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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 29, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19725
PERRIGO COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-2799573
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
515 Eastern Avenue 49010
Allegan, Michigan (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (269) 673-8451
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (without par value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the common stock on August 30,
2002 as reported on the Nasdaq National Market System, was approximately
$535,130,515. Shares of common stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of August 30, 2002 the registrant had outstanding 70,032,767 shares of common
stock.
Documents incorporated by reference: Portions of the Registrant's Proxy
Statement for its Annual Meeting on October 29, 2002 are incorporated by
reference into Part III.
PART I.
Item 1. Business of the Company. (Dollar and share amounts in thousands)
GENERAL
Perrigo Company (the Company), established in 1887, is the largest manufacturer
of store brand over-the-counter (OTC) pharmaceutical and nutritional products in
the United States. Store brand products are sold under a retailer's own label
and compete with nationally advertised brand name products. The Company
attributes its leadership position in the store brand market to its
comprehensive product assortment and to its commitment to product quality,
customer service, retailer marketing support and low cost production.
The Company's principal executive offices are located at 515 Eastern Avenue,
Allegan, Michigan 49010, its telephone number is (269) 673-8451 and its fax
number is (269) 673-7535. The Company operates primarily through two wholly
owned domestic subsidiaries, L. Perrigo Company and Perrigo Company of South
Carolina, Inc., and three wholly owned foreign subsidiaries, Perrigo de Mexico
S.A. de C.V., Quimica y Farmacia, S.A. de C.V. (Quifa) and Wrafton Laboratories
Ltd. (Wrafton). As used herein, "the Company" means Perrigo Company, its
subsidiaries and all predecessors of Perrigo Company and its subsidiaries.
The Company's customers are major national and regional retail drug, supermarket
and mass merchandise chains such as Albertson's, CVS, Kmart, Kroger, Safeway,
Target, Walgreens and Wal-Mart and major wholesalers such as Fleming, McKesson
and Super Valu.
The Company's business consists of four operating segments. Two of the operating
segments, OTC pharmaceutical products and nutritional products, are aggregated
into one reportable segment, store brand health care. This segment markets a
broad line of products that are comparable in quality and effectiveness to
national brand products. These products include analgesics, antacids, cough and
cold remedies, gastrointestinal and feminine hygiene products; as well as
vitamins, nutritional supplements and nutritional drinks. The cost to the
retailer of a store brand product is significantly lower than that of a
nationally advertised brand name product. The retailer therefore can price a
store brand product below the competing national brand product while still
realizing a greater profit margin. Generally, the retailers' dollar profit per
unit of store brand product sold is greater than the dollar profit per unit of
the comparable national brand product. The consumer benefits by receiving a
quality product at a price below a comparable national brand product. This
reportable segment includes over ninety percent of the Company's revenues. The
other two operating segments are Quifa, the Company's Mexican operating
subsidiary, and Wrafton, the Company's United Kingdom operating subsidiary.
Quifa manufactures primarily OTC and prescription pharmaceuticals for retail,
wholesale and governmental customers. Wrafton is a supplier of store brand
products to major grocery and pharmacy retailers and a contract manufacturer of
OTC pharmaceuticals. Neither of these segments meet the requirements for
separate disclosure. See Notes A and L of the consolidated financial statements
for additional segment information. The discussion in Item 1 primarily relates
to the store brand health care segment.
The Company currently manufactures and markets certain products under its own
brand name, Good Sense(R). The Company also manufactures products under contract
for marketers of national brand products.
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SIGNIFICANT DEVELOPMENTS DURING FISCAL 2002
Share Repurchase
The Company continued to repurchase shares of common stock during fiscal 2002,
purchasing 2,533 shares for $31,923. The common stock was retired upon
repurchase.
In early fiscal 2003, the Board of Directors approved the purchase of an
additional $40,000 of common stock, subject to market conditions. In the last
two fiscal years, the Company has purchased 2,670 shares for $33,012. As of
September 12, 2002, the Company has purchased and retired 3,084 shares for
$31,117 in the first quarter of fiscal 2003. The Company has approval to
purchase additional shares with a value of up to $15,871.
Settlements of Antitrust Lawsuit
The Company entered into settlement agreements with several defendants of a
civil antitrust lawsuit. The lawsuit, which was filed in August 1999, was
against a group of vitamin raw material suppliers and alleged the defendants
conspired to fix the prices of vitamin raw materials sold to the Company. The
Company received settlement payments of $27,891, net of attorney fees and
expenses, in fiscal 2002. The case against the few remaining defendants was
settled in August 2002, resulting in a final payment of $3,128 that will be
recorded in the first quarter of fiscal 2003.
Restructuring and Goodwill Impairment Charges
In the fourth quarter of fiscal 2002, the Company approved a restructuring plan
related to Quifa. The implementation of the plan began in June 2002 and is
expected to be completed in its entirety by June 2003. The Company will
discontinue certain customers and products because of inadequate profitability
and misalignment with strategic goals. Equipment related to the discontinued
customers and products has been written down to its fair market value, resulting
in an impairment charge of $2,590. The Company expects to terminate
approximately 240 employees performing certain production and administrative
tasks as a result of the restructuring plan. Accordingly, the Company recorded
employee termination benefits of $2,000 and other restructuring costs of $500.
The charges for asset impairment and employee termination benefits are included
in the restructuring line in the consolidated statement of income for fiscal
2002.
Quifa is considered a reporting unit for the purpose of goodwill impairment
testing. Due to the changes necessary at Quifa, its goodwill was tested for
impairment. The fair value of the reporting unit was estimated using the
expected present value of future cash flows. The testing procedure resulted in a
goodwill impairment charge of $11,524. The goodwill impairment charge is
recorded as a separate line item in the consolidated statement of income for
fiscal 2002.
Sale of Logistics Facility
In December 2001, the Company sold its logistics facility located in LaVergne,
Tennessee. The facility was an asset held for sale as a result of divesting the
Company's personal care business. The proceeds from the sale were $14,161. The
Company recorded a restructuring charge in fiscal 2002 of $2,046 to reduce the
value of the facility to its net realizable value.
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BUSINESS STRATEGY
The Company attributes its sustained leadership position in the store brand
market to its implementation of several focused business strategies that reflect
the Company's commitment to its customers and employees. The strategy is
outlined below.
Product Quality and Product Assortment
The Company is committed to providing a high quality product to the customer.
Substantially all products are developed using ingredients and formulas
comparable to those of national brand products. Packaging is designed to make
the product visually appealing to the consumer. The Company offers a
comprehensive product assortment in order to fill customers' needs while
minimizing their product sourcing costs. High quality standards are maintained
throughout all phases of production, testing, warehousing and distribution by
adhering to "Current Good Manufacturing Practices" (cGMP) promulgated by the
Food and Drug Administration (FDA).
The Company is dedicated to developing and marketing new store brand products
before its competitors. As a result, the Company has a research and development
staff that management believes is one of the most experienced in the industry at
developing products comparable to national brand products. This staff also
responds to changes in existing national brand products by reformulating
existing Company products. In the OTC pharmaceutical market, several new
products are the result of changes in product status from "prescription only"
(Rx) to OTC (non-prescription). These "Rx switch" products require approval by
the FDA through its Abbreviated New Drug Application (ANDA) process. In order to
accelerate the approval process, the Company uses both internal development and
strategic product development agreements with outside sources.
Customer Service and Marketing Support
The Company seeks to establish customer loyalty by providing superior customer
service and marketing support. This includes providing (1) a comprehensive
assortment of high quality, value priced products, (2) timely processing,
shipment and delivery of orders, (3) assistance in managing customer inventories
and (4) support in managing and building the customer's store brand business.
The Company provides marketing support that is directed at developing customized
marketing programs for the customers' store brand products. The primary
objective of this store brand management approach is to enable customers to
increase sales of their own brand name products by communicating store brand
quality and value to the consumer. The Company's marketing personnel assist in
the development and introduction of new store brand products and promotion of
customers' ongoing store brand products by performing consumer research,
providing market information and establishing individualized promotions and
marketing programs.
Low Cost Supplier
The Company continually strives to improve its manufacturing capabilities and
technology to provide the manufacturing flexibility necessary to meet its
customers' changing needs and to achieve a low cost supplier position. Education
of the work force and a team approach provide employees with the skills to
generate and implement programs designed to increase the Company's productivity
and efficiency, improve quality and better serve customers.
Continuous improvement programs are utilized to improve efficiency by
eliminating waste from all phases of Company operations. These programs include
cross-functional teams, internal and external audits and on-the-job training.
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The Company strives to develop partnerships with its suppliers to ensure
reliable and competitively priced raw materials and packaging supplies.
Initiatives to control supply costs include volume purchases, global sourcing,
inventory and supply management, and quality and delivery measurements.
BUSINESS SEGMENT
The Company had four operating segments in fiscal 2002 as defined by the
accounting pronouncement Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information".
These segments were OTC pharmaceuticals, nutritional products, Quifa and
Wrafton. The OTC pharmaceuticals and nutritional product segments have been
aggregated into one reportable segment because their operating processes, types
of customers, distribution methods, regulatory environment and expected
long-term financial performance are very similar. Neither Wrafton nor Quifa meet
the requirements for separate disclosure. See Notes A and L to the consolidated
financial statements for further information related to business segments.
PRODUCTS
The Company currently markets approximately 1,200 store brand products to
approximately 300 customers. The Company includes as separate products multiple
sizes, flavors and product forms of certain products. The Company has a leading
market share in certain of its products in the store brand market.
During fiscal 2002, approximately $35,000 of the Company's net sales were
attributable to new products added to the Company's product lines within the
past two fiscal years.
The following table illustrates net sales for the Company's two product lines
from fiscal 1998 through fiscal 2002. Excluded from this table is the Company's
personal care business, which was sold in August 1999.
Net Sales by Product Line
Fiscal Year
-------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------
OTC Pharmaceuticals..................... $676,084 $616,537 $590,429 $557,059 $537,339
Nutritional............................. 150,238 136,951 136,155 134,678 152,335
-------- -------- -------- -------- --------
$826,322 $753,488 $726,584 $691,737 $689,674
======== ======== ======== ======== ========
Listed below are the product categories under which the Company markets products
for store brand labels. Also listed are the names of certain national brands
against which the Company's products compete.
Product Categories Comparable National Brands
- ------------------ --------------------------
Cough/Cold Advil(R)Cold & Sinus, Afrin(R), Benadryl(R),
Dimetapp(R), NyQuil(R), PediaCare(R),
Robitussin(R), Sudafed(R), Tavist(R), Triaminic(R),
Tylenol(R)
Analgesics Advil(R), Aleve(R), Bayer(R), Excedrin(R),
Motrin(R), Tylenol(R)
Gastrointestinal Alka-Seltzer(R), Citrucel(R), Correctol(R),
Ex-Lax(R), Fibercon(R), Imodium A-D(R), Maalox(R),
Metamucil(R), Mylanta(R), Pepcid(R)AC, Pepto
Bismol(R), Phillips(R), Senokot(R), Tagamet HB(R),
Tums(R), Zantac(R)75
-4-
Sleeping Aids/Hemorrhoidal Simply Sleep(R), Unisom(R)/Preparation H(R)
Remedies/Hair Restoration /Rogaine(R)
Feminine Hygiene 1-Day(TM), Monistat(R)3, Monistat(R)7
Pregnancy Tests Kits e.p.t.(R)
Vitamins/Nutritional Centrum(R), Flintstones(R), One-A-Day(R)/
Supplements Caltrate(R),Garlique(R), Ginkoba(R), Ginsana(R),
Osteo Bi-Flex(R)
Nutritional Drinks Ensure(R)
RESEARCH AND DEVELOPMENT
Research and development is a key component of the Company's business strategy.
The Company focuses on developing store brand products comparable in
formulation, quality and effectiveness to existing national brand products. As
part of the product development process, the Company considers the possibility
of any potential patent infringement and develops alternative formulations so as
not to infringe any patent.
The Company has FDA approval to manufacture and distribute products such as
children's ibuprofen oral suspension and drops, loperamide hydrochloride,
tioconazole ointment and pseudoephedrine hydrochloride extended-release tablets,
which are products comparable to the national brands Children's Motrin(R),
Imodium A-D(R), 1-Day(TM) and Sudafed(R) 12 Hour, respectively.
The Company has the rights to distribute, through use of strategic alliance
agreements, products such as ibuprofen & pseudoephedrine tablets and acid
reducer tablets, products that are comparable to the national brands Advil(R)
Cold & Sinus and Pepcid(R) AC, respectively.
The Company estimates that products for which marketing exclusivity is expiring
through the year 2005 represent a substantial potential market. The Company
actively pursues all avenues to offer store brand products comparable to certain
of these products; however, there can be no assurance that it will be successful
in obtaining the right to distribute additional products in the future.
The Company spent $19,892, $17,634 and $16,314 for research and development
during fiscal 2002, 2001 and 2000, respectively. The Company anticipates that
research and development expenditures as a percent to net sales will increase in
the foreseeable future.
SALES AND MARKETING
The Company employs its own sales force to service larger customers and uses
industry brokers for some smaller retailers. Field sales employees, with support
from marketing, are assigned to specific customers in order to understand and
work most effectively with the customer. They assist in developing in-store
marketing programs (described below) and optimizing communication of customers'
needs to the rest of the Company. Industry brokers provide a distribution
channel for some products, primarily those marketed under the Good Sense(R)
label.
Wal-Mart accounted for 25% of net sales for each of the last three fiscal years.
Should Wal-Mart's
-5-
current relationship with the Company change adversely, the resulting loss of
business would have a material adverse impact on the Company's operating results
and financial position. Such a change is not anticipated in the foreseeable
future. No other customer individually accounted for more than 10% of net sales.
In contrast to national brand manufacturers who incur considerable advertising
and marketing expenditures that are directly targeted to the end consumer, the
Company's primary marketing efforts are channeled through its customers, the
retailers and wholesalers, and reach the consumer through in-store marketing
programs. These programs are intended to increase visibility of store brand
products and to invite comparisons to national brand products in order to
communicate store brand value to the consumer. Merchandising vehicles such as
trial sizes, floor displays, bonus sizes, coupons, rebates, store signs and
promotional packs are incorporated into customers' programs. The Company also
provides educational training aids, packaging displays and point-of-purchase
materials to customers. Because the retailer profit margin for store brand
products is generally higher than for national brand products, retailers and
wholesalers often commit funds for additional promotions. The Company's
marketing efforts are also directed at new product introductions and conversions
and providing market research data. Market analysis and research is used to
monitor trends for products and categories.
MANUFACTURING AND DISTRIBUTION
The Company's eleven manufacturing facilities occupied approximately 1.6 million
square feet at June 29, 2002 and are located in the United States, Mexico and
the United Kingdom. The Company supplements its production capabilities with the
purchase of product from outside sources and will continue to do so in the
future. During fiscal 2002, the nutritional facility generally operated at
approximately 80% of capacity and the OTC pharmaceutical facilities generally
operated at approximately 70% of capacity. The Company explores opportunities to
utilize available capacity, such as contract manufacturing for national brands.
The Company's manufacturing operations are designed to allow low cost production
of a wide variety of products of different quantities, sizes and packaging while
maintaining a high level of customer service and quality. Flexible production
line changeover capabilities and fast cycle times allow the Company to respond
quickly to changes in manufacturing schedules.
The Company has four regional logistics facilities across the United States, two
logistics facilities in Mexico and one logistics facility in the United Kingdom
that occupied an aggregate of approximately 851 thousand square feet at June 29,
2002. Both contract freight and common carriers are used to deliver products.
COMPETITION
The market for store brand OTC pharmaceutical and nutritional products is highly
competitive. Competition is based primarily on price, quality and assortment of
products, customer service, marketing support and availability of new products.
The Company believes it competes favorably in all of these areas.
The Company is the largest manufacturer of store brand OTC pharmaceutical
products in the United States. The Company's direct competition in store brand
products consists primarily of independent, privately owned companies and is
highly fragmented in terms of both geographic market coverage and product
categories. Additionally, competition is growing from generic prescription drug
manufacturers in the Rx to OTC switch products market. The Company competes in
the nutritional area with a number of public and private companies, some of
which have broader product lines and larger sales volumes.
-6-
The Company's products also compete with nationally advertised brand name
products. Most of the national brand companies have resources substantially
greater than those of the Company. National brand companies could in the future
seek to compete more directly in the store brand market by manufacturing store
brand products or by lowering prices of national brand products. The Company
believes that the manufacturing methods and business approach used by national
brand companies are not easily adapted to the requirements of the store brand
market. These requirements include the ability to produce many different package
designs and product sizes. In addition, the marketing focus of national brand
companies is directed towards the consumer rather than toward the retailer.
MATERIALS SOURCING
Raw materials and packaging supplies are generally available from multiple
suppliers. Certain components and finished goods are purchased rather than
manufactured because of temporary production limitations, FDA restrictions or
economic or other factors. In the past, supplies of certain raw materials, bulk
tablets and components have become limited, or were available from one or only a
few suppliers. The Company has historically been able to react to situations
that require alternate sourcing. Should alternate sourcing be required, the
nature of the FDA restrictions placed on products approved through the ANDA
process could substantially lengthen the approval process for an alternate
source and adversely affect financial results. The Company has good, cooperative
working relationships with its suppliers and has historically been able to
capitalize on economies of scale in the purchase of materials and supplies due
to its volume of purchases.
TRADEMARKS AND PATENTS
The Company owns certain trademarks and patents; however, its business as a
whole is not materially dependent upon its ownership of any one trademark or
patent, or group of trademarks or patents.
SEASONALITY
The Company's sales are subject to seasonality, primarily with regard to the
timing of the cough/cold/flu season, which generally runs from September through
March. In addition, historically, the Company's sales of cough/cold/flu products
have varied from year to year based in large part on the severity and length of
the cough/cold/flu season. While the Company believes that the severity and
length of the cough/cold/flu season will continue to impact its sales of
cough/cold/flu products, there can be no assurance that the Company's future
sales of those products will necessarily follow historical patterns.
PRODUCT LIABILITY
Over the last ten years the aggregate amount paid in settlement of liability
claims has not been material, and the Company is unaware of any suits that would
exceed its insurance limits. The Company believes that, currently, its product
liability coverage is adequate to cover anticipated lawsuits.
In November 2001, at the request of the FDA, the Company voluntarily withdrew
from the market its products containing Phenylpropanolamine (PPA), an ingredient
formerly used in the manufacture of certain OTC cough/cold and diet products.
Numerous individual PPA-related lawsuits have been filed alleging that the
plaintiffs suffered injury, generally some type of stroke, from ingesting the
Company's PPA-containing products. At this time, the outcome of these suits is
not determinable.
-7-
See "Item 3. Legal Proceedings" and "Additional Item. Cautionary Note Regarding
Forward-Looking Statements-Exposure to Product Liability Claims."
ENVIRONMENTAL
The Company is subject to various federal, state and local environmental laws
and regulations. The Company believes that the costs for complying with such
laws and regulations will not be material to the business of the Company. The
Company does not have any material remediation liabilities outstanding.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling, testing,
storing, distributing, advertising and sale of the Company's products are
subject to regulation by one or more United States agencies, including the FDA,
the Federal Trade Commission (FTC), the Drug Enforcement Administration (DEA)
and the Consumer Product Safety Commission (CPSC), as well as by foreign
agencies. Various agencies of the states and localities in which the Company's
products are sold also regulate these activities. In addition, the Company
manufactures and markets certain of its products in accordance with the
guidelines designated by voluntary standard setting organizations, such as the
United States Pharmacopoeia Convention, Inc. (USP) and NSF International (NSF).
The Company believes that its policies, operations and products comply in all
material respects with existing regulations.
Food and Drug Administration
The FDA exercises authority over three aspects of the Company's business: (1)
the labeling and marketing of ANDA and monograph OTC pharmaceutical drug
products, (2) the labeling and marketing of dietary supplements and (3) the
operation of its manufacturing, testing, packaging and distributing facilities.
OTC Pharmaceuticals. The majority of the Company's OTC pharmaceuticals are
regulated under the OTC Monograph System and are subject to certain FDA
regulations. Under the OTC Monograph System, classes of OTC drugs are generally
recognized as safe and effective and not misbranded. These drugs do not require
the submission of a New or Abbreviated New Drug Application (NDA or ANDA) prior
to marketing. From time to time, adequate information may become available to
the FDA regarding certain drug products that will allow the reclassification of
those products as generally recognized as safe and effective and not misbranded
and, therefore, no longer requiring the approval of an NDA or ANDA prior to
marketing. FDA regulations cover well-known ingredients and specify, among other
things, permitted indications, required warnings and precautions, allowable
combinations of ingredients and dosage levels. Drug products marketed under the
OTC Monograph System must conform to specific quality and labeling requirements;
however, these products generally may be developed under fewer restrictive
conditions than those products that require the filing of an NDA or ANDA. It is,
in general, less costly to develop, manufacture, bring to market and maintain a
product produced under the OTC Monograph System. For this reason, there may be
increased competition and lower profitability related to a particular product
should it be reclassified to the OTC Monograph System. In addition, regulations
may change from time to time, requiring formulation, packaging or labeling
changes for an affected product.
The Company also markets products that have switched from prescription to OTC
status. These Rx to OTC switch products require approval by the FDA through its
NDA or ANDA process before they can be distributed. Based on current FDA
regulations, all chemistry, manufacturing and control issues, bioequivalency and
labeling related to these products are controlled by the information
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included in the NDAs or ANDAs. The ANDA process generally reduces the time and
expense related to FDA approval compared to the NDA process. For approval, the
Company must demonstrate that the product is essentially the same as a product
that has previously been approved by the FDA and is on the market and that the
manufacturing process and other requirements meet FDA standards. This approval
process may require that bioequivalence and/or efficacy studies be performed
using a small number of subjects in a controlled clinical environment. Approval
time is generally eighteen months to four years from the date of submission of
the application. Changes to the approved ANDAs and, therefore, changes to these
products, are governed by specific regulations and guidelines that determine
when changes, if approved by the FDA, can be implemented.
The Drug Price Competition and Patent Term Restoration Act of 1984 (the
Hatch-Waxman Amendments to the Federal Food, Drugs and Cosmetic Act) can give a
three-year period of marketing exclusivity to a company that obtains FDA
approval of an Rx to OTC switch product. Unless the Company establishes
relationships with the companies having exclusive marketing rights, the
Company's ability to market Rx to OTC switch products and offer its customers
products comparable to the national brand products would be delayed until the
expiration of the three-year exclusivity granted to the company initiating the
switch. There can be no assurance that, in the event that the Company applies
for FDA approvals, the Company will obtain the approvals to market Rx to OTC
switch products or, alternatively, that the Company will be able to obtain these
products from other manufacturers.
Under the FDA Modernization Act of 1997, the FDA changed its policy regarding
market exclusivity. In general, this legislation and the FDA policy change may
grant up to one additional year of exclusivity if the innovator conducted
pediatric studies on the product. This policy change will, in certain instances,
defer sales by the Company of affected products.
If the Company is first to file its ANDA and meets certain requirements, the FDA
may grant a 180-day exclusivity for that product. During the ANDA approval
process, patent certification is required and may result in legal action by the
product innovator. The legal action would not result in material damages but
could result in the Company being prevented from introducing the product if it
is not successful in the legal action. The Company would, however, incur the
cost of defending the legal action, and that action could have the effect of
triggering a statutorily mandated delay in the FDA approval of the drug
application for a period of up to 30 months. If there is an initial court
decision in a patent litigation case related to the drug product that is
favorable to the Company, the exclusivity period may commence on the date of the
decision even though the decision may be appealed and the final decision on
appeal is not entered until sometime later. The Company may, however, decide to
not assume the risk of marketing an approved product prior to the final decision
on appeal of the favorable opinion of a lower court.
In certain instances, the FDA may determine that approval of a drug application
involved in patent litigation can only be granted after the final appeal has
been decided. In these instances, the Company could be further delayed if the
30-month time period has not expired.
If the Company is not first to file its ANDA, the FDA may grant 180-day
exclusivity to another company, thereby effectively delaying the launch of the
Company's product. In addition, if exclusivity is granted to the Company, there
can be no assurance that the beginning of the exclusivity period will coincide
with the ability of the Company to market the product, as current FDA
regulations may allow the triggering of the exclusivity period by events that
are outside of the Company's control.
The Company is also subject to the requirements of the Comprehensive
Methamphetamine Control Act of 1996, a law designed to allow the DEA to monitor
transactions involving chemicals that may be used illegally in the production of
methamphetamine. The Comprehensive Methamphetamine
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Control Act of 1996 establishes certain registration and recordkeeping
requirements for manufacturers of OTC cold, allergy, asthma and diet medicines
that contain ephedrine, pseudoephedrine or PPA. While certain of the Company's
OTC pharmaceutical products contain pseudoephedrine, the Company's products
contain neither ephedrine, a chemical compound that is distinct from
pseudoephedrine, nor PPA. Pseudoephedrine is a common ingredient in decongestant
products manufactured by the Company and other pharmaceutical companies. The
Company believes that its products are in compliance with all applicable DEA
requirements.
Dietary Supplements. The Dietary Supplement Health and Education Act of 1994
(DSHEA) was enacted on October 25, 1994 and amends the Federal Food, Drugs and
Cosmetic Act to (1) define dietary supplements, (2) expand the number of new
dietary supplement ingredients, (3) permit "structure/function" statements for
all vitamin, mineral and natural products, including herbal products and other
nutritional supplements and (4) permit the use of certain published literature
in the sale of vitamin products. Dietary supplements are regulated as food
products and the FDA is prohibited from regulating the dietary ingredients in
supplements as food additives, or the supplements as drugs, unless the FDA
interprets the claims made for these products as drug claims.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements. The latest FDA labeling regulations were effective March 23, 1999.
DSHEA permits substantiated, truthful and non-misleading statements of
nutritional support to be made in labeling. The FDA has proposed regulations for
cGMP requirements for dietary supplements. Although the Company cannot predict
the specific content of the final cGMPs or the timing of issuance, it believes
the changes will have minimal impact on its business.
On January 6, 2000, the FDA published a Final Rule regarding statements made in
dietary supplement labeling. These statements cannot state expressly or
implicitly that a dietary supplement has any effect on a disease. This Final
Rule clarifies the FDA's definition of a disease. In addition, the Final Rule
provides certain statements from several OTC drug monographs for use on dietary
supplements (e.g., relief of occasional sleeplessness) giving the industry more
latitude in marketing dietary supplements and providing information to consumers
about the use of dietary supplements.
The Company cannot determine what effect the FDA's future regulations will have
on its business. Future regulations could, among other things, require expanded
documentation of the properties of certain products or scientific substantiation
regarding ingredients, product claims or safety. In addition, the Company cannot
predict whether new legislation regulating the Company's activities will be
enacted or what effect any legislation would have on the Company's business.
Manufacturing and Packaging. All facilities where dietary supplements and
pharmaceuticals are manufactured, tested, packed, warehoused or distributed must
comply with the FDA manufacturing standards applicable to the type of product.
All of the Company's products are manufactured, tested, packaged, stored and
distributed according to the appropriate cGMP regulations. The FDA performs
periodic audits to ensure that the Company's facilities remain in compliance
with the cGMP regulations. The failure of a facility to be in compliance may
lead to a breach of representations made to private label customers or to
regulatory action against the products made in that facility, including seizure,
injunction or recall.
Consumer Product Safety Commission
The CPSC has authority, under the Poison Prevention Packaging Act, to designate
those products, including vitamin products and OTC pharmaceuticals, that require
child resistant closures to help reduce the incidence of poisonings. The CPSC
has adopted regulations requiring numerous OTC pharmaceuticals and
iron-containing dietary supplements to have these closures and has adopted
-10-
rules on the testing of these closures by both children and adults. The Company,
working with its packaging suppliers, believes that it is in compliance with all
CPSC requirements.
Federal Trade Commission
The FTC exercises primary jurisdiction over the advertising and other
promotional practices of marketers of dietary supplements and OTC
pharmaceuticals and works with the FDA regarding these practices. The FTC
considers whether the product's claims are substantial, truthful and fair.
State Regulation
All states regulate foods and drugs under laws that parallel federal statutes.
The Company is also subject to California Proposition 65 and other state
consumer health and safety regulations that could have a potential impact on the
Company's business if any of the Company's products are ever found not to be in
compliance. The Company is not engaged in any material state governmental
enforcement or other regulatory actions and is not aware of any products that
are not in material compliance with California Proposition 65 and other similar
state regulations.
United States Pharmacopoeia Convention
The USP is a non-governmental, voluntary standard-setting organization. Its drug
standards are incorporated by reference into the Federal Food, Drugs, and
Cosmetic Act as the standards that must be met for the listed drugs, unless
compliance with those standards is specifically disclaimed. USP standards exist
for most OTC pharmaceuticals. Based on guidances and industry practices, the FDA
would require USP compliance as part of cGMP.
The USP has adopted standards for vitamin and mineral dietary supplements that
are codified in the USP Monographs and the USP Manufacturing Practices. These
standards cover composition (nutrient ingredient potency and combinations),
disintegration, dissolution, manufacturing practices and testing requirements.
While USP standards for vitamin and mineral dietary supplements are voluntary,
and not incorporated into federal law, customers of the Company may demand that
products supplied to them meet these standards. Label claims of compliance with
the USP may expose a company to FDA scrutiny for those claims. In addition, the
FDA may in the future require compliance, or such a requirement may be included
in new dietary supplement legislation. All of the Company's vitamin and/or
mineral products (excluding certain nutritional supplements products for which
no USP standards have been adopted) are formulated to comply with existing USP
standards and are so labeled.
NSF International
NSF is an independent, not-for-profit, non-governmental organization providing
risk management services in public health and safety. Its services include
standards development, product certification, safety audits, management systems
registration and education programs. NSF is accredited by the American National
Standards Institute (ANSI), the Occupational Safety and Health Administration
(OSHA) and the Standard Council of Canada (SCC). These accreditations attest to
the competency of services provided by NSF and compliance with established
national and international standards for third-party certification.
The NSF GMP Dietary Supplement Program enables manufacturers to become
independently registered by NSF as conforming to GMP requirements, the
guidelines that provide a system of processes, procedures and documentation to
assure the product produced has the strength, composition, quality and purity
represented on the product label. The Company's nutritional facility has earned
NSF registration.
-11-
Foreign Regulation
The Company manufactures, packages and distributes Rx pharmaceuticals, OTC
pharmaceuticals and nutritional products in Mexico. The manufacturing,
processing, formulation, packaging, labeling, testing, advertising and sale of
these products are subject to regulation by one or more Mexican agencies,
including the Health Ministry, the Commercial and Industrial Secretariat, the
Federal Work's Secretariat, the Environmental Natural Resources and Fishing
Secretariat, the Federal Environmental Protection Ministry and the Treasury and
Public Credit Secretariat and its Customs Government department.
The Company manufactures, packages and distributes OTC pharmaceuticals in the
United Kingdom and provides contract manufacturing and packaging services for
major pharmaceutical and healthcare companies in the United Kingdom. The
manufacturing, processing, formulation, packaging, testing, labeling,
advertising and sale of these products are subject to regulation by one or more
United Kingdom agencies, including the Medicines Control Agency, the Department
of Health, the Department of the Environment, Health Ministry Customs and
Excise, the Department of Trade and Industry, the Health and Safety Executive
and the Department of Transport.
The Company exports OTC pharmaceuticals and nutritional products to foreign
countries including Mexico and Canada. Government regulations for exporting
these products are covered by the United States FDA, and where appropriate DEA
law, as well as each individual country's requirement for importation of such
products. Each country requires approval of these products through a
registration process by that country's regulatory agencies. These registrations
govern the process, formula, packaging, testing, labeling, advertising and sale
of the Company's products and regulate what is required and what may be
represented to the public on labeling and promotional material. Approval for the
sale of the Company's products by foreign regulatory agencies may be subject to
delays.
EMPLOYEES
As of June 29, 2002, the Company had 2,997 full-time and temporary employees in
the United States. The Company has not been a party to a collective bargaining
agreement in the United States. The Company had 732 employees in Mexico, of whom
357 are covered by a collective bargaining agreement. The Company had 518
employees in the United Kingdom, none of whom are covered by a collective
bargaining agreement. Management considers its relations with its employees to
be good.
Item 2. Properties.
As of June 29, 2002, the Company owned or leased the following primary
facilities:
Approximate Leased
Location Type of Facility Square Feet Or Owned
-------- ---------------- ----------- --------
Allegan, Michigan Manufacturing (4 locations) 986,400 Owned
Greenville, South Carolina Manufacturing 169,600 Owned
Greenville, South Carolina Manufacturing 72,600 Leased
Holland, Michigan Manufacturing 120,000 Owned
Ramos Arizpe, Mexico Manufacturing (2 locations) 97,300 Owned
Montague, Michigan Manufacturing 84,000 Owned
-12-
Braunton, United Kingdom Manufacturing 117,000 Owned
Allegan, Michigan Logistics 517,000 Owned
Cranbury, New Jersey Logistics 60,500 Leased
Rancho Cucamonga, California Logistics 69,300 Leased
Greenville, South Carolina Logistics 90,800 Leased
Mexico City, Mexico Logistics 27,000 Leased
Guadalajara, Mexico Logistics 9,700 Leased
Braunton, United Kingdom Logistics 77,000 Owned
Allegan, Michigan Offices 246,000 Owned
Allegan, Michigan Company Store 20,000 Leased
Monterrey, Mexico Offices 9,700 Leased
Ramos Arizpe, Mexico Offices (2 locations) 11,000 Owned
Braunton, United Kingdom Offices 36,000 Owned
Item 3. Legal Proceedings.
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 1999, the Company filed a civil antitrust lawsuit in the U.S. District
Court for the Western District of Michigan against a group of vitamin raw
material suppliers alleging the defendants conspired to fix the prices of
vitamin raw materials sold to the Company. The relief sought included money
damages and a permanent injunction enjoining defendants from future violation of
antitrust laws. The Company has entered into settlement agreements with all of
the defendants. The Company received settlement payments of $27,891, $995 and
$4,154 in fiscal 2002, 2001 and 2000, respectively. The Company received a final
payment of $3,128 in the first quarter of fiscal 2003. The payments were net of
attorney fees and expenses that were withheld prior to the disbursement of the
funds to the Company.
The Company is currently defending numerous individual lawsuits pending in
various state and federal courts involving PPA, an ingredient formerly used in
the manufacture of certain OTC cough/cold and diet products. The Company
discontinued using PPA in November 2000 at the request of the 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 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.
-13-
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the vote of security holders during the fourth
quarter of fiscal 2002.
Additional Item. Executive Officers of the Registrant.
The executive officers of the Company and their ages and positions as of
September 12, 2002 were:
Name Age Position
---- --- --------
F. Folsom Bell.................. 60 Executive Vice President, Business Development
David T. Gibbons................ 59 President and Chief Executive Officer
John T. Hendrickson............. 40 Executive Vice President, Operations
Mark P. Olesnavage.............. 49 Executive Vice President, Sales, Marketing and Scientific Affairs
Douglas R. Schrank.............. 54 Executive Vice President and Chief Financial Officer
Mr. Bell was named Executive Vice President, Business Development, in September
2000. From January 2000 until that time, Mr. Bell acted as a consultant to the
Company. Mr. Bell was a member of the Board of Directors from January 1981
through February 1986 and was re-elected in June 1988. He was the Chairman,
President and Chief Executive Officer of Thermo-Serv, Inc. from July 1989 to
September 1999.
Mr. Gibbons was elected President, Chief Executive Officer in May 2000 and a
director of the Company in June 2000. Previously, Mr. Gibbons served as
President of Rubbermaid Europe from 1997 to 1999 and President of Rubbermaid
Home Products from 1995 to 1997. Prior to joining Rubbermaid, he served in
various management, sales and marketing capacities with 3M Company from 1968 to
1995.
Mr. Hendrickson was named Executive Vice President, Operations, in October 1999.
He served as Vice President of Operations from October 1997 to October 1999 and
Vice President of Customer Service from October 1996 to October 1997.
Previously, he had been Director of Engineering of the Company since 1993 and
served in various positions in process engineering from 1989 to 1992. Prior to
1989, Mr. Hendrickson was in research management for five years at Procter &
Gamble Company.
Mr. Olesnavage was named Executive Vice President, Sales, Marketing and
Scientific Affairs in August 2000. He served as President of Customer Business
Development from June 1995 to August 2000. He served as President of the OTC
pharmaceutical operations from February 1994 to June 1995. He served as Vice
President of Pharmaceutical Business Development from July 1992 to January 1993
and as Vice President-Marketing from June 1987 to July 1992. Previously he had
been Director of Marketing of the Company since 1981. He is a member of the
Board of Directors of the Generic Pharmaceutical Industry Association and also
is a member of the Board of Directors of the Consumer Healthcare Products
Association.
Mr. Schrank was named Executive Vice President and Chief Financial Officer in
January 2000. Mr. Schrank was President of M. A. Hanna Company's Hanna Color
subsidiary from 1998 to 1999, Senior Vice President of the Plastics Division
from 1995 to 1998 and Vice President and Chief Financial Officer from 1993 to
1995. From 1977 to 1993, Mr. Schrank served in senior-level financial,
administrative and sales positions at Sealy Corporation, Eyelab, Inc. and
Pillsbury Company.
-14-
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock was first quoted and began trading on the Nasdaq
National Market System on December 17, 1991 under the symbol PRGO.
Set forth below are the high and low prices for the Company's common stock as
reported on the Nasdaq National Market System for the last eight quarters:
Fiscal 2002: High Low
- ----------- ---- ---
First Quarter $18.30 $13.27
Second Quarter $16.08 $11.55
Third Quarter $13.25 $10.56
Fourth Quarter $14.82 $11.06
Fiscal 2001: High Low
- ----------- ---- ---
First Quarter $7.95 $6.25
Second Quarter $9.25 $5.88
Third Quarter $10.38 $7.38
Fourth Quarter $16.69 $9.69
The number of record holders of the Company's common stock as of September 3,
2002 was 1,374.
Historically, the Company has not paid dividends on its common stock and has no
present intention of paying dividends. The declaration and payment of dividends
and the amount paid, if any, is subject to the discretion of the Company's Board
of Directors and will depend on the earnings, financial condition and capital
and surplus requirements of the Company and other factors the Board of Directors
may consider relevant. While the Company's credit agreement does not prohibit
the Company from paying dividends, the future payment of dividends could be
restricted by financial maintenance covenants contained in the credit agreement.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes to these statements
included in Item 8 of this report. The consolidated statement of income data set
forth below with respect to the fiscal years ended June 29, 2002, June 30, 2001
and July 1, 2000 and the consolidated balance sheet data at June 29, 2002 and
June 30, 2001 are derived from, and are qualified by reference to, the audited
consolidated financial statements included in Item 8 of this report and should
be read in conjunction with those financial statements and notes thereto. The
consolidated statement of income data for the Company set forth below with
respect to the fiscal years ended July 3, 1999 and June 30, 1998 and the
consolidated balance sheet data for the Company at July 1, 2000, July 3, 1999
and June 30, 1998 are derived from audited consolidated financial statements of
the Company not included in this report. The statement of income data reflects
one month of personal care operations for fiscal 2000 and an entire year of
operations for fiscal 1999 and 1998.
-15-
Fiscal Year
-------------------------------------------------------------
2002(1) 2001(1) 2000(2) 1999(3) 1998(4)
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Statement of Income Data:
Net sales $ 826,322 $ 753,488 $ 744,284 $ 897,515 $ 916,174
Cost of sales 614,419 568,994 597,646 724,934 700,216
PPA product discontinuation - 17,600 - - -
--------- --------- --------- --------- ---------
Gross profit 211,903 166,894 146,638 172,581 215,958
--------- --------- --------- --------- ---------
Operating expenses
Distribution 16,327 15,148 16,002 26,937 27,431
Research and development 19,892 17,634 16,314 14,867 15,942
Selling and administration 97,916 92,821 81,509 110,655 101,448
--------- --------- --------- --------- ---------
Subtotal 134,135 125,603 113,825 152,459 144,821
--------- --------- --------- --------- ---------
Restructuring 7,136 2,175 1,048 6,160 122,529
Goodwill impairment 11,524 - - - -
Unusual litigation (27,891) (995) (4,154) (3,952) 9,585
--------- --------- --------- --------- ---------
Total 124,904 126,783 110,719 154,667 276,935
--------- --------- --------- --------- ---------
Operating income (loss) 86,999 40,111 35,919 17,914 (60,977)
Interest and other, net (1,355) (3,748) 4,994 14,018 4,219
--------- --------- --------- --------- ---------
Income (loss) before income taxes 88,354 43,859 30,925 3,896 (65,196)
Income tax expense (benefit) 38,157 16,203 11,627 2,350 (13,560)
--------- --------- --------- --------- ---------
Net income (loss) $ 50,197 $ 27,656 $ 19,298 $ 1,546 $ (51,636)
========= ========= ========= ========= =========
Basic earnings (loss) per share 0.69 $ 0.38 $ 0.26 $ 0.02 $ (0.69)
Diluted earnings (loss) per share 0.67 $ 0.37 $ 0.26 $ 0.02 $ (0.69)
Weighted average shares outstanding:
Basic 73,164 73,646 73,370 73,707 75,302
Diluted 75,113 74,566 73,593 73,984 75,302
June 29, June 30, July 1, July 3, June 30,
2002(1) 2001(1) 2000(2) 1999(3) 1998(4)
--------- --------- --------- --------- ---------
(in thousands)
Balance Sheet Data (end of period):
Cash $ 76,824 $ 11,016 $ 7,055 $ 1,695 $ 1,496
Other working capital 109,993 130,362 147,670 247,722 229,438
Property, plant and equipment, net 211,044 212,087 193,580 199,662 190,644
Goodwill 35,919 47,195 18,199 19,334 20,741
Total assets 593,787 575,912 486,064 615,858 595,861
Long-term debt(5) - - - 135,326 81,619
Shareholders' equity 416,144 385,875 351,760 332,419 345,078
- --------
(1) Includes the impact of a number of non-recurring items discussed more fully
in Note K to the consolidated financial statements included in Item 8.
(2) Includes the impact of non-recurring items discussed more fully in Item 7.
(3) Includes a charge of $14,177 to write off a Russian investment, as well as
charges of $6,160 related to the fiscal 1998 and fiscal 1999 restructuring.
Excluding these charges, net income would have been $14,562 or $0.20 per
share.
(4) Includes the financial impact of the June 1998 restructuring. The pre-tax
charge was $121,966, which amounted to $86,894 or $1.16 per share on an
after-tax basis. Excluding the effects of the restructuring charge, net
income would have been $35,258 or $.47 per share. Additionally, the Company
had legal expenses of approximately $18,000 related to a lawsuit brought by
the previous owners as well as two other class action lawsuits. The legal
expenses were partially offset by an insurance reimbursement of $8,000.
(5) Includes current installments.
-16-
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition.
GENERAL
The major categories in which the Company markets its products are analgesic,
cough/cold, gastrointestinal and vitamin products. According to Information
Resources, Inc., the annual retail market in the United States for OTC
pharmaceutical and nutritional products is more than $10 billion. The store
brand industry commands approximately 24% of the retail market. The Company
estimates its share of the store brand industry to be more than 50%.
The Company's customers are major national and regional retail drug, supermarket
and mass merchandise chains such as Albertson's, CVS, Kmart, Kroger, Safeway,
Target, Walgreens and Wal-Mart and major wholesalers such as Fleming, McKesson
and Super Valu.
The Company has four operating segments. Two of the operating segments, OTC
pharmaceuticals products and nutrition products are aggregated into one
reportable segment, store brand health care. Quifa and Wrafton are included in
all other since these segments do not meet requirements for separate disclosure.
See Notes A and L to the consolidated financial statements.
RESULTS OF OPERATIONS (in thousands, except per share amounts)
The following table sets forth, for fiscal 2002, 2001 and 2000, certain items
from the Company's consolidated statements of income expressed as a percent to
net sales:
Fiscal Year
----------------------------
2002 2001 2000
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.4 75.6 80.3
PPA product discontinuation 0.0 2.3 0.0
----- ----- -----
Gross profit 25.6 22.1 19.7
----- ----- -----
Operating expenses
Distribution 2.0 2.0 2.1
Research and development 2.4 2.3 2.2
Selling and administration 11.8 12.3 11.0
----- ----- -----
Subtotal 16.2 16.6 15.3
----- ----- -----
Restructuring 0.9 0.3 0.1
Goodwill impairment 1.4 0.0 0.0
Unusual litigation (3.4) (0.1) (0.5)
----- ----- -----
Total 15.1 16.8 14.9
----- ----- -----
Operating income 10.5 5.3 4.8
Interest and other, net (0.2) (0.5) 0.7
----- ----- -----
Income before income taxes 10.7 5.8 4.1
Income tax expense 4.6 2.1 1.5
----- ----- -----
Net income 6.1% 3.7% 2.6%
===== ===== =====
STORE BRAND HEALTH CARE
Fiscal Year
----------------------------
2002 2001 2000
---- ---- ----
Net sales $761,446 $723,753 $714,978
Gross profit $193,810 $155,134 $130,986
Gross profit % 25.5% 21.4% 18.3%
Operating expenses $ 92,884 $111,790 $ 99,435
Operating expenses % 12.2% 15.4% 13.9%
Operating income $100,926 $ 43,344 $ 31,551
-17-
Comparability Issues
In November 2000, the Company voluntarily halted shipments of all products
containing the ingredient PPA in response to recommendations by the FDA. In the
second and fourth quarters of fiscal 2001, the Company recorded sales returns of
$12,500 with a negative impact on gross profit of $3,400. Additionally, the
Company recorded a charge of $17,600 in cost of sales related to the cost of
returned product, product on hand and product disposal costs. These PPA charges
reduced earnings $.18 per share in fiscal 2001.
On December 20, 2001, the Company sold its logistics facility located in
LaVergne, Tennessee. The Company recorded a restructuring charge of $2,046. See
Note O to the consolidated financial statements.
In the second quarter of fiscal 2002, the Company recorded $1,900 in bad debt
expense related to the bankruptcy of a large customer.
In fiscal 2002, the Company received $27,891, net of attorney fees and expenses,
related to settlement agreements with certain defendants of a civil antitrust
lawsuit. See Note J to the consolidated financial statements.
Net Sales
Fiscal 2002 net sales increased 5% or $37,693 to $761,446 from $723,753 during
fiscal 2001. The increase included $12,500 resulting from sales returns the
Company recorded in fiscal 2001 due to the voluntary halted shipments of
PPA-containing products discussed above. Approximately half of the remaining
$25,193 increase was due to sales growth in OTC products while the other half
was due to sales growth in nutrition products. Sales growth in OTC products was
primarily due to new products in the analgesic, feminine hygiene and antacid
categories, sales of PPA replacement products and increased sales of existing
products in the cough/cold, laxative and sleep aids categories. The nutrition
sales growth was primarily in existing vitamin products.
Fiscal 2001 net sales increased 1% or $8,775 to $723,753 from $714,978 during
fiscal 2000. The increase was due primarily to an increase in sales of existing
products to existing customers of analgesic, cough/cold, and antacid products
and to the launch of a new product, famotidine 10 mg antacid tablets. The
increase in net sales in fiscal 2001 was partially offset by the PPA sales
returns of $12,500 noted previously, the sale of the personal care business and
a decline in the sales of the nicotine transdermal system patch for smoking
cessation. Excluding the PPA sales returns in fiscal 2001 and the net sales of
the personal care business of $17,700 in fiscal 2000, net sales increased
$38,975 or 6%.
-18-
Gross Profit
Gross profit increased $38,676 or 25% during fiscal 2002 compared to fiscal
2001. The increase included $21,000 due to the recording of the PPA product
charge in fiscal 2001, which reduced gross profit. The remaining $17,676
increase was split almost equally between sales growth and our ability to manage
pricing to offset the impact of higher quality costs. The higher quality costs
are related to FDA compliance initiatives and are expected to continue.
The gross profit percent to net sales was 25.5% in fiscal 2002 compared to 21.4%
in fiscal 2001. The increase included 2.5 percentage points due to the recording
of the PPA product charge in fiscal 2001. The gross profit percent would have
been 23.9% in fiscal 2001 if the PPA product charges were excluded. The
remaining increase of 1.6 percentage points was due primarily to the ability to
manage pricing to offset the impact of higher quality costs and lower
obsolescence expenses resulting from lower finished goods inventory and improved
aging of that inventory.
Gross profit increased $24,148 or 18% for fiscal 2001 compared to fiscal 2000.
Gross profit for fiscal 2001 improved primarily due to the Company's return to
normal levels of production and obsolescence expense. However, gross profit for
fiscal 2001 was negatively impacted by the $17,600 PPA product charge and the
gross profit charge of $3,400 related to PPA sales returns. Gross profit for
fiscal 2000 was negatively impacted by higher than normal obsolescence expense
of $15,000, primarily related to inventory built both before and after the
Company's conversion to a new software system and fixed production charges of
$7,000 due to lower than normal production levels.
The gross profit percent to net sales was 21.4% and 18.3% for fiscal 2001 and
2000, respectively. The gross profit percent for fiscal 2001 improved primarily
due to the Company's return to normal levels of production and obsolescence
expense, partially offset by the $17,600 PPA product charge. The gross profit
percent for fiscal 2000 was negatively impacted by higher than normal
obsolescence expense of $15,000, fixed production charges of $7,000 due to lower
than normal production levels, and the personal care business.
Operating Expenses
Operating expenses decreased $18,906 during fiscal 2002 compared to fiscal 2001.
Operating expenses were favorably impacted by unusual litigation income of
$27,891. Research and development increased $1,606 primarily due to expenses
related to testing and legal costs for new products. Selling and administration
increased $6,198 primarily due to bad debt expense related to the bankruptcy of
a large customer and consulting expenses related to strategic initiatives
partially offset by lower employee bonuses. A restructuring charge of $2,046 was
recorded related to the sale of the LaVergne, Tennessee logistics facility.
Operating expenses increased $12,355 for fiscal 2001 compared to fiscal 2000.
Selling and administration increased $8,198 primarily due to increased salaries,
wages and bonuses. Unusual litigation income related to a civil antitrust
lawsuit decreased $3,159 to $995 for fiscal 2001. The restructuring charges of
$2,175 and $1,048 for fiscal 2001 and 2000, respectively, reflect the estimated
net realizable value of the LaVergne, Tennessee logistics facility, which was
sold in fiscal 2002. Distribution decreased $1,054 from fiscal 2000 primarily
due to the sale of the personal care business.
-19-
ALL OTHER
Fiscal Year
-----------------------------------
2002 2001 2000
---- ---- ----
Net sales $ 64,876 $ 29,735 $ 29,306
Gross profit $ 18,093 $ 11,760 $ 15,652
Gross profit % 27.9% 39.5% 53.4%
Operating expenses $ 32,020 $ 14,993 $ 11,284
Operating expenses % 49.4% 50.4% 38.5%
Operating income $(13,927) $ (3,233) $ 4,368
On June 29, 2001, the Company purchased Wrafton. Wrafton's financial results
were included in the Company's consolidated financial statements beginning in
the current fiscal year. Consequently, the increases in net sales and gross
profit in fiscal 2002 were due primarily to the inclusion of Wrafton for the
first time. The decline in gross profit percent to sales was due primarily to
lower gross profit margins at Wrafton.
In fiscal 2001, gross profit dollars and percent to net sales declined primarily
due to higher raw material costs and inventory obsolescence.
In fiscal 2002, operating expenses increased primarily due to the restructuring
of Quifa that resulted in a goodwill impairment charge of $11,524 and
restructuring charges of $5,090. See Note O to the consolidated financial
statements.
In fiscal 2001, operating expenses increased primarily due to bad debt expense.
INTEREST AND OTHER
Interest and other, net decreased $2,393 during fiscal 2002. Interest expense
was $934 for fiscal 2002 compared to interest income of $1,833 for fiscal 2001.
The change in interest was caused by a reduction in the rates of interest earned
on invested cash as well as lower average invested cash in fiscal 2002.
Interest and other, net decreased $8,742 during fiscal 2001. Interest income was
$1,833 resulting from a strong cash position and no long-term debt compared to
interest expense of $7,141 for fiscal 2000. Additionally, the Company recorded a
gain of $1,300 in fiscal 2000 on an investment held for sale.
INCOME TAXES
The effective tax rate was 43.2% for fiscal 2002 and 36.9% for fiscal 2001. The
high effective tax rate for fiscal 2002 was primarily due to nondeductible
expenses related to goodwill impairment and restructuring costs related to
Quifa.
The effective tax rate was 36.9% for fiscal 2001 compared to 37.6% for fiscal
2000. The decrease in the effective rate was due primarily to reductions in the
net state tax rate and expenses not deductible for tax purposes.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For fiscal 2002, working capital, excluding cash, decreased $20,369. Cash and
cash equivalents increased from $11,016 to $76,824.
-20-
Cash flow from operating activities was $104,192 for fiscal 2002. Cash flow was
positively impacted primarily by net income of $50,197 that included $17,850 of
income related to vitamin litigation settlements, depreciation of $25,613, a
decrease in accounts receivable of $14,301 resulting from the launch of a
significant new product in June 2001 and a decrease in inventory of $5,512. Cash
flow was negatively impacted primarily by a decrease in accounts payable of
$9,955 and a decrease in income taxes of $12,492 due to the timing of tax
payments partially offset by higher reported income. The impact on inventory and
accounts payable was primarily due to lower production levels and inventory
management at the end of fiscal 2002 compared to fiscal 2001. In the fourth
quarter of fiscal 2002, the Company recorded restructuring charges of $5,090 and
a goodwill impairment charge of $11,524 related to Quifa.
The Company's operating cash flow will be impacted by rising insurance costs in
fiscal 2003. The cost to obtain all types of insurance continues to climb
throughout the nation due to circumstances beyond the Company's control,
including large insured losses not offset by premiums and investment income,
post 9/11 sentiment and alleged improprieties in other corporations. In fiscal
2003, the Company's insurance costs are expected to increase approximately
$5,000. In addition to premium increases, the Company's new policy terms contain
significantly increased deductible and retention amounts, which will result in
increased uncertainty regarding the impact a claim may have on the Company's
operating results.
Capital expenditures for facilities and equipment of $27,528 during fiscal 2002
were primarily for normal equipment replacement, productivity enhancements and
capacity additions. The trend of capital spending is not expected to change
significantly in fiscal 2003.
In the second quarter of fiscal 2002, the Company sold its logistics facility in
LaVergne, Tennessee. The proceeds from the sale were $14,161.
During fiscal 2002, the Company continued to repurchase shares of its common
stock. The Company purchased 2,533 shares for $31,923 during fiscal 2002. Common
stock increased $10,192 primarily due to the exercise of 970 stock options.
The Company's Board of Directors has approved the repurchase of additional
shares of common stock. Repurchase of shares will have a negative impact on
future cash flows. As of September 12, 2002, the Company has purchased and
retired 3,084 shares for $31,117 in the first quarter of fiscal 2003 and may
purchase additional shares with a value of up to $15,871.
The Company had no long-term debt at June 29, 2002 and had $175,000 available on
its unsecured credit facility. Cash flows from operations and borrowings from
its credit facility are expected to be sufficient to finance the known and/or
foreseeable liquidity and capital needs of the Company.
Additional long-term cash obligations are detailed by period due in the table
below:
Less Than 1-3 4-5 After 5
CONTRACTUAL OBLIGATIONS Total 1 Year Years Years Years
------- -------- ------ ------ --------
Operating Leases $11,162 $4,618 $4,523 $1,472 $ 549
Other 1,616 - - - 1,616
------- ------ ------ ------ ------
Total $12,788 $4,618 $4,523 $1,472 $2,165
======= ====== ====== ====== ======
The amount in "Other" is related to deferred compensation payable upon
retirement of certain employees, which is assumed to be payable after five years
although certain circumstances, such as termination, would require earlier
payment.
-21-
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. Discussed below are the accounting policies
considered by management to require the most judgement and to be critical in the
preparation of the financial statements. Other accounting policies are included
in Note A of the consolidated financial statements.
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 $7,569
and $5,902 at June 29, 2002 and June 30, 2001, respectively.
Inventory - The Company maintains a reserve for estimated obsolete or
unmarketable inventory based on the difference between the cost of the inventory
and its estimated market value. In estimating the reserve, management considers
factors such as excess or slow moving inventories, product expiration dating,
current and future customer demand, and market conditions. Changes in these
conditions may result in additional reserves. The reserve for inventory was
$21,360 and $26,141 at June 29, 2002 and June 30, 2001, respectively.
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.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement
supercedes the guidance provided by Emerging Issues Task Force 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 is
required to be adopted for exit or disposal activities initiated after December
31, 2002. Because SFAS 146 only affects the timing of the recognition of the
liabilities to be incurred if an entity makes a decision to exit or dispose of a
particular activity, the Company does not expect the adoption of SFAS 146 to
have a material impact on the Company's financial statements. Accordingly, the
application of SFAS 146 to the restructuring recorded in fiscal 2002 would have
resulted in no material difference in the Company's financial statements.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk.
The Company is exposed to market risks, which include changes in interest rates
and changes in the foreign currency exchange rate as measured against the U.S.
dollar.
-22-
The Company is exposed to interest rate changes primarily as a result of
interest income earned on its investment of cash on hand and interest expense
related to its variable rate line of credit used to finance working capital when
necessary and for general corporate purposes. The Company had invested cash of
$76,824 and no outstanding borrowings on its credit facility at June 29, 2002.
Management believes that a fluctuation in interest rates in the near future will
not have a material impact on the Company's consolidated financial statements.
The Company has international operations in Mexico and the United Kingdom. These
operations transact business in the local currency, thereby creating exposures
to changes in exchange rates. The Company does not currently have hedging or
similar foreign currency contracts. Significant currency fluctuations could
adversely impact foreign revenues; however, the Company does not expect any
significant changes in foreign currency exposure in the near future.
Additional Item. Cautionary Note Regarding Forward-Looking Statements.
The Company or its representatives from time to time may make or may have made
certain forward-looking statements, orally or in writing, including without
limitation any such statements made or to be made in the Management's Discussion
and Analysis section contained in its annual and quarterly SEC filings. The
Company wishes to ensure that such statements are accompanied by meaningful
cautionary statements, so as to ensure to the fullest extent possible the
protections of the safe harbor established in the Private Securities Litigation
Reform Act of 1995. Accordingly, such statements are qualified in their entirety
by reference to and are accompanied by the following discussion of certain
important factors that could cause actual results to differ materially from
those anticipated in such forward-looking statements.
The Company cautions the reader that this list of factors may not be exhaustive.
The Company operates in a continually changing business environment, and new
risk factors emerge from time to time. Management cannot predict such risk
factors, nor can it assess the impact, if any, of such risk factors on the
Company's business or the extent to which any factors, or combination of
factors, may cause actual results to differ materially from those projected in
any forward-looking statements. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results.
Fluctuation in Quarterly Results
The Company's quarterly operating results depend on a variety of factors
including the severity, length and timing of the cough/cold/flu season, the
timing of new product introductions by the Company and its competitors, changes
in the levels of inventories maintained by the Company's customers and the
timing of retailer promotional programs. Accordingly, the Company may be subject
to significant and unanticipated quarter-to-quarter fluctuations.
Regulatory Environment
Several United States and foreign agencies regulate the manufacturing,
processing, formulation, packaging, labeling, testing, storing, distribution,
advertising and sale of the Company's products. Various state and local agencies
also regulate these activities. In addition, the Company manufactures and
markets certain of its products in accordance with the guidelines established by
voluntary standard organizations. Should the Company fail to adequately conform
to these regulations and guidelines, there may be a significant impact on the
operating results of the Company. In particular, packaging or labeling changes
mandated by the FDA can have a material impact on the results of operations of
the Company. Required changes could be related to safety or effectiveness
issues. With specific regard to safety, there have been instances within the
Company's product categories in which evidence of product tampering has occurred
resulting in a costly product
-23-
recall. The Company believes that it has a good relationship with the FDA,
which it intends to maintain. If these relationships should deteriorate,
however, the Company's ability to bring new and current products to market could
be impeded. See "Item 1. Business of the Company - Government Regulation."
Potential Volatility of Stock Price
The market price of the Company's Common Stock has been, and could be, subject
to wide fluctuations in response to, among other things, quarterly fluctuations
in operating results, adverse circumstances affecting the introduction or market
acceptance of new products, failure to meet published estimates of or changes in
earnings estimates by securities analysts, announcements of new products or
enhancements by competitors, sales of Common Stock by existing holders, loss of
key personnel, market conditions in the industry, shortages of key components
and general economic conditions.
Store Brand Product Growth
The future growth of domestic store brand products will be influenced by general
economic conditions, which can influence consumers to switch to store brand
products, consumer perception and acceptance of the quality of the products
available, the development of new products, the market exclusivity periods
awarded on prescription to OTC switch products and the Company's ability to grow
its store brand market share. The Company does not advertise like the national
brand companies and thus is dependent on retailer promotional spending to drive
sales volume and increase market share. Growth opportunities for the products in
which the Company currently has a significant store brand market share (cough
and cold remedies and analgesics) will be driven by the ability to offer new
products to existing domestic customers. Should store brand growth be limited by
any of these factors, there could be a significant impact on the operating
results of the Company.
Competitive Issues
The market for store brand OTC pharmaceutical and nutritional products is highly
competitive. Store brand competition is based primarily on price, quality and
assortment of products, customer service, marketing support and availability of
new products. National brand companies could choose to compete more directly by
manufacturing store brand products or by lowering the prices of national brand
products. Due to the high degree of price competition, the Company has not
always been able to fully pass on cost increases to its customers. The inability
to pass on future cost increases, the impact of direct store brand competitors
and the impact of national brand companies lowering prices of their products or
directly operating in the store brand market could have a material adverse
impact on financial results. In addition, since the Company sells its
nutritional products through retail drug, supermarket and mass merchandise
chains, it may experience increased competition in its nutritional products
business through alternative channels such as health food stores, direct mail
and direct sales as more consumers obtain products through these channels.
Retailer reverse auctions have added a new dimension to competition as some
retailers have instituted this process to obtain competitive price quotes over
the world wide web. The Company has evaluated, and will continue to evaluate,
the products and product categories in which it does business. Future product
line extensions, or deletions, could have a material impact on the Company's
financial position or results of operations.
Customer Issues
The Company's largest customer, Wal-Mart, currently comprises approximately 25%
of total net sales. Should Wal-Mart's current relationship with the Company
change adversely, the resulting loss
-24-
of business could have a material adverse impact on the Company's operating
results and financial position.
The impact of retailer consolidation could have an adverse impact on future
sales growth. Should a large customer encounter financial difficulties, the
exposure on uncollectible receivables and unusable inventory could have a
material adverse impact on the Company's financial position or results of
operations.
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 OTC status.
The ability to attract chemists proficient in emerging delivery forms and/or
contracting with a third party innovator in order to generate new products of
this type is a critical element of the Company's long term plans. Should the
Company fail to attract qualified employees or enter into reasonable agreements
with third party innovators, long term sales growth and profit would be
adversely impacted.
Patent and Trade Dress Issues
The Company's ability to bring new products to market is limited by certain
patent and trade dress factors including, but not limited to, the exclusivity
periods awarded on products that have switched from prescription to OTC status.
The cost and time to develop these switch products is significantly greater than
the rest of the new products that the Company seeks to introduce. Moreover, the
Company's packaging of certain products could be subject to legal actions
regarding infringement. Although the Company designs its packaging to avoid
infringing upon any proprietary rights of national brand marketers, there can be
no assurance that the Company will not be subject to such legal actions in the
future.
Effect of Research and Publicity on Nutritional Product Business
The Company believes that growth in the nutritional products business is based
largely on national media attention regarding scientific research suggesting
potential health benefits from regular consumption of certain vitamin and other
nutritional products. There can be no assurance of future favorable scientific
results and media attention, or the absence of unfavorable or inconsistent
findings. In the event of future unfavorable scientific results or media
attention, the Company's sales of nutritional products could be materially
adversely affected.
Dependence on Personnel
The Company's future success will depend in large part upon its ability to
attract and retain highly skilled research and development chemists (as noted
above), management information specialists, operations, sales, marketing and
managerial personnel. The Company does not have employment contracts with any
key personnel other than David Gibbons, President and Chief Executive Officer.
Should the Company not be able to attract or retain key qualified employees,
future operating results may be adversely impacted.
Availability of Raw Materials
In the past, supplies of certain raw materials, bulk tablets and finished goods
purchased by the Company have become limited, or were available from one or only
a few suppliers, and it is possible that this will occur in the future. Should
this situation occur, it can result in increased prices, rationing
-25-
and shortages. In response to these problems the Company tries to identify
alternative materials or suppliers for such raw materials, bulk tablets and
finished goods. The nature of FDA restrictions placed on products approved
through the ANDA process could substantially lengthen the approval process for
an alternate material source. Certain material shortages and approval of
alternate sources could adversely affect financial results.
Legal Exposure
From time to time the Company and/or its subsidiaries become involved in
lawsuits arising from various commercial matters, including, but not limited to
competitive issues, contract issues, intellectual property matters, workers'
compensation, product liability and regulatory issues such as Proposition 65 in
California. See "Item 3. Legal Proceedings" for a discussion of litigation.
Litigation tends to be unpredictable and costly. No assurance can be made that
litigation will not have an adverse effect on the Company's financial position
or results of operations in the future.
Rising Insurance Costs
The Company maintains insurance, including property, general and product
liability, and directors and officers liability 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.
The Company's operating cash flow will be impacted by rising insurance costs in
fiscal 2003. The cost to obtain all types of insurance continues to climb
throughout the nation due to circumstances beyond the Company's control,
including large insured losses not offset by premiums and investment income,
post 9/11 sentiment and alleged improprieties in other corporations. In fiscal
2003, the Company's insurance costs are expected to increase approximately
$5,000. In addition to premium increases, the Company's new policy terms contain
significantly increased deductible and retention amounts, which will result in
increased uncertainty regarding the impact a claim may have on the Company's
operating results.
Exposure to Product Liability Claims
The Company, like other retailers, distributors and manufacturers of products
that are ingested, is exposed to product liability claims in the event that,
among other things, the use of its products results in injury. There is no
assurance that product liability insurance will continue to be available to the
Company at an economically reasonable cost or that the Company's insurance will
be adequate to cover liability that the Company incurs in connection with
product liability claims. See "Item 3. Legal Proceedings".
Capital Requirements and Liquidity
The Company maintains a broad product line to function as a primary supplier for
its customers. Capital investments are driven by growth, technological
advancements and the need for manufacturing flexibility. Estimation of future
capital expenditures could vary materially due to the uncertainty of these
factors. If the Company fails to stay current with the latest manufacturing and
packaging technology, it may be unable to competitively support the launch of
new product introductions.
The Company anticipates that cash flow from operations and borrowings from the
Company's line of credit will substantially fund working capital and capital
expenditures. The Company has historically
-26-
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 has been significantly influenced by
acquisitions. There is no assurance that future sales and profits will, or will
not, be impacted by acquisition activities. The Company's current capital
structure, results of operations and cash flow needs could be materially
impacted by acquisitions.
International Operations
The Company sources certain key raw materials from foreign suppliers and is
increasing its sales outside the United States. The Company's primary markets
outside the U.S. are Mexico, Canada and the United Kingdom. The Company may have
difficulty in international markets due, for example, to greater regulatory
barriers, the necessity of adapting to new regulatory systems and problems
related to markets with different cultural bases and political systems. Sales to
customers outside the United States and foreign raw material purchases expose
the Company to a number of risks including unexpected changes in regulatory
requirements and tariffs, possible difficulties in enforcing agreements, longer
payment cycles, exchange rate fluctuations, difficulties obtaining export or
import licenses, the imposition of withholding or other taxes, economic
collapse, political instability, embargoes, exchange controls or the adoption of
other restrictions on foreign trade. Should any of these risks occur, they may
have a material adverse impact on the operating results of the Company.
Tax Rate Implication
Income tax rate changes by governments and changes in the tax jurisdictions in
which the Company operates could influence the effective tax rates for future
years. Entry into new tax jurisdictions, whether domestic or international,
increases the likelihood of fluctuation.
Interest Rate Implication
The interest on the Company's line of credit facility is based on variable
interest rate factors. The interest rates are established at the time of
borrowing based upon the prime rate or the LIBOR rate, plus a factor, or at a
rate based on an interest rate agreed upon between the Company and the Agent at
the time the loan is made. Interest income related to investing cash on hand is
based on an interest rate agreed upon by the Company and the Agent on the day
the investment is made. Accordingly, interest income and expense is subject to
fluctuation due to the variability of these rates.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Certified Public Accountants...................................................... 28
Consolidated Statements of Income for Fiscal 2002, 2001 and 2000........................................ 29
Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001....................................... 30
Consolidated Statements of Shareholders' Equity for Fiscal 2002, 2001 and 2000........................... 31
Consolidated Statements of Cash Flows for Fiscal 2002, 2001 and 2000.................................... 32
Notes to Consolidated Financial Statements.............................................................. 33 - 47
-27-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Perrigo Company
Allegan, Michigan
We have audited the accompanying consolidated balance sheets of Perrigo Company
and subsidiaries as of June 29, 2002 and June 30, 2001 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 29, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Perrigo Company and
subsidiaries as of June 29, 2002 and June 30, 2001 and the results of their
operations and their cash flows for each of the three years in the period ended
June 29, 2002 in conformity with accounting principles generally accepted in the
United States of America.
By: /s/ BDO Seidman, LLP
-----------------------------
BDO Seidman, LLP
Grand Rapids, Michigan
July 26, 2002, except for Note E, which is as of September 12, 2002 and Note J,
which is as of August 19, 2002
-28-
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Fiscal Year
-----------------------------------
2002 2001 2000
--------- --------- ---------
Net sales $ 826,322 $ 753,488 $ 744,284
Cost of sales 614,419 568,994 597,646
PPA product discontinuation -- 17,600 --
--------- --------- ---------
Gross profit 211,903 166,894 146,638
--------- --------- ---------
Operating expenses
Distribution 16,327 15,148 16,002
Research and development 19,892 17,634 16,314
Selling and administration 97,916 92,821 81,509
--------- --------- ---------
Subtotal 134,135 125,603 113,825
--------- --------- ---------
Restructuring 7,136 2,175 1,048
Goodwill impairment 11,524 -- --
Unusual litigation (27,891) (995) (4,154)
--------- --------- ---------
Total 124,904 126,783 110,719
--------- --------- ---------
Operating income 86,999 40,111 35,919
Interest and other, net (1,355) (3,748) 4,994
--------- --------- ---------
Income before income taxes 88,354 43,859 30,925
Income tax expense 38,157 16,203 11,627
--------- --------- ---------
Net income $ 50,197 $ 27,656 $ 19,298
========= ========= =========
Basic earnings per share $ 0.69 $ 0.38 $ 0.26
========= ========= =========
Diluted earnings per share $ 0.67 $ 0.37 $ 0.26
========= ========= =========
See accompanying notes to consolidated financial statements.
-29-
PERRIGO COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 29, June 30,
ASSETS 2002 2001
--------- ---------
Current assets
Cash and cash equivalents $ 76,824 $ 11,016
Accounts receivable, net of allowances of $7,569 and
$5,902, respectively 82,560 96,828
Inventories 155,611 161,112
Prepaid expenses and other current assets 6,896 8,771
Current deferred income taxes 19,860 19,203
Assets held for sale -- 16,207
--------- ---------
Total current assets 341,751 313,137
Property and equipment
Land 13,700 12,794
Buildings 182,960 164,901
Machinery and equipment 202,801 199,574
--------- ---------
399,461 377,269
Less accumulated depreciation 188,417 165,182
--------- ---------
211,044 212,087
Goodwill 35,919 47,195
Other 5,073 3,493
--------- ---------
$ 593,787 $ 575,912
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 74,449 $ 84,385
Notes payable 8,338 12,759
Payrolls and related taxes 31,338 26,121
Accrued expenses 32,721 27,917
Income taxes 8,088 20,577
--------- ---------
Total current liabilities 154,934 171,759
Deferred income taxes 20,313 17,419
Other long-term liabilities 2,396 859
Shareholders' equity
Preferred stock, without par value,
10,000 shares authorized, none issued -- --
Common stock, without par value, 200,000 shares authorized,
72,550 and 74,072 issued, respectively 89,222 108,952
Unearned compensation (608) (465)
Accumulated other comprehensive income 373 428
Retained earnings 327,157 276,960
--------- ---------
Total shareholders' equity 416,144 385,875
--------- ---------
$ 593,787 $ 575,912
========= =========
See accompanying notes to consolidated financial statements.
-30-
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Accumulated
Issued Other
------------------- Unearned Comprehensive Comprehensive Retained
Shares Amount Compensation Income Income Earnings
------ ------ ------------ ------------- ------------- ----------
Balance at July 3, 1999 73,301 $ 102,030 $ (53) $ 436 -- $ 230,006
Net income -- -- -- -- $ 19,298 19,298
Currency translation adjustments -- -- -- (187) (187) --
Issuance of common stock under:
Stock options 85 105 -- -- -- --
Restricted stock plan 103 563 (563) -- -- --
Earned compensation for restricted stock -- -- 73 -- -- --
Tax benefit from stock transactions -- 52 -- -- -- --
------ --------- --------- --------- --------- ---------
Balance at July 1, 2000 73,489 102,750 (543) 249 $ 19,111 249,304
=========
Net income -- -- -- -- $ 27,656 27,656
Currency translation adjustments -- -- -- 179 179 --
Issuance of common stock under:
Stock options 711 6,305 -- -- -- --
Restricted stock plan 9 60 (60) -- -- --
Earned compensation for restricted stock -- -- 138 -- -- --
Tax benefit from stock transactions -- 926 -- -- -- --
Purchases and retirements of common stock (137) (1,089) -- -- -- --
------ --------- --------- --------- --------- ---------
Balance at June 30, 2001 74,072 108,952 (465) 428 $ 27,835 276,960
=========
Net income -- -- -- -- $ 50,197 50,197
Currency translation adjustments -- -- -- (55) (55) --
Issuance of common stock under:
Stock options 970 10,192 -- -- -- --
Restricted stock plan 41 711 (711) -- -- --
Earned compensation for restricted stock -- -- 568 -- -- --
Tax benefit from stock transactions -- 1,290 -- -- -- --
Purchases and retirements of common stock (2,533) (31,923) -- -- -- --
------ --------- --------- --------- --------- ---------
Balance at June 29, 2002 72,550 $ 89,222 $ (608) $ 373 $ 50,142 $ 327,157
====== ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
-31-
PERRIGO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Fiscal Year
-----------------------------------
2002 2001 2000
--------- --------- ---------
Cash Flows From (For) Operating Activities
Net income $ 50,197 $ 27,656 $ 19,298
Adjustments to derive cash flows
Restructuring, net of cash 7,136 2,175 3,477
Depreciation and amortization 25,613 23,022 22,245
Goodwill impairment 11,524 -- --
Deferred income taxes 2,233 (10,548) 27,141
Changes in operating assets and liabilities, net of
restructuring and amounts acquired from
business acquisition
Accounts receivable, net 14,301 (4,964) 906
Inventories 5,512 (29,384) 70,502
Change in long-term licensing agreements -- -- 5,741
Accounts payable (9,955) 17,575 (5,068)
Payrolls and related taxes 5,218 10,879 (3,179)
Accrued expenses 4,878 3,021 (10,682)
Income taxes (12,492) 27,445 (12,624)
Other 27 1,342 56
--------- --------- ---------
Net cash from (for) operating activities 104,192 68,219 117,813
--------- --------- ---------
Cash Flows (For) From Investing Activities
Additions to property and equipment (27,528) (26,804) (14,364)
Proceeds from sale of assets held for sale 14,161 -- 31,186
Business acquisitions, net of cash -- (46,000) --
Other (398) 268 3,704
--------- --------- ---------
Net cash (for) from investing activities (13,765) (72,536) 20,526
--------- --------- ---------
Cash Flows From (For) Financing Activities
Borrowings of short-term debt -- 2,136 2,190
Repayments of short-term debt (4,506) -- --
Repayments of long-term debt -- -- (135,326)
Tax benefit of stock transactions 1,290 926 52
Issuance of common stock 10,192 6,305 105
Repurchase of common stock (31,923) (1,089) --
Other 234 -- --
--------- --------- ---------
Net cash from (for) financing activities (24,713) 8,278 (132,979)
--------- --------- ---------
Net increase in cash and cash equivalents 65,814 3,961 5,360
Cash and cash equivalents, at beginning of period 11,016 7,055 1,695
Effect of exchange rate changes on cash (6) -- --
--------- --------- ---------
Cash and cash equivalents, at end of period $ 76,824 $ 11,016 $ 7,055
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 1,542 $ 1,956 $ 5,259
Income taxes $ 47,103 $ 18,222 $ 789
See accompanying notes to consolidated financial statements.
-32-
PERRIGO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company is the largest manufacturer of store brand over-the-counter (OTC)
pharmaceutical and nutritional products in the United States.
The Company's principal customers are major national and regional retail
supermarket, drug store and mass merchandise chains and major wholesalers
located within the United States. During each of the last three fiscal years,
one customer accounted for 25% of net sales. None of the Company's other
customers individually account for more than 10% of its sales. International net
sales, primarily in Mexico and the United Kingdom, for fiscal 2002, 2001 and
2000 were $79,788, $43,997 and $42,944, respectively.
The Company has manufacturing facilities in the United States, Mexico and the
United Kingdom. As of June 29, 2002 and June 30, 2001, the net book value of
property and equipment located outside the United States was $26,334 and
$24,794, respectively.
The Company has four operating segments -- OTC pharmaceutical products;
nutritional products; Quimica y Farmacia S.A. de C.V. (Quifa), the Company's
Mexican operating subsidiary; and Wrafton Laboratories Limited (Wrafton), the
Company's United Kingdom operating subsidiary. In accordance with Statement of
Financial Accounting Standards (SFAS) 131, "Disclosures about Segments of an
Enterprise and Related Information", the OTC pharmaceutical products segment and
nutritional products segment have been aggregated into one reportable segment,
store brand health care because these two segments have very similar operating
processes, types of customers, distribution methods, regulatory environments and
expected long-term financial performance. With the addition of Wrafton in the
current year, the Company re-evaluated its reporting structure and determined
that Quifa and Wrafton should be reported separately from store brand health
care. Accordingly, for comparability purposes, all segment information has been
restated to conform to the current year presentation. Since neither Quifa nor
Wrafton meet the requirements for separate disclosure, these operating segments
are included in "all other". See Note L for additional segment information.
Basis of Presentation
The Company's fiscal year is a fifty-two or fifty-three week period, which ends
the Saturday on or about June 30. Fiscal 2002, 2001 and 2000 were comprised of
52 weeks ended June 29, June 30 and July 1, respectively.
In June 2001, the Company acquired Wrafton located in the United Kingdom. The
assets and liabilities, which are not considered significant to the Company, are
included in the consolidated balance sheet beginning June 30, 2001. Wrafton's
results of operations were included in the Company's consolidated financial
statements beginning in the current fiscal year. See Note N to the consolidated
financial statements.
In fiscal 1998, the Company announced its intention to divest the personal care
business. The Company sold its personal care business in fiscal 2000. The
LaVergne, Tennessee logistics facility was not included in this sale and
remained in assets held for sale until it was sold in the second quarter of
fiscal 2002. For fiscal 2000, the consolidated cash flow statement reflects the
changes in
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the balance sheet after the effects of the 1998 restructuring. The consolidated
income statement reflects one month of personal care operations for fiscal 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all majority owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. The Company owns a minority
interest in a Canadian company, which is accounted for using the equity method
and is recorded in other noncurrent assets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions,
which affect the reported earnings, financial position and various disclosures.
Although the estimates are considered reasonable, actual results could differ
from the estimates.
International
The Company translates its foreign operations' assets and liabilities
denominated in foreign currencies into U.S. dollars at current rates of exchange
as of the balance sheet date, and income and expense items at the average
exchange rate for the reporting period. Translation adjustments resulting from
exchange rate fluctuations are recorded in the cumulative translation account, a
component of accumulated other comprehensive income. The balance in the
cumulative translation account was $373 and $428 as of June 29, 2002 and June
30, 2001, respectively. Translation adjustments resulting from exchange rate
fluctuations on transactions denominated in currencies other than the functional
currency are not material.
Revenues
Revenues from product sales are recognized when the goods are shipped to the
customer. A provision is recorded as revenues are recognized for estimated
losses on credit sales due to customer claims for discounts, price
discrepancies, returned goods and other items.
Financial Instruments
The carrying amount of the Company's financial instruments, consisting of cash
and cash equivalents, accounts receivable, accounts payable, notes payable and
long-term debt, approximates their fair value.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. However, during the fourth
quarter of fiscal 2001, the Company entered into a foreign currency forward
contract to essentially fix the exchange rate related to funding the acquisition
of Wrafton. The Company was not a party to any other derivative contracts during
the years presented.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of demand deposits and other
short-term investments with maturities of three months or less at the date of
purchase.
-34-
Accounts Receivable
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.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in first-out (FIFO) method.
The Company maintains a reserve for estimated obsolete or unmarketable inventory
based on the difference between the cost of the inventory and its estimated
market value. In estimating the reserve, management considers factors such as
excess or slow moving inventories, product expiration dating, current and future
customer demand, and market conditions.
Long-Lived Assets
Property and equipment are recorded at cost and are depreciated primarily using
the straight-line method for financial reporting and accelerated methods for tax
reporting. Cost includes an amount of interest associated with significant
capital projects. Useful lives for financial reporting range from 5-10 years for
machinery and equipment, and 10-40 years for buildings. Maintenance and repair
costs are charged to earnings while expenditures that increase asset lives are
capitalized.
Other than goodwill, the Company periodically reviews long-lived assets with
finite lives and that are not held for sale for impairment by comparing the
carrying value of the assets to their estimated future undiscounted cash flows.
Goodwill is reviewed annually for impairment by comparing the carrying value of
each reporting unit to the present value of its expected future cash flows. For
fiscal 2002, the analysis of Quifa resulted in goodwill impairment of $11,524
and other asset impairment charges of $2,590. See "New Accounting Standards"
below.
Investment
In fiscal 2000, the Company recorded a gain of $1,300 in Interest and other, net
on the sale of an investment that was classified as available-for-sale for the
purpose of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
Income Taxes
Deferred income tax assets and liabilities are recorded based upon the
difference between financial reporting and tax reporting bases of assets and
liabilities using the enacted tax rates.
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries because those earnings are
considered permanently reinvested in the operations of those subsidiaries.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141,
"Business Combinations". SFAS 141 requires all business combinations to be
accounted for by the purchase
-35-
method and eliminates use of the pooling-of-interests method. It also requires
upon adoption of SFAS 142, that the Company reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141. Additionally,
the statement requires recognition of intangible assets apart from goodwill and
provides for additional disclosure of information related to a business
combination. This SFAS is effective for all business combinations initiated
after June 30, 2001. The adoption of this standard did not have a significant
impact on the Company's financial statements. The Company's previous business
combinations were accounted for using the purchase method.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets".
SFAS 142 eliminates goodwill amortization, provides guidance and requirements
for periodic impairment testing of goodwill and discusses the treatment of other
intangible assets. Adoption of the standard is required for fiscal years
beginning after December 15, 2001. However, because earlier adoption is
permissible, the Company adopted the standard effective July 1, 2001. The
impairment tests of goodwill and other intangible assets as required upon
adoption of this standard were performed and resulted in no initial impairment
charge. As discussed in Note O, during the fourth quarter of fiscal 2002, the
Company approved a restructuring plan related to Quifa. Because impairment
indicators were present, an additional impairment test was performed that
resulted in a charge of $11,524.
Goodwill amortization, which is non-deductible for tax purposes, was $1,135 for
both fiscal 2001 and 2000. The effect on earnings per share of eliminating
goodwill amortization is noted in the following table:
2002 2001 2000
---- ---- ----
Reported net income $50,197 $27,656 $19,298
Add back: goodwill amortization - 1,135 1,135
------ ------ ------
Adjusted net income $50,197 $28,791 $20,433
====== ====== ======
Basic EPS
Reported net income $0.69 $0.38 $0.26
Goodwill amortization - 0.02 0.02
------ ------ ------
Adjusted net income $0.69 $0.40 $0.28
====== ====== ======
Diluted EPS
Reported net income $0.67 $0.37 $0.26
Goodwill amortization - 0.02 0.02
------ ------ ------
Adjusted net income $0.67 $0.39 $0.28
====== ====== ======
The Company's intangible assets, excluding goodwill, are immaterial.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment and
Disposal of Long-Lived Assets". SFAS 144, which establishes accounting and
reporting requirements for the impairment and disposal of long-lived assets, is
required to be adopted for fiscal years beginning after December 15, 2001.
Because earlier adoption is permissible, the Company effectively adopted the
standard as of July 1, 2001. The Company was already in compliance with SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", which was superseded by SFAS 144; consequently, the
adoption of SFAS 144 did not have a material impact on the Company. However, the
Company did record an asset impairment loss of $2,590 related to restructuring
Quifa. See Note O to the consolidated financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan.
-36-
This statement supercedes the guidance provided by Emerging Issues Task Force
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS 146 is required to be adopted for exit or disposal
activities initiated after December 31, 2002. Because SFAS 146 only affects the
timing of the recognition of the liabilities to be incurred if an entity makes a
decision to exit or dispose of a particular activity, the Company does not
expect the adoption of SFAS 146 to have a material impact on the Company's
financial statements. Accordingly, the application of SFAS 146 to the
restructuring recorded in fiscal 2002 would have resulted in no material
difference in the Company's financial statements.
NOTE B - INVENTORIES
Inventories are summarized as follows:
June 29, June 30,
2002 2001
-------- --------
Finished goods $ 62,360 $ 73,996
Work in process 57,870 52,573
Raw materials 35,381 34,543
-------- --------
$155,611 $161,112
======== ========
The Company maintains a reserve 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 reserve of
$21,360 at June 29, 2002 and $26,141 at June 30, 2001.
NOTE C - GOODWILL
Changes in the carrying amount of Goodwill are as follows:
Store Brand
Health Care All Other Total
----------- --------- --------
Balance as of July 1, 2000 $ 9,654 $ 8,545 $ 18,199
Goodwill acquired - 30,928 30,928
Goodwill amortization (752) (383) (1,135)
Goodwill written off (797) - (797)
-------- -------- --------
Balance as of June 30, 2001 8,105 39,090 47,195
Impairment loss - (11,524) (11,524)
Goodwill acquired - 248 248
-------- -------- --------
Balance as of June 29, 2002 $ 8,105 $ 27,814 $ 35,919
======== ======== ========
The impairment loss in fiscal 2002 resulted from the Company's decision to
restructure Quifa as discussed in Note O. The goodwill acquired in fiscal 2002
resulted from an adjustment in the purchase price allocation from the Wrafton
acquisition. The goodwill written off in fiscal 2001 resulted from a previous
acquisition that had no remaining value.
NOTE D - LONG-TERM BORROWINGS AND CREDIT ARRANGEMENTS
Effective September 23, 1999, the Company entered into a revolving credit
agreement with a group of banks, which provides a $175,000 unsecured revolving
credit facility. The agreement expires in September 2004. Repayment has been
guaranteed by the Company's subsidiaries. Restrictive loan covenants apply to,
among other things, minimum levels of net worth, interest coverage and funded
debt leverage.
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Interest rates on the revolving credit facility are established at the time of
borrowing through three options, the prime rate or a LIBOR rate plus a factor
established quarterly based on funded debt leverage, or a rate agreed upon
between the Company and its Agent at the time the loan is made. The rate factor
at June 29, 2002 was .425%. The Company had no outstanding borrowings at June
29, 2002 and June 30, 2001.
Quifa has short-term uncommitted unsecured credit facilities with two banks in
Mexico, totaling 63,000 pesos ($6,624 at June 29, 2002). The outstanding
borrowings under the facilities were $5,128 and $10,184 at June 29, 2002 and
June 30, 2001, respectively, and were included in Notes payable. The facilities
are partially supported by a comfort letter and Company guarantee. Interest is
established at the time of the borrowing, based on a rate agreed upon between
the bank and Quifa.
In May 2000, Quifa entered into a term loan with a bank in Mexico, which matured
on May 22, 2002. The loan was secured by automobiles, and required 26 equal
monthly payments of 461 pesos ($50), plus interest on the unpaid balance at not
less than 1.5%. The outstanding balances were $0 and $643 at June 29, 2002 and
June 30, 2001, respectively, and were included in Notes payable.
Wrafton has short-term uncommitted unsecured credit facilities with two banks in
the U.K. totaling 2,100 pounds sterling ($3,071 at June 29, 2002). Outstanding
borrowings under the facilities were $1,368 and $0 at June 29, 2002 and June 29,
2001, respectively, and were included in Notes payable. The facilities are
partially supported by a Company guarantee. Interest rates are established at
the time of borrowing, based on a rate agreed upon between the bank and Wrafton,
or LIBOR plus 1%.
NOTE E - SHAREHOLDERS' EQUITY
In April 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
for each outstanding share of the Company's common stock. The Rights contain
provisions, which are intended to protect the Company's stockholders in the
event of an unsolicited and unfair attempt to acquire the Company. The Company
is entitled to redeem the Rights at $.01 per Right at any time before a 20%
position has been acquired. The Rights will expire on April 10, 2006, unless
previously redeemed or exercised.
The Company has restricted stock plans and agreements as described below that
are not subject to shareholder approval. The holder of restricted shares has all
rights of a shareholder except that the shares are restricted as to sale or
transfer for the vesting period and the shares are forfeited upon termination in
certain circumstances. The Company accounts for restricted shares as unearned
compensation, which is ratably charged to expense over the vesting period. The
unearned compensation included in shareholder's equity at June 29, 2002 and June
30, 2001 was $608 and $465, respectively.
The Company has established a restricted stock plan for directors, which is
intended to attract and retain the services of experienced and knowledgeable
non-employee directors. The terms of the plan call for the granting of $10 worth
of restricted shares to each Director on the date of the Annual Board Meeting.
The number of shares issued is based on the fair market value of the shares on
the date of the Annual Board Meeting. The restricted shares become vested on the
date of the next Annual Board Meeting on which the Director's existing term as a
Board member is set to expire (director terms are generally three years). In
fiscal 2002 and 2001, the Company granted 4 and 9 shares of restricted stock,
which increased unearned compensation by $60 for both fiscal years. The Company
charged $64 and $62 to expense in fiscal 2002 and 2001, respectively.
-38-
In August 2001, the Company granted 25 shares of restricted stock valued at $440
to David T. Gibbons, its President and Chief Executive Officer, pursuant to
restricted stock agreements. Additionally, Mr. Gibbons was granted 96 shares
valued at $503 in May 2000. Assuming certain conditions are met, the restricted
shares granted in August 2001 and May 2000 become vested in August 2003 and June
2003, respectively. The expense for these shares was $407 and $76 for fiscal
2002 and 2001, respectively.
In August 2001, the Company granted 12 shares of restricted stock valued at $211
to Douglas R. Schrank, its Executive Vice President and Chief Financial Officer,
pursuant to a restricted stock agreement. Assuming certain conditions are met,
the restricted shares become vested in August 2003. The expense for these shares
was $97 for fiscal 2002.
The Company's stock option plans for employees and directors require shareholder
approval. The Company grants key management employees options to purchase shares
of common stock. The options vest and may be exercised from one to ten years
after the date of grant based on a vesting schedule. Proceeds from the exercise
of stock options under the Company's stock option plans and income tax benefits
attributable to stock options exercised are credited to common stock.
A summary of activity for the Company's employee stock option plan is presented
below:
Fiscal Year
----------------------------------------------------------------
2002 2001 2000
----------------- ------------------ ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
Options outstanding at beginning of year 6,230 $ 10.02 6,860 $ 9.92 4,852 $ 11.68
Granted 1,213 15.15 450 9.46 2,496 6.40
Exercised (970) 10.18 (711) 9.42 (85) 1.74
Terminated (122) 19.06 (369) 10.91 (403) 10.71
----- ----- -----
Options outstanding at end of year 6,351 10.68 6,230 10.02 6,860 9.92
Options exercisable at end of year 2,483 11.66 2,757 12.34 2,330 13.23
Options available for grant at end of year 2,754 3,845 1,346
Price per share of options outstanding $5.25 to $29.38 $1.50 to $31.25 $1.00 to $31.25
In August 2002, the Company granted options to certain employees to purchase 832
shares at an exercise price of $9.84.
The Company issues stock options to directors under a non-qualified stock option
plan. Options granted under the plan vest and may be exercised from one to ten
years after the date of grant based on a vesting schedule.
-39-
A summary of activity for the Company's director stock option plan is presented
below:
Fiscal Year
----------------------------------------------------------------
2002 2001 2000
----------------- ------------------ ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
Options outstanding at beginning of year 155 11.98 91 $ 15.77 100 $ 15.94
Granted 24 14.12 64 6.56 15 8.66
Exercised - - - - - -
Terminated - - - - (24) -
----- ----- ------
Options outstanding at end of year 179 12.27 155 11.98 91 15.77
Options exercisable at end of year 116 13.67 72 17.47 56 19.32
Options available for grant at end of year 272 296 102
Price per share of options outstanding $6.56 to $29.38 $6.56 to $29.38 $8.38 to $29.38
The Company applies Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized. Had
compensation cost been determined and recorded based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS 123, "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced as follows:
Fiscal Year
--------------------------------------
2002 2001 2000
------- ------- -------
Decrease in net income $5,353 $3,424 $2,662
Basic earnings per share $ .07 $ .05 $ .04
Diluted earnings per share $ .07 $ .05 $ .04
The effects on net income and earnings per share for fiscal 2002, 2001 and 2000
may not be representative of future years because compensation cost is allocated
on a straight-line basis over the vesting periods of the grants, which extend
beyond the reported years.
The weighted average fair value per share at the date of grant for options
granted during fiscal 2002, 2001 and 2000 was $6.49, $4.13 and $2.91,
respectively. The fair value was estimated using the Black-Sholes option pricing
model with the following weighted average assumptions:
Fiscal Year
----------------------------
2002 2001 2000
------ ------ -----
Dividend yield 0.0% 0.0% 0.0%
Volatility, as a percent 37.7% 38.0% 36.0%
Risk-free interest rate 4.7% 5.3% 6.5%
Expected life in years after vest date 3.0 3.0 3.0
Forfeitures are accounted for as they occur.
-40-
The following table summarizes information concerning options outstanding under
the Plans at June 29, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------------- -------------------------------
Weighted Average Weighted
Range of Number Remaining Weighted Average Number Average
Exercise Outstanding at Contractual Term Exercise Exercisable at Exercise
Prices 6/29/02 (Years) Price 6/29/02 Price
--------------- -------------- ---------------- ---------------- -------------- ---------------
$5.25 - 7.42 1,780 7.92 $ 5.85 486 $ 5.88
$7.72 - 9.13 1,741 5.64 $ 8.54 766 $ 8.73
$9.50 - 15.50 1,649 5.03 $12.68 1,039 $13.07
$15.50 - 29.38 1,359 7.25 $17.51 308 $24.08
----- ------
6,529 2,599
===== ======
In fiscal 2002, the Company continued its common stock repurchase program.
Purchases are made on the open market, subject to market conditions, and are
funded by cash from operations. The Company purchased 2,533 shares for $31,923
during fiscal 2002. The Company purchased 137 shares for $1,089 during fiscal
2001. The common stock repurchased was retired upon purchase for both years. In
early fiscal 2003, the Board of Directors approved the purchase of an additional
$40,000 of common stock. As of September 12, 2002, the Company has purchased and
retired 3,084 shares for $31,117 in the first quarter of fiscal 2003. The
Company has approval to purchase additional shares with a value of up to
$15,871.
NOTE F - RETIREMENT PLANS
The Company has a qualified profit-sharing and investment plan under section
401(k) of the Internal Revenue Code, which cover substantially all employees.
Contributions to the plan are at the discretion of the Board of Directors.
Additionally, the Company matches a portion of employees' contributions. The
Company's contributions to the plan were $6,342, $5,840 and $5,667 in fiscal
2002, 2001, and 2000, respectively.
The Company has postretirement plans that provide medical benefits for retirees
and their eligible dependents. Employees become eligible for these benefits if
they meet certain minimum age and service requirements. The Company reserves the
right to modify or terminate these plans. The plans are not funded. The unfunded
accumulated postretirement benefit obligation was $4,180 and $3,596 at June 29,
2002 and June 30, 2001, respectively. The benefits expensed were $586, $381 and
$554 in fiscal 2002, 2001 and 2000, respectively.
The Company has non-qualified plans relating to deferred compensation and
executive retention that allow certain employees and directors to defer
compensation subject to specific requirements. The plans are not funded. The
deferred compensation liability was $1,616 at June 29, 2002.
-41-
NOTE G - INCOME TAXES
The provision for income taxes consists of the following:
Fiscal Year
------------------------------------------
2002 2001 2000
--------- --------- ---------
Current:
Federal.............. $ 33,346 $ 26,266 $(17,490)
State................ 2,019 813 654
Foreign.............. 555 (753) 1,322
-------- -------- --------
35,920 26,326 (15,514)
Deferred .................... 2,237 (10,123) 27,141
-------- -------- --------
Total............... $ 38,157 $ 16,203 $ 11,627
======== ======== ========
A reconciliation of the provision based on the Federal statutory income tax rate
to the Company's effective income tax rate is as follows:
Fiscal Year
-------------------------
2002 2001 2000
---- ---- ----
Provision at Federal statutory rate .......... 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit.... 2.4 2.1 2.1
Foreign tax rate differences ................. (0.2) - -
Expenses not deductible for tax purposes ..... 7.0 1.5 1.4
Other ........................................ (1.0) (1.7) (0.9)
---- ---- ----
Effective income tax rate .................... 43.2% 36.9% 37.6%
==== ==== ====
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries because those earnings are
considered permanently reinvested in the operations of those subsidiaries. It is
not practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings.
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting basis of assets and liabilities, and operating loss
and tax credit carry forwards for tax purposes. The components of the net
deferred income tax asset (liability) are as follows:
June 29, 2002 June 30, 2001
------------- -------------
Deferred income tax asset (liability):
Property and equipment ................................................. $(21,204) $(20,415)
Inventory basis differences ............................................ 11,934 13,106
Accrued liabilities .................................................... 2,472 7,695
Allowance for doubtful accounts ........................................ 3,482 2,138
Accrued vacation expense ............................................... 1,793 1,973
Accrued postretirement benefit ......................................... 3,409 1,348
Prepaid health expense ................................................. (1,850) (1,500)
State operating loss carry forward ..................................... 49,963 49,963
Capital loss carry forward ............................................. 3,350 3,350
Other, net ............................................................. 326 (1,976)
Foreign ................................................................ (815) (585)
-------- --------
Total ..................................................................... 52,860 55,097
Valuation allowance for carry forwards ................................. (53,313) (53,313)
-------- --------
Net deferred income tax asset (liability) ................................. $ (453) $ 1,784
======== ========
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The above amounts are classified in the consolidated balance sheet as follows:
June 29, 2002 June 30, 2001
------------- -------------
Current asset ................................ $ 19,860 $ 19,203
Long-term liability .......................... (20,313) (17,419)
-------- --------
Net deferred income tax asset (liability)..... $ (453) $ 1,784
======== ========
At June 29, 2002, the Company had state net operating loss carry forwards of
$49,963 and a capital loss carry forward of $3,350. At June 29, 2002, a
valuation allowance of $49,963 had been provided for the state net operating
loss and a $3,350 valuation allowance had been provided for capital losses as
utilization of such carry forwards within the applicable statutory periods is
uncertain. The state net operating loss carry forward expires through 2020 while
the capital loss carry forward expires through 2006. Both expiring state net
operating loss carry forwards and expiring capital loss carry forwards and the
required valuation allowances are adjusted annually. After application of the
valuation allowances described above, the Company anticipates no limitations
will apply with respect to utilization of the net deferred income tax assets
described above.
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:
Fiscal Year
--------------------------------
2002 2001 2000
------- -------- -------
Net income ......................................................... $ 50,197 $ 27,656 $ 19,298
Other comprehensive income:
Unrealized holding gains on securities ........................... - - 1,286
Reclassification adjustment for gains realized in net income...... - - (1,286)
-------- -------- --------
Net unrealized gains on investments ........................... - - -
Foreign currency translation adjustments ......................... (55) 179 (187)
-------- -------- --------
Comprehensive income ............................................... $ 50,142 $ 27,835 $ 19,111
======== ======== ========
NOTE I - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the basic and
diluted EPS calculation follows:
Fiscal Year
-----------------------------
2002 2001 2000
------- ------- -------
Numerator:
Net income used for both basic and diluted EPS ........... $50,197 $27,656 $19,298
======= ======= =======
Denominator:
Weighted average shares outstanding for basic EPS ........ 73,164 73,646 73,370
Dilutive effect of stock options ......................... 1,949 920 223
------- ------- -------
Weighted average shares outstanding for diluted EPS....... $75,113 $74,566 $73,593
======= ======= =======
Options outstanding where the exercise price was higher than the market price
were 654, 374 and 2,479 for fiscal 2002, 2001 and 2000, respectively. These
options were excluded from the diluted EPS calculation.
-43-
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company leases certain assets, principally warehouse facilities and computer
equipment, under agreements that expire at various dates through June 2011.
Certain leases contain provisions for renewal and purchase options and require
the Company to pay various related expenses. Future non-cancelable minimum
operating lease commitments are as follows: 2003--$4,618; 2004--$2,711;
2005--$1,812; 2006--$1,226; 2007--$246 and thereafter--$549. Rent expense under
all leases was $8,823, $9,446 and $10,592 for fiscal 2002, 2001 and 2000,
respectively.
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 1999, the Company filed a civil antitrust lawsuit in the U.S. District
Court for the Western District of Michigan against a group of vitamin raw
material suppliers alleging the defendants conspired to fix the prices of
vitamin raw materials sold to the Company. The relief sought included money
damages and a permanent injunction enjoining defendants from future violation of
antitrust laws. The Company has entered into settlement agreements with all of
the defendants. The Company received settlement payments of $27,891, $995 and
$4,154 in fiscal 2002, 2001 and 2000, respectively. The Company received a final
payment of $3,128 in the first quarter of fiscal 2003. The payments were net of
attorney fees and expenses that were withheld prior to the disbursement of the
funds to the Company.
The Company is currently defending numerous individual lawsuits pending in
various state and federal courts involving phenylpropanolamine (PPA), an
ingredient formerly used in the manufacture of certain OTC cough/cold and diet
products. The Company discontinued using PPA 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 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.
The Company has pending certain other legal actions and claims incurred in the
normal course of business. The Company believes that these actions are without
merit or are covered by insurance and is actively pursuing the defense thereof.
The Company believes the resolution of all of these matters will not have a
material adverse effect on its financial condition and results of operations as
reported in the accompanying consolidated financial statements. However,
depending on the amount and timing of an unfavorable resolution of these
lawsuits, it is possible that the Company's future results of operations or cash
flow could be materially affected in a particular period.
-44-
NOTE K - QUARTERLY FINANCIAL DATA (UNAUDITED)
2002 September 29, December 29,(1) March 30,(2) June 29,(3)
- ------------------------- ------------- --------------- ------------ -----------
Net sales......................................... $217,116 $228,694 $198,491 $182,021
Gross profit...................................... 50,889 61,255 55,158 44,601
Net income........................................ 13,090 16,565 19,261 1,281
Basic earnings per share.......................... 0.18 0.23 0.26 0.02
Diluted earnings per share........................ 0.17 0.22 0.26 0.02
Weighted average shares outstanding
Basic................................... 74,314 73,343 72,690 72,307
Diluted................................. 76,925 75,227 74,309 74,051
2001 September 30, December 30,(4) March 31, June 30,(5)
- ------------------------- ------------- --------------- --------- -----------
Net sales......................................... $192,142 $189,550 $190,898 $180,898
Gross profit...................................... 45,748 30,563 46,426 44,157
Net income........................................ 10,534 820 10,101 6,201
Basic earnings per share.......................... 0.14 0.01 0.14 0.08
Diluted earnings per share........................ 0.14 0.01 0.14 0.08
Weighted average shares outstanding
Basic................................... 73,505 73,522 73,468 73,750
Diluted................................. 73,929 73,953 74,552 75,720
(1) Includes a pre-tax charge of $2,046 related to the LaVergne, Tennessee
logistics facility. See Note O. Includes a pre-tax charge of $1,900 for bad
debt expense related to the bankruptcy of a large customer.
(2) Includes pre-tax income of $7,813 related to settlement proceeds of an
antitrust lawsuit. See Note J.
(3) Includes pre-tax income of $20,078 related to settlement proceeds of an
antitrust lawsuit. See Note J. Includes a pre-tax charge of $11,524 for
goodwill impairment and $5,090 for asset impairment and restructuring costs
related to Quifa. See Note O.
(4) Includes a pre-tax charge of $24,000 related to the voluntary
discontinuation of products containing phenylpropanolamine (PPA). See Note
M.
(5) Includes a pre-tax charge of $2,175 related to the LaVergne, Tennessee
logistics facility. See Note O. Includes a reduction in the charge related
to the voluntary discontinuation of products containing PPA of $3,000. See
Note M.
NOTE L - SEGMENT INFORMATION
The Company has one reportable segment, store brand health care, that
encompasses two operating segments, OTC pharmaceuticals and nutritional
products. All other consists of the operating segments, Quifa and Wrafton,
neither of which meet the quantitative thresholds for separate disclosure. The
accounting policies of all of the operating segments are the same as those
described in the summary of significant accounting policies in Note A.
-45-
Store Brand All
Health Care Other Total
----------- ----- -----
Fiscal 2002
- -----------
Net sales $761,446 $64,876 $826,322
Operating income 100,926 (13,927) 86,999
Total assets 519,834 73,953 593,787
Capital expenditures 19,329 8,199 27,528
Net property, plant and equipment 186,961 24,083 211,044
Depreciation 23,392 2,221 25,613
Asset impairment and restructuring 2,046 16,614 18,660
Fiscal 2001
- -----------
Net sales 723,753 29,735 753,488
Operating income 43,344 (3,233) 40,111
Total assets 491,721 84,191 575,912
Capital expenditures 24,304 2,500 26,804
Net property, plant and equipment 189,550 22,537 212,087
Depreciation and amortization 22,272 750 23,022
Fiscal 2000
- -----------
Net sales 714,978 29,306 744,284
Operating income 31,551 4,368 35,919
Total assets 455,197 30,867 486,064
Capital expenditures 9,703 4,661 14,364
Net property, plant and equipment 186,638 6,942 193,580
Depreciation and amortization 21,525 720 22,245
NOTE M - PRODUCT DISCONTINUATION
In November 2000, in response to recommendations by the FDA, the Company
voluntarily discontinued production and halted shipments of all products
containing the ingredient PPA, effective immediately. In fiscal 2001, the
Company recorded total net sales returns of $12,500, with a negative impact on
gross profit of $3,400. Additionally, the Company recorded a charge of $17,600
in cost of sales related to the cost of returned product, product on hand, and
product disposal costs. These PPA charges reduced earnings $0.18 per share in
fiscal 2001. Replacement products for most of the PPA-containing products began
shipping in the fourth quarter of fiscal 2001.
NOTE N - ACQUISITION
In June 2001, the Company acquired Wrafton for approximately $44,000, plus
acquisition costs. Wrafton, located in the United Kingdom, is a supplier of
store brand products to major grocery and pharmacy retailers and a contract
manufacturer of OTC pharmaceuticals. The acquisition was accounted for using the
purchase method and resulted in goodwill of approximately $27,500. The assets
and liabilities, which are not considered significant to the Company, are
included in the consolidated balance sheet beginning June 30, 2001. The results
of operations were included beginning in the current fiscal year.
NOTE O - RESTRUCTURING AND GOODWILL IMPAIRMENT CHARGES
For fiscal 2002, 2001 and 2000, the Company incurred restructuring charges
related to the declining net realizable value of its LaVergne, Tennessee
logistics facility. The restructuring charges were
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$2,046, $2,175 and $1,048 for fiscal 2002, 2001 and 2000, respectively. The
effect of suspending depreciation on this facility was approximately $400, $800
and $850 for fiscal 2002, 2001 and 2000, respectively. The Company sold this
facility in the second quarter of fiscal 2002. The effect of selling this
facility is included in the store brand health care segment.
In the fourth quarter of fiscal 2002, the Company approved a restructuring plan
related to its Mexican operating company, Quifa. The implementation of the plan
began in June 2002 and is expected to be completed in its entirety by June 2003.
The Company will discontinue certain customers and products because of
inadequate profitability and misalignment with strategic goals. Equipment
related to the discontinued customers and products has been written down to its
fair market value resulting in an impairment charge of $2,590. The Company
expects to terminate approximately 240 employees performing certain production
and administrative tasks as a result of the restructuring plan. Accordingly, the
Company recorded employee termination benefits of $2,000 and other restructuring
costs of $500. The charges for asset impairment, employee termination benefits
and other restructuring costs are included in the restructuring line in the
consolidated statement of income for fiscal 2002. As of June 29, 2002, no
payments had been made of the accrued restructuring costs.
Quifa is considered a reporting unit for the purpose of goodwill impairment
testing. Due to the changes necessary at Quifa, its goodwill was tested for
impairment. The fair value of the reporting unit was estimated using the present
value of expected future cash flows. The testing procedure resulted in a
goodwill impairment charge of $11,524. The goodwill impairment charge is
recorded as a separate line item in the consolidated statement of income for
fiscal 2002.
Update on 1998 restructuring -- The Company completed the sale of its personal
care business in fiscal 2000. Proceeds from the sale were $32,200. No gain or
loss was recorded in fiscal 2000 related to this sale. Fiscal 2000 reflects one
month of personal care business, which includes net sales of $17,700. The
Company does not maintain operating income by its main product lines; however,
based on the incremental approach, the Company estimates that pre-tax operating
income was approximately $1,000 for fiscal 2000, including the effect of
suspending depreciation of approximately $700.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors of the Company.
Information concerning directors of the Company is incorporated herein
by reference to the Company's Proxy Statement for the 2002 Annual
Meeting under the heading "Election of Directors".
(b) Executive Officers of the Company.
See Part I, Additional Item of this Form 10-K on page 14.
(c) Compliance with Section 16(a) of the Exchange Act.
Information concerning compliance with Section 16(a) of the Exchange
Act is incorporated herein by reference to the Company's Proxy
Statement for the 2002 Annual Meeting under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance".
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Item 11. Executive Compensation.
Information concerning executive officer and director compensation is
incorporated herein by reference to the Company's Proxy Statement for the 2002
Annual Meeting under the headings "Executive Compensation" and "Director
Compensation".
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference to the Company's Proxy Statement
for the 2002 Annual Meeting under the heading "Ownership of Perrigo Common
Stock". Information concerning equity compensation plans is incorporated herein
by reference to the Company's Proxy Statement for the 2002 Annual Meeting under
the heading "Equity Compensation Plan Information".
Item 13. Certain Relationships and Related Transactions.
Information concerning certain relationships and related transactions is
incorporated herein by reference to the Company's Proxy Statement for the 2002
Annual Meeting under the heading "Director Compensation".
PART IV.
Item 14. Controls and Procedures.
Not applicable.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed or incorporated by reference as part
of this Form 10-K:
1. All financial statements. See Index to Consolidated Financial
Statements on page 27 of this Form 10-K.
2. Financial Schedules
Report of Independent Certified Public Accountants on Financial
Statement Schedule.
Schedule II - Valuation and Qualifying Accounts.
Schedules other than the one listed are omitted because the required
information is included in the footnotes, immaterial or not applicable.
3. Exhibits:
3(a) Amended and Restated Articles of Incorporation of Registrant,
incorporated by reference from Amendment No. 2 to Registration
Statement No. 33-43834 filed by the Registrant on September
23, 1993.
3(b) Restated Bylaws of Registrant, dated April 10, 1996, as
amended, incorporated by reference from the Registrants Form
10-K filed on September 6, 2000.
4(a) Shareholders' Rights Plan, incorporated by reference from the
Registrant's Form 8-K filed on April 10, 1996.
10(a)* Registrant's Management Incentive Bonus Plan.
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10(b)* Registrant's Employee Stock Option Plan as amended.
10(c)* Registrant's 1989 Non-Qualified Stock Option Plan for
Directors as amended, incorporated by reference from Exhibit B
of the Registrant's 1997 Proxy Statement as amended at the
Annual Meeting of Shareholders on October 31, 2000.
10(d)* Registrant's Restricted Stock Plan for Directors, dated
November 6, 1997, incorporated by reference from Registrant's
1998 Form 10-K filed on October 6, 1998.
10(e) Credit Agreement, dated September 23, 1999, between Registrant
and Bank One, Michigan, incorporated by reference from the
Registrant's Form 10-K filed on October 1, 1999.
10(f) Guaranty Agreement, dated September 23, 1999, executed by L.
Perrigo Company and Perrigo Company of South Carolina, Inc.,
in favor of the Agent and each Lender, incorporated by
reference from the Registrant's Form 10-K filed on October 1,
1999.
10(h)* Employment Agreement, Restricted Stock Agreement, Contingent
Restricted Stock Agreement, and Noncompetition and
Nondisclosure Agreement, dated April 19, 2000, between
Registrant and David T. Gibbons, incorporated by reference
from the Registrant's Form 10-Q filed on April 26, 2000.
10(i)* Noncompetition and Nondisclosure Agreement and Indemnity
Agreement, dated June 2, 2000, between Registrant and Michael
J. Jandernoa, incorporated by reference from the Registrant's
Form 10-K filed on September 6, 2000.
10(j)* Restricted Stock Agreement, dated August 14, 2001, between
registrant and David T. Gibbons, incorporated by reference
from the Registrant's Form 10-K filed on September 7, 2001.
10(k)* Restricted Stock Agreement, dated August 14, 2001, between
registrant and Douglas R. Schrank, incorporated by reference
from the Registrant's Form 10-K filed on September 7, 2001.
10(l)* Registrant's Executive Retention Plan, dated January 1, 2002,
incorporated by reference from the Registrant's Form 10-Q
filed on January 24, 2002.
10(m)* Registrant's Nonqualified Deferred Compensation Plan, dated
December 31, 2001, incorporated by reference from the
Registrant's Form 10-Q filed on January 24, 2002.
10(n)* Consulting Agreement, dated July 31, 2002, between Registrant
and Michael J. Jandernoa.
10(o)* Registrant's Restricted Stock Plan for Directors II, dated
August 14, 2001, incorporated by reference from the
Registrant's Form 10-Q filed on October 23, 2001.
21 Subsidiaries of the Registrant.
23 Consent of BDO Seidman, LLP.
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24 Power of Attorney (see signature page).
99(a) Certification under Section 906 of the Sarbanes-Oxley Act of
2002.
* Denotes management contract or compensatory plan or arrangement.
(b) Exhibit and reports on Form 8-K.
The Company filed a report on May 20, 2002 that announced it entered into
settlement agreements with certain defendants related to a civil antitrust
lawsuit.
-50-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Board of Directors
Perrigo Company
Allegan, Michigan
The audits referred to in our report on Perrigo Company and Subsidiaries dated
July 26, 2002, except for Note E, which is as of September 12, 2002 and Note J,
which is as of August 19, 2002, relating to the consolidated financial
statements of Perrigo Company, which is contained in Item 8 of this Form 10-K
for the year ended June 29, 2002, included the audit of Schedule II - Valuation
and Qualifying Accounts. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
By: /s/ BDO Seidman, LLP
-----------------------------
BDO Seidman, LLP
Grand Rapids, Michigan
July 26, 2002, except for Note E, which is as of September 12, 2002 and Note J,
which is as of August 19, 2002
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SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS
PERRIGO COMPANY
(in thousands)
Balance Charged to Balance
at Beginning Costs and at End
Description of Period Expenses Deductions(1) of Period
----------- ------------ ---------- ------------ ---------
Year Ended July 1, 2000:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $3,281 $2,821 $ 105 $5,997
Year Ended June 30, 2001:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $5,997 $ 974 $1,069 $5,902
Year Ended June 29, 2002:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $5,902 $2,013 $ 346 $7,569
(1) Uncollectible accounts charged off, net of recoveries.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K for
the fiscal ended June 29, 2002 to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Allegan, State of Michigan on the 18th
of September 2002.
PERRIGO COMPANY
By: /s/ David T. Gibbons
----------------------------
David T. Gibbons
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints David T. Gibbons and
Douglas R. Schrank and each of them severally, acting alone and without the
other, his true and lawful attorney-in-fact with authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments to this Annual Report on Form 10-K for the fiscal year
ended June 29, 2002 necessary or advisable to enable Perrigo Company to comply
with the Securities Exchange Act of 1934, any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, which
amendments may make such other changes in the report as the aforesaid
attorney-in-fact executing the same deems appropriate.
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Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K for the fiscal year ended June 29, 2002 has been signed by
the following persons in the capacities indicated on the 18th of September 2002.
Signature Title
--------- -----
/s/ David T. Gibbons President, Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
David T. Gibbons
/s/ Douglas R. Schrank Executive Vice President and Chief Financial
- ------------------------- Officer
Douglas R. Schrank (Principal Accounting and Financial Officer)
/s/ F. Folsom Bell Executive Vice President, Business Development
- ------------------------ and Director
F. Folsom Bell
/s/ Peter R. Formanek Director
- ------------------------
Peter R. Formanek
/s/ Larry D. Fredricks Director
- ------------------------
Larry D. Fredricks
/s/ Richard G. Hansen Director
- ------------------------
Richard G. Hansen
/s/ L. R. Jalenak, Jr. Director
- ------------------------
L.R. Jalenak, Jr.
/s/ Michael J. Jandernoa Chairman of the Board
- ------------------------
Michael J. Jandernoa
/s/ Herman Morris, Jr. Director
- ------------------------
Herman Morris, Jr.
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CERTIFICATIONS
I, David T. Gibbons, certify that:
1. I have reviewed this annual report on Form 10-K of Perrigo Company;
2. Based on my knowledge, this annual 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: September 18, 2002
/s/ David T. Gibbons
--------------------------------------
David T. Gibbons
President and Chief Executive Officer
I, Douglas R. Schrank, certify that:
1. I have reviewed this annual report on Form 10-K of Perrigo Company;
2. Based on my knowledge, this annual 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: September 18, 2002
/s/ Douglas R. Schrank
---------------------------------------
Douglas R. Schrank
Executive Vice President and Chief
Financial Officer
-55-
EXHIBIT INDEX
Exhibit Document
- ------- --------
10(a) Management Incentive Bonus Plan
10(b) Employee Stock Option Plan
10(n) Consulting Agreement, dated July 31, 2002, between
Registrant and Michael J. Jandernoa
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
99(a) Certification related to Section 906 of the
Sarbanes-Oxley Act of 2002
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