SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
Commission File Number 0-24312
AGRI-NUTRITION GROUP LIMITED
(Exact name of registrant as specified in its charter)
Delaware 43-1648680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Riverport Executive Center II
13801 Riverport Drive, Suite 111
Maryland Heights, Missouri 63043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 298-7330
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of January 28, 1999 (computed by reference
to the closing price of such stock on the NASDAQ/National Market) was
$8,649,724.
As of January 28, 1999, there were 9,275,696 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Portions of the Registrant's definitive Proxy Statement
regarding the 1999 Annual Meeting of Stockholders Part III
<PAGE>
Agri-Nutrition Group Limited
FORM 10-K
Cross Reference Sheet
<TABLE>
<CAPTION>
Item Page
Part I
<S> <C> <C>
1 Business............................................................................................ 2
2 Properties.......................................................................................... 6
3 Legal Proceedings................................................................................... 7
4 Submission of Matters to a Vote of Security Holders................................................. 7
4A Executive Officers of the Registrant................................................................ 8
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters............................... 9
6 Selected Financial Data............................................................................. 10
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................ 12
8 Financial Statements................................................................................ 20
9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................................................... 21
Part III
10 Directors and Executive Officers of the Registrant.................................................. 22
11 Executive Compensation.............................................................................. 22
12 Security Ownership of Certain Beneficial Owners and Management...................................... 22
13 Certain Relationships and Related Transactions...................................................... 22
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 23
Signatures ......................................................................................... 26
</TABLE>
1
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Part I
Item 1. Business.
General
The Company manufactures and distributes a wide variety of health, grooming
and nutritional products for the pet and animal health industries and selective
products for the chemical specialties industry. The Company's Pet Health Care
Division represents the consolidation of four businesses acquired between 1995
and 1997 -- Zema Corporation in Raleigh, North Carolina ("Zema"), St. JON
Laboratories, Inc. in Los Angeles, California ("St. JON"), St. JON VRx Products
in London, England ("St. JON VRx"), and Mardel Laboratories, Inc. of Glendale
Heights, Illinois ("Mardel"). Its PM Resources division, based in St. Louis,
Missouri ("Resources"), formulates private-label products for the animal health
and specialty chemical industries.
Recent Developments
Proposed Virbac Merger. In October 1998, the Company entered into a
definitive merger agreement with Virbac, Inc. ("Virbac"), the U.S. subsidiary of
Virbac S.A. ("VBSA"), a French veterinary pharmaceutical manufacturer with
international operations, (the "Merger Agreement") whereby Virbac will be merged
into the Company and VBSA will become the Company's controlling stockholder.
Virbac, based in Fort Worth, Texas, develops, manufactures and distributes
throughout the U.S. and Canada a variety of animal health products, focusing on
dermatological, parasiticide and dental products. If the merger is consummated,
the Company's Board of Directors will be reconstituted to include a majority of
Directors designated by VBSA and the Company will change its name to Virbac
Corporation. The merger will be accounted for as a reverse acquisition of the
Company by Virbac under the purchase method.
The merger agreement provides that immediately prior to the merger,
Virbac will receive a cash infusion from VBSA of $6.7 million plus an amount
sufficient to eliminate Virbac's approximately $9.0 million of debt. In
addition, the merger agreement requires that within 60 days following the
merger, the Company will conduct a public tender offer, utilizing $3.0 million
of the cash infusion, to purchase 1,000,000 shares, or approximately 10%, of the
Company's outstanding Common Stock at $3.00 per share. If the closing price of
the Common Stock has not reached $3.00 for 40 consecutive trading days within
two years after the merger, the Company will be required to conduct a second
tender offer, funded by VBSA, for an additional 1,395,000 shares, or
approximately 15% of the shares currently outstanding, also at $3.00 per share.
The merger, which is subject to approval by the Company's stockholders
and various other customary conditions, will be submitted to stockholders for
their approval at the 1999 Annual Meeting of Stockholders, expected to take
place in February 1999.
Products
The Company's products are generally ingested by or used on animals or
in animal husbandry to promote health and production efficiency, or, in the case
of companion animals, to promote health and hygiene. The Company also
manufactures several products, including home, lawn, and garden products, and
other specialty compounds unrelated to animal health and pet care. The products
manufactured by the Company include:
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o medicated treatments to prevent and treat disease and/or promote growth in
livestock and pets, including fish;
o anthelmetics, or dewormers, to prevent gastrointestinal worms in livestock
and pets;
o nutritional supplements to promote animal growth and reproduction and
ensure efficient feed utilization, and vitamins for dogs and cats;
o aquarium water conditioners and test strips;
o pest control products, including pesticides and rodenticides;
o flea and tick products, including shampoos, dip concentrates, collars, and
sprays for dogs and cats, and flea traps;
o oral hygiene products for dogs and cats, including toothpaste and
toothbrushes, sprays, and enzymatic rawhide chews;
o gastrointestinal products for dogs and cats, including hairball remedies;
o dermatological products for dogs and cats, including anti-itch lotions and
shampoos;
o cleaners and disinfectants for use on animals and in animal quarters
including shampoos, dip concentrates, animal sprays, surface cleaners,
dairy pipeline cleaners, and all-purpose detergents;
o home, lawn, and garden products to prevent insect infestation in turf and
shrubs; and
o specialty compounds used by manufacturers in the formulation of plastics
and related products.
Customers
The Company sells its products to national or dominant regional
companies serving the animal health and specialty compound markets, pet product
distributors, specialty pet retail stores and superstores, mass merchandisers,
warehouse clubs, grocery, drug, discount, and feed stores, and veterinary
clinics. Sales are effected through a combination of full-time sales persons and
independent sales representatives, utilizing telemarketing and other means.
The Company's pet care products are sold primarily under its own brand
names, including C.E.T.(R), Petrodex(R), Maracyn(R) and Zema(R), and, to a
lesser extent, on a private-label basis. The Company's animal health products
other than pet care products are sold primarily on a private-label basis under
its customers' brand names. During 1998, branded products accounted for
approximately 48% of the Company's net sales.
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Services
The Company offers its private-label customers a wide range of services
in connection with the products it provides, including laboratory formulation
and services, technical support, registration services, and business and
marketing consulting services. Laboratory formulation and services and technical
support includes assisting customers in developing and refining products,
advising them as to suitable forms for their products or suitable packaging, and
assisting them in testing their products to enable them to provide data to their
customers or regulators. Registration services consist primarily of maintaining
the Company's Environmental Protection Agency ("EPA") and Food and Drug
Administration ("FDA") product registrations and assisting customers in
maintaining their registrations. Business and marketing consulting services
consist of assisting customers in determining new products they might
successfully market, as well as assisting them with the distribution of new and
existing products. The Company also provides distribution and warehousing
services to a number of its customers.
Registrations, Trademarks, and Patents
The Company has numerous EPA and FDA product registrations and
trademarks and patents. Its EPA product registrations permit it to sell
pesticide and rodenticide products, as well as ectoparasite products for the
treatment of fleas and ticks on dogs and cats. While EPA registrations do not
expire, registrants are required periodically to reregister certain products
with the EPA. Certain of the Company's facilities are qualified as EPA
registered manufacturing sites, which permits the Company to manufacture
products not only under its own EPA product registrations, but also under the
registrations of other companies.
The Company's FDA new animal drug applications ("NADAs") permit it to
sell medicated treatments, anthelmetics, feed additives, and other animal drug
products. NADAs do not expire, but are subject to modification or withdrawal by
the FDA based upon the related drugs' performance in the market. The Company
also has FDA manufacturing site approvals enabling the Company to manufacture
animal drugs covered by NADAs held by other companies.
The Company's trademarks relate primarily to its pet care products
which are marketed under the St. JON Pet Care(R), Mardel(R), VRx(R), Zema(R) and
Pulvex(R) labels. The Company's trademarks also include Petromalt(R), a hairball
remedy for cats originally introduced in 1923; Petrodex(R) and C.E.T.(R), lines
of dental products for dogs and cats; Petrelief(R), a line of dermatological
products for cats and dogs; Doggydent(R), a line of oral hygiene products for
dogs; Maracyn(R), a leading fish antibiotic introduced in 1969; and Trounce(R)
used to market rodenticides, the Company also has trademark registrations
pending for various additional pet care products.
The Company also has several patents covering pet toothbrushes, tartar
remover, pet shampoo, and flea traps, which expire between 2004 and 2009, and
the exclusive right to use several patents relating to enzyme generation
formulae for use in animal toothpaste and on rawhide chews. In December 1997,
the Company obtained exclusive rights to patents supporting a bioadhesive patch
technology, including exclusive distribution rights to Stomadhex(TM), a
chlorhexidine based antibacterial patch that can be placed in a pet's mouth
following dental procedures to maintain oral health. In May 1998, the Company
obtained exclusive world-wide rights to manufacture and market a line of
palatable medications for companion animals including Palaprin(R), PalaBIS(TM)
and Palapectate(TM). In August 1998, the Company obtained the North American and
U.K. rights to market and distribute certain proprietary, patented,
4
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biology-based products for the treatment of periodontal disease marketed to
companion animals as Emdovet(TM) and Profgel(TM). In addition, the Company owns
the worldwide patents for Bromethalin(R), a highly effective and proprietary
rodenticide serving agricultural and Pest Control Operator markets. Certain
Bromethalin(R) patents expired in 1997 with remaining patents expiring in 1999.
Procurement of Raw Materials
The active ingredients in the Company's products are not manufactured
by the Company, but are generally purchased from major raw materials
manufacturers. The Company generally purchases materials on an as-needed basis,
as it is generally unnecessary for the Company to maintain large inventories of
such materials in order to meet rapid delivery requirements or assure itself of
adequate supply. The Company purchases certain raw materials from multiple
suppliers; some materials, however, are proprietary, and the Company's ability
to procure such materials is limited to suppliers with proprietary rights. The
Company considers its relationships with its suppliers to be good. The Company
also purchases certain raw materials the availability of which is subject to
EPA, FDA, or other regulatory approvals. Some of the Company's customers provide
the Company with the raw materials used in the production of their products.
Competition
The Company's competitors fall into roughly four categories: animal
health distributors; manufacturers, formulators, and blenders of animal health
products; pet care product producers and suppliers; and specialty chemical and
pest control manufacturers. Each of these groups, with the exception of pet care
product producers and suppliers, are comprised primarily of privately owned
regional and local companies, although each also includes national companies
that produce or distribute certain animal health and other products. The pet
care product producer and supplier group is comprised of national and regional
companies.
Many of the Company's competitors in specific market niches are larger
and have greater financial resources than the Company. In addition, regulatory
surveillance and enforcement are accelerating, which is likely to result in
fewer competitors that have even greater resources. Much of the competition in
the industries served by the Company centers around price. The Company is
focusing on the production of high-performance, valued-added and branded
products designed to be marketed on the basis of quality as well as price.
Regulatory and Environmental Matters
The Company's operations subject it to federal, state, and local laws
and regulations relating to environmental affairs, health, and safety. These
laws and regulations are administered by the EPA, the FDA, the Occupational
Safety and Health Administration ("OSHA"), the Department of Transportation, and
various state and local regulatory agencies. Governmental authorities, and in
some cases third parties, have the power to enforce compliance with health and
safety laws and regulations, and violators may be subject to sanctions,
including civil and criminal penalties and injunctions. While the Company
believes that the procedures currently in effect at its facilities are
consistent with industry standards and that it is in material compliance with
applicable health and safety laws and regulations, failure to comply with such
laws and regulations could have a material adverse effect on the Company.
5
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The Company's operations also subject it to numerous environmental laws
and regulations administered by the EPA, including the Resource Conservation and
Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation
and Liability Act, the Federal Water Pollution Control Act, the Federal Clean
Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Toxic
Substances Control Act, as well as various state and municipal environmental
laws and regulations. See "Legal Proceedings" for a description of a Notice of
Order to Abate Violations and a Notice of Violations issued to Resources by the
Missouri Department of Natural Resources ("MDNR") relating to alleged violations
of Missouri's hazardous waste laws and regulations. Resources has discontinued
the use of underground storage tanks subject to RCRA and has submitted a closure
plan to the MDNR relating to closure of its permitted hazardous waste
operations.
Although the Company believes it is in material compliance with
applicable environmental laws, regulations, and permits and has a policy
designed to ensure that it continues to operate in material compliance
therewith, there can be no assurance that the Company will not be exposed to
significant environmental liability. The Company could be held liable for
property damage or personal injury caused by the release, spill, or other
discharge of hazardous substances or materials and could be held responsible for
cleanup of any affected sites. In connection with the acquisitions of HIB (as
defined below), Zema, St. JON and Mardel, the Company entered into agreements
pursuant to which the former owners of such companies have agreed to indemnify
the Company against liabilities, including certain environmental liabilities,
relating to the use, condition, ownership, or operation of the Company's
facilities prior to the acquisitions.
The Company has environmental compliance programs addressing
environmental and other regulatory compliance issues. Future developments, such
as stricter environmental laws, regulations or enforcement policies, could
increase the Company's environmental compliance costs. While the Company is not
aware of any pending legislation or proposed regulations that, if enacted, would
have a material adverse effect on the Company, there can be no assurance that
future legislation or regulation will not have such effect.
Employees
The Company has approximately 210 full-time employees, of which
approximately 120 are engaged in manufacturing activities and 22 in sales and
marketing activities. Forty-five of the full-time employees located at the
Bridgeton, Missouri facility are represented by the International Longshoremen's
Association, and eight are represented by the International Brotherhood of
Electrical Workers. Such employees' wages and benefits are governed by
bargaining agreements negotiated with the unions, which will expire on January
31, 1999. Management is currently negotiating an extension of these contracts
and does not anticipate that such negotiations, or the result of the
negotiations will have a materially adverse impact on the Company's operations.
The Company also employs an average of approximately 26 persons on a temporary
basis. The number of temporary employees fluctuates on an annual basis because
demand for the Company's products is seasonal. The Company considers its
employee and union relations to be good.
Item 2. Properties.
The Company owns the Bridgeton, Missouri facility at which Resources'
operations are conducted and most of the equipment located on the site. The
facility consists of a 176,600-square-foot
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manufacturing and warehousing building and three buildings for administration,
retained sample storage, equipment, and maintenance.
AGNU leases its corporate headquarters in Maryland Heights, Missouri,
and manufacturing, office, warehouse, and distribution facilities located near
Los Angeles, California, Glendale Heights, Illinois and Yeovil, the United
Kingdom, under non-cancelable leases expiring August 2000, October 1999 and
December 2002, respectively. AGNU also leases certain equipment under
non-cancelable operating leases. The Raleigh, North Carolina facility, which is
under a non-cancelable lease expiring in April 2000, has been substantially shut
down and is in the process of being subleased. Management believes that AGNU's
facilities are adequate and suitable for its current operations.
Item 3. Legal Proceedings.
On November 27, 1994, the MDNR issued a Notice of Order to Abate
Violations to the Company relating to alleged violations of Missouri's laws and
regulations relating to the storage of hazardous waste at the Bridgeton
facility. The order alleges that the Company had not remedied certain
deficiencies relating to the storage of hazardous waste cited in inspections by
the MDNR in May 1993 and March 1994, and directs remedial action.
On December 21, 1995, the MDNR issued a Notice of Violations to the
Company relating to contamination in the vicinity of an underground collection
system that was removed from the Bridgeton facility in 1994. The notice alleges
that the collection system should have been included in the Company's hazardous
waste storage permit, states that the collection system was classified by the
MDNR as a leaking underground storage tank, and directs remedial action.
The Company is currently in negotiations with the MDNR related to
certain issues raised in the November 1994 Notice of Order to Abate Violations
and the December 1995 Notice of Violations issued by the MDNR. Management does
not believe that either of the matters pose a significant risk to human health
or the environment, or that the resolution of either of the claims made by the
MDNR will have a material adverse effect on the Company's financial position or
results of operations.
The Company is aware of various disputes and potential claims and is a
party to certain litigation involving claims against the Company. Based on facts
currently known to the Company, it believes that the ultimate liability, if any,
which may result from these disputes, claims and litigation would not have a
material adverse effect on the Company's consolidated financial position or its
results of operations with or without consideration of insurance coverage. See
Note 15 to the Consolidated Financial Statements included as part of this Annual
Report.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year covered by this Report.
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Item 4A. Executive Officers of the Registrant.
The following table sets forth certain information regarding the
Company's executive officers:
Name Age Position
Bruce G. Baker 55 President and Chief Executive Officer
Robert J. Elfanbaum 35 Vice President and Chief Financial Officer
Bruce G. Baker has been President and Chief Executive Officer of the
Company since November 1, 1996. From March 1994 through October 1996, he was
Vice President and Deputy Chief Executive Officer of the Company, and he has
been a Director since August 1993. From 1965 to February 1993, he held various
management positions with Ralston Purina and Purina Mills, including Vice
President Research and Marketing of Purina Mills from 1990 to February 1993.
This was preceded by responsibilities as Vice President - Consumer Group,
directing research, marketing, manufacturing, sales, and administration for a
division of Purina Mills. Mr. Baker also has served in various capacities
relating to European, Canadian, and Mexican market development.
Robert J. Elfanbaum, C.P.A., has been Vice President and Chief
Financial Officer of the Company since August 23, 1996. From November 1994
through August 22, 1996, he served the Company as Assistant Corporate Controller
and Corporate Controller. He was Manager of Internal Auditing for Brown Group,
Inc., an international footwear company from February 1993 until he joined the
Company. From August 1985 through February 1993, he was employed by Price
Waterhouse in St. Louis, MO, most recently as a manager in their Middle Market
Group. Mr. Elfanbaum is a past president of the St. Louis Chapter of the
Institute of Management Accountants and currently is serving as Chairman of the
Nominating Committee.
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the NASDAQ National Market
under the symbol AGNU. The following table sets forth the quarterly range of
high and low closing sale prices per share for the Common Stock during the
period indicated.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal year ended October 31, 1997
First Quarter.................................. 1.63 1.13
Second Quarter................................. 1.75 1.13
Third Quarter.................................. 1.38 1.06
Fourth Quarter................................. 1.69 1.13
Fiscal year ended October 31, 1998
First Quarter.................................. 1.50 1.06
Second Quarter................................. 1.44 1.13
Third Quarter.................................. 1.31 1.00
Fourth Quarter................................. 1.50 0.81
Fiscal 1999
Through January 28, 1999....................... 1.38 1.00
</TABLE>
The Company has not paid any dividends on its Common Stock since its
formation. It presently intends to retain its earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
Further, the Company is prohibited from paying dividends without the consent of
the Company's lender. As of December 31, 1998, the Company had a total of
approximately 1,900 stockholders, including 267 stockholders of record and
approximately 1,600 persons or entities holding Common Stock in nominee name.
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Item 6. Selected Financial Data.
The selected financial data presented below should be read in
conjunction with the Consolidated Financial Statements of the Company, and the
related notes thereto,"Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other financial information included
elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales (1)................................. $13,671,588 $20,062,942 $28,661,307 $31,051,537 $32,944,020
Operating income (loss)
from continuing
operations................................ (484,272) (484,315) 47,399 978,481 (42,894)
Income (loss) from
continuing operations..................... (482,817) (108,333) (241,320) 118,671 (662,832)
Income from discontinued
operations................................ 147,206 139,766 113,900 14,659 --
Net income (loss)............................. (335,611) 31,433 (127,420) 133,330 (662,832)
Basic earnings (loss).........................
per share:
Continuing
operations.............................. (0.07) (0.01) (0.03) 0.01 (.07)
Discontinued
operations.............................. 0.02 0.01 0.01 -- --
Net income................................ (0.05) -- (0.02) 0.01 (.07)
Diluted earnings (loss) per share:
Continuing operations..................... (0.07) (0.01) (0.03) 0.01 (.07)
Discontinued
operations.............................. 0.02 0.01 0.01 -- --
Net income................................ (0.05) -- (0.02) 0.01 (.07)
Weighted average number of shares outstanding:
Basic..................................... 6,636,811 8,112,851 8,397,686 8,483,897 9,309,184
Diluted................................... 6,636,811 8,112,851 8,397,686 8,699,914 9,309,184
</TABLE>
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<TABLE>
<CAPTION>
October 31,
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash...................................... $11,185,943 $ 2,330,685 $ 2,186,877 $ 145,505 $ 97,971
Working capital........................... 13,195,940 7,808,433 9,928,248 7,772,318 9,263,115
Total assets.............................. 21,141,513 23,473,103 25,850,052 26,596,150 28,042,588
Current portion of
long-term debt.......................... 607,165 252,692 291,817 201,636 1,209,912
Long-term debt............................ 3,066,667 4,914,614 7,824,012 7,236,204 9,114,226
Stockholders' equity...................... 14,095,359 14,416,918 14,322,335 15,553,360 14,884,813
</TABLE>
(1) Net sales from continuing operations to Purina were as follows for the
respective periods:
Fiscal year ended October 31, 1994......................... $7.7 million
Fiscal year ended October 31, 1995......................... $7.1 million
Fiscal year ended October 31, 1996......................... $5.4 million
Fiscal year ended October 31, 1997......................... $4.3 million
Fiscal year ended October 31, 1998......................... $3.1 million
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Organized in 1993, the Company manufactures and distributes animal
health and pet care products. In September 1993, the Company, through its
subsidiary Resources, acquired the Health Industries Business of Purina Mills,
Inc. which formulates, manufactures and distributes animal health products and
to a lesser extent, home, lawn and garden, and other products. In July 1994, the
Company completed its initial public offering ("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, a
formulator, manufacturer and supplier of health care and grooming products to
the pet industry. Effective August 31, 1995, the Company purchased substantially
all of the net assets and business of St. JON, a developer, manufacturer and
marketer of oral hygiene, dermatological and gastrointestinal products for dogs
and cats. In September 1997, the Company purchased substantially all of the net
assets and business of Mardel. Mardel is a developer, manufacturer and marketer
of high quality care products to the pet industry with expertise extending to
fresh water and marine fish, birds, dogs, cats, small animals and pond
accessories.
The Company's results of operations presented and discussed herein only
include the results of Zema's, St. JON's and Mardel's operations subsequent to
their acquisition by the Company in April 1995, August 1995 and September 1997,
respectively.
The Company historically reported certain financial information for two
segments - ingredients and specialty products. Ingredients consisted of feed
products that were purchased or blended by the Company and distributed for
Purina (see Note 14 to the Company's Consolidated Financial Statements included
elsewhere in this Annual Report). Specialty products consist of all other
products formulated, manufactured, and distributed by the Company to various
customers, including Purina. 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.
Given the acquisitions of businesses with branded, consumer-targeted
products and the continued emphasis on growth of the specialty product segment,
the significance of the ingredients segment had decreased in fiscal 1996 and
1997. Management expected this trend to continue in the future. In June 1997,
the Company discontinued the distribution of ingredients to Purina. In July
1997, the Company distributed all of its remaining ingredients inventories and
discontinued operations in its ingredients segment. This segment is accounted
for as discontinued operations in accordance with Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations." Accordingly, the Company
has reported the ingredients segment as discontinued operations and the
consolidated financial statements have been reclassified to report separately
the financial position and operating results of the segment. The Company's
consolidated operating results for year ended October 31, 1997 has been restated
to reflect the Company's continuing operations related to its specialty products
business. There were no activities from discontinued operations in fiscal year
1998.
In the fourth quarter of 1997, the Company formed the Pet Health Care
Division, which is comprised of St. JON, St. JON VRx, Zema and Mardel. The
integration of these companies is expected
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to produce certain operating synergies, creating a platform for continued
expansion. The benefits from such integration started to impact the Company's
operating results in the third quarter of fiscal 1998. During the first six
months of fiscal 1998 production shifted from Zema's Raleigh facility to the
Company's other manufacturing locations. The distribution functions within the
Pet Health Care Division were consolidated by the end of the fourth quarter of
fiscal 1998. During August 1998, the Raleigh facility was effectively shut down
and is in the process of being sublet. Consolidation of the sales and
administration functions of the Pet Health Care Division was completed during
the third quarter of fiscal 1998. The Company has incurred certain incremental
costs associated with the integration, but such costs, in the aggregate, have
not been nor are expected to be material to the Company's consolidated results
of operations. The Company continues to pursue selective complementary
acquisitions, alignments and/or licenses in support of its core businesses.
The following table represents certain summary operating data on a
comparative basis:
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
1996 1997 1998
Dollar % of Dollar % of Dollar % of
amount net sales amount net sales amount net sales
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Net Sales............................. $ 28,661 100.0 $ 31,052 100.0 $ 32,944 100.0
Cost of sales......................... 20,784 72.5 22,851 73.6 24,008 72.9
Gross profit.......................... 7,877 27.5 8,201 26.4 8,936 27.1
Selling, general and
administrative expense........... 7,447 26.0 7,130 23.0 8,812 26.7
Operating income (loss)............... 47 0.2 979 3.2 (43) (0.1)
</TABLE>
Recent Developments
Proposed Virbac Merger. In October 1998, the Company entered into a
definitive merger agreement with Virbac, the U.S. subsidiary of VBSA, a French
veterinary pharmaceutical manufacturer with international operations, whereby
Virbac will be merged into the Company and VBSA will become the Company's
controlling stockholder. Virbac, based in Fort Worth, Texas, develops,
manufactures and distributes throughout the U.S. and Canada a variety of animal
health products, focusing on dermatological, parasiticide and dental products.
If the merger is consummated, the Company's Board of Directors will be
reconstituted to include a majority of Directors designated by VBSA and the
Company will change its name to Virbac Corporation. The merger will be accounted
for as a reverse acquisition of the Company by Virbac under the purchase method.
The merger agreement provides that immediately prior to the merger,
Virbac will receive a cash infusion from VBSA of $6.7 million plus an amount
sufficient to eliminate Virbac's approximately $9.0 million of debt. In
addition, the merger agreement requires that within 60 days following the
merger, the Company will conduct a public tender offer, utilizing $3.0 million
of the cash infusion, to purchase 1,000,000 shares, or approximately 10%, of the
Company's outstanding Common Stock at $3.00 per share. If the closing price of
the Common Stock has not reached $3.00 for 40 consecutive trading days within
two years after the merger, the Company will be required to conduct a second
tender offer, funded by VBSA, for an additional 1,395,000 shares, or
approximately 15% of the shares currently outstanding, also at $3.00 per share.
13
<PAGE>
The merger, which is subject to approval by the Company's stockholders
and various other customary conditions, will be submitted to stockholders for
their approval at the 1999 Annual Meeting of Stockholders, expected to take
place in February 1999.
Fiscal Year Ended October 31, 1997 Compared to Fiscal Year Ended October 31,
1998
Total net sales increased 6.1% from $31.1 million in fiscal 1997 to
$32.9 million for 1998. This increase reflects a 14.9% increase in sales of the
Pet Health Care Division due primarily to the acquisition of Mardel Laboratories
in September 1997 and continued strong growth in the pet oral hygiene product
category. The increase was offset by anticipated weakness in the agricultural
portion of PM Resources' business, the timing of certain rodenticide orders
anticipated in the last half of fiscal 1998 were delayed until January 1999 and
the impact of unanticipated production shortfalls related to the consolidation
of manufacturing operations within the Pet Health Care Division. Sales to
Purina, excluding sales of ingredients which were discontinued in 1997, totaled
approximately $3.1 million in 1998 compared to approximately $4.3 million in
1997. See Liquidity and Capital Resources for a discussion of the purchase of
certain inventories from Purina.
Gross profit increased from $8.2 million in 1997 (26.4% of net sales)
to $8.9 million in 1998 (27.1% of net sales), primarily due to changes in the
Company's sales mix, which consisted of an increased proportion of sales of the
Pet Health Care Division, which generally has higher margins as compared to
sales of the Company's private label/contract manufacturing business. Gross
profit was negatively impacted by certain redundant costs incurred during the
consolidation of manufacturing operations within the Pet Health Care Division;
however such consolidation was substantially completed during the last half of
fiscal 1998.
Selling, general and administrative expenses increased from $7.1
million in 1997 to $8.8 million in 1998 primarily due to the increased costs
related to Mardel's business, which was acquired in September 1997. The increase
in expenses includes certain redundant expenses that are being incurred during
the consolidation of certain manufacturing, marketing and overhead expenses
among the operating companies that comprise the Pet Health Care Division. Such
consolidation was completed by the end of the Company's 1998 fiscal year.
The factors discussed above resulted in an operating loss from
continuing operations of approximately $40,000 during the year ended 1998,
compared to operating income of approximately $1.0 million for the prior year.
Interest expense was approximately $0.6 million in 1997 and $0.8
million in 1998, reflecting increased debt balances that resulted from the
Company's investment in Mardel and additional working capital requirements.
During the fourth quarter of fiscal 1998, the Company incurred
approximately $0.25 million of expenses related to the merger agreement between
the Company, Virbac and VBSA. Such amounts were included in interest income and
other on the Company's Consolidated Statement of Operations.
The effective income tax rate of the Company was approximately 38.5%
for both 1997 and 1998. The aggregate amount of the deferred tax asset valuation
allowance at October 31, 1998 was approximately $0.1 million. This valuation
allowance reflects management's view of the portion of deferred tax assets for
which it is more likely than not that tax benefits will not be realized. The
primary
14
<PAGE>
factor affecting management's view in this regard are the Company's losses from
operations in certain prior years.
Fiscal Year Ended October 31, 1996 Compared to Fiscal Year Ended October 31,
1997
Total net sales increased 8.3% from $28.7 million in fiscal 1996 to
$31.1 million for 1997, which included net sales of Mardel subsequent to its
acquisition in September 1997. The ingredients segment was discontinued in 1997
and accordingly sales related to this segment are included in results of
discontinued operations for all periods presented and are not reflected in the
table above. The discontinuance of the ingredients segment resulted in a minimal
impact on gross profit due to its sales being of lower margin commodity
products. Sales of pet care products grew 27% reflecting the impact of new
products introduced into the veterinary channel during fiscal 1996 and 1997, and
continued strong growth from the Company's sales and distribution operation in
the United Kingdom which was acquired in July 1996.
The Company's manufacturing and supply agreement with Purina pursuant
to which Purina had 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 ended October 31, 1996
expired as of that date. See Liquidity and Capital Resources for discussion of
the purchase of certain inventories from Purina. Sales to Purina, excluding
sales of ingredients which were discontinued in July 1997, totaled $4.3 million
for the year ended October 31, 1997 compared to $5.4 million during the year
ended October 31, 1996. Fiscal 1996 income from Purina was approximately $1.2
million less than that required under the agreement. The entire amount of the
shortfall under the agreement was billed to Purina and included in net sales of
specialty products during October 1996; such billing was collected by the
Company in December 1996.
Gross profit increased from $7.9 million in 1996 (27.5% of net sales)
to $8.2 million in 1997 (26.4% of net sales), primarily due to the increased
sales in 1997. As a percent of sales, gross profit decreased approximately one
percentage point due primarily to changes in product mix.
Selling, general and administrative expenses were approximately $7.4
million in 1996 and $7.1 million in 1997, decreasing as a percent of net sales
from 26.0% in 1996 to 23.0% in 1997. The decrease in selling, general and
administrative expenses as a percent of sales is related to the impact of the
corporate management restructuring announced in August 1996, combined with the
impact of cost reduction measures implemented at the operating companies.
Severance costs of $240,000 related to the August 1996 management
restructuring were accrued in fiscal 1996 and paid in fiscal 1997. Such costs
were nonrecurring and did not impact fiscal 1997 results.
The factors discussed above resulted in operating income from
continuing operations of approximately $979,000 during the year ended October
31, 1997, a $932,000 improvement compared to the operating income of
approximately $47,000 in the prior year.
Interest expense was approximately $0.6 million in both 1996 and 1997,
with a small increase that reflects increased debt balances that resulted from
the Company's investment in Mardel and increased sales volume in fiscal 1997.
15
<PAGE>
In March 1997, the Company terminated its letter of intent related to
its proposed acquisition of Anthony Products Company. In conjunction with this
action, the Company recorded a $202,000 pre-tax charge in fiscal 1997. Such
amount was included in interest income and other in the Company's consolidated
statement of operations.
The effective income tax rate of the Company was approximately 38% for
1996 and 1997. The aggregate amount of the deferred tax asset valuation
allowance at October 31, 1997 was approximately $0.1 million. This valuation
allowance reflects management's view of the portion of deferred tax assets for
which it is more likely than not that tax benefits will not be realized. The
primary factor affecting management's view in this regard are the Company's
losses from operations in certain prior years.
Ingredients sales were approximately $7.7 million and $5.5 million in
1996 and 1997, respectively. Income from discontinued operations in 1997
decreased approximately $99,000 from $114,000 in 1996 to $15,000 in 1997. This
is primarily attributable to decreasing margins from the sales of ingredients
compared to the prior year, combined with decreased volume of units shipped in
1997. In July 1997, the Company shipped its remaining ingredients inventory and
discontinued operations related to this segment.
Net income in 1997 of $133,000 increased by approximately $260,000
compared to the net loss of $127,000 incurred in fiscal 1996 based on the
various factors described above.
Liquidity and Capital Resources
The Company's existing capital requirements are primarily to fund equipment
purchases and working capital needs. During April 1995, the Company completed
the acquisition of Zema, which required utilization of approximately $3.2
million of net proceeds from its July 1994 IPO for the acquisition and related
expenses in 1995 and an additional payment of $300,000 plus interest which was
paid in April 1998. In August 1995, the Company acquired the net assets of St.
JON, which required approximately $3.5 million of cash, the assumption of
certain liabilities aggregating approximately $1.5 million which were paid
within four months of closing, and an additional $2.0 million plus interest to
be paid in annual installments over six years commencing March 31, 1997. During
fiscal 1997, the Company utilized approximately $1.0 million of cash for payment
of this obligation and related accrued interest, and in May 1998, paid
approximately $1.1 million, the remaining amounts outstanding under this note in
conjunction with the refinancing of its debt as discussed below. Effective May
1996, the Company acquired the worldwide patents and other assets and rights to
Bromethalin, which required payments of $1.0 million including related expenses
at closing, and will require additional consideration based on shipments of
Bromethalin to Purina over a five-year period. In September 1997, the Company
acquired Mardel for cash of approximately $1.1 million and stock valued at
approximately $1.1 million. As additional consideration for the acquisition of
Mardel, the Company also issued a note payable of $300,000 to the former owners
of the acquired company to be paid in cash and stock over a period of three
years. With the acquisition of Mardel, the Company utilized its remaining
proceeds from the IPO.
During fiscal 1996, cash used by operations approximated $2.3 million,
primarily related to increased working capital requirements. Inventories
increased by approximately $1.7 million reflecting investments in adding new
products to the Company's lines and moving existing products and product-lines
from one operating company's distribution channel into distribution channels of
other operating
16
<PAGE>
companies. Increases in accounts receivable of approximately $0.5 million
compared to the prior year reflect temporary increases in certain key accounts
that were subsequently collected during fiscal 1997.
During fiscal 1997, cash generated by operations approximated $1.8
million compared to a use of cash by operations of approximately $2.3 million in
1996. This improvement in cash flows in 1997 was primarily due to emphasis
placed on the operating companies to control and reduce inventory levels, as
well as certain changes to the product mix at Resources, including the
discontinuation of the ingredients segment. The Company's inventories from
continuing operations decreased $0.7 million during 1997 compared to an increase
of $1.7 million in 1996. The discontinuation of the ingredients segment
generated cash of $1.3 million during the year ended October 31, 1997, compared
to a use of cash related to this discontinued segment of $1.0 million during the
comparable period in the prior year. Cash generated from operations in fiscal
1997 was generally utilized for capital expenditures and to pay down debt.
During fiscal 1998, the Company used cash in operations by
approximately $1.6 million. This was primarily related to an increased
investment in inventory and increases in accounts receivable. The additional
inventory consists primarily of new product promotions and a build-up of core
products for the mass markets to reduce the risk of future stock-outs which had
been occurring through the first half of fiscal 1998. Accounts receivable
increased primarily due to increased sales in September and October of 1998
compared to 1997.
In May 1998, the Company consolidated its existing credit agreements
increasing the facility to $9.2 million with a maturity date of March 31, 2001.
The new bank agreement also increased borrowing availability for working capital
demand and modified the bank covenants. The new facility consists of $4.5
million in revolving credit lines, the available amount being based upon
specified percentages of qualified accounts receivable and inventory, and a $4.7
million revolving credit line with available amounts being reduced $150,000 per
quarter with the first such reduction on November 30, 1998. On August 6, 1998
and October 2, 1998, the Company again amended its existing credit facilities,
increasing the latter revolving credit line to $5.2 million from $4.7 million to
meet temporary working capital requirements. The interest rate will range from
prime minus 0.25% to prime plus 0.5%, depending on the Company's ratio of debt
to net worth, as defined in the new agreement. At October 31, 1998, the interest
rate charged on borrowings outstanding under the new agreement, as amended, was
8.50% which is the bank's prime rate plus 0.50%. At October 31, 1998, excluding
outstanding checks, approximately $1.2 million was available under this
agreement.
Management believes that the Company will have sufficient cash to meet
the needs of its current operations, including debt service. In order to avoid
the Company's being in non-compliance with certain of the financial covenants
under its amended credit agreement in future periods due to legal, accounting
and other transaction costs related to the proposed merger with Virbac, the
Company's lending bank agreed to exclude such costs from the calculation of its
covenants. No other instances of non-compliance with financial covenants were
present at October 31, 1998. In addition, management is currently in discussions
with its bank, and is also evaluating other strategic alternatives with third
parties, including the proposed Merger with Virbac as discussed herein, to
further address its current and long-term working capital requirements.
The Board has 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 shares repurchased and the market price paid by the Company for those
shares. The Company will utilize available funds to
17
<PAGE>
implement this stock repurchase. During the year ended October 31, 1998, 83,111
shares were repurchased under this program at an aggregate cost of approximately
$100,000. As of October 31, 1998, 129,961 shares had been repurchased under this
program at an aggregate cost of $176,007. The share repurchase program has been
suspended pending the consummation of the Merger Agreement.
The Company has no plans to significantly increase any of its operating
subsidiaries' plant facilities capacity. Capital expenditures for fiscal 1998
were approximately $0.5 million. Future capital expenditures for the Company's
operating subsidiaries are not expected to significantly exceed historical
amounts, which in prior periods approximated current depreciation expense.
In January 1999, the Company acquired certain assets, primarily
inventories, related to Purina Mill's animal health products business. The
amount paid for such inventory aggregated $400,000, less future amounts which
would have been due to Purina Mills related to the acquisition of Bromethalin
assets, as discussed in Note 3 to the Company's Consolidated Financial
Statements. Purina's "additional consideration" due for the five-year period
subsequent to the acquisition of Bromethalin was waived in conjunction with this
purchase of inventories. Prior thereto, the Company manufactured and supplied
products to Purina Mills for this business. The Company will now supply animal
health products directly to Purina's dealers. Management does not anticipate any
material adverse impact on its financial position, cash flows or results of
operations as a result of this change in customer relationships.
Quarterly Effects and Seasonality
Seasonal patterns of Resources' operations are highly dependent on
weather, feeding economics and the timing of customer orders. The results of
operations of the Pet Health Care Division historically have been seasonal with
a relatively lower volume of its sales and earnings being generated during the
Company's first fiscal quarter. In addition, consolidation of certain functions
within the Pet Health Care Division during fiscal 1998 will impact the
comparative results of the Company between quarters and in future periods.
New Accounting Standards
New Accounting Standards
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income and
components in a financial statement that is displayed with the same prominence
as other financial statements. AGNU continues to analyze FAS 130 and does not
currently expect it to have a significant impact on its financial statement
presentation.
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for periods beginning after
December 15, 1997. FAS 131 supersedes FAS 14, "Financial Reporting of Segments
of a Business Enterprise." FAS 131 establishes standards for the way public
business enterprises report financial and descriptive information about the
reportable operating segments in their financial statements. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. AGNU continues to evaluate the provisions of FAS 131
relative to additional disclosure requirements for its fiscal 1999 financial
statements.
18
<PAGE>
If the merger is consummated, the Company anticipates that it will report
in similar segments as Virbac. The Company would expect to report segment
information under FAS 131 for the following segment groupings: the ethical
segment for the distribution of pet health products mainly to veterinarian
offices, the over-the-counter segment for the distribution of pet health
products to pet stores, farm and feed stores and the mass market, the PM
Resources segment for the private label and contract manufacturing business, and
the manufacturing and administration segment.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires recognition of all derivatives on the balance sheet measured at fair
value. FAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. AGNU continues to evaluate the provisions of FAS
133 to determine its impact on financial position and results of operations.
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. Under SOP 98-1, certain costs, which are currently expensed by the Company,
may be capitalized and amortized over some future period. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. AGNU is evaluating the
provisions of SOP 98-1, but does not expect this new standard to have a
significant impact on its financial position or results of operations.
Year 2000 Compliance
The Company utilizes computer information systems to internally record
and track information, as well as interact with customers, suppliers, financial
institutions and other organizations. The Company has established a plan,
utilizing internal resources and certain external consultants, to assess the
potential impact of the year 2000 on the Company's systems and operations and to
implement solutions to address these issues. The Company has completed a
significant part of the assessment phase of its year 2000 plan with respect to
all key hardware and software systems. The Company's plan for remediation
includes a combination of repair and replacement of affected systems. For the
Company's key systems located in St. Louis, Missouri and Glendale Heights,
Illinois, the Company's independent consultants have completed a significant
portion of the repair work needed to make such systems year 2000 compliant. They
have also completed a significant portion of the testing required to verify the
effectiveness of such repairs. The key systems located in Harbor City,
California will be addressed primarily through an upgrade of the existing
software to a year 2000-compliant version. Such upgrade has been evaluated and
initial planning by independent consultants retained to evaluate and implement
the upgrade has been completed. The final implementation of the upgrade has been
delayed, pending the completion of the Merger Agreement and evaluation of
information system needs of the merged organization. The cost of upgrading the
systems in Harbor City has been included in the Company's capital expenditures
plan, based on the final bid received from the Company's independent
consultants. The costs of repairs and upgrades to date have not been material to
the Company's financial position or results of operations. Non-key systems and
non-information technology systems, including embedded technology such as
microcontrollers, at all locations are in the process of being assessed. Subject
to the evaluation and resolution of the information system needs subsequent to
the merger of Virbac and the Company, it is anticipated that all key systems and
non-information technology systems will be year 2000 compliant by June of 1999.
The Company is diligently quantifying issues and developing contingency
sources to mitigate the risks associated with interruptions in its supply chain
due to year 2000 problems. The Company plans
19
<PAGE>
to develop a contingency plan by July 1999 in the event its systems or its
mission-critical vendors do not achieve year 2000 compliance.
The Company believes that, with appropriate modifications to existing
computer systems/components, updates by vendors and trading partners, and
conversion to new software and hardware in the ordinary course of business, 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. These statements are
"Year 2000 Disclosures" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
Euro Conversion Issues
On January 1, 1999, certain member nations of the European Economic and
Monetary Union ("EMU") adopted a common currency, the "Euro." For a three-year
transition period, both the Euro and individual participants' currencies will
remain in circulation; after January 1, 2002, the Euro will be the sole legal
tender for EMU countries. The adoption of the Euro will affect numerous
financial systems and business applications.
While the Company's United States operations, which comprise the
majority of its business, has contracts with European suppliers and
distributors, almost all of these contracts are U.S. dollar-denominated. Thus,
while the Company is reviewing the impact of the introduction of the Euro on
various aspects of its business (including information systems, currency
exchange rate risk, taxation, contracts, competitive position and pricing), such
introduction is not expected to have a material impact on the Company. The
Company's United Kingdom operations does the majority of its business in the
United Kingdom, however to accommodate its customers throughout Europe, it has
upgraded its information systems, contracts and certain procedures to meet the
Euro requirements. The costs incurred to date related to the introduction of the
Euro have not been material and the impact of such introduction is not expected
to materially affect the Company's financial position, cash flows or results of
operations.
Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. All statements other than statements of historical fact included in the
MD&A, including statements regarding the Company's operating strategy, plans,
objectives and beliefs of management for future operations are forward-looking
statements. Although the Company believes the expectations and beliefs reflected
in such forward-looking statements are reasonable, it can give no assurance that
they will prove to have been correct.
Item 8. Financial Statements.
The Consolidated Financial Statements of the Company, together with the
report thereon of PricewaterhouseCoopers LLP dated January 15, 1999 are listed
in Item 14(a)(1) and are included at the end of this Report on Form 10-K,
beginning on page F-1, and are incorporated herein by reference.
20
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
21
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is contained in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders under the captions
"Directors and Nominees" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934," and in Item 4A of this Report on Form 10-K, and is
incorporated herein by reference.
Item 11. Executive Compensation.
The information required by Item 11 is contained in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders under the caption
"Executive Compensation," and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is contained in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders under the caption "Common
Stock Ownership of Certain Beneficial Owners and Management," and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is contained in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders under the caption
"Compensation Committee Interlocks and Insider Participation and Certain
Transactions," and is incorporated herein by reference.
22
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) List of Financial Statements. The following is a list of the
financial statements included at pages F-1 through F-24 in this Report on Form
10-K:
Report of Independent Accountants
Consolidated Balance Sheet as of October 31, 1997 and 1998
Consolidated Statement of Operations for the Years Ended October 31,
1996, 1997 and 1998
Consolidated Statement of Cash Flows for the Years Ended October 31,
1996, 1997 and 1998
Consolidated Statement of Shareholders' Equity for Years Ended October
31, 1996, 1997 and 1998
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedules. Schedule II - Valuation
of Qualifying Accounts and Reserves is furnished. All other schedules have been
omitted because they are either not applicable or not required, or the required
information is provided in the financial statements or notes thereto.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during the fiscal quarter ended October 31, 1998:
None
(c) List of Exhibits. The following is a list of exhibits furnished.
Copies of exhibits will be furnished upon written request of any stockholder at
a charge of $.25 per page plus postage.
2.4(a) Warehousing and Distribution Agreement between Purina Mills, Inc.
and PM Resources, Inc. dated September 9, 1993
2.5(a) Indemnity Agreement between Purina Mills, Inc. and PM Resources,
Inc. dated September 9, 1993
2.8(h) Agreement and Plan of Merger among Agri-Nutrition Group Limited,
Mardel Acquisition Corporation, and Mardel Laboratories, Inc.
dated September 25, 1997
2.9(h) Indemnity Agreement between Agri-Nutrition Group Limited, Mardel
Laboratories, Inc., and the stockholders of Mardel Laboratories,
Inc. dated September 25, 1997
2.10(h) Share Transfer and Registration Rights Agreement between Agri-
Nutrition Group Limited, the Stockholders of Mardel Laboratories,
Inc. dated September 25, 1997
2.11(n) Agreement and Plan of Merger, dated October 16, 1998, by and among
Agri-Nutrition Group Limited, Virbac, S.A. and Virbac, Inc.
3.1(b) Restated Certificate of Incorporation
3.2(b) Amended and Restated By-laws
23
<PAGE>
4(a) Specimen stock certificate
10.2(g) Fourth Restated Employment Agreement between Agri-Nutrition Group
Limited and Bruce G. Baker dated as of November 1, 1996
10.3(g) Agreement between Agri-Nutrition Group Limited and George W.
Daignault dated as of August 23, 1996
10.4(g) Amended and Restated Stock Option Agreement between Agri-Nutrition
Group Limited and George W. Daignault dated as of August 23, 1996
10.9(c) Revolving Credit Agreement between St. JON Laboratories, Inc. and
First Bank, along with accompanying Guaranty by Agri-Nutrition
Group Limited in favor of First Bank both dated as of January 19,
1996
10.10(a) Form of Indemnification Agreement
10.11(a) 1994 Incentive Stock Plan
10.13(d) Reload Option and Exchange Exercise Plan
10.14(e) 1995 Incentive Stock Plan
10.15(f) 1996 Incentive Stock Plan
10.16(b) Consulting Agreement between Agri-Nutrition Group Limited and
Brakke and Associates, Inc. dated October 11, 1995
10.19(i) Second amendment to amended and restated revolving credit
agreement by and between PM Resources, Inc., Zema Corporation and
First Bank dated March 6, 1997
10.20(i) Second amendment to revolving credit agreement by and between St.
JON Laboratories, Inc. and First Bank dated March 6, 1997
10.21(j) Amended and Restated Revolving Credit Agreement between St. JON
Laboratories, Inc. and First Bank dated June 18, 1997
10.22(j) Second Amended and Restated Revolving Credit Agreement between PM
Resources, Inc., Zema Corporation and First Bank dated June 18,
1997
10.23(k) Amendment to Second Amended and Restated Revolving Credit
Agreement between PM Resources, Inc., Zema Corporation, Mardel
Acquisition Corporation and First Bank dated September 25, 1997
10.24(l) Credit Agreement by and between Agri-Nutrition Group Limited, PM
Resources, Inc., St. Jon Laboratories, Inc., and First Bank, dated
May 14, 1998
24
<PAGE>
10.25(m) Amended Credit Agreement by and between Agri-Nutrition Group
Limited, PM Resources, Inc., St. JON Laboratories, Inc. and First
Bank dated August 6, 1998
10.26+ Second Amendment to Credit Agreement by and between Agri-Nutrition
Group Limited, PM Resources, Inc., and St. JON Laboratories, Inc.
and First Bank dated October 2, 1998.
21+ List of subsidiaries
23+ Consents of PricewaterhouseCoopers LLP
27+ Financial data schedule
99(o) Press Release of the Company dated October 19, 1998.
+ Filed herewith.
(a) Filed as exhibit of same number to the Registrant's Registration
Statement on Form S-1, File No. 33-78646, and incorporated herein
by reference.
(b) Filed as exhibit of same number to the Registrant's Form 10-Q for
the Quarterly Period ended January 31, 1996, and incorporated
herein by reference.
(c) Filed as exhibit of same number to the Registrant's Form 10-K for
the Fiscal Year ended October 31, 1995, and incorporated herein by
reference.
(d) Filed as exhibit 4.2 to the Registrant's Registration Statement on
Form S-8, File No. 33- 86892, and incorporated herein by
reference.
(e) Filed as Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8, File No. 33- 93340, and incorporated herein by
reference.
(f) Filed as exhibit of the same number to the Registrant's
Registration Statement on Form S-8, File No. 33-3192, and
incorporated herein by reference.
(g) Filed as exhibit of same number to the Registrant's Form 10-K for
the Fiscal Year ended October 31, 1996, and incorporated herein by
reference.
(h) Filed as exhibit of same number to the Registrant's Current Report
on Form 8-K, filed October 8, 1997, and incorporated herein by
reference.
(i) Filed as exhibit of same number to the Registrant's Form 10-Q for
the Quarterly Period ended January 31, 1997, and incorporated
herein by reference.
(j) Filed as exhibit of same number to the Registrant's Form 10-Q for
the Quarterly Period ended July 31, 1997, and incorporated herein
by reference.
(k) Filed as exhibit of same number to the Registrant's Form 10-K for
the Fiscal year ended October 31, 1997, and incorporated herein by
reference.
(l) Filed as exhibit of same number to the Registrant's Form 10-Q for
the Quarterly Period ended April 30, 1998, and incorporated herein
by reference.
(m) Filed as exhibit of same number to the Registrant's Form 10-Q for
the Quarterly Period ended July 31, 1998, and incorporated herein
by reference.
(n) Filed as exhibit 2.1 to the Registrant's Current Report on Form
8-K, filed November 17, 1998, and incorporated herein by
reference.
(o) Filed as exhibit of same number to the Registrant's Current Report
on Form 8-K, filed November 17, 1998, and incorporated herein by
reference.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ BRUCE G. BAKER
Bruce G. Baker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ BRUCE G. BAKER President, Chief Executive February 8, 1999
Bruce G. Baker Officer, and Director
/s/ ROBERT J. ELFANBAUM Vice President and Chief February 8, 1999
Robert J. Elfanbaum Financial Officer
(Principal Accounting Officer)
Chairman of the Board February , 1999
Alec L. Poitevint, II
/s/ ROBERT E. HORMANN Vice Chairman of the Board February 8, 1999
Robert E. Hormann
/s/ W.M. JONES, JR. Director February 8, 1999
W.M. Jones, Jr.
/s/ ROBERT W. SCHLUTZ Director February 8, 1999
Robert W. Schlutz
</TABLE>
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Agri-Nutrition Group Limited Page
<S> <C>
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheet as of October 31, 1997 and 1998 .............................................. F-3
Consolidated Statement of Operations for the Three Years Ended October 31, 1998 ......................... F-4
Consolidated Statement of Cash Flows for the Three Years Ended October 31, 1998.......................... F-5
Consolidated Statement of Shareholders' Equity for the Three Years Ended
October 31, 1998............................................................................... F-7
Notes to Consolidated Financial Statements............................................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Agri-Nutrition Group Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the consolidated financial position of
Agri-Nutrition and its subsidiaries at October 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
January 15, 1999
F-2
<PAGE>
Agri-Nutrition Group Limited
Consolidated Balance Sheet
<TABLE>
<CAPTION>
October 31,
1997 1998
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................................... $ 145,505 $ 97,971
Accounts receivable, net.................................................... 3,817,417 4,812,842
Inventories (Note 6)........................................................ 6,355,310 7,150,042
Prepaid expenses and other current assets................................... 1,016,098 586,292
Deferred income taxes (Note 10)............................................. 244,574 659,517
-------------- --------------
11,578,904 13,306,664
Property, plant and equipment, net (Note 7)................................... 5,788,688 5,520,798
Goodwill...................................................................... 8,095,049 7,930,705
Other assets.................................................................. 1,133,509 1,284,421
-------------- --------------
$ 26,596,150 $ 28,042,588
============== ==============
Liabilities and Stockholders' Equity Current liabilities:
Current portion of long-term debt and notes payable (Note 8)................ $ 201,636 $ 1,160,912
Current portion of acquisition notes payable (Note 8)....................... 719,716 49,000
Accounts payable............................................................ 1,417,286 1,562,652
Accrued expenses............................................................ 1,467,948 1,270,985
-------------- --------------
3,806,586 4,043,549
Long-term debt and notes payable (Note 8)..................................... 5,665,955 8,963,226
Acquisition notes payable (Note 8)............................................ 1,570,249 151,000
Commitments and contingencies (Notes 2, 3, 7 and 15)
Stockholders' equity (Notes 4, 11 and 12):
Common stock ($.01 par value; 20,000,000 shares
authorized; 9,304,280 and 9,387,279 shares
issued and outstanding, respectively)..................................... 93,043 93,873
Additional paid-in-capital.................................................. 15,935,700 16,025,620
Accumulated deficit......................................................... (395,841) (1,058,673)
-------------- --------------
15,632,902 15,060,820
Cost of common stock held in treasury
(46,850 and 129,961 shares in 1997 and 1998, respectively).................. (79,542) (176,007)
-------------- --------------
15,553,360 14,884,813
-------------- --------------
$ 26,596,150 $ 28,042,588
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
Agri-Nutrition Group Limited
Consolidated Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales (including sales to Purina of $5.4 million,
$4.3 million and $3.1 million for the years ended
October 31, 1996, 1997 and 1998, respectively)............ $ 28,661,307 $ 31,051,537 $ 32,944,020
Cost of sales............................................... 20,783,847 22,850,923 24,008,395
-------------- -------------- --------------
Gross profit................................................ 7,877,460 8,200,614 8,935,625
Selling, general and administrative expenses................ 7,447,301 7,129,860 8,812,136
Research and development.................................... 142,760 92,273 166,383
Corporate severance costs (Note 16)......................... 240,000
-------------- -------------- --------------
Operating income (loss)..................................... 47,399 978,481 (42,894)
Interest expense............................................ (596,086) (638,599) (787,727)
Interest income and other................................... 158,904 (146,883) (247,154)
-------------- -------------- --------------
Income (loss) before income tax benefit (expense)........... (389,783) 192,999 (1,077,775)
Income tax benefit (expense)................................ 148,463 (74,328) 414,943
-------------- -------------- --------------
Income (loss) from continuing operations.................... (241,320) 118,671 (662,832)
Income from discontinued operations, net.................... 113,900 14,659
-------------- -------------- --------------
Net income (loss) .......................................... $ (127,420) $ 133,330 $ (662,832)
============== ============== ==============
Basic earnings (loss) per share (Note 5):
Income (loss) from continuing operations.................... $ (.03) $ .01 $ (.07)
Income from discontinued operations......................... .01
-------------- -------------- --------------
Net income (loss)........................................... $ (.02) $ .01 $ (.07)
============== ============== ==============
Diluted earnings (loss) per share (Note 5):
Income (loss) from continuing operations.................... $ (.03) $ .01 $ (.07)
Income from discontinued operations......................... .01
-------------- -------------- --------------
Income (loss)............................................... $ (.02) $ .01 $ (.07)
============== ============== ==============
Basic shares outstanding (Note 5)........................... 8,397,686 8,483,897 9,309,184
============== ============== ==============
Diluted shares outstanding (Note 5)......................... 8,397,686 8,699,914 9,309,184
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
Agri-Nutrition Group Limited
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) from continuing operations................ $ (241,320) $ 118,671 $ (662,832)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization............................ 847,723 966,022 1,180,382
Income from discontinued operations, net of
taxes.................................................. 113,900 14,659
Change in net assets from discontinued
operations............................................. (1,007,633) 1,347,539
Changes in operating assets and liabilities,
excluding the effects of acquisitions (Note 2):
Increase in accounts receivable........................ (528,806) (410,942) (995,425)
(Increase) decrease in inventories..................... (1,677,051) 692,492 (794,732)
(Increase) decrease in prepaids and other.............. (281,520) 48,984 131,510
Increase (decrease) in accounts payable................ 1,419,731 (785,558) 145,366
Increase (decrease) in accounts payable to
Purina................................................ (930,954)
Increase (decrease) in accrued expenses................ 63,356 (267,295) (196,963)
(Increase) decrease in deferred income taxes........... (66,611) 58,491 (414,943)
-------------- -------------- --------------
Net cash provided (used) by operating activities............ (2,289,185) 1,783,063 (1,607,637)
-------------- -------------- --------------
Investing activities:
Acquisitions (Note 2), net of cash
acquired................................................. (520,189) (970,537) (100,000)
Purchase of property, plant and equipment................... (592,678) (996,683) (500,764)
Purchase of Bromethalin Assets (Note 3)..................... (1,056,097)
Sale of short-term investments.............................. 1,191,379
-------------- -------------- --------------
Net cash used by investing activities....................... (977,585) (1,967,220) (600,764)
-------------- -------------- --------------
Financing activities:
Proceeds from (repayment of) long-term debt
and notes payable, net*.................................. 3,090,125 (1,154,911) 4,256,547
Repayment of acquisition notes payable...................... (700,000) (2,038,965)
Proceeds from sale of common stock.......................... 52,823 27,252 39,750
Payments of loans from employees............................ 30,000
Purchase of Treasury Stock.................................. (49,986) (29,556) (96,465)
-------------- -------------- --------------
Net cash provided (used) by financing activities............ 3,122,962 (1,857,215) 2,160,867
-------------- -------------- --------------
Decrease in cash and cash equivalents....................... (143,808) (2,041,372) (47,534)
Cash and cash equivalents, beginning of period.............. 2,330,685 2,186,877 145,505
-------------- -------------- --------------
Cash and cash equivalents, end of period.................... $ 2,186,877 $ 145,505 $ 97,971
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
*Debt proceeds (repayments) are presented on a net basis given the volume of
daily transactions under the Company's revolving credit facilities for lockbox
receipts and disbursements.
F-5
<PAGE>
Agri-Nutrition Group Limited
Consolidated Statement of Cash Flows (continued)
<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest..................................... $ 363,422 $ 667,922 $ 844,840
Cash paid for taxes........................................ 47,189 25,873 5,023
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the year ended October 31, 1997, the Company acquired Mardel
Laboratories, Inc. for cash of approximately $1,100,000 (Note 2) and stock
valued at approximately $1,100,000. As additional consideration for the
acquisition of Mardel, the Company also issued a note payable of $300,000 to the
former owners of the acquired company to be paid in cash and stock over a period
of three years. Fair value assigned to assets acquired was approximately
$2,600,000, fair value assigned to goodwill was approximately $2,100,000 and
liabilities assumed were approximately $2,200,000.
During the year ended October 31, 1998, the Company issued common stock with a
fair value of $51,000 to the former owners of Mardel in conjunction with certain
payments due under the $300,000 notes payable discussed above.
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
Agri-Nutrition Group Limited
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
AGNU Common Stock
AGNU Common Stock in Treasury, at Cost
Number Additional Number
of Par Paid in of Accumulated
Shares Value Capital Shares Amount Deficit Total
<S> <C> <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
directors and officers 29,605 296 52,527 52,823
Treasury stock
purchased........... (25,650) $ (49,986) (49,986)
Net loss.............. (127,420) (127,420)
----------- --------- ----------- ---------- ---------- ------------ -----------
Balance, October 31,
1996................ 8,430,949 84,309 14,817,183 (25,650) (49,986) (529,171) 14,322,335
Issuance of stock to
directors and officers 20,556 206 27,045 27,251
Issuance of stock for
acquisition......... 852,775 8,528 1,091,472 1,100,000
Treasury stock
purchased........... (21,200) (29,556) (29,556)
Net income............ 133,330 133,330
----------- --------- ----------- ---------- ---------- ------------ -----------
Balance, October 31,
1997................ 9,304,280 93,043 15,935,700 (46,850) (79,542) (395,841) 15,553,360
Issuance of stock to
directors and officers 29,300 293 39,457 39,750
Issuance of stock for
acquisition notes
payable............. 53,699 537 50,463 51,000
Treasury stock
purchased........... (83,111) (96,465) (96,465)
Net loss.............. (662,832) (662,832)
----------- --------- ----------- ---------- ---------- ------------ -----------
Balance, October 31,
1998................ 9,387,279 $ 93,873 $16,025,620 (129,961) $(176,007) $(1,058,673) $14,884,813
=========== ========= =========== ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements
1. Organization
Agri-Nutrition (the Company), a Delaware corporation, was organized on July 20,
1993, to acquire and operate businesses in the domestic and international food,
agriculture and pet industries. In September 1993, through its wholly owned
subsidiary, PM Resources, Inc. (Resources), the Company acquired certain assets
and assumed certain liabilities of the Health Industries Business (the Business)
of Purina Mills, Inc. (Purina). See Notes 13 and 16 for further discussion of
related matters involving Purina. 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. In September 1997, the Company acquired
Mardel Laboratories, Inc. (Mardel). Zema, St. JON and Mardel formulate, package,
market and distribute pet health care, veterinary and grooming products
domestically and abroad. See Note 2 for further discussion of these
acquisitions.
2. Acquisitions - Zema and St. JON
Through the Company's wholly owned subsidiary, Zema Acquisition Corporation,
substantially all of the net assets of Zema were acquired effective March 31,
1995. The sales price included a base price of $3,000,000 in cash and $300,000
in the form of a note payable to the former owner of Zema. The note payable and
related interest are due on or before April 28, 1998 and were conditioned on the
continued employment of Zema's president (see Note 8). In conjunction with
renegotiation of the employment contract of Zema's president in fiscal 1997,
such employment requirement of the note was waived. Additional purchase price is
required to be paid by the Company to the former owner of Zema based upon a
percentage of Zema's cumulative earnings before taxes and interest in excess of
$3,345,000 for the five years ending October 31, 1999. In November 1998, based
on Zema's results to date, the Company and the former owner of Zema mutually
agreed that no additional purchase price would be due and that the Company has
no additional obligations to the former owner of Zema. The Company primarily
used proceeds from its initial public offering of common stock (IPO) to fund the
$3,000,000 initial payment and related acquisition expenses of approximately
$200,000.
The acquisition of Zema was accounted for pursuant to the purchase method of
accounting. The purchase price paid for Zema has been allocated to net assets
acquired based on their estimated fair values at the date of acquisition. The
excess of the purchase price over the fair value of net assets acquired of
approximately $1,700,000 was recorded as goodwill and is being amortized on a
straight-line basis over 40 years. The amounts assigned to other intangible
assets acquired were not material. The results of Zema's operations are included
in the Company's consolidated financial statements from the date of the
acquisition.
Substantially all of the net assets of St. JON were acquired through the
Company's wholly owned subsidiary, St. JON Acquisition Corporation, effective
August 31, 1995. The purchase price included a base price of $3,500,410 in cash
and additional purchase price of $2,000,000 in the form of a
F-8
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
promissory note. The remaining balance of the note payable to the former owner
of St. JON was paid in full during fiscal 1998 (see Note 8). The Company
primarily used proceeds from its IPO to fund the $3,500,410 initial payment and
the related acquisition expenses of approximately $200,000. The acquisition of
St. JON was accounted for pursuant to the purchase method of accounting. The
purchase price paid for St. JON has been allocated to net assets acquired based
on their estimated fair values at the date of acquisition. The excess of the
purchase price over fair value of net assets acquired of approximately
$4,800,000, was recorded as goodwill and is being amortized on a straight-line
basis over 30 years. The amounts assigned to other intangible assets acquired
were not material. The results of St. JON's operations are included in the
Company's consolidated financial statements from the date of the acquisition.
Through the Company's wholly owned subsidiary, Mardel Acquisition Corporation,
substantially all of the net assets of Mardel were acquired effective September
1997. Mardel's expertise extends to fresh water and marine fish, birds, dogs,
cats, small animals and pond accessories. The purchase price consisted of
approximately $1,100,000 in cash, $1,100,000 in common stock and a promissory
note of $300,000 payable in three annual installments, each consisting of
$49,000 of cash plus interest at prime, and $51,000 of the Company's common
stock, beginning September 1998. At October 31, 1998, $200,000 was due under the
promissory note. The Company primarily used the remaining proceeds from its IPO
to fund the $1,000,000 initial payment.
The acquisition of Mardel was accounted for pursuant to the purchase method of
accounting. The purchase price paid for Mardel has been allocated to net assets
acquired based on their estimated fair values at the date of acquisition. The
excess of the purchase price over the fair value of net assets acquired of
approximately $2,100,000 was recorded as goodwill and is being amortized on a
straight-line basis over 30 years. The amounts assigned to other intangible
assets acquired were not material. The results of Mardel's operations are
included in the Company's consolidated financial statements from the date of the
acquisition.
3. Acquisition of Certain Bromethalin Assets
Effective May 1996, Resources acquired from Purina 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. The purchase price and related acquisition
costs was approximately $1 million, plus additional consideration based on
subsequent shipments of Bromethalin to Purina over a five-year period. The
Company primarily used proceeds from its IPO to fund the initial payment.
Approximately $871,000 of the purchase price was assigned to patents,
registration rights and other intangible assets which are being amortized over
three to 10 years. In December 1998, the Company entered into an agreement to
purchase certain assets of Purina's animal health products business. In
conjunction with this agreement, Purina agreed to forego any future payments
under the May 1996 Bromethalin agreement. See Note 16 for further discussion.
F-9
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
4. Initial public offering
In July 1994, the Company completed the initial public offering of 2,435,000
shares of its common stock at $6.00 per share resulting in net proceeds of
approximately $12,100,000 to be used to finance acquisitions, strategic business
alliances and joint ventures, including the payment of certain executive
salaries and other administrative expenses incurred in the implementation of the
Company's acquisition strategy. In September 1997, the Company used its
remaining IPO proceeds in conjunction with the acquisition of Mardel, as
discussed in Note 4. As of October 31, 1997, all proceeds had been expended.
5. Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions have been
eliminated.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
Revenue recognition
Revenue is generally recognized upon shipment of orders. Revenue related to
certain contract manufacturing customers, for whom the Company provides
warehousing and/or distribution services, is contractually recognized upon the
completion of the manufacturing process. For certain private label and contract
manufacturing customers, the Company provides various services, such as
laboratory services, regulatory consulting, etc. Such services are generally
performed prior to shipment, included in the cost of the related products and
billed at the time the related products are shipped. Accounts receivable
consists of the amounts estimated to be collectible on sales, after provision
for uncollectible amounts, based on historical experience. At October 31, 1996,
1997, and 1998 the provision for uncollectible amounts was $53,029, $133,705,
and $142,354, respectively.
Cash and cash equivalents
For purposes of the consolidated statement of cash flows, the Company considers
all highly liquid investments with an original maturity of three months or less
to be cash equivalents.
Concentration of credit risk
Financial instruments which potentially subject the Company to significant
concentrations of credit risk as defined by Statement of Financial Accounting
Standards No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk," consist of cash investments and accounts receivable.
F-10
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
The Company sells its products to customers in the animal health and specialty
chemical businesses throughout the United States and abroad. The three largest
customers accounted for 31%, 25% and 24% of sales from continuing operations in
the years ended October 31, 1996, 1997 and 1998, respectively, and 22% and 21%
of accounts receivable at October 31, 1997 and 1998, respectively. The Company
generally does not require collateral from its customers.
Relationship with suppliers
The Company purchases certain chemical materials from multiple suppliers, for
which alternative suppliers also exist and are adequate. However, certain
chemical materials are proprietary in nature, and the Company's ability to
procure such chemical materials is limited to those suppliers with proprietary
rights. The Company considers its relationships with its primary suppliers to be
strong.
Fair value of financial instruments
For purposes of financial reporting, the Company has determined that the fair
value of the Company's debt and investments approximates book value at October
31, 1997 and 1998, based on terms currently available to the Company in
financial markets.
Inventories
Inventories are valued at the lower of cost, determined on the average cost
method which approximates the first-in, first-out method, or market.
Inventoriable costs include materials, direct labor and manufacturing overhead.
Inventories are stated net of a reserve for estimated excess and obsolete
inventory.
Property and equipment
Property and equipment are recorded at cost. Expenditures for maintenance and
repairs are charged to operations as incurred; acquisitions, major renewals, and
betterments are capitalized. When property is retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the accounts, and
any profit or loss on disposition is credited or charged to income.
The Company provides for depreciation by charging amounts sufficient to amortize
the cost of the properties over their estimated useful lives. The straight-line
method of depreciation is utilized for substantially all asset categories.
F-11
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
A summary of estimated useful lives used in computing depreciation for financial
statement reporting purposes follows:
Estimated
useful life
Building and leasehold improvements 5-30 years
Machinery and equipment 8-12
Furniture and fixtures 5-7
Vehicles 5
Goodwill
The excess of purchase price over the fair value of net assets acquired in
business combinations is capitalized and amortized on a straight-line basis over
the estimated period benefited which ranges from 30 to 40 years. Goodwill
amortization charged to income for the years ended October 31, 1996, 1997 and
1998, was $195,000, $209,000 and $264,000, respectively.
The carrying value of goodwill is assessed for recoverability by management
based on an analysis of future expected cash flows from the underlying
operations of the Company. To the extent expected future discounted cash flows
are less than the carrying value of goodwill, a writedown of goodwill to the
extent of such shortfall may be recognized. Management believes that there has
been no impairment at October 31, 1998.
Other assets
Other assets, which is comprised of deferred compensation, patents, tradenames
and other intangible assets, including those acquired in connection with the
acquisition of the Bromethalin Assets as discussed in Note 3, are being
amortized on a straight-line basis over the lives of the related assets, which
range from one to fifteen years. Amortization expense related to other assets
for the years ended October 31, 1996, 1997 and 1998, was approximately $142,000,
$87,000 and $147,000, respectively.
Income taxes
The Company uses the liability method of accounting for income taxes as mandated
by Statement of Financial Accounting Standards No. 109. Under the liability
method, deferred taxes are recognized for the estimated future tax effects
attributable to temporary differences between the book and tax bases of assets
and liabilities as well as carryforward items. These tax effects are measured
based on provisions of enacted tax laws. The classification of net deferred tax
assets and/or liabilities, i.e., current or non-current, is based primarily on
the classification of the related assets and liabilities.
Earnings (loss) per share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share," which
changed the method of computation of earnings per share. SFAS 128, which was
adopted by the Company in fiscal 1998, requires the computation of Basic EPS and
Diluted EPS. Basic EPS is based on the weighted average number of outstanding
common shares during the period, but does not consider dilution for potentially
dilutive
F-12
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
securities. Diluted EPS reflects dilutive potential common shares. Dilutive
potential common shares arising from the effect of outstanding stock options are
computed using the treasury stock method, if dilutive. Earnings per share for
fiscal 1997, 1996 and 1995 have been restated in accordance with SFAS 128.
Preferred stock
The Company's Board of Directors may, without further action by stockholders,
from time-to-time direct the issuance of shares of preferred stock in series and
may, at time of issuance, determine the rights, preferences and limitations of
each series. No shares of preferred stock have been issued as of October 31,
1998.
Environmental policy
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated.
Purina, and the former owners of Zema and St. JON, have indemnified the Company
from environmental claims resulting from any liabilities or obligations arising
from events occurring prior to the acquisitions which the Company did not
expressly assume in these three respective acquisitions. The Company has been
notified by certain state agencies of non-compliance with certain state and
federal environmental regulations. However, management believes that the
resolution of these issues will have no material effect on the Company's
financial position, cash flows or results of operations.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
assets subject to the test for recoverability were acquired in a purchase
business combination, goodwill is allocated pro rata to such acquired long-lived
assets primarily based on the relative fair values of those assets at the
acquisition date. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of the asset, a loss is recognized for the
difference between the fair value and the carrying value of the asset.
Management believes that there has been no impairment at October 31, 1998.
Employee stock-based compensation
In October 1995, the FASB issued Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" (FAS 123), which defines the fair
value based method of accounting for stock-based compensation plans. FAS 123
allows companies to use the fair value method defined in the statement or to
continue use the intrinsic value method as outlined in APB Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25). FAS 123 was adopted during
the Company's fiscal 1997 and the Company will continue to use the provisions of
APB 25 in determining net income. See Note 11 for the pro forma impact on the
net income (loss) and earnings (loss) per share for the years ended October 31,
1996, 1997 and 1998.
F-13
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
6. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31,
1997 1998
---------------- ---------------
<S> <C> <C>
Raw materials.............................................................. $ 4,049,028 $ 4,679,508
Work-in-process............................................................ 501,801 301,354
Finished goods............................................................. 2,081,771 2,562,608
---------------- ---------------
6,632,600 7,543,470
Less reserve for excess and obsolete inventories........................... (277,290) (393,428)
---------------- ---------------
$ 6,355,310 $ 7,150,042
================ ===============
</TABLE>
7. Property, plant and equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
October 31,
1997 1998
---------------- ---------------
<S> <C> <C>
Land....................................................................... $ 638,794 $ 638,794
Buildings.................................................................. 1,895,779 1,942,628
Machinery and equipment.................................................... 4,583,080 4,816,728
Leasehold improvements..................................................... 374,203 388,196
Furniture and fixtures..................................................... 229,243 378,796
Vehicles................................................................... 34,944 34,307
---------------- ---------------
7,756,043 8,199,449
Less accumulated depreciation.............................................. (1,968,282) (2,717,949)
---------------- ---------------
5,787,761 5,481,500
Construction in progress................................................... 927 39,298
---------------- ---------------
$ 5,788,688 $ 5,520,798
================ ===============
</TABLE>
The Company leases certain equipment and facilities under noncancelable
operating leases. The primary operating facilities of Zema and St. JON are
leased from related parties (see Note 12). Minimum lease payments for operating
leases, including leases with related parties, at October 31, 1998 are as
follows:
1999................................................. $ 512,914
2000................................................. 178,403
2001................................................. 20,708
---------------
Total minimum lease payments......................... $ 712,025
===============
Rental expense under all operating leases approximated $548,000, $406,000 and
$442,000 for the years ended October 31, 1996, 1997 and 1998, respectively.
F-14
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
8. Financing
Revolving credit agreement
The Company has revolving credit facilities which aggregated $8.025 million at
October 31, 1997. In May 1998, the Company consolidated its existing credit
agreements increasing the facility to $9.2 million with a maturity date of March
31, 2001. The new bank agreement also increased borrowing availability for
working capital demand and modified the bank covenants. The new facility
consists of $4.5 million in revolving credit lines, the available amount being
based upon specified percentages of qualified accounts receivable and inventory,
and a $4.7 million revolving credit line with available amounts being reduced
$150,000 per quarter with the first such reduction on November 30, 1998. On
August 6, 1998 and October 2, 1998, the Company again amended its existing
credit facilities, increasing the latter revolving credit line to $5.2 million
from $4.7 million to meet temporary working capital requirements. The $.5
million increase in the line will continue through January 31, 1999. The
interest rate will range from prime minus 0.25% to prime plus 0.5%, depending on
the Company's ratio of debt to net worth, as defined in the new agreement. At
October 31, 1998, the interest rate charged on borrowings outstanding under the
new agreement, as amended, was 8.50% which is the bank's prime rate plus 0.50%.
At October 31, 1998, excluding outstanding checks, approximately $1.2 million
was available under this agreement.
In order to avoid being in non-compliance with certain of the financial
covenants under its amended credit agreement in future periods due to legal,
accounting and other transaction costs related to the proposed Merger with
Virbac, the Company's bank agreed to exclude such costs from the calculation of
its covenants. No other instances of non-compliance with financial covenants
were present at October 31, 1998.
Acquisition notes payable
In connection with the acquisitions completed during fiscal 1995 (see Note 2),
the Company entered into notes payable agreements with the former owners of Zema
and St. JON. During fiscal 1998, the Company repaid its note payable of
$300,000, plus accrued interest (interest rate of 8.5%), to the former owner of
Zema, of which 55% of that company's common stock was owned by an employee of
the Company (see Note 12).
At October 31, 1997, the Company had a $1,300,000 note payable outstanding
(interest rate of 7.6%) that had been assigned to the former owner of St. JON
who is the president of the Company's St. JON subsidiary. In fiscal 1998, the
Company repaid the note, in full, in conjunction with the refinancing of its
debt and legal merger of the operating companies that comprise the Pet Health
Care Division.
In connection with the acquisition of Mardel during fiscal 1997, the Company
entered into a notes payable agreement with the former owners. At October 31,
1998 the Company had a remaining note balance of $200,000 payable in two annual
installments of $49,000 of cash plus interest at prime, and $51,000 of the
Company's common stock, beginning September 1999.
F-15
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
Financing agreements
The Company entered into agreements to finance certain of its insurance
premiums. The financing agreements provide for monthly principal and interest
payments of approximately $30,000 and $28,832, covering periods from August 1996
to August 1997 and August 1997 to August 1998, respectively, and an additional
$6,882 monthly principle and interest covering periods from July 1997 to July
2000. The aggregate amount financed under these agreements are approximately
$292,000 and $372,000, respectively. Of these amounts, approximately $243,000
and $121,000 remain outstanding at October 31, 1997 and 1998, respectively, and
are included in current portion of long-term debt and notes payable at those
dates. Additionally, $45,334 represents premiums for fiscal years ended October
31, 2000, and are recorded in long-term debt.
Also in conjunction with the acquisition of Mardel, the Company assumed a note
payable with the former owner of Mardel for $489,957 due in five annual
installments of $97,991, plus interest accrued at the prime rate. At October 31,
1998, the balance due under the note was approximately $300,000.
9. Common stock transactions
During the year ended October 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. During the year ended October 31, 1997, the Company purchased 21,200
shares of its common stock at an aggregate cost of $29,556 under the stock
repurchase plan.
During the year ended October 31, 1998, the Company purchased 83,111 shares of
its common stock at an aggregate cost of $96,465 under the stock repurchase
plan. At October 31, 1998, the number of shares available to acquire its common
stock as authorized by the 1995 stock repurchase plan was 370,039. As a
condition of the Merger Agreement with Virbac (see Note 16), the Company has
suspended its stock repurchase program.
10. Income taxes
The components of the net income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1997 1998
--------------- ---------------- ---------------
<S> <C> <C> <C>
Current:
Federal................................................ $ (71,156) $ -- $ --
State.................................................. (10,696) 15,837
--------------- ---------------- ---------------
(81,852) 15,837 --
--------------- ---------------- ---------------
Deferred:
Federal................................................ (62,567) 73,854 (345,047)
State.................................................. (4,044) (15,363) (69,896)
--------------- ---------------- ---------------
(66,611) 58,491 (414,943)
--------------- ---------------- ---------------
$ (148,463) $ 74,328 $ (414,943)
=============== ================ ===============
</TABLE>
Total tax expense (benefit) above excludes tax provision of $71,000, $9,000 and
$0, related to discontinued operations for the years ended October 31, 1996,
1997 and 1998, respectively.
The net benefit for income taxes differs from the amount of income tax
determined by applying the statutory U.S. federal income tax rate to pretax loss
as a result of the following:
F-16
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1997 1998
--------------- ---------------- ---------------
<S> <C> <C> <C>
Income tax benefit at statutory rate...................... $ (132,526) $ 65,620 $ (366,444)
State income taxes, net of federal benefit................ (9,728) 313 (46,131)
Other, net................................................ (6,209) 8,395 (2,368)
--------------- ---------------- ---------------
$ (148,463) $ 74,328 $ (414,943)
=============== ================ ===============
</TABLE>
Deferred tax (assets) liabilities are comprised of the following at October 31:
<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1997 1998
--------------- ---------------- ---------------
<S> <C> <C> <C>
Purchase accounting basis differences..................... $ 180,307 $ 272,162 $ 396,221
Fixed assets.............................................. 50,302 359,182 375,163
Other..................................................... 4,074 29,367 60,729
--------------- ---------------- ---------------
Gross deferred tax liabilities.......................... 234,683 660,711 832,113
--------------- ---------------- ---------------
Inventories............................................... (192,329) (273,503) (456,973)
Accruals.................................................. (101,943) (270,146) (151,865)
Net operating loss carryforward........................... (271,863) (441,670) (961,443)
Other..................................................... (21,463) (43,810) (45,193)
--------------- ---------------- ---------------
Gross deferred tax assets............................... (587,598) (1,029,129) (1,615,474)
--------------- ---------------- ---------------
Deferred tax assets valuation allowance................... 98,850 123,844 123,844
--------------- ---------------- ---------------
Net deferred tax assets................................... $ (254,065) $ (244,574) $ (659,517)
=============== ================ ===============
</TABLE>
At October 31, 1998, the Company has approximately $2,285,000 of net operating
loss carryforwards which are available to offset future taxable income. These
carryforwards begin to expire in 2010. This valuation allowance reflects
management's view of the portion of deferred tax assets for which it is more
likely than not that tax benefits will not be realized. The primary factor
affecting management's view in this regard are the Company's losses from
operations in certain prior years.
11. Employee benefit plans
The Company maintains two 401(k) savings plans (the Plans). Employees of the
Company and non-union employees of Resources participate in one 401(k) plan; a
separate 401(k) plan was established for union employees of Resources. Employees
of Zema and St. JON each participated in separate plans that were established
prior to the acquisitions of Zema and St. JON by the Company (see Note 2) until
November 1, 1996, at which time such plans were merged with PM Resources
non-union plan into the Agri-Nutrition 401(k) plan. Employees of Mardel
participated in a separate plan established prior to the acquisition of Mardel
by the Company (see Note 2) until August 1998, at which time the Mardel plan was
merged with the Agri-Nutrition 401(k) plan into a single plan for Company
employees. Contributions to the Plans result primarily from voluntary
contributions from employees in the form of deferrals of up to 15% of the
employees' salaries. The Plans permit various employer matching contributions.
Employer contributions were $227,600, $181,418 and $177,741 for the years ended
October 31, 1996, 1997 and 1998, respectively.
F-17
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
Effective June 1, 1994, the Company adopted the Incentive Stock Plan (1994 ISP).
An aggregate of 400,000 shares of the Company's common stock are reserved for
issuance to eligible employees under the 1994 ISP. Options to purchase 121,500
shares of the Company's common stock were granted to employees under the 1994
ISP during the year ended October 31 1996. The exercise prices of the options
granted in fiscal 1996 ranged from $1.56 to $2.63 per share, all of which
approximated fair value on the dates of grant. These options vest ratably up to
three years from the date of grant and will expire five years after the vesting
date. Additionally in fiscal 1997, the Company repriced 232,500 outstanding
employee options previously issued under the 1994 ISP at a revised exercise
range of $1.4375 to $1.5625 per share, which approximated fair value on the
dates of installment. All other terms of the options remain unchanged. During
the year ended October 31, 1996, the Company also issued 28,365 shares of the
Company's Common Stock under the 1994 ISP to executives and outside directors of
the Company. No shares were issued under the 1994 ISP in the years ended October
31, 1997 and 1998.
Effective March 9, 1995, the Company adopted the 1995 Incentive Stock Option
Plan (1995 ISP). An aggregate of 500,000 shares of the Company's common stock
are reserved for issuance to eligible employees, consultants and advisors to the
Company under the 1995 ISP. Options to purchase 100,000 shares of the Company's
common stock were granted to a consultant under this plan at an exercise price
of $3.00 per share, under an amended option agreement, which approximated fair
value at the amended date of grant. These options were not exercised and expired
in June 1996. No other shares or options have been issued in connection with the
1995 ISP.
In March 1995, the stockholders of the Company approved the Reload Option and
Exchange Exercise Plan (the Reload Plan) which permits employees holding options
to elect, in accordance with terms of the Reload Plan, to pay the exercise price
of such options by surrendering the shares of the Company's common stock. The
shares surrendered are valued at the reported closing market price of the
Company's common stock on the date that the employee provides the notice of
intent to exercise the option and surrenders the shares in payment of the
exercise price. The Reload Plan also provides for the issuance to the employee
of a new option to acquire the number of shares of the Company's common stock
surrendered in the option exercise with an exercise price per share equal to the
per-share valuation applicable to the shares surrendered. There are 200,000
shares reserved for issuance under the Reload Plan; no options were granted
during the years ended October 31, 1996, 1997 and 1998.
Effective March 7, 1996, the Company's stockholders approved the 1996 Incentive
Stock Option 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 to the Company under the 1996 ISP. Options to
purchase 370,000, 192,000 and 68,000 shares of the Company's common stock were
granted to employees under the 1996 ISP during the year ended October 31, 1996,
1997 and 1998 respectively. The exercise prices of the options granted range
from $1.37 to $2.63 per share, which approximated fair value on the dates of
grant. These options vest ratably up to three years from the date of grant and
will expire ten years from the grant date. Also, during the year ended October
31, 1997, the Company issued 20,556 shares of the Company's common stock under
the 1996 ISP to executives and outside directors of the Company.
FAS 123 was adopted during the Company's fiscal 1997 and the Company will
continue to use the provisions of APB 25 in determining net income. See below
for various disclosures related to FAS 123
F-18
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
and the pro forma impact of FAS 123 on the net income (loss) and net income
(loss) per share for the years ended October 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Incentive Stock Weighted Average
Option Plan Exercise Price
<S> <C> <C>
Outstanding at October 31, 1995 795,500 $ 1.20
Granted ($1.56 to $2.63) 989,000 1.58
--------------
Outstanding at October 31, 1996 1,784,500 1.41
Granted ($1.19 to $1.56) 192,000 1.46
--------------
Outstanding at October 31, 1997 1,976,500 1.42
Granted ($1.375) 68,000 1.38
Forfeited ($1.19 to $1.59) (95,000) 1.54
--------------
Outstanding at October 31, 1998 1,949,500 $ 1.41
==============
</TABLE>
During fiscal 1997 a total of 185,000 options issued in prior years had the
exercise prices reduced from a weighted average price of $3.27 per share to
$1.56 per share, respectively.
During fiscal 1997, the Company adopted FAS 123, which addresses accounting for
stock options and warrant plans and selected the "intrinsic value based method"
for valuing stock options granted to employees. Had compensation cost for all of
the Company's stock option plans been determined based upon the fair value at
the grant dates consistent with the methodology prescribed in FAS 123, the
Company's net income (loss) and net income (loss) per share would have increased
(decreased) to the pro forma amounts listed below using the weighted average
fair values indicated.
F-19
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1997 1998
<S> <C> <C> <C>
Net income (loss) as reported $ (127,420) $ 133,330 $ (662,832)
Pro forma net loss (232,858) (75,278) (802,085)
Basic and diluted earnings (loss) per share as reported (.02) .02 (.07)
Pro forma loss per share (.03) (.01) (.09)
Weighted average fair value of options granted $ 1.14 $ 1.10 $ 1.05
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: For grants in fiscal 1996, 1997 and 1998 the weighted average risk
free interest rate was 6.24%, 6.08% and 5.79%, respectively; weighted average
expected volatility of 75%, 85% and 89%, respectively; no dividends, and an
expected life of four to six years. FAS 123 does not require pro forma
disclosure of the effect of options and warrants granted in years prior to
fiscal 1996. The pro forma effect of compensation costs using the fair value
based method are not indicative of future amounts when the new method will apply
to all outstanding option and warrant grants.
The following table summarizes information for stock warrants and options
outstanding at October 31, 1998:
<TABLE>
<CAPTION>
Weighted Average Exercisable
Range of Number Remaining Exercise Number Weighted Average
Exercise Price Outstanding Life Price Outstanding Exercise Price
<S> <C> <C> <C> <C> <C>
$ .81 558,000 .3 years $ .81 558,000 $ .81
1.19-2.00 1,326,500 5.8 years 1.55 1,073,837 1.56
2.62 15,000 7.3 years 2.62 15,000 2.62
4.25 50,000 6.5 years 4.25 50,000 4.25
</TABLE>
12. Related party transactions
During fiscal 1996, the Company amended previously issued options to purchase
387,500 shares of common stock increasing the exercise price of $.81 per share
to $1.56 per share, in conjunction with the management restructuring discussed
in Note 16.
In April 1995, in connection with the acquisition of Zema (see Note 2), the
Company entered into an operating lease agreement with a limited partnership of
which the general partner is an employee of the Company. The lease, which
expires in April 2000, with an option to extend the term for an additional five
years, and relates to the land and building that comprised the primary operating
facility in Raleigh, North Carolina. Rent expense under this agreement was
$95,000 for each of the years ended October 31, 1996, 1997 and 1998. During
fiscal 1998, the Company ceased operations at this facility and is currently in
the process of subletting the facility for the remaining term of the lease.
F-20
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
In August 1995, in connection with the acquisition of St. JON (see Note 2), the
Company entered into an operating lease agreement with the former owner of St.
JON and the president of the Company's Pet Health Care Division. The lease, as
amended, expires in August 2000, with an option to extend the term for an
additional five years, and relates to the land and buildings that comprise St.
JON's primary operating facility. Rent expense under this agreement was
$167,301, $231,680 and $167,301 for the years ended October 31, 1996, 1997 and
1998, respectively.
In September 1997, in connection with the acquisition of Mardel (see Note 4),
the Company entered into an operating lease agreement with one of the former
owners of Mardel. The lease, as amended, expires in October 1999, with an option
to extend the term for an additional five years, and relates to the land and
buildings that comprise the Company's operating facility in Glendale Heights,
IL. Rent expense under this agreement was $10,500 for the period from the date
of the Mardel acquisition through October 31, 1997 and $126,000 for the year
ended October 31, 1998.
During the years ended October 31, 1996, 1997 and 1998 the Company had net sales
of approximately $954,000, $944,000 and $1,012,000, respectively, to a national
animal health marketing, warehousing, and distribution company that is also a
stockholder of the Company. An officer of such corporation is also a stockholder
of the Company and the Vice Chairman of the Company's Board of Directors. The
Company's management considers sales to said corporation to be arms length
transactions.
As discussed in Note 8, the Company entered into acquisition note payable
agreements with the former owners of Zema, St. JON and Mardel.
13. Manufacturing and Supply Agreement
In connection with Resources' acquisition, Purina agreed to purchase sufficient
volume and mix of products to generate income, net of ingredient, direct
manufacturing, and other direct costs of approximately $2,900,000 annually
(which represents a historically consistent margin level) through October 31,
1996.
In fiscal 1996, income, net of ingredient, direct manufacturing, and other
direct costs to date from Purina was approximately $1,200,000 less than that
required under the agreement. Such amount was billed to Purina and included in
net sales by the Company during October 1996. The manufacturing and supply
agreement expired on October 31, 1996.
See Note 16 for related matters.
14. Discontinued operations
In June 1997, the Company discontinued the distribution of ingredients to
Purina. Consequently, in July 1997, the Company distributed all of its remaining
ingredients inventories to Purina and discontinued its operations in this area.
This segment of the Company's business has been accounted for and presented as a
discontinued operation in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations" (APB 30) for all periods reflected
herein. At October 31, 1997, all of the net assets relating to the ingredients
segment have either been disposed or have been deployed into the Company's
existing operations.
F-21
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
Management does not anticipate that the ingredients segment will have any
significant operations in the future. Furthermore, management does not believe
that there are any separately identifiable fixed assets related to the
ingredients segment and proceeds related to disposition of such net assets
subsequent to the June 1997 measurement date did not result in a material net
gain or loss.
The operating results of the discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1997 1998
--------------- ---------------- ---------------
<S> <C> <C> <C>
Net sales................................................. $ 7,722,255 $ 5,531,411 $ --
Income before income tax provision........................ 185,204 23,835
Income tax provision..................................... 71,304 9,176
--------------- ---------------- ---------------
Net income ............................................... $ 113,900 $ 14,659 $ --
=============== ================ ===============
</TABLE>
There were no net assets of the discontinued operations at either October 31,
1997 or 1998.
15. Commitment 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 would 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, cash flows or results of operations.
16. Other matters
Merger Agreement with Virbac, Inc.
In October 1998, the Company entered a definitive merger agreement with Virbac,
Inc., a U.S. subsidiary of the French veterinary pharmaceutical manufacturer
Virbac S.A., under which Virbac S.A. will hold approximately 60% of the
outstanding stock of the combined companies. The transaction, which is subject
to approval by the Company's stockholders, government approval and other
customary conditions, is expected to close in March 1999 and will be accounted
for as an acquisition of the Company by Virbac, Inc. pursuant to the purchase
method of accounting. Interest income and other includes approximately $230,000
of fiscal 1998 expenses relative to legal, accounting and other costs for the
pending transaction with Virbac.
Purchase of Inventories from Purina Mills, Inc.
In January 1999, the Company acquired certain assets, primarily inventories,
related to Purina Mill's animal health products business. The amount paid for
such inventory aggregated $400,000, less future amounts which would have been
due to Purina Mills related to the acquisition of Bromethalin assets, as
discussed in Note 3. Purina's "additional consideration" due for the five-year
period subsequent to the acquisition of Bromethalin was waived in conjunction
with this purchase of inventories. Prior thereto,
F-22
<PAGE>
Agri-Nutrition Group Limited
Notes to Financial Statements -- continued
the Company manufactured and supplied products to Purina Mills for this
business. The Company will now supply animal health products directly to
Purina's dealers. Management does not anticipate any material adverse impact on
its financial position, cash flows or results of operations as a result of this
change in customer relationships.
Termination of Anthony Products Letter of Intent
In March 1997, the Company terminated its letter of intent related to its
proposed acquisition of Anthony Products Company. In conjunction with this
action, the Company recorded a $202,000 pre-tax charge in the second quarter of
fiscal 1997. Such amount is included in interest income and other in the
accompanying consolidated statement of operations.
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 incurred a non-recurring charge of $240,000 relative
to severance costs in the fourth quarter of fiscal 1996. These costs were paid
during fiscal 1997.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Agri-Nutrition Group Limited
Our audits of the consolidated financial statements referred to in our report
dated January 15, 1999, appearing on page F-2 of this Annual Report on Form 10-K
also included an audit of the Financial Statement Schedules included on pages
S-2 to S-4 of this Annual Report on Form 10-K. In our opinion, the Financial
Statement Schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
January 15, 1999
S-1
<PAGE>
AGRI-NUTRITION GROUP LIMITED
SCHEDULE VIII - RULE 12-09
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
OCTOBER 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT BALANCE AT
BEGINNING DEDUCTIONS END OF
DESCRIPTION OF PERIOD ADDITIONS - DESCRIBE PERIOD
-------------------------------------------------
CHARGED TO COSTS CHARGED TO OTHER
AND EXPENSES ACCOUNTS - DESCRIBE
<S> <C> <C> <C> <C> <C>
FAS 109 Valuation
Allowance $98,850 -- -- -- $98,850
Inventory Reserve $98,914 $11,518 $38,000(1) -- $148,432
Allowance for
Doubtful Accounts $47,031 $5,998 -- -- $53,029
</TABLE>
(1) Consists of inventory reserves recorded as the result of the
acquisition of the Bromethalin Assets described in Note 4 of the
Company's Notes to Consolidated Financial Statements for the year
ended October 31, 1996.
S-2
<PAGE>
AGRI-NUTRITION GROUP LIMITED
SCHEDULE VIII - RULE 12-09
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
OCTOBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT BALANCE AT
BEGINNING DEDUCTIONS END OF
DESCRIPTION OF PERIOD ADDITIONS - DESCRIBE PERIOD
----------------------------------------
CHARGED TO COSTS CHARGED TO OTHER
AND EXPENSES ACCOUNTS - DESCRIBE
<S> <C> <C> <C> <C> <C>
FAS 109 Valuation
Allowance $ 98,850 -- $ 24,994 (1) -- $ 123,844
Inventory Reserve $ 148,432 $ (31,806) $160,664 (1) -- $ 277,290
Allowance for
Doubtful Accounts $ 53,029 $ (5,518) $ 86,194 (1) -- $ 33,705
</TABLE>
(1) The FAS 109 valuation allowance, inventory reserve and allowance for
doubtful account allowances were increased by this amount in connection with the
Company's acquisition of Mardel Laboratories, Inc. in September 1997.
S-3
<PAGE>
AGRI-NUTRITION GROUP LIMITED
SCHEDULE II - RULE 12-09
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
OCTOBER 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT BALANCE AT
BEGINNING DEDUCTIONS END OF
DESCRIPTION OF PERIOD ADDITIONS - DESCRIBE PERIOD
----------------------------------------
CHARGED TO COSTS CHARGED TO OTHER
AND EXPENSES ACCOUNTS - DESCRIBE
<S> <C> <C> <C> <C> <C>
FAS 109 Valuation
Allowance $ 123,844 -- -- -- $ 123,844
Inventory Reserve $ 277,290 $ 116,138 -- -- $ 393,428
Allowance for
Doubtful Accounts $ 133,705 $ 8,649 -- -- $ 142,354
</TABLE>
S-4
SECOND AMENDMENT TO
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, made and entered
into as of the _____ day of October, 1998, by and between PM RESOURCES, INC., a
Missouri corporation ("PM"), AGRI-NUTRITION GROUP LIMITED, a Delaware
corporation ("Agri-Nutrition"), and ST. JON LABORATORIES, INC., a California
corporation ("St. JON," and collectively with PM and Agri-Nutrition referred to
herein as "Borrowers") and FIRST BANK, a Missouri state banking corporation
("Bank").
WITNESSETH:
WHEREAS, Borrowers heretofore jointly and severally executed
and delivered to Bank a Revolving Credit Note dated May 14, 1998, in the
principal amount of up to Nine Million Two Hundred Thousand Dollars
($9,200,000.00), payable to the order of Bank as therein set forth, which
Revolving Credit Note was amended and restated by Borrowers in a Revolving
Credit Note dated August 6, 1998 in the principal amount of up to Nine Million
Seven Hundred Thousand Dollars ($9,700,000.00) made by Borrowers payable to the
order of Bank as therein set forth (as amended and restated, the "Note"); and
WHEREAS, the Note is described in a certain Credit Agreement
dated May 14, 1998 made by and among Borrowers and Bank as previously amended by
an Amendment to Credit Agreement dated as of August 6, 1998 made by and among
Borrowers and Bank (as amended, the "Loan Agreement"); and
WHEREAS, Borrowers and Bank desire to further amend the Loan
Agreement and the Note to extend the Five Hundred Thousand Dollars ($500,000.00)
temporary increase in the maximum available principal amount thereunder until
January 31, 1999 (subject to the Borrowing Base, the scheduled periodic
principal reductions set forth in Section 3.1(b) of the Loan Agreement and other
terms and conditions of the Loan Agreement) and to make certain other amendments
thereto on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the
mutual provisions and agreements hereinafter set forth, the parties hereto do
hereby mutually promise and agree as follows:
1. The Note shall be amended and restated in the form of that certain
Revolving Credit Note attached hereto as Exhibit C, to extend the increase in
the maximum principal amount thereof to Nine Million Seven Hundred Thousand
Dollars ($9,700,000.00) for the period of time up to and including November 29,
1998, reducing automatically on November 30, 1998 to the new maximum amount of
Nine Million Five Hundred Fifty Thousand Dollars ($9,550,000.00) pursuant to
Section 3.1(b) of the Loan Agreement for the period up to January 31, 1999,
reducing automatically on January 31, 1999 to the new maximum amount of Nine
Million Fifty Thousand Dollars ($9,050,000.00) and thereafter reducing as set
forth in Section 3.1(b) of the Loan Agreement, and to make certain amendments as
set forth therein. All references in the Loan Agreement to the "Note," the
"Revolving Credit Note" and other references of similar import shall hereafter
be amended and deemed to refer to the Note in the form of the Revolving Credit
Note, as amended and restated in the form attached hereto as Exhibit C.
Borrowers hereby agree that on or before 5:00 p.m. (St. Louis time) on November
30, 1998, Borrowers shall jointly and severally repay to Bank, without any
requirement of demand or notice from Bank, an amount equal to amount by which
the outstanding principal balance of the Note exceeds Nine Million Five Hundred
Fifty Thousand Dollars ($9,550,000.00), together with all other amounts then due
under the terms of the Loan Agreement and the Note and that on or before 5:00
p.m. (St. Louis time) on January 31, 1999, Borrowers shall jointly and severally
repay to Bank, without any requirement of demand or notice from Bank, an amount
equal to amount by which the outstanding principal balance of the Note exceeds
Nine Million Fifty Thousand Dollars ($9,050,000.00), together with all other
amounts then due under the terms of the Loan Agreement and the Note.
2. The fourth paragraph beginning with the word "WHEREAS" on the first page
of the Loan Agreement shall be deleted in its entirety and in its place shall be
substituted the following:
WHEREAS, Borrowers have requested the consolidation
of the above described credit facilities under one borrowing base for
Agri-Nutrition and its Subsidiaries on a joint and several basis and an
extension of such joint and several loan facility from Bank in an
aggregate principal amount of up to Nine Million Seven Hundred Thousand
Dollars ($9,700,000.00) for a period of time from October 2, 1998 up to
and including November 29, 1998, Five Million Dollars ($5,000,000.00)
of which shall be subject to a Borrowing Base (as set forth herein)
("Facility A"), and the remaining Four Million Seven Hundred Thousand
Dollars ($4,700,000.00) of which shall be a reducing revolving credit
line from Bank ("Facility B"), that on November 30, 1998 the maximum
principal amount of such loan facility and Facility B shall reduce
automatically as set forth in Section 3.1(b) herein, and on January 31,
1999 the maximum principal amount of such loan facility shall be
further reduced automatically to an aggregate principal amount of up to
Nine Million Fifty Thousand Dollars ($9,050,000.00), reducing
thereafter pursuant to Section 3.1(b) herein during the period of time
from February 1, 1999 up to and including March 31, 2001 (as of January
31, 1999, Four Million Five Hundred Thousand Dollars ($4,500,000.00) of
which shall be subject to the Borrowing Base under Facility A, and the
remaining Four Million Five Hundred Fifty Thousand Dollars
($4,550,000.00) of which shall constitute the reducing revolving credit
line from Bank under Facility B); and
3. The definition of "Letter of Credit Application" in Section 2 of the
Loan Agreement shall be deleted in its entirety and in its place shall be
substituted the following:
Letter of Credit Application shall mean an
application and agreement for irrevocable standby letter of credit in
the form of Exhibit F attached hereto and incorporated herein by
reference, or an application and reimbursement agreement for commercial
letter of credit in the form of Exhibit G attached to that certain
Second Amendment to Loan Agreement made by and among Borrowers and Bank
dated as of October ___, 1998 (the "Second Amendment") and incorporated
herein by reference, in either case as executed by Borrower, as account
party, and delivered to Bank pursuant to Section 3.3(a) as the same may
from time to time be amended, modified, extended or renewed.
4. The last sentence of Section 3.2 of the Loan Agreement shall be deleted
in its entirety and in its place shall be substituted the following:
Contemporaneously with the execution of that certain
Second Amendment to Credit Agreement dated as of October 2, 1998 made
by and among Borrowers and Bank (the "Second Amendment"), Borrowers
shall execute and deliver to Bank a Note of Borrowers dated as of
October 2, 1998 and payable jointly and severally to the order of Bank
in the original principal amount of Nine Million Seven Hundred Thousand
Dollars ($9,700,000.00) in the form attached as Exhibit C to the Second
Amendment and incorporated herein by reference (as the same may from
time to time be amended, modified, extended or renewed, the "Note").
5. Section 3.3(a) of the Loan Agreement shall be deleted in its entirety
and in its place shall be substituted the following:
3.3 Letters of Credit.
(a) Subject to the terms and conditions
of this Agreement, during the Term of this Agreement, and so long as no
Default or Event of Default under this Agreement has occurred and is
continuing, Bank hereby agrees to issue irrevocable standby letters of
credit or commercial letters of credit for the account of any of the
Borrowers, or to cause other banks to issue irrevocable standby letters
of credit or commercial letters of credit for the account of any of the
Borrowers by indemnifying such other banks for Borrowers obligations
thereunder (each individually, a "Letter of Credit" and collectively,
the "Letters of Credit") in an amount and for the term specifically
requested by any of the Borrowers by application in writing to Bank (or
such other bank) in the form of Exhibit F attached hereto and
incorporated herein by reference in the case of a standby Letter of
Credit, or in the form of Exhibit G attached to the Second Amendment
and incorporated herein by reference in the case of a commercial Letter
of Credit (each a "Letter of Credit Application") at least three (3)
Business Days prior to the requested issuance thereof; provided,
however, that:
(i) Borrowers, or any of them, shall have
executed and delivered to Bank a Letter of Credit Application with respect to
such Letter of Credit;
(ii) the term of any such Letter of Credit
shall not extend beyond the last day of the Term hereof; and
(iii) the aggregate undrawn face
amount of all outstanding Letters of Credit plus the outstanding principal
amount of all Facility A Loans shall not at any one time exceed the lesser of
(a) the Borrowing Base or (b) the Bank's Facility A Commitment; and
(iv) the text of any such Letter of Credit
is provided to Bank no less than three (3) Business Days prior to the requested
issuance date, which text must be acceptable to Bank in its sole and absolute
discretion.
6. Section 3.3(b) of the Loan Agreement shall be deleted in its entirety
and in its place shall be substituted the following:
(b) The payment of drafts under each Letter of Credit shall be made in
accordance with the terms thereof and, in that connection, Bank (or any
other issuing bank thereof) shall be entitled to honor any drafts and
accept any documents presented to it by the beneficiary of such Letter of
Credit in accordance with the terms of such Letter of Credit and reasonably
believed by Bank (or such issuing bank) to be genuine. Bank (or such other
issuing bank) shall not have any duty to inquire as to the accuracy or
authenticity of any draft or other drawing document that may be presented
to it other than the duties contemplated by the applicable Letter of Credit
Application. If Bank (or such other issuing bank) shall have received
documents that in its judgment constitute all of the documents that are
required to be presented before payment or acceptance of a draft under a
Letter of Credit, it shall be entitled to pay such draft provided such
documents conform on their face to the requirements of such Letter of
Credit.
7. Section 3.3(d)(ii) of the Loan Agreement shall be deleted in its
entirety and in its place shall be substituted the following:
(ii) Borrowers shall pay to Bank with respect to each Letter of Credit for the
period during which such Letter of Credit is outstanding:
(1) in the case of any standby Letter of Credit, a nonrefundable Letter of
Credit commitment fee in an amount per annum equal to the greater of (A)
One Hundred Dollars ($100.00) or (B) the applicable Letter of Credit
Commitment Fee Rate in effect for the fiscal quarter in which such standby
Letter of Credit is issued (calculated on an actual day, 360-day year
basis) times the face amount (taking into account any scheduled increases
or decreases therein during the fiscal quarter in question) of the standby
Letter of Credit then being issued hereunder; or
(2) such up-front fee in the case of each such commercial Letter of Credit as
shall be determined by Bank and agreed to by Borrowers prior to the
issuance thereof ;
("Letter of Credit Commitment Fee"), which Letter of Credit Commitment
Fee shall be due and payable in advance on the date of issuance of each such
Letter of Credit and on each renewal date of any such Letter of Credit.
8. Section 7.1(i)(ii) of the Loan Agreement shall be deleted in its
entirety and in its place shall be substituted the following:
(ii) Maintain a ratio of Consolidated EBITDA minus Capital Expenditures and
minus permitted purchases by Borrowers of any of the outstanding capital
stock of Agri-Nutrition during any such period (determined on a
consolidated basis for Borrowers and their Consolidated Subsidiaries and in
accordance with Generally Accepted Accounting Principles consistently
applied, for the twelve month period ending on the date of any such
calculation), to Consolidated Interest Expense plus Consolidated Tax
Expense of at least (A) 1.10 to 1.0 at all times up to and including
October 31, 1998, (B) 1.25 to 1.0 at all times from November 1, 1998 up to
and including November 30, 1998, (C) 1.50 to 1.0 at all times from December
1, 1998 up to and including October 31, 1999, and (D) 1.70 to 1.0 at all
times thereafter during the Term hereof;
9. Section 7.1(i)(iii) of the Loan Agreement shall be deleted in its
entirety and in its place shall be substituted the following:
(iii)Maintain a ratio of Indebtedness (determined on a consolidated basis for
Borrowers and their Consolidated Subsidiaries and in accordance with
Generally Accepted Accounting Principles consistently applied, but
excluding Subordinated Debt) to Consolidated EBITDA of not more than (A)
10.00 to 1.0 at all times up to and including September 30, 1998, (B) 11.00
to 1.0 at all times from October 1, 1998 up to and including October 31,
1998, (C) 9.00 to 1.0 at all times from November 1, 1998 up to and
including November 30, 1998, (D) 7.25 to 1.0 at all times from December 1,
1998 up to and including December 31, 1998, (E) 6.50 to 1.0 at all times
from January 1, 1999 up to and including February 28, 1999, (F) 7.00 to 1.0
at all times from March 1, 1999 up to and including July 31, 1999, (G) 6.00
to 1.0 at all times from August 1, 1999 up to and including October 31,
1999, (H) 5.75 to 1.0 at all times from November 1, 1999 up to and
including February 28, 2000, (I) 6.75 to 1.0 at all times from March 1,
2000 up to and including July 31, 2000, and (J) 5.75 to 1.0 at all times
thereafter during the Term hereof;
10. Section 7.1(i)(iv) of the Loan Agreement shall be deleted in its
entirety and in its place shall be substituted the following:
(iv) Maintain a minimum net income or maximum net loss as the case may be (in
either case including extraordinary losses but excluding extraordinary
gains except to the extent extraordinary gains may be netted against
extraordinary losses in a period, and determined on a consolidated basis
for Borrowers and their Consolidated Subsidiaries in accordance with
Generally Accepted Accounting Principles consistently applied, for the
twelve-month period ending on the date of each such calculation) of: (A) a
net loss of not more than Five Hundred Thousand Dollars ($500,000.00) on
September 30, 1998, (B) a net loss of not more than Five Hundred Twenty
Thousand Dollars ($520,000.00) on October 31, 1998, (C) a net loss of not
more than Three Hundred Fifty Thousand Dollars ($350,000.00) on November
30, 1998, (D) a net loss of not more than Two Hundred Thousand Dollars
($200,000.00) on December 31, 1998, (E) a net loss of not more than One
Hundred Fifty Thousand Dollars ($150,000.00) at each month-end from January
31, 1999 up to and including March 31, 1999, and (F) a net income of at
least One Hundred Thousand Dollars ($100,000.00) at each month-end
thereafter, commencing with the month ending April 30, 1999.
11. Section 7.2(g) of the Loan Agreement shall be deleted in its entirety
and in its place shall be substituted the following:
(g) Stock Redemptions and Distributions. None of the Borrowers will make or
declare or incur any liability to make any Distribution in respect of the
capital stock of Agri-Nutrition without the prior written consent of Bank,
provided that if (i) Borrowers are in compliance with each of the financial
covenants set forth in Section 7.1(i) herein as of January 31, 1999, (ii)
no Default or Event of Default otherwise then exists hereunder, and (iii)
Borrowers project that they shall remain in compliance with each of the
financial covenants contained in Section 7.1(i) herein after any such
contemplated Distribution, then Agri-Nutrition may repurchase up to 500,000
shares (less the number of shares repurchased between December 12, 1995 and
October 5, 1998) of its capital stock on the open market pursuant to that
certain share repurchase program outlined to Bank in a letter from
Agri-Nutrition to Bank dated December 12, 1995.
12. The Borrowing Base Certificate shall be amended and restated in the
form of that certain Borrowing Base Certificate attached hereto as Exhibit A to
incorporate the above changes. All references in the Loan Agreement to the
"Borrowing Base Certificate" and other references of similar import shall
hereafter be amended and deemed to refer to the Borrowing Base certificate in
the form attached hereto as Exhibit A. --------- ---------
13. In consideration of Bank's agreement to extend the Five Hundred
Thousand Dollars ($500,000.00) temporary increase in the maximum available
principal amount of the revolving credit facility as set forth herein and to
amend the covenants as set forth herein, Borrowers agree to jointly and
severally pay to Bank an amendment fee in the amount of $2,500.00, which fee
shall be due and payable and fully earned on the date hereof.
14. The agreements of Bank contained herein are expressly conditioned upon
deliver by Borrowers of the following:
(a) the executed original of this Second Amendment to Credit Agreement;
(b) the executed original of the amended and restated Note;
(c) a copy of resolutions of the Board of Directors of each of the Borrowers,
duly adopted, which authorize the execution, delivery and performance of
this Second Amendment to Credit Agreement and the amended and restated Note
and the other Transaction Documents, certified by the Secretary of each
such Borrower;
(d) the Consent of Agri-Nutrition and St. JON in the form attached hereto,
acknowledging the amendments contained herein and the continuing
effectiveness of the Pledge Agreements, duly executed respectively by
Agri-Nutrition and St. JON;
(e) such other documents as Bank may reasonably request; and
(f) payment by Borrowers of the amendment fee required under paragraph 14
above.
15. Borrowers hereby represent and warrant to Bank that:
(a) The execution, delivery and performance by Borrowers of this Second
Amendment to Credit Agreement and the amended and restated Revolving Credit
Note are within the corporate powers of Borrowers, have been duly
authorized by all necessary corporate action and require no action by or in
respect of, or filing with, any governmental or regulatory body, agency or
official. The execution, delivery and performance by Borrowers of this
Second Amendment to Credit Agreement and the amended and restated Revolving
Credit Note do not conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under or result in any
violation of, and none of the Borrowers is now in default under or in
violation of, the terms of the Articles of Incorporation or Bylaws of such
Borrower, any applicable law, any rule, regulation, order, writ, judgment
or decree of any court or governmental or regulatory agency or
instrumentality, or any agreement or instrument to which any of the
Borrowers is a party or by which any of them is bound or to which any of
them is subject;
(b) This Second Amendment to Credit Agreement and the amended and restated
Revolving Credit Note have been duly executed and delivered and constitute
the legal, valid and binding obligations of Borrowers enforceable in
accordance with their terms; and
(c) As of the date hereof, all of the covenants, representations and warranties
of Borrowers set forth in the Loan Agreement are true and correct and no
"Event of Default" (as defined therein) under or within the meaning of the
Loan Agreement has occurred and is continuing.
16. All references in the Loan Agreement to "this Loan Agreement" and any
other references of similar import shall henceforth mean the Loan Agreement as
amended by this Second Amendment to Credit Agreement.
17. This Second Amendment to Credit Agreement and the amended and restated
Revolving Credit Note shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, except that
Borrowers may not assign, transfer or delegate any of their rights or
obligations hereunder.
18. This Second Amendment to Credit Agreement shall be governed by and
construed in accordance with the internal laws of the State of Missouri.
19. In the event of any inconsistency or conflict between this Second
Amendment to Credit Agreement and the Loan Agreement, the terms, provisions and
conditions of this Second Amendment to Credit Agreement shall govern and
control.
20. The Loan Agreement, as hereby amended and modified, and the amended and
restated Revolving Credit Note, as hereby amended and restated, are and shall
remain the binding obligations of Borrowers and all of the provisions, terms,
stipulations, conditions, covenants and powers contained therein shall stand and
remain in full force and effect, except only as the same are herein and hereby
specifically varied or amended, and the same are hereby ratified and confirmed.
If any installment of principal or interest on the amended and restated
Revolving Credit Note shall not be paid when due as provided in the amended and
restated Revolving Credit Note, the holder of the amended and restated Revolving
Credit Note shall be entitled to and may exercise all rights and remedies under
the amended and restated Revolving Credit Note and the Loan Agreement, as
amended.
21. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO
FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT, INCLUDING PROMISES TO EXTEND OR
RENEW SUCH DEBT, ARE NOT ENFORCEABLE. TO PROTECT BORROWERS AND BANK FROM ANY
MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS REACHED BY BORROWERS AND BANK
COVERING SUCH MATTERS ARE CONTAINED IN THE LOAN AGREEMENT, AS AMENDED BY THIS
AGREEMENT, WHICH CONSTITUTES A COMPLETE AND EXCLUSIVE STATEMENT OF THE
AGREEMENTS BETWEEN BORROWERS AND BANK EXCEPT AS BORROWERS AND BANK MAY LATER
AGREE IN WRITING TO MODIFY. THE LOAN AGREEMENT, AS AMENDED BY THIS AGREEMENT,
EMBODIES THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES HERETO AND
SUPERSEDES ALL PRIOR AGREEMENTS AND UNDERSTANDINGS (ORAL OR WRITTEN) RELATING TO
THE SUBJECT MATTER HEREOF.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of
the date first written above on this _____ day of October, 1998.
PM RESOURCES, INC.
By:
Robert J. Elfanbaum,
Vice President and Treasurer
AGRI-NUTRITION GROUP LIMITED
By:
Robert J. Elfanbaum, Secretary
ST. JON LABORATORIES, INC.
By:
Robert J. Elfanbaum, Vice President,
Secretary and Treasurer
FIRST BANK
By:
Ted H. Kraizer, Vice President
<PAGE>
CONSENT TO SECOND AMENDMENT TO
CREDIT AGREEMENT
The undersigned hereby consent to the terms of the foregoing
Second Amendment to Credit Agreement and the amended and restated Revolving
Credit Note and other amendments being executed in connection therewith as
referenced therein (collectively, the "Amendments"), and the undersigned
acknowledge that the execution and delivery by PM Resources, Inc.,
Agri-Nutrition Group Limited and St. JON Laboratories, Inc. of said Amendments
will not affect or impair the undersigned's respective obligations to and
agreements with Bank under (i) that certain Agreement of Pledge (Third Party)
dated May 14, 1998 made by Agri-Nutrition Group Limited in favor of Bank (the
"Agri-Nutrition Pledge Agreement"), or (ii) that certain Agreement of Pledge
(Third Party) dated May 14, 1998 made by St. JON Laboratories, Inc. in favor of
Bank (the "St. JON Pledge Agreement"), which obligations and agreements are
hereby ratified and confirmed. The undersigned further acknowledge and agree
that all references in the Agri-Nutrition Pledge Agreement and in the St. JON
Pledge Agreement to the "Credit Agreement" and other references of similar
import shall henceforth mean the foregoing Credit Agreement, as amended on the
date hereof and as the same may from time to time be further amended; all
references in the Agri-Nutrition Pledge Agreement and the St. JON Pledge
Agreement to the "Note," the "Revolving Credit Note" and other references of
similar import shall henceforth mean the Revolving Credit Note, as amended and
restated, and as the same may from time to time be further amended; and all
references in the Agri-Nutrition Pledge Agreement and the St. JON Pledge
Agreement to any of the other transaction documents shall henceforth mean such
documents as the same may have been amended by the other Amendments and as the
same may from time to time be further amended.
Dated: as of October ___, 1998.
AGRI-NUTRITION GROUP LIMITED
By:
Robert J. Elfanbaum, Vice President
and Chief Financial Officer
ST. JON LABORATORIES, INC.
By:
Robert J. Elfanbaum, Vice President,
Secretary and Treasurer
- 2 -
<PAGE>
EXHIBIT A
BORROWING BASE CERTIFICATE
This Borrowing Base Certificate is delivered pursuant to
Section 3.1(d) of that certain Credit Agreement dated May 14, 1998, by and
between Agri-Nutrition Group Limited, PM Resources, Inc., St. JON Laboratories,
Inc. and First Bank (as amended, the "Loan Agreement"). All capitalized terms
used and not otherwise defined herein shall have the respective meanings
ascribed to them in the Loan Agreement.
Borrowers hereby represent and warrant to Bank that the
following information is true and correct as of _________________, 19__:
1. 75% of face amount of Eligible Accounts of PM Resources
2. 75% of face amount of Eligible Accounts of Agri-Nutrition
3. 75% of the face amount of Eligible Accounts of St. JON
4. 45% of Eligible Inventory of PM Resources, valued
at the lower of cost or market
5. 45% of Eligible Inventory of Agri-Nutrition, valued
at the lower of cost or market
6. 45% of Eligible Inventory of St. JON, valued at the lower
of cost or market
7. Total Borrowing Base (sum of 1 through 6 above not to exceed
$5,000,000.00 up to and including January 31, 1999 or
$4,500,000.00 thereafter)
Borrowers hereby further represent and warrant to Bank that
the following information is true and correct as of ______________________,
19___:
8. Aggregate principal amount of outstanding Facility A Loans
9. Aggregate face amount of outstanding Letters of Credit
10. Total Outstanding (Item 8 plus Item 9)
11. Borrowing Base Excess (Deficit) (Item 7 minus Item 10)
(Negative amount represents mandatory repayment)
If Item 11 above is negative, this Borrowing Base Certificate
is accompanied by the mandatory repayment required by Section 3.1(e) of the Loan
Agreement.
12. Maximum Available principal amount of Facility B Loans
13. Aggregate principal amount of outstanding Facility B Loans
This Borrowing Base Certificate is dated the _____ day of
__________________, 19__.
AGRI-NUTRITION GROUP LIMITED
By:
Title:
PM RESOURCES, INC.
By:
Title:
ST. JON LABORATORIES, INC.
By:
Title:
- 3 -
<PAGE>
EXHIBIT C
Revolving Credit Note
$9,700,000.00 St. Louis, Missouri
October 2, 1998
FOR VALUE RECEIVED, on March 31, 2001 (or such subsequent
anniversary thereof as determined pursuant to Section 3.10 of the Loan Agreement
(hereinafter identified)), the undersigned, AGRI-NUTRITION GROUP LIMITED, a
Delaware corporation, PM RESOURCES, INC., a Missouri corporation, and ST. JON
LABORATORIES, INC., a California corporation (collectively, the "Borrowers"),
hereby jointly and severally promise to pay to the order of FIRST BANK, a
Missouri state banking corporation ("Bank"), the principal sum of Nine Million
Seven Hundred Thousand Dollars ($9,700,000.00), or such lesser sum as may then
be outstanding hereunder. The aggregate principal amount which Bank shall be
committed to have outstanding under Facility A hereunder at any one time shall
not exceed the lesser of (i) for the period from the date hereof to and
including January 31, 1999 the amount of Five Million Dollars ($5,000,000.00),
or from and after January 31, 1999 an amount of Four Million Five Hundred
Thousand Dollars ($4,500,000.00), or (ii) the "Borrowing Base" (as defined in
the Loan Agreement (as hereinafter defined)), which amount may be borrowed,
paid, reborrowed and repaid, in whole or in part, subject to the terms and
conditions hereof and of the Loan Agreement hereinafter identified. The
aggregate principal amount which Bank shall be committed to have outstanding
under Facility B hereunder at any one time shall not exceed Four Million Seven
Hundred Thousand Dollars ($4,700,000.00) as reduced from time to time pursuant
to Section 3.1(b) of the Loan Agreement hereinafter identified, which amount may
be borrowed, paid, reborrowed and repaid, in whole or in part, subject to the
terms and conditions hereof and of the Loan Agreement hereinafter identified.
Borrowers further jointly and severally promise to pay to the
order of Bank interest on the principal amount from time to time outstanding
hereunder prior to maturity from the date disbursed until paid at the rate or
rates per annum required by the Loan Agreement or otherwise selected by any of
the Borrowers as set forth in the Loan Agreement. All accrued and unpaid
interest with respect to each principal disbursement made hereunder shall be
payable (a) monthly on the fifteenth (15th) day of the month following the month
in which such interest accrued, commencing with the fifteenth (15th) day of the
month following the month in which any such disbursement was made, and on the
fifteenth (15th) day of each month thereafter, (b) if such disbursement is a
Treasury Rate Loan, such accrued interest shall also be payable on the last day
of the Interest Period with respect thereto, and (c) at the maturity of this
Note, whether by reason of acceleration or otherwise. After the maturity of this
Note, whether by reason of acceleration or otherwise, interest shall accrue and
be payable on demand on the entire outstanding principal balance hereunder until
paid at a rate per annum equal to Three and One-Half Percent (3.50%) over and
above the Prime Rate, fluctuating as and when said Prime Rate shall change. All
payments hereunder (other than prepayments) shall be applied first to the
payment of all accrued and unpaid interest, with the balance, if any, to be
applied to the payment of principal.
All prepayments hereunder shall be applied solely to the payment of principal.
All payments of principal and interest hereunder shall be made
in lawful currency of the United States in Federal or other immediately
available funds at the office of Bank situated at 1281 Graham Road, Florissant,
Missouri 63031, or at such other place as the holder hereof shall designate in
writing. Interest shall be computed on an actual day, 360-day year basis.
Bank may record the date and amount of all loans and all
payments of principal and interest hereunder in the records it maintains with
respect thereto. Bank's books and records showing the account between Bank and
Borrowers shall be admissible in evidence in any action or proceeding and shall
constitute prima facie proof of the items therein set forth.
This Note is the Note referred to in that certain Credit
Agreement dated as of May 14, 1998 made by and between Borrowers and Bank (as
the same may from time to time be amended, the "Loan Agreement"), to which Loan
Agreement reference is hereby made for a statement of the terms and conditions
upon which the maturity of this Note may be accelerated, and for other terms and
conditions, including prepayment, which may affect this Note. All capitalized
terms used herein and not otherwise defined shall have the meanings assigned to
such terms in the Loan Agreement.
This Note is secured by that certain Security Agreement dated
as of May 14, 1998 executed by Agri-Nutrition Group Limited in favor of Bank, by
that certain Security Agreement dated as of May 14, 1998 and executed by PM
Resources, Inc. in favor of Bank and by that certain Security Agreement dated as
of May 14, 1998 executed by St. JON Laboratories, Inc. in favor of Bank (as the
same may from time to time be amended, the "Security Agreements"), to which
Security Agreements reference is hereby made for a description of the security
and a statement of the terms and conditions upon which this Note is secured.
This Note is also secured by that certain Deed of Trust and
Security Agreement dated September 9, 1993 and executed by PM Resources, Inc. in
favor of Katherine D. Knocke, as trustee for Bank (as the same may from time to
time be amended, the "Deed of Trust"), to which Deed of Trust reference is
hereby made for a description of the security and a statement of the terms and
conditions upon which this Note is secured.
This Note is also secured by that certain Agreement of Pledge
dated as of May 14, 1998 and executed by Agri-Nutrition Group Limited in favor
of Bank and by that certain Agreement of Pledge dated as of May 14, 1998 and
executed by St. JON Laboratories, Inc. in favor of Bank (collectively, as the
same may from time to time be amended, the "Pledge Agreements"), to which Pledge
Agreements reference is hereby made for a description of the additional security
and a statement of the terms and conditions upon which this Note is further
secured.
If any of the Borrowers shall fail to make any payment of any
principal of or interest on this Note as and when the same shall become due and
payable, or if an "Event of Default" (as defined therein) shall occur under or
within the meaning of the Loan Agreement, any of the Security Agreements, the
Deed of Trust or either of the Pledge Agreements, Bank may, at its option,
terminate its obligation to make any additional loans under this Note and Bank
may further declare the entire outstanding principal balance of this Note and
all accrued and unpaid interest thereon to be immediately due and payable.
In the event that any payment of any principal of or interest
on this Note shall not be paid when due, whether by reason of acceleration or
otherwise, and this Note shall be placed in the hands of an attorney or
attorneys for collection or for foreclosure of any of the Security Agreements,
the Deed of Trust or either of the Pledge Agreements securing payment hereof or
for representation of Bank in connection with bankruptcy or insolvency
proceedings relating hereto, Borrowers jointly and severally promise to pay, in
addition to all other amounts otherwise due hereon, the reasonable costs and
expenses of such collection, foreclosure and representation, including, without
limitation, reasonable attorneys' fees and expenses (whether or not litigation
shall be commenced in aid thereof). All parties hereto severally waive
presentment for payment, demand, protest, notice of protest and notice of
dishonor.
This Note shall be governed by and construed in accordance
with the internal laws of the State of Missouri.
AGRI-NUTRITION GROUP LIMITED
By:
Robert J. Elfanbaum,
Vice President and Chief Financial
Officer
PM RESOURCES, INC.
By:
Robert J. Elfanbaum,
Vice President and Treasurer
ST. JON LABORATORIES, INC.
By:
Robert J. Elfanbaum, Vice President
- 4 -
Exhibit 21
List of Subsidiaries of Agri-Nutrition Group Limited
PM Resources, Inc.
St. JON Laboratories, Inc.
St. JON VRx Products
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-94622) of
Agri-Nutrition Group Limited of our report dated January 15, 1999 appearing on
page F-2 of this Annual Report on Form 10-K/A. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule
appearing on page S-1 of this Annual Report on Form 10-K/A.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 8, 1999
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (Nos. 33-86880,
33-86892, 33-93340, 333-3192, 333-48069, and 333-48073) of Agri-Nutrition Group
Limited of our report dated January 15, 1999 appearing on page F-2 of this
Annual Report on Form 10-K/A. We also consent to the incorporation by reference
of our report on the Financial Statement Schedule appearing on page S-1 of this
Annual Report on Form 10-K/A.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
January 29, 199
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 97,971
<SECURITIES> 0
<RECEIVABLES> 4,812,842
<ALLOWANCES> 0
<INVENTORY> 7,150,042
<CURRENT-ASSETS> 13,542,443
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0
0
<COMMON> 93,873
<OTHER-SE> 16,025,620
<TOTAL-LIABILITY-AND-EQUITY> 28,042,588
<SALES> 32,944,020
<TOTAL-REVENUES> 32,944,020
<CGS> 24,008,395
<TOTAL-COSTS> 24,008,395
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<INCOME-CONTINUING> (662,832)
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