-----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, OmER1WW5pTJFWmDlF1f5SpkgaDgxxWReh3St+xThG6HzmSQ4G3yAp/T9Z4Pqaqi5 zNtog9DRsNgMnjUcsujLag== 0000950137-96-000614.txt : 19960521 0000950137-96-000614.hdr.sgml : 19960521 ACCESSION NUMBER: 0000950137-96-000614 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960509 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERRIGO CO CENTRAL INDEX KEY: 0000820096 STANDARD INDUSTRIAL CLASSIFICATION: 2834 IRS NUMBER: 382799573 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19725 FILM NUMBER: 96558762 BUSINESS ADDRESS: STREET 1: 117 WATER ST CITY: ALLEGAN STATE: MI ZIP: 49010 BUSINESS PHONE: 6166738451 MAIL ADDRESS: STREET 1: 117 WATER STREET CITY: ALLEGAN STATE: MI ZIP: 49010 10-Q 1 FORM 10-Q DATED 3/31/96 1 ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 1996 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.) 117 Water Street Allegan, Michigan 49010 ----------------------- ----------------- (Address of principal (Zip Code) executive offices) (616) 673-8451 ----------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable ----------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock April 19, 1996 --------------------- ---------------- without par 76,310,611 shares ================================================================================ 2 PERRIGO COMPANY AND SUBSIDIARIES FORM 10-Q INDEX PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets--March 31, 1996 and June 30, 1995 3 Condensed consolidated statements of income--Three months ended March 31, 1996 and 1995; Nine months ended March 31, 1996 and 1995. 4 Condensed consolidated statements of cash flows--Nine months ended March 31, 1996 and 1995 5 Notes to condensed consolidated financial statements-- March 31, 1996 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 - 2 - 3 PERRIGO COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, JUNE 30, 1996 1995 ----------- -------- (Unaudited) ASSETS Current assets Cash $ 193 $ 259 Accounts receivable, net of allowances of $2,962 and $3,040 90,330 85,018 Inventories 172,826 163,549 Prepaid expenses and other current assets 13,605 12,866 ---------- --------- Total current assets 276,954 261,692 Property and equipment, at cost 337,680 325,100 Less accumulated depreciation 95,628 78,853 ---------- --------- 242,052 246,247 Cost in excess of net assets of acquired businesses, net of accumulated amortization of $9,809 and $8,213 43,492 45,088 Other 2,574 2,706 ---------- --------- $ 565,072 $ 555,733 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 58,119 $ 57,034 Payrolls and related taxes 12,480 12,813 Accrued expenses 20,917 20,661 Income taxes 3,163 753 Current installments on long-term debt 300 300 ---------- --------- Total current liabilities 94,979 91,561 Deferred income taxes 26,415 24,415 Long-term debt, less current installments 67,840 99,140 Shareholders' equity Preferred stock, without par value, 10,000 shares authorized, none issued - - Common stock, without par value, 200,000 shares authorized, issued and outstanding 76,308 shares and 76,019 shares 145,590 145,355 Retained earnings 230,248 195,262 ---------- --------- Total shareholders' equity 375,838 340,617 ---------- --------- $ 565,072 $ 555,733 ========== =========
See accompanying notes to condensed consolidated financial statements. - 3 - 4 PERRIGO COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 1996 1995 1996 1995 ---- ---- ---- ---- Net sales $ 196,326 $185,266 $602,464 $542,672 Cost of sales 144,924 136,555 441,318 390,170 ---------- -------- -------- -------- Gross profit 51,402 48,711 161,146 152,502 ---------- -------- -------- -------- Operating expenses Distribution 6,846 5,606 19,097 15,079 Research and development 3,043 1,950 7,718 5,687 Selling and administrative 21,713 21,516 68,052 66,463 Restructuring 263 - 1,878 - Unusual litigation costs 1,586 - 4,584 - ---------- -------- -------- -------- 33,451 29,072 101,329 87,229 ---------- -------- -------- -------- Operating income 17,951 19,639 59,817 65,273 Interest expense 1,317 1,616 4,731 3,629 ---------- -------- -------- -------- Income before income taxes 16,634 18,023 55,086 61,644 Income taxes 6,000 6,600 20,100 22,600 ---------- -------- -------- -------- Net income $ 10,634 $ 11,423 $ 34,986 $ 39,044 ========== ======== ======== ======== Earnings per common share $ 0.14 $ 0.15 $ 0.45 $ 0.51 ========== ======== ======== ======== Weighted average number of common shares outstanding 77,215 77,186 77,205 77,194 ========== ======== ======== ========
See notes to condensed consolidated financial statements. - 4 - 5 PERRIGO COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 1996 1995 ---- ---- Cash Flows From Operating Activities: Net income $ 34,986 $ 39,044 Depreciation and amortization 20,361 17,205 ---------- -------- 55,347 56,249 Accounts receivable (5,312) (10,040) Inventories (9,277) (19,581) Accounts payable 1,085 9,101 Other 3,595 (901) ---------- -------- Net cash from operating activities 45,438 34,828 ---------- -------- Cash Flows For Investing Activities: Vi-Jon acquisition - (32,354) Additions to property and equipment (14,460) (31,478) Other 35 (193) ---------- -------- Net cash for investing activities (14,425) (64,025) ---------- -------- Cash Flows From Financing Activities: Borrowings of long-term debt - 40,000 Repayments of long-term debt (31,300) (12,790) Tax benefit of stock transactions - - Issuance of common stock 221 64 ---------- -------- Net cash from (for) financing activities (31,079) 27,274 ---------- -------- Net Decrease in Cash and Cash Equivalents (66) (1,923) Cash, at beginning of period 259 2,157 ---------- -------- Cash, at end of period $ 193 $ 234 ========== ======== Supplemental disclosures of cash flow information: Interest paid $ 4,552 $ 3,955 Income taxes paid $ 13,731 $ 19,419
See notes to condensed consolidated financial statements. - 5 - 6 PERRIGO COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 NOTE A -- 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) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending June 30, 1996. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 1995. NOTE B -- INVENTORIES The components of inventory consist of the following:
March 31, June 30, 1996 1995 ---- ---- (in thousands) Finished goods $ 85,247 $ 79,312 Work in process 61,267 55,958 Raw materials 26,312 28,279 --------- --------- $172,826 $163,549 ======== ========
Inventories are stated at the lower of cost (first-in, first-out) or market. NOTE C -- RESTRUCTURING COSTS For the nine months ended March 31, 1996, the condensed consolidated statement of income includes $1,878 of restructuring costs expensed as incurred related primarily to the consolidation of sales and marketing, graphic arts, purchasing and accounting functions. In addition, $2,812 of costs were paid, primarily related to severance and employee benefit costs, that had been accrued in a previous period. As of March 31, 1996, $1,188 remains in accrued liabilities. Completion of the consolidation of distribution centers, originally scheduled for the end of fiscal 1996, has been delayed. The delay relates to further review of the logistic requirements of customers in order to optimize the service level to those customers in a cost effective manner. As a result, further restructuring costs, previously estimated to be approximately $1 million, are anticipated to be recognized in fiscal 1997, if recognized at all. - 6 - 7 NOTE D -- COMMITMENTS AND CONTINGENCIES For the nine months ended March 31, 1996 the condensed consolidated statement of income includes $4,584 of costs related to a purported class action, a derivative action and a complaint related to the purchase of the Company from its former owners, all as described in the Company's annual report on Form 10-K for the year ended June 30, 1995. The Company believes the actions and claims are without merit, or are covered by insurance, and intends to vigorously defend these actions and claims. NOTE E -- LONG TERM BORROWINGS AND CREDIT ARRANGEMENTS In December 1995 the Company entered into unsecured credit facilities with two financial institutions totalling $60 million. Both facilities are uncommitted and can be terminated by either party at any time. The interest rates associated with the credit facilities are based on bids submitted by the financial institutions, for periods of 1 to 100 days. The Company's restrictive loan covenants under these agreements are substantially the same as those under its $150 million unsecured revolving credit facility. NOTE F -- SHAREHOLDERS' EQUITY On April 10, 1996 the Company's Board of Directors adopted a Preferred Share Purchase Rights Plan and declared a dividend distribution to be made to shareholders of record on April 22, 1996, of one Preferred Share Purchase Right on each outstanding share of the Company's common stock. The Rights contain provisions which are intended to protect the Company's stockholders in the event of an unsolicited and unfair attempt to acquire the Company. The Company is entitled to redeem the Rights at $.01 per Right at any time before a 20% position has been acquired. The Rights will expire on April 10, 2006, unless previously redeemed or exercised. - 7 - 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED MARCH 31, 1996 AND 1995 (DOLLARS IN THOUSANDS) RESULTS OF OPERATIONS The Company's net sales increased by 6% to $196,326 for the third quarter of fiscal 1996, from $185,266 during the same period in fiscal 1995. The Company's net sales increased by 11% to $602,464 during the first nine months of fiscal 1996 from $542,672 during the same period in fiscal 1995. The growth in net sales for the third quarter was primarily attributable to increased sales of cough and cold and liquid nutritional supplement products. The growth in net sales for the nine months ended March 31, 1996 was primarily attributable to greater unit sales of cough and cold, oral hygiene, liquid nutritional supplement and vitamin products. Cough and cold product sales increases are primarily due to a more severe cough and cold season than experienced in the same periods last year and continuing emphasis on store brand products by the Company's customers, resulting in increased market share for cough and cold products. The increase in the oral hygiene sales was due to the impact of the acquisition of certain assets of Vi-Jon Laboratories, Inc. ("Vi-Jon") in January 1995. The liquid nutritional supplement is a new product category which the Company first began shipping in June 1995. Vitamin product sales increases are due primarily to increased unit sales to new customers. The Company's analgesic sales are comparable between periods reflecting the softness of the total analgesic market. Comparative analgesic sales were also impacted by significant promotional activity in the same periods in the prior year. As anticipated, antacid sales have been negatively impacted by the competitive launch of Pepcid(R) and Tagamet(R), two new antacid products, and are comparable between periods. No store brand equivalent for these products can be approved for sale prior to September 1998 due to exclusivity granted by the U. S. Food and Drug Administration (the "FDA"). Gross profit increased 6% or $2,691 for the third quarter of fiscal 1996 compared to 1995. The gross profit percentage for the third quarter of fiscal 1996 was 26.2%, compared to 26.3% for the same period in fiscal 1995. Gross profit increased by 6% or $8,644 for the first nine months of fiscal 1996 compared to 1995. The gross profit percentage for the first nine months of fiscal 1996 was 26.7% compared to 28.1% for the first nine months of fiscal 1995. The increased sales of lower margin nutritional and personal care products and cost increases in certain material components, that were not entirely passed on to its customers, resulted in the decline in gross profit percentage between periods. Operating expenses increased by 15% or $4,379 for the third quarter of fiscal 1996 compared to the same period in fiscal 1995 and included $263 of restructuring costs and $1,586 of unusual litigation costs. Operating expenses as a percentage of net sales were 17.0% for the third quarter of the current year compared to 15.7% for the prior year. Excluding the restructuring and unusual litigation costs, operating expenses as a percent of sales were 16.1% for the third quarter of fiscal 1996. Distribution expenses increased by $1,240 or 22% from the third quarter of fiscal 1995 due primarily to increased shipment volume and additional warehousing costs supporting higher inventory levels and higher freight costs incurred in support of customers' delivery requirements. Distribution expenses as a percentage of sales were 3.5% for the third quarter of fiscal 1996, compared to 3.0% - 8 - 9 for the third quarter of fiscal 1995. Research and development expenses increased $1,093 or 56% from the third quarter of fiscal 1995 primarily due to expenses related to new product development for which an approval from the FDA, through its Abbreviated New Drug Application ("ANDA") process, is required. Selling and administrative expenses increased $197 or 1% from the third quarter of 1995. Selling and administrative expenses as a percentage of sales were 11.1% for the third quarter of fiscal 1996, compared to 11.6% for the third quarter of fiscal 1995. Operating expenses increased by 16% or $14,100 for the first nine months of fiscal 1996 compared to the same period in fiscal 1995 and included $1,878 of restructuring and $4,584 of unusual litigation costs. Operating expenses as a percentage of net sales were 16.8% for the current year compared to 16.1% for the same period last year. Excluding the restructuring and unusual litigation costs, operating expenses as a percent of sales were 15.7% for the first nine months of fiscal 1996. Distribution expenses increased by $4,018 or 27% for the first nine months of fiscal 1996 compared to the same period in fiscal 1995 due primarily to increased volume and additional warehousing costs supporting higher inventory levels. Distribution expenses as a percentage of sales were 3.2% for the first nine months of fiscal 1996 compared to 2.8% for the same period last year. Research and development expenses increased $2,031 or 36% from the first nine months of fiscal 1995 primarily due to expenses related to new product development for which an approval from the FDA through its ANDA process is required. Research and development expenses as a percentage of sales for the first nine months of fiscal 1996 were 1.3% compared to 1.0% for the same period in fiscal 1995. Selling and administrative expenses increased $1,589 or 2% from the first nine months of fiscal 1995. Selling and administrative expenses as a percentage of sales were 11.3% for the first nine months of fiscal 1996 compared to 12.2% for the first nine months of fiscal 1995. The decrease as a percent of sales is due primarily to certain sales promotions in the first nine months of fiscal 1995 which were not repeated in fiscal 1996 and to benefits realized from the restructuring process which the Company began in June 1995. The Company anticipates incurring restructuring costs totaling approximately $2.5 million and unusual litigation costs totaling approximately $6 million in fiscal 1996. As indicated in Note C, the completion of the consolidation of distribution centers, originally scheduled for the end of fiscal 1996, has been delayed. As a result, further restructuring costs, previously estimated to be approximately $1 million, are anticipated to be incurred in fiscal 1997, if recognized at all. Interest expense decreased 19% or $299 to $1,317 for the third quarter of fiscal 1996 compared to $1,616 for the same period in fiscal 1995. The decrease reflects lower interest rates and lower borrowing levels in the current year period. Interest expense increased $1,102 during the first nine months of fiscal 1996 compared to $3,629 for the same period in fiscal 1995. The increase reflects higher borrowing levels due to the acquisition of certain assets from Vi-Jon and higher interest rates during the current year period. The effective income tax rate for the third quarter of fiscal 1996 was 36.1% compared to 36.6% for the same period in fiscal 1995 and reflects a slight adjustment to the anticipated effective tax rate for the year due to permanent differences. The effective income tax rate for the first nine months of fiscal 1996 was 36.5% compared to 36.7% for the same period in fiscal 1995. - 9 - 10 LIQUIDITY AND CAPITAL RESOURCES As the Company's business has continued to grow, liquidity requirements have increased in order to fund working capital needs, primarily accounts receivable and inventory, and capital expenditures for the purposes of increasing manufacturing and distribution capacity. These requirements have been satisfied by cash flow from operations. During the first nine months of fiscal 1996 working capital increased $11,844 and cash flow generated by operations exceeded cash flow used by operations by $45,438. Accounts receivable increased $5,312 due primarily to increased sales and inventories increased $9,277 in order to support the increased sales volume. The Company's capital expenditures for facilities and equipment were $14,460 for the nine months ended March 31, 1996. The Company anticipates capital expenditures of approximately $20,000 during fiscal year 1996, principally for additional manufacturing and packaging equipment. Capital expenditures in the first nine months were below the original plan as the Company continually assesses its capital needs. Fiscal year 1996 capital expenditures requirements have been lowered reflecting adequate manufacturing and packaging capacity in most product categories. The Company will finance these capital expenditures with cash flow from operations. The Company's ratio of indebtedness for borrowed money to equity of .2:1 at March 31, 1996 is down slightly from June 30, 1995. As indicated in Note E, in December 1995, the Company entered into unsecured credit facilities with two financial institutions totalling $60 million. The credit facilities are short term in nature bearing interest rates based on bids submitted by the financial institutions. The Company intends on utilizing the credit facilities to fund working capital requirements, as required. - 10 - 11 PART II. OTHER INFORMATION Item 5. Other Information In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing cautionary statements identifying important factors that could cause the Company's actual results to differ from those that may have been or may be projected in forward-looking statements by or on behalf of the Company from time to time. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are enclosed herein:
Exhibit Number Description - - -------------- ----------- 5 Cautionary Statement Identifying Important Factors That Could Cause Results to Differ 27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the three months ended March 31, 1996. - 11 - 12 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: May 8, 1996 /s/Michael J. Jandernoa ---------------------------------- Michael J. Jandernoa Chairman of the Board and Chief Executive Officer Date: May 8, 1996 /s/Steve M. Neil ---------------------------------- Steve M. Neil Vice President--Finance, Treasurer and Chief Financial Officer - 12 - EX-5 2 CAUTIONARY STATEMENT 1 EXHIBIT 5 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS The Company or its representatives from time to time may make or may have made certain forward-looking statements, orally or in writing, including without limitation any such statements made or to be made in the Management's Discussion and Analysis contained in its various SEC filings. The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. Accordingly, such statements are qualified in their entirety by reference to and are accompanied by the following discussion of certain important factors that could cause actual results to differ materially from those projected in such forward-looking statements. The Company cautions the reader that this list of factors may not be exhaustive. The Company operates in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such risk factors, nor can it assess the impact, if any, of such risk factors on the Company's business or the extent to which any factors, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Many of the important factors discussed below have been discussed previously in the Company's SEC filings, including without limitation in the Company's most recent Annual Report on Form 10-K dated June 30, 1995. Store Brand Product Growth The future growth of domestic store brand products will be influenced by general economic conditions, which can influence consumers to switch to store brand products, consumer perception and acceptance of the quality of the products available, the development of new products, the market exclusivity periods awarded on prescription to over-the-counter switch products and the Company's ability to grow the store brand market share. The Company does not advertise like the national brand companies and thus is dependent on retailer promotional spending to help drive sales volume and increase market share. Promotional spending is a significant element of selling and administrative expenses and is directly influenced by retailer promotional decisions and is thus very difficult to predict in future periods. Growth opportunities for the products in which the Company currently has a significant store brand market share (mouthwash, cough and cold remedies and analgesics) will be driven by the ability to offer new products to existing domestic customers and the Company's ability to service new customers internationally. Should store brand growth be limited by any of these factors, there could be a significant impact on the operating results of the Company. Fluctuation in Quarterly Results The Company's quarterly operating results depend on a variety of factors including the severity and timing of the cough, cold and flu season, the timing of new product introductions by the 2 Company, its customers and its competitors, changes in the levels of inventories maintained by the Company's customers and the timing of retailer promotional programs. Accordingly, the Company may be subject to significant and unanticipated quarter-to-quarter fluctuations. Regulatory Environment The Company's products are subject to regulation by a number of federal and state governmental agencies. The cost of maintaining product quality through Good Manufacturing Practices ("GMP") is increasing. Should the Company fail to adequately conform to governmental regulations, there may be a significant impact in the operating results of the Company. The Company's ability to bring new products to market is limited by certain patent and tradedress factors including, but not limited to, the exclusivity periods awarded on products that have switched from prescription to over-the-counter status. The cost and time to develop these switch products is significantly greater than the rest of the new products that the Company seeks to introduce. The Federal Drug Administration ("FDA") will from time to time mandate packaging or labeling changes. Such changes could be related to safety or efficacy issues. With specific regard to safety, there have been instances within the Company's product categories in which evidence of product tampering has occurred resulting in a costly product recall. Significant costs could also be incurred in complying with the required packaging and labeling changes. Should the Company be involved in such an event, the associated costs could have a material impact on the results of operations. The Company believes that it has excellent relationships with these agencies, which it intends to maintain. If these relationships should deteriorate, however, the Company's ability to bring new and current products to market could be impeded. Research and Development The Company's investment in research and development will continue to exceed historical levels due to the high cost of developing and becoming a qualified manufacturer of new products that are switching from prescription to over-the-counter status. The ability to attract chemists proficient in emerging delivery forms and/or contracting with a third party innovator in order to generate new products of this type is a critical element of the Company's long term plans. Should the Company fail to attract qualified employees or enter into reasonable agreements with third party innovators, long term sales growth and profit would be adversely impacted. Dependence on Personnel The Company's future success will depend in large part upon its ability to attract and retain highly skilled research and development chemists (as noted above), management information specialists, operations, sales, marketing and managerial personnel. The Company does not have employment contracts with any key personnel. Should the Company not be able to attract or retain key qualified employees, future operating results may be adversely impacted. 3 International Operations The Company sources certain key raw materials from foreign suppliers and is increasing its sales outside the United States. Additionally, the Company is investing significant amounts in the development of its international business. Sales to customers outside the United States and foreign raw material purchases expose the Company to a number of risks including unexpected changes in regulatory requirements and tariffs, possible difficulties in enforcing agreements, longer payment cycles, exchange rate fluctuations, difficulties obtaining export or import licenses, and the imposition of withholding or other taxes, embargoes, exchange controls or the adoption of other restrictions on foreign trade. Should any of these risks occur, they may have a material adverse impact on the operating results of the Company. Raw Material Availability In the past, supplies of certain raw materials used by the Company have become limited, or are available from one or only a few suppliers, and it is possible that this will occur in the future. Should this situation occur, it can result in increased prices, rationing and shortages. In response to these problems the Company tries to identify alternative materials or suppliers for such raw materials. Certain shortages could adversely affect financial results. Legal Exposure From time to time the Company and/or its subsidiaries become involved in lawsuits arising from various commercial matters, including, but not limited to competitive issues, contract issues, intellectual property matters, workers' compensation and product liability. Currently, the most significant pending litigation relates to a purported class action, a derivative action and a complaint related to the purchase of the Company from its former owners, all as described in the Company's annual report on Form 10-K for the year ended June 30, 1995. Litigation tends to be unpredictable and costly. There is no assurance that litigation will not have an adverse effect on the Company's financial position or results of operations in the future. The Company maintains property, cargo, auto, product, general liability, and directors and officers liability insurance to protect itself against potential loss exposures. To the extent that losses occur, there could be an adverse effect on the Company's financial results depending on the nature of the loss, and the level of insurance coverage maintained by the Company. From time to time, the Company may reevaluate and change the types and levels of insurance coverage that it purchases. Competitive Issues The market for store brand over-the-counter pharmaceutical, personal care and nutritional products is highly competitive. Store brand competition is based principally on price, quality of products, customer service and marketing support. National brand companies could choose to compete more directly by manufacturing store brand products or by lowering the prices of national brand products. Due to the high degree of price competition, the Company has not always been able to fully pass on future cost increases to its customers. Additionally, from time to time in response to competitive situations, the Company is required to adjust prices in order to maintain existing business. The inability to pass on future cost increases, the impact of direct store brand competitors, and the impact of national brand companies lowering prices of their products or directly operating in the store brand market could have a material adverse impact on financial results. 4 Customer Issues The impact of retailer consolidation is unknown but could have an adverse impact on future sales growth. Should a large customer encounter financial difficulties, the exposure on uncollectible receivables and unusable inventory could have a material adverse impact on the Company's financial position or results of operation. The Company's largest customer, Wal-Mart, currently comprises approximately 19% of total revenues. Should Wal-Mart's current relationship with the Company change adversely, the resulting loss of business could have a material unfavorable impact on the Company's operating results and financial position. Capital Requirements The Company maintains a broad product line to function as a primary supplier for its customers. Capital investments are driven by growth, technological advancements and the need for manufacturing flexibility. Estimation of future capital expenditures could vary materially due to the uncertainty of these factors. If the Company fails to stay current with the latest manufacturing and packaging technology it may be unable to competitively support the launch of new product introductions. The Company also is vertically integrated in the areas of preprinted componentry (labels and cartons) and plastics (bottle blow molding). Should the Company fail to keep up with current technology it could lose its cost competitive advantage in these areas. Interest Rate Implication The Company's line of credit facilities are based on a variable interest rate factor. The interest rates are established at the time of borrowing based upon the prime rate, the LIBOR rate, plus a factor, or at a rate based on interest rate bids. Accordingly, interest expense is subject to variation due to the variability of these rates. Tax Rate Implication Income tax rate changes by governments and changes in the tax jurisdictions in which the Company operates could influence the effective tax rates that have been projected for future years. The anticipated growth of the Company's international business increases the likelihood of fluctuation occurring. Liquidity and Capital Resources The Company anticipates that cash flow from operations will substantially fund working capital, restructuring and other unusual charges and capital expenditures. Additionally, borrowing from the Company's line of credit are available, if required. The Company has historically evaluated acquisition opportunities and anticipates that acquisition opportunities will continue to be identified and evaluated in the future. The historical growth of sales and profits have been significantly influenced by acquisitions. There is no assurance that future sales and profits will, or will not, be impacted by acquisition activities. The Company's current capital structure, results of operations and cash flow needs could be materially changed by acquisitions. The Company has, and will continue to, evaluate the products and product categories in which it does business. Future product line extensions, or deletions, could have a material impact on the Company's financial position or results of operations. 5 Potential Volatility of Stock Price The market price of the Company's Common Stock has been, and could be subject to wide fluctuations in response to, among other things, quarterly fluctuations in operating results, adverse circumstances affecting the introduction or market acceptance of new products, failure to meet published estimates of, or changes in earnings estimates by securities analysts, announcements of new products or enhancements by competitors, sales of Common Stock by existing holders, loss of key personnel, market conditions in the industry, shortages of key components and general economic conditions. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JUN-30-1996 JUL-01-1995 MAR-31-1996 193 0 90,330 2,962 172,826 276,954 337,680 95,628 565,072 94,979 0 0 0 145,590 230,248 565,072 602,464 602,464 441,318 441,318 101,329 392 4,731 55,086 20,100 34,896 0 0 0 34,896 .45 .45
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