SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended July 31, 1996
Commission File Number: 0-24312
AGRI-NUTRITION GROUP LIMITED
State of Incorporation: Delaware I.R.S. Employer I.D. 43-1648680
Riverport Executive Center II
13801 Riverport Drive
Suite 111
Maryland Heights, MO 63043
(314) 298-7330
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 twelve months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
The number of shares of common stock outstanding at September 11, 1996 is
8,383,692 shares.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
INDEX
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PAGE
FINANCIAL INFORMATION
Financial Statements
Consolidated Balance Sheet -
July 31, 1996 (unaudited) and
October 31, 1995 1
Consolidated Statement of Operations -
three months and nine months ended
July 31, 1995 and 1996 (unaudited) 2
Consolidated Statement of Cash Flows -
nine months ended July 31, 1995
and 1996 (unaudited) 3
Consolidated Statement of Shareholders' Equity -
nine months ended July 31, 1996 (unaudited) 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signature 15
<PAGE>
AGRI-NUTRITION GROUP LIMITED
CONSOLIDATED BALANCE SHEET
PAGE 1
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OCTOBER 31, JULY 31,
1995 1996
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,330,685 $ 2,123,816
Short-term investments 1,191,379
Accounts receivable 3,451,011 3,995,699
Inventories 4,201,315 5,828,636
Prepaid expenses and other assets 775,614 855,087
----------------- -----------------
11,950,004 12,803,238
Property, plant and equipment, net 4,826,970 4,849,101
Goodwill 6,177,068 7,101,003
Other assets 519,061 455,540
----------------- -----------------
$ 23,473,103 $ 25,208,882
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and notes payable $ 252,692 $ 486,473
Accounts payable 1,757,973 1,873,961
Accounts payable to Purina 930,954
Accrued compensation expense 449,061 9,933
Accrued expenses 750,891 669,011
----------------- -----------------
4,141,571 3,039,378
Long-term debt 2,614,614 5,801,510
Acquisition notes payable 2,300,000 2,104,648
Commitments and contingencies (Notes 2 and 10)
Shareholders' equity:
Common stock ($.01 par value; 20,000,000
shares authorized; 8,401,344 and
8,409,342 shares issued in 1995
and 1996, respectively) 84,013 84,093
Additional paid-in capital 14,734,656 14,784,571
Accumulated deficit (401,751) (555,332)
----------------- -----------------
14,416,918 14,313,332
Cost of common stock held in Treasury
(0 and 25,650 shares in 1995 and
1996, respectively (49,986)
----------------- -----------------
14,416,918 14,263,346
----------------- -----------------
$ 23,473,103 $ 25,208,882
----------------- -----------------
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
PAGE 2
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<TABLE>
<CAPTION>
FOR THE THREE AND NINE MONTHS ENDED JULY 31,
1995 1996
THREE NINE THREE NINE
MONTHS MONTHS MONTHS MONTHS
<S> <C> <C> <C> <C>
Net sales (including sales of $3.5
million and $11.2 million for the three and
nine months ended July 31, 1995, respectively,
and $2.4 million and $9.2 million for the
three and nine months ended July 31, 1996,
respectively, to Purina Mills) ................ $ 7,524,768 $ 19,644,727 $ 8,724,603 $ 26,319,619
Cost of sales .................................. 6,091,619 16,940,239 6,676,840 20,719,240
------------ ------------ ------------ ------------
Gross profit ................................... 1,433,149 2,704,488 2,047,763 5,600,379
Selling, general and administra-
tive expenses ................................. 1,319,299 2,864,814 1,931,572 5,562,514
------------ ------------ ------------ ------------
Operating income (loss) ........................ 113,850 (160,326) 116,191 37,865
Interest expense ............................... (79,091) (221,127) (152,596) (413,101)
Other income ................................... 115,014 463,567 26,931 133,655
------------ ------------ ------------ ------------
Income (loss) before income
tax benefit (provision) ....................... 149,773 82,114 (9,474) (241,581)
Income tax benefit (provision) ................. 76,000 88,000
------------ ------------ ------------ ------------
Net income (loss) .............................. $ 149,773 $ 158,114 $ (9,474) $ (153,581)
------------ ------------ ------------ ------------
Primary net income (loss) per
common and common
equivalent share (Note 4)..................... $ .02 $ .02 $ -- $ (.02)
------------ ------------ ------------ ------------
Fully diluted net income (loss)
per common and common
equivalent share (Note 4)..................... $ .02 $ .02 $ -- $ (.02)
------------ ------------ ------------ ------------
Primary common and common
equivalent shares outstanding
(Note 4)...................................... 8,080,899 8,080,246 8,402,845 8,401,848
------------ ------------ ------------- -------------
Fully diluted common and
common equivalent shares
outstanding (Note 4)........................... 8,990,482 8,989,829 8,402,845 8,401,848
------------ ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
PAGE 3
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FOR THE NINE MONTHS
ENDED JULY 31,
1995 1996
OPERATING ACTIVITIES
Net income (loss) .............................. $ 158,114 $ (153,581)
Adjustments to reconcile net
income (loss) to net
cash used in operating activities:-
Depreciation and amortization ............... 338,580 617,776
Increase in deferred tax assets ............. (76,000)
Changes in operating assets and
liabilities, excluding the effects of the
Zema and Bromethalin acquisitions:
Increase in accounts receivable .......... (377,079) (736,172)
Increase in inventories .................. (13,522) (1,494,133)
Decrease in prepaid expenses ............. 227,351 8,012
Decrease in accounts payable ............. (1,390,993) (885,001)
Decrease in accrued expenses ............. (165,871) (506,378)
------------ ------------
Net cash used in operating activities .......... (1,299,420) (3,149,475)
------------ ------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment ...... (334,920) (399,519)
Purchase of Bromethalin Assets (Note 3) ........ (850,771)
(Purchase) sale of short-term investment
securities .................................. (599,826) 1,191,379
Purchase of Zema and St. JON net assets,
net of cash acquired ........................ (3,282,037) (220,474)
------------ ------------
Net cash used in investing activities .......... (4,216,783) (279,385)
------------ ------------
FINANCING ACTIVITIES
(Repayment) borrowings of long-term
debt and notes payable, net ................. (500,352) 3,221,982
Issuance of Common Stock to Directors (Note 8) . 19,995
Purchase of Treasury Stock ..................... (49,986)
Repayment of employee stock purchase loans ..... 30,000
------------ ------------
Net cash (used in) provided by
financing activities ......................... (500,352) 3,221,991
------------ ------------
Decrease in cash and cash equivalents .......... (6,016,555) (206,869)
Cash and cash equivalents, beginning of period . 11,185,943 2,330,685
------------ ------------
Cash and cash equivalents, end of period ....... $ 5,169,388 $ 2,123,816
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Effective
March 31, 1995, the Company purchased substantially all of the net assets and
business of Zema Corporation for $3,000,000 cash and certain other contingent
future payments (see Note 2). In conjunction with the acquisition, liabilities
were assumed as follows:
Total assets purchased $ 3,945,163
Cash paid 3,059,719
-----------------
Liabilities assumed $ 885,444
-----------------
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PAGE 4
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<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------
ADDITIONAL
NUMBER OF PAR PAID-IN ACCUMULATED TREASURY
SHARES VALUE CAPITAL DEFICIT STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1,
1995 8,401,344 $ 84,013 $ 14,734,656 $ (401,751) $ 14,416,918
Repayment of employee
stock purchase loans ......... 30,000 30,000
Issuance of stock to
outside Directors ............ 7,998 80 19,915 19,995
Purchase of Treasury
Stock, at cost ............... (25,650) $ (49,986) (49,986)
Net loss (unaudited) .......... (153,581) (153,581)
------------ ------------ ------------ ------------ ------------ ------------
Balance, July 31,
1996 (unaudited) ............. 8,383,692 $ 84,093 $ 14,784,571 $ (555,332) $ (49,986) $ 14,263,346
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PAGE 5
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1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of July 31, 1996, the
consolidated statements of operations for the three and nine month
periods ended July 31, 1995 and 1996, the consolidated statement of cash
flows for the nine month periods ended July 31, 1995 and 1996 and the
consolidated statement of shareholders' equity for the nine month period
ended July 31, 1996 have been prepared by Agri-Nutrition Group Limited
(the "Company") without audit. In the opinion of management, all
adjustments (which include only normal, recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows at and for the periods ended July 31, 1995 and 1996 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted where inapplicable.
The results of operations for the periods ended July 31, 1995 and 1996,
respectively, are not necessarily indicative of the operating results for
the full year.
2. ORGANIZATION
The Company, a Delaware corporation, was founded in 1993 to
acquire and operate businesses in the domestic and international food,
agriculture and pet industries. In September 1993, the Company, through
its PM Resources, Inc. subsidiary ("Resources"), acquired certain assets
and assumed certain liabilities of the Health Industries Business of
Purina Mills, Inc. (the "Business"). Resources commenced operations on
September 9, 1993, the effective date of the acquisition of the Business.
Resources formulates, manufactures and distributes feed additives,
medicated treatments, anthelmetics, nutritional supplements, cleaners and
disinfectants, pest control products, home, lawn and garden products, and
specialty compounds.
Effective March 31, 1995, the Company purchased substantially all
of the net assets and business of Zema Corporation ("Zema"). The Company
also purchased substantially all of the net assets and business of St.
JON Laboratories, Inc. ("St. JON") effective August 31, 1995. Zema and
St. JON formulate, package, market and distribute pet health care,
veterinary and grooming products domestically and abroad.
See Note 3 to the Company's Consolidated Financial Statements
included in the Company's annual report to shareholders for the year
ended October 31, 1995 ("1995 Annual Report") for additional information
related to the acquisitions of Zema and St. JON, including information
regarding acquisition notes payable and the additional purchase price
which must be paid to the former owner of Zema if Zema achieves certain
financial goals. Based on Zema's results of operations since its
acquisition by the Company, no such additional purchase price has been
accrued in the accompanying financial statements.
3. ACQUISITIONS - BROMETHALIN NET ASSETS
Effective May 1996, Resources acquired the worldwide patents,
active ingredient inventory, registrations and rights to Bromethalin
("the Bromethalin Assets"), a highly effective and proprietary
rodenticide serving agricultural and Pest Control Operator (PCO) markets
from Purina Mills, Inc. The sales price was $800,000, plus an additional
consideration based on subsequent shipments of Bromethalin to Purina
Mills, Inc. over a five-year period. The Company primarily used proceeds
from its July 1994 initial public offering of its Common Stock to fund
the initial payment.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PAGE 6
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The acquisition of the Bromethalin Assets was accounted for
pursuant to the purchase method of accounting. The purchase price paid
has been preliminarily allocated to net assets acquired based on their
estimated fair values at the date of acquisition. Since the Company
historically has manufactured rodenticides containing Bromethalin, the
acquisition of the Bromethalin Assets is expected to have a minimal
impact on the Company's net sales, but is expected to increase the
Company's gross margins related to these products. The Bromethalin Assets
impact the Company's consolidated financial statements commencing in May
1996, the effective date of the acquisition.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in
Note 5 to the Consolidated Financial Statements included in the 1995
Annual Report. The financial statements included herein should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included in such report.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share is
calculated based on the weighted average number of common and common
equivalent shares outstanding during the periods presented, using the
treasury stock method. The calculation does not reflect common stock
equivalent shares when their inclusion in such calculation would have
been anti-dilutive.
5. INVENTORIES
Inventories consist of the following:
OCTOBER 31, JULY 31,
1995 1996
Raw materials $ 2,806,050 $ 3,921,286
Work-in-process 239,170 98,893
Finished goods 1,255,009 1,979,908
----------------- -----------------
4,300,229 6,000,087
Less: reserve for excess
and obsolete inventories (98,914) (171,451)
----------------- -----------------
$ 4,201,315 $ 5,828,636
----------------- -----------------
6. FINANCING
In May 1996, the Company amended its revolving credit agreements
with its primary lender to extend their term through December 31, 1997.
At July 31, 1996, an aggregate of $8.1 million is available under the
agreements, $3.4 million of which is subject to a borrowing base
calculated from specified percentages of qualified accounts receivable
and inventory and the balance of which will be reduced by $150,000 per
quarter. At July 31, 1996, borrowings outstanding under the agreements
totaled approximately $4.8 million. The interest rate ranges from prime
to prime plus 1.125%, depending on the Company's ratio of debt to net
worth, as defined in the agreements. At July 31, 1996, the interest rate
charged on borrowings outstanding was 8.50%. The agreements require the
Company and its subsidiaries to comply with various financial covenants
(net worth, debt service coverage ratio, current ratio and ratio of
indebtedness to net worth) and prohibit the Company from paying dividends
without the consent of the Company's lender.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PAGE 7
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At July 31, 1996, the Company and its subsidiaries were in
compliance with all covenants related to its various financing
arrangements.
7. TREASURY STOCK
During the three months ended July 31, 1996, the Company purchased
25,650 shares of its common stock at an aggregate cost of $49,986. These
purchases were the first under the stock repurchase plan authorized by
the Board of Directors in December 1995. At July 31, 1996, the Company
had authorization to acquire an additional 474,350 shares under the stock
repurchase plan. The Company expects to finance additional treasury stock
purchases, if any, with available funds.
8. RELATED PARTY TRANSACTIONS
See Note 12 to the Company's Consolidated Financial Statements in
the 1995 Annual Report for a discussion regarding related party
transactions. Also, see Note 9 regarding issuance of the Company's Common
Stock and options to purchase the Company's Common Stock granted to
outside directors of the Company in conjunction with the Company's
Director Compensation Program. In addition to the grant of stock and
options, each outside director of the Company receives a $3,000 annual
retainer and $500 for each board meeting attended. The total amount paid
in fiscal 1996 under this program through July 1996 was $31,500.
9. EMPLOYEE BENEFIT PLANS
Effective March 7, 1996, the Company adopted the 1996 Incentive
Stock Plan ("1996 ISP"). An aggregate of 1,000,000 shares of the
Company's Common Stock are reserved for issuance to eligible Directors,
officers and other employees, and consultants of the Company under the
1996 ISP. During the three months ended July 31, 1996, the Company issued
7,998 shares of the Company's Common Stock under the 1996 ISP to outside
directors of the Company. Options to purchase 15,000 shares of the
Company's Common Stock at exercise prices of $2.625 per share, which
approximated fair value at the date of grant, were also issued to these
directors under the 1996 ISP. No other shares or options have been issued
under the 1996 ISP. Subsequent to July 31, 1996, the Compensation
Committee of the Board of Directors authorized the issuance of options to
purchase up to 487,000 shares of the Company's Common Stock to various
senior and middle-level managers of the Company at exercise prices which
will approximate fair value at the date of grant.
Effective March 9, 1995, the Company adopted the 1995 Incentive
Stock Plan ("1995 ISP"). An aggregate of 500,000 shares of the Company's
Common Stock are reserved for issuance to eligible employees, and
consultants and advisors to the Company under the 1995 ISP. No shares or
options have been issued under the 1995 ISP during 1996. During the three
months ended July 31, 1996, options to purchase 100,000 shares of the
Company stock at an exercise price of $3.00 per share were forfeited. No
other options have been issued or remain outstanding under the 1995 ISP
as of July 31, 1996.
During the nine months ended July 31, 1996, options to purchase
61,500 shares of the Company's Common Stock were granted to employees
under the Company's Incentive Stock Plan ("1994 ISP") at exercise prices
ranging from $2.00 to $2.19 per share, which approximated fair value at
the date of grant. The options vest ratably up to five years from the
date of grant and will expire ten years after the grant date. An
aggregate of 400,000 shares of the Company's Common Stock are reserved
for issuance to eligible employees under the 1994 ISP. As of July 31,
1996, options to purchase an
<PAGE>
AGRI-NUTRITION GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PAGE 8
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aggregate of 299,000 shares of the Company's Common Stock were
outstanding and 11,430 shares of the Company's Common Stock had been
issued under the 1994 ISP.
In August 1996, the Company extended the expiration date of
previously issued non-qualified options to purchase 387,500 shares of the
Company's stock held by the Company's former Chief Financial Officer, to
October 31, 1999, thereby waiving the forfeiture provisions related to
continued employment. In addition, the exercise price was increased from
$0.81 per share to $1.5625 per share, which approximated fair value at
the date the forfeiture provisions were waived.
10. COMMITMENTS AND CONTINGENCIES
From time to time, the Company becomes party to various claims and
legal actions arising during the ordinary course of business. Management
believes that the Company's costs and any potential judgments resulting
from such claims and actions will be covered by the Company's product
liability insurance, except for deductible limits. The Company intends to
defend such claims and actions in cooperation with its insurers. It is
management's opinion that, in any event, their outcome would not have a
material effect on the Company's financial position or results of
operations.
11. SUBSEQUENT EVENTS
CORPORATE REORGANIZATION
In August 1996, the Company announced the resignation of the
Company's Chief Executive Officer and President, effective October 31,
1996, and its Chief Financial Officer effective August 23, 1996. In
connection with these resignations, the Company expects to incur a
one-time charge, net of tax, of approximately $150,000 in the fourth
quarter of fiscal 1996, but reduce ongoing corporate costs by
approximately $600,000 per annum.
ANTHONY LETTER OF INTENT
In August 1996, the Company announced the signing of a letter of
intent to acquire Anthony Products Company, a private company
specializing in the development and manufacturing of pharmaceutical
animal health products. The transaction is subject to completion of due
diligence and negotiation of a definitive agreement. Management expects
that the purchase price will be paid with cash and common stock, the cash
portion of which will be funded by a combination of bank financing,
available funds and the issuance of equity securities in private
transactions.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 9
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OVERVIEW
The Company was founded in 1993 to acquire and operate businesses in the
domestic and international food, agriculture and pet industries. In September
1993, the Company, through its Resources subsidiary ("Resources"), acquired the
Health Industries Business of Purina Mills, Inc. In July 1994, the Company
completed its initial public offering of Common Stock ("IPO"), the net proceeds
of which were approximately $12.1 million. Effective March 31, 1995, the Company
purchased substantially all of the net assets and business of Zema Corporation
("Zema"). The Company purchased, substantially all of the net assets and
business of St. JON Laboratories, Inc. ("St. JON") effective August 31, 1995.
Zema and St. JON formulate, package, market and distribute pet health care,
veterinary and grooming products domestically and abroad. In August 1996, the
Company entered into a letter of intent to acquire Anthony Products Company, a
private company specializing in the development and manufacturing of
pharmaceutical animal health products. The acquisition, which is subject to
completion of due diligence and a definitive agreement, is expected to be
completed by November 15, 1996.
In August 1996, the Company announced a major organizational
restructuring. W. M. Jones, Jr., currently chairman of the board, president and
chief executive officer, will resign his positions as president and chief
operating officer effective October 31, 1996 while actively continuing as
chairman of the board. Bruce G. Baker, currently deputy chief executive officer,
will assume the position of president and chief executive officer. In addition,
effective August 23, 1996, George W. Daignault resigned as chief financial
officer but will continue to be employed on special projects. Robert J.
Elfanbaum, formerly corporate controller, has replaced Mr. Daignault as chief
financial officer. These organizational changes result from the Company's
achieving sufficient critical mass to transition from an acquisition vehicle to
an operating company and are expected to reduce corporate costs by approximately
$600,000 per annum. The Company will continue to focus its efforts in the
growing pet and animal health sector through internal growth and strategic
acquisitions and alliances complimentary to the established businesses.
Management's discussion and analysis addresses the three and nine month
periods ended July 31, 1996 with comparisons to the preceding comparable
periods. The Company's results of operations presented and discussed herein only
include the results of Zema's and St. JON's operations subsequent to their
acquisition by the Company effective March 31 and August 31, 1995, respectively.
The Company has reported certain financial information for two segments -
ingredients and specialty products. Ingredients consist of feed products that
are purchased or blended by the Company and distributed for Purina Mills (see
Note 13 to the Company's Consolidated Financial Statements included in the 1995
Annual Report to Stockholders). Specialty products consist of all other products
formulated, manufactured, and distributed by the Company to various customers,
including Purina Mills. Included in the specialty products segment are sales of
private label and branded products for which the Company manufactures goods
using registrations and/or formulas owned by the Company, and sales of products
manufactured under contract for which the Company manufactures products using
the customers' registrations and/or formulas. While the Company believes segment
data is meaningful for net sales, the Company does not believe segment data for
costs of sales and administrative costs are necessarily relevant to
understanding the Company's business. Costs of sales, other than raw materials,
and administrative costs incurred in the servicing of the two segments are joint
in nature and essentially invariable, particularly within the levels of sales
volume experienced within the reporting periods. The supporting asset base,
excluding inventories, is also joint in nature.
Given the acquisitions of businesses with branded, consumer-targeted
products in 1995 and the continued emphasis on growth of the specialty product
segment for which gross margins are higher than in the ingredients segment, the
significance of the ingredient segment has decreased in fiscal 1995 and 1996.
Management expects this trend to continue in the future such that at some point,
the ingredient segment may no longer meet the requirements for segment
disclosure under generally accepted accounting principles.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 10
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In prior year reporting, the Company utilized a dollar amount margin
concept of income over raw ingredients costs, known as "IOIC." In sales of
ingredients and other commodities, as ingredient prices rise or fall, such
increases or decreases are generally passed on to customers. However, in 1995,
the Company acquired businesses with branded, consumer-targeted products, and
continues to obtain increasing percentages of its operating profit from
non-commodity products. Management believes that given the changes in the
Company's underlying business, IOIC is no longer a meaningful indicator of
revenue contribution for a significant portion of its operations.
<TABLE>
<CAPTION>
(DOLLARS IN 000'S)
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
1995 1996 1995 1996
DOLLAR % OF DOLLAR % OF DOLLAR % OF DOLLAR % OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales
Ingredients ..................... $ 1,617 21.5% $ 1,311 15.0% $ 6,017 30.6% $ 5,363 20.4%
Specialty products .............. 5,908 78.5 7,414 85.0 13,628 69.4 20,957 79.6
Total net sales ............... 7,525 100.0 8,725 100.0 19,645 100.0 26,320 100.0
Cost of sales ...................... 6,092 81.0 6,677 76.5 16,940 86.2 20,719 78.7
Gross profit ....................... 1,433 19.0 2,048 23.5 2,705 13.8 5,601 21.3
Selling, general and
administrative expense ........... 1,319 17.5 1,932 22.2 2,865 14.0 5,563 21.2
Operating income (loss) ............ 114 1.5 116 1.3 (160) (0.8) 38 (.1)
</TABLE>
THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THREE MONTHS ENDED JULY 31, 1995
Total net sales increased 16.0% from $7.5 million in fiscal 1995 to $8.7
million for 1996, primarily reflecting additional net sales of $2.4 million
related to St. JON, partially offset by decreased sales at Zema. Net sales of
ingredients decreased 18.9% from $1.6 million in fiscal 1995 to $1.3 million for
1996, primarily due to low levels of profitability in the animal production
industry which continue to adversely impact the sales of ingredients. The change
in ingredient sales had minimal impact on gross profit. Specialty products sales
increased $1.5 million, or 25.5%, compared to the same period of the prior year,
primarily due to the inclusion of St. JON's sales during the period, partially
offset by decreased sales at Zema. As was the case throughout the industry for
flea and tick products sold over the counter, Zema sales were negatively
impacted in the three months ended July 31, 1996 by lower incidence of
infestation than normal and by the introduction of highly promoted new products
distributed exclusively through veterinaries. Furthermore, Zema's sales were
adversely affected by the decision of one of its principal customers to
substantially reduce product offerings in all categories including companion
animals. However, partially offsetting these factors was the introduction by
Zema of several new product lines developed in association with other
Agri-Nutrition Group companies.
The Company is party to a manufacturing and supply agreement with Purina
Mills pursuant to which Purina Mills has guaranteed the Company sufficient sales
to generate annual income, net of ingredient, direct manufacturing, and other
direct costs of approximately $2.9 million for the three-year period ending
October 31, 1996. Actual sales under the agreement generated incremental income
of approximately $.7 million and
<PAGE>
AGRI-NUTRITION GROUP LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 11
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$.3 million for the three-month periods ended July 31, 1995 and 1996,
respectively. For the three months ended July 31, 1996, this was approximately
$.3 million below the expected level guaranteed under the agreement, adjusted
for seasonality. However, the Company does not recognize any benefits related to
shortfalls under the agreement until year end. Although the Company expects to
have a supply relationship with Purina Mills after expiration of the agreement,
there can be no assurance that this will be the case or what level of sales or
income will be obtained.
Gross profit increased from $1.4 million in 1995 (19.0% of net sales) to
$2.0 million in 1996 (23.5% of net sales), primarily due to increased gross
profit related to the increased specialty products sales in 1996. Gross profit
as a percentage of sales increased due to the higher margins generated by sales
of specialty products compared to ingredients, as well as higher margins
realized by Zema and St. JON, compared to margins realized from the Company's
operations prior to these acquisitions. While not significantly impacting net
sales, the acquisition of Bromethalin positively impacted gross profit during
the period.
Selling, general and administrative expenses increased from $1.3 million
or 17.5% of net sales in 1995 to $1.9 million or 22.2% of net sales in 1996. The
increase in selling, general and administrative expenses is primarily related to
operating expenses incurred by St. JON subsequent to its acquisition by the
Company. As a percentage of sales, St. JON selling, general and administrative
expenses were approximately 29% during the three months ended July 31, 1996,
reflecting higher selling costs associated with its sales of branded products
into consumer markets.
The factors discussed above resulted in operating income of $.12 million
or 1.3% of sales for the three months ended July 31, 1996 compared to $.11
million or 1.5% of net sales in the prior year.
Interest expense was approximately $.15 million in 1996, compared to $.08
million in 1995, reflecting increased debt incurred in conjunction with
acquisitions during 1995 and related increases in working capital financing. The
decrease in other income from approximately $.12 million in 1995 to
approximately $.03 million during 1996 is due to utilization of certain proceeds
of the Company's IPO during 1995 in conjunction with the acquisitions of Zema
and St. JON.
The effective income tax rate of the Company was 0% for both 1995 and
1996, respectively. The effective rate in 1995 is based on the Company's net
income during the period and also reflects the reversal of $.06 million of
valuation allowance recorded in prior periods related to deferred tax assets,
pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Based on the Company's historical and projected results of
operations, and taking into account the impact of the Zema acquisition, Company
management determined that there was greater than a 50% probability that the
recorded deferred tax assets would be realized. Management accordingly
determined and adjusted the valuation allowance at July 31, 1995 and the related
effective tax rate by recognizing future tax benefits related to certain
previously unrecognized temporary differences and net operating loss
carryforwards. The effective rate for the three months ending July 31, 1996 is
based on the Company's minimal pre-tax income earned during the period.
NINE MONTHS ENDED JULY 31, 1996 COMPARED TO NINE MONTHS ENDED JULY 31, 1995
Total net sales increased 34.0% from $19.6 million in fiscal 1995 to
$26.3 million for 1996, reflecting additional net sales related to Zema and St.
JON, subsequent to their acquisition by the Company effective March 31 and
August 31, 1995, respectively. Decreased volume of ingredients shipped compared
to the prior year was the primary factor causing a reduction in ingredients
sales of $.6 million from $6.0 million in 1995 to $5.4 million in 1996. Low
levels of profitability in the animal production industry continue to adversely
impact the sales of ingredients. The reduced ingredient sales had minimal impact
on gross profit. Specialty products sales increased $7.3 million, or 53.8%,
compared to the same period of the prior year, primarily due
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AGRI-NUTRITION GROUP LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 12
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to the inclusion of Zema's and St. JON's sales during the period, but also due
to a 4.6% increase in specialty products sales at Resources. As was the case
throughout the industry for flea and tick products sold over the counter, Zema
sales were negatively impacted in the three months ended July 31, 1996 by lower
incidence of infestation than normal and by the introduction of highly promoted
new products distributed exclusively through veterinaries. Furthermore, Zema's
sales were adversely affected by the decision of one of its principal customers
to substantially reduce product offerings in all categories including companion
animals. However, partially offsetting these factors was the introduction by
Zema of several new products lines developed in association with other
Agri-Nutrition Group companies.
The Company is party to a manufacturing and supply agreement with Purina
Mills pursuant to which Purina Mills has guaranteed the Company sufficient sales
to generate annual income, net of ingredient, direct manufacturing, and other
direct costs of approximately $2.9 million for the three-year period ending
October 31, 1996. Actual sales under the agreement generated incremental income
of approximately $1.9 million and $1.5 million for the nine-month periods ended
July 31, 1995 and 1996, respectively. For the nine months ended July 31, 1996,
this was approximately $.6 million below the expected level guaranteed under the
agreement, adjusted for seasonality. However, the Company does not recognize any
benefits related to shortfalls under the agreement until year end. Although the
Company expects to have a supply relationship with Purina Mills after expiration
of the agreement, there can be no assurance that this will be the case or what
level of sales or income will be obtained.
Gross profit increased from $2.7 million in 1995 (13.8% of net sales) to
$5.6 million in 1996 (21.3% of net sales), primarily due to increased gross
profit related to the increased specialty products sales in 1996. Gross profit
as a percentage of sales increased due to the higher margins generated by sales
of specialty products compared to ingredients, as well as higher margins
realized by Zema and St. JON, compared to margins realized from the Company's
operations prior to these acquisitions. While not significantly impacting net
sales, the acquisition of Bromethalin positively impacted gross profit during
the period.
Selling, general and administrative expenses increased from $2.9 million
or 14.6% of net sales in 1995 to $5.6 million or 21.2% of net sales in 1996. The
increase in selling, general and administrative expenses is primarily related to
operating expenses incurred by Zema and St. JON subsequent to their acquisition
by the Company. As a percentage of sales, Zema and St. JON selling, general and
administrative expenses were approximately 34% during the nine months ended July
31, 1996, reflecting higher selling costs associated with these subsidiaries
sales of branded products into consumer markets, and thereby resulting in the
Company's overall increase of selling, general and administrative expenses as a
percentage of sales.
The factors discussed above resulted in an operating income of $.04
million during the nine month period compared to an operating loss of $.16
million in the prior year.
Interest expense was approximately $.4 million in 1996, compared to $.2
million in 1995, reflecting increased debt incurred in conjunction with
acquisitions during 1995 and related increases in working capital financing,
which was partially offset by the impact of the Company's restructured financing
and lower interest rates. The decrease in other income from approximately $.5
million in 1995 to approximately $.1 million during 1996 is due to utilization
of certain proceeds of the Company's IPO during 1995 in conjunction with the
acquisitions of Zema and St. JON.
The effective income tax rate of the Company was (93%) and 36% for 1995
and 1996, respectively. The effective rate in 1995 is based on the Company's
pre-tax income during the period and also reflects the reversal of $.1 million
of valuation allowance recorded in prior periods related to deferred tax assets,
pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Based on the Company's historical and projected results of
operations, and taking into account the impact of the Zema acquisition, Company
management determined that there was greater than a 50% probability that the
recorded
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AGRI-NUTRITION GROUP LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 13
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deferred tax assets would be realized. Management accordingly determined and
adjusted the valuation allowance at July 31, 1995 and the related effective tax
rate by recognizing future tax benefits related to certain previously
unrecognized temporary differences and net operating loss carryforwards. The
effective rate for the nine months ending July 31, 1996 is based on the
Company's pre-tax loss during the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing capital requirements are primarily to fund
equipment purchases and working capital needs. The Company's cash balance of
$2.1 million at July 31, 1996 consists of net proceeds from the IPO remaining
available for further acquisition funding requirements. During April 1995, the
Company completed the acquisition of Zema, which required payment of
approximately $3.2 million for the acquisition and related expenses in 1995 and
will require additional payments of $.3 million plus interest prior to April
1998, and additional payments conditioned upon the achievement of certain
operating criteria by Zema which would be due in April 2000. In August 1995, the
Company acquired the net assets of St. JON, which required approximately $3.5
million of cash paid at closing, the assumption of certain liabilities
aggregating approximately $1.5 million which were paid within four months of
closing, and an additional $2 million plus interest to be paid in annual
installments over six years commencing March 31, 1997. Effective May 1996, the
Company acquired the worldwide patents and other assets and rights to
Bromethalin, a highly effective and proprietary rodenticide, which required
payments of $.8 million and will require additional consideration based on
subsequent shipments of Bromethalin over a five-year period. These acquisitions
were financed through utilization of net proceeds from the Company's IPO.
Although the Company expended available cash to finance these acquisitions,
management has utilized Zema's and St. JON's businesses and net assets to secure
approximately $3.5 million of additional financing, as described further below.
The remaining net proceeds of the IPO continue to be invested in high-grade,
short-term interest-bearing obligations pending their specific use. Speculative
use of derivatives is prohibited by the Company's investment policy.
During the nine months ended July 31, 1996, cash used by operations
approximated $3.3 million, which was primarily related to funding seasonal
working capital requirements. These requirements were primarily funded through
utilization of available credit facilities. Proceeds from the IPO of
approximately $1.1 million were utilized to fund the purchase of Bromethalin and
certain other acquisition-related expenses. Long-term debt and notes payable
during the period increased by approximately $3.3 million, primarily due to the
cash utilized by operations, as discussed above.
During the nine months ended July 31, 1995, cash used by operations
approximated $1.3 million, which was primarily related to funding seasonal
working capital requirements. These requirements were funded through utilization
of available funds. Approximately $.7 million, or 6%, of the proceeds from the
IPO, were utilized to fund payment in 1995 of certain acquisition-related
expenditures.
In May 1996, the Company amended its revolving credit agreements with its
primary lender to extend their term through December 31, 1997. At July 31, 1996,
an aggregate of $8.1 million is available under the agreements, $3.4 million of
which is subject to a borrowing base calculated from specified percentages of
qualified accounts receivable and inventory and the balance of which will be
reduced by $150,000 per quarter. At July 31, 1996, borrowings outstanding under
the agreement totaled approximately $4.8 million. The interest rate ranges from
prime to prime plus 1.125%, depending on the Company's ratio of debt to net
worth, as defined in the agreements. At July 31, 1996, the interest rate charged
on borrowings outstanding was 8.50%. The agreements require the Company and its
subsidiaries to comply with various financial covenants (net worth, debt service
coverage ratio, current ratio and ratio of indebtedness to net worth) and
prohibits the Company from paying dividends without the consent of the Company's
lender.
In December 1995, the Company's board of directors authorized the
repurchase of up to 500,000 shares of the Company's Common Stock. The amount of
funds required will depend upon the actual number of
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AGRI-NUTRITION GROUP LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 14
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shares repurchased and the market price paid by the Company for those shares.
The Company will utilize available funds to implement this stock repurchase.
During the three months ended July 31, 1996, 25,650 shares of the Company's
common stock were repurchased by the Company at an average price per share of
$1.95. No shares had been repurchased under this program prior to April 30,
1996.
Management believes that the Company will generally have sufficient cash
to meet the needs of the current operations for the foreseeable future from cash
flows from current operations, available funds, and existing financing
facilities.
The Company has no plans to significantly increase any of its operating
subsidiaries' plant facilities capacity. Capital expenditures for the nine
months ended July 31, 1996 were approximately $.3 million. Future capital
expenditures for the Company's operating subsidiaries are not expected to
significantly exceed historical amounts, which approximate current depreciation
expense.
In August 1996, the Company announced the signing of a letter of intent
to acquire Anthony Products Company, a private company specializing in the
development and manufacturing of pharmaceutical animal health products. The
transaction is subject to completion of due diligence and negotiation of a
definitive agreement. Management expects that the purchase price will be paid
with cash and common stock, and the cash portion, if any, will be funded by a
combination of bank financing, available funds and the issuance of equity
securities in private transactions.
QUARTERLY EFFECTS AND SEASONALITY
Resources' results of operations have historically been seasonal, with a
low percentage of its volume and earnings in the fourth quarter (August through
October) of the fiscal year. However, such seasonal patterns are highly
dependent on weather, feeding economics, the timing of customer orders and the
timing of recognition of shortfalls, if any, under the manufacturing and supply
agreement with Purina Mills. Furthermore, new business growth has not reflected
historical patterns. The results of Zema's operations are also historically
seasonal with a high volume of its sales and earnings being generated during the
months of April through September. St. JON's sales and earnings have not
historically been seasonal.
<PAGE>
AGRI-NUTRITION GROUP LIMITED
PART II - OTHER INFORMATION
PAGE 15
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits.
None.
b. Reports on Form 8-K.
None.
SIGNATURE
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.
AGRI-NUTRITION GROUP LIMITED
/s/ROBERT J. ELFANBAUM
- -----------------------------------------------------
Robert J. Elfanbaum
Vice President and Chief Financial Officer
September 11, 1996
