VIRBAC CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2003

Commission File Number: 0-24312

VIRBAC CORPORATION

State of Incorporation: Delaware I.R.S. Employer I.D. 43-1648680

3200 Meacham Boulevard
Fort Worth, TX 76137
(817) 831-5030

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.

Yes X No
----- -----

The number of shares of common stock outstanding at August 4, 2003 is 22,243,650
shares.

VIRBAC CORPORATION

INDEX

VIRBAC CORPORATION

PART I - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (UNAUDITED) PAGE 3

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

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) PAGE 4

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

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) PAGE 5

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

VIRBAC CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) PAGE 6

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

VIRBAC CORPORATION PAGE 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

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

The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
information and footnotes required by accounting standards generally accepted in
the United States of America for complete financial statements. In the opinion
of management, these statements include all adjustments (which consist of
normal, recurring adjustments) necessary to present fairly the financial
position as of June 30, 2003 and December 31, 2002, and the results of
operations and cash flows for the three and six months ended June 30, 2003 and
2002. The results of operations for the three and six months ended June 30, 2003
and 2002 are not necessarily indicative of the operating results for the full
year. This interim report should be read in conjunction with the Company's
consolidated financial statements and notes related thereto included in the 2002
Form 10-K as filed with the Securities and Exchange Commission.

REVENUE RECOGNITION

The Company recognizes revenue when ownership transfers to the
Company's customers.

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.

CONCENTRATION OF CREDIT RISK

Members of one veterinary buying group of customers accounts
for approximately 22% and 15% of net sales for the three months ended June 30,
2003 and 2002, respectively, and 19% of net sales for the six months ended June
30, 2003 and 2002, respectively. Accounts receivable outstanding to the same
buying group as of June 30, 2003 and 2002 was $9.2 million and $2.2 million,
respectively.

EMPLOYEE STOCK-BASED COMPENSATION

The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," on a disclosure basis only. The Company measures compensation
costs under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations. 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 SFAS
No. 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.

VIRBAC CORPORATION PAGE 8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. INVENTORIES (in thousands)

Inventories consist of the following:

3. LONG-TERM DEBT (in thousands)

VIRBAC CORPORATION PAGE 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The revolving credit facility expires on July 31, 2005. There are no
principal payments due until July 2005, when the full amount outstanding will be
due and payable. At June 30, 2003, $0.9 million was available under the credit
facility and the interest rate was 3.0%. The interest rate for 2002 was 4.0%.

The revolving credit facility contains financial covenants, including,
but not limited to, tangible net worth and interest coverage ratios, and
restricts the payment of dividends. At June 30, 2003, the Company was in
compliance with all covenants.

The Company has repaid $0.4 million subsequent to June 30, 2003.

4. STOCK OPTIONS AND COMMON STOCK TRANSACTIONS

Under terms of the Company's Incentive Stock Option Plans, officers and
certain other employees may be granted options to purchase the Company's common
stock at the closing market price on the date that the option is granted.
Options generally vest over three years and have a maximum term of ten years.

The Company had a treasury stock transaction related to the issuance
and purchase of shares of stock associated with the Incentive Stock Option Plan.
For the six months ended June 30, 2003, 57,000 options were exercised. Of the
options exercised, 30,000 were issued from previously unissued shares and 27,000
were issued from treasury.

5. COMMITMENTS AND CONTINGENCIES

LITIGATION

The Company is subject to certain litigation and claims arising out of
the conduct of its business. While the final outcome of any litigation or claim
cannot be determined with certainty, management believes that the final outcome
of any current litigation or claim will not have a material adverse effect on
the Company's financial position, cash flows or results of operations.

ADJUSTMENT OF MERGER SHARES

The Company is the result of the March 5, 1999 merger of Virbac, Inc.,
a subsidiary of Virbac SA ("VBSA"), a French veterinary pharmaceutical
manufacturer, and Agri-Nutrition Group Limited ("AGNU"), a publicly held
company. In order to maintain VBSA's 60% ownership interest in the Company until
the expiration, termination or exercise of all options to purchase the Company's
common stock outstanding as of the date of the merger and until the Company's
last issuance of common stock pursuant to the "Mardel Merger Agreement", the
Company will contemporaneously, with the issuance of common stock upon the
exercise of pre-merger AGNU options or pursuant to the Mardel Merger Agreement,
issue to VBSA a number of additional shares of common stock equal to the product
of (a) the aggregate number of shares of common stock issued upon the exercise
of such AGNU options or pursuant to the Mardel Merger Agreement and (b) 1.5.
Each such post-merger adjustment will dilute the voting power of current
stockholders. As of June 30, 2003, 181,000 pre-merger options were outstanding.
The pre-merger options will expire in the years 2005 to 2007. During the first
six months of 2003, no shares were issued for pre-merger options exercised. No
newly issued shares will be issued to VBSA as long as treasury shares are
available to satisfy these pre-merger obligations.

ACQUISITION OF LICENSING RIGHTS

In 1999, the Company acquired the rights to manufacture and sell
products under development by a third party for a period of 15 years. The
Company has made milestone payments totaling $3.2 million for such rights.
Depending upon the third party reaching certain milestones with respect to
obtaining U. S. Food and Drug Administration ("FDA") approval to sell such
products, the Company was committed to paying in fiscal 2001 and 2002
approximately $0.8 million and $0.7 million, respectively. During 2001, the
Company entered into an agreement with the third party whereby the Company
acquired ownership of all rights and data for the

VIRBAC CORPORATION PAGE 10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $0.8
million had been incurred through June 30, 2003.

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.

PFIZER AGREEMENT

In 2000, the Company reached an agreement with Pfizer, Inc. to
sublicense 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, of which $4.25 million was subject to repayment if the
Company did not obtain FDA approval to sell the products or certain other
conditions were not met by January 1, 2004. In July 2003, the Company received
the FDA approval required to sell the product and the other conditions were met.
Furthermore, the Company will receive an additional $2.8 million for achieving
this regulatory milestone of which up to $1.0 million is subject to repayment if
competitive products of third parties are introduced and sold into the
marketplace before July 2006. In September 2002, the Company received a payment
of $0.7 million because a separate regulatory milestone had been achieved. All
of 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 accompanying Balance Sheets, net of revenue recognized. The Company
began recognition of these fees in the fourth quarter of 2002 and the Company
recognized $26,000 and $52,000 of revenue during the three and six months ended
June 30, 2003, respectively.

6. SEGMENT AND RELATED INFORMATION

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

The accounting policies of the reportable segments are the same as
those described in Note 2 of the Company's annual report 10-K. In evaluating
segment performance (excluding PM Resources), management focuses on income from
operations excluding depreciation, amortization, interest, other expenses or
(income), and taxes. All intercompany sales and transfers to the reportable
segments are at cost. Such sales are eliminated in consolidation. Total assets
are monitored by the Company's corporate personnel (except for accounts
receivable which is reviewed by Veterinary and Consumer Brands segments).
Management separately monitors PM Resources results and total assets. The
Company's reportable segments utilize different channels of distribution. They
are managed separately because each business distributes different products and
each has different marketing strategies. During the three months ended March 31,
2003, the management of the Company reorganized the reporting structure for
certain customers previously reported in the PM Resources segment into the
Consumer Brands segment. All results reported below have been adjusted to
reflect this change. Summarized financial information concerning the Company's
reportable segments is shown in the following tables:

VIRBAC CORPORATION PAGE 11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. OUTSTANDING CHECKS IN EXCESS OF FUNDS ON DEPOSIT

The Company uses a revolving credit facility to fund working capital
needs. Under terms of this facility, the bank automatically sweeps the Company's
checking accounts and either increases or reduces the amount outstanding under
the revolving line of credit. At any given point in time, the Company has checks
outstanding that have not been presented to the bank for payment. The Company's
outstanding checks are classified as accounts payable-trade in the amounts of
$0.8 million and $1.2 million at June 30, 2003 and December 31, 2002,
respectively.

8. INCOME TAXES

As of June 30, 2003, the Company has available net operating loss
carryforwards totaling approximately $0.3 million, which expire in the years
2011 to 2019. The Company also has available general business tax credit and
alternative minimum tax credit carryforwards totaling approximately $0.1
million. The general business tax credits expire in the years 2010 to 2020; the
alternative minimum tax carryforwards may be carried forward indefinitely.

9. INTANGIBLE ASSETS AND GOODWILL

For the six months ended June 30, 2003, no goodwill or other intangible
assets were impaired or disposed. Goodwill and other intangibles, net consisted
of the following:

VIRBAC CORPORATION PAGE 12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Intangible Assets:

Goodwill:

Amortization expense for patents and product rights is expected to be the
following for each of the next five years (in thousands):

10. WORKING CAPITAL

The net change in working capital described earlier in the Consolidated
Statements of Cash Flow consists of the following changes:

VIRBAC CORPORATION PAGE 13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

VIRBAC CORPORATION PAGE 14

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

OVERVIEW

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

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

o 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 SA ("VBSA"), including product development and 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 Certain customer relationships represent a significant percentage
of net revenues. The loss of the relationships could result in a
significant reduction in future sales.

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.

SIGNIFICANT ESTIMATES AND CRITICAL ACCOUNTING POLICIES

The consolidated financial statements of the Company are prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of these consolidated 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.

o The Company maintains allowances for doubtful accounts for
estimated losses resulting from the

VIRBAC CORPORATION PAGE 15

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
income 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 income tax assets
in the future, an adjustment to the deferred income 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 Company will record the
income based upon estimates of when the sales of these products
will occur. 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.

RESULTS OF OPERATIONS:

Vedco, a major customer of the Company, represented 22% of sales and 56% of the
increase in sales for the quarter ended June 30, 2003. For the six months ended
June 30, 2003, Vedco represented 19% of sales and 20% of the increase in sales.
As of June 30, 2003, 51% of trade accounts receivable are from Vedco. Management
believes that the Company will receive a substantial portion of these
receivables, during the

VIRBAC CORPORATION PAGE 16

upcoming quarter ended September 30, 2003 and management expects the collection
of the Vedco accounts receivable to be a source of liquidity.

QUARTER ENDED JUNE 30, 2003 COMPARED TO QUARTER ENDED JUNE 30, 2002

Net Revenues: Net revenues increased by approximately $3.4 million or 22% for
the quarter ended June 30, 2003 compared with the quarter ended June 30, 2002
due to increased sales across all segments. Specifically, net revenues by
segment were as follows:

During the quarter ended March 31, 2003, the management of the Company
reorganized the reporting structure for certain customers previously reported in
the PM Resources segment into the Consumer Brands segment. As a result, revenue
of $2.0 million that previously would have been reported for the PM Resources
segment for the three months ended June 30, 2003, was reported for the Consumer
Brands segment. All results reported below have been adjusted to reflect this
change.

o Veterinary net revenues increased principally due to the
fulfillment of the backorders to our customers that existed at
March 31, 2003 of $1.1 million and due to incrementally higher
sales in all product lines. Backorders at March 31, 2003 were
higher than at March 31, 2002, due to production difficulties
resulting from the closure of the Harbor City facility. At June 30,
2003, the backorders have returned to a more normal level of
$200,000 to $300,000.

o Consumer Brands net revenues increased principally due to higher
sales of the Company's rodenticide product. Sales of the
rodenticide product are expected to be lower in the second half of
2003 than the first half due to the seasonality of the product.

o PM Resources net revenues increased mostly because of higher
livestock pour-on product sales. The livestock pour-on product
sales increased by $745,000 due to the addition of a distributor in
late 2002. Sales in the third and fourth quarter 2003 of this
product are expected to be lower due to the seasonality of the
product.

Gross Profit: Gross profit increased by $2.1 million or 30%. The increase in
gross profit increase was attributable to increased net revenues and a favorable
mix of products sold. Gross profit as a percentage of net revenues increased to
47% from 44%. Specifically, gross profit by segment was as follows:

VIRBAC CORPORATION PAGE 17

o Veterinary gross profit increased almost entirely due to increases
in sales volume in all categories due to decreases in backorders
and incrementally higher sales in all product lines. In addition,
the Company has also been implementing cost improvements in its
Iverhart line to improve gross profits. Gross profits for this
segment are expected to range between 58% and 62% in the future.

o Consumer Brands gross profit increased due to higher sales volume
offset by a weaker mix of products sold. The weaker mix of products
sold results from higher sales of the rodenticide products, which
generate lower gross margin rates than most of the other products
sold in this segment. The higher volume accounted for $176,000 of
the variance and the lower margin rate due to the mix of products
sold was $87,000. The Company expects the Consumer Brands gross
profit to range between 30% and 33% for the remainder of the year.

o PM Resources gross profit increased due to higher sales volume and
a favorable mix of products sold. The higher volume accounted for
$257,000 of the variance and the improved mix accounted for
$298,000 of the variance. The improved mix resulted from higher
sales of the livestock pour-on product, which generates higher
gross margins than the contract-manufactured products do. The
Company expects gross profits to range between 15% and 20% for the
remainder of 2003.

Operating Expenses: Operating expenses have increased $1.2 million or 22% for
the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002. As
a percent of sales, operating expenses were flat quarter over quarter at 36%.
Selling, general, and administrative expenses ("SG&A") accounted for $533,000 of
the increase in the operating expenses for the quarter. The SG&A expenses were
higher due to higher promotion costs related to the Company's dental and
dermatological products. Research and development expenses increased by $607,000
compared to the corresponding quarter in 2002, due to the timing of expenditures
related to the new product registration efforts the Company is undertaking. The
Company expects research and development expenses to be approximately 6% to 7%
of sales for the next several quarters. Warehouse and distribution expenses
increased by $109,000 compared to the corresponding quarter in 2002. The
increased distribution costs were due to increased sales volume.

Interest Expense and Other Income (Expense): Interest expense was lower for the
quarter than the prior year due to lower interest rates in 2003 as compared with
2002. The interest rate on the Company's debt agreement was 4.0% at June 30,
2002 as compared with 3.0% at June 30, 2003.

Taxes: The Company has available net operating loss carryforwards totaling
approximately $0.3 million, which expire in the years 2011 to 2019. The Company
also has available general business tax credit and alternative minimum tax
credit carryforwards totaling approximately $0.1 million. The general business
tax credits expire in the years 2010 to 2020; the alternative minimum tax
carryforwards may be carried forward indefinitely. The Company has recorded
income tax expense in the quarter ended March 31, 2003 of $733,000 compared to
$440,000 in the quarter ended March 31, 2002, which reflects a 38% effective tax
rate for 2003 and 40% for 2002. The effective tax rate is lower in 2003 due to
revised estimates of the apportionment of taxable income to the states in which
the Company operates.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002

Net Revenues: Net revenues increased by approximately $3.0 million or 9% for the
six months ended June 30, 2003 compared with the six months ended June 30, 2002
due to increased sales in Consumer Brands and PM Resources. Specifically, net
revenues by segment were as follows:

VIRBAC CORPORATION PAGE 18

During the three months ended March 31, 2003, the management of the Company
reorganized the reporting structure for certain customers previously reported in
the PM Resources segment into the Consumer Brands segment. As a result, revenue
of $3.8 million that previously would have been reported in the PM Resources
segment for the six months ended June 30, 2003, was reported in the Consumer
Brands segment. All results reported below have been adjusted to reflect this
change.

o Veterinary net revenues were unchanged mostly due to Iverhart Plus
sales being lower in the first six months of 2003 compared to the
same period in 2002. Somewhat offsetting the lower Iverhart Plus
sales was higher sales in the dermatology and dental lines within
this segment. Iverhart was first launched in the first six months
of 2002 and, as a result, achieved higher than normal sales levels.
The 2003 volume reflects more normal sales levels of this product.
The higher dermatology sales are the result of new product
introductions. The higher dental sales are the result of a
promotional campaign conducted by the Company in the first half of
2003.

o Consumer Brands net revenues increased primarily due to higher
sales of the Company's rodenticide product. These increased
rodenticide sales are not expected to continue at such a high rate
in the second half of 2003 due to the seasonality of the product.

o PM Resources net revenues increased principally because of higher
livestock pour-on product sales and higher contract manufacturing
sales. The livestock pour-on product sales increased by $912,000
due to the addition of a distributor in late 2002. Sales are
expected to be less than this for the remainder of the year due to
seasonality of the product.

Gross Profit: Gross profit increased by $1.3 million or 9%. The increase in
gross profit was attributable to increased net revenues. Gross profit as a
percentage of net revenues remained at 43%. Specifically, gross profit by
segment was as follows:

o Veterinary gross profit was mostly unchanged due to lower sales
volumes of Iverhart Plus that were somewhat offset by other product
lines, which have similar gross margin rates. The gross margin
rates for this segment are expected to range between 58% and 62%
for the remainder of the year.

o Consumer Brands gross profit increased due to higher sales volume
offset by a weaker mix of products sold. The higher volume
accounted for $274,000 of the variance and the lower margin rate
due to the mix of products sold was $113,000. The higher volume and
lower margin rate resulted from higher sales of the rodenticide
products, which also carry a lower gross margin rate. The Company
expects the Consumer Brands gross profit to range between 30% and
33% for the remainder of the year.

o PM Resources gross profit increased due to higher sales volume and
a favorable mix of products sold. The higher volume accounted for
$512,000 of the variance and the improved mix accounted for
$562,000 of the variance. The higher volume and more favorable
product mix results from higher

VIRBAC CORPORATION PAGE 19

sales of the livestock pour-on product, which generates higher
gross margins than the contract manufacturing lines do. The Company
expects gross profits to range between 15% and 20% for the
remainder of 2003.

Operating Expenses: Operating expenses have increased $2.9 million or 26% for
the six months ended June 30, 2003 compared to the same period in 2002. As a
percent of sales, operating expenses were 40% for the six months ended June 30,
2003 compared to 35% in the comparable period for 2002. Selling, general, and
administrative expenses ("SG&A") accounted for $1.8 million of the increase in
the operating expenses for the quarter. The SG&A expenses were higher due to
$323,000 in costs to close the Company's Harbor City manufacturing facility and
the remaining $1.5 million was due to higher promotion costs related to the
Company's dental and dermatological products. Research and development expenses
increased by $1.1 million for the first six months of 2003 compared to the
corresponding six months in 2002, due to the timing of expenditures related to
the new product registration efforts the Company is undertaking. The Company
expects research and development expenses to be approximately 6% to 7% of sales
for the next several quarters. Warehouse and distribution expenses were mostly
unchanged compared to the corresponding six months in 2002 with the higher
volumes being offset by more efficient operations.

Interest Expense and Other Income (Expense): Interest expense was lower for the
six months ended Jun 30, 2003 than the comparable prior year period due to lower
interest rates in 2003 as compared with 2002. The interest rate on the Company's
debt agreement was 4.0% at June 30, 2002 as compared with 3.0% at June 30, 2003.

Taxes: The Company has available net operating loss carryforwards totaling
approximately $0.3 million, which expire in the years 2011 to 2019. The Company
also has available general business tax credit and alternative minimum tax
credit carryforwards totaling approximately $0.1 million. The general business
tax credits expire in the years 2010 to 2020; the alternative minimum tax
carryforwards may be carried forward indefinitely. The Company has recorded
income tax expense in the quarter ended June 30, 2003 of $733,000 compared to
$440,000 in the quarter ended June 30, 2002, which reflects a 38% effective tax
rate for 2003 and a 40% tax rate for 2002. The effective tax rate is lower in
2003 due to revised estimates of the apportionment of taxable income to the
states in which the Company operates.

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 30, 2003, $2.3 million of cash was
used in operations; $4.1 million was used for working capital. The Company
carried higher accounts receivable of $3.1 million due to the seasonal impact of
granting customers longer payment terms. Inventories increased by $2.6 million
due to the launches of new products and due to the seasonal nature of some of
the Company's products. Inventory and accounts receivable are expected to be
reduced significantly during the next two quarters. Somewhat offsetting these
two increases were accounts payable, which rose by $1.9 million. The payables
increase is a result of the higher inventory balances. Other favorable operating
cash flows were $818,000 from depreciation expense, $328,000 from recognition of
deferred taxes, and net income of $534,000.

Cash flows used in investing activities during the six months ended
June 30, 2003 include payments made for proprietary dental product licenses and
purchases of property, plant, and equipment.

Cash flows provided by financing activities during the six months ended
June 30, 2003 primarily reflect net borrowings of the revolving credit facility.
This credit facility was used to fund the growth in accounts receivable and
payments of accrued expenses.

The Company's revolving credit facility contains financial covenants
including, but not limited to, tangible net worth and interest coverage ratios,
and restricts the payment of dividends. At June 30, 2003, the Company was in
compliance with such covenants.

At June 30, 2003, $0.9 million was available under the revolving credit
facility and the interest rate was 3.0%.

The Company repaid $0.4 million subsequent to June 30, 2003.

VIRBAC CORPORATION PAGE 20

Management believes that the Company will have sufficient cash to meet
the needs of its current operations for at least the next twelve months from
cash flows from current operations and from existing financing facilities. In
addition, the Company will be placing particular emphasis on reducing
inventories and receivables through the end of 2003.

The Company has no current plans to significantly increase capacity of
any of its plant facilities or to expend significant capital in modifying them.
The Company expects capital expenditures to be approximately $3.0 million for
the remainder of the year.

In 2000, the Company reached an agreement with Pfizer, Inc. to
sublicense 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, of which $4.25 million was subject to repayment if the
Company did not obtain FDA approval to sell the products or certain other
conditions were not met by January 1, 2004. In July 2003, the Company received
the FDA approval required to sell the product and the other conditions were met.
Furthermore, the Company will receive an additional $2.8 million for achieving
this regulatory milestone of which up to $1.0 million is subject to repayment if
competitive products of third parties are introduced and sold into the
marketplace before July 2006. In September 2002, the Company received a payment
of $0.7 million because a separate regulatory milestone had been achieved. All
of 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 accompanying Balance Sheets, net of revenue recognized. The Company
began recognition of these fees in the fourth quarter of 2002 and the Company
recognized $26,000 and $52,000 of revenue during the three and six months ended
June 30, 2003, respectively.

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

NEW ACCOUNTING PRONOUNCEMENTS

None

QUARTERLY EFFECTS AND SEASONALITY

The results of operations of certain products in the Veterinary product
line, including Virbac's flea and tick collars, have been seasonal with a lower
volume of its sales and earnings being generated during the Company's first and
fourth fiscal quarters. The results of operations of the Company's Consumer
Brands segment have also been seasonal with a relatively lower volume of its
sales and earnings being generated during the Company's fourth quarter. PM
Resources operations are highly dependent on weather, livestock economics, and
the timing of orders.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

The Company's exposure to market risks results from changes in interest
rates. Interest rate risk exists principally with respect to long-term
indebtedness, which bears interest at floating rates. At June 30, 2003, the
Company had $10.6 million of indebtedness bearing interest at floating rates. If
an unfavorable change of 100 basis points in the interest rate applicable to the
Company's floating-rate indebtedness had occurred in the three-month period
ended June 30, 2003, the Company would have experienced additional interest
expense of $27,000 for this three-month period. This assumes no change in the
principal or a reduction of such indebtedness.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal

VIRBAC CORPORATION PAGE 21

executive officers 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.PART II - OTHER
INFORMATION

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

The Company held its annual meeting of shareholders on April 24, 2003.
At the meeting, the shareholders elected the following individuals as members of
the Board of Directors: Thomas L. Bell and Pierre Pages. The voting results of
the election of directors voted upon at the meeting are as follows:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

None.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

VIRBAC CORPORATION

/s/ Joseph A. Rougraff
- --------------------------------------------------
Joseph A. Rougraff
Vice President and Chief Financial Officer
August 8, 2003