<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended September 30, 2000
Commission File Number: 0-24312
VIRBAC CORPORATION
State of Incorporation: Delaware I.R.S. Employer I.D. 43-1648680
3200 Meacham Boulevard
Fort Worth, TX 76137
(817) 831-5030
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
--- ---
The number of shares of common stock outstanding at November 10, 2000 is
21,450,933 shares.
<PAGE> 2
VIRBAC CORPORATION
INDEX
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
FINANCIAL INFORMATION
Financial Statements
Consolidated Balance Sheets -
September 30, 2000 (unaudited) and December 31, 1999 (unaudited) 3
Consolidated Statements of Income -
Three months and nine months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 (unaudited) 5
Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 2000 (unaudited) 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
</TABLE>
<PAGE> 3
VIRBAC CORPORATION
PART I - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS PAGE 3
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (UNAUDITED)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 106,474 $ 231,297
Accounts receivable 10,809,582 5,555,363
Accounts receivable - Virbac SA 181,147 424,931
Inventories 12,271,617 13,773,605
Prepaid expenses and other assets 1,084,791 919,112
-------------- --------------
Total Current Assets 24,453,611 20,904,308
Property, plant and equipment, net 12,490,769 12,765,120
Goodwill and other intangibles, net 10,373,871 9,953,120
Other assets 93,410 10,470
-------------- --------------
Total Assets $ 47,411,661 $ 43,633,018
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and notes payable 697,991 1,564,080
Accounts payable
Trade (Note 10) 4,255,398 3,579,822
Virbac SA 16,938 776,586
Accrued expenses 1,398,850 2,723,588
-------------- --------------
Total Current Liabilities 6,369,177 8,644,076
Long-term debt and notes payable 6,837,725 9,347,993
Unearned product license fees (Note 9) 5,250,000 --
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock ($.01 par value; 38,000,000 shares
Authorized; 21,765,258 and 20,975,747, respectively issued) 217,652 209,757
Additional paid-in capital 34,474,033 33,998,794
Treasury stock at cost (16,949 and 42,949 shares, respectively) (44,719) (97,581)
Accumulated deficit (5,692,207) (8,470,021)
-------------- --------------
28,954,759 25,640,949
-------------- --------------
Total Liabilities and Shareholders' Equity $ 47,411,661 $ 43,633,018
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 4
VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) PAGE 4
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net revenues $ 14,331,676 $ 12,854,051 $ 41,466,357 $ 34,980,231
Cost of goods sold 8,426,481 7,912,284 23,749,454 20,272,064
------------ ------------ ------------ ------------
Gross profit 5,905,195 4,941,767 17,716,903 14,708,167
Operation expenses:
Selling, general and administrative 3,821,843 3,165,636 11,551,430 10,644,657
Research and development 333,924 307,916 996,962 890,784
Warehouse and distribution 580,592 445,285 1,989,563 1,310,842
------------ ------------ ------------ ------------
Total Operating Expenses 4,736,359 3,918,837 14,537,955 12,846,283
Income from operations 1,168,836 1,022,930 3,178,948 1,861,884
Interest expense (271,655) (155,511) (777,943) (396,039)
Other income (expense) 108,861 (61,270) 376,809 (154,947)
------------ ------------ ------------ ------------
Income before income tax expense 1,006,042 806,149 2,777,814 1,310,898
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net income $ 1,006,042 $ 806,149 $ 2,777,814 $ 1,310,898
============ ============ ============ ============
Basic income per share $ 0.05 $ 0.04 $ 0.13 $ 0.07
============ ============ ============ ============
Diluted income per share $ 0.05 $ 0.04 $ 0.13 $ 0.07
============ ============ ============ ============
Basic shares outstanding 21,346,217 20,978,163 21,211,277 19,229,769
Diluted shares outstanding 21,972,097 21,054,573 21,949,050 19,305,793
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 5
VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) PAGE 5
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,777,814 $ 1,310,898
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 1,324,003 1,170,217
Changes in operating assets and liabilities:
(Increase) in accounts receivable (5,010,435) (1,610,421)
(Increase) decrease in inventories 1,501,988 (2,204,766)
(Increase) decrease in prepaid expenses and other (165,679) 152,161
Decrease in accounts payable (84,071) (1,149,426)
Increase (decrease) in accrued expenses (1,324,738) 229,059
------------ ------------
Net cash used in operating activities (981,118) (2,102,278)
------------ ------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (607,165) (274,418)
Acquisition of Product Licenses (1,000,000)
Unearned product license fees 5,250,000
Other 53,822 139,056
Merger with Agri-Nutrition Group Limited (see Note 1) -- (643,979)
------------ ------------
Net cash provided by, (used in) investing activities 3,696,657 (779,341)
------------ ------------
FINANCING ACTIVITIES
Proceeds from long-term debt and notes payable 15,900,466 8,126,679
Repayment of long-term debt and notes payable (19,225,824) (16,119,802)
Cash infusion by Parent in connection with the Merger
(see Note 1) 13,749,897
Repurchase of treasury shares (120,769) (3,036,683)
Reissuance of treasury shares 101,250
Issuance of common stock 504,515 8,494
------------ ------------
Net cash (used in), provided by financing activities (2,840,362) 2,728,585
------------ ------------
Decrease in cash and cash equivalents (124,823) (153,034)
Cash and cash equivalents, beginning of period 231,297 412,378
------------ ------------
Cash and cash equivalents, end of period $ 106,474 $ 259,344
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 6
VIRBAC CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) PAGE 6
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------ Additional -----------------------
Number Par Paid In Number Par Accumulated
of Shares Value Capital of Shares Value Deficit Total
---------- --------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1999 20,975,747 $ 209,757 $33,998,794 42,949 $ (97,581) $(8,470,021) $25,640,949
Issuance of shares
for exercise of
Options 754,828 $ 7,548 $ 464,467 $ 472,015
Issuance of shares to
Directors 21,353 $ 214 $ 32,286 $ 32,500
Purchase of Treasury
Shares 42,000 $(120,769) $ (120,769)
Issuance of treasury shares
for exercise of
options $ (72,381) (68,000) $ 173,631 $ 101,250
Issuance of shares
to retire debt 13,330 $ 133 $ 50,867 $ 51,000
Net Income $ 2,777,814 $ 2,777,814
Balance at September 30, 2000 21,765,258 $ 217,652 $34,474,033 16,949 $ (44,719) $(5,692,207) $28,954,759
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 7
VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PAGE 7
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Virbac Corporation (the "Company" or "Virbac") manufactures and distributes a
wide variety of health, grooming, oral hygiene and parasiticidal products for
pets and other companion animals under the C.E.T., Allerderm, St. JON, Zema,
Mardel, 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 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; and (iii) Virbac, Inc. merged with AGNU with AGNU being the surviving
entity with VBSA its majority stockholder. The name of the surviving entity was
then changed to Virbac Corporation.
For financial statement reporting purposes, Virbac, Inc considers the
merger a purchase of AGNU. Accordingly, the accompanying unaudited consolidated
financial statements are the historical financial statements of Virbac, Inc.,
which reflect its acquisition of AGNU as of March 5, 1999.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
information and footnotes required by United States generally accepted
accounting principles for complete financial statements. In the opinion of
management, these statements include all adjustments (which consist of normal,
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at and for periods ending September 30,
2000 and 1999. The accompanying consolidated statements of operations reflect
the historic operations of Virbac, Inc. and include the operations of AGNU since
the date of the Merger. The results of operations for the nine months ending
September 30, 2000 and 1999 are not necessarily indicative of the operating
results for the full year. This interim report should be read in conjunction
with the Company's consolidated financial statements and notes related thereto
included in the 1999 Form 10-K as filed with the Securities and Exchange
Commission.
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)
<TABLE>
<S> <C>
Working Capital $ (2,970)
Fixed Assets 8,413
Identifiable Intangible Assets 223
Goodwill 7,295
----------------
$ 12,961
================
</TABLE>
<PAGE> 8
VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PAGE 8
--------------------------------------------------------------------------------
Goodwill is being amortized over twenty years.
The results of the operations of AGNU have been included in the Company's
consolidated financial statements only since the date of the Merger, March 5,
1999. The following table reflects the pro forma sales, net income, and net
income per share as if the merger had occurred at the beginning of each period.
Adjustments to net income include a reduction in interest expense to reflect a
contribution of $15.7 million from VBSA, which was primarily used to reduce
debt.
PROFORMA INFORMATION
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
<S> <C> <C>
Net sales $ 41,466 $ 40,168
Net income $ 2,778 $ 1,181
Basic earnings per share $ 0.13 $ 0.06
Diluted earnings per share $ 0.13 $ 0.06
Basic weighted average shares outstanding 21,211 20,977
Diluted weighted average shares outstanding 21,949 21,051
</TABLE>
Pursuant to the Merger Agreement, 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") in April 1999. The shares issued
to Interlab S.A.S. as part of the merger were excluded from this tender offer.
Following the Mandatory tender Offer, VBSA controls approximately 60% of the
outstanding Common Stock of the Company. If the closing sale price of the
Company's Common Stock has not reach at least $3.00 per share for 40 consecutive
trading days by March 5, 2001, the Company would 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. However, as of August 4, 2000, the closing
price of the Company's stock was $3.00 per share or greater for 40 consecutive
trading days so this tender offer is not required and will not be made.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
<S> <C> <C>
Raw materials $ 7,903,241 $ 8,617,833
Finished goods 5,241,890 6,069,769
------------ ------------
13,145,131 14,687,602
Less: reserve for excess and obsolete inventories (873,514) (913,997)
------------ ------------
$ 12,271,617 $ 13,773,605
============ ============
</TABLE>
<PAGE> 9
VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) PAGE 9
--------------------------------------------------------------------------------
4. FINANCING
The Company has a revolving credit facility of $9.4 million at September
30, 2000. Long-term debt and notes payable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
<S> <C> <C>
Revolving credit facility with a financial institution up to $9.4
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 (9.25%, as
of September 30, 2000). $ 7,437,725 $ 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. 97,991 195,983
Notes payable dated September 25, 1997, due and paid in full in
September 2000, with $49,000 payable in cash, plus interest at
prime, and $51,000 in shares of the Company's Common stock. -- 100,000
------------ ------------
7,535,716 10,912,073
Less- Current maturities (697,991) (1,564,080)
------------ ------------
$ 6,837,725 $ 9,347,993
============ ============
</TABLE>
The amount available under the $9.4 million revolving credit facility
reduces by 150,000 per quarter beginning September 1999 until such amount is $7
million. At September 30, 2000, $2.0 million was available under the credit
facility.
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 March 31, 2000, the Company was not in compliance
with these covenants. However, the Company received a waiver from the bank
related to such non-compliance. In addition, the bank amended the debt covenants
prior to the filing of the Company's 1999 Form 10-K and the Company was in
compliance with such amended covenants at September 30, 2000.
5. STOCK OPTIONS AND COMMON STOCK TRANSACTIONS
During the nine months ended September 30, 2000, options to purchase 82,000
shares of the Company's Common Stock were granted to employees. The
weighted-average exercise price of $2.71 was determined based upon the fair
value of the shares on the date of grant. These options vest ratably over three
years from the dates of grant and will expire ten years from the grant date.
During the same period, non-qualified options to purchase 366,000 shares of the
Company's Common Stock were exercised. Of the options
<PAGE> 10
VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) PAGE 10
--------------------------------------------------------------------------------
exercised, 298,000 shares were issued from previously unissued shares and 68,000
shares were issued from treasury shares
6. CONTINGENCIES
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.
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 September 30, 2000, 399,000 pre-merger options were
outstanding and 456,000 shares have been issued pursuant to this agreement. No
shares will be issued to VBSA in the event that treasury shares are reissued to
satisfy these pre-merger obligations.
7. SEGMENT AND RELATED INFORMATION
The Company has three reportable segments. The Veterinary segment
distributes pet health care products mainly to veterinarian offices. The
over-the-counter (OTC) segment manufactures and distributes pet health products
to pet stores, farm and fleet stores, and the mass retail market. PMR
manufactures and distributes animal health and specialty chemicals under private
label brands and for third parties. There has been no material change from the
1999 Annual Report in total assets by segment, in the basis of segmentation, nor
in the basis of measuring segment profit. Summarized financial information
concerning the Company's reportable segments is shown in the following table
(dollars in thousands):
<TABLE>
<CAPTION>
Manufacturing
And Consolidated
Veterinary OTC PMR Administration Total
<S> <C> <C> <C> <C> <C>
For the nine months ended September 30, 2000
Net Revenues $ 18,547 $ 12,031 $ 10,853 $ 35 $ 41,466
Income (loss) from operations 5,453 1,886 1,025 (5,185) 3,179
Interest (expense) and other income, net (401)
Net income 2,778
For the nine months ended September 30, 1999
Net Revenues $ 16,023 $ 9,913 $ 8,858 $ 186 $ 34,980
Income (loss) from operations 4,126 434 1,112 (3,810) 1,862
Interest (expense) and other income, net (551)
Net income 1,311
</TABLE>
<PAGE> 11
VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) PAGE 11
--------------------------------------------------------------------------------
8. TRANSACTIONS WITH VBSA
On January 1, 2000, the Company sold its distribution subsidiary in the
United Kingdom, VRx U.K. to VBSA for 1 pound sterling. In addition the Company
has signed a distribution agreement with VBSA that grants VBSA the distribution
rights for all products the Company manufactures to be sold outside of the
United States and Canada. The effective date of this transaction was January 1,
2000. Accordingly, the accompanying consolidated financial statements do not
include the results of operations of VRx U.K. for the nine months ended
September 30, 2000. Sales for VRx for the nine months ended September 30, 1999,
were $808 thousand.
During 1999 the Company signed a five-year distribution agreement with VBSA
whereby VBSA was granted exclusive distribution rights of the Company's products
outside of North America. In exchange for these rights, VBSA guaranteed to the
Company minimum profit of approximately $800 thousand on VBSA sales in 2000.
Through September 30, 2000, the Company has recorded approximately $600 thousand
of profit on sales to VBSA.
9. PFIZER AGREEMENT
The Company reached an agreement to sublicense to Pfizer Inc. the Company's
North American distribution rights for two equine products. Under the terms of
the agreement, the Company received an initial cash payment of $5.25 million,
some or all of which is subject to repayment if the Company has not obtained
United States Food and Drug Administration ("FDA") approval to sell the products
by a certain date or certain other conditions are not met. Accordingly the
Company will not recognize revenue from this payment until all of the conditions
that would require repayment have passed.
10. OUTSTANDING CHECKS IN EXCESS OF FUNDS ON DEPOSIT
The Company uses a revolving credit facility to fund working capital needs.
Under terms of this facility, the bank automatically sweeps the Company's
checking accounts and either increases or reduces the amounts outstanding under
the revolving line of credit. At any given point in time the Company has checks
outstanding that have not been presented to the bank for payment. The Company's
outstanding checks are classified as Accounts Payable in the amounts of $928,540
and $1,059,584 at September 30, 2000 and December 31, 1999, respectively.
11. INCOME TAXES
As of December 31, 1999, management concluded that, based on the Company's
history of losses, it was more likely than not that the Company would not
realize its net deferred tax assets related to deductible temporary differences
and loss carryforwards. Accordingly, the Company provided a 100% valuation
allowance. During 2000 the Company adjusted its 1999 deferred tax assets,
increasing them by $3.8 million and recognizing a corresponding increase in the
valuation allowance. Based on the Company's results of operations for the 9
months ended September 30, 2000, management now believes that it is more likely
than not that a portion of these deferred tax assets will be realized. The tax
benefit related to the AGNU acquisition is recognized (that is, by elimination
of the valuation allowance) in the financial statements as a reduction to the
goodwill created by the merger not as a reduction to income tax expense. The
Company's income for the 9 months ended September 30, 2000 utilized a portion
of its deferred tax assets and created deferred income tax expense. Such
deferred income tax expense was eliminated by a reduction in the valuation
allowance related to certain deferred tax assets not related to the AGNU
acquisition.
<PAGE> 12
VIRBAC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PAGE 12
--------------------------------------------------------------------------------
OVERVIEW
Virbac Corporation (the "Company") manufactures and distributes companion
animal health products. The Company is a leader in dermatological and oral
hygiene products for companion animals, or pets, and provides a broad array of
health care products to its customers under the C.E.T., Allerderm, St. JON,
Zema, Mardel, 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.
VBSA, 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 reporting purposes. Accordingly, Virbac, Inc has accounted for the
merger as a purchase of Agri-Nutrition Group Limited.
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 may result from
actual or planned headcount reductions may not be achieved if unforeseen
difficulties arise in executing the plans or if assumptions made in the plans
are not achieved. 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. Projections regarding
interest rates and changes to those rates could differ significantly from
Company projections. The Company receives significant support from its majority
owner VBSA. This support includes product development; research expenditures
made that benefit the Company, short-term borrowings and worldwide distribution
of the Company's products. Projections of future revenues related to products
not yet registered with certain governmental agencies could differ significantly
if those registrations are not received in the time periods anticipated.
Therefore, the Company's actual results could differ materially from such
forward-looking statements.
RESULTS OF OPERATIONS
The actual results of operations for the quarters ended September 30, 2000
and September 30, 1999 as presented in the Consolidated Statements of Income
include the operations of Virbac, Inc. plus the results of Agri-Nutrition.
However, the actual results of operations for the nine months ended September
30, 1999 as presented in the Consolidated Statements of Operations, only include
the Agri-Nutrition results since March 5, 1999 and Virbac, Inc for the entire
period, while the results of operations for the period ended September 30, 2000
include both companies for the entire period. For comparative purposes,
management believes that an analysis upon which 1999 results are presented on a
basis that is equivalent to 2000 will provide a more meaningful discussion of
the results of operations. To that end, the actual results for the nine-month
period ending September 30, 1999 have been adjusted to include the results of
Agri-Nutrition since January 1999 in order to be comparable with the actual
results of 2000. The amounts for the nine month period ended September 30, 1999
have also been adjusted to reflect the January and February 1999 Agri-Nutrition
actual results.
<PAGE> 13
VIRBAC CORPORATION
MANAGEMENT DISCUSSION (CONTINUED) PAGE 13
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands of dollars) For the Three Months Ended For the Nine Months Ended
September 30 September 30
1999
2000 1999 2000 (as adjusted)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Revenues $ 14,332 $ 12,854 $ 41,466 $ 40,168
Gross Profit 5,905 4,942 17,717 16,153
Gross Profit % 41% 38% 43% 40%
Operating Expenses 4,736 3,919 14,538 14,386
Operating Expense % 33% 30% 35% 36%
Interest and other (income) 163 217 401 551
Net income (loss) $ 1,006 $ 806 $ 2,778 $ 1,216
</TABLE>
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
Net revenues increased by approximately $1.5 million or 11.5% for the
quarter September 30, 2000 compared with the quarter ended September 30, 1999
due to increased sales in all operating divisions. Sales for PMR were up $0.5
million due to the timing of orders received in the second quarter in 1999 but
received in the third quarter 2000. The veterinary division sales increased $0.3
million due to increased shipments of dental products. The OTC division sales
increased by $0.7 million due to a new product acquired from Pfizer (Pet Tabs).
Gross profit increased by approximately $1.0 million and improved as a
percentage by 3 percentage points. This is due to the consolidation efforts
undertaken in 1999 that have reduced production costs and due to more favorable
mix of products sold. The favorable mix comes from increased dental and oral
hygiene products, sales of Pet Tabs and higher margin contract manufacturing
work.
Operating expenses have increased $817 thousand for the quarter ended
September 30, 2000 compared to the quarter ended September 30, 1999. The
operating expense increase is due to higher sales volumes in the quarter as well
as initiatives undertaken to enhance computer and operating systems and costs
incurred to upgrade and fill staff positions that are needed to support new
product launches and to support growth in the Company's existing businesses.
As of December 31, 1999, management concluded that, based on the Company's
history of losses, it was more likely than not that the Company would not
realize its net deferred tax assets related to deductible temporary differences
and loss carryforwards. Accordingly, the Company provided a 100% valuation
allowance. During 2000 the Company adjusted its 1999 deferred tax assets,
increasing them by $3.8 million and recognizing a corresponding increase in the
valuation allowance. Based on the Company's results of operations for the 9
months ended September 30, 2000, management now believes that it is more likely
than not that a portion of these deferred tax assets will be realized. The tax
benefit related to the AGNU acquisition is recognized (that is, by elimination
of the valuation allowance) in the financial statements as a reduction to the
goodwill created by the merger not as a reduction to income tax expense. The
Company's income for the 9 months ended September 30, 2000 utilized a portion of
its deferred tax assets and created deferred income tax expense. Such deferred
income tax expense was eliminated by a reduction in the valuation allowance
related to certain deferred tax assets not related to the AGNU acquisition.
Management will continue to evaluate the valuation allowance and make any
adjustments necessary based on its assessment of whether it is more likely than
not that such assets will be realized. The effect of such adjustments if any
will reduce the income tax provision from normal statutory rates to the extent
that such adjustments do not relate to tax benefits related to the AGNU
acquisition.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO PRO FORMA NINE MONTHS ENDED
SEPTEMBER 30, 1999
Sales increased by $1.3 million or 3% for the nine months ended September
30, 2000 compared to the nine months ended September 30, 1999. Most of the
growth has come from increased dental products sold
<PAGE> 14
VIRBAC CORPORATION
MANAGEMENT DISCUSSION (CONTINUED) PAGE 14
--------------------------------------------------------------------------------
through the veterinary division, sales of Pet Tabs that were shipped for the
first time in September 2000 and increased aquatic sales in the OTC division.
The gross profit percentage for 2000 improved by 3 percentage points
compared to 1999. This was caused by a more favorable product mix and due to
cost efficiencies implemented in 1999. Margins for the sales segments of the
Company typically range:
<TABLE>
<CAPTION>
GROSS PROFIT
DIVISION PERCENTAGE RANGE
-------- ----------------
<S> <C>
Veterinary 50% - 60%
OTC 40% - 45%
PMR 15% - 23%
</TABLE>
Operating expenses have increased by $152 thousand for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
The increase was due to increased operating expenses associated with increased
sales volume partially offset by the synergies resulting from the consolidation
of operations that took place in 1999. The Company incurred unusually high costs
of approximately $0.6 million of costs associated with completing the audit of
the Company's financial statements for 1999. The Company anticipates that the
cost of preparing its financial statements for 2000 and subsequent periods will
be significantly less than they were for 1999.
Interest and other income decreased by $150,000 for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999.
Included in the September 30, 2000 other income is approximately $250 thousand
in one-time fees earned from granting a third parties the use of registration
data on the Company's bromethalin rodenticide and insecticidal shampoos.
Included in the September 30, 1999, was a loss associated with a lawsuit filed
by a former employee for approximately $80 thousand.
As of December 31, 1999, management concluded that, based on the Company's
history of losses, it was more likely than not that the Company would not
realize its net deferred tax assets related to deductible temporary differences
and loss carryforwards. Accordingly, the Company provided a 100% valuation
allowance. During 2000 the Company adjusted its 1999 deferred tax assets,
increasing them by $3.8 million and recognizing a corresponding increase in the
valuation allowance. Based on the Company's results of operations for the 9
months ended September 30, 2000, management now believes that it is more likely
than not that a portion of these deferred tax assets will be realized. The tax
benefit related to the AGNU acquisition is recognized (that is, by elimination
of the valuation allowance) in the financial statements as a reduction to the
goodwill created by the merger not as a reduction to income tax expense. The
Company's income for the 9 months ended September 30, 2000 utilized a portion of
its deferred tax assets and created deferred income tax expense. Such deferred
income tax expense was eliminated by a reduction in the valuation allowance
related to certain deferred tax assets not related to the AGNU acquisition.
Management will continue to evaluate the valuation allowance and make any
adjustments necessary based on its assessment of whether it is more likely than
not that such assets will be realized. The effect of such adjustments if any
will reduce the income tax provision from normal statutory rates to the extent
that such adjustments do not relate to tax benefits related to the AGNU
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, $ 1.0 million of cash was
used in operations. Although $ 2.8 million was generated by the Company's net
income before depreciation and amortization, working capital needs consumed $
5.0 million. The increase in working capital reflects increases in accounts
receivable, which arises from the seasonal increase in sales. The days sales
outstanding for accounts receivable improved to 59 days from 66 days in the
quarter ended June 30, 2000.
Cash flows used in investing activities include cash costs related to
capital improvements at the Company's St. Louis and Fort Worth computer
equipment and software. As well as funds paid to acquire the rights to sell a
new product. These outflows were offset by the $5.25 million payment received
from Pfizer as discussed in Note 9 to the financial statements.
<PAGE> 15
VIRBAC CORPORATION
MANAGEMENT DISCUSSION (CONTINUED) PAGE 15
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Cash flows from financing activities reflect primarily reductions in
borrowing under a revolving credit facility. Additional cash flows from
financing activities were the purchases and subsequent reissuance of treasury
shares and the issuance of previously unissued shares in order to satisfy
distributions under stock compensation plans.
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 the in-licensing of a product and to fund working
capital increases related to the consolidation of the Company's production
facilities. This temporary increase was repaid in installments from February to
July 2000. Of the remaining $9.4 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 $2.4 million will be
reduced by $150,000 per quarter. At September 30, 2000, $2.0 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 September 30,
2000, the Company is paying 25 basis points under prime (9.25%).
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 March 31, 2000, the Company was not in compliance
with these covenants. However, the Company received a waiver from the bank
related to such non-compliance. In addition, the bank amended the debt covenants
prior to the filing of the Company's 1999 Form 10-K and the Company was in
compliance with such amended covenants at September 30, 2000.
Management believes that the Company will have sufficient cash to meet the
needs of its current operations for at least the next twelve months from cash
flows from current operations, up-front fees to be realized from the
out-licensing of certain products under development, from existing financing
facilities, and, if necessary, from short-term advances from VBSA.
The Company has no current plans to significantly increase capacity of any
of its plant facilities or to expend significant capital in modifying them.
During 1999, the Company acquired the rights to manufacture and sell
products currently in development by a third party. The Company has paid
$2,000,000 in partial payment for those rights, and, depending upon the third
party reaching certain milestones in the registration process, is committed to
paying up to an additional $2,150,000 between 2000 and 2002.
The Company was committed to conduct a public tender offer to purchase up
to 1,395,000 of the Company's outstanding Common Stock at a price of $3.00 per
share if, during the period ending on the second anniversary of the merger, the
closing sale price of the Company's Common Stock had not reached at least $3.00
per share for a period of 40 consecutive trading days. Pursuant to the merger
agreement, such tender offer, if necessary, would be funded by VBSA's direct
purchase, from the Company, of 1,395,000 shares of Common Stock at $3.00 per
share. As of August 4, 2000 the Company's outstanding common stock had traded at
or above $3.00 per share for 40 consecutive days and therefore no tender offer
will be conducted.
The Company has no plans to pay dividends to stockholders in the
foreseeable future.
NEW ACCOUNTING PRONOUNCEMENT
SAB 101 PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). SAB 101
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. The SEC has delayed the adoption of SAB
101 until the fourth quarter of fiscal 2000. As of the date of this filing, the
Company does
<PAGE> 16
VIRBAC CORPORATION
MANAGEMENT DISCUSSION (CONTINUED) PAGE 16
--------------------------------------------------------------------------------
not anticipate any impact from adopting this statement.
QUARTERLY EFFECTS AND SEASONABILITY
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 orders.
<PAGE> 17
VIRBAC CORPORATION
PART II - OTHER INFORMATION PAGE 17
--------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
b. Reports of Form 8-K.
No reports on Form 8-K were filed during the three-month period ended
September 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIRBAC CORPORATION
/s/ Joseph A. Rougraff
----------------------------------------------
Joseph A. Rougraff
Vice President and Chief Financial Officer
November 7, 2000
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
