VIRBAC CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

or


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-24312

VIRBAC CORPORATION

(Exact name of registrant as specified in its charter)


DELAWARE		43-1648680
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3200 Meacham Boulevard Fort Worth, Texas (Address of principal executive offices)		76137 (Zip Code)

Registrant’s telephone number including area code: (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 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 o NO þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at March 31, 2005
Common Stock, $0.01 par value		22,325,406 shares

VIRBAC CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share data)

Item 1. Financial Statements.


	September 30,			December 31,
	2003			2002
				(As restated)
Assets
Current assets:
Cash and cash equivalents	$	154		$	865
Accounts receivable – trade (net of reserves of $97 and $135, respectively)		8,622			8,448
Accounts receivable – Virbac S.A. and subsidiaries		309			289
Inventories (net of reserves of $3,075 and $1,798, respectively)		13,021			10,833
Inventories on consignment		2,014			2,064
Prepaid expenses		1,315			1,339
Product license fee receivable		1,672			—
Other current assets		572			643

Total current assets		27,679			24,481

Property, plant and equipment, net		12,644			12,812
Goodwill, net		5,571			4,826
Intangibles, net		21,941			2,917
Other assets		228			209

Total assets	$	68,063		$	45,245


Liabilities and Shareholders’ Equity
Current liabilities:
Borrowings under revolving line of credit and note payable	$	27,275		$	6,854
Checks outstanding in excess of funds on deposit		1,108			1,157
Accounts payable – trade		3,639			3,331
Accounts payable – Virbac S.A. and subsidiaries		377			119
Sales related and product replacement reserves		2,959			2,728
Accrued expenses		4,233			4,097

Total current liabilities		39,591			18,286

Note payable		8			10
Unearned product license fees		7,472			5,916
Liability related to contingent consideration		2,173			—

Total liabilities		49,244			24,212

Commitments and contingencies (Note 7)

Shareholders’ equity:
Preferred Stock – 2,000,000 shares authorized and zero issued and outstanding		—			—
Common stock ($.01 par value; 38,000,000 shares authorized; 22,245,084 and 22,212,804 issued and outstanding in 2003 and 2002, respectively)		222			222
Additional paid-in capital		34,866			34,891
Treasury stock at cost (15,941 shares in 2002)		—			(80	)
Accumulated deficit		(16,269	)		(14,000	)

Total shareholders’ equity		18,819			21,033


Total liabilities and shareholders’ equity	$	68,063		$	45,245

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

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share data)


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
				(As restated)						(As restated)
Net revenues	$	18,008		$	16,082		$	49,825		$	46,058
Cost of goods sold		11,475			9,923			31,019			27,827

Gross profit		6,533			6,159			18,806			18,231

Operating expenses:
Selling, general and administrative		4,814			4,012			15,449			12,679
Research and development		1,015			741			3,385			2,156
Warehouse and distribution		657			500			1,912			1,718

Total operating expenses		6,486			5,253			20,746			16,553

Income (loss) from operations		47			906			(1,940	)		1,678

Interest expense		(155	)		(87	)		(329	)		(310	)
Other (expense) income		—			(1	)		—			6


(Loss) income before income tax expense		(108	)		818			(2,269	)		1,374

Income tax expense		—			(208	)		—			(360	)


(Loss) income before cumulative effect of change in accounting principle		(108	)		610			(2,269	)		1,014
Cumulative effect of change in accounting principle		—			—			—			(2,308	)


Net (loss) income	$	(108	)	$	610		$	(2,269	)	$	(1,294	)


Basic income (loss) per share before cumulative effect of change in accounting principle	$	—		$	0.03		$	(0.10	)	$	0.04
Cumulative effect of change in accounting principle		—			—			—			(0.10	)

Basic income (loss) per share	$	—		$	0.03		$	(0.10	)	$	(0.06	)


Basic shares outstanding		22,244			22,116			22,229			22,098

Diluted income (loss) per share before cumulative effect of change in accounting principle	$	—		$	0.03		$	(0.10	)	$	0.04
Cumulative effect of change in accounting principle		—			—			—			(0.10	)

Diluted income (loss) per share	$	—		$	0.03		$	(0.10	)	$	(0.06	)


Diluted shares outstanding		22,244			22,886			22,229			22,877

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

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Nine Months Ended September 30,
	2003			2002
				(As restated)
Operating activities
Net loss	$	(2,269	)	$	(1,294	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Cumulative effect of change in accounting principle		—			2,308
Provision for excess and obsolete inventories		1,578			871
Depreciation and amortization		1,383			990
Provision for doubtful accounts		26			206
Recognition of unearned product license fees		(98	)		(45	)
Provision for impairment		122			—
Provision for sales related reserves		660			1,170
Issuance of stock to directors as compensation		—			63
Loss on disposal of assets		24			24
Receipt of product license fees		1,654			650
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable		5			742
(Increase) decrease in inventories		(3,519	)		674
Decrease in consigned inventories		50			514
Increase in prepaid expenses and other assets		(1,033	)		(349	)
Increase (decrease) in accounts payable		264			(1,635	)
(Decrease) increase in sales related reserves		(429	)		193
Increase in accrued expenses		51			899


Net cash (used in) provided by operating activities		(1,531	)		5,981


Investing activities
Purchase of property, plant and equipment		(688	)		(1,077	)
Acquisition of businesses		(17,806	)		—
Acquisition of product license rights		(1,111	)		(1,025	)
Other		—			112


Net cash used in investing activities		(19,605	)		(1,990	)


Financing activities
Net borrowings (repayments) under revolving line of credit		20,421			(4,059	)
Proceeds from notes payable		—			11
Repayment of notes payable		(2	)		—
Change in outstanding checks in excess of funds on deposit		(49	)		(350	)
Issuance of common stock		55			169


Net cash provided by (used in) financing activities		20,425			(4,229	)


Decrease in cash and cash equivalents		(711	)		(238	)
Cash and cash equivalents, beginning of period		865			477


Cash and cash equivalents, end of period	$	154		$	239

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

VIRBAC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited, in thousands)


	Common Stock					Additional						Treasury Stock
	Number			Par		Paid In			Accumulated			Number
	of Shares			Value		Capital			Deficit			of Shares			Amount			Total
Balance at December 31, 2002 (As reported)		22,214		$	222	$	35,287		$	(837	)		16		$	(80	)	$	34,592

Effect of restatement on periods ended on or before December 31, 2002		(1	)		—		(396	)		(13,163	)		—			—			(13,559	)


Balance at December 31, 2002 (As restated)		22,213			222		34,891			(14,000	)		16			(80	)		21,033

Issuance for stock compensation plans		32			—		(25	)		—			(16	)		80			55

Net loss		—			—		—			(2,269	)		—			—			(2,269	)


Balance at September 30, 2003		22,245		$	222	$	34,866		$	(16,269	)		—		$	—		$	18,819

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

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

1. Nature of Operations and Basis of Presentation

The business now operated by Virbac Corporation (the “Company” or “Virbac”) was initiated in 1993 when Agri-Nutrition Group Limited, a Delaware corporation (“Agri-Nutrition”), acquired the animal health industries business of Purina Mills, Inc. In July 1994, Agri-Nutrition completed an initial public offering of its Common Stock, $0.01 par value per share (the “Common Stock”).

On March 5, 1999, Virbac S.A. (“VBSA”) a company organized under the laws of the Republic of France, acquired control of the Company in a merger, which resulted in VBSA indirectly owning approximately 60% of the Company’s outstanding Common Stock. In the merger, Virbac, Inc., a Delaware corporation, wholly-owned by VBSA, merged with and into the Company with the Company remaining as the surviving corporation. In connection with the merger, the Company changed its name to Virbac Corporation.

Virbac, based in Fort Worth, Texas, develops, manufactures, markets, distributes and sells a variety of pet and companion animal health products, focusing on dermatological, parasiticidal, dental and certain pharmaceutical products. The Company has three reportable segments which include the Veterinary segment, which provides animal health products to veterinary clinics throughout North America; the Consumer Brand segment which sells over-the-counter products for companion animal health national accounts, distributors and wholesalers; and the Contract Manufacturing segment which is operated by PM Resources, Inc., a Missouri corporation (“PMR” or the “Contract Manufacturing segment”), and is a wholly-owned subsidiary of the Company. PMR is based in a 176,000 square-foot Environmental Protection Agency (“EPA”) and Food and Drug Administration (“FDA”) registered facility in Bridgeton, Missouri, and formulates products under private-label and provides third party contract manufacturing services of products for use in the animal health and specialty chemicals industries, including products for over 20 international, national and regional veterinary pharmaceutical companies.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on 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 September 30, 2003 and December 31, 2002, the results of operations for the three and nine months ended September 30, 2003 and 2002 and cash flows for the nine months ended September 30, 2003 and 2002. The results of operations for the three and nine months ended September 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 its Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 10-K”) which was filed with the United States Securities and Exchange Commission (the “SEC” or the “Commission”) on April 29, 2005. Through the 2003 10-K, the Company has filed its restated audited financial statements for each of the years 2001 and 2002, its restated unaudited interim financial data for all quarters of 2001 and 2002, its restated unaudited interim financial data for the quarters ended March 31, 2003 and June 30, 2003, and its audited financial results for 2003.

The Company accounts for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock Based Compensation (“SFAS No. 123”). 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 (loss) income and net (loss) income per share would have changed to the pro forma amounts listed below using the weighted average fair values indicated.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands, except per share data)	2003			2002		2003			2002
				(As restated)					(As restated)
Net (loss) income as reported	$	(108	)	$	610	$	(2,269	)	$	(1,294	)
Less: Compensation expense for equity awards determined by the fair value based method, net of related tax effects		13			9		755			384

Pro forma net (loss) income	$	(121	)	$	601	$	(3,024	)	$	(1,678	)


Basic (loss) income per share	$	—		$	0.03	$	(0.10	)	$	(0.06	)
Diluted (loss) income per share	$	—		$	0.03	$	(0.10	)	$	(0.06	)

Pro forma basic (loss) income per share	$	(0.01	)	$	0.03	$	(0.14	)	$	(0.08	)
Pro forma diluted (loss) income per share	$	(0.01	)	$	0.03	$	(0.14	)	$	(0.07	)

2. Restatement of Consolidated Financial Statements

During the course of its regular review of the operating results for the third quarter of 2003, Virbac‘s independent registered public accounting firm raised questions concerning the Company’s revenue recognition practices with the Company’s management and the Audit Committee of the Company’s Board of Directors (the “Audit Committee”). As a result, the Audit Committee initiated an internal investigation into Virbac’s accounting and financial reporting practices. The Audit Committee retained independent counsel to conduct the investigation.

On November 12, 2003, the Company publicly disclosed the initiation of the internal investigation and that it would be unable to timely file its Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. At that time, the Company also announced that it had voluntarily contacted the SEC to advise it of the internal investigation.

On November 24, 2003, Virbac issued a press release stating that, based upon the results of the internal investigation as of that time, the Company expected to restate its previously issued financial statements for the years ended December 31, 2001 and 2002, as well as its previously issued financial statements for the quarters ended March 31, 2003 and June 30, 2003 (the “Restatement”).

The continuation of the internal investigation resulted in various adjustments to the Company’s financial statements for the years 1998 through 2003. The Restatement is the result of accounting irregularities and errors, including: (i) improper revenue recognition; (ii) the understatement of sales related reserves; (iii) the understatement of inventory obsolescence reserves; (iv) the understatement of a deferred tax valuation allowance; (v) the impairment of goodwill; (vi) the improper capitalization of research and development expenses; and (vii) other miscellaneous accounting corrections.

Revenue Recognition

Virbac’s internal investigation revealed that certain of the Company’s revenue recognition practices were not in accordance with generally accepted accounting principles. A summary of the principal types of revenue recognition adjustments are as follows:

• Virbac has restated its revenues and the related cost of sales for certain transactions in which product was sold to certain distributors in large quantities and with extended payment terms. These transactions were inappropriately recorded as sales despite: (i) an oral agreement with its customer to

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

    delay delivery; (ii) the Company paying for storage with a third party prior to delivery to a customer; (iii) the Company not pursuing collection from a customer after the shipped products shelf life had expired and were destroyed by the customer at the behest of the Company; and (iv) an understanding that these were consignment transactions. Virbac’s restated results reflect revenue recognition on these transactions only to the extent payment was received. If a refund credit was subsequently issued to the customer related to these transactions, the sale was reversed in the period recorded.

•   During the first two quarters of 2003, Virbac recognized revenue for shipments of products by shipping goods to customers after midnight on the final day of the applicable quarter. The sales for these products were recorded in the prior quarter, although the products had been shipped after the quarterly revenue cut-off date. Virbac has restated these transactions to exclude the sale and related cost of sales of any product shipped after midnight on the final day of the applicable quarter.

•   Certain sales transactions were improperly recorded as revenue at the time the product was shipped despite side agreements that these customers were not required to pay until the customer sold the products to its customers. Other transactions were improperly treated as “bill and hold” sales because the Company requested that the transactions be on a “bill and hold” basis which precludes revenue recognition. For various other transactions the Company has determined that collectibility was not reasonably assured at time of shipment, and, therefore, these transactions have been recorded as consignment sales transactions. Certain other sales transactions were improperly recorded as revenue at the time product was shipped, despite the Company paying for subsequent storage with a freight carrier before delivery to its customer. Virbac’s restated financial statements reflect revenue recognition and the related cost of sales on these transactions based upon when payment was received. If no payments were received, no revenue was recorded and the inventory was written off.

•   Virbac’s general policy is to recognize revenue at the time product is shipped. In connection with the Audit Committee’s internal investigation, Virbac determined that for certain customers, title and risk of loss did not pass until the product was delivered. The Company has restated these transactions to recognize revenue and the related cost of sales when the product was delivered to the customer.

•   During the first two quarters of 2003, Virbac accounted for certain arrangements with customers as contract tolling arrangements and recorded revenues and the related cost of sales upon completion of the manufacturing process rather than at the time of shipment. The Company has restated these transactions to properly recognize revenues and the related cost of sales at the time the product was shipped.

Sales-Related and Product Replacement Reserves

Virbac’s customer contracts and agreements provide certain rights of return upon authorization by Virbac, including the right to return product if its shelf life has expired. Virbac’s policy is to either credit the customer’s account for authorized returns, or, in the case of expired product, Virbac can elect to ship replacement product to the customer. Additionally, in the ordinary course of business, Virbac issues credits to customer accounts for damaged product, billing errors and shipping errors. Upon review and analysis of Virbac’s financial records, the Company determined that its sales-related reserves and replacement product reserves were not adequate relative to the actual rate of sales credits and replacement product issued. Accordingly, Virbac’s restated financial statements include adjustments to reflect the proper level of estimated sales related and product replacement reserves at the time of sale.

Inventory Obsolescence Reserves

Virbac’s analysis and review of its financial records indicated that its past estimates of inventory obsolescence reserves did not properly consider forecasted consumption and inventory quantities on hand.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

Accordingly, the Restatement includes adjustments to reflect the proper level of inventory obsolescence reserves.

Deferred Tax Valuation Allowance

In 2000, Virbac recorded a reversal of its deferred tax valuation allowance based on improved operating results and projected improved operating results in 2001 and beyond. In connection with the Restatement, the Company reassessed the reversal of the deferred tax valuation allowance in recognition of its restated 2000 and subsequent period operating results and determined that such reversal was no longer appropriate. Accordingly, the Restatement includes a deferred tax valuation allowance of $7.4 million at December 31, 2000. The recognition of the deferred tax valuation allowance resulted in an increase in goodwill of $4.2 million as these were deferred tax assets of Agri-Nutrition.

Goodwill Impairment

The Company re-evaluated its goodwill for impairment and determined that as a result of the aforementioned adjustment to goodwill related to the valuation allowance for the Agri-Nutrition deferred tax assets and lower actual and forecasted results, the goodwill allocated to the Consumer Brand segment was impaired and, accordingly, the Company recorded a charge for $2.3 million to write-off goodwill. The impairment was recognized as of January 1, 2002 as the cumulative effect of a change in accounting principle in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangibles (“SFAS No. 142”).

Research and Development Expenses

In 1999, the Company acquired the rights to manufacture and sell products in development by a third party for 15 years. In 1999, 2000 and 2001, the Company paid $1.0 million, $1.7 million and $0.5 million, respectively, for such rights and capitalized the payments as intangible product rights. 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 obtaining FDA approval for one of the products. Prior to the adoption of SFAS No. 142, the Company began to amortize this asset over its estimated remaining useful life of 15 years. Upon the adoption of SFAS No. 142, the Company ceased amortization of this asset as it was considered to be an indefinite-lived intangible asset.

Upon review and analysis of the agreements related to the acquisition of the right to manufacture and sell products in development, the Company determined that the Company’s payments should be classified as research and development expenses rather than capitalized as intangible product rights since the products that are the subject of the agreement were not immediately salable at the date of the Company’s payments and required regulatory approval by the FDA. Accordingly, Virbac’s restated financial statements include adjustments to properly reflect the Company’s payments as research and development expenses.

Other Miscellaneous Accounting Corrections

The Company’s review and analysis of its financial records indicated that certain miscellaneous accounting accruals were not properly stated at the end of the reporting period. These accounts included bonus, royalty, employee benefit plan and other accruals. Additionally, Virbac determined that its patent and trademark account balances included assets that were impaired or could not be identified and, therefore, should have been written off. Accordingly, the Restatement includes adjustments to correct these estimates and valuations.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

Additionally, the Company determined that borrowings under Virbac’s Credit Agreement with First Bank dated as of September 7, 1999, as amended (the “Credit Agreement”) should have been classified as a current liability in accordance with EITF 95-22 “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement”. The borrowings under the Credit Agreement are classified as a current liability since the Credit Agreement with its lenders contains a subjective acceleration clause and contractual provisions that require the cash receipts of the Company be used to repay amounts outstanding under the Credit Agreement. Borrowings under the Credit Agreement are also subject to acceleration if the Company violates various covenants. Also, promotional expense should have been classified as selling, marketing and administrative costs instead of cost of sales for all periods presented. Accordingly, as part of the Restatement, reclassification adjustments have been made to correctly classify these items in the financial statements.

Virbac has restated its financial statements to account for and correct the foregoing adjustments. The net effect of the Restatement reduced net income by $0.3 million and $3.7 million for the three and nine months ended September 30, 2002, respectively. Therefore, with its 2003 10-K, which was filed with the SEC on April 29, 2005 the Company has filed its restated audited financial statements for each of the years of 2001 and 2002, its restated unaudited interim financial data for all quarters in 2001 and 2002, its restated unaudited interim financial data for the quarters ended March 31, 2003 and June 30, 2003, and its audited financial results for 2003.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

The effect of these changes on the Consolidated Balance Sheets, Consolidated Statement of Operations and Consolidated Statements of Cash Flows presented in this Quarterly Report on Form 10-Q, are set forth below:

VIRBAC CORPORATION
CONSOLIDATED BALANCE SHEETS

(In thousands)


	December 31, 2002
	As reported			Adjustments			As restated
Assets
Current assets:
Cash and cash equivalents	$	865		$	—		$	865
Accounts receivable — trade (1)		14,970			(6,522	)		8,448
Accounts receivable - Virbac S.A. and subsidiaries		289			—			289
Inventories (2)		12,022			(1,189	)		10,833
Inventories on consignment (1)		—			2,064			2,064
Deferred income taxes (3)		662			(662	)		—
Prepaid expenses		1,479			(140	)		1,339
Other current assets		656			(13	)		643

Total current assets		30,943			(6,462	)		24,481

Property, plant and equipment, net		12,841			(29	)		12,812
Goodwill, net (3)		3,266			1,560			4,826
Intangibles, net (4)		6,497			(3,580	)		2,917
Deferred income taxes (3)		1,886			(1,886	)		—
Other assets		278			(69	)		209


Total assets	$	55,711		$	(10,466	)	$	45,245


Liabilities and Shareholders’ Equity
Current liabilities:
Borrowings under revolving line of credit and note payable(6)	$	4		$	6,850		$	6,854
Checks outstanding in excess of funds on deposit		1,157			—			1,157
Accounts payable — trade		3,330			1			3,331
Accounts payable — Virbac S.A. and subsidiaries		119			—			119
Sales related and product replacement reserves (5)		363			2,365			2,728
Accrued expenses (7)		3,368			729			4,097

Total current liabilities		8,341			9,945			18,286

Note payable (6)		6,862			(6,852	)		10
Unearned product license fees		5,916			—			5,916

Total liabilities		21,119			3,093			24,212

Commitments and contingencies

Shareholders’ equity:
Preferred stock		—			—			—
Common stock		222			—			222
Additional paid-in capital		35,287			(396	)		34,891
Treasury stock at cost		(80	)		—			(80	)
Accumulated deficit		(837	)		(13,163	)		(14,000	)

Total shareholders’ equity		34,592			(13,559	)		21,033

Total liabilities and shareholders’ equity	$	55,711		$	(10,466	)	$	45,245

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share)


(In thousands, except	Three Months Ended September 30, 2002									Nine Months Ended September 30, 2002
per share amounts)	As reported			Adjustments			As restated			As reported			Adjustments			As restated
Net revenues(1)	$	15,883		$	199		$	16,082		$	47,421		$	(1,363	)	$	46,058
Cost of goods sold (2)(3)		9,153			770			9,923			27,001			826			27,827

Gross profit		6,730			(571	)		6,159			20,420			(2,189	)		18,231

Operating expenses:
Selling, general and administrative (3)		3,949			63			4,012			12,422			257			12,679
Research and development (3)		630			111			741			2,067			89			2,156
Warehouse and distribution (3)		527			(27	)		500			1,706			12			1,718

Total operating expenses		5,106			147			5,253			16,195			358			16,553

Income from operations		1,624			(718	)		906			4,225			(2,547	)		1,678
Interest expense (3)		(80	)		(7	)		(87	)		(278	)		(32	)		(310	)
Other income		(1	)		—			(1	)		6			—			6


Income before income tax expense		1,543			(725	)		818			3,953			(2,579	)		1,374
Income tax expense (4)		(596	)		388			(208	)		(1,560	)		1,200			(360	)


Income before cumulative effect of change in accounting principle		947			(337	)		610			2,393			(1,379	)		1,014
Cumulative effect of change in accounting principle (5)		—			—			—			—			(2,308	)		(2,308	)


Net income (loss)	$	947		$	(337	)	$	610		$	2,393		$	(3,687	)	$	(1,294	)


Basic income per share before cumulative effect of change in accounting principle	$	0.04					$	0.03		$	0.11					$	0.04
Cumulative effect of change in accounting principle (5)		—						—			—						(0.10	)

Basic income (loss) per share	$	0.04					$	0.03		$	0.11					$	(0.06	)


Basic shares outstanding		22,116						22,116			22,098						22,098

Diluted income per share before cumulative effect of change in accounting principle	$	0.04					$	0.03		$	0.10					$	0.04
Cumulative effect of change in accounting principle		—						—			—						(0.10	)

Diluted income (loss) per share	$	0.04					$	0.03		$	0.10					$	(0.06	)


Diluted shares outstanding		22,886						22,886			22,877						22,877

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

VIRBAC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)


	Nine Months Ended September 30, 2002
	As reported			Adjustments			As restated
Operating activities
Net income (loss) (1)	$	2,393		$	(3,687	)	$	(1,294	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of change in accounting principle (6)		—			2,308			2,308
Provision for excess and obsolete inventories (4)		586			285			871
Depreciation and amortization		988			2			990
Provision for doubtful accounts		—			206			206
Recognition of unearned product license fees		(45	)		—			(45	)
Provision for sales related reserves (5)		—			1,170			1,170
Deferred tax provision (2)		1,582			(1,582	)		—
Issuance of stock to directors as compensation		63			—			63
Loss on disposal of assets		—			24			24
Receipt of product license fees		650			—			650
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (3)		(199	)		941			742
Decrease in inventories (7)		740			(66	)		674
Decrease in consigned inventories (7)		—			514			514
Increase in prepaid expenses and other assets (8)		(173	)		(176	)		(349	)
Decrease in accounts payable		(1,162	)		(473	)		(1,635	)
Increase in sales related reserves (5)		—			193			193
Increase in accrued expenses (8)		1,139			(240	)		899


Net cash provided by operating activities		6,562			(581	)		5,981


Investing activities
Purchase of property, plant and equipment		(1,077	)		—			(1,077	)
Acquisition of product license rights		(1,025	)		—			(1,025	)
Other		9			103			112


Net cash used in investing activities		(2,093	)		103			(1,990	)


Financing activities
Net repayments under revolving line of credit (9)		—			(4,059	)		(4,059	)
Proceeds from revolving line of credit and notes payable (9)		7,959			(7,948	)		11
Repayment of revolving line of credit and notes payable (9)		(12,006	)		12,006			—
Change in outstanding checks in excess of funds on deposit		(824	)		474			(350	)
Issuance of common stock		169			—			169


Net cash used in financing activities		(4,702	)		473			(4,229	)


Decrease in cash and cash equivalents		(233	)		(5	)		(238	)
Cash and cash equivalents, beginning of period		477			—			477


Cash and cash equivalents, end of period	$	244		$	(5	)	$	239

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

3. Acquisitions

In the third quarter of 2003, the Company completed two acquisitions in order to expand its pharmaceutical product offerings, leverage its distribution channel and increase its overall product portfolio. These acquisitions are detailed below.

Delmarva Acquisition

On August 15, 2003, the Company completed the acquisition of Delmarva Laboratories, Inc. (“Delmarva”). Delmarva’s product portfolio includes Euthasol® and Pentasol®, both of which are humane euthanasia products, and Biomox® (amoxicillin) tablets and suspension. The Company also received as part of the Delmarva acquisition, the FDA product registrations for Clintabs™ tablets and Clinsol™ liquid, which are products containing the antibiotic clindamycin. The Company determined that all of the product rights acquired are finite lived intangible assets with no residual values and assigned an estimated weighted-average amortization period of 32 years.

The Company paid approximately $2.6 million in cash, which includes $0.1 million in transaction costs. In accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”), the Company accounted for this transaction under the purchase method and, at the date of acquisition, recorded a liability of $2.2 million in the Consolidated Balance Sheet at September 30, 2003 for the excess of the estimated fair value of the acquired net assets over the initial cash payment. See Note 7. “Commitments and Contingencies” for further discussion. As the contingencies resolve, any amounts paid related to the contingencies will reduce the liability booked at the acquisition date and amounts paid in excess of the liability will be reflected as an increase to goodwill. Any remaining liabilities after all contingencies resolve will be allocated as a pro rata reduction of the amounts assigned to the assets acquired with any amounts that remain after reducing those assets to zero recognized as an extraordinary gain.

Under the purchase method of accounting, the assets acquired and liabilities assumed from Delmarva are recorded at the date of acquisition, at their respective fair values. Accordingly, the results of operations of Delmarva are included in the Company’s financial statements beginning August 15, 2003. The Delmarva acquisition was funded with existing cash and with borrowings under Virbac’s Credit Agreement.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes the estimated fair market value, as determined by independent valuations and supported by internal studies, of the assets acquired and the liabilities assumed at the date of acquisition:


(In thousands)
Product rights	$	4,760
Working capital		(5	)

Estimated fair value of acquired net assets		4,755
Liability related to contingent consideration		2,173

Cash consideration	$	2,582

King Acquisition

On September 8, 2003, the Company completed the acquisition of assets relating to the animal health products of King Pharmaceuticals, Inc. (“King”) for a purchase price of $15.2 million in cash. The acquired assets include certain product assets, unfilled customer orders, inventories, manufacturing equipment and intellectual property. The product portfolio includes SOLOXINE®, a leader in canine thyroid hormone replacement, Pancrezyme®, Tumil-K®, Uroeze® and Ammonil®. The Company determined that all of the product rights acquired are finite lived intangible assets with no residual values and assigned an estimated weighted-average amortization period of 24 years.

The acquisition has been accounted for as a purchase business combination. Accordingly, the results of operations of King are included in the Company’s financial statements beginning September 8, 2003. The acquisition was funded with cash on hand and additional borrowings under the Credit Agreement.

The following table summarizes the estimated fair value, as determined by independent valuations and supported by internal studies, of the assets acquired and the liabilities assumed at the date of acquisition:


(In thousands)
Inventory	$	133
Unfilled customer orders		520
Product rights		13,630
Property, plant and equipment		196
Goodwill		745

Cash consideration	$	15,224

In accordance with SFAS No. 142, goodwill recorded in the King acquisition, which is deductible for income tax purposes, will not be amortized. The goodwill will be tested annually for impairment.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

Pro Forma Information

The following unaudited pro forma information below sets forth summary results of operations as if the acquisition of King (acquired September 8, 2003) had occurred on January 1, 2002, after giving effect to certain adjustments, primarily interest expense and amortization of intangibles. The effect on the results of operations of the Delmarva acquisition is considered not significant and is not presented. The following pro forma information has been prepared for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisitions occurred on January 1, 2002, or of results which may occur in the future (in thousands, except per share amounts):

Virbac Corporation
Pro Forma Condensed Combined Statements of Operations


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
Net revenue	$	18,767		$	18,265		$	52,575		$	50,375
Cost of goods sold		11,828			10,657			32,299			29,182

Gross profit		6,939			7,608			20,276			21,193
Operating expenses		6,764			5,870			21,665			18,089

(Loss) income from operations		175			1,738			(1,389	)		3,104
Interest and other expense		(336	)		(269	)		(871	)		(846	)
Income tax expense		—			(208	)		—			(360	)
Cumulative effect of change in accounting principle		—			—			—			(2,308	)

Net (loss) income	$	(161	)	$	1,261		$	(2,260	)	$	(410	)


(Loss) income per share:
Basic (loss) income per share	$	(0.01	)	$	0.06		$	(0.10	)	$	(0.02	)

Diluted (loss) income per share	$	(0.01	)	$	0.06		$	(0.10	)	$	(0.02	)


Basic shares outstanding		22,244			22,116			22,229			22,098
Diluted shares outstanding		22,244			22,886			22,229			22,098

4. Facility Closure

In the first quarter of 2003, the Company closed its leased Harbor City, California manufacturing facility and moved the production at that facility to its Fort Worth, Texas facility. The Harbor City facility manufactured primarily oral hygiene products. The costs to close the facility were approximately $333,000 and consisted mostly of leasehold improvement write-offs and costs to transfer existing equipment and inventory to the Fort Worth facility. These costs were recorded in selling, general and administrative expenses of the Veterinary and Consumer Brand segments during the first and second quarter of 2003, when the liability to close the plant was incurred.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

5. Inventories

Inventories consist of the following:


	September 30,			December 31,
(In thousands)	2003			2002
				(As restated)
Raw materials	$	7,652		$	5,161
Finished goods		8,444			7,470

		16,096			12,631
Less: reserve for excess and obsolete inventories		(3,075	)		(1,798	)

	$	13,021		$	10,833

6. Borrowings Under Revolving Line of Credit and Notes Payable


	September 30,			December 31,
(In thousands)	2003			2002
				(As restated)
Credit Agreement with a financial institution up to $30.0 million, varying interest rates based on covenant ratios (see below)	$	27,271		$	6,850
Installment credit loan due September 2006		12			14

Total debt		27,283			6,864
Less current portion		(27,275	)		(6,854	)

Notes payable	$	8		$	10

Funding availability under the Credit Agreement is determined by a borrowing-base formula equal to a specified percentage of the value of the Company’s eligible accounts receivable and inventory plus an assigned value to both its Bridgeton, Missouri and Fort Worth, Texas facilities. The accounts receivable, inventory, equipment and intangibles of the Company, as well as the real property of the Bridgeton and Fort Worth facilities, are pledged as collateral under the Credit Agreement. At September 30, 2003 and December 31, 2002, the interest rate on loans under the Credit Agreement is 0.75% over prime. At September 30, 2003 and December 31, 2002, the interest rate on the loans under the Credit Agreement is 4.75% and 3.25%, respectively and there were $470,000 in letters of credit outstanding under the Credit Agreement at September 30, 2003.

On August 7, 2002, the Credit Agreement was amended to extend the expiration date to July 31, 2005, and to increase the amount available under the facility from $10.8 million to $12.0 million. On August 11, 2003, an additional amendment was made to the Credit Agreement increasing the amount available under the facility from $12.0 million to $14.5 million. The existing maturity date of the Credit Agreement, July 31, 2005, was left unchanged. The increased availability was used to fund the acquisition of Delmarva.

On September 3, 2003, a further amendment to the Credit Agreement was entered into for the purpose of increasing the amount available under the facility from $14.5 million to $30.0 million and to accelerate the maturity date from July 31, 2005 to February 27, 2004. The increased borrowings were used to fund the acquisition of the animal health products of King.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

In the fourth quarter of 2003, Virbac notified its lenders that the Company would not meet the September 30, 2003 10-Q reporting period covenant. On November 12, 2003, the Company received a 90-day waiver from its lenders for non-compliance of the September 30, 2003 10-Q reporting period covenant. The waiver expired on February 10, 2004. Subsequent to this date the Company entered into an amendment to the Credit Agreement whereby the maturity date was extended to April 5, 2004.

On April 9, 2004, the Company entered into a Forbearance Agreement under its Credit Agreement (the “Forbearance Agreement”) with its lenders whereby a standstill period, with a termination date of May 10, 2004, was agreed upon. Under key terms of the Forbearance Agreement the lenders agreed to not (i) file or join in the filing of any involuntary petitions in bankruptcy with respect to the Company; (ii) seek to collect or enforce against the Company by litigation or other legal proceedings any payment or other obligation due under the Credit Agreement; or (iii) exercise or enforce any right or remedy against the Company to which the lenders would be entitled by reason of any event of default under the terms of the Credit Agreement.

The Company agreed that during the standstill period it would pay to the lenders additional principal payments to reduce the amount of outstanding borrowings under the Credit Agreement by approximately $7.0 million, which were in excess of the Company’s borrowing base, as defined under the Credit Agreement. On May 10, 2004, the Company entered into an amendment to the Forbearance Agreement with its lenders for the purpose of reducing the amount available under the Credit Agreement from $30.0 million to $20.0 million and extending the standstill period termination date to August 9, 2004. On May 6, 2005, the Company entered into another amendment to the Forbearance Agreement which reduced the amount available under the Credit Agreement from $20.0 million to $15.0 million. The standstill period currently expires on September 30, 2005. Other key terms under the Forbearance Agreement include interest at prime plus 1% and compliance with certain key financial covenants. The Company is currently in compliance with all covenants under the Forbearance Agreement and at March 31, 2005 had $2.6 million available under the Credit Agreement.

In order to reduce the amount outstanding under the Credit Agreement and provide for operating cash requirements, the Company, in the first half of 2004, executed three secured subordinated promissory notes with VBSA (“the VBSA Notes”), its indirect majority shareholder. The total borrowings under the VBSA Notes are $9.0 million and each VBSA Note has an expiration date of October 9, 2005. Under the terms of the subordinated promissory notes, interest accrues at a base rate of 5.5% per year, which is adjusted monthly based on the LIBOR Reference Rate or the EURIBOR Reference Rate, in accordance with the terms of the notes.

The Company’s cash requirements during 2004, and continuing into early 2005, have been unusual due to elevated legal and accounting fees associated with the internal investigation initiated by the Audit Committee in late 2003, the re-audit of the Company’s historical financial statements and the legal costs associated with the SEC investigation and the shareholder lawsuits. To date the Company has been able to fund these additional cash requirements from operating cash, the additional borrowings provided by VBSA and insurance coverage provided by its Directors and Officers insurance policy.

While the Company’s cash flow from operations has been sufficient to fund its normal cash requirements; there can be no assurance the Company has sufficient capital to continue to fund the ongoing unusual cash requirements. The Company does not currently have sufficient cash on hand nor does it anticipate it will have sufficient cash to repay its borrowings due to VBSA at the current maturity date of October 9, 2005. The Company expects that it will be able to negotiate an extension to the Forbearance Agreement or a new Credit Agreement with its lenders prior to its expiration on September 30, 2005, however there can be no assurance the Company’s lenders will agree to either of these arrangements.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

7. Commitments and Contingencies

Legal Proceedings

Virbac is a party to various claims and litigation, the significant items of which are discussed below. Management recognizes the uncertainties of litigation and the possibility that one or more adverse rulings could materially impact operating results.

Putative Securities Class Action Litigation

On December 15, 2003, Martine Williams, a Virbac stockholder, filed a putative securities class action lawsuit in the United States District Court for the Northern District of Texas, Fort Worth Division, against Virbac, VBSA, Thomas L. Bell (the Company’s former President, Chief Executive Officer and member of the Company’s Board of Directors), Joseph A. Rougraff (the Company’s former Vice President, Chief Financial Officer and Secretary), and Pascal Boissy (the Chairman of the Board of Directors). The complaint asserted claims against Virbac and the individual defendants based on securities fraud under Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 of the Exchange Act (“Rule 10b-5”), and claims against VBSA and the individual defendants based on “control person” liability under Section 20(a) of the Exchange Act. On May 19, 2004, the Williams v. Virbac et al. lawsuit was consolidated with a separate lawsuit filed by John Otley, which contained virtually identical allegations to those claimed by Martine Williams, and the court appointed lead counsel for the plaintiffs.

On September 10, 2004, plaintiffs filed a consolidated amended class action complaint (the “Amended Complaint”), asserting claims against Virbac and the individual defendants based on securities fraud under Section 10(b) under the Exchange Act and Rule 10b-5, and asserting claims against VBSA and the individual defendants for violation of Section 20(a) of the Exchange Act as alleged “control persons” of Virbac. Plaintiffs generally allege in the Amended Complaint that the defendants caused Virbac to recognize and record revenue that it had not earned; that Virbac thereupon issued financial statements, press releases and other public statements that were false and materially misleading; that these false and misleading statements operated as a “fraud on the market,” inflating the price of Virbac’s publicly traded stock; and that when accurate information about Virbac’s actual revenue and earnings emerged, the price of the Company’s Common Stock sharply declined, allegedly damaging plaintiffs. Plaintiffs seek to recover monetary compensation for all damages sustained as a result of the defendants’ alleged wrongdoing, in an amount to be determined at trial (including pre-judgment and post-judgment interest thereon), costs and expenses incurred in connection with the lawsuit (including attorneys’ fees and expert witnesses’ fees), and such other and further relief as the court may deem just and proper.

Virbac believes that it has meritorious defenses to the plaintiffs’ claims, and it filed a motion to dismiss the Amended Complaint on December 10, 2004, as did defendants Bell and Rougraff. Defendants VBSA and Boissy filed a joint motion to dismiss on December 14, 2004. On February 11, 2005, plaintiffs filed a consolidated opposition against all defendants’ motions to dismiss. On March 11, 2005, Virbac, Bell, and Rougraff each filed separate replies to plaintiffs’ consolidated opposition. Defendants VBSA and Boissy filed a joint reply on March 11, 2005.

At the present time, Virbac is unable to predict the outcome of the lawsuit and cannot provide an estimate of losses likely to be incurred in connection with it, or its financial impact, if any.

Shareholder Derivative Lawsuit

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

members of Virbac’s Board of Directors and Joseph A. Rougraff, a former officer of the Company. These two lawsuits have been consolidated in the United States District Court for the Northern District of Texas, Fort Worth Division. On December 3, 2004, the court appointed lead counsel for plaintiffs. On March 1, 2005, plaintiffs filed a consolidated amended derivative shareholder complaint (the “Amended Derivative Complaint”), asserting all claims against: defendants Bell and Rougraff for improper financial reporting under the Sarbanes-Oxley Act of 2002 (“SOX”); all individual defendants for gross mismanagement, breach of fiduciary duty, waste of corporate assets, and unjust enrichment; and defendant Boissy for breach of fiduciary duties due to insider selling and misappropriation of information. Virbac is named as a nominal defendant in the Amended Derivative Complaint.

Plaintiffs generally allege in the Amended Derivative Complaint that the individual defendants caused Virbac to issue financial statements, press releases, and other public statements that were false and materially misleading, caused Virbac to miss required financial reporting deadlines under SOX, and sold stock on inside information. As a result, plaintiffs allege, the Company’s market capitalization and share price were severely devalued; the Company was subjected to a formal investigation and a potential civil action brought by the SEC; the Company faces tens of millions of dollars in legal, accounting, and other professional fees; and the Company’s overall credibility, reputation, and goodwill were irreparably damaged. Plaintiffs seek, on behalf of nominal defendant Virbac, to recover monetary compensation, including a disgorgement of all profits and bonuses the defendants allegedly earned in the relevant time period, as a result of the defendants’ alleged wrongdoing, in an amount to be determined at trial (including pre-judgment and post-judgment interest thereon), costs and expenses incurred in connection with the lawsuit (including attorneys’ fees and expert witnesses’ fees), and such other and further relief as the court may deem just and proper.

On April 18, 2005, Virbac and certain individual defendants filed a motion to stay the shareholder derivative action until such time as the Court rules on the pending motions to dismiss the putative securities class action. A decision on the motion to stay has not yet been rendered. On April 28, 2005, the Court issued an order extending the time in which Virbac and the individual defendants have to file responsive pleadings in the shareholder derivative action until 30 days after the earlier of: (1) when the motions to dismiss filed in the putative securities class action are decided; or (2) when the motion to stay the shareholder derivative action is decided.

At the present time, Virbac is unable to predict the outcome of the lawsuit and cannot provide an estimate of losses likely to be incurred in connection with it, or its financial impact, if any.

Virbac intends to defend vigorously against the putative shareholder class action and shareholder derivative lawsuits. Virbac cannot predict the likely outcome of these lawsuits, and an adverse result in either lawsuit could have a material adverse effect on the Company or on its operations. The Company has notified its insurance carriers of these lawsuits and submitted expenses incurred in defending the lawsuits as claims under the relevant insurance policies.

SEC Investigation

On February 13, 2004, the staff of the SEC notified Virbac that it had commenced a formal investigation to determine whether any violations of the federal securities laws may have occurred. The Company, its officers, directors and employees have, under a directive from the Company’s Board of Directors, cooperated with the SEC in its investigation.

On January 13, 2005, the Company announced it had received a written “Wells Notice” from the staff of the SEC. The Wells Notice indicated that the staff intends to recommend to the SEC that it authorize an enforcement action against the Company alleging that the Company violated certain provisions of the federal securities laws.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

The Company has been in settlement discussions with the staff of the SEC regarding the terms of a proposed settlement of the previously announced investigation. The proposed settlement, which the staff has indicated that they intend to recommend that the SEC accept, includes the following principal terms:

• without admitting or denying the SEC’s allegations, the Company would agree to a stipulated judgment enjoining the Company from future violations of various provisions of the federal securities laws; and

• the Company would pay a total of $500,001, consisting of $1 in disgorgement and $500,000 in a civil money penalty.

As a result of these settlement discussions, the Company recorded a reserve of $500,000 in the quarterly period ended December 31, 2003, for the civil money penalty that may be assessed in connection with the proposed settlement. The proposed settlement is subject to final approval by the SEC, and no assurance can be given that this matter will be settled consistent with the proposed terms or amount reserved.

Additionally, the staff of the SEC has also notified the Company that, if the Company does not file its periodic reports for fiscal year 2004 with the SEC on or before August 31, 2005, the staff of the SEC may recommend that the SEC institute an administrative proceeding to deregister the Common Stock pursuant to Section 12(j) of the Securities Exchange Act of 1934, as amended. The Company continues to cooperate with the SEC in connection with its investigation.

Operating Leases

The Company leases facilities and certain machinery under non-cancelable operating leases that expire at various dates through June 2008 and have renewal options ranging from 1 to 5 years. As discussed in Note 4. “Facility Closure”, in the first quarter of 2003, the Company closed its leased Harbor City manufacturing facility and moved all of the production at that facility to its Fort Worth facility.

Future lease payments under non-cancelable operating leases as of September 30, 2003, are as follows:


(In thousands)
Remainder of 2003	$	53
2004		189
2005		105
2006		27
2007		11
2008		2

Total amortization	$	387

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 totalling $3.2 million for such rights. These payments have been recorded as research and development expenses when paid since the products underlying the licensing rights were not approved for marketing by the FDA at the time of the payments. During 2001, the Company entered into an agreement with the third party whereby the 15 year license was converted to the Company’s full ownership of all rights relating to the products and the Company’s future payments under the agreement were reduced in exchange for the Company assuming all remaining costs of registering the products. The Company estimated those costs to be approximately $1.4 million. Such costs

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

are recorded as research and development expense in the periods in which they are incurred. Of the expected $1.4 million, approximately $0.9 million had been incurred through September 30, 2003.

Pfizer Agreement

In 2000, the Company entered into an agreement with Pfizer Inc. (“Pfizer”) to sublicense to Pfizer the Company’s North American distribution rights for two equine products. In accordance with the terms of the agreement, Pfizer initially paid the Company $1.0 million and $4.25 million for the development of the two products, respectively. Each payment was subject to repayment if the Company did not obtain FDA approval to sell the respective products by January 1, 2004. In the third quarter of 2002, the Company received the FDA approval required to sell the first product and received an additional milestone payment of $0.7 million because the approval was received in advance of a specified date. The Company began to recognize the unearned product license fee on the first product as revenue in the fourth quarter of 2002, when sales of the product to Pfizer commenced. In July 2003, the Company received the FDA approval for the second product, which entitled the Company to receive an additional milestone payment of $1.7 million. The Company began to sell the second product to Pfizer in the third quarter of 2003 and, accordingly, began to recognize the unearned product license fees for the second product during that quarter. Unearned product license fees on both products are recognized into revenue on a proportionate basis, based upon estimates of when the sales of each of these products will occur over the periods covered by the licenses. The payments received for both products have been reflected as unearned product license fees in the accompanying Consolidated Balance Sheets, net of revenue recognized. In connection with this agreement, the Company recognized $98,000 and zero of revenue during the nine months ended September 30, 2003 and 2002, respectively.

Environmental

PMR is the subject of a Consent Order dated November 22, 1999, issued by the Circuit Court of St. Louis County, Missouri requiring investigation and remediation of historic contamination at its Bridgeton, Missouri facility. The majority of the costs of investigation and remediation have already been incurred and reimbursed pursuant to third party indemnity obligations. The Company expects that all future remediation costs will be reimbursed under the terms of the indemnity agreement. However, the Company can make no assurance that contingencies might not increase or that the indemnity will continue. The Company does not believe that any additional costs to the Company to complete the obligations under the Consent Order will have a material adverse effect on the Company. Further, management believes that the Company is in substantial compliance with all applicable local, state and federal environmental laws and regulations, and that resolution of the environmental issues contained in this paragraph will have no material adverse effect on the Company’s financial position, cash flows, or results of operations.

Adjustment of the Merger Shares

In order to maintain VBSA’s indirect 60% ownership interest in the Company through Interlab S.A.S., a French corporation (“Interlab”), until the expiration, termination, or exercise of all options to purchase the Common Stock outstanding as of the date of the Merger, the Company will contemporaneously, with the issuance of Common Stock upon the exercise of pre-Merger Company options issue to Interlab 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 Agri-Nutrition options and (b) 1.5. Each such post-Merger adjustment will dilute the voting power of current shareholders. As of September 30, 2003, 181,500 pre-Merger options were outstanding. In 2003, approximately 40,000 shares of Common Stock were issued from the exercise of pre-Merger options. As a result, approximately 60,000 shares are currently owed to Interlab for the pre-Merger options exercised in 2003 and are to be issued in 2005. No new shares will be issued to Interlab in the event that treasury shares are reissued to satisfy these pre-merger obligations since the use of treasury shares does not dilute VBSA’s indirect ownership interest.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

Delmarva Acquisition

As more fully described in Note 3. “Acquisitions”, the Company purchased 100% of the outstanding shares of the common stock of Delmarva for a base purchase price of $2.5 million in cash and additional contingent purchase consideration of up to $2.5 million. The purchase agreement provides that the contingent consideration will be paid in increments based upon the attainment of several performance thresholds of the products purchased. The various stated performance thresholds generally include the registration and revenue goals of a product right purchased, as well as gross profit milestones within a specified time period for the other products purchased.

No contingency payments were earned or payable as of September 30, 2003, under the terms of the Delmarva purchase agreement. During the first quarter of 2005, one of the contingency thresholds was met and accordingly, a contingency payment of $250,000 is owed by the Company to the prior shareholders of Delmarva. Based on the Company’s most recent fair market valuation of Delmarva and product performance, the Company expects that it will pay the full balance of the contingent consideration under the terms of the agreement.

8. Segment and Related Information

The Company has three reportable segments. The Veterinary segment manufactures and distributes pet health products mainly to veterinary offices. The Consumer Brand segment manufactures and distributes pet health products to pet stores, farm and feed stores, and the mass retail market. The Contract Manufacturing segment 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. “Summary of Significant Accounting Policies” of the 2003 10-K which was filed with the SEC on April 29, 2005. In evaluating segment performance (excluding Contract Manufacturing), management focuses on income from operations. Accounts receivable are allocated by segment while all other assets remain unallocated. Management separately monitors the Contract Manufacturing results and total assets.

The Company’s reportable segments utilize different channels of distribution, are managed separately, sell different products and have different marketing strategies. Summarized financial information concerning the Company’s reportable segments is shown in the following table:

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)


			Consumer			Contract					Consolidated
(In thousands)	Veterinary		Brand			Manufacturing		Unallocated			Total
As of and for the three months ended September 30, 2003
Revenues	$	8,106	$	5,227			4,675	$	—		$	18,008
Income (loss) from operations		1,551		205			767		(2,476	)		47
Interest expense, other income and tax expense, net		—		—			—		(155	)		(155	)
Net loss		—		—			—		(108	)		(108	)

As of and for the three months ended September 30, 2002 (As restated)
Revenues	$	7,831	$	6,276			1,975	$	—		$	16,082
Income (loss) from operations		1,834		914			76		(1,918	)		906
Interest expense, other income and tax expense, net		—		—			—		(296	)		(296	)
Net income		—		—			—		610			610

As of and for the nine months ended September 30, 2003
Revenues	$	21,818	$	17,445		$	10,562	$	—		$	49,825
Income (loss) from operations		2,748		1,242			1,970		(7,900	)		(1,940	)
Interest expense, other income and tax expense, net		—		—			—		(329	)		(329	)
Net loss		—		—			—		(2,269	)		(2,269	)

As of and for the nine months ended September 30, 2002 (As restated)
Revenues	$	21,992	$	17,811			6,255	$	—		$	46,058
Income (loss) from operations		5,139		(257	)		411		(3,615	)		1,678
Interest expense, other income and tax expense, net		—		—			—		(664	)		(664	)
Net loss		—		—			—		(1,294	)		(1,294	)

9. Goodwill and Other Intangible Assets

Upon adoption of SFAS No. 142 in the first quarter of 2002, the Company recorded a non-cash charge of $2.3 million to reduce the carrying value of goodwill. Such charge is nonoperational in nature and is reflected as the cumulative effect of an accounting change in the accompanying consolidated statements of operations. In calculating the impairment charge, the fair value of the impaired reporting unit underlying the segment was estimated using a discounted cash flow methodology.

In performing its impairment testing on other intangible assets, the Company determined that certain intangible assets with determinable lives and certain intangible assets with indefinite lives were impaired as they were no longer utilized. During the nine months ended September 30, 2003 and 2002, the Company charged $3,000 and $3,000, respectively to expense related to impaired patents with determinable lives and $5,000 and zero, respectively to expense related to impaired trademark rights with indefinite lives. The impairment charges by segment were $3,000 in the Consumer Brand segment and $8,000 in Veterinary segment. The impairment amounts were recorded to selling, general and administrative expenses in the Consolidated Statement of Operations.

In connection with the acquisitions described in Note 3. “Acquisitions”, the Company acquired $18.4 million of product rights, all of which have finite lives and are subject to amortization. The Company also recorded a liability related to contingent consideration of $2.2 million in connection with the Delmarva

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

acquisition and $0.7 million of goodwill in connection with the assets purchased from King. The acquired goodwill will not be subject to amortization but instead evaluated for impairment on an annual basis.

Expected amortization expense for the remainder of 2003 and annually through 2008 is as follows:


(In thousands)
Remainder of 2003	$	232
2004		928
2005		928
2006		928
2007		928
2008		928

Total amortization	$	4,872

10. 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 distributor consortium, Vedco Inc., represent the Company’s largest group of customers and accounted for approximately 21.3% and 20.3% of net revenues for the nine months ended September 30, 2003 and 2002, respectively. These revenues are reflected in the Veterinary and Contract Manufacturing segments. Accounts receivable outstanding from this same buying group at September 30, 2003 and December 31, 2002, were approximately $7.6 million and $4.0 million, respectively.

11. Recent Accounting Standards

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, (“SFAS No. 149”). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149 amends Statement 133 for decisions made: (i) as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133; (ii) in connection with other Board projects dealing with financial instruments; and (iii) regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of an “underlying” and the characteristics of a derivative that contain financing components. The statement is generally effective for contracts entered into or modified after June 30, 2003, and is to be applied prospectively. The implementation of SFAS No. 149 did not have an impact on the Company’s consolidated financial position and results.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS No. 150 will be effective on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The implementation of SFAS No. 150 on July 1, 2003, did not have a material effect on the Company’s consolidated financial statements.

VIRBAC CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Restatement of Financial Statements

During the course of its regular review of Virbac’s operating results for the third quarter of 2003, the Company’s independent registered public accounting firm raised questions concerning the Company’s revenue recognition practices with the Company’s management and the Audit Committee. As a result, the Audit Committee initiated an internal investigation into Virbac’s accounting and financial reporting practices. The Audit Committee retained independent counsel to conduct the investigation.

Contemporaneously with the filing of this Quarterly Report on Form 10-Q, the Company has filed its restated audited financial statements for each of the years 2001 and 2002, its restated unaudited interim financial data for all quarters in 2001 and 2002, its restated unaudited interim financial data for the quarters ended March 31, 2003 and June 30, 2003, and its audited financial results for 2003 through its filing of the 2003 10-K on April 29, 2005. The 2003 10-K also includes restated unaudited financial data for years 1998 through 2000. The Company’s previously released financial data for each of these periods should not be relied upon.

As a result of its inability to timely file its Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, the Common Stock was de-listed from the NASDAQ National Market, effective January 23, 2004.

The Company intends to file a new listing application with NASDAQ once it is deemed that the Company has filed all necessary reports under the federal securities laws. Although the Company currently believes it will satisfy all relevant requirements for listing of the Common Stock on NASDAQ, there can be no assurance that its application will be approved, or, if approved, when the Common Stock will be re-listed for trading on NASDAQ.

Overview

Virbac, based in Fort Worth, Texas, develops, manufactures, markets, distributes and sells a variety of pet and companion animal health products, focusing on dermatological, parasiticidal, dental and certain pharmaceutical products. Its Bridgeton, Missouri facility also formulates products under private-label and provides third party contract manufacturing services of products for use in the animal health and specialty chemicals industries, including products for over 20 international, national and regional veterinary pharmaceutical companies.

The Company has three reportable segments: the Veterinary segment, which provides animal health products to veterinary clinics throughout North America; the Consumer Brand segment, which sells over-the-counter products for companion animal health to national accounts, distributors and wholesalers; and the Contract Manufacturing segment, which offers a broad range of services and specialized expertise in the manufacture of highly regulated products as well as direct sales of livestock products. Operating results for these segments may be found in Note 8. “Segment and Related Information” of the “Notes to Consolidated Financial Statements.”

The Veterinary segment includes dermatological products, oral hygiene products, flea and tick products, ear cleaners, nutritional supplements, gastrointestinal products and certain pharmaceutical products, including canine heartworm preventatives, endocrinology treatments and euthanasia drugs. The Company considers the Veterinary segment to be its core business and devotes most of its management time and other resources to improving the prospects for this segment. A significant amount of the Company’s sales and marketing expenses are in the Veterinary segment and the vast majority of the research and development spending is dedicated to this segment, as well. Virbac has devoted substantial resources to the research and development of innovative products in the Veterinary segment, where the Company strives to develop high value products.

Virbac’s product development strategy has included in-house development, licensing and the direct acquisition of products. Virbac’s products are widely recognized by veterinarians for their quality and proven effectiveness. Virbac’s core products in this segment have historically been dermatological and dental care products. In the past few years, Virbac has expanded its product offerings to include pharmaceutical products.

In the third quarter of 2003, Virbac completed two acquisitions to expand its pharmaceutical product offerings, leverage its distribution channel and increase its overall product portfolio. These acquisitions are more fully described in Note 3., “Acquisitions” of the “Notes to Consolidated Financial Statements.”

The majority of the Company’s animal health products in the Veterinary segment are sold to or through veterinarians. Virbac provides veterinarians with a suggested retail price for the sale of the product to the consumer. The Company’s veterinary products are sold to veterinarians exclusively through distributors. The Company considers its relationships with both the distributors and veterinarians to be crucial to its success.

The Consumer Brand segment sells more than 300 product presentations in pet specialty retail stores, superstores, mass merchandisers and farm and fleet stores. Under the Company’s principal consumer brand labels of Petrodex®, Mardel®, Petromalt®, Francodexâ, Zema®, Healthy Companion® and Pet Relief®, the Company sells health care products for dogs, cats, tropical fish, birds and various other animals. Some of these products are manufactured by Virbac, while others are contract manufactured or purchased. The promotion of the Company’s Consumer Brand segment is focused on obtaining shelf space in retail locations by creating consumer brand awareness and demand. In 2001, the Company consolidated its over-the-counter brands under the corporate umbrella of the Virbac name while maintaining the established, individual brands. The Company sells its Consumer Brand segment products directly to retailers or through distributors. The Company

considers its relationship with major retailers such as PETCO and PETsMART, critical to the success of its Consumer Brand segment.

The Contract Manufacturing segment’s products are generally regulated pharmaceuticals and pesticides and primarily manufactured for significant animal health and specialty chemical customers. This segment distributes animal health products to the farm and fleet market, as well as rural and urban pet feed retailers. It also produces private label products, whereby the Company produces the product and then labels it with the customer’s label. This division performs a broad range of formulation, development, manufacturing, packaging and distribution activities. The Company holds over 140 FDA and EPA product registrations.

The Contract Manufacturing segment includes a 176,000 square foot production facility in Bridgeton, Missouri that is licensed with both the EPA and FDA. The Company views this facility as a strategic asset, which allows it to control the cost of goods that are manufactured for both the Veterinary and Consumer Brand segments. Over the past several years, the Company’s strategy has been to eliminate low margin contract manufacturing products and transfer the available production capacity to Veterinary and Consumer Brand products. Virbac expects this transition to continue in the future as it expands its product portfolio.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Statements contained herein (and other statements made by the Company) are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including:

•   statements contained or incorporated herein regarding possible or assumed future results of operations of the Company’s business, pricing trends, the markets for Virbac products, anticipated capital expenditures, regulatory developments, or competition;

•   statements preceded by, followed by, or that include the words “intends,” “estimates,” “believes,” “expects,” “anticipates,” “ plans,” “projects,” “should,” “could” or similar expressions; and

•   other statements contained or incorporated by reference herein regarding matters that are not historical facts.

Investors are cautioned not to place undue reliance on these statements, which speak only as of the date this Quarterly Report on Form 10-Q is filed. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to matters arising out of the putative securities class action and other lawsuits and the ongoing SEC investigation related to the previously announced Restatement in the 2003 10-K, which was filed on April 29, 2005. A discussion of the risk factors that may cause actual results to differ materially from management’s expectation is located in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2003 10-K.

Although the Company considers its estimates and assumptions to be reasonable based upon information currently available to it, due to these and other risks and uncertainties, actual future events may deviate from the estimates and assumptions on which the forward-looking statements are based. Deviation between actual future events and Virbac’s estimates and assumptions could lead to results

that are materially different from those expressed in or implied by the forward-looking statements. Virbac does not intend to update these forward-looking statements to reflect actual future events.

Critical Accounting Policies and Estimates

The financial statements of the Company are prepared in accordance with accounting principles generally accepted 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 net revenues and expenses. On an ongoing basis, management evaluates its estimates and judgments, 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 judgments 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.

The Company believes the following critical accounting policies reflect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition

The Company recognizes revenue when the following four criteria have been met. These include: (i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price is fixed and determinable; and (iv) collectibility is reasonably assured.

Virbac recognizes revenue at the time of shipment to its veterinary distributors, certain of its Consumer Brand distributors and direct customers, and all of its Contract Manufacturing customers where Virbac has ownership of the inventory, as title and risk of loss pass to the customers on delivery to the common carrier. Virbac recognizes revenue for certain Consumer Brand customers when the product is delivered. Revenue related to certain Contract Manufacturing customers, for which the Company provides warehousing and/or distribution services, is recognized upon the completion of the manufacturing process when the customer accepts all risks of ownership but requests, due to the nature of the inventory, that the Company hold the inventory for a short period of time and all the other necessary conditions for revenue have been met.

In connection with the Restatement, the Company determined it was more appropriate to recognize revenue for certain of its product sales, principally the livestock de-wormer product sales, during the nine months ended September 30, 2003 and 2002, at the time of cash collection, as collectibility was not reasonably assured at the time of shipment. In addition, the Company recognized revenue at the time of cash collection for all sales transactions during the nine months ended September 30, 2003 and 2002 for which there was a warehousing arrangement in connection with the delivery.

Sales Related and Product Replacement Reserves

The Company’s gross product sales are subject to a variety of deductions, primarily representing rebates and discounts to its customers and expected returns. These deductions and returns represent estimates of the related obligation and, as such, judgment is required when estimating

the impact of these sales deductions on gross sales for a reporting period. The sensitivity of the estimates can vary by program, type of customer and geographic location. Estimates associated with certain veterinary products with limited expiration periods are at-risk for material adjustment because the customers may return unsold expired products. Other products with longer shelf lives have longer return periods which makes the determination of their ultimate return rate more difficult.

The Company generally records marketing related sales incentives, such as co-op advertising, as a charge to selling, general and administrative expenses at the time the related revenues are recorded or when the incentive is offered, whichever is later. Virbac estimates the cost of sales incentives based on historical experience with similar incentive programs.

The Company’s sales related and product replacement reserves are recorded as liabilities in the Consolidated Balance Sheets, as opposed to a reduction in accounts receivable, as the sales to which they pertain have generally been collected and these reserves represent liabilities for future performance.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is estimated based on historical charge-off experience, evaluation of customers’ delinquency status and assumptions regarding probable credit losses. Such estimates are reviewed monthly and may be impacted by actual performance of trade receivables and changes in any of the factors discussed above. The Company believes that the allowance for doubtful accounts is adequate to cover probable losses inherent in its receivables; however, because the allowance for doubtful accounts is based on estimates, there can be no assurance that the ultimate charge-off amount will not exceed such estimates.

Inventories and Inventories on Consignment

Inventories include material, labor and overhead and are stated at the lower of average cost or market. Inventory is written-down for estimated obsolescence when warranted, based on estimates of future demand and the shelf life of products. If actual market conditions are less favorable than those estimated by management, additional inventory write-downs may be required. Inventories on consignment represent finished goods delivered to customers in transactions for which revenue recognition is not appropriate.

Valuation of Long-Lived and Intangible Assets and Goodwill

In 2002, the Company adopted SFAS No. 142 and as a result, ceased to amortize goodwill along with trademarks. In lieu of recording amortization expense on these intangible assets, the Company is required to perform an annual impairment review. For additional information, see Note 9. “Goodwill and Other Intangible Assets”, of the “Notes to Consolidated Financial Statements”.

On January 1, 2003, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS No. 144”). SFAS No. 144 requires the Company to evaluate property, plant and equipment and amortizable intangible assets for impairment whenever current events and circumstances indicate the carrying amounts may not be recoverable. If the carrying amount is greater than the expected future undiscounted cash flows to be generated, the Company recognizes an impairment loss equal to the excess, if any, of the carrying value over the fair value of the asset.

In accordance with the above accounting provisions, the Company assesses the impairment of long-lived and intangible assets, and goodwill at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include, but are not limited to the following:

•   Significant under-performance compared to historical or projected future operating results;

•   Failure to obtain regulatory approval of certain products;

•   Significant changes in the manner of use of the acquired assets or the strategy for the overall business;

•   Significant increase in the discount rate assumed to calculate the present value of future cash flows;

•   Significant negative industry or economic trends; and

•   Significant advancements or changes in technology.

Unearned Product License Fees

The Company has received payments on two products related to its distribution agreement with Pfizer. The payments received for both products have been reflected as unearned product license fees in its Consolidated Balance Sheets. Upon the Company obtaining registrations from the appropriate governmental agencies permitting it to sell these products, the Company began to recognize revenue from these product license fees during the fourth quarter of 2002 for the first product and during the third quarter of 2003 for the second product. Revenue is recognized on a proportionate basis, based upon estimates of when the sales of each of these products will occur over the periods covered by the licenses.

Assessment of Loss Contingencies

The Company has legal and other contingencies that could result in significant losses upon the ultimate resolution of such contingencies. Virbac has provided for losses in situations where it has concluded that it is probable a loss has been or will be incurred and the amount of the loss is reasonably estimable. A significant amount of judgment is involved in determining whether a loss is probable and reasonably estimable due to the uncertainty involved in determining the likelihood of future events and estimating the financial statement impact of such events. Accordingly, it is possible that upon the further development or resolution of a contingent matter a significant charge could be recorded in a future period related to an existing contingent matter that could have a material adverse effect on the results of operations, financial position or cash flows of the Company. For additional information, see Note 7. “Commitments and Contingencies” of the “Notes to Consolidated Financial Statements”.

Income Taxes

Virbac accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing

assets and liabilities and their respective tax bases. In addition, deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Valuation allowances are established when realization of the benefit of deferred tax assets is not deemed to be more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Certain of Virbac’s deferred tax assets are comprised of net operating loss carryforwards for federal and state income tax filing purposes for which recovery is dependent on the amount and timing of taxable income that will ultimately be generated in the future and other factors. A high degree of judgment is required to determine the extent that valuation allowances should be provided against deferred tax assets.

Business Combinations

Virbac has accounted for business combinations using the purchase method of accounting in accordance with the provisions of SFAS No. 141. Prior to the July 1, 2001 adoption of SFAS No. 141, the Company accounted for business combinations in accordance with the provisions of APB Opinion No. 16, Business Combinations. The results of operations of the acquired business are included in the consolidated results of operations from the date of acquisition. The cost to acquire companies, including transaction costs, has been allocated to the underlying net assets of the acquired companies based on their respective fair values. Any excess of the purchase price over estimated fair values of the tangible and identified intangible assets acquired has been recorded as goodwill. The application of purchase accounting required a high degree of judgment and involves the use of significant estimates and assumptions.

Although Virbac generally uses independent third party valuation specialists to determine the fair values of acquired assets and assumed liabilities for purposes of performing purchase price allocations, such valuations are based in large part on management estimates and assumptions that the Company believes to be reasonable, but which are inherently uncertain. The most significant of these assumptions involves the estimation of future cash flows of acquired product rights and the discounting of such cash flows to estimate the fair value of acquired intangible assets such as goodwill and product rights.

Other significant estimates and assumptions are required to value acquired receivables, inventories, other assets and various assumed liabilities. The fair values reflected in the Company’s purchase price allocations impact depreciation, amortization, impairment charges and other components of Virbac’s ongoing operating results. Accordingly, variations in the estimates and assumptions from the amounts reflected in the final purchase price allocations would result in changes to the Company’s operating results. In this regard, different classes of assets have varying impacts on the Company’s operating results. For example, goodwill is no longer amortized. For additional information, see Note 3. “Acquisitions” of the “Notes to Consolidated Financial Statements”.

Results of Operations

The following table sets forth, for the periods presented, the Company’s revenues and expenses as a percentage of net revenues:


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2003			2002			2003			2002
				(As restated)						(As restated)
Net revenues		100	%		100	%		100	%		100	%
Cost of goods sold		64			62			62			60

Gross profit		36			38			38			40

Operating expenses:
Selling, general and administrative		27			25			31			27
Research and development		6			4			7			5
Warehouse and distribution		3			3			4			4

Total operating expenses		36			32			42			36

Income (loss) from operations		—			6			(4	)		4
Interest expense and other (expense) income		(1	)		(1	)		(1	)		(1	)


(Loss) income before income tax expense		(1	)		5			(5	)		3
Income tax expense		—			(1	)		—			(1	)


(Loss) income before cumulative effect of change in accounting principle		(1	)		4			(5	)		2
Cumulative effect of change in accounting principle		—			—			—			(5	)


Net (loss) income		(1)	%		4	%		(5)	%		(3)	%

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002

Net Revenues:

Net revenues increased by approximately $1.9 million or 12% for the three months ended September 30, 2003, compared with the three months ended September 30, 2002. Specifically, net revenues by segment were as follows:


	For the Three Months Ended September 30,
					Change
(In thousands)	2003		2002		Dollars			%
			(As restated)
Veterinary	$	8,106	$	7,831	$	275			4%
Consumer Brand		5,227		6,276		(1,049	)		(17)
Contract Manufacturing		4,675		1,975		2,700			137%

Total	$	18,008	$	16,082	$	1,926			12%

•   Veterinary net revenues experienced an increase primarily due to higher sales in the dermatology and dental lines and sales of products related to the Delmarva and King acquisitions in August and September of 2003, respectively. The Delmarva product portfolio includes Euthasol® and Pentasol®, both of which are humane euthanasia products and Clintabsä and Clinsolä. The King product portfolio includes SOLOXINE®, a leader in canine thyroid hormone replacement, and Pancrezyme®, Tumil-K®, Uroeze® and Ammonil® which are pancreatic and nutritional supplements.

•   Consumer Brand net revenues were negatively affected by an increase in sales related discounts and return reserve requirements. This segment is experiencing extreme competitive pressures within the pet store channel and from competing products sold by mass- merchandising stores.

•   The Contract Manufacturing segment includes net revenues from the Company’s contract manufacturing operations as well as livestock de-wormer product sales and equine products sold exclusively to Pfizer. Net revenues increased for the three months ended September 30, 2003 as compared with the three months ended September 30, 2002, principally due to increased livestock de-wormer product sales and sales from the introduction of two equine products. The Company obtained FDA approval for the second of two equine products in July 2003. The first product was launched in the fourth quarter of 2002.

The Company expects that overall net revenues will be higher continuing into 2004, principally as a result of increased net revenues from the King and Delmarva acquisitions completed by the Company in the third quarter of 2003. For additional information, see Note 3. “Acquisitions” of the “Notes to Consolidated Financial Statements.”

The Company’s pro forma operating results reflected in Note 3. “Acquisitions” of “Notes to Consolidated Financial Statements” indicate that the King acquisition is dilutive in 2003, and accretive in 2002. The principal reason for the dilution in 2003, is due to decreased annual net revenues and lower gross profit margins for King animal health products in 2003, as compared to 2002. The Company believes this trend will not continue in future periods and expects that the King animal health product revenues will increase in the future as a result of the Company’s focused marketing efforts. In addition, gross profit margins are expected to improve as the Company has transferred the manufacture of King animal health products to its Bridgeton, Missouri facility in 2004.

Gross Profit

Gross profit increased by $0.4 million or 6% for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002. Gross profit as a percentage of net revenues decreased to 36% for the three months ended September 30, 2003, from 38% in the comparable year ago. Specifically, gross profit by segment was as follows:


	For the Three Months Ended September 30,
			Gross					Gross			Change
(In thousands)	2003		Profit %			2002		Profit %			Dollars			%
						(As restated)
Veterinary	$	4,333		53	%	$	3,924		50	%	$	409			10	%
Consumer Brand		1,455		28	%		2,097		33	%		(642	)		(31	%)
Contract Manufacturing		745		16	%		138		7	%		607			440	%

Total	$	6,533		36	%	$	6,159		38	%	$	374			6	%

•   Veterinary gross profit for the three months ended September 30, 2003 as compared to the year ago period increased as a result of the acquired product lines of King and Delmarva, partially offset by increased inventory obsolescence reserves and product replacement reserves.

•   Consumer Brand gross profit decreased for the three months ended September 30, 2003 as compared to the year ago period principally due to lower revenues and increased inventory obsolescence reserves.

•   Contract Manufacturing gross profit increased for the three months ended September 30, 2003 as compared with the year ago period principally due to increased net revenues of the livestock de-wormer product and net revenues related to equine products sold to Pfizer.

Operating Expenses

Operating expenses increased $1.2 million or 23% for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002. As a percentage of revenues, operating expenses increased 4 percentage points to 36%. Selling, general, and administrative expenses (“SG&A”) accounted for $0.8 million of the increase in the operating expenses in the 2003 period. The SG&A expenses were higher in the 2003 period as compared to the 2002 period primarily due to higher amortization expense as well as promotion costs related to the Company’s dental and dermatological products. The increased amortization expense is a result of intangible assets related to the King and Delmarva acquisitions made in the third quarter of 2003. Research and development expenses increased $0.3 million in the 2003 period as compared to the 2002 period due to higher clinical study expenses associated with the Company’s research activities related to IVERHART® PLUS and higher product registration costs for various products. Warehouse and distribution expenses increased $0.2 million in the 2003 period as compared to the 2002 period primarily due to increased sales volume.

Interest Expense and Other (Expense) Income

Interest expense increased $0.1 million for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002, due to increased borrowings under the Credit Agreement and an increase in the interest rate, which was 4.75% at September 30, 2003, as compared with 3.75% at September 30, 2002. The increased borrowings were used to fund the King and Delmarva acquisitions. The Company expects increased interest expense over the next twelve months due primarily to higher borrowings.

Taxes

The Company does not currently record a federal tax provision or benefit because the Company has recorded a full valuation allowance against its deferred tax assets. Currently, and in the foreseeable future, as the Company incurs tax expense or benefit, an offsetting decrease or increase is recorded to the valuation allowance. The Company assesses the realizability of its deferred tax assets on an ongoing basis and will eliminate the valuation allowance when warranted based on sustained profitable operating results. The tax provision recorded by the Company in 2002 principally represents the recognition of deferred tax assets related to Agri-Nutrition for which any changes are recorded as a reduction of goodwill.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

Net Revenues

Net revenues increased by approximately $3.8 million or 8% for the nine months ended September 30, 2003, compared with the nine months ended September 30, 2002. Specifically, net revenues by segment were as follows:


	For the Nine Months Ended September 30,
					Change
(In thousands)	2003		2002		Dollars			%
			(As restated)
Veterinary	$	21,818	$	21,992	$	(174	)		(1	%)
Consumer Brand		17,445		17,811		(366	)		(2	%)
Contract Manufacturing		10,562		6,255		4,307			69	%

Total	$	49,825	$	46,058	$	3,767			8	%

•   Veterinary net revenues experienced a slight decrease for the nine months ended September 30, 2003 as compared to the year ago period primarily due to declines in the Company’s pesticide, nutraceuticals and heartworm preventative products. This decrease was partially offset by higher sales in the dermatology and dental lines within this segment and sales of products related to the Delmarva and King acquisitions in the third quarter of 2003.

•   Consumer Brand net revenues experienced decreased sales of the Company’s pesticides and nutraceutical products for the nine months ended September 30, 2003 as compared with the year ago period, partially offset by an increase in dental product sales in the same period. Net revenues in 2003 were also negatively affected by an increase in sales related discounts and return reserve requirements. This segment is experiencing extreme competitive pressures within the pet store channel and from competing products sold by mass-merchandising stores.

•   Contract Manufacturing net revenues increased for the nine months ended September 30, 2003 as compared with the year ago period principally due to increased livestock de-wormer product sales and sales from the introduction of two equine products sold exclusively to Pfizer. The first product was launched in the fourth quarter of 2002 and the Company obtained FDA approval for the second of the two equine products in July 2003.

The Company expects that overall net revenues will be higher in 2004, principally as a result of increased net revenues from the King and Delmarva acquisitions completed by the Company in the third quarter of 2003. For additional information, see Note 3. “Acquisitions” of the “Notes to Consolidated Financial Statements.”

Gross Profit

Gross profit increased by $0.6 million or 3% for the nine months ended September 30, 2003 as compared with the nine months ended September 30, 2002 and gross profit as a percentage of net revenues decreased to 38% from 40% for the same periods. Specifically, gross profit by segment was as follows:


	For the Nine Months Ended September 30,
			Gross				Gross		Change
(In thousands)	2003		Profit %		2002		Profit %		Dollars			%
					(As restated)
Veterinary	$	11,785		54%	$	11,863		54%	$	(78	)		(1%)
Consumer Brand		4,907		28%		5,741		32%		(834	)		(15%)
Contract Manufacturing		2,114		20%		627		10%		1,487			237%

Total	$	18,806		38%	$	18,231		40%	$	575			3%

•   Veterinary gross profits were essentially flat for the nine months ended September 30, 2003 as compared to the year ago period as increased revenues were offset by increased inventory obsolescence and product replacement reserves.

•   Consumer Brand gross profit decreased for the nine months ended September 30, 2003 as compared to the year ago period principally due to lower revenues and increased inventory obsolescence reserves.

•   Contract Manufacturing gross profit increased for the nine months ended September 30, 2003 as compared with the year ago period principally due to increased net revenues of the livestock de-wormer product and net revenues related to equine products sold to Pfizer.

Operating Expenses

Operating expenses have increased $4.2 million or 25% for the nine months ended September 30, 2003 as compared to the year ago period. As a percentage of revenues, operating expenses increased 6 percentage points to 42%. Research and development expenses increased $1.2 million and SG&A increased $2.8 million for the nine months ended September 30, 2003 as compared to the year ago period. Research and development expenses increased as compared to the year ago period due to higher clinical study expenses associated with the Company’s research activities related to IVERHART® PLUS and higher product registration costs for various products. The SG&A expenses increased due to higher marketing related costs associated with the Company’s dental and dermatological products as well as its recently acquired product portfolios, higher royalty expense related to a product which commenced sales in late 2002 and increased costs to vacate the Company’s Harbor City manufacturing facility.

Interest Expense and Other (Expense) Income

Interest expense for the nine months ended September 30, 2003 approximated interest expense in the year ago period, due primarily to higher average interest rates during the nine month

period ended September 30, 2002, offset by higher average borrowings during the nine month period ended September 30, 2003. The Company expects increased interest expense over the next twelve months due primarily to the increased borrowings under the Credit Agreement which were used to fund the Delmarva and King acquisitions in the third quarter of 2003.

Taxes

The Company does not currently record a federal tax provision or benefit because the Company has recorded a full valuation allowance against its deferred tax assets. Currently, and in the foreseeable future as the Company incurs tax expense or benefit, an offsetting decrease or increase is recorded to the valuation allowance. The Company assesses the realizability of its deferred tax assets on an ongoing basis and will eliminate the valuation allowance when warranted based on sustained profitable operating results. The tax provision recorded by the Company in 2002 principally represents the recognition of deferred tax assets related to Agri-Nutrition for which any changes are recorded as a reduction of goodwill.

Goodwill Impairment

As a result of the Restatement, the Company’s goodwill was increased due to the reinstatement of the Company’s valuation allowance against the deferred tax assets related to Agri-Nutrition. Upon completing its goodwill impairment analysis, which included an evaluation of the discounted future cash flows of the Consumer Brand segment as compared to the segment’s carrying value, the Company determined that the goodwill related to the Consumer Brand segment was impaired and accordingly, the Company recorded a non-cash charge to income of $2.3 million to write-off the goodwill. The impairment was recognized as of January 1, 2002 as the cumulative effect of a change in accounting principle in accordance with the provisions of SFAS No. 142.

Liquidity and Capital Resources

For the nine months ended September 30, 2003, operating activities utilized approximately $1.5 million in cash. Principal operative uses of cash included an increase in inventories of $3.5 million and an increase in prepaid expenses and other current assets of $1.0 million. The increase in inventories was due principally to the purchase of large quantities of a dental care product for which the Company had forecasted significant revenues. These uses of cash were offset by income from operations of $1.4 million after adjusting for non-cash charges to operations, the receipt of product license fees of $1.7 million and an increase in accounts payable.

For the nine months ended September 30, 2002, operating activities generated $6.0 million in cash. Principal operating sources of cash flows included cash from operations of $4.3 million after adjusting for non-cash charges to operations, the receipt of product license fees and decreases in accounts receivable and inventories. Operating uses of cash included a decrease in accounts payable and an increase in prepaid expenses and other current assets.

For the nine months ended September 30, 2003, cash used in investing activities included the acquisition of King and Delmarva. Both of these acquisitions are viewed as strategic by the Company and represent the Company’s further entrance into the pharmaceutical product market. The Company believes that pharmaceutical products carry higher gross profit margins and continually evaluates other opportunities to complement its existing portfolio of pharmaceutical and non-pharmaceutical product offering to leverage its existing sales and distribution channels. Cash used in investing activities for

the nine months ended September 30, 2002, was primarily related to the acquisition of equipment used in the Company’s manufacturing operations and the acquisition of product licenses and rights.

Cash flows from financing activities for the nine months ended September 30, 2003 and 2002, principally reflect activity under the Credit Agreement, which is used primarily to fund working capital needs. For the nine months ended September 30, 2003, the Credit Agreement was also used to fund the Delmarva and King acquisitions. The Company had planned to substitute the additional short-term borrowings incurred for these acquisitions with a longer term facility at more favorable rates, however, shortly after completing these acquisitions, the Company informed its lenders that it was not able to meet its September 30, 2003 10-Q reporting period covenant. See below for further discussion.

On August 7, 2002, the Credit Agreement was amended to extend the expiration date to July 31, 2005, and increase the amount available under the Credit Agreement from $10.8 million to $12.0 million. On August 11, 2003, an additional amendment was made to the Credit Agreement increasing the amount available under the facility from $12.0 million to $14.5 million. The existing maturity date of the Credit Agreement of July 31, 2005, was left unchanged by such amendments. The increased availability was used to fund the acquisition of Delmarva in 2003.

On September 3, 2003, a further amendment to the Credit Agreement was entered into in order to increase the amount available under the Credit Agreement from $14.5 million to $30.0 million and to accelerate the maturity date from July 31, 2005 to February 27, 2004. The increased borrowings were used to fund the acquisition of the animal health products of King.

On April 9, 2004, the Company entered into the Forbearance Agreement with its lenders whereby a standstill period, with a termination date of May 10, 2004, was agreed upon. Under key terms of the Forbearance Agreement the lenders agreed to not (i) file or join in the filing of any involuntary petitions in bankruptcy with respect to the Company; (ii) seek to collect or enforce against the Company by litigation or other legal proceedings any payment or other obligation due under the Credit Agreement; or (iii) exercise or enforce any right or remedy against the Company to which the lenders would be entitled by reason of any event of default under the terms of the Credit Agreement.

The Company agreed that during the standstill period it would make additional payments of principal to reduce the amount of outstanding borrowings under the Credit Agreement by approximately $7.0 million, which were in excess of the Company’s borrowing base, as defined in the Credit Agreement. On May 10, 2004, the Company entered into an amendment to the Forbearance Agreement with its lenders for the purpose of reducing the amount available under the Credit Agreement from $30.0 million to $20.0 million and extending the standstill period termination date to August 9, 2004. On May 6, 2005, the Company entered into another amendment to the Forbearance Agreement which reduced the amount available under the Credit Agreement from $20.0 million to $15.0 million. The standstill period currently expires on September 30, 2005. Other key terms under the Forbearance Agreement include interest at prime plus 1% and compliance with certain key financial covenants. The Company is currently in compliance with all covenants under the Forbearance Agreement; however, there can be no assurance that the Company will continue to remain in compliance with the covenants in the future.

In order to reduce the amount outstanding under the Credit Agreement and provide for operating cash requirements, the Company executed the VBSA Notes in the first half of 2004. The total borrowings under the VBSA Notes are $9.0 million, and each VBSA Note has a maturity date of October 9, 2005. Under the terms of the VBSA Notes, interest accrues at a base rate of 5.5% per year, which is adjusted monthly based on the LIBOR Reference Rate or the EURIBOR Reference Rate.

The Company’s cash requirements during 2004, and continuing into early 2005, have been unusual due to elevated legal and accounting fees associated with the investigation initiated by the Audit Committee in late 2003, the Restatement of the Company’s historical financial statements and the legal costs associated with the SEC investigation and the shareholder lawsuits. To date, the Company has been able to fund these additional cash requirements from operating cash, the additional borrowings provided by VBSA, and insurance coverage provided by its directors’ and officers’ insurance policy.

While the Company’s cash flow from operations has been sufficient to fund its normal cash requirements, there can be no assurance the Company has sufficient capital to continue to fund the ongoing unusual cash requirements. The Company does not currently have sufficient cash on hand nor does it anticipate it will have sufficient cash to repay its borrowings due to VBSA at the maturity date of October 9, 2005. The Company expects that it will be able to negotiate an extension to the Forbearance Agreement or a new credit facility with its lenders prior to its expiration on September 30, 2005, however there can be no assurance the Company’s lenders will agree with either of these arrangements. If the Company’s lenders do not agree to an extension of the Forbearance Agreement or a new revolving credit facility, and the Company is unable to obtain financing from other sources, the Company may be forced to file for bankruptcy protection.

Quarterly Effects and Seasonality

The sales of certain products in the Veterinary segment, including Virbac’s tick collars, have historically been seasonal with a higher volume of sales during the Company’s second and third quarters. The canine heartworm products generally have higher sales in the first and second quarters. The results of operations of the Company’s Consumer Brand segment have also been seasonal with a relatively lower volume of its sales during the fourth quarter. Seasonal patterns of the Contract Manufacturing segment are dependent on weather, livestock feeding economics and the timing of customer orders.

Recent Accounting Standards

See Note 11. “Recent Accounting Standards” of “Notes to Consolidated Financial Statements” for a discussion of recent accounting standards.

Item 3. 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.

At September 30, 2003, the Company’s exposure to market risks resulted from changes in interest rates. Interest rate risk exists principally with respect to the Company’s Credit Agreement, which bears interest at floating rates. At September 30, 2003, the Company had $27.3 million outstanding under this facility. The current maturity date of the Credit Agreement is September 30, 2005, under the terms of the Forbearance Agreement entered into by the Company and its lenders.

A sharp rise in interest rates could materially adversely affect the financial condition and results of operations of the Company. The Company has not entered into any instruments to minimize the market risk of adverse changes in interest rates because the Company believes the cost associated with such instruments would outweigh the benefits that would be obtained from utilizing such instruments. If interest rates, applicable to the Company’s floating rate debt, increased 100 basis points in the twelve-month period ended September 30, 2003, the Company would have experienced additional interest expense of $273,000 for the twelve-month period. This assumes no change in the principal or a reduction of such indebtedness at September 30, 2003. Moreover, under the Credit Agreement, for each 1% incremental increase in the prime rate, the Company’s annualized interest expense would increase by approximately $273,000. Consequently, an increase in the prime rate of 5% would result in an estimated annualized increase in interest expense for the Company of approximately $1.4 million.

In the second quarter of 2004, the Company executed the VBSA Notes in amounts totaling $9.0 million. Under the terms of the VBSA Notes, interest accrues at a base rate of 5.5% per year, which is adjusted monthly, based on the LIBOR Reference Rate or the EURIBOR Reference Rate. As of March 31, 2005, the interest rate on these notes was 7.1%.

Under the VBSA Notes, for each 1% incremental increase in LIBOR, the Company’s annualized interest expense would increase by approximately $90,000. Consequently, an increase in LIBOR of 5% would result in an estimated annualized increase in interest expense for the Company of approximately $450,000.

Item 4. Controls and Procedures.

Evaluation of the Company’s Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) of the Exchange Act, designed to provide reasonable assurance that the information required to be reported in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to SEC rules and forms, including controls and procedures designed to ensure that this information is accumulated and communicated to management including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that, because of inherent limitations the disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met. The Company’s current management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, as required by Rule 13a-15 of the Exchange Act. This evaluation included a review of findings arising in conjunction with the Restatement (see Note 2. “Restatement of Financial Statements” of the “Notes to Consolidated Financial Statements”), and an internal investigation initiated by the Audit Committee. Based upon this evaluation, current management has concluded that disclosure controls and procedures were not effective at September 30, 2003, at the reasonable assurance level as a result of the material weaknesses described below.

Identification of Material Weaknesses in Internal Control Over Financial Reporting

The Company’s efforts to evaluate the effectiveness of the design and operation of its disclosure controls and procedures identified certain “material weaknesses” and other deficiencies relating to internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. During its evaluation of the Company’s disclosure controls and procedures during the second half of 2004 and the first quarter of 2005, current management identified the following material weaknesses in Virbac’s internal control over financial reporting, as of September 30, 2003:

• Deficiencies related to the internal control environment. The prior Chief Executive Officer and Chief Financial Officer (i) did not promote an environment that emphasized the establishment and/or adherence to appropriate internal control and (ii) took actions or directed subordinates to take actions that circumvented or otherwise over-rode the existing controls. Management concluded that, among other things, the Company did not have adequate integrity, experience or depth of certain sales, operating, accounting and financial management personnel, and the Company lacked a robust governance function and adequate financial oversight.

• Deficiencies related to the design, documentation and execution of accounting policies and procedures. Current management has identified areas where controls were ineffective or not effectively executed or monitored, including failures in documenting business process policies and procedures, adequately segregating responsibilities and establishing effective management review controls. Accounting entries were processed without appropriate supporting documentation or documented approval and certain intangible assets were recorded without appropriate supporting

   documentation. The review and analysis of the historical books and records identified various transactions in which former officers and employees misapplied or ignored generally accepted accounting principles in a manner that permitted the Company to defer certain expenses improperly.

•   Deficiencies related to policies and procedures with respect to revenue recognition. In addition to the deficiencies in the internal control environment noted above, current management also concluded that policies and practices with respect to revenue recognition in accordance with generally accepted accounting principles were either misapplied or ignored in a manner that permitted the Company to recognize revenue prematurely. Additionally, the Company failed to properly maintain credits and return goods authorizations issued to customers, and, therefore, did not adequately provide for these sales-related and product-replacement reserves in the proper accounting periods.

•   Deficiencies related to policies and procedures with respect to inventory valuation. Current management also concluded that policies and practices for the review and evaluation of slow moving inventory were inadequate or ineffective resulting in inadequate inventory obsolescence reserves.

These control deficiencies resulted in the restatement of the Company’s 2002 and 2001 annual and 2003, 2002 and 2001 interim financial statements. In addition, these control deficiencies could result in the misstatement of the Company’s financial statement accounts and disclosures that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has concluded that these control deficiencies constitute material weaknesses.

In connection with the audits of the consolidated financial statements, the Company’s independent registered public accounting firm reported to management and the Audit Committee the existence of material weaknesses, each listed above; these findings were considered by the Company in their evaluation as described above. Based on the Company’s evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2003, September 30, 2002, March 31, 2003 and June 30, 2003, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in the reports it files and submits under the Exchange Act were recorded, processed, summarized and reported as and when required. In making this evaluation, the Chief Executive Officer and Chief Financial Officer considered, among other matters:

•   the Restatement;

•   the findings of the Audit Committee’s internal investigation;

•   the resignations of the Company’s former President and Chief Executive Officer, former Chief Financial Officer and other employees resulting from the findings of the internal investigation;

•   the material weaknesses in the Company’s internal control over financial reporting that Virbac and the Company’s independent registered public accounting firm identified;

• the remedial measures that the Company has identified, developed and begun to implement beginning in November 2003, to remedy those material weaknesses (as more fully described below); and

• the Company’s inability to file timely its 2004 and 2003 Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

These new conclusions about the ineffectiveness of the Company’s disclosure controls and procedures are in contrast to conclusions reached as a result of previous evaluations carried out under the supervision and with the participation of management, including the former Chief Executive Officer and former Chief Financial Officer. In particular, after taking into account the Restatement and the identification of the material weaknesses described above, these conclusions differ from the conclusions stated in the Company’s 2002 Annual Report on Form 10-K as originally filed and Quarterly Reports on Form 10-Q as originally filed for the quarters ended September 30, 2002, March 31, 2003 and June 30, 2003, that the Company’s disclosure controls and procedures were effective as of December 31, 2002, September 30, 2002, March 31, 2003 and June 30, 2003, respectively.

In addition, in light of the material weaknesses identified in connection with the Restatement, the Company’s current management expects to conclude that the Company’s disclosure controls and procedures as of December 31, 2004 were ineffective. While the Company is implementing steps to ensure the effectiveness of its disclosure controls and procedures and internal control over financial reporting, failure to restore the effectiveness of its disclosure controls and procedures and internal control over financial reporting could continue to affect its ability to report the Company’s financial condition and results of operations accurately and could have a material adverse effect on the Company’s business, results of operations, financial condition and liquidity.

Changes in Internal Control over Financial Reporting

Virbac has taken a number of steps that have improved and are expected to continue to improve the effectiveness of the Company’s internal control over financial reporting, including the following:

•   Virbac appointed a new CEO during the first quarter of 2004 and a new CFO during the first half of 2004.

•   Virbac has appointed a new member to its Board who qualifies as a financial expert in accordance with Section 407 of SOX. This Board member has also been appointed chairman of the Audit Committee.

•   Virbac has adopted a new charter for the Audit Committee, which meets the requirements of the SEC and the NASDAQ National Market listing standards.

•   Virbac has implemented the Virbac Corporation Code of Business Conduct & Ethics (the “Code of Ethics”), which is applicable to all Virbac directors, officers and employees, including the Company’s Chief Executive Officer, Chief Financial Officer, Corporate Controller and other financial personnel performing similar functions. The Code of Ethics satisfies, and in many respects exceeds, all of the requirements of SOX and the rules and regulations promulgated by the SEC pursuant to SOX. The Code of Ethics also satisfies, and in many respects exceeds, the listing

    standards established by the NASDAQ National Market, where the Company’s stock was previously quoted. The Code of Ethics has been disseminated to all Company employees and employees are required to certify their agreement to abide by the Code of Ethics. The Company has posted the Code of Ethics on its website at www.virbaccorp.com.

•   Virbac has adopted a whistleblower policy and has established a reporting process for employees by telephone hotline, e-mail, facsimile or physical address. The whistleblower policy provides employees direct anonymous access to the Audit Committee chairman or to the corporate governance committee.

•   The Audit Committee has exercised increased oversight over management’s assessment of internal control over financial reporting and response to control deficiencies identified in these assessments.

•   Virbac has established a Disclosure Review Committee, consisting of senior executives from the Company’s sales, research, operating and finance organizations. The Disclosure Review Committee was established to assist in the administration of disclosure controls and procedures with respect to the Company’s public disclosures, including SEC filings.

•   Virbac has sought to thoroughly understand the nature of the issues identified in the Audit Committee-sponsored internal investigation through discussions with its auditors and the independent counsel and forensic accountants engaged by the Audit Committee.

•   Virbac has recruited and continues to recruit new personnel to the accounting and financial reporting organization who have expertise in financial controls, financial reporting and cost accounting to improve the quality and level of experience of the Company’s finance organization.

•   Virbac has made changes to the Company’s organizational structure to provide a clearer segregation of responsibilities in connection with order entry, customer account management and inventory accounting.

•   Virbac has adopted and is implementing formal standard financial policies and procedures and education and training of employees on policies and procedures in an effort to constantly improve internal controls and the control environment. U.S. Generally Accepted Accounting Principles (“GAAP”) compliant revenue recognition policies have been communicated to sales, operations and financial personnel throughout the Company. The Company has also implemented new inventory obsolescence review and cycle-count policies.

•   Virbac implemented a standardized account reconciliation policy, which requires the monthly reconciliation of all balance sheet accounts and the use of standard methodology and templates for account reconciliations.

•   The Company implemented new or revised accounting policies and procedures designed to comply with GAAP, which include the accounting for sales related and product replacement reserves, inventory obsolescence reserves and intangible assets.

•   The Company has taken advantage of significant outside resources to supplement the Company’s finance and accounting functions and to support the preparation of the consolidated financial statements and related information included in this Quarterly Report on Form 10-Q.

•   The Company continues to work to improve its internal control over financial reporting. In this regard, Virbac is interviewing certain outside firms to assist the Company in further development of its disclosure controls and procedures and the evaluation of its internal control over financial reporting as required under Section 404 of SOX. Additionally, the Company has purchased and commenced the implementation of a fully integrated management information system, which will provide enhanced internal control features.

The effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, the Company’s disclosure controls and procedures and internal control over financial reporting may not prevent all errors or improper acts or ensure that all material information will be made known to appropriate management in a timely fashion.

As noted above, management continues to identify, develop and implement remedial measures, including the development of a detailed plan and timetable to comply with the internal control over financial reporting requirements established by Sections 302 and 404 of SOX for the year ending December 31, 2006.

Other than as summarized above, since September 30, 2003, there have been no other significant changes in the Company’s internal control over financial reporting or in other factors that could significantly impact such internal control.

PART II – Other Information

Item 1. Legal Proceedings.

Putative Securities Class Action Litigation

On December 15, 2003, Martine Williams, a Virbac stockholder, filed a putative securities class action lawsuit in the United States District Court for the Northern District of Texas, Fort Worth Division, against Virbac, VBSA, Thomas L. Bell (the Company’s former President, Chief Executive Officer and member of the Company’s Board of Directors), Joseph A. Rougraff (the Company’s former Vice President, Chief Financial Officer and Secretary), and Pascal Boissy (the Chairman of the Board of Directors). The complaint asserted claims against Virbac and the individual defendants based on securities fraud under Section 10(b) of the Exchange Act, and Rule 10b-5, and claims against VBSA and the individual defendants based on “control person” liability under Section 20(a) of the Exchange Act. On May 19, 2004, the Williams v. Virbac et al. lawsuit was consolidated with a separate lawsuit filed by John Otley, which contained virtually identical allegations to those claimed by Martine Williams, and the court appointed lead counsel for the plaintiffs.

On September 10, 2004, plaintiffs filed an Amended Complaint asserting claims against Virbac and the individual defendants based on securities fraud under Section 10(b) under the Exchange Act and Rule 10b-5, and asserting claims against VBSA and the individual defendants for violation of Section 20(a) of the Exchange Act as alleged “control persons” of Virbac. Plaintiffs generally allege in the Amended Complaint that the defendants caused Virbac to recognize and record revenue that it had not earned; that Virbac thereupon issued financial statements, press releases and other public statements that were false and materially misleading; that these false and misleading statements operated as a “fraud on the market,” inflating the price of Virbac’s publicly traded stock; and that when accurate information about Virbac’s actual revenue and earnings emerged, the price of the Company’s Common Stock sharply declined, allegedly damaging plaintiffs. Plaintiffs seek to recover monetary compensation for all damages sustained as a result of the defendants’ alleged wrongdoing, in an amount to be determined at trial (including pre-judgment and post-judgment interest thereon), costs and expenses incurred in connection with the lawsuit (including attorneys’ fees and expert witnesses’ fees), and such other and further relief as the court may deem just and proper.

Virbac believes that it has meritorious defenses to plaintiffs’ claims, and it filed a motion to dismiss the Amended Complaint on December 10, 2004, as did defendants Bell and Rougraff. Defendants VBSA and Boissy filed a joint motion to dismiss on December 14, 2004. On February 11, 2005, plaintiffs filed a consolidated opposition against all defendants’ motions to dismiss. On March 11, 2005, Virbac, Bell, and Rougraff each filed separate replies to plaintiffs’ consolidated opposition. Defendants VBSA and Boissy filed a joint reply on March 11, 2005.

At the present time, Virbac is unable to predict the outcome of the lawsuit and cannot provide an estimate of losses likely to be incurred in connection with it, or its financial impact, if any.

Shareholder Derivative Lawsuit

On February 19, 2004, Richard Hreniuk and Peter Lindell, both Virbac shareholders, filed separate, similar lawsuits derivatively on behalf of the Company against Virbac, as a nominal defendant, and Thomas L. Bell, Pascal Boissy, Eric Marée, Pierre Pagès, Alec Poitevint and Jean-Noel Willk, all current or former members of Virbac’s Board of Directors and Joseph A. Rougraff, a former officer of the Company. These two lawsuits have been consolidated in the United States District Court for the Northern District of Texas, Fort Worth Division. On December 3, 2004, the court appointed lead counsel for plaintiffs. On March 1, 2005, plaintiffs filed an Amended Derivative Complaint asserting all claims against: defendants Bell and Rougraff for improper financial reporting under SOX; all individual defendants for gross mismanagement, breach of fiduciary duty, waste of corporate assets, and unjust enrichment; and defendant Boissy for breach of fiduciary duties due to insider selling and misappropriation of information. Virbac is named as a nominal defendant in the Amended Derivative Complaint.

At the present time, Virbac is unable to predict the outcome of the lawsuit and cannot provide an estimate of losses likely to be incurred in connection with it, or its financial impact, if any.

SEC Investigation

On February 13, 2004, the staff of the SEC notified Virbac that it had commenced a formal investigation to determine whether any violations of the federal securities laws may have occurred.

The Company, its officers, directors and employees have, under a directive from the Company’s Board of Directors, cooperated with the SEC in its investigation.

Item 3. Defaults Upon Senior Securities.

At September 30, 2003, the Company had $27.3 million outstanding under the Credit Agreement and an outstanding balance on letters of credit totaling $0.5 million. The accounts receivable, inventory, equipment and intangibles of the Company, as well as the Company’s real property, including the Bridgeton, Missouri facility and the Fort Worth, Texas facility, are pledged as collateral under the Credit Agreement. At September 30, 2003, the Company’s weighted average rate on the Credit Agreement for the three and nine months ending on September 30, 2003 was 3.5% and 3.3%, respectively.

In the fourth quarter of 2003, Virbac notified its lenders that the Company would not meet the September 30, 2003 10-Q reporting period covenant. On November 12, 2003, the Company received a 90-day waiver for non-compliance of the September 30, 2003 10-Q reporting period covenant. The waiver expired on February 10, 2004. Subsequent to this date the Company entered into an amendment to the Credit Agreement whereby the maturity date was extended to April 5, 2004.

On May 10, 2004, the Company entered into an amendment to the Forbearance Agreement with its lenders for the purpose of reducing the amount available under the Credit Agreement from $30.0 million to $20.0 million and extending the standstill period termination date to August 9, 2004. On May 6, 2005 the Company entered into another amendment to the Forbearance Agreement which reduced the amount available under the Credit Agreement from $20.0 million to $15.0 million. The standstill period currently expires on September 30, 2005. Other key terms under the Forbearance Agreement include interest at prime plus 1% and compliance with certain key financial covenants. The Company is currently in compliance with all covenants under the Forbearance Agreement; however, there can be no assurance that the Company will continue to remain in compliance with the covenants in the future.

Item 6. Exhibits and Reports on Form 8-K.

Exhibits


		Incorporation
Exhibit		by Reference
Number	Description of Document	(if applicable)
2.1	Agreement and Plan of Merger, dated October 16, 1998, by and among Agri-Nutrition Group Limited, Virbac S.A., and Virbac, Inc.	(3); Ex. 2.1

2.2	Stock Purchase Agreement by and between Virbac Corporation and Delmarva Laboratories, Inc. dated as of August 15, 2003.	+

2.3	Asset Purchase Agreement by and among Virbac Corporation, Jones Pharma Incorporated and JMI- Daniels Pharmaceuticals, Inc. dated as of September 5, 2003.	(4); Ex. 2.1

3.1	Restated Certificate of Incorporation.	(2); Ex. 3.1

3.2	Amended and Restated By-Laws, dated as of January 27, 2004.	+

4	Specimen Stock Certificate.	(1); Ex. 4

10.10	Fifth Amendment to Credit Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc. Virbac AH, Inc., and First Bank, dated August 11, 2003.	+

10.11	Sixth Amendment to Credit Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc. Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated September 3, 2003.	(4); Ex. 10.1


		Incorporation
Exhibit		by Reference
Number	Description of Document	(if applicable)
10.12	Waiver of September 30, 2003 10-Q Reporting Period from First Bank, dated November 12, 2003.	+

10.13	Seventh Amendment to Credit Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc. Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated March 1, 2004.	+

10.14	Secured Subordinated Promissory Note for $3,000,000 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated April 9, 2004.	+

10.15	Secured Subordinated Promissory Note for $4,000,000 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated April 29, 2004.	+

10.16	Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated April 9, 2004.	+

10.17	Amendment to Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated May 10, 2004.	+

10.18	Acknowledgment of Extended Maturity Date by Virbac S.A., dated June 3, 2004.	+

10.19	Secured Subordinated Promissory Note for $2,000,000 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated June 4, 2004.	+

10.20	Second Amendment to Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated August 9, 2004.	+

10.21	Third Amendment to Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated February 7, 2005.	+

10.22	Acknowledgment of 2005 Extended Maturity Date by Virbac S.A., dated February 8, 2005.	+


		Incorporation
Exhibit		by Reference
Number	Description of Document	(if applicable)
10.23	First Amendment to Secured Subordinated Promissory Note Dated as of April 9, 2004 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated March 24, 2005.	+

10.24	First Amendment to Secured Subordinated Promissory Note Dated as of April 29, 2004 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated March 24, 2005.	+

10.25	First Amendment to Secured Subordinated Promissory Note Dated as of June 3, 2004 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated March 24, 2005.	+

10.26	Amendment to Forbearance Agreement Dated as of April 9, 2004 to Amend Delivery of Audited Financial Statements by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated April 1, 2005.	+

10.27	Waiver of 2001 and 2002 Financial Covenant Defaults and Amendment to Forbearance Agreement Dated as of April 9, 2004 to Amend Delivery of Audited Financial Statements by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated April 15, 2005.	+

10.28	Fifth Amendment to Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated May 6, 2005.	+

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	+

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	+

32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	+

32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	+

Filed herewith.

(1) Incorporated herein by reference to the Company’s Registration Statement on Form S-1 filed on May 5, 1994. (File No. 33-78646)

(2) Incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1996. (File No. 000-24312)

Index to Exhibits


		Incorporation
Exhibit		by Reference
Number	Description of Document	(if applicable)
2.1	Agreement and Plan of Merger, dated October 16, 1998, by and among Agri-Nutrition Group Limited, Virbac S.A., and Virbac, Inc.	(3); Ex. 2.1

2.2	Stock Purchase Agreement by and between Virbac Corporation and Delmarva Laboratories, Inc. dated as of August 15, 2003.	+

2.3	Asset Purchase Agreement by and among Virbac Corporation, Jones Pharma Incorporated and JMI- Daniels Pharmaceuticals, Inc. dated as of September 5, 2003.	(4); Ex. 2.1

3.1	Restated Certificate of Incorporation.	(2); Ex. 3.1

3.2	Amended and Restated By-Laws, dated as of January 27, 2004.	+

4	Specimen Stock Certificate.	(1); Ex. 4

10.10	Fifth Amendment to Credit Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc. Virbac AH, Inc., and First Bank, dated August 11, 2003.	+

10.11	Sixth Amendment to Credit Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc. Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated September 3, 2003.	(4); Ex. 10.1

10.12	Waiver of September 30, 2003 10-Q Reporting Period from First Bank, dated November 12, 2003.	+

10.13	Seventh Amendment to Credit Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc. Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated March 1, 2004.	+

10.14	Secured Subordinated Promissory Note for $3,000,000 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated April 9, 2004.	+

10.15	Secured Subordinated Promissory Note for $4,000,000 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated April 29, 2004.	+


		Incorporation
Exhibit		by Reference
Number	Description of Document	(if applicable)
10.16	Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated April 9, 2004.	+

10.17	Amendment to Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated May 10, 2004.	+

10.18	Acknowledgment of Extended Maturity Date by Virbac S.A., dated June 3, 2004.	+

10.19	Secured Subordinated Promissory Note for $2,000,000 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated June 4, 2004.	+

10.20	Second Amendment to Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated August 9, 2004.	+

10.21	Third Amendment to Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated February 7, 2005.	+

10.22	Acknowledgment of 2005 Extended Maturity Date by Virbac S.A., dated February 8, 2005.	+

10.23	First Amendment to Secured Subordinated Promissory Note Dated as of April 9, 2004 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated March 24, 2005.	+

10.24	First Amendment to Secured Subordinated Promissory Note Dated as of April 29, 2004 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated March 24, 2005.	+

10.25	First Amendment to Secured Subordinated Promissory Note Dated as of June 3, 2004 by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex	+


		Incorporation
Exhibit		by Reference
Number	Description of Document	(if applicable)
	Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated March 24, 2005.

10.26	Amendment to Forbearance Agreement Dated as of April 9, 2004 to Amend Delivery of Audited Financial Statements by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated April 1, 2005.	+

10.27	Waiver of 2001 and 2002 Financial Covenant Defaults and Amendment to Forbearance Agreement Dated as of April 9, 2004 to Amend Delivery of Audited Financial Statements by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and Virbac, S.A., dated April 15, 2005.	+

10.28	Fifth Amendment to Forbearance Agreement by and among Virbac Corporation, PM Resources, Inc., St. JON Laboratories, Inc., Francodex Laboratories, Inc., Virbac AH, Inc., Delmarva Laboratories, Inc., and First Bank, dated May 6, 2005.	+

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	+

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	+

32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	+

32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	+

Filed herewith.

(1) Incorporated herein by reference to the Company’s Registration Statement on Form S-1 filed on May 5, 1994. (File No. 33-78646)

(2) Incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1996. (File No. 000-24312)

(3) Incorporated herein by reference to the Company’s Current Report on Form 8-K, dated as of October 16, 1998, filed September 18, 2003. (File No. 000-24312)

(4) Incorporated herein by reference to the Company’s Current Report on Form 8-K, dated as of September 8, 2003, filed September 18, 2003. (File No. 000-24312)


	VIRBAC CORPORATION
	/s/ Jean M. Nelson
	Jean M. Nelson
	Executive Vice President and Chief Financial Officer May 6, 2005



		Page
Part I — Financial Information

Item 1.	Financial Statements (unaudited).
	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (As restated)		3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 (As restated)		4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (As restated)		5
	Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2003		7
	Notes to Consolidated Financial Statements		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		46
Item 4.	Controls and Procedures.		47

Part II — Other Information

Item 1.	Legal Proceedings.		52
Item 3.	Defaults Upon Senior Securities.		54
Item 6.	Exhibits and Reports on Form 8-K.		55
Signature			59
Stock Purchase Agreement
Amended and Restated By-Laws
Fifth Amendment to Credit Agreement
Waiver of September 30, 3002 10-Q Reporting Period from First Bank
Seventh Amendment to Credit Agreement
Secured Subordinated Promissory Note for $3,000,000
Secured Subordinated Promissory Note for $4,000,000
Forebearance Agreement
Amendment to Forebearance Agreement
Acknowledgement of Extended Maturity Date
Secured Subordinated Promissory Note for $2,000,000
Second Amendment to Forebearance Agreement
Third Amendment to Forbearance Agreement
Acknowledgment of 2005 Extended Maturity Date
First Amendment to Secured Subordinated Promissory Note
First Amendment to Secured Subordinated Promissory Note dated April 29, 2004
First Amendment to Secured Subordinated Promissory Note dated June 3, 2004
Amendment to Forebearance Agreement
Waiver
Fifth Amendment to Forbearance Agreement
Certification of the CEO Pursuant to Section 302
Certification of the CFO Pursuant to Section 302
Certification of the CEO Pursuant to Section 906
Certification of the CFO Pursuant to Section 906


Exhibit 31.1 –	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


Exhibit 31.2 –	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


Exhibit 32.1 –	Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


Exhibit 32.2 –	Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

		delay delivery; (ii) the Company paying for storage with a third party prior to delivery to a customer; (iii) the Company not pursuing collection from a customer after the shipped products shelf life had expired and were destroyed by the customer at the behest of the Company; and (iv) an understanding that these were consignment transactions. Virbac’s restated results reflect revenue recognition on these transactions only to the extent payment was received. If a refund credit was subsequently issued to the customer related to these transactions, the sale was reversed in the period recorded.

	•	During the first two quarters of 2003, Virbac recognized revenue for shipments of products by shipping goods to customers after midnight on the final day of the applicable quarter. The sales for these products were recorded in the prior quarter, although the products had been shipped after the quarterly revenue cut-off date. Virbac has restated these transactions to exclude the sale and related cost of sales of any product shipped after midnight on the final day of the applicable quarter.

	•	Certain sales transactions were improperly recorded as revenue at the time the product was shipped despite side agreements that these customers were not required to pay until the customer sold the products to its customers. Other transactions were improperly treated as “bill and hold” sales because the Company requested that the transactions be on a “bill and hold” basis which precludes revenue recognition. For various other transactions the Company has determined that collectibility was not reasonably assured at time of shipment, and, therefore, these transactions have been recorded as consignment sales transactions. Certain other sales transactions were improperly recorded as revenue at the time product was shipped, despite the Company paying for subsequent storage with a freight carrier before delivery to its customer. Virbac’s restated financial statements reflect revenue recognition and the related cost of sales on these transactions based upon when payment was received. If no payments were received, no revenue was recorded and the inventory was written off.

	•	Virbac’s general policy is to recognize revenue at the time product is shipped. In connection with the Audit Committee’s internal investigation, Virbac determined that for certain customers, title and risk of loss did not pass until the product was delivered. The Company has restated these transactions to recognize revenue and the related cost of sales when the product was delivered to the customer.

	•	During the first two quarters of 2003, Virbac accounted for certain arrangements with customers as contract tolling arrangements and recorded revenues and the related cost of sales upon completion of the manufacturing process rather than at the time of shipment. The Company has restated these transactions to properly recognize revenues and the related cost of sales at the time the product was shipped.

(1)		Restated to reflect revenue recognition adjustments.

(2)		Restated to properly reflect inventory obsolescence reserves and revenue recognition adjustments.

(3)		Restated to reflect the deferred tax valuation allowance related to the Agri-Nutrition merger in 2000 and the impairment of the Consumer Brand segment goodwill in 2002.

(4)		Restated to write-off certain intangibles.

(5)		Restated to reflect sales related and product replacement reserves.

(6)		Restated to classify borrowings under the Credit Agreement as current.

(7)		Restated to correct miscellaneous accounting accruals.

(1)		Restated to reflect revenue recognition adjustments and sales related reserves.

(2)		Restated to properly reflect inventory obsolescence reserves, revenue recognition adjustments and product replacement reserves.

(3)		Restated to reclassify promotional expenses related to sales incentives as selling, general and administrative expenses, reflect the impairment of intangibles and correct miscellaneous accounting accruals.

(4)		Restated to reflect the deferred tax valuation allowance related to the Agri-Nutrition merger in 2000 and the impairment of the Consumer Brand segment goodwill in 2002.

(5)		Restated to reflect the impairment of goodwill.

(1)		Restated as discussed in the consolidated statements of operations.

(2)		Restated due to the re-establishment of a deferred tax valuation allowance.

(3)		Restated to reflect revenue recognition adjustments.

(4)		Restated to reflect inventory obsolescence reserves.

(5)		Restated to reflect sales related reserves.

(6)		Restated to reflect the impairment of goodwill.

(7)		Restated to reflect adjustment to inventory due to revenue recognition adjustments.

(8)		Restated to reflect corrections of miscellaneous accounting accruals.

(9)		Restated to classify the Credit Agreement as current and reflect net borrowing activity.

	•	without admitting or denying the SEC’s allegations, the Company would agree to a stipulated judgment enjoining the Company from future violations of various provisions of the federal securities laws; and

	•	the Company would pay a total of $500,001, consisting of $1 in disgorgement and $500,000 in a civil money penalty.

	•	statements contained or incorporated herein regarding possible or assumed future results of operations of the Company’s business, pricing trends, the markets for Virbac products, anticipated capital expenditures, regulatory developments, or competition;

	•	statements preceded by, followed by, or that include the words “intends,” “estimates,” “believes,” “expects,” “anticipates,” “ plans,” “projects,” “should,” “could” or similar expressions; and

	•	other statements contained or incorporated by reference herein regarding matters that are not historical facts.

	•	Significant under-performance compared to historical or projected future operating results;

	•	Failure to obtain regulatory approval of certain products;

	•	Significant changes in the manner of use of the acquired assets or the strategy for the overall business;

	•	Significant increase in the discount rate assumed to calculate the present value of future cash flows;

	•	Significant negative industry or economic trends; and

	•	Significant advancements or changes in technology.

	•	Veterinary net revenues experienced an increase primarily due to higher sales in the dermatology and dental lines and sales of products related to the Delmarva and King acquisitions in August and September of 2003, respectively. The Delmarva product portfolio includes Euthasol® and Pentasol®, both of which are humane euthanasia products and Clintabsä and Clinsolä. The King product portfolio includes SOLOXINE®, a leader in canine thyroid hormone replacement, and Pancrezyme®, Tumil-K®, Uroeze® and Ammonil® which are pancreatic and nutritional supplements.

	•	Consumer Brand net revenues were negatively affected by an increase in sales related discounts and return reserve requirements. This segment is experiencing extreme competitive pressures within the pet store channel and from competing products sold by mass- merchandising stores.

	•	The Contract Manufacturing segment includes net revenues from the Company’s contract manufacturing operations as well as livestock de-wormer product sales and equine products sold exclusively to Pfizer. Net revenues increased for the three months ended September 30, 2003 as compared with the three months ended September 30, 2002, principally due to increased livestock de-wormer product sales and sales from the introduction of two equine products. The Company obtained FDA approval for the second of two equine products in July 2003. The first product was launched in the fourth quarter of 2002.

	•	Veterinary gross profit for the three months ended September 30, 2003 as compared to the year ago period increased as a result of the acquired product lines of King and Delmarva, partially offset by increased inventory obsolescence reserves and product replacement reserves.

	•	Consumer Brand gross profit decreased for the three months ended September 30, 2003 as compared to the year ago period principally due to lower revenues and increased inventory obsolescence reserves.

	•	Contract Manufacturing gross profit increased for the three months ended September 30, 2003 as compared with the year ago period principally due to increased net revenues of the livestock de-wormer product and net revenues related to equine products sold to Pfizer.



•	Veterinary net revenues experienced a slight decrease for the nine months ended September 30, 2003 as compared to the year ago period primarily due to declines in the Company’s pesticide, nutraceuticals and heartworm preventative products. This decrease was partially offset by higher sales in the dermatology and dental lines within this segment and sales of products related to the Delmarva and King acquisitions in the third quarter of 2003.

•	Consumer Brand net revenues experienced decreased sales of the Company’s pesticides and nutraceutical products for the nine months ended September 30, 2003 as compared with the year ago period, partially offset by an increase in dental product sales in the same period. Net revenues in 2003 were also negatively affected by an increase in sales related discounts and return reserve requirements. This segment is experiencing extreme competitive pressures within the pet store channel and from competing products sold by mass-merchandising stores.

•	Contract Manufacturing net revenues increased for the nine months ended September 30, 2003 as compared with the year ago period principally due to increased livestock de-wormer product sales and sales from the introduction of two equine products sold exclusively to Pfizer. The first product was launched in the fourth quarter of 2002 and the Company obtained FDA approval for the second of the two equine products in July 2003.

	•	Veterinary gross profits were essentially flat for the nine months ended September 30, 2003 as compared to the year ago period as increased revenues were offset by increased inventory obsolescence and product replacement reserves.

	•	Consumer Brand gross profit decreased for the nine months ended September 30, 2003 as compared to the year ago period principally due to lower revenues and increased inventory obsolescence reserves.

	•	Contract Manufacturing gross profit increased for the nine months ended September 30, 2003 as compared with the year ago period principally due to increased net revenues of the livestock de-wormer product and net revenues related to equine products sold to Pfizer.

	•	Deficiencies related to the internal control environment. The prior Chief Executive Officer and Chief Financial Officer (i) did not promote an environment that emphasized the establishment and/or adherence to appropriate internal control and (ii) took actions or directed subordinates to take actions that circumvented or otherwise over-rode the existing controls. Management concluded that, among other things, the Company did not have adequate integrity, experience or depth of certain sales, operating, accounting and financial management personnel, and the Company lacked a robust governance function and adequate financial oversight.

	•	Deficiencies related to the design, documentation and execution of accounting policies and procedures. Current management has identified areas where controls were ineffective or not effectively executed or monitored, including failures in documenting business process policies and procedures, adequately segregating responsibilities and establishing effective management review controls. Accounting entries were processed without appropriate supporting documentation or documented approval and certain intangible assets were recorded without appropriate supporting

		documentation. The review and analysis of the historical books and records identified various transactions in which former officers and employees misapplied or ignored generally accepted accounting principles in a manner that permitted the Company to defer certain expenses improperly.

	•	Deficiencies related to policies and procedures with respect to revenue recognition. In addition to the deficiencies in the internal control environment noted above, current management also concluded that policies and practices with respect to revenue recognition in accordance with generally accepted accounting principles were either misapplied or ignored in a manner that permitted the Company to recognize revenue prematurely. Additionally, the Company failed to properly maintain credits and return goods authorizations issued to customers, and, therefore, did not adequately provide for these sales-related and product-replacement reserves in the proper accounting periods.

	•	Deficiencies related to policies and procedures with respect to inventory valuation. Current management also concluded that policies and practices for the review and evaluation of slow moving inventory were inadequate or ineffective resulting in inadequate inventory obsolescence reserves.

	•	the Restatement;

	•	the findings of the Audit Committee’s internal investigation;

	•	the resignations of the Company’s former President and Chief Executive Officer, former Chief Financial Officer and other employees resulting from the findings of the internal investigation;

	•	the material weaknesses in the Company’s internal control over financial reporting that Virbac and the Company’s independent registered public accounting firm identified;

	•	the remedial measures that the Company has identified, developed and begun to implement beginning in November 2003, to remedy those material weaknesses (as more fully described below); and

	•	the Company’s inability to file timely its 2004 and 2003 Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

	•	Virbac appointed a new CEO during the first quarter of 2004 and a new CFO during the first half of 2004.

	•	Virbac has appointed a new member to its Board who qualifies as a financial expert in accordance with Section 407 of SOX. This Board member has also been appointed chairman of the Audit Committee.

	•	Virbac has adopted a new charter for the Audit Committee, which meets the requirements of the SEC and the NASDAQ National Market listing standards.

	•	Virbac has implemented the Virbac Corporation Code of Business Conduct & Ethics (the “Code of Ethics”), which is applicable to all Virbac directors, officers and employees, including the Company’s Chief Executive Officer, Chief Financial Officer, Corporate Controller and other financial personnel performing similar functions. The Code of Ethics satisfies, and in many respects exceeds, all of the requirements of SOX and the rules and regulations promulgated by the SEC pursuant to SOX. The Code of Ethics also satisfies, and in many respects exceeds, the listing

		standards established by the NASDAQ National Market, where the Company’s stock was previously quoted. The Code of Ethics has been disseminated to all Company employees and employees are required to certify their agreement to abide by the Code of Ethics. The Company has posted the Code of Ethics on its website at www.virbaccorp.com.

	•	Virbac has adopted a whistleblower policy and has established a reporting process for employees by telephone hotline, e-mail, facsimile or physical address. The whistleblower policy provides employees direct anonymous access to the Audit Committee chairman or to the corporate governance committee.

	•	The Audit Committee has exercised increased oversight over management’s assessment of internal control over financial reporting and response to control deficiencies identified in these assessments.

	•	Virbac has established a Disclosure Review Committee, consisting of senior executives from the Company’s sales, research, operating and finance organizations. The Disclosure Review Committee was established to assist in the administration of disclosure controls and procedures with respect to the Company’s public disclosures, including SEC filings.

	•	Virbac has sought to thoroughly understand the nature of the issues identified in the Audit Committee-sponsored internal investigation through discussions with its auditors and the independent counsel and forensic accountants engaged by the Audit Committee.

	•	Virbac has recruited and continues to recruit new personnel to the accounting and financial reporting organization who have expertise in financial controls, financial reporting and cost accounting to improve the quality and level of experience of the Company’s finance organization.

	•	Virbac has made changes to the Company’s organizational structure to provide a clearer segregation of responsibilities in connection with order entry, customer account management and inventory accounting.

	•	Virbac has adopted and is implementing formal standard financial policies and procedures and education and training of employees on policies and procedures in an effort to constantly improve internal controls and the control environment. U.S. Generally Accepted Accounting Principles (“GAAP”) compliant revenue recognition policies have been communicated to sales, operations and financial personnel throughout the Company. The Company has also implemented new inventory obsolescence review and cycle-count policies.

	•	Virbac implemented a standardized account reconciliation policy, which requires the monthly reconciliation of all balance sheet accounts and the use of standard methodology and templates for account reconciliations.

	•	The Company implemented new or revised accounting policies and procedures designed to comply with GAAP, which include the accounting for sales related and product replacement reserves, inventory obsolescence reserves and intangible assets.

	•	The Company has taken advantage of significant outside resources to supplement the Company’s finance and accounting functions and to support the preparation of the consolidated financial statements and related information included in this Quarterly Report on Form 10-Q.

	•	The Company continues to work to improve its internal control over financial reporting. In this regard, Virbac is interviewing certain outside firms to assist the Company in further development of its disclosure controls and procedures and the evaluation of its internal control over financial reporting as required under Section 404 of SOX. Additionally, the Company has purchased and commenced the implementation of a fully integrated management information system, which will provide enhanced internal control features.