VIRBAC CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.

For the quarterly period ended June 30, 2002

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 August 5, 2002 is 22,097,465
shares.

VIRBAC CORPORATION

INDEX
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VIRBAC CORPORATION

PART I - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (UNAUDITED) PAGE 3
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The accompanying notes are an integral part
of these consolidated financial statements.

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) PAGE 4
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The accompanying notes are an integral part
of these consolidated financial statements.

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) PAGE 5
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The accompanying notes are an integral part
of these consolidated financial statements.

VIRBAC CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) PAGE 6
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The accompanying notes are an integral part
of these consolidated financial statements.

VIRBAC CORPORATION PAGE 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

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,
Iverhart, Mardel, Pet Tabs, and Preventic brand names.

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 accounting standards generally accepted in
the United States of America 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 as of June 30, 2002 and December 31, 2001 and the results of operations
and cash flows for the three and six months ended June 30, 2002 and 2001. The
results of operations for the three and six months ended June 30, 2002 and 2001
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 2001 Form 10-K as
filed with the Securities and Exchange Commission.

REVENUE RECOGNITION

The Company recognizes revenue when the risks of ownership have
transferred to the Company's customers. See the discussion in Note 9 regarding a
change in accounting principle in 2000.

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.

2. INVENTORIES (in thousands)

Inventories consist of the following:

VIRBAC CORPORATION PAGE 8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. LONG-TERM DEBT (in thousands)

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 June 30, 2002, the Company was in
compliance with these covenants.

On April 4, 2001, the revolving credit facility was amended to extend
the expiration date to July 31, 2003 and increase the amount available under the
facility from $9.1 million to $12.1 million. The Company was required to repay
$250,000 of the outstanding balance per month commencing August 31, 2001 until
November 30, 2001 when the credit facility was $11.1 million. Beginning February
28, 2002, the Company is required to repay $150,000 each quarter until the
amount available under the facility has been reduced to $8.0 million. At June
30, 2002, $1.6 million was available under the credit facility and the interest
rate was 4.00%.

4. STOCK OPTIONS AND COMMON STOCK TRANSACTIONS

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.

On February 25, 2002, the Board of Directors granted 86,000 options to
employees at the exercise price of $5.00, which was the market value of the
Company's stock on February 25, 2002. These options vest ratably over three
years from the dates of grant and will expire ten years from the grant date. For
the six months ended June 30, 2002, 58,000 options were exercised. Of the
options exercised, 53,000 were issued from previously unissued shares and 5,000
shares were reissued from treasury shares.

During the six months ended June 30, 2002, 6,000 shares were issued
from previously unissued shares and 5,000 shares were reissued from treasury
shares as compensation to non-employee directors of the Company. Compensation
expense of approximately $53,000 was recorded based on the market price of the
Company's shares at the date of issuance.

5. COMMITMENTS AND CONTINGENCIES

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

VIRBAC CORPORATION PAGE 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

ADJUSTMENT OF MERGER SHARES

The Company is the result of the March 5, 1999 merger of Virbac, Inc.,
a subsidiary of Virbac SA ("VBSA"), a French veterinary pharmaceutical
manufacturer, and Agri-Nutrition Group Limited ("AGNU"), a publicly held
company. 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 June 30, 2002, 274,000 pre-merger options were outstanding.
During the first six months of 2002, 5,000 shares were issued for pre-merger
options exercised; however, since these shares were issued from treasury stock,
no shares were issued to VBSA. No newly issued shares will be issued to VBSA as
long as treasury shares are available to satisfy these pre-merger obligations.

ACQUISITION OF LICENSING RIGHTS

In 1999, the Company acquired the rights to manufacture and sell
products under development by a third party for a period of 15 years. The
Company has made milestone payments totaling $3.2 million for such rights.
Depending upon the third party reaching certain milestones with respect to
obtaining U. S. Food and Drug Administration ("FDA") approval to sell such
products, the Company was committed to paying in fiscal 2001 and 2002
approximately $0.8 million and $0.7 million, respectively. During 2001, the
Company entered into an agreement with the third party whereby the Company
acquired ownership of all rights and data for the products and the Company's
future royalty payments under the agreement were reduced in exchange for the
Company assuming all remaining costs of registering the products. The Company
estimates those costs to be approximately $1.4 million and they will be recorded
as research and development expense. The Company began to amortize its payments
to the third party over the period of expected future benefit in the second
quarter of 2001.

Upon adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangibles, the Company determined that the $3.2 million
previously paid to the third party has an indefinite life and will not be
amortized. Instead, these costs will be reviewed for impairment each year and,
if necessary, the amount will be adjusted to reflect its current value. The $1.4
million of future costs to complete the remaining project will be expensed in
the periods in which it is incurred.

PFIZER AGREEMENT

In 2000, 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 FDA approval to sell the products or certain other conditions are
not met by December 31, 2003. This product license fee will be recognized over
the longer of the contract period, 15 years, or the expected period of future
benefits. The expected period of future benefits has not yet been determined,
and the payment received has been reflected as unearned product license fees in
the June 30, 2002 and December 31, 2001 Balance Sheet.

VIRBAC CORPORATION PAGE 10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. SEGMENT AND RELATED INFORMATION

The Company has three reportable segments. The Veterinary segment
distributes pet health products mainly to veterinarian offices. The Consumer
Brands segment manufactures and distributes pet health products to pet stores,
farm and feed stores, and the mass retail market. PM Resources manufactures and
distributes animal health and specialty chemicals under private label brands and
for third parties.

The accounting policies of the reportable segments are the same as
those described in Note 3 of the Company's annual report 10-K. In evaluating
segment performance (excluding PM Resources), management focuses on income from
operations excluding depreciation, amortization, interest, other expenses
(income), and taxes. All intercompany sales and transfers to the reportable
segments are at cost. Such sales are eliminated in consolidation. Total assets
are monitored by the Company's administrative segment (except for accounts
receivable which is reviewed by Veterinary and Consumer Brands segments).
Management separately monitors PM Resources' results and total assets. 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. Summarized financial information
concerning the Company's reportable segments is shown in the following table:

7. 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 amount 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-trade in the amounts of
$1.6 million and $1.1 million at June 30, 2002 and December 31, 2001,
respectively.

VIRBAC CORPORATION PAGE 11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. INCOME TAXES

As of June 30, 2002, the Company has available net operating loss
carryforwards totaling approximately $2.4 million, which expire in the years
2011 to 2019. The Company also has available general business tax credit and
alternative minimum tax credit carryforwards totaling approximately $0.1
million. The general business tax credits expire in the years 2010 to 2020; the
alternative minimum tax carryforwards may be carried forward indefinitely.

9. CHANGE IN ACCOUNTING PRINCIPLE

On December 3, 1999, the United States Securities and Exchange
Commission issued Staff Accounting Bulletin 101 ("SAB 101"), which became
effective for the Company during the fourth quarter of 2000. This pronouncement
required a change in the way in which the Company recorded revenues. Prior to
the implementation of SAB 101, the Company recognized revenues when the product
was shipped from the Company's distribution facility due to the transfer of the
risk of loss.

Because of the accounting change discussed above, the Company recorded
$1.8 million of sales and diluted earnings per share of $0.02 in the first
quarter of 2001 when the risk of ownership had passed to its customers, while
the product had shipped in the fourth quarter of 2000. During 2001, the Company
changed its shipping terms with its customers so that the risk of ownership
transferred at the time of shipment. Therefore, there was not a similar
offsetting amount in the fourth quarter of 2001 to be carried over to 2002.

10. INTANGIBLE ASSETS AND GOODWILL

Effective July 1, 2001, the Company adopted certain provisions of
Statement of Financial Accounting Standard ("FAS") No. 141, and effective
January 1, 2002, the Company adopted the full provisions of FAS No. 141 and FAS
No. 142. FAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets apart from goodwill. The Company
evaluated its goodwill and intangibles acquired prior to June 30, 2001 using the
criteria of FAS No. 141, which resulted in no changes in the classification of
goodwill or intangibles at January 1, 2002. FAS No. 142 requires that purchased
goodwill and certain indefinite-lived intangibles no longer be amortized, but
instead be tested for impairment at least annually. The Company evaluated its
intangible assets and determined that patents have determinable lives and
product rights and other intangibles have indeterminate lives.

FAS No. 142 requires a transitional goodwill impairment test and an
annual goodwill impairment test. The Company completed the first phase of the
transitional goodwill impairment test during the first quarter of 2002 and found
no instances of impairment of its recorded goodwill; accordingly, the second
phase is not necessary. The Company anticipates performing its annual goodwill
and indefinite-lived intangibles impairment tests during the fourth quarter of
2002.

In accordance with FAS No. 142, the effect of this accounting change is
reflected prospectively. Supplemental comparative disclosure as if the change
had been retroactively applied to the prior year period is as follows (in
thousands, except per share amounts):

VIRBAC CORPORATION PAGE 12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended June 30, 2002, no goodwill or other intangible
assets were impaired or disposed. Goodwill and other intangibles, net consisted
of the following:

Acquired Intangible Assets:

Goodwill:

Amortization expense for patents is expected to be $23,000 per year for
each of the next five years.

VIRBAC CORPORATION PAGE 13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, the Company adopted SFAS No. 144 ("FAS
144"), "Accounting for the Impairment of Long-Lived Assets", which establishes
accounting and reporting standards for impairment and disposition of long-lived
assets (except unidentifiable intangibles), including discontinued operations.
Additionally, FAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. The implementation of FAS 144 did not have
an impact on the Company's consolidated financial position, consolidated results
of operations and cash flows.

VIRBAC CORPORATION PAGE 14

OTHER INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Virbac Corporation (the "Company") manufactures and distributes
companion animal health products. The Company is a leader in dermatological and
oral hygiene products for companion animals, or pets, and provides a broad array
of health care products to its customers under the C.E.T., Allerderm, St. JON,
Iverhart, Mardel, Pet Tabs, and Preventic brand names.

The Management's Discussion and Analysis that follows, and the other
documents incorporated by reference, contain forward-looking information made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements involve a number of risks, uncertainties
and other factors that could cause actual results to differ materially from
those stated, including without limitation:

o Inaccurate projections relating to introductions of new
competitive products or technological entries into the market
could adversely affect sales forecasts.

o A lack of acceptance of the Company's products by the market
could adversely affect sales projections.

o Projections of future revenues related to products not yet
registered with certain governmental agencies, particularly
the FDA, could differ significantly if those registrations are
not received in the time periods anticipated.

o Interest rates and changes to those rates could differ
significantly from Company projections.

o 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.

o The Company could experience a decrease in the demand for its
products, which could result in reduced funding available
under the Company's lines of credit.

o Effects of other strategic initiatives, including
acquisitions, divestitures, and restructurings.

RESULTS OF OPERATIONS

The results of operations of the Company are prepared in accordance
with generally accepted accounting principles in the United States. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent liabilities and the reported amounts of revenues
and expenses. On an ongoing basis, management evaluates its estimates and
judgements, including those related to customer incentives, product returns, bad
debts, inventories, intangible assets, income taxes, contingencies and
litigation. Management bases its assumptions on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgements about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

Management believes the following critical accounting policies, among
others, affect its more significant judgements and estimates used in the
preparation of its consolidated financial statements:

o The Company records estimated reductions in revenue for
product returns. Should a greater proportion of product be
returned in later periods than was estimated, additional
reductions to revenue may be required.

VIRBAC CORPORATION PAGE 15

OTHER INFORMATION

o The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. If the financial condition of the
Company's customers were to deteriorate, resulting in
impairment in their ability to make payments, additional
provisions may be required.

o The Company writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference
between cost of the inventory and the estimated market value
based upon assumptions about future demand and market
conditions. If actual market conditions or demand is less
favorable than management projected, additional write-downs
may be required.

o The Company records a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more
likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the
valuation allowance, in the event that the Company were to
determine that it would not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to
the deferred tax assets would be charged to income in the
period such determination was made.

o The Company has recorded unearned income related to its
distribution agreement with Pfizer. The ability of the Company
to recognize this as income is dependent upon the Company
obtaining registrations permitting it to sell these products
from the appropriate governmental agencies. The Company also
will record the income based upon estimates of when the sales
of these products will occur. If the registrations are not
received in a timely manner, or certain other conditions are
not met, the Company would be required to repay some or all of
the unearned income to Pfizer.

o The Company is required to assess the carrying values of
goodwill and intangible assets with indeterminate lives
annually, or when circumstances dictate that the carrying
value might be impaired. Intangibles that are subject to
amortization are also reviewed in each reporting period to
determine if the carrying value might be impaired. The method
for determining if impairment has occurred requires estimates
of future cash flows and the Company's weighted average cost
of capital. In the event that an impairment is determined to
have occurred, the Company will reduce the carrying value of
the asset and earnings in that period.

VIRBAC CORPORATION PAGE 16

OTHER INFORMATION

QUARTER ENDED JUNE 30, 2002 COMPARED TO QUARTER ENDED JUNE 30, 2001

Net Revenues: Net revenues decreased by approximately $325,000 or 2% for the
quarter ended June 30, 2002 compared with the quarter ended June 30, 2001 due to
decreased sales in the Consumer Brands and PM Resources segments, partially
offset by increased sales in the Veterinary segment. Specifically, net revenues
by segment were as follows:

o Veterinary net revenues were up due to higher sales of
parasiticide, dermatology and dental products.

o Consumer Brand net revenues were down due to lower sales in
all product categories. This segment is experiencing extreme
competitive pressures within the segment and from outside the
segment. The Company is in the process of seeking new
profitable sales opportunities outside the pet store sales
channel. Namely, the Company will be seeking sales
opportunities in the grocery, drug and discount channels.

o PM Resources net revenues were down because the Company's
strategy has been to eliminate low margin contract
manufacturing products and transfer the available production
capacity to internal products, which temporarily has reduced
sales. In addition, some contract sales volume shipped in the
second quarter last year will not be shipped until the third
quarter 2002.

Gross Profit: Gross profit increased by $332,000 or 5%. The gross profit
increase was attributable to a more favorable mix of products sold, partially
offset by an increase in the Company's obsolescence and excess inventory
reserve. The gross profit as a percentage of net revenues increased from 41% to
44%. Specifically, gross profit by segment was as follows:

VIRBAC CORPORATION PAGE 17

OTHER INFORMATION

o Veterinary gross profit increased primarily due to increases
in sales volume in the parasiticide line. This category
delivers higher gross margins than the other veterinary
categories. Partially offsetting the favorable mix was a
$119,000 increase in the Company's obsolescence and excess
inventory reserve principally related to nutraceutical
products.

o Consumer Brands gross profit decreased due to lower net
revenues and an increase in the inventory obsolescence
reserve. The lower volume accounted for $399,000 of the
decreased gross profit. In addition, the Company increased its
inventory obsolescence and excess inventory reserve in this
segment by $401,000, principally due to reduced demand for
some of the segment's pesticide products. These two
unfavorable variances were partially offset by lower
production costs. The Company expects the Consumer Brands
gross profit to range between 32% and 35% for the remainder of
the year.

o PM Resources gross profit remained constant as lower sales in
the segment were totally offset by a favorable mix of products
sold.

Operating Expenses: Operating expenses have increased $121,000 or 2% for the
quarter ended June 30, 2002 compared to the quarter ended June 30, 2001. As a
percent of sales, operating expenses increased to 36% compared to 35% in the
year earlier quarter. Selling, general and administrative expenses ("SGA")
accounted for almost all of the increase in the operating expenses for the
quarter increasing by $256,000. Of this increase, $200,000 was incurred as a
result of an effort to purchase the animal health business of a competitor.
After careful due diligence and preliminary negotiations, the parties could not
reach an agreement and the transaction was abandoned. Offsetting this increase
was decreased amortization expense of $117,000 for goodwill and indefinite-lived
assets, which was due to the adoption of Statements of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. The
remaining SGA variance was primarily due to sales and marketing costs associated
with the launch of new products. Research and development expenses decreased by
$61,000 for the quarter due to the Company canceling a project that did not hold
the promise of an appropriate return for the investment. Research and
development expenses in the third and fourth quarters will be higher, as the
Company will focus on other more promising projects. The Company expects
research and development expenses to be approximately 6% to 7% of sales for the
remainder of fiscal 2002. Warehouse and distribution expenses were down by
$74,000 compared to the year earlier quarter. The decreased distribution costs
were due to decreased sales volume in the quarter and more efficient
distribution operations in the quarter.

Interest Expense and Other Income (Expense): Interest expense was lower for the
quarter than the prior year primarily due to lower interest rates in 2002 as
compared with 2001. The interest rate on the Company's debt agreement was 6% at
June 30, 2001 as compared with 4.00% at June 30, 2002.

Taxes: The Company has available net operating loss carryforwards totaling
approximately $2.4 million, which expire in the years 2011 to 2019. The Company
also has available general business tax credit and alternative minimum tax
credit carryforwards totaling approximately $0.1 million. The general business
tax credits expire in the years 2010 to 2020; the alternative minimum tax
carryforwards may be carried forward indefinitely. The Company has recorded
income tax expense in the quarter ended June 30, 2002 and June 30, 2001 of
$440,000 and $383,000 respectively, which reflects a 40% effective tax rate for
2002 and a 43% tax rate for 2001. The effective tax rate has declined in 2002
because the Company no longer amortizes goodwill or indefinite lived intangible
assets for book purposes.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001

NET REVENUES: Net revenues increased by approximately $577,000, or 2% for the
six months ended June 30, 2002 compared with the six months ended June 30, 2001
due to increased Veterinary sales, which were partially offset by decreased
sales in the Consumer Brands and PM Resources segments. Specifically, net
revenues by segment were as follows:

VIRBAC CORPORATION PAGE 18

OTHER INFORMATION

o Veterinary net revenues were up due to higher sales of
parasiticide, dermatology and dental products.

o Consumer Brand net revenues were down due to lower sales in
all product categories. This segment is experiencing extreme
competitive pressures within the segment and from outside the
segment. The Company is in the process of seeking new
profitable sales opportunities outside the pet store sales
channel. Namely, the Company will be seeking sales
opportunities in the grocery, drug and discount channels.

o PM Resources net revenues were down because the Company's
strategy has been to eliminate low margin contract
manufacturing products and transfer the available production
capacity to internal products, which temporarily has reduced
sales. In addition, some contract sales volume recorded in the
second quarter last year will be shipped in the third quarter
2002.

Gross Profit: Gross profit increased by $1.2 million or 9%. The gross profit
increase was attributable to a more favorable mix of products sold, partially
offset by unfavorable production costs and an increase in the Company's
obsolescence and excess inventory reserve. The gross profit as a percentage of
net revenues increased from 40% to 43%. Specifically, gross profit by segment
was as follows:

o Veterinary gross profit increased primarily due to increases in sales
volume in the parasiticide line. This category delivers higher gross
margins than the other veterinary categories.

o Consumer Brands gross profit decreased due to lower net revenues and
higher production costs. The lower volume accounted for $584,000 of the
decreased gross profit. In addition, the Company increased its
obsolescence and excess inventory reserve in this segment by $401,000,
principally due to reduced demand for some of the segment's pesticide
products. The gross profit further decreased due to higher production
costs that were not passed on to the Company's customers. The Company
expects the Consumer Brands gross profit percentage to range between
32% and 35% for the remainder of the year.

o PM Resources gross profit decreased due to lower sales that were
somewhat offset by a favorable mix

VIRBAC CORPORATION PAGE 19

OTHER INFORMATION

of products sold. The lower volume accounted for $279,000 of the
variance and the more favorable mix accounted for $126,000 of the
variance.

Operating Expenses: Operating expenses increased $776,000 or 8% for the six
months ended June 30, 2002 compared to the six months ended June 30, 2001. As a
percent of sales, operating expenses increased to 35% compared to 33% in the
year earlier period. Selling, general and administrative expenses ("SGA")
increased by $760,000. Of this increase, $200,000 was incurred as a result of an
effort to purchase the animal health business of a competitor. After careful due
diligence and preliminary negotiations, the parties could not reach an agreement
and the transaction was abandoned. Offsetting this increase was decreased
amortization expense of $210,000 for goodwill and indefinite-lived assets, which
is due to the adoption of Statements of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, on January 1, 2002. The remaining SGA
variance was primarily due to sales and marketing costs associated with the
launch of new products. Research and development expenses decreased by $12,000
for the six months ended June 30, 2002 due to the Company canceling a project
that did not hold the promise of an appropriate return for the investment.
Research and development expenses in the third and fourth quarters will be
higher, as the Company will focus on other more promising projects. The Company
expects research and development expenses to be approximately 6% to 7% of sales
for the remainder of fiscal 2002.

Interest Expense and Other Income (Expense): Interest expense was lower for the
six months ended June 30, 2002 than the prior year primarily due to lower
interest rates in 2002 as compared with 2001.

Taxes: The Company has available net operating loss carryforwards totaling
approximately $2.4 million, which expire in the years 2011 to 2019. The Company
also has available general business tax credit and alternative minimum tax
credit carryforwards totaling approximately $0.1 million. The general business
tax credits expire in the years 2010 to 2020; the alternative minimum tax
carryforwards may be carried forward indefinitely. The Company has recorded
income tax expense for the six months ended June 30, 2002 and June 30, 2001 of
$964,000 and $820,000, respectively, which reflects a 40% effective tax rate for
2002 and a 43% tax rate for 2001. The effective tax rate has declined in 2002
because the Company no longer amortizes goodwill or indefinite-lived intangible
assets for book purposes.

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 30, 2002, $1.3 million of cash was
provided by operations. Of this amount, $1.4 million came from net income with
the remaining operating cash flow items tending to offset each other. Working
capital consumed $2.1 million of operating cash flows with most of the increases
in this area due to an increase in inventory and a decrease in accounts payable.
The inventory increase is due to having larger than normal balances on hand for
new product launches. The Company typically carries an excess of inventory for
one year after a new product is launched. This is done to cover variances in
expected demand for the product.

Cash flows used in investing activities during the six months ended
June 30, 2002 include cash costs related to capital improvements at the
Company's St. Louis and Fort Worth facilities.

Cash flows used in financing activities during the six months ended
June 30, 2002 primarily reflect net decreases in borrowing under the revolving
credit facility. This credit facility is used to fund the growth in accounts
receivable and inventory.

The Company's 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 June 30, 2002, the Company was in
compliance with such covenants.

On April 4, 2001, the Company and the bank entered into an amendment of
the revolving credit facility that extended the expiration date of the agreement
until July 31, 2003 and increased the facility to $12.1 million. The Company was
required to repay $250,000 per month commencing August 31, 2001 until November
30, 2001 when the credit facility was $11.1 million. Beginning February 28,
2002, the Company is required to repay

VIRBAC CORPORATION PAGE 20

OTHER INFORMATION

$150,000 each quarter until the amount available under the facility is $8.0
million. At June 30, 2002, $1.6 million was available under the facility and the
interest rate was 4.00%.

Management has begun to negotiate an amendment to its revolving credit
agreement to extend the term beyond the expiration date of July 31, 2003.
Management believes that it will be successful in extending the term of the
agreement at terms substantially similar or better than the existing agreement.

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 and from existing financing facilities. In
addition, the Company will be placing particular emphasis on reducing
inventories and receivables through the end of 2002.

The Company has no current plans to significantly increase capacity of
any of its plant facilities or to expend significant capital in modifying them.
The Company expects capital expenditures to be approximately $750,000 for the
remainder of the year.

In 2000, 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 FDA approval to sell the products or certain other conditions are
not met by December 31, 2003. This product license fee will be recognized over
the longer of the contract period, 15 years, or the expected period of future
benefits. The expected period of future benefits has not yet been determined,
and the payment received has been reflected as unearned product license fees in
the March 31, 2002 and December 31, 2001 Balance Sheet.

The Company has no plans to pay dividends to stockholders in the
foreseeable future.

NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, the Company adopted SFAS No. 141 and 142
("FAS 141" and "FAS 142"). FAS 141 requires all business combinations be
accounted for using the purchase method of accounting. FAS 141 also defines
acquired intangible assets and requires a reassessment of a company's
preexisting acquired intangible assets and goodwill be evaluated and adjusted to
conform with that definition. The adoption of FAS 141 did not have a significant
impact on our consolidated financial position, consolidated results of
operations and/or our consolidated cash flows. FAS 142 requires goodwill no
longer be amortized under any circumstances. Instead, all goodwill (including
goodwill associated with acquisitions consummated prior to the adoption of FAS
142) is to be evaluated for impairment annually or when events or circumstances
occur indicating that goodwill might be impaired. FAS No. 142 requires a
transitional goodwill impairment test and an annual goodwill impairment test.
The Company completed the first phase of the transitional goodwill impairment
test during the first quarter of 2002 and found no instances of impairment of
its recorded goodwill; accordingly, the second phase is not necessary. The
Company anticipates performing its annual goodwill and indefinite-lived
intangibles impairment tests during the fourth quarter of 2002.

Effective January 1, 2002, the Company adopted SFAS No. 144 ("FAS
144"), "Accounting for the Impairment of Long-Lived Assets", which establishes
accounting and reporting standards for impairment and disposition of long-lived
assets (except unidentifiable intangibles), including discontinued operations.
Additionally, FAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. The implementation of FAS 144 did not have
an impact on our consolidated financial position, consolidated results of
operations and cash flows.

In June 2001, the Financial Accounting Standards Board (FASB or the
"Board") concluded deliberations and unanimously voted to issue SFAS No. 143
("FAS 143"), Accounting for Asset Retirement Obligations. FAS 143 requires that
obligations associated with the retirement of a tangible long-lived asset to be
recorded as a liability when those obligations are incurred, with the amount of
the liability initially measured at fair value.

VIRBAC CORPORATION PAGE 21

OTHER INFORMATION

FAS 143 will be effective for financial statements for the year
beginning January 1, 2003. The Company has determined that the effect of FAS 143
will be immaterial to its consolidated financial position or results of
operations.

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 Consumer
Brands segment have also been seasonal with a relatively lower volume of its
sales and earnings being generated during the Company's fourth quarter. PM
Resources operations are highly dependent on weather, livestock economics and
the timing of orders.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not have any derivative instruments that materially
increase its exposure to market risks for interest rates, foreign currency
rates, commodity prices or other market price risks. In addition, the Company
does not use derivatives for speculative purposes.

The Company's exposure to market risks results from changes in interest
rates. Interest rate risk exists principally with respect to long-term
indebtedness, which bears interest at floating rates. At June 30, 2002, the
Company had $9.2 million of indebtedness bearing interest at floating rates. If
an unfavorable change of 100 basis points in the interest rate applicable to the
Company's floating-rate indebtedness had occurred in the three-month period
ended June 30, 2002, the Company would have experienced additional interest
expense of $23,000 for this three-month period. This assumes no change in the
principal or a reduction of such indebtedness.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company held its annual meeting of shareholders on April 25, 2002.
At the meeting, the shareholders elected the following individuals as members of
the Board of Directors: Alec Poitevint, II and Jean-Noel Willk.

The voting results of the election of directors voted upon at the
meeting are as follows:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

None

VIRBAC CORPORATION PAGE 22

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
August 8, 2002

INDEX TO EXHIBITS