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