-----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, Un/ovQZVuwXl1vh86IjKuEjeX9lQfN3rflQ7jguCme7otmOBFPiQXwHHuF6if/d/ MNZnKhOe43ElCTerHTacsA== 0000950137-06-012118.txt : 20061109 0000950137-06-012118.hdr.sgml : 20061109 20061109100739 ACCESSION NUMBER: 0000950137-06-012118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061109 DATE AS OF CHANGE: 20061109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERRIGO CO CENTRAL INDEX KEY: 0000820096 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 382799573 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19725 FILM NUMBER: 061199837 BUSINESS ADDRESS: STREET 1: 515 EASTERN AVENUE CITY: ALLEGAN STATE: MI ZIP: 49010 BUSINESS PHONE: 6166738451 MAIL ADDRESS: STREET 1: 515 EASTERN AVENUE CITY: ALLEGAN STATE: MI ZIP: 49010 10-Q 1 c09893e10vq.txt QUARTERLY REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 0-19725 PERRIGO COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MICHIGAN 38-2799573 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
515 EASTERN AVENUE ALLEGAN, MICHIGAN 49010 (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES)
(269) 673-8451 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): LARGE ACCELERATED FILER [X] ACCELERATED FILER [ ] NON-ACCELERATED FILER [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [X] NO As of October 27, 2006 the registrant had 92,627,810 outstanding shares of common stock. ================================================================================ PERRIGO COMPANY FORM 10-Q INDEX
PAGE NUMBER ------ CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated statements of income -- For the quarters ended September 30, 2006 and September 24, 2005 2 Condensed consolidated balance sheets -- September 30, 2006, July 1, 2006 and September 24, 2005 3 Condensed consolidated statements of cash flows -- For the quarters ended September 30, 2006 and September 24, 2005 4 Notes to condensed consolidated financial statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risks 21 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 1A. Risk Factors 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 Item 6. Exhibits 24 SIGNATURES 25
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this report are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. These statements relate to future events or the Company's future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of the Company or its industry to be materially different from those expressed or implied by any forward-looking statements. In particular, statements about the Company's expectations, beliefs, plans, objectives, assumptions, future events or future performance contained in this report, including certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential" or the negative of those terms or other comparable terminology. Please see Item 1A of the Company's Form 10-K for the year ended July 1, 2006 for a discussion of certain important risk factors that relate to forward-looking statements contained in this report. The Company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. While the Company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the Company's control. These and other important factors may cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements in this report are made only as of the date hereof, and unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. -1- PERRIGO COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited)
First Quarter ------------------- 2007 2006 -------- -------- Net sales $340,215 $319,734 Cost of sales 245,598 232,818 -------- -------- Gross profit 94,617 86,916 -------- -------- Operating expenses Distribution 7,384 7,150 Research and development 13,047 12,649 Selling and administration 48,474 46,388 -------- -------- Total 68,905 66,187 Operating income 25,712 20,729 Interest, net 4,586 4,026 Other income, net (61) (1,246) -------- -------- Income before income taxes 21,187 17,949 Income tax expense 4,305 5,038 -------- -------- Net income $ 16,882 $ 12,911 ======== ======== Earnings per share Basic $ 0.18 $ 0.14 Diluted $ 0.18 $ 0.14 Weighted average shares outstanding Basic 92,168 93,188 Diluted 93,521 94,314 Dividends declared per share $ 0.043 $ 0.040
See accompanying notes to condensed consolidated financial statements. -2- PERRIGO COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, July 1, September 24, 2006 2006 2005 ------------- ---------- ------------- (unaudited) (unaudited) Assets Current assets Cash and cash equivalents $ 33,027 $ 19,018 $ 25,118 Investment securities 27,922 26,733 15,823 Accounts receivable 230,239 240,130 212,433 Inventories 326,538 302,941 269,695 Current deferred income taxes 52,215 52,058 49,870 Prepaid expenses and other current assets 21,068 16,298 39,270 ---------- ---------- ---------- Total current assets 691,009 657,178 612,209 Property and equipment 617,813 606,907 594,464 Less accumulated depreciation 298,260 287,549 275,758 ---------- ---------- ---------- 319,553 319,358 318,706 Restricted cash 400,000 400,000 400,000 Goodwill 183,205 152,183 144,362 Other intangible assets 134,078 132,426 144,315 Non-current deferred income taxes 43,380 43,143 26,828 Other non-current assets 44,449 46,336 44,617 ---------- ---------- ---------- $1,815,674 $1,750,624 $1,691,037 ========== ========== ========== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 172,680 $ 179,740 $ 142,361 Notes payable 5,740 20,081 19,303 Payroll and related taxes 41,458 54,153 37,788 Accrued customer programs 45,084 49,534 40,129 Accrued liabilities 41,164 45,335 56,821 Accrued income taxes 17,501 14,132 25,903 Current deferred income taxes 9,837 8,456 10,980 ---------- ---------- ---------- Total current liabilities 333,464 371,431 333,285 Non-current liabilities Long-term debt 678,272 621,717 670,814 Non-current deferred income taxes 105,427 81,923 56,586 Other non-current liabilities 36,922 34,809 37,715 ---------- ---------- ---------- Total non-current liabilities 820,621 738,449 765,115 Shareholders' equity Preferred stock, without par value, 10,000 shares authorized -- -- -- Common stock, without par value, 200,000 shares authorized 510,132 516,098 523,093 Accumulated other comprehensive income (loss) 17,461 3,593 (4,402) Retained earnings 133,996 121,053 73,946 ---------- ---------- ---------- Total shareholders' equity 661,589 640,744 592,637 ---------- ---------- ---------- $1,815,674 $1,750,624 $1,691,037 ========== ========== ========== Supplemental Disclosures of Balance Sheet Information Allowance for doubtful accounts $ 12,195 $ 11,178 $ 10,207 Allowance for inventory $ 40,992 $ 42,509 $ 37,164 Working capital $ 357,545 $ 285,747 $ 278,924 Preferred stock, shares issued -- -- -- Common stock, shares issued 92,556 92,922 93,561
See accompanying notes to condensed consolidated financial statements. -3- PERRIGO COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
First Quarter ------------------- 2007 2006 -------- -------- Cash Flows From (For) Operating Activities Net income $ 16,882 $ 12,911 Adjustments to derive cash flows Depreciation and amortization 13,502 14,296 Share-based compensation 2,434 2,403 Deferred income taxes (1,157) (1,072) -------- -------- Sub-total 31,661 28,538 -------- -------- Changes in operating assets and liabilities Accounts receivable 8,550 (1,559) Inventories (25,211) 3,776 Accounts payable (5,785) (723) Payroll and related taxes (12,423) (4,631) Accrued customer programs (4,450) (1,537) Accrued liabilities (4,203) (2,938) Accrued income taxes 3,474 2,757 Other 1,983 (5,961) -------- -------- Sub-total (38,065) (10,816) -------- -------- Net cash from (for) operating activities (6,404) 17,722 -------- -------- Cash Flows (For) From Investing Activities Purchase of securities (52,340) (19,438) Proceeds from sales of securities 51,074 21,372 Additions to property and equipment (8,113) (8,228) -------- -------- Net cash for investing activities (9,379) (6,294) -------- -------- Cash (For) From Financing Activities Repayments of short-term debt, net (14,331) (6,104) Borrowings of long-term debt 55,000 15,000 Tax (expense) benefit of stock transactions 616 (500) Issuance of common stock 2,222 2,000 Repurchase of common stock (11,238) (8,558) Cash dividends (3,939) (3,741) -------- -------- Net cash (for) from financing activities 28,330 (1,903) -------- -------- Net increase in cash and cash equivalents 12,547 9,525 Cash and cash equivalents, at beginning of period 19,018 16,707 Effect of exchange rate changes on cash 1,462 (1,114) -------- -------- Cash and cash equivalents, at end of period $ 33,027 $ 25,118 ======== ======== Supplemental Disclosures of Cash Flow Information Cash paid/received during the period for: Interest paid $ 8,309 $ 9,210 Interest received $ 4,700 $ 5,641 Income taxes paid $ 1,797 $ 2,928 Income taxes refunded $ -- $ 4,866
See accompanying notes to condensed consolidated financial statements. -4- PERRIGO COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 (in thousands, except per share amounts) Perrigo Company is a leading global healthcare supplier and the world's largest manufacturer of over-the-counter (OTC) pharmaceutical and nutritional products for the store brand market. The Company also develops and manufactures generic prescription (Rx) drugs, active pharmaceutical ingredients (API) and consumer products. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included. The Company has reclassified certain amounts in the prior years to conform to the current year presentation. Operating results for the quarter ended September 30, 2006 are not necessarily indicative of the results that may be expected for a full year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended July 1, 2006. New Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48, "Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement 109, "Accounting for Income Taxes" (FIN 48), which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial position or results of operations. In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) 157, "Fair Value Measurements". This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS 157 is effective for the Company's fiscal year ending June 27, 2009. The Company has not yet determined if the adoption of this statement will have a material impact on its results of operations or financial position. -5- In September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements 87, 88, 106 and 132(R)". SFAS 158 requires companies to recognize a net liability or asset and an offsetting net of tax adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. SFAS 158 requires prospective application, and the recognition and disclosure requirements are effective for the Company's fiscal year ending June 30, 2007. Based on preliminary evaluations of SFAS 158, the Company does not expect the adoption of this requirement of the statement to have a material impact on its results of operations or financial position. Additionally, SFAS 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. This requirement is effective for the Company's fiscal year ending June 27, 2009. Since the Company's measurement date currently aligns with its year-end balance sheet date, this requirement will have no impact on the Company's results of operations or financial position. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year's financial statements are materially misstated. SAB 108 becomes effective during the Company's 2007 fiscal year. The Company does not expect that the adoption of SAB 108 will have a material impact on its results of operations or financial position. NOTE B - EARNINGS PER SHARE A reconciliation of the numerators and denominators used in the basic and diluted earnings per share (EPS) calculation follows:
First Quarter ----------------- 2007 2006 ------- ------- Numerator: Net income used for both basic and diluted EPS $16,882 $12,911 ======= ======= Denominator: Weighted average shares outstanding for basic EPS 92,168 93,188 Dilutive effect of share-based awards 1,353 1,126 ------- ------- Weighed average shares outstanding for diluted EPS 93,521 94,314 ======= =======
Share-based awards outstanding that are anti-dilutive were 2,787 and 3,852 for the first quarter of fiscal 2007 and 2006, respectively. These share-based awards were excluded from the diluted EPS calculation. -6- NOTE C - INVENTORIES Inventories are summarized as follows:
September 30, July 1, September 24, 2006 2006 2005 ------------- -------- ------------- Finished goods $163,793 $148,603 $133,347 Work in process 77,220 70,974 60,708 Raw materials 85,525 83,364 75,640 -------- -------- -------- $326,538 $302,941 $269,695 ======== ======== ========
The Company maintains an allowance for estimated obsolete or unmarketable inventory based on the difference between the cost of inventory and its estimated market value. The inventory balances stated above are net of an inventory allowance of $40,992 at September 30, 2006, $42,509 at July 1, 2006 and $37,164 at September 24, 2005. The Company recorded additional charges of $1,250 in the first quarter of fiscal 2007 for estimated obsolete pseudoephedrine inventory on hand. NOTE D - GOODWILL There were no acquisitions, dispositions or impairments of goodwill during the first quarter of fiscal 2007. Changes in the carrying amount of goodwill, by reportable segment, are as follows:
Consumer Rx Pharma- Healthcare ceuticals API Total ---------- ---------- ------- -------- Balance as of July 1, 2006 $44,452 $61,406 $46,325 $152,183 Goodwill adjustment -- 14,877 11,223 26,100 Currency translation adjustment 1,048 2,226 1,648 4,922 ------- ------- ------- -------- Balance as of September 30, 2006 $45,500 $78,509 $59,196 $183,205 ======= ======= ======= ========
During the first quarter of fiscal 2007, the Company recorded an adjustment to goodwill for the Rx Pharmaceuticals and API segments. This adjustment was to record a deferred tax liability for income and withholding taxes related to pre-acquisition earnings in an approved enterprise zone in Israel. In accordance with Emerging Issues Task Force 93-7, "Uncertainties Related to Income Taxes in a Purchase Business Combination" (EITF 93-7), the Company treated this item as an uncertain tax position at the time of the acquisition. Until the first quarter of fiscal 2007, the Company was unable to reasonably estimate the liability that was required. Certain factors still remain that could change the ultimate liability and result in subsequent changes in goodwill, however the adjustment recorded was the Company's best estimate of the liability at September 30, 2006. Provision has not been made for U.S. or additional foreign taxes on undistributed post-acquisition earnings of foreign subsidiaries because those earnings are considered permanently reinvested in the operations of those subsidiaries. -7- NOTE E - INTANGIBLE ASSETS Intangible assets and related accumulated amortization consist of the following:
September 30, 2006 July 1, 2006 ----------------------- ----------------------- Accumulated Accumulated Gross Amortization Gross Amortization -------- ------------ -------- ------------ Developed product technology/formulation $121,629 $12,801 $117,615 $10,656 Distribution and license agreements 19,275 4,260 18,755 3,765 Customer relationships 4,900 3,028 4,900 2,698 Trademarks 9,721 1,358 9,503 1,228 -------- ------- -------- ------- Total $155,525 $21,447 $150,773 $18,347 ======== ======= ======== =======
The Company recorded a charge for amortization expense of $3,100 and $3,635 for the first quarter of fiscal 2007 and 2006, respectively, for intangible assets subject to amortization. The estimated amortization expense for each of the following five years is as follows:
Fiscal Year Amount - ----------- ------- 2007(1) $ 8,475 2008 10,700 2009 11,200 2010 9,300 2011 9,300
(1) Reflects remaining nine months of fiscal 2007. -8- NOTE F - OUTSTANDING DEBT Total borrowings outstanding are summarized as follows:
September 30, July 1, September 24, 2006 2006 2005 ------------- -------- ------------- Short-term debt: Swingline loan $ 5,740 $ 19,195 $ 4,135 Bank loan - Germany subsidiary -- -- 8,651 Bank loan - U.K. subsidiary -- -- 2,161 Bank loans - Mexico subsidiary -- 886 4,356 -------- -------- -------- Total 5,740 20,081 19,303 -------- -------- -------- Long-term debt: Revolving line of credit 135,000 80,000 130,000 Term loan 100,000 100,000 100,000 Letter of undertaking - Israel subsidiary 400,000 400,000 400,000 Debenture - Israel subsidiary 43,272 41,717 40,814 -------- -------- -------- Total 678,272 621,717 670,814 -------- -------- -------- Total debt $684,012 $641,798 $690,117 ======== ======== ========
The terms of the loan related to the letter of undertaking indicated above require that the Company maintain a deposit of $400,000 in an uninsured account with the lender as security for the loan. The deposit is included in the balance sheet as a non-current asset. On October 30, 2006, the Company entered into a Second Amendment to its Credit Agreement, dated as of March 16, 2005. Under the Second Amendment, the Applicable Margin for Eurocurrency Loans and the facility fees were reduced. The maturity date of the credit facility was extended from March 16, 2010 to October 30, 2011 and the aggregate amount of revolving commitment may be increased to $450,000, subject to certain conditions. Previously, the aggregate amount of revolving commitment was $325,000. NOTE G - SHAREHOLDERS' EQUITY The Company has a common stock repurchase program. Purchases are made on the open market, subject to market conditions, and are funded by available cash or borrowings. All common stock repurchased is retired upon purchase. The Company has a 10b5-1 plan that allows brokers selected by the Company to repurchase shares on behalf of the Company at times when it would ordinarily not be in the market because of the Company's trading policies. The Company repurchased 710 shares of its common stock for $11,238 and 606 shares for $8,558 during the first quarter of fiscal 2007 and 2006, respectively. Private party transactions accounted for 13 shares in the first quarter of fiscal 2007 and 110 shares in the first quarter of fiscal 2006. -9- NOTE H - 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:
First Quarter ----------------- 2007 2006 ------- ------- Net income $16,882 $12,911 Other comprehensive income: Change in fair value of derivative instruments, net of tax (1,786) 2,029 Foreign currency translation adjustments 16,297 (5,074) Change in fair value of investment securities, net of tax (643) 330 ------- ------- Comprehensive income $30,750 $10,196 ======= =======
NOTE I - COMMITMENTS AND CONTINGENCIES The Company is not a party to any litigation, other than routine litigation incidental to its business 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. In August 2004, the Company reached a settlement with the United States Federal Trade Commission (FTC) and states' attorneys general offices regarding a now terminated agreement between Alpharma, Inc. and the Company related to a children's ibuprofen suspension product. In connection with the Alpharma, Inc. agreement and the related FTC settlement, the Company has been named as a defendant in three suits, two of which are class actions that have been consolidated with one another (the Direct Purchaser Action), filed on behalf of Company customers (i.e., retailers), and the other consisting of four class action suits (the Indirect Purchaser Action), filed on behalf of indirect Company customers (i.e., consumers), alleging that the plaintiffs overpaid for children's ibuprofen suspension product as a result of the Company's agreement with Alpharma, Inc. On April 24, 2006, the court in the Direct Purchaser Action issued an order and final judgment approving the settlement of this matter with respect to defendants Alpharma, Inc. and the Company. The Company agreed to pay $3,000 as part of the settlement of the Direct Purchaser Action. Separately, Alpharma, Inc. and the Company entered into a settlement agreement to resolve the Indirect Purchaser Action for a combination of cash and product donations. On July 25, 2006 the court issued an order preliminarily approving the settlement of the Indirect Purchaser Action. However, the settlement is subject to final court approval. The Company recorded a charge of $4,500 in the fourth quarter of fiscal 2005 as its best estimate of the combined expected cost of the settlements. While the Company believes the estimate of the charge is reasonable, the total amount of future payments related to these lawsuits cannot be assured and may be materially different than the recorded charge. The Company is defending a few remaining individual lawsuits pending in various state and federal courts involving phenylpropanolamine (PPA), an ingredient used in the manufacture of certain OTC cough/cold and diet products. The Company discontinued using PPA in the U.S. in November 2000 at the request of the United States Food and Drug Administration (FDA). These cases allege that the plaintiff suffered injury, generally some type of stroke, from ingesting PPA-containing products. Many of these suits also name other manufacturers or retailers of PPA-containing products. These personal -10- injury suits seek an unspecified amount of compensatory, exemplary and statutory damages. The Company maintains product liability insurance coverage for the claims asserted in these lawsuits. The Company believes that it has meritorious defenses to these lawsuits and intends to vigorously defend them. At this time, the Company cannot determine whether it will be named in additional PPA-related suits, the outcome of existing suits or the effect that PPA-related suits may have on its financial condition or operating results. In addition to the foregoing discussion, the Company has pending certain other legal actions and claims incurred in the normal course of business. The Company believes that it has meritorious defenses to these lawsuits and/or is 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, the Company's future results of operations or cash flow could be materially impacted in a particular period. The Company's Israeli subsidiary has provided a guaranty to a bank to secure the debt of a 50% owned joint venture for approximately $460, not to exceed 50% of the joint venture's debt, that is not recorded on the Company's condensed consolidated balance sheets as of September 30, 2006. NOTE J - SEGMENT INFORMATION The Company has three reportable segments, aligned primarily by product: Consumer Healthcare, Rx Pharmaceuticals and API as well as an Other category. The majority of corporate expenses, which generally represent shared services, are charged to operating segments as part of a corporate allocation. Unallocated expenses related to one-time acquisition integration costs and certain corporate services that are not allocated to the segments. The first quarter of fiscal 2006 included charges of $318, $1,747 and $2,697 for the Consumer Healthcare segment, API segment and Other category, respectively, for the write-off of the step-up in the value of inventory resulting from the Agis acquisition. The write-off of the inventory step-up value was completed in the first quarter of fiscal 2006.
Consumer Rx Pharma- Unallocated Healthcare ceuticals API Other expenses Total ---------- ---------- ------- ------- ----------- -------- First Quarter 2007 Net sales $241,809 $31,425 $29,779 $37,202 -- $340,215 Operating income (loss) $ 17,100 $ 5,787 $ 4,658 $ 2,664 $(4,497) $ 25,712 Amortization of intangibles $ 847 $ 1,584 $ 429 $ 240 -- $ 3,100 First Quarter 2006 Net sales $227,100 $29,094 $26,791 $36,749 -- $319,734 Operating income (loss) $ 13,327 $ 3,836 $ 6,586 $ (864) $(2,156) $ 20,729 Amortization of intangibles $ 1,382 $ 1,584 $ 429 $ 240 -- $ 3,635
NOTE K - RESTRUCTURING In the fourth quarter of fiscal 2006, as a result an ongoing review of its Consumer Healthcare operating strategies, the Company's Board of Directors approved plans to exit two unprofitable product lines, effervescent tablets and psyllium-based laxatives. This action would have resulted in the closure of two Michigan plants that primarily manufacture these products. Subsequent to September 30, 2006, the -11- Company entered into an agreement to sell one of the Michigan plants intended to be shutdown. The Company expects to record a one-time gain of approximately $2,000 in the second quarter of fiscal 2007 as a result of the sale of the plant. The remaining plant is expected to be phased out and closed by the end of the calendar year. The Company expects to incur a charge of approximately $2,000 in fiscal 2007 for employee-related and plant shutdown costs. As of September 30, 2006, the Company had not incurred any of the expected charges related to this restructuring. In connection with the Agis acquisition, the Company reviewed its Consumer Healthcare operating strategies. As a result, the Company approved a restructuring plan and recorded a charge to the Company's Consumer Healthcare segment. The implementation of the plan began on March 24, 2005 and was completed in its entirety by July 2006. Certain assets were written down to their fair value resulting in an impairment charge of $3,232 in the fourth quarter of fiscal 2005. In addition, the Company terminated 22 employees performing in certain executive and administrative roles. Accordingly, the Company recorded a charge for employee termination benefits of $3,150 in the fourth quarter of fiscal 2005. The activity of the restructuring reserve is as follows:
Fiscal 2005 Restructuring Employee Termination ------------------------- Balance at July 1, 2006 $ 105 Payments (105) ----- Balance at September 30, 2006 $ -- =====
In connection with the Agis acquisition, the Company accrued $2,727 of restructuring costs, consisting of employee termination benefits for 60 employees and certain lease termination costs. The Company accrued an additional amount of $1,206 for employee termination benefits in the first quarter of fiscal 2006. For accounting purposes, these restructuring costs were included in the allocation of the total purchase price. The remaining employee termination benefits are expected to be paid over the next three to six months. The activity related to these restructuring costs is as follows:
Fiscal 2005 Restructuring ---------------------------------------- Employee Termination Lease Termination -------------------- ----------------- Balance at July 1, 2006 $ 871 $1,098 Payments (323) (32) ----- ------ Balance at September 30, 2006 $ 548 $1,066 ===== ======
NOTE L - SUBSEQUENT EVENT On November 9, 2006, the Company initiated a voluntary retail-level recall of certain lots of its acetaminophen 500 mg caplets containing raw material purchased from a third party supplier. The Company's quality control systems noted trace amounts of metal particulate in a very small number of these caplet products. The probability of health risk is remote and there have been no reports of injury or illness related to this incident. The total cost of the recall for sales returns, handling of on-hand inventories and disposal is estimated to be approximately $2,900. The Company determined that $1,026 of the total cost of the recall related to the first quarter of fiscal 2007. The remainder of the charge will be recorded in the second quarter of fiscal 2007. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER FISCAL YEARS 2007 AND 2006 (in thousands, except per share amounts) OVERVIEW Segments - The Company has three reportable segments, aligned primarily by product: Consumer Healthcare, Rx Pharmaceuticals and API as well as an Other category. Segment information for prior periods has been restated to conform to the current year presentation. The Consumer Healthcare segment includes the U.S., U.K. and Mexico operations supporting the sale of OTC pharmaceutical and nutritional products worldwide. The Rx Pharmaceuticals segment supports the development and sale of prescription drug products. The API segment supports the development and manufacturing of API products in Israel and Germany, with sales to customers worldwide. The Other category consists of two operating segments, Israel Consumer Products and Israel Pharmaceutical and Diagnostic Products, with sales primarily to the Israeli market, including cosmetics, toiletries, detergents, manufactured and imported pharmaceutical products and medical diagnostic products. Neither of these operating segments meets the quantitative thresholds required to be separately reportable segments. Seasonality - The Company's sales of OTC pharmaceutical and nutritional products are subject to the seasonal demands for cough/cold/flu and allergy products. Accordingly, operating results for the first quarter of fiscal 2007 are not necessarily indicative of the results that may be expected for a full year. Current Year Results - Net sales for the first quarter of fiscal 2007 were $340,215, an increase of 6% over fiscal 2006. The increase spanned all of the Company's segments and included new product sales of approximately $11,000. Gross profit was $94,617, an increase of 9% over fiscal 2006, generally in line with the volume increase in net sales. The gross profit percentage in the first quarter of fiscal 2007 was 27.8% up from 27.2% last year. Operating expenses were $68,905, an increase of 4% over fiscal 2006, but as a percent of net sales were slightly lower than in fiscal 2006. Net income was $16,882, an increase of 31% over fiscal 2006. However, the first quarter of fiscal 2006 was unfavorably impacted by the write-off of the step up in inventory related to the Agis acquisition. Further details for each reportable segment are included in the following Results of Operations. Product Recall (Subsequent Event) - On November 9, 2006, the Company initiated a voluntary retail-level recall of certain lots of its acetaminophen 500 mg caplets containing raw material purchased from a third party supplier. The Company's quality control systems noted trace amounts of metal particulate in a very small number of these caplet products. The probability of health risk is remote and there have been no reports of injury or illness related to this incident. The total cost of the recall for sales returns, handling of on-hand inventories and disposal is estimated to be approximately $2,900. The Company determined that $1,026 of the total cost of the recall related to the first quarter of fiscal 2007. The remainder of the charge will be recorded in the second quarter of fiscal 2007. This product recall related to the Consumer Healthcare segment. -13- RESULTS OF OPERATIONS CONSUMER HEALTHCARE
First Quarter ------------------- 2007 2006 -------- -------- Net sales $241,809 $227,100 Gross profit $ 56,201 $ 52,644 Gross profit % 23.2% 23.2% Operating expenses $ 39,101 $ 39,317 Operating expenses % 16.2% 17.3% Operating income $ 17,100 $ 13,327 Operating income % 7.1% 5.9%
Net Sales First quarter net sales for fiscal 2007 increased 6% or $14,709 compared to fiscal 2006. The increase was comprised primarily of $9,100 of domestic sales and $5,000 of international sales. The domestic increase resulted from $7,300 of new product sales in the smoking cessation, antacid and nutrition categories along with an $8,000 increase from higher unit sales of existing products in the smoking cessation, cough/cold, and analgesics categories. These combined domestic increases were partially offset by sales declines from the combination of pseudoephedrine and phenylephrine-containing products that were $6,200 lower in the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006. The Company continued to be impacted by the legislative and market changes related to products containing pseudoephedrine, which have resulted from concerns over the use of pseudoephedrine in the production of methamphetamine, an illegal drug. Sales of these products in the first quarter of fiscal 2007 were approximately $19,000 lower than the first quarter of fiscal 2006. Sales of pseudoephedrine products are expected to be $30,000 to $35,000 for fiscal 2007, excluding expected sales of pseudoephedrine replacement products. The Company carefully monitors its inventory levels and expected sales for these products, and, consequently, recorded a charge of approximately $1,250 in the first quarter of fiscal 2007 for estimated obsolete inventory on hand. Gross Profit First quarter gross profit for fiscal 2007 increased 7% or $3,557 compared to fiscal 2006 primarily due to increases in sales volume in both the domestic and international operations. The increase resulted from higher gross margins attributed to new products and improved gross margins in the international operations partially offset by an unfavorable mix of products sold, higher inventory obsolescence costs in the domestic operations and costs related to a product recall. Operating Expenses First quarter operating expenses for fiscal 2007 were essentially flat compared to fiscal 2006. -14- RX PHARMACEUTICALS
First Quarter ----------------- 2007 2006 ------- ------- Net sales $31,425 $29,094 Gross profit $13,787 $11,625 Gross profit % 43.9% 40.0% Operating expenses $ 8,000 $ 7,789 Operating expenses % 25.5% 26.8% Operating income $ 5,787 $ 3,836 Operating income % 18.4% 13.2%
Net Sales First quarter net sales for fiscal 2007 increased 8% or $2,331 compared to fiscal 2006. This increase was primarily due to new product sales of $3,700 and higher non-product revenues of approximately $4,000. These increases were partially offset by pricing pressure on current products sold under Abbreviated New Drug Applications (ANDA) and an adjustment for customer-related programs, such as rebates, of approximately $3,300. Fiscal 2006 was unfavorably impacted by a product recall, described below, that decreased sales $1,350. Gross Profit First quarter gross profit for fiscal 2007 increased 19% or $2,162 compared to fiscal 2006. The increase was primarily due to non-product revenues, new product sales and the absence of the mesalamine product recall. The increase was partially offset by pricing pressure on current ANDA products and an adjustment for customer-related programs. In the first quarter of fiscal 2006, the Company initiated a voluntary retail-level recall of all affected lots of mesalamine rectal suspension, an anti-inflammatory agent used to treat mild to moderate ulcerative colitis, following reports of leakage related to the bottle closure cap. The recall was not safety related and there have been no reports of injury or illness related to the leakage of this product. The costs to write off the value of the Company's on-hand inventories and the costs of return and disposal, estimated to be $2,750, were recorded in the first quarter of fiscal 2006. No further expense is expected to be incurred related to this recall. Operating Expenses First quarter operating expenses for fiscal 2007 increased 3% or $211 during fiscal 2007 compared to fiscal 2006. Research and development spending in this segment was $4,312 for fiscal 2007 and $4,849 for fiscal 2006. -15- API
First Quarter ----------------- 2007 2006 ------- ------- Net sales $29,779 $26,791 Gross profit $11,879 $12,004 Gross profit % 39.9% 44.8% Operating expenses $ 7,221 $ 5,418 Operating expenses % 24.2% 20.2% Operating income $ 4,658 $ 6,586 Operating income % 15.6% 24.6%
Net Sales First quarter net sales for fiscal 2007 increased 11% or $2,988 compared to fiscal 2006. The increase was primarily due to changes in the sales mix of both products and customers, including strong sales of finished dosage forms in Europe and the introduction of existing products into new geographic markets. The net sales of API are highly dependent on the level of competition in the marketplace for a specific material. The current trend of increased sales may not continue due to this dependency. Gross Profit First quarter gross profit for fiscal 2007 decreased 1% or $125 compared to fiscal 2006, primarily due to the changes in the sales mix of products and customers as well as fixed overhead costs spread over lower production levels. Fiscal 2006 included a charge of $1,747 for the write-off of the step-up in the value of inventory resulting from the Agis acquisition. Operating Expenses First quarter operating expenses for fiscal 2007 increased 33% or $1,803 compared to fiscal 2006. The increase was primarily due to higher sales commissions and research and development costs. Research and development spending in this segment was $2,389 for fiscal 2007 and $1,584 for fiscal 2006. -16- OTHER The Other category includes two operating segments: Israel Consumer Products and Israel Pharmaceutical and Diagnostic Products. Neither of these operating segments individually meets the quantitative thresholds required to be a reportable segment.
First Quarter ----------------- 2007 2006 ------- ------- Net sales $37,202 $36,749 Gross profit $12,750 $10,643 Gross profit % 34.3% 29.0% Operating expenses $10,086 $11,507 Operating expenses % 27.1% 31.3% Operating income (loss) $ 2,664 $ (864) Operating income (loss) % 7.2% (2.4)%
First quarter net sales for fiscal 2007 increased 1% or $453 compared to fiscal 2006. First quarter gross profit for fiscal 2007 increased 20% or $2,107 compared to fiscal 2006. The first quarter gross profit for fiscal 2006 included a charge of $2,697 for the write-off of the step-up in the value of inventory resulting from the Agis acquisition. First quarter operating expenses for fiscal 2007 decreased 12% or $1,421 compared to fiscal 2006 primarily due to lower sales commissions and administration expenses. UNALLOCATED EXPENSES Unallocated expenses for the first quarter were $4,497 for fiscal 2007 and $2,156 for fiscal 2006. These expenses were comprised of certain corporate services that were not allocated to the segments. The increase in fiscal 2007 was primarily due to wages and benefits. INTEREST AND OTHER (CONSOLIDATED) Interest expense for the first quarter was $9,340 for fiscal 2007 and $9,504 for fiscal 2006. Interest income for the first quarter was $4,754 for fiscal 2007 and $5,478 for fiscal 2006. INCOME TAXES (CONSOLIDATED) The effective tax rate for the first quarter was 20.3% for fiscal 2007 and 28.1% for fiscal 2006. The relative composition of U.S. and Foreign income has changed considerably for the Company. This change is expected to result in a lower effective tax rate than the Company has historically experienced. The tax rate will fluctuate from quarter to quarter depending on the composition of income before tax. Sixty-eight percent of income before tax in the first quarter of fiscal 2007 was contributed by foreign entities, generally Israeli, with a tax rate lower than the U.S. statutory rate. The effective tax rate for succeeding quarters is expected to be higher as the Company's U.S. income is likely to represent a higher percentage of the total income than in the first quarter. The estimated annualized effective tax rate for fiscal 2007 is between 30% and 32%. -17- FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and investment securities increased $20,008 to $60,949 at September 30, 2006 from $40,941 at September 24, 2005. Working capital, including cash, increased $78,621 to $357,545 at September 30, 2006 from $278,924 at September 24, 2005. The increase in working capital was due primarily to higher seasonal accounts receivable and the build-up of new product and reformulation inventory. The Company's working capital balance is expected to return to more normalized levels throughout the rest of fiscal 2007. Cash used for operating activities increased by $24,126 to $6,404 for fiscal 2007 compared to cash provided from operating activities of $17,722 for fiscal 2006. The increase in cash used for operations was primarily related to the strategic building of inventories and an increase in employee bonuses paid as a result of fiscal 2006 operating results. Inventory levels tend to be higher in the first quarter as the Company's operations focus on preparing to meet customer requirements during peak demand of the cough/cold/flu season. In addition, the Company's new product development process has added to the inventory pipeline at September 30, 2006 in preparation for upcoming product launches. Cash used for investing activities increased $3,085 to $9,379 for fiscal 2007 compared to $6,294 for fiscal 2006. Capital expenditures for facilities and equipment were for normal replacement and productivity enhancements. Capital expenditures are anticipated to be $40,000 to $50,000 for fiscal 2007. Cash from financing activities increased $30,233 to $28,330 for fiscal 2007 compared to cash used for financing activities of $1,903 for fiscal 2006. The increase was primarily due to borrowings of long-term debt to fund the Company's working capital requirements. The Company repurchased 710 shares of its common stock for $11,238 and 606 shares for $8,558 during the first quarter of fiscal 2007 and 2006, respectively. Private party transactions accounted for 13 shares in the first quarter of fiscal 2007 and 110 shares in the first quarter of fiscal 2006. The Company paid quarterly dividends in the first quarter of $3,939 and $3,741, or $0.043 and $0.040 per share, for fiscal 2007 and 2006, respectively. The declaration and payment of dividends, if any, is subject to the discretion of the 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. GUARANTIES AND CONTRACTUAL OBLIGATIONS The Company's Israeli subsidiary has provided a guaranty to a bank to secure the debt of a 50% owned joint venture for approximately $460, not to exceed 50% of the joint venture's debt that is not recorded on the Company's condensed consolidated balance sheet as of September 30, 2006. During the first quarter of fiscal 2007, no material change in contractual obligations occurred. -18- CRITICAL ACCOUNTING POLICIES Determination of certain amounts in the Company's financial statements requires the use of estimates. These estimates are based upon the Company's historical experiences combined with management's understanding of current facts and circumstances. Although the estimates are considered reasonable, actual results could differ from the estimates. The accounting policies, discussed below, are considered by management to require the most judgment and are critical in the preparation of the financial statements. These policies are reviewed by the Audit Committee. Other significant accounting policies are included in Note A of the notes to the consolidated financial statements in the Company's annual report on Form 10-K for the fiscal year ended July 1, 2006. Revenue Recognition and Customer Programs - The Company records revenues from product sales when the goods are shipped to the customer. For customers with Free on Board destination terms, a provision is recorded to exclude shipments estimated to be in-transit to these customers at the end of the reporting period. A provision is recorded and accounts receivable are reduced as revenues are recognized for estimated losses on credit sales due to customer claims for discounts, price discrepancies, returned goods and other items. A liability is recorded as revenues are recognized for estimated customer program liabilities, as discussed below. The Company maintains accruals for customer programs that consist primarily of chargebacks, rebates and shelf stock adjustments. Certain of these accruals are recorded in the balance sheet as current liabilities and others are recorded as a reduction in accounts receivable. A chargeback relates to an agreement the Company has with a wholesaler, a pharmaceutical buying group or a retail customer that will ultimately purchase product from a wholesaler for a contracted price that is different than the Company's price to the wholesaler. The wholesaler will issue an invoice to the Company for the difference in the contract prices. The accrual for chargebacks is based on historical chargeback experience and estimated wholesaler inventory levels, as well as expected sell-through levels by wholesalers to retailers. Rebates are payments issued to the customer when certain criteria are met such as specific levels of product purchases, introduction of new products or other objectives. The accrual for rebates is based on contractual agreements and estimated purchasing levels by customers with such programs. Medicaid rebates are payments made to states for pharmaceutical products covered by the program. The accrual for Medicaid rebates is based on historical trends of rebates paid and current period sales activity. Shelf stock adjustments are credits issued to reflect decreases in the selling price of a product and are based upon estimates of the amount of product remaining in a customer's inventory at the time of the anticipated price reduction. In many cases, the customer is contractually entitled to such a credit. The accrual for shelf stock adjustments is based on specified terms with certain customers, estimated launch dates of competing products and estimated declines in market price. -19- Changes in these estimates and assumptions related to customer programs may result in additional accruals. The following table summarizes the activity for the balance sheet for accounts receivable allowances and customer program accruals:
First Fiscal First Quarter Year Quarter 2007 2006 2006 -------- --------- -------- CUSTOMER RELATED ACCRUALS Balance, beginning of period $ 54,456 $ 48,378 $ 48,378 Provision recorded 41,834 158,210 29,575 Credits processed (48,497) (152,132) (31,564) -------- --------- -------- Balance, end of the period $ 47,793 $ 54,456 $ 46,389 ======== ========= ========
Allowance for Doubtful Accounts - The Company maintains an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical and anticipated customer performance, historical experience with write-offs and the level of past-due amounts. Changes in these conditions may result in additional allowances. The allowance for doubtful accounts was $12,195 at September 30, 2006, $11,178 at July 1, 2006 and $10,207 at September 24, 2005. Inventory - The Company maintains an allowance for estimated obsolete or unmarketable inventory based on the difference between the cost of the inventory and its estimated market value. In estimating the allowance, management considers factors such as excess or slow moving inventories, product expiration dating, products on quality hold, current and future customer demand and market conditions. Changes in these conditions may result in additional allowances. The allowance for inventory was $40,992 at September 30, 2006, $42,509 at July 1, 2006 and $37,164 at September 24, 2005. Goodwill - Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The estimates associated with the goodwill impairment tests are considered critical due to the judgments required in determining fair value amounts, including projected future cash flows. Changes in these estimates may result in the recognition of an impairment loss. The goodwill allocated to the API and Rx Pharmaceuticals segments is tested annually for impairment in the third quarter of the fiscal year. Goodwill allocated to the Consumer Healthcare segment is tested annually for impairment in the second quarter of the fiscal year. In fiscal 2006, although the testing performed on the Company's U.K. component within the Consumer Healthcare segment indicated that the estimated fair value exceeded the carrying value, these values were closer than they had been in previous years. The narrowing of the difference in these values increases the possibility of an impairment charge in future periods. The goodwill balance of the U.K. component was $37,395 as of September 30, 2006. Goodwill was $183,205 at September 30, 2006, $152,183 at July 1, 2006 and $144,362 at September 24, 2005. Other Intangible Assets - Other intangible assets subject to amortization consist of developed product technology, distribution and license agreements, customer relationships and trademarks. Most of these assets are related to the Agis acquisition and are amortized over their estimated useful economic lives using the straight-line method. An accelerated method of amortization is used for customer relationships. For intangible assets subject to amortization, an impairment analysis is performed whenever events or -20- changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized if the carrying amount of the asset is not recoverable and its carrying amount exceeds its fair value. Other intangible assets had a net carrying value of $134,078 at September 30, 2006, $132,426 at July 1, 2006 and $144,315 at September 24, 2005. Product Liability and Workers' Compensation - The Company maintains accruals to provide for claims incurred that are related to product liability and workers' compensation. In estimating these accruals, management considers actuarial valuations of exposure based on loss experience. These actuarial valuations include significant estimates and assumptions, which include, but are not limited to, loss development, interest rates, product sales, litigation costs, accident severity and payroll expenses. Changes in these estimates and assumptions may result in additional accruals. The accrual for product liability claims was $2,069 at September 30, 2006, $1,937 at July 1, 2006 and $2,182 at September 24, 2005. The accrual for workers' compensation claims was $2,016 at September 30, 2006, $1,919 at July 1, 2006 and $2,703 at September 24, 2005. Item 3. Quantitative and Qualitative Disclosures About Market Risks The Company is exposed to market risks due to changes in currency exchange rates and interest rates. The Company is exposed to interest rate changes primarily as a result of interest expense on borrowings used to finance the Agis acquisition and working capital requirements and interest income earned on its investment of cash on hand. As of September 30, 2006, the Company had invested cash, cash equivalents and investment securities of $60,949 and short and long-term debt, net of restricted cash, of $284,012. The Company enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure, particularly related to the management of interest rate risk. Because of the use of certain derivative financial instruments, the Company believes that a significant fluctuation in interest rates in the near future will not have a material impact on the Company's consolidated financial statements. These instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. Derivative financial instruments are not used for speculative purposes. Gains and losses on hedging transactions are offset by gains and losses on the underlying exposures being hedged. The Company has operations in the U.K., Israel, Germany and Mexico. These operations transact business in their local currency and foreign currencies, thereby creating exposures to changes in exchange rates. Significant currency fluctuations could adversely impact foreign revenues; however, the Company cannot predict future changes in foreign currency exposure. -21- Item 4. Controls and Procedures As of September 30, 2006, the Company's management, including its Chief Executive Officer and its Chief Financial Officer, has performed an interim review on the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on that review, as well as an evaluation and consideration of the update described below, the Chief Executive Officer and Chief Financial Officer have concluded the Company's disclosure controls and procedures are effective in ensuring that all material information relating to the Company and its consolidated subsidiaries required to be included in the Company's periodic SEC filings would be made known to them by others within those entities in a timely manner and that no changes are required at this time. Following is an update of the remediation plan related to the Company's fiscal 2005 Agis acquisition which should be read in conjunction with Item 9A. Controls and Procedures included in the Company's Form 10-K for the fiscal year ended July 1, 2006. - The Company's implementation of an enterprise resource planning (ERP) system at its Israeli location to remediate the majority of the previously disclosed weaknesses is expected to be completed in the second quarter of fiscal 2007. - The Company continues to make minor changes in its control processes to reduce reliance on spreadsheets for financial reporting, improve segregation of duties issues and alleviate other less critical control deficiencies. In connection with the interim evaluation by the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the Company's internal control over financial reporting (ICFR) pursuant to Rule 13a-15(d) of the Securities Exchange Act of 1934, no changes during the quarter ended September 30, 2006 were identified that have materially affected, or are reasonably likely to materially affect, the Company's ICFR. -22- PART II. OTHER INFORMATION Item 1. Legal Proceedings In August 2004, the Company reached a settlement with the FTC and states' attorneys general offices regarding a now terminated agreement between Alpharma, Inc. and the Company related to a children's ibuprofen suspension product. In connection with the Alpharma, Inc. agreement and the related FTC settlement, the Company has been named as a defendant in three suits, two of which are class actions that have been consolidated with one another (the Direct Purchaser Action), filed on behalf of Company customers (i.e., retailers), and the other consisting of four class action suits (the Indirect Purchaser Action), filed on behalf of indirect Company customers (i.e., consumers), alleging that the plaintiffs overpaid for children's ibuprofen suspension product as a result of the Company's agreement with Alpharma, Inc. On April 24, 2006, the court in the Direct Purchaser Action issued an order and final judgment approving the settlement of this matter with respect to defendants Alpharma, Inc. and the Company. The Company agreed to pay $3,000 as part of the settlement of the Direct Purchaser Action. Separately, Alpharma, Inc. and the Company entered into a settlement agreement to resolve the Indirect Purchaser Action for a combination of cash and product donations. On July 26, 2006 the court issued an order preliminarily approving the settlement of the Indirect Purchaser Action. However, the Indirect Purchaser Action settlement is subject to final court approval. The Company recorded a charge of $4,500 in the fourth quarter of fiscal 2005 as its best estimate of the combined expected cost of the settlements. While the Company believes the estimate of the charge is reasonable, the total amount of future payments related to these lawsuits cannot be assured and may be materially different than the recorded charge. Item 1A. Risk Factors The Company's Annual Report on Form 10-K filed for the fiscal year ended July 1, 2006 includes a detailed discussion of the Company's risk factors. During the first quarter of fiscal 2007, there have been no material changes to the risk factors that were included in the Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On February 15, 2006, the Board of Directors approved an additional plan to repurchase shares of common stock with a value of up to $60,000. This plan will expire on February 17, 2007. The Company has a 10b5-1 plan that allows brokers selected by the Company to repurchase shares on behalf of the Company at times when it would ordinarily not be in the market because of the Company's trading policies. The amount of common stock repurchased in accordance with the 10b5-1 plan on any given day is determined by the plan's formula which is generally based on the market price of the Company's stock. All common stock repurchased is retired upon purchase. -23- The table below lists the Company's repurchases of shares of common stock during its most recently completed quarter:
Total Average Total Number of Value of Number Price Shares Purchased Shares of Shares Paid as Part of Publicly Available Fiscal 2007 Purchased (1) per Share Announced Plans for Purchase ----------- ------------- --------- ------------------- ------------ $54,120 July 2 to August 5 281 $15.63 281 $49,727 August 6 to September 2 248 $15.74 247 $45,834 September 3 to September 30 181 $16.23 169 $43,087 --- --- Total 710 697
(1) Private party transactions accounted for the purchase of 1 share in the period from August 6 to September 2 and 12 shares in the period from September 3 to September 30. Item 6. Exhibits
Exhibit Number Description - ------- ----------- 10(a) Employment Agreement dated as of September 8, 2006 by and between Perrigo Company and Joseph C. Papa, incorporated by reference from Registrant's Form 8-K filed on September 12, 2006. 10(b) Second Amendment to Employment Agreement dated as of September 9, 2006 by and between Perrigo Company and David T. Gibbons, incorporated by reference from Registrant's Form 8-K filed on September 12, 2006. 10(c) Form of Long-Term Incentive Award Agreement, incorporated by reference from the Registrant's Form 8-K filed on August 22, 2006. 10(d) Form of Indemnity Agreement. 10(e) Second Amendment to Credit Agreement, dated as of October 30, 2006, among Perrigo Company, the Foreign Subsidiary Borrowers, JPMorgan Chase Bank, N.A., as Administrative Agent for the Lenders, Bank Leumi USA, as Syndication Agent, and Bank of America, N.A., LaSalle Bank Midwest National Association, formerly known as Standard Federal Bank N.A. and National City Bank of the Midwest, as Documentation Agents, incorporated by reference from the Registrant's Form 8-K filed on November 2, 2006. 31 Rule 13a-14(a) Certifications. 32 Section 1350 Certifications.
-24- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PERRIGO COMPANY (Registrant) Date: November 9, 2006 By: /s/ Joseph C. Papa ------------------------------------ Joseph C. Papa President and Chief Executive Officer Date: November 9, 2006 By: /s/ Judy L. Brown ------------------------------------ Judy L. Brown Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) -25- EX-10.(D) 2 c09893exv10wxdy.txt FORM OF INDEMNITY AGREEMENT Exhibit 10(d) INDEMNITY AGREEMENT This Agreement is made as of [Date], by and between PERRIGO COMPANY, a Michigan corporation (the "Company"), 515 Eastern Avenue, Allegan, Michigan 49010, and [Name]("Indemnitee"), whose address is [Address]. 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; 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, the Act (as defined below) permits the Company to contractually commit itself to increase the scope of indemnification of its directors and officers 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 order to ensure that it can continue to attract and retain qualified persons to serve as officers and directors of the Company. 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 date of this Agreement of a nature that would be required to be reported in response to Item 6(e) 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 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 a director, officer, employee, agent and/or fiduciary of 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. For the avoidance of doubt, Indemnitee may serve in any one or more of such positions. (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. (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. 2 (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 in a Corporation Position for so long as Indemnitee is duly elected or appointed or until Indemnitee's death, permanent disability or written resignation from his or her Corporate Position. 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; (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 or her 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 3 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 the corporate offices of the Company or its successor 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 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 4 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. (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 5 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 or her right to indemnification or to the advancement of Expenses, at his or her 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 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 or her 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 6 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 or her 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 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 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 7 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 shareholders or disinterested directors, the Act as amended from time to time, or otherwise, both as to actions in Indemnitee's official capacity and as to actions in another capacity while holding such office. 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. 8 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 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. SECTION 21 EFFECTIVE PERIOD OF COVERAGE. This Agreement shall cover and extend to all actions taken by Indemnitee in the course of his or her duties in a Corporate Position from the inception of those duties on and after [Date, 20__]. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ATTEST: PERRIGO COMPANY By: - ------------------------------------- ------------------------------------ [ ] [ ] -------------------------- ------------------------- Its: Secretary Its: Chief Executive Officer INDEMNITEE ---------------------------------------- [ ] ------------------------- 9 EX-31 3 c09893exv31.txt CERTIFICATIONS Exhibit 31 CERTIFICATION I, Joseph C. Papa, certify that: 1. I have reviewed this report on Form 10-Q of Perrigo Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2006 /s/ Joseph C. Papa ---------------------------------------- Joseph C. Papa President and Chief Executive Officer Exhibit 31 CERTIFICATION I, Judy L. Brown, certify that: 1. I have reviewed this report on Form 10-Q of Perrigo Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2006 /s/ Judy L. Brown ------------------------------------ Judy L. Brown Executive Vice President and Chief Financial Officer EX-32 4 c09893exv32.txt CERTIFICATIONS Exhibit 32 THE FOLLOWING STATEMENT IS BEING MADE TO THE SECURITIES AND EXCHANGE COMMISSION SOLELY FOR THE PURPOSES OF SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350), WHICH CARRIES WITH IT CERTAIN CRIMINAL PENALTIES IN THE EVENT OF A KNOWING OR WILLFUL MISREPRESENTATION. Securities and Exchange Commission 450 Fifth Street NW Washington, DC 20549 Re: Perrigo Company Ladies and Gentlemen: In accordance with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC 1350), each of the undersigned hereby certifies that: (i) this Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Perrigo Company. Dated as of this 9th day of November, 2006. /s/ Joseph C. Papa /s/ Judy L. Brown - ------------------------------------- ---------------------------------------- Joseph C. Papa Judy L. Brown President and Executive Vice President and Chief Executive Officer Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----