PERRIGO CO - 10-Q Quarterly Report

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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: MARCH 26, 2005

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-19725

PERRIGO COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MICHIGAN 38-2799573
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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)

(269) 673-8451
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

OUTSTANDING AT
CLASS OF COMMON STOCK APRIL 29, 2005
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WITHOUT PAR 93,836,662

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PERRIGO COMPANY

FORM 10-Q

INDEX

PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)

See accompanying notes to condensed consolidated financial statements

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PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

See accompanying notes to condensed consolidated financial statements

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PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

See accompanying notes to condensed consolidated financial statements

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PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 26, 2005
(in thousands, except per share amounts)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals and other adjustments) considered necessary for a fair presentation
have been included. The Company has reclassified certain amounts in the prior
years to conform to the current year presentation.

An evaluation of the Company's classification of cash equivalents indicated
that, due to their contractual maturity date, floating and adjustable rate
securities were more appropriately classified as investment securities.
Accordingly, the Company reclassified floating and adjustable rate securities of
$152,860 as of June 26, 2004 and $125,725 as of March 27, 2004 from cash and
cash equivalents to investment securities in its consolidated balance sheets.
The Company has also reclassified the purchases of and proceeds from sales of
these securities in its consolidated statements of cash flows, which decreased
cash flows from investing activities by $42,290 for the nine months ended March
27, 2004.

Operating results for the quarter and year-to-date ended March 26, 2005, are not
necessarily indicative of the results that may be expected for a full year. The
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes included in
the Company's annual report on Form 10-K for the year ended June 26, 2004.

Significant Events

On March 17, 2005, the Company acquired all of the outstanding shares of Agis
Industries (1983) Ltd. (Agis), an Israeli public company. The accompanying
condensed consolidated balance sheet as of March 26, 2005, includes the accounts
for Agis. Results of operations for Agis will be included in the Company's
consolidated results of operations beginning in the fourth quarter of fiscal
2005. See Note B for further information.

In connection with the acquisition of Agis, the Company reviewed its Consumer
Healthcare operating strategies. As a result, the Company approved a
restructuring plan and recorded a charge to the Company's Consumer Healthcare
segment. The implementation of the plan began on March 24, 2005 and is expected
to be completed in its entirety by March 2006. Certain assets were written down
to their fair value resulting in an impairment charge of $3,232. In addition,
the Company terminated 22 employees performing in certain executive and
administrative roles. Accordingly, the Company recorded a charge for employee
termination benefits of $3,150. The charges for

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asset impairment and employee termination benefits are included in the
restructuring line of the consolidated statement of income for the third quarter
of fiscal 2005. As of March 26, 2005, no payments had been made for the accrued
restructuring costs.

Certain states are enacting legislation in reaction to nationwide concerns over
the control of chemicals that may be used illegally in the production of
methamphetamine. This legislation may result in removal of certain products
containing pseudoephedrine from the retail shelf to a more controlled position
of sale behind the pharmacy counter of a retailer. Additionally, such
legislation may require special product packaging, enhanced recordkeeping and
limits on the amount of product a consumer may purchase. Legislation is also
pending in Congress to classify pseudoephedrine as a controlled substance.
Certain major retailers that are customers of the Company have announced they
will preemptively move such products behind pharmacy counters. Products
containing pseudoephedrine generated approximately $150,000 of the Company's
revenues in the first nine months of fiscal 2005. Reformulation is underway for
many of these products to substitute pseudoephedrine with a chemical that cannot
be used in the production of methamphetamine. The Company cannot predict the
scale of the expected negative impact of these actions on future revenues of
pseudoephedrine-containing or substitution products.

In November 2004, the Company initiated a retail-level recall of all lots of
loratadine syrup, a liquid antihistamine indicated for the relief of symptoms
due to hay fever or other upper respiratory allergies. The Company made the
decision to recall all product from the retailer and wholesaler channels due to
a detected difference in its stability profile. The recall is not safety related
and there have been no reports of injury or illness related to the use of this
product. The value of the Company's on-hand inventories and the cost of return
and disposal is estimated to be $8,300, which reduced earnings $0.07 per share
for the year-to-date fiscal 2005.

In September 2004, the Company acquired certain assets from a manufacturer of
foot care products for $5,562.

In January 2004, the Company was notified by the Internal Revenue Service that
it had concluded the routine Federal tax examination of tax years 1998, 1999 and
2000. As a result, the Company recorded a one-time income tax benefit of $13,100
which increased earnings $0.18 per share in the second quarter of fiscal 2004,
reducing its income tax accrual associated with these audits. The Company
believes it has appropriately accrued for probable Federal income tax exposures
subsequent to 2000.

In December 2003, the Company acquired Peter Black Pharmaceuticals, Ltd. (Peter
Black) for $12,061 in cash. Peter Black, located in the United Kingdom, was the
largest manufacturer of store brand vitamin and nutritional supplement products
for grocery stores, pharmacies and contract customers in the United Kingdom. The
assets and liabilities, which were not considered significant to the Company,
were included in the Company's consolidated balance sheet at December 27, 2003.
No goodwill was recorded as a result of the acquisition. Results of operations
were included beginning in the third quarter of fiscal 2004.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 153, "Exchanges of
Nonmonetary Assets, an

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amendment of APB Opinion 29". SFAS 153 addresses the measurement of exchanges of
nonmonetary assets. It eliminates the exception from fair value accounting for
nonmonetary exchanges of similar productive assets and replaces it with an
exception for exchanges that do not have commercial substance. SFAS 153
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of an entity are expected to change significantly as a result of the
exchange. This statement is effective beginning in the first quarter of fiscal
2006 and is not expected to have a significant impact on the Company's
consolidated financial statements.

In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment", to expand
and clarify SFAS 123, "Accounting for Stock-Based Compensation," in several
areas. SFAS 123(R) requires companies to measure the cost of employee services
received in exchange for an award of an equity instrument based on the
grant-date fair value of the award. The cost is recognized over the requisite
service period (usually the vesting period) for the estimated number of
instruments where service is expected to be rendered. SFAS 123(R) is effective
beginning in the first quarter of fiscal 2006. Since the Company began expensing
stock-based compensation using the fair value based method of accounting as
permitted under SFAS 123 in December 2002, the Company does not expect its
consolidated financial statements or results of operations will be materially
impacted by SFAS 123(R).

In November 2004, the FASB issued SFAS 151, "Inventory Costs - An amendment of
ARB No. 43, Chapter 4". SFAS 151 clarifies that abnormal amounts of idle
facility expense, freight, handling costs and spoilage should be expensed as
incurred and not included in overhead. Further, SFAS 151 requires that
allocation of fixed production overheads to conversion costs should be based on
normal capacity of the production facilities. The provisions in SFAS 151 are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005 and must be applied prospectively. The Company believes that its
current accounting policies closely align to the new rules and the adoption of
this statement will not have a material impact on the Company's consolidated
financial position or results of operations.

In October 2004, the FASB issued FASB Staff Position (FSP) 109-2, "Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004", effective upon issuance. The American
Jobs Creation Act of 2004 provides for a special one-time tax deduction of 85%
on certain foreign earnings that are repatriated. The Company believes that the
deduction will have no impact on its fiscal 2005 and 2006 results of operations.

In October 2004, the FASB issued FSP 109-1, "Application of FASB Statement 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004", effective upon
issuance. The FSP provides guidance on the application of SFAS 109, "Accounting
for Income Taxes", to the provision within the American Jobs Creation Act of
2004 that provides a tax deduction on qualified production activities. According
to FSP 109-1, the deduction should be accounted for as a special deduction in
accordance with Statement 109. The Company believes that the impact in fiscal
2005 will be immaterial and is reviewing the potential impact of the deduction
for fiscal 2006.

In May 2004, the FASB issued FSP 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" (Act). The

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Act entitles employers who provide certain prescription drug benefits for
retirees to receive a federal subsidy beginning in calendar 2006, thereby
creating the potential for significant benefit cost savings. FSP 106-2 requires
companies to record the amount expected to be received under the Act as an
actuarial gain, to the extent the related postretirement medical plan's total
unrecognized actuarial gains or losses exceed certain thresholds, to be
amortized into income over time. FSP 106-2 was effective beginning the first
quarter of fiscal 2005. The Company is a sponsor of a postretirement health care
plan (plan) that provides prescription drug benefits. As the subsidy is expected
to be passed on to the retirees through a reduction in premiums, the Company
does not anticipate a material impact on its financial statements or the plan.
Accordingly, any effects of the Act will be incorporated in the next measurement
of plan assets and obligations.

NOTE B - ACQUISITION OF BUSINESS

On March 17, 2005, the Company acquired all of the outstanding shares of Agis
Industries (1983) Ltd. (Agis), an Israeli public company. Agis is included in
the accompanying condensed consolidated balance sheet as of March 26, 2005. The
operating results of Agis will be included in the Company's consolidated results
of operations beginning in the fourth quarter of fiscal year 2005. For purposes
of consolidation, Agis' fiscal year begins June 1 and ends May 31, the same
period followed for the Company's UK and Mexico operations. Prior to being
acquired, Agis' net sales for the year ended December 31, 2004 were
approximately $405,000.

Agis and its subsidiaries develop, manufacture and market specialized generic
pharmaceuticals, over the counter drug products, active pharmaceutical
ingredients (API) and consumer products. Agis' strategy has focused primarily on
the U.S. and Israeli markets. As a result of the acquisition, the Company is
expected to realize numerous strategic and financial benefits including
additional capabilities to grow in the global generic pharmaceutical, API and
consumer healthcare markets.

The acquisition was accounted for under the purchase method of accounting with
Agis considered as the acquiree for accounting purposes. The purchase price was
allocated to the fair value of assets acquired, identifiable intangible assets
and liabilities assumed from Agis. For convenience purposes, the acquisition was
recorded as of February 28, 2005 and those balances are reported in the
accompanying consolidated balance sheet as of March 26, 2005. Fair value was
estimated by various techniques including analysis of expected future cash flows
and market comparisons. The excess of the purchase price over the fair value of
net assets acquired was recorded as goodwill in the consolidated balance sheet.
Goodwill will be assigned to the appropriate reportable segments presented in
the fourth quarter of fiscal 2005.

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The total purchase consideration exchanged for all of the outstanding shares of
Agis is calculated as follows:

Shares of Agis common stock outstanding at the
closing date 27,394
Exchange ratio per merger agreement 0.8011
Shares of Perrigo common stock issued at the closing date 21,945

Multiplied by Perrigo's average stock price for the five day period beginning
two business days before and ending two business
days after November 14, 2004 $ 18.72 $ 410,812

Shares of Agis common stock outstanding at the
closing date 27,394
Cash consideration paid per share $14.93 $ 408,989

Estimated fair value of Perrigo stock options exchanged for Agis
stock options outstanding at the closing date 833
Perrigo's estimated acquisition costs 11,482
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Purchase price for accounting purposes 832,116
Agis' net debt outstanding at the closing date 8,974
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Total purchase consideration $ 841,090
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The total purchase price for accounting purposes of $832,116 excludes assumed
net debt. Below is the preliminary allocation of the purchase price. The Company
expects to adjust the allocation of the purchase price in the future because the
assets and liabilities of Agis are still being evaluated. Appraisals of real
estate and personal property are in process. Plans for the New York facility
will result in a reduction of the workforce employed under a collective
bargaining agreement. Negotiations with representatives of the union are
currently underway to determine employee termination benefits. Management is
evaluating future use of certain facilities for their strategic value that may
result in additional asset impairments and/or liabilities for employee
termination benefits.

In connection with the acquisition, the Company recorded $2,322 of estimated
restructuring costs related to Agis employee and lease termination costs
associated with the elimination of duplicate leased distribution centers and
streamlining operations. Employee termination benefits of $730 are expected to
be paid within the next 12 months to approximately 60 employees. For accounting
purposes, these restructuring costs are included in the allocation of the total
purchase price.

-8-

A preliminary allocation of the purchase price is as follows:

Cash $ 38,902
Investment securities 33,115
Inventory 136,900
Other current assets 139,826
Property and equipment 104,521
Other assets 34,716
Intangible assets 526,600
Goodwill 114,307
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Total assets acquired 1,128,887
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Notes payable 9,285
Current maturities of long-term liabilities 20,000
Other current liabilities 158,824
Other liabilities 26,251
Deferred income taxes 30,705
Long-term debt 51,706
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Total liabilities assumed 296,771
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Total purchase price $ 832,116
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A step-up in the value of inventory of $27,584 was recorded in the allocation of
the purchase price based on preliminary valuation estimates. This amount will be
charged to cost of sales over the next three to six months, but is not expected
to have any impact beyond that period.

Management determined the value of intangible assets by considering a number of
factors, including an independent third-party valuation. Intangible assets are
valued as follows:

The amount allocated to in-process research and development, $388,600, was
charged to operations as of the acquisition date. The valuation of in-process
research and development related to numerous ongoing projects which were
assigned fair values by discounting forecasted cash flows directly related to
the products expecting to result from the subject research and development. As
of the date of acquisition, the technological feasibility of the acquired
technology had not yet been established and the technology had no future
alternative uses. The Company estimates that additional costs related to efforts
necessary to develop the acquired, incomplete technology into commercially
viable products could be as much as or more than $70,000 over the next 10 years.

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Aggregate amortization expense for the other intangible assets is expected to be
approximately $10,000 for each of the next five years. Under the purchase method
of accounting, goodwill is not amortized but is tested for impairment at least
annually in the second quarter of the Company's fiscal year. The write-off of
in-process research and development is not deductible for tax purposes. From a
tax perspective, no goodwill resulted from the acquisition due to the Company's
selected tax treatment.

The following unaudited pro forma financial information presents results as if
the acquisition had occurred at the beginning of the respective periods:

These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as write-off of step-up value of inventory and
additional amortization related to intangible assets arising from the
acquisition, additional compensation expense and interest expense on acquisition
debt. Since the write-off of in-process research and development is directly
attributable to the acquisition and will not have a continuing impact, it is not
reflected in this unaudited pro forma information. The pro forma results are not
necessarily indicative either of the results of operations that actually would
have resulted had the acquisition occurred at the beginning of the respective
periods or of future results.

NOTE C - EARNINGS PER SHARE

A reconciliation of the numerators and denominators used in the basic and
diluted earnings per share (EPS) calculation follows:

Anti-dilutive share-based awards outstanding were 2,816 and 1,058 for the third
quarters of fiscal 2005 and 2004, respectively, and 2,772 and 1,947 for
year-to-date fiscal 2005 and 2004, respectively. These share-based awards are
excluded from the diluted EPS calculation. The weighted average shares for
fiscal 2005 include a proportionate number of shares issued for the acquisition
of Agis.

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NOTE D - INVENTORIES

Inventories are summarized as follows:

The Company maintains an allowance for estimated obsolete or unmarketable
inventory based on the difference between the cost of inventory and its
estimated market value. The inventory balances stated above are net of an
inventory allowance of $27,841 at March 26, 2005, $22,888 at June 26, 2004 and
$22,493, at March 27, 2004. The increase at March 26, 2005 was primarily due to
the acquisition of Agis.

NOTE E - POSTRETIREMENT MEDICAL BENEFITS

The Company has an unfunded postretirement plan (plan) that provides health
benefits to eligible retired employees and their dependents. The cost of
postretirement health benefits is accrued by the Company over the service lives
of the employees based on actuarial calculations for the plan. Effective January
1, 2004, the plan was modified to limit the amount of benefits the Company
provides to retirees each year, adjusted annually for inflation.

Retirement benefit claims paid for year-to-date fiscal 2005 are $277 and are
expected to be approximately $400 for fiscal 2005.

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NOTE F - CREDIT FACILITIES, DERIVATIVES AND GUARANTIES

Total borrowings outstanding at March 26, 2005 were $709,040. There were no
long-term borrowings as of June 26, 2004 or March 27, 2004. These borrowings
include the assumed debt of Agis and additional borrowings related to the
acquisition of Agis. Total borrowings are presented on the balance sheet as
follows:

On March 16, 2005, the Company and certain foreign subsidiaries entered into a
credit agreement with a group of banks which provides an initial revolving line
of credit of $250,000 and an initial term loan commitment of $100,000, each
subject to increase or decrease as specified in the credit agreement. Both loans
bear an interest rate of Alternative Base Rate or LIBOR plus an applicable
margin determined by the Company's leverage ratio over the trailing four
quarters. As of March 26, 2005, the actual rates ranged from 3.425% to 3.575%.
Additionally, the credit agreement provides for a short-term swingline loan with
a maximum commitment of $25,000 and a negotiable rate of interest that was
3.325% as of March 26, 2005.

The obligations under the credit agreement are guarantied by certain
subsidiaries of the Company and the Company will guaranty obligations of foreign
subsidiary borrowers. In some instances, the obligations may be secured by a
pledge of 65% of the stock of foreign subsidiaries. The maturity date of the
term and revolving loans is March 16, 2010. Restrictive loan covenants apply to,
among other things, minimum levels of interest coverage and debt to Earnings
Before Interest, Taxes and Depreciation (EBITDA) ratios. These loan covenants
are not effective until June 25, 2005.

Subsequent to the quarter ended March 26, 2005, the Company entered into two
interest rate swap agreements to reduce the impact of fluctuations in interest
rates on the aforementioned term and revolving commitments. These interest rate
swap agreements are contracts to exchange floating rates for fixed rate interest
payments over the life of the agreements without the exchange of the underlying
notional amounts. The notional amounts of interest rate swap

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agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The differential paid or
received on interest rate swap agreements is recognized as an adjustment to
interest. The Company does not use derivative financial instruments for trading
purposes.

The interest rate swap agreements fix the interest rate at 4.77% on an initial
notional amount of principle of $50,000 on the revolving line of credit and
$100,000 on the term loan. The interest rate swap agreements expire on March 16,
2010. Changes in the fair value of the swap agreements, net of tax, will be
reported as a component of other comprehensive income beginning in the fourth
quarter of fiscal year 2005.

The counterparty to the interest rate swap agreements is a commercial bank which
has other financing relationships with the Company. While the Company is exposed
to credit loss in the event of nonperformance by the counterparty, the Company
does not anticipate nonperformance and a material loss would not be expected
from such nonperformance. Fluctuations in interest rates are similarly not
expected to have a material impact on the Company's future operating results.

The Company accounts for derivatives in accordance with SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS 138,
which establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at fair value. Additionally, changes in the derivative's fair value
shall be recognized currently in earnings unless specific hedge accounting
criteria are met. If hedge accounting criteria are met, the changes in a
derivative's fair value are recorded in shareholders' equity as a component of
comprehensive income. These deferred gains and losses are recognized in income
in the period in which the hedge item and hedging instrument are settled. The
ineffective portions of the hedge items are recognized in earnings.

In accordance with SFAS 133, as amended by SFAS 138, the Company has formally
documented the relationship between the interest rate swaps and the variable
rate borrowings, as well as its risk management objective and strategy for
undertaking the hedge transaction. This process includes linking the derivative
which was designated as a cash flow hedge to the specific liability on the
balance sheet. The Company also assesses, both at the hedge's inception and on
an ongoing basis, whether the derivative used in the hedging transaction is
highly effective in offsetting changes in the cash flows of the hedged item.

On March 16, 2005, the Company's Israel holding company subsidiary entered into
a letter of undertaking and obtained a loan in the sum of $400,000. The loan has
a ten-year term with a fixed annual interest rate of 5.025%. The Company may
prepay the loan after twelve interest payments upon 30 days written notice. The
lender may demand prepayment of the loan in whole or in part upon 90 days
written notice on the interest payment date that is 24 months after the loan
date and every 12 months subsequent to this date. The terms require the Company
to maintain a deposit of $400,000 in an uninsured account with the lender as
security for the loan. This deposit has a fixed 4.9% yield. The Company does not
have the right to withdraw any amounts from the deposit account including any
interest paid until the loan has been paid in full or unless it receives consent
from the lender. Earned interest will be released to the Company on each
interest payment date as long as all interest due has been paid to the bank.

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The Company's New York subsidiary, acquired in connection with the Company's
acquisition of Agis, has a revolving line of credit for approximately $20,000
which bears interest at LIBOR plus 0.65% and is due on June 20, 2005. Prior to
the acquisition, the subsidiary executed an interest rate swap whereby the
interest on a notional amount of $15,000 was changed to a fixed rate of 2.15%
plus 0.65%. This swap is considered to be a highly effective hedge and is
recorded at its fair value of $46 in current liabilities. This commitment is
guarantied by the Company's Israel subsidiary and has covenants which require
minimum levels of shareholders' equity and shareholders' equity to assets ratio.
The Company's Israel subsidiary was in compliance with these covenants as of
March 26, 2005.

The New York subsidiary has an additional revolving line of credit that expires
March 15, 2007 which allows for borrowings up to $15,000 and bears interest at
LIBOR plus 1.5%. This agreement requires a facility fee of 0.2% on the unused
portion of the letter to be paid quarterly. As of March 26, 2005, the balance
was $10,000 and is payable on March 15, 2007. This commitment, up to $10,000, is
supported by a letter of credit from the Company's Israel subsidiary.

The Company's Israel subsidiary, acquired in connection with the Company's
acquisition of Agis, has a debenture for approximately $42,000 with a fixed
interest rate of 5.6%. The principal of the loan is linked to the increase in
the Israel consumer price index (CPI) and is payable in three annual
installments beginning in 2007. Prior to the acquisition, the subsidiary
executed an interest rate swap in the notional amount of approximately $15,000
to exchange the aforementioned terms for linkage to the dollar with the addition
of variable interest based on LIBOR plus 2%. The subsidiary also entered into a
fair value hedge in the notional amount of approximately $7,500 to protect
against extreme changes in LIBOR. These transactions do not meet the criteria of
highly effective hedges and are recorded at their fair value of $346 in
non-current assets with the associated gains or losses to be reflected in
interest beginning in the fourth quarter of fiscal year 2005.

The Company's German subsidiary has a bank loan for approximately $9,300 which
bears interest at Euribor plus 1.35%. The loan is due in November 2005 and is
guarantied by the Company's Israel subsidiary.

The Company's UK subsidiary has short-term, unsecured debt with a bank for
approximately $2,900 which is supported by a Company guaranty. Interest rates
are established at the time of borrowing based on LIBOR plus 1%.

The Company's Mexico subsidiary has short-term, unsecured debt with two banks
for approximately $4,300 which is supported by a Company guaranty. Interest
rates are established at the time of borrowing based on a rate agreed upon
between the banks and the subsidiary.

The Company's Israel subsidiary has entered into foreign currency put, call and
futures contracts to assist in managing currency risks. These derivatives are
not considered to be highly effective hedges and are recorded at their fair
market value of $119 in current assets with the associated gains or losses
reflected in interest beginning in the fourth quarter of fiscal year 2005.

-14-

The Company's Israel subsidiary has provided a guaranty to a bank to secure the
debt of a 50% owned joint venture for approximately $460, not to exceed 50% of
the joint venture's debt. The joint venture is accounted for using the equity
method of accounting.

NOTE G - SHAREHOLDERS' EQUITY

The Company has a common stock repurchase program. Purchases are made on the
open market, subject to market conditions, and are funded by available cash or
borrowings. All common stock repurchased is retired upon purchase. The
repurchase program announced on October 29, 2003 expired on April 28, 2005. On
April 26, 2005, the Board of Directors announced the authorization to repurchase
up to $30,000 of common stock over the next 12 months. No shares were
repurchased in the third quarter of fiscal year 2005. For year-to-date fiscal
2005, the Company repurchased 7 shares of common stock for $122. For
year-to-date 2004, the Company repurchased 146 shares of common stock for
$1,940. In connection with the acquisition of Agis, approximately $833 of
non-qualified options were granted in exchange for Agis options outstanding at
the closing date and $4,100 of restricted stock were granted to Agis employees.

The Board of Directors has a policy of paying regular quarterly dividends. The
Company paid quarterly dividends of $8,195 and $6,664, or $0.115 and $0.095 per
share during fiscal 2005 and 2004, respectively. The declaration and payment of
dividends, if any, is subject to the discretion of the Board of Directors and
will depend on the earnings, financial condition and capital and surplus
requirements of the Company and other factors the Board of Directors may
consider relevant. On April 22, 2005, the Board of Directors declared a dividend
of $0.04 payable on June 21, 2005 to shareholders of record on May 27, 2005. The
estimated aggregate payment is $3,750.

NOTE H - COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of all changes in shareholders' equity
during the period other than from transactions with shareholders. Comprehensive
income (loss) consists of the following:

NOTE I - COMMITMENTS AND CONTINGENCIES

The Company is not a party to any litigation, other than routine litigation
incidental to its business except for the litigation described below. The
Company believes that none of the routine litigation, individually or in the
aggregate, will be material to the business of the Company.

In August 2004, the Company agreed to settle with the United States Federal
Trade Commission (FTC) which had been investigating a 1998 agreement between
Alpharma, Inc. and the Company related to a children's ibuprofen suspension
product. The agreement

-15-

between Alpharma, Inc. and the Company is no longer in effect. The consent order
included payment of $4,750 to resolve all claims by the FTC and state
governments as well as certain restrictions on future contractual agreements of
this nature. These restrictions are not expected to have a material impact on
the Company's future results of operations. The $4,750 charge was recorded in
the fourth quarter of fiscal 2004 and paid in the first quarter of fiscal 2005.

In connection with the Alpharma, Inc. agreement and the related FTC settlement,
the Company has been named as a defendant in two suits, one of which is a class
action, filed on behalf of Company customers (i.e., retailers), as well as four
class action suits filed on behalf of indirect Company customers (i.e.,
consumers), alleging that the plaintiffs overpaid for children's ibuprofen
suspension product as a result of the Company's agreement with Alpharma, Inc.
The Company is defending these claims and has participated in court ordered
mediation with the plaintiffs. The Company does not believe that these suits,
individually or in the aggregate, will result in payments by the Company that
are material to the Company's financial condition or future results of
operations. Until final resolution of these suits, however, there can be no
assurance that these suits will not result in payments by the Company that are
material to the Company's financial condition or future results of operations in
a particular fiscal quarter or year.

The Company is currently defending numerous individual lawsuits pending in
various state and federal courts involving phenylpropanolamine (PPA), an
ingredient used in the manufacture of certain OTC cough/cold and diet products.
The Company discontinued using PPA in the United States 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.

NOTE J - SEGMENT INFORMATION

The Company has four reportable segments: Consumer Healthcare, Pharmaceuticals,
UK Operations and Mexico Operations. Consumer Healthcare includes the U.S.
operations supporting the sale of OTC (over-the-counter) pharmaceutical and
nutritional products. Pharmaceuticals includes the development and sale of
prescription generic drug products. UK Operations support the sale of OTC
pharmaceutical and nutritional products in the United Kingdom. Mexico Operations
support the sale of OTC and prescription drug products for retail, wholesale,
and governmental customers in Mexico.

The charges to earnings of $388,600 for the write-off of in-process research and
development and $4,625 for acquisition and integration costs related to the
acquisition of Agis are excluded from the table below as they are considered
corporate charges.

-16-

The Company is reviewing its operating segments as a result of its acquisition
of Agis and expects to realign its reportable segments beginning in the fourth
quarter of fiscal 2005. All comparative periods presented will be adjusted.

NOTE K - INCOME TAX

In January 2004, the Company was notified by the Internal Revenue Service that
it had concluded the routine Federal tax examination of tax years 1998, 1999 and
2000. As a result, the Company recorded a one-time income tax benefit of $13,100
which increased earnings $0.18 per share in the second quarter of fiscal 2004,
reducing its income tax accrual associated with these audits. The Company
believes it has appropriately accrued for probable Federal income tax exposures
subsequent to 2000.

NOTE L - RESTRUCTURING

In connection with the acquisition of Agis, the Company reviewed its Consumer
Healthcare operating strategies. As a result, the Company approved a
restructuring plan and recorded a charge to the Company's Consumer Healthcare
segment. The implementation of the plan began on March 24, 2005 and is expected
to be completed in its entirety by March 2006. Certain assets were written down
to their fair value resulting in an impairment charge of $3,232. In addition,
the Company terminated 22 employees performing in certain executive and
administrative roles. Accordingly, the Company recorded employee termination
benefits of $3,150. The charges for asset impairment and employee termination
benefits are included in the restructuring line of the consolidated statements
of income for the third quarter of fiscal 2005. As of March 26, 2005, no
payments had been made for the accrued restructuring costs.

-17-

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER FISCAL YEARS 2005 AND 2004
(in thousands, except per share amounts)

RESULTS OF OPERATIONS

Segments

The Company has four reportable segments: Consumer Healthcare, Pharmaceuticals,
UK Operations and Mexico Operations. Consumer Healthcare includes the U.S.
operations supporting the sale of OTC (over-the-counter) pharmaceutical and
nutritional products. Pharmaceuticals includes the development and sale of
prescription generic drug products. UK Operations support the sale of OTC
pharmaceutical and nutritional products in the United Kingdom. Mexico Operations
support the sale of OTC and prescription drug products for retail, wholesale and
governmental customers in Mexico.

The Company is reviewing its operating segments as a result of its acquisition
of Agis and expects to realign its reportable segments beginning in the fourth
quarter of fiscal 2005. All comparative periods presented will be adjusted.

Significant Events

On March 17, 2005, the Company acquired all of the outstanding shares of Agis
Industries (1983) Ltd. (Agis), an Israeli public company. The accompanying
condensed consolidated balance sheet as of March 26, 2005, includes the accounts
for Agis. Results of operations for Agis will be included in the Company's
consolidated results of operations beginning in the fourth quarter of fiscal
2005. See Note B to the condensed consolidated financial statements.

In connection with the acquisition of Agis, the Company reviewed its Consumer
Healthcare operating strategies. As a result, the Company approved a
restructuring plan and recorded a charge to the Company's Consumer Healthcare
segment. The implementation of the plan began on March 24, 2005 and is expected
to be completed in its entirety by March 2006. Certain assets were written down
to their fair value resulting in an impairment charge of $3,232. In addition,
the Company terminated 22 employees performing in certain executive and
administrative roles. Accordingly, the Company recorded a charge for employee
termination benefits of $3,150. The charges for asset impairment and employee
termination benefits are included in the restructuring line of the consolidated
statement of income for the third quarter of fiscal 2005. As of March 26, 2005,
no payments had been made for the accrued restructuring costs.

Certain states are enacting legislation in reaction to nationwide concerns over
the control of chemicals that may be used illegally in the production of
methamphetamine. This legislation may result in removal of certain products
containing pseudoephedrine from the retail shelf to a more controlled position
of sale behind the pharmacy counter of a retailer. Additionally, such
legislation may require special product packaging, enhanced recordkeeping and
limits on the amount of product a consumer may purchase. Legislation is also
pending in Congress to classify pseudoephedrine as a controlled substance.
Certain major retailers that are customers of the Company have announced they
will preemptively move such products behind pharmacy

-18-

counters. Products containing pseudoephedrine generated approximately $150,000
of the Company's revenues in the first nine months of fiscal 2005. Reformulation
is underway for many of these products to substitute pseudoephedrine with a
chemical that cannot be used in the production of methamphetamine. The Company
cannot predict the impact of these actions on future revenues of
pseudoephedrine-containing or substitution products.

In November 2004, the Company initiated a retail-level recall of all lots of
loratadine syrup, a liquid antihistamine indicated for the relief of symptoms
due to hay fever or other upper respiratory allergies. The Company made the
decision to recall all product from the retailer and wholesaler channels due to
a detected difference in its stability profile. The recall is not safety related
and there have been no reports of injury or illness related to the use of this
product. The value of the Company's on-hand inventories and the cost of return
and disposal is estimated to be $8,300, which reduced earnings $0.07 per share
for the year-to-date fiscal 2005.

In September 2004, the Company acquired certain assets from a manufacturer of
foot care products for $5,562.

In January 2004, the Company was notified by the Internal Revenue Service that
it had concluded the routine Federal tax examination of tax years 1998, 1999 and
2000. As a result, the Company recorded a one-time income tax benefit of $13,100
which increased earnings $0.18 per share in the second quarter of fiscal 2004,
reducing its income tax accrual associated with these audits. The Company
believes it has appropriately accrued for probable Federal income tax exposures
subsequent to 2000.

In December 2003, the Company acquired Peter Black Pharmaceuticals, Ltd. (Peter
Black) for $12,061 in cash. Peter Black, located in the United Kingdom, was the
largest manufacturer of store brand vitamin and nutritional supplement products
for grocery stores, pharmacies and contract customers in the United Kingdom. The
assets and liabilities, which were not considered significant to the Company,
were included in the Company's consolidated balance sheet at December 27, 2003.
No goodwill was recorded as a result of the acquisition. Results of operations
were included beginning in the third quarter of fiscal 2004.

Seasonality

The Company's sales of OTC pharmaceutical and nutritional products are subject
to the seasonal demands for cough, cold, analgesic and allergy products.

-19-

CONSUMER HEALTHCARE

Sales

Third quarter net sales for fiscal 2005 decreased 6% or $12,078 compared to
fiscal 2004. Fiscal 2004 was favorably impacted by sales of new products
containing loratadine. For fiscal 2005, a decline in unit sales of existing
vitamin products due to quarter-to-quarter shifts in retailer purchasing
patterns was partially offset by sales of new products for smoking cessation and
feminine hygiene.

Year-to-date net sales for fiscal 2005 decreased 2% or $11,527 compared to
fiscal 2004, primarily due to the sales returns of approximately $6,300 related
to the recall of loratadine syrup; a decline in sales of a starch blocker
product introduced in the first quarter of fiscal 2004; and a decrease in sales
of analgesic and antacid products. The decrease was partially offset by higher
unit sales of existing vitamin products and new products for smoking cessation,
feminine hygiene and foot care.

Gross Profit

Third quarter gross profit for fiscal 2005 decreased 10% or $6,701 compared to
fiscal 2004. The decrease in gross profit was primarily due to fixed costs
applied over lower than planned production levels.

Year-to-date gross profit for fiscal 2005 decreased 7% or $14,389 compared to
fiscal 2004. The decrease in gross profit was primarily due to sales returns and
costs of disposal for the loratadine syrup recall of approximately $8,300 and
fixed costs related to low production levels. The decrease in the gross profit
percentage was approximately split evenly between costs associated with the
product recall and lower production volumes. The decrease was partially offset
by improved margins on existing and new products.

Operating Expenses

Third quarter operating expenses for fiscal 2005 increased 9% or $3,387 compared
to fiscal 2004, primarily due to the restructuring charges described below,
partially offset by a decrease in compensation-related expenses, such as
employee bonuses and medical costs.

In connection with the acquisition of Agis, the Company reviewed its Consumer
Healthcare operating strategies. As a result, the Company approved a
restructuring plan and recorded a charge of $6,382. The implementation of the
plan began on March 24, 2005 and is expected

-20-

to be completed in its entirety by March 2006. Certain assets were written down
to their fair value resulting in an impairment charge of $3,232. In addition,
the Company terminated 22 employees performing in certain executive and
administrative roles. Accordingly, the Company recorded employee termination
benefits of $3,150. The charges for asset impairment and employee termination
benefits are included in the restructuring line of the consolidated statement of
income for the third quarter of fiscal 2005. As of March 26, 2005, no payments
had been made for the accrued restructuring costs.

Year-to-date operating expenses for fiscal 2005 increased 7% or $7,474 compared
to fiscal 2004, primarily due to the restructuring charges described above and
an increase in research and development costs of $2,030. The increase was
partially offset by a reduction in the allowance for product liability claims
and a decrease in compensation-related expenses, such as employee bonuses and
medical costs.

PHARMACEUTICALS

Operating expenses consist primarily of research and development costs for
generic prescription drug products related to the Company's entry into this
market.

UK OPERATIONS

Comparability of Periods

In December 2003, the Company acquired Peter Black. The third quarters of both
fiscal 2005 and 2004 included results of operations for the acquired company.
Because results of operations for Peter Black were not reported in this segment
until the third quarter of fiscal 2004, the year-to-date amounts are not
comparable. Fiscal 2004 includes one quarter of results of operations while
fiscal 2005 includes three quarters. This difference causes some complexity in
the following discussion.

-21-

Net Sales

Third quarter net sales for fiscal 2005 decreased 9% or $1,980 compared to
fiscal 2004. The majority of the decrease was due to lower demand for contracted
products partially offset by exchange rate fluctuations.

Year-to-date net sales for fiscal 2005 increased 37% or $18,109 compared to
fiscal 2004. Approximately $14,000 of the increase was due to sales of
nutritional products related to the acquisition of Peter Black in December 2003.
The remaining increase was primarily due to exchange rate fluctuations partially
offset by lower volume of contract manufactured products.

Gross Profit

Third quarter gross profit remained relatively constant in fiscal 2005 compared
to fiscal 2004 as favorable exchange rates were offset by lower sales volume.

Year-to-date gross profit for fiscal 2005 increased 49% or $3,137 compared to
fiscal 2004, primarily due to the acquisition of Peter Black and exchange rate
fluctuations.

Operating Expenses

Third quarter operating expenses for fiscal 2005 decreased 11% or $258 compared
to fiscal 2004, primarily due to efficiencies resulting from the integration of
Peter Black administrative functions and exchange rate fluctuations.

Year-to-date operating expenses for fiscal 2005 increased 48% or $2,344 compared
to 2004, primarily due to the acquisition of Peter Black and exchange rate
fluctuations.

MEXICO OPERATIONS

Net Sales

Third quarter net sales for fiscal 2005 increased 18% or $885 compared to fiscal
2004, primarily due to increased sales in the store brand and pharmaceutical
distributor markets.

Year-to-date net sales for fiscal 2005 increased 2% or $332 compared to fiscal
2004, primarily due to increased store brand sales, significantly offset by
exchange rate fluctuations.

-22-

This segment has refocused its business model and become more dependent on
retail store brand sales which grew 50% for the year and now represent
approximately 37% of total sales for the business.

Gross Profit

Third quarter gross profit for fiscal 2005 increased 49% or $587 compared to
fiscal 2004, primarily due to higher margins on products in the mix of products
sold.

Year-to-date gross profit increased 14% or $797 during fiscal 2005 compared to
fiscal 2004, primarily due to higher margins on products in the mix of products
sold. The increase was partially offset by exchange rate fluctuations.

Operating Expenses

Third quarter operating expenses during fiscal 2005 decreased 18% or $360
compared to fiscal 2004, primarily due to a reduction in bad debt expense
partially offset by increased selling expenses related to new products.

Year-to-date operating expenses decreased 7% or $350 during fiscal 2005 compared
to fiscal 2004, primarily due to a reduction in bad debt expense partially
offset by increased selling expenses related to new products.

INTEREST AND OTHER (CONSOLIDATED)

Third quarter interest income was $454 for fiscal 2005 compared to interest
income of $324 for fiscal 2004. Other income was $1,091 for fiscal 2005 compared
to $882 for fiscal 2004.

Year-to-date interest income was $1,405 for fiscal 2005 compared to interest
income of $656 for fiscal 2004. Other income was $1,584 for fiscal 2005 compared
to $1,503 for fiscal 2004.

The increase in interest income was due to the higher level of average invested
cash balances in fiscal 2005 compared to fiscal 2004.

INCOME TAXES (CONSOLIDATED)

The calculated effective tax rate for fiscal 2005 (1.4% for the third quarter
and 7.4% for the year-to-date) was impacted by the non-deductible charge to
earnings of $388,600 for the write-off of in-process research and development
related to the acquisition of Agis. The effective tax rate was 36.0% for the
quarter and year-to date fiscal 2005, excluding this charge.

The effective tax rate was 36.0% and 21.9% for the quarter and year-to-date
fiscal 2004. In January 2004, the Company was notified by the Internal Revenue
Service that it had concluded the routine Federal tax examination of tax years
1998, 1999 and 2000. As a result, the Company recorded a one-time income tax
benefit of $13,100 in the second quarter of fiscal 2004, reducing its income tax
accrual associated with these audits. The Company believes it has appropriately
accrued for probable Federal income tax exposures subsequent to 2000.

-23-

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased $10,043 to $40,735 at March 26, 2005 from
$30,692 at March 27, 2004. Working capital, including cash, increased $17,518 to
$293,000 at March 26, 2005 from $275,482 at March 27, 2004.

Year-to-date net cash provided by operating activities decreased by $49,816 to
$54,392 for fiscal 2005 compared to $104,208 for fiscal 2004. The increased use
of cash was primarily due to a decrease in net income of $29,902, excluding the
write-off of in-process research and development related to the acquisition of
Agis, lower accounts payable due to reduced production levels and payment of
employee bonuses related to fiscal 2004.

Year-to-date net cash used for investing activities increased $554,813 to
$639,802 for fiscal 2005 compared to $84,989 for fiscal 2004, primarily related
to the acquisition of Agis. Capital expenditures for facilities and equipment
were for normal replacement and productivity enhancements. Capital expenditures
are expected to be $20,000 to $24,000 for fiscal 2005.

Year-to-date net cash from financing activities increased $615,603 to $616,512
for fiscal 2005 compared to $909 for fiscal 2004 primarily due to the increase
in long-term debt of $615,000 related to the acquisition of Agis.

The Company has a common stock repurchase program. Purchases are made on the
open market, subject to market conditions, and are funded by available cash or
borrowings. All common stock repurchased is retired upon purchase. The
repurchase program announced on October 29, 2003 expired on April 28, 2005. On
April 26, 2005, the Board of Directors announced the authorization to repurchase
up to $30,000 of common stock over the next 12 months. The Company repurchased 7
shares of common stock for $122 and 146 shares of common stock for $1,940 for
the year-to-date fiscal 2005 and 2004, respectively.

The Board of Directors has a policy of paying regular quarterly dividends. The
Company paid quarterly dividends of $8,195 and $6,664, or $0.115 and $0.095 per
share, during fiscal 2005 and 2004, respectively. The declaration and payment of
dividends, if any, is subject to the discretion of the Board of Directors and
will depend on the earnings, financial condition and capital and surplus
requirements of the Company and other factors the Board of Directors may
consider relevant. On April 22, 2005, the Board of Directors declared a dividend
of $0.04 payable on June 21, 2005 to shareholders of record on May 27, 2005. The
estimated aggregate payment is $3,750.

CREDIT FACILITIES AND CONTRACTUAL OBLIGATIONS

The Company had long term debt, less current maturities, of $666,706 at March
26, 2005. These borrowings include the assumed debt of Agis and additional
borrowings related to the acquisition of Agis. The Company has approximately
$135,000 available from its primary source of credit described below. This
available credit coupled with its cash, cash equivalents, investment securities
and cash flows from operations is expected to be sufficient to finance the known
and/or foreseeable liquidity and capital needs of the Company.

-24-

On March 16, 2005, the Company and certain foreign subsidiaries entered into a
credit agreement with a group of banks which provides an initial revolving line
of credit of $250,000 and an initial term loan commitment of $100,000, each
subject to increase or decrease as specified in the credit agreement. Both loans
bear an interest rate of Alternative Base Rate or LIBOR plus an applicable
margin determined by the Company's leverage ratio over the trailing four
quarters. As of March 26, 2005 the actual rates ranged from 3.425% to 3.575%.
Additionally, the credit agreement provides for a short term swingline loan with
a maximum commitment of $25,000 and a negotiable rate of interest that was
3.325% as of March 26, 2005.

The obligations under the credit agreement are guarantied by certain
subsidiaries of the Company and the Company will guaranty obligations of foreign
subsidiary borrowers. In some instances, the obligations may be secured by a
pledge of 65% of the stock of foreign subsidiaries. The maturity date of the
term and revolving loans is March 16, 2010. Restrictive loan covenants apply to,
among other things, minimum levels of interest coverage and debt to Earnings
before Interest, Taxes and Depreciation (EBITDA) ratios. These loan covenants
are not effective until June 25, 2005.

Subsequent to the quarter ended March 26, 2005, the Company entered into two
interest rate swap agreements to reduce the impact of fluctuations in interest
rates on the aforementioned term and revolving commitments. These interest rate
swap agreements are contracts to exchange floating rates for fixed rate interest
payments over the life of the agreements without the exchange of the underlying
notional amounts. The notional amounts of interest rate swap agreements are used
to measure interest to be paid or received and do not represent the amount of
exposure to credit loss. The differential paid or received on interest rate swap
agreements is recognized as an adjustment to interest. The Company does not use
derivative financial instruments for trading purposes.

The interest rate swap agreements fix the interest rate at 4.77% on an initial
notional amount of principle of $50,000 on the revolving line of credit and
$100,000 on the term loan. The interest rate swap agreements expire on March 16,
2010. Changes in the fair value of the swap agreement net of tax will be
reported as a component of other comprehensive income beginning in the fourth
quarter of fiscal year 2005.

The counterparty to the interest rate swap agreement is a commercial bank which
has other financing relationships with the Company. While the Company is exposed
to credit loss in the event of nonperformance by the counterparty, the Company
does not anticipate nonperformance and a material loss would not be expected
from such nonperformance.

On March 16, 2005, the Company's Israel holding company subsidiary entered into
a letter of undertaking and obtained a loan in the sum of $400,000. The loan has
a ten-year term with a fixed annual interest rate of 5.025%. The Company may
prepay the loan after twelve interest payments upon 30 days written notice. The
lender may demand prepayment of the loan in whole or in part upon 90 days
written notice on the interest payment date that is 24 months after the loan
date and every 12 months subsequent to this date. The terms require the Company
to maintain a deposit of $400,000 in an uninsured account with the lender as
security for the loan. This deposit has a fixed 4.9% yield. The Company does not
have the right to withdraw any amounts from the deposit account including any
interest paid until the loan has been paid in full or unless it receives consent
from the lender. Earned interest will be released to

-25-

the Company on each interest payment date as long as all interest due has been
paid to the bank.

The Company's New York subsidiary, acquired in connection with the Company's
acquisition of Agis, has a revolving line of credit for approximately $20,000
which bears interest at LIBOR plus 0.65% and is due on June 20, 2005. Prior to
the acquisition, the subsidiary executed an interest rate swap whereby the
interest on $15,000 of the notional amount was changed to a fixed rate of 2.15%
plus 0.65%. This commitment is guarantied by the Company's Israel subsidiary and
has covenants which require minimum levels of shareholders' equity and
shareholders' equity to assets ratio. The Company's Israel subsidiary was in
compliance with these covenants as of March 26, 2005.

The New York subsidiary has an additional revolving line of credit that expires
March 15, 2007 which allows for borrowings up to $15,000 and bears interest at
LIBOR plus 1.5%. This agreement requires a facility fee of 0.2% on the unused
portion of the letter to be paid quarterly. As of March 26, 2005, the balance
was $10,000 and is payable on March 15, 2007. This commitment, up to $10,000, is
supported by a letter of credit from the Company's Israel subsidiary.

The Company's Israel subsidiary, acquired in connection with the Company's
acquisition of Agis, has a debenture for approximately $42,000 with a fixed
interest rate of 5.6%. The principal of the loan is linked to the increase in
the Israel consumer price index (CPI) and is payable in three annual
installments beginning in 2007. Prior to the acquisition, the subsidiary
executed an interest rate swap in the notional amount of approximately $15,000
to exchange the aforementioned terms for linkage to the dollar with the addition
of variable interest based on LIBOR plus 2%. The subsidiary also entered into a
fair value hedge in the notional amount of approximately $7,500 to protect
against extreme changes in LIBOR.

The Company's German subsidiary has a bank loan for approximately $9,300 which
bears interest at Euribor plus 1.35%. The loan is due in November 2005 and is
guarantied by the Company's Israel subsidiary.

The Company's UK subsidiary has short-term, unsecured debt with a bank for
approximately $2,900 which is supported by a Company guaranty. Interest rates
are established at the time of borrowing based on LIBOR plus 1%.

The Company's Mexico subsidiary has short-term, unsecured debt with two banks
for approximately $4,300 which is supported by a Company guaranty. Interest
rates are established at the time of borrowing based on a rate agreed upon
between the banks and the subsidiary.

The Company's Israel subsidiary has entered into foreign currency put, call and
futures contracts to assist in managing currency risks. These derivatives are
not considered to be highly effective hedges and are recorded at their fair
market value of $119 in current assets with the associated gains or losses
reflected in interest beginning in the fourth quarter of fiscal year 2005.

-26-

The Company's Israel subsidiary has provided a guaranty to a bank to secure the
debt of a 50% owned joint venture for approximately $460 but not to exceed 50%
of the joint venture's debt.

The Company's contractual obligations have increased as a result of the
acquisition of Agis. The Company expects to pay estimated interest payments on
its debt obligations of $9,000 annually. The additional estimated amounts
related to other total known contractual obligations include capital and
operating leases of $26,000 for warehouse facilities and computer equipment;
purchase obligations of $58,000 for materials and services and other long-term
liabilities reflected in the balance sheet of $26,000 primarily related to
contractual employee termination benefits.

CRITICAL ACCOUNTING POLICIES

Determination of certain amounts in the Company's financial statements requires
the use of estimates. These estimates are based upon the Company's historical
experiences combined with management's understanding of current facts and
circumstances. Although the estimates are considered reasonable, actual results
could differ from the estimates. The accounting policies, discussed below, are
considered by management to require the most judgment and are critical in the
preparation of the financial statements. These policies are reviewed by the
Audit Committee. Other accounting policies are included in Note A of the
consolidated financial statements included in the Company's annual report on
Form 10-K for the year-ended June 26, 2004.

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 $8,280,
$8,296 and $7,606 at March 26, 2005, June 26, 2004 and March 27, 2004,
respectively.

Inventory - The Company maintains an allowance for estimated obsolete or
unmarketable inventory based on the difference between the cost of the inventory
and its estimated market value. In estimating the allowance, management
considers factors such as excess or slow moving inventories, product expiration
dating, products on quality hold, current and future customer demand, and market
conditions. Changes in these conditions may result in additional allowances. The
allowance for inventory was $27,841, $22,888 and $22,493 at March 26, 2005, June
26, 2004 and March 27, 2004, respectively. The increase at March 26, 2005 was
primarily due to the acquisition of Agis.

Goodwill - Goodwill is tested for impairment annually or more frequently if
changes in circumstances or the occurrence of events suggest impairment exists.
The test for impairment requires the Company to make several estimates about
fair value, most of which are based on projected future cash flows. The
estimates associated with the goodwill impairment tests are considered critical
due to the judgments required in determining fair value amounts, including
projected future cash flows. Changes in these estimates may result in the
recognition of an impairment loss. The required annual testing of goodwill was
performed in the second quarter of fiscal 2005 and resulted in no impairment.

-27-

Other Intangible Assets - Other intangible assets subject to amortization
consist of developed product technology, distribution and license agreements,
customer relationships, and trademarks. The majority of these assets are related
to the acquisition of Agis and will be amortized over their estimated useful
economic lives using the straight-line method. For intangible assets subject to
amortization, an impairment analysis is performed whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. An impairment loss is recognized if the carrying amount of the
asset is not recoverable and its carrying amount exceeds its fair value. Other
intangible assets were $142,050, $94 and $110 as of March 26, 2005, June 26,
2004 and March 27, 2004, respectively.

Customer Programs - The Company maintains accruals for programs with its
customers that include chargebacks, rebates and shelf stock adjustments. A
chargeback relates to an agreement the Company has with a retail customer that
will ultimately purchase product from a wholesaler for a contracted price that
is different than the Company's price to the wholesaler. The wholesaler will
issue an invoice to the Company for the difference in the contract prices. The
accrual for chargebacks is based on historical chargeback experience and
estimated wholesaler inventory levels, as well as expected sell-through levels
by wholesalers to retailers. Rebates are payments issued to the customer when
certain criteria are met which may include specific levels of product purchases,
introduction of new products or other objectives. The accrual for rebates is
based on contractual agreements and estimated purchasing levels by customers
with such programs. Shelf stock adjustments are credits issued to reflect
decreases in the selling price of a product and are based upon estimates of the
amount of product remaining in a customer's inventory at the time of the
anticipated price reduction. In many cases, the customer is contractually
entitled to such a credit. The accrual for shelf stock adjustments is based on
specified terms with certain customers, estimated launch dates of competing
products and estimated declines in market price. Changes in these estimates and
assumptions related to customer programs may result in additional accruals. The
accrual for customer programs was $31,302, $13,212, and $13,187 at March 26,
2005, June 26, 2004 and March 27, 2004, respectively. The significant increase
at March 26, 2005 was primarily due to the acquisition of Agis.

Product Liability and Workers' Compensation - The Company maintains accruals to
provide for claims incurred that are related to product liability and workers'
compensation. In estimating these accruals, management considers actuarial
valuations of exposure based on loss experience. These actuarial valuations
include significant estimates and assumptions, which include, but are not
limited to, loss development, interest rates, product sales, litigation costs,
accident severity and payroll expenses. Changes in these estimates and
assumptions may result in additional accruals. The accrual for product liability
claims was $2,751, $3,876, and $3,963 at March 26, 2005, June 26, 2004 and March
27, 2004, respectively. The accrual for workers' compensation claims was $2,731,
$2,458 and $3,250 at March 26, 2005, June 26, 2004 and March 27, 2004,
respectively.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements in Management's Discussion and Analysis of Results of
Operations and Financial Condition and other portions of this report are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor created
thereby. These statements relate to future events or the Company's future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause the actual results, levels of activity, performance
or achievements of the Company or its industry to be materially different from
those expressed or implied by any forward-looking statements. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "could," "would," "should," "expect," "plan," "anticipate," "intend,"
"believe," "estimate," "predict," "potential" or other comparable terminology.
Please see the "Risk Factors" in the Company's Registration Statement on Form
S-4 (No. 333 - 121574) filed on December 23, 2004, including any amendments
thereto, for a discussion of certain important factors that relate to
forward-looking statements contained in this report. Although the Company
believes that the expectations reflected in these forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Unless otherwise required by applicable securities laws, the Company
disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risks due to changes in currency exchange rates
and interest rates.

The Company is exposed to interest rate changes primarily as a result of
interest expense on borrowings used to finance the Agis acquisition and working
capital requirements and interest income earned on its investment of cash on
hand. As of March 26, 2005, the Company had invested cash, cash equivalents and
investment securities of approximately $74,000 and debt, net of restricted cash,
of approximately $309,000. The Company has executed interest rate swap
agreements to manage its interest rate exposure. Management believes that a
significant fluctuation in interest rates in the near future will not have a
material impact on the Company's consolidated financial statements.

The Company has operations in the United Kingdom, Israel, Germany and Mexico.
These operations transact business in their local currency and foreign
currencies, thereby creating exposures to changes in exchange rates. Significant
currency fluctuations could adversely impact foreign revenues; however, the
Company cannot predict future changes in foreign currency exposure.

The Company enters into certain derivative financial instruments, when available
on a cost-effective basis, to hedge its underlying economic exposure. These
instruments are managed on a consolidated basis to efficiently net exposures and
thus take advantage of any natural offsets. The Company does not use derivative
financial instruments for speculative purposes. Gains and losses on hedging
transactions are expected to be largely offset by gains and losses on the
underlying exposures being hedged. Any ineffective portion of hedges will be
reported in earnings as it occurs.

-29-

Item 4. Controls and Procedures

Upon consummation of the purchase on March 17, 2005 of Agis Industries (1983)
Ltd. (Agis), an Israeli company, the Company performed an initial assessment of
Agis' internal control over financial reporting (ICFR). While the assessment is
not complete or as detailed as would be necessary to support the report by
management on the Company's ICFR that will be required in its annual report, the
Company has gained a basic understanding of the internal control structure
within Agis. Management's opinion is that if it were required to include Agis in
assessing the Company's ICFR at this time, management would not be able to
conclude that the Company's ICFR is effective as it pertains to Agis.
Furthermore, since the merger was consummated late in the Company's third fiscal
quarter, the Company does not expect that it will be possible to complete its
assessment and remediation of ICFR for Agis' operations as of June 25, 2005, at
which time the Company is required by Section 404 of the Sarbanes-Oxley Act of
2002 to make its initial report of the Company's ICFR. Accordingly, the Company
intends to exclude Agis from the scope of its annual assessment of the Company's
ICFR for fiscal 2005, in accordance with applicable SEC rules and guidance.

Based on the initial assessment, the Company believes that the following areas
would contain enough significant deficiencies to constitute a material weakness
in Agis' ICFR:

o Documentation of significant accounts, processes and key controls;

o Control over the general information systems, including change
control, access rights and operational infrastructure;

o Levels of staffing that would promote sufficient segregation of
duties;

o Significant reliance on uncontrolled spreadsheets for financial
reporting;

o Insufficient use of its current information systems; and

o Formal policies and procedures that reflect the tone of top
management.

The Company is currently planning its approach to remediate these deficiencies
and expects to include a plan and timeline for remedying these deficiencies in
its fiscal 2005 Annual Report on Form 10-K.

As of March 26, 2005, the Company's management, including its Chief Executive
Officer and its Chief Financial Officer, have reviewed and evaluated the
effectiveness of the Company's disclosure controls and procedures pursuant to
Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on that review,
evaluation and consideration of the foregoing discussion of Agis' ICFR, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are not effective at a reasonable
assurance level. The Company is actively seeking to remedy the deficiencies
related to Agis identified herein. Other than the deficiencies related to Agis,
the Chief Executive Officer and Chief Financial Officer did not note any other
material weaknesses or significant deficiencies in the Company's disclosure
controls and procedures during their evaluation.

In connection with the evaluation by the Company's management, including its
Chief Executive Officer and Chief Financial Officer, of the Company's ICFR
pursuant to Rule 13a-15(d) of the Securities Exchange Act of 1934, no changes
during the quarter ended March 26, 2005 were identified that have materially
affected, or are reasonably likely to materially affect, the Company's ICFR,
other than changes that resulted from the acquisition of Agis as described
above.

-30-

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In August 2004, the Company agreed to settle with the United States Federal
Trade Commission (FTC) which had been investigating a 1998 agreement between
Alpharma, Inc. and the Company related to a children's ibuprofen suspension
product. The agreement between Alpharma, Inc. and the Company is no longer in
effect. The consent order included payment of $4,750 to resolve all claims by
the FTC and state governments as well as certain restrictions on future
contractual agreements of this nature. These restrictions are not expected to
have a material impact on the Company's future results of operations. The $4,750
charge was recorded in the fourth quarter of fiscal 2004 and paid in the first
quarter of fiscal 2005.

In connection with the Alpharma, Inc. agreement and the related FTC settlement,
the Company has been named as a defendant in two suits, one of which is a class
action, filed on behalf of Company customers (i.e., retailers), as well as four
class action suits filed on behalf of indirect Company customers (i.e.,
consumers), alleging that the plaintiffs overpaid for children's ibuprofen
suspension product as a result of the Company's agreement with Alpharma, Inc.
The Company is defending these claims and has participated in court ordered
mediation with the plaintiffs. The Company does not believe that these suits,
individually or in the aggregate, will result in payments by the Company that
are material to the Company's financial condition or future results of
operations. Until final resolution of these suits, however, there can be no
assurance that these suits will not result in payments by the Company that are
material to the Company's financial condition or future results of operations in
a particular fiscal quarter or year.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On April 26, 2005, the Board of Directors announced the authorization to
repurchase up to $30,000 of common stock over the next 12 months. The repurchase
program announced on October 29, 2003 expired on April 28, 2005. The Company
repurchased 7 shares of common stock from a private party for $122 on August 12,
2004. The common stock repurchased was retired upon purchase. The Company did
not repurchase any shares in the third quarter of 2005.

Item 4. Submission of Matters to a Vote of Security Holders

The Company held a special meeting of shareholders on March 15, 2005. At the
meeting, shareholders considered a proposal to approve the issuance of shares of
the Company's common stock in connection with the Company's acquisition of Agis.
This proposal was approved by a vote of 58,571,437 shares for, 1,594,020 shares
against and 58,292 shares abstaining.

-31-

Item 6. Exhibits

Exhibit Number Description
- -------------- -----------

2(a) Agreement and Plan of Merger dated as of November 14, 2004
among Perrigo Company, Agis Industries (1983) Ltd. and Perrigo
Israel Opportunities Ltd., included as and incorporated by
reference from Appendix A to the proxy statement/prospectus
included in the Registrant's Registration Statement on Form
S-4 (No. 333-121574).

3(a) Amended and Restated Articles of Incorporation of Registrant,
as amended, incorporated by reference to the Registrant's Form
10-Q filed on February 2, 2005.

3(b) Restated Bylaws of Perrigo Company, as amended through March
1, 2005 (filed on March 3, 2005 as Exhibit 3.1 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).

4(a) Shareholders' Rights Plan, incorporated by reference from the
Registrant's Form 8-K filed on April 10, 1996. (SEC File No.
00-19725).

4(b) Registration Rights Agreement, dated as of November 14, 2004,
between Perrigo Company and Moshe Arkin, included as and
incorporated by reference from Appendix H to the proxy
statement/prospectus included in the Registrant's Registration
Statement on Form S-4 (No. 333-121574).

10(a) Employment Agreement, dated as of November 14, 2004, among
Perrigo Company, Agis Industries (1983) Ltd. and Rafael Lebel,
included as and incorporated by reference from the
Registrant's Current Report on Form 8-K filed on March 22,
2005.

10(b) Credit Agreement, dated as of March 16, 2005, among Perrigo
Company, the Foreign Subsidiary Borrowers, JPMorgan Chase
Bank, N.A., as administrative agent, Bank Leumi USA, as
syndication agent, and Bank of America, N.A., Standard Federal
Bank N.A. and National City Bank of the Midwest, as
documentation agents.

10(c) Letter of Undertaking of Perrigo Israel Holdings Ltd. dated
March 16, 2005.

10(d) Cash Collateral Pledge Agreement dated as of March 16, 2005
between Perrigo International, Inc., as Pledgor, and Bank
Hapoalim B.M.

10(e) Guaranty of Perrigo International, Inc. dated March 16, 2005.

10(f) Contract, dated as of December 19, 2001, between Arkin Real
Estate Holdings (1961) Ltd. and Agis Industries (1983) Ltd.

31 Rule 13a-14(a) Certifications.

32 Section 1350 Certifications.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

PERRIGO COMPANY
--------------------------
(Registrant)

Date: May 5, 2005 By: /s/David T. Gibbons
----------------------- ---------------------------------------
David T. Gibbons
Chairman, President and Chief
Executive Officer

Date: May 5, 2005 By: /s/Douglas R. Schrank
------------------------ ---------------------------------------
Douglas R. Schrank
Executive Vice President and Chief
Financial Officer
(Principal Accounting and
Financial Officer)

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