vacancy may be filled by the Board for a term of office continuing only until the next election of the class of directors in which the vacancy occurred. When the number of directors is changed, any newly created directorships or any decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible. No decrease in the number of authorized directors constituting the Whole Board of Directors shall shorten the term of any incumbent director. Any director may be removed from office as a director at any time, but only for cause, by the affirmative vote of shareholders holding a majority of the outstanding shares of Common Stock of the Corporation entitled to vote for the election of directors at a meeting of the shareholders called for that purpose. 7 9 If for any reason the annual meeting of shareholders shall not be held at the time appointed by these Bylaws, the directors shall cause a meeting to be held for the election of the directors as soon thereafter as conveniently may be, and the directors then in office who are nominees for reelection or for whom successors are to be elected shall continue in office until such election shall have been held and until their reelection or their successors have been duly elected and qualified. Section 2. - Meetings The Board of Directors may hold its meetings and have an office and keep the books of the Corporation, except as otherwise provided by applicable law or these Bylaws, in such place or places within or without the State of Michigan as the Board may from time to time determine. The Board of Directors may in its discretion provide for regular meetings of the Board. Notice of regular meetings need not be given. Special meetings of the Board shall be held whenever called by direction of the Chairman of the Board or the President or any two of the directors for the time being in office. The Secretary shall give notice of a special meeting by mailing same at least three days, or by delivering personally or by overnight mail or courier service, or by telegraphing the same at least one day, or by telephoning or delivering by facsimile transmission at least twelve hours, before the meeting to each director, but such notice may be waived by any director. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. A meeting may be held without notice, and any business may be transacted thereat, if every director shall be present, or if those not present waive notice of the meeting in accordance with Article VI of these Bylaws. No notice of any adjourned meeting need be given. Section 3. - Quorum and Actions of the Board of Directors Except as provided in Section 6 of this Article III of these Bylaws, a majority of the Board of Directors shall constitute a quorum for the transaction of business, and the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors; but if there be less than a quorum at any meeting of the Board, a majority of those present may adjourn the meeting from time to time. The directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. A member of the Board may participate in any meeting of the Board by means of conference telephone or similar communications equipment by means of which all persons may participate in the meeting, and participation in a meeting by such means shall constitute presence in person at such meeting. 8 10 Section 4. - Committees The Board of Directors may designate from among its members such committees as it may deem appropriate from time to time, and such committees shall exercise the authority delegated to them. The Board may delegate to any committee, but not more than one committee, the power and authority to declare a distribution or dividend upon any outstanding class or series of capital stock of the Corporation, and the Board may delegate to the same or any other committee, but not more than one committee, the power and authority to authorize the issuance of shares of any class or series of capital stock of the Corporation. Section 5. - Quorum and Action of a Committee Except as provided in Section 6 of this Article III of these Bylaws, a majority of any committee of the Board of Directors shall constitute a quorum for the transaction of business, and the acts of a majority of the committee members present at a meeting at which a quorum is present shall be the acts of the committee; but if there be less than a quorum at any meeting of a committee, a majority of those present may adjourn the meeting from time to time. The members of a committee present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough committee members to leave less than a quorum. A majority, or the chairperson, of any committee may fix the time and place of its meeting, unless the Board shall otherwise provide. Notice of meetings of a committee shall be given to each member of the committee in the manner provided for in the second paragraph of Section 2 of this Article III of these Bylaws. In the absence or disqualification of a member of a committee, the remaining members thereof present at a meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of such absent or disqualified member. A member of a committee of the Board of Directors may participate in any meeting of the committee by means of conference telephone or similar communication equipment by means of which all persons may participate in the meeting, and participation in a meeting by such means shall constitute presence in person at such meeting. Section 6. - Action by Unanimous Written Consent Any action required or permitted to be taken at any meeting of the Board of Directors or a committee thereof may be taken without a meeting if, before the action, all members of the Board or of the committee consent thereto in writing. The written consents shall be filed with the minutes of the proceedings of the Board or committee. The consent shall have the same effect as a vote of the Board or committee for all purposes. Section 7. - Compensation of the Board of Directors Directors, unless employed by and receiving a salary from the Corporation, shall receive such compensation for serving on the Board and for attending meetings of the Board and any committee thereof as may be fixed by the Board. Directors shall be reimbursed their reasonable expenses incurred while engaged in the business of the Corporation. 9 11 ARTICLE IV. Officers Section 1. - Selection and Removal At the first meeting of the Board of Directors after the annual meeting of shareholders each year, the Board of Directors shall elect a President, a Secretary, and a Treasurer. All of these officers, except the Secretary, are required to be regular full-time employees of the Corporation. The Board of Directors may also elect one or more Vice Presidents including Senior Vice Presidents or Executive Vice Presidents, one or more Assistant Secretaries and one or more Assistant Treasurers. No one of these officers needs to be a director. Any two of the above offices except those of (a) President and Vice President, (b) Secretary and Assistant Secretary or (c) Treasurer and Assistant Treasurer may be held by the same person; but no officer shall execute, acknowledge, or verify any instrument in more than one capacity. An officer shall hold office for the term of one year and until his or her successor shall have been elected or appointed and qualified, or until resignation or removal. Any officer may be removed by the Board of Directors with or without cause. The Board of Directors may fill any vacancies in any offices occurring for whatever reason. The Board is authorized from time to time to elect or appoint one of its members as Chairman of the Board or Vice Chairman of the Board and such person or persons shall perform such duties as shall be prescribed by these Bylaws or by the Board of Directors from time to time. Section 2. - Powers and Duties of the President Subject to the direction of the Board of Directors, the President shall be the chief executive officer in general charge of the business and affairs of the Corporation, shall have control over the general operations of the Corporation and shall establish and implement its corporate policies. He or she shall have supervisory power and authority over all officers and agents elected or appointed by the Board of Directors of the Corporation and over the employment, appointment, functions, duties, removal or discharge of all other employees and agents of the Corporation. The President shall perform such other duties as may be delegated to him or her from time to time by the Board of Directors. The President may delegate any of his or her powers or functions to any officer of the Corporation. The President shall at least once in each year cause a true statement of the operations and properties of the Corporation for the preceding fiscal year to be made and to be communicated or distributed to each shareholder thereof within four months after the end of the preceding fiscal year. 10 12 In the event of the absence or inability to act of the Chairman of the Board, the President, in addition to his or her powers and duties as President, shall have the powers and perform the duties of the office of the Chairman of the Board. Section 3. - Powers and Duties of Vice Presidents The Vice Presidents shall perform any such duties as may from time to time be assigned to them by the Board of Directors or the President. Section 4. - Powers and Duties of Secretary The Secretary or an Assistant Secretary shall record the proceedings of all meetings of the Board of Directors and of the shareholders, in books kept for that purpose. The Secretary shall be the custodian of the corporate seal, and he or she or an Assistant Secretary shall affix the same to and countersign papers requiring such acts. The Secretary and the Assistant Secretaries shall perform such other duties as may be required by the Board of Directors, the President, or a designated Vice President. Section 5. - Powers and Duties of Treasurer The Treasurer and Assistant Treasurers shall have care and custody of all funds of the Corporation and disburse and administer the same under the direction of the Board of Directors, the President, or a designated Vice President, and shall perform such other duties as the Board of Directors, the President, or a designated Vice President may assign to them. Section 6. - Voting Shares of Other Corporations Unless otherwise ordered by the Board of Directors, the President or such proxy as he or she may appoint, shall vote all shares which the Corporation may own in another corporation, and if solicited, shall consent in writing, in the name of the Corporation as such holder, to or against any action by such other corporation, and if the officer himself or herself is not so voting or consenting, the officer appointing such proxy may instruct such proxy as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies or other instruments as such officer may deem necessary or proper in the premises. Section 7. - Execution of Instruments The President or a Vice President or such other officer from time to time designated by the Board of Directors is authorized to sign and the Secretary or an Assistant Secretary to attest under the corporate seal, on behalf of the Corporation, contracts and other instruments in writing, including bonds and other obligations required in legal proceedings, surety and indemnifying bonds required in the conduct of the business of the corporation, papers required by the applicable laws of any state with respect to the right to conduct business in such state, and reports required by the applicable laws of the United States or any state, territory, or foreign country. 11 13 Section 8. - Officers Appointed by the President The President may appoint such officers, other than those that shall be elected by the Board of Directors pursuant to Section I of this Article IV of these Bylaws, and such agents as may be necessary or desirable for the conduct of the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as may be provided by the Board of Directors or any committee thereof or the President, as the case may be. Any such officer or agent appointed by the President may be removed by the President with or without cause. The President may fill any vacancies in any office appointed by the President occurring for whatever reason. Section 9. - Delegation Subject to any restrictions imposed by the Board of Directors, the President and/or any Vice President of the Corporation may delegate contractual powers to others under his or her jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power. ARTICLE V. Capital Stock Section 1. - Certificates of Stock Every shareholder shall be entitled to have a certificate of stock signed by or in the name of the Corporation by the Chairman of the Board, the President, or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, and such signatures may be facsimiles, sealed with the Corporation's seal, certifying the number and class of shares represented by such certificate, and where such certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee, the signatures of the officers may be facsimiles. In case any officer who shall have signed or whose facsimile signature shall have been placed upon a certificate shall cease to be such officer, whether because of death, resignation or otherwise, before such certificate shall have been issued by the Corporation, such certificate may nevertheless be issued by the Corporation with the same effect as if such person were such officer at the date of issue. If the Corporation is authorized to issue shares of more than one class of stock, the certificate shall state on its face or back that the Corporation will furnish a shareholder upon request and without charge a full statement of the designation, relative rights, preferences and limitations of the shares of each class to be issued, and if the Corporation is authorized to issue any class of shares in a series, the designation, relative rights, preferences and limitations of each series so far as the same have been prescribed and the authority of the Board to designate and prescribe the relative rights, preferences and limitations of other series. Section 2. - Transfers of Shares Upon surrender of the Corporation or the transfer agent of the Corporation of a stock certificate duly endorsed or accompanied by proper evidence of succession, assignment, or authority to 12 14 transfer, it shall be the duty of the Corporation to issue a new certificate for not more than the same number of shares (appropriately adjusted for any dividends paid in shares of the Corporation, or any subdivision, combination or reclassification of the shares of the Corporation) to the person entitled thereto, cancel the old certificate, and record the transaction upon the books of the Corporation. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Section 3. - Lost, Stolen, or Destroyed Certificates The Chairman of the Board, President, Secretary, or any Vice President may approve issuance of replacement stock certificates upon presentation of such documentation and obligation bond(s), if any, as such officer, in his or her discretion, shall deem adequate for the protection of the Corporation. Section 4. - Transfer Agent and Registrar; Regulations The Corporation shall, if and whenever the Board of Directors shall so determine, maintain one or more transfer offices or agencies, each in charge of a transfer agent designated by the Board of Directors, where the shares of the capital stock of the Corporation shall be directly transferable, or a transfer clerk to act on behalf of the Corporation in connection with such transfers, and also one or more registry offices, each in charge of a registrar designated by the Board of Directors, where such shares of stock shall be registered; and no certificate for shares of the capital stock of the Corporation in respect of which a transfer agent or transfer clerk and registrar shall have been designated shall be valid unless countersigned by such transfer agent or transfer clerk and registered by such registrar, and such signature may be a facsimile. The Board of Directors may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates for shares of the capital stock of the Corporation. Section 5. - Fixing of Record Date For the purpose of determining (a) shareholders entitled to notice of and to vote at a meeting of shareholders, (b) shareholders entitled to receive payment of any dividend, or (c) shareholders for any other purpose, the Board of Directors may fix, in advance, a date as the record date for any such determination, such date in the case of a meeting to be not more than 60 nor less than 10 days before the date of the meeting and in any other case to be not more than 60 days before the date of the action to be taken. If a record date is not fixed, (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be the close of business on the day next preceding the day on which notice is given and (b) the record date for determining shareholders for any other purpose shall be the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment thereof unless the Board of Directors fixes a new record date for the adjourned meeting. 13 15 ARTICLE VI. Waiver of Notice Notice of the time, place, and purpose of any meeting of the Board of Directors, a committee thereof, or shareholders may be waived by telegram, radiogram, cablegram, facsimile transmission or other writing by those not present, and entitled to vote thereat, either before or after the holding thereof. ARTICLE VII. Indemnification and Insurance Section 1. - Right to Indemnification and Advance Payment of Expenses a Contract Right All rights to indemnification and payment of expenses in advance of the final disposition of any action, suit or proceeding conferred by Article IX of the Corporation's Amended and Restated Articles of Incorporation and this Article VII of these Bylaws shall be a contract right inuring to the benefit of (i) the person conferred such rights to indemnification and advance payment of expenses by Article IX of the Corporation's Amended and Restated Articles of Incorporation and this Article VII of these Bylaws, and (ii) such person's heirs, executors and administrators. Section 2. - Advance Payment of Expenses The Corporation shall pay and/or reimburse (as applicable) the reasonable expenses incurred by a director or officer or a former director or officer, or other person designated as entitled to indemnification and/or advance payment of expenses under Article IX of the Corporation's Amended and Restated Articles of Incorporation and/or this Article VII of these Bylaws, who is a party or threatened to be made a party to an action, suit or proceeding in advance of final disposition of the action, suit or proceeding. Such advance payment of expenses shall be made upon satisfaction of the following (to the extent required by the Business Corporation Act of the State of Michigan): (1) the person seeking advance payment of expenses furnishes the Corporation a written affirmation of his or her good faith belief that he or she has met the applicable standard of conduct set forth in Article IX of the Corporation's Amended and Restated Articles of Incorporation entitling such person to indemnification; (2) the person seeking advance payment of expenses furnishes the Corporation a written undertaking, executed personally or on his or her own behalf, to repay the advance if it is ultimately determined that he or she did not meet the standard of conduct set forth in Article IX of the Corporation's Amended and Restated Articles of Incorporation entitling such person to indemnification; (3) a determination is made that the facts then known to those making the determination as to the entitlement to advance payment of expenses would not preclude 14 16 indemnification under Article IX of the Corporation's Amended and Restated Articles of Incorporation. The determinations and evaluations under this Section 2 of this Article VII of these Bylaws shall be made in the applicable manner specified in Article IX of the Corporation's Amended and Restated Articles of Incorporation and this Article VII of these Bylaws or, if the person seeking advance payment of expenses is party to an indemnification agreement with the Corporation (or any of its subsidiaries), in the applicable manner (if any) specified in such agreement. Section 3. - Claim of Indemnification and Advance Payment of Expenses In the event a claimant shall submit to the Corporation a written request for indemnification and/or advance payment of expenses pursuant to Article IX of the Corporation's Amended and Restated Articles of Incorporation and this Article VII of these Bylaws and there shall have occurred within two years prior to the date of the commencement of the action, suit or proceeding for which indemnification and/or advance payment of expenses is claimed a Change of Control (as hereinafter defined), determination of entitlement to indemnification and/or advance payment of expenses is to be made by Independent Counsel (as hereinafter defined) selected by the claimant unless the claimant shall request that such selection be made by the Board of Directors. If it is so determined that the claimant is entitled to indemnification and/or advance payment of expenses, payment to the claimant shall be made within 10 days after such determination. Section 4. - Enforcement of Right to Indemnification and Advance Payment of Expenses If a claim for indemnification and/or advance payment of expenses under Article IX of the Corporation's Amended and Restated Articles of Incorporation and/or this Article VII of these Bylaws is not paid in full by the Corporation within thirty days after a written claim requesting such payment has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standard of conduct which makes it permissible under the Business Corporation Act of the State of Michigan for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, Independent Counsel or shareholders) to have made a determination prior to the commencement of such action that indemnification and/or advance payment of the expenses of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Business Corporation Act of the State of Michigan, nor an actual determination by the Corporation (including its Board of Directors, Independent Counsel or shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. 15 17 Section 5. - Determination of Entitlement to Indemnification and/or Advance Payment of Expenses If a determination shall have been made pursuant to Article IX of the Corporation's Amended and Restated Articles of Incorporation or Section 3 of this Article VII of these Bylaws that the claimant is entitled to indemnification and/or advance payment of expenses, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to Section 4 of this Article VII of these Bylaws. Section 6. - Procedures Not to be Contested The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to Section 4 of this Article VII of these Bylaws that the procedures and presumptions of Article IX of the Corporation's Amended and Restated Articles of Incorporation and/or this Article VII of these Bylaws are not valid, binding and enforceable and shall stipulate in such proceeding that the Corporation is bound by all the provisions of Article IX of the Corporation's Amended and Restated Articles of Incorporation and this Article VII of these Bylaws. Section 7. - No Retroactive Effect of Amendments No repeal or modification of Article IX of the Corporation's Amended and Restated Articles of Incorporation and/or of this Article VII of these Bylaws shall in any way diminish or adversely affect the rights of any present, former or future director, officer, employee or agent of the Corporation hereunder in respect of any occurrence or matter arising prior to any such repeal or modification. Section 8. - Severability If any provision or provisions of this Article VII of these Bylaws shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this Article VII of these Bylaws (including, without limitation, each portion of any section of this Article VII of these Bylaws containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this Article VII of these Bylaws (including, without limitation, each such portion of any section of this Article VII of these Bylaws containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 9. - Definitions For purposes of this Article VII of these Bylaws: (A) "Change of Control" means: (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person")) of beneficial ownership (within 16 18 the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this Section 9(A)(1) of this Article VII of these Bylaws, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Corporation, (ii) any acquisition by the Corporation, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any other Corporation controlled by the Corporation or (iv) any acquisition by any other Corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of Section 9(A)(3) of this Article VII of these Bylaws; or (2) Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (3) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the Corporation resulting from such Business Combination (including, without limitation, another corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the Board of Directors of the corporation resulting from such Business Combination were 17 19 members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (4) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. (B) "Independent Counsel" means a law firm, a member of a law firm, or an independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Corporation or the claimant in an action to determine the claimant's rights under this Section 9 of this Article VII of these Bylaws. Section 10. - Notices Any notice, request or other communication required or permitted to be given to the Corporation under Article IX of the Corporation's Amended and Restated Articles of Incorporation or under this Article VII of these Bylaws shall be in writing and either delivered in person or sent by telegram or facsimile transmission, or overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation and shall be effective only upon receipt by the Secretary. ARTICLE VIII. Control Share Acquisitions Statute Pursuant to Section 794 of the Business Corporation Act of the State of Michigan (Mich. Comp. Laws Ann.ss.450.1794 (West 1995)), the Corporation expressly elects that Chapter 7B, such chapter being that commonly entitled "Control Share Acquisitions Statute" and comprised of Sections 790 through 799, of the Business Corporation Act of the State of Michigan (Mich. Comp. Laws Ann.ss.ss.450.1790 to 450.1799 (West 1995)), shall not apply to control share acquisitions of shares of the Corporation; and the phrase "control share acquisitions" having the meaning ascribed thereto in Section 791 of the Business Corporation Act of the State of Michigan (Mich. Comp. Laws Ann. ss. 450.1791 (West 1995)). ARTICLE IX. Miscellaneous Provisions Section 1. - Fiscal Year The fiscal year of the Corporation shall be the 52 or 53-week period that ends on the Saturday closest to each June 30. Section 2. - Reliance Upon Records In discharging his or her duties, a director or an officer, when acting in good faith, may rely upon the opinion of counsel for the Corporation, upon the report of an independent appraiser selected with reasonable care by the Board, or upon 18 20 financial statements of the Corporation represented to him or her to be correct by the President or the officer of the Corporation having charge of its books of account, or stated in a written report by an independent or certified public accountant or firm of such accountants fairly to reflect the financial condition of the Corporation. Section 3. - Checks All checks, drafts or orders for the payment of money and all notes and acceptances shall be signed by such officer(s) or agent(s) or both as the Board of Directors may from time to time designate. No check, draft, or note shall be signed in blank. ARTICLE X. Amendments To the extent not in conflict or inconsistent with the Articles of Incorporation of the Corporation, as amended, these Bylaws may be amended or repealed or new Bylaws may be adopted by a majority of the Board of Directors then in office. So long as the shareholders of the Corporation shall be empowered by applicable law to adopt, amend or repeal bylaws for the Corporation or adopt any provision inconsistent herewith, such action may only be taken by the shareholders by the favorable vote of the holders of not less than eighty percent (80%) of the issued and outstanding shares of the common stock of the Corporation unless such action has first been recommended by the favorable vote of at least a majority of the Whole Board of Directors. 19 EX-10.(I) 3 c57316ex10-i.txt CONSULTING AGREEMENT 1 EXHIBIT 10(i) CONSULTING AGREEMENT THIS AGREEMENT made this 2nd day of June, 2000, by and between MICHAEL J. JANDERNOA (the "Consultant") and PERRIGO COMPANY, a Michigan corporation having its corporate offices at 515 Eastern Avenue, Allegan, Michigan ("Perrigo"). WITNESSETH: WHEREAS, Consultant has been a loyal and valuable executive officer of Perrigo for many years and has peculiar and special knowledge regarding all facets of the business of Perrigo and the manner in which it is conducted; and WHEREAS, Perrigo desires to assure itself of the continued services of Consultant as a consultant to assist the new President and Chief Executive Officer in the performance of his duties on an as requested basis during the term of this Agreement; and WHEREAS, Consultant desires to be retained by Perrigo as a consultant under the terms and conditions as hereinafter set forth; NOW, THEREFORE, in consideration of the services to be performed by Consultant for Perrigo and in further consideration of the mutual covenants and agreements hereinafter set forth, Consultant and Perrigo have agreed as follows: 1. Services. During the term of this Agreement, Consultant shall render to Perrigo, any successor corporation, affiliate or parent company of Perrigo such consulting and advisory services as shall be requested by the President and Chief Executive Officer of Perrigo that are consistent with the services performed by Consultant while employed by Perrigo. Subject to Section 2 below, during the first eight (8) months of the term of this Agreement Consultant shall provide consulting services to the President and Chief Executive Officer on an as-requested basis, which services shall be performed at all reasonable times. Subject to Section 2 below, during the remainder of the term of this Agreement, the consulting services shall be provided at the times and in the manner, by telephone or in person, specified by Consultant. 2. Term. The term of this Agreement shall begin on the Effective Date hereof and shall end two (2) years from such Effective Date. 3. Compensation. (a) As an inducement to Consultant to enter into this Agreement and accept the terms herein set forth, Perrigo agrees to pay to Consultant a pro rata portion of the Management Incentive bonus that Consultant would have earned for fiscal year 2000 under Perrigo's 2 Management Incentive Bonus Plan (the "Plan") had Consultant continued his written consent of employment with Perrigo through the payment dates provided for in the Plan ("the MIB Bonus"). The pro rata bonus will be determined by multiplying the MIB Bonus by a fraction, the numerator of which is 10 and the denominator of which is 12. The pro rata bonus as determined pursuant to this Section 3(a) shall be paid on the dates and in the proportionate amounts that bonuses are paid to all other participants in the Plan for fiscal year 2000. (b) During the term of this Agreement, Perrigo shall pay and provide to Consultant, for the services of Consultant under this Agreement, compensation and benefits as follows: (i) A consulting fee of Sixteen Thousand Six Hundred Sixty Eight Dollars ($16,668.00) monthly shall be paid to Consultant during the two year term of this Agreement commencing in May 2000. (ii) A private health insurance policy shall be provided to Consultant for the term of this Agreement that is comparable to the health insurance coverage now provided to the executive officers of Perrigo. (c) During the term of this Agreement, Perrigo shall provide to Consultant office space and secretarial services in the area leased by it in the Grand Rapids, Michigan area together with basic utility services (including telephone service) copying and telecopying services, all at no cost to Consultant; provided; however that (i) Consultant shall reimburse Perrigo for long distance charges incurred by him that were not in connection with business conducted by him on behalf of Perrigo and (ii) Consultant shall pay the full cost of the secretarial services from and after October 1, 2001. (d) In addition to the amounts payable pursuant to Section 3(a), (b), and (c) above, Perrigo shall reimburse Consultant for his other reasonable out-of-pocket expenses incurred in the performance of his duties upon submission by Consultant of appropriate documented expense reports. (e) Consultant's existing stock options shall all become vested as of May 1, 2000 and Consultant shall have a period of three (3) years, ending May 1, 2003, during which Consultant may exercise those options. In the event of a termination of this Agreement pursuant to Section 5 (a) or (c) below, Consultant, or his heirs, representatives, or assigns, in the event of his death, shall have the right to exercise Consultants existing stock options for the remainder of the period specified above. (f) As long as Consultant remains on the Board of Directors of Perrigo, he shall receive the compensation in effect from time to time paid by Perrigo to its outside directors. Consultant agrees that all perquisites and benefits provided to him as an executive officer of Perrigo ceased as of May 1, 2000. 2 3 4. Perrigo, (a) engage directly or indirectly, for himself or others, in any activity or employment in the faithful performance of which it could be reasonably anticipated that he would be required or expected to use or disclose Confidential Information obtained by him prior to or during the term of this Agreement, or (b) otherwise disclose such Confidential Information to any third party except as necessary for the performance of his duties under this Agreement. The term "Confidential Information" shall mean and include methods, processes, techniques, formulae, compounds, compositions, equipment, research and development data, clinical and pharmacological data, marketing and sales information, personnel data, customer or supplier lists, financial information or data, strategic, operational, financial or other plans, computer hardware and software, and all know-how and trade secrets which are in the possession of Perrigo, its subsidiaries, or any company affiliated with Perrigo, and which have not been published or disclosed to the general public. In consideration of the agreements set forth in Section 3 above, Consultant agrees to execute a Noncompetition and Nondisclosure Agreement in the form attached as Exhibit A. 5. Termination. This Agreement may be terminated by: (a) The expiration of the term of this Agreement pursuant to Section 2 above. (b) Mutual written agreement of Consultant and Perrigo. (c) Perrigo upon the death of Consultant. (d) Perrigo upon the refusal of Consultant to make himself reasonably available for the consulting services to be rendered hereunder during the term of this Agreement. (e) Perrigo upon a material violation by Consultant of any of the material covenants contained herein. (f) Perrigo in the event of Consultant's dishonesty or willful misconduct. In the event this Agreement is terminated, the rights of Consultant to payments hereunder shall immediately terminate for any payment that becomes due and owing after the date of termination. Perrigo's rights of termination shall be without prejudice to its other legal remedies. Consultant's obligations under Section 4 hereof shall survive expiration or termination of this Agreement. 6. Relationship of the Parties. The relationship between Perrigo and Consultant will be that of principal and agent; provided, however, that except as otherwise provided by Perrigo in writing, Consultant 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, Consultant 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 Consultant under this Agreement, all tax liability in respect of 3 4 Consultant's receipt of compensation hereunder being the sole and exclusive responsibility of Consultant. 7. Indemnification. In connection with the performance of his duties hereunder, Consultant shall be entitled to indemnification as an agent of Perrigo to the full extent required or provided for by (a) the Business Corporation Law of the State of Michigan; (b) the Articles of Incorporation and By-laws of Perrigo; and (c) the terms of the attached Indemnity Agreement. 8. 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 Consultant: Michael J. Jandernoa 2431 Belleglade S.E. Grand Rapids, Michigan 49546 (b) If to Perrigo: Perrigo Company 515 Eastern Avenue Allegan, Michigan 49010 Attention: Chief Executive Officer 9. Entire Agreement. This document contains the entire agreement between Consultant and Perrigo concerning the subject matter hereof and it may not be changed orally, but only by agreement in writing, executed by Consultant and Perrigo. 10. Governing Law. This Agreement and the performance hereunder shall be construed in accordance with the laws of the State of Michigan. 11. Effective Date. The "Effective Date" of this Agreement shall be May 1, 2000. PERRIGO COMPANY, a Michigan corporation By: ------------------------ Its: -------------------- CONSULTANT: --------------------------- Michael J. Jandernoa 4 5 NONCOMPETITION AND NONDISCLOSURE AGREEMENT THIS NONCOMPETITION AND NONDISCLOSURE AGREEMENT ("Agreement") entered into on June 2, 2000, by and between PERRIGO COMPANY, a Michigan corporation, for and in behalf of itself and each of its subsidiary and affiliated companies (collectively referred to "Perrigo" or the "Company"), and MICHAEL J. JANDERNOA (referred to as "Consultant"). WITNESSETH: WHEREAS, Perrigo's special competence in its various fields of endeavor is the secret of its growth, and such growth depends to a significant degree on Perrigo's confidential, proprietary information. This information that is not generally known to others and includes more and better information that our competitors have about research, development, production, marketing and management in the manufacture, preparation, handling, treatment, storage, sale, distribution, shipment and use of products for the Store and Value Brand Product (as herein defined) ("Company Business"). To obtain such information and use it successfully, Perrigo spends considerable sums of money in product development, the development of marketing methods, training its employees, and service to its customers; and WHEREAS, Consultant has entered into a Consulting Agreement with Perrigo. In connection with providing such consulting services, Consultant has obtained or will obtain access to sensitive information regarding the Company Business and its customers. The parties agree that improper disclosure or use of that information will cause series and irreparable harm to the Company; and WHEREAS, Perrigo has agreed to cause all of Consultant's existing stock options to vest as of May 1, 2000 and to extend to Consultant a period of two (2) years, ending May 1, 2002, during which Consultant may exercise those options; and WHEREAS, on the date hereof Consultant has entered into a Consulting Agreement and has further agreed as a condition of Perrigo entering into the Consulting Agreement and this Noncompetition and Nondisclosure Agreement to not compete with Perrigo; NOW, THEREFORE, in consideration for the vesting of all of Consultant's existing stock options, the extension of Consultant's time to exercise those stock options to May 1, 2003 and for other good and valuable consideration, the receipt of which is acknowledged, the parties agree as follows: 12. Restriction on Competing Activities. During the term of Consultant's Consulting Agreement (May 1, 2000 through May 1, 2002), Consultant will not, directly or indirectly, alone or as a partner, officer, director, owner, employee or consultant of any business or other entity, be engaged in any business or other enterprise that competes, directly or indirectly, with the Company Business without the express written consent of the Board of Directors of Perrigo. 5 6 13. Restriction on Post-Consultant Activities. For a period of two (2) years following the expiration of the Consulting Agreement, Consultant shall not, directly or indirectly, alone or as a partner, director, officer, owner, employee or consultant of any business or other entity, compete in any way with the Company Business. In addition to its plain meaning and understanding, "compete in any way with the Company Business" shall specifically include engaging in any way in the production, distribution or sale of any Store and Value Brand Products that are similar to or competitive with those now or hereafter produced, distributed or sold by Perrigo. As used in this Agreement, "Store and Value Brand Products" means those products that are supplied by a manufacturer or marketer through channels of distribution (including, but not limited to, wholesalers, distributors and retailers) that bear either (i) a label or brand name that is not regularly advertised by national broadcast, print, direct mail or other media for the purpose of establishing brand name recognition of the manufacturer, marketer and/or distributor with the general public. Consultant also agrees that during this two-year period, he will not, directly or indirectly, either for himself or any other person, solicit or induce, or attempt to solicit or induce, any individual who is an employee, independent contractor, supplier or customer of Perrigo to terminate his, her or its business relationship with the Company or in any way interfere with or disrupt the Company's relationship with any of its employees, independent contractors, suppliers or customers. 14. Nondisclosure. Consultant will not during or at any time after the termination of his consulting relationship with Perrigo use, divulge or convey to others any secret or confidential information, knowledge or data of Perrigo or that of third parties obtained by Consultant during the period of consulting for Perrigo. Such secret or confidential information, knowledge or data includes, but is not limited to, secrete or confidential matters: (a) Of a technical nature such as, but not limited to, methods, know-how, formulas, compositions, processes, discoveries, machines, inventions, computer programs and similar items or research projects; (b) Of a business nature such as, but not limited to, information about costs, purchasing, profits, marketing, sales or lists of customers; and (c) Pertaining to future developments such as, but not limited to, research and development or future marketing or merchandising. 15. Return of Company Property. Upon termination of the Consulting Agreement with Perrigo, or at any other time at Perrigo's request, Consultant agrees: (a) To deliver promptly to Perrigo all manuals, letters, notes, papers, books, reports, sketches, computer data or disks, files and programs, price lists, customer files, memoranda, contracts and agreements, business and marketing plans, product formulations, manufacturing processes, procedures and methods (including equipment specifications and drawings), vendor lists, vendor files, customer lists, stored or recorded documents, and all other materials and copies thereof relating in any way to the Company Business and in any way 6 7 obtained by Consultant during the period of employment with Perrigo which are in Consultant's possession or under his control. Consultant further agrees that he will not make or retain any copies of any of the foregoing and will so represent to Perrigo upon termination of employment. (b) To confirm to Perrigo that all of Perrigo's computer records, files and programs have first been turned over to Perrigo and then deleted or erased from all computer equipment owned, leased or used by Consultant. (c) To return to Perrigo all personal property provided for Consultant's use during his consulting with Perrigo including, but not limited to, automobiles, computers and related equipment, telephones, credit cards, security cards and identifications, keys and tools. 16. Remedies. Consultant acknowledges and agrees that monetary damages for his breach of any provision of this Agreement would be an inadequate remedy and that the Company would not have an adequate remedy at law for such breach. Accordingly, Consultant agrees that, in addition to all other rights and remedies available to the Company to enforce its rights pursuant to this Agreement, the Company shall, without the necessity of proving irreparable harm or of posting a bond, be entitled to such equitable relief from any court with proper jurisdiction, including, but not limited to, an injunction, a temporary restraining order, or an order for specific performance, as may be necessary to enforce or prevent a violation (whether anticipatory, continuing or future) of any provision of this Agreement. If Consultant breaches any provision of this Agreement, he shall pay all expenses, including court costs and actual attorney fees, incurred by the Company in enforcing such provision. 17. Enforceability. The unenforceability of any provision or portion of any provision of this Agreement shall not affect the enforceability of the remaining provisions or the remainder of any provision of this Agreement. If at any time a court determines that any restrictive covenant contained in this Agreement is unreasonable, the parties agree that the maximum restriction permitted by law shall be substituted for the stated restriction and that such substitution shall govern this Agreement as if originally part of this Agreement. 18. Binding Effect. This Agreement and the rights and obligations of Perrigo hereunder shall inure to the benefit of and be binding upon Perrigo and its successors and assigns. 19. Entire Agreement Modifications. This Agreement contains the entire agreement between the parties with respect to its subject matter and supersedes all other agreements, whether oral or written, between the parties regarding such subject matter. This Agreement may be modified or terminated only through a written instrument signed by each of the parties. 20. Waiver. The waiver by either party of the enforcement or the breach of any provision of this Agreement shall not operate or be construed as a subsequent or continuing waiver of the enforcement or the breach of any provision. The failure by either party to insist upon strict compliance of any provision of this Agreement shall not be deemed a waiver of such provision. No waiver shall be valid unless in writing and signed by the party giving the waiver. 7 8 21. Governing Law. This Agreement shall be enforced, governed and construed by the laws of the State of Michigan, regardless of the fact that either of the parties may be or become a resident of another state. The parties have executed this Agreement as of the date first appearing above. PERRIGO COMPANY By: ------------------------ Its: -------------------- CONSULTANT: --------------------------- Michael J. Jandernoa 8 9 INDEMNITY AGREEMENT This Agreement is entered into this 2nd day of June, 2000, effective as of May 1, 2000, by and between PERRIGO COMPANY, a Michigan corporation (the "Company"), 515 Eastern Avenue, Allegan, Michigan 49010, and Michael J. Jandernoa ("Indemnitee"), whose address is 2431 Belleglade S.E., Grand Rapids, Michigan 49546. WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation evidenced by present trends subjects directors and officers to expensive litigation risks at the same time that the cost of directors' and officers' liability insurance has steadily increased and its availability has been severely limited; and WHEREAS, it is now and has always been the express policy of the Company to indemnify its directors and officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, Indemnitee has terminated his employment with the Company and his position as an officer of Company but will continue to consult with the Company for a period of two years in order to help the new President and Chief Executive Officer with the transition into his position; and WHEREAS, the Company believes it is appropriate and in the best interest of the Company to indemnify Indemnitee in connection with the consulting services provided by him to the Company during the two year term of his consulting arrangement in addition to the indemnification protection now provided to him as a director of the Company; WHEREAS, the Act (as defined below) permits the Company to contractually commit itself to increase the scope of indemnification beyond the indemnification rights provided for in the Act and the Company has determined under the circumstances that it is reasonable and necessary and in the best interest of the Company and its shareholders to do so in the case of Indemnitee in order to assure an orderly transition of his duties to the Company's new President and Chief Executive Officer during the next two years. NOW, THEREFORE, the parties agree as follows: SECTION 1 Definitions. As used in this Agreement: (a) "Act" means the Michigan Business Corporation Act in existence on the date of this Agreement. (b) "Change in Control" means a change in control of the Company after the effective date of this Agreement of a nature that would be required to be reported in response to Item 6(e) 9 10 of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act, whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the effective date of this Agreement (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities without the prior approval of at least eighty percent (80%) of the members of the Board in office immediately prior to such person attaining such percentage interest; (ii) the Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least eighty percent (80%) of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board. (c) "Corporate Position" means the position of a person as a director, officer, employee, agent or fiduciary of or as a consultant to the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. (d) "Disinterested Director" means a director of the Company who is not and was not a party to or threatened to be made a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (e) "Expenses" shall mean all costs, expenses, and obligations paid or incurred in connection with investigating, litigating, being a witness in, defending or participating in, or preparing to litigate, defend, be a witness in or participate in any matter that is the subject of a Proceeding, including attorneys' and accountants' fees and court costs. (f) "Independent Committee of the Board" means a committee of two or more Disinterested Directors appointed by the Board of Directors of the Company to determine the right of Indemnitee to be indemnified pursuant to the terms of this Agreement and to act upon all other issues and matters relating to such indemnification. (g) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent (i) the Company or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. 10 11 (h) "Independent Director" means a director of the Company designated as an independent director pursuant to Section 450.1505(3) of the Michigan Business Corporation Act now in effect. (i) "Proceeding" shall mean any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation, whether brought by or in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise by reason of the fact that Indemnitee held or holds a Corporate Position, or by reason of any action taken by Indemnitee or any inaction on Indemnitee's part while acting in a Corporate Position, or by reason of the fact that Indemnitee is or was serving at the request of the Company in a Corporate Position of another corporation, or as a member, agent or fiduciary of a partnership, joint venture, trust or other enterprise. (j) "Resolution Costs" shall mean any amount, fine or penalty paid or payable by Indemnitee in satisfaction of a final judgment entered by a court of competent jurisdiction in any Proceeding or in settlement of any such Proceeding. (k) "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. SECTION 2 Agreement to Serve. Indemnitee agrees to serve as a consultant to the Company for the period and subject to the terms set forth in a Consulting Agreement entered into on the execution date of this Agreement. SECTION 3 Indemnification. (a) In any Proceeding other than a Proceeding by or in the right of the Company, the Company shall indemnify Indemnitee against all Expenses and Resolution Costs actually and reasonably incurred by Indemnitee in connection with such Proceeding. Notwithstanding the preceding but subject to Section 4 below, no indemnification shall be made under this subsection unless otherwise determined or directed by the court in which such proceeding was brought: (i) with respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (ii) on account of any suit in which a final judgment or other final adjudication is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act and amendments thereto or similar provisions of any federal, state or local law; 11 12 (iii) on account of Indemnitee's conduct which is determined by a final judgment or other final adjudication to have been knowingly fraudulent, deliberately dishonest or willfully wrong; (iv) on account of Indemnitee's conduct which by a final judgment or other final adjudication is determined to have been in bad faith and in opposition to the best interests of the Company or to have produced an unlawful personal benefit; or (v) with respect to a criminal proceeding if the Indemnitee knew or reasonably should have known that Indemnitee's conduct was illegal. (b) The Company shall indemnify Indemnitee in accordance with the provisions of this subsection (b) if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that Indemnitee held or holds a Corporate Position, against all Expenses actually and reasonably incurred by Indemnitee and any Resolution Costs paid by Indemnitee in settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. Notwithstanding the preceding but subject to Section 4 below, no indemnification shall be made under this subsection (b) in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudged to be liable to the Company in the performance of his duty to the Company, unless and then only to the extent that any court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such amount of Expenses as such court shall deem proper. (c) In addition to any indemnification provided under subsection (a) and (b) above, the Company shall indemnify Indemnitee against any Expenses and/or Resolution Costs incurred by Indemnitee, regardless of the nature of the Proceeding in which Expenses and/or Resolution Costs were incurred, if such Expenses or Resolution Costs would have been covered under the directors' and officers' liability insurance policies in effect on the effective date of this Agreement or under any such insurance policies which become effective on any subsequent date. (d) The indemnification contemplated by this Agreement shall be to the fullest extent now or hereafter allowed by law (whether statutory or common law) as presently or hereafter enacted or interpreted. In this connection, if a change in the Act or in the statutory laws of any other state under which the Company, or its successor, is hereafter incorporated or to which its corporate offices are hereafter located or relocated permits greater or lesser indemnification, either by agreement or otherwise, than currently provided by the Act or this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change or prior to such change, as the case may be. SECTION 4 Mandatory Advancement of Expenses. Notwithstanding anything in this Agreement expressed or implied to the contrary, the Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within 12 13 thirty (30) days after the receipt by the Company of a statement or statements from time to time submitted by Indemnitee requesting such advance or advances, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined by a final order of a court of competent jurisdiction that Indemnitee is not entitled to be indemnified against such Expenses under this Agreement in which event the amounts so advanced shall be repaid to the Company. SECTION 5 Procedure for Determination of Entitlement to Indemnification for Resolution Costs. (a) To obtain indemnification under this Agreement for Resolution Costs, Indemnitee shall submit to the Company a written request, including such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine pursuant to subsection (b) below whether and to what extent Indemnitee is entitled to indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to subsection (a) above, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto, shall be made in each specific case as follows: (i) if a Change in Control shall have occurred, the determination shall be made by Independent Counsel who shall be selected in the manner provided in Section 5(c)(ii) below. In the alternative and at Indemnitee's sole option, Indemnitee shall have the right to direct that such determination be made in the manner provided in the following subparagraph (ii) of this subsection (b); and (ii) if a Change in Control shall not have occurred or if otherwise directed by Indemnitee pursuant to subsection (b)(i) above, the determination shall be made by the Board by a majority vote of a quorum of the Board consisting of Disinterested Directors, provided, however, that if a quorum of the Board consisting solely of Disinterested Directors is not obtainable then, at the option of the Board, by a majority vote of a quorum of all of the directors (whether or not disinterested), such determination shall be made by (A) majority vote of a committee of two or more Disinterested Directors appointed by the Board, or (B) all Independent Directors, or (C) Independent Counsel, or (D) the stockholders of the Company. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within thirty (30) days after such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in connection with the making of such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby agrees to indemnify and hold Indemnitee harmless therefrom. A determination by the Independent Directors or Independent Counsel shall be expressed in a written opinion to the Board, a copy of which shall be delivered to Indemnitee. 13 14 (c) If the determination of entitlement to indemnification is to be made by Independent Counsel, the Independent Counsel shall be selected as follows: (i) if a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board, or (ii) if a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee. The party selecting Independent Counsel shall advise the other party in writing of the identity of the Independent Counsel so selected. The Company shall pay any and all fees and expenses incurred by such Independent Counsel and otherwise incident to the procedures of this Section 5, regardless of the manner in which such Independent Counsel was selected or appointed. SECTION 6 Presumptions and Effect of Certain Proceedings. (a) If a Change in Control shall have occurred, the person or persons making a determination with respect to entitlement to indemnification shall presume that Indemnitee is entitled to indemnification under this Agreement, and the Company shall have the burden of proof to overcome that presumption. (b) If the person or persons empowered or selected to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after being selected or empowered to do so (or within ninety (90) days thereafter, if such determination is to be made by the stockholders), the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, unless such indemnification is specifically prohibited under applicable law. (c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or by a plea of nolo contendere or its equivalent, shall not of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. SECTION 7 Remedies of Indemnitee. (a) The Indemnitee shall be entitled to an adjudication of his right to indemnification or to the advancement of Expenses, at his sole option, (i) by the Circuit Court for the County of Kent or Allegan, State of Michigan, or any other court of competent jurisdiction, or (ii) by a 14 15 single arbitrator in an arbitration conducted pursuant to the rules of the American Arbitration Association, if: (i) a determination has been made pursuant to Section 5 that the Indemnitee is not entitled to indemnification for Resolution Costs; (ii) the determination of his entitlement to indemnification is not timely made pursuant to Section 5; (iii) advancement of Expenses is not timely made pursuant to Section 4; or (iv) payment of indemnification to which Indemnitee is entitled under Section 9 below is not timely made or payment is not timely made after a determination has been made that Indemnitee is entitled to indemnification. The Company shall not oppose Indemnitee's right to seek any such adjudication, whether in a court or in arbitration. (b) If a determination shall have been made that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 7 shall be conducted in all respects, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change in Control shall have occurred, then, in any judicial proceeding or arbitration commenced pursuant to this Section 7, the Company shall have the burden of proving that Indemnitee is not entitled to indemnification. (c) If a determination shall have been made that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 7, unless such indemnification is prohibited under applicable law. (d) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. (e) If Indemnitee, pursuant to this Section 7, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in the judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the expenses incurred by Indemnitee in connection with such judicial 15 16 adjudication or arbitration shall be appropriately prorated between the Company and the Indemnitee. SECTION 8 Insurance; Subrogation. (a) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of or consultants to the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves in a Corporate Position at the request of the Company (the "D & O Policy"), Indemnitee shall be covered by the D & O Policy or Policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (b) If the Company makes any payment under this Agreement, the Company 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 take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (c) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. SECTION 9 Partial Indemnification; Successful Defense. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses actually and reasonably incurred by Indemnitee or for Resolution Costs but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses or Resolution Costs to which Indemnitee is entitled. Notwithstanding any other provision of this Agreement, expressed or implied to the contrary, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all claims relating in whole or in part to a Proceeding or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. SECTION 10 Consent. Unless and until a Change in Control has occurred, the Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding made without the Company's written consent. Following a Change in Control, such consent shall not be required. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Company nor the Indemnitee will unreasonably withhold their consent to any proposed settlement. SECTION 11 Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall be in addition to any other rights to which Indemnitee may be entitled under the Articles of Incorporation, the Bylaws, any agreement, any vote of 16 17 shareholders or disinterested directors, the Act as amended from time to time, or otherwise, both as to actions in Indemnitee's official capacity as a consultant to and director of the Company and as to actions in another capacity while holding such positions. SECTION 12 Severability. If this Agreement or any portion hereof (including any provision within a single section, subsection or sentence) shall be held to be invalid, void or otherwise unenforceable on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify Indemnitee as to any Expenses or Resolution Costs with respect to any Proceeding to the full extent permitted by law or any applicable portion of this Agreement that shall not have been invalidated, declared void or otherwise held to be unenforceable. SECTION 13 No Presumption. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court had determined that indemnification is not permitted by applicable law. SECTION 14 Notice. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified under this Agreement, give to the Company notice in writing as soon as practicable of any claim for which indemnity will or could be sought under this Agreement. Notice to the Company shall be directed to the Company's corporate offices at 515 Eastern Avenue, Allegan, Michigan 49010, Attention: Secretary (or to such other individual or address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three (3) days after the date postmarked if sent by prepaid mail properly addressed. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power to give. SECTION 15 Continuation of Indemnification. The indemnification rights provided to Indemnitee under this Agreement, including the right provided under Sections 3, 4 and 5 above, shall continue after Indemnitee has ceased to hold a Corporate Position. SECTION 16 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company, and its successors and assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company, and of Indemnitee and the spouse, heirs, assigns and personal and legal representatives of Indemnitee. SECTION 17 Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the state of Michigan applicable to contracts made and to be performed in such state without giving effects to the principles of conflicts of laws. SECTION 18 Liability Insurance. To the extent the Company maintains an insurance policy or policies providing directors and officers' liability insurance, Indemnitee shall 17 18 be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any one else who holds a Corporate Position. SECTION 19 Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company or any affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs, assigns or personal or legal representatives after the expiration of two (2) years from the date of accrual of such cause of action, and any claim or cause of action of the Company or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two (2) year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action such shorter period shall govern. SECTION 20 Amendments; Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. COMPANY ATTEST: PERRIGO COMPANY By - --------------------------- ------------------------- John R. Nichols David T. Gibbons Its: Secretary Its: President and CEO INDEMNITEE --------------------------- Michael J. Jandernoa 18 EX-21 4 c57316ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT
State/Country of Percent Owned By Name Incorporation Perrigo Company ---- ---------------- --------------- L. Perrigo Company Michigan 100% Perrigo Company of Tennessee, Inc. Tennessee 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. Quimica y Farmacia S.A. de C.V. Mexico 87.8% by Perrigo International, Inc. Perrigo do Brasil Ltda. Brazil 100% by Perrigo International, Inc.
-1- EX-23 5 c57316ex23.txt CONSENT OF BDO SEIDMAN, LLP 1 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference and use of our report dated August 4, 2000, on the consolidated financial statements of Perrigo Company and subsidiaries which appears on page 29 of this Form 10-K for the year ended July 1, 2000 in the previously filed registration statements for that company's 1988 Employee Incentive Stock Option Plan as amended (Registration No. 33-46265), 1989 Non-qualified Stock Option Plan for Directors as amended (Registration No. 33-46264), L. Perrigo Investment Plan and Trust (Registration No. 33-46262) and Perrigo Company of Tennessee, Inc. Retirement Income Savings Plan (Registration No. 33-46263). By: /s/ BDO Seidman, LLP ---------------------------------- BDO Seidman, LLP Grand Rapids, Michigan September 6, 2000 -1- EX-27 6 c57316ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUL-01-2000 JUL-04-2000 JUL-01-2000 7,055 0 88,217 5,997 126,935 268,645 338,447 144,867 486,064 113,920 0 0 0 102,750 249,010 486,064 738,555 738,555 583,314 583,314 0 2,821 7,141 30,485 11,187 19,298 0 0 0 19,298 .26 .26
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