SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-24312
VIRBAC CORPORATION
(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)
3200 Meacham Blvd.
Fort Worth, TX 76092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 831-5030
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 of 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 April 25, 2000 (computed by reference to
the closing price of such stock on the NASDAQ/National Market) was $17,161,706.
As of April 25, 2000, there were 21,030,798 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Virbac Corporation
FORM 10-K
Cross Reference Sheet
Item Page
Part I
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1 Business......................................................................... 1
2 Properties....................................................................... 6
3 Legal Proceedings................................................................ 6
4 Submission of Matters to a Vote of Security Holders.............................. 7
4A Executive Officers of the Registrant............................................. 7
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters............ 8
6 Selected Financial Data ......................................................... 8
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................ 9
8 Financial Statements............................................................. 16
9 Changes in Disagreements With Accountants on Accounting and
Financial Disclosure......................................................... 16
Part III
10 Directors and Executive Officers of the Registrant............................... 17
11 Executive Compensation........................................................... 18
12 Security Ownership of Certain Beneficial Owners and Management................... 19
13 Certain Relationships and Related Transactions................................... 20
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 20
Signatures....................................................................... 23
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Part I
Item 1. Business
Business Overview
Virbac Corporation ("Virbac" or "the Company"), based in Fort Worth,
Texas, develops, manufactures, markets, distributes and sells a variety of
animal health products, focusing on dermatological, parasiticide and dental
products. Its PM Resources division ("PMR"), based in St. Louis, Missouri,
formulates products under private-label and under third party contract
manufacturing for use in the animal health and specialty chemicals industries.
Virbac S.A. ("VBSA") is a French veterinary pharmaceutical manufacturer with
operations throughout much of the world. Interlab S.A.S., a French Corporation
and wholly-owned subsidiary of VBSA ("VBSA Sub"), owns approximately 60% of the
outstanding common stock of the Company. The Company distributes and sells its
products throughout the United States and Canada, and through a distribution
agreement with VBSA, in foreign markets.
1999 Merger
The Company is the result of the March 5, 1999 merger of Virbac, Inc.,
a subsidiary of VBSA, and Agri-Nutrition Group Limited ("AGNU"), a publicly held
company whose common shares were traded on the NASDAQ National Market. Pursuant
to the merger agreement dated October 16, 1998, the merger was completed by the
following series of transactions: (i) VBSA contributed a total of $15.7 million
to Virbac, Inc. consisting of $13.7 million in cash and $2.0 million in
intercompany debt recapitalized as equity; (ii) AGNU issued 12,580,918 shares of
AGNU stock to VBSA Sub; and (iii) Virbac, Inc. merged with AGNU with AGNU being
the surviving entity and VBSA its majority shareholder. The name of the
surviving entity was then changed to Virbac Corporation.
Products and Product Development
The Company's products are used to promote the health and hygiene of
companion animals - principally dogs, cats, and fish. The principal products
manufactured by the Company include:
o Dermatological products for dogs and cats, including anti-itch,
anti-microbial, and anti-inflammatory lotions and shampoos,
o Oral hygiene products for dogs and cats, including toothpaste and
toothbrushes, sprays, and enzymatic rawhide chews,
o Flea and tick products, including collars, shampoos, dip concentrates, and
sprays,
o Ear cleaners, including anti-microbial and anti-inflammatory treatments,
o Aquarium water conditioners and test strips,
o Pest control products, including rodenticides,
o Nutritional supplements to promote healthy coat and skin,
o Anthelmetics, or dewormers, to prevent gastrointestinal worms in livestock
and in companion animals,
o Gastrointestinal products for dogs and cats, including hairball remedies,
and
o Specialty chemicals
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Sales and Marketing
The Company sells its products to national or dominant regional
companies serving the animal health markets, pet product distributors, specialty
pet retail stores and superstores, mass merchandisers, and farm and fleet
distributors. Sales are made through a combination of full-time sales persons
and independent sales representatives, utilizing direct sales, telemarketing,
and other means. Separate sales forces are employed for each of its veterinary
and over-the-counter ("OTC") lines, as well as PMR.
The Company distributes its veterinary line of products to
veterinarians through wholesale distributors. Its marketing and sales promotions
target veterinarians through education and sampling to encourage veterinarians
to prescribe and sell more of Virbac's products. The Company markets its
products to the veterinarian market under the Allerderm(R) line of
dermatological products, the C.E.T.(R), line of dental products, and the
Preventic(R) line of tick collars.
The promotion of its OTC products is focused on obtaining shelf space
in retail outlets. The Company markets its products under the St. JON(R),
Zema(R), Mardel(R), and Francodex(R) lines of products.
PMR's products are primarily contract manufactured for significant
animal health and specialty chemical customers. In addition, PMR distributes
animal health products to Purina Mills' dealer distribution network.
Research and Development
Virbac maintains a research and development staff for the purpose of
developing improved products. Currently, Virbac's product development efforts
are focused on new formulations for dermatology. Virbac believes it is an
international leader in pet dermatology product development and a recognized
authority in insect growth regulator research. Virbac does not produce chemical
compounds, but develops formulas adapted to the needs of companion animals
either from generic compounds or original compounds. Virbac currently has
licenses for all original compounds used in its manufacturing process. Virbac
believes that the loss of any such license would not have a material effect on
the business of Virbac as such licenses can be easily replaced.
Virbac also has the exclusive North American rights to any products
developed by VBSA dedicated to companion animals and equine and food-producing
animals. VBSA has a multi-million dollar annual budget dedicated to developing
new products and improving current products. Beginning in 2001, the Company will
reimburse VBSA for its past research and development efforts by paying a 3%
royalty on the Company's sales of new products developed by VBSA and paying a
$500,000 annual flat fee to induce VBSA to continue its research and development
efforts. In 1999 and 2000, VBSA reimbursed the Company $300,000 and $400,000
respectively, for internal costs incurred by the Company in readying VBSA
products for launch in North America.
In developing new or improved products, Virbac considers a variety of
factors, including (i) existing or potential marketing opportunities for such
products, (ii) the capability of Virbac to manufacture such products, (iii)
whether such products complement existing products of Virbac, and (iv) the
opportunities to leverage such products with the development of additional
products. During 1999, the Company spent approximately $1 million (net of
reimbursement from VBSA) on research and development, including approximately
$154,000 on clinical studies of products. Virbac also conducts research on VBSA
products that have the potential to be distributed on a world-wide basis.
Registrations, Trademarks and Patents
The Company has numerous EPA and FDA product registrations, 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 up on 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 numerous trademarks relate primarily to its veterinary
and OTC products which are marketed under the St. JON(R), Mardel (R), Zema(R)
and Allerderm(R) labels. The Company also has trademark registrations pending
for various additional companion animal products.
The Company also has several patents covering pet toothbrushes, tartar
remover, pet shampoo, and flea traps. In addition, the Company has the exclusive
right to use several patents owned by others, most notably patents relating to
enzyme generation formulae for use in animal toothpaste, on rawhide chews, in
insect regulators and VBSA's Spherulite technology, which enables active
ingredients to be progressively discharged following application of the product.
Procurement of Raw Materials
The active ingredients in the Company's products are not manufactured
by the Company, but are generally purchased from large 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 relationship 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 product 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 markets served by the Company centers around price. The Company is focusing
on the production of high-performance, value-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.
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 PMR by the
Missouri Department of Natural Resources ("MDNR") relating to alleged violations
of Missouri's hazardous waste laws and regulations. PMR 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 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.
The federal government has extensive enforcement powers over the
activities of veterinary pharmaceutical manufacturers, including authority to
withdraw product approvals, commence actions to seize and prohibit sale of
unapproved or non-complying products, and to halt manufacturing any operations
that are not in compliance with applicable laws and regulations. Virbac has not
experienced any such restrictions or prohibitions. However, any such
restrictions or prohibitions on sales or withdrawal of approval of products
marketed by Virbac could materially adversely affect Virbac's business,
financial condition and results to operation.
While Virbac believes that all of its current pharmaceuticals are in
compliance with all applicable FDA regulations or have received requisite
government approvals for manufacture and sale, such marketing authority is
subject to revocation by the applicable government agencies. In addition,
modifications or enhancements of approved products are in many circumstances
subject to additional FDA approvals which may be subject to a lengthy
application process and may ultimately be rejected. Virbac's manufacturing
facilities are continually subject to inspection by such government agencies and
manufacturing operations could be interrupted or halted in any such facilities
if such inspections prove unsatisfactory.
The product development and approval process within applicable
regulatory frameworks may take a number of years to successfully complete and
involves the expenditure of substantial resources. Additional government
regulation may be established that could prevent or delay regulatory approval of
any one or more of Virbac's products. Delays or rejections in obtaining
regulatory approvals would adversely affect Virbac's ability to commercialize
any product Virbac develops and Virbac's ability to receive product revenues or
royalties. If regulatory approval of a product is granted, the approval may
include limitations on the indicated uses for which the product may be marketed.
Employees
The Company has approximately 307 full-time employees, of which
approximately 202 are engaged in manufacturing activities and 72 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 seven are represented by the International Brotherhood of
Electrical Workers. Such employees' wages and benefits are governed by
collective bargaining agreements negotiated with the unions, which will expire
in the fourth quarter of 2001. In 1999, the unionized workers conducted a strike
which lasted one month. The Company does not believe that this strike had a
material adverse impact on the Company's operations. The Company also employs
workers on a temporary basis, the number of which fluctuates on an annual basis
because demand for the Company's products is seasonal. The Company considers its
employees and union relations to be good.
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Item 2. Properties.
The Company owns the Fort Worth, Texas and the Bridgeton, Missouri
manufacturing facilities where most of the Company's products are produced. The
Fort Worth facility is a 118,000 square foot manufacturing, warehousing and
office facility. Most of the Company's non-EPA regulated products are
manufactured at this facility. The Bridgeton facility, at which PMR's operations
are conducted and most EPA regulated products are manufactured, consists of a
176,000 square foot manufacturing and warehousing building.
The Company also leases a manufacturing, warehousing, and office
facility near Los Angeles, California. During 1999, the production of the
majority of products manufactured at this facility was transferred to the Fort
Worth facility, with only specialized product manufacturing remaining. The
remaining manufacturing is located in a facility leased under a non-cancelable
operating lease that expires August 2000, with a five year renewal option; the
Company intends to exercise the renewal option. The Company also leases certain
equipment under non-cancelable operating leases.
Management believes that the Company'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 affect 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 affect on the Company's consolidated financial position, its
results of operations or its cash flows with or without consideration of
insurance coverage. See Note 13 to the Consolidated Financial Statements
included as part of this Annual Report.
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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 quarter ended December 31, 1999.
Item 4A. Executive Officers of the Registrant.
The following table sets forth certain information regarding the
Company's executive officers:
Name Age Position
Thomas L. Bell 41 President and Chief Executive Officer
Bruce G. Baker 56 Executive Vice President - Business Development
Henry B. Haley 40 Vice President and Chief Financial Officer
Thomas L. Bell has been President and Chief Executive Officer of the
Company since May 1999. Mr. Bell held various management positions during the
previous 13 years with Fort Dodge Animal Health/American Cyanamid, an
international manufacturer and distributor of animal health pharmaceuticals and
biologicals, and a subsidiary of American Home Products. Mr. Bell was most
recently vice-president for the International Animal Health and Nutrition
division, where he was responsible for 26 world-wide profit centers.
Bruce G. Baker has been Executive Vice President - Business Development
of the Company since March 1999. Previously, he served as President and Chief
Executive Officer of Agri-Nutrition Group Limited from November 1996 until its
merger with Virbac, Inc. in March 1999. From March 1994 through October 1996 he
was Vice President and Deputy Chief Executive, and has been a director of the
Company since August 1993.
Henry B. Haley has been Vice President and Chief Financial Officer
since May 1999. Mr. Haley held various financial management positions during the
previous 12 years with Lafarge S.A., the international construction materials
company. Most recently, he was Vice-President of Finance of Lafarge Road
Markings, Inc. from March 1998 until he joined the Company, and was
Vice-President of Finance of Lafarge Monolithiques from 1996 until February
1998. He was a manager in the corporate financial analysis department from
October 1991 until February 1996. Mr. Haley is a Certified Public Accountant.
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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 VBAC. 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.
High Low
Fiscal year ended December 31, 1997
First Quarter........................................1.75 1.13
Second Quarter.......................................1.50 1.06
Third Quarter........................................1.59 1.06
Fourth Quarter.......................................1.69 1.19
Fiscal year ended December 31, 1998
First Quarter........................................1.44 1.06
Second Quarter.......................................1.31 1.00
Third Quarter........................................1.31 0.81
Fourth Quarter.......................................1.50 0.94
Fiscal year ended December 31, 1999
First Quarter........................................1.56 1.00
Second Quarter.......................................1.75 1.03
Third Quarter........................................1.50 1.13
Fourth Quarter.......................................3.00 1.25
The Company has never paid any dividends on its Common Stock. 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,
pursuant to the September 7, 1999 credit facility, the Company is prohibited
from paying dividends without the consent of the Company's lender. As of March
6, 2000, the Company had a total of approximately 1,542 stockholders, including
242 stockholders of record and approximately 1,300 persons or entities holding
Common Stock in nominee name.
In March 1999, AGNU issued 12,580,918 shares of common stock to VBSA
Sub in connection with the merger described under Item 1. Business - History.
The transaction was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) of the Act because it did not involve a public
offering.
Item 6. Selected Financial Data.
The following table presents selected financial data for each of the
five years in the period ended December 31, 1999 for the Company. The selected
financial data for the three years in the period ended December 31, 1998 are
derived from the Consolidated Financial Statements of Virbac, Inc., each of
which has been audited by Arthur Andersen LLP, independent public accountants.
The selected financial data for the year ended December 31, 1999 are derived
from the Consolidated Financial Statements of the Company, which has been
audited by PricewaterhouseCoopers, LLC, independent accountants. The data 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.
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Fiscal Year Ended December 31,
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1999 (1) 1998 (2) 1997 (2) 1996 (2) 1995 (2)
(unaudited)
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STATEMENT OF OPERATIONS DATA
Net revenues.............................$ 43,717,824 $ 15,051,090 $ 16,235,284 $ 17,493,683 $ 18,659,499
Income (loss) from operations............ 33,174 (1,238,523) (730,820) (889,354) (986,857)
Net loss ................................ (543,776) (1,821,386) (1,255,207) (1,387,248) (1,095,590)
Loss per common share.................... (0.03) (0.14) (0.10) (0.11) (0.09)
Weighted average number of common 19,677,053 12,580,918 12,580,918 12,580,918 12,580,918
BALANCE SHEET DATA
Cash................................$ 231,297 $ 412,378 $ 84,047 $ 124,203 $ 16,965
Working capital (deficit)........... 12,260,232 (854,656) 2,426,916 (166,950) 1,387,132
Total assets........................ 43,633,018 12,680,651 13,391,178 13,792,535 16,123,540
Current portion of notes payable.... 1,564,080 3,200,000 400,000 400,000 800,000
Long-term obligations, less
current maturities.............. 9,347,993 4,000,000 6,650,000 3,450,000 4,250,000
Stockholders' equity................ 25,640,949 1,890,700 3,712,086 4,967,293 6,290,626
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(1) The results for the year ended December 31, 1999 include the operations of
Virbac, Inc. plus the results of Agri-Nutrition since March 5, 1999.
(2) Earnings per share for the periods ending December 31, 1998, 1997, 1996 and
1995 have been restated to reflect the number of equivalent shares received
by Virbac, Inc. in connection with the March 5, 1999 Purchase of
Agri-Nutrition Group Limited.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company manufactures and distributes companion animal health
products. The Company is a leader in dermatological and oral hygiene products
for companion animals, or pets, and provides a broad array of health care
products to its customers under the C.E.T., Allerderm, St. JON, Zema, and
Francodex brand names.
On March 5, 1999, the Company, formerly named Agri-Nutrition Group
Limited, merged with Virbac, Inc., with the Company being the surviving
corporation. Virbac SA, the parent of Virbac, Inc., received 60% of the voting
equity of the Company; therefore, Virbac, Inc. is considered to be the acquirer
for financial statement purposes. Accordingly, the merger has been accounted for
as a purchase of Agri-Nutrition Group Limited by Virbac, Inc.
In conjunction with the merger, the Company assessed, formulated and
announced plans to consolidate its manufacturing and distribution operations.
Under the plan, which was completed prior to the end of the year, all pet
product distribution operations have been transferred from AGNU's Chicago,
Illinois, and Los Angeles, California facilities to the Company's larger Fort
Worth, Texas facility. All manufacturing and distribution operations which had
been carried out at the Chicago facility ceased, and such operations have been
transferred to other existing Company facilities. In addition, manufacturing and
distribution operations related to the majority of products previously produced
at the Los Angeles facility have been transferred to the Fort Worth facility,
with only certain production and marketing activities remaining in California.
The Management's Discussion and Analysis that follows contains forward
looking information made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements may
be affected by certain risks and uncertainties described in the Company's
filings with the Securities and Exchange Commission. Projections of gross margin
improvements anticipated due to the consolidation of manufacturing and
distribution facilities and of expense reductions that should result from actual
or planned headcount reductions may not be achieved if management is not
vigilant in executing its plans or if assumptions made in the plans are
inaccurate. Forward-looking statements regarding future sales may be affected by
new competitive or technological entries into the market or by lack of
acceptance of the Company's products by the market. Therefore, the Company's
actual results could differ materially from such forward-looking statements.
Results of Operations
The results of operations for the year ended December 31, 1999 as
presented in the Consolidated Statements of Operations include the results of
operations of Virbac, Inc. for the entire year and the results of operations of
Agri-Nutrition since March 5, 1999. The results of operations for the years
ended December 1998 and 1997 as presented in the Consolidated Statements of
Operations include only the operations of Virbac, Inc.
Because Agri-Nutrition's operations were significantly larger than
those of Virbac, Inc., substantially all of the increase in each component of
the Consolidated Statements of Operations from 1998 to 1999 is due to the
acquisition of Agri-Nutrition. For the year ended December 31, 1999 as compared
to December 31, 1998, the acquisition accounts for approximately 94% of the
increase in revenues, approximately 88% of the increase in gross profit and all
of the increase in operating expenses.
For comparative purposes, management believes that an as-adjusted
analysis upon which 1998 results are presented on a basis that is equivalent to
1999 will provide a more meaningful discussion of the results of operations. To
that end, the actual results for the period ending December 31, 1998 have been
adjusted to include the results of Agri-Nutrition since March 1998 in order to
be comparable with the actual results of 1999. The 1998 as-adjusted amounts have
also been adjusted to reflect the effects of the merger, primarily adjustments
to reduce interest expense reflecting the repayment of debt in conjunction with
the merger and adjustments to depreciation and amortization related to certain
purchase accounting adjustments. Management believes the amounts and discussion
below provide a more meaningful comparison of the Company's results of
operations. The analysis of the 1998 results compared to 1997 are based upon
actual Virbac, Inc. results and do not include Agri-Nutrition's Results since
these periods are prior to the purchase of Agri-Nutrition by the Company.
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Year Ended December 31, 1999 Compared to As Adjusted Year Ended December 31,
1998
For the year ended
December 31,
-----------------------------
(in thousands of dollars)
1998
1999 (as adjusted)
Net Revenues $ 43,717 $ 42,065
Gross Profit 17,944 16,931
Gross Profit % 41% 40%
Operating Expenses 17,911 18,208
Interest and other expenses 577 583
Net loss $ (544) $ (1,860)
The results of operations for the year ended December 31, 1999 include
the operations of Virbac, Inc. for the entire year and the operations of
Agri-Nutrition since the date of the merger, March 5, 1999. For purposes of this
Management's Discussion and Analysis, 1999 amounts are compared to 1998 amounts
adjusted to include Agri-Nutrition for the same period as 1999. See "Results of
Operations" above.
Sales of $43.7 million in 1999 increased $1.7 million or 4% compared to
the prior year. Positive factors impacting sales were:
o Increased volumes of the Company's PreventicR tick collar.
o The introduction of advanced formula and patent protected Spherulites to
the Company's dermatological line, which management believes have led to an
increase in market share in the dermatological line.
o Increased volumes of Bromethalin(TM)rodenticides.
These positive factors were partially offset by the following negative
factors:
o A disruption to the dental line's marketing efforts caused by the
relocation of the line's marketing staff from California to Texas; this
relocation is now complete and is not expected to have an adverse impact on
future sales.
o Increased competition in the OTC distribution channel, particularly for the
insecticides.
o A shift in the Company's focus in the product lines sold through the OTC
distribution channel. As the Company integrates the Francodex business of
Virbac, Inc. with the St. JON business of Agri-Nutrition, it is focusing on
the more profitable products as it eliminates duplication, thus impacting
sales.
o Distribution disruptions in the fourth quarter caused by the consolidation
of the Company's production and distribution facilities in California and
Illinois into its Fort Worth facility.
<PAGE>
The increase in gross profit percentage (41.0% in 1999 compared to
40.2% in 1998) primarily reflects fixed overhead charges being absorbed by
higher sales. Somewhat offsetting the positive impact of the increased sales
were approximately $750,000 of inventory write-offs taken in conjunction with
the consolidation of the Company's production and distribution facilities during
the fourth quarter. These write-offs reduced the gross profit percentage by
approximately 1.7 percentage points.
The Company's operating expenses of $17.9 million decreased $0.3
million in 1999 compared to 1998. Operating expenses include expenses incurred
related to sales and marketing, research and development, warehouse and
distribution, as well as general and administrative costs. The decrease in 1999
was primarily attributable to actions taken by Agri-Nutrition in 1998 to reduce
costs and to cost cutting measures taken in the second quarter 1999 by the
Company to consolidate certain commercial and administrative functions. These
measures include a 17% reduction in commercial and administrative personnel that
reduced related costs. Partially offsetting these expense reductions were
expected increases in variable costs related to the increase in sales as
discussed above, and approximately $0.3 million of non-recurring expenses
incurred in connection with the operations of Virbac, Inc., including certain
severance payments to Virbac, Inc. employees, including the former president of
the Company. As a percent of sales, operating expenses decreased from 43.3% of
sales in 1998 to 40.9% in 1999, reflecting the cost reductions discussed above.
The Company did not record an income tax benefit in connection with its
operating loss in 1999, nor in 1998. The aggregate amount of the deferred tax
asset valuation allowance at December 31, 1999 was approximately $2.4 million.
This valuation allowance reflects management's view that it is more likely than
not that tax benefits related to the Company's deferred tax assets will not be
realized. The primary factor affecting managements' view in this regard is the
Company's losses from operations in prior years.
Net loss in 1999 of $0.5 million improved by $1.3 million compared to
the net loss in 1998 based on the various factors described above.
Fourth Quarter Results
The Company reported a net loss of $1.9 million, or $0.09 per share,
for the fourth quarter of 1999. The results for the fourth quarter were
adversely affected by inventory write-offs, lower sales, and costs associated
with the consolidation of the Company's production and distribution facilities
during the fourth quarter. The Company wrote-off approximately $750,000 of
inventory in conjunction with the consolidation. Revenues, which are typically
lower in the fourth quarter compared to the rest of the year due to seasonality,
were further unfavorably impacted by disruptions to shipments caused by the
consolidation process. Net revenues during the fourth quarter were approximately
$4.0 million lower than in the third quarter of 1999. This decrease resulted in
a decrease in gross profit of $1.6 million.
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
For the year ended
December 31,
-------------------------------
(in thousands of dollars)
1998 1997
Net Revenues $ 15,051 $ 16,235
Gross Profit 9,486 10,326
Gross Profit % 63% 64%
Operating Expenses 10,725 11,056
Interest and other expenses 583 524
Net loss $ (1,821) $ (1,255)
Net revenues decreased $1.2 million, or 7%, primarily due to heavy
competition in the pesticide market that negatively affected business in the
veterinary and OTC markets. In addition, distributors carried forward
significant inventories of the PreventicR tick collar at year-end 1997 that
resulted in lower than expected sales of these products in the first half of
1998.
Gross margin as a percentage of revenues decreased slightly from 63.6%
to 63.0% due to a shift in sales mix and the outsourcing of manufacturing of
some new products launched in 1997, including Nutraceuticals and Spot Ons.
Operating expenses decreased $0.3 million, or 3%, in 1998. Sales and
marketing expenses remained constant but as percentage of revenues increased
from 35% to 38% due to higher percentage of marketing dollars spent on the
PreventicR tick collars and new product launches. General and administrative
expenses remained constant despite increased professional fees incurred in
pursuing acquisitions and increased insurance expenses. Warehouse and
distribution expenses remained constant but as a percentage of revenues
increased from 8% to 9% due to increased freight rates of common carriers.
Research and development expense decreased $0.4 million, or 29% due to the lack
of a research and development director from March through September 1998.
Interest expense increased $0.1 million due to increased borrowings in
1998.
The Company did not record an income tax benefit in connection with its
operating loss in 1998, nor in 1997. The aggregate amount of the deferred tax
asset valuation allowance at December 31, 1998 was approximately $1.4 million.
This valuation allowance reflects management's view that it is more likely than
not that tax benefits related to the Company's deferred tax assets will not be
realized. The primary factor affecting management's view in this regard are the
Company's losses from operations in prior years.
The net loss in 1998 of $1.8 million was $0.5 million higher than the
net loss of $1.3 million in 1997 based on the various factors described above.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been cash flows from
operations, proceeds from bank borrowings and cash infusion from VBSA. Although
$1.0 million was generated by the Company's operations before depreciation and
amortization, operating activities used $3.2 million of cash in 1999 due
primarily to an increase in inventory and a reduction to trade payables.
Inventory increased for several reasons: (1) the build-up in inventory prior to
commencing the consolidation of the manufacturing and distribution facilities to
reduce the interruption of service to customers; (2) low levels of inventory at
the beginning of the year which had created a significant back-order position;
and (3) the build-up of inventory by PMR to serve the Purina Mills' dealer
distribution network. In addition, accounts payable decreased by approximately
$1.0 million reflecting more timely payments to vendors and suppliers.
Cash flows used in investing activities in 1999 include cash costs
related to the merger and capital improvements at the Company's Bridgeton and
Fort Worth facilities, and acquisition fees related to the in-licensing of
certain products.
Cash flows from financing activities in 1999 reflect primarily the
merger with Agri-Nutrition Group. In conjunction with the merger, Virbac S.A.
invested approximately $13.7 million of cash in the Company. These funds were
used to pay down debt and to repurchase 1,000,000 shares of the Company's
outstanding common stock at $3.00 per share in April 1999 pursuant to the
mandatory tender offer required under the merger agreement. In addition,
borrowing under a credit facility increased to fund working capital needs and
the investments described above.
On September 7, 1999, the Company replaced all of its then-existing
credit facilities with a three-year $10 million facility. In December 1999, the
Company obtained a temporary $2.5 million increase to its line of credit to fund
acquisition fees related to its acquisition of certain product manufacturing and
distribution rights discussed below and to fund working capital increases
related to the consolidation of the Company's production facilities. This
temporary increase is to be repaid in installments from February to July 2000.
Of the remaining $10 million, $7 million is subject to a borrowing formula based
upon eligible accounts receivable and inventory and serves as a revolving line
of credit. The availability of the remaining $3 million will be reduced by
$150,000 per quarter. The interest rate and fees vary based upon the financial
performance of the Company as measured by the ratio of EBITDA to interest
expense paid and current maturities due. Interest rates can vary from prime plus
25 basis points to prime minus 75 basis points. At December 31, 1999, the
Company was paying prime minus 75 basis points (7.75%).
The revolving credit facility contains financial covenants, including
but not limited to, tangible net worth and interest coverage ratios, and
restricts the payment of dividends. At December 31, 1999, the Company was not in
compliance with these covenants. However, the lending bank has waived such
non-compliance for periods through April 30, 2000. On May 1, 2000, the Company
and the bank amended the revolving credit facility and the Company would have
been in compliance with such amended covenants at December 31, 1999. At December
31, 1999, $1.7 million was available under the credit facility, as amended.
The Company has no current plans to significantly increase capacity of
any of its plant facilities or to expend significant capital in modifying them.
At the end of 1999, the Company consolidated certain manufacturing and
distribution operations that had been carried out at several different
facilities; this consolidation required expenditures of approximately $600,000
for plant closing costs and minor upgrades to remaining facilities.
In 1999, the Company acquired the rights to manufacture and
distribution products currently in development by a third party for a period of
15 years. In December 1999, the Company paid $1,000,000 at signing in partial
payment for these rights, and, depending upon the third party reaching certain
registration milestones, the Company is committed to paying in fiscal 2000, 2001
and 2002 approximately $1.7 million, $750,000 and $700,000, respectively.
The Company expects to be able to fund its fiscal 2000 cash
requirements through cash flows from operations, initial payments to be received
in connection with the licensing of certain products and availability under the
credit agreement. In addition, currently the Company has approximately $1.7
million available under its credit agreement at December 31, 1999. Together with
the availability under the credit facility, licensing fees and cash flows from
operations, the Company's current debt maturity requirements, licensing fees
commitments and capital expenditure needs are expected to be met.
The Company is committed to conduct a public tender offer to purchase
up to 1,395,000 of the Company's outstanding Common Stock at a price of $3.00
per share if, prior to the second anniversary of the merger (March 2001), the
closing sale price of the Company's Common Stock has not reached $3.00 per share
for a period of 40 consecutive trading days. Pursuant to the merger agreement,
such tender offer, if necessary, will be funded by Virbac SA's direct purchase
from the Company of 1,395,000 shares of Common Stock at $3.00 per share.
The Company has no plans to pay dividends to stockholders in the
foreseeable future.
Quarterly Effects and Seasonality
The results of operations of certain products in the veterinary product
line, including Virbac's flea and tick collars, have been seasonal with a lower
volume of its sales and earnings being generated during the Company's first and
fourth fiscal quarters. The results of operations of the Company's OTC segment
have also been seasonal with a relatively lower volume of its sales and earnings
being generated during the Company's fourth quarter. Seasonal patterns of PM
Resources' operations are highly dependent on weather, feeding economics and the
timing of customer orders.
In addition, consolidation of certain manufacturing, distribution,
commercial and administrative functions between AGNU and Virbac, Inc. during
1999 will impact the comparative results of the Company between quarters and in
future periods.
New Accounting Standards
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. The original implementation date of FAS 133 has been extended and it is
now effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. The Company believes that the adoption of this new standard will not
have a material impact on the Company's financial position, results of
operations, or related disclosures.
Year 2000 Compliance
The Year 2000 issue arose as a result of computer programs that were
written using two digits rather than four to define the applicable year.
Consequently, these computer programs may contain time-sensitive software which
recognizes a date using "00" as the year 1900 rather than the year 2000. The
impact of the Year 2000 issue extended beyond traditional computer hardware and
software systems and could have potentially impacted telephone systems, building
facilities systems, security systems and systems utilized by outside vendors and
customers. Failure to effectively address the Year 2000 issue could have
resulted in a disruption of operations and the inability to process transactions
or to perform other normal business activities.
The Company reviewed its key hardware and software systems for
compliance. Those systems that were not in compliance have been repaired or
updated to support Year 2000 compliance. Less critical systems, such as personal
computers, have also been evaluated and upgraded. The cost of the repairs and
upgrades to the key hardware and software systems and to the less critical
systems have not been material to the Company's financial statements.
The Company also evaluated its mission critical vendors and suppliers.
The Company recognized that business could have been interrupted because of Year
2000 problems at one or more of its business partners such as vendors or
customers.
The Company believes that the Year 2000 issues did not pose significant
operational problems for the Company because of its preparedness and because the
Company's operations are not driven by systems technology. In addition, Year
2000 problems at the Company's business partners, if any, did not impact the
Company's business.
Item 8. Financial Statements.
The financial statements prepared in accordance with Regulation S-X are
included in a separate section of this report. See the index to Financial
Statements at Item 14(a)(1) and (2) of this report.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Nominees
Name Age Position
Pascal Boissy 57 Chairman
Eric Maree 47 Director
Pierre Pages, D.V.M. 48 Director
Alec L. Poitevint, II 52 Director
Bruce G. Baker 56 Director and Executive Vice President-
Business Development
Pascal Boissy has served as the Company's Chairman since March 1999.
Mr. Boissy served as President of Virbac S.A. from April 1992 until December
1999. Virbac S.A. is a French veterinary pharmaceutical manufacturer that
indirectly owns approximately 60% of the Company's outstanding common stock. He
served on Virbac S.A.'s Board of Directors from 1989 through 1999, and served as
President and Chairman of the Board of Directors of various subsidiaries of
Virbac S.A. Mr. Boissy serves as a Rotarian Member of the Advisory Board of the
Banque de France in Nice and as an Advisor for Foreign Trade to the French
Government.
Eric Maree was appointed by the Board of Directors on January 25, 2000
to complete the unexpired Class 2 term, which became vacant upon the resignation
of Dr. Brian Crook. Mr. Maree joined Virbac S.A. in October 1999 and was
appointed its President effective December 15, 1999. Previously, he was Chief
Executive Officer of Laboratories Roche Nicholas and Vice President Roche
Consumer Health, two subsidiaries of Hoffman La Roche, from 1994 through 1999.
Pierre Pages, D.V.M. has been a Director since March 1999. Dr. Pages
has served as Executive Vice President of Virbac S.A. and has been a member of
the Directory Board in charge of Operations, Production, and Quality Assurance
since January 1997. Prior to becoming Executive Vice President, Dr. Pages served
as Director of International Operations from 1995 through 1997.
Alec L. Poitevint, II has been a Director since January 1996, and
previously served as the Company's Chairman from February 1997 until March 1999.
Mr. Poitevint has been Chairman and President of Southeastern Minerals, Inc. and
its affiliated companies since 1981 and 1976, respectively. Since May 1991, he
has served as Director of the American Feed Industry Insurance Company, Des
Moines, Iowa, and from May 1994 to April 1995, he served as Chairman of the
American Feed Industry Association ("AFIA"). He is a director of the Georgia
Agribusiness Council and a life member of the Poultry Leader Round Table of the
Georgia Poultry Federation, and in 1988 and 1989 he served as Chairman of the
National Feed Ingredients Association. He also has served in various capacities
relating to Eastern European agricultural trade and market development,
including Director of the International Republican Institute since March 1992.
In addition, Mr. Poitevint currently serves as Treasurer of the Republican
National Committee and as Treasurer of the Republican National Convention, a
member of the RNC Budget Committee, and Republican National Committeeman for
Georgia. He has served as the Vice Chairman and a director of the First Port
City Bank, Bainbridge, Georgia since January 1994 and February 1989,
respectively.
Bruce G. Baker has been Executive Vice President, Business Development
of the Company since March 1999. Previously, he served as President and Chief
Executive Officer of Agri-Nutrition Group Limited from November 1, 1996 until
its merger with Virbac, Inc. in March 1999. From March 1994 through October
1996, he was Vice President and Deputy Chief Executive, and he has been a
Director since August 1993.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and Directors, and persons who own
more than ten percent of the Company's Common Stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
The Company believes that each such person complied with such filing
requirements during the fiscal year ended December 31, 1999.
See Item 4A of this report on Form 10-K for information on the
Executive Officers of the Registrant.
Item 11. Executive Compensation
The following table sets forth compensation for the fiscal years ended
December 31, 1999, 1998, and 1997 earned by the Chief Executive Officer and each
of the most highly compensated executive officers whose individual remuneration
on an annual basis exceeded $100,000 during 1999 (the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Shares Underlying
Name and Year Ended Options All Other
Principal Position December 31 Salary Bonus Compensation
<S> <C> <C> <C> <C> <C>
Thomas L. Bell 1999 $ 105,000 $ 40,000 50,000 $ 7,000
President and Chief
Executive Officer(1)
Bruce G. Baker 1999 $ 178,333 $ 16,667 8,000 12,000
Executive Vice
President - Business
Development (2)
President and Chief 1998 $ 195,000 -- -- 22,437
Executive Officer (2) 1997 $ 195,000 -- -- 25,291
</TABLE>
- -----------------------------
(1) Mr. Bell joined the Company as its President and Chief Executive Officer
effective May 6, 1999.
(2) Mr. Baker resigned as President and Chief Executive Officer of
Agri-Nutrition Group Limited and took the position of Executive Vice
President - Business Development effective March 5, 1999.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 6, 2000 by (i) each person
who is known by the Company to be the beneficial owner of more than five percent
of the Company's outstanding Common Stock, (ii) each Director of the Company and
each Nominee, (iii) each Named Executive, and (iv) all Directors and executive
officers of the Company as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
Unless otherwise indicated, the address of each stockholder is: c/o Virbac
Corporation, 3200 Meacham Boulevard, Fort Worth, Texas 76137.
<TABLE>
<CAPTION>
Beneficial Owner Shares Beneficially Owned (1) Percentage Ownership (1)
<S> <C> <C>
Interlab S.A.S. (2) 12,580,918 60.1
Durvet/PMR, L.P. (3) 1,094,021 5.2
Pascal Boissy 36,429 0.2
Bruce G. Baker (4) 557,275 2.7
Eric Maree - -
Pierre Pages 4,212 -
Alec L. Poitevint, II (5) 379,297 1.8
Thomas L. Bell 6,000 -
Directors and Executive Officers as a
Group (7 persons) (6) 983,213 4.7
</TABLE>
- -------------------------------------------
(1) Includes shares issuable upon the exercise of options that are exercisable
within 60 days of the date of this Form 10-K. The shares underlying such
option are deemed to be outstanding for the purpose of computing the
percentage of outstanding stock owned by such persons individually and by
each group of which they are a member, but are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
(2) Interlab S.A.S. is a wholly-owned subsidiary of Virbac S.A. Its address is
13 emme rue - L.I.D., 06517 Carros Cedex, France.
(3) The address of Durvet/PMR, L.P. is P.O. Box 279, 100 S.E. Magellan Drive,
Blue Springs, Missouri 64014. The general partner of Durvet/PMR, L.P. is
Durvet, Inc., and the limited partners of Durvet/PMR L.P. are the 25
stockholders of Durvet, Inc., each of which has a 3.2% interest in the
partnership.
(4) Includes options to purchase 100,000 shares of Common Stock and shares held
by Mr. Baker's spouse. Excludes 37,200 shares held by an independent
trustee for the benefit of three adult children and 12,000 shares held by
such children.
(5) Mr. Poitevint's address is Southeastern Minerals, Inc., P.O. Box 1866, 1100
Dothan Road, Bainbridge, Georgia 31718. Includes options to purchase 5,000
shares of Common Stock. Also includes 147,252 shares held by Marshall
Minerals, Inc. and 162,339 shares held by Mineral Associates, Inc. Mr.
Poitevint is president and chairman of both corporations, but is not a
controlling shareholder of either corporation, and disclaims beneficial
ownership of such shares. Also includes 20,000 shares held by adult
children, for which Mr. Poitevint disclaims beneficial ownership.
(6) Includes options to purchase 100,000 shares of Common Stock.
<PAGE>
Item 13. Certain Relationships and Related Transactions.
The Company has adopted a policy that any transaction between the
Company and any of its officers, Directors, or holders of as much as five
percent of any class of its capital stock is required (i) to be on terms no less
favorable than those that could be obtained from unaffiliated parties and (ii)
to be approved by a majority of disinterested Directors.
During 1999 the Company purchased $1,843,470 of raw materials and
finished goods from, and sold $234,723 of finished goods to, VBSA and its
affiliates. VBSA also reimbursed the Company $315,477 for research and
development costs incurred on its behalf.
In addition, during 1999 the Company entered into an agreement with
VBSA, giving the Company the exclusive U.S. and Canadian rights to manufacture
and distribute products currently in development and previously developed by
VBSA. VBSA also agreed to reimburse the Company $400,000 in 2000 for internal
costs incurred in assisting VBSA obtain U.S. registration for VBSA products
currently in development. Beginning in 2001, the Company will pay VBSA a royalty
of 3% on VBSA-developed products sold by the Company. The Company has also
agreed to pay VBSA an anual fee of $500,000 for a period of four years beginning
in 2001 in order to induce VBSA to continue research and development efforts
that may benefit the Company.
In 1999, the Company entered into an agreement with VBSA appointing
VBSA as its exclusive distributor for its pet health care products outside of
the U.S. and Canada. Under the agreement, VBSA guarantees a minimum overall
annual gross profit through 2004, which is based upon an annual 10% increase
from the gross profit realized by the Company on its 1998 export sales.
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-28 in this
Report on Form 10-K:
Report of Independent Accountants
Report of Independent Public Accountants
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholder's Equity for
Years Ended December 31, 1999, 1998 and 1997
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 December 31, 1999:
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
2.11(i) 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
4(a) Specimen stock certificate
<PAGE>
10.2(f) Fourth Restated Employment Agreement between Agri-Nutrition Group
Limited and Bruce G. Baker dated as of November 1, 1996
10.10(a) Form of Indemnification Agreement
10.11(a) 1994 Incentive Stock Plan
10.13(c) Reload Option and Exchange Exercise Plan
10.14(d) 1995 Incentive Stock Plan
10.15(e) 1996 Incentive Stock Plan
10.24(g) Credit Agreement by and between Agri-Nutrition Group Limited, PM
Resources, Inc., St. JON Laboratories, Inc. and First Bank, dated May 14,
1998
10.25(h) 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(k)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.
10.27+Second Amendment to Credit Agreement by and between Virbac Corporation, PM
Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc.,
and Virbac AH, Inc. and First Bank dated May 1, 2000.
21(k)List of subsidiaries
23+ Consent of PricewaterhouseCoopers LLP
Consent of Arthur Andersen LLP
27+ Financial data schedule
99(j) 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 4.2 to the Registrant's Registration Statement on Form
S-8, File No. 33-86892, and incorporated herein by reference.
(d) Filed as Exhibit 4.1 to the Registrant's Registration Statement on Form
S-8, File No. 33-93340, and incorporated herein by reference.
(e) 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.
(f) 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.
(g) Filed as exhibit of the same number to the Registrant's Form 10-Q for the
Quarterly Period ended April 30, 1998, and incorporated herein by
reference.
(h) Filed as exhibit of the same number to the Registrant's Form 10-Q for the
Quarterly Period ended July 31, 1998, and incorporated herein by reference.
(i) Filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K, filed
November 17, 1998, and incorporated herein by reference.
(j) Filed as exhibit of the same number to the Registrant's Current Report on
Form 8-K, filed November 17, 1998, 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, 1998, and incorporated herein by reference.
<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.
VIRBAC CORPORATION
By: /s/ THOMAS L. BELL
Thomas L. Bell
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.
Signature Title Date
/s/ Thomas L. Bell President, Chief Executive
Thomas L. Bell Officer, and Director
(Principal Executive Officer)
/s/ Henry B. Haley Vice President and Chief
Henry B. Haley Financial Officer
(Principal Accounting Officer)
/s/ Pascal Boissy Chairman of the Board
Pascal Boissy
/s/ Bruce G. Baker Director
Bruce G. Baker
/s/ Eric Maree Director
Eric Maree
/s/ Alec L. Poitevint, II Director
Alec L. Poitevint, II
/s/ Pierre Pages Director
Pierre Pages
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Virbac Corporation Page
Report of Independent Accountants........................................ F-2
Report of Independent Public Accountants................................. F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-4
Consolidated Statements of Operations for Each of the Three Years Ended
December 31, 1999.................................................. F-5
Consolidated Statements of Cash Flows for Each of the Three Years Ended
December 31, 1999.................................................. F-6
Consolidated Statements of Shareholders' Equity for Each of the Three
Years Ended December 31, 1999...................................... F-8
Notes to Consolidated Financial Statements............................... F-9
<PAGE>
Report of Independent Accountants
To Board of Directors and
Shareholders of Virbac Corporation:
In our opinion, the accompanying consolidated balance sheet as of December 31,
1999 and the related consolidated statements of operations, shareholders'
equity, and cash flows present fairly, in all material respects, the financial
position of Virbac Corporation and its subsidiaries at December 31, 1999, and
the results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, 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 audit provides a reasonable basis
for the opinion expressed above. The financial statements of the Company as of
December 31, 1998 and for the two years then ended were audited by other
independent accountants whose report dated January 20, 1999 expressed an
unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Fort Worth, Texas
May 1, 2000
<PAGE>
REPORT OF INDEENDENT PUBLIC ACCOUNTANTSs
To the Stockholders of
Virbac, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Virbac, Inc. (a
Delaware corporation) and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1998. 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 in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virbac, Inc. and Subsidiaries
as of December 31, 1998, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
January 20, 1999
<PAGE>
<TABLE>
<CAPTION>
VIRBAC CORPORATION
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31,
1999 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 231,297 $ 412,378
Accounts receivable, net 5,555,363 1,230,361
Accounts receivable - Virbac SA 424,931 91,212
Inventories, net 13,773,605 3,355,504
Prepaid expenses and other assets 919,112 845,840
----------------- ----------------
20,904,308 5,935,295
Property, plant and equipment, net 12,765,120 4,904,520
Goodwill and other intangible assets, net 9,953,120 1,804,885
Other assets 10,470 35,951
----------------- ----------------
Total Assets $ 43,633,018 $ 12,680,651
================= ================
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft $ 1,059,584 $ --
Current portion of long-term debt and notes payable 1,564,080 3,200,000
Advance from Virbac S.A. -- 2,000,000
Accounts payable
Trade 2,520,238 503,724
Virbac S.A. 776,586 262,487
Accrued expenses 2,723,588 823,740
----------------- ----------------
8,644,076 6,789,951
Long-term debt and notes payable 9,347,993 4,000,000
Commitments and contingencies (Notes 2 and 13)
Shareholders' equity:
Common stock ($.01 par value; 38,000,000 shares authorized;
20,975,747 and 12,580,918 issued, respectively) 209,757 125,809
Additional paid-in capital 33,998,794 8,284,453
Accumulated deficit (8,470,021) (6,519,562)
----------------- ----------------
25,738,530 1,890,700
Less: Treasury stock at cost (42,949 and 0 shares, respectively) (97,581) --
----------------- ----------------
25,640,949 1,890,700
----------------- ----------------
Total Liabilities and Shareholders' Equity $ 43,633,018 $ 12,680,651
================= ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRBAC CORPORATION
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Net revenues $ 43,717,824 $ 15,051,090 $ 16,235,284
Cost of goods sold 25,774,014 5,564,757 5,909,671
---------------- ---------------- ----------------
Gross profit 17,943,810 9,486,333 10,325,613
Operating expenses
Sales and marketing 8,272,404 5,768,218 5,737,787
General and administrative 6,833,286 2,682,332 2,665,945
Research and development, net of 999,402 985,313 1,388,903
Warehouse and distribution 1,805,544 1,288,993 1,263,798
---------------- ---------------- ----------------
Income (loss) from operations 33,174 (1,238,523) (730,820)
Other income (expense)
Interest expense (576,950) (582,611) (525,342)
Other -- (252) 955
---------------- ---------------- ----------------
Loss before income taxes (543,776) (1,821,386) (1,255,207)
Income tax benefit -- -- --
---------------- ---------------- ----------------
Net loss $ (543,776) $ (1,821,386) $ (1,255,207)
================ ================ ================
Basic and diluted loss per share $ (.03) $ (.14) $ (.10)
================ ================ ================
Basic and diluted shares outstanding 19,677,053 12,580,918 12,580,918
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRBAC CORPORATION
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Operating activities:
Net loss $ (543,776) $ (1,821,386) $ (1,255,207)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,508,908 846,208 889,031
(Gain) loss on disposal of assets 7,547 9,140 (4,360)
Changes in operating assets and liabilities,
net of the effects of the Merger:
(Increase) decrease in accounts receivable, net (440,236) 206,774 485,425
(Increase) decrease in inventories, net (3,091,174) 129,968 (746,102)
(Increase) decrease in prepaid expenses and other 353,224 (487,707) (27,195)
Increase (decrease) in accounts payable (1,047,973) (54,025) 631,037
Increase in accrued expenses 12,256 14,893 22,813
--------------- ---------------- ---------------
Net cash used in operating activities (3,241,224) (1,156,135) (4,558)
--------------- ---------------- ---------------
Purchase of property, plant and equipment (504,720) (59,455) (148,591)
Purchase of Agri-Nutrition Group Limited, net
of cash acquired (see Note 1) (643,979) -- --
Acquisition of licensing rights (see Note 13) (1,000,000) -- --
Other (70,420) (56,079) (87,007)
--------------- ---------------- ---------------
Net cash used in investing activities (2,219,119) (115,534) (235,598)
--------------- ---------------- ---------------
Financing activities:
Proceeds from long-term debt and notes payable 2,500,000 1,000,000 6,700,000
Repayment of long-term debt and notes payable (8,783,443) (400,000) (2,500,000)
Increase in bank overdraft 1,059,584 -- --
Advance from (reimbursement to) Virbac S.A. -- 1,000,000 (4,000,000)
Cash infusion by Virbac S.A. in connection with
the Purchase of Agri-Nutrition Group Limited
(see Note 1) 13,749,897 -- --
Purchase and retirement of shares (see Note 2) (3,246,776) -- --
--------------- ---------------- ---------------
Net cash provided by financing activities 5,279,262 1,600,000 200,000
--------------- ---------------- ---------------
Increase (decrease) in cash and cash equivalents (181,081) 328,331 (40,156)
Cash and cash equivalents, beginning of period 412,378 84,047 124,203
--------------- ---------------- ---------------
Cash and cash equivalents, end of period $ 231,297 $ 412,378 $ 84,047
=============== ================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
VIRBAC CORPORATION
Consolidated Statements of Cash Flows (Continued)
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
For the Years Ended December 31,
-----------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Cash paid for interest $ 592,806 $ 623,534 $ 470,573
Cash paid for income taxes -- -- --
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
On March 5, 1999, Agri-Nutrition Group Limited ("AGNU") consummated a
merger with Virbac, Inc., a Delaware corporation and indirect subsidiary of
Virbac SA, a French corporation ("VBSA"), pursuant to which (i) Virbac received
a cash infusion from VBSA of approximately $13.7 million plus a contribution of
$2.0 million of intercompany debt that was recapitalized to Virbac, Inc.'s
equity, (ii) AGNU issued 12,580,918 shares of its Common Stock to a subsidiary
of VBSA and (iii) Virbac was merged with and into AGNU, with AGNU being the
surviving entity and VBSA its controlling stockholder (see Note 1). Because
VBSA, the parent of Virbac, received 60% of the voting equity of the Company,
Virbac is considered to be the acquirer for financial statement purposes.
Therefore, the Merger has been accounted for as a purchase of AGNU by Virbac.
See Notes 1 and 2 for further discussion.
In September 1999, the Company repaid debt in the amount of $51,000 by
issuing 37,051 shares of the Company's common stock.
See Note 7 for information regarding the transfer of 1998 outstanding
debt to the September 7, 1999 new, three-year, $10 million facility.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRBAC CORPORATION
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Treasury Stock
---------------------------- ----------------------------
Additional
Number Par Paid In Accumulated Number
of Shares Value Capital Deficit of Shares Amount Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 12,580,918 $ 125,809 $ 8,284,453 $ (3,442,969) -- $ -- $ 4,967,293
Net loss -- -- -- (1,255,207) -- -- (1,255,207)
Balance
December 31, 1997 12,580,918 125,809 8,284,453 (4,698,176) -- -- 3,712,086
Net loss -- -- -- (1,821,386) -- -- (1,821,386)
Balance
December 31, 1998 12,580,918 125,809 8,284,453 (6,519,562) -- -- 1,890,700
Cash infusion by VBSA 13,749,897 13,749,897
in connection with the
Merger (see Note 1)
Debt payable to Virbac 2,000,000 2,000,000
S.A. recapitalized as
equity (see Note 1)
Purchase of Agri-Nutrition
Group Limited
(see Note 1) 9,387,279 93,873 11,637,538 11,731,411
Issuance of shares to
directors 7,550 75 8,418 8,493
Purchase and retirement
of shares pursuant to
Mandatory Tender
Offer (see Note 2) (1,000,000) (10,000) (1,620,000) (1,406,683) (3,036,683)
Purchase of treasury
shares 80,000 (210,093) (210,093)
Issuance of treasury
shares to retire debt (61,512) (37,051) 112,512 51,000
Net loss (543,776) (543,776)
Balance,
December 31, 1999 20,975,747 $ 209,757 $ 33,998,794 $(8,470,021) 42,949 $ (97,581) $ 25,640,949
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRBAC CORPORATION
Notes to Consolidated Financial Statements
1. Nature of Operations and Basis of Presentation
Virbac Corporation (the "Company" or "Virbac") manufactures and
distributes a wide variety of health, grooming, dental and parasiticidal
products for pets and other companion animals under the C.E.T., Allerderm, St.
JON, Zema, and Francodex brand names.
The Company is the result of the March 5, 1999 merger of Virbac, Inc.,
a subsidiary of Virbac SA, a French veterinary pharmaceutical manufacturer
("VBSA"), and Agri-Nutrition Group Limited ("AGNU"), a publicly held company.
Pursuant to the merger agreement dated October 16, 1998 (the "Merger
Agreement"), the merger was completed by the following series of transactions:
(i) VBSA contributed a total of $15.7 million to Virbac, Inc. consisting of
$13.7 million in cash and $2 million in intercompany debt recapitalized as
equity; (ii) AGNU issued 12,580,918 shares of AGNU stock to Interlab S.A.S., a
wholly owned subsidiary of VBSA ("VBSA Sub"); and (iii) Virbac, Inc. merged with
AGNU with AGNU being the surviving entity and VBSA its majority stockholder. The
name of the surviving entity was then changed to Virbac Corporation.
For financial statement reporting purposes, the merger is considered a
purchase of AGNU by Virbac, Inc. Accordingly, the 1998 and 1997 financial
statements reflect the operations Virbac, Inc. Earnings per share for the
periods ending December 31, 1998 and 1997 have been restated to reflect the
number of equivalent shares received by Virbac, Inc.
2. The Merger
As discussed in Note 1, the Company is the combination of Virbac, Inc.
and AGNU, the merger of which has been accounted for as a purchase of AGNU by
Virbac, Inc. The purchase price of $13.0 million assigned to the transaction is
the market value of the outstanding Common Stock shares of AGNU at the time of
the merger announcement (9,387,279 shares of AGNU at $1.25 per share, or $11.7
million) plus the direct acquisition cost incurred by Virbac, Inc. The purchase
price has been allocated to the acquired assets and liabilities based on
estimated fair market values as follows ($000's).
Working Capital $ (2,970)
Fixed Assets 8,413
Identifiable Intangible Assets 223
Goodwill 7,295
--------------
$ 12,961
==============
Goodwill is being amortized over twenty years.
The acquisition was accounted for as a purchase and the results of the
operations of AGNU have been included in the Company's consolidated financial
statements only since the date of the Merger, March 5, 1999. The unaudited
consolidated statements of operation data is presented below on a pro forma
basis as though the Merger had occurred as of the beginning of
<PAGE>
VIRBAC CORPORATION
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
1998. Adjustments to net loss include a reduction in interest expense to reflect
a contribution of $15.7 million from Virbac S.A., which was primarily used to
reduce debt.
Pro Forma Information
(unaudited, and in thousands except per share data)
For the Years Ended December 31,
-------------------------------------
1999 1998
Net sales $ 48,906 $ 47,982
Net loss 1,043 1,718
Basic and diluted loss per share .05 .08
Also, pursuant to the Merger Agreement, in April 1999 the Company
commenced a public tender offer to purchase 1,000,000 shares of the Company's
outstanding Common Stock for $3.00 per share (the "Mandatory Tender Offer"). The
shares issued to VBSA Sub as part of the merger were excluded from this tender
offer. Although these treasury shares were not formally retired by the Board of
Directors until January 2000, they are deemed to have been constructively
retired when purchased. Following the Mandatory tender Offer, VBSA controls
approximately 60% of the outstanding Common Stock of the Company. In addition,
if, prior to the second anniversary of the Merger, the closing sale price of the
Company's Common Stock has not reached $3.00 per share for 40 consecutive
trading days, the Company will conduct another public tender offer to purchase
up to 1,395,000 shares of the Company's outstanding Common Stock at a price of
$3.00 per share. Pursuant to the Merger Agreement, such tender offer will be
funded by VBSA's direct purchase from the Company of 1,395,000 shares of
unissued Common Stock at a price of $3.00 per share.
3. Summary of Significant Accounting Policies
Principals 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 accounting
principles generally accepted in the United States 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.
<PAGE>
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 allowance for uncollectible amounts based on historical
experience. At December 31, 1999 and 1998, the allowance for uncollectible
accounts was $170,606 and $64,639, 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 primarily of accounts receivable.
The Company sells its products to customers in the animal health and
specialty chemical business throughout the United States and abroad. Members of
one veterinary buying group represent the Company's largest group of customers
and accounted for approximately 11% of net sales in 1999. In 1998, another
customer represented 15% of net sales. No customer accounted for more than 10%
of net sales in 1997. The Company does not require collateral from its
customers.
Relationship with suppliers
The Company purchases certain chemical materials from multiple
suppliers including VBSA (see Note 15), 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.
<PAGE>
Fair value of financial instruments
For purposes of financial reporting, the Company has determined that
the fair value of the Company's debt approximates book value at December 31,
1999 and 1998, based on terms currently available to the Company in financial
markets.
Inventories
Inventories are stated at the lower of average cost or market, which
approximates the first-in, first-out method. Inventoriable costs include
materials, direct labor and manufacturing overhead. Inventories are stated net
of a reserve for estimated excess and obsolete inventory.
Property, plant and equipment
Property, plant 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 dispositions 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.
A summary of estimated useful lives used in computing depreciation for
financial statement reporting is as follows:
Estimated
Useful life
Building and leasehold improvements 5-30 years
Machinery and equipment 8-12 years
Furniture and fixtures 5-7 years
Vehicles 5 years
Goodwill and other intangible assets
Goodwill represents the excess of purchase price over the fair value of
net assets acquired in business combinations and is capitalized and amortized on
a straight-line basis over 20 years. Other intangible assets, which consist
primarily of licenses, patents, and trademarks, are amortized on a straight-line
basis over the lives of the related assets, which range from one to twenty
years.
The carrying value of goodwill and other intangible assets is assessed
for recoverability by management based on an analysis of future expected
undiscounted 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 and other intangible assets, a writedown to the extent of such
shortfall may be recognized. Management believes that there has been no
impairment as of December 31, 1999.
Long-lived assets
Pursuant to Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" the Company's management continually evaluates whether
events and circumstances indicate that the remaining estimated useful life of
intangible assets may warrant revisions or that the remaining balance of
intangibles or other long-lived assets may not be recoverable, based on the
undiscounted cash flows of operations over the remaining amortization period,
then the carrying value of the asset will be reduced to fair value. Management
believes that its long-lived and intangible assets are fully recoverable.
Advertising expense
Advertising costs are expensed the first time the advertising takes
place. Advertising expense for fiscal 1999, 1998 and 1997 was $1,759,086,
$1,504,926 and $1,948,727, respectively.
Research and development expenses
Research and development costs are charged to expense when incurred. In
1999, the Company entered into a contract with VBSA to perform research and
development services for specific products to be launched in 2001. In 1999, the
Company was reimbursed $300,000 by VBSA for services performed in fiscal 1999.
See also Note 15.
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 any net
deferred tax assets and/or liabilities, i.e., current or non-current, will be
based primarily on the classification of the related assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Earnings (loss) per share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share," which 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 securities. Diluted EPS reflects dilutive potentil common shares.
Dilutive potential common shares arising from the effect of outstanding stock
options are computed using the treasury stock method, if dilutive.
For fiscal 1999, 1998 and 1997, the number of weighted average shares
and potential common shares is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Weighted average shares - basic 19,677,053 12,580,918 12,580,918
Potential common shares
Stock options 16,632 -- --
Debt payable in stock 63,273 -- --
Total weighted average common and
Potential common shares - diluted 19,756,958 12,580,918 12,580,918
</TABLE>
The potential common shares have not been included in the computation
of diluted EPS because to do so would have been anti-dilutive for 1999, 1998 and
1997. Weighted average shares for the period ending December 31, 1998 and 1997
have been restated to reflect the number of equivalent shares received by
Virbac, Inc. in conjunction with the March 1999 purchase of Agri-Nutrition Group
Limited.
Preferred stock
The Company's Board of Directors may, without further action by
stockholders, from time-to-time direct the issuances 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 December 31, 1999.
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.
The former owners of PM Resources, 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 of these
three companies which the Company did not expressly assume. 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.
Employee stock-based compensation
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), allows companies to use the fair value
method defined in the statement or to continue use of the intrinsic value method
as outlined in APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
(APB 25). The Company will continue to use the provision of APB 25 in
determining net income. See Note 10 for the pro forma impact on the net loss and
loss per share for the years ended December 31, 1999, 1998 and 1997.
New Accounting Standards
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. The original implementation date of FAS 133 has been extended and it is
now effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. The Company believes that the adoption of this new standard will not
have a material impact on the Company's financial position, results of
operations, or related disclosures.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
<S> <C> <C>
Raw materials $ 6,340,906 $ 799,848
Packaging 2,276,927 855,305
Finished goods 6,069,769 1,756,137
----------------- -----------------
14,687,602 3,411,290
Less - Reserve for excess and obsolete inventories (913,997) (55,786)
----------------- -----------------
$ 13,773,605 $ 3,355,504
================= =================
</TABLE>
5. Property, plant and equipment
Property, plant and equipment consist of the following:
December 31,
---------------------------------
1999 1998
Land $ 3,405,072 $ 642,072
Building and improvements 6,919,081 4,555,262
Production equipment 4,813,438 1,373,647
Furniture and fixtures 545,862 548,728
Computer equipment and software 601,427 487,716
------------- --------------
16,284,880 7,607,425
Less-Accumulated depreciation (3,519,760) (2,702,905)
------------- --------------
$ 12,765,120 $ 4,904,520
============= ==============
In 1999, 1998 and 1997, depreciation expense was approximately $1,068,908,
$500,000, and $547,000, respectively.
6. Goodwill and other intangible assets
Goodwill and other intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998
<S> <C> <C>
Goodwill $ 10,653,334 $ 3,367,553
Patents, licenses, trademarks and other 1,835,745 482,144
----------------- --------------
12,489,079 3,849,697
Less-Accumulated amortization (2,535,959) (2,044,812)
----------------- --------------
$ 9,953,120 $ 1,804,885
================= ==============
</TABLE>
See Note 13 for discussion of the acquisition of licensing rights in
1999. In 1999, 1998 and 1997, amortization expense was approximately $440,000,
$346,000, and $342,000, respectively.
7. Long-Term Debt and Notes Payable
The Company has a revolving credit facility of $12,350,000 at December
31, 1999. Long-term debt and notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
<S> <C> <C>
Revolving credit facility with a financial institution up to $12.350
million based upon specified percentages of qualified accounts
receivable and inventory, collateralized by accounts receivable,
inventory, equipment, intangibles, and certain real estate, with
interest varying based upon financial
performance (7.75%, as of December 31, 1999). $ 10,616,090 $ --
Note payable dated September 25, 1997, interest at prime, due
in annual installments of $97,991, plus accrued interest,
maturity September 25, 2001 195,983 --
Note payable dated September 1997, due in 2000, with $49,000
payable in cash, plus interest at prime, and $51,000 of
the Company's common stock 100,000 --
Revolving line of credit with a financial institution up to $1,000,000,
interest paid quarterly at LIBOR +.95%,
uncollateralized and guaranteed by Virbac, SA. paid in full. -- 1,000,000
Revolving line of credit with a financial institution up to
$4,000,000, with interest paid quarterly at LIBOR plus .75%,
guaranteed by Virbac, SA., paid in full. -- 4,000,000
Note payable to a financial institution, dated July 6, 1994,
with interest paid quarterly from the date of initial advance
at LIBOR plus .95%, uncollateralized and guaranteed by
Virbac, S.A., paid in full -- 2,200,000
------------- -------------------
10,912,073 7,200,000
Less current portion (1,564,080) (3,200,000)
------------- -------------------
$ 9,347,993 $ 4,000,000
============= ===================
</TABLE>
On September 7, 1999, the Company replaced all of its then-existing
credit facilities with a three-year $10 million facility. The outstanding debt
associated with the then-outstanding facilities, approximately $3.2 million, was
transferred to the new three-year, $10 million facility. In December 1999, the
Company obtained a temporary $2.5 million increase to its line of credit to fund
acquisition fees related to its acquisition of certain product manufacturing
rights (see Note 13) and to fund working capital increases related to the
consolidation of the Company's production facilities. This temporary increase is
to be repaid in installments from February to July 2000. Of the remaining $10
million, $7 million is subject to a borrowing formula based upon eligible
accounts receivable and inventory and serves as a revolving line of credit. The
availability of the remaining $3 million will be reduced by $150,000 per
quarter. At December 31, 1999, $1.7 million was available under the credit
facility. The interest rate and fees vary based upon the financial performance
of the Company as measured by the ratio of EBITDA to interest expense paid and
current maturities due. Interest rates can vary from prime plus 25 basis points
to prime minus 75 basis points. At December 31, 1999, the Company is paying
prime minus 75 basis points (7.75%). A commitment fee, ranging from .25% to
1.25%, is calculated on the unused portion of the facility to be paid quarterly.
In addition, a letter of credit commitment fee, ranging from 1% to 1.375%, per
annum, based upon financial performance ratios, are calculated for all letters
of credit issued up to and including October 31, 1999, and thereafter.
The revolving credit facility contains financial covenants, including
but not limited to, tangible net worth and interest coverage ratios, and
restricts the payment of dividends. At December 31, 1999, the Company was not in
compliance with these covenants. However, the lending bank has waived such
non-compliance for the periods through April 30, 2000. On May 1, 2000, the
Company and the bank amended the revolving credit facility and the Company would
have been in compliance with such amended covenants at December 31, 1999.
<PAGE>
8. Financial Results
The Company reported a net loss of $1.9 million for the fourth quarter
of 1999. The results for the fourth quarter were adversely affected by inventory
write-offs, lower sales, and costs associated with the consolidation of the
Company's production and distribution facilities during the fourth quarter.
During the fourth quarter of 1999, the Company wrote-off approximately $750,000
of inventory in conjunction with the consolidation. Revenues, which are
typically lower in the fourth quarter compared to the rest of the year due to
seasonality, were further unfavorably impacted by disruptions to shipments
caused by the consolidation process. Net revenues during the fourth quarter were
approximately $4.0 million lower than in the third quarter of 1999. This
decrease resulted in a decrease in gross profit of $1.6 million.
9. Common Stock Transactions
During the year ended December 31, 1999, the Company purchased
1,000,000 shares of its common stock for constructive retirement pursuant to the
Mandatory Tender Offer at an aggregate cost of $3,036,683. See Note 2. In June
1999, the Board of Directors authorized, under the Stock Repurchase Plan, the
Company to purchase in the open market up to $250,000 of the Company's common
stock. As of December 31, 1999 the Company had repurchased approximately 80,000
shares at an aggregate cost of $210,093. These shares were purchased to satisfy,
in part, future distributions of stock under stock compensation plans and under
an agreement to retire certain debt. During the year, 37,051 shares of treasury
stock were reissued to retire $51,000 of debt.
10. Stock Options
The Company has a 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
shares of the Company's common stock already owned by the employee. 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 have been granted to
date under this plan.
Under terms of the Company's Incentive Stock Option Plans, officers and
certain other employees may be granted options to purchase the Company's common
stock at the closing market price on the date that the option is granted.
Options generally vest over three years and have a maximum term of ten years. At
December 31, 1999, a total of 1,655,000 shares were reserved for issuance under
the plans.
A summary of the incentive plans' stock option activity for the years
shown is as follows:
Weighted Average
Options Exercise Price
Balance, December 31, 1998 and 1997 0 $ --
AGNU options from merger 1,949,500 1.41
Granted 245,000 1.32
Forfeited (217,500) 1.53
Expired (945,500) 1.12
Balance, December 31, 1999 1,031,500 $ 1.64
The Company has 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 changed to the pro
forma amounts listed below using the weighted average fair values indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Net loss as reported $ (543,776) $ (1,821,386) $ (1,255,207)
Pro forma net loss (596,653) (1,821,386) (1,255,207)
Basic and diluted loss per share as reported (0.03) (0.14) (0.10)
Pro forma loss per share (0.03) (0.14) (0.10)
Weighted average fair value of options granted $ 0.68 $ -- $ --
</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 1999, a weighted average risk free interest
rate of 5.88%; weighted average expected volatility of 51.85%; no dividends, and
an expected life of five 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 options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average Exercisable
Range of Exercise Number Number Weighted Average
Price Outstanding Remaining Life Exercise Price Outstanding Exercise Price
<S> <C> <C> <C> <C> <C>
$1.25 - $2.00 966,500 7.3 years $ 1.50 710,200 $ 1.55
$2.01 - $4.25 65,000 5.5 years 3.78 65,000 3.78
$1.25 - $4.25 1,031,500 7.2 years $ 1.64 775,200 $ 1.74
</TABLE>
11. Income Taxes
Due to the Company's net losses in 1999, 1998 and 1997, and due to the
lack of any loss carryback opportunities, the Company has no taxes currently
payable or refundable during 1999. The effective income tax rate differs from
the statutory federal income tax rate, principally as a result of the valuation
allowance related to the net operating loss carryforward.
The following table summarizes the net deferred tax assets as of
December 31, 1999 and 1998:
December 31,
----------------------------------------
1999 1998
Asset reserves $ 366,000 $ 41,000
Nondeductible liabilities 117,000 122,000
Net operating loss carryforward 2,078,000 983,000
Depreciation and amortization (368,000) 256,000
Other 229,000 43,000
----------------- --------------
2,422,000 1,455,000
Valuation allowance (2,422,000) (1,445,000)
----------------- --------------
Deferred income tax, net $ -- $ --
================== ==============
Management has concluded that, based on the Company's history of
losses, it is currently more likely than not that the Company will not realize
its net deferred tax assets. Therefore, the Company has provided a 100%
valuation allowance on its net deferred tax assets. Of the $2.4 million
valuation allowance at December 31, 1999, approximately $.7 million relates to
the Company's purchase of Agri-Nutrition Group Limited. If the Company
subsequently recognizes tax benefits associated with this valuation allowance,
the benefit will be a reduction of goodwill.
The Company's tax net operating loss carryforwards of approximately
$6,111,000 will begin to expire in the year 2010. The Company has available an
unused tax credit carryforward of $58,000 which may be available against future
taxable income and expire beginning the year 2008.
<PAGE>
12. Employee Savings Plan
The Company sponsors three 401(k) savings plans (the Plans). Former
employees of Virbac, Inc. participate in one plan, non-union former employees of
AGNU participate in a separate plan, and union employees of PMR participate in a
third plan. Substantially all employees of the Company may participate in one of
the Plans, subject to certain eligibility and entry requirements. Contributions
to the Plans result primarily from voluntary contributions from employees in the
form of deferrals of up to 15% or 20% of the employees' salaries, depending upon
the Plan. The Plans permit various employer contributions. Employer
contributions were $175,000, $19,000, and $22,000 for 1999, 1998, and 1997,
respectively.
13. Commitments and Contingencies:
Operating Leases
The Company leases facilities and certain machinery under
non-cancelable operating leases that expire at various dates through December
2004 and have renewal options ranging from 1 to 5 years. See Note 15 regarding
the lease with a related party. Future lease payments under non-cancelable
operating leases as of December 31, 1999, are as follows:
2000 $ 283,749
2001 141,118
2002 39,086
2003 24,513
2004 18,780
Total minimum lease payments $ 507,246
Total rent expense under operating leases was $163,301, $39,944 and
$42,438, in fiscal years 1999, 1998, and 1997, respectively. Subtenant rental
income was $37,510 in 1999 and zero in 1998 and 1997, respectively. Future
minimum lease payments have not been reduced by future minimum, subtenant rental
income of $90,024.
Acquisition of Licensing Rights
In 1999, the Company acquired the rights to manufacture and sell
products currently in development by a third party for a period of 15 years. In
December 1999, the Company paid $1,000,000 at signing in partial payment for
these rights, and, depending upon the third party reaching certain registration
milestones, the Company is committed to paying in fiscal 2000, 2001 and 2002
approximately $1.7 million, $750,000 and $700,000, respectively.
Litigation
The Company is subject to certain litigation and claims arising out of
the conduct of its business. While the final outcome of any litigation or claim
cannot be determined with certainty, management believes that the final outcome
of any current litigation or claim will not have a material adverse effect on
the Company's financial position, cash flows or results of operations.
Contingent Tender Offer
As described in Note 2, if, prior to the second anniversary of the
merger, the closing price of the Company's Common Stock has not reached $3.00
per share for 40 consecutive trading days, the Company will conduct a public
tender offer to purchase up to 1,395,000 shares of the Company's outstanding
Common Stock at a price of $3.00 per share. Pursuant to the Merger Agreement,
each tender offer will be funded by VBSA's direct purchase from the Company of
1,395,000 shares of unissued Common Stock at a price of $3.00 per share.
Adjustment of the Merger Shares
In order to maintain VBSA's 60% ownership interest in the Company until
the expiration, termination or exercise of all options to purchase the Company's
Common Stock outstanding as of the date of the merger and until the Company's
last issuance of Common Stock pursuant to the "Mardel Merger Agreement", the
Company will contemporaneously, with the issuance of Common Stock upon the
exercise of pre-merger AGNU options or pursuant to the Mardel Merger Agreement,
issue to VBSA a number of additional shares of Common Stock equal to the product
of (a) the aggregate number of shares of Common Stock issued upon the exercise
of such AGNU options or pursuant to the Mardel Merger Agreement and (b) 1.5.
Each such post-Merger adjustment will dilute the voting power of current
stockholders. As of December 31, 1999, 808,000 pre-merger options were
outstanding; no pre-Merger options were exercised in 1999. The Company will
issue additional shares of Common Stock with an aggregate value of $51,000
pursuant to the Mardel Merger Agreement in September 2000. No shares will be
issued to VBSA in the event that treasury shares are reissued to satisfy these
pre-merger obligations.
14. Facility Closures
In conjunction with the Merger, the Company assessed, formulated and
announced plans to consolidate its manufacturing and distribution operations.
Under the plan, which was completed prior to the end of the year, all pet
product distribution operations have been transferred from AGNU's Chicago,
Illinois, and Los Angeles, California facilities to the Company's larger Fort
Worth, Texas facility. All manufacturing and distribution operations, which had
been carried out at the Chicago facility, ceased, and such operations have been
transferred to other existing Company facilities. In addition, manufacturing and
distribution operations related to the majority of products previously produced
at the Los Angeles facility have been transferred to the Fort Worth facility,
with only certain production and marketing activities remaining in California.
The cost to close the Chicago facility, which mostly comprises
severance costs and future lease obligations, and relocation costs for certain
key members of the manufacturing team were approximately $350,000. The severance
costs has been paid as of December 31, 1999 and the lease obligation will be
paid in fiscal 2000. These costs are included in the purchase price allocation
of the Merger. See Note 2.
In 1998, the Company closed its New Castle, Indiana facility. All
products that were manufactured at that facility are now being manufactured at
other Company facilities or by third parties. All material costs, including
severance costs of approximately $83,000, associated with the transfer of
operations were recognized and paid in 1998. During fiscal 1999, the Company's
management committed to dispose of the land and building in New Castle, Indiana.
The land and building's carrying value of approximately $350,000 is held at the
Manufacturing and Administrative segment. Management expects to dispose of the
building during fiscal 2000. See Note 16.
15. Related Party Transactions
The Company purchased raw materials and finished goods from VBSA and
its related affiliates in the amount of $1,843,470, $233,837, and $2,468,816 in
1999, 1998, and 1997, respectively. The Company had sales to VBSA and its
related affiliates in the amount of $234,723, $132,828, and $102,344 in 1999,
1998, 1997, respectively.
In 1999, the Company was reimbursed $315,477 by VBSA for internal and
external research and development costs that were incurred on behalf of VBSA.
The reimbursement is included as an offset to research and development expense.
During 1999, the Company entered into an agreement with VBSA, giving the Company
the exclusive U.S. and Canadian rights to manufacture and sell products
currently in development and previously developed by VBSA. In addition, VBSA has
agreed to reimburse the Company $400,000 in 2000 for internal costs incurred in
assisting VBSA obtain U.S. registration for VBSA's products currently in
development. Beginning in 2001, the Company will pay VBSA a royalty of 3% on
VBSA-developed products sold by the Company. The Company has also agreed to pay
VBSA a flat fee of $500,000 per year for a period of four years beginning in
2001 in order to induce VBSA to continue research and development efforts that
may benefit the Company.
In 1999, the Company entered into an agreement with VBSA appointing
VBSA as its exclusive distributor for its pet health care products outside of
the U.S. and Canada. Under the agreement, VBSA guarantees a minimum overall
annual gross profit through 2004, which is based upon an annual 10% increase
from the gross profit realized by the Company on its 1998 export sales.
The Company rents the land and building at the Company's Harbor City,
California facility from the former owner of St. JON and the former president of
the Company's OTC Division. The lease, as amended, expires in August 2000, with
an option to extend the term for an additional five years. Rent expense under
this agreement was $139,417 in 1999.
In 1997, the Company was reimbursed $400,000 by VBSA for advertising
costs that were incurred on behalf of VBSA. The reimbursement is included as an
offset to selling and marketing expense.
In 1998, the Company transferred a $450,000 note receivable from a
former employee and a corresponding $450,000 note payable mirroring the terms of
the note receivable to a wholly owned subsidiary of VBSA.
At December 31, 1998, the Company had an advance from VBSA in the
amount of $2,000,000. This advance was recapitalized as equity as part of the
merger agreement. See Note 1.
16. Segment and Related Information
The Company has three reportable segments. The veterinary segment
distributes pet health products mainly to veterinarian offices. The
over-the-counter (OTC) segment manufactures and distributes pet health products
to pet stores, farm and feed stores, and the mass retail market. PMR
manufactures and distributes animal health and specialty chemicals under private
label brands and for third parties.
Manufacturing of veterinary products and corporate administration
activities are recorded at the corporate level. The Company also performs
contract manufacturing for third parties from its Fort Worth facility. These
revenues are recorded at the corporate level and are not allocated to the
reportable segments.
The accounting policies of the reportable segments are the same as
those described in Note 3 - Summary of Significant Accounting Policies. The
Company evaluates segment performance based on profit or loss from operations.
All intercompany sales and transfers to the reportable segments are at cost.
Such sales are eliminated in consolidation.
The Company's reportable segments utilize different channels of
distribution. They are managed separately because each business distributes
different products and each has different marketing strategies.
The Company does not allocate interest and other expense/income or
taxes to segments. Amortization of goodwill is charged at the corporate level.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (dollars in thousands):
<PAGE>
<TABLE>
<CAPTION>
Manufacturing
and Consolidated
Veterinary OTC PMR Administration Total
<S> <C> <C> <C> <C> <C>
As of and for the year ended
December 31, 1999
Revenues from external
customers $ 20,365 $ 11,697 $ 11,445 $ 211 $ 43,718
Depreciation and amortization 199 201 402 707 1,509
Income (loss) from
operations 5,039 (916) 1,044 (5,134) 33
Interest and other expense (577)
Net Loss (544)
Total assets 6,484 9,433 9,904 17,812 43,633
Capital expenditures 36 23 187 1,329 1,575
As of and for the year ended
December 31, 1998
Revenues from external
customers $ 12,665 $1,996 $ -- $ 390 $ 15,051
Depreciation and amortization 218 1 -- 627 846
Income (loss) from
operations 1,968 (428) -- (2,778) (1,238)
Interest and other expense (583)
Net Loss (1,821)
Total assets 4,225 1,039 -- 7,417 12,681
Capital expenditures -- -- -- 59 59
As of and for the year ended
December 31, 1997
Revenues from external
customers $ 13,111 $ 2,236 $ -- $ 888 $ 16,235
Depreciation and amortization 221 3 -- 665 889
Income (loss) from
operations 2,354 (331) -- (2,754) (731)
Interest and other expense (524)
Net loss (1,255)
Total assets 4,710 763 -- 7,918 13,391
Capital expenditures 19 -- -- 130 149
</TABLE>
<PAGE>
During 1999, 1998, and 1997, the Company sold its products in the
United States and Canada. In addition, as a result of the Merger, the Company
recognized export sales, primarily to the United Kingdom and Germany. All
property owned by the Company is located in the United States. The following
table presents revenue by country based on location of the customer.
1999 1998 1997
United States $ 41,599,735 $ 14,216,206 $ 15,450,982
Canada 1,437,816 834,884 784,302
Export 680,273 -- --
--------------- -------------- --------------
Total revenue $ 43,717,824 $ 15,051,090 $ 16,235,284
See Note 3 for disclosure of significant customers.
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and
Shareholders of Virbac Corporation
Our audit of the consolidated financial statements referred to in our report
dated May 1, 2000, appearing on page F-2 of this Annual Report on Form 10-K also
included an audit of the financial statement schedule included on page S-3 of
this Annual Report on Form 10-K. In our opinion, the financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Fort Worth, Texas
May 1, 2000
<PAGE>
Report of Independent Public Accountants
To the Stockholders of
Virbac, Inc. and Subsidiaries:
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of Virbac, Inc. and Subsidiaries as of
December 31, 1998, and for the two years in the period ended December 31, 1998,
and have issued our report thereon dated January 20, 1999. Our audit was made
for the purpose of forming an opinion on those statements taken as a whole. The
schedules of Valuation of Qualifying Accounts and Reserves as of December 31,
1998 and 1997 are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
January 20, 1999
<PAGE>
VIRBAC CORPORATION
SCHEDULE II - RULE 12-09
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-------------------------------------------
BALANCE AT BALANCE AT
BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS - DESCRIBE - DESCRIBE PERIOD
<S> <C> <C> <C> <C> <C>
FAS 109 Valuation $ 1,445,000 $ 193,639 $ 783,361 (1) -- $ 2,422,000
Inventory Reserve $ 55,785 $ 370,734 $ 487,478 (1) -- $ 913,997
Allowance for $ 64,639 -- $ 246,125 (1) $ 140,158 (2) $ 170,606
Doubtful Accounts
</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 purchase of Agri-Nutrition Group Limited in March 1999.
(2) Net write-off of uncollectible accounts in the ordinary course of business.
<PAGE>
VIRBAC CORPORATION
SCHEDULE II - RULE 12-09
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
--------------------------------------------
BALANCE AT BALANCE AT
BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS - DESCRIBE - DESCRIBE PERIOD
<S> <C> <C> <C> <C> <C>
FAS 109 Valuation $ 904,000 $ 541,000 -- -- $ 1,445,000
Inventory Reserve $ 47,856 $ 10,000 -- $ 2,071(1) $ 55,785
Allowance for $ 46,395 $ 42,849 -- $24,605(2) $ 64,639
Doubtful Accounts
</TABLE>
(1) Net write-off of obsolete inventory in the ordinary course of business.
(2) Net write-off of uncollectible accounts in the ordinary course of business.
<PAGE>
VIRBAC CORPORATION
SCHEDULE II - RULE 12-09
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
----------------------------------------
BALANCE AT BALANCE AT
BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS - DESCRIBE - DESCRIBE PERIOD
<S> <C> <C> <C> <C> <C>
FAS 109 Valuation $ 580,000 $ 324,000 -- -- $ 904,000
Inventory Reserve $ 65,728 $ -- -- $ 17,872 (1) $ 47,856
Allowance for $ 58,995 $ 38,017 -- $ 50,617 (2) $ 46,395
Doubtful Accounts
</TABLE>
(1) Net write-off of obsolete inventory in the ordinary course of business.
(2) Net write-off of uncollectible accounts in the ordinary course of business.
SECOND AMENDMENT TO
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, made and entered
into as of the _____ day of May, 2000, by and between VIRBAC CORPORATION, a
Delaware corporation ("Virbac"), PM RESOURCES, INC., a Missouri corporation ("PM
Resources"), ST. JON LABORATORIES, INC., a California corporation ("St. JON"),
FRANCODEX LABORATORIES, INC., a Kansas corporation ("Francodex"), and VIRBAC AH,
INC., a Delaware corporation ("Virbac AH," and collectively with Virbac, PM
Resources, St. JON and Francodex referred to herein as the "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 September 7, 1999, in the
principal amount of up to Ten Million Dollars ($10,000,000.00), payable to the
order of Bank as therein set forth, which Revolving Credit Note has been most
recently amended and restated by that certain Revolving Credit Note dated
December ___, 1999 in the principal amount of up to Twelve Million Three Hundred
Fifty Thousand Dollars ($12,350,000.00) (as amended and restated, the "Note");
and
WHEREAS, the Note is described in a certain Credit Agreement
dated as of September 7, 1999 made by and among Borrowers and Bank, as
previously amended by an Amendment to Credit Agreement dated as of December ___,
1999 made by and among Borrowers and 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); and
WHEREAS, Borrowers and Bank desire to amend the financial
covenants in 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 definition of "Consolidated Debt Service" in Section 2
of the Loan Agreement shall be deleted in its entirety and in its place shall be
substituted the following:
Consolidated Debt Service shall mean the sum of all
of Virbac's and its Consolidated Subsidiaries' payments of principal
scheduled on all long term borrowed money Indebtedness within the
twelve month period preceding the date of any such calculation
(provided that no principal repayments of Facility A Loans shall be
included in Consolidated Debt Service and the only principal repayments
on the Facility B Loans to be included in Consolidated Debt Service
during the period from December 31, 1999 through June 30, 2000 shall be
$150,000.00 on the last day of each February, May, August and
November), plus Consolidated Interest Expense during the twelve month
period preceding the date of any such calculation, all determined on a
consolidated basis and in accordance with Generally Accepted Accounting
Principles consistently applied.
2. The definition of "Consolidated Tangible Net Worth" in
Section 2 of the Loan Agreement shall be deleted in its entirety and in its
place shall be substituted the following definition of Consolidated Net Worth:
Consolidated Net Worth shall mean, at any date, the
sum of the consolidated stockholders' equities of Virbac and its
Consolidated Subsidiaries plus all Subordinated Debt then outstanding,
determined in accordance with Generally Accepted Accounting Principles
consistently applied.
3. A new definition of "Consolidated Senior Debt " shall be
added to Section 2 of the Loan Agreement in proper alphabetical order as
follows:
Consolidated Senior Funded Debt of any Person shall
mean, as of the date of any determination thereof, the sum of, without
duplication, (a) all Indebtedness of such Person for borrowed money
(excluding any Subordinated Debt), plus (b) all Indebtedness of such
Person which has been incurred in connection with the purchase or other
acquisition of Property (other than unsecured trade accounts payable
incurred in the ordinary course of business), plus (c) all obligations
of such Person under any Capitalized Leases, plus (d) the aggregate
undrawn face amount of all letters of credit issued for the account
and/or upon the application of such Person together with all
unreimbursed drawings with respect thereto plus (e) all Guarantees by
such Person of Indebtedness of others, all determined on a consolidated
basis and in accordance with Generally Accepted Accounting Principles
consistently applied.
4. Section 7.1(i) of the Loan Agreement shall be deleted in
its entirety and in its place shall be substituted the following:
(i) Financial Covenants, Borrower will:
(i) Maintain a ratio of Consolidated EBITDA minus permitted
purchases by Borrowers of any of the outstanding capital stock of
Virbac 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
applicable period ending on the date of any such calculation), to
Consolidated Debt Service (which for any such calculations prior to
January 1, 2000 shall be determined using Virbac's and its Consolidated
Subsidiaries' actual principal reductions made or required on all long
term borrowed money Indebtedness during the period included in any such
calculation instead of scheduled principal payments during the period
of equal length following the date of any such calculation) of at least
(A) 1.50 to 1.0 for the four quarter period ending December 31, 1999,
(B) 1.50 to 1.0 for the four quarter period ending January 31, 2000,
(C) 1.50 to 1.0 for the four quarter period ending February 29, 2000,
(D) 1.75 to 1.0 for the four quarter period ending March 31, 2000, (E)
1.75 to 1.0 for the four quarter period ending April 30, 2000, (F) 1.75
to 1.0 for the four quarter period ending May 31, 2000, (G) 1.75 to 1.0
for the four quarter period ending June 30, 2000, and (H) 2.00 to 1.0
for the four quarter period ending at each month-end and fiscal year
end thereafter during the Term hereof;
(ii) Maintain a minimum Consolidated Net Worth at all times
during the Term hereof of not less than the sum of: (A) Twenty-Five
Million Dollars ($25,000,000.00) , plus (B) Seventy-Five Percent (75%)
of the Consolidated Net Income of Borrowers (with no deductions for any
consolidated losses for any such fiscal year) shown on Borrowers'
audited consolidated financial statements for each fiscal year,
commencing with the fiscal year ending December 31, 1999, such required
increases to be cumulative for each such fiscal year;
(iii) Maintain a ratio of Consolidated Senior Funded Debt
(determined as of any such date), to Consolidated Tangible Net Worth
(determined as of any such date) of not more than 1.0 to 1.0 as of each
fiscal quarter-end during the Term hereof; and
(iv) Deliver a certificate of the principal financial officers
of each of the Borrowers containing the financial ratio calculations
required in clauses (i), (ii) and (iii) above simultaneously with the
financial statements referred to in Sections 7.1(a)(i), (ii) and (iii).
5. 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 written consent to these amendments signed by Ramon
Mulholland as holder of the subordinated debt, which consent shall be in form
and substance acceptable to Bank; and
(c) such other documents as Bank may reasonably request.
6. Borrowers hereby represent and warrant to Bank that:
(a) The execution, delivery and performance by Borrowers of
this Second Amendment to Credit Agreement 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 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 has been duly
executed and delivered and constitutes the legal, valid and binding obligation
of Borrowers enforceable in accordance with its 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.
7. All references in the Loan Agreement to "this Agreement"
and any other references of similar import shall henceforth mean the Loan
Agreement as amended by this Second Amendment to Credit Agreement.
8. This Second Amendment to Credit Agreement 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.
9. This Second Amendment to Credit Agreement shall be governed
by and construed in accordance with the internal laws of the State of Missouri.
10. 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.
11. The Loan Agreement, as hereby amended and modified, and
the Note, 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 Note
shall not be paid when due as provided in the Note, the holder of the Note shall
be entitled to and may exercise all rights and remedies under the Note and the
Loan Agreement, as amended.
12. 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 May, 2000.
VIRBAC CORPORATION
By:
Bruce G. Baker, Executive Vice President
PM RESOURCES, INC.
By:
Bruce G. Baker, Executive Vice President
ST. JON LABORATORIES, INC.
By:
Bruce G. Baker, Executive Vice President
VIRBAC AH, INC.
By:
Bruce G. Baker, Executive Vice President
FRANCODEX LABORATORIES, INC.
By:
Bruce G. Baker, Executive Vice President
FIRST BANK
By:
Traci L. Dodson, Vice President
<PAGE>
CONSENT TO SECOND AMENDMENT TO
CREDIT AGREEMENT
The undersigned hereby consents to the terms of that certain
Second Amendment to Credit Agreement (the "Amendment"), a copy of which has been
provided to the undersigned, and the undersigned acknowledges that the execution
and delivery by Virbac Corporation (formerly known as Agri-Nutrition Group
Limited), PM Resources, Inc., Virbac AH, Inc., St. JON Laboratories, Inc. and
Francodex Laboratories, Inc. of said Amendment will not affect or impair the
undersigned's obligations to and agreements with Bank under that certain
Subordination and Standby Agreement executed as of May 8, 1998 by the
undersigned (and as of May 14, 1998 by the Borrowers) in favor of Bank (the
"Subordination Agreement"), which obligations and agreements are hereby ratified
and confirmed. The undersigned further acknowledges and agrees that (i) all
references in the Subordination Agreement to the "Loan Agreement" and other
references of similar import shall henceforth mean the amended and restated
Credit Agreement dated as of September 7, 1999, as amended by the Amendment, and
as the same has been or may from time to time be further amended; and (ii) all
references in the Subordination Agreement to the "Senior Indebtedness" and other
references of similar import shall henceforth mean and include as Senior
Indebtedness, the $12,350,000.00 amended and restated Revolving Credit Note, as
the same may from time to time be further amended, and the Subordinated
Indebtedness of the undersigned is and shall remain subordinated to such Senior
Indebtedness.
Dated: as of May ___, 2000.
Ramon A. Mulholland
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 33-94622) of Virbac Corporation of our reports dated
May 1, 2000 relating to the financial statements, which appear on page F-2 and
the financial statement schedule, which appears on page S-1 of this Annual
Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Fort Worth, Texas
May 4, 2000
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33-86880, 33-86892, 33-93340, 333-3192, 333-48069,
and 333-48073) of Virbac Corporation of our report dated May 1, 2000 relating to
the financial statements, which appear on page F-2 and the financial statement
schedule, which appears on page S-1 of this Form 10-K.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Fort Worth, Texas
May 4, 2000
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 20, 1999, for Virbac Inc. and Subsidiaries as of December
31, 1998 and for the two years in the period ended December 31, 1998, included
in the Virbac Corporation's Form 10-K for the year ended December 31, 1999, into
the Company's previously filed Registration Statements on Form S-3 (File No.
33-94622) and on Form S-8 (File Nos. 33-86880, 33-86892, 33-93340, 333-3192,
333-48069, and 333-48073). It should be noted that we have not audited any
financial statements of the Company as of any date or for any period subsequent
to December 31, 1998, or performed any audit procedures subsequent to January
20, 1999, the date of our report.
/S/ ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 4, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 231,297
<SECURITIES> 0
<RECEIVABLES> 6,150,900
<ALLOWANCES> 170,606
<INVENTORY> 13,773,605
<CURRENT-ASSETS> 20,904,308
<PP&E> 16,284,880
<DEPRECIATION> 3,519,760
<TOTAL-ASSETS> 43,633,018
<CURRENT-LIABILITIES> 8,644,076
<BONDS> 0
0
0
<COMMON> 209,757
<OTHER-SE> 25,431,192
<TOTAL-LIABILITY-AND-EQUITY> 43,633,018
<SALES> 43,717,824
<TOTAL-REVENUES> 43,717,824
<CGS> 25,774,014
<TOTAL-COSTS> 43,684,650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 576,950
<INCOME-PRETAX> (543,776)
<INCOME-TAX> 0
<INCOME-CONTINUING> (543,776)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (543,776)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
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