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 June 30, 1999
Commission File Number: 0-24312
VIRBAC CORPORATION
(formerly Agri-Nutrition Group Limited)
State of Incorporation: Delaware I.R.S. Employer I.D. 43-1648680
3200 Meacham Boulevard
Fort Worth, TX 76137
(817) 831-5030
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 August 12, 1999 is
20,975,747 shares.
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
INDEX
Page
Financial information
Financial Statements
Consolidated Balance Sheets -
June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations -
three months and six months ended June 30, 1999
and 1998 (unaudited) 4
Consolidated Statements of Cash Flows -
six months ended June 30, 1999 and 1998 (unaudited) 5
Consolidated Statement of Shareholders' Equity -
six months ended June 30, 1999 (unaudited) 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Other information
Item 6. Exhibits and Reports on Form 8-K 20
Signature 20
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
PART I - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS PAGE 3
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 90,087 $ 412,378
Accounts receivable 7,178,129 1,230,361
Accounts receivable - Virbac SA 64,759 91,212
Inventories 12,800,447 3,355,504
Prepaid expenses and other assets 708,142 845,840
------------------ -----------------
20,841,564 5,935,295
Property, plant and equipment, net 12,924,657 4,904,520
Goodwill 7,265,234 1,464,058
Other assets 936,789 376,778
------------------ -----------------
Total Assets $ 41,968,244 $ 12,680,651
================== =================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt and notes payable $ 1,648,590 $ 3,200,000
Advance from Virbac SA -- 2,000,000
Accounts payable
Trade 3,217,560 503,724
Virbac S.A. 273,411 262,487
Accrued expenses 2,576,821 823,740
------------------ -----------------
7,716,382 6,789,951
Long-term debt and notes payable 7,403,295 4,000,000
Commitments and contingencies (Note 2)
Shareholders' equity:
Common stock ($.01 par value; 38,000,000 shares authorized;
21,975,747 and 12,580,918 issued, respectively) 219,757 125,809
Additional paid-in capital 35,680,306 8,284,453
Treasury stock at cost (1,000,000 shares) (3,036,683) --
Accumulated deficit (6,014,813) (6,519,562)
------------------ -----------------
26,848,567 1,890,700
------------------ -----------------
Total Liabilities and Shareholders' Equity $ 41,968,244 $ 12,680,651
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) PAGE 4
<TABLE>
<CAPTION>
For the three months For the six months
Ended June 30, Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues $ 14,406,197 $ 4,653,297 $ 22,126,180 $ 8,995,563
Cost of goods sold 8,529,910 2,311,360 12,359,779 3,933,247
---------------- ---------------- ---------------- ----------------
Gross profit 5,876,287 2,341,937 9,766,401 5,062,316
Operation expenses:
Selling, general and administrative 4,375,023 2,091,757 7,479,021 4,481,395
Research and development 367,365 84,700 582,868 352,225
Warehouse and distribution 411,818 88,450 865,558 411,292
---------------- ---------------- ---------------- ----------------
Income (loss) from operations 722,081 77,030 838,954 (182,596)
Interest expense (123,884) (131,470) (240,528) (272,665)
Other income (expense) (105,462) (46,875) (93,677) 75
---------------- ---------------- ---------------- ----------------
Income (loss) before income tax 492,735 (101,315) 504,749 (455,186)
benefit
Income tax benefit -- -- -- --
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 492,735 $ (101,315) $ 504,749 $ (455,186)
================= ================= ================ =================
Basic loss per share $ 0.02 $ (0.01) $ 0.03 $ (0.04)
================= ================= ================ =================
Diluted loss per share $ 0.02 $ (0.01) $ 0.03 $ (0.04)
================= ================= ================ =================
Basic shares outstanding 21,250,472 12,580,918 18,341,083 12,580,918
================= ================= ================ ================
Diluted shares outstanding 21,250,472 12,580,918 18,341,083 12,580,918
================= ================= ================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) PAGE 5
<TABLE>
<CAPTION>
For Six Months
Ended June 30,
1999 1998
<S> <C> <C>
Operating activities
$ 504,749 $ (455,186)
Net income (loss) from operations
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:-
Depreciation and amortization 722,318 441,147
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,581,500) (1,837,127)
(Increase) in inventories (1,574,343) (491,024)
(Increase) decrease in prepaid expenses and other 419,708 (78,593)
Increase in accounts payable 155,062 925,132
Increase (decrease) in accrued expense 65,068 (387,986)
-------------- --------------
Net cash used in operating activities (2,288,938) (1,883,637)
-------------- --------------
Investing activities
Purchase of property, plant and equipment (144,236) (56,224)
Other 71,627 (24,193)
Merger with Agri-Nutrition Group Limited (see Note 1) (643,979) --
-------------- --------------
Net cash used in investing activities (716,588) (80,417)
-------------- --------------
Financing activities
Proceeds from long-term debt and notes payable 4,734,338 2,000,000
Repayment of long-term debt and notes payable (12,772,811) --
Cash infusion by Parent in connection with the Merger 13,749,897 --
(see Note 1)
Repurchase of treasury shares (3,036,683) --
Issuance of common stock to directors 8,494 --
-------------- --------------
Net cash provided by financing activities 2,683,235 2,000,000
-------------- --------------
Increase (decrease) in cash and cash equivalents (322,291) 35,946
Cash and cash equivalents, beginning of period 412,378 84,047
-------------- --------------
Cash and cash equivalents, end of period $ 90,087 $ 119,993
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) PAGE 6
Supplemental disclosure of non-cash investing and financing activities:
On March 5, 1999, Agri-Nutrition Group Limited ("AGNU") consummated a
merger with Virbac, Inc., a Delware corporation and indirect subsidiary of
Virbac SA, a French corporation ("VBSA"), pursuant to which (i) Virbac received
a cash infusion from VBSA of approximately $13.7 million plus a contribution of
$2.0 million of debt to Virbac, Inc.'s equity, (ii) AGNU issued 12,580,918
shares of its Common Stock (the "Merger Shares") to VBSA Sub and (iii) Virbac
was merged (the "Merger") with and into AGNU, with AGNU being the surviving
entity and VBSA its controlling stockholder (see Note 1). Because VBSA, the
parent of Virbac, received 60% of the voting equity of the Company, Virbac is
considered to be the acquirer for financial statement purposes. Therefore, the
Merger has been accounted for as a reverse purchase of AGNU by Virbac. See notes
1 and 2 for further discussion.
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) PAGE 7
<TABLE>
<CAPTION>
Common Stock Treasury Stock
Additional Number
Number Par Paid In of Shares Amount Accumulated Total
of Shares Value Capital Deficit
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, 12,580,918 $ 125,809 $ 8,284,453 $ (6,519,562) $ 1,890,700
December 31, 1998
Cash infusion by Parent in
connection with the 13,749,897 13,749,897
Merger (see Note 1)
Contribution of debt to
Parent to equity in
connection with the 2,000,000 2,000,000
Merger (see Note 1)
Merger with
Agri-Nutrition Group 9,387,279 93,873 11,637,538 11,731,411
Limited (see Note 1)
Issuance of shares to 7,550 75 8,418 8,493
directors
Purchase of treasury (1,000,000) $(3,036,683) (3,036,683)
Shares (see Note 2)
Net income 504,749 504,749
Balance,
June 30, 1999 21,975,747 $ 219,757 $ 35,680,306 (1,000,000) $(3,036,683) $ (6,014,813) $ 26,848,567
============ =========== ============= ============ ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRBAC CORPORATION(formerly Agri-Nutrition Group Limited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PAGE 8
1. Nature of Operations and Basis of Presentation
Virbac Corporation (the "Company" or "Virbac") manufactures and distributes a
wide variety of health, grooming, dental and parasiticidal products for pets and
other companion animals under the C.E.T., Allerderm, St. JON, Zema, and
Francodex brand names.
The Company is the result of the March 5, 1999 merger of Virbac, Inc.,
a subsidiary of Virbac SA, a French veterinary pharmaceutical manufacturer
("VBSA"), and Agri-Nutrition Group Limited ("AGNU"), a publicly held company.
Pursuant to the merger agreement dated October 16, 1998 (the "Merger
Agreement"), the merger was completed by the following series of transactions:
(i) VBSA contributed a total of $15.7 million to Virbac, Inc. consisting of
$13.7 million in cash and $2 million in intercompany debt recapitalized as
equity; (ii) AGNU issued 12,580,918 shares of AGNU stock to VBSA; and (iii)
Virbac, Inc. merged with AGNU with AGNU being the surviving entity with VBSA its
majority stock holder. The name of the surviving entity was then changed to
Virbac Corporation.
For financial statement reporting purposes, the merger is considered a
purchase of AGNU by Virbac, Inc. Accordingly, the accompanying unaudited
consolidated financial statements are the historical financial statements of
Virbac, Inc., which reflect its acquisition of AGNU as of March 5, 1999. See
Note 2.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, these
statements include all adjustments (which consist of normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at and for periods ending June 30, 1999 and 1998. The
accompanying consolidated statements of operations reflect the historic
operations of Virbac, Inc. and include the operations of AGNU since the date of
the Merger. The results of operations for the three months and six months ending
June 30, 1999 and 1998 are not necessarily indicative of the operating results
for the full year. This interim report should be read in conjunction with the
Virbac, Inc. and AGNU consolidated financial statements and notes related
thereto, included in the Proxy Statement of Agri-Nutrition Group Limited for the
1999 Annual Meeting of Stockholders filed with the Securities and Exchange
Commission on February 10, 1999 ("the Proxy Statement").
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) PAGE 9
2. The Merger
As discussed in Note 1, the Company is the combination of Virbac, Inc.
and AGNU, the merger of which has been accounted for as a purchase of AGNU by
Virbac, Inc. The purchase price of $13.0 million assigned to the transaction is
the market value of the outstanding Common Stock shares of AGNU at the time of
the merger announcement (9,387,279 shares of AGNU at $1.25 per share, or $11.7
million) plus the direct acquisition cost incurred by Virbac, Inc. The purchase
price has been allocated to the acquired assets and liabilities as follows
($000's)
Working Capital $ (1,629)
Fixed Assets 8,413
Identifiable Intangible Assets 223
Goodwill 5,952
$ 12,961
Goodwill is being amortized over 20 years.
The results of the operations of AGNU have been included in the
Company's consolidated financial statements only since the date of the merger,
March 5, 1999. The following table reflects the pro forma sales, net income, and
net income per share as if the merger had occurred at the beginning of each
period. Adjustments to net income include a reduction in interest expense to
reflect a contribution of $15.7 million from Virbac S.A., which was primarily
used to reduce debt:
PRO FORMA INFORMATION
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Net sales $ 27,314,036 $ 26,062,699
Net income (loss) $ 374,638 $ (442,349)
Earnings (loss) per share $ 0.02 $ (0.02)
Weighted average shares outstanding 21,975,000 21,268,565
</TABLE>
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) PAGE 10
Also pursuant to the Merger Agreement in April 1999, the Company
commenced a public tender offer to purchase 1,000,000 shares of the Company's
outstanding Common Stock for $3.00 per share (the "Mandatory Tender Offer"). The
shares issued to VBSA as part of the merger were excluded from this tender
offer. Following the Mandatory tender Offer, VBSA controls approximately 60% of
the outstanding Common Stock of the Company. In addition, if, during the period
ending on the second anniversary of the merger, the closing sale price of the
Company's Common Stock has not reached $3.00 per share for 40 consecutive
trading days, the Company will conduct another public tender offer to purchase
up to 1,395,000 of the Company's outstanding Common Stock at a price of $3.00
per share. Pursuant to the Merger Agreement, such tender will be funded by
VBSA's direct purchase from the Company of 1,395,000 shares of unissued Common
Stock at a price of $3.00 per share.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
Raw materials $ 4,817,489 $ 799,848
Packaging 1,659,231 855,305
Finished goods 7,242,156 1,756,137
13,718,876 3,411,290
Less: reserve for excess and obsolete inventories (918,429) (55,786)
$ 12,800,447 $ 3,355,504
================ ==============
</TABLE>
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) PAGE 11
4. Financing
The Company has revolving credit facilities that aggregated $13.7
million at June 30, 1999. Notes payable as of June 30, 1999 and December 31,
1998, consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
Revolving line of credit with a financial institution up to
$1,000,000, interest due quarterly at LIBOR +.95% (5.9% at
June 30, 1999), expires August 25, 1999, unsecured and
guaranteed by Virbac, SA. $ 1,000,000 $ 1,000,000
Note payable to a financial institution, dated March 5, 1999,
with interest due quarterly from the date of initial advance
at LIBOR plus .95% (5.9%, as of June 30, 1999), due in full
on July 1, 1999, unsecured and guaranteed by Virbac, SA. 1,800,000 2,200,000
Revolving line of credit with a financial institution up to
$4,000,000, with interest due quarterly at LIBOR plus .75%
(5.7% as of June 30, 1999), expires July 6, 2000, guaranteed
by Virbac, SA. 400,000 4,000,000
Revolving credit facility with a financial institution up to
$7 million based upon specified percentages of qualified
accounts receivable and inventory, secured by the assets of
AGNU, amended March 5, 1999, with interest at prime (8.0%, as
of June 30, 1999), available amounts being reduced $100,000
per quarter, due in full on July 31, 2001. 5,354,706 --
Notes payable due to the former owners of Mardel Laboratories
Inc. dated September 25, 1997, interest at prime, due in
annual installments in 1999 and 2000 of approximately
$150,000 plus accrued interest, and $51,000 of which is
payable in shares of the Company's Common stock and a final
payment of approximately $100,000 in 2001. 497,179 --
--------------- --------------
9,051,885 7,200,000
Less- Current maturities (1,648,590) (3,200,000)
--------------- --------------
$ 7,403,295 $ 4,000,000
============== ==============
</TABLE>
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) PAGE 12
The note payable of $1.8 million to a financial institution expired in
July 1999, but was refinanced under the $4 million revolving line of credit.
The Company has reached an agreement in principle to replace all of the
revolving lines of credit with one credit facility of $10 million. Of the total,
$7 million would be subject to a borrowing formula based upon eligible accounts
receivable and inventory and would serve as a revolving line of credit. The
availability under the remaining $3 million would be reduced by $150,000 per
quarter. The interest rate and fees would vary based upon the financial
performance of the Company as measured by the ratio of EBITDA to interest
expense paid and current maturities due. Interest rates could vary from prime
plus 25 basis points to prime minus 75 basis points. The agreement is expected
to be finalized by the end of August 1999.
At June 30, 1999, the Company was in compliance with all covenants
related to its various financing arrangements, as amended.
5. Stock Options
During the six months ended June 30, 1999, options to purchase 240,500
shares of the Company's Common Stock were granted to employees. The exercise
price of 50,000 of the options was $1.25 per share and was $1.34 per share for
the remaining 190,500 options. The exercise prices were determined based upon
the fair value of the shares on the dates of grant. These options vest ratably
over three years from the dates of grant and will expire ten years from the
grant date. During the same period, non-qualified options to purchase 558,000
shares of the Company's Common Stock expired.
<PAGE>
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Virbac Corporation ("the Company") manufactures and distributes
companion animal health products. The Company is a leader in dermatological and
oral hygiene products for companion animals, or pets, and provides a broad array
of health care products to its customers under the C.E.T., Allerderm, St. JON,
Zema, and Francodex brand names.
On March 5, 1999, the Company, formerly named Agri-Nutrition Group
Limited, merged with Virbac, Inc., with the Company being the surviving
corporation. Virbac SA, the parent of Virbac, Inc., received 60% of the voting
equity of the Company; therefore, Virbac, Inc. is considered to be the acquirer
for financial statement purposes. Accordingly, the merger has been accounted for
as a reverse purchase of Agri-Nutrition Group Limited by Virbac, Inc.
The Management's Discussion and Analysis that follows contains
forward-looking information made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements may be affected by certain risks and uncertainties described in the
Company's filings with the Securities and Exchange Commission. The Company's
actual results could differ materially from such forward-looking statements.
Results of Operations
The actual results of operations for the three and six months ended
June 30, 1999 as presented in the Consolidated Statements of Operations
(unaudited) include the operations of Virbac, Inc. plus the results of
Agri-Nutrition since March 5, 1999. The actual results of operations for the
three and six months ended June 1998 as presented in the Consolidated Statements
of Operations (unaudited) include only the operations of Virbac, Inc.
Because Agri-Nutrition operations were significantly larger than
Virbac, Inc., substantially all of the increase in each component is due to the
acquisition of Agri-Nutrition. For the six months ended June 1999 as compared to
June 1998, the acquisition accounts for 92% of the increase in revenue, 90% of
the increase in gross profit and almost all of the increase in operating
expenses. The impact is even more significant when comparing the three-month
periods ending June 30, 1999 and 1998.
For comparative purposes, management believes that an as adjusted
analysis will provide a more meaningful discussion of the results of operations.
To that end, the actual results for the periods ending June 30, 1998 have been
adjusted to include the results of Agri-Nutrition for the four months from March
through June 1998 in order to be comparable with the actual results of 1999.
Management believes the amounts and discussion below provide a more meaningful
comparison of the Company's results of operations.
<TABLE>
<CAPTION>
(in thousands of dollars) For the quarter ended For the six months ended June 30,
June 30,
1999 1998 1999 1998
as adjusted as adjusted
<S> <C> <C> <C> <C>
Sales $ 14,406 $ 12,937 $ 22,126 $ 20,146
Gross Profit 5,876 5,243 9,766 8,579
Gross Profit % 41% 41% 44% 43%
Operating Expenses 5,154 5,181 8,927 8,913
Interest and other expenses 229 225 334 330
Net income (loss) $ 493 $ (163) $ 505 $ (664)
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION (continued) PAGE 14
Quarter Ended June 30, 1999 Compared to As Adjusted Quarter Ended June 30, 1998
The increase in sales for the three months ended June 30, 1999 is
primarily volume driven. Positive factors impacting sales were:
Strong volumes of the Company's Preventic tick collar.
The introduction of advanced formula and patent protected Spherulites in the
Company's dermatological line, which management believes has led to an
increase in market share in the dermatological line.
Increased volumes of bromethalin redenticides under contract manufacturing.
These positive factors were partially offset by the following negative
factors:
A decrease in sales of the relatively low margin nutraceutical products
due to increased competition.
A disruption to the dental line's marketing efforts caused by the
relocation of the line's marketing staff from California to Texas;
this relocation is now complete and volumes are expected to recover.
Increased competition in the over-the-counter (OTC) distribution channel,
particularly for insecticides.
A shift in the Company's focus in the product lines sold through the OTC
distribution channel. As the Company integrates the Francodex business
of Virbac, Inc. with the St. JON business of Agri-Nutrition, it is
focusing on the more profitable products as it eliminates duplication.
The gross profit percentage is stable at 41%. The consolidated gross margin
is a weighted average of the pet care lines sold through the veterinary and OTC
distribution channels (49% in 1999 and 49% in 1998) and of the Company's PM
Resources (PMR) subsidiary (21% in 1999 and 13% in 1998), whose business is
primarily contract manufacturing. In 1999 PMR began providing products to the
3500 dealer Purina Mills distribution network on a direct basis. Gross profit
margins on sales to these dealers are higher than the margins realized on PMR's
traditional sales from contract manufacturing. Other than the products sold
through the Purina dealers, gross profit percentages by product line were
generally stable, as selling prices and cost of goods were little changed across
product lines.
<PAGE>
MANAGEMENT'S DISCUSSION (CONTINUED) PAGE 15
The Company's operating expenses were relatively unchanged as compared to
1998. This stability reflects an increase of $412,000 in corporate expenses and
$170,000 in PMR's expenses, offset by a $450,000 reduction in expenses in the
St. JON subsidiary.
The reduction in St. JON's expenses result from 1998 actions by
Agri-Nutrition to consolidate the Zema, Mardel, and St. JON operations
into one unit. Although the consolidation took place in 1998, the
impact of these actions did not begin to be fully realized until 1999.
The increase in corporate expenses generally corresponds to acquisition
and integration expenses that are non-recurring in nature, such as
severance pay.
PMR'sincrease is due to distribution and marketing functions necessary to
support the sales to its new distribution channel of Purina dealers.
Additional actions, for which the positive impact on earnings are expected
to be significantly realized in the third quarter, were taken in the second
quarter to further reduce costs. These actions include a reduction in headcount
of 22 people in sales and marketing functions, resulting in estimated net annual
savings of $750,000. This headcount reduction is expected to have no impact on
sales, because the Company has gained efficiencies in marketing as a result of
the merger, especially by integrating telemarketing with the direct sales force.
In addition, the Company is moving forward with its plan to consolidate
manufacturing and distribution facilities by the end of 1999, which it expects
to result in significant annual savings beginning in 2000.
Management anticipates further improvement in sales and in market share
penetration as a result of the introduction, during the latter half of 1999, of
Spherulite technology into additional dermatological products and into its aqua
science line.
The Company did not record an income tax benefit in connection with its
operating loss in 1998. In 1999, income tax expense has been offset by a
reduction in the valuation allowance established in prior years in connection
with certain loss carryforwards. The aggregate amount of the deferred tax asset
valuation allowance at June 30, 1999 was approximately $1.5 million. This
valuation allowance reflects the significant losses incurred by Virbac, Inc. and
Agri-Nutrition over the last three years. Management will continue to evaluate
the valuation allowance and may make an adjustment in future periods if
operations continue to improve.
<PAGE>
MANAGEMENT'S DISCUSSION (CONTINUED) PAGE 16
Six Months Ended June 30, 1999 Compared to As Adjusted Six Months Ended
June 30, 1998
The results of operations for the six-month period ended June 30, 1999
include the operations of Virbac, Inc. for the entire six months and the
operations of Agri-Nutrition since the date of the merger, March 5, 1999. For
purposes of this Management's Discussion and Analysis, 1999 amounts are compared
to 1998 amounts adjusted to include Agri-Nutrition for the period March through
June 1998.
The increases in sales for the six months ended June 30 is primarily
volume driven. Positive factors impacting sales were:
Strong volumes of the Company's Preventic tick collar.
The introduction of advanced formula and patent protected Spherulites in
the Company's dermatological line, which management believes have led
to an increase in market share in the dermatological line.
Increased volumes of bromethalin redenticides under contract manufacturing.
These positive factors were partially offset by the following negative
factors:
A decrease in sales of the relatively low margin nutriceutical products
due to increased competition.
A disruption to the dental line's marketing efforts caused by the
relocation of the line's marketing staff from California to Texas;
this relocation is now complete and volumes are expected to recover.
Increased competition in the OTC distribution channel, particularly for the
insecticides.
A shift in the Company's focus in the product lines sold through the
OTC distribution channel. As the Company integrates the Francodex business of
Virbac, Inc. with the St. JON business of Agri-Nutrition, it is focusing on the
more profitable products as it eliminates duplication.
The improved gross profit percentage (44% in 1999, 43% in 1998)
reflects PMR's new distribution channel with the Purina dealers. Gross profit
margins on sales to these dealers are higher than the margins realized on PMR's
traditional sales from contract manufacturing because of higher selling prices.
Gross profit percentages of the other product lines were generally stable, as
selling prices and cost of goods were little changed across product lines. The
gross profit percentage for the six-month period was higher than for the three
month period ended June 30 because the weighting of Agri-Nutrition in the
consolidated results were less important in the six-month results
(Agri-Nutrition is included for four out of the six months) than in the
three-month period (Agri-Nutrition is included for three out of the three
months). Historically, Agri-Nutrition, whose focus was primarily in the OTC and
contract manufacturing product lines, had a lower gross profit percentage than
Virbac, Inc., whose focus was primarily in the veterinary product lines. The
consolidated gross margin is a weighted average of the pet care lines sold
through the veterinary and OTC distribution channels (51% in 1999 and 50% in
1998) and of PMR (22% in 1999 and 13% in 1998), whose business is primarily
contract manufacturing.
<PAGE>
MANAGEMENT'S DISCUSSION (CONTINUED) PAGE 17
The Company's operating expenses were relatively unchanged compared to
1998. This overall stability reflects a $600,000 reduction in expenses in the
St. JON business unit, offset by increases of $400,000 in corporate expenses and
$200,000 in PMR's expenses.
The reduction in the St. JON expenses result from 1998 actions by
Agri-Nutrition to consolidate the Zema, Mardel, and St. JON operations
into one unit. Although the consolidation took place in 1998, the
impact of these actions did not begin to be fully realized until 1999.
The increase in corporate expenses generally corresponds to acquisition
and integration expenses that are non-recurring in nature, such as
severance pay
PMR'sincrease is due to distribution and marketing functions necessary to
support the sales to its new distribution channel of Purina.
Additional actions, for which the positive impact on earnings are
expected to be significantly realized in the third quarter, were taken in the
second quarter to further reduce costs. These actions include a reduction in
headcount of 22 people in sales and marketing functions, resulting in estimated
net annual savings of $750,000. This headcount reduction is expected to have no
impact on sales, because the Company has gained efficiencies in marketing as a
result of the merger, especially by integrating telemarketing with its direct
sales force. In addition, the Company is moving forward on its plan to
consolidate manufacturing and distribution facilities by the end of 1999, which
it expects to result in significant annual savings beginning in 2000.
Management anticipates further improvement in sales and in market share
penetration as a result of the introduction of Spherulite technology into
additional dermatological products and into its aqua science line during the
latter half of 1999.
The Company did not record an income tax benefit in connection with its
operating loss in 1998. In 1999, income tax expense has been offset by a
reduction in the valuation allowance established in prior years in connection
with certain loss carryforwards. The aggregate amount of the deferred tax asset
valuation allowance at June 30, 1999 was approximately $1.5 million. This
valuation allowance reflects the significant losses incurred by Virbac, Inc. and
Agri-Nutrition over the last three years. Management will continue to evaluate
the evaluation allowance and may make an adjustment in future periods if
operations continue to improve.
<PAGE>
MANAGEMENT'S DISCUSSION (CONTINUED) PAGE 18
Liquidity and Capital Resources
During the six months ended June 30, 1999, $2.3 million of cash was
used in operations. Although $1.2 million was generated by the Company's net
income before depreciation and amortization, working capital needs consumed $3.5
million. The increase in working capital reflects increases in accounts
receivable and in inventory. The increased accounts receivable balance arises
from the increase in sales and from seasonality. Inventory increased for several
reasons: (1) the seasonality of the Company's business, (2) the significant
back-order position at the beginning of the year, and (3) the build-up of
inventory by PMR to serve the Purina Mills' dealer distribution network.
Cash flows used in investing activities include cash costs related to
the merger and capital improvements at the Company's St. Louis and Fort Worth
facilities.
Cash flows from financing activities reflect primarily the merger with
Agri-Nutrition Group Limited. In conjunction with the merger, Virbac S.A.
invested approximately $15.7 million in the Company. These funds were used to
pay down debt and to repurchase 1,000,000 shares of the Company's stock at $3.00
per share in April 1999 pursuant to the mandatory tender offer required under
the merger agreement. In addition, borrowing under a line of credit facility
increased to find working capital needs.
The Company had credit facilities aggregating $13.7 million at June 30,
1999. This amount consists of $1.8 million in term loans and $12 million in
revolving credit agreements. The Company's credit facilities with one bank
aggregating $6.8 million are guaranteed by the Company's majority shareholder,
Virbac SA. The availability of $4.5 million under the revolving credit
facilities is dependent upon the Company's balance of qualified accounts
receivable and inventory, and the available amount on a $2.5 million line is
reduced by $100,000 quarterly. There are no conditions on the availability of
the remaining $5.0 million revolving credit facilities. The aggregate
availability under all lines of credit was $5.1 million at June 30, 1999. All
agreements expire in July 2000.
On March 5, 1999, the Company amended its existing credit lines to
accommodate changes in the organizational structure of the Company subsequent to
the merger. In conjunction with the merger, the Company is required to remove
the guarantee of Virbac S.A. from its financing agreements. The Company is
currently in negotiations with its banks to restructure its credit facilities
and has reached an agreement in principle with one of its banks to replace all
of the credit facilities described above with a $10 million facility, which
management believes is sufficient for its needs. The guarantee of Virbac SA on
existing financing agreements would be effectively removed. This facility would
be a three-year facility. Of the total, $7 million would be subject to a
borrowing formula based upon eligible accounts receivable and inventory and
would serve as a revolving line of credit. The availability under the remaining
$3 million would be reduced by $150,000 per quarter. The interest rate and fees
would vary based upon the financial performance of the Company as measured by
the ratio of EBITDA to interest expense paid and current maturities due.
Interest rates could vary from prime plus 25 basis points to prime minus 75
basis points. It is expected that the agreement will be finalized by the end of
August 1999.
Management believes that the Company will have sufficient cash to meet
the needs of the current operations for at least the next twelve months from
cash flows from current operations and from existing and proposed financing
facilities.
<PAGE>
MANAGEMENT'S DISCUSSION (CONTINUED) PAGE 19
The Company has no plans to significantly increase any of its plant
facility's capacity or to expend significant capital in modifying them.
Management is currently developing plans for the consolidation of certain plants
that may require expenditures for plant closing costs and minor upgrades to
remaining facilities. These requirements, if any, are expected to be funded from
current operations and from existing and proposed financing facilities.
The Company is committed to conduct a public tender offer to purchase
up to 1,395,000 of the Company's outstanding Common Stock at a price of $3.00
per share if, during the period ending on the second anniversary of the Merger,
the closing sale price of the Company's Common Stock has not reached $3.00 per
share for a period of 40 consecutive trading days. Pursuant to the Merger
Agreement, such tender, if necessary, will be funded by Virbac SA's direct
purchase from the Company of 1,395,000 shares of Common Stock at $3.00 per
share.
The Company has no plans to pay dividends to stockholders in the
foreseeable future.
Year 2000 Compliance
The Year 2000 issue arises as a result of computer programs being
written using two digits rather than four to define the applicable year.
Consequently, these computer programs may contain time-sensitive software which
recognizes a date using "00" as the year 1900 rather than the year 2000. The
impact of the Year 2000 issue extends beyond traditional computer hardware and
software systems and may potentially impact telephone systems, building
facilities systems, security systems and systems utilized by outside vendors and
customers. Failure to effectively address the Year 2000 issue could result in a
disruption of operations and the inability to process transactions or to perform
other normal business activities.
The Company has reviewed its key hardware and software systems for
compliance. Those systems that were not in compliance have been repaired or
updated to support Year 2000 compliance. The repairs and upgrades have been
tested or are in the process of being tested. The testing that is not yet
complete should be complete by the end of September 1999. Less critical systems,
such as personal computers, have been or are in the process of being evaluated
and upgraded; this process should be complete by the end of August 1999. The
cost of the repairs and upgrades to the key hardware and software systems and to
the less critical systems have not been, and are not expected to be, material to
the Company's financial statements.
The Company believes that the Year 2000 issues will not pose
significant operational problems for the Company. However, there can be no
assurance that the Company will not experience unanticipated costs and/or
business interruptions due to Year 2000 problems in its internal systems, its
supply chain or from customer product migration issues, or that such costs
and/or interruptions will not have a material adverse effect on the Company's
consolidated results of operations.
<PAGE>
PART II - OTHER INFORMATION PAGE 20
Item 6. Exhibits and Reports on Form 8-K.
b. Reports of Form 8-K.
No reports on Form 8-K were filed during the three-month period ended
June 30, 1999.
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.
VIRBAC CORPORATION (formerly Agri-Nutrition Group Limited)
/s/ Henry B. Haley
Henry B. Haley
Vice President and Chief Financial Officer
August 16, 1999
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