VIRBAC CORP - 10-K Annual Report

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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, 2002

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 76137
(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 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange act Rule 12 b-2) YES NO X

The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of June 30, 2002 (computed by reference to
the closing price of such stock on the NASDAQ/National Market) was $55,586,082.

DOCUMENT INCORPORATED BY REFERENCE*

Definitive proxy statement for the registrant's 2003 annual meeting of
stockholders, in Part III (items 10 - 13).

* Only certain specified portions of such documents are incorporated by
reference in this report.

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VIRBAC CORPORATION

FORM 10-K

CROSS REFERENCE SHEET

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PART I

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS

The discussion 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 the
following:

o Unanticipated 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 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,
Virbac S. A. ("VBSA"), including product development; research
expenditures made that benefit the Company, short-term borrowings,
and worldwide distribution of the Company's products. The
Company's results could be adversely affected if VBSA were to
reduce this support.

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.

o The cost of compliance with newly issued SEC rules and corporate
governance initiatives is uncertain and could adversely affect the
Company's operating results in future periods.

Stockholders may obtain free of charge copies of the Company's Annual Report on
Form 10-K, its Quarterly Reports on Form 10-Q, its Current Reports on Form 8-K,
and all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the Commission by
requesting in writing to Joseph A. Rougraff, Secretary, Virbac Corporation, 3200
Meacham Boulevard, Forth Worth, TX 76137. Copies of all of these documents are
also made available free of charge on the Company's website located at
www.virbaccorp.com.

BUSINESS OVERVIEW

Virbac Corporation ("Virbac" or "the Company"), based in Fort Worth,
Texas, develops, manufactures, markets, distributes and sells a variety of pet
and companion animal health products, focusing on dermatological, parasiticide,
and dental products. Its PM Resources division ("PMR"), based in Bridgeton,
Missouri, formulates products under private-label and third party contract
manufacturing for use in the animal health and specialty chemicals

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industries. Some of the Company's products are manufactured and distributed
under license from Virbac S.A. ("VBSA"), a French veterinary pharmaceutical
manufacturer, which since 1999 has indirectly owned approximately 60% of the
Company's outstanding common stock. The Company distributes and sells its
products throughout the United States and Canada, and, through a distribution
agreement with VBSA, in other foreign markets.

The Company has three reportable segments. The Veterinary segment
manufactures and distributes pet health products mainly to veterinarian offices.
The Consumer Brands 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. Detailed operating results for these segments may be
found in Footnote 16 to the Company's annual financial statements.

VBSA had annual sales in 2001 of approximately E.350 million
(approximately $350 million at current exchange rates), ranking it among the top
ten distributors of animal health products worldwide. VBSA focuses on two
segments of the animal health market: the pet and companion animal segment, and
the livestock segment. VBSA has 23 subsidiaries and distributes its products in
more than 100 countries. VBSA has a multi-million dollar research and
development budget for developing new products.

Virbac also has the exclusive North American manufacturing and
distribution rights to any new or existing products developed by VBSA intended
for companion animals and livestock, for which it pays royalties to VBSA ranging
from 2.5% to 6% of its sales of such products. In 2002 and 2001, those royalties
totaled $0.1 million and $0.2 million, respectively. In 2000, VBSA reimbursed
the Company $400,000 for costs incurred by the Company in readying VBSA products
for distribution in North America. Beginning in 2001, the Company was
responsible for all such costs.

PRODUCTS

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 oral rinses,

o Canine heartworm preventatives,

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 Anthelmintics, or dewormers, to treat gastrointestinal worms in
livestock,

o Gastrointestinal products for dogs and cats, including hairball
remedies, and

o Specialty chemicals.

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The canine heartworm group of products contributed 13% of total
revenues for 2002. These products, which were first introduced in December 2001,
did not have significant sales prior to the year ended December 2002.

SALES AND MARKETING

The Company markets three basic lines of products - a veterinary line
sold at the retail level by veterinary clinics; consumer brand line sold by
specialty pet retail stores and superstores, mass merchandisers, and farm and
fleet distributors; and a livestock and contract manufacturing line sold through
PM Resources. The Company sells all lines of products to national or regional
wholesale distributors serving the animal health markets, 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 the veterinary and consumer
brands lines, as well as for PMR.

The Company estimates that there are currently 68 million dogs and 73
million cats owned by 63 million households in the United States. The small
animal industry generates approximately $28.5 billion in annual sales, of which
$13 billion is spent on food, $12.5 billion is spent on goods and services, and
$2.9 billion is spent on highly regulated pharmaceuticals. The Company further
estimates that the canine heartworm market generates approximately $330 million
in annual sales to veterinary clinics.

The Company's veterinary marketing and sales promotions target
veterinarians through education and sampling to encourage veterinarians to
prescribe and sell more of Virbac's products. The Company's principal veterinary
line labels are Allerderm(R) dermatological products, C.E.T.(R) dental products,
and Preventic(R) tick collars.

The promotion of the Company's consumer brand line is focused on
obtaining shelf space in retail outlets. The Company's principal consumer brand
labels are St. JON(R), Zema(R), Mardel(R), Francodex(R), and Pet-Tabs(R).

PMR's products are primarily contract manufactured for significant
animal health and specialty chemical customers. In addition, PMR distributes
animal health products to the farm and fleet market, rural, and urban feed and
pet retailers.

Members of one veterinary buying group (Vedco) represent the Company's
largest group of customers and accounted for approximately 18% and 12% of net
revenues in 2002 and 2001, respectively.

In addition to its direct marketing and distribution activities, the
Company licenses marketing and distribution rights to some of its products to
third parties. During 2000, the Company sublicensed to Pfizer Inc. the North
American distribution rights to two products, which will be manufactured by the
Company under license from VBSA.

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RESEARCH AND DEVELOPMENT

Virbac maintains a research and development staff for the purpose of
developing improved products and filings with various regulatory agencies.
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. Virbac does not produce chemical compounds, but
develops formulas adapted to the needs of companion animals, either from generic
compounds or proprietary compounds licensed from others.

The Company frequently uses third parties to perform certain research
studies and developmental activities. The costs of these services are expensed
as incurred and are included as part of the Company's research and development
expense.

Virbac also has the exclusive North American manufacturing and
distribution rights to any new or existing products developed by VBSA intended
for companion animals and livestock, for which it pays royalties to VBSA ranging
from 2.5% to 6% of its sales of such products. In 2002 and 2001, those royalties
totaled $0.1 million and $0.2 million, respectively. In 2000, VBSA reimbursed
the Company $400,000 for costs incurred by the Company in readying VBSA products
for distribution in North America. Beginning in 2001, the Company was
responsible for all such costs.

In developing new or improved products, the Company considers a variety
of factors, including (i) existing or potential marketing opportunities for such
products, (ii) the capability of Virbac to manufacture the products, (iii)
whether the products complement existing products of Virbac, and (iv) the
opportunities to leverage the products with the development of additional
products. In 2000, 2001, and 2002, the Company spent (net of reimbursement from
VBSA) approximately $1.3 million, $3.0 million, and $3.0 million, respectively,
on research and development. Virbac also conducts research on VBSA products that
have the potential to be distributed on a worldwide basis.

In addition to developing its own products and obtaining North American
manufacturing and distribution rights to products developed by VBSA, the Company
obtains both North American and worldwide manufacturing and distribution rights
with respect to products developed by third parties.

REGISTRATIONS, TRADEMARKS, AND PATENTS

The Company has numerous Environmental Protection Agency ("EPA") and
Food and Drug Administration ("FDA") product registrations, trademarks, and
patents. Its EPA product registrations permit it to sell pesticide and
rodenticide products, as well as ectoparasiticide products for the treatment of
fleas and ticks on dogs and cats. While EPA registrations do not expire,
registrants are required periodically to re-register certain products with the
EPA. The Company's facilities are qualified as EPA-registered manufacturing
sites, which permit 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-approved new animal drug applications ("NADAs")
permit it to sell medicated treatments, anthelmintics, feed additives, and other
animal drug products. NADAs do not expire, but are subject to modification or
withdrawal by the FDA based upon the

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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 consumer brands 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, and pet shampoo. 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, insect
growth 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 generally fall into four categories:
manufacturers, formulators and blenders of animal health products; animal health
product distributors; pet care product producers and suppliers; and specialty
chemical and pest control manufacturers.

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. 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

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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 substantial 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.

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.

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 of 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 applicable FDA regulations and have received required government
approvals for manufacture and sale, approvals are subject to revocation by the
applicable government agencies. In addition, modifications or enhancements of
approved products are, in many circumstances, subject to additional approvals,
which may be subject to a lengthy application process. Virbac's manufacturing
facilities are subject to continual inspection by regulatory agencies, and
manufacturing operations could be interrupted or halted in any such facilities
as a result of such inspections.

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

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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 278 full-time employees, of which,
approximately 165 are engaged in manufacturing activities, and 73 in sales and
marketing activities. Sixty-five of the full-time employees located at the
Bridgeton, Missouri facility are covered by collective bargaining agreements
with international unions that will expire in the fourth quarter of 2004. 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.

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 127,000 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 located on 37 acres.
This facility has been pledged as collateral under the Company's revolving
credit facility.

The Company has a non-cancelable lease for a manufacturing,
warehousing, and office facility in Harbor City, California. The lease expires
August 2005. The Company also leases certain equipment under non-cancelable
operating leases.

In January 2003, the Company committed to a plan to close its leased
Harbor City manufacturing facility and to move all of the future production at
that facility to its Fort Worth facility. The Harbor City facility manufactured
primarily oral hygiene products. The Company expects to reduce costs by this
move. The Company began negotiations with the landlord for the Harbor City
facility in January 2003, and, during that month, the Company and landlord
agreed to terminate the lease as of February 28, 2003. The expected costs to
close the facility are approximately $539,000 and consist mostly of leasehold
improvement write-offs and costs to transfer existing equipment and inventory to
the Fort Worth facility. The Company expects the closure of this facility to
result in annual cost reductions of $700,000, consisting primarily of eliminated
rent charges and reduced staffing levels.

Management believes that the Company's facilities are adequate and
suitable for its current operations.

ITEM 3. LEGAL PROCEEDINGS

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 income. See Note 13 to the
Consolidated Financial Statements included in 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, 2002.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the
Company's executive officers:

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 Wyeth. Mr. Bell was most recently Vice
President for the International Animal Health and Nutrition Division, where he
was responsible for 26 worldwide profit centers.

Joseph A. Rougraff has been Vice President and Chief Financial Officer
since May 2000. Mr. Rougraff was employed previously for 14 years with Lacy
Distribution, Inc. Immediately prior to joining the Company, Mr. Rougraff was
the Vice President - Finance for four years for Ed Tucker Distributor, Inc., a
subsidiary of Lacy Distribution, Inc. Mr. Rougraff has an MBA from Indiana
University and 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.

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, under
its credit facility, the Company is prohibited from paying dividends without the
consent of the Company's lender. As of March 3, 2003, the Company had a total of
approximately 2,500 stockholders, including approximately 400 stockholders of
record and approximately 2,100 persons or entities holding common stock in
nominee name.

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ITEM 6. SELECTED FINANCIAL DATA

The Company is the result of a March 5, 1999 merger of Virbac, Inc. and
Agri-Nutrition Group Limited. The following data has been derived from the
Company's audited financial statements for each of the five years in the period
ended December 31, 2002. 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.

- ----------

(1) 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 records revenue. 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 to common carriers. The net effect for fiscal 2000 of
this change was to reduce sales by $763,000, and diluted earnings
per share by $0.02. The pro forma amounts for 1999 and 1998 are
not determinable due to the unavailability of the accounting
records. During 2001, the Company changed its shipping terms with
its customers so that ownership transferred to the customer at the
time of shipment.

(2) The results for the year ended December 31, 1999 include the
operations of Virbac, Inc. plus the results of Agri-Nutrition
Group Limited since March 5, 1999.

(3) Earnings per share for the period ending December 31, 1998 has
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.

(4) In the fourth quarter 2000, the valuation allowance for net
deferred tax assets decreased by $6.2 million and the Company
recorded a net tax benefit of $1.2 million. The reduction was
based on improved operating results in 2000 and projected
operating results in 2001 and beyond.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company manufactures and distributes companion animal and livestock
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, Francodex, and Pet-Tabs brand names.

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 to the common carriers. The cumulative effect of this change for
periods prior to December 31, 2000 of $469,000, or $0.02 per share, is shown as
the cumulative effect of accounting change in the Consolidated Statements of
Income for the year ended December 31, 2000. The net effect for fiscal 2000 of
this change was to reduce sales by $763,000, and diluted earnings per share by
$0.02. During 2001, the Company changed its shipping terms with its customers so
that ownership transferred at the time of shipment.

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 ownership transferred
to the customer 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.

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.

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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 product license fees 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 product license fees to
Pfizer. The Company began to recognize these product license
fees into income in 2002.

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.

RECENT DEVELOPMENTS

In January 2003, the Company committed to a plan to close its leased
Harbor City manufacturing facility and to move all of the future production at
that facility to its Fort Worth facility. The Harbor City facility manufactured
primarily oral hygiene products. The Company expects to reduce costs by this
move. The Company began negotiations with the landlord for the Harbor City
facility in January 2003, and, during that month, the Company and landlord
agreed to terminate the lease as of February 28, 2003. The expected costs to
close the facility, which will be recorded as an expense during the first
quarter 2003, are approximately $539,000 and consist mostly of leasehold
improvement write-offs and costs to transfer existing equipment and inventory to
the Fort Worth facility. The Company expects the closure of this facility to
result in annual cost reductions of $700,000, consisting primarily of eliminated
rent charges and reduced staffing levels.

12

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Net Revenues

Sales increased by approximately $3.1 million or 5% for the year ended
December 31, 2002 compared with the year ended December 31, 2001 due to
increased sales in the veterinary segment. As was previously discussed, the
Company had a one-time sales benefit of $1.8 million in 2001 due to changed
shipping terms with its customers. The specific net revenues by segment were as
follows:

o Veterinary net revenues increased due to higher sales of dermatology
products, which increased $2.1 million; parasiticide products, which
increased $4.8 million; nutraceuticals, which increased $0.2 million;
and dental products, which increased $0.4 million. The parasiticide
line includes the Iverhart line of products, the Company's newly
registered canine heartworm preventive products; shipments of these
products commenced in December 2001. Net revenues of the dental line of
products increased due to the Company's ongoing efforts to increase
awareness about the importance of dental hygiene for dogs and cats. Net
revenues in the dermatology segment increased due to the introduction
of Genesis and Allermyl during 2002. These two products expanded the
Company's offerings to treat chronic pruritis in dogs. The Company
intends to continue to add a small number of new products to this line
each year. Net revenues of the nutraceutical product line increased due
to the launch of the products in Canada. The Company expects sales of
this line to grow slightly in 2003.

o Consumer Brands net revenues decreased due to lower sales in all
product categories. This segment is experiencing extreme competitive
pressures within the pet store sales channel and from competing
products sold by mass-market stores. The Company is in

13

the process of seeking new profitable sales opportunities outside the
pet store sales channel. Namely, the Company will be seeking sales
opportunities in mass-market stores such as grocery, drug, and discount
channels. The Company expects revenues in this segment to remain flat
or decrease slightly until it is successful in selling to the
mass-market stores.

o PM Resources net revenues were decreased because the Company's strategy
has been to eliminate low margin contract manufacturing products and
transfer the available production capacity to internal veterinary
products, which has resulted in reduced sales. In addition, beginning
late in the third quarter 2001, the livestock pour-on product was
launched for sale. Typically, when a new product is launched, the
distributors buy an amount for normal inventory plus an extra amount to
fill immediate demand. As a result, the net revenues in 2001 were $1.4
million higher than in 2002. The Company expects that revenues for this
product will increase by $2 million in 2003, as the product has become
more widely accepted by the market place.

Gross Profit

Gross profit increased by $2.7 million or 11%. The gross profit
increase was attributable to increased sales partially offset by a lower gross
profit percentage. Gross profit as a percentage of net revenues increased from
41% to 43%. The increase in the gross profit percentage was due to higher sales
from the veterinary segment, which have higher gross margins. The specific gross
profit by segment was as follows:

o Veterinary products gross profit increased primarily due to increases
in sales volume. The Company expects gross margins in this segment to
average between 55% and 60% in the coming year.

o Consumer Brands gross profit decreased due to lower net revenues and
higher production costs. The lower volume accounted for $523,000 of the
decreased gross profit. In addition, the Company increased its
obsolescence and excess inventory reserve in this segment by $364,000
in 2002. The Company expects the Consumer Brands gross profit
percentage to range between 30% and 35% for the next twelve months.

o PM Resources gross profit decreased due to lower net revenues somewhat
offset by a more favorable mix of products sold. The lower net revenues
caused $649,000 of the decreased gross profits and the favorable mix
increased gross profits by $216,000. The Company expects gross margins
in this segment to range between 18% and 25% in the coming year.

14

Operating Expenses

Operating expenses were essentially unchanged for the year ended
December 31, 2002 compared to the year ended December 31, 2001. As a percentage
of net revenues, operating expenses decreased to 34% in 2002 compared to 36% in
2001. Research and development expenses in 2002 and 2001 were 5% of net
revenues. The Company expects research and development expenses to be
approximately 5.5% to 6% of net revenues for the foreseeable future. Selling,
general and administrative costs were also flat in 2002 compared to 2001. In
2003, the Company plans to spend up to $1.6 million to advertise its oral
hygiene products on a national radio network. As a result, selling expenses in
2003 will be higher.

Interest Expense and Other Income (Expense)

Interest expense for the years ended December 31, 2002 and December 31,
2001 was $0.3 million and $0.6 million, respectively, primarily due to lower
borrowing levels in 2002 compared to 2001. The interest rate on the Company's
credit agreement was 3.25% at December 31, 2002 compared to 4.0% at December 31,
2001. Based on the average debt for the year, the slightly lower interest rate
in 2002 accounted for $64,000 of the lower interest expense.

Taxes

Income tax expense increased from $1.2 million for 2001 to $2.1 million
for 2002. The increase is due to higher income before tax in 2002 compared to
2001, partially offset by a lower effective income tax rate. The effective tax
rate for 2002 was 38% compared to 48% for 2001, which was higher principally
because the Company was amortizing goodwill that was not deductible for tax
purposes and because of higher state income tax rates. At December 31, 2002, the
Company has available net operating loss carryforwards totaling approximately
$1.2 million, which expire in the years 2011 to 2019. The Company expects the
net operating loss carryforwards to be deductible in future years, which will
have the effect of reducing cash paid for income taxes. The Company also has
available general business tax credit and alternative minimum tax credit
carryforwards totaling approximately $0.1 million. The business tax credits and
alternative minimum tax credits have the effect of reducing tax amounts due. The
general business tax credits expire in the years 2010 to 2020; the alternative
minimum tax carryforwards may be carried forward indefinitely.

15

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Net Revenues

Sales increased by approximately $7.5 million or 14% for the year ended
December 31, 2001 compared with the year ended December 31, 2000 due to
increased sales in all segments. During 2001, the Company changed its shipping
terms with its customers, which resulted in a one-time sales benefit of $1.8
million in 2001. The specific net revenues by segment were as follows:

o Veterinary net revenues increased due to higher sales of Iverhart Plus,
pesticide, and dental products. Net revenues of the Company's
parasiticide line of products, which includes Iverhart Plus and
pesticides, increased by $2.6 million. Shipments of Iverhart Plus, the
Company's canine heartworm preventive product, commenced in December
2001. The increase in net revenues of pesticide products was due to
increased sales in the Company's Preventic product line. The increase
in Preventic sales occurred due to the introduction of a new product
that controls both fleas and ticks and increased market share achieved
from the existing Preventic products. Net revenues in the dental line
of products increased by $1.1 million due to the Company's efforts to
increase awareness about the importance of dental hygiene for dogs and
cats. These sales were offset by lower sales of dermatology products
(down $0.5 million) and nutraceutical products (down $0.2 million). The
overall dermatology market is flat due to the availability of better
flea and tick control products in the marketplace resulting in fewer
skin ailments.

16

The nutraceutical product line was revamped in 2001, and, as a result,
sales were down.

o Consumer Brands net revenues increased due to the full year impact of
having Pet-Tabs for sale in 2001. Pet-Tabs were first sold in September
2000. Pet-Tab sales increased by $3.0 million for 2001 compared to
2000. All other product lines decreased due to weak economic conditions
at the retail level.

o PM Resources net revenues increased primarily due to sales of the
Company's recently approved livestock parasiticide product, sold under
the trade names of Virbamec or Bovimec.

Gross Profit

Gross profit increased by $2.0 million or 9%. The gross profit increase
was attributable to increased sales partially offset by a lower gross profit
percentage. Gross profit as a percentage of net revenues declined from 43% to
41%. The decline in the gross profit percentage was due to the decline in the
Consumer Brands segment. As discussed above in the sales analysis, the Company
had a one-time gross profit benefit of $0.9 million due to changed shipping
terms with its customers. Gross profit by segment was as follows:

o Veterinary products gross profit increased primarily due to increased
sales volume.

o Consumer Brands gross profit decreased due to higher production costs
that were not passed on to the Company's customers. The sales volume
increase accounted for $0.5 million of the gross profit variance and
the decreased gross profit percentage accounted for $1.2 million.

o PM Resources gross profit increased principally due to the sales volume
of the livestock parasiticide product.

Operating Expenses

Operating expenses increased $1.7 million or 9% for the year ended
December 31, 2001 compared to the year ended December 31, 2000. As a percentage
of sales, operating expenses decreased to 36% in 2001 compared to 38% in 2000.
Research and development expenses increased by $1.7 million for the year due to
the Company's efforts to obtain new product registrations from the FDA. In
addition, the Company received a reimbursement of research and development costs
from VBSA of $0.4 million in 2000 and no such reimbursement in 2001. Selling,
general and administrative costs also increased by approximately $0.5 million,
primarily due to costs incurred for the launch of the Company's canine heartworm
product, Iverhart Plus. Sales of the canine heartworm product commenced in the
fourth quarter of 2001. Warehouse and distribution expenses decreased by $0.5
million compared to the prior year. This was

17

achieved by the Company's efforts to continue to manage expenses so that they
grow at a slower rate than sales.

Interest Expense and Other Income (Expense)

Interest expense for the years ended December 31, 2001 and December 31,
2000 was $0.6 million and $1.0 million, respectively, primarily due to lower
interest rates in 2001. The interest rate on the Company's credit agreement was
4.0% at December 31, 2001 as compared to 9.0% at December 31, 2000.

Taxes

In the fourth quarter 2000, the valuation allowance for net deferred
tax assets decreased by $6.2 million. The reduction in the valuation allowance
was based on improved operating results in 2000 and projected operating results
in 2001 and beyond. At December 31, 2001, the Company had available net
operating loss carryforwards totaling approximately $4.8 million, which expire
in the years 2011 to 2019. The Company expects the net operating loss
carryforwards to be deductible in future years, which will have the effect of
reducing cash paid for income taxes. 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 business tax credits and alternative minimum tax credits have
the effect of reducing tax amounts due. The tax rate for 2001 was 48% and the
Company expects the rate for 2002 to be 40% because the Company will no longer
be amortizing goodwill and because of lower anticipated state income tax rates.

LIQUIDITY AND CAPITAL RESOURCES

FOR YEAR ENDED DECEMBER 31, 2002

The Company's primary sources of liquidity during 2002 were cash flows
from operations, which generated $7.1 million of cash. Net income, recognition
of deferred tax expense, and depreciation and amortization generated operating
cash flows of $6.8 million. Receivables increased by $1.2 million due to the
increased sales volume the Company experienced in the fourth quarter 2002
compared to the same period in 2001. Inventory decreased by $1.5 million due to
the Company's ongoing efforts to reduce inventory levels. The Company routinely
gives extended payment terms to its customers for newly registered products or
for products that are of a seasonal sales nature. At December 31, 2002, there
were approximately $2.6 million of receivables for which extended payment terms
had been granted by the Company. These receivables should be collected by June
30, 2003. Accounts payable decreased by $1.4 million due to lower raw material
inventory levels at December 31, 2002. Accrued expenses increased by $1.9
million mostly due to accrued product license fees and accrued bonuses due to
employees.

The Company expects to meet its operating cash needs in 2003 from
increased cash flow from operations in part due to its continuing efforts to
reduce accounts receivable and inventory levels.

The Company has entered into a one-year contract with a major radio
network to spend up to $1.6 million in 2003 to promote the Company's oral
hygiene products. The contract allows

18

the Company to cancel its obligation after six or nine months at its sole
discretion. If the contract is canceled, the Company would owe the radio network
only for the advertising performed through the cancellation date. Since no
advertising had been performed under this contract through December 31, 2002, no
liability or expense has been recorded on the Company's financial statements.

During 2002 and 2003, the Company entered into several agreements with
third parties to conduct research studies on behalf of the Company. Under these
agreements, the Company records expense as it is incurred. The obligations under
the agreement total $0.5 million and the Company expects to pay this amount in
2003.

Cash used for investing activities were primarily the acquisition of
product license rights and equipment used in the Company's manufacturing
operations. The Company expects capital expenditures in 2003 to range between $2
million and $3.5 million. The Company could also receive $2.5 million from
Pfizer if the registration for an equine product is achieved by December 31,
2003.

Cash flows from financing activities in 2002 reflect the activity of
the Company's revolving bank line of credit. This line of credit is primarily
used to fund working capital needs. The Company paid interest on the advance at
100 basis points below the prime rate then in effect in the United States.

On August 7, 2002, the revolving credit facility was amended to extend
the expiration date to July 31, 2005 and increase the amount available under the
facility from $10.8 million to $12.0 million. There are no principal payments
due until July 2005 when the full amount outstanding will be due and payable. At
December 31, 2002, $6.8 million was outstanding under the facility. At December
31, 2002, there was $5.2 million available and the interest rate was 3.25%.

The revolving credit facility contains financial covenants, including
requirements to meet tangible net worth and interest coverage ratios, and
restricts the payment of dividends. During 2002, and at December 31, 2002, the
Company was in compliance with all of these covenants.

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 has historically purchased product license rights from third parties
and intends to continue to pursue those opportunities that fit within the
Company's strategy. The amounts or timing of those acquisitions cannot be
determined at this time.

The Company had net issuances of $0.2 million of common stock during
2002. These issuances were primarily related to the Company's Incentive Stock
Option Plan that is available to most of the management of the Company.

The Company expects to be able to fund its fiscal 2003 cash
requirements through cash flows from operations and borrowings under the credit
agreement. The Company believes that these sources of funds will be sufficient
to meet its licensing fees commitments and capital expenditure needs.

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

19

The Company receives significant research and development support from
VBSA. VBSA performs most of the initial research to develop certain products and
creates most of the documentation needed to file registration applications with
the governmental regulatory bodies in the United States. In return, the Company
pays a royalty to VBSA when the Company begins to sell the product. As a result,
the Company has lower costs to develop and register a product and the Company
can get the product to the marketplace sooner than if the Company performed
these tasks by itself.

FOR YEAR ENDED DECEMBER 31, 2001

The Company's primary sources of liquidity during 2001 were cash flows
from operations and bank borrowings. Net income, recognition of deferred tax
expense, and depreciation and amortization generated operating cash flows of
$4.1 million, which was offset by use of cash to fund increased accounts
receivable. Receivables increased due to the increased sales volume the Company
experienced in the fourth quarter 2001 compared to the same period in 2000, and
to more liberal payment terms allowed on the sales of the newly registered
products.

Cash used for investing activities were primarily the acquisition of
equipment used in the Company's manufacturing operations and the acquisition of
product licenses and patents.

Cash flows from financing activities in 2001 reflect the activity of
the Company's revolving bank line of credit. This line of credit is primarily
used to fund working capital needs. The Company paid interest on the advance at
75 basis points below the prime rate then in effect in the United States.

In 1999, the Company acquired the rights to manufacture and sell
products under development by a third party for a period of 15 years. In fiscal
2001 and 2000, the Company made milestone payments of $0.5 million and $1.7
million, respectively, for such rights. During 2001, the Company entered into an
agreement with the third party that eliminated any future milestone payments,
reduced the amount of future royalties payable to the third party, and gave the
Company ownership of all registrations and rights for the products. In return,
the Company will bear the costs to complete the registration process for all
future products.

FOR YEAR ENDED DECEMBER 31, 2000

The Company's primary sources of liquidity during 2000 were cash flows
from operations, sales of product licenses, and bank borrowings. Net income and
depreciation and amortization generated operating cash flows of $4.7 million,
which was partially offset by uses of cash to purchase inventory and to fund
increased accounts receivable. The inventory increase was a planned increase of
inventory so that product would be available for sale in the first quarter 2001
to meet expected demand resulting from an oral hygiene promotional campaign the
Company was undertaking. Receivables increased due to the increased sales volume
the Company experienced in the fourth quarter 2000 compared to the same period
in 1999.

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

20

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.

In 1999, the Company acquired the rights to manufacture and sell
products then in development by a third party for a period of 15 years. In
fiscal 2000 and 1999, the Company made milestone payments of $1.7 million and
$1.0 million, respectively, for such rights. See a further discussion concerning
this agreement in the liquidity discussion for 2001.

Cash flows from investing activities were favorably affected by the
Pfizer agreement reached in 2000 and were unfavorably affected by the payments
to a third party for rights to new products.

Cash flows from financing activities in 2000 reflect the activity of
the Company's bank revolving line of credit. During 2000, VBSA advanced, and the
Company repaid, $1.5 million. The Company paid interest on the advance at the
prime rate then in effect in the United States.

The revolving credit facility contains financial covenants, including
requirements to meet tangible net worth and interest coverage ratios, and
restricts the payment of dividends. At December 31, 2000, the Company was in
compliance with all of these covenants.

The Company had net issuances of $0.5 million of common stock during
2000. These issuances were primarily related to the Company's Incentive Stock
Option Plan that is available to most of the management of the Company.

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 canine heartworm products are expected to have
higher sales volumes in the first and second quarters each year.

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.

Seasonal patterns of PM Resources operations are highly dependent on
weather, feeding economics, and the timing of customer orders. The livestock
pour-on product sales are typically higher in the second and third quarters each
year.

NEW ACCOUNTING STANDARDS

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 acquired prior to June 30, 2001 using the criteria of FAS
No. 141, which resulted in no changes in the classification of goodwill at
January 1, 2002. FAS No. 142 requires that purchased goodwill and certain
indefinite-lived intangibles no longer be amortized, but

21

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 performed its annual goodwill and
indefinite-lived intangibles impairment tests during the fourth quarter of 2002
and found no impairment to its recorded goodwill. During the years ended
December 31, 2001 and 2000, goodwill and indefinite lived intangibles
amortization expense was approximately $0.4 million and $0.6 million,
respectively.

The FASB issued Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," ("SFAS 146")
in June 2002. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The provisions of SFAS 146 are not expected
to have a material impact on the Company's consolidated financial position,
consolidated income, or cash flows.

The FASB issued Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosures," ("SFAS
148"), which amends SFAS 123 "Accounting for Stock-Based Compensation." SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. The
Company has not elected to change to the fair value-based method. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS 148 have been adopted for the year ended December
31, 2002. The interim disclosure provisions are effective for financial reports
containing financial statements for the three-month interim period ended March
31, 2003.

The FASB issued Interpretation No. 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value. The initial recognition and measurement provisions of
FIN 45 are applicable, on a prospective basis, to guarantees issued or modified
after December 31, 2002. FIN 45 also requires a guarantor to make new
disclosures regarding guarantees. The disclosure requirements are effective for
financial statements ending after December 15, 2002. The provisions of FIN 45
are not expected to have a material impact on the Company's consolidated
financial position, consolidated income, or cash flows.

The FASB issued Interpretation No. 46 (FIN 46), "Consolidation of
Variable Interest Entities," ("FIN 46"), which is effective immediately to
variable interest entities created after January 31, 2003, and applies in the
first interim period beginning after June 15, 2003 to variable interest entities
created before February 1, 2003. FIN 46 addresses the consolidation of variable
interest entities through identification of a primary beneficiary. The
provisions of FIN 46 are not expected to have a material impact on the Company's
consolidated financial position, consolidated income, or cash flows.

22

ITEM 7A. QUANTITATIVE AND QUALITATIVE 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 December 31, 2002 and
2001, the Company had $6.9 million and $10.3 million, respectively, 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 twelve-month period ended December 31, 2002 or
December 31, 2001, the Company would have experienced additional interest
expense of $69,000 and $103,000, respectively, for these twelve-month periods.
This assumes no change in the principal or a reduction of such indebtedness at
December 31, 2002 or December 31, 2001.

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 15(a)(1) and (2) of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

23

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

This information is incorporated by reference to the Company's
definitive proxy statement to be filed for the 2003 annual shareholders'
meeting.

ITEM 11. EXECUTIVE COMPENSATION

This information is incorporated by reference to the Company's
definitive proxy statement to be filed for the 2003 annual shareholders'
meeting.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
DISCLOSURE OF EQUITY COMPENSATION PLANS

This information is incorporated by reference to the Company's
definitive proxy statement to be filed for the 2003 annual shareholders'
meeting.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information is incorporated by reference to the Company's
definitive proxy statement to be filed for the 2003 annual shareholders'
meeting.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officers and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
reports filed with the Securities and Exchange Commission. In addition, we
reviewed our internal controls, and there have been no significant changes in
our internal controls or in other factors that could significantly affect those
internal controls subsequent to the date we carried out our last evaluation.

24

PART IV

ITEM 15. 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-26 in
this Report on Form 10-K:

Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2002
and 2001
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2002, 2001, and 2000
Consolidated Statements of Shareholders' Equity for
Years Ended December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements

(2) LIST OF FINANCIAL STATEMENT SCHEDULES FOR EACH OF THE THREE
YEARS ENDED DECEMBER 31, 2002, Schedule II - Valuation and
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, 2002:

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

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

25

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(j) Second Amendment to Credit Agreement by and between Agri-Nutrition
Group Limited, PM Resources, Inc., St. JON Laboratories, Inc., and
First Bank, dated October 2, 1998

10.27(k) Second Amendment to Credit Agreement by and between Virbac
Corporation, PM Resources, Inc., St. JON Laboratories, Inc.,
Francodex Laboratories, Inc., Virbac AH, Inc., and First Bank, dated
May 1, 2000

10.28(l) Third Amendment to Credit Agreement by and between Virbac
Corporation, PM Resources, Inc., St. JON Laboratories, Inc.,
Francodex Laboratories, Inc., Virbac AH, Inc., and First Bank, dated
April 4, 2001

10.29(m) Fourth Amendment to Credit Agreement by and between Virbac
Corporation, PM Resources, Inc., St. JON Laboratories, Inc.,
Francodex Laboratories, Inc., Virbac AH, Inc., and First Bank, dated
August 7, 2002

21+ List of Subsidiaries

23+ Consent of PricewaterhouseCoopers LLP

99+ Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code

- ----------

+ 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 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 number to the Registrant's Form 10-Q for the
Quarterly Period ended April 30, 1998, and incorporated herein by
reference.

26

(h) Filed as Exhibit of same number to the Registrant's Form 10-Q for the
Quarterly Period ended July 31, 1998, and incorporated herein by
reference.

(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 same number to the Registrant's Form 10-K for the
Fiscal Year ended October 31, 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 December 31, 1999, and incorporated herein by
reference.

(l) Filed as Exhibit of same number to the Registrant's Form 10-Q for the
Fiscal Quarter ended March 31, 2001, and incorporated herein by
reference.

(m) Filed as Exhibit of same number to the Registrant's Form 10-Q for the
Fiscal Quarter ended September 30, 2002, and incorporated herein by
reference.

27

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.

28

CERTIFICATION

I, Thomas L. Bell, certify that:

1. I have reviewed this annual report on Form 10-K of Virbac Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data, and have
identified for the registrant's auditors, any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ Thomas L. Bell
- ------------------------------
Thomas L. Bell
Chief Executive Officer
February 28, 2003

29

CERTIFICATION

I, Joseph A. Rougraff, certify that:

1. I have reviewed this annual report on Form 10-K of Virbac Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data, and have
identified for the registrant's auditors, any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ Joseph A. Rougraff
- --------------------------------
Joseph A. Rougraff
Chief Financial Officer
February 28, 2003

30

INDEX TO FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To Board of Directors and
Shareholders of Virbac Corporation:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 25 present fairly, in all material
respects, the financial position of Virbac Corporation and its subsidiaries at
December 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedules listed
in the index appearing under Item 15(a)(2) on page 25 present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets
effective January 1, 2002. In addition, as discussed in Note 4 to the
consolidated financial statements, the Company changed its method of accounting
associated with revenue recognition effective October 1, 2000.

PricewaterhouseCoopers LLP
Fort Worth, Texas
February 28, 2003

F-2

VIRBAC CORPORATION

CONSOLIDATED BALANCE SHEETS

- --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated
financial statements.

F-3

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

- --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated
financial statements.

F-4

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

- --------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

The accompanying notes are an integral part of these consolidated
financial statements.

F-5

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

- --------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

During 2000, the Company determined that due to the profit realized in
2000 and the expectation of future profits, the valuation allowance for deferred
tax assets was no longer necessary. Accordingly, the valuation allowance was
reversed in the quarter ended December 31, 2000, and a non-cash tax benefit of
$1.1 million was recorded and goodwill from the merger, described below, was
reduced by $4.3 million.

In order to maintain Virbac S. A.'s (VBSA") 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. Accordingly, 52,000, 0, and 606,000 shares were issued to
VBSA in 2002, 2001, and 2000, respectively. No shares will be issued to VBSA in
the event that treasury shares are reissued to satisfy these pre-merger
obligations.

In September 2000, the Company repaid debt in the amount of $51,000 by
issuing 13,000 shares, respectively, of the Company's common stock.

The accompanying notes are an integral part of these consolidated
financial statements.

F-6

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

- --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated
financial statements.

F-7

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, Mardel, Pet-Tabs, and Francodex brand names.

The Company is the result of the March 5, 1999 merger of Virbac, Inc.,
a wholly owned subsidiary of Virbac S. A., a French veterinary pharmaceutical
manufacturer, 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 $2.0 million in intercompany debt recapitalized as
equity; (ii) AGNU issued 12.6 million 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany
transactions have been eliminated.

ESTIMATES

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.

REVENUE RECOGNITION

The Company recognizes revenue when ownership transfers to the
Company's customers. See the discussion in Note 4 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.

F-8

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

Amounts reflected in the financial statements as unearned
product license fees will be recognized into revenue over the term of
the agreement based upon actual sales versus forecasted sales of the
licensed product.

Accounts receivable consists of the amounts estimated to be
collectible on sales, after allowance for uncollectible amounts based
on historical experience. At December 31, 2002 and 2001, the allowance
for uncollectible accounts was $98,000 and $106,000, respectively.

SALES RETURNS

The Company records estimated reductions in revenue for
product returns from its customers in the period that the sale occurs.
The amount of returns for the years ended December 31, 2002, 2001, and
2000 was $1.8 million, $2.9 million, and $1.7 million, 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.

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 in excess of funds on deposit are classified as accounts payable
in the amounts of $1.2 million and $1.1 million at December 31, 2002
and December 31, 2001, respectively.

CONCENTRATION OF CREDIT RISK

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 18% and 12%
of net sales in 2002 and 2001, respectively. Accounts receivable
outstanding to this same buying group at years ended December 31, 2002
and December 31, 2001 were approximately $5.2 million and $3.8 million,
respectively. The Company has another customer whose sales were less
than 3% of total sales for 2002 and 2001, but whose receivable balance
was $2.6 million and $1.7 million at December 31, 2002 and December 31,
2001, respectively.

F-9

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

RELATIONSHIP WITH SUPPLIERS

The Company purchases certain chemical materials from multiple
suppliers including VBSA, for which alternative suppliers also exist
and are adequate. However, certain chemical materials are
governmentally regulated or are proprietary in nature, and the
Company's ability to procure such chemical materials is limited to
those suppliers with regulatory or proprietary rights. The Company
considers its relationships with its primary suppliers to be strong.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents approximates
fair value because of the short maturity of those instruments.

The Company has determined that the fair value of the
Company's debt approximates book value at December 31, 2002 and 2001,
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 inventories.

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:

F-10

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

GOODWILL AND OTHER INTANGIBLE ASSETS

On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill
and Other Intangible Assets" ("FAS No. 142"). 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.
This test is performed in the fourth quarter of each year. The Company
has determined that patents have determinable lives and product rights,
and these assets are amortized over the period of expected future
benefit.

LONG-LIVED ASSETS

Pursuant to Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Asset" 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 2002, 2001, and 2000 were
$1.4 million, $2.4 million, and $1.5 million, respectively. Prepaid
expenses at December 31, 2002 and December 31, 2001 included deferred
advertising costs of $0.2 and $0.3 million, respectively, which will be
expensed during the quarterly period that advertising first takes
place.

FREIGHT TO CUSTOMERS

During fiscal 2000, the Financial Accounting Standards Board's
Emerging Issues Task Force issued EITF 00-10, "Accounting for Shipping
and Handling Costs." The Company has chosen to adopt this standard in
the fourth quarter of 2000. Freight and handling expense for 2002,
2001, and 2000 was $1.3 million, $1.5 million, and $1.2 million,
respectively, and is classified as warehouse and distribution expense.

RESEARCH AND DEVELOPMENT EXPENSES, NET OF REIMBURSEMENT

Research and development costs are charged to expense when
incurred. The costs mostly consist of labor and third party consulting
fees. In 1999, the Company entered into a contract with VBSA to perform
research and development services for specific

F-11

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

products to be launched in 2001. For 2000, the Company was reimbursed
$400,000 by VBSA for services performed in those years, and research
and development costs, as presented in the accompanying statements of
income, were reduced by such reimbursement. Beginning in 2001, the
Company is responsible for all such costs.

INCOME TAXES

The Company uses the liability method of accounting for income
taxes in accordance with 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 basis 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 PER SHARE

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, such as stock options and
stock issuable under the antidilution provisions of the merger
agreement with VBSA. Diluted EPS reflects dilutive potential common
shares. Dilutive potential common shares arising from the effect of
outstanding stock options are computed using the treasury stock method,
if dilutive.

For fiscal 2002, 2001, and 2000, the number of weighted
average shares and potential common shares is as follows:

There were no antidiluted options during each of 2002, 2001,
or 2000.

F-12

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

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, 2002.

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 income.

EMPLOYEE STOCK-BASED COMPENSATION

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 and net
income per share would have changed to the pro forma amounts listed
below using the weighted average fair values indicated.

F-13

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

SALES INCENTIVES

The Company offers sales incentive programs to its
distributors based upon sales volumes generated by the distributors.
The incentives earned under these programs are accrued in the period
that the incentive is earned and are deducted from revenues. For 2002,
2001, and 2000, these rebates totaled $0.8 million, $0.2 million, and
$0.6 million, respectively.

NEW ACCOUNTING STANDARDS

The FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," ("SFAS 146") in June 2002. SFAS 146 is effective for exit
or disposal activities that are initiated after December 31, 2002. The
provisions of SFAS 146 are not expected to have a material impact on
the Company's consolidated financial position, consolidated income, or
cash flows.

The FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosures," ("SFAS 148"), which amends SFAS 123 "Accounting for
Stock-Based Compensation." SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. The Company has not
elected to change to the fair value-based method. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require more
prominent and more frequent disclosures in financial statements about
the effects of stock-based compensation. The transition guidance and
annual disclosure provisions of SFAS 148 have been adopted for the year
ended December 31, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for the
three-month interim period ended March 31, 2003.

F-14

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

The FASB issued Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires
certain guarantees to be recorded at fair value. The initial
recognition and measurement provisions of FIN 45 are applicable, on a
prospective basis, to guarantees issued or modified after December 31,
2002. FIN 45 also requires a guarantor to make new disclosures
regarding guarantees. The disclosure requirements are effective for
financial statements ending after December 15, 2002. The provisions of
FIN 45 are not expected to have a material impact on the Company's
consolidated financial position, consolidated income, or cash flows.

The FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," ("FIN 46"), which is effective
immediately to variable interest entities created after January 31,
2003, and applies in the first interim period beginning after June 15,
2003 to variable interest entities created before February 1, 2003. FIN
46 addresses the consolidation of variable interest entities through
identification of a primary beneficiary. The provisions of FIN 46 are
not expected to have a material impact on the Company's consolidated
financial position, consolidated income, or cash flows.

3. 2003 FACILITY CLOSURE

In January 2003, the Company committed to a plan to close its leased
Harbor City manufacturing facility and to move all of the future production at
that facility to its Fort Worth facility. The Harbor City facility manufactured
primarily oral hygiene products. The Company began negotiations with the
landlord for the Harbor City facility in January 2003, and, during that month,
the Company and landlord agreed to terminate the lease as of February 28, 2003.
The expected costs to close the facility are approximately $539,000 and consist
mostly of leasehold improvement write-offs and costs to transfer existing
equipment and inventory to the Fort Worth facility.

4. 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 to common carriers. The cumulative effect of this change for
periods prior to December 31, 2000 of $469,000, or $0.02 per share, is shown as
the cumulative effect of accounting change in the Consolidated Statements of
Income for the year ended December 31, 2000. The net effect for fiscal 2000 of
this change was to reduce sales by $763,000, and diluted earnings per share by
$0.02. During 2001, the Company changed its shipping terms with its customers so
that ownership transferred to the customer at the time of shipment.

F-15

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

5. INVENTORIES

Inventories consist of the following:

6. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consist of the following:

In 2002, 2001, and 2000, depreciation expense was $1.3 million, $1.2
million, and $1.2 million, respectively.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective July 1, 2001, the Company adopted certain provisions of
Statement of Financial Accounting Standard ("FAS") No. 141, "Business
Combinations," and, effective January 1, 2002, the Company adopted the full
provisions of FAS No. 141 and FAS No. 142, "Goodwill and Other Intangible
Assets." 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 acquired prior to June 30, 2001 using the criteria of FAS
No. 141, which resulted in no changes in the classification of goodwill at
January 1, 2002. FAS No. 142 requires that purchased

F-16

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

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 performed its annual goodwill and
indefinite-lived intangibles impairment tests during the fourth quarter of 2002
and found no impairment to its recorded goodwill.

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):

F-17

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

Goodwill and other intangibles, net consist of the following:

Acquired Intangible Assets:

Goodwill:

Amortization expense for each of the next five years is expected to be
(in thousands):

2003 $ 232
2004 309
2005 249
2006 205
2007 175
--------------
TOTAL AMORTIZATION $ 1,170
==============

Amortization expense for the year-ended December 31, 2002 was $72,000.

During 2002, the Company acquired the rights to a new anti-pruritic
product for $1.5 million. The product is patented, and, accordingly, is being
amortized over the expected period of benefit, 15 years. In addition, the
Company modified its agreement with the patent holder of its oral hygiene
products. The original agreement required the Company to pay a royalty for each
unit of product sold. The Company paid a lump sum payment of $0.7 million and
therefore no longer has to make future periodic royalty payments. The Company
will be amortizing the payment over the expected period of benefit, 15 years.

F-18

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

8. LONG-TERM DEBT AND NOTES PAYABLE

On August 7, 2002, the revolving credit facility was amended to extend
the expiration date to July 31, 2005 and increase the amount available under the
facility from $10.8 million to $12.0 million. There are no principal payments
due until July 2005, when the full amount outstanding will be due and payable.
At December 31, 2002, $5.2 million was available under the credit facility and
the interest rate was 3.25%.

The weighted average interest rates for 2002 and 2001 were 3.81% and
5.69%, respectively.

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 100 basis points. At December 31, 2002, the Company was paying
prime minus 100 basis points (3.25%) compared to 4.00% at December 31, 2001. 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, is paid quarterly. At December 31, 2002, there was $195,000 in letters
of credit outstanding 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. During 2002 and at December 31, 2002, the
Company was in compliance with all covenants.

No interest was capitalized for each of the three years in the period
ended December 31, 2002.

F-19

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

9. COMMON STOCK TRANSACTIONS

In 2002, 2001, and 2000, under certain antidilution provisions of the
Merger Agreement, the Company issued 52,000, 0, and 606,000, shares of common
stock, respectively, to VBSA. During 2002, 2001, and 2000, the Company also
issued 6,000, 0, and 34,000 shares, respectively, of common stock to certain
directors as part of their compensation for serving on the Company's Board of
Directors. The Company charges as expense the closing value of the shares on the
date they are granted to the directors. The shares granted to the directors will
dilute earnings per share. The Company had several treasury stock transactions
related to the issuance and purchase of shares of stock associated with the
activity of its Incentive Stock Option Plan and for compensation to directors.

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. During 2002, 2001, and 2000,
15,000, 37,000, and 0, options, respectively, were granted under this plan to
employees. With options granted in prior years, there are 148,000 shares
available under the Reload 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. For
the years ended December 31, 2002, 2001 and 2000 options granted under the plan
were 151,000, 213,000, 113,000, respectively. Options generally vest over three
years and have a maximum term of ten years. At December 31, 2002, a total of
1,900,000 shares were reserved for issuance under the plans.

A summary of the Reload and Incentive Stock Option Plans' activity for
the years shown is as follows:

F-20

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

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 2002, a weighted average risk-free interest
rate of 3.92%; weighted average expected volatility of 91.46%; no dividends and
expected life of 6.4 years. For grants in fiscal 2001, a weighted average
risk-free interest rate of 5.17%; weighted average expected volatility of
95.84%; no dividends and an expected life of seven years. For grants in fiscal
2000, a weighted average risk-free interest rate of 5.11%; weighted average
expected volatility of 104.92%; 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 is 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, 2002:

F-21

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

11. INCOME TAXES

The Company has recognized a net income tax provision, (benefit) as
follows:

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:

The Company has available net operating loss carryforwards totaling
approximately $1.2 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

F-22

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

million. The general business tax credits expire in the years 2010 to 2020; the
alternative minimum tax carryforwards may be carried forward indefinitely.

Although realization of the net deferred tax assets is not assured,
management believes that it is more likely than not that all of the net deferred
tax assets will be realized. The amount of net deferred tax assets considered
realizable, however, could be reduced in the near term based on changing
conditions. Realization of the deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of any net operating loss
carryforwards.

The 2002 expense, 2001 expense, and 2000 benefit for income taxes is
different than the amount computed using the applicable federal statutory income
tax rate, with the differences summarized below:

The adjustment for the change in the valuation allowance for deferred
tax assets is due to the Company determining in late 2000 that due to its
profitability and its expectation of future profits, it was more likely than not
that the Company would be able to realize the tax benefit from the deferred tax
assets.

12. EMPLOYEE SAVINGS PLAN

The Company sponsors two 401(k) savings plans (the Plans). Former
employees of Virbac, Inc. and non-union former employees of AGNU participate in
one plan, while union employees of PM Resources participate in a second 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 approximately $424,000, $280,000, and $123,000 for 2002, 2001, and 2000,
respectively.

F-23

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

13. COMMITMENTS AND CONTINGENT LIABILITIES:

OPERATING LEASES

The Company leases facilities and certain machinery under
non-cancelable operating leases that expire at various dates through December
2005 and have renewal options ranging from 1 to 5 years. Future lease payments
under non-cancelable operating leases as of December 31, 2002 are as follows
($000's):

2003 $ 351
2004 307
2005 190
2006 12
2007 3
------
TOTAL MINIMUM LEASE PAYMENTS $ 863
======

Total rent expense under operating leases was $374,000, $438,000, and
$401,000 in fiscal years 2002, 2001, and 2000, respectively.

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 in the periods in which they are incurred.
Of the expected $1.4 million, approximately $50,000 had been incurred by
December 31, 2002. The Company began to amortize its payments to the third party
over the period of expected future benefit in the second quarter of 2001. During
2001, $11,000 of amortization expense was recorded in the Statement of Income.

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 in
accordance with the Company's policy.

F-24

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

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. In September 2002, the Company received an
additional payment of $0.7 million because a regulatory milestone had been
achieved. These product license fees will be recognized over the contract period
of 15 years. The payments received have been reflected as unearned product
license fees in the September 30, 2002 and December 31, 2001 Balance Sheet and
accretion of these fees was begun in the fourth quarter of 2002 and totaled
$34,000.

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 income.

REGULATORY AND ENVIRONMENTAL MATTERS

The Company is subject to certain rules and regulations of various
governmental regulatory bodies. The Company believes that it is in compliance
with these rules and regulations.

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, 2002, 221,000 pre-merger
options were outstanding. In 2002, 58,000 pre-merger options were exercised. As
a result, 52,000 shares were issued to VBSA. In the future, and, to the extent
available, no shares will be issued to VBSA in the event that treasury shares
are reissued to satisfy these pre-merger obligations.

F-25

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

ADVERTISING

The Company has committed to a one-year contract with a major radio network to
spend up to $1.6 million in 2003 to promote the Company's oral hygiene products.
The contract allows the Company to cancel its obligation after six or nine
months at its sole discretion. If the contract is canceled, the Company would
owe the radio network only for the advertising performed through the
cancellation date. Since no advertising had been performed under this contract
through December 31, 2002, no liability or expense has been recorded on the
Company's financial statements.

14. SELECTED QUARTERLY DATA (UNAUDITED)

The table below details quarterly results for each quarter for the last
two years.

15. RELATED PARTY TRANSACTIONS

The Company purchased raw materials and finished goods from VBSA and
its related affiliates in the amount of $0.6 million, $2.5 million, and $1.1
million in 2002, 2001, and 2000, respectively. The Company had sales to VBSA and
its related affiliates in the amounts of $1.4 million, $1.2 million, and $1.2
million in 2002, 2001, and 2000, respectively.

In 2000, the Company was reimbursed $400,000 by VBSA for obtaining U.
S. registration and internal and external research and development costs that
were incurred on behalf of VBSA. 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. Beginning in 2001, the Company started

F-26

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

paying VBSA a royalty ranging from 2.5% to 6% on VBSA-developed products sold by
the Company. In 2002 and 2001, those royalties totaled $0.1 million and $0.2
million, respectively.

During 2000, the Company rented 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 Consumer Brands Segment. The lease, as amended,
expired in August 2000 and the Company exercised an option to extend the term
for an additional five years. Rent expense under this agreement was $167,000 in
2000. Subsequent to December 31, 2000, the building was sold to an unrelated
third party.

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.

16. SEGMENT AND RELATED INFORMATION

The Company has three reportable segments. The Veterinary segment
manufactures and 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 (or
"PMR") manufactures and distributes animal health and specialty chemicals under
private label brands and for third parties.

Each segment uses the accounting policies described in Note 2. In
evaluating segment performance (excluding PM Resources), management focuses on
income from operations excluding depreciation, amortization, interest, other
expenses, (income), and taxes. Total assets are monitored by the Company's
administrative segment (except for accounts receivable which are 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 (dollars in thousands):

F-27

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

During 2002, 2001, and 2000, the Company sold its products in the U.S.
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 U.S. The following table presents revenue by
country based on location of the customer:

F-28

VIRBAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- --------------------------------------------------------------------------------

17. OTHER INCOME

Other income, (expense) consists of:

F-29

VIRBAC CORPORATION
SCHEDULE II - RULE 12-09
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2002

(1) During the year, $415,000 of inventory was removed from stock and
destroyed.

(2) Accounts receivable of $133,000 were written off during the year
because they were deemed to be uncollectible.

S-1

VIRBAC CORPORATION
SCHEDULE II - RULE 12-09
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2001

(1) During the year, $326,000 of inventory was removed from stock and
destroyed.

(2) Accounts receivable of 306,000 were written off during the year because
they were deemed to be uncollectible.

S-2

VIRBAC CORPORATION
SCHEDULE II - RULE 12-09
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2000

(1) During the third quarter the Company recorded additional deferred tax
assets and a corresponding increase in its valuation allowance.

(2) The reduction to the valuation allowance was based on improved
operating results in 2000 and projected operating results in 2001 and
beyond.

(3) During the year, inventory was removed from stock and destroyed. As a
result, the reserve was reduced. In addition, the reserve was evaluated
for appropriateness and an adjustment was made to reflect the current
estimated balance needed.

(4) Accounts receivable written off during the year due to
uncollectibility.

(5) Accounts receivable provisions during the year totaled $128,000. The
reserve was reviewed for appropriateness and was reduced by $177,000 at
December 31, 2000.

S-3

INDEX TO EXHIBITS

- ----------

+ 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 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 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 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 same number to the Registrant's Form 10-K for the
Fiscal Year ended October 31, 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 December 31, 1999, and incorporated herein by
reference.

(l) Filed as Exhibit of same number to the Registrant's Form 10-Q for the
Fiscal Quarter ended March 31, 2001, and incorporated herein by
reference.

(m) Filed as Exhibit of same number to the Registrant's Form 10-Q for the
Fiscal Quarter ended September 30, 2002, and incorporated herein by
reference.